Cavotec Group AB (CCC) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Cavotec Q4 Report Call. [Operator Instructions] Today, I'm pleased to present CEO, Mikael Norin; and CFO, Glenn Withers. Please go ahead with your meeting.

Thank you, and good morning, everyone, and welcome to this audiocast. As you heard, my name is Mikael Norin, CEO of Cavotec. And with me, I have our CFO, Glenn Withers, today. And we're here to present our year-end report for 2019. I'd like to start with talking about how 2019 really was a milestone year for Cavotec. It was the year that we finalized the transformation of the company that we launched in the fall of 2017. In this transformation, we have completed a thorough reorganization and restructuring of our business, a strengthening of the management team and a successful rights issue. In this period, we also launched a new strategy and published financial targets for the company. During the year that's just passed, we have focused on locking in the improvements from these initiatives and on further investing in our Commercial and Operational Excellence programs, and this is what's going to underpin our growth ambitions for 2020 and beyond. We've also added an attractive service offering to our portfolio, and that provides the potential for more stable and predictable income streams in the future. And this was one of the key initiatives in our strategy, and it's really encouraging to see how this business continues to develop. As a matter of fact, I'm happy to report that Services now represents 20% of our total revenues. It is also encouraging that we -- despite this focus on the quality of our sales orders, we managed to keep revenues for the fourth quarter and for the whole year 2019 in line with previous year. And this shows that we've become increasingly better at delivering stable financial performance without any boost from any extraordinary contracts. Now revenues within Ports & Maritime increased again in the fourth quarter, mainly as a result of higher sales in the Shorepower, MoorMaster and Reels product categories, and the growing service offerings within that division. Revenues within Ports & Maritime increased again in the fourth quarter, as I said, but when we turn to Airports & Industry, their revenues decreased due to lack of bigger projects and lower activity among industrial companies and on our continued focus on high-quality orders. We are, nevertheless, optimistic for 2020 as we expect higher activity in Airports with projects in India and the Middle East, and we also plan to acquire new Industry customers in geographies that we have not focused on previously. And in terms of our financial performance, I'm pleased to say that we achieved a much improved profitability margin of 11.8% in the last quarter of 2019 and 8% for the full year on an adjusted basis. We actually also generated the highest cash flow since Cavotec was listed in Stockholm in 2011, even after the one-off payment of approximately EUR 8 million that we did in June for the California legal case. As a result, we now have the room to invest in further developing our business organically and to start contemplating acquisitions. Our order book at the end of the quarter is stable relative to a year ago at EUR 100 million, and the order intake in the quarter was lower than a year ago, but we don't expect this to have an impact on our growth ambitions for 2020, as variation from one quarter to another is common for us. And with that, I now like to hand over to Glenn to talk about the quarter in more detail.

Thank you, Mikael, and good morning, everyone. I will start where Mikael just finished and talk more about our order intake, where we reported EUR 38.2 million for the quarter. That's less than what we had in the prior quarter. But as we've said on previous updates, our order intake can differ a lot between quarters, depending on whether we've signed bigger deals or not. And the lower outcome this quarter is mainly explained by delayed larger projects that we expect to secure now in 2020. We do continue to focus on a sustainable flow of profitable business and it's really encouraging that the development of our orders were less volatile than last year. A good example of the way we've been able to achieve that is the development of our Services offering, which provides an increasing proportion of repeatable business. And as you heard Mikael talk about earlier, what's also promising is that the overall level of activity and interest within the Ports & Maritime market continues to be high, and we see some good opportunities in Airports. However, we still see lower activity from our main industry customers. Now turning to our top line. We've reported revenues of 48 -- EUR 47.8 million for the quarter, which, as Mikael pointed out, is fully in line with our expectation and communication. In fact, 2019 stands out because we held the line on revenue after our transformation, which was a key aim of ours. But it also stood out because we delivered the most consistent quarterly flow of revenue since Cavotec listed in Stockholm in 2011. Going a bit more into the detail. Revenues within Ports & Maritime increased, and that's mainly because of higher sales in the Shorepower, MoorMaster and Reels product ranges. And also, like I talked about before, a growing Services offering. Our revenues within Airports & Industry decreased compared to the same period previous year due to lower project activity in Airports, and generally lower activity among our industrial customers. Some impact in Industry also came from our continued focus on profitability rather than volume. Speaking of profitability and again, reiterating what Mikael said earlier, we're very happy to report that the adjusted EBIT in the quarter, excluding nonrecurring items, increased to EUR 5.6 million, corresponding to a margin of 11.8%. That came from a good product mix in the quarter. However, the main impact came from the focus we've had all year on a disciplined approach to our sales, finishing our restructuring program earlier than we had planned and keeping a very close eye on our costs. We've now delivered 4 consistent quarters of improving profitability. Moving on to our cash performance. I'm very pleased to report, as well as generating good profits, we've also delivered this in cash. Our operating cash flow amounted to EUR 9.1 million in the quarter, and this was EUR 1 million more than our EBITDA. And it was the same story for the full year. You can see our operating cash was EUR 14.4 million, and that is the best cash flow since Cavotec listed in Stockholm in 2011. It's also after we made a large one-off payment of EUR 8.1 million in the second quarter to the California legal case. If I exclude that payment, we delivered an underlying operating cash flow that was also EUR 1 million more than our full year EBITDA. The good operating cash performance, together with the rights issue that we completed in early 2019, also meant that we finished the year with a very low leverage ratio of 0.2x and a net debt of EUR 3.9 million. Those numbers are before the impact of IFRS 16, which is covered in good detail in our report. So sticking with my overall theme, this is the best -- or the lowest leverage since we listed in 2011. Notwithstanding that, the Board of Directors' proposal to the Annual General Meeting is that no dividend will be paid for the 2019 financial year, and that's to give us the room in 2020 to grow organically and also possibly have a look at acquisitions. To finish, I'm very happy with the way our financial performance has consistently improved during 2019, and we've prepared a very good platform from which to grow. And with that, I would like to hand back to you again, Mikael.

Thank you very much, Glenn. Yes, the strong financial performance in the year that Glenn spoke about means that we have exceeded our profitability target that we set of 7% margin earlier than we -- than expected. And we've, therefore, today, announced a new accelerated financial target, and that is to reach an annual adjusted EBIT margin of more than 10% within 2 years and more than 12% within 5 years. Remaining targets previously announced are unchanged. Now to conclude, I started off by saying that the transformation we launched 2.5 years ago is now finalized, and thanks to the hard work of our incredible people across the organization, we've left the challenging period in the company's history behind us. And we can now fully leverage the fantastic products, the sustainable technologies and the excellent customer relationships that we have. And with that, I'd like to thank you all for your attention, and that concludes our prepared statements. And we are now happy to take any questions that you may have.

[Operator Instructions] And we have a question from Karl Bokvist from ABG.

First of all, here, the service proportion that you mentioned here, I guess that you are talking about 20% of Q4 sales. So could you get some insight -- could one get some insight into the proportion of service for 2019 as a whole?

Karl, actually, the percentage we announced today is the percentage for the whole year.

All right. Okay. And just out of interest here, when it comes to service, is it split? How -- what is the split between Ports & Maritime and Airports & Industry? And is it mainly related to personnel-intensive service or are we talking about component deliveries and spare parts?

Well, on the first question, Karl. So we -- like most companies, we choose only to provide the Services share of overall revenue for commercial reasons, right? We don't provide details at that level because that would honestly give too much important information to our competitors. So we don't want to do that. Now in terms of what is included in that portfolio, in Services, it is -- spare part is one component and then actual service for maintenance, repair and so on is another important part. And they are both actually combined when we have long-term service agreements with our customers. And that is something that we're really focusing on, trying to sign up as many customers as possible for long-term agreements.

Understood. And you talked about your initiatives within servicing your -- at your CMD last year. Just if you could please remind us what's your outlook and view on where -- how much service could be your sales for the next 1 to 3 years, perhaps?

Yes. No, thank you for the question, Karl. So I mean, we can now offer, and I think that's why we reached this level, we can now offer complete solution to cover the total life cycle of our products and systems. And we can do that by -- we have during the past 1.5 years developed a large range of service products, from inspections to comprehensive maintenance agreements, for example, and that way we can answer to the needs of the different markets in -- that we operate in. And it's clear from the development that there is a demand for life cycle support for our products from our customers. And we're going to continue to invest in growing the Service business. For example, we are now rolling out the program to cross-train and certify our service technicians beyond what are their primary product specialization. And we then can cover more opportunities with the same workforce, which is important. And another area, as I said, is -- which is really important is this -- about long-term service agreements. So we are very optimistic about the potential for that business line in the future. It's going to really support the other 2 divisions, but it will also be an attractive business in its own right.

Understood. And if we turn to growth here and outlook, you -- as you mentioned, you are optimistic for heading into 2020, perhaps -- despite the -- with a decline for 2019 as a whole. And I was just interested in finding out, is it based on an expectation for orders coming into the first half of the year? Or is it just that you still have quite a bit of deliveries here despite the book-to-bill of around 1?

Yes. But -- yes -- well, first of all, to address the first part of your question, Karl, and I think I know where you're coming from. I mean, I just like to reiterate, we are committed to the growth targets that we have announced. And in terms of the order intake, actually there's -- and we've looked, but there's very little correlation between the order intake in a particular quarter and the revenue in subsequent quarters. And the reason for that is the delivery time can vary substantially from order to order, right? So our optimism is really about what we see that it's an underlying activity in the market and an interest in the solutions that we have. And again, I know I've said this several times, so forgive me if I repeat myself. But we're incredibly well positioned when it comes to long-term market trends, environmental concerns, automation, electrification and so on, right? And our customers are really grappling with these challenges today. So I believe we have plenty of opportunities for organic growth, but just leveraging the technologies and customer relationships that we have as well as focus on new customer segments and geographies, which we can do now as a result of the Commercial Excellence program where we've rebalanced our sales force around the world.

And so just 2 more questions here from my end. Then if we look ahead now and let's just assume that you start to, already in 2020, grow in line with your targets, 5%, do you think that the uptick in margins towards your new targets will be mostly based on just good leverage from this growth? Or is there any more on the cost side that you expect to trickle through during 2020?

Well, I think, first of all, Karl, I'm going to hand it over to Glenn, but let me just say that we are never satisfied with our performance. So yes, of course, we're going to focus on revenue growth and get higher profitability from that. But we are not going to settle down when it comes to how we look at our organization and improvements and possible improvements within productivity and so on. And with that, I'll hand over to you, Glenn.