Sensys Gatso Group AB (publ)

Good morning and welcome to CensusGazzo's market presentation of the third quarter of 2024. My name is Ivo Munnink, I'm the CEO of CensusGazzo and I will be presenting to you together with Simon Melder, 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 USA. Our backlog, which includes 1 billion of large orders in our home markets. Our recurring trust 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 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 95 million compared to 145 million in Q3 2023. Of the total order intake, 25 million is from a new Trust Managed Services contract with the city of Montgomery Town in Pennsylvania, USA. Year to date, the total order intake, including procurement awards, amounted to 831 million, 55% higher than last year at 541 million. In the first three quarters of 2024, no less than 576 million or 70% came from trust order intake from the US market with 13 new contracts, including renewals and extensions. This translates to an average revenue per contract of 44 million. In 2022, we received two large orders in our home markets, Sweden and the Netherlands. The combined value of the two contracts is 1.25 billion. The development phase of the Swedish order of 850 million is nearly completed and our customer traffic fair get 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 customers' 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 400 million, split between 200 million in system sales and 200 million in repairs and maintenance over a six-year period. The system's installation rollout has really taken on in the third quarter, with approximately 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 1.25 billion contract value, approximately 12% has been delivered to date, leaving more than 1 billion still in the backlog of just these two programs in our home markets. Total revenue for the quarter arrived at 141 million compared to 157 million in Q3 2023. This is a decrease of 10%, mainly driven by lower system sales, which arrived at 42 million 40% lower compared to the 71 million in Q3 2023. Our trust revenue for the quarter of 99 million was 15% higher than Q3 2023 at 86 million. This recurring business equates this quarter to 70% of total sales. The trust revenue is primarily driven by our trust managed services business in the USA. Year to date, our trust managers services revenue grew by 10% from 156 million in 2023 to 172 million in 2024. The revenue from newly signed contracts in the USA 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 USA 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 Census 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 and 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 IOI 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, Sensegatso, including our local consultants and legal counsel, will work with the partner communities to seek all options that would re-establish the operations of the speech systems not receiving a permit. In April, we signed a memorandum of understanding with our customer Tahacom in the Kingdom of Saudi Arabia. Following this, our customer provided technical qualification for fixed and mobile speed, fixed red light solutions. After the quarter, CensusGazzo has signed framework agreements for these three 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, CensusGazzo 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 TACOM in the Kingdom of Saudi Arabia. In September of this year, CensusGadzo successfully raised €30 million for the issuance of senior unsecured bonds with a four-year tenor and the floating rate interest of Euroboard three months plus 4.75% per year under a framework of 60 million euro. 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 CensusGazzo. At the end of this quarter, the free available cash amounted to 295 million compared to 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 six 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 EBDA for the quarter arrived at 12 million compared to 90 million last year. A year to date, the EBDA arrived at 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 141 million compared to 157 million. Year to date, the revenue amounted to 433 compared to 403 million. During the quarter, trust sales has increased by 13 million. The 12-month rolling increase of trust by 3% is mainly attributable to growth in the first half year in the USA. The group's gross margin arrived at 37% for the quarter. Year-to-date, the margin landed at 39%, and from a 12-month rolling perspective, the margin came in at 40%. The operating expenses totaled 49 million, a decrease of 3 million compared to Q3 2023. Year to date, the expenses totaled 161 million compared to 156 million. The increase in expenses is driven by sales expenses related to the inter-traffic fair in April of this year and increased sales activities in the USA. 12 months rolling, the expenses are at a comparable level. Our operating profit for the period came in at 1 million compared to 8 million in Q3 2023. Year to date, the operating profit landed at 8 compared to 5 million. From a 12 months rolling perspective, the operating profit came in at 42 compared to 49 million. Our managed services segment predominantly reflects our US business, including costs related to development and maintenance of our software suites, Zillium and Pulse. With an order intake during the quarter of 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 3 million. EBITDA came in at 2 million for the quarter. From a year-to-day perspective, the managed services sales is stable, moving from 203 million in the previous quarter to 200 million. With 12 months rolling, the EBITDA amounting to 31 million compared to 34 million for the previous quarter. Now onto the segment system sales, starting with the order intake. Order intake during the quarter landed at 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 99 million compared to 112 million last year. On a lower revenue level and due to the initial deliveries on the Dutch project, the EBTA came in at 10 million compared to 15 million last year. 12 months rolling. Our revenue has moved from 468 million to 455 million, with our EBITDA moving from 59 million to 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 €30 million bond to finance investments for future growth. With this €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 €263 million in our available cash. The investments year to date amounted approximately 62 million, of which 33 million in fixed assets and operations for mainly the USA. The company has continued to invest in its products, adding 21 million to the intangible fixed assets. The net interest bearing debt has increased from 109 million at the opening of 2024 to 159 million at the end of the quarter. mainly due to investments in working capital and fixed assets. The available cash has increased from 84 million to 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 backlog of over 1 billion provides solid revenue visibility well into the future. We expect our trust business to continue delivering profitable growth driven by a strengthened US team and a groundbreaking flux roadside platform. However, we also recognize that recent market dynamics such as extended customer testing phases and legislative changes may temporarily affect our timeline. 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 timelines 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?

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Orjan Rodan from Carnegie Investment Bank. Please go ahead.

Hi and good morning, gentlemen. 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 reminder to be booked into your accounts? That's my first question.

Okay, let's start maybe with the Dutch order, which is 400 million Swedish kroner. 200 million of that is system sales. And 200 million is repairs and maintenance. The last part will be delivered over a six-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 200 million in the Netherlands, 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. um then looking at sweden here we have delays mainly because of testing programs so we it's 850 million order over 12 year period about 60 of it is system sales 40 is is recurring maintenance repairs and maintenance so the trust part um 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 two sides. It's a new system, which is called Flux. And it's also on the part of the customer, a new IT system. 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. 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 two contracts combined are 1.25 billion, and of which still more than 1 billion, I would say 1.1 billion is still to be delivered. So a backlog on these two contracts of 1.1 billion.

Okay, thank you very much. Luke, 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. Yeah, I think what we typically see is we hover around the 40%. I don't see that changing in the short or maybe in the short term a little bit, because if you start installing the systems in the field, then you recognize the revenue for that. And typically the margins on system sales, as we all know, are somewhat lower than on the maintenance part. So, but I do expect it to Hoover around the 40% going forward.

Okay. Thank you very much. Turning to the US elections, do you foresee with the information you have right now that there are any changes in your roadmap when it comes to your US 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. That's, I think, what you referred to. There were no changes at that point in time. So talking to the US 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.

Thank you very much. And a more detailed question to Simon, I suppose. The cash position at the end of 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?

No, I think at the, After the quarter, we've repaid another, I think, 10 million in long-term debt. So what you see on our balance sheet now is that all of the long-term debt that remained has been classified as short-term because we have repaid it after the period. So that's approximately 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.

Okay, thank you very much.

And maybe to add to that, Orion, we've not only repaid bank financing, but we've also repaid the shareholder loan that has been with us since the acquisition of GATS over here. Okay, thank you very much.

Okay, that was all from my side.

Yep.

The next question comes from Tim Ellis from Kepler Chouvriaks. Please go ahead.

Yes, good morning, Ivo and Simon. Thanks for taking my question. I have one question with regards to Saudi Arabia that popped up during your presentation. You mentioned that you came to an agreement with regards to service and maintenance work for the vehicles you provided. Is that something new or was that part of the old contract you already had for Saudi Arabia when you delivered the in-vehicle speeding cameras?

In the past, we delivered, we got two 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've 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 in the process of signing a service level agreement to do the maintenance of these 1200 installed vehicle emotions.

Okay, great.

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

Yeah, of course.

But it's an add-on compared to... It's absolutely an add-on to the existing system.

Okay, great. Then, going to the US news. The impact from Iowa, was that visible in the revenue already? Because if I look at the managed services revenue development, 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, 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, OK, 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, you know, 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 trust 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

Yes, 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 and which will then also be the uh the base for appealing appealing the decisions so it's it's a it will take uh it will take some time because obviously there's politics involved and governance involved it won't happen overnight but um yeah it's a that's that's what the plan is to help we also help the the cities to to make sure that the efforts to appeal are 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.

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 regard to your outlook and your guidance, this time you don't mention the financial targets you mentioned after the first six months results with 1 billion revenues, 6% trust revenues and 15% EBITDA margin. Are those still in place?

Well, I mean, we're approaching, of course, the end of 2025. 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 three framework agreements. The numbers in that country are going to be, by definition, high. 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, on the recurring part of our business. So 70% of the year to date order intake of 580 million approximately is coming from a new trust contract. So they will also come online to some extent. So what I'm saying is that in 2025, a lot could potentially happen. Um, 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, you... There is, of course, a little bit more timing uncertainty on the target.

I think that's fair to say. Okay.

Thanks. I move back into the queue and if there are no other questions, I'm just going to ask two more afterwards.

Yeah. As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Tim Ellers from Kepler-Chouvriax. Please go ahead.

People ask questions besides me. Just two more and then I'm done. With regards to mixed effects, you were mentioning that the reason for the drop in the EBTA margin was partly explained by a higher contribution of system cells. 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, operation leverage played a role. But we'll be there to get some insights there.

Yeah, you're absolutely right about that. The operational leverage does play a role in the way that we present our profit and loss. Yeah, and sometimes, you know, 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 run of it.

Yeah, and if you compare it 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 two or three years of delivery, right? And then, you know, the operational efficiency of just delivering the same type of systems is relatively high, right? and those things have impact whilst for example the first deliveries to saudi were also at the lower margin because yeah of course we have a product but we need to make sure that it works in the environment and and so on so those things have impact okay thanks and then one last question um the swedish contract is there any risk to it or is it just you know a bit of the the same thing as

with Saudi Arabia that there might be some delays, but 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 validated 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 yeah, 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. Okay.

Great, thanks a lot, very helpful and I guess have a nice weekend then. Thank you.

So we have two questions 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.

Yeah, there are two questions I think directed to us, Ivo. One is that there is more requests 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. 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 uh 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 it's a it's a system which is based on cassettes and the cassettes 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 is sustainable for the next typically 10 to 15 years, so. 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 demands 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 US that are undergoing or expected to undergo legislative changes like Iowan?

That question has actually been asked to our US 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. As I mentioned before, we believe that in the first term of the Republican Trump, party Trump, we did not see any changes. Most of the most of these changes will also be at state level. So not at federal level, but at state level. So yeah, 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 our strategy has been along two lines. One is if you install system sales, then make sure that you have a 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 managers 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, etc. 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 the managed services in Australia. One other example is that Ghana, where we have to contract to nationally enforce automated traffic enforcement. And 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.