Cavotec Group AB (CCC) Earnings Call Transcript & Summary

Hello, and welcome to the Cavotec SA Audiocast Teleconference Q3 2021. [Operator Instructions] Today, I'm pleased to present CEO, Mikael Norin; and CFO, Glenn Withers. Please begin your meeting.

Good morning, everyone, and welcome to this morning's audiocast. My name is Mikael Norin. I'm the CEO of Cavotec. And as usual, I have Cavotec's CFO, Glenn Withers, with me on the call today. And we are going to talk about our Q3 '21 report. Starting off with a reminder that we announced back in May that the future of Cavotec lies in providing cleantech solutions for ports and industrial applications. Now that is a strategy backed by more than 40 years of providing connection and electrification solutions for ensuring the safe, efficient and sustainable operations for our customer base worldwide. Now 6 months after our announcement, it is clear to us that this focus on finding sustainable solutions is on top of mind of our customers as well. For us, this meant that we, during the third quarter, saw a continued strong demand for our solutions for the decarbonization of the maritime industry. For example, we signed several orders for our prefabricated PowerFit shore power connection modules that will be retrofitted to a number of vessels for 2 of the world's largest container shipping lines. The orders were up around EUR 6.5 million, is a recognition of our leading position in the market for retrofitting the thousands of ships that need to be made shore power-ready in the coming years. Now we also signed several orders for shore power connection systems for newbuild vessels in recognition of our wide offering in this space. Now to us, the fact that shipping lines choose to install our equipment in anticipation of ports around the world to do the same is very encouraging as well as our dominating market position in this market. Now the orders send a strong signal to ports around the world that their biggest customers, the shipping lines, plan for a reality in which charging in port will be the new normal. During the quarter, we also secured orders with Port of Stockholm for the first MoorMaster system in Sweden, which is estimated to reduce CO2 emissions by up to 5,000 tonnes per year. And in fact, there is a study out by Starcrest Consulting Group that shows that automated mooring can reduce carbon emissions in a typical cargo port by tens of thousands of tonnes. Now if automated mooring will be installed at every container port worldwide, the carbon dioxide savings alone would be equal to the emissions from 1 million-plus cars. To help ports make the right decisions, we have released a free tool that can be used by them to estimate the potential fuel savings and emissions reductions from adopting automated vacuum mooring. So the above I talked about and the other orders resulted in a 20% increase in the backlog for New Cavotec. And we ended with a backlog of EUR 92.8 million, and that is almost 60% higher than a year ago. The majority of revenue from these maritime orders will not materialize until 2022 and beyond since the planning cycle in the industry is long. So it's against this background actually encouraging that revenues in New Cavotec, despite the long sales and delivery cycles, increased 3.1% to EUR 29.2 million in the quarter. Also strong revenue in Industry and Services contributed to the increase. During the quarter, we continued to make investments in line with the strategy we announced in May, as I mentioned. Our focus is, as many of you know, on developing our cleantech systems further as well as recruitment of sales and marketing people globally. In line with that, we opened a new office in Malaysia to leverage our strong position in the Far East, which is a growing market for electrification and automation. In total, the growth investments during the third quarter amounted to EUR 1.3 million. These investments have a short-term impact on our profitability, but EBIT adjusted for these growth investments came in at EUR 2.5 million, and that corresponds to a margin of 8.5%. Now I'm going to ask Glenn now to take us through the third quarter in a little bit more detail.

Thank you, Mikael, and good morning, everyone. I will now summarize our financial performance in the third quarter in terms of New Cavotec, Airports and, finally, the total group, in that order. This way of presenting our results is consistent with how we reported the prior quarters in 2021. Now as Mikael already mentioned, New Cavotec's order backlog increased 20% over the second quarter to a value of EUR 92.8 million. The increased order backlog is due to new cleantech orders in the ports and maritime sector, and that's predominantly in Asia and Europe. And it's also that our Service and Industry customers continue to order at a good level during Q3. Revenues increased 3.1% to EUR 29.2 million in the quarter. Revenue growth in the quarter was not as strong as growth in order backlog, and that was really due to the high proportion of orders that we received for deliveries in 2022. The Services share of revenue inside New Cavotec during the quarter was 22%. Turning to profit. EBIT in New Cavotec before growth investments grew to EUR 2.5 million, corresponding to a margin of 8.5%. During the quarter, the investments to accelerate our focus on cleantech by investing in sales, marketing, engineering and technology amounted to EUR 1.3 million, and EBIT after making these investments was reported at EUR 1.2 million for the quarter. Turning to Airports. The order backlog decreased 4.7% compared to the second quarter, and we reported a total order intake of EUR 27.2 million. We still see the demand for both new products and services in the airport sector will increase as travel rebounds as we exit the pandemic. Revenues in the quarter decreased 16.4% to EUR 7.7 million, and that decrease is mainly explained by the continued disruption in the business due to the pandemic and the order intake that I mentioned previously. The Services share of revenues in Airports was 30% during the quarter. Overall EBIT decreased in the airport sector to EUR 2.4 million loss, corresponding to a margin of minus 30%. And that lower EBIT is mainly explained by lower volumes. Now turning to group level. The margin in our total business, and that's both in New Cavotec and in Airports, like many businesses, was impacted by supply chain constraints, and that has led to higher material prices and freight cost across all of our business areas. There's a time lag in the impact of our own price increases to recover from that. Overall operating cash flow amounted to negative EUR 3.6 million during the quarter, and that cash outflow is mainly due to the buildup of inventory and, in particular, EUR 2.4 million during the quarter as a result of the growth in production, which is, in turn, driven by the improvement in our order backlog. And it's also due to the payment of EUR 1.5 million during the quarter, a one-off payment, as a consequence of an airport customer in the Middle East making an unwarranted calling on a performance guarantee. We continue to manage that situation. Finally, on cash flow, research and development investments in New Cavotec products especially -- or in particular, the continued development of the new MoorMaster NxG product continued in the quarter, and that resulted in a EUR 1 million investing activity attached to that research and development in the quarter. Finally, I'll just finish up by mentioning that the process to divest the Airports business in line with our previously announced strategy is ongoing. We're making good progress on that, and we still expect this to be finalized during 2021. And with that, I'd like to hand back to you, Mikael.

Thank you very much, Glenn. Well, let me just conclude with that we are on track with our strategy. And we believe it's a strategy that is perfectly in step with the market trends that we are seeing right now. As you all know, this weekend, world leaders will meet again to discuss means and ways of reversing the impact that we are all having on the environment. This global conversation around ESG topics means that we expect the focus on sustainability, workplace safety and increased efficiency to accelerate further in the future. And we are determined to continue to solidify our leading position and capitalize on these trends. Now with that, I thank you all for your attention. That concludes our prepared statements, and we will now be opening up for questions.

[Operator Instructions] We have a question from the line of Karl Bokvist from ABG.

My first one is a bit more oriented towards what we're seeing among a lot of manufacturing companies at the moment, the supply chain constraints and the cost inflation. Just curious to see, did you notice a sort of a worsening situation into October? Or do you think that you've been able to manage the kind of situation that you saw in Q3 going forward? And also, how you're working with price adjustments?

Karl, first, looking at the experience, what we're seeing, I think, the experience is what you'd expect and what we see reported in many of the manufacturing companies or assembly-type operations around the world. It's the same disruption that we experienced in the supply chain is coming in 2 ways. It's coming in terms of logistics disruption, so availability of materials, and a couple of areas of our business have reported issues with that during the quarter. I wouldn't say that that's a hugely significant impact that we've had, but it certainly doesn't seem to be getting better in any -- with any great deal of speed. And then the other impact is the unit prices of our inputs. We see increases in that and different products. And like I said in my comments earlier, Karl, we see a lag in the way we've addressed our pricing coming through. So a number of activities were put in place so that we would start recovering those costs from 1st October. But it is that, that takes a while to work through our invoicing based on new orders. So I would say we see a continuation of that, and we're in our planning phases for next year and already considering how to manage it for another round of pricing.

Understood. And just another question related to the quarter in particular. If we exclude the working capital net change that was sort of negative EUR 1.8 million, I believe you mentioned a few other aspects here, but it seems like almost EUR 3.5 million related to provisions and other items not involving cash flow. So just to understand that, was -- how much of that did you say was related to the Middle East customer? And what was the other -- what were the other items? And should we expect working capital or any other effects to provide a positive support in the fourth quarter, if things normalize at least going forward?

Yes. So first of all, on the Middle East, that's a cash impact in our working capital, so cash outflow. And as I said, we're managing that situation. We see that as a totally unwarranted draw on the bond that -- it's -- market practice in the Middle East is that the bond wording is a lot different from maybe other markets. It's, well, for want of a better term, a lot looser, in line with market practice. And like I say, our position on that was a totally unwarranted draw on the bond. Moving on from that, back to your question about the future, the second part of your question. Yes, I see normalization during Q4 going into Q1 to start recouping some of the cash outflow we've had during the year. Of course, the underlying -- there's an underlying cash performance issue coming from Airports as well. In particular, bond draw had a big impact on the cash flow of Airports during the quarter and the investments that we talked about in our New Cavotec strategy. So marketing costs and recruitment costs. These are largely one-off costs, and the impact of those will be less in the -- for the fourth quarter.

Understood. So the -- again, it's very quarter-specific, but the EUR 2.5 million and then also the additional EUR 1 million for the -- what you report as provision for risks and charges and also the other items not involving cash flows, that -- those 2 line items, were they particularly related to something specific for this quarter? Is it something you expect will continue to have a negative cash flow impact going forward?

Yes. No, I understand the question, Karl. Actually, I think I've covered it also when it's happened in previous quarters. If you look at the P&L, we've got a fairly large FX movement reported in the P&L, and that leads directly into that line in the cash flow. So that's the main reason for it.

Understood. Good. And then just on -- I mean, you reported a very strong backlog buildup, and you mentioned that most of the deliveries will take place in 2022. Just to understand that based on what you see now, should we -- the schedule of those deliveries, how do you view the delivery pace for the first quarter or the first half of 2022?

Okay. Just looking at the order backlog overall, as you mentioned, Karl, there's a very good growth in that. We said it's up 20% in the quarter, and it's coming from 2 places. So it's the projects business, predominantly Ports & Maritime inside New Cavotec, and then a very good flow of orders -- or a good momentum in orders from what we call our flow businesses of Industry and Services. So starting with that last topic, Industry and Services are flow business. So that momentum comes pretty fast into our revenue reporting and deliveries. So we continue to see that momentum growing. That's the first impact. So a growing flow business in Industry and in Services coming through pretty fast into the P&L -- fast into the revenue line, I would say. Then turning to the projects business, that's where my comment was about the lag in orders coming through. That's predominantly going to start impacting on the revenue from the second quarter, the way the orders have come in. So -- and that's based on the shipbuild schedule attached to new vessels and the shore power that we're going to fit to those new vessels, as Mikael mentioned in his comments earlier.

Understood. And then a more market-oriented question for you, Mikael. The -- I understand it takes a connection on both ends for shore power, one on the port side, one on the vessel. Just with -- you previously highlighted the market size and the potential just on the port side. Is that the correct way of looking at it, at least when you described your market size at your Capital Markets Day and so forth, that you haven't really included the market size for the vessel connectors in that market?

Well, I mean, that's correct. When we had our Capital Markets Day, and I think it's almost a year ago now, we did not know how fast shipping lines were going to start to take this seriously, honestly. We've had preliminary conversation with ports, but that conversation has now completely changed character. And as you've seen in our order intake, we see strong interest from the shipping lines, all the major container shipping lines, Maersk, MSC, COSCO and so on. And where they are really focused on that one side of the connection that is needed to be able to provide electricity to ship at port, the ship side. So that is very, very encouraging. And without getting into specific numbers, there are still, I would say, more than 1,000 vessels in total that will be needed -- that will need to be converted to be able to provide or to accept shore power. So that is a very interesting market for us, and we have a good position there. The other part of it, which I mentioned in the report is, of course, that it puts increasing pressure on the ports because the ports' customers are the shipping lines. So they are doing everything to become more sustainable. So it's an increasing ports of -- increasing pressure on the ports to be able to provide infrastructure to them, the port side of shore power, which is also a field that we play very actively in, of course. So the evolution in the last 6 months, I would say, has been very encouraging.

All right. And a final one for me before getting back to the queue. You mentioned in the report continued good deliveries in your industry segments. I think, for the year in total, I think the first question, would it be fair to assume perhaps that the industry has delivered sales in the double digits compared to 2020? And the follow-up also, I believe, when you -- based on the numbers you provided, it seems that the industry had a healthy double-digit EBITDA margin in 2020 given the sales growth and your structural improvement programs in recent years. Has that also meant that profitability in the industry continued to improve during 2021?

Talking about the top line first. We are seeing growing demand from our top OEM customers, and I'm especially pleased with our industry leadership team who have managed to expand the customer base that we have. So that is very encouraging. You have seen from many of these companies that will be reporting that they see strong demand, and that also flows to us. That's very encouraging. Another part of it I'd like to mention also, maybe a little bit more future-oriented, but there is also a strong focus on sustainability from our customers and their end customers in the Industry segment. So a focus on the electrification of the heavy machinery and equipment, for example. And we -- this is an area that we're starting to dip our toes into and where we're actually using the same core technology that we have developed for the ports and maritime sector, for example, automated battery chartering and so on. So this is for equipping them this heavy machine, as I said, to be battery-powered instead. So we're looking at port terminal tractors, mine hauling equipment and so on. And we are having preliminary discussions, early discussions with a number of customers around in that field. So that is encouraging. We are also happy with how the industry part of our business is performing in general. And Glenn mentioned also that we are, as a result of the increased cost that we've seen in the supply chain, we're also passing on some of that to our customers. And there is an understanding from our customers also about the need for price increases, so that's also good news.

[Operator Instructions] And we have a follow-up from Karl.

Yes. So we've seen a lot of shore power orders, a couple of MoorMaster orders as well. I'm just a bit curious to hear the market dynamics for the MoorMaster situation, in particular, in recent months and what you see for the next year. Will perhaps next year be mainly related to shore power and you see the upturn in automated mooring coming perhaps more towards 2023 based on what you feel and what you hear from customers?

Yes. I mean we -- the thing with MoorMaster also is it has 2 things going for it right now. The first of it is the supply chain crunch that you have seen around the world. We have all seen the stories about containerships waiting to offload around port -- in ports around the world, and that has definitely increased the interest in automated mooring because that is one way of speeding up the process in a container port. So that is driving some of the conversations we have. On top of that also and as we mentioned in the report, there's also a clear case for reducing the environmental impact in a port by using automated mooring. Now these are bigger investments, so the decision cycle is longer than if you compare to an on-ship shore power systems, for example. But we are encouraged by the interest that we are seeing. Part of that is also our offering around mooring as a service, which we have launched, and that also helps in those conversations about bridging that decision from -- or from interest to an actual decision, obviously, because it reduces the barrier to taking a decision. Now we believe that there is more than 4,000 berths around the world that would benefit from automated mooring, so I think we're just at the beginning of that market opening up.

Understood. And just final one relates to Airports. I believe you -- the operating performance and demand environment you highlighted in the report, but just to hear a bit about the sales process and how that is ongoing. I understand that the formal close and exit -- potential exit of the business would happen -- could happen next year. But is your intent still to reach an agreement by the end of this year in line with your previous plan?

Well, we're working on that according to that plan, Karl, and that is still our aim right now. Now obviously, the air transportation industry is under a lot of pressure, as you know. Things are starting to look up, but we are not through the tunnel yet. So it is a challenging environment. But we believe that our Airports business has a lot of value in the right hands of a company that can really capitalize on the position we have there and as a complement to an existing product portfolio in that space.

Understood. Just final one then. On the competitive environment in ports now. First, on onshore power, what you're seeing here in terms of which competitors you're facing off against now when you see demand picking up in terms of firm orders, how that landscape is developing? And then on the MoorMaster, I believe you previously said that you -- well, you were the market pioneer, so to say. I'm just curious to hear if you're feeling any kind of increased competition in that space now with other players launching their own versions.

Well, if I start with shore power and if we keep that distinction between on-ship shore power and onshore shore power, I know that could be a bit difficult to see the distinction there, but I think it's an important one. When we talk about on-ship shore power, we have a very strong position, and that is really based on the long history we have within this field. And we are moving our positions further in that field by also doing complete retrofits of ships with our containerized solution. So a very strong position there. Obviously, we are not alone in that market. I don't think we even want to be alone in any market. It's better to have some competitors, also keeps you on your toes and there are more people out there spreading the message. If we then talk about onshore shore power, what we're doing there is that we are building up our capabilities around the core component that we have, what's called the cable management system, to be able to provide a complete turnkey solution. Ports today, and most of them is not a question of do they -- is there a will to introduce shore power. It's more a question of how are they going to do it. And they are faced with questions of the quality and -- the quality especially of the power that they can get from their power supplier, the -- often electrical utility in the area, and then how they're going to get that from that connection point the port has to the berth. And that's where we want to provide a complete turnkey solution. And our -- and we have -- in the cable management system, there is competition, although, again, that's where we are the market leader, but we want to further move up our position by becoming a turnkey supplier within that field. So that's something that we're building on. Some of the investments that we have made for future growth is in that field. Talking then about automated mooring, there is one other competitor in that field. Again, I think we benefit from more people being out in the market talking about the benefits of automated mooring. So far, we have kept our dominant market position. And I think -- and that is definitely our aim to do, to keep doing that through innovation, through great customer service. And so still very encouraged about our position in that segment.

Right. A follow-up then on what you described there in want to try turnkey solutions. I think the Cavotec prior to 2017, 2018 had its fair share of struggles when it came to these larger projects. So could you just shed some insight into how you aim to differ in terms of scope and risk and everything when it comes to new turnkey solutions compared to how they looked in the past?

Yes, that's a great question. I think the difference is it comes from people and it comes from processes, Karl. So we now have a strong leadership team, and we're complementing that team with turnkey experience. I mean, myself, for example, I spent 14 years leading a large turnkey business in the past in another company. And we are also recruiting other people with a lot of experience in this field. Then it comes down to processes, which is exactly what you mentioned, which is around scope, so choosing which scope you take on and how you look and evaluate risks. So it's all about being very disciplined in those areas. So that's something that we're working on.

And as there are no further audio questions, I will hand it back to the speakers for closing remarks.

Okay. Thank you very much, everyone, for joining us on this Friday. Thank you for your attention, and we wish you a very good Friday and eventually a great weekend. Thank you.

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