Cavotec Group AB (CCC) Earnings Call Transcript & Summary

Welcome to Cavotec Q3 Report 2024. [Operator Instructions]. Now I will hand the conference over to CEO, David Pagels; and CFO, Joakim Wahlquist. Please go ahead.

Good morning, and welcome to Cavotec's third quarter presentation. I am David Pagels, the CEO of Cavotec. And together with me today, I have, as usual, my CFO, Joakim Wahlquist. So, to start a little bit with a short introduction to Cavotec. I know we have a lot of new -- we might have newcomers in the call as well. So Cavotec has close to 50 years of experience. And next year, we will actually celebrate our 50 years anniversary, which is quite cool milestone. Over these 50 years, Cavotec has built a strong position as a leading clean tech company with a global presence. Our offering consists of design and delivery of solutions to connect, to automate and to electrify ports, vessels, other industrial applications like heavy-duty vehicles that are used in, for instance, the mining industry. Our most important competitive advantage is that solutions and services contribute to the decarbonization of ports, mines and other industrial applications. This trend is strong all over the world, and we are in it, and we've been there since 50 years. A significant asset for us is our large installed base in over 80 countries. The installed base gives us a well-established customer relation. It gives us a good reference, of course, going forward, but it also is a big potential for also us looking after our equipment and then also continue to driving our service business. Let's turn to the next slide to see a little bit why our market is so interesting. What we have is we have a strong position in the market, but it is driven then by megatrend and regulations. The megatrends that drive our market are the urgent need to reduce greenhouse gases and also noise in critical infrastructures such as ports, container terminals and onboard on vessels. Our solutions are also supporting the reduction of emissions and noise in certain different industrial environments and for instance, the charging of the heavy trucks, as I mentioned. These megatrends are supported by international and local regulations that enforces the operations of ports, terminals, vessels and other industrial applications to really reduce the emissions and also then to reduce the noise of their equipment. We know everyone wants to walk away from dependence on the fossil fuel, and that's where we play a critical role. We operate within market segments that are critical to society, where our solutions are needed to lower the emissions and to create a better environment. Cavotec plays a significant role here with our solutions and our leading technologies that are proven, reliable, efficient and safe and therefore, perfectly suited to meet our customer requirements. So let me talk a little bit about the various business segments. We have 2 business segments. Ports & Maritime has the world-leading solutions for ports, ships and other marine applications. We have unique systems, for example, automated mooring, shore power, crane electrification and connection and charging system, significantly improving the environment in the ports worldwide. Customers for us include the shipowners, operators, ports and terminals, port equipment manufacturers and of course, also shipyards. Ports & Maritime is our largest segment and stands for the majority of the group sales and EBIT. So then moving over to the Industry Solutions. Our industry solutions drive productivity and contribute to the customers' operational efficiency, electrification as well as occupational health and safety. The products include motorized cable reels, hose reels, radio remote controls, power connections, spring-driven cables and host wheels. Customers is a wide variety of industrial sectors such as cranes, energy, processing and transportation, surface and underground mining and tunneling, of course. And service is, of course, an integral part of our business segments. So, let's move over to some recent business updates, progress here. I have talked to you about in the last quarterly presentation that I had the pleasure of cutting the ribbon in our new facility in Chennai in India in beginning of July. This new facility will serve a large and growing market in India, and it will also improve our supply chain and sourcing capabilities and support our operations across the globe. Our integration took place in July, but even before that, we completed our first deliveries back in April, making an important milestone. Since then, we have received orders from both Ports & Maritime and India customers, and we now have the production going on in Chennai facility, and it's really pleased to see how it moves on. After the end of the quarter, we had 2 major shore power orders were signed with a total value of EUR 6.5 million. The first order includes a power move mobile crane management system, you can say, designed to serve cruise and ro-ro vessels in Italy. These deliveries are expected to begin mid of '25 and will be concluded by the end of the year. The second order there involves also supplying our 2 power moves, shore power systems scheduled for delivery in the first quarter of 2026. This system will enable the cruise ship to come into the ports and connect to shore power in order to switch on the auxiliary power. And of course, this is critical when the cruising ships are coming in and so that they can turn down the engine and you don't need to see any black smoke from the chimneys. These 2 orders are good examples of how we can contribute to the decarbonization of ports and also how regulations imposed on ports will drive the demand for our products. And those 2 projects are now the first, but we see a lot of things in our pipeline for more opportunities around Italian coast, but also to be spread along other coasts in Europe as well. Before I hand over to Joakim, I'll take a little bit of the overall picture of what we have done in the last quarter here. In the quarter, we saw a good revenue growth of 5.1% and a strongly improved profitability. This has been the focus for me in Joakim since we joined, and it's really good now to see that we are progressing stable in that direction. We report for the seventh consecutive quarter, a positive EBIT that grew 76.3% over last year. This is a great improvement, mainly driven by margin improvement in the Port & Maritime segment. The EBIT margin improved to 6.8% and again, a great improvement from the third quarter last year, which is a result of the Change Program and the strategic focus and priorities that we are carrying out. And also following the focus on the change programs, we report a net profit for the fifth consecutive quarter. So, with this short introduction, I'll now hand over to Joakim, and he will walk us through a little bit more of the details in the numbers.

Thank you very much, David, and good morning to everyone listening in. I can see that there's big interest in Cavotec today. We have many people on the call. I will walk you through a bit more of the details in the finances, like David said here. So, let's start with the revenue. As you can see here, the revenue grew with 5.1% in the quarter, mainly as a result of a very strong quarter for the industry segment with good sales of radio remotes and services. The currency effects had only a small impact this quarter with 0.3%. And we have seen a more stable increase in sales the last quarters, but we sell to a large extent, projects, which means that revenues can fluctuate quite a bit between the quarters depending on which projects have been completed and what milestones that have been achieved. And as David described earlier, we continue to see a very strong interest in our solutions driven by both international and local regulations as well as the megatrends to reduce emissions, which David had talked about earlier. If we move on to the order intake. Order intake has decreased in the quarter with 6%. But as you can see -- and as you can see from the graph, the order backlog has decreased a bit over the last year, which is a consequence of our active choice to increase the profitability in the order backlog. I just want to stress what David already has said that a large portion of the Cavotec business is project-driven and the order intake can, therefore, fluctuate quite a bit depending on the timing of signing the orders and quite a lot between the quarters. And although we have a declining order intake here slightly in the quarter, the underlying market demand for our climate-friendly solution remains really good. And this is driven by the customers' need to increase both efficiency but also to decarbonize and adapt to the new environmental regulations. If we move over to the EBIT improvement. And I can add to what David has said earlier that we're happy but not yet satisfied with the profitability development. We have seen a stable improvement quarter-over-quarter, and it's really a result of our employees' commitment to implement our change programs. Since last year, we have also increased our focus on our supply chain and improved our purchasing procedures, which we're now starting to slowly see adding to our performance. And in addition to this, which is something that I'm also very excited about is the cost reduction efforts that are being brought in across our product portfolio, which we expect to further support our journey towards our profitability goals. However, I want to underline that we are not in any way finished with the transformation of Cavotec, and we have a lot of initiatives and improvement activities on our to-do list, which will contribute further to the value creation. After our positive impact of these change programs that we have implemented, in Ports & Maritime, I'm also very comfortable to see good results going forward in the industry segment. And David will come back to that a bit more in his part later on in the presentation. Over to net profit. These stable improvements in the operating result are now also starting to show some results on the bottom line. And it's good to see that we are reporting a net profit now for the fifth consecutive quarter, and earnings per share also improved significantly, and this is really a proof of our ability to transform Cavotec and strengthen the financial health of this company. We move over to cash flow. And cash flow decreased a bit here in between the quarters. It was negative. It was negatively affected temporarily by increasing working capital related to some lower prepayments from customer and timing of receivables and collection of them. Compared to the third quarter last year, the leverage ratios continue to move in the right direction and improved to 0.85 versus last year's 2.68. So very stable also compared to the second quarter this year. I can underline, though, that we have a still very stable cash position and plenty of headroom. So, I feel comfortable about our cash flow situation. What I can say is that we continue also to have a very big focus on the working capital. So that will remain a focus throughout 2024 and also in 2025. Let's now move over to Ports & Maritime. And Ports & Maritime, like David said, offerings have decarbonization solutions for ports and vessels and automatic mooring systems and also shore power solutions. These offerings are sold as projects, which means, as I earlier explained, that revenue can fluctuate quite a bit between the quarters, depending on which projects have been completed and what milestones have been achieved, which is something that you can also quite clearly see in the top graph in this slide. So, Ports & Maritime shows a very robust profitability development with an EBITDA margin of 13.2% in the quarter. And as David has mentioned earlier, Cavotec also have signed 2 major shore power orders in October with a value of SEK 6.5 million, which is very exciting for us. Let me now move over to the industry division. So, the Industry division showed a strong revenue growth with an increase of 11.6%, driven partly by good demand for radio remote controls and services in this segment. However, we are not satisfied with the profitability development in the segment yet. And the EBITDA margin decreased in the quarter. But what I can say is that I feel very confident that the work that is now being done to implement our change programs also in this division will have a positive impact going forward. And as you know, David is still the interim Head of the Industry division and a lot of activities have been initiated across all the functions. And by this, I will hand back or leave the presentation back to you, David.

Thank you very much, Joakim. So let me go through -- round off the presentation here before we move into the Q&A session. So, talking a little bit about the key strategic priorities that we have here. Although the Ports & Maritime segment will continue the execution of their change programs in order to further improve the efficiency, to become more competitive, et cetera, we also see that a lot more to do in the industry segment, as Joakim just mentioned, when it comes to implementation of the change program. As Joakim said, we have clear plans and projects underway also within industry to improve the profitability. We started these exercises on the Ports & Maritime, and now we see clearly the results coming through there. Compared to '22 and '23, we are now on a robust positive upcoming trend for ports. We are now applying the same kind of methods and the same kind of plans and improvements on the industry side. And so therefore, I'm very, very optimistic that we're going to see the same things there. We work across the group to improve in sourcing and the supply chain. This has been a little bit of an untapped potential within Cavotec. The new facility in India is a part of our strategy to improve our supply chain and sourcing capabilities. We expect to see continuous effect from the enhanced supply and sourcing processes. Of course, some of that will further strengthen our profitability, but also it also then gives us a more possibility to sharper offer and also strengthen our competitiveness in the market. We also increased our focus on innovation and product development. This has led to us identifying product areas where we see exciting potential. One example here is within our radio remote controls, where we have a strong position among other world-leading companies that manufacture heavy-duty vehicles, et cetera. Within all these areas we have identified, we see a good opportunity to grow with both new and existing customers. Another important priority that we have already touched upon in the presentation is focus on untapping the service potential on the installed base. Ports and Maritime has, over the past quarters, been successful in reaching out with this improved service offering, and we will see the potential in this area. And our installed base is growing quarter-by-quarter. We're also now going to see the same thing on the industry chart where we have not been. But service is, as we all know, it's a perfect opportunity to stand by our products to support the customer. If anything goes wrong, we are there to support them, and therefore, we tie up the customer in a very good relationship. So, they know that Cavotec products is something they can rely upon. As Joakim said earlier, the whole group will continue to focus on developing our working capital and further strengthen our financial position going forward. And finally, as we said in the second quarter presentation, the Board is giving Cavotec management team the assignment to assess the possibility of moving the registered offers from Switzerland to Sweden. This assessment has now started, although we have no schedule or more detail to communicate today, but it makes sense to have the registered offers certain benefits to have the registered offers where we are also listed. So, to summarize up, let me quickly summarize the key points that we have in this presentation before we open up for the questions here. We have had good revenue growth, and we see a positive business activity. So, a lot of things happening in the market, which, of course, gives us good opportunity to capture more business. I feel that we have a very strong momentum in the organization with all the employees worldwide, which is a conclusion that I can draw by my visits when I'm out meeting the organization with colleagues and also meeting customers. We have now for soon 2 years, demonstrating our ability to steadily improve Cavotec to where it should be. Our performance also shows that our clear strategic priorities and change programs are effective, and they will contribute to building a stronger Cavotec going forward. So, to conclude, Cavotec has a strong position. It's a key player in the growing market, driven by the need to create more sustainable solutions in an emission-free world. So, by that, I will end this presentation and now ready to take questions.

The next question comes from Lara Mohtadi from ABG Sundal Collier.

As you know, your order intake was down slightly this quarter and your order backlog seems to have normalized. Obviously, as you mentioned previously, your business is order-driven and orders can fluctuate between quarters, but your book-to-bill has been below 1 for some time now. When can we expect to see a positive trend in orders?

Okay. I can start there, Joakim, and you can fill in. As you know, we don't really speculate in the forecast in terms of giving indication where we see, but I can confirm that -- but if you look back to our quarters, we have always finish. We have strong fourth quarters. That's just the pattern in the company. At the same time -- so from that point of view, I'm confident. I'm sleeping well during the nights for that reason. We also know that right now, we have a very high tendering activity in our order intake in the pipeline of opportunities. As I mentioned, we have the power move orders in Italy. We see big opportunities coming around there. We see also that spread out to the rest of Europe and also to some degree, this is also funded by European Union. At the same time, we also see a similar trend now in U.K., where there's also a lot of opportunities that they just need to catch up. And so, I'm very confident that what we see in terms of the order intake and the tendering activity -- so I'm not really worried about the even if we have, to some degree, a decreasing order intake in the last quarters. Joakim, anything to add there?

No, I think you summarized it well. I mean we see very high activity in the market and a lot of interest for our solutions. So, we look forward with a positive mind.

Great. And my second question is on the development in your industry segment. Maybe you touched on this a little earlier, but can you just give some examples of the initiatives that have been put into place to further enhance the profitability?

I'll give that to the industry President, David.

Yes. So, as you know, I'm acting interim for the industry President position here. And it's it gives me a perfect opportunity to actually dive deeper into the business there to meet the customers to talk about the products, to discuss the various tenders, et cetera. So, it's a very good opportunity, even though it's a little bit of double work here, of course, for me. But nevertheless, I see there that we are now more precision and accuracy in when we are tendering. We're looking in, we're turning around the stones. We are making sure we're working as one seamlessly between sales and engineering as well as operations and sourcing. And again, everything we did in a similar way on the Port & Maritime side will now be and is now repeated also with a strong focus on the industry side. So, with that said, I'm confident that we will see a positive trend there. At the same time then, when I'm out meeting, I was in U.S. a couple of weeks ago on a mining conference or mining exhibition and meeting our customer on the radio business, which is an important part of our business. Customers, they like our products, and they like dealing with us. They see a clear difference dealing with Cavotec versus our competitors, and they just want to do more with us. Of course, it comes that we need to upgrade to some degree a little bit of the product offering. We need to customize the offering a little bit to the customers. But the customers are there, the market is there, and it's just opportunities are lying around, and we will capture them. I'm confident with that. It will require that we need to speed up some things. We have more focus during 2024 on new product development, which will then, of course, generate order intake opportunities for both Ports & Maritime, but also for the industry side. So, I'm very confident that we're going to turn around also and creating a similar trend as we've seen on Ports & Maritime also for the industry business.

Okay. Very clear. And I was just wondering a little on your current lead times in both your segments. How do the lead times look? And have they changed now? Or have the change programs had any impact on these in terms of efficiency and so on?

I could say that the lead times vary quite a lot between the different projects, but we're continuously working with improving lead times. That's clear. That's a big work that's being done across our production sites and in the whole organization. If you're looking at the Ports & Maritime segments, we have longer lead times. We have between 1 to 2 years. If you then look at the industry segment, lead times are typically shorter. That's 3 to 6 months usually, but it could also be up to a year. But having said that then, if you look at the backlog as of now, most of those deliveries will happen during 2025.

Okay. And just a final one. It's obviously very promising to see that services are growing. What can we expect in terms of growth within this business offering?

David, do you want to say something about services?

Yes. I can say something. Again, everyone knows that the more we grow our installed base, the more is also we're growing our opportunity to generate and create service revenue. That goes without saying. At the same time, as I mentioned before, and this is my experience within Cavotec, it's also my experience from our previous companies, that if you are active on the service side, you work with the customers and you never walk away from a customer who has a problem, we will help the problem with the customer. If it's our fault, okay, of course, we will pay for it. If it's their fault, okay, we expect that to be sorted out in a different way, of course. But having the mindset and having the attitude within the service to work with customer, a customer who has a problem is not a happy customer. And if we are then fast in solving the problems, we are fast in responding to whatever they want, and we are fast in sending our field service technician, then an unhappy customer will be a happy loyal customer going forward. And that's why we invest and we are probably the company in our industry, which is most spread out and we clearly believe in being close with our service staff, hardworking 24/7 out in the field in the various markets so that we can always support our customers whenever they need, and that generates business. It generates business for the service side, yes, but it also generates business for the new sales. And that's valid for Ports and Maritime. It's valid also for industry. So service is and will always be an important portion for us for multiple reasons.

I think just adding to that is, we have big untapped potential in the installed base over these 80 countries that David have already talked about. But then, of course, we have also a growing base year-on-year, and we are also working with increasing the penetration with service levels agreement on that part of the equipment also. So, we have a lot of more work to be done on the services side. We have a very active team, very professional team there that is really driving the business and really building the relationship with our customer and to some extent, helping us to sell the second time.

[Operator Instructions].

I can read some of the questions if we have no more people on the phone. I have one question here on, are there any internal capacity or production constraints in the Ports & Maritime or Industry division going into 2025 and 2026? Maybe you want to say something on that, David?

Yes, I can do that. And the answer is, of course, we look into how we can plan the capacity in our facility. We have done the investment in Chennai in order to open up a second hub, so to say, for the domestic market, but also for the export market out of India. We have today the production or the capacity set up to do more in our existing facilities. India is one thing there, but also in our existing production facilities that we have, we can do more with the installed capacity that we have. So, I'm not worried for that. Of course, as Joakim mentioned before, Ports & Maritime have longer lead times and cycles in the products. It's not because we are not ready or we don't have the capacity. It's more related to its complex, high technology products that need to be engineered and then they need to be sourced and they need to be assembled. And that's just the type of equipment is more complex and bigger equipment normally on the Ports & Maritime side. Industry is more of a flow business is more stable and therefore, normally shorter lead times. The lead times is not driven by the fact that we don't have the capacity. It's just it takes time to take an order, engineer it, source it and then actually assemble it and ship it out. And then in many cases, we also commission our equipment as well with the customers. So, it is not related to that we don't have the capacity. It's more related to the nature of the business.

Okay. We take one more question, which starts with the congratulations to the impressive improvement in profitability, margin, cash flow and debt level ratio so far this year. Thank you for that. When in time do you expect sales in Ports & Maritime to take off long term given the need for efficiencies, regulations and productivity, not the least in U.S. and Europe. Is this cyclically driven or other underlying trends? Maybe, David, you can say something.

I think -- and we touched a little bit of that. I can drill a little more around that. We have the regulations. It's there. We see it clearly on the West Coast of U.S. We talked about that before, but we have not the same regulations on the East Coast of U.S. However, there's a trend you want to be green and you want to be seen as green. So, there is not just driven by regulations, but also driven by image and the way they really want to have our solutions in order to be able. I talked about the Miami skyline before where the cruising ships and the skyscrapers and you don't really want to see black smoke or having equipment that is creating noise when you have a cruise ship laying more or less inside the city of Miami. So those things are happening. The same thing we talked about on the mining side. We have been in the electrification of the mining side, for a long time when it comes to the underground mining, naturally because you can't use diesel engines underground. However, we see the same trend going now also for the overground mining where, again, they want to reduce the dependence on the fossil fuel and therefore, go for electrical solutions as well there. And there, of course, our equipment also plays a very important role also for the overground mining. So, I think it's a long-term trend. I think there's a lot of things happening. In many cases, when it comes to Ports & Maritime, it is long projects. It's a complex product because our equipment is -- to some degree, we can deliver our equipment. But in some cases, they are just upgrading completely entire ports installations and big investments. And therefore, of course, we are part of that game, and we are part of that business. But again, building out a berth in a port is a major investment, and it takes time. But we are there, and we see opportunities and we see that growing. When it comes to the shore power solutions that we now see, the 2 orders there in Italy, there is a trend and it will, but it's driven by European Union, driven by regulations, driven by the megatrends, but it also takes time before the applies in the various countries. But we see a clear trend driving in the right direction. And as I said so many times, it is a fortunate situation we've been 50 years in the industry, which is now becoming very, very hot and very, very, so to say, on the focus to do, and we'll be here. This is our home territory that all of a sudden over the last years and the coming years for sure, is just going to be more and more important. So, it's a little bit of a sweet spot position to be in. But it is long project-driven cycles that take some time.

Okay. We take one other question here that could you develop a little bit more in detail what is required short term, long term to become more of a higher-margin system integrator, internal work or acquisitions being considered?

Okay. I can take a little bit of that to start with Joakim there. Yes, of course, we want to work closely with our customers. And one thing is to sell the equipment and ship it to the customer and they take care of it. We don't really believe in that. We believe more into selling equipment to the customer and selling solutions to customers. So actually, going on board on vessels and helping our customer to install our equipment and integrate it into their vessels or in their ports. But again, it requires the long-term relationship, and we need to be with our people. We need to be there with our people speaking the right language in the right countries and working close to the customer. So that is something which we will continue to embark in that direction. We're already there, but we see that also growing. If it's internal work or acquisitions being considered, I think it's clear when I joined Cavotec 2.5 years ago, we were not really in the shape and form and performance to do acquisitions. Now we see clear that we have changed the direction of the company, we have turned around the company. We're going in the right direction. Of course, that also makes us now to activate our acquisition radar, so to say, to look into where are the things where we can grow into? Are the partners or the product types or are there other things which we could step into in order to improve our offering and work closer to the customer. So that is something which we're definitely starting. We are already visiting some opportunities, and that is more to come for that because now we are ready for that. We were not ready 2 years ago, but now we're ready for it.

Good. Another question regarding industry here. Revenue increased and driven by industry. Do you see a more positive development in that segment now? And maybe I could say a few words before I hand over to you, David there. I think one of the things that we're doing now with the industry segment is really the same that we've done in the Ports & Maritime segment. We're using all the capabilities, all the knowledge in the organization when doing the deals. And we are really making good progress there, and we could start to see that on the contribution margins on that business also. So, I really think that the underlying business is starting to become much healthier. Then, of course, it takes a bit of time. But the segment has a very big potential going forward. We often talk about the Ports & Maritime segment or division, but the industry division also have a very big potential. David?

Yes. I can echo that one. And yes, it's exciting times right now at Cavotec. That's a good summary because I'm really optimistic about the way going forward there and the momentum that we have created in Ports & Maritime, and we are also creating it right now within Industry, working more with the customer, closer with the customers and more actively there to drive the business.

We have another question that you could say is industry related, so it's really good. We have the industry President with us here today. Can you, for example, cooperate with the Bure company, Allgon, on industrial radio controls, which seems to have done increasingly well in Q3 to improve both companies?

Yes. And the simple answer is yes, of course. Bure is a minority owner of Allgon. They are a big owner also in Cavotec. But of course, there is opportunities there. We are, to some degree, very much complementing each other. We have the EX proven solutions with explosion safe. They don't really have that on the Allgon side. At the same time, they are very strong in certain market segments and push buttons, et cetera. We are more into the little bit more sophisticated high-tech joystick solutions, et cetera. But of course, there's an opportunity there to cooperate and to work closer with each other in order to see what makes sense for both companies. And that is something which we are taking up and we're doing that, of course. Whatever makes sense for both companies, but it's valid for Allgon, it's valid for other companies. If it makes sense to cooperate 1 plus 1 becomes 3, then of course, we should take that opportunity.

Okay. I think that is all the questions we have at the moment. So, if no further questions, then maybe I hand over to you, David.

Okay. So then thank you very much. We have no further questions, and I'm looking forward to speak to you at the end of February when we will present our fourth quarter and the year-end report really. So, thank you very much for that. Thank you for listening in. Good questions and that you share the positive view that we have about the company, and that is good news here. Thank you very much.