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Earnings Call Transcript 2021-Q1

[Håkon Rypern Volldal, CEO & President]

Good morning, and welcome to Q-Free's First Quarter 2021 Presentation. My name is Håkon Volldal. I am the CEO of Q-Free. And with me today, I also have our CFO Trond Christensen. If we start with the summary and the highlights, we generated NOK 191 million in revenues in the quarter, down 5% from last year, driven by COVID-19 effects and also currency. EBITDA was significantly up from a loss of NOK 8 million in 2020 to NOK 13 million plus this quarter, so a substantial improvement, driven by a higher gross margin and a significant reduction in operational expenses. EBIT also showed progress from minus NOK 24 million last year to minus NOK 1 million this quarter. So not a fantastic quarter in terms of financial results, but a very strong improvement over last year.What was exceptionally good this quarter was the order intake, NOK 434 million, which is the highest order intake in a single quarter for many years. It represents almost a doubling from the NOK 220 million we delivered in 2020. And consequently, also the order backlog was up to almost NOK 1.3 billion. Cash flow from operations, minus NOK 5 million versus minus NOK 13 million last year.To spend some -- or a few minutes on the order intake, which was extraordinary this quarter. We signed 8 important contracts and a lot of smaller contracts. But the 8 most important contracts were the renewal of the congestion charging or consistent tax system in Stockholm. That was done in January, NOK 130 million. It's a 10-year agreement. And a lot of the revenues from that contract are recurring over the next years. Also very important contracts in the quarter were the 2 traffic management contracts. Statewide traffic management systems, one for 10 years and the other for 8 years with additional potential task orders on top.And what's good about these 2 contracts, and I'll get back to that a bit later, is the recurring nature of the revenues. So operations and maintenance for many years, recurring, on both the NOK 90 million contract and the NOK 60 million contract.In addition, we signed a nice roadside contract in Norway for tolling equipment. Upgrade existing toll stations and also deliver a couple of new ones, NOK 40 million. Again, a big portion of that is recurring service and maintenance.Portugal, a NOK 20 million contract to upgrade the A28, deliveries will start this year. A nice contract for us in the first quarter, although the absolute amount is not big, but the importance of the contract is that the NOK 12 million back office system for handling lease cars is again a recurring revenue contract. The initial contract term is 3 years, but this could be prolonged and its software services.Spain, NOK 12 million, an extension of a multi lane free flow system to cover also light vehicles in addition to trucks. Roadside deliveries will happen in 2021. And this is actually the third extension of our project in -- or the second extension of our project in northern part of Spain.An important contract, which did not impact the order intake or backlog that much, but it will, going forward, was a frame agreement with Georgia DoT for traffic controllers and software. It's an 8-year contract with low guaranteed minimum value but high expected value. So as they place purchase orders for controllers and software, we will take that to order intake in the coming quarters. But it's -- if you look at this contract, historically, it has generated substantial revenues every year since, I think it is 2013 or '14, so for many years. So this is a long extension of our urban activities in Georgia.A key happening in the first quarter was the conversion of a convertible bond to equity, which was completed, in May 2020, we issued an NOK 80 million convertible bond. And as Rieber & Son bought a stake of -- or some shares in December 2020 that triggered a potential conversion of this convertible bond to equity. All bondholders requested a conversion and the final share issue was registered on 17th of February 2021. Consequently, our equity ratio has been strengthened and our interest-bearing debt reduced. There is no cash settlement of accrued interest. So as a consequence, you can see we have net interest-bearing debt of NOK 181 million, down from NOK 229 million in the previous quarter. So that's good in terms of strengthening our financial structure.Another important event was the divestment of parking assets, which is now completed. We have divested 2 entities. The first entity is TCS International, Inc. It's a business that developed and sold parking guidance solutions predominantly in North America. They had revenues of NOK 28 million in 2020 and 8 employees. The company has been sold to our previous general manager, no reps and warranties and it's partially funded through a seller credit to the new owner.Almost the same story and structure in France. We have sold our French subsidiary, Q-Free France. That entity imported parking guidance solutions from TCS International and deployed and sold those solutions in France. 2020 revenues of NOK 9 million and 5 employees, and the company was sold to the former general manager, technical director of the company. No reps and warranties and again, partially funded through a seller credit.So the consequence of this to Q-Free is that from the second quarter this year, we will no longer operate in the parking guidance market. The parking guidance generated total revenues after internal eliminations of NOK 35 million in 2020 and a negative EBITDA of NOK 7 million. The new company in France called INNVIA will continue as Q-Free's agent or distributor for DSRC tags and readers in France. So we will not lose anything in terms of tolling presence in France. And the transactions have no significant P&L impact in the first quarter.As a consequence of the divestment of our parking business, we will change the segment reporting from Q1 or we have changed it, and it will be further changed in the second quarter.The Infomobility business, which has been classified as held for sale, we have decided to include in the Traffic Management segment from the first quarter. And this is due to, 1, an inconclusive divestment process and 2, the company owner TDC or Q-Free U.K. has actually delivered solid 2020 results and has a very positive outlook for 2021.The Assets Held for Sale segment will be discontinued because the only remaining assets after we have included Infomobility in Traffic Management, our parking assets, and they were divested in Q1. So during 2020, we've had 3 segments, Tolling, Traffic Management and Assets Held for Sale comprised of Infomobility and parking assets. This report reflects Tolling as before Infomobility has been included in the Traffic Management business. And Assets Held for Sale, it's just parking. And as we owned and operated the 2 legal entities, we divested in the first quarter, we had to report them in the P&L. However, the balance sheet has been adjusted for these transactions as they were effective from end of first quarter.From the second quarter, going forward, we will only have 2 segments. It will be Tolling as before and Traffic Management, including Infomobility. So then we are down from 6 segments, I think, back in 2016 to 2 segments, from second quarter 2021.A bit more details on the financials. Let me start with the summary financials. As I said, revenue is down 5%. Gross contribution was actually up 3%, driven by a favorable revenue mix, 5 percentage point increase in the gross margin. A significant decrease in OpEx, 13% down year-on-year. And thus EBITDA up from minus NOK 8 million last year to NOK 13 million plus this year. Also, EBIT improved substantially from minus NOK 24 million to minus NOK 1 million.Revenues, the 5% decrease due to COVID-19 impacts. We have lower [ public sales ] especially in Tolling, and we also have some delayed system deliveries, both in Traffic Management and Tolling due to travel restrictions and lockdown. This will hopefully improve in the coming quarters. But we were negatively impacted in the first quarter also compared to last year, currency sort of worked against us on the revenue line.The revenue mix is 62% Tolling, 37% Traffic Management, now including the Infomobility business. And Assets Held for Sale, i.e., Parking only 1%. As you can see, Tolling was down year-on-year, 13%, again, due to low product sales. Traffic Management was up 22%, driven by high product sales of traffic controllers and also increased revenues on the Infomobility side with system deployments in, for instance, Ukraine. The Parking business was down 69%.EBITDA, 13%, now NOK 13 million, EBITDA margin of 7%. What is important here is that if you take a look at the accumulated EBITDA over the last 4 quarters, we are close to NOK 100 million. Actually, it's NOK 104 million, excluding Parking and 11% average margin over the past 4 quarters, so 12% Parking. So profitability is improving. It will vary from quarter-to-quarter. First quarter is always a difficult quarter, but we noticed the improvement over last year and feel well positioned to handle or to meet our targets for 2021.Again, if we look at the EBITDA per segment, Tolling solid as usual, actually margin was up 7 percentage points. Traffic Management also from red numbers last year to black numbers this year, and Assets Held for Sales, stable at minus 2% and Group Functions also are fairly stable.Order intake, as I said, was fantastic in the quarter. It does not include frame agreements, only agreements with guaranteed purchase orders or values. So it was up 97%, with a nice mix between Tolling and Traffic Management in the quarter.As revenues were only NOK 191 million in the quarter, and order intake was NOK 434 million. We have a significant increase in our order backlog also, 16% year-on-year, and the expected delivery schedule shows that what we have in our backlog for the second quarter is above what we reported in the first quarter. And usually, there were some smaller things also coming on top of what we have in the backlog. So second quarter looks decent. And also in the second half, we have good volumes [ for it ]. And so the order backlog is healthy. The only uncertain thing here is, of course, the COVID-19 pandemic might cause changes to the plans they renewed. Not renewed -- problems on our side, but it might be that customers are not ready to take orders or that not allowed to travel, et cetera. So there might be some smaller changes due to that.Funding and liquidity, down from NOK 175 million in the fourth quarter NOK 144 million in -- at the end of the first quarter, driven by a couple of things. First of all, we have some working capital changes. We tied up more working capital on ongoing project in Thailand and also in Portugal. There are component shortages in the world, especially on the electronics side and chips, which means we need to increase our inventories. We need to carry more stock in order to ensure high delivery precision. And we've also repaid part of our debt. So also that's sort of the reason for the NOK 13 million decrease. It's of a temporary nature, we believe. So we're not worried about the cash balance. It's just a ramp-up on the projects and also, again, debts handling.The balance sheet now that we have divested the parking assets. We have a fairly clean asset base. It's down from NOK 850 million to NOK 824 million, as we have now removed the Parking assets. We have on the equity side, converted the bond to equity, which shows -- which means we have a strengthening of our equity in comparison to total equity and liabilities. Our net interest-bearing debt is down from NOK 229 million to NOK 181 million, which also means that the trailing 12-month NIBD/EBITDA is close to 1.9 and well inside loan covenants.Now for the outlook and the summary. We have today announced our annual report, released our Annual Report 2020. So I stole a slide from that report to basically highlight our strategy. We have a 3-step strategy. We are in the second step of that 3 step program, and it's all about building a strong presence in existing markets and the reputation as the prime mover in traffic technology.If we look at how we're doing, again, in this quarter, we saw a nice contract win in Norway. We saw a nice contract win in Portugal. We won the Sweden Stockholm project. We also won a NOK 20 million tag contract early in April in Chile. And all of this means that we have basically ensured our presence in all 8 core Tolling markets, and we generate now NOK 165 million in annual recurring revenues. And these markets continue to offer exciting growth opportunities going forward.On the Traffic Management side, we have close to NOK 50 million in annual recurring revenues. And also these key customers that we have and these key markets offer significant up-sell potential because once you sell a software system there will always be changes, task orders, additional things on top of the base contract. So this is quite, I would say, new for us to have recurring revenues. In this business 3, 4 years ago, we only sold hours; project hours and projects. Now we have long-term contracts in place. Most of them have been signed or renewed in 2021 or 2020. So out of our 5 -- I would say 5 top accounts, all of them are recently renewed or just signed. So these are long-term contracts that will continue to generate nice recurring revenues in the years ahead.The pipeline for 2021 remains solid. We have already NOK 434 million in order intake. If we look at the opportunities out there that we expect to address and bid on. We're talking about NOK 1.6 billion. I'm not going to win all of that, but we will try to win as much as possible. And the nice thing is that there are specific tenders out for both tolling products, tolling systems, ALPR solutions, traffic management solutions. And as always, there will be some miscellaneous smaller orders on top of the big ones. So enough to work on for Q-Free in 2021, despite a very successful start to the year. We're not running out of opportunities, which is nice.Some examples of prime mover projects in -- or prime mover technology developments in the first quarter. We launched a new security server for improved system security, both hardware and software, in tolling projects. That was launched in the first quarter. We have started to deploy a new generation of cameras for single and multi-lane configurations. I think this is from Portugal, a nice camera setup. We are testing DSRC technology, meaning the core sort of building blocks for our tolling solutions to use that as a payment method for electric vehicle charging. We're testing that in Norway.We have launched our first multiuse high-speed weigh in motion and multi-modal classification solution to cover an enormous amount of all lanes. I think we can count and classify up to 8 lanes in each direction now with this solution. And in the U.S., we have some fairly complex and large highways, which need these kind of solutions in order to keep track of traffic flows.And we've also launched the most powerful and forward thinking central traffic signal management system called Kinetic Signals. What we used to call MAXVIEW is now called Kinetic Signals. And it's out in a market of a new technology stack and receiving a great welcome by the market. I think we've hosted a number of webinars with hundreds of attendance, and there's a lot of interest around this new platform for managing and signals.So a lot happening. These are just a few examples. If you want more details on what we have done recently and what we will do, I refer you to our annual report. There's a special section on technology developments and prime mover projects.Our high-level financial goals remain the same, but I would like to reiterate our 2021 goals. Despite the 5% revenue decrease in the first quarter, we believe in north of 10% organic revenue growth. Again, assuming that the currency rates don’t mess this up too much. But if you look at what we will generate in 2021 and use 2020 FX rates, I think we are still confident that we can deliver more than 10%. Just that first quarter is a bit slow, and we expect things to pick up in the second and third and fourth quarter. Which means we also target a book-to-bill of more than NOK 1.1 billion and an EBITDA margin north of 10%. How much north of 10%, we have to see. But with the first quarter this year, substantially better than last year, I think, we're off to a good start, at least in comparison with 2020.For 2025, we also reiterated our long-term ambitions of NOK 1.3 billion to NOK 1.5 billion in revenues. Potential M&A will come on top. So this represents roughly a 10% annual average growth rate or CAGR. We expect an EBITDA margin in 2025 in the 15% to 20% range and also an EBIT margin now in the 10% to 15% range. So we stand by our ambitions. They were launched, I think, last -- in the previous quarter, and nothing has happened in this quarter that will make you sort of deviate from this. So we still believe in our high-level financial goals.Now as a consequence of Q-Free's emphasis on recurring contracts and our desire to shift more of our business to revenue, recurring revenue models, we will make a change to our announcement policy. Previously, we have reported all contracts with a total value of NOK 25 million or above. Going forward, we will continue to do that, but we will also announce all annual recurring revenue contracts in excess of NOK 2.5 million per year. So one example is the contract we signed in Norway with a leasing company, back office services, to handle their fleet of rental cars that will generate roughly NOK 4 million in recurring revenues per year. So with this policy, that contract will be announced; with the policy we had, it was not announced. So I think if you also look at the value, some of these contracts generate for Q-Free, you could ask what does the NOK 25 million hardware contract generate in terms of profits, and it could actually be less than NOK 7 million or NOK 5 million or NOK 10 million software contract. So that's also part of the reason why we want to highlight the ARR contracts going forward.That was it from me. If there are some questions that have been posted that I will try to answer. And if you have questions now, feel free to post them.

[Håkon Rypern Volldal, CEO & President]

The first question is, is Infomobility still for sale?And the answer to that is we have tried to sell it, and we were not happy with the response we got. So we think we are better off further developing that company, and we do that by integrating it into our Traffic Management portfolio. They have delivered strong 2020 results. We expect even stronger 2021 results, and we're on a good track. So at the moment, I think it would take a lot to, sort of, restart that process to sell it again short term. I think we need to develop the company and at least and align with the market on what the value of that business is.There's 1 question, how do you consider the pricing margin expected on the new contracts signed this quarter compared to your current backlog? And are you expecting some cost increases due to material electronic cost increases?And the answer is that I think all the contracts we have signed have healthy margin structures. So I'm quite happy with or we are happy with the margin structure of our order backlog. It varies a bit. Some projects are more profitable than others, depending on the scope and your starting position and how much of the delivery that you can reuse and how much you have to develop. But in general, I would say the contracts we won in the first quarter were strong and good contracts in terms of margins. We do expect some cost increases on components. They are not massive, but the problem is to get enough, I think microcontrollers and chips. We're not big volume takers, and we have to stand in line behind Apple and Samsung and the car manufacturers -- and even they struggle. So there is a fight to secure components, especially chips and microcontrollers, which means if you want them, you need to pay a bit more. But as -- if you look at a tolling system and the chips and microcontrollers, we're not talking percentages, we're talking very small amounts. So it won't affect, sort of, the overall COGS on most of our products. But it might be that the unit price, for instance, or the unit cost, for instance, on tax will increase as we have to pay a bit more. But it's interesting times. A few months ago, we had no issues, no supply chain issues. We have worked hard to secure key components and stock up on critical items, and we've been quite successful, but there are still some components, especially for tags that are challenging to obtain.There is one question. Can you comment on potential implications of Biden's announced infrastructure package in the U.S.?And I can say if that is approved, it's very positive for Q-Free. Most of our customers in North America are the state DoTs or Department of Transportations, and they are underfunded. They do get most of their revenues from gas taxes. And as engines become more efficient and some people switch to electric cars and people stay at home or work from home due to lockdowns and corona restrictions, revenues for these DoTs from gas taxes have come down significantly; as much as 30% in some states. Which means they do rely on federal funding in order to carry through with their investment decisions on bridges and roads and tunnels and to deploy new technology and upgrade existing technology into new technology provided by, for instance, Q-Free. So if this infrastructure package is approved, it's a huge boost -- or it will be a huge boost to our U.S. or North American business, absolutely.There's one question, to realize your high backlog, would you need to increase again your workforce?And yes, I mean, for every project that we take on, we typically have to increase the workforce slightly, but we're talking a couple of people. And the benefit of all these recent contracts that we've signed is that they are in existing markets, where we do have an organization in place, and we have the experience of working with the customers. So it's not a greenfield operation. We're already present with the local team. We have a central team that is able to support. So I would say right now, as long as we continue to win contracts in existing markets, our business model is quite scalable. If you enter a new market, then you need to increase your presence on the ground or you need to establish a presence on the ground. You need to recruit a local team. And that, of course, means you need to add resources. Now it's more like a step function that once you can handle x projects and you can handle x plus 2 projects. But when you get to x plus 3, you might need a couple of new hires. And when you get to x plus 5, you might need a few more new hires. So this is managed dynamically by us. In some quarters, staffing goes down, in other quarters staffing goes up depending on the workload. But I would say we have an organization that is able to deliver a lot of what's in the backlog. So this will be just normal changes.There's 1 question here. You mentioned possible M&A in your 2025 plan. With the end of the crisis, we hope, do you see a consolidation trend coming in your industry? Would you be ready to participate?I think it's too early to conclude on that. But consolidation is of course, going to happen also in our industry. We don't have the financing to go out and actively consolidate the market. But what we will focus on is to strengthen certain offerings and positions within the niches that we see, we find interesting and attractive. So if we talk about M&A, we're talking bolt-on acquisitions. We're talking maybe acquisitions of technology companies with complementary offerings and market positions within something we consider to be core. So when we talk M&A, it's not so much diversification. It's more consolidation of interesting market positions and technologies. So that's sort of the scope of it. We're not talking hundreds of millions of NOK in M&A, at least not for now. Yes, I think we have to [ burn the right ] in that case to do it. We're talking more sort of, as I said, smaller bolt-on acquisitions.That's what I have on my screen, in terms of questions. Again, I conclude that the first quarter was not a stellar quarter, but first quarter in any given year is usually not a stellar quarter. What we are very pleased to see is the improvement over last year, a substantial improvement with the margin expansion and 13% OpEx reduction. And not to forget the order intake of NOK 434 million, which proves that we are now very competitive in the marketplace in both tolling and traffic management.And then I encourage you to take a look at our Annual Report 2020. We put a lot of effort into that in explaining our business, our activities, our goals and also our sustainability commitments. So a big thing this year is the increased focus on ESG and sustainability and are rolling that in our contribution. So I -- again, I encourage you to go to q-Free.com and download the annual report. So you can enjoy a weekend reading about the [ prime viewer ] in traffic technology and how we will change the world.So thanks for your attention.