Cavotec Group AB (CCC) Earnings Call Transcript & Summary

Welcome to the Cavotec SA audiocast with teleconference Q2 2021. [Operator Instructions] Today, I am pleased to present CEO, Mikael Norin; and CFO, Glenn Withers. Please begin your meeting.

Good morning, everyone, and welcome to this audiocast. My name is Mikael Norin. I'm the CEO of Cavotec. And as usual, I have our CFO, Glenn Withers on the call with me today. We are here to talk about our second quarter 2021. It was a quarter characterized by a high activity level, and we actually secured many important orders in our Ports & Maritime business, both with current, but also new customers and very encouragingly also in new geographies. And as a result, the order backlog in New Cavotec increased by 19% compared to the previous quarter. I think that really validates our strategy to focus on cleantech solutions for Ports & Maritime and industrial application. Talking about the orders in that quarter, we, for example, won a series of orders to equip new build containerships with ShorePower systems, and that was a total order value of around EUR 5 million. We also won a breakthrough MoorMaster order in Japan. And this is the first of its kind in the Far East. And for in order to be in the quality conscious and very competitive Japanese market, it's really important for us, because it's a validation of the technology for the whole of that region. We were also happy to see a repeat order for 2 MoorMaster systems from Fjord 1, which is the leading Norwegian e-ferry operator. And as you may have seen, after the end of the quarter, we secured also the first automated mooring system order -- MoorMaster order in Sweden for the Port of Stockholm. So it -- really we can see that the adoption of this technology is really happening across the globe. Now, all those installations will lead to reduced CO2 emissions by up to 90% and it means that we play a very active role in the transformation to clean energy in the industry. And I think it's truly encouraging to experience the widespread interest in our technology and its growing use around the world. And several of the recent orders, such as the one in Japan that I mentioned and one in Sweden, I think it lays the foundation for a wider adoption in those and neighboring markets. I'm also happy to report that the EBIT margin for New Cavotec, adjusted for investment in our future growth, increased to 5.2% compared to 3.6% last year, despite revenues decreasing versus the same period last year. That revenue decrease is, to a very large extent, explained by the impact that pandemic had on the order intake in 2020. We saw a lot of hesitancy in terms of decision-making during the pandemic year. But we have seen now a high growth into order and backlog, and we feel very confident going forward about the track that we are on. Speaking of the future, we have long recognized that one of the biggest obstacles to greater adoption of the latest automation technologies that we can provide is the perceived complexity in upfront investment that it often entails. So in the beginning of July, we launched MoorMaster-as-a-Service, and this is the world's first subscription-based automated mooring service. And actually, it's one of the maritime industry's first product as a service offerings. So under MoorMaster-as-a-Service contract, our customers can benefit from the productivity of MoorMaster, but with 0 upfront investment and they get a full performance guarantee. So we will install the hardware and cover all of the maintenance cost in a fully managed service. I think we think this is revolutionary. And we believe that customers will appreciate this reliable and a simple way of transitioning to automated mooring. And I think also for us, as a company, of course, it leads to longer customer relationships and a higher degree of recurring revenue, which is a long term strategy of ours. And with that summary of the quarter, I'd like to hand over to Glenn to talk more about the quarter in detail.

Thank you, Mikael, and good morning to those of you on the call. I'll start by summarizing our financial performance in the second quarter in terms of New Cavotec, airports, and finally, the total group in that order. As Mikael mentioned, New Cavotec's order backlog increased 19% compared to the previous quarter to EUR 77.4 million. There was growth in backlog in all of our main areas, and that's to say MoorMaster ShorePower and also with our industry customers. The good number of orders is a strong sign for us that the customer pickup is improving with regards to our developed and also our new solutions. As for revenues, we're still feeling the effect of the pandemic and what that has had on the order intake, and Mikael talked about that earlier. The fact that the revenues decreased 13.7% to EUR 25.8 million is to a large extent, explained by the impact the pandemic had on decision-making during 2020, resulting in an order backlog at the start of the year that impacted the revenue levels that we see in this quarter. However, the order activity that we are now seeing will impact revenue in a positive way in future reporting periods. Looking at profitability, EBIT in New Cavotec, adjusted for the growth investments, amounted to EUR 1.3 million, corresponding to a margin of 5.2%. As many of you will know, in 2021, we launched a transformation plan to accelerate the focus on cleantech by investing in sales, marketing, engineering and technology to solidify our market-leading position in Ports & Maritime. In the quarter, these investments amounted to EUR 0.4 million, and in the year-to-date, $0.6 million. Turning to Airports. The order backlog increased 1.7% compared to the previous quarter to EUR 28.5 million. However, revenues decreased 17.7% to EUR 10 million. And correspondingly, the EBIT decreased to $0.3 million from EUR 1.3 million in the same period last year. However, in Airports, going forward, we expect the demand for both new product and services will improve with increasing optimism in the industry as the pandemic subsides. And while I'm talking about Airports, earlier this year, we announced that we intend to divest this business. My only update today is that the process is ongoing and that we still expect this to be finalized during 2021. Finally, at a total level, and that's to say New Cavotec plus Airports, the order backlog increased 13.8% compared to the previous quarter to EUR 105.9 million, and the revenues decreased 14.8% to EUR 35.8 million due to the reasons that Mikael and I talked about earlier. Remaining at a group level, operating cash flow amounted to EUR 2.5 million in the quarter, which is slightly higher than the previous year and much improved on our first quarter result, which was impacted by the timing of major project receipts, particularly in Ports & Maritime business and also by the operating results of the Airport business in that quarter. Investing activities in the cash flow amounted to EUR 0.5 million, mainly due to R&D investments in New Cavotec products and technologies. And this was partly offset by the proceeds from the sale of a building in France. Cash flow from financing activities was EUR 1.7 million, and which is a negative number, mainly due to the repayment of financial liabilities in the quarter. The difference compared to last year is due to the new longer term credit facility that we entered during June 2020, i.e., at the end of the second quarter last year. And with that, I would like to hand back to you, Mikael.

Thank you very much, Glenn. To conclude, I think I'll pick up on one of the comments Glenn made around our investments that we're making in our future growth. So this is something that we announced in May of this year. And we said that, we believe that we have such a strong position in market segments that are now really ripe for very fast growth. So, I'm talking about electrification, automation of ports and also increased electrification of industrial applications. And we said, we're going to invest EUR 20 million over the next 5 years in technology, engineering and business development. I can tell you that it is full speed ahead in terms of those plans. There's been a lot of high activity during the quarter. And we are seeing every day how some of these niche markets that we've been active before are now rapidly becoming mass markets just in terms of the interest from customers and the conversations that we're having. So we're very optimistic about the future, and we are very encouraged by the fact that we are on the right track in terms of our strategy. With that, I thank everyone for your attention today, and that concludes our prepared statements, and we're now going to open up for questions.

[Operator Instructions] And we currently have one question in the queue. That's from the line of Karl Bokvist of ABG Sundal Collier.

First question has to do with the port side where you secured the order for fitting vessels with the ability to achieve ShorePower electrification. I'm just a bit curious here, are you seeing any differences in interest and/or demand between the port operators and the vessel operators? I can imagine it takes to 2 to tango, so to say?

That is a -- good morning, Karl, and happy summer to you as well. That's a great question. And as you said, both parts or both ends of that the equation has to be in place for ShorePower to work. Obviously, it's quite encouraging for us that the shipowners are investing heavily in equipping their ships to be able to accept ShorePower. And this is a conversation that we're having also with ports, where -- and part of how the conversation has shifted is that -- previously for port, it was conversation about either legislation or sort of public pressure in terms of electrifying and reducing emissions. What they are seeing now is that there's also competitive pressure. Pressure from their customers who are saying, well, we have the sustainability agenda as a company, you -- if you are going to be the port for us that we call on, you have to be part of that. So, you have to be able to provide ShorePower to the ships that we now have made -- that we have now enabled for taking that ShorePower. So the conversation is actually happening in both of those parts of the industry. So it's quite encouraging.

And then I realized your business can be volatile at times, but is it your feeling now that the order momentum, if we just look at the backlog, has sort of turned the corner. I mean, we've seen quarter-over-quarter growth in your backlog for -- both in Q2 and Q1 now if we look at New Cavotec.

Yes, I would say so, Karl. And that hesitancy that we saw last year during the pandemic in terms of taking -- making investment decisions is -- that has subsided definitely. The one thing that I am concerned about, and I think a lot of business leaders are, is the ongoing restrictions that the pandemic has on our business and other business in terms of travel, in terms of being able to be out there, meet our customers, but also to meet our people and so on. But I would say that, there's definitely a more optimistic view now than a year ago or even, I would say, 6 months ago.

And then just 2 questions more on sort of demand. But first, are you -- what segments within industry are you seeing as particularly strong or is it just industry overall that has been growing year-over-year?

Well, in general industry, and I think you've seen that probably from reporting from a lot of industrial companies, it's -- has really picked up in terms of demand. What is interesting for us is, again, the conversation around electrification. We are in a lot of very interesting conversations regarding charging. And I'm not talking about charging of personal vehicles, I'm talking about commercial vehicles -- trucks, buses and so on, where some of our core technologies around connections, around cable management and so on is seen as very interesting for a lot of our customers. So that is also happening. Now, that's early days. So I don't want to read too much into it. But we will just -- again, we're seeing that a change in attitude, a change in the view of where the business is going.

And then just 2 final questions before getting back in line, has to do with -- if we look at your sort of -- normally the sales conversion from your backlog it's a bit low this quarter. And I'm just wondering in case we should assume a kind of back to normal backlog conversion for the coming quarters? And the second question might have something to do with it, I don't know. But in case you have seen any effects on your business from supply chain disturbances, bottlenecks, cost inflation any sort of those kind of effects that we're seeing in other industries?

Karl, Glenn here. Good one. The -- I guess, 2 questions there, I think. The first is that -- related to the backlog conversion. One thing that's going to happen over time is the backlog conversion will depend on the mix of long term service contracts and other contracts, such as mooring-as-a-service versus the standard equipment sale. So I expect the conversion rate to change over time, and it will depend on the mix of revenue sitting in that backlog. So that's the -- relative to your first question. Then coming to the second question about supply chain and potential disruption in the supply chain. Like all businesses, we are seeing that there are some challenges in the supply chain. And those challenges are coming through in relation to products both in industries and in our industry sector and in our port sector. So we continue to have some logistics delays as well as some price impacts on our inputs. And we're reviewing those impacts and the way that we address those as part of our day-to-day management of the business. Finally, on the point about overall supply chain management, with our new strategy in the Ports & Maritime business and with a focus on what I call volume product, we will improve the resilience of our overall supply chain from a global perspective. So I think that's something else that we'll see as a mitigating factor going forward.

[Operator Instructions] There seems to be no one else coming forward apart from you, Karl, so I will put you back through.

So the -- just out of curiosity, and perhaps you could give us a bit of a recap. The investments -- the growth investments that you target of EUR 20 million, I seem to recall that this was primarily or entirely related to OpEx investments. Could you also just remind us of the kind of CapEx investments that you have planned? And if you've quantified those?

Yes. You're correct, Karl, that the majority of the spend that we announced of EUR 20 million falls in the OpEx category. It doesn't mean that there's no CapEx. And there is some CapEx attached with the development of new production lines, again for volume-based production, particularly in our MoorMaster and ShorePower products. But compared to the OpEx spend, the CapEx spend is a lot, lot lower.

So would it be fair to assume that perhaps sort of the -- let's say, EUR 16 million or EUR 17 million of EUR 20 million will be in the P&L and that the large part of those OpEx investments will be taken sort of front-loaded over the next 3 years?

Yes, that's a fair assumption, Karl.

And then just on the Airports side, you reiterate your target of having divested during this year. And I was just wondering about sort of internal milestones that you are still aiming to reach in terms of accounting and the separation of legal units and so on, where you are in that process.

Sorry, I was on mute there, Karl. As we've said, I mean, the process is ongoing. It is progressing well. We, obviously, have an internal time plan, like you pointed out, and I can just say that we are on track in terms of that plan. So, again, this statement that we've made about our belief that we can conclude it in 2021 is still very much valid.

And sort of without going into too much detail, but do you think that there would be any anti-competitive, sort of, risks legally if a direct competitor were to be interested in the business?

We have not seen any indications of that. We do not have any reason to believe that, that would be the case. And part of that -- the reason for that is also why we're hopeful about being able to conclude this transaction has to do with the unique position that the technology that we have in the industry. So in terms of in-ground, total -- total turnkey in-ground solutions, which is an area where we are actually unique in the industry. So it would be for -- for another industry player, it would be technology that complements their product portfolio, if that would be the possible buyer.

And my final question has to do with Airports, just to understand there. You mentioned that the business is still sort of feeling the overall lower demand in the air travel industry, but expected to improve in line with improving air traffic. But just -- I just note that the backlog in Airports has still continuing to improve sequentially. And is there anything that would sort of disrupt this trend also for the coming quarters? So are you seeing anything sort of materially worsening further before it improves?

No. I think we -- for the Airports business, I think we have the same sort of optimism about the future versus last year, and that has to do with, again, with easing of all hesitancy when it comes to decision-making. And I think even though air travel has not picked up everywhere, that's for sure. But we're seeing signs, for example, in the United States, where domestic travel is getting close to pre-pandemic levels. So I think there's much more optimism in the industry than there was, obviously, last year, and we're seeing that also, again, in terms of conversations around the future and future projects that they are picking up with that.

[Operator Instructions] As there are no further questions coming forward, I'll hand back to our speakers for the closing comments.

Okay. Thank you very much for your attention today on this Friday morning. We wish you a great Friday, and a great weekend. Thank you for your attention. Goodbye.