Sensys Gatso Group AB (publ) (SGG) Earnings Call Transcript & Summary

Thank you, Sandra. Welcome to Sensys Gatso's Presentation of the Fourth Quarter and Year-End Report for 2019. My name is Ivo Mönnink. I'm the CEO of Sensys Gatso, and I will be presenting to you together with Simon Mulder, our CFO. Next slide, please. Let's start with the company's snapshot followed by an update on our business for the quarter and then followed by a financial update. After the Q4 presentation, I would like to present to you today the long-term financial goals for Sensys Gatso until 2025. Next slide, please. As there might be some new attendance to this call, let's quickly look at who we are. Here is a snapshot of Sensys Gatso. Sensys merged with Dutch Gatsometer in July 2015. With this merger, the Swedish Sensys, famous for its involvement in the Swedish concept of Vision Zero, came together with the company that started traffic enforcement in the world. By introducing the first automated speed enforcement camera in 1964. Today, we are a global leader in traffic enforcement solutions, with sales of more than SEK 400 million, presence in 70 countries and with more than 250 employees. Next slide, please. Let's now look at an update on our business in Q4. In this business update, I will take you through our order intake in general, the status of our transformation to a service provider and developments in traffic enforcement in general and for Sensys Gatso. Next slide, please. Now let's first look at our order intake in general. We had a very good order intake in the fourth quarter of SEK 241 million. The order intake is 67% higher than we achieved the same period last year. Looking at the full year 2019, we had a record-breaking total order intake of SEK 562 million, 17% higher than last year, which arrived at SEK 480 million. Major contributors to the order intake during the year were Australia, France, U.S.A., United Arab Emirates, and of course, Colombia in our new region, Latin America. We advanced further into the promising U.S. market, where we signed 9 class contracts during the year. In Australia, we signed orders for our new in-vehicle solution for a total contract value of SEK 107 million. On top, Australia received a SEK 60 million TRaaS contract in Q4. With SEK 225 million in total, Australia was the largest contributor to our global 2019 order intake. After the quarter, we received a notice of award from Costa Rica for a total estimated contract value of SEK 192 million. When transferred into a contract, this would further reinforce our position in Latin America that only started in 2019. All in all, we have delivered in 2018 and 2019 consistently higher quarterly order intakes compared to 2016 and '17. This order intake is not only higher but also more diverse geographically and by application. This high order intake will be the driver for the future growth of Sensys Gatso. Next slide, please. A few years ago, we decided to focus on becoming a full solution provider to our customers. This has been particularly successful in the U.S.A., where we build, maintain and control the enforcement infrastructure, including the back office and where we get paid per citation. Looking at the table, we can see the split between one-off system sales orders and TRaaS orders during the year and between orders intake announced and smaller, not announced order intake. The total 2019 order intake of SEK 562 million consists of SEK 434 million orders announced in press releases and SEK 128 million or 23% of smaller orders not announced, mostly from our existing customers. Our TRaaS order intake now accounts for 60% of our total order intake. TRaaS strengthens to bolt with our customers and gives our research and development engineers invaluable information. With this, we continue to create the best solution and programs in the market. As a result, Sensys Gatso is changing more and more from an equipment provider with one of revenue to a service provider with recurring revenue. This is what we call Traffic Enforcement as a Service transformation. Next slide, please. Let's now look at how the already strong TRaaS order intake in the past has transformed into sales of our TRaaS business. For the full year 2019, the TRaaS revenue arrived at SEK 177 million, 22% higher than SEK 145 million realized in 2018. The increase of our TRaaS revenue is fully in line with our strategy to grow this business. We have now more than 34 active TRaaS contracts in 11 states in the U.S.A. and our customer base keeps growing. TRaaS sales year-to-date as a percentage of the total sales amounts to 44%. This is a considerable step up compared to the same period last year at 38%. All in all, we are pleased with our TRaaS business development. We see both the TRaaS order intake as well as our TRaaS sales being on track to realize our strategy to grow this business. Next slide, please. Several global trends continue to favor Sensys Gatso, not the least the world's drive for sustainable cities and United Nations 2030 Sustainable Development goals. Making the road safer by changing human behavior and traffic is our purpose. Our TRaaS business not only supports our customers in the transformation towards sustainable and safe environments. An example of this is the global increased interest in the enforcement of distracted driving, for which we are participating in customer pilot projects. We saw healthy demand from our customers in EMEA, retaining our strong market position in this region. In Australia, Sensys Gatso received technical and legal approval of our innovative in-vehicle solution, followed by a strong order intake in the fourth quarter of an impressive SEK 167 million. In U.S.A., our biggest single market, showed solid demand for a full TRaaS offering with 9 contracts signed. During the year, we have successfully implemented the first statewide uninsured vehicle enforcement program, a promising new business vertical in the U.S. market. Our strong international brand name and U.S. presence helped us to win significant orders in 2 separate departments in Colombia, leading Sensys Gatso to enter the new Latin American market in 2019. After the quarter, we received notes of award from Costa Rica's -- from Costa Rica, for the country's nationwide intelligent transportation system for a total value of SEK 192 million. This further reinforces our position in Latin America. In summary, I see traffic enforcement growing across the world as governments increasingly discover the benefits for health, safety and for the environment. As a leading global player, we are well positioned to take advantage of this trend. I would like to hand over now to Simon for the financial update.

Next slide, please. Next. Thank you, Ivo. And I would like to take you through the following topics today and the analysis of the segment's performance, our consolidated income statement, and finally, our cash position. Next slide, please. Now let's have a look at the performance of our system sales business. The 2019 order intake landed at SEK 376 million, which is 14% higher than the system sales order intake of 2018. The order intake for this segment, to a large extent, is from TRaaS, service and maintenance contracts of our Australian customer. The total amount of TRaaS recurring revenue order intake in 2019 amounted to SEK 127 million. The sales for the segment system sales in the quarter amounted to SEK 130 million compared to SEK 107 million in the comparison period. The fourth quarter revenue is driven by deliveries to our Colombian and our Australian customers. We will continue to deliver in 2020 on the remainder of the outstanding Australian order and the new order of SEK 52 million received in the fourth quarter. Full 2019 sales for the segment system sales amounted to SEK 311 million compared to SEK 310 million in 2018. Throughout the year, we've had a good global spread in our system sales revenue. For example, repeat orders in Europe, like the in-vehicle solution for France, standard delivery to our Swedish customer, deliveries on the in-vehicle order in Saudi Arabia and delivery on our in-vehicle solution in Australia, as mentioned before. Furthermore, 2019 has been a year of development on our new solution for the average speed project on the Dutch rural roads. We expect to start delivering the solution as of the second quarter of 2020. The EBITDA in the segment for the fourth quarter amounted to SEK 23 million compared to SEK 15 million in the comparison period. For the full year 2019, the EBITDA amounted to SEK 21 million compared to SEK 19 million in 2018. The improvement in EBITDA in the fourth quarter is mainly driven by the volume of sales and shows that the organization is ready for higher sales volumes without significant increases in the organization and cost structure. Next slide, please. Now let's have a look at Managed Services. The 2019 order intake for the segment, Managed Services, amounted to SEK 186 million, which is 24% higher than 2018. In the fourth quarter, we received an order intake of SEK 56 million related to 3 new contracts for speed and red light enforcement in Independence, LeClaire and Buffalo in the U.S.A. The sales of the segment, Managed Services, amounted to SEK 28 million in the quarter compared to SEK 17 million in the same period last year. The increase in sales in the quarter was driven by new programs in the U.S.A. and Germany. These programs have been awarded in 2018 and 2019 and had started to contribute. The sales in the segment, Managed Services, is 100% TRaaS recurring revenue, predominantly from the U.S. and Germany. Full TRaaS programs, where Sensys Gatso takes full responsibility for installation of equipment, fine processing and collecting, are projects that typically have a ramp-up period of 10 months before they start to contribute to revenue and cash. The sales for the full year 2019 amounted to SEK 95 million compared to SEK 70 million in 2018, which is an increase of 36%. Due to onboarding and start-up of new programs, the segment has encountered additional costs in 2019, temporarily impacting our EBITDA. The EBITDA for the quarter amounted to SEK 4 million compared to SEK 2 million. The full year EBITDA for this segment amounted to SEK 7 million compared to SEK 18 million in 2018. Next slide, please. Looking at the consolidated income statement, we can see that the net sales of the fourth quarter amounted to SEK 158 million compared to SEK 124 million in the same quarter last year. The sales for the full year amounted to SEK 406 million compared to SEK 380 million in 2018. The increase in sales was mainly driven by sales in the segment, Managed Services, as mentioned before. The expenses in the fourth quarter amounted to SEK 41 million compared to SEK 44 million in 2018. The decrease in cost is caused by end-of-year closing procedures, resulting in lower cost accruals. On a full year basis, the expenses amounted to SEK 169 million compared to SEK 161 million. This 5% increase in costs in 2019 is driven by an increase in sales expenses and administrative expenses, which relate to the sales activities in the Latin America region. With this, the operating profit for the quarter landed on SEK 13 million compared to SEK 8 million. Year-to-date, the operating profit amounted to negative SEK 24 million compared to positive SEK 1 million in 2018. Next slide, please. I would like to take you through our cash position now. Cash and cash equivalents at the end of the period totaled SEK 52 million compared to SEK 77 million. At the end of the period, free available cash amounted to SEK 85 million compared to SEK 153 million, taking into account the total amount of credit facilities. The reduced available cash of SEK 68 million mainly relates to repayment on the vendor loan to the amount of SEK 10 million, high working capital needs in our system sales business due to large projects to the amount of SEK 24 million; and investments in fixed assets to the amount of SEK 43 million. These investments in fixed assets mainly relate to fixed assets and operations in the U.S.A. and in the development of a new platform launch. The operating cash flow of Q4 arrived 10% higher at SEK 43 million compared to SEK 93 million in Q4 2018. To facilitate further growth, Sensys Gatso and Rabobank intend to increase the current total facilities granted by the Rabobank with an additional SEK 50 million. The facility increase will be provided to Sensys Gatso upon request and is conditional on meeting the agreed covenants. The expectation is that parties will agree to the covenants and the terms in March 2020. The additional facility is conditional -- the additional facilities conditional of our final approval of the Rabobank credit committee. Next slide, please. In summary, we have had a very good fourth quarter and closing of the year in both sales and order intake. We ended the year with a record high order intake of SEK 562 million. Our segment, Managed Services, contributed to this with SEK 186 million order intake. Our strong order intake track record started in Q4 2017 and has continued to be strong. Our 12 months rolling sales has steadily increased since the fourth quarter 2017, moving from SEK 293 million to SEK 406 million in 2019, a CAGR of 18%. Our Managed Services segment has contributed with SEK 95 million and our system sales segment with SEK 311 million to the 2019 total sales of SEK 406 million, which is an increase of 7% compared to 2018. More importantly, the distribution between our TRaaS recurring revenues and one-off project sales has improved from 38% TRaaS in 2018 to 44% TRaaS in 2019. Now I would like to hand over to Ivo. Next slide, please.

Thank you, Simon. With the improved financial performance and a good strategy in place, the Board and management of Sensys Gatso feel it is time now to share our long-term financial goals with the market. In this section, I will take you through the assessment of our addressable market. I then will review our focused strategies, our TRaaS focus, and then finally, I will share with you the financial goals for 2025. Next slide, please. What you see here is data from the World Health Organization related to traffic fatalities per 100,000 inhabitants. There are huge differences per region. 90% of the world's fatalities on the roads occur in low and middle-income countries, even though these countries have approximately 50% of the world's vehicles. Out of the top 5 countries, the lowest levels of fatalities 4 are Sensys Gatso countries, meaning countries where Sensys Gatso has started traffic enforcement and still has a strong market position. From this, we may conclude the traffic enforcement clearly contributes to saving lives. The growing global mobility and related traffic fatality levels have created an increasing demand for road safety solutions. As you can see from the table, MarketsandMarkets, an independent market survey agency, estimates the global road safety market to grow with 10% annually from SEK 28 billion in 2018 to SEK 44 billion in 2023. Next slide, please. To address this growing market, we have gone through a strategic planning process in 2018 with our extended management team. This slide summarizes the 4 strategic priorities we have identified for the upcoming years: one, development of a flexible hardware and scalable software platform; two, expansion in U.S.A. with Traffic Enforcement as a Service; three, entry into new markets with Traffic Enforcement as a Service; and finally, extension of our service scope in existing markets. When we talk about flexible hardware and scalable software platforms, we mean that our solutions can be used within many customer environments using different enforcement areas, such as speed and red light enforcement, and in enforcement areas like uninsured vehicles and parking. Traffic Enforcement as a Service, TRaaS, is our service offering where we build to maintain service and operate enforcement programs. As you have seen in the Q4 report, we are making very good progress in the U.S.A. in our TRaaS business. This is largely thanks to the proven track record with our U.S. customers. We are now taking our U.S. TRaaS experience and our 60 years of experience in global traffic enforcement business to new markets. Finally, within the segment system sales based on our large installed base, we see opportunities to increase the recurring revenues from our service contracts in our existing markets. Our strong financial performance in 2018 and 2019 provides a very good base to execute these focused strategies and achieve our long-term financial goals. Next slide, please. Diverse global market conditions and customer needs are changing faster than ever. Sensys Gatso's investments in technology have resulted in scalable software solutions combined with flexible hardware. The great strength of our FLUX hardware platform is that it seamlessly integrates with our existing software solutions, PULS and Xilium. This means that we can offer complete, flexible and scalable solutions for traffic enforcement. This also allows us to scale up much faster, targeting new customers and new verticals like, for instance, uninsured vehicles and parking enforcement. There is a significant leverage in our TRaaS business model. Our business model is based on long-term customer contracts. Each new Sensys Gatso program in operation generates revenue, margin and cash flow on a yearly basis, typically for more than 5 years to come. As governments outsource more and more public funds to the private sector, it is our strong belief that our TRaaS service model will continue to grow. This outsourcing has already started in U.S.A., where we continue building on our strong TRaaS market position. Next slide, please. We started our full TRaaS business in the U.S.A., more than 10 years ago with a small team. Today, we are present in 34 TRaaS programs in 11 states and we are seen as a leading player in traffic enforcement. In 2019, we signed 9 contracts, of which 5 new contracts and 4 renewal contracts. This indicates a strong customer satisfaction with our TRaaS programs. Because of this, Sensys Gatso U.S.A. historically has a very good track record in extending the contracts beyond 5 years with a contract renewal rate of more than 85%. Next slide, please. We are operating in a global sizable and growing market. Marketsandmarkets, the industry's market research reference source estimates the size of the total global road safety market to grow with an average growth rate of approximately 10% to SEK 44 billion in 2023. We operate in a traffic enforcement part of the road safety market, and we focus on specific regions and solutions. Given these choices, we estimate our total addressable focus market to be approximately SEK 12.5 billion in 2025. This addressable focus market is estimated to grow annually at the same 10% rate as the total road safety market. It is our ambition to grow our net sales with a compound annual growth rate of 16%, thereby outperforming the market to a total net sales of more than SEK 1 billion in 2025. Next slide, please. Our mission and focus remains the same. Sensys Gatso plays a leading role in changing this product behavior and saving life. Thanks to the combination of scalable software and flexible hardware solutions, our strong global brand heritage and our competent global team, we feel we have a big opportunity to increase our recurring revenues through our TRaaS offering on highways, rural roads and in cities. Our strategy is focused on profitable TRaaS revenue growth. With this focus, we aim to grow the TRaaS part of our total net sales with an average 22% per year from SEK 177 million in 2019 to more than SEK 600 million in 2025. The overall profitability ambition increases with at least 8 percentage points from 7% in 2019 to more than 15% by 2025. On that final note, I would like to open up for questions.

[Operator Instructions] And our first question comes from the line of Johan Widmark from Erik Penser Bank.

Okay. Ivo and Simon, can you hear me?

Yes, yes. We can.

Yes, we can.

First, congratulations on the strong numbers, and very encouraged to see this new long-term targets of yours. I'm still, though, a bit curious about the mix here and what happens between the EBITDA line and the revenue line. If I assume that the operating expense will increase from SEK 169 million last year to, say, SEK 250 million in 2025, I get that it would imply a 35% gross margin in the systems business and a 45% gross margin in TRaaS approximately. Is that the mix that you're seeing? Or what I'm really asking is a 35% estimate for systems reasonable. And do you think that an OpEx estimate of SEK 250 million is a reasonable target for 2025?

So let me just summarize to see if I understand your question. Your question is whether you think SEK 250 million of operating expenses is a valid number. And whether 35% gross margin for system sales is a valid number as well. Well, of course, we don't guide on gross margins for commercial reasons. And so that's why we are now putting out our long-term goals with a 15% EBITDA ambition. And to me, I would like to leave that.

Yes, absolutely. Maybe trusting also that the EBITDA target is going to be at least 15%. So we're aiming at a target which is higher than 15% by 2025.

Right. Right. Okay. So if we leave the gross margin aside, do you think that -- can you give some flavor maybe on how big an organization in terms of operating expenses that you expect to this kind of revenue to require in 2025 if that's your EBITDA?

I mean it's a long way out, so that's kind of difficult to say. But what we do see, Johan, is that we have a sort of like a minimal sized structure in place now and that if we increase our business, we don't really need to add that many resources, indirect resources, to the structure in order to grow the business. So you could argue that, that could be a valid reason why we can improve the profitability.

Okay. Okay. I see. So also one last follow-up on that. This 15% EBITDA margin target, would you say that this represents TRaaS business that is still in some sort of scale-up phase? Or would that reflect a more mature phase of the business, so to speak?

Well, I mean, first of all, it's not 15%. It's higher than 15%. I want to stress that. And what we do see is that when you -- so I think important to note is that when you start with new TRaaS programs, you have startup costs, and they suppress the margin initially. That when these TRaaS programs are in a mature phase, then they start to significantly contribute to the profitability. And so if you say mature -- when it is mature, you could argue that means that you're not adding new programs, and we are. So we are in a growth phase. We have a focus on growing the TRaaS business, so we will continue to add programs, hopefully, to our TRaaS revenue. And we will always have -- part of that will always be the startup costs that suppress the margin a bit. Having said that, the bigger the business becomes, the smaller the impact will be of adding new TRaaS programs to our overall market -- overall profitability.

[Operator Instructions] Our next question comes from the line of Viktor Westman from Redeye.

Congrats on the strong figures. First question on the 2025 target. Do you need any M&A to reach the SEK 1 billion? And how do you think about the M&A, in general, in this strategy?