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

Good day, and welcome to the Sensys Gatso Group Second Quarter and First Half Year 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ivo Mönnink. Please go ahead, sir.

Good morning, and welcome to Sensys Gatso's presentation of the second quarter and first half of 2022. 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 provide you with an update on our business for the second quarter and the first half year. 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 our order intake, which is up by more than 400%. The growth of our proven TRaaS business model, up 19% this quarter. The impact of our growing TRaaS business on our margins and our profitability. The positive development of our EBITDA, which is up 31% this quarter. The steady delivery of our Saudi contract. Our supply chain costs, which are expected to be stable for Sensys Gatso throughout 2022. Finally, some words on the ESG business profile of Sensys Gatso Group. Next slide, please. Now let's first look at our order intake for the quarter. The order intake in Q2 arrived at SEK 240 million, up 411% compared to last year. I'm especially pleased to see that our U.S. Managed Services model will now also be implemented in Tasmania, Australia. During the quarter, we received an order of SEK 74 million to provide an automated traffic enforcement program to the state of Tasmania for a contract period of 3 years. This confirms our vision that in the future, more developed countries are looking to outsource the operational part of the automated traffic enforcement activities to commercial parties while still keeping legal control over the process. What is especially noteworthy is that this quarter, nearly 100% of the order intake was TRaaS. Next to the new TRaaS contract in Tasmania, we renewed contracts with 2 cities in the United States for a total value of SEK 144 million and a TRaaS contract extension in the Netherlands of SEK 10 million. On a 12-month rolling basis, our order intake now amounts to SEK 583 million. It's important to note that the Dutch procurement award, amount of SEK 245 million in Q1, has not yet been included in these numbers and will be added once the orders under the procurement award are being allotted. Next slide, please. Now let's zoom in on the Tasmania contract we won last May. I'm particularly excited about this new order. It demonstrates how our Australian team executes on our strategy to expand our TRaaS business outside of the United States. The contract won is for a 2-year period with an extension of 1 year already budgeted for and further potential extensions thereafter. In this model, Sensys Gatso Australia owns and maintains the enforcement equipment. More importantly, we also operate the vehicles that conduct the enforcement. After that, we do pre-verifications of the events captured before we send those to our customer, the Tasmanian Traffic Enforcement Authorities. Our customer is then responsible for adjudicating the events using our Xilium back-office platform and sending out and collecting the fines. We provide different automated traffic enforcement solutions like mobile point-to-point speed enforcement, roaming speed enforcement, distracted driving enforcement and automated number plate recognition-based solutions. The TRaaS business model is based on a monthly subscription fee for each solution used with a minimum subscription period of 2 years. We'll be very excited to see this program go into operation in the upcoming months. Next slide, please. Looking at our top line, we had a solid second quarter with total sales of SEK 125 million, at par with last year. Our strategic recurring TRaaS sales arrived at SEK 74 million, up by 19%. The increase in TRaaS sales in this quarter is mainly attributable to higher volumes on our U.S.A. TRaaS programs that have started enforcement last year and are now contributing in full this quarter. Our TRaaS sales arrived at 59% of total sales in the quarter, which is on target with our 2025 ambition. Looking at the first half of the year, we see a 70% increase over top line from SEK 204 million to SEK 238 million. A major part of this year-to-date growth is from TRaaS sales, which grew by 30% from SEK 109 million to SEK 143 million. Next slide, please. Our EBITDA arrived at SEK 18 million for the quarter, up SEK 4 million or 31% compared to last year. The EBITDA growth can mainly be attributed to the strong performance of our TRaaS Managed Services business with higher margins in the U.S.A. We further managed to keep our costs in control. In the quarter, the expenses arrived at SEK 44 million or 35% of sales. This compares to SEK 42 million or 43% of sales in Q2 2021. Year-to-date, our costs are stable at approximately 38% of sales. On a 12-month rolling basis, our EBITDA arrived at SEK 109 million, 100% higher than in the same period last year and 20% of sales on the same basis. Our operating profit EBIT improved by SEK 2.5 million or 54% from SEK 4.6 million to SEK 7.1 million. I'm proud to state that 12-month rolling, this is the eighth consecutive quarter we managed to arrive at a positive EBIT. Next slide, please. To date, in Q2, we have delivered 75% of this SEK 275 million contract for our unique Vehicle-in-Motion solution. We keep a steady pace in our deliveries to meet the requirements of our customers. Meanwhile, we progress in discussions and testing to develop and possibly provide new solutions to this important customer in the Middle East region. Next slide, please. At Sensys Gatso, we have long lead time for sales, delivery and operations processes. Critical components are, therefore, sourced way in advance and had already been secured for 2022. Assembly of our systems takes place in our European factories, where most of the added value for System Sales is realized. Our System Sales and Managed Services business models are hardly affected by increases in energy costs. We also have no business today in Russia or Ukraine, no employees working from these countries and no supplies coming from the region. Today, we expect no delivery issues in the supply chain, and our supply chain costs remain relatively stable throughout 2022. Next slide, please. Finally, in this business update, I would like to highlight how Sensys Gatso contributes to a better world. We are probably all familiar with the 17 United Nations Sustainable Development Goals to which all United Nations member countries in 2015 signed up to, to achieve by 2030. As a company, we are committed to pay our contribution to this global agenda, however, especially -- in a special position to do so. The United Nations Sustainable Development goal #11 is about making cities and human settlements inclusive, safe, resilient and sustainable. By using automated traffic enforcement solutions like ours, we help reducing speed. And by doing so, we make cities and roads safe and to help -- and we help to reduce emissions from cars. One example of this is Sensys Gatso's point-to-point speed solution, which we deployed, for instance, in the Netherlands. This solution promotes lower emissions by bringing about a behavioral change in the way people drive. This solution, developed to measure and ensure adherence to local speed limits between 2 points, cause drivers to maintain lower speeds for long stretches and thereby changing how people behave in traffic. The reduced speeds lead to lower emissions and a reduction in pollutants. Reduced speed limits from, for example, 120 kilometers per hour to 100 kilometer per hour results in a 25% reduction in emissions. Another example is our installed speed enforcement solution in Cedar Rapids, Iowa, in the United States. After careful analysis of the traffic patterns and the crunch data, Sensys Gatso presented a successful comprehensive plan to improve road safety. This trial solution, fully operated by Sensys Gatso, led to a significant reduction in road casualties. As traffic is projected to grow substantially, enforcing speed will become even more important. And with Sensys Gatso's TRaaS business model, we support customers in the transformation towards sustainable and safe transportation environment when limiting investments and resources. On that note, I'd like to hand over to Simon, our CFO, for the financial update. Next slide, please.

Thank you, and good morning all. 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, and finally, our financial position. Next slide, please. The second quarter sales of SEK 124 million is in line with Q2 last year. The sales for the first half year has seen a steady increase of 17% compared to H1 last year. We've continued the year with strong margins, which were 41% for the quarter and 43% for the first half year, an improvement of 8 percentage points compared to 2021. In absolute terms, the gross profit has grown by 11% in the quarter and has increased from SEK 71 million to SEK 103 million in the first half year, which equals to an increase of 45%. The expenses in Q2 are stable compared to the same quarter last year. On a half year basis, we see an increase in cost related to increased sales activities and expenses related to the Intertraffic event in April of this year. The improved gross profit, due to higher margins on TRaaS sales compared to System Sales, more than compensates for the increase in expenses. The operating profit EBIT for the quarter is up by SEK 2 million and SEK 7 million. On a half year basis, our EBIT landed at SEK 13 million compared to negative SEK 10 million, an increase of SEK 23 million. The profit for the period increased by SEK 5 million to SEK 9 million. And for the first half year, the increase was SEK 21 million from negative SEK 6 million to positive SEK 15 million. Next slide, please. Our Managed Services business has continued to grow in the second quarter with increased sales of SEK 12 million. The increase in sales is mainly attributable to higher volumes on our U.S.A. TRaaS programs that started enforcement last year and that are now contributing in full. During the quarter, we've announced 2 contract extensions in Iowa, resulting in an order intake of SEK 144 million total contract value over the contract period. Sensys Gatso U.S.A. has retained and strengthened its market position with contract renewals in both Cedar Rapids and Des Moines. With these extensions and the onboarding of a new customer Oelwein in February of 2022, Sensys Gatso now has a market share of more than 50% of total programs in Iowa. During the quarter, we've increased our sales efforts and strengthened the sales team as well as improve the sales strategy based on a more data-driven approach. These higher expenses will contribute to continued order intake. With a higher level of sales in the quarter, we see a better leverage of our cost in this segment, resulting in a positive EBITDA for the quarter of SEK 10 million, SEK 3 million improvement compared to Q2 last year. Looking from a 12-month rolling perspective, the order intake reached SEK 343 million. Sales has arrived at SEK 160 million, an increase of SEK 46 million or 40%. The 12-month rolling EBITDA has reached to SEK 45 million compared to SEK 16 million for Q2 2021, an increase of 180%. Next slide, please. The segment System Sales have seen a higher level of order intake in the second quarter at SEK 96 million compared to last year at SEK 32 million. The order intake for the quarter mainly relates to the TRaaS order intake in the Netherlands, SEK 10 million, and the TRaaS contract in Australia worth SEK 74 million over the contract period. The sales for the quarter came in lower than Q2 last year at SEK 81 million, due to the higher margin and therefore an increased EBITDA by SEK 1 million. The segment has seen another strong quarter in deliveries to our Saudi customer, driving the revenue in this segment as well as continued deliveries to our European and Australian markets. From a 12-month rolling perspective, the order intake at SEK 239 million is lower than Q2 2021 12 months' rolling numbers. When taking into account the procurement award related to the Dutch tender announced to the market in Q1 worth SEK 245 million, the total order intake will reach SEK 484 million, SEK 50 million higher compared to the 12 months rolling of last year. The sales 12 months rolling ended SEK 25 million higher at SEK 381 million, with the EBITDA profitability arising at SEK 64 million compared to SEK 38 million. The increase in EBITDA is caused by the higher levels of sales in the past 4 quarters with a favorable mix between TRaaS recurring service and maintenance sales with a higher margin and one-off System Sales. Next slide, please. On this slide, I would like to take you through the main movements in the cash flow of the first half year, 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 and ended the first half year SEK 71 million higher, arriving at SEK 172 million. In the first half year, we've added a positive EBIT of SEK 13 million. The main driver, however, in our closing cash -- available cash position is the receipt of trade receivables and lower inventories of SEK 68 million. During the first half year, we've continued to invest in our software platforms and our fixed assets and operations, resulting in a cash-out of approximately SEK 60 million. And we have repaid approximately SEK 9 million on our external financing during the period. The available cash of SEK 172 million at the end of the period consists of SEK 107 million in cash and bank, SEK 65 million in remaining credit facilities. Next slide, please. During the first half year, we've seen -- 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 35 million usage. After the balance sheet date, the company has made the final payment on the vendor loan in connection with the acquisition of Gatso Beheer BV to the amount of EUR 840,000 year ago, approximately SEK 8.5 million. With this milestone, the acquisition is now financially completed. Cash at bank has increased during the first half year by SEK 35 million to SEK 107 million. And with this, our net interest-bearing debt improved by SEK 63 million, ending at SEK 42 million positive. With our solvency ratio at approximately 76%, our financial position remains strong. And with that final note, I would like to hand it over to Ivo. Next slide, please.

Thank you, Simon. Our order book is strong and growing. 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. We, therefore, retain our long-term plan to, by 2025, grow our net sales to more than SEK 1 billion, of which TRaaS revenues is more than SEK 600 million. And we also retained our ambition to increase our EBITDA margin to more than 15% in 2025. On a final note, I'd like to finish this presentation and open up for any questions. Next slide, please.

[Operator Instructions] And our first question will come from Jesper Von Koch with Redeye.

Congrats to another good quarter. So my first question is about the Saudi customer and the additional potential in additional orders that you see there. Could you just talk about that for a bit?

Yes. I mean we are the preferred customer for what we call the Vehicle-in-Motion solution in the car. But they have also been doing testing with our fixed solutions. And those are 2, a Swedish solution and a Dutch solution technically. And they seem to have raised a lot of interest from the customer. So what we are doing now is what we call first-of-kind testing. So they tested on closed roads and thereafter on open roads. And obviously, meaning that we have to close roads is causing all kinds of restrictions and absorbing some time, but we're confident about that being positive and that opens up a potential new solution for this customer.

All right. And could you say anything about the -- like the potential sum of this? Is it like substantial compared to the other orders from this customer?

I mean it's going to be substantial because it's a large country. They have their Vision 2030, which is all about basically repositioning Saudi Arabia, and the United Nations development goals are also part of that vision. So traffic enforcement, therefore, is also part of what they want to do. So I believe there will be substantial -- potentially substantial business coming from a new fixed solution in Saudi Arabia for us.

Okay. Good. So also could you elaborate on the development for Managed Services in the U.S.A., like both regarding your increased sales efforts and also the regulatory tailwind that is expected to come in force?

Yes. Well, first of all, we hired a new Managing Director. His name is Bill Braden. He joined us by mid-May. He's got a very solid industry experience, having worked 10 years in the industry before. And so -- and we also developed a new strategic plan how to grow this business in this market where we see a lot of potential for Sensys Gatso. And the way we're going to do that is basically focusing on a more proactive sales approach using data, data coming from our existing installed base. But combining that with data coming from, well, generally available data. And by using that data, the sales approach is going to be much more data-driven and will help the decision-making process in cities where they might not even have plans to introduce traffic enforcement. So we're not waiting for customers to potentially come to us. But by using this methodology, we will approach them proactively. So that also means that we are spending in the front-end side of our organization, meaning adding more sales resources in the U.S. to be able to enable this new approach. And then on your second question, clearly, I mean, the infrastructure bill has been signed now. And that means that it's going to be more funding available to enable traffic enforcement solutions. That mostly for our customers would mean more funds available to the investigation about the potential impact for them because you know we have a fully managed services model in the U.S. The investments on that model -- in that model are actually on our plate and on the -- not the responsibility of the cities. So there is -- it's definitely going to be, because of the availability of these funds, more interest coming from the cities. If you combine that with a more proactive sales approach, likely more doors will be open to our salespeople.

All right. And I mean, the infrastructure bill assess [indiscernible]. But can you -- do you have any idea of like when will this affect like customers' decision-making like with the additional funding then?

I don't know. I mean, quite frankly, I -- we don't know. There's going to be a lot of rumor around it and that in itself is a potentially door opener to conversations of our salespeople. That's the way I look at it.