Cavotec Group AB (CCC) Earnings Call Transcript & Summary

Welcome to the Cavotec Q1 Report 2020. [Operator Instructions] Today, I'm pleased to present CEO, Mikael Norin; and CFO, Glenn Withers. Please go ahead with your meeting.

Good afternoon, everyone, and welcome to today's call. My name is Mikael Norin, CEO of Cavotec; and on the call with me is our CFO, Glenn Withers. And we will present Cavotec's Q1 report for 2020 today. As you can imagine, the circumstances for this call is, as it has been for many companies during these challenging times, quite different from what we used to. Glenn and I are, in fact, sitting in different locations as a result of the work-from-home rules that we put in place very early on during the COVID-19 pandemic. So I hope you bear with us if we experience any technical or coordination issues. Actually, Johan Hähnel, our Investor Relations responsible at Cavotec is also on the call, and he's prepared to step in if we lose connections to both Glenn and myself, so he's our backup today. So thank you for that, Johan. Let me start this call by commenting on what I think is possibly on everyone's mind, and that is how we have managed during the COVID-19 pandemic in Q1. As many businesses around the world, we really felt the impact of COVID-19 first in China because we have a site in Shanghai. That site was closed first during Chinese New Year and then a couple of weeks in February before they reopened. Then for the last 2 weeks of March, as you probably are aware, our site located in Italy, outside Milan, were closed due to the Italian government's decision to close all nonessential businesses. And the combined effect was that postponed deliveries of orders happened, and those were orders that were scheduled for the end of the quarter. And in addition, some deliveries were also delayed due to logistical restrictions in terms of transportation and so on. And the consequence of that is that our revenues were down around 20% in Q1 2020 compared to the same period last year. That's -- so we ended up at EUR 38.7 million in revenue. I think it's important to point out that, that decrease is not a reflection of lower sales, but of delayed revenues that will be accounted for as soon as the products have been delivered when we have rescheduled with our customers, a work that is ongoing. The safety and well-being of our employees have been and it still is our top priority during this situation. And we, very early on, established a team to address and coordinate all our efforts around the world. We introduced, as I said before, work-from-home for all of our office staff, and then for the production sites, very early on, temperature checks. We introduced new PPE. We have safety distance rules. We have, in many locations, 2 shifts to reduce the number of employees at each production site and so on. And I have to say I'm very happy and grateful that, as a result, out of our 800 employees around the world, we have only had 1 confirmed case of COVID-19. And that was in early March when an office-based colleague was confirmed to have illness, but he has since fully recovered. So we're very grateful for that. Another positive news, we reopened our Milan facility 2 weeks ago to fully resume production there. And we are working 2 shifts and 6 days a week right now to clear the backlog that we have of orders. And all of our other production units around the world are fully open and operational. Now the other focus for us has, of course, been our customers. And in the beginning, we were wondering how would they react, how would they act. And I can tell you that I'm very thankful for the strong support that they have shown. We've not seen any order cancellations. And we are, as I said, working actively with each of our customers that were impacted to reschedule their deliveries. And in fact, interest in new business with us has remained at a strong level also in the quarter, including in March. What we have done is we've adapted our sales processes to make use of remote mode meetings and real-time sharing of documents and so on. And because of that, we've actually been able to close some significant orders during the quarter. For example, new airport fueling orders in the U.S., Europe and China and totally worth more than EUR 8 million. And I think it really confirms the very strong position we have as a preferred supplier when it comes to the global aviation fuel in the market. We also received a repeat order in Norway to -- for 2 new port berths with -- where we're going to install our Automatic Plug-in System for charging of e-ferries. And this repeat order, I think, is a strong sign that we are very well positioned in this market. The e-vessel market and each -- e-vessel charging market, that is a market who is estimated to be worth more than EUR 60 million only in Norway. And we see a lot of interest for the same technology in the neighboring countries of Denmark, Finland and Sweden, but we have also active inquiries from the U.S. and Canada. As I said previously, we took the early signs of COVID-19 very seriously from the start, and that also meant implementing measures to control costs. And that helped us stay profitable in the quarter and with a positive cash flow despite a 20% dip in revenue as a result from the delayed deliveries. Our EBIT came in at EUR 0.8 million to be compared with EUR 1.4 million in the same period last year. And our operating cash flow was EUR 0.5 million. And our net debt actually decreased to EUR 2.6 million from EUR 3.9 million at the end of last year. So all in all, I think we have handled the situation very well so far. But with that, let me hand over to Glenn to talk about the quarter in more detail. Glenn?

Thank you, Mikael, and good afternoon, everyone. If I start with revenue, and Mikael already mentioned this, it was impacted by the closure of our facility in Italy and logistic delays due to the COVID-19 situation generally. And that resulted in a decrease of 20.3% to our reported revenue of EUR 38.7 million for the quarter. Looking at segment level, revenues for Ports & Maritime decreased 28.3% and for Airports & Industry, 14.5%. I'd like to stress again that these decreases are not a reflection of lost revenue but delayed revenue, and we'll deliver that in future quarters. Revenue generated by services continued to develop in a good way and represented 20.9% of total revenue during the quarter, and that compares favorably to the proportion of 20% that we reported in 2019. If I turn to profitability, we see the positive EBIT of EUR 0.8 million corresponding to a margin of 2.1% and we think that's a sign of strength in the sense that it signals to us that the cost control and the resultant ability to adapt to those changing circumstances that the group faced during the quarter has improved considerably since the turnaround. Moving on to our cash performance. I'm also very pleased to report that the operating cash flow remain positive and amounted to EUR 0.5 million in the quarter despite the decrease in revenue. At the end of the quarter, Cavotec's total assets amounted to EUR 221.9 million, and that -- if I exclude the impact of IFRS 16, the equity-to-assets ratio was 52.6%, and the net debt, again without the impact of IFRS 16, amounted to EUR 2.6 million at the end of the quarter compared to EUR 3.9 million at the end of last financial year. And what that means is we have a strong balance sheet and that we're well positioned even in the circumstances that we all face now. And if I continue talking about our balance sheet and in particular, our very low leverage at the end of the quarter, our senior credit facility expires at the end of June 2020. We're in advanced discussions to extend or replace the facility prior to its expiry and to secure an attractive structure for Cavotec on the basis of our improved performance compared to before the turnaround. Now as we've outlined in prior quarters, we're very focused on building a consistently profitable cash-generating base business, something we proved in 2019. I talked about the proportion of our services business earlier, and we plan to keep growing our service and flow businesses as a proportion of our total business. We're aiming for consistent revenue performance in every quarter. This is different from order intake, which varies considerably from quarter-to-quarter. So from now on, we will, therefore, report order backlog but not order intake. Order intake in a quarter does not tell the story of which quarter the orders will be delivered and when the revenue will be generated. We, therefore, believe the order backlog is a better metric to demonstrate our revenue potential in the short and medium term. Now looking at the order backlog, it was EUR 106.6 million at the end of this quarter, an increase of 6.5% compared to the previous quarter. This is partly explained by the delay in deliveries, but also by strong sales performance during the quarter. The increase was highest within Airports & Industry, where order backlog was EUR 48.4 million. That's an increase of 20.9% compared to the previous quarter on the back of those important wins that Mikael talked about earlier. Ports & Maritime's order backlog was EUR 58.1 million, a decrease of 3.1% compared to the previous quarter. However, as you heard Mikael talk about earlier, we've extended our leadership in the Norwegian e-ferries market during the first quarter and we've received orders for more than 20 Automatic Plug-in Systems from all major e-ferry operators in the past 2 years. We now estimate that our share of the growing market in Norway is approximately 50%. And with that, I'd like to hand back to you again, Mikael.

Thank you very much, Glenn. Well, in conclusion, the first quarter of 2020 certainly did not play out in the way we expected. But as I said, I believe that we have handled the situation very well. During this period, we have again seen that our absolute biggest strength in this organization is our incredible people who have been working very hard every day to support our customers. And our primary focus continue, as I said, to be their health and well-being, and we will do whatever is necessary going forward to protect that. But we're also, of course, working to make sure that our operations continue to work well and that we are well positioned for the future. And I can tell you that we are super eager, we're champing at the bit to resume the high ambitions for growth that we had for this business as soon as this crisis has passed. With that, thank you for your attention so far, and I think we will now open up for questions, please.

Hello, do we have the operator there to open up for questions, please?

[Operator Instructions] And the first question comes from the line of Karl Bokvist from ABG Sundal Collier.

My first question is, I mean if we talk about just the overall sales development without the deferred revenues, for example, I mean, would you have seen a flat development compared to last year without this deferral effect? Or is there any way you can sort of give an indication of the underlying sales development, please?

Thank you for -- sorry, I was -- this is something that we will have to accept. There will be some confusion on this. Let me start. I know you have the details, Glenn, but let me start with talking about the market a little bit. Of course, Karl, it's sort of a hypothetical question because we don't know exactly what would have happened. But what I can tell you is that we have seen strong interest during this period. And especially in some of those areas that we've talked about earlier also in the aviation market and in Ports & Maritime, for Shore Power, MoorMaster and so on. So we continue to be optimistic about and very convinced about the strong position that we have in market. Because remember, the -- whatever has happened now, the long-term market trends or environmental concerns, automation, connectivity and so on, they are the same. And our customers are focused on improving their efficiency, improving their productivity and then also to reduce their environmental footprint. So that works for us regardless of the circumstances. Sorry, Glenn, you may want to add something to that.

I think only about the revenue part of the question, Karl. First, I think it's a bit hypothetical to speculate what revenue might have been if it wasn't COVID impacted. But what I can reemphasize is that we've closed with a good order backlog. We've not had any cancellations in that order backlog. And as we speak today, we're operating in our key sites and including double shifts in a couple of those sites to try and catch up some of those delays as fast as possible.

All right. And a follow-up here. We've heard from some other companies active within the Ports & Maritime space that they have seen, well, both declining or sort of hesitation for larger projects, but also a lack of access to the sites to perform service and so on. Is this something that you have seen as well that you have actually had restrictions to your customers' operations?

Thank you, Karl. One of the challenges that we, like many other companies, have had is the ability for our field service personnel to travel, as you know, because of the restrictions in many countries. So that has impacted us not in a material way, but it has impacted us. Our customers have continued to buy spare parts and so on, but of course, larger overhauls or maintenance work and so on has been postponed. Then when it comes to projects, we, as I've said, have not seen a slowdown so far in the conversations around larger projects. And I actually believe that, that may even accelerate in the future, depending on what happens with this situation. Because I think it's important to remember when we talk about the Port industry, this is a very competitive industry. The port in Marseille competes with the port in Genoa for the same trade volume. The port in Singapore competes with the port in Johor Bahru which competes with the port in Kuala Lumpur, and so on. The port in Savannah, Georgia competes with the port in South Carolina just up the road, relatively speaking. So all ports have been, and I expect them to continue to be, focused on really improving their competitiveness by looking at the -- by looking at automation and productivity investments. So I don't expect that to impact. I expect that to accelerate, actually. Then I think also, if we look at the conversation recently, I think it's even more focused on environmental concerns and sort of social, economical aspects, and there will be a bigger focus on that. And you know that we are incredibly well positioned in all of these areas. So when our customers are challenged with questions about productivity, efficiency, connectivity, the environmental impact of their operations, that's where Cavotec really has, that's where we have our strength. And I think also -- so in general, also, and this is, I guess, a general comment that every company I worked for that have been able to help customers with becoming more competitive, have actually been winners in a possible -- in a downturn scenario. I think also that because of the work that we have done during the turnaround, we are also very well positioned right now, very well prepared. We put our house in order. And I would say that this organization is the most competitive right now than we had ever been in the history of this company. So -- and that also speaks to how we look at the future.

Okay. Understood. And if we perhaps could talk a bit about -- although it's difficult, but when it comes to Q2, we have GDP forecasts for most regions down double digits. We have industrial end markets down more than that. It would just be interesting to hear given that your -- some of your end customers will, of course, be impacted. So in your view, how do you see perhaps Q2 sales developing also given that you have deferred deliveries? Would you still expect perhaps a sequential decline quarter-over-quarter? How would you be able to mitigate the overall negative impact seen on the global economy?

Well, then let me talk about the market and the global economy and try to be an economist here, Karl, and then I'll turn to Glenn to talk about revenue in Q2 and so on. One thing also, again, to remember when it comes to our position is that we have, through what we call commercial excellence. We've really built out our sales force during the year and during the turnaround and really rebalancing where we have sales. And because of that, we are targeting market segments and geographies that we haven't targeted before. So we believe that even if there would be a shrinking pie for everyone that we can take a bigger part of that. And you just take in the industry segment, and as you know, we've been dependent on a couple of large OEMs in the past. We've now started, but they're not the only OEMs in that market, if you take mining, for example. Now that we started to target other companies, we're getting a lot of great response from potential suppliers who say, well, great to see you guys, and then let's talk about the future, let's talk about what you can do. So quite optimistic about that still, as I said. And then again, offering higher productivity, cost savings, offering solutions that actually reduces the labor component and the number of employees in the organization is usually something that is actually seen as quite positive during any downturn. Now, I mean, it's impossible to forecast for the future because, as you know, the scenarios out there in the media and so on, I mean, they range from end of the world at the one end to back to normal in June at the others. But as I said, regardless of where we end up, we believe we are very well positioned. And yes, so I think that's how I look at the market, short and medium term. Glenn, please, for Q2.

Yes. So I'd say specific -- specifically about Q2 forecast or forecasting generally at -- there's a lot of variables. So I won't get into a specific forecast, but I repeat what I said earlier that all of our facilities are currently open. We've got double shifts in a couple of those facilities, and we've got a good order backlog to work on. So that's what we're doing. We're almost -- well, we're 1 month into the second quarter. There's still 2 months of potential disruption that could happen. So -- which is not necessarily within our control. But as we speak today, everything is open, operating and delivering as fast as we can. That's the status right now.

[Operator Instructions] And we have no more questions registered. So we go back to Karl Bokvist from ABG.

Okay. Perfect. So just a quick follow-up on that. Is it possible to give some indication of how the development was in April? Did you still see perhaps a decline year-over-year? Or are you seeing a good development there?

Glenn?

Karl, was your question about orders or revenue or...

Perhaps mainly deliveries, given that -- well, as you say, you're seeing good interest and so on, but more interested in delivery capabilities and executing on the backlog that you have?

Yes. I...

Let me answer that then. Sorry, Glenn. But just in general, well, first of all, 2 parts to the answer, Karl. Our facility in Italy was closed until the 14th of April. So as we said, we're working hard now to get the backlog that we have cleared. And it's also -- it's not only up to us, it's also about rescheduling with our customers when it fits them. But we're working hard on that, and all of our facilities around the world are fully operational. Then when it comes to sales work, as I said, that continues. And we've seen a lot of interest in larger projects, believe it or not. I think when people are sitting home possibly in some of our customers and less disturbed by day-to-day topics, they focus on some of the larger projects they have, projects for improvements. And let's remember also a lot of the projects that we work on have been planned for many years, and they are based on assumptions that these customers have about their operation going out many years into the future as well. So most of what we hear from our customers, they are not taking short-term decisions when it comes to these improvement projects. So that -- so nothing really changed there. Sorry, Glenn, over to you.

No, I don't have anything else to add.

Yes. Okay. And is it possible for you to say how much of share -- of sales now is actually serviced? I think you mentioned 20% for the full year 2019.

Yes. The percentage in the first quarter was 20.9%, Karl. So almost 21% in the first quarter.

Good. Then more -- I think I'm -- thank you for the more strategic questions, a bit more financial now. Just starting off, one thing I noticed in your cash flow is there's quite a big item here I would say involving other items, not -- involving cash flows. So I was just interesting in what that actually includes and how one should think about cash flow for the coming quarters in terms of working capital and if there are any other sort of other items that will negatively impact cash.

Okay. The -- if I start with the question about other items, it's an item of EUR 2.1 million negative in the cash flow. Is that the one you're referring to?

Yes, correct.

Yes. It's the adjustment for FX movements in our P&L. A large -- as I'm sure you can appreciate, there are very large swings in the FX rates towards the end of the first quarter.

Okay. And then how do you foresee your working capital discipline going forward?

Well, so it was relatively neutral in the first quarter. Going forward, we have implemented additional review procedures, especially on the cash receipt side of the business just to ensure that we keep close to understanding what's happening in the market with the payments from our customers, and we're keeping a close eye on our inventory balances. So inventory, at the end of the first quarter, it ticked up. But that was mainly due to the delayed deliveries that we've talked about already. I expect that to come down again.

Okay. And just 2 more questions from me here. Starting off, employee costs were essentially the same in Q4 and Q1. Is this more of a normalized level that one could expect going forward as well?

Yes, it is, Karl. We've talked about consistency a lot in our calls. But at the moment, that's a good go-forward assumption in the sense of the current situation wherein -- where all facilities are open.

Okay. Good. And just a final one, now back to more a strategic perspective here. Now that you are, I can't imagine quite satisfied with what you have done so far in terms of the turnaround, what sort of areas do you see when you look at your entire portfolio that you would like to add either organically or inorganically once, of course, the situation start to return back to normal?

Thank you, Karl, and thank you for the question about the future. I appreciate that. We do want to focus on the future, and we are trying to -- or we are making sure that we actually on a daily basis and I think it -- that we're not consumed only what this COVID-19 situation. And I think it's me and the management team, many of us, it's not the first crisis. I think it's probably the most -- a substantial crisis and global crisis we experienced, but it's not the first crisis that a lot of us experienced in our careers. So it's important to also keep an eye on the future and future plans. Now to answer your question, what we're doing is that on the basis of the greatly improved position, we have, the performance of the business, the strengthened balance sheet and so on, we've said that we want to start to look at M&A. And the way we look at that is we look at the market position that we have and defining that and seeing what adjacent areas are there where our customers still have pain points, where our customers still feel that their operations is impacted in terms of their efficiency, in terms of also how profitable, competitive they can be. So if you take -- I'm just trying to be concrete here, if you take the example of our position in an airport today, which has to do with increasing how efficiently an airport can turn around an aircraft and to service that aircraft with heating and cooling, electricity, water, fueling, et cetera, we are now looking at other areas that are not covered well by anyone else today. So the other white spots where we can either innovate or where we can do a very targeted M&A to improve that position that we have. And we're looking at it exactly the same way in Ports & Maritime. And we're building sort of a list of interesting areas that we're going to look at in the near future.

We don't have any more questions registered. So I hand back to our speakers.

Okay. In that case, I would like to thank you very much for your continued interest in Cavotec and for joining us on the call this afternoon. As I said, stay safe and have a great day. Thank you. Bye.

This now concludes our conference. Thank you all for attending. You may now disconnect your lines.