Cavotec Group AB (CCC) Earnings Call Transcript & Summary

Welcome to Cavotec Q2 Report 2023. [Operator Instructions] Now, I will hand the conference over to CEO, David Pagels; and CFO, Joakim Wahlquist. Please go ahead.

Good morning, everyone, and welcome to this webcast. My name is David Pagels. I'm the CEO of Cavotec. With me here today, I have our CFO, Joakim Wahlquist, who has now taken over the role from Glenn Withers as of 1st of May. Today, Joakim and I will present Cavotec's Q2 Report 2023. You are then most welcome to ask questions by clicking on the link at the bottom of your screen or over the phone, and we will see all the questions on our screen. So, we will today first present the performance of the quarter, both from an operational and financial perspective, then we'll look a little bit to the outlook, what we see coming. And at the end, we will open up for the Q&A session, as I just said. In the second quarter, we reported revenues of close to EUR 46 million, up 44% compared to last year, which is very satisfying. The order backlog decreased slightly in the quarter to EUR 140.3 million, down 8% from the same period last year. And I will explain a little bit later why that is the case. In addition, the increase in revenue, we also continue to see improvements in our operating profit. EBIT in the quarter was EUR 1.2 million, up from EBIT EUR 0.3 million in the previous quarter and up from minus EUR 0.9 million in the same period last year. Moving over now to Slide 6. First, in our Ports & Maritime division. The order backlog has slightly decreased mainly due to deliveries. Higher on-time deliveries, we are delivering out our products in a higher speed than we did before. We also had one big order in the -- that was won in Q2 in last year, which was a big one, EUR 50 million. And of course, that is a comparison, is a big balance. But also the timing of the orders that we expect in the quarter, that some of them fell into Q3, not really fell out. We didn't lose them, but they are just timing effects in the quarter, which we need to just understand. There is still a very solid pipeline of orders and opportunities, primarily for the PowerFits, which is retrofitting the PowerFits on the existing container vessels and power solutions as well as the motorized cable reels. The revenue increase is especially strong in the Ports & Maritime division, with an increase of 65% to last year and close to EUR 29 million, and I'm very, very pleased with that outcome. For our Industry division, the order backlog increased with more than 7% in the quarter to EUR 31.5 million. The revenue increased by almost 19% to EUR 17 million compared to the last year. The revenue growth for the Industry division mainly came from deliveries of motorized cable reels systems, spring reels and collectors, especially within EMEA and the Americas. And now over to some highlights regarding our organization and strategy. First, our service business continues to play an important role in both divisions. And it will continue to do so as our installed base continues to grow. In addition, we also focus on increase the number of service level agreements to maximize the performance and availability of our product in order to satisfy our customers. And that's a good strategy which I'm pleased with. Secondly, here, in order to establish one efficient global production and sourcing function across Cavotec, we have recruited Jorgen Ohlsson to head our Global Operations. Jorgen has an extensive experience from sourcing and production and will join us 21st of August. Initially, Jorgen will focus on establishing a strategic sourcing function with global commodity management structure, an important piece in order to improve the performance of Cavotec. In July, we also made a strategic decision -- took a strategic decision to set up an assembly site in Chennai, India, which will support our global sourcing initiatives. And this will also give us an additional manufacturing capacity for PowerFits and charging products outside China. There is also a strong demand from our customers to localize in India. In addition, India is a very hot market and have a very clear agenda to develop their ports in a sustainable way, and that's why we need to be there. Lastly, another important change is within engineering. We have already structured our product management by products. And as a natural step now, we organize also our engineering and R&D in a corresponding way. Jim Andriotis, who has a long experience in Cavotec, has been appointed as Chief Technology Officer and will be leading this job and transformation. Slide 8. Let me now hand over to Joakim to talk more about the financials in detail.

Thank you, David, and good morning to all of you. I will continue to build a bit on David's comments regarding the order backlog, the revenues, profit and the cash situation within Cavotec. And I will start with the order backlog. The order backlog is year-on-year, as you saw earlier, down 8% with the explanations that David gave earlier. On top of that also, the fact that we are a little bit more restrictive now on taking in orders with low profitability. We also see very good increasing profitability in the actual order book. Down versus Q1, it's only 6.3%. David also outlined a bit of the timing. So, there's a few big tickets that are falling into Q3. So, we still see a very strong continued demand for the solutions. And we have a very good pipeline of new opportunities that also continued to increase. I myself is also very pleased to see the growing order intake for the services business in both divisions. And then there continue to be a really strong demand for our solutions, not only driven by the awareness in our markets, but also the growing legal regulations. So, I feel that we're well positioned here to capitalize on this development. Talk a little bit about the revenue then. David has already said that we're very pleased with the increase versus last year, 44% up to almost EUR 46 million. And if we compare that -- we're also looking at the divisions, we can see that we're extra pleased with the Ports & Maritime division, I think a 65% increase versus last year speaks for itself. Profitability, we have an EBIT in Q2 that is EUR 1.2 million, and that's corresponding to a margin of 2.6%. And these are, of course, profitability levels that we are not satisfied with yet, but we can now see a very clear trend of improvement and that is satisfying. And this is a direct effect of a number of activities that have been taken to enhance the financial performance. And as a new CFO in Cavotec, I've also made profitable growth one of my top priorities. And I can see along a lot of untapped potential in our group. I believe all of you have also read the report, full year partly. And as you can see also, we have not only improvement potential to do then on the -- or above our operating profit, but also below the operating profit to increase our earnings per share. And there, we also have a number of activities that are already launched to address that. Let us now take a step to -- next step to cash flow. And here, we are still, of course, in Q2 here. We have a negative cash flow of EUR 4.6 million in the quarter. But what we are seeing now is a stabilization in the inventory levels. We're also improving the collections. And here, we still have a bit of untapped potential, and we have normalized the payable situation. So, I believe that we, in the very near future, will see a similar trend here to our revenue and EBIT. And my last slide here. I will tell you that I have now been on board since the 8th of March and took over the pen from Glenn on the 1st of May. And during these months, I've had the opportunity to make a very clear list of priorities for Cavotec as a company to increase the financial performance. And we have already started to implement a number of activities. And I'm very convinced that the focus areas that we have chosen will make a big increase in the financial performance of the group. And I'm just like David here, very eager and determined to roll up my sleeves and get things happen. And to finish off, I want to say also that we have had a very good dialogue with our lenders during Q2, and they can also see the positive trend for Cavotec. And they have, therefore, also granted us a relief of the covenants for the rest of 2023, which will allow us then to focus full energy on our improvement areas. With those words, I will hand the relay stick back here to David.

Have we now Slide 15 on the screen, I think? So thank you, Joakim. So just to summarize a little bit of the conclusion before we move into the Q&A session here. In summary, we saw and continue to see a very strong revenue growth and also very strong demand for Cavotec solutions in the second quarter. We are on the right spot in terms of our products and in the market and the trends, with an increasing demand for sustainability solutions and also to continue to accelerate on the decarbonization agenda. Our growth is fueled by our excellent product portfolio and services, and we continue to work close to our customer, but also then, as I mentioned, the increased awareness by corporations and governments across the world to shift for more sustainable solutions in order to make sure we have a better world going forward. Our decision to expand our manufacturing capabilities in India and the increased focus on strategic sourcing will be an important component in the future success and also they're shaping up the performance of Cavotec as a company. And I'm really pleased that we are now taking clear steps in that area. We're not talking about a massive investment. We're talking about ramping up in a small scale. But we have already a couple of guys on the way to be on board in India in order to do the job there. And it is very satisfying to see that we are making progress. It's been hard work, and still a lot of hard work remains. But we are turning and determined to turn Cavotec into a profitable, as well as growing company. And it's important here that we continue to focus on profitable growth and not just growth for the segment. And that is something which I think is now well understood across through the entire organization. So that concludes the official presentation from our side. And we are now opening up for questions.

[Operator Instructions] The next question comes from Karl Bokvist from ABG Sundal Collier.

Just on the -- the first question is on the comments there regarding a bit of hesitant activity and you mentioned delays. Just a bit curious here what you see in the market and why it's perhaps more of a delay rather than a declining market sentiment?

Okay. Thank you, Karl, there. It's clearly -- we see -- okay, there is a lot of uncertainty out in the world economy that we all know, and it's a little bit turbulent areas with increased rates -- interest rates and so on and so forth. So, of course, the customers are a bit more reluctant to place the orders. They are waiting. We have big investments for the shipping line and the vessel industry at the same time as the tourists for the shipping industry goes down. And, of course, that makes them a little bit hesitant to actually press the button. And therefore, we see a little bit of a slower speed in the opportunities that is coming up or actually the decision that they are taking. They're waiting a little bit more, think one more time before they press the button and go ahead. However, we see a strong increase in the opportunities. And also, we have now 2 big shipping lines that has just launched, 2 big tenders for PowerFit, which is the retrofitting for shore power on the vessels, on the existing fleets. And there are 2 of them that just launched 2 big tenders that we will submit within the couple of weeks here. Most likely that's not going to go down to one big order. It's going to be split in several orders. However, there, India is also playing a vital part in that in order to make sure that we can demonstrate to our customers that we are able to deliver in dual source -- dual supply, so to say, by de-risking only delivery for one side so that we don't end up in a similar pandemic situation, et cetera. So it's a little bit of a slowing down, but at the same time, it's a continuous slowing down of the decision rather than slowing down in the market. That is what I would say.

Okay. Understood. And then it's still early days, but not too long ago, at least, it seems like EU further kind of clarified the deadline for shore power in European ports. And I'm just curious if what you have heard on the port side in recent months regarding such investments?

Yes. It's a good point. Good question there. We see a clear trend. First, we all knew when we discussed that before, that on the West Coast of US, where they started naturally. They are the one. It's not spreading over to the East Coast, but also in Europe is now coming. And it's coming for various reasons, coming also with the legislation. So it will be a -- they will be penalized if they are not able to connect to shore power, that legislation is coming. But it's also coming a clear interest from the port themselves, primarily the ports on cruise terminals because they are normally located quite close into the city center, and there is a lot of tenders coming up now around Italy. And that is also something, which we will see strong interest in and we are playing a good role. We are located in Italy, and we -- and that's, of course, a good news. So that -- there will be a lot of opportunities coming and the whole, to say, regulation wind is blowing over Europe as well. Finally, it took some time and it's coming. But also then we see that, as I mentioned before, also India, which is a huge country with a long cost, but they are also determined of playing according to the book here and then fulfilling the sustainable agenda when they are modernizing their ports. So regulations or not, there are worldwide regulations, but they also drive from the countries and the cities themselves.

Understood. And then now as you ramp-up sales and continued increase in deliveries and then maybe a bit of a short-term asset and activity on new orders perhaps. So, your view on kind of -- are you still pretty comfortable with the level of coverage you have from your backlog in terms of just your ability to continue to grow not only this year, but the next ones.

I think we have now -- and that is also where we are starting up India in a way. It's also that we are preparing ourselves to have dual locations where we actually can produce and supply to the market. But I think we have capacity to do. We have capacity already in China today where we can produce our profits, but we want to have additional capacity in order to meet there. And it takes time to build up capacity. We're not going to do it with a big investment. We're going to wrap it up. But at the same time, it takes time to build up the capability in order to make sure that we deliver high-quality products and the customer shouldn't really notice if they are coming from one side or the other. That's, of course, what we are -- it's very strong requirements from our side. So, I think we're well positioned for that. We still have capacity to grow, but we're also investing slightly for the future and preparing ourselves for more volumes to come.

Understood. And then I have 3 more, if I may. I was just a bit curious, you said that service was growing. And for a couple of quarters now, it doesn't seem to have been disclosed at least. But I was just curious, how large share of your business is serviced today?

Not big enough is a good [indiscernible] for that one, Karl, but somewhere around 20% to 30%.

All right. Understood. And then on the profitability side, margins have now improved kind of quarter-by-quarter for 2 quarters now. And just going forward, it seems like profitability has improved in Ports & Maritime, while industry is more on kind of the same level. What are the different drivers that need to happen for the 2 divisions to show an improvement in margins here?

I would say within Ports & Maritime, we had an order backlog a year ago when I came on board, that was quite long in time naturally. The industry business is more of a flow business, meaning they don't have the same outlook or horizon in their order backlog. We had margins in our existing order backlog for Ports & Maritime when I came on board a year ago, which wasn't really at the level where we expected them to be. We are now delivering out on that one, as we said before, more and more -- so the portion of not enough satisfactory margins are drastically reducing. And on top of that, we're also then seeing that we're now bringing new orders with better margins and on the right level. And therefore, I'm very confident that we will see a continuous margin improvement and profitability improvement on the Ports & Maritime side. On the industry side, it's more of a flow business, which is where they don't have the same horizon or timeframe on their orders. And therefore, it's a little bit more -- a little bit more -- a little bit more difficult to predict exactly what is going to happen. It's more a fighting to make sure or it's more hard work in order to make sure that we continue to work on improving the margin there. And on the industry side, I think we have a lot of initiatives going on right now in terms of lowering the material cost. It has been a very booming market and also a very inflationary economy on the material supply side. But we now see that we are able to catch up on that one. We have also increased our price levels a couple of times, and we're now starting to see the effect of that coming through the system as well. So, I'm quite optimistic that industry is going to catch up as well here.

All right. That's good to hear. And my final one was just a bit on what you mentioned, Joakim, on cash flow and working capital. So just a bit...

Sorry. We lost you a little bit, Karl there. So if you can repeat your question? Do you hear me now? Yes. Now we hear you. Yes.

Okay. So final question on working capital. If you could just clarify how you see the timing of payments, will it be more kind of towards the end of the year? Or can we see improving working capital effects already in the third quarter?

I think we will see some improvements already during Q3, but majority of effects also coming during the later part -- the later part of the year. I think just like I said there, we have normalized the payable situation and we are improving collections that takes a bit of time to get that process as efficient as it should be, but we're seeing clear improving trends. And we have also there stabilized the inventory. But of course, we also need the contribution from the actual operations. And here, we're seeing that the margins in the order book just like David said, they are -- the projections there that are going in the right direction. And that will also, in itself, then help us to turn that trend around.

So then, I think we have quite a lot of questions here on the.... Okay. The first -- there is a question here from [ Rasmus ]. Regarding the revenue increase, what is the mix between growth in volume versus price increases? I would say that the majority -- it differs a little bit between the 2 divisions as well. On the industry side, it's more -- there were increased prices. On the Ports & Maritime side, it's more bigger tenders that we are bidding and winning and so on. So, I'd say it's not easy to talk about the price increases because we don't deliver always the same item on the Ports & Maritime side. But we are clearly aiming for more profitable orders and we're not just for Ports & Maritime and we're not just winning orders for the sake of it. And therefore, we've been a little bit more reluctant to take on more of those because we don't really -- we want to have a more solid order backlog with good margins in. But we also see the effect of the price increases, primarily then on the services side as well as for the industry side.