Earnings Call: Q1 2021

Apr 28, 2021

Thank you very much, and welcome everyone to our Q1 presentation. The highlights for our Q1 are 2 things. 1st of all, we are slowly but surely seeing an increased activity market in the market, especially in the U. S. And the second highlight for our Q1 has been the integration or the start of the integration with Raychel Acoustics that is proceeding according to plan. If we turn to Page 3 and look at the financial results for the quarter, we saw our revenues increase by about 23% in the quarter, 26% if we look at the currency impact, so we ended at approximately SEK 144,000,000. Our gross profit was increased with approximately the same amount, which percentage, which means that the gross margin was same level as in previous year or same quarter last year. Revenues related to the Raquel Acoustics product line contributed with a little over EUR 20,000,000 in the 2 months, February March, that they have belonged to the Invisio group. We were also quite pleased with our order intake that amounted to EUR137,000,000 compared to 90 last year. And of course, also part of that is related to the products under the Raquel Acoustics line. Our order book then at the end of the quarter was at SEK 191 SEK 1,000,000, which then also includes the order book that the regular acoustics products have brought into the group. So all in all, this has been uneventful, I guess. And one thing that we will mention for the quarter is that depreciation and amortization has increased as you will see on the next Page 4, where we have specified that. There are two reasons. First that we have now started depreciation of products that we have successfully developed and are now starting to sell. Those include products that you are wear off like the new intercom system and our T7 headset, but it also includes certain products that are part of our normal product development and that are not yet publicly announced that will be shown later in the year when we have the possibility to attend public events like trade shows and so forth. And then there is an amount, which according to standard accounting principles are related to the acquisition of Raykil Acoustics. So our total amount for depreciation and amortization in the Q1 was about $10,700,000 and 6 of those or 5.5 of 6 related to radio acoustics and 4.5 for the development costs of our own. On Page 5, our standard overview of our long term development in sales and the EBITDA margin that we have decided to use in this quarter, as you can see, the sales per quarter and rolling 12 months on the left hand side continue to show a positive development. On the right hand side, you can see a more volatile development on the EBIT margin, also on a rolling basis. And part of that is, of course, the investments we are continuing to make in both our sales and marketing organization, our R and D organization, of course, also in the continued development of new adjacent product categories that we spent a lot of money and resources on. On Page 6, acquisition of regular acoustics was completed at the end of January. And along with that, the current or the former, you say, use the CEO of Raquel and he's Mr. James Ewing, he's still the CEO of Regal, but he is also now part of the Invisio Group Management team James brings a lot of wealth of information and experience from not only Raquel, but also from other industries, and he will benefit of our senior management team going forward and making sure that all parts of the business is aligned. On the next page, before completing the acquisition, Raechel actually had a major win with the Danish Ministry of Defense for one of their newest products, the RA4000 magnet digital headset system that is for use in very high noise environment vehicles. And regular acoustics was announced as the winner of this tender and they were awarded a 7 year framework contract worth up to $4,700,000 The contract includes a support package with trading, consumables, spare parts and then also an option for further follow on orders as required. So a framework contract is, as usual, a contract with no guarantees, but there's a good reason to expect orders under the duration of the contract. Regular acoustics already have an order book related to the Danish Minister of Defense, and those concrete orders are part of the order book, the total order book that we have at the end of the year. It is important just to stress that there is a little difference between how The Invisio products for dismounted solar use are normally delivered and how the high noise solutions from Raquel are delivered time wise to the vehicle programs that they address. We have normally, for Enviso Products, seen delivery times ranging from 2 to 6 months or maybe a little bit more depending on customer requirements and their rollout schedules. Vehicles sometimes see a little longer schedules for their delivery plans because when they sell headset systems for vehicles, they are sometimes tied to the rollout of new vehicles with the military organization. So therefore, when Rekle receives an order, it could be that part of the order is for immediate delivery and part of the order is only for delivery next year when the customer receives more vehicles, as an example. So all in all, that's yes, just a characteristic of the high noise environment market. Page 8, we, as I said, are in full integration mode between regular acoustics and invisio and we will be operating under the invisio group, but with 2 very strong brands, regular acoustics for high noise headset solutions and Envisio brand for solar systems and portable intercom systems. This also means that the current organization in the UK with Raquel will be our center of excellence and focus on solutions for high noise environment. And we believe this is the way we will, in the best possible way, take advantage of the combined competencies that exists, of course, the 2 brands in all functions. We have so far only seen very good integration efforts. There is a high level of enthusiasm and good spirit in regular acoustics and in Invitio. We all look forward to bringing our fantastic solutions to the market, and we are already in the process of combining some of our product solutions to bring to the market later this year. So this is a very positive thing for both companies. On the following page, we also during the quarter received an order from another American elite force. And as always, this is very important for us when we get new high profile customers that can serve as reference cases for not only in the U. S, but also in other parts of the world. But other than that, we did not announced larger orders in the Q1, which means that the order intake of SEK 137,000,000 were mainly combined of a larger number of smaller orders, which I think is good in the circumstances we see right now where many projects have been postponed due to the pandemic. On the next page, we yesterday had our general annual meeting, where the press release was also sent out yesterday, the summary of the meeting. The proposal from our Board of Directors about a dividend of SEK 0.70 per share was approved and will be executed in the coming days. On Page 11, we continue on our long term path of executing our strategy and in 2021, we will have a number of focus areas. One of them, of course, the continued integration of regular acoustics, making sure that we take advantage of all the opportunities we have with the 2 brands combined in 1 group. And one of the first efforts we have seen successfully integrated is the sales teams that will focus as one group now focusing on all the products we have in the group. Our intercom system is also continuing to see huge interest despite the difficulty with meeting customers in person. We are having a high activity level for our intercom system, both in Europe and also in the U. S. We did receive orders for the intercom in the Q1, and we believe that we will, especially in the second half of the year, be well positioned for good orders for the intercom system. It looks very promising, and it also sometimes opens stores with customers that do not have Invisio sold your hearing protection systems yet, so that the intercom system will actually be the door opener for them for also buying other types of equipment from us or under the Raykil brand as many of the radio headsets are suited for high noise environments where the intercom will also be used. So makes a lot of sense for our total product portfolio. Our law enforcement and security efforts will continue as well. We have now, with our own organization and our global network of distribution partner, a good set up both in the U. S. And in the rest of the world, and we will continue to utilize our combined product portfolio to make sure we gained more ground and increased our foothold in many other larger markets towards law enforcement and security. So we've seen good progress in 2020, and we expect to continue to gain ground in 2021. We've also seen prior to the pandemic that we were making good progress in especially in Asia, and we believe that this will soon be back on track, we will definitely focus on that region and also the Middle East in the coming year and making sure we take advantage of the opportunities that are available. We have, in 2020, had a quite high number of new hirings into the company, increased our level of resources significantly also with the acquisition of regular acoustics. We will continue to support our focus areas with more resources where needed. But at this point in time, we do not see the same recruitment speed as we saw in 2020. So we will now just take a little step back and but support these different areas where we see the need for more resources. Again, we are in the early phase of the intercom and law enforcement investments. So therefore, it is possible that there will be a need for further investment, especially in salespeople, as soon as we are able to address more markets and when we can see that the interest is higher than what we can cope with, with our current setup. So on Page 12, final slide. So we believe that the continued rollout of vaccines and a gradual return to more normal conditions will also soon mean rise in the activity level with our customers and that they will continue the modernization programs for hearing protection and communication in high noise environment. We have seen many postponements and delays due to the pandemic. But now that both the U. S, U. K. And other markets are slowly but surely opening up, we hope and believe that the customers will soon be back in their normal positions and the activity level will continue to go up. So we have all reasons to continue to be very positive about the continued development of Envisio. So with that, I conclude our presentation of the Q1 financial report. And operator, we are ready to take questions, please. Thank you. Victor Westmeiss from Redeye. Your line is now open. Yes. Hi, thank you for taking my questions. Maybe we can start with one question about Raquel Acoustics. What do you see as the main growth opportunities for Raquel? And what are the main challenges? Well, I think the main opportunities are actually bringing many of the Rekla products out to a broader audience as Rekul was previously part of a large corporation where they did not receive maybe enough attention. I think the fact that they are now part of the Envisio Group and the large sales organization we have will make it possible to bring out the products of Raykil to a much broader audience, especially in the U. S, where they haven't had too big of a market share in recent years. And Regal has some really impressive newly developed products that are state of the art and is definitely market leading. So we look forward to bringing those products out. And then secondly, the combination of the Rakul products with the Enviso products is a very strong offering to the market where we can then cover both dismounted and mounted solutions for the users. And it all works in one system with our patented cable technologies and so forth. So and your question about challenge, well, the challenge, as always, is that things takes a long time in our business. Projects along and that is not different for Raquel Acoustics Products Lines. They are often related to new acquisitions or upgrading of vehicle communications and so forth. So it's the same type of time lines as we have been used to for our type of business. Yes. And why is the why Has regular acoustics not won much business in the U. S. In the past? Are they I mean, are they compatible with all the different types of Tanks and vehicles, etcetera, the Leopard tanks and the German the American tanks. So is there any reason why they are not have not Focus on U. S. No. And they have. It was maybe put wrong. They have had a focus on the U. S, they have also been successful in the U. S. In the past. It's only, I would say, in the last couple of years or so where they have been part of a large organization and while developing some of their newer products that they the newer products have not been brought to the market yet. So but they do actually I mean, they do absolutely have sales in the U. S. Today and so forth. But I think the total sales organization for Raquel has been 5 people. And for Enviso, we are 40 people. So that alone will make a huge difference when you address the global market. Yes, definitely. And shifting gears to Asia then. Can you say something how the hearing aid costs look like here compared to your for instance, the U. S. Market? Are there the same type of veteran programs with hearing aids and those associated costs in the Asia? Or How does that look like? Good question. I'm not fully on top the cost associated, but I'm sure that they had the same issues with hearing deficiencies from high noise and you see as you see in the Western world. So and I'm also sure that they have high focus on this because as soon as somebody loses his hearing or has hearing deficiencies, it is possible to do the job that you were trained for without a hearing aid or different types of help. So the focus is always twofold for our products. 1 is to, of course, reduce or take down the risk for hearing loss and hearing decisions. The other is that you are able to communicate more efficiently and clear in high noise and thereby not get hurt or, yes, get into the wrong situations. Okay. And last question On the segment of the Rest of the World sales, I noticed there was a handsome pickup in sales there to €24,000,000 Are those pilot orders for some of the new Asian markets? Or can you give some more color on what yes, yes, they are definitely pilot orders with special forces in different countries in Asia. But it's also fair to say that the Asian region has been the most difficult for us to address during the pandemic because of the total close down and inability to visit customers and simply also that acquisitions or programs has been postponed and delayed. So that has been we expect that we don't see that we have lost opportunities in Asia, but rather that they are put on hold for different reasons. But it is also very important to be on-site when you address the markets in Asia. And there, the pandemic has made it difficult in the short term. Yes. And on that note, Lars, just last question there. Do you need more boots on the ground and more potentially more In Asia besides Banco? That is possible. That is possible. That is what we are constantly reviewing as soon as we see activity levels going up, opportunities increasing, then of course, we will be looking at when where do we need to apply more sales resources to follow-up on the opportunities. Okay, great. Thank you so much, Lars. Welcome. Thank you. And your next question comes from the line of Yiwei Zhao from SEB. Your line is now open. Hi, Lars. Thank you for taking my question. A few questions from my side. And firstly, follow-up question on Recall. You previously mentioned the profitability for Recall was lower and but has the potential to raise invidious margin. Now it's 1 quarter into integration. Has your expectation changed? And what is the time line for the margin improvement? I think that this is, of course, ongoing process, but I think that we know that Rekhu's business model includes selling through system integrators and large partners. And by definition, that gives a little bit lower gross margin. But I think that already now and as you can see in the Q1, we are actually at the same level as last year for gross margin. So there's no impact from Wraykl in this quarter. And I don't think that there will be any larger impact from the Raykil business going forward. We are doing a number of things to make sure that we have solid gross margin in all product lines that so I think that we will it will be a marginal impact on us. Great. And then secondly, So the order intake in Q1, dollars 137,000,000 is it possible to indicate how much Was in relating to Intercom? And how much was Reiko products? No, we have decided not to do that. I will only say that we continue to see order intake satisfactory order intake on the intercom. But I think that quarter by quarter, we will not be disclosing numbers. We will be looking at it on a yearly perspective and follow-up on this as we see interesting orders coming in and hopefully also orders of a certain magnitude. And the same for Raykel because already now, the RACLE product line is being integrated with the Invisio product line. So it would not make sense for us to split it up because a customer might want to ask for a headset from Rachel and then a control unit and cables from Envisio and the customer doesn't really care whether the headset has 1 or the other brand. So therefore, it doesn't really make sense for us. We will not we will operate as one group, one company. So therefore, we will not split it up. But we have agreed to, at least for a couple of quarters, to say how much of sales is related to the regular product line, but not more than that. Okay. And lastly, CapEx spending. I mean, looking the CapEx I'm talking about the development cost capitalized. It was only $19,000,000 for 2020, And it was a big job from 20192018 level. And now into the Q1 of 2021, it looks like it continued to decline. So what is the implication here? I mean, how should we look at your CapEx spending for the coming years? And any implication to your product pipeline. Well, in terms of we have seen a lot of our product development efforts being finalized in 2020. And therefore, of course, there is a huge increase now as you see in Q1. And given the size of the organization and the increased activity level, we have, of course, already initiated new development projects that the organization is working on. So it is a higher, you can say, activity level in general for the company. And as I said, we have not been able to publicly announce all of the new products yet because of the pandemic, but we will do that during the year even though some of these products are already selling and shipping to customers. But since they are part of our normal product portfolio, we do not see a need to announce them until we have the possibility for doing it. Okay. Is it possible to give us indication of your CapEx spending for the coming years? And how should we compare it to 2020 level? I mean, you had only RMB 19,000,000 In the capitalization of development costs in 2020. And it was a decline from 2019. Yes, I think you should see it in the same way as the Q1 label we have released now. Okay. Thank you. I'll jump back to the queue. Thank you. And your next question comes from the line of Jesper Bjornsson from ABG. Your line is now open. Thank you. Good morning, Lars. Thank you for taking my questions. First off, you might have already answered here, but In terms of your order book, you mentioned that it stood at the SEK 190,000,000 at the end of Q1. And you also mentioned that there are different delivery times for EVC versus Raquel, so an interesting question. And it's what approximately what percentage of the order book is Inviso versus Raquel, We can give any indication on that. Well, no, again, we have decided not to split it up We will be operating going forward as one group. So these are just product lines within the company. So we will not but I will say still that the majority of the order book is majority of Raquel order book is further down the line. It is a smaller portion of their order book that goes into following years. So all of majority of what you see in the order book is for deliveries during 2021. Thank you. And also in the report, you mentioned that market activity in the U. S. Especially has been picking up here in late Q1. And then I'm wondering like how far away is it from a normalized state? And also how far behind is Europe lagging compared to U. S. Currently? It's a little difficult to say, and I would not I would also not I would be a little cautious not to overdo the activity level because but as we all see and know from the news, the rollout of vaccines is going very fast in the U. S, and they are state by state returning to more or less normal life within a quarter or so. So that, of course, also means that many of our customers will be returning back to their physical locations for work. And many of our customers in general, we have seen have had challenge is working from home because their systems are not set up for being from so there has been many delays and difficulties. So at least now, our U. S. Sales team is out and about visiting because the vaccine rollout is going somewhat slower. Certain countries are better, like the U. K. I hear from the team that they will be probably at the end of May able to be at work for majority of the time physically. And for other markets in Europe, it's a little bit further down the road, but still improving. Asia takes probably a little longer from what I hear right now. We are still, yes, a little behind in terms of the opening up of the different countries there. So we will have to follow this closely in the coming quarter but at least it is more open than it was 3 months ago. Thank you. My last question is just terms of the logistical situation, I mean, we're hearing a lot about delays in expenses, shipping components and products from Asia, For example, what's the situation like here? Or is it brakes or costs still higher than usual? Or what trends are you seeing there? It's under control for us. I think we as we have said before, early in the pandemic, we also shipped a lot of products to the U. S. To be closer to customers. And so I think the shipping costs are at a more normal level at this time. When it comes to components and lack of components, of course, we are following that very closely. We have not seen any issues for us yet. So and we have no indication at this point that we will have any issues, but we are, of course, following the situation very closely as any other company that has to do with electronics. So far, so good. Thank you. That was all for me. Thank you. Thank you. And your next question again from Mr. Victor Westman from Reda. Your line is now open. Hello again. I wanted to ask about the Magna ARRAY 4000. If this is a super niche product I mean high end or is it possible to convert a large part of the installed base to these products and what would be that effect, if so? Absolutely, it is a high end product, but it's not a niche niche product. I think this is a very relevant product for anyone being a driver or being constantly in vehicles with high noise. And I think that this is some of the competitive products to this are, for instance, from Bose, who has been supplying products for vehicles for many years. And comparing to Bose, the Magna is a much more modern up to date digital headset. So we definitely believe that we can take market share with this product. But I think that the need for very high attenuation levels, hearing protection is increasing not only within the Army, but also in other areas. There is a much higher noise level than only some years ago. So these high levels of attenuation is something that is very much looked for. And we can, over time, both develop the Magna headset with different variants, but maybe also take it broader from a user point of view than what is the case today. But this is some of the things we are now investigating and exploring with our new combined sales team. So where I'm getting at is that you had one other older product that have sold in several 100 of 1000 units. So I was just thinking the difference in pricing with this the Magna Product should be quite substantial. So that should be an important growth driver then for Raykel? Yes, absolutely. And another question. Is it fair to say that the Intercom solution will be the 1st new growth driver to give a meaningful contribution to sales if you compare it to The The police vertical and the new geographies, as I say, intercom is a bit faster than the others in Contributing. Yes. I think they have different dynamics because The if you take the law enforcement, that is more of a distribution and sales effort where you are where we are selling what we already have into new user groups, but where we also see that this is a different way of selling because it is much often, it is much lower volumes, and you have to go through distribution to reach all the different users. It's not centralized in the same way we see on the military market. The Intercom, on the other hand, yes, you are right, but it follows the yes, The time lines we've seen before, it takes a while to sell in. And then the testing procedures needs to be done. The funding needs to be in place and then the orders could also be substantially higher than what we see, for instance, for law enforcement. So as we've said before, we believe that the Intercom investment over time will be a very important contributor to Envisio. And of course, this is not just one product. This is getting into a whole new product area where we can see that we can operate, not only with military customers, but we have also actually sold the first units to law enforcement vehicles. And speaking about law enforcement there, what you have a good foundation with the distribution and the sales team. What's next in terms of law enforcement? Are there any actions you need to take? Or are you just yes, anything we all Yes. We the first step is, of course, to sell what we have. And as we have said, what we have today, the military solutions will fit with many law enforcement users as well, especially in the top tiers of law enforcement users, the Riotcrowd teams and SWAT teams and so on. And our next move is, of course, to broaden the product portfolio also for law enforcement with products that will address maybe the lower end of Tier 1 and Tier 2, but maybe also go little bit further. And one smaller initiative was the collaboration with Energia, where we address a different type of police and law enforcement needs with those types of ear tubes. So you will see over the coming years that we will expand the product portfolio that addresses law enforcement users. Yes. Just the last question on the intercom. You mentioned the need for Further resources in both sales as well as development, and you wanted to drive more penetration efforts. Can you just give some more color on what exactly you are wanting to do here? But it's a little bit of a circle in the sense that let's say we have 2 salespeople. And then with 2 salespeople, we know that we can handle, let's say, 5 intercom sales projects. And then we need 2 or 3 people in support on R and D for that amount of business. If we certainly see that now we actually have 10 or 15 relevant intercom customer projects, then we need to look at what more resources do we actually need to cover these projects in a meaningful way. So and those investments, of course, always come before we get the order. So it is a snowball a little bit that when we can see that the activity level is increasing, then we need more support, then we need more sales to support those projects. So it is an ongoing process. And I assume you have a quite good leads for the increased Action when you take the decision to hire more people there. It's not just Yes. I think I mean, it is easy to say that if we when we show our intercom to almost it doesn't really matter who we show it to. Almost everybody would like to try it. That's the first step. Can we try it? And then after that, it is our task to try to find out, is this just trying because they think it is fun to try it? Or are they trying it because they actually have funding available in the foreseeable future? And once we can see that here are business opportunities where there is money behind, then we will, of course, need to make sure that we have enough resources to address it because it is a complex product also to sell because requires a lot of cables and interfaces to all the equipment they have. So it does require resources to follow-up. But it is an ongoing process where we follow the activity level closely. Very good. Thank you so much, Lars. Welcome. Thank you. And your next Question comes from the line of Yiwei Zhao from SEB. Your line is now open. Hi, again. Lars, just a quick question regarding the GSA contract. Can you sell Rayko's products through the contract? Yes Do you want to confirm? Yes. Okay. That we can. But we have it on the top of my head, as I recall it, twice a year, I think some of regular products are already on other companies' DSA contract. But we have an opportunity at least twice a year to put new products, including our own new products from Invisio and then now also including Raquel, we can put those onto the DSA contract twice a year, yes. Okay, great. Thanks. Thank you. And there are no further questions at this time. Sir, you may continue. Okay. So then that concludes our presentation of the Q1 report. Thank you for attending, and thank you for all the great questions. I look forward to speaking to you again in July after the Q2 financial report. Thank you all. Have a great day. Stay safe.