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

Good morning, everybody, and welcome to Sensys Gatso Presentation of the Second Quarter 2020. My name is Ivo Mönnink, and I'm 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. This will be followed by an update on our business for the quarter and for the first 6 months. We then follow-up with a financial update by Simon. And finally, I will end this presentation with a summary and our outlook. Next slide, please. Let's start with an update on our business during the COVID-19 pandemic. As the virus outbreak is increasingly spreading across the world, we keep in very close contact with our employees and our customers. At the customer side, we continue to see the social relevance of the traffic safety industry in which we operate. Without exception, Sensys Gatso is seen as an essential business helping to ensure the roads remain safe. Even in lockdown situations, like currently in the U.S.A. or Australia, we receive governmental permissions to continue maintaining and operating our activated traffic enforcement solutions. In the U.S.A., in general, we do not see traffic diminishing in the stage in which we operate. At the moment, schools are closed across the U.S.A. This is related to COVID-19 restrictions and some holidays. At this moment, we expect that schools will reopen again at the latest in the beginning of September. This reopening would enable us to start the programs in cities in which we have school zone speed programs, like, for instance, Buffalo Pawtucket and Parma. With most of our employees still working safely from their home locations and with systems and tools in place that enable remote working, we have not seen any impact on the outlook of our workforce to date. Overall, for now, the continuing activity with our customers, our motivated employees and our essential business label have made Sensys Gatso resilient to the impact of the COVID-19 pandemic. Next slide, please. Now let's look at an update on our business. In this business update, I will take you through the order intake, which is breaking records; our deal sizes, which are becoming larger; our TRaaS business, which continues to grow; and finally, our positive EBITDA margin development. Next slide, please. First, we look at our order intake. During the quarter, we received an order intake of SEK 283 million, more than 100% higher than last year and a quarterly record. Year-to-date, we received a total order intake of SEK 344 million, which is the highest order intake in the history of our company. This is, to a large extent, driven by our deal sizes becoming larger, which I will demonstrate in the next slide. With the signing of the SEK 192 million Costa Rica contract in Q2 and including new TRaaS contracts in the U.S.A. and The Netherlands, our 12 months rolling order intake has now arrived at SEK 665 million, another record in the history of Sensys Gatso. Next slide, please. We are currently experiencing a very positive momentum when it regards our order book. It started at the end of 2019 when we received 3 consecutive orders from a single customer in Australia amounting to SEK 167 million. A few months later, in May 2020, we received a signed contract for the national implementation of traffic enforcement solutions in Costa Rica for a total value of SEK 192 million. After the quarter, in August, we received a contract from a customer in the Kingdom of Saudi Arabia for our in-vehicle solution. With a total value of SEK 275 million, this represents the largest single contract ever received by Sensys Gatso. The contract underscores Saudi Arabia's commitment to increase traffic safety in line with efficient in 2030. It also demonstrates the effectiveness and scalability of our unique in-vehicle solution in various regions in the world. Next slide, please. Our strategic focus on recurring TRaaS revenue has resulted in revenue growth of 12% in the second quarter and 27% in the first half of the year. The total TRaaS order intake year-to-date is SEK 146 million, of which 75% or SEK 109 million is from new contracts. As we are adding these new contracts, our TRaaS revenue will continue to grow. Our TRaaS revenue of SEK 107 million in the first half of the year now represents 57% of total revenue, close to our long-term ambition of at least 60% of total revenue by 2025. Next slide, please. During the quarter, we received COVID-19 relief funding from the Dutch and U.S. governments for a total of SEK 8.3 million, of which SEK 3.5 million has been accounted for in the profit and loss as a grant. This COVID-19 relief funding has enabled Sensys Gatso to retain the workforce needed to execute on future revenues from the increased order intake. Including this grant, the EBITDA arrived year-to-date at SEK 13 million or a margin of 7%. Most of the increased profitability is coming from the segment managed services, which is 100% TRaaS or recurring revenue. Managed services due -- and EBITDA margin year-to-date of 12.5%. Although the segment contributes to only 33% of revenue, the EBITDA share of the segment is 59%. It confirms our strategy to focus on the higher-margin recurring revenue business in both our segment's system sales and managed services. With that said, I'd like to hand over to Simon for the financial update. Next slide, please.

Thanks, Ivo. I would like to take you through the following topics today: An analysis of the segments performance, our consolidated income statement, and finally, our available cash and financial position. Next slide, please. Let's have a look at the performance of our system sales business. The 12-month rolling order intake of Q2 2020 landed at SEK 544 million, which is a record high order intake for Sensys Gatso. This is 76% higher than the system sales order intake of Q2 last year. The higher order intake is mainly driven by the Costa Rica order of SEK 192 million. This order contains SEK 60 million of TRaaS revenues over the contract period. The sales for the segment in the quarter amounted to SEK 64 million compared to SEK 72 million. For the first half year, the sales landed at SEK 127 million compared to SEK 133 million in H1 last year. The EBITDA for the quarter arrived at SEK 7 million, positively impacted by COVID-19 relief from the Dutch government to the amount of SEK 3.5 million. Next slide, please. Moving to our Managed Services segment. The 12 months rolling order intake arrived at SEK 121 million compared to SEK 177 million in Q2 2019. As explained in the first quarter presentation, order intake can be somewhat lower during the first half year compared to the second half year. Our managed services sales, however, have increased by 20% compared to the second quarter last year. In both the first and the second quarter of 2020, we've seen higher levels of sales, mainly relating to our U.S. operation and the TRaaS managed services contracts that we operate. The H1 sales of the segment arrived at SEK 63 million compared to SEK 42 million, which is an increase of 50%. The higher levels of sales is due to the contribution of the new orders won in 2019 that contribute to sales in 2020. Overall, we've not seen a reduction in the numbers of citations sent out on the programs that we operate as a result of COVID-19. In the first quarter, we incurred all the costs for processing and sending out the warnings for a new school zone speed program in Buffalo without receiving any compensation. Because of COVID-19 driven school casings in March, no citations have been issued for our school zone speed programs in the second quarter. Based on the current available information, we anticipate that most of these programs will restart after the U.S. summer holiday period in the second half of the year and will contribute to the revenue. The EBITDA in the second quarter amounted to SEK 5 million compared to SEK 3 million in the same quarter last year. Year-to-date, the EBITDA has doubled from SEK 4 million to SEK 8 million. Next slide, please. Looking at the consolidated income statement, we can see that the net sales of the quarter amounted to SEK 93 million compared to SEK 97 million for the same quarter last year. The sales for the first half year landed at SEK 189 million compared to SEK 175 million for last year. The margin arrived at approximately 37.5%, which is stable compared to the same quarter last year. The operating expenses totaled SEK 36 million compared to SEK 45 million, including amortization of intangible fixed assets recognized as part of the acquisition to the amount of SEK 6 million. In the quarter, Sensys Gatso received COVID-19 relief from the Dutch and the U.S. government for a total amount of SEK 8.3 million, of which SEK 3.5 million has been accounted for under other operating income in the profit and loss and SEK 4.8 million has been accounted for as a loan. The COVID-19 relief can be turned into a government grant if requirements are met. With this, the operating profit for the quarter landed on negative SEK 1 million compared to negative SEK 8 million and the profit for the period arrived at positive SEK 3 million. Next slide, please. Finally, I would like to take you through our cash position. The available cash at the end of the period totaled SEK 103 million compared to SEK 111 million for the same period last year. The available cash includes the credit facilities not taken up. The operating cash flow of the second quarter amounted to positive SEK 2 million due to positive changes in working capital. The H1 operating cash flow arrived at positive SEK 22 million. In the first half year, we've made investments in our platform FLUX, in our software platforms Xilium and Puls of approximately SEK 8 million, of which SEK 4 million in the second quarter. To facilitate further growth, Sensys Gatso and Rabobank have agreed to extend the current facilities granted with an additional SEK 50 million. The facility increase will be provided to Sensys Gatso upon request and is conditional upon meeting agreed covenants with steps of SEK 12.5 million each 6 months. In this quarter, the first SEK 12.5 million additional funding has become available. The short-term part of the loan has been presented as an obligation under the short-term borrowings on our balance sheet. Overall, we are pleased with our additional funding and our strengthened financial position. And on that note, I would like to hand over to Ivo. Next slide, please.

Thank you, Simon. Traffic safety continues to be a high priority for governmental customers with the essential business label for Sensys Gatso in all our markets, the execution of projects and TRaaS contracts continues. We, therefore, retain our expectation that with our resilient business model, the impact of COVID-19 prices for the group are limited. New and larger orders keep coming in, and our order book is stronger than ever before. Our strategic recurring TRaaS revenue also continues to grow. In the first half of the year, TRaaS has grown by 27% compared to last year, and it now represents 42% of our total order intake, 57% of our sales. With our resilient business and strong order book, we retain our long-term position to grow our net sales to more than SEK 1 billion in 2025, 60% or more than SEK 600 million of this revenue is to come from our recurring TRaaS business. We also hold on to our ambition to increase our EBITDA margin to more than 15% by 2025. On that final note, I would like to open up for questions.

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

Congrats on a solid quarter. I wanted to ask first about the -- you're going to deliver a lot of the big contracts now simultaneously during the next quarters, can you describe a little bit about how you are able to do that and what the challenges are that you need to overcome?

Well, first of all, I think we mentioned that before, our sales cycles are long, which means that we can anticipate a lot of the logistics already early upfront. So yes, you talk about a lot of products that need to be sent out simultaneously. So it means that we will have to be in close contact with our suppliers and make sure that the workforce is ready to execute, and all of that has been done. So we're clear on that side. Also, we have payment conditions in place with our customers that enable us to help with the funding of this part of your question. We have a solid cash position at this moment. We have additional funding from Rabobank. We have schools opening up again in the United States that will drive the indication in a positive way. We have very good cost control. COVID is helping us with that, I have to say. I think we have really good management of our working capital at this point in time as well. So there's a strong focus on cash, if you can imagine. And we have a strong shareholder backing us. So I believe all in all, we are in a very good position to execute these large orders in time and in full.

That's very good to hear. And can I just talk about the more -- the big context becoming more common. It's very unusual to see so many big contracts for us, I have followed the company for a long time. Can you just comment on the what's going on in the market? Is the general trend of more traffic safety or is there some particular thing you can mention?

Well, maybe one thing to mention is that if you look at Costa Rica and Colombia also related to -- from the same region, you can see now that regions that have not been focused on traffic enforcement as much as we have been doing in Europe are starting to open up. We might see that also in other parts of the world. Saudi Arabia is another example where the government starts to realize that actually fatalities in traffic is something you can avoid. And so the investments they're making here is really also for economic reasons. And I believe that is also sort of pushing possibly further business in the future in that region. So I'd say the developing regions have been lagging a little bit behind in traffic enforcement, and they are now -- seems they're seems starting up and investing more in traffic safety, which is, I think, a really, really good thing.

Yes. It's really good to see that they go for the big contract immediately also, but why do you think this is? Do you think this trend can continue with the large contract?

That is -- I mean, a trend is difficult to say because if you talk about trends, you need really high numbers, right, in terms of contracts. And that's not what happens in our industry. So we -- so we can't really apply any statistics to it. That's why we call it a momentum. It is something we see happening right now. Whether it will continue, difficult to say. I do see that the market, as I said before, in the developing parts of the world, is getting ready for this. So it could happen. Yes. Sure. And I think the good thing now is, Viktor, is this -- with us receiving these contracts, we obviously are positioning ourselves in a much better way to receive future nationwide contracts from other parts of the world as well.

That makes sense. Just can you squeeze in a last question about the -- you mentioned the trough is improving your margins. And can we talk a little bit about the margins in the TRaaS business that does not come from managed services? I thought that this was a rather low-margin business. Has there been any change in this -- in the margin profile in this part of the TRaaS business?

Okay. Simon, you want to comment to this?

Yes. So generally, of course, Viktor, we don't give any specific information about the margins for competitive reasons. But I don't see a specific trend in our margins at this point in time in TRaaS. You know, of course, that Managed Services has a good TRaaS margin. And the other big TRaaS contributor is service and maintenance, and we also see the same picture there on SLA contracts that we sign. We have good margins and on the regular repairs and calibrations, we have good margins.

Next question is from Johan Widmark, Erik Penser Bank.

Ivo and Simon, can you hear me?

Yes, we can. Allow you on.

Congratulations on the strong numbers. And I just have one maybe a bit weird question, but looking back when you announced your long-term targets, you also referred to some external research on the general outlook for your market. And if I'm not mistaken, the assumption of SEK 600 million in TRaaS sales and SEK 1 billion in revenue implied because your system side would actually grow slower than the expected market growth in the external research you were referring to. So seeing now that there still is a big system demand out there, is this demand stronger than what you expected when you set the targets? And does the development in the past 6 months give you reason to maybe reconsider an upwards revision of the systems portion of your long-term target, the remaining SEK 400 million?

Well, our system sales, as you probably know, is very on and off, I would say. I mean, the deals are coming or they're not coming, so it is kind of difficult to predict where that is going. So for us, the SEK 400 million is something we actually build up from the base. So we have not really taken any guessing or just -- how do you say that, estimations. We actually work with our entities. We work with the local entities. They build up their business plans, all the projects we see on the horizon, and then we factor them into our long-term business plan. So that's where this SEK 400 million by 2025 is actually coming from. And that's what we believe. And the SEK 600 million is really because we are focusing on our TRaaS business. It's a strategic focus, and that's where we see the growth for the company. That's where we also see the increased valuation of the company growing. I mean this, first, the major area to focus on. The system sales is sort of enabling the TRaaS business, if you like, but it's there or it's not there. It's also more difficult to predict, quite frankly. But we retain that SEK 400 million as our ambition.

[Operator Instructions] And we do not have any further questions at the moment. I hand the floor back to you.

All right. Are there any questions coming in through email? I don't see any. No? Okay. No questions for email. Then on -- I would like to thank everybody for attending this presentation. And hope to see you next time again. Bye-bye.