Cavotec Group AB (CCC) Earnings Call Transcript & Summary

Welcome to the Cavotec Q4 report for 2020. [Operator Instructions] Today, I'm pleased to present the CEO, Mikael Norin; and the CFO, Glenn Withers. Please go ahead with your meeting.

Good morning, everyone, and welcome to this audiocast. As you heard, my name is Mikael Norin. I'm the CEO of Cavotec, and I have our CFO, Glenn Withers, with me today. And the topic is our Q4 report for 2020. So Cavotec's Q4 report. As we all know, the second wave of COVID-19 resulted in partial lockdowns in many places around the world in the fourth quarter of last year. And this means that the market situation continued to be challenging for us, including delayed decision-making by customers and postponed projects in our markets. Now we believe that we managed the situation well, though, considering in the quarter, we generated slightly higher revenue and EBIT versus the third quarter 2020, while the operating cash flow was considerably stronger. Our financial position continues to be strong, and we are well positioned to both handle the current situation and to invest in the future. Glenn will elaborate more on our financial results in a minute, but let me first talk about how we see market growth returning when the pandemic's under control. The thing is that despite a depressed business climate at the end of last year, we continue to be optimistic about the future. We remain committed to developing solutions that contribute to improvements in efficiency and productivity, while at the same time, reducing environmental impacts. We call these profitable sustainability solutions. We actually see the pandemic making key trends of efficiency, safety and sustainability that our solutions address more relevant than ever. Now underpinning our optimism is some of the orders we won in the quarter that reinforces our leading position in the growing market for profitable sustainability solutions for the maritime sector. For example, we won automated mooring and automated e-charging systems for the world's first fleet of zero-emission autonomous battery-powered ships in Norway to ASKO. I'm convinced that this project will be talked about in the future as the breakthrough step towards a fully autonomous maritime supply chain. In the coming years, I believe we will see a proliferation of autonomous shipping and zero-emission technologies being introduced in the maritime world. And talking about new technologies, we were really excited to book 2 orders in quick succession for our next-generation automated mooring system, MoorMaster NxG, so soon after the global launch in October. I think this is a testament to how MoorMaster can revolutionize the way ships enter and leave ports, with mooring in as little as 30 seconds to drastically reduce docking time. That leads to increased loading and offloading productivity in the port. And from an environmental perspective, it results in an hour less of heavy diesel emissions for every ship and every mooring sequence. Now our optimistic view of the future also means that we, despite the current headwinds, increased our investments in developing our technology and products. And in October, we announced that we will open a new innovation center in the Netherlands at the beginning of 2021, focusing on profitable sustainability solutions. And this will bring together the capabilities that we have within areas such as artificial intelligence; remote connectivity; high-power, high-speed electrical charging; and battery technology. And I think with this introduction, let me hand over to Glenn to talk about the fourth quarter.

Thanks, Mikael, and good morning, everyone. As you heard earlier, we continued to experience longer lead times to close the deals with our customers. Nevertheless, we did win several significant orders in the quarter. And in addition to the ones that Mikael already mentioned, in particular, we secured orders for 2 separate MoorMaster systems in Australia and New Zealand. In aggregate, they were worth about EUR 6.5 million. In addition to that, we also won several airport gate refurbishment projects in the U.S.A. during the quarter. The COVID effect, however, resulted in our order backlog decreasing 7% during the quarter. And we ended at EUR 85 million. In Ports & Maritime, the backlog was 3.5% lower, while in Airports & Industry, it was 11% lower prior to -- compared to the prior quarter. Now turning to revenue. It decreased 15.7% in the fourth quarter compared to the same period previous year, and we finished at EUR 40 million. This is mainly as a result, as I mentioned earlier, of delayed projects related to the second wave of COVID-19 and the continued partial lockdown in some markets that we experienced during the quarter. And at division level, revenue for Ports & Maritime decreased to EUR 17.8 million. That's a drop of 20% compared to the same period previous year, while in Airports & Industry, the revenue decreased 11% compared to 2019. Now that decline in Airports & Industry, if I split it between airports and industry, we were down more in airports, while in industry, the profile was relatively stable quarter-on-quarter. Despite those reductions, adjusted EBIT remained positive for the fourth quarter at EUR 1 million. This corresponded to a margin of 2.5% compared to 11.8% in the same period of last year. The positive result again proved that our efforts to restructure our operations in the past has improved our flexibility and our resilience to changes in volumes. In the quarter, we also continued to invest in the future, and we incurred costs of EUR 1.9 million in relation to our plan to accelerate the development of products and growth in the Ports & Maritime sector. Including these one-off costs, we reported a loss of EUR 0.9 million in the quarter. Something that also affected us in the quarter in a substantial way was the strengthening of the euro against the U.S. dollar, especially towards the end of 2020. And this resulted in an FX loss of EUR 3.3 million in the quarter, which was a EUR 1.1 million negative swing versus the same period last year. I will point out though that virtually all of this impact is due to unrealized balance sheet currency translations. I previously talked about the importance of a consistently profitable cash-generating base business in Cavotec. From the beginning of 2020, we focused a lot on our processes, follow-up and consistency. As a result, we've previously reported 3 consecutive quarters of positive and improving operating cash flow, despite the significant top line impact from the pandemic. I'm happy to report that the fourth quarter was no exception to this, and we reported a positive cash flow of EUR 9.6 million in the quarter, which was 7% higher than the previous year and for the full year, represented about 116% of EBITDA. Cash flow from investing activities was EUR 2.2 million, mainly due to investments in research and development for new products in Ports & Maritime. And you've heard us talk about those investments in the last few months. We closed the year with a cash balance of EUR 19.2 million, up EUR 6 million during the year. This means that we're well positioned to continue to invest in future growth. And with that, Mikael, I'd like to hand back to you.

Thank you very much, Glenn. For us as a management team, we remain very much optimistic about the future, as I said in the beginning of this presentation. But for us, it means that in the short term, we have to have one foot on the brake pedal, and at the same time, the other on the accelerator. So what we tried to do is we have to both handle the short-term market challenges due to COVID by controlling our costs. And I think we've done a pretty good job of that, but simultaneously also to continue to invest in further strengthening our market positions, so that we are prepared for the expected recovery and growth in our markets. And I believe that behind the headline numbers in this report, we have shown in Q4, and during the year, that we are very capable of doing just that. So in summary, we are more committed than ever to investing in profitable sustainability solutions so that we can take full advantage of the expected increase in demand as soon as the world returns to a more normal situation. We have a lot of exciting things planned for the year ahead. So I hope that you stay tuned. And with that, I'd like to thank you for your attention so far. This concludes our prepared statements, and we're ready to open up for questions.

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

So let's perhaps start off, I think, in the outlook statements of some other companies out there. We tend to see a sort of at least a sequential improvement in customer sentiment out there, even though it's, of course, still highly uncertain due to the pandemic. So I mean, just to hear your flavor on whether or not you feel that customers are getting a bit more optimistic about the future. Do you feel that in your end markets that it's just a similar type of appetite for investments as it was perhaps in the early fall? Or just to understand how your customers are viewing the situation.

Well, thank you, Karl. I think we need to separate that question into our 2 different business areas. And we start with Ports & Maritime. We definitely see a lot of growing interest in these type of solutions that we offer. So our customers are trying to find solutions that both increase productivity and simultaneously offer sustainability because of the pressure that they are on to, to improve in both of those areas. So we have a lot of positive interest from the market for that, and we think that we're very well positioned. It may not look like that in the report today. But as I said, there's a lot of interest, a lot of conversations going on. Now airports, as you know, it's still a market that is heavily impacted by the COVID situation. And due to the uncertainty around the future passenger volumes, we see that the airports, which are -- they are the end customers for our solutions, they're still very hesitant to commit to new investments. We haven't seen any projects that were planned for the future to be canceled, but they keep being pushed into the future. So it's really a story of two different -- a tale of two different stories.

Understood. And just to get a sense of -- typically in a fourth quarter for a company of your business, I can imagine that as you had the prior year that you had a bit of a good mix in terms of Services and a bit of deliveries towards the end of the year. So I think you mentioned that Services now are roughly 22% of sales. And I think it was 20% or something like that, that last year. So just to understand, I mean, would -- do you feel that Services could have been even higher or Services also impacted by COVID, for example?

Well, Services has been impacted during the year, Karl, because of travel restrictions. So that repair jobs and maintenance jobs and so on are very difficult for us to undertake with our customers as they come in. We have mitigated that by developing remote ways of conducting service with cameras and stuff like that. So I think the service team has done a really good job of that. And honestly, we're very encouraged by the fact that Services continues to develop in a positive way and especially when it comes to long-term service agreements for the installed base that we have. As you mentioned in the quarter, now Services represent almost 22% of our revenue. But what is interesting is that if I look at the portfolio of long-term service contracts that we have now, if we take like an annualized value of that, that actually grew 36%. Still from a modest base, but we see us progressing on that quarter after quarter. So that is very positive, I think. And it shows that what we're doing and how we are setting up the whole Services organization is something that our customers are reacting very positively.

Understood. And two more questions for me. The first one has to do with -- you continued to -- or we continued to see a reduction in your personnel base. Now part of this has to do with your prior programs. But in case demand recovers quite substantially, let's say, revenues could return in a year or so to the kind of level we saw in 2019, do you feel that with the lower personnel base, you still have the ability and capacity to handle those sorts of volumes?

Well, what we did in -- during the transformation, Karl, is that we rebalanced our workforce so that we have a base of permanent employees. And then on top of that, we have permanent employees so that we can flex with demand. And that's exactly what we've been able to do. That's one of the reasons that we've been able to react in -- so forcefully and in a fast way to the situation during COVID. So this is also what we will do when demand returns. We're able to add on top the temporary staff to be able to flex again without locking in that cost permanently for labor.

Understood. And my final one has to do with what you call growth investments, the EUR 1.9 million into growth investments within ports. What kind of items are -- do these relate to? And since you call them a one-off, how should we think about the possibility of even more investments in the future?