FREQUENTIS CEO Norbert Haslacher in web conference with boersengefluester.de and BankM (20.10.2021)

Thank you, Mr. Kruse, and from my side, a warm welcome to this event. I am always happy to do this because personal exchange with investors is important to learn how we can present ourselves even better and be more transparent. I look forward to the next hour and a half. Let me briefly introduce Frequentis. As mentioned, we have been listed via IPO in Frankfurt and Vienna since May 2009/2010. Why two venues? Not only because we operate in a safety-critical area and always need a plan B, but also because Austria is our headquarters, and we have a high reputation at technical universities in Vienna and Graz. Germany is our largest market and our extended home market, our gateway to the world, so we decided to list in Frankfurt as well. Frequentis is not a startup; we have been around for over 70 years, founded in 1947 after World War II to enable air traffic to and from Vienna. It has always been a family company, now publicly listed since 2009/2010, but at heart still a family company. We are a global company with customers in over 150 countries. Our customers are typically authorities with national safety-critical tasks. Revenue last year was nearly 300 million euros, and our equity ratio is 40%. We serve two segments: air traffic management and public safety and transport. In civil aviation, customers are air navigation service providers like DFS in Germany or Austro Control in Austria, as well as the armed forces. In public safety, we serve fire departments, rescue centers, police, railway transport, and maritime authorities like coast guard and search and rescue.

What does Frequentis do in these segments? We have a clear strategy: we equip control centers or command centers. This is a very interesting niche market that exists worldwide, worth billions of euros. The total volume of tenders each year is about 13 billion euros, of which we can address about 2.5 billion with our current portfolio. You will not find another company in the world that exclusively makes control centers for the security sector globally. There are regional companies with only one product, or large military companies that also make control centers, but their main business is hardware for the military, not control centers. Control centers look quite similar worldwide; the tasks of an air traffic controller or a firefighter dispatcher are very comparable. We see several global trends: first, digitalization – control centers still use old systems, and digitalization is now coming to the safety-critical industry. Second, integration – combining multiple screens and keyboards into one interoperable screen, enabling more automation. Also important is the sustainability of investments because our customers are authorities spending taxpayer money. Frequentis applications typically last 15 to 25 years and are continuously upgraded.

We are very proud of our customer base: 500 customers in 150 countries in the safety-critical sector. This is unique. We want to use this to move our addressable potential from 2.5 billion towards 13 billion. We achieve this through R&D, spending about 6-7% of revenue per year, which we do not capitalize but pay from profits. We also do M&A; we have bought four companies. In R&D, we developed remote tower technology with DFS, allowing controllers to control a tower remotely from a central location. This increases safety and helped during the pandemic. It is now being rolled out in many countries, especially in Asia where new airports are being built. We also invest in storm management and LTE for public safety.

Our customers are authorities responsible for national security. They are very risk-averse and work with suppliers they have known for 25-30 years. Trust, reputation, and quality are crucial because people's lives depend on our systems. We are a global company with over 2,000 employees, 900 at headquarters. We have a strong presence in North America, Australia, South America, China, and Europe. Over 90% of flying passengers come into contact with Frequentis systems. Classic solutions: we are proud of a nationwide network project in Brazil for air traffic control voice and data integration, now in rollout. We also won a communication solution for Hamburg's fire department and police, using our '30 Plant Classics' platform. In the drone area, we have won our first project to equip 18 towers for safe drone integration into civil aviation.

ESG is a key part of our business. We build solutions to reduce CO2 in air traffic, such as guiding aircraft on optimal paths from runway to gate to avoid unnecessary fuel burn. We also have systems to reduce circling. Socially, as a family company, we introduced 'Flexi' to help employees with childcare during summer holidays. Governance includes mandatory compliance and safety training. On drones, we believe they are the future and must be safely integrated into airspace. We invest in research and have EU-funded projects.

We had a successful first half of 2021 with increased revenue and EBIT. Group result was positive at 4.1 million euros. Typically, the first half is negative in the public sector, but this time it was positive. We have strong equity and net cash of 77.2 million. We made acquisitions: from a large US military supplier, an Australian voice communication company, a German airspace management company, and a Canadian company. This includes a reseller cooperation. Order backlog and revenue increased. ATM grew strongly; PSP had rail project delays. We expect rail tenders in 2-3 years. EBIT was affected by acquisition accounting, but even excluding that, we delivered a very good result.

Our outlook: order backlog of 453 million euros is very good. We aim to increase revenue and order intake in 2021. EBIT margin around 5-7%, an honest margin as we pay for everything from profits. We have integration costs for acquisitions. Our salespeople need to learn how to sell these high-tech products. On COVID: we had very few infections, switched to virtual work early, and maintained customer contact. Travel restrictions remain a risk, but we are well positioned. That concludes my presentation; I hand over for questions.

Thank you for the question. It is legitimate. First, we are a high-tech company investing heavily in R&D, necessary to meet standards. Second, we invested in regionalization in recent years, which is now complete. Third, the industry is transforming from hardware to software, requiring significant investment in a new software platform. This transformation costs money, but we have shown year-on-year improvement. Our long-term target is an EBIT margin of 8-10%, comparable to classic IT system companies. The owner family is interested in both returns and long-term sustainability, and our path balances both.

I would say that in many parts of the company we are already a pure software company. We started a few years ago building up capacities in Romania, Bulgaria, Poland, Czech Republic, Slovakia, and we have successfully built software centers in recent years. In public safety, it's already pure software; there is no hardware advantage anymore. Everything for emergency services is software projects. Of course, we still have the installed base for this voice communication, with obligations for another five to ten years that we must fulfill. That's why there is still some production for that part. But new business for the last two years has been only software. In the air traffic control area, it's still mixed because air traffic control organizations are very, very slow. That has disadvantages but also advantages: once you are in such a project, you are in it for 20 to 25 years, and the order value can increase ten to twenty times the original order value due to add-ons. But I think it depends heavily on the fact that air traffic control itself must build up personnel to maintain IT infrastructure and applications. Currently, they are electrical engineers or communications technicians who work on the hardware systems. They now need to increasingly focus on software as well. For air traffic control, I think it will take only five to ten years until we are 100% software. I would say not 100% because we also build our own safety-critical routers in the network area, which enabled the network project in Brazil, among others. But there, I estimate we will have five to ten percent hardware, and 90 to 95 percent software in the final stage. That will take about seven to ten years. Frequentis will never become a 100% software company; similar to Siemens, we will always have a certain revenue mix, including consulting and partner services. So, as I said, we don't just sell licenses like SAP or Microsoft; we integrate our own software at the customer and are then responsible for operations for 25 years to ensure it continues to work. Currently, the split is about 25-30% hardware, 60% services, and 10% software. That will shift, I'm convinced, but we are more of a system integrator with our own product, so you have to see it that way.

That is very difficult to answer because it depends heavily on the product and the type of order. If it's a national program with a rollout, like we just completed in Bavaria or are currently doing in Australia, it takes four, five, six years until everything is rolled out, and then we have ten to fifteen years of maintenance and expansion obligations. But there are also orders that are smaller services, which can be completed within six to twelve months.

That's a good question. If you look at our side, we have about 90% of revenue from existing customers, albeit with new products that we either developed ourselves or acquired. 90% from existing customers, 10% from new customers. Of the revenue from existing customers, about 40% is recurring elements: change requests, software maintenance contracts, hardware maintenance contracts, spare parts contracts. So you can say that without tenders, about 40% is recurring. We also have the best brands, you have to imagine, and 60% are new products with existing customers. That's roughly how you can picture it. Where is this heading? I see that customers are gradually coming to terms with buying software. That also means they have to buy software maintenance, which they weren't used to before. They used to buy hardware; when something broke, they bought a spare part. So customers also have to adapt, but gradually you notice in tenders that they are learning and getting advice that when they buy software, software maintenance contracts go along with it. Therefore, I believe that sooner or later, the recurring revenue shares in the software area will increase massively. That is my expectation of this market's development.

Yes, that's a good question. Basically, I see Asia as a very, very exciting market for the following reasons. If you look, I think there's a YouTube video from Honda or Al Gore that shows the flight routes in Asia today and the projected growth in five to ten years. That image alone shows that massive infrastructure must be built in the coming years in Asia to manage that air traffic at all. China is building airports at a tremendous pace, and we are the market leader there with our VCS system for civil air traffic control. With the new acquisitions, we are trying to get these products certified for the Chinese market as well, because it is simply huge and self-contained. That's why we set up a subsidiary in China about ten years ago, which is successful. For the rest of Asia, not just China, but also other countries: look at what they are doing. Indonesia wants to build 120 airports in the coming years, India over 100, Vietnam is planning a mega airport worth billions of US dollars near Ho Chi Minh City, Thailand wants to build a new airport. So what is happening in Asia is enormous. We are present with our own company in China and a separate company in Singapore that covers the rest of Asia. We have had this company for about six or seven years now with a regionalized strategy, and I believe that ATM (air traffic management) will offer the largest growth segment in Asia over the next five to ten years.

Yes, it's interesting to observe. As you say, the entry barriers are high. Why are they high? First, you need a certain reference base to even survive the pre-qualification of a public tender. That makes it very difficult for companies without references. Second, we are talking about high-tech, so you have high initial investments and must go through a very strong certification process with the Federal Aviation Office before your product is even approved for a market. So certification also plays a big role, and all of that is very costly. I think that for a relatively small niche market of 13 billion per year, it's difficult. In the drone area, hundreds of companies suddenly appear building drone apps, but interestingly, they disappear just as quickly when the funding runs out because the market is still very early. In my opinion, they have no chance of surviving integration into the air traffic control system. I cannot imagine that an authority or a state would allow drone traffic without integrating the data into an air traffic control system. For that, you need a lot of know-how, applications, and references to be allowed to do that. So I see the entry barriers remaining very high due to high regulatory requirements, investment costs, and high entry barriers for public procurement procedures.

The drone market is still hard for us to assess. First, the drone manufacturers themselves don't interest us; there will certainly be a few. Currently, there is almost a global market position. Then there are the so-called drone operators, service providers that offer inspection flights or wedding photos. They don't want to deal with regulatory things. Then there are those active in the regulatory area. Right now, everything is still simple because the person controlling the drone must see it by law. But now it's moving towards so-called BVLOS flights (beyond visual line of sight). That becomes complicated because the drone must be able to fly without colliding with other air traffic. These small companies simply don't have the ability to process air traffic control data and understand the regulations behind it. So I think we can cooperate with them and perhaps pick out the best to complement our portfolio or learn from these young people who have great ideas on how to control drone traffic. But I believe that the traditional players will remain when it comes to integration into air traffic control systems. That will probably stay with the old providers.

I am a bit ambivalent, I must say. I still don't consciously believe in this Amazon, Google, rusty drone railway traffic. I think the first demand drivers that will also trigger many flights in the near future will be emergency services. We are currently running a trial with a German federal state where, when an emergency call comes into the control center for a fire, the GPS data of the caller is automatically transferred to a drone, which then requests a flight plan from air traffic control, gets it approved, flies to the location, and sends video back to the command center to get the right assessment of the fire and send the right resources. That is a use case. Other use cases are likely in agriculture, where drones spread bacteria for soil treatment, inspection flights for power plants, wind turbines, railways. I think police will also use drones for counter-drone strategies. We recently published a press release about a research project with the Ministry where we successfully tested the first civilian interception of a drone. So the market will come. Eventually, air taxis will come, probably, where you say you take a taxi somewhere. But for package delivery, I still can't imagine the business case. Is it really cheaper to deliver a package by drone? For organ transplants, I could imagine it, but the classic mass package market via drones I don't see yet.

Your answer that it will take another ten years, or five? For drone packages, I think five to ten years. But I'm over 50, so maybe I don't have the right feeling for it. Younger people might say two years. I can't judge. For us, it doesn't matter which drone it is, because we are about integrating drones safely into the airspace. Whether the drone is carrying a package or a person is irrelevant for us. I believe that any kind of drone integration into a controlled airspace managed by a control center is a market for us. The beginning, in my opinion, is now driven by EU regulations that will be given to states for national implementation from 2022. That is very important for us, and we have contributed to that. Now Austria, Switzerland, France, Spain, each will receive this EU regulation for national implementation. That will create legal liability, and laws will be adjusted to allow a drone flight in a regulated airspace. That is a key driver for the development of this market in Europe.

Yes, we are looking, of course. I think I said in a previous call that we are not at the end of our model; we still have many ideas. There are ongoing analysis processes throughout the year. As for the question of how many more acquisitions we can make, I can't answer that. How long will the integration of the Eltria components and companies take? I estimate we will still be busy with that next year. We have some experience from the acquisition of Balkons in Karlsruhe, which we bought in 2016. They had high expertise in data processing and sensor data processing in the network. It took us about one and a half years to integrate them. And that was in Germany, so it was like a brother or sister, depending on how you see it. In Australia and Canada, it will occupy us for the next fiscal year, in my opinion.

I think so, yes. The issue is that there is no study for this market that you can buy and that tells you exactly which market grows how much. That's why we designed and developed our own market model. We used certain assumptions that we have corrected to estimate the market growth and the market itself. We have just reviewed it again because I am working on the new package for the company. And I am more convinced that the market grows about 3-5% per year, also due to the cost investments in Asia and the USA. And we believe we can grow faster than the market, so 5-7% is quite valid.

Yes, that was a huge shock for us. We had a business relationship with the bank for over 20 years, with regular deposits and withdrawals. It grew over many years, and then the insolvency came due to a fraud case. We wrote it off 100% last year, so at least from a balance sheet perspective, the matter is closed for us. Legally, of course, it's far from over. We have engaged teams that have filed lawsuits, but I can't go into detail. There can only be positive surprises from this Madoff-like case. What have we changed? We immediately had all our policies reviewed, and they were revised after the scandal last year. The investments were reduced and made more granular. Additionally, we expanded to a second bank. As of the half-year 2021, we had a cash balance of over 80 million euros as of end of June 2021. More than 80% is held at systemically important large banks in Germany and Austria, and less than 20% is at about 20 other banks in Europe, Australia, Asia, and the Americas. But we also need capital for the individual subsidiaries. Negative interest rates: we have managed quite well so far; we paid about 10,000 euros in negative interest in 2020.

Yes, we are certainly not the best payer in the world, I have to say. But we pay according to collective agreements. However, I must also say that we cannot complain about applicants currently or in the last two years. We receive about 4,000 applications, of which about 1,000 lead to interviews, and about 80 are hired. So about 2% of applicants get a job. Typically, they stay with Frequentis for a very long time. I think it's the overall package that the company offers for the family. We don't have a high turnover; people really stay with us for a long time. There is also a no-blame culture because we are a safety-critical company. That means I am not interested in who made a mistake, but what the mistake is and how we can avoid it in the future so that the system doesn't suffer again. That is a cultural aspect that, besides money, is a significant attraction for many. Money is a hygiene factor, certainly not a motivator. So I think we pay fairly, and there are many career opportunities at Frequentis. We pay for training, MBAs, we send people abroad, sometimes with their families. So I think there is overall respect for our colleagues, and the turnover rate is below 10%. So I think it's okay, even if some are not satisfied with their salary. But that is often about the fixed salary, not the quality.

I have to say, I don't know that company. So apparently they are not so much in our focus as a competitor.

Yes, I think I know who you mean. We are already working with the German Bundeswehr in the area of IT security as a partner. So definitely not a competitor, but a partner with whom we work at the German Bundeswehr.

Yes, I think what is important for an investor is the business model. Frequentis is in a niche that is growing due to mega trends: the human need for security, the need for mobility, and the technological shift from hardware to software-centric systems in the customer landscape. The business model is focused on government business with an enormous installed base globally: 500 government groups in 100 countries. So it has been shown that this business is very crisis-resistant. It is a company that should also be valued based on many innovations. We invest 6% of our own money and another 6% customer-financed or research-financed into innovation. And that in a signal that we, as the largest player, know very well: the control center market for security authorities and air traffic control. One last point I would like to mention personally: I have also put myself forward as a person and said what we want to do with the IPO and what we want to achieve afterwards. Those who were there then and may remember what I said will find today that we have fulfilled what we promised. And that despite a pandemic, despite a Madoff case, and despite a more difficult market environment in 2020 and 2021 than everyone imagined. Those would be the valuation criteria I would apply.

Yes, as I said, I really appreciate such platforms. That's why I like to do everything myself because the exchange is important. I learn a lot from the questions; I always write down the most important ones because they often stimulate new thoughts. So thank you for the exchange; it was a very valuable hour for me. And also thanks for providing this platform.

Yes, I can answer that. There is Mr. Adamovich, listed as a major shareholder with over 12% of the company. I hold 15,000 shares. We have a long-term incentive program where shares are part of the compensation, which was also approved at the last Annual General Meeting. The board has certainly taken note that the free float on the capital market is a bit too small. We are working on finding larger blocks for a further capital increase or the sale of existing shares to increase the free float. That is the main reason why there have been no insider purchases. The second reason is that we are constantly in insider circles relevant to the capital market and were not allowed to buy. If you look at our history over the last twelve months, you can imagine that none of us had permission to buy any shares.