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

Hello, and welcome to the Sensys Gatso Group Audiocast with Teleconference Q4 2021. [Operator Instructions] Today, I'm pleased to present CEO, Ivo Mönnink. Please begin your meeting.

Good morning, and welcome to Sensys Gatso's presentation of the fourth quarter and the full year 2021. My name is Ivo Mönnink. I'm the CEO of Sensys Gatso, and I will be presenting our results 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 fourth quarter and full year 2021. We then follow up with a financial update by Simon. And finally, I will finish this presentation with a summary and our outlook. Next slide, please. Let's now look at an update of our business. In this business update, I will take you through the positive development of our profitability with our EBITDA arriving at SEK 38 million, 61% higher than last year. The growth of our proven TRaaS business model, the growth potential we see in the U.S.A. driven by software development and data analytics, an update on our Latin American region. Our order backlog, which is solid at SEK 840 million and the supply chain costs, which are expected to be stable for Sensys Gatso throughout 2022. Next slide, please. Now let's start with how our profitability has been developing this quarter. After a strong Q3, I'm proud to announce that the entire team at Sensys Gatso delivered an even better result in the fourth quarter. The EBITDA arrived at SEK 38 million, 61% higher than last year. Our EBITDA margin arrived at 22% of net sales, 7 percentage points ahead of our long-term target of 15%. The main reason for the strong performance this quarter is an increase in the gross margin to 42% from 37% a year ago. This, in turn, relates to the increased sales of our recurring TRaaS business. On top came the outstanding uptime performance of more than 99% of our Dutch TRaaS business, which resulted in a customer bonus payout in this quarter. For the full year, the EBITDA arrived at SEK 84 million, 41% higher than 2020 and 16% of net sales. The operating profit EBIT landed at SEK 27 million, up 118% for the quarter. Full year 2021, we landed at SEK 46 million EBIT, no less than 4x the EBIT of last year. With this, we demonstrate a steady profit improvement and a proof of the effectiveness of our strategic focus on the profitable recurring TRaaS business. Next slide, please. We also had a strong sales performance in the fourth quarter with SEK 173 million, 28% higher than last year. An important contributor has been Saudi Arabia, of which we have delivered an additional 15% contract in the quarter. To date, we have delivered, in total, 55% of this SEK 275 million contract. The remaining SEK 124 million of the contract is expected to be delivered throughout 2022. For the full year, our total sales grew 11% to SEK 507 million. Our strategic recurring TRaaS business demonstrated higher growth levels with 28% in the quarter. Looking at the full year, our TRaaS business grew 14% and now represents 49% of net sales, a steady growth from the 42% share in 2019. Most of this growth is coming from our U.S. business, where we operate a full TRaaS model. In the U.S.A., we added 3 new contracts in 2021 and to date in 2022, another 3. This demonstrates the anticipated interest from cities to implement automated traffic enforcement. On top, the school zone speed enforcement progress -- programs have all been restarted after COVID induced school closings. This will likely further help our U.S. revenue development going forward. Next slide, please. As mentioned, our U.S. TRaaS business is steadily growing as new programs are being added and efficiencies are increasing through software development. We also benefit from our speed and red light cameras we have installed across 12 states. As we execute on our strategy to transfer Sensys Gatso from a hardware company to a software and services company, these census generate valuable data. Our installed base in the U.S.A. of nearly 270 cameras generated more than 540 million data points of cars and trucks passing by cameras in the last 3 years. This vast amount of anonymous data points, combined with data from other sources, generates valuable information for Sensys Gatso and our customers. By using data analytics, we can optimize the locations of our cameras to help reduce traffic incidents with the maximum effect. Information from our installed database will also be an attractive sales enabler to predict the impact of Sensys Gatso's automated traffic enforcement solutions for future customers. Our revised business plan for the U.S. market centers around this proactive sales model. With the recently signed transportation authorization bill that includes, for the first time ever, explicit federal funding support for speed cameras, we also have positive momentum for automated traffic enforcement in many new states and cities for Sensys Gatso. Next slide, please. During the quarter, we announced the establishment of Sensys Gatso Colombia, a joint venture with Capatest Colombia, a leading local provider of automated traffic enforcement solutions. With this joint venture, we combine our TRaaS business model with a local knowledge and experience in traffic enforcement from Capatest. As part of the agreement, Sensys Gatso will provide back office processing software Xilium, PULS, analytics software, enforcement hardware and the Sensys Gatso brand name. The business model we operate in Sensys Gatso Colombia is a full TRaaS model, very similar to how our business in the U.S.A. is operated. The main difference is that contracts periods are typically much longer, even up to 25 or 30 years. 2 existing enforcement contracts currently operated by Capatest supported with Sensys Gatso solutions will be added to the joint venture once Sensys Gatso Colombia is fully operational. This is expected by the second half of 2022. These contracts with a total value of approximately SEK 145 million will be operated over the remaining contract period of 17 years. The Costa Rica national contract has still not started due to budget constraints at our customer. Together with our consortium partners, we have shifted the deployment of our solution in Costa Rica to municipalities. A successful implementation with the cities will possibly assist in starting the national project. Meanwhile, we have received our first order from Ecuador, a new market in the LatAm region. The active projects in Colombia, Costa Rica and Ecuador are evidence of the increased momentum we see in the LatAm region. Next slide, please. During the quarter, the order intake arrived at SEK 195 million, 62% higher than last year. This is mainly driven by order intake of our joint venture in Colombia, in which we have a controlling interest and where we consolidate the revenue for the remaining 17 years in the contracts. With the full year order intake of SEK 368 million in 2021 and SEK 788 million in 2020, we now have a backlog of SEK 840 million to be delivered mainly in 2022. Of this backlog, 32% related to System Sales projects and the remaining 68% relates to TRaaS recurring revenue, such as Managed Services, and maintenance and licenses. The System Sales order backlog is expected to be delivered in 2022 and 2023. The TRaaS order backlog as a recurring nature and will convert into revenue over the remaining contract periods. Next slide, please. At Sensys Gatso, we typically have long lead times for sales, delivery and operations processes. Critical components are, therefore, sourced way in advance and have already been secured for 2022. Assembly of our systems takes place in European factories where most of the added value for our System Sales is realized. Our System Sales and Managed Services business models are not energy intensive and therefore, hardly affected by increases in energy costs. Today, we expect no delivery issues in our supply chain and our supply chain costs to remain relatively stable throughout 2022. On that note, I'd like to hand over to Simon, our CFO. Next slide, please.

Thanks, Ivo. And I would like to take you through the following topics today: our consolidated income statement; the performance of our segments; cash flow and available cash; our working capital position; and finally, the investments in fixed assets. Next slide, please. The fourth quarter sales at SEK 173 million are 29% higher compared to Q4 last year. The sales in this quarter is mainly from our order backlog and new repeat orders from our existing customer base. Year-to-date, our sales is up by 11% compared to 2020. The gross margin for the quarter ended at 42% compared to 36%. For the full year, the gross margin landed at 41% compared to 36%. The increased margins are mainly due to more TRaaS sales with higher gross margin in 2021. The fourth quarter operating expenses totaled SEK 45 million compared to SEK 36 million in 2020. The expenses in the quarter have increased due to more sales activities and expenses related to setting up the entity in, for example, Colombia. Due to a good gross profit and expenses that are in control, we've reached an operating profit EBIT of SEK 27 million, which is an improvement of 125%. Year-to-date, the EBIT landed at SEK 46 million, which is an increase of 318% compared to 2020. Our operating profit margin of 2021 equates to 9%. With that, we have ended the year in profits with an increase of profit for the period of SEK 31 million to SEK 35 million profit after tax. Next slide, please. Okay. Let's have a look at the performance of our System Sales business. The order intake of 2021 landed at SEK 177 million. The order intake of System Sales is volatile to a large extent, dependent on tenders coming out. Our order backlog of SEK 840 million, approximately 32% relates to one-off System Sales and 18% relates to TRaaS service and maintenance to be recognized over the coming years. The total order backlog for the System Sales segment amounts to SEK 418 million. The sales for the segment System Sales in the quarter amounted to SEK 134 million, 33% higher compared to 2020. Year-to-date, we ended at sales of SEK 377 million compared to SEK 333 million, an increase of 13%. The profitability in the quarter has remained high at SEK 25 million EBITDA compared to SEK 14 million for the same quarter last year. Looking at the full year performance of this segment, the EBITDA arrived at SEK 56 million compared to SEK 39 million with the EBITDA margin improving from 12% to 15%. Next slide, please. Now moving to our Managed Services segment. The order intake of 2021 arrived at SEK 192 million compared to SEK 159 million. Of the total order backlog of SEK 840 million, approximately 50% relates to Managed Services amounting to SEK 422 million. The increased order backlog is mainly caused by the 2 projects in Colombia with a total corporate value of SEK 145 million over the remaining 17 years of operations. These contracts will be operated in our new 51% joint venture controlled by Sensys Gatso once the company is fully operational. Our Managed Services sales in the quarter amounted to SEK 39 million, an increase of 12%. Looking at the full year 2021, sales arrived at SEK 129 million, an increase of 6%. The increase in the sales, together with the lower onboarding costs has led to an increase in EBITDA. The EBITDA in the quarter was SEK 30 million compared to SEK 9 million. The absolute EBITDA for 2021 arrived at SEK 27 million, which is an increase of 35% compared to 2020 numbers. Next slide, please. On this slide, I would like to take you through the main movements in cash flow of 2021, the closing cash position and available cash at the end of the year. We started the year with a cash position of SEK 108 million. During the year, we've added to cash the EBIT result of SEK 46 million, plus the noncash and other movements of SEK 25 million from our operations. From our external financier Rabobank, we secured the third tranche of the long-term financing arrangement, adding a net of SEK 7 million to our cash position. Over the course of 2021, we've increased our working capital by SEK 61 million and invested SEK 42 million in fixed assets, consisting mainly of investments in our software platforms and fixed assets and operations. The acquisition of Gatso Beheer in 2015 was partially financed by vendor loan. This vendor loan may under circumstances be converted into new shares in Sensys Gatso Group. In 2021, the group repaid the part of the vendor loan that was due, amounting to EUR 1 million or SEK 10 million. The remaining part of the vendor loan amounts to EUR 840,000 and is due on July 31, 2022. The closing cash for the year amounted to SEK 72 million. Adding the SEK 30 million of available credit facility, the total available cash at the end of the year was $102 million. The availability of cash has remained stable over the quarters by managing our profitability and timing of our investments in working capital and fixed assets. Next slide, please. When analyzing the working capital position, we typically look at net working capital without and with cash and borrowings. Big projects such as the Saudi project in predominantly are System Sales business, have a high impact on net working capital. Working capital assets such as trade receivables, inventory and work in progress related to these one-off project sales are mainly impacted. During 2021, we delivered approximately 40% of the Saudi project. In total, 55% has been delivered, resulting in a lower inventory and work in progress position at the end of the year amounted to SEK 97 million. Because a large part of these deliveries took place in the fourth quarter, we see an increase of trade receivables to SEK 141 million, combined with receivables and other deliveries in the fourth quarter, such as deliveries under the procurement award of Belgium. We expect these trade receivables to convert into cash in 2022. With relatively low trade in other payables, we have secured and paid a large part of our inventory to be able to meet delivery demands in 2022. All in all, the net working capital in 2021 has increased by SEK 27 million from SEK 188 million to SEK 250 million, including cash and borrowings. Next slide, please. The Managed Services business is a CapEx business model where investments in fixed assets and operations support the future growth. In 2021, we invested SEK 42 million in fixed assets, of which SEK 21 million was invested in fixed assets and operations supporting our U.S. business. During 2021, we've also significantly invested in our software platforms, FLUX, PULS and Xilium for the amount of SEK 18 million. We will continue to develop on these platforms in the future with improved and additional functionalities. The continued investments in fixed assets and operations has driven the growth in Managed Services sales. The sales have increased from SEK 55 million in 2017 to SEK 129 million in 2021, equaling an increase of 135% growth. The year-on-year growth rate of the segment amounts to 24%. And on that note, I would like to hand it back over to Ivo.

Thank you, Simon. I am proud of the outstanding result the global Sensys Gatso team has delivered in 2021. In challenging COVID circumstances with lockdowns in many countries, the team realized an EBITDA of no less than SEK 38 million this quarter, 61% higher than last year and 22% of net sales. For the full year, we arrived at SEK 84 million EBITDA, 71% higher than last year. This result is driven by the steady growth we see from our higher-margin TRaaS business. It proves that our strategic focus on this recurring business segment is paying off. Our financial position is solid with more than SEK 100 million cash freely available. Further, we have SEK 161 million of our working capital assets connected to active contracts and deliveries. With investments of SEK 39 million in our software platforms and in fixed assets in the TRaaS operations in the U.S.A., together with a new data-driven sales approach, we are gearing up for future growth in this important market. We're ending the year with a backlog of SEK 840 million, most of which will be delivered to our customers in 2022. Based on this, we retain our long-term plan to grow our net sales to more than SEK 1 billion, which TRaaS revenue 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'd like to finish this presentation and open up for any questions. Next slide, please.

[Operator Instructions] We have one question from the line of Jesper Von Koch from Redeye.

So starting with Costa Rica. You say that you will commence like a rollout on municipality level first and then hopefully convert that to national level. Could you just elaborate on like how are your discussions going? And what is your plan going forward?

Well, first of all, I think we have to realize that Costa Rica is a country which is highly dependent on the influx of tourism and the funds which are generated by that. And because of COVID, less -- fewer tourists were coming to the country, and that has actually caused the government to postpone this project. And so we have a totally valid contract there. We expect it to start, but the timing of which of the contract execution is, at this moment, not sure. So we took a different angle to it, and we started talking to the municipalities. They have their own budgets. And we presented them with the very same model we were going to implement nationally. The reactions up to date have been very positive. So I mean, these are, of course, processes that will take time, but the initial reactions are positive and will be starting to, in the first phases of creating these projects and then thereafter implementing them. And we believe because we will demonstrate the success of these -- hopefully, the success of these programs, that will help the national government also to starting the project on a national level.

All right. Good. And can you say anything about like how many in municipalities or like how big part of the country have you like convinced to start with these project on a municipality level? Yes.

Yes. Right now -- and that's all I can disclose. Right now, we're talking to 3 cities.

All right. Good. All right. So -- and regarding the customer bonus from the Netherlands that you received, how much was that the bonus payment of…

SEK 4 million.

For the South Europe.

4?

Yes.

Good. And so -- and also, if we move on to Trafikverket in Sweden, like could you talk a little bit about the ongoing procurement from Trafikverket? And like what sums are we talking about? And over how long time are those deliveries are supposed to go on?

Are you talking about the tender coming out? Is that what you're talking about?

Yes. Exactly.

Okay. Yes, what we can say there is that, obviously, it's a very large tender. It regards 4,000 systems plus maintenance for quite a long time. We talk about 6 years plus 2, plus 2, plus 2. So the total length of that contract potentially is 12 years. Yes. I mean, it's clearly a focus area for the entire company to bring that -- win that tender and bring it to us. So you can imagine that this is taking up quite some resources internally as well because it has all this focus. So anything else you want to know about this?

I mean, and also like what is your view on your chances on winning this? I guess you have a good track record in Sweden and good relationships ongoing.

Yes. Absolutely. I think we have a very good relationship with Trafikverket, and we've been delivering up to their very high standards over the past contract periods. So that gives us a definitely a -- puts us in the best position. But still in the end, it's a tender. So the tender rules apply, which means that if other participants also qualify with the requirements -- for the requirements, then in the end, the lowest price bidder will win. And obviously, Jesper, that is going to be us, right? So we have all intention of winning that tender clearly.

Good stuff. All right. So moving on to Saudi. I mean, it's like from an outside perspective, it seems like everything is going to plan there, like you delivered as much as you said you would, like in Q4. What is your projections for 2022? Like will it be like a front heavy or back heavy in the delivery?

Yes. I mean, I think we explained before that in the end, it's the customer of our customer that drives the timing of the deliveries. And that's depending on their needs. And their needs are driven by the amount of vehicles they can outfit with the system and/or the number of drivers they can find to operate the systems. So that's how the dependencies lie. And we're just -- we are ready to deliver. I mean the relationship with the customer is very good. We have a very regular contact, and we travel there as well even during the COVID period in the past 2 years. So yes, it's not the fastest rollout that we've seen in other situations, but it is a steady pace and also with the steady pace, the payments from the Saudi. So that's -- we're very happy with that. And if you recall, we had a first order from the Saudi for 200 systems and that was paid in full, like 100%. So that gives us also a very good level of confidence of how the payments will evolve with this new -- with the new order of the 1,000 systems.

Good. And so moving on to the Managed Services. Did you have any rollouts of new programs during the quarter? And if not, like how much of an impact on the gross margin does that have like compared to, like say, 2 rollouts for example?

Do you want to take that one?

Yes, Jesper, Simon here. Yes, so the cost of a rollout typically depend on what type of project it is and the need of, for example, warning periods or marketing campaigns that we agree upon with our customer. we didn't have any big events like those going on in this quarter, right? And that's why I also stated that -- yes, the lower onboarding costs also led to a better EBITDA performance. And typically, we want to have those costs because it means that there is a buildup. But sometimes, some programs don't have these additional costs with them. And you especially see that with takeover contracts, right? Those don't need a marketing campaign, don't need warning periods. So those are the lower cost to begin with. And then those costs depends on the size of the city, right? How big is the campaign? How big is the number of violations or warnings that we need to send up beforehand? And that heavily impacts the onboarding costs.

All right. And how -- yes, that's good. And how big of a part is -- like how large of a percentage is the -- like your takeover contract wins compared to like just new wins this [ industry that ] have not had it before?

Yes. It's -- I don't know that number exactly. I mean, sometimes we have takeover contracts. Sometimes we have completely new ones, right? I don't have that percentage, whether [indiscernible]?

But is it like 50-50? Or is it like 90-10? Like what's the goal target are we [ talking ]?

Yes. It's difficult to say that, yes, but because it's also dependent on the size of the contract. So a contract could be large with many cameras. It could be smaller with just few cameras. And then the impact will be different, frankly. So hard to say, but we get the question. We'll dive into that, and maybe we'll able to get back to you with a bit more analysis on that one. But statistically, with the number of cities we have, I don't think it's going to be something you can actually model.

All right. All right. So moving on with Managed Services. With all the Biden initiative with the -- yes, with the big initiative for speed cameras announced in Q4, are you experiencing any positive effects on this so far?

Well, I mean, there's definitely a lot of talk around it in our industry. But for instance, we see the state of Massachusetts opening up having political discussions about implementing automated traffic enforcement. So there's definitely activity -- political activity around it.

And as there are no further questions, I will hand it back to the speakers.

Okay. Well, thank you, everybody, for attending this presentation, and I hope to see all of you back on the next quarterly report presentation. Thank you. Have a nice day.

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.