Earnings Call: Q3 2020

Nov 26, 2020

Thank you. Welcome to Sensus Hutso's presentation of the Q3 2020. My name is Ivo Munning. I'm the CEO of Sensus Hutso, and I will be presenting to you together with Simon Norder, our CFO. Next slide, please. In this market presentation, we will provide you with an update on our business for the quarter and for the 1st 9 months. 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 on our business. In this business update, I will take you through our order intake, which has now broken through the €900,000,000 order intake level some more information about recent orders and why we won those our positive sales development, which is up by 80% our school zone trans speed enforcement programs and some recent information on the timing of the Costa Rica project the development of our EBIT, which is up by nearly €31,000,000 this quarter and finally, I will talk you through our successful direct share issue. Next slide, please. First, we look at our order intake. With the record high order intake this quarter of €324,000,000 more than 4 times higher than last year, we achieved a strong sales outlook. The order intake for the year to date looks equally strong. We arrived in September year to date at €640,000,000 100 percent higher than last year. When we look at the 12 months rolling order intake, we arrived at a record high of NOK 909,000,000 95% higher than last year. We are operating in a business environment with long term relations and contracts from our governmental customers. To assess our future sales position, we consider the 12 months rolling order intake one of our key performance indicators. With 3 large sales orders in the past 9 months factored in, it is encouraging to see this performance indicator is making such a significant upswing. Next slide, please. It is not only the large orders that contribute to our high order intake. Also, smaller orders announced and not announced are part of it. What is interesting to see from this slide that captures a few examples of these orders in the past 9 months are 4 things. First, orders are coming from all our global regions: APAC, Latin America, Europe, USA and Middle East. 2nd, we have sold various solutions demonstrating the technological capabilities of our development team and the scalability of our solutions. 3rd, we manage in all these examples to provide our customers with a trust component, ensuring we generate recurring revenue and long lasting customer relationships. This can be a service level agreement for service, maintenance and calibrations of our systems or a flexible software solution, Cilium, to operate the back offices. Last and foremost, none of the contracts we won just on price. It was always the added value stemming from our proven technology, our solution and service performance and our sales efforts that brought us the business. Next slide. Now let's have a look at our top line development. We had yet another strong sales quarter with sales up 80% compared to Q3 2019. This is proving the resilience of our business to the COVID-nineteen pandemic. Year to date, we are now nearly 30% ahead of last year. Class sales are up by 20% in the quarter and up 24% year to date. Although strong growth, it is somewhat below our expectations. This mainly relates to the temporary school closings in the United States caused by the pandemic. To ensure proper education and social participation of children, some schools have reopened again as of September. We are pleased that we can contribute again to safer school zones with our school zone speed enforcement solutions, and we expect all our school zone programs to come fully operational again in the course of 2021. Now let me shed some more light on what these full zone speed programs encompass. Next slide please. Few people will argue against children needing to be safe when traveling back and forth to their schools. It is therefore quite acceptable for communities in the United States to introduce speed enforcement in school zones. As you can see, from the table on this slide, we have initiated 6 come zone speed enforcement programs across 5 different states in the past 2 years. These are all traffic enforcement as a service contracts with an average contract period of 4.7 years and options for extensions included in these contracts. The nature of these programs is that they can only be operated by Sensus Hutso when schools are open. So not before and after school time and not on weekends and during the vacation periods. The programs are successful in reducing speed around schools at those times when this matters most, when kids are on or near the roads. More and more cities take note of this success. As a result, I'm proud to announce that yesterday, we received our 2nd contract in the state of Rhode Island in East Providence for a total contract value of €34,000,000 over a 5 year period. This provides us with yet another important opportunity to make traffic saver around schools. Next slide, please. In February of this year, Sensus Ratso, together with our consortium partners, signed a contract with the Costa Rican government for the country's nationwide intelligence transportation system. At the time, the 2020 budget for the execution of the project was approved by the government. Due to COVID-nineteen circumstances, the parliament could not convene to approve the 2021 part of the total budget for the project. We expect this to occur later in December of this year. At the moment, we expect the deployment of this €192,000,000 contract to be shifted into the beginning of 2021. Next slide please. With our highest sales volume this quarter, the gross margin significantly improved by 3.5 percentage points to 37.4%. In addition, our operating expenses were €6,000,000 lower than last year. This resulted in a strong and profitable quarter. The EBITDA arrived at €23,000,000 or 17 percent of sales and €26,000,000 higher than last year at minus €3,000,000 The operating profit EBIT increased by nearly €31,000,000 to €13,000,000 in the quarter. Next slide, please. Sensus Hutso is on a growth journey. We are expanding our truss business in the U. S. A. We have recently entered into new markets in Latin America, and we have seen the size of our contracts increasing, requiring larger investments in working capital. In September, we issued new shares to raise equity capital for the amount of 75,000,000 This directed share issue enabled us to diversify the shareholder base in the company among long term investors and at the same time take advantage of the opportunity to raise capital in a time and cost efficient manner. The capital was raised at emission prices of SEK1.46, 9.7 percent below the market price at that time and generated a dilution of approximately 6%. This was the first time Sensus Hutso made use of its yearly mandate by the AGM to issue maximum 10% of our share volume directly to the market. We are proud to have raised the capital we targeted in a timely and cost efficient way and to see a high interest from the investment community to join us in our journey to realize our growth ambitions. With that said, I'd like to hand over to Simon for the financial update. Next slide, please. Okay. Thank you, Ivo. I would like to take you through the following topics today: an analysis of the segment's performance our consolidated income statement and finally our available cash and financial position. Next slide please. So this slide illustrates the performance of our system sales business. The 12 months rolling order intake of Q3 2020 landed at SEK783,000,000 which is a record high for Sensors Gaso. This order intake is 170% higher than the 12 months rolling order intake of Q3 last year. The increase is mainly driven by the contract received from Costa Rica of €192,000,000 in the 2nd quarter and the order won from our Saudi customer of €275,000,000 in the Q3 of this year. The sales for the Checkpoint Systems sales in the quarter amounted to NOK 105,000,000 compared to NOK 48,000,000. For the 1st 9 months of the year, the sales landed at NOK 232,000,000 compared to NOK 182,000,000 for the same period last year. The sales increase is driven by the first deliveries on the Saudi order. The EBITDA for the quarter arrived at $20,000,000 compared to negative $2,000,000 last year. The improvement in the performance is due to the increased sales levels and higher efficiency on delivery of bigger volumes and repeat orders. The operating profit arrived at approximately SEK 15,000,000 compared to negative SEK 8,000,000,000. Year to date, the operating profit of the segment amounted to €10,000,000 Next slide please. So moving to the segment Managed Services. The 12 months rolling order intake for this segment arrived at €126,000,000 compared to NOK 176,000,000 in Q3 2019. After the quarter, we've received a renewal for a program in Ebington with a total contract value of CHF 23,000,000 and a new school zone program in East Providence, Rhode Island for a total contract value of CHF 34,000,000 euros Our managed services sales has increased by 8% compared to the Q3 last year. Year to date, we've seen an increase of 33% of sales due to contribution to sales of programs that were won in 2018 2019. Our managed services business in the U. S. Has seen somewhat lower volumes than expected due to the school closing since March and lower volumes of holiday traffic in general. The schools have partially reopened in the U. S. As of September. For the programs operated by SENSACATSA, this means that we have partially resumed enforcements in these school zones. The EBITDA in the quarter amounted to €3,000,000 compared to negative €1,000,000 Year to date, the EBITDA has more than tripled from €3,000,000 to €11,000,000 Next slide please. We operate in business segments System Sales and Managed Services with a focus on Tras recurring revenues. On this slide, we would like to take you through the various revenue sources within Tras. Let's first look at the sales values of Tras within the segments. The total Tras sales value for the quarter arrived at 51,000,000 dollars or 59% of total sales. Year to date, the trans sales amounted to 158,000,000, 49% of year to date sales. The sales of managed services is 100% recurring revenues and considered full trust sales. In the quarter, the truss sales value in the segment system sales amounted to 24%. Year to date, the truss share amounted to 30%. Tras revenue sources in the segments are as follows: Managed Services, this revenue relates to the programs that we predominantly operate in the U. S. Repeat repairs, calibrations, maintenance services on existing global installed base. As we sell systems around the world, we add to our active installed base and therefore increase our service and maintenance sales. Licenses on functionalities and software, we always aim to sell additional functions and our software suites, Xyleum and Pulse. Next slide please. So looking at the consolidated income statement. We can see that the net sales of the quarter amounted to $132,000,000 compared to $73,000,000 for the same quarter last year. This is an increase of 80% in sales driven by a strong performance of the system sales segment and continued stable performance in the segment managed services. The margin for the quarter arrived at approximately 37.4% compared to 33.9% for the same quarter last year. The increase in margin is due to better leveraging our organization whilst delivering higher volumes. The operating expenses totaled €36,000,000 compared to €43,000,000 including amortization of intangible fixed assets. Operating expenses are lower, mainly due to lower amortization in connection with the acquisition of Carcao Bier. The amortization has decreased from CHF 6,000,000 in the Q3 of 2019 to CHF 2,500,000 in 2020. With this, the operating profit for the quarter landed on positive CHF 30,000,000 compared to negative CHF 80,000,000 last year. This is an improvement of €31,000,000 in 1 quarter. Next slide, please. Finally, I would like to take you through our cash position. In the quarter, the company has issued approximately 54,000,000 new shares through a successful Oberspraim directed share issue, raising 75,000,000 in available cash. More importantly, the company has broadened its shareholder base with long term investors. The net proceeds from the direct new share issue will primarily be used to support and accelerate the company's growth plan, which includes investments in expanding current and new markets. The available cash at the end of the period totaled 100 and €69,000,000 compared to €66,000,000 for the same period last year. The available cash includes the credit facilities not taken up, but excludes the tranches of additional financing of Raubal Bank not yet taken up. The remainder of that additional financing amounts to €37,500,000 The company has covenants in place with its banks and is in compliance of these covenants in the quarter. The operating cash flow of the 3rd quarter amounted positive CHF 11,000,000 an improvement of CHF 35,000,000 compared to Q3 2019. Year to date, the operating cash flow amounts to CHF 22,000,000 Investments for the 1st 9 months in our platform Flux and our software platform Xilium and Pulse amount to approximately $10,000,000 of which $3,000,000 in the Q3. The investments in fixed assets and operations, supporting our managed services business, amounts to €11,000,000 of which €8,000,000 in the 3rd quarter. With the new capital funds raised, additional financing from Rabobank, we have a strong financial position with a 66% equity asset ratio. And on that note, I would like to hand it over to Ivo. Next slide, please. Thank you, Simon. In Q1 of this year, the COVID-nineteen pandemic started to impact all of us. Fortunately, we have seen in the past 6 months that our business has been minimally impacted. Some shifts in timing of deployment and temporary portion of enforcement do not pose structural issues to our often long term contracts with customer relationships. Our order book was even reinforced in this quarter, with the largest order in our history coming from the Middle East region. With higher sales, improved margin and controlled expenses, our profitability has increased significantly in this quarter. We therefore retain our long term ambition to grow our net sales to more than €1,000,000,000 in 2025, 60% or more than €600,000,000 of this revenue is to come from our recurring trust business. We also hold on to our ambition to increase our EBITDA margin to more than 15% by 2025. On that final note, I would like to open up for questions. Next slide, please. Thank you. Our first question comes from the line of Victor Westman of Redeye. Please go ahead. Your line is open. Good morning. Congrats on a strong report. I have a few questions on Costa Rica. Maybe first, will you start preparing the work on Costa Rica? Or is this completely on hold until you get the final signing and everything? No, we actually have started the preparation work already, having some of the units that needed to be shipped ready for dispatching. And the time schedule is in place as well. So yes, we're ready to start there. But it's waiting on the government to make a final decision there on the timing. Yes. And with that in mind, how do you see the risks of further delays or even cancellations? Yes. I mean, we see this project to go ahead and just shift in time. That's, I think, what we also said. I mean, we expect this to start in the beginning of 2021. It's also in the benefit of the people of Costa Rica and of the government, of course, to start the program, and they realize that. So I don't see a huge problem there. But having said that, we're talking about politics, so we never know. Yes, true. And I wanted to follow-up generally about risks for cancellations. I think this has been very rare during the past 6 years. But maybe Simon has some insight in the history how common cancellations are on the system side, of course. Yes. Victor, thank you for your question. In my experience, I haven't encountered any cancellations at all. In our business, it happens that there are delays in the deployment within a certain time frame, But real cancellations, I haven't seen, not since I've been here at least. Bear in mind, Victor, we have a very strong contract in place with the government. So that also ensures a very strong legal position on this. I understand that. That's really good. Just last question there. If there would be any cancellations, heaven forbid, are there any penalties for the customers, penalty fees? Yes. Okay. Very good. Thank you so much. Actually, to be more precise, there will be a reimbursement on a large part of the profitability for the lifetime of the project. So that gives us a very strong legal position. And on top of that, Costa Rica has a lot of business with the U. S. They really cannot afford to cancel customer contracts that pose a really bad reputation for future investments in the country. So we don't expect that at all. So if anything, it's a delay. We expect the delay to be, what, 3 to 6 months max. And if for whatever reason, there will be a cancellation, which we do not expect, let me be very clear on that, then we have a strong legal position and that will actually be well, that would be really beneficial for us to if we would have to execute that. Again, I'm not expecting this. That's crystal clear everything. Thank you so much. You're welcome. Thank you. Okay. There seems to be no further questions from the phones at this time, so I'll hand back to our speakers. Okay. Thank you for dialing in, everybody, and hope to see you again in the presentation of the Q4 results. Thank you. Bye bye.