Cavotec Group AB (CCC) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Cavotec Q4 Report for 2021. [Operator Instructions]. Today, I am pleased to present CEO, Mikael Norin. Mikael, please go ahead.

Thank you very much. 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. It has been almost a year since we launched our strategy to focus on cleantech reports and industrial applications and to divest the Airports business. This is a new strategy that's backed by more than 40 years of providing connection and electrification solutions that ensure the safe, efficient and sustainable operations for our customers worldwide. We have seen continued increase in demand for our sustainability solutions in what we call new Cavotec, and it's excluding the Airports business. During the fourth quarter, this focus on finding sustainable solutions has been on the top of mind of our customers as well, with especially strong growth in orders for on-ship Shore Power for both new vessels and for retrofits. We also saw an increase in orders for motorized reels, including 2 key orders for reel electrification systems for container cranes at major ports in China and the U.S. from leading crane manufacturer, ZPMC. Furthermore, industry showed a strong increase in the order backlog, driven by an increase in orders from heavy equipment OEMs. It is truly encouraging to see the continued increase in demand for our cleantech solutions and the effects of our new strategy. Now the fact that shipping lines chose to install our equipment in anticipation of ports around the world to do the same is very encouraging. The orders send strong signals to ports around the world that their biggest customers plan for a reality in which charging in port will be the new normal. Looking at the whole of 2021, while order intake has been the highlight of our performance, the majority of revenue from the maritime orders will not materialize until 2022, so this year and onwards. And that is due to the planning cycle industry being long. As a result, annual revenue in 2021 was flat compared to the previous year. During the quarter, we continued to make investments in line with the strategy we announced back in March of '21. Our focus is, as many of you know, on developing our cleantech systems further as well as the recruitment of sales and marketing people globally. On February 22 of this year, we signed an agreement to divest 100% of our Airports business to a U.S.-based investment company called Fernweh Group. The transaction is expected to close in the summer of this year 2022. And I'd like to say that it is with a bitter-sweet feeling that we're going to see our Airports colleagues leave, but we believe that they as well as our customers' partners will benefit greatly from the focus that the new owners will bring. And the sale of our Airports business is an important step to allow us to fully focus on New Cavotec going forward. I'm going to come back to that. But before I do that, I'd like to hand over to Glenn to walk us through the fourth quarter in more detail.

Thank you, Mikael, and good morning, everyone. First, I'll start with a recap on the basis for our reporting during 2021, especially for those of you that have followed us during the whole year. Up to and including the third quarter, we reported our results in terms of New Cavotec and then Airports and finally, the total group in that order. However, during the fourth quarter, the process of divesting the Airports business, as Mikael just mentioned, reached an advanced stage. And then subsequently, in February, we announced the agreement to sell the business. This has triggered a different accounting treatment for our Airports business during the fourth quarter in accordance with IFRS 5. We determined that the conditions required to classify the business as held for sale were satisfied, and we've published our Q4 report today with the Airports business classified as discontinued. And specifically, Airports is disclosed as discontinued operations in the income and cash flow statements and as assets and liabilities held for sale in the balance sheet. In addition, as a direct result, a consequence of the spinoff, a noncash one-off impairment charge has been taken in the fourth quarter of EUR 32.8 million. And this adjustment takes our book value down to net realizable value for the closed transaction -- for the confirmed transaction. We're progressing well on the carve-out of the business in preparation for completion. The majority of that work is taking place in the U.S.A., Germany and the U.K., and we are well on track for completion in the summer as Mikael already mentioned. Now I'll turn to New Cavotec. Order backlog in the fourth quarter increased 6.5% compared to the prior quarter and 71% compared to a year ago. And we're reporting just under EUR 100 million of order backlog at the end of the year. The increased order backlog is due to new cleantech orders in the ports and maritime sector and those are predominantly coming in Asia and Europe. It's also that our flow services and industrial performance -- that business has performed well and order backlog for Cavotec service offering also continued to grow during the quarter. I would say we also continue to see good order growth during the start of this year. So the momentum towards the second half and the end of last year has continued into the beginning of this year. Now turning to revenues. Those increased in the quarter 5.4% to EUR 31.4 million, which is a reflection of the strong order book we recorded in previous quarters. And the services share of revenues in New Cavotec during the quarter increased to almost 23%. Although this development is in line with our strategy, I don't expect that sort of percentage to continue that high in 2022 due to the high number of deliveries that we have in the order book, are coming from the products business. Revenue growth in the quarter was not as strong as the growth in the order backlog, and that's really due to the high proportion of orders, as Mikael mentioned earlier, that were taken in 2021 up for delivery in 2022. During the quarter, we continued to make investments in sales, marketing and engineering and technology costs to meet future demand and to increase our order intake and revenues. Adjusted for those growth investments, we recorded a breakeven EBIT for the quarter. Now turning to cash flow. Our operating cash flow amounted to EUR 5.8 million in the quarter, and this was predominantly driven by working capital performance inside the quarter. We also recorded R&D investments in New Cavotec products, especially continued development of the MoorMaster and Shore Power ranges in ports and maritime, resulting in EUR 1.4 million of investing activity in our cash flow in the quarter. We reported a leverage ratio of 3.2x, which is similar to the third quarter. And there was an impact from the one-off impairment coming from Airports that I just discussed on our equity ratio, which reduced in the quarter to 38%. I'd like to confirm that we're in full compliance with our banking covenants in the fourth quarter despite the size of that adjustment or that impairment. And finally, one more topic from me. In our report this morning, I'd just like to draw to your attention that we have disclosed on subsequent events impact that we're seeing from the current COVID lockdowns that are occurring in Shanghai, especially in the latter part of March and continue as we speak on this call now, and are expected to continue into April. As a result, our facility there has not been able to deliver and invoiced a substantial part of the orders at the end of the first quarter despite the production being completed. I want to emphasize that orders are not canceled. The deliveries will resume as soon as the situation has normalized. Therefore, represents a temporary delay in revenue. We anticipate that approximately EUR 4 million worth of revenue will be delayed from the first quarter into the second quarter. The final day of the delays will depend on individual deliveries and discussions with customers who have deliveries sitting in our factory on the floor in China. Even though this is a temporary impact on our ability to deliver and invoice according to plan, we've nevertheless started a discussion with our banks or started discussion with our banks this morning, in the event that we're not able to meet all of the conditions of our existing bank agreements in the first quarter of 2022. Again, I want to emphasize that we're in full compliance with our bank covenants at the end of the year and at the end of the fourth quarter. So what I'm referring to here is in anticipation in abundance of caution and preparing for first quarter reporting as a result of the closure of the facility in Shanghai. We will update on the status of those discussions when we report our annual report which we will now publish on the 27th of April 2022. And on that note, Mikael, I'll just let you...

Thank you very much, Glenn. Looking back then at 2021, I believe we are on track with our strategy and the trends that we are seeing in the marketplace is working in our favor. We are well positioned to create unmatched environmental and financial benefits for our customers through the technology solutions we will have. We're going to continue to develop connection and electrification solutions to enable the decarbonization of ports and industrial applications. And as I said, 2021 has been a year of confirmation for the strategy and the growing demand for our solutions is a strong sign of our expectations for the future of Cavotec. Before we end, you may have seen that in January, I informed the Board of Directors that I have decided to leave my position as the CEO of Cavotec after 5 years in the role. The family and I wish to return to the U.S. later this year. It has been the privilege of a lifetime to lead the transformation of Cavotec from a traditional product manufacturing company to a focused cleantech solution provider. And I believe that as this journey is almost complete, now it's the right time to hand over to someone else to continue developing this incredible company. I know the Board and the executive management team is fully committed to the strategy, so this should not make any change to the future of Cavotec. And with that, I thank you for your attention. It concludes our prepared statements, and we will be now opening up for questions.

[Operator Instructions] Our first question comes from Karl Bokvist with ABG Sundal Collier.

My first question just relates to what you highlighted here in the near term. I was just a bit curious on the bank discussions here? Is it related to potential risks with any form of covenants? And is it possible to disclose what kind of measures those relate to without perhaps disclosing the absolute level? And then just you can point to the EUR 4 million in deliveries, but you can also point to the minimum EUR 10 million that you will receive from the sale of Airports in the summer. But I also read that you sold a property in Italy, now to be received in Q2, how much do you think you could receive in cash from that one?

Okay. Karl, there's a few questions in one there, I think. First, to address specifically the first question about covenants. To repeat for emphasis, as we exited the fourth quarter, we're in full compliance with our -- all of our covenants under our existing banking arrangement. Unfortunately, the timing of the closure of -- and disruption caused by the closure of our Shanghai facility right at the end of the quarter, there's an outsized impact because China, for us, with the types of deliveries that we're making has a significant amount of deliveries to ship not just at the end of Q1, but going into Q2 and for the rest of the year. The shutdown is temporary, but obviously, we can't control the overall timing of reopening and how much we can deliver in any given week at the moment. As of Friday, we were relatively -- Friday last week, that is, we're relatively optimistic. And then by Friday night, a new shutdown has been announced across Shanghai. So that's the reason we are where we are. In relation to looking ahead and what we will report in Q4, as I just discussed in my prepared statement, EUR 4 million of revenues is likely to shift as a result of the ongoing closure in Shanghai from Q1 into Q4. Because of the size of business we are, EUR 4 million has a big impact on us. And that's why we're flagging that we will be discussing the impact of that movement in the quarter with our banks and seeking some additional headroom, I would say, in relation specifically to just the leverage ratio. In other words, it's the profitability of the business that's impacted short term for Q1. Again, I emphasize that Q4, it was in full compliance. And we've taken a cautious step here in relation to Q1 expectations. It's not that Q1 has finalized yet, of course. So does that answer your first question, Karl?

Yes. Perfect. And then just thinking out loud here, but you -- you will likely be able to point to the EUR 10 million in proceeds from the Airport sale as you know, already agreed terms, right? And that's the amount minimum that you will receive in cash in the summer. And then just that you highlighted in the report that you sold a property in Italy. So I was just a bit curious about if you could share any comment on the potential proceeds from that sale or if it's a sale or sale leaseback or what you did there?

Yes. It's actually -- so I'll address the Italian one first. That's a building that we owned in Milan, surplus to requirements. It's not a sale and leaseback. It's the sale of the facility outright, where we will have no future interest in the property. The cash will probably come in the next -- it will come during Q2. So in terms of completing that transaction. So that's -- and it's less than EUR 1 million in terms of overall impact to cash flows. Then addressing the proceeds from the sale. First, the EUR 10 million is the gross proceeds before transaction costs. Some transaction costs were already incurred in cash. During Q4, the majority will actually be incurred in cash either during Q2 or on completion. So there is a -- that EUR 10 million is gross, not net of transaction costs. But at the moment, we've said we expect to complete during the summer, whether that falls into the second quarter depends on timing of various implications like foreign direct investment approvals, for example. So that's how I see it playing out.

Yes. Okay. And I'm sorry for speaking to this particular topic. But just to get the numbers right, can you say anything about what do you think about the net proceeds?

Net proceeds, overall, it still depends probably on how long it takes to get to completion. So I prefer not to go through that right now.

All right. And then just on the products that you shipped there from Shanghai, the EUR 4 million, for example, is this fully related to Ports & Maritime products and systems? And is it only Shore Power? Or is it MoorMaster or what do they relate to? And...

Sorry, I'm going to jump in there, Glenn. The majority of the orders coming out of our Shanghai facility are related to our Ports & Maritime business. A lot of it is also relating to the onshore -- sorry, on Shore Power orders that we have received. And then we talked about the increased interest in those products. So we do have a lot of a lot of activity out of that facility. There is some coming also from the -- some industry products also have the majority portion.

All right. And let's say, before we go into supply chain, I think just the comments you made on continued growth, and I know that you continue to expand the employee base here. And you've talked about the total EUR 20 million in, let's say, growth investments over the next 5 years. But can you provide any insight into your view on -- if all things go well and you can find the people that you want? How should we think about the personnel base for New Cavotec?

Well, I think what we are doing is that we are balancing, of course, we are investing in the future, but at the same time, we are also balancing that -- the pace of those investments with the reality that we're seeing in the market and how we're seeing deliveries. And as we've seen, the deliveries have been -- we talked about that the planning cycle is long, so deliveries have been put further out in this year, although we had a great order intake last year. So that's something that we are -- continuously on our mind. In terms of attracting people, we have seen that, that has become easier for us also as a result of the strategy that we announced that we have become as we are a more focused organization and focused on things like sustainability that is seen as attractive by many people and especially younger people who want to have -- also see sort of a purpose with the work that they do on a daily basis. So quite optimistic about finding good people, and we've seen that. And that is very, very important for us.

Understood. And thanks for the comment there on providing a bit of flavor on the order momentum at the start of this year. It seems like things are progressing well here. But the backlog continues to develop well. What are your thoughts and view on the delivery potential given what we continue to see globally with supply chain constraints and component shortages and everything?

Yes. That's obviously something that we're keeping a very close eye on and it's something that we have a lot of activities internally on to making sure that we have a supply chain that can meet the demand that we are now seeing. So it's a lot of work around that. And I don't have a crystal ball. We will see what happens going forward here with the supply chain crunches that we have seen. So far, we have been able to have managed, but it is something that we keep a close eye on and making sure that we find -- or trying to find alternative suppliers and so on.

Understood. And the question that all Nordic capital goods companies will be facing this impending reporting period. But how have you managed the price adjustments compared to cost inflation and also you know lead times on orders that you have booked, whereas the costs related to those orders might still be volatile and thereby put pressure on near-term margins, but just the dynamics here? And if you have clauses in your contracts that can handle that?

Yes. I mean that's also obviously, it's something that we keep a close eye on. I think what has happened because of the inflationary pressure that everyone feels, so the conversation that were difficult a year ago about price increases are much easier. I think we're -- at a society, that's not a good thing because that means that we will have continued inflation, but it is a fact. So we are working continuously now with price increases, especially in our flow business, where it's easier to implement those in the spare parts part of our service business, the industry products and so on. But then when it comes to the more project-oriented business, then we are focused on, as you alluded to, yourself, Karl, to have CPI increase clauses in our contracts and so on. So that's something that we are working quite focused on.

[Operator Instructions] We have no further questions at this time. Karl, did you have a follow-up question?

Yes. So just on what you are -- we, of course, do have a bit of insight on the gross profitability from the Ports & Maritime segment before the pandemic. It was a bit of a different business back then. Of course, you've done a lot of internal improvements and you have a higher service share and a bit of shift in equipment mix and everything. But could you give some flavor on how we should think about the margin trajectory this year if you get a bit more deliveries and mainly for next year, especially also given perhaps what we are seeing on the cost side?

Yes. I don't want to try to look into the future there, Karl, it's all depending on what happens now short term with Shanghai. It depends on what's happening with supply chain issues that we have with inflation and so on. I mean -- but what I can say is that we are trying to also move to a situation where we have longer serious larger volumes for products for example, on ship Shore Power orders. That's going to mean that we can have more synergies in the supply chain on to, also to compensate for some of the other challenges. Yes, just spoke about. But I don't want to speculate further on that right now.

All right. And just 2 more. The first one, you commented a bit about the reported EBIT in New Cavotec and then the amount related to growth investments, but then you also referred to adjusted for reconciling items. I believe it's EUR 1 million, just out of curiosity for what does that relate to?

So if you go to the basis of our accounts as they've always been set up, Karl, the segmental reporting further into the quarterly report, which still separates out New Cavotec airports and these other reconciling items, which are basically central costs. So refer you to the detailed segmental analysis and the report for the breakout of that. But that's what it has been. As we progress with the carve-out of Airports in Q1 and Q2, we'll start to see those numbers change as we actually separate the business into the different legal entities as the airports operations are transferred to the target company.

Understood. So you believe that at least a portion of the central cost can actually be allocated out to Airports?

Yes, it will be. But on a natural basis, as you would appreciate with real head count, which is already determined as part of the carve-out plan.

All right. Perfect. And just a final one was on -- you mentioned continued good momentum in the industry. Would it be fair to assume that also sales and profitability in the industry continues to be on a good level?

We have -- yes, we are very encouraged by the development that we see in the industry called 2 dimensions of that. First of all, the sort of more traditional part of that business towards our traditional OEM customers. That has gone very well. But on top of that, we also see an interest in some of the new solutions that we have developed around charging of heavy-duty equipment for -- heavy-duty construction equipment, mining equipment and so on. So this is really building on, we talked about a year ago that we had done a pilot in the Port of Long Beach for electrification and some yard trucks. And that has been picked up by several big OEMs, and they've looked at that. And we have started conversations around electrification, where we would help with charging stations for those type of equipment, that's our specialty, it's high-power, high-speed charging. So we're seeing development there as well. And that's really interesting for the future.

All right. That's interesting because you highlighted the ports opportunities. But within, let's say, underground mining equipment without mentioning any names, but there are not that many out there. But is that actually a market where you see tangible demand or possibly actual deliveries?

Yes. When we announced our strategy about a year ago, there was, of course, a lot of focus on ports and maritime and the opportunities. But we did say also the reason that we believe that industry is such an important part of us is because of the synergies, because of the synergies in terms of technologies and the same type of technology, especially in electrification and charging, it can be used because we're talking about, as I said, high power charging, high-speed charging. So yes, the underground mining equipment manufacturers, but we also see interest from other heavy-duty construction equipment manufacturers. So we hope to be able to talk more about that when we report our Q1. But I can tell you, we're quite excited about the conversations that we're having.

At this time, there are no further questions. I will now hand back to Mikael Norin for any closing comments.

Thank you very much. With that, thank you for your attention and participation today, and we wish you a good day.