Cavotec Group AB (CCC) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to this webcast. My name is David Pagels, I'm the CEO of Cavotec. With me here, I have our CFO, Glenn Withers. We will today present Cavotec's Q3 report '22. You're all most welcome to ask questions online during our presentation [Operator Instructions] We will see all your questions and -- on our screen. We will today first present the financials and operational highlights of the quarter, thereafter give you a financial update followed by a summary of the quarter and the way forward and then, of course, finish off with a Q&A session. We can conclude that Cavotec's order backlog increased 65% from the same period last year, but remained flat compared to the second quarter. Revenues in Q3 increased almost 44% compared to the same period last year, up to EUR 42 million, and also grew 32% compared to the previous quarter. However, during the quarter, while the revenue increased, we reported a loss and I will talk more about that later. And Glenn will talk a little bit more about the cash flow. Moving over to some more details. The strong revenue development is partly explained by capacity ramp-up in Shanghai. This is, of course, very positive and meant that we could catch up on COVID-related delays. During the quarter, we managed to reduce the delayed or the backlog by EUR 7 million, down to EUR 3 million and naturally we expect to reduce that further. However, during the quarter, the profitability in the New Cavotec was very unsatisfactory impacted by several factors. Starting in 2021, we invested in our organization for growth, which is not yet in sync with the revenues. We added 65 people in the past 12 months. We strongly believe in our future and it's right to invest in that, but it comes with a cost. Additionally, we have also -- we have existing orders with low margin in our order backlog and they had a negative effect on our profitability. At the same time, there were material cost increases, higher transportation costs and supply chain constraints, which were not fully compensated for in time. Furthermore, there were some one-off costs of EUR 1 million arising from the departure of the previous CEO. In total, above factors led to an EBIT in New Cavotec in the third quarter amounting to minus EUR 0.4 million. As I mentioned earlier in this presentation, I'm not satisfied at all with that. The prospects for New Cavotec's core business are very positive. Before I continue, let me explain what I mean by core business. This is Ports & Maritime, Industry and the corresponding Service activity in those segments. Today, we already see an increase in shipyards building new vessels with on-ship shore power, and going forward, we expect a strong outlook in our retrofit business to install shore power also in existing container vessels. To electrify business is almost a prerequisite in today's shipping market due to increasing legislation and demand for sustainable solutions. Increasingly, we see that ports and terminals are responding to that sustainable trend. In addition to this, the automation of ports and drive for increased efficiency also led to an order during the quarter for close to EUR 5 million for MoorMaster next-generation installation at a container terminal in South America. We did also see a positive development within Industry. Revenue and order book for our industrial applications improved due to strong demand across diverse markets and customer segments. We see significant interest in our high-power charging solution package for the mining and heavy construction segments. Customers are investing more of their resources towards net zero objectives and at decarbonization in general. We expect such investments to accelerate, and we are well positioned to capture that business in the future. In addition, we have also intensified our sales efforts to grow the Service revenue from our base of installations worldwide in periodic overhauls and increasing spare parts volumes. With that, let me hand over to Glenn to talk more about the financials in detail.

Thank you, David, and good morning. I will build some more detail on David's comments, particularly about the order backlog, revenues, profit and cash and then finish with a couple of other topics. So first, starting with order backlog. You can see from the chart here that it was stable in the New Cavotec core business, and David described what we mean by core business earlier during the quarter, the third quarter here. There are 2 main reasons for that. First, you'll see in the next slide when I talk about revenue that we've increased deliveries and revenue in the quarter and that's been offset with new orders that we've taken in the quarter. But the net result is a stable order backlog. And then just to talk, secondly, a bit about what's going on inside the business with David starting as CEO here in the last few months is he and I, together with a couple of other members of the team, have commenced a new process of deal reviews, and in particular, there are much more stringent requirements from all of our teams in the sales process regarding profitability in particular. Now turning to revenue. After a long -- quite a long period of flat revenue actually and also after the COVID-related closure of the Shanghai facility and the closure of that entire city actually in the second quarter, we've finally started to deliver more in the third quarter. In other words, we're now benefiting from the high order backlog and starting to see that in our revenues -- reported revenues for the first time. In particular, you heard David talk earlier about the impact of a capacity ramp-up in Shanghai. And we've tackled a very large backlog of approximately EUR 10 million that had built up due to disruptions in the prior quarter. We're happy that we're able to reduce that delayed backlog in the third quarter. And as we exited the quarter, we're now at a backlog -- a delayed backlog of approximately EUR 3 million. And as David said, we'll continue to work on that. The catch-up overall was mainly in Ports & Maritime and mainly for our customers where we're emitting product out of the China facility. But there was also a general boost in Services and Industry revenue. Now turning to profitability. And as David summarized and as we've talked about before, we see our profitability as unsatisfactory in the quarter. And David mentioned 3 factors that resulted in that view of -- or that result of unsatisfactory profitability. I'll now summarize the financial impact -- or our estimate of the financial impact of each of these factors on the operating results for the quarter. And I should point out before I go through those 3 factors that the percentages that I referred to are relative to the financial performance that we reported in the previous third quarter 2021. So firstly, and very directly, there was a one-off cost of EUR 1 million arising from the departure of the prior CEO and that represents about 2% of the quarterly revenue that we reported inside the third quarter. Secondly, the combined impact of delivering orders that we had taken earlier at lower margins, which was predominantly in the Ports & Maritime business, and the impact of cost increase arising from material cost changes, supply chain challenges and higher logistics costs, the combined impact of all of those together has resulted in a negative margin change compared to the prior year same quarter of approximately 4% of quarterly revenue. And finally, there was the impact of adding the net equivalent of 65 full-time people in the past year and that's added another negative margin impact of at least 3% of quarterly revenue in the third quarter. Now I'll talk about our negative operating cash performance in the quarter, but with particular reference to the New Cavotec base business, again, our core business. In prior quarters, we've had a buildup of inventory and work-in-progress as we geared up for higher delivery. Now that we've delivered more in the third quarter, that increase in revenue that we've reported has resulted in an almost EUR 5 million increase in our receivables. And I really see that as a natural result of the higher volumes that we've built up in the business now. Importantly, inventory levels have stabilized in the quarter and they are only up EUR 0.8 million compared to the end of the second quarter. And then finally, I said I'll talk about a couple of other topics. For those of you that have followed Cavotec, we've talked about the divestment of Airports consistently now since -- well, really the first quarter in 2021 up till now. We've completed that process during the quarter. That's a great achievement, but it was a complex carve-out process. It took longer and it's definitely cost more than our original expectation. And the net result of that is there is an impact to the group in the quarter of an additional loss on this transaction of EUR 5 million. Now taking the combined impact of the profit issues I talked about at New Cavotec and the additional loss arising from the divestment of the Airports business, it's meant that we've reclassified our long-term loan temporarily as a current loan. We've subsequently agreed with our lenders that they will waive compliance with the covenants for the third and fourth quarters of 2022. And with that, I will now hand back to David.

Okay. Thank you very much, Glenn. So in summary, we see -- we saw a strong revenue growth and demand for Cavotec solutions also in the third quarter, but a very weak profitability. This is partly explained by the one-offs in the quarter, but also with the low margin on existing orders and the cost increases. The sale of the Airport business finally closed, and that was an important milestone for the company. During my six first months as the CEO of Cavotec, I have visited many customers and end users worldwide to see our products in operation but also to get direct feedback on our products and on Cavotec as a company. I met with many of our employees. I've also spent days assembling our products at some of our sites. I can clearly see that we have a huge potential in Cavotec, a strong need for our products, a strong brand reputation and that we have very skilled and loyal workforce around the world. However, it is also clear to me that there are some challenges and hard work to be done. Our results of the last quarter speaks for itself. We need to improve our efficiency in sourcing, capture volume bundling across sites, continue our strict margin control when bringing in orders, in other words, prioritize margin over volume; increase the level of modularization and reuse of proven design in our product portfolio; stricter budget control; and in general, increase our efficiency across the entire Cavotec. We are not yet acting as one Cavotec, but we're going to get there. But we have to, and I have done it earlier in my career, so I'm confident it can be done also in Cavotec. We are now starting a new chapter in Cavotec's history and can focus on our core business with full force. I'm very optimistic about our future with a very strong demand of our products in a world with an increasing green focus. So to finish off, I'm looking forward to lead Cavotec working with our teams around the globe to provide sustainable solutions and drive our profitable business. So by that, we finish the presentation now and we hand over for Q&A. Okay. We don't have any questions at the moment. So maybe we were that crystal clear, Glenn. So if that's the case, then we thank you very much for your attention. And then looking forward to come back and listen to -- present our Q4 results. Thank you very much.