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 Half Year 2021 Results Call. [Operator Instructions] And I would now like to turn the conference over to Stefan Marin. Please go ahead.

Thank you, Hailey. Ladies and gentlemen, good afternoon, and welcome from Vienna. Thank you for taking the time to dial in today. With me are Norbert Haslacher, CEO; Peter Skerlan, CFO; and Hermann Mattanovich, Chief Technical Officer. We will start with the presentation of our H1 2021 results followed by a Q&A session. I would like to ask Norbert Haslacher to start.

Yes. Thank you, Stefan, and a warm welcome from me as well. Despite the pandemic challenges, which we all know more than enough about by now, we were able to achieve a really satisfactory and promising performance in the first half of this year. So our business model remains robust. What I also want to mention is that our employees again showed their flexibility and willingness and a tremendous team spirit. We like to win for our customers and for Frequentis. So I'm on Slide #2 now on the highlights slide. So the measures we introduced last year to deal with the pandemic paid off. So they included, as you know, digitalization efforts, for example, the virtual trade shows and our Sales Goes Digital initiative. And due to pandemic-related restrictions in the contract award process, the awards of some contracts and some tenders were postponed as already last year experienced. Overall, order intake in first half of 2021 was below that in the outstanding first half year of 2020. With more orders on hand of more than EUR 450 million for the first time ever, we have a good basis for this year and also the next years. What we are proud of is that we were able to accomplish so many project acceptances in the past 6 months. That resulted in higher revenues of EUR 144.6 million. It's more than 9% higher than first half of 2020. The EBITDA more than doubled to EUR 12.4 million on the back of higher revenues, higher-margin projects and a profit from the transaction within -- with L3Harris. The EBIT follows and was positive for the first time ever in the first 6 months. So we also made a net profit. As in the past, we continue to monitor the quality and strength of our balance sheet. The equity ratio was at almost 40%, 39.6%, to be precise, only slightly down from the 40.7% as of the end of 2020, and total equity was up at EUR 115.1 million. The net cash position was EUR 77.2 million, thereof EUR 4.6 million in time deposits and EUR 45.1 million in advanced payments from customers. Let me elaborate a bit around the acquisition of the L3Harris ATM piece. So this slide provides an overview of the different units of the L3Harris transaction. L3Harris is a U.S.-based aerospace and defense company with about $18 billion in revenues. It was the largest acquisition in Frequentis history, and it's a game changer in terms of products and additional customer access we can gain. Hence, we can address more of the EUR 13 billion safety critical control room center market. Our addressable market will increase from the current EUR 2.2 billion by about 10%. So M&A remains as one of our strategic initiatives also for the future. Let me give you an overview of what we have acquired. These are civil and military product lines for air traffic management, voice communication systems and software and cloud solutions for air traffic optimization from L3Harris. Besides the portfolio expansion, a partnership with L3Harris to provide voice communication products for use in L3Harris large-scale solutions and service business was also agreed. The geographical market focus from the acquired companies is North America, Australia, Europe and Asia. It's a little bit too early to make exact projections for the regional revenue split. We anticipate that regions outside Europe will play a bigger role than is the case today. What we're happy about is that we closed the transaction in just over 5 months after signing the agreement. And the whole transaction is paid with our cash. One word on the purchase price. I think you remember the press release we have sent out recently. We are currently at USD 18.3 million plus USD 4.6 million for the cash that we acquired as part of the transaction. So depending on the final financial figures for working capital of the acquired units, the purchase price may increase or decrease. This is now a process for the next 2 to 3 months. The transaction will contribute, as indicated, to the anticipated increase in revenues this year, but the full potential will unfold in 2022 when we expect revenues of around EUR 30 million from this transaction. From a margin perspective, we expect an acceptable margin at group level in the medium term. As you can imagine, we have to consider post-merger integration costs to be expected in the short term. On Slide #4, order intake for the Air Traffic Management or ATM segment was at the same level as last year despite the decline in overall flight movements, especially in Europe. The Public Safety & Transport, we call the PST segment, was lower. We count on continued orders from public safety organizations, especially police. In railway, we experienced some postponement in investments. But I want to mention very clearly that the target from the European Commission to significantly increase rail traffic within this decade. Hence, we see growing opportunities in this sector as well. One highlight of our order intake was the takeover of the NATS contract in connection with the L3Harris transaction. That is the U.K. air navigation service provider. Other orders included the extension of the contract with our customer, Eurocontrol, for the European Aeronautical Information Management Database, EAD, and the supply of a tactical control radar communication equipment for the Royal Canadian Airforce. We have a well-filled tender pipeline. This, together with the usual higher order level in the second half year, makes us confident that we can increase order intake for the full year 2021 versus 2020. We'll now go more into financial details. I would like to hand over to our CFO, Peter Skerlan. Peter, please.

Thanks, Norbert, and good afternoon from me as well. I'm now on Slide 5. Orders on hand are at a record high of EUR 453 million, an increase of 5.9% versus year-end 2020, and the revenues increased by 9.4%. The PST segment showed lower orders on hand but was able to increase its revenues. The ATM segment showed the opposite direction with higher orders on hand but the revenues remaining flat. This difference between the segments is driven by the project nature of our business and budget cycles of our customers. Thanks to the good performance of Public Safety & Transport, this segment now accounts for almost 30% of group revenues. The changes between the 2 segments show the flexibility of our business model and our workforce utilization. Let's have a look at Slide #6. Based on the stringent execution of our projects and some higher-margin projects in the Public Safety & Transport segment, we can report the profit not only for EBITDA but also for EBIT as well as net profit. One important question at this point is the current half year profitability, a sign of a turnaround to sustainable profitable half year results. Since travel expenses and expenses for trade shows are still well below average because of the pandemic, we do not see the past half year as an indication of a lasting trend to positive half year results in the future. Expenses for travel and trade shows are still at the low level, EUR 1.5 million in first half 2021 compared to EUR 2.4 million in first half 2020 and EUR 6 million in first half 2019. We surely will rise again sometime this next year. They are vital for sales activities, on-site acceptances, especially for go-live operations, training and personal interaction with customers and partners at trade shows. It's hard to estimate whether travel expenses in the medium term will decline by 10% or 20% when compared with the prepandemic 2019 levels. We have to put into consideration that we have just acquired 3 units whose main offices are in 3 different countries on different continents. I will continue to keep a close eye on these and other expense items. Let's switch to Slide 7 that shows our financial policy framework. Our net cash position is well above the target of 10% net cash in relation to group revenues. The equity ratio came in at 39.6%, again, above our target of 35%. CapEx is mainly maintenance expenditures for IT infrastructure, software licenses and IT equipment and equipment for production and buildings. No significant amount needs to be added for the units acquired from L3Harris. We expect total group CapEx to be about EUR 5 million in 2021, about at the same level as 2020. For 2021 as a whole, we expect R&D expenses to be higher than in 2020. I will hand over to Norbert for the outlook and management agenda for 2021.

Yes. Thanks, Peter. So let me conclude with the outlook and our agenda for the running year. So as mentioned already, based on orders on hand of EUR 453 million, we are working at a good capacity level. These orders are the basis for our statement that we aim to increase revenue. Some of this increase will be attributable to the L3Harris transaction, of course. So we are focusing on integrating the 3 units smoothly into the Frequentis growth. Regarding profitability, we expect the EBIT margin to be in the range of 5% to 7%. It depends on several factors that are related to the ongoing pandemic, the post-merger integration cost for the L3Harris unit and, of course, project execution. So that's what we wanted to share with you, and we are now available for your questions.

[Operator Instructions] And the first question comes from the line of Florian Treisch of ODDO BHF.

I have 3 questions, if I may. The first one is on your order intake and the targeted kind of uptick in H2. I would like to ask if that is really driven by continued recovery turn of demand from your ATM clients? Or do you expect a factor in any larger-scale PST orders here? The second is around your margin outlook. After this, yes, very strong H1 profitability, wouldn't you agree that the margin outlook does not really look overly ambitious now, implying that you have a good H2 seasonality? Or are there any kind of, as you said, kind of post-merger integration costs we should be aware of? And the last one is around your net cash level. As you said, it's considerably above your minimum level you have highlighted. Can we expect here more near-term M&A? Or are you open for, yes, share buybacks, higher dividends or something like that?

Yes, thank you for your questions. I would like to structure it in a way that I will answer question 1 on the order intake side and question 3 on the M&A procedure, and question 2 is for Peter on the profitability. So our -- on the order intake side, as I've mentioned, our order intake stream was always driven by stronger H2 compared to H1. I think we have had an exception last year as the only year ever where we have a stronger H1 than in H2. So we expect this year coming back to an order we had the last decades, which means that we have a stronger H2 order intake than H1. As I said, we expect a higher order intake by the end of 2021 compared to the order intake 2020. We have a good pipeline for this year. We see some movements and postponement into next year. But nevertheless, we stick to our saying that we expect a higher order intake end of this year compared to end of next year. On the segment perspection, we had large orders in our pipeline for both segments, PST and ATM. And it depends on the duration and the speed of the process of the customer how fast he can execute the award of the tender. This is always an uncertainty in our public sector business, but the pipeline is full. We are confident for this year, and we have large orders in our pipeline for both segments. On the M&A side, yes, we still have a strong cash position. You know that we are continuously working on M&A opportunities. There are quite a view out there. They occurred during the last 12 to 16 months. We are working on them. If we can close another transaction during this fiscal year, I cannot promise, but we are working on opportunities. On the profitability, Peter, do you want to answer the question?

Concerning the profitability, the question is we listed already on Slide #6. The question is what can we expect due to the pandemic in the second half of the year? There are a lot of milestones depending on the possibility to travel and on the possibility that we have -- we need access to the control rooms of the customer. We improved our delivery process sharply in the past so that we can do a lot of things remotely, which were absolutely not possible in the past. But there are still certain things necessary, especially upgrades on live systems, where we have to be on site. And due to these uncertainties, due to the project business and due to pandemic, we would like to point out that the profit margin of 5% to 7% is acceptable and achievable also because of the post-merger integration costs that we have to face concerning to the Harris transaction.

The next question is from the line of Teresa Schinwald of Raiffeisen Bank International.

I actually have a few questions, but I'll give them anyway in one take. So am I right to assume that the higher order intake outlook does not mean that the order intake go -- grow organically without the acquisition? The second one is also concerning kind of getting a feeling about the profitability actually in the ATM segment, including the acquisition effect. So am I right to assume that the margin actually was not changed year-over-year, given some gains but also post-merger integration costs? Then one, could you give us a reinsured feeling of the post-merger integration costs you're expecting still? And also, I should put Stefan on top. How much of your pipeline is attributable to the recent acquisition? A rough percentage would be great. And the last one is, could you give us a feeling on how much of the acceptances were already virtual and how this has evolved over the course of the last year and a few months?

Thanks, Teresa, for the question. So we will structure it in a way that I will answer the order intake and the pipeline question. And the acceptances, the post-merger integration cost and profitability on the L3Harris transaction will be done by Peter, and the acceptance is followed by Hermann there. So on the acquisition order intake in -- you know that we have recently closed C4i in Australia, which was not part of the first half year. So from the largest part of the transaction, no order intake is part of the first half year. There will be some elements probably in the second half year. But as it was confidential due to the situation we had as a competitor against them, we have not got all the information available prior the transaction. So since the closing of C4i, we now start getting all the information on their pipeline. We will probably identify some overlaps where Frequentis was bidding against C4i, but the majority will be additional. But I cannot tell you now any figure as the transaction closed in the second half year. So it's not part of the first half year. On the other entities, Canada and Orthogon in Germany, they have been closed in April and May. The share of order intake within the order intake we have shown for the first half year, it's very low. So Orthogon and Canada, they did probably a EUR 1 million order intake as a contribution to the order intake we have shown you for the first half year. Coming to your question #4, on the pipeline, until the end of this year, as I said, Orthogon and Canada will probably contribute with, it's not bad, EUR 5 million to EUR 8 million. But C4i, I cannot tell you any figure now because we do not have all the information disclosed on our table for now. We will get that within the next days and weeks, and I can report that when we have all the information available from C4i. Peter, on the profitability?