Earnings Call: Q1 2021

Apr 27, 2021

Thank you. Welcome to Sensus Hutso's presentation of the Q1 2021. My name is Ivo Mollink. I am the CEO of Sensus Hutso, and I will be presenting our Q1 results together with Simon Nauder, our CFO. Next slide, please. In this market presentation, we will provide you with an update on our business for the Q1. We then follow-up with a financial update by Simon. And finally, I finish this presentation with a summary and our outlook. During our Q4 presentation, we promised to introduce our new CEO, Per Deggeman, to you this quarter. Per has prepared a short presentation to share his background and high level technology vision. At the end of Per's presentation, we open up for questions. Next slide please. Now let's have a look at an update of our business. In this business update, I will take you through our 12 months rolling order intake, which is stable at 789,000,000 and up 50% in comparison to last year. Schools on sales, which are expected to pick up in Q2, The strong Costa Rica contract position, which was confirmed during our visit to Costa Rica late March, Our best estimate remains that first deliveries will start in the second half of twenty twenty one. 20% of the Saudi contract, which is now being delivered, the total value of the contract is €275,000,000 and deliveries are picking up again in April. And finally, on financing larger contracts. We are glad to be supported by our bank to manage the record breaking order intake of 2020. Next slide, please. First, we look at our order intake. The order intake during the Q1 totaled €62,000,000 compared to also €62,000,000 last year. The order intake for the quarter mainly relates to repeat and smaller orders from our existing installed base as well as $14,000,000 purchase order under the €60,000,000 announced procurement award from our Belgian customer. Including this procurement award, the order intake would amount to €108,000,000 With order intake in 1st quarters typically being somewhat lower, The 12 month volume order intake arrived at 789,000,000, an equal level compared to Q4 2020 and up 50% in comparison to last year. All in all, the activity level is high and we have a solid pipeline. Next slide please. Net sales in the quarter arrived at €78,000,000 compared to €96,000,000 last year. This deviation is to a large extent due to the managed services business in USA falling behind in the quarter by 11,000,000 We believe this effect to be temporary caused by COVID related school closings. Automated traffic enforcement in school zones can only be operational when kids attend schools, so not during weekends, vacation periods for 4th school closings. Because of COVID, schools in the USA were closed most of the time between the summer period of 2020 through to March 2021 when they gradually reopened. Revenue recognition of school program citations is typically realized 30 days after the citation issuance. It can be expected, therefore, that the U. S. Car sales will start picking up again in the second half of Q2 of this year. Next slide please. In February 2020, Sensus Hutso, together with Consortium Partners signed a contract with the Costa Rican government for the country's nationwide intelligent transportation system. To confirm our position in the contract, we traveled to Costa Rica 4 weeks ago to meet with our customer, Cozevi, with our consortium partners and with members of the Costa Rican government in person. During these meetings, Both are strongly positioned in the contract and the willingness of our customer to execute the contract were confirmed. Together with our consortium partners, we agreed to further reinforce our contractual position in the coming months. With the information currently at hand, we believe the program will be rolled out as projected, but on a different timeline. Our best estimate remains that first deliveries will start in the second half of twenty twenty one. Next slide please. After logistics challenges at our customer for our mobile solution in the Kingdom of Saudi Arabia, The execution of this large order from Sensus Hutso has resumed deliveries in February. With these deliveries, we have now executed 20% of the €275,000,000 total contract value. The end customer project and the rollout thereof is defining the speed of further deliveries. We are planning the next shipments to align with our customers' requirements. We foresee the remainder of the deliveries under the contract corresponding to approximately €220,000,000 still to be executed through 2021, with next payments and subsequent deliveries already in April. Next slide please. Our cash at the end of the period amounts to a solid €102,000,000 This includes the 1st tranche of €12,500,000 of the €50,000,000 new facility agreement, which was signed with Rabobank in 2020 to facilitate further growth. In April 2021, we received the 2nd and third tranche of the Rabobank financing, adding €25,000,000 to the available cash position. This additional funding enables the company to manage larger contracts and the related buildup of inventory and work in progress, like for instance in the case of the Saudi contract. Our global order intake is big and it's good to note we are supported by our bank finance the deliveries and execute on our growth plan. Simon, can you please take us through the financial update now? Yes. Thank you, Yigal. Next slide, please. So I would like to take you through the following topics today: Our consolidated income statement, an update on the segment's performance, an analysis on our trans performance, and finally, our available cash position. Next slide, please. The first quarter sales arrived at €78,000,000 compared to 96,000,000 Q1 2020. The decrease in sales is mainly due to less managed services revenues of $11,000,000 due to school closings. The gross margin in Q1 amounted to 31% compared to 30% in the same quarter last year. Gross margins are typically influenced by sales mix and sales volume. The 1st quarter operating expenses totaled €39,000,000 compared to €42,000,000 The operating expenses have decreased compared to last year due to lower amortization of intangible fixed assets related to the purchase price allocation of the acquisition of Gazzo Berheere BV as mentioned in our Q4 report presentation. The operating profit for the quarter arrived at a similar level as Q1 2020, totaling negative SEK 14,000,000. Next slide, please. Let's have a look at the performance of our system sales business. The 12 months rolling order intake of Q1 landed at €661,000,000 excluding the remainder of the procurement award from our Belgian customer, totaling $46,000,000 The 12 months rolling order intake has increased 97% compared to Q1 2020. And as of the Q2 of 2020, the 12 months rolling water intake has stabilized at a higher level. The sales for this segment in the quarter amounted to $56,000,000 compared to $63,000,000 Volatility in sales and the sales mix can have an impact on the segment's performance from 1 quarter to another. Looking from a 12 months rolling perspective, the Total sales arrived at €326,000,000 compared to €330,000,000 up 4%. The EBITDA for the quarter arrived at negative €3,000,000 However, the 12 months rolling absolute EBITDA for the segment arrived at positive €38,000,000 compared to €20,000,000 in Q1 2020, an increase of 19%. Next slide please. Moving to our Managed Services segment. The 12 months rolling order intake arrived at 128,000,000 compared to €126,000,000 in Q1 2020. In the Q1, the order intake has been low, which is not uncommon. The order intake in the quarter relates to contract extensions of existing programs, taking the total contract period well beyond the initial contract period. Our managed services sales in the quarter amounted to $22,000,000 a decrease of 33%. From a 12 months rolling perspective, the sales has remained at $111,000,000 The lower sales volume in our U. S. Managed Services business is driven by school closings. In March of this year, the schools have gradually reopened with our Schools on Speed programs resuming enforcement. As of the second half of Q2, we expect to see an improvement in sales in this segment. The EBITDA in the quarter amounted to negative 3,000,000 12 months rolling, the absolute EBITDA arrived at $50,000,000 an increase of 67% compared to Q1 2020 rolling numbers. Next slide, please. Since last year, we have been reporting to the market on the trust development on a quarterly basis. This time around, I would like to zoom in on the performance of the sales within the Tras recurring revenues. Tras or Traffic Enforcement as a Service has 2 main revenue streams, being managed services and service and maintenance. The trash bin and services revenue was mainly driven by the U. S. Enforcement programs from both Speed and Redlight in 11 different states and 36 Cities and Municipalities. Since 2019, we have significantly added Schools Hospice B programs to our U. S. Revenue, which has been a great success. These programs bring a seasonality pattern into the performance of our managed services. This is due to the fact that these programs only operate when schools are open. Due to school closings caused by COVID, we have experienced temporary suppressed sales in our managed services business. Then looking at the service and maintenance part of our business, The revenues from service and maintenance are considered to be recurring revenues on a reinstalled base. The increase in revenues of 25% is mainly due to the rollout of the large contract in Australia, which contains a large service and maintenance part in a service level agreement. As we continue to roll out more systems, we see this revenue stream growing over time, but also generating a healthy level of recurring revenues. Next slide please. So finally, I'd like to take you through our cash position. The available cash at the end of the period totaled $102,000,000 compared to $92,000,000 for the same period last year. The available cash includes the credit facilities not taken up, but excludes the tranches of additional financing in Bravo not taken up. The remainder of that additional financing amounts to 37,500,000 The operating cash flow of the Q4 was negative €40,000,000 This cash flow in the quarter is driven by an increase in net working capital, which peaked at €157,000,000 excluding cash and short term borrowings. The increase in working capital is related To deal sizes that have significantly increased, resulting in an increase of €34,000,000 in our net working capital. After the period, the company has received the 2nd and the 3rd tranche of the growth financing amounting to 25,000,000 With the cash raised and the direct share issue and the financing agreements with Rabobank secured in 2020, The company has the bandwidth to finance larger contracts, which require investments in net working capital. And on that note, I would like to hand it over to Ivo. Next slide, please. Thank you, Simon. Our order book is strong, our costs are in control, and our 12 months of rolling EBITDA is up by 77%. Even with some short term COVID related revenue impact, we retain our long term plan to grow our net sales to more than €1,000,000,000 With STRAS, revenues is more than €600,000,000 by 2025. We also retain our ambition to increase our EBITDA margin to more than 15% in 2025. On that note, I'd like to hand over now to Per Degemann, our new CTO, who will present himself and his technology vision to you. Next slide, please. It's around, Ivo. And it's a pleasure to be able to introduce myself to you. I will start off by discussing my career a little bit and then I'll take a deep dive into the technology platforms that we're building inside of Seseskafsson as well as how they can stay relevant now and in the future and also point out that we are on a Very good way of having a technology platform that allows us to grow in a scalable and sustainable fashion for the future. With relation to my experience, it has been largely within the automotive sector where I spent 12 years at various sessions at Skania and the Volkswagen Group since Skania at that time was owned by Volkswagen. I worked closely when it came to connected services and IPS systems as well as automated driving. And 3.5 years ago, I joined a smooth start up called Enride, which is a manufacturer of autonomous and fully electric freight vehicles. But they are sold not as vehicles, but as a service business where the customer orders transport from the company. I took part in building that company from when I joined Boer Tenant Elise. And when I left, we were pushing over 80 people. During my time at Scania, I was also appointed an industry expert on ITS, where I took part in the C ITS platform. This also led me into standardization topics within both ISO and Etsy. And now since February 2021, I'm now the CTO at Sandiskhatzu Group. So Today actually marks my 50th Workday anniversary in this position. Next slide, please. When thinking about traffic enforcement, this is the camera is what you usually think about, the tangible asset that is next to the road, which takes your picture when you're speeding or violating a red light or any other type of violation. It's important to note that this is only one part of the total technology platform that we offer. I will go into the various components of the technology platform and the clients a little bit later. But we need to ensure that what we sell and what we build is viable for the future and also is something That can be flexible when transportation change, when mobility change, which is something that's really happening in the world today. So let's look a bit into our technology platforms. Next slide, please. We are offering our products in 3 different product lines. That is FLUX, that is the data generation sensors. Those are the cameras and sensors that we put next to the road, which collects information about how Mobility is being done on that location and whether there's enforcement in progress and also to fix a violation towards Those rules that are there. Further, we'll go to Pulse, which is our data analytics software. This is where we connect our flux data generation sensors, but we're also pickable to connecting to other types Sensors which are out there and other data streams which might be connected into an enforcement system. So this is where all of the data is being normalized and connected. This is where we can do analytics and also perform more advanced type of enforcement, which we are able to do in a single roadside unit. Further, we have Cilium, which is our back office processing software. This is where Enforcement are turned into violations. This is where we approve or deny a specific violation. And this is where we, in a scalable and efficient manner, allow to send out citations to any offenders that are out there. Together, these three product lines form the basis of the technology that we're building. This is a flexible and scalable way of approaching traffic enforcement where we can do system sales, but also to do managed service sales. And in doing so, we can be very scalable with the number of customers that we have, with the number of data generation sensors that we connect to our system and the number of citations that we've pushed through the systems. Next slide, please. Here we're looking into the business model and also how we invest in the various product lines inside the company. As you can see, the lion's share of the investments that we make in terms of headcount is towards the 3 product lines, The 3 software product lines that I discussed in the previous slide, only small part is actually going into investing into the actual hardware that is This is a true statement that where we see the future and where we need to be scalable for the future Sure. It's the combination of systems of software systems that we built. The flux, pulse and Cylium systems is where we invest. This is where we'll be flexible and scalable, scalable towards approaching more customers and more business model And scalable in terms of increasing the number of citations that we move through the system and also being applicable for the future state of mobility. Next slide, please. So looking into mobility, we can see that there's a radical change Going on in how we move around, we're going towards more and more automated vehicles where the drivers themselves perhaps doesn't our R and And digitalized transport systems where larger data volumes are in play every day. The product lines that we build in flux, pulse and Cilium are flexible to adapt to this new reality. We can make ourselves relevant even in a future system where vehicles and roadside equipment are more and more connected Because we can scale towards the data volumes that we'll see towards the future, we can also be flexible in terms of looking at how we need to do enforcement in the future to uphold road safety. This is due to the fact that we are a software driven technology company, where we can adapt the functionality of our platforms through our Flux, Pulse and Celliant Product Lens. With this, that would conclude the technology update for this year. I will come back in Q3 for an additional update showcasing product developments and their applicability to the markets again. This is something that will continue, so I will give you an update on the state of technology inside Sensipatso 2 times a year. And with that, I would like to hand over back to Ivo. Next slide, please. Yes, thank you, Per. Good to have you on board. So here's a summary of what we presented today. First, we have a very strong order book. The 12 months rolling order intake arrived at EUR789,000,000 an equal level compared to Q4 2020 and an increase of 50% in comparison to last year. Looking at KSA, 20 percent of the €275,000,000 contract is now delivered. We foresee the remainder of the deliveries under the contract still to be executed throughout 2021, and we already see this happening in April, so that's good news. The strong Costa Rica contract position is confirmed. We believe the contract will be rolled out as projected, but on a different timeline. With the information we have from our recent visit, the strong contract position is confirmed as well, and our best estimate remains The first deliveries will start in the second half of twenty twenty one. On school zone sales in the USA, We see them picking up again, and we expect that to happen as of Q2, the second half of Q2. So that's due to the reopening of the schools in March. And finally, you just listened to our new CTO, Per Degemann. I'm happy to see that he concludes that we have future proof technology with Carlson and Cilium. And as he mentioned also in his final statement, we are a technology company, and we feel we should be disclosing more of that to the market. So twice a year, we will be doing that towards you during the market presentations. Okay. Thank you very much. And on the next slide, please, I would like to open up for questions. Milling. The first question is from Jasper Henriksen of Red Eye. Your line is now open. Please go ahead. Thank you very much and thank you for the presentation. About the Costa Rica deal, you say that you will Further reinforce your contractual position. And so could you give us some more flavor on this? Like how is your dialogue developing and what is the plan going forward? The favor of that would be that everybody is in strong favor of executing the program. We do see, however, that the Minister of Finance is holding back on the budget. This is an illegal action by the minister. So we are sort of reinforcing our position towards the Ministry of Finance. And we're doing that together with all the consortium partners, so it's a joint effort. Just bear in mind that both the consortium partners, all of the consortium partners, together with our customer, which is Kosevi, are pushing the, let's say, the political relevant people in the government to Start executing on the contract. Okay. So basically, your relation with your customer It's good, but the politicians are trading back. Okay, good. So a second question regarding the managed services in the U. S. Yes, you've told us that many schools are now closed and so this is basically on hold. But how are sales discussions Where the counties and municipalities are going? And what states are the most promising? Okay. I can talk about it more in general terms and not specific terms for commercial reasons, if you may appreciate that. But in general, what we see is that a lot of the city budgets have been depleted because of COVID support activities. We see an increased activity or requests from cities to start talking about Revenue generating programs like speed enforcement, that's what I can say about that. So activities are actually increasing on that in that perspective. Good. And then my last Question regarding your offering for uninsured vehicles. You've previously mentioned some promising dialogues there. What would you say the temperature is regarding the uninsured vehicle? I would call that lukewarm. It's progressing, but it's I wouldn't call it a fast speed, but conversations are progressing. I think that's the way to put it. Okay. Thank you very much. That's all for me. Okay. Thank you. The next question is from Magnus Ding of Arete Bank. The line is now open. Please go ahead. Yes. Hello, Eivor, Simon and Thav. Thank you for the presentation. If I understand it correctly, if I assume that 5% of the Saudi project was delivered in Q1. I guess that's a good calculation. Okay. Sounds good. And Will the delays affect profitability in any way? No, there is no impact on profitability. It's as I tried to explain in my comments, it's about the requirements from the customer that is actually driving the rollout of the program. And we are in close communication with the customers. So we align the requirements and the payments with the deliveries of the next phases in the contract. Okay. Super. And regarding the troughs revenue from school areas, How were the revenues impacted in Q1 compared to Q4 and Q3? That would mean we would have to give you a forecast for Q1, which we don't do. I think what is most important, I guess, is to understand that We have full confidence in our long term ambition making our TRAS objective of 600,000,000 and the minimum EBITDA of 15%, we're targeting. So I think that's all we are willing to disclose on any forecasts. Yes. I meant Q1 compared to Q3 and Q4 last year, 2020, so no forecast. Sorry, I didn't get that. Sorry, can you say something about that? So Magnus, you of course know that last year, I think Q4 Q3 and Q4, some of the programs were operating again. So and as Ivo explained in the Milling. We have like a 30 day delay for it to come into revenue. So in Q4, we saw some of that revenue coming in. Of course, after that, the schools closed again to be reopened in March. So that means that as of April, we expect Revenues to come in again. So in comparison to Q4, that school zone revenue has dropped off. Okay. Super, I understand. Thanks. That was all. Thank you. Thank you. And we have last question of Ingo Westman of Bradeye. Your line is now open. Hello. Thank you. This is Victor Westman from Redeye. I wanted to ask you about The win ratio in your bids in the U. S. Managed Services And how often do you lose and what is the reason generally when you lose a bid in U. S. Managed Services? We're discussing offline how to answer that question because it's really difficult to say that. That would mean that we would have an insight in all the contracts with all the cities in the United States, which unfortunately we don't. On top of that, we see basically also driven by COVID, what I explained earlier, we see entirely new cities coming up on the radar and they're not even we're not even in a bidding situation there. So The cities are approaching us and we're not in competition there. So it's not it's definitely not always Tender Business. So it's kind of a it's a good question, Victor, but it is really very difficult to give you a Solid answer on that, I'm afraid. Thank you. I'm going to try to ask a Question in a bit of another way then. You mentioned that there is a positive growing interest for school zone contracts, But do you think that this interest would have been much stronger if there were if there would not have been lockdowns? And do you expect an uptick in the interest when schools are open again? I don't think it's related to Cool sourcing is more related to traffic automated traffic enforcement in general where we see an uptick. So I don't think we can draw a connection between school zones that have been closed and traffic enforcement programs that are a new traffic enforcement programs that are being initiated right now. There is a relation between COVID and the depletion of the city budgets and how to go about that, how to fund that, and automated traffic enforcement programs, there's a relation there. But I don't think there's a relation between schools being closed and programs for school zone enforcement, new programs for school zone enforcement. I don't see that. Your last question then, if I may, on the gross margin. In general, I think during the past Years, couple of years, the gross margin has been trending downwards. Can you comment on why that is? And if that's some If there's some reason for that, some fundamental reason that we should continue? So Victor, if you look at 2018 2019, for example, We've seen a very heavy order intake on various programs in the U. S. Mainly. And those programs, as we've talked to the market, I think, in Q2 last year, they have a longer phase of implementation, right, 6 to 9 months. And in that phase of implementation, There are onboarding costs related to marketing of a program, all different kind of costs to start up a program like that. So in periods where we have a lot of new programs onboarding, we typically see the margins going down a little bit. When the margin goes up is when we are in normal operation and we don't have these heavy investment costs in our P and L. That's, I think, basically it. Yes, that's a great explanation.