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

Welcome to Sensys Gatso Presentation of the Fourth Quarter and Year-end Report of 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 provide you with an update on our business for the quarter and for the full year 2020. We then will follow up with a financial update by Simon. And finally, I will finish this presentation with a summary and our outlook. Next slide, please. Now let's look at an update of our business. In this business update, I will take you through: The order intake, which is up by 40%; our TRaaS sales, up by 23% for the year; our profitability with a positive EBIT of SEK 11 million; the deliveries to Saudi Arabia that have restarted; our strong position in the Costa Rica contract; an update on the Netherlands; and finally, I will shortly talk about our new CTO, Pär Degerman, who has recently joined Sensys Gatso as our new CTO. Next slide, please. First, we look at our order intake. The order intake for the fourth quarter arrived at a solid SEK 121 million. More important than the absolute size of the order intake is the quality of it. With TRaaS contracts signed in the U.S.A. and in the Netherlands, the major part of the order intake came from recurring revenue contracts. The renewal of the Dutch TRaaS contract stands out this quarter for its longevity. We received the second renewal of this contract in November, extending it to a total contract length of 12 years. This speaks for the long-standing customer relationship based on our excellent hit rate and uptime performance. In the U.S.A., 2 of the 3 contracts we signed in the fourth quarter were school zone speed enforcement contracts, a strategic objective for us. Looking at the full year of 2020, we booked a record high order intake of SEK 788 million. This is 40% higher than the already strong order intake of SEK 562 million in 2019. The excellent global spread of the full year order intake as well as the high level of TRaaS in the order intake is paving the way for strong profitable sales growth in the years to come. Next slide, please. Now let's have a look at our top line development. The total sales for the quarter came in at SEK 134 million. We are pleased with the sales level, given that as a result of the pandemic not all school some speed enforcement programs in the U.S.A. have fully restarted in Q4. Of the sales in the quarter, 44% relates to TRaaS, mainly from programs in the United States. This is an improvement of 12 percentage points compared to Q4 last year at 32%. Overall, the total global sales for the year grew by 12% to SEK 455 million compared to SEK 406 million in 2019. Given the market challenges in 2020, we consider this an excellent growth level. The global distribution of our sales by region is well balanced in 2020, with 26% coming from Americas, 34% from Europe and 40% from APAC and MEA. It's evidence of our true global distribution and brand strength. In 2020, TRaaS accounted for SEK 217 million, 48% of total sales. Compared to 2019, with SEK 177 million of TRaaS sales, this is an increase of 23%. Next slide, please. We finished the year at a high EBITDA level of nearly SEK 60 million or 13% of sales. This is a doubling of our EBITDA compared to 2019. We are particularly proud to have reached this result in a year of global economic downturn due to the COVID-19 crisis. Right from the start of the pandemic, we came together as a global team and continued our business, almost as usual. It has taught us that our investments in customer relations, in our internal organization and in our agile way of working are paying off in times of global distress. Due to this favorable situation, we could keep our sales levels high and our margins up. Even with the average number of full-time employees during the year increasing with 27 to support our growing business, we managed the cost side of our company well. Our total expenses decreased with 11% during the year. With higher sales, stable margins and lower expenses, we are proud to have realized a positive EBIT of SEK 11 million in 2020, an improvement of SEK 35 million compared to last year. Next slide, please. In August 2020, we received a contract from our customer in the Kingdom of Saudi Arabia for our in-vehicle solution. With a total contract value of SEK 275 million, this represents the largest single contract ever awarded to Sensys Gatso. Since 2015, we have sold more than 2,200 in-vehicle systems across 4 countries. The user friendliness, ease of installation and above all the precision and effectiveness of our solution makes us the clear market leader in this domain. We have first started our deliveries to our customer in Saudi Arabia in Q3. Due to logistics challenges at our customer, only 15% of the contract revenue is accounted for in 2020. We have restarted deliveries in February and foresee the remainder of the deliveries under the contract to be executed throughout 2021. Next slide, please. In February 2020, Sensys Gatso, together with our consortium partners, signed a contract with the Costa Rican government for the country's nationwide Intelligent Transportation System for a total contract value of SEK 192 million. Alongside the systems agreement of SEK 132 million, there is an additional TRaaS maintenance and staffing contract estimated at SEK 60 million over a contract period of 4 years. Sensys Gatso will supply T-Series camera roadside systems together with related analytics software PULS and our back-office software Xilium. During the quarter, it became apparent that the Costa Rican economy has been severely impacted by the COVID-19 pandemic. The budget already allocated to our customer for the execution of our contract was withheld by the Ministry of Finance. This has put the formal start of the program for the moment on hold. The Costa Rican government clearly recognizes the benefits of our traffic enforcement program for the general public that has other financial priorities in the short term. Given our strong contractual position and the willingness of the government to ultimately implement a national traffic safety program, we believe the program will be rolled out as projected, albeit later than initially expected. Right now, our best estimate is that first deliveries will start in the second half of 2021. Next slide, please. Now let's have a look at some recent developments in the Netherlands. The city of Amsterdam has defined a policy how to make Amsterdam a more sustainable and healthier place to live in. One of the key contributors to this policy is to reduce emissions for vehicles entering the city. The policy envisions that by 2030, only emission-free vehicles are allowed to enter the city. In order to enforce this policy, Sensys Gatso has been the technology provider to the city of Amsterdam already since 2010. More than 50 cameras have been placed around Amsterdam, reading the license plate of all vehicles. Those license plates are checked against the national vehicle database using our analytics software, PULS. With that information, PULS decides if an entry in the city is unlawful, and if so, to record a violation. On a daily basis, more than 600,000 license plates are read and checked using our PULS software. The result of the enforcement of this policy is that the emission levels within the city have decreased by more than 50% since the introduction of the program. The greenhouse gas emissions are now within the levels of a healthy living space. We are very proud to support Amsterdam in making the city a healthy place to stay. Next slide, please. In January, fiscal information and investigation service in the Netherlands started an investigation into Sensys Gatso Netherlands B.V., formally known as Gatsometer b.v. The investigation relates to allegations of misconduct in Gatsometer before the acquisition by Sensys Gatso AB. Investigation is at a very initial phase of collecting information and verifying details related to a certain contract dating back to 2015. We want to be very transparent about the situation. And therefore, we decided, although not a MAR obligation to nevertheless inform the market and all other stakeholders about this initial investigation. We do so because for Sensys Gatso, everything we do revolves around 1 powerful word, integrity. It's been in our DNA for 60 years. It defines who we are as people and as a partner to our customers. All of our actions are based upon that single word. Showing high level of integrity is a way of being, and we're building our products and providing services and above all a way of doing business. In line with our integrity culture, we have initiated in January our own internal audit, which has not provided any indications of possible wrongdoing. We will, of course, fully cooperate and proactively share our findings with the investigating authority. Although we are positive about the outcome, it will not be possible to assess if there are any consequences for the company until a final conclusion has been reached by the investigating authority. Next slide, please. We are pleased that Pär Degerman has joined Sensys Gatso in February as our new CTO, replacing Timo Gatsonides, who decided to pursue other opportunities Timo's vast experience in our industry and his inclusive leadership style have helped us to get to our current market-leading position. Timo will remain with the company in an advisory role. Pär Degerman is a Swedish national, which helps in diversifying the group management team. He has an international technical background from Scania and Einride, a company that develops autonomous driving trucks where he has served as a CTO. Pär holds a Master of Science as well as a licentiate degree from Linköping University. He has strong skills in building a modern engineering organization and he brings additional knowledge about the automotive and traffic industry to our company. I am confident that he will be able to help align the company with changing marketing needs, creating long-term shareholder value. Pär will introduce himself and share his technology vision on our business during the Q1 market presentation on April 27. Next slide, please. With the additional of Pär to our team, we have further diversified our team and added additional knowledge and experience in the mobility market. This slide shows how we are organized. We have a global organization operating in 70 countries across the world. To run this global operation in an efficient way and retain focus on our local businesses and customers, we operate from 5 entities with local leadership and P&L responsibility, being Sweden, Netherlands, Australia, U.S.A. and managed services, where we do software and business development. The group management team consists of 4 people and a responsible for global results and functional strategy development. The 5 entities report on a monthly basis to group management. And as an extended management team, we need around 8 times per year to exchange information and make sure all teams are globally aligned with the objectives and strategies. The collective team is very senior with more than 150 years of experience in our or related industries. As CEO of Sensys Gatso Group, I report into the Board of Directors, minimal 8x a year. The Board of Sensys Gatso is a professional board with a collective international business experience of more than 125 years. All in all, we are blessed with a very experienced team with a strong international background to lead and control our company. On that note, I'd like to hand over to Simon for the financial update. Next slide.

Okay. Thank you, Ivo. I would like to take you through the following topics today: Our consolidated income statements, an update on the segment's performance, and a full year analysis on the TRaaS sales development and finally our available cash and financial position. Next slide, please. The fourth quarter sales arrived at SEK 134 million compared to SEK 156 million in Q4 2019. Full year sales ended at SEK 455 million compared to SEK 406 million, an increase of 12% year-over-year. The gross margin over these sales amount to 35.6%. The operating expenses for the year totaled SEK 150 million compared to SEK 169 million in 2019. The decrease of expenses is partially driven by lower amortization of SEK 8 million related to the acquisition of Gatso Beheer. During the year, the company received COVID-19 relief from the Dutch government to the amount of SEK 3.5 million. This has been recorded as a benefit in the operating expenses. The company also received COVID-19 relief from the U.S. government, the relief amounting to SEK 4.5 million is recorded on the balance sheet as a loan. The operating profit for the year totaled positive SEK 11 million compared to negative SEK 24 million, and we have ended the year 2020 with a profit after tax of SEK 4 million which is an increase of SEK 19 million compared to 2019. Next slide, please. So now let's have a look at our performance of the system sales business. The order intake of system sales for the full year ended at SEK 629 million. With this order intake, we end the year on a record high order intake for Sensys Gatso. Compared to last year, the order intake has increased by 67%. The increase was driven by order intake from existing customers and order intake related to Costa Rica of SEK 192 million in the second quarter and the order from Saudi Arabia of SEK 275 million in the third quarter of this year. The sales for the segment system sales in the quarter amounted to SEK 101 million compared to SEK 130 million in the comparison period. For the full year, the segment sales landed on SEK 333 million compared to SEK 311 million, corresponding to 7% annual growth. The EBITDA for the quarter arrived at SEK 14 million (sic) [ SEK 13 million ] compared to SEK 23 million last year. The full year EBITDA has increased from SEK 21 million to SEK 39 million with an EBITDA margin improvement from 7% to 12%. The full year improvement in the performance is due to higher efficiency on delivery of bigger volumes and repeat orders. The operating profit for the year 2020 arrived at SEK 19 million compared to SEK 1 million in 2029 (sic) [ 2019 ]. Next slide, please. Moving to our Managed Services segment. The order intake for 2020 arrived at SEK 159 million compared to SEK 186 million in 2019. In the quarter, we have received 2 new TRaaS maintenance services contracts and 1 extension, with a combined order value over contract periods of 5 years of SEK 89 million. Our Managed Services sales in the fourth quarter amounted to SEK 33 million and has increased by 18% compared to the fourth quarter last year. For the full year, the segment sales landed on SEK 122 million, an increase of 28%. Large contributors to the 2020 sales of Managed Services are school zone speed programs. With the higher sales level, combined with lower cost of implementation during the second half of the year, the EBITDA has increased 173% from SEK 7 million to approximately SEK 20 million. From an operating profit perspective, the performance of the segment has improved from negative SEK 26 million to negative SEK 8 million. Next slide, please. Last quarter, we added this slide to our market reporting pack, demonstrating in what way trust is part of the segment System Sales and Managed Services. In general terms, TRaaS' recurring revenue within both segments with TRaaS Managed Services being 100% recurring revenue. For the full year, the segment System Sales had 29% TRaaS sales included. These TRaaS sales mainly relate to service and maintenance for our customer installed base. In addition to last quarter's presentation, I want to show you what the development of TRaaS sales has been over the years, with 2017 as a base. We have seen double-digit growth numbers since 2018, with 2019 and 2020 at 23% year-on-year growth. This growth is mainly driven by TRaaS Managed Services contracts in the U.S.A., of which predominantly school zone speed programs. These programs are operated in school zone areas where the most vulnerable road users, children, participate in traffic. We are proud that Sensys Gatso is contributing to safer school environments by reducing speeds on the roads in these areas. Based on the year-on-year growth of 2019 and 2020 at 23%, we are still trending towards our long-term ambition to grow TRaaS sales by more than 22.2% compound annual growth rate to more than SEK 600 million in 2025. Next slide, please. Finally, I would like to take you through our cash position. The available cash at the end of the year totaled SEK 148 million compared to SEK 85 million at the end of 2019. The available cash includes the credit facilities not taken up, but excludes the tranches of additional financing of Rabobank not taken up. The remainder of that additional financing amounts to SEK 37.5 million. The operating cash flow for the fourth quarter was slightly negative at SEK 7 million. For the full year, however, the operating cash flow amounted positive SEK 15 million compared to negative SEK 4 million for the year 2019. The negative cash flow from operations in the fourth quarter is driven by the increase in net working capital, which peaked at SEK 188 million at the end of 2020. The increase in working capital is related to deal sizes that have significantly increased. With the new raise capital funds in the third quarter and the additional financing from Rabobank, we remain to have a strong financial position, with 67% equity assets ratio. And on that note, I would like to hand over to Ivo. Next slide, please.

Thank you, Simon. Our order book is stronger than ever before. Our TRaaS business continues to grow, leading to higher margins. Together with tightly managed costs, our EBITDA margin has now nearly doubled from 7% in 2019 to 13% in 2020. Even with some short-term revenue impact related to COVID-19, we retain our long-term plan to grow our net sales from SEK 455 million in 2020 for more than SEK 1 billion, which TRaaS revenues is more than SEK 600 million in 2025. We also retain our ambition to increase the profitability and 13% EBITDA margin in 2020 for more than 15% in 2025. On that final note, I would like to open up for questions. Next slide, please.

[Operator Instructions] The first question comes from the line of Viktor Westman from Redeye.

Good job with solid report. I wanted to ask about some of the contract. You mentioned there was some delays on the customer side. Is this corona related? And do you see that other customers have similar problems?

No, not at all corona related. It's actually been an implementation of a new ERP system at the end of the customer, which is causing us.

Okay. Very good. And I wanted to follow up also on the uninsured vehicles. What's going on there, you mentioned there's been a solid interest before. Can you give some update on this?

I don't -- what I mean by with the question exactly?

The potential for uninsured vehicles, not Oklahoma, but in other states?

Yes. I mean that's -- like always, we are facing long sales cycles for these programs. Certainly, with the local governments being closed in the U.S. that processes, but it processes slowly. But there is progress there. Absolutely. Yes.