Earnings Call: Q2 2021

Aug 18, 2021

Hello and welcome to Sensus Capital Group audio cast with teleconference Q2 to 1. Call. Just to remind you, this conference call is being recorded. Today, I am pleased to present CEO, Ivo Monique and CFO, Simon Lander. Please begin your meeting. Okay, thank you. Welcome to Sensus Hutso presentation of the Q2 2021. My name is Ivo Munning. I'm the CEO of Sensus Hutso and I will be presenting our Q2 results to you together with Simon Mulder, our CFO. In this market presentation next slide please. In this market presentation, we will provide you with an update on our business for the Q2. We then follow-up with financial updates by Simon and finally, I will finish this presentation with a summary and our outlook. Next slide please. Now let's look at an update of our business. In this business update, I will take you through our order intake where our existing customers support us this quarter, Our total sales which is up 35% with U. S. Trial sales up by 45%, An update on Costa Rica where we are pushing the contract execution, an update On the Saudi Arabia contract, which is in steady delivery mode, the establishment of Sensus Hutso Latam and last but not least, An update on the investigation in the Netherlands, which is now legally dismissed. Next slide please. First, we look at our order intake. The order intake arrived this quarter at 47,000,000 compared to the record breaking €283,000,000 in Q2 last year. This difference is mainly due to 2 large contracts In Australia and Costa Rica that were part of the high Q2 2020 order intake. This quarter, the order intake mainly consists of repeat orders from our existing customer base. It portrays the importance of a large global installed base that requires system updates, parts and maintenance To maintain the high uptime performance of more than 99% which our solutions are renowned for. During almost the whole COVID period, our local sales teams worked hard on an active engagement with existing and new customers all around the world. The order intake is dependent on how quick a government, city or municipality can pass contract proposals through the councils. Governments are slowly coming out of COVID pandemic and are picking up where they left off, passing resolutions on traffic enforcement proposals amongst others. This has created a very healthy sales pipeline for us that will quite likely drive our order intake forward in the near future. Next slide please. Net sales for the quarter reached 126,000,000, 35% higher than Q2 last year. It is also the highest Q2 sales level since the merger of Sensus and Hatso In 2015, as expected, our recurring managed services or trust business has picked up again this quarter With schools in the U. S. Opening again after COVID related closings in Q4 and Q1. Compared to Q2 last year, our U. S. Trash business went up by 5%. Compared to the previous quarter, our trash business showed an increase of 46% from 22,000,000 in Q1 to 32,000,000 in Q2. Year to date, we added 2 new trials contracts in USA, of which 1 more school zone speed enforcement program in Houston, Georgia After the quarter, the total count of our school zone programs is now at 7 in 5 different states. With higher vaccination rates and more controlled COVID conditions to keep schools open, we expect our managed services sales to normalize going forward With a healthy sales pipeline in place to secure future growth. Next slide please. In August 2020, we signed a second contract with our customers Saudi Arabia for our unique in vehicle speed enforcement solution Worth 275,000,000. This was the 2nd contract for this solution after the first 66,000,000 contract we signed in September 20 'eighteen. The final payment we received in August marks the successful completion of this first order. Together with our customer TahaCom, we can now focus on the execution of the much larger second contract. Year to date July, we have delivered 35% of this 270,000,000 total contract value And the deliveries are progressing steadily. The execution and rollout Projects characterized by this size and solution type in combination with complex customer networks in a dynamic market is challenging. Although this complexity can sometimes slow down deliveries, it is more important that this progress happens steadily and correctly in order to ensure customer satisfaction. We foresee the remainder of the deliveries under the contract Corresponding to approximately 180,000,000 to be executed throughout 2021 and the beginning of 2022. Next slide please. In the quarter, the new regional entity Sensus Hatzolatam SL Was established with the objective to centrally manage and consolidate our business activities in the important and growing Latin American region. On July 1, we hired Jose Lozano, a business veteran with 22 years of experience in our industry, We started in the new role of Regional Director Latin America. With this, we are executing on our strategy to operate closer to our end customers in new and growing regions, just like we did with the Middle East region. At this moment, we have contracts in place in Costa Rica, Colombia and Barbados, and we are developing partnerships in Panama and Ecuador, a good base to further build our LatAm business upon. Next slide please. The Costa Rican national traffic enforcement contract That we won in Q2 of last year has not yet started. COVID related budgetary constraints currently hamper the timing of The execution of this program. With our local presence, we are in continuous communication with all stakeholders in the program Sure, the budget to start the execution. During these meetings, both our strong maiden position in the contract and the willingness of our customer to execute the contract Are confirmed. With this, we believe the program will be rolled out as projected, but on a different time line. We expect the budget to be allocated in December and first deliveries to start in 2022. Next slide, please. In January of this year, we informed the market About an investigation by the Fiscal Information and Investigation Service field related to allegations of misconduct in 2014 2015 in Gato Mete BV before the acquisition of Sensus Traffic. Naturally, we have fully cooperated with the investigative Authorities have conducted an in-depth internal inquiry into the allegations, the results of which we shared with the field. In the beginning of August, we heard the formal outcome of the investigation. Fiat dismissed all allegations and will not proceed with any prosecution. I'm very happy with this positive, fast and rare outcome in investigations of this kind. Our company revolves around integrity. It defines who we are as people, as a partner to our customers and how we design our solutions. Integrity guided us in our communication with the authorities and with the market. Simon, can you now please take us through the financial update? Next slide please. Yes, thank you, Yvonne. Okay, today I would like to take you to the following topics, And our consolidated income statement and an update on our trial service development, the performance of our segments and finally Our available cash and working capital position. Next slide please. The 2nd quarter sales are up by 35% and arrived at 126,000,000. This increase in sales is mainly due to increase of system sales related to Saudi project deliveries and a higher level of trans managed services sales. For the first half year, the sales were up by 7% to 204,000,000. The gross margin in Q2 amounted to approximately 37% in the quarter. For the first half year, the gross margin arrived at 35%. Gross margins Typically influenced by sales mix and sales volume. With a higher service and maintenance sales in the quarter, we have kept our margins at a good level. The Q2 operating expenses totaled 42,000,000 compared to 36,000,000 in 2020. This is connected to a higher sales level in the quarter. The 2nd quarter performance has significantly improved compared to Q1 2021. With higher sales levels and improved gross margin, the company has arrived at a positive operating profit level in the quarter of 5,000,000 compared to negative 1,000,000. Also the results from a half year perspective have improved with 5,000,000 compared to last year. Next slide please. Moving over to our trans sales development now. Trans sales is Recurring revenue within both of our operating segments. In the 6th segment system sales, it relates to truss service and maintenance. Our segment managed services is 100% trans recurring revenue. Recurring revenue from service and maintenance consists of repeat Repairs and calibrations on our customer installed base and more predominantly on service level agreement contracts with our customers for multiple years. This guarantees our customers the best product operations with an uptime of more than 99%. The revenue of Fast service and maintenance has grown over the last 6 quarters from $20,000,000 in Q1 2020 to $29,000,000 in Q2 2021, representing an increase of 45%. Our managed services revenue has increased from 30,000,000 In Q2 2020 to 32,000,000 in 2021, representing an increase of 7%. The increase of sales is mainly due to more school zone speed events in the quarter compared to last year. All in all, the trial revenue has shown an increase of 15% to $62,000,000 compared to Q2, 2020. Next slide please. Okay, now let's have a look at the performance of our systems sales business. The 12 months rolling order intake of Q2 2021 landed at 434,000,000 down 20% compared to Q2 2020. The order intake of system sales is volatile And to a large extent dependent on tenders coming out. The sales for the segment system sales in the quarter amounted to 94,000,000 compared to 56,000,000 in the comparison period. This is an increase of 47% as we execute on our order backlog which is driven by Saudi project deliveries. 12 months rolling, the sales increased to $356,000,000 an increase of 70%. Also looking at the half year sales numbers, we've seen an increase of 18% from 127,000,000 To 150,000,000 in 2021. The EBITDA for the quarter arrived at approximately 7,000,000 which is a similar level as Q2 last year. The 12 months rolling EBITDA for this segment has increased by 46% from 26,000,000 to 38,000,000. The segment system sales has operated at a higher sales level with a 12 month rolling EBITDA remaining in an uptrend since Q1 2020. Next slide please. Now moving to our managed services segment. The 12 months rolling water intake arrived at $119,000,000 compared to 121 1,000,000 in Q2 2020. Our managed services sales in the quarter amounted to 32,000,000 an increase of 7%. Looking at a 12 month rolling perspective sales, it is slightly down by 2%. This is caused by lower revenues from school zones in 2020 Due to temporary COVID related school closings. The EBITDA in the quarter was positive 7,000,000 compared to 5,000,000. The 12 months rolling absent EBITDA arrived at 60,000,000 which is an increase of 33% compared to Q2 rolling numbers last year. The 2nd quarter results of the segment managed services have significantly improved with higher sales and improved EBITDA margins. Next slide please. Finally, I would like to take you through our cash position and our net working capital. The available cash at the end of the period totaled $124,000,000 compared to $102,000,000 for the same period last year. The available cash includes the credit facilities not taken up, but excludes the tranches of additional financing of Rabobank not taken up. At the end of the quarter, dollars 12,500,000 is remaining of the additional financing. In the quarter, the company has drawn down 25,000,000 of this additional financing. These funds are part of the long term financing of the Rabobank and have been used for financing fixed assets. The total investment in fixed assets in the first half year amounted to 28,000,000. To a large extent, these investments were made in fixed assets Operations relating to installed cameras for the execution of our trans programs previously announced in the United States And that will contribute to revenue in the second half of the year. The operating cash flow in the 2nd quarter arrived at 39,000,000. This positive cash flow is mainly driven by lower net working capital of 23,000,000 looking from Q1 to Q2 2021 due to Saudi project deliveries and payments. When comparing the networking capital to Q2 2020, we can see that it has increased From 84,000,000 to 134,000,000. These investments in net working capital relate to the buildup of inventories to enable us to keep on delivering on the Saudi project. After the quarter, Sensorskutskutskutsk has informed Sensorskutsk special products That it will make payment on the vendor loan due to the amount of €1,000,000 in the Q3 in accordance with the vendor loan agreement. After this payment, the remaining and final installment of the vendor loan will be €840,000 which is due on July 31, 2022. The company Has been operating at approximately an operating cash breakeven level in the first half year. Our long term investments in fixed assets and operations have been financed with long term loans creating a better financing balance. With an available cash position at 124,000,000 at the end of the quarter and a healthy equity asset ratio of 68%, The company has a solid financial position. And on that note, I would like to hand it over to Ivo. Next slide please. Thank you, Simon. With large contracts recently signed, Our order backlog remains strong and our costs are in control. With SCOOP closings in Q4 and Q1 for now behind us, Our U. S. Trans business has started picking up again. With total sales at 126,000,000, we realized the strongest Q2 sales performance Since the merger of Sensus and Hutso in 2015. Our 12 months rolling sales is up by 12% And our EBITDA is up by 42%. Together with a very healthy sales pipeline in all regions, we feel confident about our future. We retain our long term plan to grow our net sales to more than 1,000,000,000 of which trust revenues will be more than 600,000,000 in 2025. We also retain our ambition to increase our EBITDA margin to more than 15% in 2025. On this final note, I would like to open up for questions. Next slide please. We have the first question from Jesper Enrijssen from Rede. Sir, please go ahead. Thank you very much for taking my question. Sales from managed services picked up nicely in Q2 2 following the reopening of schools in the U. S. But what would you say that the share of open schools is now for your current school zone contracts, On what capacity is managed services running at the moment? Yes. It's a very good question. I don't have the exact answer, but we estimate that Between 20% 25%. 20% to 25% is on or off? On. On. Okay, great. And continuing on Managed Services. This or we believe that this unit holds great potential in the U. S. But could you talk A little around the progress that you're seeing in the different states and how you work to capture these opportunities? Yes. When we look at the states and we communicated before, once you have the first contract in, you see Actually, cities talking to each other and we use the existing contracts basically as a marketing tool or a sales tool To drive new contracts towards us. So that's what we typically see happening. And it really is developing In a very positive way. We now have 7 contracts in 5 states. You know that we are pushing the schools on speed enforcement because it's The best and also maybe even the easiest way of getting speed enforcement into new states. So that's also what we're doing. We have seen we actually said that before in the presentation, we have a very solid sales pipeline specifically in the United States. We did see that the municipalities were not coming together physically in the COVID period, so they have been postponing Resolutions to pass speed enforcement programs, that is now picking up. So we do expect Quite a few contracts coming in going forward without being too precise there, but it looks very promising for now. Yes. I mean, that's what I can say about that. Great. And recently, you have established Offices in both Latin America as well as in the Middle East. Could you tell us a little bit about your main idea with the offices and what you expect From these regions going forward? Yes. Looking at the Latin American region first, That region was previously managed out of the United States. So we know you know that the United States is a growth market And having the management also focusing on Latin America was a distraction. So we decided to Take over that management directly and establish a regional office there with a regional director. We hired Jose Lozano, who's been with Kapsch for 22 years. So really an industry expert That is up and running from day 1. He's been in the region. He started in July. Today actually he's in the region for the 2nd time already. So That really helps us driving that business. We have contracts in place in Costa Rica, in Colombia, in Barbados. We have partnerships in Ecuador and in Panama. We have an extremely interesting sales pipeline in place. So with that focus now and a separated P and L for the region, we believe that there's Really very good sales performance for the future to be expected from that region. Any questions on Latin America for now? No, that's good. Okay. And then if you look at Saudi, Saudi really is at the beginning of traffic enforcement. It's a very wealthy and large And country in the region, but they're behind on traffic enforcement and we are really at the forefront of delivering to them The in vehicle solution, which is unique, they really like it. So we've got 2 large contracts, 1 of $66,000,000 1 of $275,000,000 as you know. It really is a customer that we have a very good relationship with. It's also proven by the fact that the first contract has been completely paid for and therefore finished and delivered, Which is it's a very positive sign and which enables us also to focus on the much larger 275,000,000 contract execution. But we also know that in a region like the Middle East, it's extremely important to be very close to the end customer. That's how it works. The culture is a culture of Passing by time after time and building up a relationship. We have an office in Dubai that's close, but not close enough. So we feel that having an entity in the region will definitely help us taking advantage of The larger opportunities which we also see in that specific market in the future. Great. And would those further opportunities be like with the same customer as you have now or Are there many more? Well, I mean, the customer is Tahacom. They are the We shall say procurement partner of the government. So they will procure us. The end customer will be the Saudi government. But there is many more opportunities apart from just the in vehicle solution. You can talk about the maintenance The services and maintenance part to it. We have already announced that we do expect an SLA coming Out of the region, out of that customer for the Inveco solution. But you can also imagine, Having said that, they are at the beginning of traffic enforcement and they want to be a dominant player in the whole market in the Middle East. There will be more solutions coming from that customer, particular customer in the future. You can think about maybe fixed solutions or any other type of solutions in our domain. Good. Good. And last, regarding the Costa Rica contract, you say that The contract is still intact, but you expect it to be started in 2022 instead of H2 this year After the budget process expected to be finalized in December, as I understand it. But could you give us a little bit more flavor on what's going on in the negotiations? What's going on really is that The Minister of Finance with a as always with Ministers of Finance with a limited budget has to make decisions on timing of the execution of Execution of those budgets. And for now, he is of the opinion that the budget should be used more For social purposes related to COVID support than the introduction of a traffic enforcement program. So we are working with the assembly also to influence the government in Starting the execution of this program and what we feel now is that in doing so we will be in a position to Drive the budget availability by the end of this year, which would be in December for execution in 2022. I do want to stress the fact that we have a very strong legal position in the contract, which we don't want to use because it would be Opposing your direct customer and it's never a good thing to do. But I do want to stress that we do have that in place as well. So if it would be needed, we would take that route. But for now, we believe that working the political Arena is the best way forward to ensure that we will have the budget available for the execution in 2022. And on top, I think I mentioned already Jose Lozano, as we speak, he is in Costa Rica and he is talking To political parties to help us with pushing the execution and pushing the budget availability, I should say. Perfect. Thanks for the answers. That's all for me. You're welcome. Thank you. Next question from Magnus I have a question regarding the admin expenses. They were up a little bit this quarter. Is it related to managed The services? And do you expect the level in the future to be around the same as this quarter? Yes. No, the admin expenses has a couple of things to it. But as Ivo explained, we established new companies in this quarter And that has driven a large part of that admin cost. So it's basically cost for Establishing a company being guided by the right advisers and lawyers to do so. And I don't expect it To remain at this level going forward, albeit that we, of course, have more activities planned for the rest of the year. Okay, Sifo. Thank you. And regarding the healthy sales pipeline in managed services, Do you consider the system sales pipeline to be healthy as well or are you mainly referring to managed services? I would say both. We really looked took a close look at all the regions and we came to the conclusion that there is A really very interesting sales pipeline also on the system sales side across the world. That's what we see happening. It's not always coming all in the same quarter. It's spread over time. You realize that. So it's depending on when the And those are coming out and so forth, but there is some pretty interesting business, which could or should be ours coming up in the coming periods. And as I said on managed services, we do see we were expecting that already because I mentioned that in earlier presentations, the cities in the U. S. Are facing what we call what you could call budget holes Because of social support in COVID and traffic enforcement could be a legitimate way of repairing those. So what we see happening is there's quite a lot of interest coming out of the cities to introduce where possible, introduce traffic enforcement. Yes, super. Thank you. That was all for me. Thank you. Thank you. No more question by phone. Gentlemen, back for the conclusion. Okay. All right. Yeah. One more comment maybe on the cameras being up Around schools, you have to imagine that we're now in the holiday period, which means that we cannot operate The school zone speed cameras in that period. So this may be an important addition to that question. Other than that, I want to thank everybody for attending the presentation and looking forward to see you next quarter again. Thank you, ladies and gentlemen. This concludes the conference call. Thank you all for your participation. You may now disconnect.