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

Welcome to the Sensys Q3 2024 Report Presentation. [Operator Instructions] Now I will hand the conference over to speakers, CEO, Ivo Mönnink; and CFO, Simon Mulder. Please go ahead.

Good morning, and welcome to Sensys Gatso's market presentation of the third quarter of 2024. My name is Ivo Mönnink, I'm the CEO of Sensys Gatso, and I will be presenting to you together with Simon Mulder, our CFO. In this quarter presentation, I will provide you with an update on our business for the third quarter 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 where we now, year-to-date, have 13 new contracts in the U.S.A.; our backlog, which includes SEK 1 billion of large orders in our home markets; our recurring TRaaS revenue, which is 70% of total revenue this quarter; unexpected legislative changes in Iowa; an update on our Saudi customer where we entered the next phase in our relationship; our available cash position that increased this quarter to SEK 295 million due to a successful bond issue in September; and finally, our margin, which is stable at 37%. Order intake and procurement awards during the third quarter came in at SEK 95 million compared to SEK 145 million in Q3 2023. Of the total order intake, SEK 25 million is from a new TRaaS Managed Services contract with the city of Montgomery Town in Pennsylvania, U.S.A. Year-to-date, the total order intake, including procurement awards, amounted to SEK 831 million, 55% higher than last year at SEK 541 million. In the first 3 quarters of 2024, no less than SEK 576 million or 70% came from TRaaS order intake from the U.S. market with 13 new contracts, including renewals and extensions. This translates to an average revenue per contract of SEK 44 million. In 2022, we received 2 large orders in our home markets, Sweden and The Netherlands. The combined value of the 2 contracts is SEK 1.25 billion. The development phase of the Swedish order of SEK 850 million is nearly completed, and our customer Trafikverket is in the final phase of acceptance. We are jointly targeting successful completion of an extensive test program of both the hardware and software of our solution in Q1 2025. This extensive test program is required to align and integrate our new FLUX speed enforcement system with our customer's various IT systems, some of which are also new or updated. The start of the rollout of this project is now expected to commence in the first half of 2025 with the replacement of existing systems and the installations of new systems in the field. The service and maintenance part of the contract will gradually kick in and continue for an expected 12 years. Implementation continues for the Dutch order, which is worth SEK 400 million, split between SEK 200 million in system sales and SEK 200 million in repairs and maintenance over a 6-year period. The systems installation rollout has really taken on in the third quarter with approximately SEK 145 million delivered year-to-date. We expect to continue installations into the first half of 2025, depending on the acceptance schedule from our customer. Of the combined SEK 1.25 billion contract value, approximately 12% has been delivered to date, leaving more than SEK 1 billion still in the backlog of just these 2 programs in our home markets. Total revenue for the quarter arrived at SEK 141 million compared to SEK 157 million in Q3 2023. This is a decrease of 10%, mainly driven by lower System Sales, which arrived at SEK 42 million, 40% lower compared to the SEK 71 million in Q3 2023. Our TRaaS revenue for the quarter of SEK 99 million was 15% higher than Q3 2023 at SEK 86 million. This recurring business equates this quarter to 70% of total sales. The TRaaS revenue is primarily driven by our TRaaS Managed Services business in the U.S.A. Year-to-date, our TRaaS Managed Services revenue grew by 10% from SEK 156 million in 2023 to SEK 172 million in 2024. The revenue from newly signed contracts in the U.S.A. this year is not yet part of this. We expect a number of these new contracts to start contributing by the end of 2024. As of May 17, 2024, the state of Iowa in the U.S.A. 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 temporarily paused between May 17 and late June. As part of the new legislation, each location where automated speed enforcement was already being used had to receive a permit through the Iowa Department of Transportation. The Iowa Department of Transportation has now released its decisions on submitted permit applications for automated speed enforcement systems. Unexpectedly, only 11 out of 140 fixed speed locations permits throughout the state were approved. For Sensys Gatso's customers, 7 out of 75 fixed speed system location permits were approved by the Iowa DOT. In addition, 95 of 148 submitted mobile speed deployment location applications were approved. The legislation and permitting process did not apply to automated red light enforcement cameras in the state. Each of those 52 installed systems will continue normal operations. All city authorities are investigating the appeals process allowing for reconsideration of all sites not permitted in the unprecedented decisions by the Iowa DOT. Our leadership team is in communication with our customers to see how we might be able to provide assistance to fill the void in their traffic safety programs. In the interim, Sensys Gatso, including our local consultants and legal counsel, will work with the partner communities to seek all options that would reestablish the operations of the speed systems not receiving a permit. In April, we signed a memorandum of understanding with our customer, Tahakom, in the Kingdom of Saudi Arabia. Following this, our customer provided technical qualification for our fixed and mobile speed and fixed red light solutions. After the quarter, Sensys Gatso has signed framework agreements for these 3 types of enforcement as well as a framework agreement for service and maintenance on the delivered vehicle-in-motion systems. With these agreements in place, Sensys Gatso is now in the position to receive the first purchase order under these agreements, which will cater for supply of enforcement solutions during the period 2025 through 2027. With the signing of these new framework agreements a year later than initially anticipated, we have entered the next phase in our relationship with Tahakom in the Kingdom of Saudi Arabia. In September of this year, Sensys Gatso successfully raised EUR 30 million through the issuance of senior unsecured bonds with a 4-year tenor and a floating rate interest of Euribor 3 months plus 4.75% per year under a framework of EUR 60 million. The net proceeds from the bond issue have partly been applied to refinance existing debt and primarily towards general corporate purposes, including investing in working capital and fixed assets in operation to accelerate further growth of Sensys Gatso. At the end of this quarter, the free available cash amounted to SEK 295 million compared to SEK 84 million at the start of the year. After the quarter, the company has successfully applied to have the bonds admitted to trading on the corporate bond list of Nasdaq Stockholm. Our gross margin this quarter was 37% compared to 38% in Q3 2023. This is somewhat lower than our run rate margin of 40% and is driven by the relatively large contribution this quarter of System Sales from the Dutch project. In a contract like the Dutch tender, we start with the installation of the enforcement equipment alongside the roads. When our customer accepts the individual sites, we recognize the revenue in our System Sales business segment. Margins on System Sales are typically lower and precede the higher-margin service and maintenance part of the contract. This recurring revenue is gradually phasing in with the installations of the system and is expected to continue for a minimum period of 6 years. The overall gross margin of the contract will gradually recoup during this phase. Year-to-date, the margin was 39.1% compared to 39.9% in 2023. Our EBITDA for the quarter arrived at SEK 12 million compared to SEK 19 million last year. And year-to-date, the EBITDA arrived at SEK 40 million, similar to last year. On that note, I'd like to hand over to Simon Mulder.

Thank you, Ivo. I will take you through the consolidated income statement, the performance of our segments and 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 141 million compared to SEK 157 million. Year-to-date, the revenue amounted to SEK 433 million compared to SEK 403 million. During the quarter, TRaaS sales has increased by SEK 13 million. The 12-months rolling increase of TRaaS by 3% is mainly attributable to growth in the first half year in the U.S.A. The group's gross margin arrived at 37% for the quarter. Year-to-date, the margin landed at 39%. And from a 12-months rolling perspective, the margin came in at 40%. The operating expenses totaled SEK 49 million, a decrease of SEK 3 million compared to Q3 2023. Year-to-date, the expenses totaled SEK 161 million compared to SEK 156 million. The increase in expenses is driven by sales expenses related to the Intertraffic Fair in April of this year and increased sales activities in the U.S.A. 12-months rolling, the expenses are at a comparable level. Our operating profit for the period came in at SEK 1 million compared to SEK 8 million in Q3 2023. Year-to-date, the operating profit landed at SEK 8 million compared to SEK 5 million. From a 12-months rolling perspective, the operating profit came in at SEK 42 million compared to SEK 49 million. Our Managed Services segment predominantly reflects our U.S. business, including costs related to development and maintenance of our software suites, Xilium and Puls. With an order intake during the quarter of SEK 25 million, we have a similar order intake level compared to Q3 last year. Revenue came in lower due to less volume on existing programs. The impact compared to Q3 last year is SEK 3 million. EBITDA came in at SEK 2 million for the quarter. From a year-to-date perspective, the Managed Services sales is stable, moving from SEK 203 million in the previous quarter to SEK 200 million. With 12-months rolling, the EBITDA amounting to SEK 31 million compared to SEK 34 million for the previous quarter. Now on to the segment System Sales, starting with the order intake. Order intake during the quarter landed at SEK 70 million, mainly from smaller repeat orders from existing customers. The rollout of the Dutch speed and red light project has increased velocity during the quarter. Due to a lower activity level in the Middle East compared to Q3 2023, the revenue came in at SEK 99 million compared to SEK 112 million last year. On a lower revenue level and due to the initial deliveries on the Dutch project, the EBITDA came in at SEK 10 million compared to SEK 15 million last year. 12-months rolling, our revenue has moved from SEK 468 million to SEK 455 million, with our EBITDA moving from SEK 59 million to SEK 54 million. 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 increased funding through the bond issue and investments. In September, the company secured a EUR 30 million bond to finance investments for future growth. With this EUR 30 million, the company has repaid a large part of the long-term debt during the quarter and the remaining after the quarter. On a net balance, the securing of the bond and repayment of the loans resulted in an increase of SEK 263 million in our available cash. The investments year-to-date amounted approximately SEK 62 million, of which SEK 33 million in fixed assets and operations for mainly the U.S.A. The company has continued to invest in its products, adding SEK 21 million to the intangible fixed assets. The net interest-bearing debt has increased from SEK 109 million at the opening of 2024 to SEK 159 million at the end of the quarter, mainly due to investments in working capital and fixed assets. The available cash has increased from SEK 84 million to SEK 295 million at the end of the period. On that note, I'd like to hand it over to Ivo.

Thank you, Simon. Our robust order book and backlog of over SEK 1 billion provide solid revenue visibility well into the future. We expect our TRaaS business to continue delivering profitable growth, driven by our strengthened U.S. team and our groundbreaking FLUX roadside platform. However, we also recognize that the recent market dynamics, such as extended customer testing phases and legislative changes, may temporarily affect our time line. The Swedish contract rollout is now anticipated to start in early 2025, and we are addressing recent Iowa program suspensions alongside our customers. Additionally, commercial time lines in Saudi Arabia are shifting into 2025. While these factors affect short-term timing, they do not impact our long-term ambition. We remain confident in our growth trajectory with our strategic initiatives on track to deliver sustainable, profitable growth. On this note, I would like to open up for questions. Operator?

[Operator Instructions] The next question comes from Orjan Roden from Carnegie Investment Bank.

Starting with the top line, can you just try to summarize the Netherlands and Swedish orders? You touched upon it, but just to remind us how much is actually done and when do you expect the remainder to be booked into your accounts? That's my first question.

Okay. Let's start maybe with the Dutch order, which is SEK 400 million, SEK 200 million of that is System Sales and SEK 20 million is repairs and maintenance. The last part is -- will be delivered over a 6-year period, and that will gradually move along the installations of the systems. Those systems have been installed for a large part and will continue into 2025. Of the SEK 200 million in the Netherlands, SEK 145 million has been installed to date. So we have made a really good bump-up in the third quarter, and I expect that also to happen in the fourth quarter for the Netherlands. Then looking at Sweden, here, we have delays mainly because of testing programs. So we -- it's a SEK 850 million order over a 12-year period. About 60% of it is System Sales, 40% is recurring maintenance -- repairs and maintenance. So the TRaaS part, the installations haven't really taken place yet because the customer has not fully accepted the solution, and the reason for that is that it's on 2 sides: it's a new system, which is called FLUX; and it's also on the part of the customer, new IT systems. So they need to be working together, obviously, that takes time and testing and time, of course, to prove that. We expect that to happen in Q1. And then the rollout will start, and that will take a number of years, not exactly determined how many years. But in that period, we will replace the existing installed base, but we also will add new systems in the field. So the installed base will actually grow in Sweden. So that's what we are. So I do expect in Sweden, the ramp-up of the system installations to start really in 2025. So it's logical that in the beginning, the number of installations will move a bit faster than towards sort of the tail of the installation period for the systems. Okay. So all in all, these 2 contracts combined are SEK 1.25 billion, and of which still more than SEK 1 billion, I would say, SEK 1.1 billion is still to be delivered. So a backlog on these 2 contracts of SEK 1.1 billion.

Okay. Look, can you say anything about the gross margin and the road to approach historical levels? Or is it too early to say given all the things you have on the agenda?

Are you talking gross margin in general?

Gross margin in general, yes.

Yes. I think what we typically see is we hover around the 40%. I don't see that changing in the short or -- well, maybe in the shorter term a little bit because if you start installing the systems in the field, then you recognize the revenue for that. And typically, the margin on System Sales, as we all know, are somewhat lower than on the maintenance part. So -- but I do expect it to hover around the 40% going forward.

Okay. Turning to the U.S. elections, do you foresee, with the information you have right now, that there are any changes in your road map when it comes to your U.S. business?

That's always very difficult to say. I mean one way of looking at it is looking back at the first term of Trump because that's, I think, what you referred to. There were no changes at that point in time. So talking to the U.S. team, the general idea is that, that will also not happen this time around. No guarantees, but that's what it seems to be.

Okay. And a more detailed question to Simon, I suppose. The cash position at the end of the quarter, how much of that will be used to repay -- to further repay down other debt issues? And how much is then left to finance investments?

I think after the quarter, we've repaid another, I think, SEK 10 million in long-term debt. So what you see on our balance sheet now is that all of the long-term debt has been -- that remained has been classified as short term because we have repaid it after the period. So that's approximately SEK 10 million. We are still utilizing our RCF facility at Rabobank, and we aim to significantly pay down on that one to minimize interest expenses. And maybe to add to that, Orjan, we've not only repaid bank financing, but we've also repaid the shareholder loan that has been with us since the acquisition of Gatso Beheer.

The next question comes from Tim Ehlers from Kepler Cheuvreux.

I have one question with regards to Saudi Arabia that popped up during your presentation. You mentioned that you came to an agreement with regard to service and maintenance work for the vehicles you provided. Is that something new? Or is that part of the old contract you already had with Saudi Arabia when you delivered in-vehicle speeding cameras?

In the past, we delivered -- we got 2 orders from Saudi Arabia. One was for 200 in-vehicle systems and another one for 1,001 in-vehicle systems, so let's say, 1,200 in total. And they have been deployed, to a large extent, on the roads in Saudi Arabia. Up until now, a lot of the maintenance and repairs were done by the customer, and they figured that it would be better to have us do that, which typically is the case if it applies to our equipment. We're better in doing maintenance and repairs. So we have signed a -- or we're in the process of signing a service level agreement to do the maintenance of these 1,200 installed vehicle-in-motions.

Okay. Great. And then...

Sorry to interrupt, but that would be sort of a -- for a number of years and recurring revenue, of course.

Yes, of course. But it's an add-on compared to what...

Yes, totally, absolutely an add-on to the existing business area.

Okay. Great. And then, well, going to the U.S. news. The impact from Iowa, was that visible in the revenue already? Because if I look at the Managed Services revenue development, flat, not necessarily the growth that we would have expected. And is there also a risk that something similar could happen in other states?

Well, I mean, let's maybe start with the last question is that I would say Iowa was catching up with other states. In other states, there was legislation in place about thresholds, about permitted locations and that kind of stuff. In Iowa, it wasn't the case. So I think it was a catch-up and which is a positive thing because we think for the industry in general, it's better that it's sort of regulated to some extent at state level. The impact on the revenue, we are not -- I mean we're looking at this sort of like, okay, it's happening, and we need to deal with that. We don't know what will happen with the appeals. We will have mitigations in place. So short term, definitely, there is an impact. But longer term, we expect that we can recoup some of it or a lot of it, that's still depending. But I think what's most important is that we really stick to our long-term ambition to deliver the growth, specifically on the Managed Services part, the TRaaS part of our business in a profitable way.

Okay, fair. All right. And there's a reason why they didn't grant the permits. Could you explain that a little bit? Was it because of the location? What's the reason behind it? And how likely is it that the appeal will be successful and you can actually use those?

Yes, that's hard to say. That's hard to say. I mean what I can say is that it's unprecedented. Something like this has never happened before. I can also say that it was unexpected by the city. So they were caught by surprise. They were expecting the Iowa DOT not to be that stringent. So we're now in the process of understanding why this is the case and which will then also be the base for appealing the decisions. So it will take some time because, obviously, there is politics involved and governance involved, and it won't happen overnight. But yes, it's a -- that's what the plan is to help -- we also help the cities to make sure that the efforts to appeal are somewhat aligned and help them with also some legal support where that is needed, and then also work together with the cities on what are the locations mostly where we can do the mobile speed enforcement, where we can mitigate some of the lost revenues. And then on top of that, we have the benefit of owning the equipment, so the equipment can be relocated. So you can imagine that if there are other new fixed sites that are approved by the Iowa DOT, we can move our equipment in those locations.

Okay. And you already answered my follow-up question to that, if you can relocate the equipment. That's good to hear. And I have one more question before I move back in the line. With regards to your outlook and your guidance, this time, you don't mention the financial targets you mentioned after the first 6-month results with the SEK 1 billion revenues, 6% TRaaS revenues and 15% EBITDA margin. Are those still in place?

Well, I mean, we're approaching, of course, at the end of 2025. And what we see happening is a lot of, let's say, commercial activity moving into 2025. I'm talking about what happens in Saudi Arabia where we signed now 3 framework agreements. The numbers in that country are going to be, by definition, high, and that's one aspect. The other aspect is that the Swedish contract will start delivering in 2025. I expect initially a higher bump-up in 2025 because the focus of the delivery will be a little bit more in the beginning. So that's an impact. And then we don't know what's going to happen on the Iowa side, of course. But we do have a lot of -- a very high backlog also on the recurring part of our business. So 70% of the year-to-date order intake of SEK 580 million approximately is coming from new TRaaS contracts. So -- and they will also come online to some extent. So what I'm saying is that in 2025, a lot could potentially happen. So we do believe that there is a long-term strong fundamental base for the profitable growth in this business, and we do stick to our ambition.

Okay. But the targets are still in place? Or as a precautionary measure, due to the uncertainty next year, are you [ indefinite for now and maybe come in ]...

There is, of course, a little bit more timing uncertainty on the target. I think that's fair to say.

Okay. Then I'll move back into the queue. I mean if there are no other questions, I'm just going to ask 2 more afterwards.

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

Just 2 more and then I'm done. With regards to mix effects, you were mentioning that the reason for the drop in the EBITDA margin was also partly explained by a higher contribution of System Sales. Although when I look into the mix, it was actually lower than in Q2. Could you maybe explain that a little bit to make me understand the EBITDA bridge and the profitability also going forward? I guess operational leverage played a role, but it would be great to get some insights there.

Yes, that's -- you're absolutely right about that, the operational leverage does play a role in the way that we present our profit and loss. Yes. And sometimes, it depends on system deal per system deal, what the margins really are, right? And some are better, and some are not so good at the beginning and better at the end when we go into service and maintenance. So it also depends on the mix of customers and deliveries within the System Sales that has an impact on the overall margins.

Okay. So it's fair to assume that the Dutch contract could be one of those examples where the margins at the beginning are a bit lower and accelerate in the...

Yes. And if you compare to Q3 last year, we were at the end of the -- or almost at the end because in Q4, we also delivered to Saudi after 2 or 3 years of delivery, right? And then the operational efficiency of just delivering the same type of systems is relatively high, right? So -- and those things have impact, whilst, for example, the first deliveries to Saudi were also at a lower margin because, yes, of course, we have a product, but we need to make sure that it works in the environment and so on. So those things have impacts.

Okay. And then one last question, the Swedish contract, is there any risk to it? Or is it just a bit of the same thing as with Saudi Arabia that there might be some delays, but the risk -- sorry, the contract itself is not at risk at all?

No, absolutely not. We are the single supplier to the Swedish government. And so there's every interest to get this started. But I think it's a wise thing. I mean this is a legal instrument, automated traffic enforcement. So you need to make sure that you've done all the testing to make sure that the integrity of the systems, I include the systems at the customer end, are validating and guaranteed. So I applaud the fact that we take a bit more time to do it properly than rushing this through to realize maybe more revenue, which is also not the interest of our customer, by the way. They are just interested in making a very solid automated traffic enforcement solution for Sweden. And we can't push them, and we won't. So yes, that's the comment. The contract is not at risk.

Okay. And the delay in the ramp-up does not impact the profitability of the project at all?

No, no.

So we have 2 questions, too, on the question list.

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

Okay. So we have questions online. Maybe, Simon, if you can read them?

Yes, there are 2 questions, I think, directed to us, Ivo. One is that there is more request for AI-powered enforcement systems. So that's one question, if we can handle AI, and what is groundbreaking about FLUX?

Okay. Well, let's start with the last question. And groundbreaking about FLUX is the way the platform has been built, specifically the software part of it. So the structure of the software allows us to integrate new sensors in a very, very easy way. So we don't need to -- if we, let's say, move from one camera to another or one radar to another, it takes us literally writing a new API, a new little piece of software to allow for that. And that makes it a very flexible system. On top of that, it's a system which is based on cassettes, and the cassette can slide into a housing, which means that we can easily replace the existing systems by sliding out the existing systems, which typically is a T-Series or an S-Series from Sweden and then slide in the new cassette that contains the new FLUX software. So it's an enabler of future growth, and it will be a platform that we will -- is sustainable for the next, typically, 10 to 15 years. So AI, yes, AI is a good question. I think all what we do is basically also allows for AI implementations. We have our own software development team. And yes, we are looking at all kinds of different opportunities to implement that. We do have to say, however, that in many cases, it's the government, which is the local government that is driving the demand for the products, and we deliver against those. So we're not sort of building a product and then try to sell it. It's always based on a specific requirement from a governmental customer.

Okay. We have another question, and that is, are there any other states in the U.S. that are undergoing or expected to undergo legislative changes like Iowa?

That question has actually been asked to our U.S. team as well, and the answer was, no, we don't expect that or they don't expect that. I think it's also based on the question of what will the elections do to us, to our business. And as I mentioned before, we believe that in the first term of the Republican Trump Party, Trump, there were -- we did not see any changes. Most of these changes will also be at state level, so not at federal level, but at state level. So yes. No guarantees, but we don't have the indications, let's put it that way.

And then one final question is, what is going to drive the value of the company in the future?

Well, definitely, profitable growth in recurring business. So we -- our strategy has been along 2 lines. One is if you install System Sales, then make sure that you have an SLA, a recurring maintenance contract coming along with it. So that's a specific focus around System Sales. The other one is, of course, driving Managed Services in, specifically, in the United States. So that's where we do the whole process of owning the equipment, maintaining it, sending out the citations, collecting the funds, et cetera. And we do see that, that business model, which is until recently unique to the United States, is moving into other parts in the world as well. We see that happening in Australia. We don't do the whole value chain there, but to a large extent, we also do service the Managed Services in Australia. One other example is that Ghana where we will -- where we have the contract to nationally enforce automated traffic enforcement, and that's -- we apply the same model as we see it in the United States. So we do the whole enforcement process. So that's where we see the growth for the future in the company. Okay. We don't have any more questions from the online audience. So on that note, I want to thank everybody and close the meeting.