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Earnings Call Transcript 2020-Q2

[Håkon Rypern Volldal, CEO & President]

Welcome to Q-Free Second Quarter and First Half Year Results 2020. My name is Håkon Volldal. I'm the CEO. And with me today, I also have our interim CFO, Trond Christensen. Before we go into the results, just want to recap a little bit of Q-Free's positioning and who we are as a company. We see ourselves as a prime mover in traffic technology. We have 2 main business areas. One is called Tolling where we act as a full service provider, offering tags, roadside equipment, turnkey solutions, ALPR license plate recognition technology and service and maintenance on the [ rise ] installations throughout the world. Our second leg is called Traffic Management where we do state-wide advanced traffic management systems, and we also have traffic controllers and central systems for managing networks of traffic controllers. Our purpose is what we call strong and compelling because we address the 3 main headaches of modern mobility. It's congestion, it's accidents and it's pollution. So our concepts, Q-Flow, Q-Safe and Q-Clean, will help customers, meaning road operators, authorities, address these overall challenges with [ rise ] solutions and technologies. And if we look at what Q-Free actually contributes around the world, we do have a real positive impact, and examples include fast lanes in Bangkok, Thailand, where we have reduced congestion by 420,000 hours per year. We have also reduced emissions of particulate matter 2.5 significantly. In Stockholm, our congestion charging solutions have reduced traffic by 20%. We have reduced airborne pollutants by 13%. Same in Slovenia, millions of kilograms of carbon dioxide abated per year. We are helping authorities in North Carolina decrease driver time through smart ramp metering solutions. An example from Georgia, U.S. for the Super Bowl, we managed to actually clear the stadium with 70,000 fans in 45 minutes rather than the normal 2 hours by using smart traffic single controlling software. And in Virginia, we also help with our lane closure management solution to save lives and prevent accidents and injuries. So in sum, we feel that Q-Free should be regarded as an ESG company because we definitely contribute to the U.N. Sustainable Development Goals. Specifically, we aim to help out with goals number 3, 8, 9 and 11, and we do that by reducing the number of global deaths and injuries from road traffic accidents. These are subgoals listed by the U.N., so it's not something I'm making up for this presentation. Reducing the number of deaths and illnesses from air pollution and contamination; providing access to safe, affordable, accessible and sustainable transport systems for all and improving road safety; supporting a positive economic, social and environmental links between urban, peri-urban and rural areas by strengthening development planning. So I think we definitely address all of these subgoals, and we are proud to see that our solutions have an impact in the world. Now on to the main story for today, and that is the second quarter and first half year results. Let me start by saying that we are actually quite pleased with the quarter and the results. From an absolute perspective, meaning absolute numbers, we still feel that we can do better, that there's potential to improve. But from a relative perspective, compared to the previous quarters and, in particular, the first quarter, and bearing in mind that we are now facing a global pandemic, which of course, also impacts our revenues, we are very pleased with how the results turned out and how the organization has responded to the challenges presented by COVID-19.If we look at the specifics. In terms of revenues, they were down 11% year-on-year mainly due to reduced product sales and again caused by COVID-19. We have seen a decrease in sale of tags and traffic controllers. But thanks to a very healthy product mix and swift implementation of cost reductions announced in April, we managed to increase EBITDA to 12%, NOK 26 million, and that's up from NOK 23 million last year, and also a considerable rebound from the minus NOK 8 million in the first quarter this year. So quite happy with EBITDA. In terms of order intake, again, it's been difficult to get signatures on some of the contracts that we have negotiated over the past months and weeks, and we also see a reduction in purchase orders for products. But despite that, despite lacking the big contracts, we managed to book NOK 170 million in orders. And bear in mind, this does not include the NOK 55 million traffic management contract we announced yesterday. So -- okay, we missed that by a few days. If we had included that, book-to-bill would have been above 1. Now it's a bit less, but we have more contracts coming in over the coming months. So we're not worried about the order intake at all. Another positive thing in the quarter is the strong positive cash flow from operations. And as we also strengthened our financing with NOK 80 million in a convertible bond issue and NOK 82 million in new loans, we had improved liquidity and also increased our operational flexibility significantly. Bear in mind that in this quarter, we also purchased the remaining shares in our subsidiary, Intelight Inc. So there were no additional obligations linked to that anymore. Year-to-date, NOK 424 million in revenues, so down 10%, mainly as a result of, as I said, reduced product sales, both in the U.S. but also in other parts of the world. EBITDA is NOK 18 million, so down from NOK 31 million in 2019, but we'll see if we can catch up in the coming quarters. Order intake accumulated NOK 390 million. And again, it's caused by COVID-19, but I think we will see a big improvement in order intake in the coming months. Order backlog is still healthy. At the end of the second quarter, it was NOK 1.40 billion, so down 7% year-on-year. This also has to do, of course, with currency adjustments. Just as a reminder, if you have questions, you can post these online, and I will answer them towards the end. There is a lag of approximately 20, 30 seconds on this presentation, so do not wait until the very end. If you already know that you're going to ask me some tough questions, please post them now, so we have time to answer them, and we can actually see them on our screen. Some more details on the summary financials. Gross contribution remains constant, so big uptick in gross margin driven by more software sales in the quarter. So from 54.7% to 61.4%, that's a big improvement, and also partly because the tolling project deliveries are done with a better margin this quarter than last year. OpEx is down. In the first quarter, OpEx was NOK 134 million. And in the second quarter, we have NOK 111 million. So we're down almost 20% compared to the first quarter. Also nominally towards last year, we are 3.5% down despite currency impacting this year's number negatively. EBITDA, we have commented on. And also EBIT has been doubled from NOK 5 million in the second quarter last year to NOK 10 million this quarter. So that's a good development. As I said, prime motivation or prime driver for the result improvement is cost reduction. And something strange with the numbers here, but we are -- if I decode this information, there should be travel restrictions close to NOK 2 million in savings per month; purchases, events, others, roughly NOK 1 million; global pay cut, a little more than NOK 2 million; and layoffs, furloughs, close to NOK 3 million. So in sum, we have reduced monthly expenses by NOK 7.5 million compared to the first quarter. So I would like also to compliment the organization on how swiftly the measures were implemented and the collaborative efforts to make sure that we could bounce back from a weak first quarter. Detailed financials. If we look at revenues, NOK 223 million, 61% of that coming from the Tolling business, 30% from Traffic Management and 9% from held for sale. And for Tolling, we had a decline in the quarter driven by low product sales, low volumes of tags. There is limited need for tags when there are few cars on the road, but we see basically traffic picking up again. And as an example, in Norway, in June, we were back to normal levels. So June 2020, we had the same number of tolling transactions as last year. Traffic Management, down 10%. Still waiting for some of the DOTs to reopen and, more specifically, the purchasing departments to get through their paperwork and to place the orders. Assets held for sale, Infomobility is -- the Infomobility division and also Parking have been negatively impacted by travel restrictions and customers not wanting to have outside people on-site to install equipment. So again, we hope this will improve in the third quarter. Still quite pleased with the revenue generation. Even more pleased with EBITDA, as I said, from minus NOK 8 million to NOK 26 million in 1 quarter and from minus 4% to 12% EBITDA margin. That's good. And if we look at the contribution per business area, Tolling is more or less flat, 0.7 percentage points improvement in EBITDA margin. Traffic Management is up from NOK 7 million to NOK 12 million, with a 9 percentage point EBITDA margin improvement. Assets held for sale, more or less same contribution, and group function is fairly stable. So that's what gives the result in this quarter. Order intake, driven by several small and medium-sized contracts, nothing of which has been reported. So no single order above our threshold of NOK 25 million for reporting. We did win yesterday a NOK 55 million Traffic Management contract in the U.S. Very pleased with that. And we do expect, as I will comment on in the outlook, several large contracts to be signed in the coming weeks and months. So we have spent the time during the corona pandemic and working from home in a good way and basically progressed a lot of tenders and awards, and now we're waiting for the final awards to happen and the final signatures to be collected, and we typically don't announce anything until everything is carved in stone and there is ink on the paper from the customer side. Order backlog, slightly down due to book-to-bill less than 1. So with NOK 170 million in order intake and NOK 220 million in revenues, of course, we're not able to maintain the order backlog, and we also have the negative currency adjustment quarter-on-quarter. So the exchange rates at the end of the first quarter were different than at the second quarter. So the NOK has appreciated slightly against the major currencies for Q-Free. Again, not worried about development in order intake at all given the big contracts we expect to sign. Expected delivery schedule. Both Q3 and Q4 have healthy backlogs, NOK 241 million in the backlog for the third quarter compared to the NOK 223 million we reported in the second quarter. So even if we don't generate anything on top of this in the third quarter, we should be able to report quarter-on-quarter revenue increases. I do want to comment that there are some uncertainties related to some of these deliveries. Not major, but given the COVID-19 situation, certain things might be accelerated, certain things might be delayed. Right now, most things are on track. So no information that will tell me other than this is what we planned for. But there could be -- if there are lockdowns or restrictions, then, of course, the numbers might change a little bit. But up until now, we haven't been very impacted in terms of delays on ongoing work. Cash flow and available funds in the second quarter, very happy with the increase from NOK 101 million to NOK 176 million in a quarter where we have repaid some of the old loan we had and also acquired the remaining shares in Intelight and interest expenses and all of that. We have now a healthy balance sheet and sufficient credit and cash at hand to have the operational flexibility we need in order to win new contracts and generate operating profits. A big thing in the quarter for us was the positive impact from cash flow from operations of NOK 21 million compared to minus NOK 45 million last year, so a big improvement in cash flow from operations. And yes, so we're quite pleased with both the cash situation and the underlying cash-generation capabilities. New financing. We also raised convertible bonds. This, I commented on in the first quarter presentation so I'm not going to details, but the convertible bond was approved by the Extraordinary General Meeting on 18th of May, and we also then managed to get a new loan agreement with our main bank. Maybe the most important thing for you to take a look at is the leverage ratio, where we have a holiday until Q4 2020, and in Q4 2020 12-month rolling EBITDA targets, about NOK 30 million. We're at NOK 18 million now, with a good third quarter and fourth quarter. There's been no problem beating that, and also be in a good position to beat the NOK 45 million target. Also, equity ratio is close to 50%. Is that right, Trond?

[Trond Christensen, Interim Chief Financial Officer]

Including the bond.

[Håkon Rypern Volldal, CEO & President]

Including the bond, it's close to 50%. So again, we're way above the threshold. Balance sheet. We have split out the book values of the assets held for sale on the asset side. So as you can see, there are some changes, particularly related to how we classify current liabilities and noncurrent liabilities. Net interest-bearing debt has also increased from NOK 225 million to NOK 244 million, but actually not less than what I expected at the first -- at the end of the first quarter. So also the debt situation is now under control. Then turning to the more interesting part maybe, strategy and outlook. We announced a new strategic plan at the end of fourth quarter 2019, and it contained 3 phases. Phase 1 was all about reducing business complexity to improve execution and optimize resource allocation. The second phase that we're moving into now is about building reputation as the #1 technology provider in tolling and traffic management and fortifying our positions in core markets. And the third phase, scaling, is about geographical expansion of standardized solutions. If we look at the first step, focus, we have now -- we are now running the company through 2 autonomous business units, Tolling and Traffic Management. We are done with optimizing and focusing remaining resources and investments. There might be small changes, but new roles have been assigned, people have been reallocated. We have slimmed down the organization from close to 400 and down to 380 employees, and we have raised new financing. What we have not concluded yet is the sale of Parking and Infomobility. For obvious reasons, it has been difficult to progress that and conclude that in the second quarter with travel restrictions making cross-border M&A activity very difficult and also with the pandemic creating uncertainty about future business prospects and maybe both with regards to our potential buyers' internal operations but also, of course, operations of our Infomobility and Parking companies. But we are now back to the table. We are having discussions with several interested parties, and we still aim to conclude this in 2020. We are, as I said, moving on to Phase #2, which is important, because without leading technology and without a strong, let's call it, home market or good market positions in a few selected markets, it's very difficult to expand and make money. You need a core that is profitable and where you have all your references and showcases that you can then use in order to build further business. So I want to comment a little bit on what we're doing. Last quarter, we commented on several products and services launched in the first quarter. In the second quarter, we have continued to work on the technology side, a lot of good work being done. We are in the process of upgrading our camera technology used on the roadside for tolling installations. So that will be a whole new camera generation, where we also, of course, will utilize our world-class ALPR technology. We are working in the field of road user charging or Cooperative-ITS technology. So we're looking into potential concepts for how to charge motorists per kilometer driven rather than collecting money through today's tolling stations or charging points. So that's something we have progressed, and we will most likely start to pilot in Norway in 2021 together with the authorities. So I'll get back to that later, but it looks promising that we can pilot this technology in Norway in 2021. We are working on replacing our key distribution center, which is a software solution for how to handle our tags. We sell millions of tags to customers. We then have millions of customers and millions of tags in operation. So this is an important software feature for managing an inventory of tags. Key thing for us in the second quarter was the June launch of what we call MAXVIEW 2.0. That is the centralized, intelligent software solution for managing a network of traffic intersections. This is where Q-Free has one of its main competitive advantages in traffic management. It's a super technology that can manage everything from a single intersection up to thousands and thousands of intersections. And we have upgraded the technology stack and added new features to make sure that MAXVIEW 2.0 continues to lead in terms of functionality and performance. We are also working on what we call event management as a module, so picking out certain functionality from our OpenTMS platform and turning that into a product like we did for LaneAware. I commented on that in the last quarter. It's a product that you can sell in order to manage work zones. And now we are taking that same product and turning it into a product for work zones at airports. So that will continue to drive profitable sales. It's products that you can resell over and over again, and that, of course, will also enhance earnings for our Traffic Management division. In terms of the outlook now in the second phase. We -- and building strong market positions. We are still targeting contracts with a total value of NOK 2 billion. I don't want to promise you that we win all of this. I would be surprised if we did. But we have 1 NOK 400 million already. We have added NOK 55 million in -- actually, NOK 70 million, NOK 80 million in the first week of July. So we are close to NOK 500 million now. And there are several contracts that will be awarded, both in Tolling and Traffic Management. Some of these situations are competitive situations. Some situations are with customers where there is no competition, so it's about timing and getting the contracts executed. A lot of the existing systems we have had to be renewed every now and then. So renewals will typically be with limited competition, and then some new projects are out with lots of competition. So some will be lost, some will be won. I'm still banking on a majority of this being won by Q-Free. I think we're in a good position, and that's also why I'm so confident about the order intake and pipeline for 2020. If we look at our geographic footprint in Tolling, the different countries or markets around the world have very different starting points. If we look at our key markets today, it's -- in Asia, it's Thailand and Australia. And in both of these markets, we are actually gaining or building market share. We have won 2 projects in Australia. There are new projects coming out that we're bidding on, and we think we're in a good position to capture some of that business. In Thailand, we recently signed one of the biggest system projects in Thailand ever, the Don Muang project, for NOK 75 million for Q3. And there were lots and lots of new projects coming out where they need tolling equipment. And so Thailand and Australia will be important markets for us, both short term and midterm and long term. And it's all about continued renewals and upgrades of existing systems or conversion of manual systems to more modern, let's call it, Multi-Lane Free-Flow systems that we call them like we have in Europe and other places. If we look at Europe, we have our most important markets in Scandinavia, in Iberia to Portugal and Spain and Slovenia. Those are the main markets in terms of revenues and systems. Of course, we sell products to Russia, France and Turkey and the U.K. But in terms of total revenues, systems operations, service operation, these are the key markets. We believe that at the end of 2020, we will have basically fortified our position in these markets. In Norway, as an example, we built up a business of close to NOK 250 million for ferries, so selling to pass holding technology to ferries for a speedy boarding on ferries and collection of payments. So that's important for us. Of course, we still continue to operate toll charging points in Norway, so we have a service and maintenance organization. Sweden, Stockholm, out on tenders, so that will be awarded in probably the coming months. So we'll see who will win that. We have Portugal and Spain, where we expect new contracts; and Slovenia, of course, is a Q-Free market and will be for many years. So we feel quite comfortable about our market position in Western Europe. There will be continued renewals, upgrades of existing systems. So there will still be opportunities to generate growth. But maybe, medium term, the most likely markets for bigger projects, you will find in Eastern Europe. And examples include the Baltics, where they are looking into both congestion charging around their capitals and truck tolling systems, like we have implemented in Slovenia. Ukraine will receive funding -- or has received funding from the European Investment Bank to improve their road infrastructure. So there are plans to implement a lot of different tolling projects and other projects that could be relevant for all the parts of Q-Free. Croatia and Serbia are looking into tolling. So there are multiple opportunities in Eastern Europe, and those can be captured a bit later on. In North America, we are predominantly selling ALPR, automated license plate recognition technology, and we will continue to do that. It's a very profitable business. It's a nice business where we don't compete with plenty of other system integrators, but we actually sell to the system integrators. So in some instances, direct to the end customer. So North America is still a growth market for us in terms of deploying our world-class ALPR technology in -- on more projects. South America for us will be Chile, short and medium term. And it's a nationwide strategy to convert to Multi-Lane Free-Flow. And we have won a couple of projects in Chile. We have increasing service and maintenance revenues, and we expect also to compete on future projects. So the geographic footprint that we have today is something that will basically make sure we can have a profitable and growing tolling operation. And then if we look at the expansion happening in the third phase, I think it will most likely come from Eastern Europe and maybe some new countries in Asia. So we will do selected new markets over time. We have shrunk our footprint for many years, but we're making more revenues than ever before in Tolling. So I think for us, it's about making more in the markets we're in because that's a better way to earn profitable -- to basically improve profitability. And then to add on top, icing on the cake, have the new markets, and we'll get there. But then you get a picture of how we're thinking in terms of our footprint. Same on the Traffic Management side. Here, we made a distinction between inter-urban and urban. So inter-urban is state-wide road monitoring software solutions; and urban will be traffic intersection controllers, traffic light operations. And if we go back to a couple of years, we would only be present in a few states. We have now established ourselves as a key competitor in multiple states. We have 4 key inter-urban markets where we have the state-wide deployments of the advanced traffic management system. We have 5, 6 other states where we have implementation of certain corridors or roads. We have established Q-Free as a main player in several other states. So on the urban side, so both in Florida, Georgia, Texas, Washington, Oregon, et cetera, we are a key player. And we've also entered now several other markets, so California, Nevada, Utah, Colorado, et cetera. So we're basically filling in the map. And what's good about this is that we focus on North America, and some people believe that this is a limiting factor, that we should go abroad. But there's so much more we can do in North America. We now have a strong foothold in that market, but there's still room to expand. Of course, we will go international over time. That will be in the third phase of probably 2022 and beyond. But for the coming 12 to 18 months, there's plenty of work in North America alone. So let me conclude this webcast by saying that we are pleased with the second quarter. We think operational performance was strong, attractive product mix and reduced operational expenses year-on-year, EBITDA and EBIT growth had a significant improvement versus first quarter, good cash flow from operations. We have strengthened our financial position with the NOK 82 million convertible bond placements and NOK 80 million in new bank loans. We have 100% of Intelight shares acquired. Actually, should be the only way around, right, on the convertible bond and loan, but it's a small detail. So we have strengthened our financial position. The outlook, I think, is promising. We have a low cost base, thanks to the implementation of the cost measures. We have a solid backlog for the third quarter and the fourth quarter, and we have a strong pipeline with multiple large contracts that we expect to sign in the second half. So all in all, we are quite pleased with the second quarter and think we can do better going forward also. Then we turn to questions and answers, and I will take a moment to just review the questions that have come in. And in case you have things you want to ask, now is a good time to type in the questions.

[Håkon Rypern Volldal, CEO & President]

So there's one question. The performance in Infomobility and Parking has not been good during the quarter. Are you confident you can still get a good price for them in the second half? Is there many interest for them?I think I commented on that. We aim to conclude these processes in 2020. Performance varies a little bit from month to month. But overall, I would say, year-to-date, the Infomobility business is doing well, and Parking is also picking up. So we're not concerned about performance in the second quarter having a negative impact on value. There is one question. Can we expect the shift to higher-margin products to continue? What can we expect from the gross margin going forward?I think in the -- what's important to remember is that when you're selling hardware, you typically have lower gross margins than when you sell software. And as product sales have been hit by the COVID-19 pandemic, we have sold fewer tags on the Tolling side and fewer traffic controllers on the Traffic Management side, which means gross margin has improved. On top of that, we also had better gross margins on tolling projects. And also, I think we have margin expansion on some of the software solutions in the U.S., where we don't have the same internal cost in terms of development for delivering some of the things we were selling. So I think if the tag and control market comes back, then gross margin will go down from the current level, but it's difficult to predict. I think we will, with normal product sales, we'll be a bit below this quarter. I think that's fair to say. Then again, you can have quarters where you have large software deliveries with 100% gross margin. And even if you have good product sales, it's hard to predict. It's just -- I think we, in most businesses, see good gross margins along all the different revenue-generating items. So service and -- in Tolling, if we look at service and maintenance, it's stable. Product is stable albeit low. Systems is actually improving. ALPR software and back-office software is close to 100% in terms of gross margin, the way we do it. And on the Traffic Management side, we have implemented a lot of cost-reduction programs for our controllers. So I think over the past quarters, gross margin on the hardware has improved, and software is always high. So we're down to how much of each product do we sell. It's hard to give more specific guidance on that. One question regarding pipeline. Considering the contract you were targeting, have you seen some projects canceled or postponed with the crisis?We've not seen many projects canceled, but of course, we've seen a lot of projects being postponed. People, government officials working from home, not always -- it's difficult to progress things then. They are used to working in bigger teams, and to organize all of that in a smart way has been challenging. But we're getting very close now to landing some big contracts. So even though we expected more of these bigger contracts to be signed in the second quarter, we are quite confident they will be signed in the second half. Of the NOK 2 billion you're targeting, is there some new product you are not expecting?Yes, of course. Every month, new projects are announced, and we have an overview or a target list that we will keep on updating. So there are projects. We win projects, we lose and new projects being announced, some projects being canceled. But net-net, I would say the pipeline is growing, so that's good to see. One question regarding costs. You had cut salaries in the second quarter to reduce costs, so we expect that you will increase again salary in the third quarter, and therefore, that fixed cost will increase again.No. As we have communicated, the pay cut will also be valid in the third quarter. So the savings we've had in the second quarter, we will also have in the third quarter. And then in the fourth quarter, we probably reverse some of the cuts once we have secured some of these bigger contracts and have more visibility in terms of our revenue side. If we don't have visibility, then, of course, we will find other ways to compensate for shortfall in revenues, which means we need to look at other ways to save costs. But right now, we will carry with us the cost savings in the second quarter into the third quarter and partly into the fourth quarter. One here. Can you expect real synergies between urban and inter-urban in the U.S. since you now own 100% of Intelight?Yes. So we started that process actually several months ago. If we look at the cost side of things, we have now organized this as 1 group. So we have combined development resources. We have combined back-office functions. But of course, we sell to different people within the customer organization. So we have different sales teams and different product experts. So on the organizational side and taking out costs, we've done our homework, and then we have implemented that already. On the commercial side, we have delivered joint projects between urban and inter-urban or the old urban and inter-urban. We did that to PennDOT in 2019. And there are more tenders coming out, asking for a combination of advanced traffic management systems and traffic single operation. So for us, it means integrating MAXVIEW or MAXTIME into our OpenTMS solution, and we've done that. So we are in a good position to serve customers that want both solutions. And we believe, of course, being Q-Free that this is the trend, and there were some tenders out, but we'll see in the coming years what the real commercial benefit is or the synergies are. I think from a marketing perspective, from a cost perspective, from a customer service point of view, there are clear synergies, and then we have taken those out already. Okay. That's it. I don't see a lot of additional questions on my screen. So with that, we conclude the second quarter presentation. Thanks for watching. And we hope to get back to you in October, I think, for the third quarter with more good news. And pay attention in the meantime for these larger contracts to be awarded. Thank you. Bye.