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Edited Transcript of QFR.OL earnings conference call or presentation 23-Oct-19 7:00am GMT

Q3 2019 Q-Free ASA Earnings Call

TRONDHEIM Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Q-Free ASA earnings conference call or presentation Wednesday, October 23, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Håkon Rypern Volldal

Q-Free ASA - CEO & President

* Tor Eirik Knutsen

Q-Free ASA - CFO

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Presentation

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Håkon Rypern Volldal, Q-Free ASA - CEO & President [1]

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Okay. Welcome to Q-Free's presentation of the third quarter 2019 results. My name is Håkon Volldal. I'm the CEO. And with me today, I have Tor Eirik Knutsen, our CFO.

If we start with the summary and the highlights. In the third quarter, we had revenues of NOK 243 million, which is up 12% year-on-year driven by good growth in our tolling and interurban segments.

EBITDA was strong, NOK 31 million, 13% margin, almost a doubling from the NOK 16 million we reported last year. The number is positively impacted by NOK 9 million in reduced pension obligations.

NOK 206 million in order intake. That does not include the announced ALPR frame agreement in the U.S. of NOK 80 million to NOK 130 million. We do not take frame agreements to our order intake unless there is a minimum volume commitment, and there is no such thing here on this contract. But we expect the value to be between NOK 80 million and NOK 130 million.

The order backlog is actually unchanged from third quarter last year. It remains at NOK 1,091 million, excluding all frame contracts. The financial situation, some of you had some concerns after our second quarter results, but the situation improved during the third quarter. We had NOK 36 million in net cash flow from operations, which also led to a 10% reduction in net interest-bearing debt. So no waiver in the third quarter.

NOK 95 million tolling contract in Thailand was awarded to Q-Free in early October, quite happy about that. Would have been nice to have it in the third quarter, but then we have a head start on the fourth quarter order intake.

Some more details on the numbers. As I said, revenues in the quarter, up 12%. Also, year-to-date were up 11%. Gross margin is down driven by product mix. And also some price pressure on the hardware components that goes for the quarter and also for the year-to-date results. So we're down 8 percentage points year-to-date. So we'll comment on that a bit later.

OpEx. We had good control on OpEx, down 8% in the quarter, of course, impacted by the pension obligation. But even on a year-to-date level, we were actually down adjusted for that. That gives us an EBITDA year-to-date in line with last year and a margin of 9% in the quarter after pension adjustment, 7% last year, 7.4% this quarter -- year-to-date and 9.7% last year. So we hope to catch up on the year-to-date figures in the fourth quarter and also improve margins going forward. But Q3 isolated, quite happy with that.

If you look at the business update. As you know, we have 5 segments or business areas, starting with the tolling, which represents roughly 54% of the business. Third quarter was strong. Revenues grew by NOK 30 million. We went from NOK 117 million last year to NOK 147 million driven by high product and ALPR revenues in Europe and also, of course, project revenues from Denmark and also started to take some revenues to P&L in Australia on the Cross City Tunnel project. EBITDA was NOK 40 million up from NOK 15 million last year. This strong performance is driven by high contribution from ALPR in Norway and also in terms of license sales. Project financials are actually still weak. We expect to finalize some of the weak projects during the fourth quarter. Fourth quarter will be negatively impacted by some of these projects. But if you look at the contracts we have in our backlog and the contracts we have recently announced, they have much better profitability than what we are currently working on. So despite that, third quarter was very strong on the tolling side.

In terms of order intake, we announced the Multi-Lane Free-Flow project in Australia and also had lots of small, medium-sized orders below their reporting thresholds accumulating to NOK 82 million.

Commenting a little bit on the 2 projects we've won recently. The one in Australia, NOK 55 million is a project with Transurban to upgrade their tolling assets in Queensland. The good thing about that is that it's the first tolling projects for Q-Free in Australia, except for the Cross City Tunnel, which we have had since 2005, I think. So we've worked for many, many years to qualify Q-Free as a tolling system supplier in Australia. Now we're back. And Australia will be a very interesting market going forward with lots of new projects coming up. And with the Cross City Tunnel contract and the Queensland contract, we feel that we are in a good position to capture more business in Australia.

Thailand is another very interesting market. The ETC project in Bangkok is actually to provide tolling solutions on extension of an existing highway from Bangkok to the Dongguan Airport. That's a NOK 95 million contract/NOK 75 million. Why do we say that? Well, NOK 20 million will be pass-through revenues. So you should calculate margins on the NOK 75 million. That's a good project for Q-Free. We've worked a long time to get back into Thailand with a sizable tolling project, and there are numerous new projects. I think Thailand is one of the countries in the world that will deploy ETC solutions, tolling solutions on a very high scale in the going -- in the coming years. There are 2 big contracts, projects we are working on at the moment and hope to win at least one of them, that would be nice. It could happen in the fourth quarter. It could be early 2020. But the list of projects in Thailand and accumulated potential order intake is quite significant. So Thailand is another very interesting market for Q-Free. We have organizations in place. It's known technology for us. So that's also why the margins are more attractive on these projects than what we have seen in 2018 and '19. So a lot of them -- actually, technology developed for the Great Belt Bridge in Denmark will be reused in Thailand, which reduces the risk and improves margins. That's good.

Parking is still a small segment. Revenues up, driven by increased deliveries in the U.S. We announced a contract with Charles Schwab earlier this year. But despite that, EBITDA is still negative. We've had development costs related to finalizing our new products. We expect the new indoor sensor is now finalized. The outdoor sensor is more or less finalized. Some remaining work on the base station. But going forward, R&D costs in parking will come down. We have gained momentum in the U.S. and in France with our new updated indoor portfolio, and we're also piloting our outdoor sensor in several markets. So we expect parking to improve.

Infomobility had a rather uneventful quarter, fairly flat revenues versus last year. EBITDA negatively impacted by lower ALPR license revenues. So that's the explanation for the decline versus third quarter 2018.

Urban was -- whereas tolling was a positive surprise in the third quarter, urban was a negative surprise. We had expected stronger software sales. Revenues in the quarter impacted by several delays of software deliveries, and software deliveries are important in this segment. It's not that we've lost contracts, it's just that the deliveries have been postponed. We were not able to deliver the solutions and hence, invoice the software deliveries in the third quarter and that impacts revenues and it definitely impacts margins. Margins on software is close to 100%. When you have it, all revenues go to the bottom line. With hardware, it's different. It's lower margin. So we expect a rebound in the fourth quarter. But of course, margins are very weak in this quarter. So fourth quarter will make up for some of that. 2019 has been a bit challenging. First quarter was weak. Second quarter was better. Third quarter, weak. Fourth quarter, better. In 2018, we had 4 strong quarters and was one of the biggest contributors to Q-Free. And it's not that we have lost faith in this at all, it's not that the market is going down at all, it's just about timing and getting these software deliveries out.

Order intake is fairly stable, several small and medium-size orders. We also have some larger orders we're waiting for. So again, we're not concerned about urban, medium to long term, it's just the third quarter was a disappointment.

Inter-urban, on the other hand, was a positive experience in the third quarter. We had NOK 38 million in revenues, up from NOK 29 million last year. And this strong growth was driven by Slovenia, which has caught up after a slow first half, ALPR camera deliveries to Norwegian Customs and also good contribution from the U.S. business. So EBITDA is also then significantly up driven by high revenue recognition in the quarter. Versus last year, year-to-date, margin is rather stable. So again, they've caught up. Low order intake, a couple of tender awards have been postponed and the ALPR frame agreement, which would have been booked in this segment is not included in our order intake. Again, this is a little -- in inter-urban, you have certain spikes in order intake, and then it's rather low in between these contracts. This is not a business where you have contracts awarded every week or every month, you have a few customers that you work with, and then when you get the contracts, these contracts are rather big.

The ALPR license agreement. Just to comment on that. We have 50,000 licenses in operation for automatic license plate recognition used in tolling applications, parking applications, border control security applications. The new contract is signed. We hope we'll open up a new segment for us related to security. And it will more than double the number of installations in use. So this is a game-changer for the ALPR business. Of course, this also triggers us to go out and hunt for similar orders. And if there's something Q-Free needs, this is more of these high-margin software deliveries. So we're extremely pleased with this frame agreement and hope to receive the first purchase orders next year.

And Tor Eirik, you will do the financial update. Just going to switch the mic.

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Tor Eirik Knutsen, Q-Free ASA - CFO [2]

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Thank you, Volldal. Yes, starting with the revenues. Revenues in the quarter were up 12%. Main driver was tolling, it was up 25%. That was driven by strong product sales in Europe. ALPR revenues in Europe, especially from Norway, we are benefiting from increased traffic going through the Norwegian tolling stations, especially here in Norway and Bergen. Increased volumes generates revenues for us. And in inter-urban, it is 3 markets, and I will come a little bit back to that later also, but these 3 markets that generates revenue for our service in the U.S., especially the VDOT agreement where we also have passed some important milestones, which also have a positive trigger for our cash flow. And we also do -- since we have passed the milestone also took some more revenue and there to take some more margin on that project. Second low market is Slovenia. In that market, we had a quite slow start, but in the third quarter and the fourth quarter, we have a very high and strong backlog. Also what you see in terms of profitability is that the marginal costs when you deliver these orders are quite low. This is a high degree of software. And the third market coming up is, is Norway, where we have had some strong deliveries now in the third quarter, 2 Norwegian Customs on this -- in the frame agreement we communicated last year, and there is more to come from that market. So I think in going forward, especially in Europe, we will see continuous growth in inter-urban.

Region-wise, Europe is up 19% in the quarter, again, driven by Great Belt, Norway. We also started to recognize some revenues from the Ferry agreements. We are deploying those contracts now, especially for new lads. They were going -- they will go live in the 1st of January. So we are working hard to deploy those, make them ready. And we also have 18% growth from APMEA. And I think we see just a start from that region, 18% from low levels, with the backlog we have -- we have all-time high backlog in the region. So we will going forward, see a significant contribution from APMEA.

The market that was somewhat disappointing in the third quarter was America, where we saw flat development. Main reason for that is urban that Håkon already have commented on. We expect, going forward, to see a significant rebound in the U.S. We have a good, strong backlog and, of course, as I mentioned, APMEA going forward will increase in share.

Looking at the tolling versus the nontolling segments, we are quite up this quarter compared to last quarter or to the third quarter. Going forward, I think when we'll see that, tolling will be the main driver, given the backlog, given the prospects we see now in pipeline.

EBITDA-wise, the reported EBITDA was NOK 31 million, 13% margin. We actually had a positive nonrecurring item. And that's I think should also be noted. 9% EBITDA margin in a quarter where we are taking revenues from polling agreements with quite low gross margin, which we have mentioned before. But also to mention, we are, of course, having also some agreements here with quite strong margins like the ALPR revenues in Norway, where we have quite good leverage.

If you look at the segments and the development over time. Tolling, going back, you will see it's been stable around 15%, 20% EBITDA margin. Going forward, I think it's a fair assumption to believe that we will continue to -- and the aim is to now maintain fairly above 15%. Backlog is strong. Per quarter, positively impacted by onetime effect in Norway. Infomobility still very low level, but positive contributor to Q3, positive cost cash-wise as well.

Parking. We are now stopping to invest in tech, but we are starting to invest in sales and are trying now to really materialize on the technology platform we have. So costs are going down in tech. We're reallocating resources to other parts of the business and the focus now is all about sales and hope to basically geographically expand this business also to markets outside the U.S. Urban -- inter-urban, I commented on that. It's -- the marginal cost for us to deliver revenues in inter-urban is quite low. So when you then take some additional orders in the quarter, you have very strong profitability in that quarter. This is a segment where, as a CFO, I can take with me the backlog to bet. It's a quite stable resilient business, and the order intake will vary, as Håkon mentioned, but the pipeline is there, and I'm convinced going forward that we will continue to see positive contribution from that segment, also driven by Norway and Slovenia.

Urban has been a roller coaster. And I think Håkon already have commented on the expectations there. So I will not spend more time on that.

Order intake, in the quarter, if I include the ALPR agreement, was around NOK 300 million. That gives a book-to-bill of 1.28. If I compare the year-to-date order intake with last year, we are up more than 10%, if I include the ALPR agreement. We have currently, with the Thailand order secured, NOK 902 million in order intake. Last year at the same period, it was NOK 709 million. So it's -- I'll say that revenue-wise and order intake-wise, the momentum is quite strong. The order intake in tolling, NOK 55 million was the Australia agreement. Rest was small, medium orders basically covering all parts of the world.

Order backlog. Backlog is the same level, but the quality of the backlog this quarter is significantly better than it was in the third quarter last year because the quality of the revenues and the quality -- I mean, profitability is better. So that's, for sure, something worth notifying. If you look at the orders into the fourth quarter and what's secured, we have, as of today, secured NOK 924 million in revenues. That's excluding the Thailand order, NOK 806 million same period last year. And I think last year, we had revenues of NOK 888 million around that. If I look into 2020, we have now secured NOK 518 million in orders. If I then add the Thailand, the DMT order, we'll have a little bit uncertain how much impact it will have this -- in the fourth quarter, but did most of that order will be delivered in Q4, now in 2020. So if I add that, we are already around NOK 600 million. And last year, at the same time, we had NOK 429 million.

Cash flow was positive in the quarter, which was basically, I think, also was quite clear when I stood here 3 months ago that we expected the cash flow to improve because we had, in the first half, some, I would say, quite -- we are negative development in the working cap, which was also a little bit timing-dependent. So when I stood and presented the numbers, I knew that our cash flow would be better because we have already collected quite a lot of receivables. So the financial situation improved significantly during the quarter. And I'm quite convinced that this will continue also into the fourth quarter. No way that we are going to collect a lot of milestone payments, et cetera, et cetera. The biggest uncertainty and the only contract left now in that we are recognizing revenue from, which has a quite unfavorable, and I will say, unpredictable pattern, that's the VDOT agreement in the U.S. And we're still dragging the feet after us on that. So we will -- either we will collect NOK 20 million to NOK 25 million, and that's basically collection because all these costs are spent in the fourth quarter if everything goes according to plan. Otherwise, Q-Free will, in 2020, see a significant cash inflow from that agreement. So fingers are crossed that we will manage to maneuver so that we get those money into the fourth quarter. Then the cash flow in the fourth quarter will be strong.

The cash flow reconciliation here is a little bit showing exactly how the cash flow is not following IFRS, which I think is a little bit misleading, especially on the finance side and other items. So on the net finance, it says NOK 8 million minus. And of that, NOK 5 million is IFRS 15 effect, which then should have been added to the -- taken away from the NOK 22 million on EBITDA. Remaining NOK 3 million, there is really the finance costs for the company. And also to mention here is the NOK 11 million in increased credit lines basically to secure that we have maneuvering to fund operations sufficiently.

Balance sheet is quite up in the quarter. Main effect is currency. We have a lot of assets in dollars and euro. So when the Norwegian coin weakens, that has an impact on that. The Equity is up NOK 40 million, half of that is -- more than half of that is currency. So it's not -- besides that, there is not so many items that has changed during the quarter, except that we had a profitable quarter, which also was positive.

Net interest-bearing debt were down NOK 26 million, NOK 27 million, depending on rounding. And given that I'm guiding a little bit on the fourth quarter and positive cash flow, we expect that to decline further going forward.

Håkon, then you will round off.

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Håkon Rypern Volldal, Q-Free ASA - CEO & President [3]

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Okay. Thank you, Tor Eirik. Then on the outlook, these goals remain fairly stable. We want a book-to-bill above 1.1 because that supports 10% organic revenue growth, and we want an EBITA margin now in Italy of more than 10% to be stable. I think, over time, we can move that upwards. So how are we doing? In terms of order intake, we have NOK 300 million in the first quarter, roughly; NOK 200 million in the second quarter; then you could argue, it's NOK 300 million in the third quarter, but let's use NOK 200 million then. We are now at NOK 700 million, excluding frame agreements. And what about the fourth quarter? Well, the pipeline is quite strong. We have projects in Thailand that will be awarded. We are waiting for contracts on the ALPR side in the U.S. We are waiting for inter-urban contracts in the U.S. and urban contracts in the U.S. So fourth quarter could be quite strong. Then again, this is the challenge of doing business with the government bodies. You never know what they decide and then they're quite good at postponing timelines and not sticking to initial plans, so it might be that the Thailand contracts will be signed or awarded in the first quarter of 2020. But we're still keeping our fingers crossed that it will happen in the fourth quarter. And if it happens, and we win, then we will be above, I would assume we would then be around NOK 1.1 billion, NOK 1.2 billion, which would be in line with our goal.

Beyond 2019, there are lots of opportunities out there. As I mentioned earlier, there are new projects in Australia with the customer that we have recently won 2 contracts with. So more specifically, the M2 highway and the CityLink, 2 big highways, especially the CityLink in New South Wales. In Thailand, we're looking at, at least 3 fairly short-term opportunities and maybe 1 in 6 that we hope will be awarded in 2019, and 5 will probably happen next year. The 3 might happen next year. Portugal is considering upgrading their tolling assets. All of the Baltic countries are considering truck tolling similar to what Slovenia has done. That was a EUR 50 million contract for Q-Free and then put it that way, Estonia, Latvia and Lithuania will not be smaller than Slovenia. They are also considering congestion charging projects around their capitals. So similar to what Stockholm has done, London has done, Milano has done. That's also very interesting project for Q-Free. We have some of the strongest references when it comes to congestion charging. We are waiting for urban contracts inter-urban contracts and, of course, more ALPR agreement. So if I look at the pipeline of opportunities and, as Tor Eirik said, the quality of those revenues, meaning the margin potential on these contracts, I would say, we're in a better position than ever.

Revenue momentum. We are quite confident that we will meet a 10% growth ambition for 2019. As Tor Eirik said, we are -- if you look at year-to-date revenues and you add the backlog for the fourth quarter that is secured at the end of the third quarter, we had NOK 806 million secured at the end of the third quarter last year. At the end of the third quarter this year, we have secured NOK 924 million. So that gives a 15% growth versus 2018. And we had a strong quarter in the fourth quarter last year. But if we're able to deliver something similar on top, then maybe we cross the NOK 1 billion mark for the first time. But again, it also depends a little bit on timing of deliveries to Thailand, et cetera, and software deliveries. So -- but that's ballpark where we think we will land.

Margins, of course, interesting. We're not pleased with the margin development in 2019. It has been slightly disappointing. The good thing is that we're quite positive when it comes to how it will develop from this level going forward. Looking at our different revenue categories and how we expect revenues and margins to develop, we think that on the tolling side, service and maintenance contracts are stable. Looking at gross margins, margins are fairly stable. Products have been down quite a bit in 2019 compared to 2018. And we expect that trend to continue, but it will be much more stable, I would say, than in 2019 versus 2018. And the reason is that we are now on certain frame contracts with guaranteed pricing for the coming years. So the declines you've seen in 2019 will not continue into 2020.

Tolling systems, we expect to go significantly up. We have delivered some very low-margin projects in 2019 that will, unfortunately, continue in the fourth quarter, but then from 2020, Thailand, Australia and other projects will kick in with a much better margin structure. So that will help us overall and especially in tolling. Parking will be stable versus current levels, depending a little bit on pass-through revenues. Infomobility, we expect to be rather stable. Urban, we expect to go up because we expect to increase software deliveries. And inter-urban, we expect to be stable. So the margin -- the gross margin should actually overall go up versus where we are at the moment. So you should not extrapolate the current margin development. That's the best guiding I can do on the margin side.

And then I want to end with a comment on what we are working on. A lot of people ask us, so you provide these tolling tags, and we hear about parking and bicycle counters and whatnot, but really what is Q-Free doing for the future? Well, we do a lot. We do a lot more than most people know. We are actually at the forefront of cooperative ideas and connected an autonomous vehicle technology and to give you some examples of what we are currently testing. We have a first-generation product that can deliver this. Now considering to develop a second-generation product, which is much more about finding the right costs and also form factor to fit this technology into vehicles on a high scale. But if you look at some of the things we are working on, we are working on in vehicle technology and roadside technology that will open up for quite advanced communication between infrastructure on the roadside and vehicles and vehicle-to-vehicle communication. So the cars can start to communicate with each other. That means that we are looking in to things like roadworks warning. You will get inside the vehicle a message that there is roadworks upcoming, so be careful. A lane might be closed, you will get the warning on that. You will get the red light warning, speed warning, collision warning. And more importantly, because this has never been done before, end-of-queue warning. That's a major source of accidents. When you approach the end of a queue, let's say, it's around a bend and then you don't see the end of it, a lot of collisions happen. But in fact, with our technology, you can actually get the warning that in 100 meters, you will reach the end of a queue if you slow down. Another interesting thing is wrong-way driver. So you can get notifications that somebody is approaching you in the wrong direction. Let's say, you're on the highway and somebody, unfortunately, is driving in the wrong direction on the highway, the technology will detect that something is approaching in the wrong direction. You will also be -- you can also use this technology for low-emission zone. So you can set virtual zones and once your car goes into the virtual zone, you can override the engine and turn it automatically to, let's say, if you have a hybrid car, you turn it to electric mode. That's quite advanced. So this technology will communicate with the ITS platform inside the car. It's what we call the OBD-II port. It has a lot of information. For many, many years, the car manufacturers have been able to pull data from their cars, but they're not used. So what this technology does is that it allows us to use this data and also pull data from other vehicles. So not only warnings and accident prevention, but also actually remote diagnostics done by others than the OEMs.

So this technology we're testing. We have tested it in Norway, we have tested it in the U.S., we've tested it in Australia and we're talking to some fairly big companies and working with some fairly interesting potential clients. So this could be one part of our future Q-Free.

So just to let you know that we're not stuck on the 5 things, the 5 business areas that we have and the current products, we're also investing into the future. And Q-Free is not a big company in terms of revenues, but we're absolutely able to make some marks out in the world in terms of technology development in standard settings. So Q-Free has been driving the industry standards on this for many, many, many years.

We'll now stop bragging and allow you to ask some questions.

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Questions and Answers

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Unidentified Participant, [1]

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(inaudible) private investor. You said that about NOK 1 billion for 2019. What you -- can you please elaborate a little bit about the probability? Would you say it's 20%? Or would you say it's 50%?

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Håkon Rypern Volldal, Q-Free ASA - CEO & President [2]

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I think it will be -- it will be around that. Whether we missed it by NOK 20 million, NOK 30 million or could go above depends a little bit on when we can recognize revenues on the Thai contract that we announced in October. So when the startup is on that and how much progress we can make. So I don't think I would give you an exact probability, but it will be ballpark NOK 1 billion plus/minus, based on what we're seeing now. You never know.

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Unidentified Participant, [3]

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And one more question more about the last slide, you put out was very interesting. I'm very technology interested. But are we talking about completely different clients? Are we talking about Tesla or the Volkswagen Group, those kind of clients? Or who are the potential clients for those new opportunities?

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Håkon Rypern Volldal, Q-Free ASA - CEO & President [4]

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So that we don't know yet. That's the interesting part about it, so we will actually drive this deployment. There are at least 3 big groups. One would be the automotive OEMs, so Volkswagen and Toyota and Tesla and whatnot. Then you have the technology giants, Google, Microsoft, et cetera, that might want to control this because it's about data. They want to harvest data. And then you have, let's call it, the DOTs, the Department of Transportations and the government bodies, the National Public Road Administration in Norway or Trafikverket in Sweden or Georgia DOT. They are also interested in this. So who will actually win, I think that will vary. So we're testing with -- currently, we are working more closely with government because this also requires regulations. And working with OEMs is very attractive in terms of scalability, but not so attractive in terms of margins. So we keep all options open. But in terms of testing and piloting, here you're testing with government bodies.

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Unidentified Participant, [5]

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Do you think there will be some announcements around this into 2020? Or are we talking about further years ahead?

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Håkon Rypern Volldal, Q-Free ASA - CEO & President [6]

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I think we will continue to do pilots, and it will generate a few million NOK in revenues in 2020, but this is more, I would say long term. It could be really big. What is long term? Well, in this industry, it could be 2 years. It could be 5. But this is the future in telematics device and software solutions that you need in order to facilitate, let's say autonomous driving. So this is something that will gradually come in the next years. But again, also to show you that even though all vehicles end up as autonomous robotaxis in 10 years, there is a market for Q-Free's technology still.

Okay. Anything from the web?

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Operator [7]

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Yes, there are 3 questions so far. Can you give some guidance on CapEx for 2019 and 2020?

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Tor Eirik Knutsen, Q-Free ASA - CFO [8]

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Good question. I actually forgot to mention that because if you look at our OpEx, it's -- actually would have been lower if we have to continue to capitalize R&D as we did last year. So this year, we are -- have reduced that quite significantly. I think if you look at Q3, we have been -- last year, we were at around 4% of revenues. This year, we will be around 2.5%, 2.6% of revenues. And most of that is capitalized R&D into tolling. So last year, it was locked in -- invested and capitalized locked in parking has stopped, so now moving into the next phase. So going forward, I think the CapEx in Q-Free will be around 2.5%, 3%, as we have, I think, said before. So we are not an asset-heavy company.

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Operator [9]

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How is the covenant of the loan agreement calculated?

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Tor Eirik Knutsen, Q-Free ASA - CFO [10]

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So we had -- traditional leverage ratio from last -- it's 12-month rolling EBITDA divided by the -- sorry, it's the net interest-bearing debt divided by 12-month rolling EBITDA. And we have a leverage ratio of 3%, and we are below that.

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Operator [11]

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Can you come back on parking, how much cost of development are still in the EBITDA? Should we expect a decline of those costs in Q4 or stability due to increase in commercial spending? No loss reduction expected in 2020?

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Håkon Rypern Volldal, Q-Free ASA - CEO & President [12]

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Yes, loss reduction expected in 2020. I think that's what we said. So 2019 has been impacted by, let's say, NOK 4 million, NOK 5 million in R&D expenses. First half was weak sales. So we're now focusing on sales and marketing. But I think our strategy will not too much be direct sales as it will be indirect sales. So we need a couple of people to go hunt for distributors and dealer agreements. So sales and marketing investments will not be significant. So as R&D expenses will drop, and then hopefully, sales will increase, then I think parking will improve its EBITDA performance in 2020. Whether we see that improvement in the fourth quarter, I think we'll see a marginal improvement in the fourth quarter, but a more significant improvement in 2020.

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Operator [13]

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Inter-urban, ALPR frame agreement is not included in the order book, how much orders are expected in 2020 in this framework? It is just license sales, any recurring aspects in this contract?

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Håkon Rypern Volldal, Q-Free ASA - CEO & President [14]

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No, it's -- when you do license sales, they don't have recurring revenues. Our business in the U.S. is recurring. But this is just selling software licenses. So we get to a certain amount, euro amount per license that we sell. And the amount will be based on call-offs on the frame agreement. So exactly how many licenses they will buy next year and how much revenue that will generate, we don't know yet. It has been, as I said, calculated a need for this customer between NOK 80 million and NOK 135 million. So that's the range we're working on and how that's -- and that's over 3 years. So exactly how that will be divided between 2020, '21 and '22, we don't know yet.

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Operator [15]

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That's all from the web.

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Håkon Rypern Volldal, Q-Free ASA - CEO & President [16]

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Okay. Thank you for attending.