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

Welcome to the Sensys Q2 2024 Report Presentation. [Operator Instructions] Now I will hand the conference over to speaker, CEO, Ivo Mönnink; and CFO, Simon Mulder. Please go ahead.

Good morning, everybody, and welcome to Sensys Gatso's Market Presentation of the Second Quarter and First Half of 2024. 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. In this market presentation, I will provide you with an update on our business for the second quarter and the first half year of 2024. We then follow up with a financial update by Simon. And finally, I will finish this presentation with a summary and our outlook. 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 37% this quarter and 86% year-to-date. The large backlog in our home markets in Sweden and Netherlands, SEK 1.14 billion, strong revenue growth of 26%, an explanation on the legislative changes in Iowa, an update on our enhanced relationship with our Saudi customer. Our investments in working capital for the large contracts we signed in our home markets, Sweden and the Netherlands. And finally, our improving EBITDA, which is up by 28%. Order intake and procurement awards during the second quarter came in at SEK 418 million compared to SEK 306 million in Q2 2023, an increase of 37%. Of the total order intake, SEK 276 million, or 61%, is from TRaaS Managed Services contracts in the United States. Part of the order intake this quarter is the signing of our first contract in the Town of Stratford, Connecticut worth SEK 73 million. This state just recently opened up for Photo Enforcement. Getting our first contract in this state is an important milestone for Sensys Gatso, USA. For the first half year, the total order intake, including procurement awards amounted to SEK 736 million compared to SEK 396 million in the first half of 2023. No less than SEK 551 million, or 75%, came from TRaaS order intake from the U.S. market. With our strengthened U.S. sales team, we managed to sign 12 contracts in the first half of this year, of which five new customers and seven contract renewals and extensions. It's encouraging to see that our stepped-up sales efforts in the strategic U.S. market are clearly visible in the order intake. In 2022, we received two large contracts in our home markets, Sweden and The Netherlands. The combined value of the two contracts is SEK 1.25 billion. The Swedish order of SEK 850 million is in its final development phase. The rollout of this project is now expected to start in the third quarter and will continue for the next 5 years. The Dutch order, worth SEK 400 million, has started its rollout and will continue into the first half year of 2025, depending on the acceptance schedule from our customer. Of the combined SEK 1.25 billion contract value, 9% has been delivered to date, the remaining SEK 1.14 billion is still in our backlog. Total revenue for the quarter arrived at SEK 167 million. Compared to SEK 133 million in Q2 2023, this is an increase of 26%. Looking at revenue by nature, our system sales for the quarter arrived at SEK 119 million. And compared to SEK 90 million in Q2 2023, this is an increase of 32%. Our TRaaS revenue for the quarter of SEK 88 million was slightly higher than in Q2 2023 at SEK 87 million. This recurring business equates this quarter to 53% of the total sales. The TRaaS revenue is primarily driven by our TRaaS Managed Services sales, which was up this quarter by 13% to SEK 59 million. Year-to-date, our TRaas Managed Services revenue grew by 16% from SEK 102 million in 2023 to SEK 118 million in 2024. The revenue from newly signed contracts in the USA this year is not yet part of this. We expect these new contracts to start contributing by the end of 2024. As of May 17, 2024 the state of Iowa in the United States enacted legislation that provided guidelines for automated speed enforcement programs. The aim is to bring Iowa legislation in line with other states, mostly regarding permitted locations, maximum fine amounts, and speed thresholds. As communities navigated the changes, some programs were paused between May 17th and late June. We estimate that the pause of the programs will have limited effect on our revenues for 2024 in the United States. The changes include the catch up period through the process of restarting the mailing of citations and the timing for payments thereafter. We do not project that the Iowa legislative changes will have an effect on the delivery of services or revenue in future years, other than a pause on the start of the implementation of three new programs in Newton, Granger, and Grinnell. Our U.S. sales team will continue to work with partner communities to ensure the effectiveness of their driver safety programs while adhering to the new regulations. In April this year, we signed a Memorandum of Understanding with our customer Tahakom in the Kingdom of Saudi Arabia. With this MoU, Sensys Gatso will collaborate with Tahakom in multiple initiatives across Saudi Green Initiative, Local Content and the road to Saudi Vision 2030, reinforcing the strong partnership between the two entities that dates back to 2016. Sensys Gatso and Tahakom will provide the Kingdom with next-generation traffic safety solutions that can handle a variety of Smart Mobility features in all environments and weather conditions. Next to the successful in-vehicle solution, Tahakom has now technically qualified Sensys Gatso as a supplier for Fixed Speed and Fixed Redlight solutions, creating the possibility for a more in-depth relationship in the future. The available cash at the end of the quarter came in at SEK 65 million compared to SEK 84 million at the beginning of the year. Financing of big projects such as the Swedish and Dutch contracts has temporarily increased our investments in working capital. On top we have continued investing in fixed assets in operations in the USA as well as in our software platforms. With the roll-out of the projects in Sweden and The Netherlands we expect a gradual improvement of our available cash. Our gross margin this quarter was 42%, the same as in Q2 2023. This is mainly due to higher margins on system sales from our Saudi customer. At the same time, and as we planned, we face lower margins on deliveries of system sales in the initial phase, specifically from the new large contracts in the Netherlands and Sweden. We typically start the rollout of a new system sales program with the delivery and installation of systems, followed by acceptance by our customer. Only after this customer acceptance, the systems go into operation and the service and maintenance part of the contract commences. This is a gradual process over a period of typically 12 to 18 months. The program will come to full fruition when all the new systems have been installed and are in operation. The overall gross margin of the contract will gradually recoup during this phase. 12 months rolling, our margin is stable at around 40%. Our EBITDA for the quarter arrived at SEK 25 million, 28% higher than in Q2 2023 at SEK 19 million. Year-to-date, the EBITDA arrived at SEK 28.3 million, 37% higher than the first half of 2023 at SEK 21 million. On that note, I would like to hand over to Simon Mulder.

Thank you, Ivo. We have three topics for today. Our consolidated income statements, the performance of our segments and finally, our financial position. Looking at the consolidated income statement, we focus on revenue, margins and profitability. The revenue for the quarter came in at SEK 167 million compared to SEK 133 million, an increase of 26%. For the first half year, the revenue amounted to SEK 292 million compared to SEK 246 million, up by 19%. The increase in sales was driven by strong system sales deliveries during the quarter and the first half year compared to 2023. The TRaaS revenues have shown an increase of 2% compared to Q2 2023. From a half year perspective, TRaaS revenues are in line with 2023. TRaaS growth in the quarter has been impacted due to Iowa legislative changes that are expected to have a minimal impact on the full year projected revenue of TRaaS Managed Services in the U.S. 12 months rolling, the revenue was up by 5%. The group's gross margin rises 42% for the quarter. The first half year, the margin landed at 40%. The increase in margin is related to higher margin on the latest study deliveries. 12 months rolling, the margin came in at 40%. The operating expenses totaled SEK 57 million, an increase of SEK 7 million compared to Q2 2023. The first half year, the expenses totaled SEK 112 million compared to SEK 104 million. The increase in expenses is driven by sales expenses related to the Intertraffic fare in April of this year and increased sales activity in the USA. 12 months rolling, the expenses increased by 3%. Our operating profits for the period came in at SEK 40 million compared to SEK 6 million in Q2 2023. For the first half year, the operating profit increased from negative SEK 3 million to positive SEK 7 million. 12 months rolling, the operating profit amounted to SEK 49 million, a margin of 7%. Our Managed Services segment predominantly reflects our U.S. business, including the costs related to development and maintenance of our software services, FLUX, Xilium and Puls. During the quarter, we've had a high number of contract signings with SEK 276 million in total contracts value over the contract period. Revenue has grown by SEK 3 million to SEK 48 million in the quarter. The Managed Services segment has realized an EBITDA of SEK 7 million, also a growth of SEK 3 million. On 12 months rolling basis, revenue has grown from SEK 178 million to SEK 203 million, a growth of 14%. The EBITDA from a 12-month rolling perspective has increased by 79% from SEK 19 million to SEK 34 million. During 2023, we have invested in our U.S. organization in the operation as well as the sales teams. The EBITDA is in an upward trend since the second quarter of 2023. Now on to the segment system sales, starting with order intake. Order intake during the quarter landed at SEK 142 million, mainly due to the win of the Dutch EG 39 tender for average speed enforcement on Dutch Highways, worth SEK 84 million. Of this total amount, an estimated SEK 48 million relates to TRaaS, Service and Maintenance over a 6-year contract period. On top of that, we have received several repeat orders from existing customers and expansions on Dutch service and maintenance contracts during the rollout of the Dutch tenders. The rollout of the Dutch Speed and Redlight projects has increased velocity during the quarter and now have several sites waiting for acceptance by the customer. After that, invoicing and payment is expected swiftly. Revenue has increased by 35%, growing from SEK 88 million to SEK 119 million in the quarter. Due to the initial deliveries on the Dutch project, we've seen a lower gross margin impacting our EBITDA. But with higher margins on our latest Saudi deliveries, the EBITDA came in at SEK 18 million or 15%. 12 months rolling, our revenue has increased from SEK 324 million to SEK 468 million, a growth of 44%, with our EBITDA increasing with SEK 80 million, also a 44% growth. Discussing the financial position of our company, I would like to focus on cash movements, interest-bearing debt and available cash. The largest movements in our available cash position are working capital and investments. During the first half year, we financed big projects. On the balance, working capital has increased during the year with SEK 24 million. The USA has continued rolling out on signed contracts of 2023, resulting in investments in fixed assets and operations of SEK 19 million. Investments in our platforms FLUX, Puls and Xilium, have resulted in an addition to the amount of SEK 16 million. And in 2023, we started investing in our Ghana joint venture. The investment in the first half year of 2024 amounted to SEK 4 million. The adjusted net interest-bearing debt has increased compared to the closing balance of 2023, mainly due to the investments in working capital and fixed assets. The adjusted net interest-bearing debt at the end of the period amounted to SEK 124 million. The available cash has decreased from SEK 84 million to SEK 65 million by adding operational cash flow of SEK 35 million and taking the largest movements in our cash into account. With the rollout of the projects in Sweden and the Netherlands, we expect a gradual improvement of our available cash. And on that note, I would like to hand it over to Ivo.

Thank you, Simon. Our order book is strong, with a revenue backlog of SEK 1.14 billion from two large contracts in our home markets, Sweden and the Netherlands. Our profitable TRaaS business continues to grow, and our strengthened team in the USA proves able to sustainably grow our topline in this strategic market. On top, we are pleased to see our new ground-breaking roadside platform, FLUX, now launched in our home markets Sweden and The Netherlands. We therefore retain our long-term plan and ambition to, by the end of 2025, grow our net sales to more than SEK 1 billion, of which TRaaS revenue is more than SEK 600 million. We also retain our ambition to increase our EBITDA margin to more than 15% by the end of 2025. On that note, I would like to open up for questions.

[Operator Instructions] The next question comes from Tim Ehlers from Kepler Cheuvreux.

I've got a couple of questions. Let me start with one regarding the Saudi development. So I think quite positive news on that side. One question I had regarding the payment you received which boosted your or impacted your margin in second quarter or in H1. Is there more to come for the second half? Or is that the final payment for the solid project that you finalized already?

It's not the final payment. So there's more to be received. That's the answer to the question. As part of the T&C, the terms and conditions for the contract that we will receive a final payment after a certain period of completion of the project. And that's what you find here now, but there is more to come. To be more precise on that, what I think on that contract, specifically really interesting is that Saudi is opening up, as we all know. And public safety is really important for them. And so the standard process are taking place for a number of solutions in automated traffic enforcement. And apparently, we found out that we are the only party in the whole market that is capable of delivering on all the tenders. So we are the only supplier of automated traffic rules. We're really proud of that. I just wanted to mention that.

Okay. Sounds great. Well, then one follow-up question with regards to Saudi Arabia. Is it fair to assume that the potential follow-up projects that will come after you signed a memorandum of understanding and now you're qualified to deliver the Fixed Speed and Redlight Control Systems, will be significantly bigger than the previous project as it was only in vehicle speed control?

Well, the total demand for these projects is significantly higher, but there is, of course, in this case also competition. So it will be depending what will be the share that is coming our way. We do expect it to be for more than one solution next to the we already have, coming our way. The numbers are not known yet. So we can't say anything yet, simply we don't know. So once this is the case, and we're qualified, then of course, we will announce it to the market. In general, numbers in Saudi are always really high. It's a large country, and there's a huge investment behind upgrading the road systems and the traffic enforcement around that.

Okay. Great. Then another question regarding your working capital. So you mentioned that you had to do some working capital investments because of the rollout of the Dutch project. And since you mentioned that the Swedish project will start its rollout in the second half of this year. Is it fair to assume that we would see another significant working capital increase due to that?

Yes. The Swedish tender is structured a little bit different from a payment perspective. So I believe that we are better aligned with outgoing funds and incoming funds on that particular project. But of course, starting up any project takes on working capital. That's correct. But I don't expect a similar kind of -- similar kind of impact.

Maybe to add to that. On the Dutch contract, it is in our interest to keep an inventory level, because once you -- the faster you complete the project, you can choose a new, what they call a mock, which is a site assigned to one of the competitors in the tender. So the faster you can operate and react to that, the higher volume you're getting. So that's also a reason -- a strategic reason to keep a higher inventory level for the Dutch tender.

Okay. Understood. And then one last question before I move back in the queue. Also with regards to investments, but now more on a CapEx level. You mentioned that you did some further investments in your software, and I think also some hardware stuff. The levels we are seeing now are those levels that will be stable going forward? Or is that still part of a bigger investment plan that will not go on like this for the foreseeable future?

Yes. So I think, if we look at the intangible fixed assets in our software suites, for now, we foresee this level continuing in the quarter. The second quarter, the investments in fixed assets and operations have been somewhat lower. We expect that to come back in the second half of the year.

The next question comes from Orjan Roden from Carnegie Investment Bank.

Yes. Good morning, everyone. And to start with congrats to what I thought it was a very solid report. If I start with a strong order intake and in particular, in the U.S., do you plan that this is an exceptional quarter? Or do you see that the U.S. market is rather accelerating a structural trend? Or is it more down to your own activities by expanding the sales force?

Yes. I guess it's both. But I would start with saying that with an expanded sales team, which requires investments, of course, you can see that with feet on the ground and talking to the cities, you have a way higher chance of bringing in new contracts. At the same time, we see markets Connecticut, Florida, California, opening up for automated speed enforcement around schools, which is also an indication that the market is moving. We also see, yes, maybe some -- a situation in Iowa, which has been under discussion for more than 10 years about how to deal with automated traffic enforcement, and that's how finally settled down. So I think that's also a very positive turn in the end for automated traffic enforcement in general. So there is -- it's a combination of markets in moving at this point in time and a sales force, which is rather active on going after the opportunities.

Okay. Okay. Great. Looking at your two segments, Managed Services and Systems. It's still the system sales that it's posting the strongest growth. And without giving a forecast, how do you see lead times in Managed Services evolving, both in terms of sales growth and the EBITDA margin, given that order intake is quite strong currently?

I would say that typically, it would take, well, 6 to 12 months for in order to start from signing the order into -- going into operation, which basically is due to the fact that you need permits to install the equipment. Then there's the installation time and there's the warning time where we want to make sure that, all vendors are being prewarned that this is happening, and then you start issuing the citations and then there is the collection of the fund. So that's also in that time schedule are -- these components are basically all adding up to that sort of time frame work I just mentioned.

Okay. And just drilling down a little bit on the working capital. Can we -- do I interpret correctly that you expect some reversal already this year? Or do you expect it to take longer?

No. As we mentioned, right, we expect the available cash to restore gradually while we roll out the Swedish and the Dutch tender further. And like Ivo said, we have a strategic inventory position to maximize our sales in that tender. So yes, the expectation is that, that we will go back to more normal levels.

Can you say anything about what do you think about the timing of that? Or is it too early?

What I can say about it is, there is pressure from the government to install it as fast as possible. So they have an interest to help us with that. And we have an interest in growing our revenue. So we're on the same page here. I would say, yes, within mid-2025, we will probably see most of it being delivered to the market. That will be my expectation.

The next question comes from Tim Ehlers from Kepler Cheuvreux. Please go ahead.

Just one follow-up question also regarding margins going into the second half of the year. With the rollout of the Swedish project, I guess we'll see a higher increase in system sales compared to the TRaaS revenues. Could you maybe guide a little bit on the margin development there? Are you rather expecting a flattish development like we've seen in the first half due to a higher sales mix coming from system sales? Or will it rather be a little slight rise for you?

Yes. What we can say about that, Tim, is that, Yes, I mean, we see -- if system sales is higher, we might be a bit lower, if the share of Managed Service is high, it might be a little bit higher. I prefer to look at the 12 months rolling gross margin, where we see that we're around to 40%, so plus or minus. As I think the best answer I can give to that, because of the mix impact.

There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

Okay. Thank you, everybody, for attending. Thank you, Orjan and Tim, for asking the questions. And hopefully, we'll see you back in the next quarterly report presentation.