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

Hello, and welcome to Sensys Gatso Group Audiocast with Teleconference Q2 2021. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present CEO, Ivo Mönnink, and CFO, Simon Mulder. Please begin your meeting.

Okay. Thank you. Welcome to Sensys Gatso presentation of the second quarter 2021. My name is Ivo Mönnink, I'm the CEO of Sensys Gatso, and I will be presenting our Q2 results to you, together with Simon Mulder, our CFO. In this market presentation -- next slide, please. In this market presentation, we will provide you with an update on our business for the second quarter. We then follow up with financial updates 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 our order intake, where our existing customers support us this quarter. Our total sales, which is up 35% with U.S. TRaaS sales up by 45%. An update on Costa Rica, where we are pushing the contract execution. An update on the Saudi Arabia contract, which is in steady delivery mode. The establishment of Sensys Gatso LATAM. And last but not least, an update on the investigation in the Netherlands, which is now legally dismissed. Next slide, please. First, we look at our order intake. The order intake arrived this quarter at SEK 47 million compared to the record-breaking SEK 283 million in Q2 last year. This difference is mainly due to 2 large contracts in Australia and Costa Rica that were part of the high Q2 2020 order intake. This quarter, the order intake mainly consists of repeat orders from our existing customer base. It portrays the importance of a large global installed base that requires system updates, parts and maintenance to maintain the high uptime performance of more than 99%, which our solutions are renowned for. During almost the whole COVID period, our local sales teams worked hard on an active engagement with existing and new customers all around the world. The order intake is dependent on how quick a government, city or municipality can pass contract proposals through the councils. Governments are slowly coming out of COVID pandemic and are picking up where they left off, passing resolutions on traffic enforcement proposals, amongst others. This has created a very healthy sales pipeline for us that will quite likely drive our order intake forward in the near future. Next slide, please. Net sales for the quarter reached SEK 126 million, 35% higher than Q2 last year. It is also the highest Q2 sales level since the merger of Sensys and Gatso in 2015. As expected, our recurring Managed Services or TRaaS business has picked up again this quarter with schools in the U.S. opening again after COVID-related closings in Q4 and Q1. Compared to Q2 last year, our U.S. TRaaS business went up by 5%. Compared to the previous quarter, our TRaaS business showed an increase of 46% from SEK 22 million in Q1 to SEK 32 million in Q2. Year-to-date, we added 2 new TRaaS contracts in U.S.A., of which one was school zone speed enforcement program in Hoschton, Georgia after the quarter. The total count of our school zone programs is now at 7 in 5 different states. With higher vaccination rates and more controlled COVID conditions to keep schools open, we expect our Managed Services sales to normalize going forward with a healthy sales pipeline in place to secure future growth. Next slide, please. In August 2020, we signed a second contract with our customer in Saudi Arabia for our unique in-vehicle speed enforcement solution worth SEK 275 million. This was the second contract for this solution after the first SEK 66 million contract we signed in September 2018. The final payment we received in August marks the successful completion of this first order. Together with our customer Tahakom, we can now focus on the execution of the much larger second contract. Year-to-date July, we have delivered 35% of this SEK 270 million total contract value and the deliveries are progressing steadily. The execution and rollout of projects characterized by this size and solution type in combination with complex customer networks in a dynamic market is challenging. Although this complexity can sometimes slow down deliveries, it is more important that this progress happens steadily and correctly, in order to ensure customer satisfaction. We foresee the remainder of the deliveries under the contract, corresponding to approximately SEK 180 million to be executed throughout 2021 and the beginning of 2022. Next slide, please. In the quarter, the new regional entity, Sensys Gatso LATAM S.L. was established with the objective to centrally manage and consolidate our business activities in the important and growing Latin American region. On July 1, we hired Jose Lozano, a business veteran with 22 years of experience in our industry who started in the new role of Regional Director Latin America. With this, we are executing on our strategy to operate closer to our end customers in new and growing regions, just like we did with the Middle East region. At this moment, we have contracts in place in Costa Rica, Colombia and Barbados, and we are developing partnerships in Panama and Ecuador, a good base to further build our LATAM business upon. Next slide, please. The Costa Rican National Traffic Enforcement contract that we won in Q2 of last year has not yet started. COVID-related budgetary constraints currently hamper the timing of the execution of this program. With our local presence, we are in continuous communication with all stakeholders in the program to secure the budget to start the execution. During these meetings, both our strong legal position in the contract and the willingness of our customer to execute the contract are confirmed. With this, we believe the program will be rolled out as projected, but on a different time line. We expect the budget to be allocated in December and first deliveries to start in 2022. Next slide, please. In January of this year, we informed the market about an investigation by the Fiscal Information and Investigation Service FIOD related to allegations of misconduct in 2014 and 2015 in Gatsometer B.V. before the acquisition by Sensys Traffic. Naturally, we have fully cooperated with the investigative authorities and conducted an in-depth internal inquiry into the allegations, the results of which we shared with the FIOD. In the beginning of August, we heard the formal outcome of the investigation. FIOD dismissed all allegations and will not proceed with any prosecution. I'm very happy with this positive, fast and rare outcome in investigations of this kind. Our company revolves around integrity. It defines who we are as people, as a partner to our customers and how we design our solutions. Integrity guided us in our communication with the authorities and with the market. Simon, can you now please take us through the financial update. Next slide, please.

Yes. Thank you, Ivo. Okay, today, I would like to take you through the following topics, our consolidated income statement, an update on our TRaaS Sales development, the performance of our segments, and finally, our available cash and working capital position. Next slide, please. The second quarter sales are up by 35% and arrived at SEK 126 million. This increase in sales is mainly due to an increase of system sales related to Saudi project deliveries and a higher level of TRaaS Managed Services sales. For the first half year, the sales were up by 7% to SEK 204 million. The gross margin in Q2 amounted to approximately 37% in the quarter. For the first half year, the gross margin arrived at 35%. Gross margins are typically influenced by sales mix and sales volume. With a higher service and maintenance sales in the quarter, we have kept our margins at a good level. The second quarter operating expenses totaled SEK 42 million compared to SEK 36 million in 2020. This is connected to a higher sales level in the quarter. The second quarter performance has significantly improved compared to Q1 2021. With higher sales levels and an improved gross margin, the company has arrived at a positive operating profit level in the quarter of SEK 5 million compared to negative SEK 1 million. Also, the results from a half year perspective have improved with SEK 5 million compared to last year. Next slide, please. Moving over to our TRaaS sales development now. TRaaS sales is recurring revenue within both of our operating segments. In the segment, System Sales, it relates to TRaaS Service and Maintenance. Our segment, Managed Services is 100% TRaaS recurring revenue. Recurring revenue from Service and Maintenance consists of repeat repairs and calibrations on our customer installed base and more predominantly on service level agreement contracts with our customers for multiple years. This guarantees our customers the best product operations with an uptime of more than 99%. The revenue of TRaaS Service and Maintenance has grown over the last 6 quarters from SEK 20 million in Q1 2020 to SEK 29 million in Q2 2021, representing an increase of 45%. Our Managed Services revenue has increased from SEK 30 million in Q2 2020 to SEK 32 million in 2021, representing an increase of 7%. The increase of sales is mainly due to more school zone speed events in the quarter compared to last year. All in all, the TRaaS revenue has shown an increase of 15% to SEK 62 million compared to Q2 2020. Next slide, please. Okay. Now let's have a look at the performance of our System Sales business. The 12-month rolling order intake of Q2 2021 landed at SEK 434 million, down 20% compared to Q2 2020. The order intake of System Sales is volatile and, to a large extent, dependent on tenders coming out. The sales for the segment System Sales in the quarter amounted to SEK 94 million compared to SEK 56 million in the comparison period. This is an increase of 47% as we execute on our order backlog, which is driven by Saudi project deliveries. 12 months rolling, the sales increased to SEK 356 million, an increase of 17%. Also looking at the half year sales numbers, we've seen an increase of 18% from SEK 127 million to SEK 150 million in 2021. The EBITDA for the quarter arrived at approximately SEK 7 million, which is a similar level as Q2 last year. The 12-month rolling EBITDA for this segment has increased by 46% from SEK 26 million to SEK 38 million. The segment System Sales has operated at a higher sales level with a 12-month rolling EBITDA remaining in an uptrend since Q1 2020. Next slide, please. Now moving to our Managed Services segment. The 12-month rolling order intake arrived at SEK 119 million compared to SEK 121 million in Q2 2020. Our Managed Services sales in the quarter amounted to SEK 32 million, an increase of 7%. Looking at the 12 months rolling perspective sales, it is slightly down by 2%. This is caused by lower revenue from school zone in 2020 due to temporary COVID-related school closings. The EBITDA in the quarter was positive SEK 7 million compared to SEK 5 million. The 12 months rolling absolute EBITDA arrived at SEK 60 million, which is an increase of 33% compared to Q2 rolling numbers last year. The second quarter results of the segment Managed Services have significantly improved with higher sales and improved EBITDA margins. Next slide, please. Finally, I would like to take you through our cash position and our net working capital. The available cash at the end of the period totaled SEK 124 million compared to SEK 102 million for the same period last year. The available cash includes the credit facilities not taken up, but excludes the tranches of additional financing of Rabobank not taken up. At the end of the quarter, SEK 12.5 million is remaining of the additional financing. In the quarter, the company has drawn down SEK 25 million of this additional financing. These funds are part of the long-term financing of the Rabobank and have been used for financing fixed assets. The total investment in fixed assets in the first half year amounted to SEK 28 million. To a large extent, these investments were made in fixed assets and operations relating to installed cameras for the execution of our TRaaS programs previously announced in the United States and that will contribute to revenue in the second half of the year. The operating cash flow in the second quarter arrived at SEK 39 million. This positive cash flow is mainly driven by lower net working capital of SEK 23 million, looking from Q1 to Q2 2021, due to Saudi project deliveries and payments. When comparing the net working capital to Q2 2020, we can see that it has increased from SEK 84 million to SEK 134 million (sic) [ SEK 135 million ]. These investments in net working capital related to the buildup of inventories to enable us to keep on delivering on the Saudi project. After the quarter, Sensys Gatso has informed Gatso Special Products that it will make payment on the vendor loan due to the amount of EUR 1 million in the third quarter in accordance with the vendor loan agreement. After this payment, the remaining and final installment of the vendor loan will be EUR 840,000, which is due on July 31, 2022. The company has been operating at approximately an operating cash breakeven level in the first half year. Our long-term investments in fixed assets and operations have been financed with long-term loans, creating a better financing balance. With an available cash position at SEK 124 million at the end of the quarter and a healthy equity asset ratio of 68%, the company has a solid financial position. And on that note, I would like to hand it over to Ivo.

Next slide, please. Thank you, Simon. With large contracts recently signed, our order backlog remains strong and our costs are in control. With school closings in Q4 and Q1 for now behind us, our U.S. TRaaS business has started picking up again. With total sales at SEK 126 million, we realized the strongest Q2 sales performance since the merger of Sensys and Gatso in 2015. Our 12 months rolling sales is up by 12%, and our EBITDA is up by 42%. Together with a very healthy sales pipeline in all regions, we feel confident about our future. We retain our long-term plan to grow our net sales to more than SEK 1 billion, of which TRaaS revenues will be more than SEK 600 million in 2025. We also retain our ambition to increase our EBITDA margin to more than 15% in 2025. On this final note, I would like to open up for questions. Next slide, please.

[Operator Instructions] We have the first question from [indiscernible] from Redeye.

Sales from Managed Services picked up nicely in Q2 following the reopening of schools in the U.S. But what would you say that the share of open schools is now for your current school zone contracts, i.e., on what capacity is Managed Services running at the moment?

Yes. It's a good -- very good question. I don't have the exact answer, but we estimate that between 20% and 25%.

20% to 25% is on or off?

On.

On. Okay. Great. And continuing on Managed Services, this -- we believe that this unit holds great potential in the U.S. But could you talk a little around the progress that you're seeing in the different states and how you work to capture these opportunities?

Yes. Yes, when we look at the states and we communicated before, once you have the first contract in, you see actually cities talking to each other, and we use the existing contracts basically as a marketing tool or a sales tool to drive new contracts towards us. So that's what we typically see happening. It really is developing in a very positive way. We now have 7 contracts in 5 states. You know that we are pushing the schools on speed enforcement because it's the best, also maybe even the easiest way of getting speed enforcement into new states. So that's also what we're doing. We have seen -- we actually said that before in the presentation, we have a very solid sales pipeline, specifically in the United States. We did see that the municipalities were not coming together physically in the COVID period, so they have been postponing resolutions to pass speed enforcement programs. That is now picking up. So we do expect quite a few contracts coming in going forward, without being too precise there, but it looks very promising for now. Yes, I mean, that's what I can say about that.

Great. And recently, you have established offices in both Latin America as well as in the Middle East. Could you tell us a little bit about your main idea with the offices and what you expect from these regions going forward?

Yes. Looking at the Latin American region first, that region was previously managed out of the United States. So we know, you know that the United States first is a growth market and having the management also focusing on Latin America was a distraction. So we decided to take over that management directly and establish a regional office there with a Regional Director. We hired Jose Lozano, who's been with Kapsch for 22 years, so really an industry expert, that is up and running from day 1. He's been in the region. He started in July. Today actually he is in the region for the second time already. So that really helps us driving that business. We have contracts in place in Costa Rica, in Colombia, in Barbados. We have partnerships in Ecuador and in Panama. We have an extremely interesting sales pipeline in place. So with that focus now and a separated P&L for the region, we believe that there's really very good sales performance for the future to be expected from that region. Any questions on Latin America for now?

No, that's good.