Dynavox Group Ab

Good morning and welcome to this earnings call. We will cover the third quarter of 2022 and our business then in July, August and September. Click. I'm Fredrik Ruben. I'm the CEO of Tobii Dynavox.

And I'm Linda Theibring, CFO of Tobii Dynavox.

And in this earnings call for the third quarter of 2022, we'll first take you through some brief fundamentals about the company, summarizing the main takeaways from the quarter. We will then dive deeper into the financials, and thereafter, there will be a Q&A session. You can submit questions during this live session in the chat function that you have in front of you on your screen. We, of course, and also for this call, you can submit offline questions via email to Linda's email address, which is linda.tybring at tobydynabox.com. Right, but then we'll dig deeper into a little bit of a summary about what Tobii Dynavox is about. The first and most important is to reiterate our mission and vision, which I know is very dear not only to roughly the 600 or so colleagues around the world in Tobbe Dynavox, but also to our ecosystem of partners, investors and more. Our vision is a world where everyone can communicate and we will contribute to this by focusing on our mission. Our mission reads to empower people with disabilities to do what they once did or never thought possible. And this basically summarizes two of our main user stories of the people that we're trying to serve. The first one is to do what you once did. That may be the person who led a normal life until a diagnosis such as ALS rendered her unable to control her body or communicate like before. The other story is never thought possible. That can refer to the child diagnosed at an early age with a condition such as autism, cerebral palsy, where thanks to our solutions, she can do much more than the world around her ever thought possible. And on the picture on this slide, you see Delaina Parrish from Florida, who was born with cerebral palsy, and she is an absolutely great example of that user story. The market that Tobii Dynavox serves is hugely underserved. There are some 50 million people on the face of this earth that have a condition so grave they simply cannot communicate unless they have solutions like ours. Every year, about 2 million people are being diagnosed, yet only about 2% of those are actually being served. The rest remain silent. The main reason for this spells lack of awareness also among the professionals and the prescribers that are tasked to assist these users, which then, of course, obviously leads to poor health care reimbursement system, even in some of the most well-developed countries in the world. Tobii Dynavox, we operate with a global footprint. Today, some three quarters of our business stems out of the US, largely because a reasonable, well-functioning funding system established some 20, 30 years ago in the US. But our products are also sold in over 60 markets around the world. Our staff is distributed in a similar way as our revenue. That means that some 75% of our own staff are based in North America. our u.s headquarters in pittsburgh pennsylvania our second largest office is here in danderyd outside of stockholm where we but we also have branch offices in several european countries as well as in suju china at this point we employ roughly 600 employees or 550 full-time equivalents With the recent acquisitions, we have now established or increased our presence specifically in countries including Belgium, France, Ireland and Denmark. But we also have a smaller number of remote employees in primarily Central Europe. At Tobii Dynavox, we provide a comprehensive portfolio of solutions. And it ranges from these five kind of buckets that we have on this list, where the first one is the content, such as the world's leading library of communication symbols called PCS. We also have synthetic voices and specifically the voices is a component that we now own in-house through the acquisition of Acapella Group, which is the world's leading provider of naturally sounding and diverse synthetic voices. If we then go down to the list, we also have highly sophisticated communication software. That software is tailored to the type of users, which obviously can vary greatly based on that specific user's needs. We then develop and design devices with cutting edge technology. They're typically medically certified, very, very durable. And this, of course, includes communication aids that you can control via eye tracking. We have services portfolio to help our users through the complexity of obtaining and getting funding for solutions. And last but not least, we're there to help our users, therapists and caregivers through a global team of support resources. We operate this model globally, and it's important to know that each piece of this that you see on this slide is critically important and also a significant differentiator for us, making us absolutely unique in this space. Tobii Dynavox's go-to-market model is predominantly as prescribed aids. Some 90% of our revenue comes from public or private insurance providers. This also means that we have solid paying customers and have always been very resilient towards changes in the overall economic climate, which is obviously something very important at this date and time. In addition to that, our market is, as I showed on the previous slide, extremely underpenetrated. So that, again, was a little bit of a recap about Tobii Dynavox. So now we'll move back and focus more on the main topic of today, namely our earnings report for the third quarter of 2022. And I will start with some highlights and the main events from the quarter. We had yet another very strong quarter when it comes to revenue development, both in absolute terms, but also in adjusted terms. The underlying revenue growth compared to the same quarter last year sums up to 25%, which is the same trend as we saw also in the second quarter of this year. We obviously feel the strength of an up-to-date product portfolio. It's continuously improved with new products such as the SC Tablet Mini, which is in the picture on this slide, which was launched in September, combined with many new software improvements. And specifically, the SC Tablet Mini is a highly portable, medically certified communication aid that we target towards younger ambulatory users. Typical case is children are children with autism. At the same time, we also grown our sales and marketing organization and perfected steering and onboarding to ensure that we have a minimum of delay once we onboard new employees. This includes further strengthening our US funding organization, which is a function which is an important inside sales and support team basically. They navigate each customer through the complexities of obtaining funding for a new communication aid through private or public insurance systems. Our relentless work to improve awareness and the competence around the solutions we provide continue specifically among prescribers and professionals and the value of now being able to meet in person after the pandemic both internally within our team but also as well with as with our customers it cannot be underestimated the majority of our growth in the quarter continues to come from our north american markets which is also the largest and most influential market in our industry so it's not just us In Europe and other select markets outside of North America, the healthcare systems and the processing are still not fully up to speed as a consequence of the pandemic. The underlying need is, of course, no different compared to, for example, the US. If you then go down further out in our P&L, our margin continues to be negatively impacted by higher than normal component costs and freight charges. But we see a clear improvement when it comes to the component prices, which will help us in the longer term. We currently have adequate stock levels for all our main product lines, basically. Our OPEX levels are higher than a year ago, but this must be seen in the light that a year ago, we still had large portions of lockdowns. We also have the split from Tobii to become a standalone company, which has increased our OPEX and we have made significant investments in our staff. We see that this increase will start to plateau going forward. In the quarter, we also concluded the acquisition of our Danish reseller partner Ask, which now enables us to align our commercial organization, which is direct in the same model as in Sweden and in Norway. And these are all three markets with similar characteristics. I'd like to hand it over to you, Linda, to take us slightly more into details when it comes to our financials.

Yes, sir. So revenue for the quarter came in at 320 million SEK, a 26% year-on-year growth. Currency impacted positively with around 19%. M&A contributed with almost 6%, and organic was flat. However, remember Q3 last year was artificially boosted with some 43 million SEK regarding orders pushed from Q2 to Q3, related to the supply problems we had. If we adjust for this, our underlying organic growth was solid 25%, continuing the trend from the second quarter. As Fredrik said, North America continues to choke strong growth and momentum. Europe and the rest of the world outside North America, on the other hand, are still experiencing delays related to the opening up post-pandemic, for example, heightened usual absence levels among healthcare staff and therapists. In addition, these regions normally, even before the pandemic, have had a longer prescription lead times versus North America. The gross margin ended up at 67%, but we have had some tailwinds related to currency that are still impacted by high components and freight costs. Component prices are now starting to normalize, but we see high level of inventories But since we have had a high level of inventories, we will see improved gross margin. It will take some time during the coming quarters. The level of freight cost will most likely remain for some time, depending on how the world around us actually develop. We expect the gross margin to fluctuate somewhat over the coming quarters before normalizing at historical levels. But it's also important to understand our FX exposure. We have around 80% of our revenue in US dollars and almost the same level of cost in US dollars. That means that we have a limit impact on our EBIT from an FX movement, but we'll have fluctuations on revenue and some short-term like timing effects on gross margin and EBIT. So if we look at the EBIT for the quarter, we concluded 25 million SEC or almost 8%. versus 16.5% last year. But last year's numbers were impacted by the push revenue from Q2 to Q3, which improved EBIT with around 28 million SEK. So if we adjust our underlying EBIT margin in Q3 last year was around 6%, which means our underlying EBIT margin improved year on year. Our OPEX increased organically with around 17% versus prior year. The comparable period last year had a lower cost due to that we had low level of activity due to pandemic, lower costs related to travel and events. Now things are opening up and cost development this year came in at the more normalized level after the pandemic. Increased OPEX also relates to salary increase, hiring more people, primarily in sales and marketing like Fredrik was talking about. And we still have high consultancy costs, partly due to staff turnover. The net effect of R&D spend increased with 10 million SEK, mainly driven by normalized development cost. We have for the past year, like many other industries, had slightly harder to replace turnover within R&D. We also see increased depreciation related to major product launches during end of 2021 and beginning of 2022. But as we have said earlier, we are super happy with the growth that we see and the improvements. But we see that we need to do improvements when it comes to EBIT. But we remain super competent to reach our 15% EBIT target. And we have been there historically. And nothing has actually changed when it comes to the go-to-market model, products or prices. As we also have said earlier, reaching our EBIT target will come gradually. And the basic three main drivers will be we need to continue to grow our revenue. We have to have a more normalized gross margin and OPEX that grows at a slower pace than our sales. So talking a little bit about the balance sheet. Cash flow after continuous investment, minus 9 million SEC. The negative effect on working capital in the quarter is mainly driven by increased sales in North America, where the payment terms are slightly longer versus the rest of the world. As we have said earlier quarter, it is a cautious decision to maintain higher level of inventory, but we've started to balance this a little bit in this quarter. Cash at hand ended up at 109 million SEK, Net debt was 565 million SEK. And during this quarter, we closed the one acquisition and paid this in cash. Net debt over last 12 months EBITDA was 3.1 times in absolute terms. But also note that if we would add our acquired companies last 12 months EBITDA, net leverage would be around 2.9 times. In the beginning of the fourth quarter, we signed a new refinance agreement with Swedbank with the same facility level as earlier of 700 million SEK. And we are super proud to say that this loan is signed under the classification of a social loan, which is a proof of that we truly contribute to a better society as a clear example of the SESG. So, Fredrik, let's conclude the call.

Yeah, thank you, Linda. So before we open up for question, I'd like to reiterate the main takeaways from this third quarter 2022. So we saw a very strong underlying revenue development of 25%. Similar to the second quarter, North America continues to be the main growth driver for us. Our margins are hampered by high component and freight charges, but the component prices are now starting to come down. The strong US dollar has a limited impact on our bottom line earnings. Also, a large portion of our revenue comes in US dollars, but it does impact the top line revenue. Our EBIT came in at 7.8% in the quarter, which is sequentially up from both the previous quarter, but also if we adjust for the artificial revenue boost in the third quarter of 2021, we're also better than the same period last year. We're happy with yet another record quarter revenue wise. It's well above our long term targets of 10% annual revenue growth. At the same time, we improve our profitability sequentially, but we still have some work to do before we reach the plus 15% debit margin that we believe is desirable for this company. But the goal, however, remains intact. And to reiterate our long term financial targets, which has a time horizon of roughly two years. So over time, we aim to maintain an annual growth in excess of 10% adjusted for currencies. We want to reach and maintain an EBIT margin of 15% or more. We want to maintain a net debt ratio over the last 12 months EBITDA of two to three times. The absolute outcome, as Linda said, was 3.1. But if we add back the run rate of the newly acquired entities, it was 2.9 times this quarter. And once we have landed in our recent split from Tobii and we've built up our balance sheet, dividends will happen unless other more compelling alternatives such as M&A, et cetera, takes preference.

that said we're handing over the microphone and inviting christian hall to take questions from the audience hi christian hi hi everyone okay so a couple of questions from donnie newberry yeah uh looking outside of u.s what are the key trends including public funding and also demand has td pilot been launched globally or only in the u.s

So I'll start from the from the back there. Hi Daniel. Yes, the TD pilot has been launched globally. It's a typically a funded product, so it's not a product that you buy over the counter, etc. So it kind of requires a reasonably solid funding systems similar to our other medically great medical grade eye tracking devices. We see that trends overall in the world is that inclusion, accessibility, etc is something that is coming up higher on the agenda. At the same time, the big hurdle for us is the fact that the competence and awareness also among the people that prescribe our product is still very, very low. I think we have come a little bit further in the US when it comes to general awareness, for example, among speech language pathologists, occupational therapists than we've done in most other markets, including Europe or other developed countries outside of the US.

Okay, and a follow-on question. Competitive development. Remind us about key competitors and your view on the market share developments in the past 12 months, especially in US dollars.

Sure. The competitive landscape has not changed in pretty much any shape or form. We have a number of quite niched players where there is one company that we have named before called PRC, Saltillo, in the US. which has a similar offering to us, but more regional specific to the US. And nothing has changed according to what our estimates, at least when it comes to the different pieces of the pie. But again, I think it is very difficult to talk about competitive pressure in a market where we have a 2% penetration. It's almost to the point that we should applaud any product that is being sold into this market because the vast majority of users out there, they remain silent, regardless whether they have a product from us or someone else.

Okay, so a final question from Daniel. Any risk of internal suboptimization from a product point of view? Might the SC tablet and TV pilot cannibalize on the TV 110? I think I wanted to say.

Yeah, so first I think it is important that we have. We have products that does to some degree virtually the same thing, but with different ecosystems. the the good part for us that even if there is cannibalization our gross margin and the price tag on these products are virtually the same so for us we're quite indifferent whether a user picks a windows based device or an or in this case an ios or app ipad os based device because we we have the same financial uh or profitability metrics basically on either of those devices so Almost the liberating part here is that I think we should look at this as the world at large. We have a certain number of users who prefer Windows-based devices for various reasons, and we have certain types of users who prefer Apple's ecosystem of apps, etc. And that is no different among our users. So we're quite indifferent. We don't see this as any hinder whatsoever, neither internally or when it comes to our offering in the market.

Okay. We have a question from post Q3. Have you seen any improvements in staffing and efficiency healthcare systems, forcing the weak development in Europe relative to North America? When do you expect most European markets to normalize post-pandemic similar to that of North America?

I think we have to add the fact that we are quite far away from as a solutions provider to what actually happens day to day, specifically if we should see, you know, absence levels, et cetera, post Q3. But our observation, and this is also something we got verified when we talked to other adjacent industries is that In the US specifically, it's largely a private practice type of system where the prescribers are entrepreneurs and the business model for them is basically to make sure that they have a full caseload and the calendars are full with meeting patients. If you then go to some of the markets here in Europe, which has a more public funding and public employee system, we do see that there isn't that same drive to actually come back to full productivity. which means that A, there is still a gap and there's staff missing. They have very big backlogs in terms of meeting patients. We hear from certain markets where just to get an appointment with a speech language pathologist could be a three to four month delay. If you add to that, in some of the bigger markets, there is a three to four month processing time to do the assessment and get funding. And then the occupational therapist has to go out and that those also have a three to four months delay before they can actually go out to the patient. So to some degree, what we see in some of those markets right now is a consequence of what happened maybe 12 months ago, where we still were in a, in a pandemic scenario. I hope that kind of paints a little bit of a bigger picture, but I think it is important to maybe look at other providers of healthcare services, which we see a lot of proof that the leave of absence for sick leave, et cetera, is going down compared to the pandemic, but they're still at historically very, very high levels. And that probably explains a little bit on what we feel in the end.

And now we have a question from an anonymous person. Can you talk about the order backlog in the US and European countries? How was Q4 started and how should we think about sales seasonality in Q4?

Maybe you can talk a little bit about the backlog effect and just explain the comparison between this year and last year so that we can make that clear.

If we remember last year, I mean, we had a huge backlog going into Q3 and we were able to shift majority of the backlog, but we also ran into some problems at the end of Q3 with some logistic, which means we had an unusually high backlog also at the end of Q3, but not as big as it was going into Q3. Now we are more at the normal level, even though, I mean, we have increased our sales, which means our backlog is slightly higher than it was maybe one and a half years ago.

Yeah. So we have no systemic backlog in terms of, you know, we don't have supply, et cetera. And to answer the seasonality.

Q4 is normally our largest quarter. And that relates specifically in U.S., the funding system is actually going from a calendar year. So at the end of the year, they need to start a new physical year for the subscription of the insurance.

So you really want to get it up. There is an incentive, basically, when it comes to something called co-pays, etc., to actually process orders before December 31 in the US. But that's, on the other hand, the only seasonality effect we have in the company. Normally, it's quite well smeared out over the year.

Now we have a couple of questions. Firstly, I just wanted to get a sense of the gross margin here. The so-called normalized levels, is that some 67 to 68% you're talking about? How should we think about Q4, given it seemed like quite an improvement the last quarter, considering the one percentage point non-recurring boost?

I mean, historically we have tracked around 66 and 67%. And as we have said, this is where we should be going forward. We think that because of the inventory levels and the currency, the gross margin will fluctuate a little bit. What we also see is that the prices on our product are starting to normalize. So we don't have the extra surcharges, but we still have a high level of inventory that we bought some time ago that we need to now shipping queue for. So I think we will see slightly improvements, but it will come over time.

But the assessment on what is considered a normalized gross margin is exactly what you say, Oskar.

And another question from Oskar. then this is the uh this is the third quarter with quite substantial working capital build-up how do you feel about inventory levels going forward if you can comment on the cash flow prospects forward given that it looks quite weak over the last few quarters even excluding mma and the payment i think

The majority of our working capital is actually in inventory. And if you look at the level of inventory that we had a year ago and that we've had historically is higher. What we have said now, because of the situation in the world, we think that the level that we have now is where we should be as long as the situation in the world looks like this. It might be that we are able to lower that in the future. But for now, I think we are about the stable levels.

But also in the working capital situation, one positive effect, there's actually a fundamentally positive effect, and that's because our revenue specifically in the U.S. is growing. And as Linda noted before, the payment terms in the U.S. are slightly longer. So obviously this is something we're going to make sure that our accounts receivable is, we have a laser eye on making sure that that actually turns into cash.

another question from did you get any benefits in terms of your new financing agreement regarding the social loan classification compared to your old the commercial agreement with our bank is about similar as before a question from matt sitting here a red eye could you expand on the component prices do you see any shortages as well

We don't see any shortages right now. In fact, we do see on the component prices that products that we build today, which then will be sold and shipped slightly further out in the future, those component charges are lower. And I can reason just a little bit. Why is that? So what happened was when there was a shortage of components in the world, Obviously, in some cases we couldn't even buy those components from the actual producer of those components. We had to turn to certain middlemen and other types of companies who had built up storage and they of course had quite big freedom in setting the prices. What has happened now since A lot of companies have built up safety stocks. They're no longer doing that. And the demand and the normal supply levers are starting to level out. That means that we can now go back and buy those specific components directly from the producer of those at the normalized price. That is happening right now. And those one-time surcharge charges, sometimes referred to as PPVs, we don't see them any longer. So, hence, we feel quite confident that the actual component charges will go down. The one thing that we, however, don't have full visibility into is the cost for logistics. Because logistics, at least for us as a reasonably small player, remain quite high and it's difficult for us to gauge exactly when those will and if they will start to come down. But one of the good things with the fact that we now have a more predictable supply chain when it comes to components is that we can use cheaper and more environmentally friendly shipping methods, such as shipping our products by boat.

Okay, a question from Michael Lafayette from Carnegie. You mentioned that operating costs should plateau ahead. Is the Q3 OPEX a fair assumption also for Q4? and the quarters during 23? Or do you foresee a need to increase market and development activity further?

Do you want to answer to that?

What we have said historically is that our OPEX needs to continue to increase when it comes to sales and marketing. So we need to add more resources to be able to grow. And I think we are still, if we look at the full year 2022, we have still impacted by COVID. So we will have some continuous development of the OPEX as well.

But I can say just from an operational perspective that in Q3, activity levels are back to at least normal levels when it comes to, for example, industry conferences, travel, internal travel and meetings, et cetera, within the company. So it's been a very normal quarter when it comes to, you know, our largest spend, which is on staff and marketing.

Okay, and a question from Oskar Elmqvist in conjunction with this. Could we expect similar selling expenses as a percentage of sales for the coming key?

A very good question, Oskar. I would say spontaneously yes for the simple reason that our go-to-market model hasn't changed whatsoever. We continue to sell in the same type of way as we've done before our staff are back to a normal sales pattern on how we sell things so we should have a quite linear growth in in terms of you know revenue increase and then hopefully slightly lower sales and marketing expense related to that okay and a question regarding the inflationary pressure generally and how you see your pricing power and the

possibility of compensating for a higher cost.

Yeah, so it comes in a little bit different fashions depending on where in the world we sell. If you look at markets where we sell through distributors, etc., we are increasing the prices for our products in a similar way as many other industries because we have control over that. In some markets, and there are quite few, our products are sold through tenders who typically have a one to two year term. and in in some of those there is no kind of inflation uh lever to be pulled so we won't be able to change those prices until the tender term expires then in our biggest market the us there is an annual in KPIs increase, which is set by, in this case, Medicare in January every year, where the allowable amount that we can charge for our products will be increased according to KPI. We don't know what those numbers have been, and it sometimes takes some time before they're actually turned into action. But we are quite confident that there will be, in our by far biggest market similarly there, an opportunity for us to follow inflation and increase our sales prices there too.

Okay, and a more general question regarding how you view the present situation, the challenges you see, and what priorities you have short term right now.

Yeah. As I was on a little bit before, our biggest challenge, not just as a company, but as the fairly big fish in this pond, is the fact that awareness is so low. Most people in the world that are in need of our products and live In a country where there is a welfare system that technically should support these types of products, they don't get it. They are silent. This includes Sweden and many very well developed markets. That challenge is what we need to have front and center of everything we do, because that's how we will be able to grow this business. That's how we will reach our purpose and help more people with a voice and also how we will meet the financial targets that we have set up in terms of both revenue and profitability growth.

That concludes all the questions.

All right. So I would like to thank everyone for dialing into this Q&A session and this earnings call presentation. We're there for you. So don't hesitate to reach out if you want more information. I wish you all a great Friday and weekend. Thank you. Bye.