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

Yes. Good morning, everybody. Welcome to Sensys Gatso presentation of the first quarter 2020. My name is Ivo Mönnink, I am the CEO of Sensys Gatso, and I will be presenting to you together with Simon Mulder, our CFO. Next slide, please. In this market presentation, we will cover an update on how we are dealing with the global COVID-19 crisis. We -- this will be followed by an update on our business for the quarter and then followed by a financial update. And finally, I'll finish with a summary and our outlook. Next slide, please. Let's start with the business update. On the one topic the world is daily talking about for the last 2 months, COVID-19. The moment the virus outbreak was declared a pandemic by the World Health Organization, we acted swiftly by protecting our employees and the continuity of our operations. We created business continuity plans for all of our entities and ask nearly 80% of our employees to work from home. Our objective is to keep our employees healthy and to protect those employees that absolutely need to be in the office or in the field to continue the product and service deliveries to our customers. Because we globally adopted the Agile and Scrum way of working in 2018, our developers can now 100% continue their work remotely. With this, the execution of development projects and customer contacts can continue without disruption. We are very pleased that in the United States, we obtained security clearance from the legal authorities for our operators and customer service staff to work from home. As a result, our ability to send out citations in the U.S.A. is not impacted by the lockdown. The achieved continuity of our business is important to our customers because we are seen as an essential business to many governments across the world. With emptier roads, drivers may be more tempted to exceed speed limits, risking crashes and putting an unnecessary burden on the already stretched health care systems. In line with our mission to make traffic safer, we are actively pushing the message to drive safely, especially now, using our social media channels. Of course, as schools closed and less traffic overall in the United States, we will possibly start to see an impact on our TRaas revenue in that market. To what extent? Largely depends on the timing of the gradual reopening the American economy and the schools in the cities, where we have fulsome speed enforcement programs. Overall, for now, I can conclude that our employees are healthy and motivated. Our business is in control and continues, and the impact of COVID-19 for Sensys Gatso globally is limited. Next slide, please. Now first, here's an update on the Costa Rica contract. In February of this year, Sensys Gatso together with our consortium partners were given a notice of contract award from the Costa Rican government. The award was for the development, implementation and maintenance of Costa Rica's nationwide intelligent transportation system. The total contract value for Sensys Gatso is SEK 192 million of which SEK 60 million is TRaas revenue over a period of 4 years. As already mentioned in the media, there have been appeals from several competitors in the tender process that none of these appeals have been rewarded. As a result, we are now in the process of stipulating the legal details of the contract between co-parties involved. Due to COVID-19-related communication circumstances, this takes more time than initially anticipated. At the moment, we do not expect this to have an impact on the overall execution timeline of the project. The rollout of the program is still estimated to start in Q3 2020 and is expected to be ready for activation by Q1 2021. We are very excited about this contract, which provides for a -- for our second entry after Colombia in a large and growing Latin American region. Clarity, the order will be taken into the order intake when the final contract is signed, which is expected in Q2. Next slide, please. Now let's look at our order intake. The order intake for the quarter has been relatively low SEK 34 million. In general, first quarter order intakes are lower compared to other quarters as it is not uncommon for our government customers to release their annual budgets for new projects after the first quarter. During the quarter, we received a notice of award from Costa Rica for the amount of SEK 192 million. As mentioned, due to initial COVID-19-related communication challenges, the signing of the Costa Rica contract has been delayed into Q2. Because we are seen by our governmental customers as an essential business, we do not anticipate at this point that COVID-19 will impact the full year order intake. Next slide, please. Let's now look at how sales has developed in this quarter. The total sales arrived at SEK 96 million. 23% higher than last year at SEK 78 million. More importantly, our strategic recurring TRaas sales grew in the first quarter by 47% from SEK 36 million to SEK 53 million. We are seeing a continuing trend of growing the share of our TRaas business. In the full year 2018, TRaas represented 38% of our total sales. Full year 2019, we grew our TRaas basis to 22% -- by 22% to SEK 177 million, coming from SEK 145 million in 2018. The share of our TRaas business represented 44% in 2019. In Q1 2020, we see this growing trend continue with 56% share of TRaas within our total sales. Next slide, please. As you can see from this slide, we have been stacking our TRaas business. Just last year, we signed a total of 13 contracts in the strategic recurring revenue stream. 9 of these contracts were entirely new programs. Four were contract extensions of already existing programs. The total contract value of these contracts is SEK 379 million, and they represent a weighted average revenue of approximately SEK 90 million per year for the next 4 to 5 years. The largest contributor to our TRaas revenue growth in 2020 has been our customer DJCS in Australia. Here, we closed 2 TRaas contracts at the end of 2019 for a total contract value of SEK [ 190 ] million. Our second biggest contributor to the growth of the TRaas business of the United States in 8 of the 13 contracts closed. The total contract value of these U.S. contracts is SEK 178 million. The U.S.A. and Australia TRaas contracts closed in 2019 together represent 97% of the total TRaas contract value close to 2019. The programs will start to generate revenue in the course of 2020 and the years thereafter. All in all, we are very pleased to see that our contracts grow the strategic recurring TRaas revenue is starting to pay off with an increase of 47% this quarter and a total TRaas revenue share now 56%. On that note, I'd like to hand over to Simon for an update on our financials. Next slide, please.

Okay. Thank you, Ivo. I would like to take you through the following topics today. An announcement of the segment's performance; our consolidated income statement; and finally, our available cash and financial position. Next slide, please. Now let's have a look at the performance of our system sales business. The 12 months rolling order intake of Q1 2020 lands at SEK 336 million. This is 40% lower than the system sales order intake of Q1 2019. This is due to a lower order intake in the first quarter of this year. As Ivo explained, this is in line with our expectations as order intake in the first quarter are typically lower compared to other quarters. The sales in the segment system sales in the quarter amount to SEK 63 million compared to SEK 61 million in the comparison period. The sales in the quarter is mainly driven by deliveries to our Australian and Middle East customers. In Australia, our business is considered essential. Therefore, we continue to roll out our new in-vehicle solution in the state of Victoria. The margin of this System Sales project is lower due to contracted development expenses, which are accounted for in the cost of goods sold. This project, however, is the enabler of a 6-year SEK 130 million TRaas contract. The EBITDA for the quarter arrived at nearly breakeven level, which is comparable to Q1 2019. As mentioned in the fourth quarter reports, the system sales organization is ready for new high-volume projects without significant increases in organization and in cost structure. Next slide, please. Now moving to our Managed Services segment. As mentioned, the order intake for the first quarter is generally somewhat lower than the remainder of the year. However, our 12 months rolling order intake has increased by nearly 19% compared to Q1 2019 for the segment Managed Services. This is mainly due to the strong order intake that we have seen in the second and fourth quarter of 2019 which excludes our speed contract signings by the program in Buffalo. The increase in our Managed Services sales of 94% compared to the first quarter of last year is mainly due to the onboarding activities which we had in 2019 into Oklahoma starting up at the beginning of 2019 and closing the year with the onboarding of a high-volume school zone speed program in Pawtuckets. Amongst others, these programs now provide this segment with an increased level of sales. On top of that, we onboarded our first German program during Q1 of last year, resulting in full sales contribution in 2020. The first quarter of 2020 has been a quarter of onboarding our schools zone school speed program in Buffalo. Where we have seen high initial volumes during the warning period, resulting in higher onboarding costs. During the onboarding phase of these TRaas Managed Services programs, we typically incur one-off costs for customization of our software platform, Xilium and PULS as well as costs relating to public awareness. Most importantly, as part of these programs, we start with a warning period of typically 1 month to help create public acceptance for these programs. In this period, we incur all the costs for processing and sending out warnings without receiving any compensation. These costs are recorded as cost of goods sold in the period, temporarily suppressing the margins. This has had an impact on this segment's EBITDA level, still arriving at positive SEK 2.6 million for the first quarter compared to SEK 0.7 million last year. Our Managed Services business is in a strong growth phase, where the full EBITDA potential has yet to be realized due to the onboarding investments of new programs. Next slide, please. Looking at the consolidated income segment, we can see that the net sales for the quarter amounted to SEK 97 million compared to SEK 78 million for the same quarter last year. The increase in sales is mainly driven by the increase in sales of the segment Managed Services of 94% from SEK 70 million to SEK 33 million in this quarter. Due to high onboarding costs and lower gross margins on our Australian projects, the gross margin is temporarily suppressed arriving at 30% in the quarter compared to 37% in same quarter last year. The expenses in the quarter amounted to SEK 42 million compared to SEK 41 million in Q1 2019. These are in line with the average quarterly expenses of 2019 to the amount of SEK 42 million. With this, the operating profit for the quarter landed on negative SEK 13 million compared to negative SEK 12 million. Next slide, please. Finally, I would like to take you through our cash position. Cash and cash equivalents at the end of the period totaled SEK 54 million compared to SEK 52 million at the end of 2019. At the end of this quarter, the free available cash amounted to SEK 92 million compared to SEK 85 million at the end of last year, taking into account the total amount of available credit facilities. First quarter operating cash flow has arrived at positive SEK 20 million due to positive changes in working capital. During the quarter, we've made investments in our platform FLUX and software programs Xilium and PULS of approximately SEK 4 million. To facilitate our growth ambition, Sensys Gatso and Rabobank had agreed during the quarter on a term sheet for additional funding to a maximum amount of SEK 50 million. The first SEK 12.5 million additional funding will become available upon signing the final contract with Rabobank during the second quarter. Overall, we are pleased with our additional funding and our solid financial position. On that note, I would like to hand over to Ivo. Next slide, please.

Thank you, Simon. For now, we expect the impact of COVID-19 for Sensys Gatso to be limited. With a healthy and motivated workforce, mostly, working from home, we can continue the execution of our projects. No projects have been canceled or delayed as we deal with government customers that value our traffic safety solutions as being essential to society. If anything, our long project timelines and multiyear government contracts play in our favor during this global crisis. I'm also pleased to see that our TRaas business develops in the right direction with a 47% year-on-year growth in the quarter. We also realized TRaas share of nearly 60% in the quarter. We have increased TRaas revenue 3 quarters in a row now, which confirms that we are on the right track to execute our strategy to grow this recurring revenue part of our business. With additional funding from Rabo in place, we now also improved our financial position. For these reasons, we retain our long-term plan to grow our net sales from SEK 400 million to more than SEK 1 billion, of which TRaas revenues is more than SEK 600 million in 2025. We also retain our ambition to increase the profitability from 7% EBITDA in 2019 to more than 15% in 2025. On that final note, I would like to open up for questions. Next slide, please.

[Operator Instructions] Our first question is from Viktor Westman from Redeye.

It's nice to hear that you are not affected by the corona and that you have a high [ pipeline filling ]. I got a couple of questions on the market. For us, on the outside, we only see the announced orders. So can you say something maybe about your pipeline in this quarter compared to through last year? Is it the larger or smaller than last year?

Effectively, we don't have that information readily available at this point in time.

Okay. Okay. But I have also a question on the -- you mentioned that you expect to see less driving and that could impact your Managed Services business somewhat. And -- but I guess, have you considered also the effect that people are more prone to driving instead of using public transport.

Yes. And what I said in my remarks on that is that, it could possibly have an impact. As of yet, we don't see that too much actually because we still have a very healthy level of events in United States. So we don't see that. So how it will pay out in the future is, of course, very difficult to predict. But for now, as I said, also the impact is limited, and hopefully, it will stay like that. But of course, it's impacting is that, in the cities where we have school zone speed enforcement programs, we can only enforce when schools are open. So the schools in the U.S. are now closed where we have the programs. And the -- normally schools open up in September again. We believe that -- and that's the input we're getting from our U.S. entity is that, we believe that the schools will start opening up again in August already. So there is going to be a lot of recovery, we'll expect to have a lot of recovery of that volume in the remainder of the year.

And just a question on the Managed Services. You had a great growth there of 94%, despite the corona times. Of course, U.S. was a bit late to lockdown. But still I mean what's driving this very impressive growth, primarily?

In the end, it is stacking up all the contracts we have been realizing in the past years and TRaas -- that's the beauty of TRaas is recurring revenue. It just continues. So we are building this base revenue, which keeps growing with the addition of new contracts, and that's what you're seeing.

Yes. Yes. Okay. Last question was on the -- you made a very interesting comment there about your business being essential for the customers. Can you just say something about, in case, if there are resource constraints for the customers, what are the type of investments are you competing with? I mean what can the customer choose to investing instead of Sensys Gatso?

That's a difficult question, frankly. Because it's obviously different customer by customer and country by country. So that's difficult to say. What is -- what I can say is that, I think the government has realized that traffic enforcement these days is more important than even before. And what they -- because of the strain on the health care systems, what you see is there's an enormous amount of people dying from the coronavirus. But now you see -- and what's the press for that, that there's a lot of comments about the fact that across the world, 1.3 million people die every year from traffic crashes. So that is now being highlighted. And that plays, I believe, in the advantage of our business and our industry that we do play a very, very important role in -- as contributed to society. And -- for me, this is a proof of that. So the fact that we are now seeing as an essential business is actually helping us.

[Operator Instructions] Our next question is from Johan Widmark from Erik Penser Bank.

Can you hear me?

Yes.

Yes, again.

Okay. Perfect. Great. Well, some of my questions have already been answered or partly answered, but I just want to go back to the sales and marketing efforts that you're doing right now. And yes, if I can maybe ask you just to elaborate a bit on how this is done in reality. I mean with sales forces not being able to travel and take physical meetings and how do you do this? And I suppose it's a pretty bold statement compared to other companies to say that you expect only limited effects from this. How do you manage to do this in reality.

Well, maybe fortunately, you could argue we have long sales cycles. That means that most of the contracts have already established. And with people working from home in the countries where we have our customers, actually, in many cases, we see communication improve. Because the decision-makers are not directing to all kinds of meetings, and they have more availability to actually meet over a phone and using webcast. So yes, we do see an improvement. And I think in reality, it's actually playing in our advantage, Widmark. So if this is lasting too long, of course, then it becomes a different situation because you are not in a position to open up completely new markets, so the biggest business development part of our business would then suffer over time. But as I said, the long lead times in our business are playing in our advantage here.

Okay. Perfect. And also, I just want to summarize a bit and go back to your -- the long-term targets that you announced last quarter. And looking at the SEK 400 million in System Sales, If I'm not miscalculating here, I suppose that corresponds to a 4% compound annual growth rate, which would be a lower rate than the market in total, implying that you would reduce your overall market share in the -- on the systems side. Am I missing something here? Or is that correct?

System sales is always difficult to predict because these tender businesses are there or are not there. We prefer to be a little bit more prudent on this, if you like, than maybe the market would be. That doesn't mean that we're not going to be able to surpass that but anyway, this is [ good ] prudence.

Okay. But in more general terms, do you expect to maintain your market share? Or is that the more the system side, would you see that as a market that you're pulling back from to leave space for other players.

No. We're not pulling back from the market at all because I think the Australian project is a very good example, where we invest in a new solution for the market the in-vehicle solution. That's a project of System Sales but it's also the enabler for a SEK 130 million, 6-year TRaas contract. So that is actually -- the way we look at this is that projects growth is fantastic. We want it. It's even more and better than if there is a TRaas business linked to it. But that's not initially the case, it could become a TRaas business going forward. So System Sales is definitely a very important business for us. Having said that, if the tenders are there or they are not there, and we can't force them. That is something that is actually not in our scope to influence that. But we do see, in general, that markets are transforming more from System Sales.

And after -- are no further audio questions, I will hand that back to the speakers.

Okay. Well, thank you, everybody, for attending and we wish you a healthy and safe couple of months going forward. Thank you very much. Bye-bye.