Frequentis AG (FQT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Hailey, your Chorus Call operator. Welcome, and thank you for joining the Frequentis conference call following the publication of the half-year 2020 results. [Operator Instructions] I would now like to turn the conference over to Stefan Marin. Please go ahead.

Ladies and gentlemen, good afternoon, and welcome. Thank you for taking the time to dial in today. With me are Norbert Haslacher, our CEO; Sylvia Bardach, CFO; Hermann Mattanovich, CTO; and Peter Skerlan, Vice President, Finance. We will start with the presentation followed by a Q&A session. I would like to ask Norbert Haslacher to start with the presentation.

Yes. Thank you, Stefan, and a warm welcome from me as well. The past months have been very busy for us, but with good operating results in many events, which we would like to present to you today. So I would like to start on Slide #3. On the 2nd of April, when we had our call on the 2019 figures, most European countries were in some kind of a lockdown. So we are convinced that we did the best we could to actively manage the COVID-19 challenges. And keep the wheels turning as much as we can. So in addition to the measures taken, there were several reasons why we were able to cope successfully with the impact of the pandemic to our business. I think the resilience of our business model is supported by the fact that the product supplied by us are part -- or usually a part of a country's safety critical infrastructure. And this infrastructure must be always available and ready for operation, irrespective of number of flights or flight movements or how many times a police or fire service or emergency rescue service are deployed. So consequently, there is continued demand for our products worldwide and services, as shown by the massive increase in order intake. So our business continuity, I think, is proven by the revenue generated in the first half 2020. And this was made possible because Frequentis project teams found new digital ways of performing installations and project acceptances. On-site acceptance, systems upgrades, testing, training were carried out remotely in special 2-person teams. So 1 person on the customer side and 1 in the Frequentis office. And our regional presence in countries like the United States of America, Australia, Brazil, China, the U.K. and Germany was, and still is helpful in the face of travel restrictions. And last but not least, I think it's worth to mention that for many years, our corporate culture has permitted mobile working practices, working from home or on-site at customer premises. So employees and the existing IT infrastructure handles the complete shift to working from home very well. There is also no need for additional IT investments. But I think at this stage, we have to give a big thank you to our people worldwide, how they have coped with this special situation, managing the clients and managing order intake and managing the projects. So now I would like to come more into the figures of our presentation, so Slide #4. All in all, we can report that the impact from the COVID-19 pandemic on Frequentis day-to-day operations was limited, as shown on Slide #4. So we are very proud to report to you an order intake rose of 28.8% to EUR 171.8 million in the first half year. To secure orders for Frequentis during this pandemic, we introduced a range of measures such as digital marketing, via webinars, online demonstration rooms, and we successfully launched these [indiscernible] the contribution to this order intake. Orders on hand, therefore, are very high at the moment. It's EUR 445.2 million, orders on hand, that provides us with at least 1.5 years of visibility and secures a fair portion of the revenue in the second half of 2020 and beyond. Revenue was almost unchanged at EUR 132 million. EBITDA came in at EUR 6 million and EBIT increased by EUR 2.9 million to minus EUR 1 million. So the reason for this improvement were mainly lower travel expenses, as you can imagine, as well as lower advertising expenses due to cancellation of tradeshows. Due to the one-off effect of the impairment loss of Commercial Bank Mattersburg, we reported a net result of minus EUR 23.4 million for the group compared with a loss of EUR 2.4 million in the first half of 2019. So without the impairment loss, the net result for the first half 2020 would have been EUR 0.2 million. Despite the impairment loss, the equity ratio was at 36.5% at the end of June, and total equity at EUR 94.1 million. Net cash was EUR 51 million, including EUR 36.8 million in advanced payments from customers. Cash and cash equivalents amounted to EUR 57.7 million. Liabilities to banks were only 6.5 million. Further highlight in H1 2020 Slide will provide an overview of further events. Back in March, we acquired 51% of ATRICS. This company is still run by the owner of the remaining 49%. And it develops software solutions for runway taxi operations management to improve safety and especially to improve the digitalization at airports. It's a cost-efficient exercise with digitalization at airports, which is, of course, in line with the current energy in this industry. And it offers also consulting disturbances for airports and air traffic control organizations. So ATRICS has been fully consolidated by the Frequentis Group since the start of April 2020 and we are working on the integration into the Frequentis Group. Last week, we announced that we have signed a binding investment agreement, which will give us a 50% stake at Nemergent Solutions, company based in Bilbao in Spain. Our bundled software and technology expertise will allow better use to be made of the opportunities for safety critical broadband communication, offered by the LTE mobile communication standards. By acquiring ATRICS and the shareholding in Nemergent this is continuing to drive forward and broaden its product portfolio as presented during the IPO. Our latest transaction shows also that the impairment loss due to the insolvency of Commerzialbank Mattersburg has no impact on our M&A activities. This year's Annual General Meeting had to be held virtually, as you know. And as a company, providing safety critical infrastructure, we choose to do this using two different internet streaming providers as well as phone connections. And the dividend proposal of EUR 0.15 per share for the 2019 financial year was approved. And also worth what to mention is our employee participation program had a high take-up of over 35% of eligible employees, bringing proceeds of just over EUR 1 million into Frequentis. So let us now report on the financial performance of the first half year 2020 in more detail. On Slide #7, let's turn there. You see the order intake. So the increase in order intake was quite significant. And it was also supported by some large orders, which is good for us to manage our utilization from the long term. These includes an order from the Spanish air traffic control organization, and the contract to deliver communication system for the police and fire service control centers in Germany, Hamburg. Interesting to mention is that Hamburg will be deployed with our software platform LifeX. And in addition to the telephony and digital radio, the communication system for Hamburg will allow interactive use of model multimedia information in control centers, for example, by our social networks or messenger services and related apps. And therefore, we go more and more as promised into data. We aim to roughly maintain or even increase the order intake in 2020 as a whole. Now to Slide #8. So orders on hand are high at almost EUR 450 million. The Public Safety and Transport segment increased its orders on hand by 4.4% compared to the end of 2019. And the Air Traffic Management segment reported a 20% rise in orders on hand. Revenue development was stable despite the pandemic and its challenges, especially the travel restrictions and current time regulations. So the revenue split shows a slight increase in the proportion of revenues at public safety and transport with accounted for almost 1/3 of revenues. For more details of profitability, I would like now to hand over to our CFO, Sylvia Bardach. Sylvia please?

Good afternoon from me as well. Let's have a look at Slide 9, which shows our profitability. We were able to increase both EBITDA and EBIT. Lower travel and trade show expenses had a clearly positive impact. EBIT was in line with the normal seasonality. It should be noted that there will not be a reduction in travel expenses on the same scale in subsequent quarters because business level remains vital for sales activities on site, acceptance and training. Due to the one-off effect of the impairment loss from Mattersburg, the net result was minus EUR 23.4 million. Taking the tax effect of 25% of the impairment loss of EUR 30.9 million into account, the impact on the net result was minus EUR 23.2 million. Hence, without Mattersburg we would have reported a net result of minus EUR 0.2 million. The next Slide 10 shows a usual seasonal pattern of Frequentis business. Negative EBIT in the first half of the year is followed by positive EBIT in the second half. This seasonality results from the fact that revenues and profitability are higher in the second half of the year, especially in quarter 4. This is due to completion of site acceptance tests in our customer premises, finalization of projects and handover of major parts of projects in the second half of the year with revenue and EBIT highest in the second half. Expenses for staff raw materials, energy and so on, are spread fairly evenly over the quarters. On Slide 11, we show the financial policy framework. Our net cash position of EUR 51.2 million at the end of June 2020 is about 16.9% of group revenues in the 2019 financial year, and therefore, above our target of 10% net cash in relation to group revenues. Some facts about our cash position. Around 20% of the cash and cash equivalents of EUR 57.7 million at the end of June 2020 were deposited with 9 system-relevant major banks in Austria and Germany. The remaining amount of approximately 30% was deposited with more than 15 other banks in Europe, Australia, Asia and the Americas. The main banks, which we have a relationship, have contacted us in the past weeks. One of them stressed that they are happy to support us and that we can develop on our unused credit lines at any time if necessary. We aim for an equity ratio of at least 35%. It is currently 36.5%. We will be keeping a close eye on this ratio. CapEx is mainly maintenance CapEx for the IT infrastructure, software licenses and IT equipment and equipment for production sites and buildings. We expect it to be about EUR 5 million a year. R&D expenses should stay at about EUR 22 million in 2020. I shall now hand back to Norbert Haslacher. Norbert?

Thank you, Sylvia. So I'm now on Slide #13. Slide #13 gives you an update on the Commercial Bank Mattersburg case. So following the closure of the bank by the Austrian Financial Market Authority, FMA, on the 14th of July, an auditor was appointed as a government commissioner. And he stated in his report on the 24th of July that the bank was over in debt. So the FMA filed the application to open insolvency proceedings on the 22nd -- 27th of July. So what measures have we taken so far? So we claimed the full amount of our deposits from the bank on the 16th of July. We've received the EUR 100,000 from the Austrian credit production insurance entity on the 24th of July. We have engaged a team of lawyers to evaluate all legal options in order to protect the interest of Frequentis in the best possible manner. And we are filing the entire amount in the insolvency proceedings as well. We file a statement effect with the Austrian economic and corruption prosecution service. And we are participating in the criminal proceedings with the insolvent party. Regarding legal costs, the team of lawyers are working out a strategy with us. And in any case, we will make sure that the costs are reasonable. We ask for your understanding that for procedural reasons, we do not want to go into further details here and also not in the Q&A as we don't want to outline our legal strategy in this case. The Executive Board is currently reviewing the related processes and regulations for the treasury, including preparing process improvement proposals. The Supervisory Board has established a temporary special committee on the Commercial Bank Mattersburg case as well. In July, the Executive Board asked the auditor BDO to evaluate the risk management with respect to Rule 83 of the Austrian corporate governance code. And in August 2020, BDO confirmed the functioning and appropriateness of Frequentis risk management system in accordance with Rule 83. On the next Slide #14, I would like to go a little bit more into detail around the rationales around our Nemergent participation. Slide #14. So we are really pretty pleased to be able to -- to have been able to acquire a 15% stake in Nemergent Solutions. The company is based in Bilbao and has around 30 employees with a very strong R&D expertise in mission critical services, which is, as you know, one of our future fields where we invest because we think that 5G LTE will bring a new generation of country rooms, especially in the blue light organizations. So the rationale for the transaction is to better exploit the opportunities in safety critical broadband communication brought by the LTE mobile communication standards, for example, in the public safety and transport market as mentioned. And Frequentis is representative, will become a member of the Board of Directors of Nemergent. And the customary preemption right has also been agreed between Frequentis and Nemergent. So this is also leading to the next slide, #15, where we see our growth markets of the future, they have not changed. So I would like to go into a little bit more into details before concluding the presentation. I would like to highlight the growth markets of the future, which we are, again, investing and how our innovations are already at work. The Digital Remote Tower is based on the concept that we have developed with the German Air Traffic Control organization, DFS, and it's now deployed, as you can see in various countries around the globe. And market analysts suggest that there will be double-digit growth in this market in the coming years due to cost efficiency and due to cost -- due to digitalization strategies of the A&S piece. We are also at the forefront of drone management. In other words, the integration of drones in regulator spaces. Our engineers are also developing counter drone systems, for example, for the FALKE project currently in Germany. And the 5G LTE communication standards, which are already being used for every day, noncritical communication are now ready to be deployed in safety critical infrastructures. So the project for the U.K. Home Office, which is somehow German or Austrian [ pundit ] to the Ministry of Internal Affairs, will lead the way. Good. So last slide out to the management agenda for 2020. So thanks to the good order situation, the teams have generated all over the world. And the efforts made to use digitalization to deliver projects, Frequentis has been and still is, working at full capacity despite the pandemic. So based on the good start to the first half year 2020, we strive to roughly maintain or even increase order intake and revenue by the end of the year. However, certain activities such as installation and go-lives of new systems require travel, which may remain a challenge due to the pandemic. I think nobody can really foresee how this will go over the next 4 to 5 months. We are convinced that we are on the right track in our management of the pandemic as well as on an operational level in both segments. And we will now conclude our presentation and are ready for your questions. So back to Stefan, please.

Operator?

[Operator Instructions] And the first question is from the line of Teresa Schinwald of Raiffeisen CENTROBANK.

And the first one revolves around the rather substantial cost savings could have met during the first half. You said that we can't expect the same amount in the upcoming quarters, which is obvious. But maybe you could give us more information of -- on how much you think can be done via virtual site acceptance in the future? Maybe a percentage of how much reduction in these expenses we can expect going forward also in the midterm?

If we are -- Hermann Mattanovich speaking. If we are talking about savings and project delivery, you've heard that a majority of the savings was coming from travel restrictions. And therefore, savings and flights, et cetera. We expect that we will get back for the next half year to 50% of travelling compared to the normal traveling that we had in the past. But of course, we will try to prolong the savings that have been introduced and have been introduced in a positive way and acknowledged by the customer. So on long-term, I think that we can save about 10% to 15% of our travel expenses in the future for the long term.

Then my next question, if I may, is these new growth markets. Could you give us an indication on how much you've already -- what's the size of these markets in the first half? What size you're expecting for the full year when it comes to digital towers and drone markets, for example?

Yes. Teresa, Norbert speaking. I would like to answer that. I think it's too early to share market figures as they are not really sufficient at the moment. There are a lot of useless reports circling around like the year 2000, and the euro implementation figures of McKinsey. I think we are on the same level for these 3 markets at the moment, as they are, at the moment, developing. The three elements, remote tower is the most mature, where we see already, double-digit opportunities every single year coming in, where we can address the markets directly. But for 5G LTE and drones, I think it's too early at this stage to mention any figure because it depends on the investments of the countries when they are ready to roll out the 5G LTE infrastructure. And then use it for safety critical communication areas. At the moment, it's only for commercial usage. So I think it's a little bit too early, but we think it will be big, but we don't know how big it will be.

Understood. And my last question is on next year's potential payout as you're likely to record a loss for the full year. Can you already make some comments? What needs to happen for you to think about the dividend payment, a deviation from your dividend policy or looking at adjusted net results when it comes to dividend payments?

Yes. What we can say, Teresa, is there is not yet an executive board resolution on this. And we cannot provide any further information on this in the midyear 2020 status. Our dividend policy remains unchanged. But I think you have to be a little bit more patient as soon as we have an executive board resolution on this topic.

The next question is from Adrian Pehl of Commerzbank.

A couple of questions actually. First of all, maybe I missed it, but did you put a figure to the cost savings that you had in the first half, assuming that actually, your other operating expenses were below EUR 15 million last year, they were like EUR 20 million. I mean is that the delta basically explaining what you saved here? Or are there any other effects we should take into account? And then I have a question actually on your installed base business versus new business in the first half? It looks like installed base business has been very strong. At the same time, new business has been rather weak-ish. So is that kind of a trend that we observe that customers out there are currently more reluctant to give you a new business, while, let's say, the existing customer base is using the lower activity times to upgrade the systems? And then the third question is actually on your main segments and how they progress. Actually, order intake in PSP has been developing less pronounced compared to ATM. And I was just wondering, since I also believe that this could be kind of a winner from corona, do you see actually more order intake picking up in the second half or going into 2021? What are your general expectations for this one? And then I might have some follow ups, potentially.

Okay. Adrian for your question, I would like to maybe start with the cost savings. Sylvia, Hermann can you...

Yes. [indiscernible] Adrian thanks for the first question. I would like to answer it concerning the savings. The savings consists mainly of the saving of travel expenses due to two facts: One is that we couldn't travel to the side of the customer for on-site activities. And the second one, due to the fact that international sales didn't happen in -- due to corona. We also had savings concerning advertising costs and also in relation to that savings concerning sales trips and trips payers. So this is the biggest saving effect. Travel costs. Second one is advertising costs and also we have some savings concerning automotive costs.

Right. And that would be like, what, EUR 5 million to EUR 6 million, we should assume in H1?

It's mentioned in our half year financial statements on Page 33, where we can compare half year's figures of 2020 to half year's figure of 2019. So this consists of travel cost, EUR 3.5 million and advertising costs EUR 0.5 million. So these are the biggest portions.

Okay. I obviously missed that in the report, but thanks for clarification here.

If you need further assistance, just ask. But -- probably we go on in the meantime to the second question?

Yes, the second question was referring, Adrian, to the revenues between IBP or new customers or the order intake?

It was actually in your report, you split out revenues basically in these kinds of three portions, which is business installed base and other. And so I was looking at the change of the major positions in H1 and found other new business wins when my math is correct, it was like down 22%, but installed base business strongly up like 23%. So there was kind of a mix shift between those segments. And my assumption was that maybe you can confirm it or not, maybe it's not correct, but new customers are probably rather hard to win in corona times for the existing customers use the time of lower activity to operate systems. Is that correct? Or is that actually a little bit misleading here?

No. I think, Adrian, it's a bit misleading maybe since it's the typical waiving over the years and over the months, you have seen a major -- two major orders this year. We have communicated was Hamburg and the Spanish ANSB, which have been the biggest orders this year so far, both our new customers and not installed base. So they are completely new customers. So I would say it's a little bit misleading this conclusion. I think it's typical waiving exercise. But Peter, I think Adrian is referring to slide -- to Page #32 revenues and the split between new products or customer business versus IBB. Maybe you want to add something?

Yes. I want to add something here. We're talking about revenues. It's quite obvious that as we discussed, there have been delays in project delivery, because systems could not be put in operation. And in our business, it's quite normal that if new systems are delayed for whatever reasons, there is the need for the customer to go into longer maintenance periods for existing systems. So that balanced out quite well that for delays, which were caused by the pandemic and delays in going operational at the customer side. We had higher revenues and maintenance and IBP business. So in this respect, your assumption was correct.

All right. And on PST going forward and order intake?

Yes. I think the -- it's somehow when you look on [ Slide #7 ] when it comes to order intake. I think you're referring to order intake now, Adrian?

Yes, definitely.

It looks somewhat a little bit strange that everybody thinks that air traffic management will go down due to the pandemic. But in Frequentis, we had a massive increase from 80 to 117. I think we have to keep in mind that our clients, as I think you have heard that already many, many times from myself that we are not vendors of airports or airlines. We are vendors of governmental entities who provide safety critical infrastructure services. Therefore, they are not really depending in their investments on slight movements. They depend on obsolescence, obligations or technology obligations. And the sales cycle, usually, in average, is between 2 and 3 years. So what we have won the first half year, where we are very happy about, has been tendered maybe last year or 1.5 years ago, in the ANSB area. So maybe that's a little bit -- the win rate was quite good in the first half year, I have to say. So we have won most of the deals we have bided for. And I think that the trend when we look at year-end is also stable and good. I think it will balance out a little bit between public safety and transport and air traffic management growth compared to last year when we look at the year-end.

Okay. I mean -- yes -- I mean, you're perfectly right, as we have been discussing this for quite some time because on 1 hand, you would assume yes, for sure. Your customers are not the airport operators, but actually, the regulatory bodies, nevertheless, however, they are finding it -- is also exposed to either movements or passengers. It could always infer that these get sufficient funding from the government, obviously, but I mean, given in the history where we had adverse events in the markets, you also had some effects on the topline in your ATM division. What is different now, which I'm trying to still to extract to some degree? And the other thing is -- I mean, obviously, air control is working these days, right? So by how far could these government bodies? Nevertheless, probably not. They will not cancel any projects. I think this is very unlikely, for sure, but they could decide maybe next year, when they have sorted out themselves to a little bit push out these kinds of projects? Is that possible? Do you think that's not possible at all? Or what is your view here?

I would like to comment the first thing -- first comment, Adrian. Not all ANSBs are depending on over flight fees because when you see the biggest client, the FAA in the United States is funded by the Congress and not by all flight fees. So I think there are different patterns, how an ANSB is funded. Some of them are by all flights. Some are part of the governmental budget, some are part of the Congress budget. So it's a very diverse picture. Some are privatized like nuts, the primate onerous, like airlines and so on. So it's a very, very diverse picture. And I think the difference to 20 years ago is that frequent is much more global than 20 years ago. When you see how many countries we meanwhile deliver and where we have installed base business with existing clients, and the reputation, I think it has tripled the amount of countries where we are in, therefore, the risk is much more spread out over more regions and countries than 20 years ago. And we see that flights are coming back in Asia, maybe much more and faster than in Europe. So it's good that we are in Asia. I think U.S. is anyhow a special story because the flights will be back very soon as well. I think it was a good decision to regionalize and decentralize our sales operation a couple of years ago to be more independent in go-to-market and sales. And I think it's paying off. How it will be next year? I don't know. We do not see now a massive wave that they cancel programs. We do not see that. But what we also do not see is a second wave. It's a second lockdown. It's the second lockdown of airspace. That's, we don't know. But we will see, I think, very soon.

Yes. Great. And maybe one question, which is sort of a housekeeping one, actually maybe for Sylvia, I don't know. The point is actually, I want to reconcile in ATM, your sales, order intake and order backlog. It looks like actually that from the pure figures, your order backlog in ATM should be lower by EUR 20 million, roughly. So I was wondering -- I mean, usually, in that figure, you have clearly some FX deviations as you probably allocate in the period and FX rate to it. But it seems like this time, it is a bit more pronounced. I was wondering if there were any effects that I can't see from the outside, if you want so, anything that distorted this number.

Yes. This is Peter, I would like to answer to this question. If you do the reconciliation due to the numbers that we've given in the financial statements, you may see in ATM this difference in the public system and transport, the difference the other way around, a little bit smaller, but they are the way around. And that has to do with currency fluctuation where the value of our orders in hand fluctuate, as a lot of these orders are in foreign currencies.

Yes. And can you give us a rough idea? I mean, it shouldn't be the U.S. dollar, right? Or am I wrong?

When you look upon this reconciliation last year, you will see that the differences are way around. So what we have is concerning our total or the backlog difference concerning foreign currencies of approximately 3%.

Okay. And then last question, also financial wise, is actually -- you've given us the number for CapEx for this year, which is, I think, reasonably low. I was, nevertheless, wondering to make the picture complete a little bit since we have this new funny thing of IFRS 16. Actually, what should we factor in for the addition to rights of use this year, should it be actually comparable to what we saw before? Or where are we standing there?

Yes. Concerning IFRS 16, what we see is two influences: One is that it changed the amount of depreciation and amortization due to the fact that the right of lease has to be depreciated over the lifetime of the lease contract. That's one thing. The next thing is that when we enter into a new lease contract that it has to be immediately capitalized. When we enter in a new one as well as when we -- concerning the first half here, what you can see is that we have in addition to IFRS 16 additions of almost EUR 1 million. And we depreciated approximately EUR 3 million that what has happened in the first half year.

And is that a good proxy for the second half? Or should we factor in more additions to right of use?

I would take the same for the second half of the year. As I -- there's one thing concerning some smaller entities we think of making a new lease contract, but these are just smaller entities and shouldn't have such a big impact. When we go -- when we enter into a new lease contract of 2 to 3 years, but there could be a certain deviation due to this new lease contract, and we try to be very careful if we enter in a new lease contract due to the COVID situation.

[Operator Instructions] And there appears to be no further questions. I hand back to Stefan Marin for closing comments.

Yes. Thanks for participating today. We will be available for calls at the Virtual Commerzbank Conference on the 3rd of September and the Deutsches Eigenkapitalforum on the 17th of November. We will report the full year results for 2020 in spring 2021. And yes, please feel free to drop me a line to arrange for a call with myself or the management at any time. And in this time, goodbye and stay safe. Thank you so much.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.