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

Hello, and welcome to Sensys Gatso Group audio cast with teleconference Q1 2022. [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.

Yes. Thank you. Good morning, and welcome to Sensys Gatso's presentation of the first quarter 2022. My name is Ivo Mönnink, I am the CEO of Sensys Gatso, and I will be presenting our Q1 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 first quarter. 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. Now let's look at an update of our business. In this business update, I will take you through our order intake, including procurement award, which is up by more than 200%. The growth of our proven TRaaS business model, information around the successful intertraffic show in Amsterdam, the positive development of our profitability with EBITDA, which is up by SEK 21 million this quarter. The steady delivery of our Saudi contract and the supply chain costs, which are expected to be stable for Sensys Gatso throughout 2022. Next slide, please. Now let's look at our order intake for the quarter. The order intake, including procurement awards in Q1, arrived at SEK 328 million, up more than 200% compared to last year. We were chosen as 1 of the 3 vendors to supply, operate and support big systems for speed and red light enforcement in the Netherlands, and we received a procurement award of SEK 250 million. With this investment, the Dutch Public Prosecution Services Authority is aiming to replace the existing automated traffic enforcement infrastructure in the Netherlands. I'm also very pleased to see we added significantly to our TRaaS order backlog. Of the Q1 order intake, SEK 166 million relates to TRaaS recurring revenue, including SEK 26 million from 3 new cities we added in our strategic U.S. market. This is an increase of SEK 151 million compared to last year. Next slide, please. We had a strong first quarter with total sales of SEK 113 million, up by 45%. Our strategic recurring cross sales arrived at SEK 69 million, up by 44%. In Q1 last year, we had temporary COVID-related school closings that suppressed our sales. Our school on related TRaaS business in the U.S.A. has returned to normal operations this quarter. This is reflected in our TRaaS services business, which grew by 82% from SEK 22 million to SEK 40 million. Our TRaaS sales arrived at 61% of total sales in the quarter, right on target with our 2025 ambition. Next slide, please. End of March, the largest global show in our industry, the InterTraffic, was held in Amsterdam. It was the first time after 2018 that many suppliers and customers physically came together again. The day before the opening of the show, we organized our Partner Day in our Harland offices. Here, we presented to more than 50 invited partners and customers our TRaaS software-based product vision and 13 user stories. At our booth on the show, we presented a live demonstration of our U.S. full-class business model. This show was a great success for Sensys Gatso, renewing many existing customer relationships and developing promising new ones in various regions. Next slide, please. Our EBITDA arrived at SEK 60 million for the quarter, up SEK 21 million compared to last year. The EBITDA growth can mainly be attributed to the rebound of our TRaaS Managed Services business with higher margins in U.S.A., as explained before. On a 12-month rolling basis, our EBITDA arrived at SEK 105 million, nearly 100% higher than the same period last year. Main contributor is our gross margin, which arrived at 45% for the quarter compared to 31% last year. On a 12-month rolling base, our gross margin arrived at 41%, 5 percentage points higher than last year. This demonstrates a structural margin improvement as we grow our TRaaS business year-on-year. Next slide, please. In the quarter, we delivered yet another 10% of the SEK 275 million contract for our unique Vehicle-in-Motion solution to our Saudi customer. To date, in Q1, we have delivered 65% of this contract or SEK 180 million. We expect to keep a steady pace in our deliveries to meet the requirements of our customer. Meanwhile, we're engaged in discussions and testing to develop and possibly provide additional solutions for this key customer in the Middle East region. Next slide, please. At Sensys Gatso, we have longer lead time 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 our European factories where most of the added value for our system sales is realized. Our System Sales and Managed Services business models are hardly affected by increases in energy costs, and we have price arrangements in place with suppliers to secure our '22 sales and margins. Sensys Gatso were not significantly impacted by increases in gas prices. Sensys Gatso is deeply concerned and saddened by the war in Ukraine and the devastating impact on the people of the country. We have no business to date in Russia or Ukraine, no employees working from these countries and no supplies coming from the region. So today, we expect no delivery issues in supply chain and our supply chain costs to remain relatively stable throughout 2022. And I'd like to hand over to Simon, our CFO. Next slide, please.

Okay. Thank you, Ivo. I'd like to take you through the following topics today. Our consolidated income statement, the performance of our segments, cash flow and available cash and finally, our financial position. Next slide, please. The first quarter sales at SEK 113 million are 45% higher compared to Q1 last year. The sales mix in the quarter shows 61% TRaaS recurring revenue, which yields a higher gross margin. The gross margin for the quarter ended at 45% compared to 31% in the comparative quarter. In absolute terms, the gross profit has increased from SEK 25 million to SEK 52 million, which equals an increase of 108%. The expenses in Q1 have increased from SEK 39 million to SEK 46 million. This is related to increased sales activities in various regions as well as costs related to InterTraffic. The increase in expenses, however, is lower than the increase in sales for the period. Due to a favorable sales mix, with more TRaaS sales, the margin has improved in the quarter. The gross profit more than compensates for the increase in expenses, leading to a positive EBIT for the period of SEK 6 million compared to negative SEK 40 million, which is an increase of SEK 20 million. This is the seventh quarter in a row with a positive EBIT, demonstrating our continuous profitability improvement. Next slide, please. Our Managed Services business has seen a strong first quarter with an increase in sales of 82%, ending at SEK 40 million. The increase in sales is mainly due to the release of COVID-19 school measures, which increased traffic volumes. At the same time, we have onboarded several new programs during the quarter, also resulting in an increase in volumes. Q1 of 2022 is the highest ever first quarter for the Managed Services segment. During the quarter, we've announced 3 new programs, resulting in an order intake of SEK 26 million total contract value over the contract period. These contracts will go live during 2022, depending on speed of execution for getting planning permits in place. You see the impact of software, however, has already been prepared to support swift onboarding. With a higher level of sales in the quarter, we see a better leverage of our base cost of this segment, resulting in a positive EBITDA for the quarter of SEK 11 million, SEK 14 million improvement compared to Q1 last year. Looking from a 12-month rolling perspective, the order intake reached SEK 214 million, including SEK 145 million relating to Colombia. Sales has arrived at SEK 148 million, an increase of SEK 37 million or 33%. The 12 months rolling EBITDA has reached to SEK 42 million compared to SEK 40 million for Q1 2021, the highest EBITDA for this segment to date. Next slide, please. The segment System Sales has seen a comparable level of order intake at SEK 57 million compared to Q1 last year at SEK 58 million. The sales for the quarter has increased by SEK 17 million from SEK 56 million to SEK 73 million, driven by Saudi project deliveries. At this sales level, the segment has achieved a positive EBITDA of SEK 4 million compared to negative SEK 2 million in Q1 2021. The System Sales segment has more volatile sales from quarter-to-quarter than our Managed Services segment. Therefore, the 12 months rolling numbers are more suitable for judging the performance of this segment. From a 12-month rolling perspective, the order intake at SEK 176 million is lower than Q1 2021 12 months rolling numbers. This is due to big order intake on projects like Saudi at SEK 275 million. The sales 12-month rolling were SEK 68 million higher, ending at SEK 394 million as we are currently still executing on some of the big orders. The EBITDA profitability ended at SEK 63 million compared to SEK 39 million. The increase in EBITDA is caused by the higher levels of sales in the past 4 quarters. These sales have had a good sales mix between one of System Sales and TRaaS recurring service and maintenance sales with a higher margin. Next slide, please. On this slide, I would like to take you through the main movements in the cash flow of Q1, starting with the opening available cash at the beginning of the year. We started the year with an available cash position of SEK 101 million, adding the positive EBIT of SEK 6 million for the first quarter. Main driver in our closing available cash position is the receipt of trade receivables during the quarter of SEK 56 million. This, amongst others, is related to payments from our Saudi customer. During the quarter, we've continued to invest in our software platforms and our fixed assets and operations, resulting in a cash out of approximately SEK 9 million. The current repayment of long-term loans and other movements resulted in a cash out of SEK 7 million. At the end of the quarter, we ended with SEK 149 million in available cash, consisting of SEK 99 million in cash at bank and SEK 50 million in remaining credit facilities. Next slide, please. During the first quarter, we've achieved a significant improvement on our net interest-bearing debt. Due to customer payments and prefinance inventory positions, the company has used less debt financing from the bank, moving from SEK 64 million to SEK 43 million usage. During the quarter, the loan from shareholders remained stable, consisting of a SEK 20 million loan with no redemption schedule and SEK 9 million of the remaining acquisition financing, also referred to as the vendor loan. Cash at banks has increased during the period by SEK 70 million to SEK 99 million. With this, our net interest-bearing debt improved by SEK 47 million during the quarter, ending at SEK 26 million positive. With our solvency ratio at approximately 74%, our financial position is strong. And on that note, I would like to hand it back over to Ivo. Ivo? Next slide, please.

Thank you, Simon. Our order book is strong. Our costs are in control. Our profitable TRaaS business continues to grow, and our financial position is strong. On top, we see in the short-term limited impact from supply chain cost increases and the war in Ukraine. Based on this, 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. And we also retained our ambition to increase our EBITDA margin to more than 50% in 2025. On this final note, I'd like to finish this presentation and open up for any questions. Next slide, please.

[Operator Instructions] So we have one question from Jesper Von Koch from Redeye.

Congrats to another strong quarter and also to the large share contract win in the Netherlands.

Thank you.

So -- yes. So if you could just tell us a bit more about the contract in Netherlands. Like I mean you've written some of it in the press release, but like when will delivery start? And how will delivery look throughout the period?

Yes. Well, it's a large contract, as you say, in our whole -- of our 2 main markets, Sweden and the Netherlands. So we're really, really happy that we received the -- won this award. The fair -- there's going to be 3 vendors selected for this. We have taken the fair share of the total amount, which adds up to SEK 250 million for us. 50% of that will be System Sales, another 50% of that will be recurring TRaaS business. So that's another way of looking at it, and we're planning to roll this out in Q1 2023. The objective is to roll it out as quickly as possible because that enables us to get a bigger share of the pie. Our fair share. That's what we're aiming at. So very important contract for us and really, really happy we won this.

Okay. Nice. And I guess, will like a large part of the System Sales come in, in 2023 and then like after the installation of the systems like the TRaaS contract will more start? Or is that correct interpretation?

No, no, that's definitely a fair assumption. So we start with rolling out the installations, which is System Sales and then the maintenance, et cetera. And the recurring TRaaS part will kick in thereafter. So starting is expected to be in Q1 2023.

Good. And so there's also a possibility to extend the contract beyond this first 6-year period. Could you elaborate on these possibilities? Would that be an extension of the TRaaS business? Or would it be like further System Sales, too?

Looking at the current contract, that's also been extended. So it is not uncommon, let's put it that way to get extensions. It's always to be seen, of course, but we have good high level of confidence level that, that could happen. And what it will mean from installations, that's not sure at this point in time. So we'll see that after 6 years, if there are going to be more installations requested by the customer. But the extensions are mainly, I would say, around the TRaaS part, the 50% TRaaS part.

Okay. Okay. Good. And you'll say that you have like an additional dialogue with the Saudi customers or the Saudi customer about additional order. Could you please just elaborate on that one?

Yes. I mean we have actually built up a very good relationship with this customer. So we are a qualified supplier, and we have a unique solution with our T-Series in the sense that we don't need a specific power supplies going to these systems, which means that the construction costs for the Saudi customer is going to be less. And also there, you're dealing with all kinds of permitting. So they're extremely interested in that solution. They're also interested to look at our S-Series solution. And currently, we're conducting what we call first-of-kind tests in the country. You never know what's coming out of that. But we have, as I said, good relationships and actually discussions also at the fair -- InterTraffic fair in Amsterdam around this topic. So no [indiscernible] and of course -- but I'm bullish about, first of all, this extremely good relationship and secondly, about our ability to start delivering other solutions apart from the very successful [indiscernible] solution we already delivered to them.

Good. And in Q1, you delivered about 10% of the total value of the Saudi order. Are you still confident in delivering the full order in 2023?

I mean, I've said this a couple of times before, I believe, is that our customer is Tahakom. They have an end customer and that customer really drives the speed of the deployment. And what we do is, we are in contact with Tahakom and ask them time after time about what is the delivery schedule. Up until now, we've gotten the answer that they expect the systems to be not by their end customer before the end of the year. That's the information we currently have, and that's why we're writing it down as well in the report.

Okay. Good. And so -- and just about the rollout of new Managed Services contracts, how did this look in the short term? And how do you expect that to impact the gross margin in the short term?

Simon, you want to answer this one?

Yes. Jesper, yes, so we closed 3 new contracts in the quarter, [indiscernible]. 1 in New York, 2 in Ohio. As we stated in our press releases, we expect these programs to become operational in 2022. I think the good thing about these contracts, looking at Ohio and New York, both states where we have -- currently have projects, that's why we also stated in the market presentation that [ Gilliam ], the back office software, is already ready. So we don't see any rollout issues on the technology part. It always is depending on how quick can we get permits to put up PULS in data. So I think that's good, and furthermore, we fortified our current sales level by signing up with the [indiscernible] again for 3 years, which I think is a proof of our excellent customer delivery in the U.S.

Good. And also I'll ask the -- a final question about the dynamics in the U.S. and the word of mouth in the industry is in the -- or partly the word about the -- of Europe Managed Services, but also about your increased sales efforts. How are these...

Yes. We announced a new model, which we are introducing to the U.S. team, and we're in a phase that we are introducing it. So it's too short notice to see any implications of that as well, but the change in a more proactive way of selling is, I think, it's going to be taking Sensys Gatso a huge step forward in the U.S. market. So we're not only relying on the word of mouth, which has been very successful in the past. But if we want to scale up this business, then the more proactive data-driven sales model, which we have been developing and are about to implement in the U.S., is going to make a huge difference.

Good. And I realize one last question about the establishment of your TRaaS business in Colombia. How is that going? And how is the market taking it?

Yes, we are still on track. I think we said [indiscernible] that we are implementing or adding the revenue in the second half of this year from Colombia. That's what we communicated before, and we are still on track on doing that. So there is some still development work to do, and -- but we're on track there.

So we have no further question. [Operator Instructions] We have no further questions, gentlemen.

Okay. Well, thank you very much. Thank you very much for attending the Q1 results 2022 of Sensys Gatso, and I hope to see you again in the next quarter.