Q-Free ASA

OSE:QFR

Earnings Call Transcript 2020-Q1

[Håkon Rypern Volldal, CEO & President]

Welcome to Q-Free's First Quarter 2020 Presentation. My name is Håkon Volldal. I am the President and CEO. And with me today, to answer difficult questions, I have our interim CFO, Trond Christensen.Couple of comments to this rather unorthodox results announcement. First of all, I hope you will be able to hear me, but you will not be able to ask questions with normal audio capabilities. You need to post them online, and then we will answer those questions towards the end.Also, if this session will freeze in your browser, remember to refresh the browser to get started again.Okay. If we look at the highlights for the first quarter, I have to say, first quarter was a challenging quarter, both financially, operationally, with the coronavirus outbreak, and organizationally with the reorganization and restructuring happening in the middle of all of this.We delivered NOK 202 million in revenues, which is down 10% year-on-year, predominantly due to delayed purchases in Traffic Management. Tolling held up pretty well.EBITDA was negative at NOK 8 million, down from NOK 9 million in the first quarter of 2019. Order intake was solid, NOK 220 million taken to backlog. That does not includes new frame agreements with an estimated value of NOK 55 million. So excluding the new frame agreements, we had a book-to-bill of 1.09 in the quarter. Order backlog increased by 6% versus the end of last year to NOK 1.14 billion. And we also implemented the new and simplified operational structure according to the updated strategic plan that we shared in our previous presentation. So we now have 2 main business areas, Tolling and Traffic Management.Then after the closing of the first quarter, a couple of key things happened that we should also mention. First of all, as a response to the weak performance in the first quarter and also expected negative impact of COVID-19, we have reduced our monthly cost base by approximately NOK 7 million compared to the run rate that we had in the first quarter. So that's a significant saving, which will bring the company, we think, back on track in terms of profitability.Another key event was the NOK 80 million in expected proceeds from the convertible bond that we successfully placed last week and also with that NOK 82 million in new loans from our main bank. And together, that gives us the liquidity and operational flexibility to pursue our strategic plan and take care of our obligations. So quite an eventful first quarter, I have to say.If you look at the key figures in the first quarter, as I said, revenues are down, predominantly driven by Traffic Management. Gross margin improved on the back of a good product mix in the quarter. OpEx was significantly up, 14.7%. I should comment on that and say that both revenues and OpEx, of course, are impacted by the weak NOK that we've seen in the first quarter. So a lot of the OpEx increase is related to currency. We have significant costs, both in U.S. dollars and euro. So if you look at the underlying cost base, number of employees increased by roughly 3%. Salaries increased by less than 3% year-on-year, and the remaining increase then is due to currency, which, of course, with the measures taken now in March and April, in the second quarter, we expect the OpEx to come significantly down from this level.The revenue decline and the OpEx increase then resulted in a negative EBITDA, which, of course, we're not happy with. We are impacted by the coronavirus in the first quarter. A lot of delayed orders placed, not lost but delayed. March is usually a very strong month for Q-Free, but this year, it was not a strong month. We then end up with an EBIT of minus NOK 24 million and EPS of minus NOK 0.15. That's something, of course, we're not happy with and will address with the cost savings and also a healthy project pipeline that we see in front of us.Some more details then on the key figures. If you start with revenue, we have now converted to a new segment reporting consisting of 2 main business areas, Tolling and Traffic Management. Tolling represented roughly 68% of revenues in the quarter, Traffic Management, 19%. And Traffic Management is usually a lot higher. But again, this is where we saw the impact of the coronavirus outbreak and also have delays in deliveries that have been planned. Assets held for sale include our previous Infomobility and Parking business areas and represented 13% of overall revenues. And as a mix effect, you can see that Tolling, of course, helped by currency effects, it was down 4%, Traffic Management, 26% and assets held for sale, 12%. On the average then, it was 10% for the business as a whole. We expect Traffic Management to rebound. A bit difficult to say if it will happen in the second quarter or in the second half, but we hope that the second half will be a lot stronger than what we now witness and what we expect for the full second quarter. So the rebound itself, we are pretty confident it will come. But exactly when this will come, we don't know. The projects still have to be delivered. So we're not worried about the industry as a whole, but rather the timing of it.EBITDA, first quarter in, I think, 3.5, 4 years, where we reported negative EBITDA, again due to revenue shortfall and OpEx increases.If we look at the segment reporting, Tolling is down from NOK 16 million to NOK 12 million, Traffic Management from minus NOK 2 million to minus NOK 13 million. Assets held for sale, meaning Parking and Infomobility, stable. And then group functions, fairly in line with last year. So it's the rebound in Traffic Management and growth in the Tolling business that will bring us back on track in terms of profitability.Order intake was okay, especially given the circumstances. We had NOK 220 million in confirmed order intake, driven by 2 key tag contracts worth roughly NOK 50 million and 2 ALPR or image-based solutions contracts for roughly NOK 50 million. In addition, we signed frame agreements with an estimated value of NOK 55 million. So order intake in the first quarter we are quite happy with.Some of the key wins included large tag orders in Thailand and Russia. Q-Free has almost 100% market share for tags in Thailand. We are increasing our tag deliveries due to Russia, which is a growth market for us. We delivered or we signed another key contract for ferries in Norway. We had an ALPR enhancement contracts signed with our customer MassDOT in the U.S. to further improve automation rates and then accuracy. We received a couple of large traffic controller contracts in the U.S. Some of those are frame agreements. We also received a contract for MAXVIEW central software for traffic signaling in the U.S. And we extended our agreement with AutoPass for the central system in Norway for another 6 months. So some rather nice contracts. And as you can see, a lot of them are now software-based, both the ALPR contract, the AutoPass extension, the MAXVIEW contract are software contracts.Order backlog increased 6% from the previous quarter. And according to our contracts, we have NOK 209 million secured for deliveries in the second quarter, NOK 287 million for the remaining 2 quarters of 2020, meaning the second half, and then NOK 645 million for delivery after 2020. I have to say that, previously, what we have reported as expected deliveries for the coming quarter has been quite accurate. There have been very few delays. These days, it might be that a few contracts will be delayed due to travel restrictions and other measures taken in order to combat the corona pandemic. But nevertheless, we don't expect the number to deviate that much. So NOK 209 million is fairly safe. Remember that a lot of our business is built on long-term service and maintenance agreements with customers that have healthy balance sheets and still good cash flow. So it's not that much at risk. I just want to comment that this -- In some months, we don't see it down to the penny that what we have in our backlog is, is always taken to P&L.Cash flow, we increased our available credit and then cash on hand during the quarter. We were able to obtain NOK 40 million in extra credit lines with our main bank. That was sort of a temporary action taken in the first quarter in order to be prepared for the operational challenges related to the coronavirus outbreak. More importantly, I will comment on that would be the new financing that we secured after the closing of the first quarter, I'll get to that in a second.If you look at the balance sheet, the total balance sheet increased. A lot of it is driven by currency in terms of assets and also some reclassifications regarding debt. But we can see that the net interest-bearing debt has also increased from NOK 201 million to NOK 225 million. That has to do with the normal working capital fluctuations. Sometimes you're on -- the payment structure allows you to have a good working capital development. In other quarters, the cutoff dates might be that you pay certain invoices prior to closing of the quarter, and you don't receive the cash until 5, 6 days later. So these are timing things. Fourth quarter 2019 had a favorable closing mechanism related to working capital, and then Q1 is slightly different. Although I have to say, customers have also been quite good at paying our invoices in the quarter, and we handled our cash in a good way.New financing raised after closing of the first quarter, that's extremely important to us, and I'm very happy with what we've seen last week. First of all, we successfully placed NOK 80 million in unsecured subordinated convertible bond. That is due in May 2023. It has an interest rate of 6-month NIBOR plus 4% per annum interest. The bonds are convertible to shares at a 25% premium to what was the trading price for the shares at the time of the issue. So NOK 4.37 is the conversion price. Our largest shareholder, Rieber & Søn, subscribed NOK 49.5 million on the NOK 80 million. And of course, the bond itself is subject to approval by an extraordinary general meeting that will take place on May 18. And we are positive that it will be approved.As a result of placing the NOK 80 million nonconvertible bonds, we were also able to agree with our main bank, Nordea, a new loan. NOK 82 million in new loans have been granted, partly guaranteed under the COVID-19 support package from the Norwegian state. And we also have a new, and I would say, viable and feasible covenant structure. So the covenants related to our new EBITDA ratio or leverage ratio and also the equity ratio have been relaxed and improved for us, and we are quite confident with our ability to stay within these covenants.If we then look to the future, I should start by saying that, even though the world is changing, we still have a strong and compelling purpose as Q-Free. And now more than ever, key mobility challenges will have to be fixed related to congestion, accidents and pollution. And we have not all solutions, but we have a lot of solutions to address these challenges, one by one or in combination. So we're quite happy with the offering we have. And we see that we have a meaningful role to play in the years to come despite pandemics and other crisis. There is demand for our solutions.I would also like to repeat that, although our performance varies from quarter-to-quarter and this quarter not being especially good, we are in a business that does fluctuate a bit from year-to-year. So you could look at 3-year averages and say that, okay, during a 3-year period, then at least, you should be able to account for both good years with high project revenues and years where you don't have a lot of project revenues.So if you look at past 3 years and compare it to the previous 3-year periods, there is an underlying revenue growth in our business. There is also performance improvement related to EBITDA. So in the past 3 years, we had an EBITDA margin close to 10% compared to roughly 3% in the previous 2-, 3-year periods. So I think we are on the right path, but we are, of course, hit by also the coronavirus outbreak and also normal fluctuations within the industry when it comes to exactly when contracts and awards will be given.In our previous quarterly presentation, we communicated our new strategic plan, which is about focusing on tolling and traffic management first. And I'm happy to say that despite the turbulent quarter, we have been able to tick most of the boxes. We have established Tolling and Traffic Management as the 2 key business areas. We have optimized our investments and reallocated resources to match our priority to go after business in those 2 business areas, and we have secured new financing.The only thing we haven't been able to close is the divestment of Parking and Infomobility. We were on a good track, but of course, doing cross-border M&A deals in the current environment is a bit challenging. So the strategy remains the same, to seek divestment of these assets, but we probably need to spend a little bit more time to complete that task, given the current situation.Going forward, there will be increased focus on building our reputation as a technology leader, and over time, of course, scaling standardized solutions. And a lot of solutions will be software solutions to selected new markets. So we are happy with the plan we have in place. We're pursuing that, and we are soon ready to embark on step 2 in that 3-step program.Now some comments related to the impact of the COVID-19 or coronavirus situation. If you look at the 2019 revenue composition, roughly 1/3 we would classify as recurring revenues, stable revenues coming from service and maintenance agreements and transaction-based contracts. That portion of our business is not very impacted by the coronavirus, but there is some impact related to transaction-based revenues in Norway. Traffic is down 40%. And of course, that does have an impact on our results. But I should say that the contract we have consists of both a fixed element and a variable element. So our revenues will not be down 40% on this contract, but we are hit by a 40% reduction. So maybe between NOK 1 million, NOK 1.5 million in -- per month in impact from this part of the business.Where we see the most impact is actually on what we would typically call resilient revenues. But I don't think that's a proper word these days, resilient, when we see what is happening. So our product sales is down, and it's clearly impacted by COVID-19, both in the U.S. related to limited ability among our customers to process existing orders and preparing new contracts. So we haven't lost contracts, we haven't lost business, but contracts are delayed. We're not able to install or commission our solutions. And that will, of course, come back, but will depend on our customers to get back in the office and fully staffed and ready to go. And then what we can do is to make sure we are ready to go once the world returns to normal. So this part is where we take the biggest hit. Traffic controllers, tolling tags and other hardware equipment is tough these days, but we believe it will rebound.On the project revenue side, the third key element of our revenue stack, there is some impact, but not much as we speak. Current contracts are, or current projects are running according to schedule, both in Thailand and Australia and other markets. What we might see is a delay in the award of new projects and new contracts. So towards the end of 2020, maybe some business that we had thought would be taken to P&L in 2020 will be pushed into 2021. But in terms of order intake, we still -- we're still quite optimistic that most of these contracts will be awarded this year. For us, there's a plus and a minus with the delay. And the plus is that we have an opportunity to plan the installations and the deliveries so that we can maximize profitability on the contracts. The negative part is, of course, that it takes more time to get it done. And the revenue recognition will happen over a longer period of time compared to a normal situation.We are not happy, as I said, with the first quarter results, and we expect, maybe not additional impact of the COVID-19 outbreak to hit us that hard in the second quarter compared to the first quarter, but we still need to take actions in order to bring the company back on a positive EBITDA trajectory. So already in mid-March, we introduced travel restrictions. We did reductions in terms of purchases, events and other things. And from early April, we introduced a global pay cut of 10%. And we also, unfortunately, had to lay off or furlough some of our employees. I can see from this slide that the formatting is a bit off. Travel restrictions will have an impact of roughly NOK 2 million per month. Purchases, events and other will have an impact of roughly NOK 0.5 million per month. And then global pay cuts and layoffs, 2.2, 2.3, each. So altogether, we expect a monthly saving of NOK 7 million compared to the run rate we had in the first quarter. So that gives us, everything else being equal, a NOK 20 million improvement in our cost base and hence EBITDA. If we have been able to execute this prior to the start of the first quarter, we would have the positive EBITDA. But let's see how it plays out. We believe this is sufficient to get through the current turbulent times and get back to a profitability level where we can meet covenants and stay within the terms that we have been given by our creditors. So we think this is sufficient. If it's not, then we will take further measures. But the support given by the employee community in order to bring the company back on track has been tremendous. And we feel that with this we are well positioned to meet the obligations we have and take care of business without losing a lot of capacity that we would need. So that's the reason why everybody agreed to a 10% pay cut. Rather than taking out additional employees, we preserve the capacity to deliver contracts, which is important.Now at some point, hopefully, the world will return to normal. And the good thing for Q-Free is that we are part of an industry which is a key instrument in bringing the economy back. If we look to the financial crisis in 2008, 2009 and the stimulus package introduced in different countries during and after the crisis, infrastructure investments were quite significant and represented in some markets, 70% of the stimulus that were given in order to get the economy back on track. We expect something similar to happen this time, that governments will put money into improving roads and infrastructure.There is one example from the U.S. where they -- this says Trump calls for a $2 trillion, infrastructure package. But it's not only Trump. It's also supported by Democrats. So package #4 in the U.S. might be a big infrastructure push. And of course, a lot of that will be related to road infrastructure where we can help and be of assistance. So we expect, actually, when the world normalizes, our industry to be in a very favorable position to get going again and get growth rates up. With that in mind, it's also important to remember that, in 2019, out of all the contracts we decided to bid on, our share of value captured was 60%. And if we look at 2020 and what is in the pipeline, meaning the value of contracts that we think will be awarded and that we will bid on in 2020, we are at NOK 2 billion or 60% of that, if we have the same win rate, would indicate an order intake of NOK 1.2 billion. That is built up in the following way. There are some tolling product contracts. This is what we are aware of. There might be additional contracts being announced, and tags are typically purchased on short notice. So it could well be that tolling products is double this figure or triple this figure, but this is what we see in our system at the moment. Contracts worth roughly NOK 100 million related to tolling products. Tolling systems, close to NOK 900 million. Key projects in Asia, in Europe, in the U.S. ALPR, a very profitable part of our business, several contracts in the U.S. and also increased license sales in Europe, so up to NOK 200 million in contracts. Some of that has been captured already. Same for tolling products. Traffic management. A lot of people forget that Q-Free is not a pure tolling company only. We also do traffic management. And this is a sizable part of our business. What we have in our plans at the moment is to go after contracts worth up to NOK 500 million. And on top of that, you have the miscellaneous, small and medium-sized contracts. A few hundred thousand there, a few millions there. And altogether, that might represent as much as NOK 300 million. So the total pipeline, the addressable market in 2020 is NOK 2 billion, and we secured NOK 220 million plus the NOK 55 million in extensions or roughly NOK 275 million we captured in the first quarter, which means there are lots of opportunities to be captured.We continue to build our reputation as the prime mover in traffic technology also. In the first quarter, we have made some advancements, and we have launched some new interesting solutions. First of all, we have facelifted our tags. The new tag is smaller and has an even surface, which makes it easier to customize the tag and put stickers on. So that's ready to go. We have developed a digital tachograph for onboard weighing of trucks, which is quite important in Europe these days. So remote reading of loads and weights on heavy trucks. We have made enhancements to our world-class Intrada ALPR solution related to vehicle analytics, so model make and direction of travel for the vehicle. We have launched a new cabinet for our urban business, meaning traffic controllers and roadside cabinets. And we have developed what we call a lane-aware module for work zone management.The last one is actually quite cool. It's an easy-to-use tool for managing work zone activities, lane closures and special events. And we have deployed this on the George Washington Bridge, which is, according to several sources, at least, the world's busiest road bridge with 100 million plus vehicles per year passing. This software was developed as commercial off-the-shelf software using modern technology stack. It's deployed as software-as-a-service. And it gives real-time status and communication with variable speed limits. It communicates with the signs and ramp meters and traffic signals and basically ensures that the people working on the bridge can work safely whenever they need to close a lane and motorists are warned and guided in terms of their travel. And there are also opportunities to take this concept to other customers. It's currently being expanded to JFK and LaGuardia airports in the U.S. And this is an example of a module coming out of our software platform called OpenTMS for advanced traffic management systems in the U.S. So this is a productification of a service within a bigger platform. So instead of buying a complete full long platform, you can buy this module. And that makes it easier to grow software sales also in the Traffic Management business.Then we get to the questions and answers. So I will look at the comments or the questions you have posted.

[Håkon Rypern Volldal, CEO & President]

The first one is, if you give some rough quantification of the COVID-19 impact on recurring product and project revenues, respectively. I think, on the recurring side, we said that the impact, the way we can see it at the moment, is roughly between NOK 4 million and NOK 5 million per quarter. On the product side, it's very difficult to say.In the U.S., if you look at the Traffic Management business and also the product sales in Tolling, we were talking about 15% to 20% to 25% reductions, but I don't expect the second quarter to be worse than the first quarter. I think we -- if things continue as is, it will be in line with the first quarter both in terms of product sales and also project revenues.So recurring and project revenues, not so much worried about. But it's the product sales which is hit hard, but not more, I think, in the second quarter than what we have witnessed in the first quarter.Then there is a question, for the NOK 2 billion pipeline, how much do you believe can be delayed? I don't know because I'm not in control of this. We see that some customers stick to their plans. Some customers have delayed the project award by 4, 5 months. So this varies a lot, and it's very difficult to say that it's 10% or 20% or other value that might be delayed. Also the NOK 2 billion pipeline includes what we are aware of at the moment. There might also be additional tenders and contracts coming out that can compensate for some of this. So I think it's -- I understand the question, but I'm not able to give a precise answer on that.Then there is a question on the covenant, if I correctly understand, by year-end, you have to generate a 12-month EBITDA higher than NOK 30 million. How confident are you with this number?We are confident with that number. We are confident that we will be able to deliver at least NOK 30 million in EBITDA during 2020.Then there is a question, can you come back on the cost-cutting measure on the NOK 7 million monthly saving? How much is temporary? What is the reduction in number of employees? Can we have a breakdown of the saving by country, region and by segments?A lot of questions in one. I think what is temporary is the salary reduction is something that we would like to reinstate when the business picks up. The layoffs, terminations, I don't think -- I think we will watch our OpEx base carefully. What this situation has taught us is that we don't have to travel as much as we did in the past. So we plan to hold on to some of the travel savings. I think some of the purchases, we will continue to be a bit strict on. I think we will be careful to hire new people. Our first priority is to get back to a profitability level where we can take back the furloughed employees and also adjust salaries back to normal level. But besides that, we want to keep the savings. And remember that, with the purchase of the remaining shares in Intelight, we're also in a position to take advantage of tighter integration of our previous urban and inter-urban businesses. So now that we control 100% of the company, we're also able to run the company and manage it in a slightly different way than we could in the past. So that opens up for increased sales, but also synergies in technology development and sales and marketing and back-office functions. So we will continue to look for cost-saving opportunities. But I would say more than half of the NOK 7 million is something that you could expect us to carry on with. To break that down per segment and region, I will not do.Then there is one question related to the backlog for the second quarter, which we already commented on. And then there is one question, when will Q-Free be profitable?That's a good question. It depends on what you mean by profitability. I think Q-Free as a company has been through a rather rough journey over the past several years to restructure the company and focus on the most promising opportunities. I think we are more or less done with the restructuring now. We have closed down offices. We have divested businesses. We have refocused the company around Tolling and Traffic Management, and we are quite happy with that reorientation.And then you might ask, why didn't you do it all at once? Because it wasn't possible with bank covenants, loan covenants and other strings attached, it's difficult to do everything at one go. And also, I had to admit that 3 years ago we didn't know exactly how the world would look. We had to explore. And of course, in retrospect, some things should have been done a lot earlier, but that's in a theoretical world. In the real world, you don't always have the answer. You have a hypothesis. And then some of those hypotheses are right and some of them are wrong.But I think what we have done in Q-Free consistently is to take actions when we have enough information. So we have changed our course, but still try to stick to the mantra of simplifying the business. And with that, I think we are well prepared to return the company to profitability, not only on the EBITDA level, but also on EBIT level.What we need for that to happen is to control our expenses tightly, which we will do, that we can do ourselves, but we also need a market to come back as soon as possible. We are not a company that is hit as much as other companies by the COVID-19 crisis, but we are impacted by slow decisions and delayed orders. So definitely, we will need a more normal environment in order to show the profitability that we believe the company is capable of delivering and also what the shareholders deserve in terms of the faith they have put in the company.Let's see if there are other additional questions. Can you elaborate a bit on status and prospects of your initiatives within Parking? As long as Q-Free owns the Parking assets, we continue to operate as normal, meaning we try to take care of the business as best as we can by pursuing new contracts and installing equipment and managing our cost base in a smart way. There are some discussions related to Parking, structural discussions. But again, as I said, to do M&A deals, purchases, sales in these times is quite difficult, first of all, because of the repricing that happened in the market; and secondly, because it's difficult to meet physically; and third, if you talk about the cross-border deal, it's almost impossible for a new owner to take over a business and manage that from day 1 when they're not allowed to travel or work in the country. So we need some of these restrictions to be lifted before we can close that initiative. But we are -- we remain positive that we will be able to find good homes for Infomobility and Parking in the future.I think that's also covered, one question related to when will you reopen the sales process for assets held for sale. It is open, but it has to be feasible, and that we don't control. So once the travel restrictions are lifted or if it's possible to meet in person and then look at business plans and the world economy that is a bit more predictable, I think we can get back on track with the sales process.Okay. Then I don't have any further questions on my screen. I know there is a 20-, 30-second delay. So I'll just give it a few more seconds to see if there are additional questions. If not, then we conclude this unconventional results announcement.There's one question. You look extremely fit and healthy. What is your secret? Well, that was my wife, sorry.One more question. Considering the cost-cutting measure you are expected -- considering the cost-cutting measure, are you expecting a positive EBITDA in the second quarter? The answer is yes. We expect a positive EBITDA in the second quarter. Okay. Thank you for watching. Have a nice day, and maybe we could see each other in person for the next announcement, but that we don't know yet. Thank you. Bye.