Cavotec SA

STO:CCC

Earnings Call Transcript

[Operator]

Hello and welcome to the Cavotec SA Audio Cast with Telephone Conference Q1 2019 Call. [Operator Instructions] Today, I'm pleased to present CEO Mikael Norin. Please go ahead with your meeting.

[Mikael Norin, Group Chief Executive Officer]

Thank you. Good morning, everyone, and welcome to this audio cast. I'm Mikael Norin, CEO of Cavotec, and with me I have, as usual, our CFO, Glenn Withers. And we are going to present our Q1 2019 report today.It has now been 18 months since we launched the transformation of Cavotec in the fall of 2017 after I joined the group earlier that year. The company I got to know at the time had and still has a very strong sales culture, a strong customer focus and great products that are well positioned in terms of market trends such as automation, sustainability and safety.However, we did also identify several weaknesses such as a fragmented structure with weak internal processes. This had caused inefficiencies and higher costs, resulting in decreasing sales and profitability. This was obviously not sustainable, and we therefore decided to launch an extensive transformation program.We are now a few months into 2019, and I'm very happy to report that we've come very far in that transformation. Through the massive efforts we have put into addressing our weaknesses, we have created a strong and steady base to build on.All the 50 projects under the A New Day plan designed to streamline processes and transform Cavotec into a more efficient organization were finalized at the end of the quarter. We have also reduced our headcount by 100 employees compared to a year ago as part of the restructuring program.It is very encouraging to start to see the return of all the efforts we have made and that we have made good progress on our journey to improve profitability and then accelerate growth in earnest. The key metric for this ambition, our adjusted EBIT for the quarter was EUR 2.7 million. That's an increase of 13.4% compared to the first quarter last year despite revenues being down 8% in the quarter.Now there are several explanations to the revenue performance that I will let Glenn speak about in a minute. It is however important to highlight that our focus during 2019 is on improved profitability. We want to set the stage for future profitable growth by embedding a cost control and cost consciousness culture in the organization around our base day-to-day business. And that will ensure profitability and competitiveness in the future.Now having said that, there should be no doubt that we're keeping up the activity level in the market, and we have a very healthy order book at EUR 113 million at the end of the quarter. That's an increase of more than 12%, both compared to the end of 2018 and the first quarter last year. An important order in the quarter was a EUR 10.3 million agreement with a major port operator for our MoorMaster automated mooring system, further proof that this technology is gaining traction with ports around the world.Now before handing over to Glenn, let me address the issue of our facility in Italy, which we have talked about during the last couple of earnings calls. I'm pleased to report that we faced fewer production challenges in Italy than previous quarters, thanks to all the efforts that have gone into reconfiguring the facility by the new local management. Late deliveries in Italy have decreased significantly, and we expect to see a continued positive development in the second quarter.Now with that, let me hand over to Glenn to talk about the quarter in more detail.

[Glenn Withers, Group Senior VP & CFO]

Thank you, Mikael, and good morning, everyone. Firstly, the quarter saw strong demand in Ports & Maritime and order intake increased by 28.7% compared to the same period in 2018, including the EUR 10.3 million MoorMaster order that Mikael talked about earlier. Demand continues to be strong there, driven by the automation trend for ports and a healthy shipping industry.However, within Airports & Industry, the situation was the opposite. The order intake decreased 31.7% compared to the same period in 2018. Order activity remained strong in Europe and Asia Pacific within airports including several fueling and aircraft ground service orders. The airports market in the Middle East, however, remained slow with no major orders in contrast to the same period last year. Industry continues to perform well in their day-to-day business.Group revenues decreased 8% to EUR 48.5 million. The decrease is mainly due to the lower revenues inside Airports & Industry, which was not fully compensated by the increased revenue that I talked about in Ports & Maritime. As I mentioned, Airports & Industry performed well in their day-to-day business, but less projects compared to the first quarter of 2018. And several delayed larger projects, and that -- those delays are on the customer's side, resulted in lower order intake and revenues for the division.Adjusted EBIT, excluding nonrecurring items, increased to EUR 2.7 million, and that corresponds to a margin of 5.6%, an increase of 1% on last year despite the lower revenues. The higher EBIT is explained by increased efficiency and lower operating expenditure as a result of the transformation program that we previously talked about in Cavotec, and that's mainly in employee costs and other overhead costs.Nonrecurring items related to the restructuring program of EUR 1.3 million were booked in the quarter and that's what led to an EBIT reported after those nonrecurring items of EUR 1.4 million, and that corresponds to a margin just under 3%.Income tax expense for the first quarter of 2019 amounted to EUR 0.2 million, which translates into an effective tax rate of 20.3%. Although we are actively addressing our historically high effective tax rate, I would like to mention that the decrease in the rate in the quarter has also been driven by a favorable mix of jurisdictions and that may differ from quarter to quarter.Cavotec adopted IFRS 16 from January 1. In summary, the EBITDA for the quarter increased approximately 25% as a consequence of that, while the impact on the EBITDAR is not material.The operating cash flow was EUR 8.2 million. We're very focused on ensuring our profits translate into cash, and we had a good operating cash flow during Q1. We continue to work on our order to cash cycle to develop a more consistent cash flow from operations over time.Capital expenditure during the quarter was only EUR 0.1 million compared to last year's EUR 6.4 million, which was driven by the investments in our new production facility in Italy last year. Cash flow from financing activities was EUR 0.8 million.In Q4 last year, we announced and completed a rights issue for approximately EUR 18.5 million. The proceeds from this issue were received in early January, therefore, during Q1, and we applied a lot of that cash to our revolving credit facility during the quarter. As a result, the operating cash flow -- as a result of the operating cash flow and the cash receipts from the equity injection, our net debt reduced to EUR 25 million during the quarter.And with that, I'd like to hand back to Mikael.

[Mikael Norin, Group Chief Executive Officer]

Thank you very much, Glenn. Let me conclude by saying that although we are in no way done, the major steps of the turnaround of Cavotec are now behind us. And we see clear signs of improvements and that the transformation is taking hold across the whole organization.So in 2019 and then onwards, our efforts across the group will be centered around 2 themes of continuous improvement: what we call operational excellence and commercial excellence while we continue to control our costs. So we will be meeting our customer needs better in order to sell and deliver more and to produce an attractive return for our shareholders.Now let me again stress that by focusing on profitability in 2019, we will ensure that we deeply embed the competitiveness needed to support our growth journey in 2020 and beyond. The market is there and we will be in a position to capitalize on our customer relationships and the offers we have.Finally, let me also remind you that we will talk more about our long-term strategy and we will also be revealing our financial goals at our Investor Information Meeting next week in Stockholm. That's on the 7th of May. So I hope to see you all there.And that concludes our prepared statements, and we are ready for questions.

[Operator]

[Operator Instructions] We've received the first question. It is from Karl Bokvist of ABG.

[Karl Bokvist, Analyst]

It's encouraging to see positive EBIT results here. I'm a bit interested in what do you see now going into the rest of the year in terms of demand. Of course, we've seen positive signals from the likes of Cargotec and Konecranes on the forward side. But how things are looking on the Airports & Industry, for example?

[Mikael Norin, Group Chief Executive Officer]

Well, I think in general, I think it's what you hinted to as well. There has been a possible, I guess, nervousness in the market that we -- in general, we're heading into a recession and so on. And we are happy like everyone else that we have not seen any signs of that. The demand for us remains very healthy. And as you see, we've had a good order intake in Ports & Maritime as well and we see no reason why that would not continue.

[Karl Bokvist, Analyst]

Okay. And within Airports & Industry perhaps you can't comment specifically, but are there any active airport projects coming up?

[Mikael Norin, Group Chief Executive Officer]

We pursue all of the projects that are in the market continuously, as you know, Karl. The thing is, though, the timing, when the time comes to large projects, it's always a tricky issue to deal with. Those are the other things that, of course, we don't control, anything from the customer's own investment decisions to legislation and permits and stuff like that for large infrastructure projects.

[Karl Bokvist, Analyst]

Okay. Understand. And I would just like to go back to profitability because I think that's the most interesting thing here. Would you say that the production issues in the Italy and so on that Q1 or Q4 were the toughest quarters? And I mean I would like to highlight the comment you said, you expect continued positive effects. But I mean, should we perhaps expect continued margin improvements going forward given that things seem to be progressing well now on the production side?

[Mikael Norin, Group Chief Executive Officer]

Yes. I mean, I hope that what we've been able to tell the story about in this quarter was -- is that we're happy that we have sort of turned the page now and that we have most of the transformation behind us. And part of that is also that we have addressed the issues that we've had in Italy, which we've all along been very transparent about.We are not finished when it comes to those issues, and we -- or actually, next week, call -- if you have time -- Investor Information Meeting. We're going to be doing more of a deep dive in the efforts that's been done there and also in general, when it comes to our operational footprint and the ambitions that we have. So it is a continuous effort, definitely.Now in terms of -- I'm just going to say that in terms of margin, of course, we expect that any effort that we put in like that will eventually improve margins.

[Karl Bokvist, Analyst]

Yes. Okay. And I have a few others, but I'll have a final one before getting back in line here. You mentioned, of course, cost savings on the employee and overhead side. But how are things looking on the gross margin in terms of material costs and those sorts of items? Did you post anything in particular during Q1 that improved the margin? Or is this more of a sustainable, lower OpEx base that we can expect to see now going forward?

[Mikael Norin, Group Chief Executive Officer]

I'm going to let Glenn answer the question about Q1. And I will just mention in general that we -- and as I said, we are focusing on operational excellence next in terms of the improvement that we need to make. And that will address everything from our supply chain to inventory, productivity and so on as well. And that's also a topic that we will discuss in more detail next week, but I'll let Glenn talk about Q1.

[Glenn Withers, Group Senior VP & CFO]

Yes. Thanks, Mikael. You mentioned 2 quarters there, Q4 and Q1. I actually say that 2 quarters is quite different in their outcomes. Q4, where we're still very much -- as we reported in that quarterly call a quarter ago, very much in the transformation and restructuring that we've previously talked about.Q1, we're still doing things, but it's much clearer that the cost base we have inside Q1 is what we were searching for when we did the restructuring program. So I think we are seeing the benefits already of that program in the way we would like. So actually, we're very happy with the cost base we see generally on OpEx, for example, inside Q1.Then you mentioned product margin. Any individual quarter is going to vary, I think, a little bit on product margin. But like I said about cash flow when I was talking in my summary, it's the same with our earnings. We're looking to deliver a more consistent earnings stream compared to the past.There's been a lot of variability in the past, especially in -- even the last 6 to 8 quarters. What our objective is, is to deliver a more consistent earnings outcome from our base business, our day-to-day business. And I think we see good signs of that in Q1 as the summary go.

[Operator]

[Operator Instructions] And we've received a follow-up question from Karl.

[Karl Bokvist, Analyst]

Now perhaps, I'm also interested in -- if we look at the cash flow here, what do you see going forward in terms of CapEx? Do you have anything major coming up whether it be on the fixed asset side or on the R&D? The investments in the first quarter were low. Should this be the new normal for the rest of the year?

[Glenn Withers, Group Senior VP & CFO]

Yes. Karl, the first, a little bit of repetition on the message, but we are very focused on ensuring our profits turn into cash this year to work on that profitable base and cash base. And we had a good operating cash flow from Q1, as you can see.We are focused on delivering a healthy return on the investments that we already made. For example, our Italian facility. And after that, any future investments will be tied very heavily to profitable growth opportunities. That's really the summary of it.

[Karl Bokvist, Analyst]

Yes. So I'm just a bit curious. So perhaps we should think about this as maintenance CapEx that you don't have any major expansion investments going forward whether it be in R&D or on fixed assets?

[Glenn Withers, Group Senior VP & CFO]

Correct.

[Karl Bokvist, Analyst]

Okay. Good. And then just a follow-up here. If we look at net working capital, where do you see that the main improvements can be made? Is it in inventories or receivables or on the payable side?

[Glenn Withers, Group Senior VP & CFO]

That -- relative to our closing position at the end of Q1, I would say in relation to the key message, we are focused very heavily on the order to cash cycle, which then of course affects both inventory and receivables. So we're working pretty heavily on creating a more consistent cash flow based on that order to cash cycle. I see opportunities both in the way we manage inventory and also in the way we manage our billing and invoicing and collection processes generally.

[Karl Bokvist, Analyst]

Okay. Good. So then just to conclude, would it be fair to say that there's not much oscillations in the cost base now? I mean this is the cost base we can try to make estimates on going forward now. There won't be that much more travel expenses and external consultant fees and those sorts of onetime effects going forward?

[Glenn Withers, Group Senior VP & CFO]

Yes. In general, that's correct, Karl. I think overall, in -- especially in the past 18 months, we've reported a lot of nonrecurring items attached to the transformation and restructuring of Cavotec. You should expect to see a lot less of that going forward. And like I said before, we're trying to create a consistent earnings and cash stream from our base day-to-day business.

[Karl Bokvist, Analyst]

Okay. Good. And congratulations on improving your margins in line with your strategy.

[Mikael Norin, Group Chief Executive Officer]

Thank you very much, Karl. And that's exactly what we're trying to do to is to be very transparent about our plans and then to deliver on those without any surprises.With that, I thank you all for your attention. And again, I'd like to repeat the invitation to come join us for the Investor Information Meeting in Stockholm next week for those of you who have the opportunity to do so. And we wish you all great rest of the day and a great weekend. Thank you. Goodbye.