Cavotec Group AB (CCC) Earnings Call Transcript & Summary

Welcome to the Cavotec Q2 Report 2020. [Operator Instructions] Today, I'm pleased to present CEO, Mikael Norin; and CFO, Glenn Withers. Please begin your meeting.

Good afternoon, everyone. Welcome to this audio cast, and thank you for joining us. My name is Mikael Norin. I'm the CEO of Cavotec. And on the call with me is our CFO, Glenn Withers. And we are going to present Cavotec's Q2 report for 2020. The second quarter was to a large extent still impacted by the COVID-19 situation. Our customers' short-term investment decisions were delayed and deliveries were impacted by the logistical restrictions that we still feel and the closure of our production facility outside of Milan during the first 2 weeks of April, although all of our sites are now up and running. As a consequence, revenues were 18% lower in Q2 2020 compared to the same quarter last year. However, it is, at the same time, encouraging that our revenues recovered almost 9% compared to the first quarter this year. So they're up 9% compared to the first quarter this year. All of our facilities globally remain open, as I said, but in the present environment, customers continue to be very careful about their planned investments. So in the short term, this leads to lower activity in our markets. But nevertheless, our order backlog was relatively stable at the end of the quarter at EUR 98 million, approximately. Now this is 8% lower than the first quarter, but only 2% lower compared to where we started the year. The underlying dynamics in our markets have not changed. I think that's important to point out. The focus on trends such as automation, sustainability and workplace safety has not diminished. On the contrary, the COVID-19 situation is expected to bring even more attention to our solutions as ports and airports move towards more safe and efficient operations with a smaller environmental footprint. Now we are building on this increased interest by even more emphasizing the significant sustainability benefits of our solutions in our marketing. And one great example that you may have seen is that the 600 shore power systems that Cavotec has installed around the world has led to an environmental benefit equivalent to taking 5 million cars off the roads as ships can switch off their diesel engines when at port. Another positive aspect of this report, I believe, is our profitability performance. And as a consequence of the transformation that we completed in 2019, and together with additional cost control measures, our profit performance has proven resilient with an achieved EBIT margin of 6.6%. Now let me hand over to Glenn now to talk about the quarter in more detail, and then I'll come back to conclude at the end.

Thank you, Mikael, and good afternoon, everyone. Starting with revenue, and then maybe looking at it from a segment perspective, revenue for Ports & Maritime was EUR 19.9 million for the quarter. This is an increase of 36.8% compared to the first quarter, but a decrease of 2.8% when we compare it to the same period in the prior year. Comparing the 2 first quarters for the segment, our Italian facility was closed for a similar amount of time in both quarters, but we were able to better plan for the production after reopening in the second quarter. In Airports & Industry, revenue was EUR 22.1 million in the quarter. This is a decrease of 8.3% compared to the first quarter and a decrease of 28.4% compared to the same period last year. And about last year, the second quarter was the peak revenue quarter in the segment. The decrease compared to the average quarterly revenue for the year, last year, that is, was 18.7%. And airport's overall interest remains good, particularly for our fueling and automated ground connection products. And industry demand was lower during the quarter, and there was a reduced level of orders from our main OEM customers. Restrictions on the movement of goods and people across borders had a direct impact on our services business. As a consequence, the proportion of services revenue in the quarter reduced to 17.4% when compared to our total revenue, and that 17.4% compares to 21% in the first quarter as a proportion of total revenue. Now looking at orders. Our order backlog decreased 7.9% to EUR 98.2 million when compared to the first quarter, and the overall reduction in the backlog is evenly distributed across both of our segments. The 6.6% profit margin that you heard Mikael talk about earlier translates to an EBIT of EUR 2.8 million, which I feel is a quite satisfactory result in view of the lower revenues. We did, during the period, utilize COVID-19-related government assistance as appropriate. However, this has not had a material impact on our financial performance to date. Moving on to our cash performance. I'm also pleased to report that the operating cash flow was positive and amounted to EUR 2.3 million. This enabled us to close the quarter with a leverage ratio of less than 1 time even after taking into consideration the impact of IFRS 16. Also during the quarter, we replaced our existing senior credit facility as scheduled. Choosing from competing bids involving several bank consortia, we signed an agreement with Crédit Suisse to provide a 5-year facility as it offered the most competitive overall services and terms. And I'm pleased that we secured this long-term agreement in the current environment. I think this really is a testament to the strength of our financial standing coming out of the transformation of the company. So as we stand today, Cavotec is a business with a strong balance sheet, a good profit and cash conversion and supported by favorable long-term credit facility. And with that summary, I'd like to hand back to you again, Mikael.

Thank you very much, Glenn. Well the business environment is, in many ways, challenging currently, as you know, and it is incredibly hard to predict when the global economy will recover and at -- what areas first and so on. But if we look at Cavotec, and as Glenn pointed out, we are, first of all, in a very good financial position right now. Secondly, our customers are looking at us to provide solutions to many of the challenges that they face, not least environmental challenges. And we are actually going to accelerate our investment in strengthening our position in key markets and product segments to support them, as this represents a huge opportunity for us going forward. So with that, thank you, everyone, for your attention, and that concludes our prepared statements, and we will now be happy to take any questions that you have.

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

So my first question concerns the -- if you were to assess the outlook per division, if you -- if we perhaps first look at Ports & Maritime, as you say, it's turned out to be more resilient, I should say, on in terms of deliveries. But if we look at the demand picture for the rest of the year, first, within Ports & Maritime, and also if we could do the same within Airports & Industry in light of the very, very severe situation we have in the airline or aerospace industry as a whole currently.

Yes. Thank you very much, Karl. Hope you're doing well. Well as you know, I'm going to start with talking, and you know I always want to do that. I want to start with talking about long-term trends before actually addressing your more short-term question. I think, again, I always want to point out that, that the -- that Cavotec is incredibly well positioned when it comes to the long-term trends in the market. And you know that environmental concerns, electrification, automation and so on, right? Now short term, it is, of course, incredibly difficult to predict how global mobility and trade would develop in the short and medium term. And maybe you have better insights to this. But what we know is that our products are not directly dependent on the volume of containers in ports or passengers in airports. It's -- our products are instead focused on increasing efficiency and reducing OpEx and labor participation in the operations of both ports and passengers, right, and also to make them more sustainable. So I -- I mean, with the COVID-19 situation, in many ways, you can say that we're even more optimistic because there's more focus on, especially environmental and social economical aspects that we've seen that, that is how the discussion with our customers are shaping up. And then also in a downturn, companies often focus on strengthening their competitiveness through investments in automation and productivity and so on. So we're very, very well prepared to do that. But to be a little bit more concrete and to answer your questions, let me talk a little bit about how we look at the market. And this goes both for ports and airports. So what we do is that we continuously have a list of project opportunities that we believe in that we are targeting. And let me give you another idea how we look at the market in the last 6 months then, right? So -- and in airports, for example. At the start of the year, we were following a number of targeted projects for airports that we believe would be decided this year. And during these 6 months, we can see that actually 25% of those projects have been postponed or canceled, and that has been referred to be an impact of COVID-19. But what is worth pointing out that in -- during the same period, we've actually had 29% new targeted projects in March that customers have brought to our intention. So on the whole, we remain continuously optimistic and encouraged by how the market is developing. And the same thing goes for Ports & Maritime. We had very few projects that we were following that have been canceled. And actually more projects coming up as customers have said they're looking at, okay, in the present situation, how can we be more efficient? How can we reduce the labor component? How can we be more efficient and not least, how can we answer these challenges we're getting about the environmental footprints of our operations.

And I think as a follow-up there, what you also discussed you mentioned these new initiatives or initiatives when it comes to investing into your core environmental products, if you were to phrase it like that. But -- so it's very interesting to hear, I mean, is it possible to shed some more light on this? And what this will entail in terms of concrete actions if we look at R&D? Is it CapEx? Is it OpEx? Yes?

Yes. Yes. No, thanks for the question, Karl. So what we -- as I mentioned, we've actually seen a growth in interest when it comes to efficiency and sustainability, workplace safety and so on. And we believe we have a window of opportunity now to solidify the position that we have in the marketplace in these areas. So we're actually going to go on the offensive. It is easy in a situation like we are in now to just play defense. We're not going to do that. We are going to -- and if I can quote the great Wayne Gretzky, we're going to skate to where the puck will be. We're not going to sit around and wait. So in the coming months, we are going to reinvest some of our earnings in sales, marketing, industrial design, turnkey capabilities, engineering capability and so on, so that we are going to be way ahead of our competitors when these opportunities crystallizes in the near future. So as I said, we're really going to go on the offensive. Now more concretely, so we will be wanting to share with you in the coming months as we also introduced it to the market.

Understood. And you have long-term financial targets of where you could see a potential 5% organic growth, at least. In light of what has happened during the first half of this year and also perhaps if we weigh in the margin targets of 10% within 2 years and 12% in the longer term. Looking at it from this way, let's put 2019 as a base level, do you still find it viable that sales could be above 2019 levels in 2021 or 2022?

Why don't you take this one, Glenn?

Sure. Thank you, Mikael. Karl, first and foremost, as Mikael has mentioned already, it really is difficult to predict the timing of the global recovery both in terms of shape and timing in the current situation. And like I mentioned, when I was talking about our results for the quarter, even if we had lower volume, we were still able to generate okay profits and cash flow. So first and foremost, even if the volume challenge remains in the short term, I still expect to deliver a reasonable level of profit and cash as indicated by Q2. Now coming to the longer term, the financial targets that we set really were based on a 5-year window of time. And I suppose COVID-19 and the recent events hasn't really changed that long-term view. So then I suppose the question is more about the impact in the short term. And because of the timing issue in terms of the global recovery, I don't really want to make a comment about 2021, which is -- feels like it's only just around the corner. But I do want to reiterate that our overall 5-year view hasn't changed. And one of the reasons for that is the stuff, Mikael has been talking about already. We still see a great market opportunity in front of us as and when the economy recovers. So in summary, the long-term view of those targets hasn't changed. The short term is a little bit dependent on the timing and shape of the global recovery.

Yes. That's interesting. And if we stay in the long-term perspective, let's say, for example that the volume or growth target might not reach 5%, just out of interest, how sensitive do you believe that your margins are to volumes going forward? I mean, you've done a lot on the cost base over the last few years, but looking ahead, how do you believe that -- I mean, is it possible for you to reach the targeted margins even if volumes were not to materialize in the way that you foresee?