Frequentis AG (FQT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Natalie, your Chorus Call operator. Welcome, and thank you for joining the Frequentis Full Year 2021 Results Call. [Operator Instructions] I would now like to turn the conference over to Stefan Marin. Please go ahead.

Thank you, Natalie. Ladies and gentlemen, good afternoon, and welcome. Thank you for taking the time to dial in today. With me are Norbert Haslacher, CEO; Peter Skerlan, CFO; and Hermann Mattanovich, CTO. First, we want to show you our 75th anniversary video. The video and the presentation will be shown in the webcast link. Afterwards, Norbert Haslacher will start the presentation about the year 2021. The video that we are going to show you now will last about 3.5 minutes, and you can follow it in the webcast link.

Yes. A warm welcome from me as well. The years 2020 and 2021 were defined by the pandemic. And the new year is unfortunately impacted by the war in Ukraine. Some of our colleagues have relatives in Ukraine and Russia, and our thoughts are with them. We, as Frequentis, offer support to our colleagues and their relatives. Private initiatives of Frequentis' employees offer homes to refugees from Ukraine, and we all hope that this war will end very soon. As you know, we, as Frequentis, supply national safety-critical infrastructures, which must be upheld and always maintained. And despite the burdensome travel restrictions, it was possible to continue our project business almost unchanged. So many thanks, at this point, to every Frequentis employee around the globe, especially those who joined our group recently for mastering these challenging times in such a positive manner. We are now in business for 75 years, as you have seen in the video, and are very proud to have made our contribution for a safer world. We continue to do so with innovative products and the very high level of motivation. So I would like to start now with Slide #3. As you can see, we walked the talk, and we are successful to acquire 3 companies in the Air Traffic Management business from the U.S.-based and listed L3Harris Technologies. And the transaction has a positive impact on our growth plan. As you can see from the figures, we made significant progress, despite the pandemic challenges. Order intake, orders on hand and revenue were up by 6%, more than 9% and more than 11%, respectively. And the good business development of the companies acquired from L3Harris Technologies in 2021 and the profitable project executions despite the continued travel restrictions, enabled us to continue our growth plan also in [ 2020 ]. In total, EBITDA grew to EUR 46.5 million and EBIT to EUR 29 million. Net profit was EUR 20.8 million. So we are very satisfied with this development, as you can imagine. The equity ratio was at 41.1%, 1 percentage point higher than in December 2020, and total equity was EUR 129.9 million. So by the end of December 2021, we had a net cash position of EUR 101.1 million. There are EUR 54 million advance payments from our customers. The net cash position increased significantly, despite the payout of EUR 16.3 million for the L3Harris transaction. On Slide #4, we are a specialist, as you know, for safety-critical control centers, and this focus on a global level is unique. We think that we have proven several times already in the past to [ decade ] that the business model is resilient to any type of crisis. The L3Harris transaction is a big step forward for us. The largest acquisition in Frequentis history is a game changer, with respect to the products, additional customer access as well as the cooperation, which gives us potentially the possibility to be part of U.S. contracts, we did not have access to in the past. And it was the sixth acquisition after the IPO. It was the purchase of a 51% stake in the Italian company Regola in January 2022. Regola complements the product portfolio for our public safety applications and doubles for us the addressable global market. We combine it with our existing and widely accepted LifeX product, a pure software solution. And although Regola is currently a relatively small entity, we want to enlarge their customer base in Europe, step-by-step, through our salesforces in the region. On Slide #5, I would like to report on the financial performance in more detail. So we had some larger-scale orders in 2021 like from NATS, the British [ Navigation ] Service provider, all the extension of the [ IP ] service management and operation contract for European Aeronautical Database, EAD, from Eurocontrol. Orders like these and new orders from the L3Harris transaction helped to increase the order intake for ATM to a new level. The order intake for public safety, public transport and maritime market was in total below last year. We were again strong in the German public safety market. Some investments in both segments were postponed to 2022, mainly due to delays in tender processes as a result of the still-ongoing pandemic and its various regional lockdown regimes. Compared to a lot of other industries, we are blessed with orders and are back to pre-pandemic levels. We also see a well-filled pipeline for 2022. On Slide #6, our orders on hand are high at EUR 468 million, which is a plus of 9.4 percentage versus end of 2020. Our revenue development was positively influenced by the L3Harris transaction, by about EUR 19 million. Without this contribution, we would have seen an organic growth, fully organic, of 5%. The split was almost unchanged. It's around 2/3 from ATM and 1/3 from PST. Regional split was led by Europe, with a little bit more than 2/3 of the revenue generated. Short notes, the exposure of Frequentis to Russia, Belarus and Ukraine was very little. Less than 1% of revenues were generated in these 3 countries, in total. For more financial details, I would like to hand over to Peter Skerlan, our CFO. Peter, please?

Thank you, Norbert. Good afternoon from me as well. Let's have a look at Slide 7. Based on our stringent execution of projects, we got a good operating profitability. EBIT was EUR 29 million, EBIT margin came in at 8.7%, ahead of our estimation of 5% to 7%. While the ATM segment showed a decrease in EBIT margin, Public Safety and Transport was able to increase its margin. Let me explain. The ATM segment was burned by the planned restructuring costs for the acquired entity in Canada with EUR 1.4 million and the impairment of the goodwill for ATRiCS is of EUR 1.7 million. The impairment at ATRiCS, which we acquired in 2020, was necessary as the prospects were impacted by the pandemic. One short remark on travel costs. Planning of these costs is still volatile as the pandemic continues. In view of the good net result of EUR 20.8 million and our solid financial position, we propose a dividend of EUR 0.20 per share, an increase by 1/3. Let's go to Slide 8. Thanks. Beyond finance, I'm also responsible for human resources. We think that we are well prepared to attract new talents. One of the measures is that we have a quite significant employee [ refill ] bonus of EUR 4,000. About 10% of the cases in Vienna were filled through employee recommendations. We source globally, and we are also able to offer global working opportunities, and we are quite good in keeping these talents, when they return to their home country. Perhaps the most important aspect of existing and future employees is our modern leadership culture, an integral part of our business model MD&A. We put a lot of emphasis on sales responsibility and an open, trusting and non-punishment leadership culture. Everyone needs to speak up to improve our products and business. Let me share with you some numbers for our recruiting efforts in the headquarters in Vienna. We received approximately 4,000 applications per year. Out of these, we conducted 600 interviews and 100 were hired. Hence, the top 2.5% from all applications got a job at Frequentis. Corporate sustainability is vital for the Frequentis Group and thus, for us as the Executive Board. We see sustainability as a fundamental and holistic principle of corporate management, involving different aspects. On this chart, you'll see examples of our activities in 2021, in the field of environment, social and governance. Our first CSR evaluation by [ ecovadis ] resulted in the award of the Bronze Medal for Sustainability performance. In 2022, ESG measures already implemented by Frequentis, will be combined and further extended in a professional ESG organization. For more details on our vision, I would like to hand over to Hermann.

Thank you, Peter, and good afternoon to all of you. I'm now on Slide 10. Frequentis' long-term vision is to be the global #1 in solutions for control centers in the safety-critical sector. Thanks to the L3Harris transaction, the annual addressable market grew to EUR 2.7 billion. The overall market continues to grow by about 5%. As a systems integrator that integrates its own software and hardware to customers' existing IT landscapes, we expect Frequentis' long-term profitability in project business to be on the level of established IT system integrators. The transformation to a software-centric business is underway, but given our customer structure, this will take several years or even longer in some markets. Research and development is aligned to this transformation. Regarding R&D. On top of customer-financed R&D, we as Frequentis spent, on average, about 5% of revenue in the past 3 years on internal R&D. All [ R&D ] costs were fully expensed. We didn't capitalize any R&D. Our focus points, amongst others, remain remote digital tower, drone management and mission-critical services via 5G/LTE in the public safety market. Let's switch to Slide 11. Slide 11 shows that Frequentis acquired several green products in the past years that helped to address ESG trends in the aviation industry. Our products digitalize current processes and help reduce emissions while at the same time, saving costs for the industry. Be it less taxiway of airplanes on the ground or less holding patterns in the air. That is the [ circling ] of planes before landing. One innovative product, the Arrival Manager, was awarded the Sustainability Award at World ATM congress in 2021 in Madrid. All 3 products shown are part of the acquisitions we have done in 2020 and 2021. I'm now on Slide 12, which shows new business models. We can follow these on the successful strategic acquisitions. Regola and Frequentis combined now their respective products. We offer our solution for public safety customers out of the cloud or as a service. The 3 most important applications, computer-aided dispatching and communication are now integrated. Thus, the addressable market [ doubles ]. We start our marketing and sales efforts in the U.K. As studied by IHS, states that 50% of control room refreshes will be deploying cloud-based technology in the future. Products like the Demand Capacity Balancer, which is in place in London Heathrow, are also hosted in the [ count ]. For the outlook, I hand over to Norbert now.

Yes. Thanks, Hermann. Thanks, Peter. Let me conclude with the outlook and our agenda for 2022. So based on almost EUR 470 million of orders on hand, we are working at a good capacity utilization level. So we aim to increase revenue and order intake again. And regarding profitability, we expect an EBIT margin in the range of 6% to 8%, better than the previous range. However, the profitability depends on a lot of factors, as you know, in these uncertain times. As you may experience yourself in these days, the continued pandemic and the impact from the war in Ukraine is a burden for the global economy due to inflation, supply chain and higher energy prices. So in the past 2 years, we digitalized parts of our value chain. The low level of travel costs we experienced in 2020 and 2021, will not continue. We integrated the lessons learned into our daily life and strive to keep travel costs below the pre-pandemic level. We might also see some shift in orders and revenues. It is somewhat difficult for us to estimate the budget behavior of our customers, given uncertainty here and there. But all in all, we are looking forward to another year of growth. This is the end of the presentation, and we are now ready for your questions.

[Operator Instructions] And the first question is from the line of Daniel GroBjohann from BankM.

My question is around supply chain and inflation. Could you say something about the input costs on your side, you can see the energy is up. But what is about the other components and something like that? And how are you able to transfer these costs to your clients?

Peter Skerlan. I would like to answer to your question concerning the inflation. There is one big part that's payroll. And payroll is affected by, let's say, the Austrian part by deferred . So we expect probably a little bit higher increase than in autumn of payroll costs. When you look upon our provision, our [ operating ] [indiscernible], severance payments provision, then you can see that we already increased the further expected payroll, increased from 3% per annum to 3.3%. So there is already an increase in this provision. Concerning the other costs, I would say, procured services will probably see a similar increase. These are the main impact concerning what can we do with that. We will try to increase prices where it's possible. In some long-term contracts, we have the possibility to increase the prices in relation to [ indices ]. But concerning some projects, we have a bulk is a fixed price, where we don't have the possibility to increase.

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

I have a few questions, so -- but more general ones and one regarding the revenue development. So I pose them like one after the other. The like-for-like growth, they were flattish, actually, year-over-year, in 2021. Is this in line, actually, with the market because the average market growth is still expected at 5%. Can you tell us a bit more about that particular year and what you've observed on the market?

Yes, Teresa, thank you for this question. We had an ATM, a growth of 5% organic, compared to last year. And in public safety and transport, we have been certain -- do you know the exact time?

No. In public safety and transport, the revenue was up 18%.

So do you talk about order intake, Teresa? Or do you talk about revenues?

I thought I was talking about revenues. My bad, Sorry.

No worries.

Next -- yes. My next question is to the -- up to two pandemic years. And you've mentioned that some things will come back, like travel costs, but -- is it already time to make observations about the permanent changes to the business, to operations? Can you tell us a bit more about that?

Yes. Yes. It's still a best guess, Teresa. We -- of course, we would like to see our customers a little bit more often than we have seen them in 2020 and 2021. We also see that the exhibitions, they will take place. So we have already booked a couple of exhibitions and fares during the year. So what we expect as a sustainable saving on the travel cost side and marketing cost side, would be between 10%, 12% to maybe 18% to 20%. This is our best guess at the moment.

Okay. And regarding, in general, the share of virtual site acceptance, tests and the like?

Yes. Hermann, do you know how many virtuals we had, compared to physical SATs, FATs?

Yes, the -- for factory acceptance tests, the number of tests, where the customer visited us, went up again in 2021. In 2020, we almost had no customer visiting us for an acceptance test. All the customers just joined virtually. This has changed. So we see more willingness from the customer to visit us again. I think that this, now, has reached again -- not again, but has reached the level, which we would be happy to keep at that level as it is right now. For Frequentis, people visiting on-site for site acceptance and installation, we successfully tried to gain some extra leverage out of the changes that we have implemented during 2020, when traveling was not possible. So of course, there were more visits and flights than in 2020. But I'm sure that we can keep that level, which we have reached right now and stay below what we had pre-pandemic. We have implemented a lot of new possibilities of remote access and virtual support for the on-site personnel. So the only figure I can give you is that on average, in the past for one installation, something like 5 people of Frequentis had to visit the customer. And we were able to reduce this to 1 or 2 persons today, where the other people support the on-site personnel via video conferences or remote access.

And my last one, and I really appreciate you stepping your up -- your ESG reporting and communication. And I know it's the early days of the war in Ukraine, but we can already observe a shift in the views of companies that are in the defense business and also in the safety business, have you already had a change in context? What's your take on that?

Yes. Teresa, we see the same development. I mean, there is no concrete -- no clear view for us available. But we think that the -- especially in the [ NATO ] countries, where we are active, there is a new perception on security and defense, which is maybe also playing us good for the perception of companies like us doing defense business. Although it's only 17% of revenues, we would appreciate if that development comes a little bit further and it's part of the ESG environment as well that defense business in a good way. So I hope to have a positive development on that side. But it's not clear for us now.

[Operator Instructions] The next question is from the line of [indiscernible] from [ JMS ].

Yes. Hello, can you hear me?

We can hear you.

Okay. Hello to the team, and congratulations to the results. I have a question regarding outlook 2022 and the outlook that you have given because you actually didn't really give an outlook, right? I mean, you said how much of the orders on hand are allocated to the current year, but you didn't really give an outlook about the organic growth in 2022. And maybe you can help me with that, what is your expectation to continue in the range of around 5%, 6%? Or with all the topics that we've discussed several times, we expect actually the order intake to accelerate at some point in time. And I'm just talking about the organic development. Now, I would like to talk about the acquisition effects of the [ works ]. The next question.

Yes, Miro, so what we -- you know that we are not giving any guidance, as Frequentis is being listed in Vienna. But we, of course, want to give you an outlook, how we perceive the upcoming year? So what we think is that -- and what we have also put into our slides, is that we see an EBIT margin increase 2022. So we target a 6% to 8% range on the bottom line, compared to the outlook we have given [ 2024 ], 2021, which was 5% to 7%. So we have increased our EBIT margin outlook from 2021 to 2022. What we also say is that we strive to have a larger order intake and larger revenue in 2022 than we had in 2021. Of course, they are the former acquisitions from the past. They are now part of the CRM system and of the pipeline. So it will be difficult in 2022 to really extract them as a separate inorganic path, and they are anyhow consolidated already since June, July, August this year. So overall, in a nutshell mirror, we strive for a growth in revenues, higher orders and the EBIT margin improvement between 6% to 8%, compared to 5% to 7% from last year. That's in a summary, in a nutshell.

Okay. And the EUR 30 million from L3Harris, that would come on top?

No, we have already -- in our slide, you see, we had already EUR 19 million in our results, 2021.

So the EUR 10 million comes on top of that.

Yes, correct.

Okay. So we can think about your top line growth, is at least EUR 10 million and maybe from Regola, something, I don't know that. You haven't really said how much Regola makes in revenue, probably much less than L3Harris, right? But that will also come on top after...

That would be the right math.

Okay. Now, regarding the EBIT margin, I mean, you're always talking about an increase in EBIT margin, but your EBIT margin in 2021 was 8.7%. Now, you're gating -- guiding for 6% to 8%. Can you please explain what you mean by increase in EBIT margin?

Yes. What we always wanted to educate our investors is, we shouldn't take 2020 and 2021 as the real benchmark for an operating performance, in terms of EBIT, because we had significant savings on the travel side and on the marketing side, it was millions of savings. And of course, the black side of this saving was that we haven't seen our customers. So what we don't want is that we take this huge savings sustainable into the future. We would like to spend much more money, if it's possible, 2022 and onwards, to see our customers. Therefore, our baseline is still the 2019 margin, from whereon we would like to improve. And don't take 2020 and 2021 as the benchmark because that would be the wrong benchmark as that have been extraordinary savings due to travel restrictions and due marketing savings.

Okay. Good. But there has also been some extraordinary costs, as I can see in other operating expenses from the annual report. So it's not just -- you also have a relief from extraordinary costs, I would argue. Isn't that true?

Peter, can you repeat the question, Miro, for the CFO?

So if I look at the notes in the annual report, and I look at the extraordinary -- at the other operating expenses, then I can also see some points, which probably would not incur again in this EUR 40.5 million that you have just had in 2021. So like you...

You mean the other operating expenses?

Yes. Not nice.

Yes. Well, what we hopefully don't see is another depreciation of our shares in companies. So hopefully, nothing like that happens in 2022. The other thing is that concerning the M&E transaction, that depends on the -- on how close we are, concerning such transactions, and the size of these transactions. In 2021, we had EUR 1.5 million of cost for that equation, is something similar like that during this year. What we have to face is an increase of, I think, travel costs and advertising costs. Hopefully, we can be closer again to the customer, not reaching the level of 2019, where we had EUR 11 million, but I would expect an increase for advertising and travel. But that refers to how corona develops in 2022.

Okay. maybe last one from my side. What's the average salary increase that you -- or how much are you increasing the salaries of your personnel in 2022, compared to 2021?

Yes. So what -- as I mentioned before, concerning our -- for Vienna because that's the company where we have the severance payment. We had -- we expect this increase of [ 3.3% ] in subsidiaries, in the eastern subsidiaries. We have higher increases of payroll costs in Romania, Slovakia.

Are we talking about 10% or how much?

I would say, close to that.

Okay. And that's -- okay. But most is Vienna, right? So from a mix perspective, it's rather going to be closer to 3% than to 10%.

I would say, half of our staff is based in Vienna, half of our staff.

And that's like 2/3 of the salary cost or so?

Yes. The question is, what about the inflation rate during this year and what will happen until autumn? So will we see a further sharp increase of rental costs and energy costs for the employees because then the council and will -- the unions, the trade unions will ask for a sharp payroll increase. So we don't know what will happen until autumn.

[Operator Instructions] There is a follow-up question from Miro from [ JMS ].

Can you hear me?

Yes, Miro. .

Okay. Just one follow-up, if nobody else is in the queue. Your backlog is roughly EUR 470 million in 2021. And the increase was mainly due to the acquisitions, I infer, from like your order intake and the revenue. And -- but -- and you also gave like a split between these orders about the deliveries between 2022 and 2023, which is great. But do you expect, actually, this order backlog to remain at this roughly 17, 18 months? Or do you believe that like with the increase in turnover, this will come down again to around 12 months at some point in the future?

So Miro, this is depending on a lot of data points. So first of all, we always strive to have a book-to-bill ratio greater than 1. So what we strive is to increase the order backlog, compared to the revenue. So the ratio is a very important KPI for us. When you talk about the allocation of the orders on hand over the fiscal years, that's pretty much depending on the type of contract we signed. So on a large contract, which has to be delivered within 1 year, it's a different scenario than if we sign a contract, which we deliver over a couple of years. And as we only book in our orders on hand, values, which are committed and not potentially committed. You can imagine that this EUR 470 million is already contractually committed and is a split, which is usually a visibility of 17 to 18 months, stable within the last couple of years, as it contains long-term contracts, maintenance contracts and short-term contracts in the mix. But if we get a large deal in, where the whole delivery is within the fiscal year, then this 17, 18 months could change to 15, 16 months, but this is currently not foreseen.

The next question is from the line of [indiscernible] from [indiscernible] Bank International.

Can you hear me?

Yes, we can hear you well.

So congrats also from my side to the very good results and also to the 75th anniversary. I just would like to ask one question regarding supply chain shortages. So am I right that due to the effect that you are mainly offering digital solutions, you are not so much depending on the delivery of a certain raw material or electronic component? Or is there any component where we are a little bit worried about?

Yes. Thank you for the question. We -- part of our business is based on Frequentis hardware that we produce here in Vienna. [indiscernible] of course, we have certain dependencies on the supply chain and on the equipment. There, we follow very much the rule that we -- by -- in advance, whatever we need for our production for the next 12 months in the past, we increased this time spend for 18 months last year. And we now look forward to the next 24 months and try to secure everything that we need for the next 24 months. So we are quite safe there. But on top of that, yes, you're right, most -- more and more increasing part of our delivery is software. But still, this software has to run on hardware, which is either ordered by the customer directly on the market or is ordered by the customer at Frequentis. In both cases, the delivery and the final acceptance of the project depend on the availability of this IT equipment. Until now, we managed to handle this successfully. And we do not see dramatic shortages in the next month. But we do not know how the -- mainly the logistics, the worldwide logistics might be impacted by the war in Ukraine or by still ongoing pandemic and lockdowns in -- especially in China. So there, we have a certain risk.

There are no further questions at this time, and I would like to hand back to Stefan Marin for closing comments.

Yes. Thank you so much for all your questions and for the time you spent with us. We will be available for meetings at the virtual conference, hosted [indiscernible] International or the spring conference from the Equity Forum in Frankfurt. The next time we are going to report the results, will be on the 17th of August. And in the meantime, please always feel free to drop me a line to arrange for a call. Goodbye, and stay safe.

Thank you. Bye guys.

Thank you. Bye-bye.

Bye.

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