Cavotec SA

STO:CCC

Earnings Call Transcript

[Operator]

Hello, welcome to the Cavotec Q2 report for 2018. [Operator Instructions] Just to remind you, this session is being recorded. So today, I am pleased to present the CEO, Mikael Norin; and the CFO, Kristiina Leppänen. Please begin.

[Mikael Norin, Group CEO & Director]

Good morning, everyone, and welcome to this audio cast. My name is Mikael Norin, and I'm the CEO of Cavotec. And with me, as you heard, I have also today, our CFO, Kristiina Leppänen. And we are going to present Cavotec's Q2 2018 report today. As usual, I am going to start by giving an overall view of our performance. And Kristiina will thereafter go through our financial performance in more detail. And then I will come back with a short summary. And from the report, you can see that we clearly have a good precision in growing markets. And this was again manifested in the second quarter by a continued robust order intake, up about 27% year-over-year. It's also very encouraging to note that we, during the first 6 months of 2018, saw the strongest half-year order intake in Cavotec's history. The orders came from across our market segments. Among them were new MoorMaster orders for the e-ferry market in Northern Europe as well as important airport orders from Bahrain and Orlando Airports among others. So the result is that we now have a healthy order book worth about EUR 117 million, that's up 36%, compared to the end of last year. Now in addition to all the sales activities, we continued to focus on the transformation of Cavotec in the second quarter, and we're determined to push ahead with the plans that we have for 2018. And to date, we have completed about 40% of the initial transformation projects. And some key achievements in the quarter, as I can mention, include new processes for production planning and inventory control within operations and deployment of a new CRM system within sales. And also, it's encouraging to see that the focus on efficiency improvements have resulted in a 6.4% lower headcount than at this time last year. In May, we opened Cavotec's new production facility in Milan. And we've had startup problems in the plant, that has impacted output, but we are addressing those, and we are convinced that the plant in the future will be a key part of our push for operational excellence. As you are probably aware, we recently announced to the market that we have made a nonrecurring provision of EUR 6.8 million in the quarter in connection with the latest development of the lawsuit with Mr. Colaco, the former owner of INET Airport Systems. INET verdict by the Court of Appeal of the State of California, the original award from 2015 of punitive damages to Cavotec was upheld. But the court reversed the decision that Mr. Colaco was not entitled to an earn-out payment and to reimburse Cavotec's legal costs. Now this is, of course, very unfortunate, and we are looking into possibilities of filing a petition with the California Supreme Court to hear the case. And as the case has not been concluded, it may impact future results further in a positive or negative way. And with that overview, let me hand over to our CFO, Kristiina Leppänen. Kristiina?

[Kristiina Leppänen, Group CFO & Investor Relations]

Thank you, Mikael. The order intake for the second quarter increased, as Mikael mentioned, 27%, compared to the same period in 2017 to EUR 62.1 million. The higher order intake compared to the same quarter last year is explained by high sales activity within Ports & Maritime and Airports & Industry, supported by a strong market pick up, especially in the Ports & Maritime markets. Revenues for the group, as a whole, during the second quarter, decreased 8%, compared to the second quarter of 2017, amounting to EUR 46.3 million. In the local currencies, the decrease was 3%. The decrease is mainly explained by weak revenues within Ports & Maritime, coming from the low order intake in the second half of 2017 and delayed deliveries due to startup challenges in our new facility in Italy. Order intake in Ports & Maritime increased 26% during the second quarter, compared to the same period in 2017. The increase is mainly explained by an increase in overall demand in the USA, Northern Europe and the Middle East, combined with a strong order intake for MoorMaster systems that is mainly linked to the e-ferry market in Northern Europe, with those certain possibilities also outside the region. Revenues in Ports & Maritime did, however, decrease 9% to EUR 14.4 million during the second quarter. In the local currencies, the decrease was 5%. The development is mainly explained by low order intake in the second half of 2017, and due to earlier mentioned production challenges in Cavotec Italy. Order intake in Airports & Industry increased 28% during the second quarter, compared to the same period 2017. The increase is partly explained by several large orders, as Mikael explained. Demand is low in Asia, while the European market continues to show strong development. Revenues in Airports & Industry decreased 7% to EUR 31.9 million. When excluding the FX impact, the decrease was 2.5% during the quarter. The decrease is mainly due to delays in the industry market caused by our internal production challenges. EBIT for the group for the second quarter amounted to minus EUR 7.8 million. This figure includes nonrecurring items of EUR 7 million, of which EUR 6.8 million is related to the provision for the U.S. litigation as mentioned. Furthermore, the low revenues in Ports & Maritime had a negative impact on EBIT, while a better product mix and lower cost in Airport & Industry had a positive impact. The operating cash flow in the second quarter amounted to minus EUR 9.8 million. The negative cash flow is mainly related to the startup issues in Italy, where the delayed deliveries cost build-up of the inventory. Additionally, POC receivables and advanced payments related to the new building in Italy cost and increase in working capital. Investing activities in the second quarter include CapEx of EUR 1.8 million, mainly due to capitalization of R&D cost. Moving to the 6 months figures. As we have heard, the order intake for the first 6 months increased 17% to EUR 130 million, being the strongest half year order intake in Cavotec's history. Revenues decreased 4% to EUR 99 million. However, if we exclude FX impact, revenues increased 2% in the first half 2018. EBIT for the first 6 months amounted to minus EUR 5.6 million. This figure includes the nonrecurring items of EUR 7.2 million. Operationally, despite low revenues, EBIT, excluding nonrecurring items, EUR 1.7 million, remains stable for the first 6 months due to a low headcount and a better control of costs compared to the same period last year. Net debt amounted to EUR 32.9 million, which is an increase of EUR 12 million from the previous year-end. The increase is explained by low profitability, increase in working capital, investments and advanced payment related to new facility in Italy. With that, I would like to hand over to you again, Mikael.

[Mikael Norin, Group CEO & Director]

Thank you, Kristiina. We are in the middle of a high-paced project to transform Cavotec. A lot has been done, but a lot remain also. We have reorganized ourselves, we have complemented our top management team with several key members, and we have undertaken a comprehensive mapping of our markets. I believe, we are on the right track. But I would like to remind you that the success for transformation of this scale does not happen overnight. Now during the second half of the year, we will focus on reallocating our resources so that we can target and satisfy the right customer segments as well as increasing our efficiency and capabilities. In summary, considering our high pace of transformation, I am pleased with the quarter, and especially that we have shown that our traditional strengths around customer focus and sales remain intact, even though we dedicate time and resources to fixing our internal weaknesses. In the end, our success in transforming the high demand that we see from our customers to profitable growth is solely in our own hands. And that's what makes us very positive about the future for this company. With that, I would like to open up for questions.

[Operator]

[Operator Instructions] And we have a question from the line of Karl Bokvist of ABG Sundal Collier.

[Karl Bokvist, Analyst]

If I may start by 3 questions and then I'll get back in line here. The first one, you obviously had a very good order activity. My question is, do you expect that the rest of your transformation project activities will have an impact on the order intake? And perhaps also, sales going forward for the year?

[Mikael Norin, Group CEO & Director]

Well, let me take that first question then, Karl. We continue to see high activity in the markets, and we continue to address those opportunities that we see. I think that we have a great potential with the technologies in the market, and we're just going to continue to focus on those. And I think in the first half, we've shown that we can actually do both. We can have high sales activity and continue to focus on the transformation of the group. I don't see that changing in the second half.

[Karl Bokvist, Analyst]

Okay. And you mentioned that you saw a boost from the large orders that you have announced. This -- when I look at the calculations, it seems to me that the sort of base order activity was fairly flat. Is that something that you would agree with?

[Mikael Norin, Group CEO & Director]

I would not agree with that accusation, Karl. I think what was encouraging was that we saw high activity, all the -- both when it comes to larger orders and when the -- and also the underlying sort of day-to-day business.

[Karl Bokvist, Analyst]

Okay. That's good to know. And then my final one here, could you perhaps shed some further light on the market development. I mean, there has been a lot of talk recently about the trade wars and port activity and then if you look at the industry section, you have declining metal prices. So it would be interesting to see if you've heard anything from your sales team or your customers?

[Mikael Norin, Group CEO & Director]

We have -- as you can see from the order intake, we have seen actually quite a lot activity in the market. So those rumblings in the market that you refer to is not something that has translated into lower interest for us at this moment. Then, what the future bears, I am sure you can speculate to as well as I can.

[Operator]

[Operator Instructions] And we have further question from the line of Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, Analyst]

Feel free to stop me anytime you want to. But if you perhaps talk a bit more about the transformation. You mentioned that you saw a year-on-year headcount decrease, but if you look at the previous quarter, it was more or less flat. Do you expect to see anymore sort of efforts when it comes to your employee base for the rest of the year?

[Mikael Norin, Group CEO & Director]

The transformation is going really well. And we have completed 40% of all the projects that we lifted and when we started with, what we call a new day, up from a quarter of projects at the end of the last quarter. So I'm quite pleased with that, and I said, I'm incredibly pleased with the fact that we can continue to focus on sales and the output activities at the same time. We are constantly looking at how we can improve efficiency and how we can become more productive in the group. And that's an ongoing path for us.

[Karl Bokvist, Analyst]

Okay. And perhaps this question is more aimed towards Kristiina. But if you look at the material costs, it's came down both sequentially and year-on-year. Is this a sort of sustainable lower material cost base or is this a temporary effect?

[Kristiina Leppänen, Group CFO & Investor Relations]

No, it's an outcome what we have discussed partly coming from the transformation, but clearly, reduction on the direct cost side, which is coming from the employees side also, but also, of course, the material prices, so we expect that to continue.

[Karl Bokvist, Analyst]

Okay. And you mentioned that you -- last quarter this had a sort of soft order book. Do you have any legacy projects that will sort of burden profitability and deliveries going forward?

[Kristiina Leppänen, Group CFO & Investor Relations]

No, we don't have any of those.

[Carl Ragnerstam, Analyst]

Okay, and I think you answered my question on working capital earlier. But if I take a more general question, if we compare Cavotec today versus 3 to 5 years ago, has there been an increase in competitors and -- or has the competition among existing players intensified?

[Mikael Norin, Group CEO & Director]

I think what's interesting to remember about Cavotec is that if you look at our individual products, in our product portfolio, on each individual product, we have several competitors. What's unique about Cavotec is as long -- as soon as we move into a system supply then actually they -- we have very few competitors. And that is the strength of us that we're able to provide our customers with a complete solution, whether it's the -- in airports or in the ports sector. And that has not changed compared to a few years ago. Now, of course, we don't expect that to be the case forever in the future, and we are devoting energy and resources to make sure that we keep that competitive advantage that we have in terms of technology and system deliveries.

[Karl Bokvist, Analyst]

Okay. And then I have 2 final quick questions here. If you -- what would you say about your sort of approximate lead time would be once you get the order from -- and that's until the time it is delivered? And I understand that there are differences between the 2 segments and products, of course.

[Mikael Norin, Group CEO & Director]

Well, I think, you partly answered the question yourself. Because it really varies from product to product and from offering to offering. So from anything from a couple of weeks for a very standard product itself to many months for a complete system supply. So there is no one answer that I can give you on that.

[Carl Ragnerstam, Analyst]

Okay. And perhaps if you take a medium size MoorMaster order, how long would that lead time be, for example?

[Mikael Norin, Group CEO & Director]

Typically, I would say around 6 months.

[Karl Bokvist, Analyst]

Okay. And then my final question here. You're obviously almost finished with the factory in Italia, I mean, when you consider the start-up cost, but going forward, what would you sort of expect your underlying maintenance CapEx level to be now that your new factory has been completed?

[Mikael Norin, Group CEO & Director]

Well, we -- I'm happy to say that Mr. Martin Riegger, our CEO, joined us on the 1st of July and his first order of business, of course, has been to address the issues that we have in the new facility. And he and the team, they're making great progress on turning that around and getting the facility operating in the way that it's supposed to do. Then when it comes to forecasting in terms of costs and revenue and profitability, as you know, we are not giving guidance at this point in time. The transformation that we're doing will provide us with operational metrics. And that -- on basis of that, we've said that when that's in place then we have a view not only of our current performance, but also what is the art of the possible. So we've said by Q1 2019, we will be prepared to discuss in more detail what our guidance is for our future performance.

[Karl Bokvist, Analyst]

Okay. And just -- yes, so I am clear about the new factories that mainly MoorMaster manufacturing, or am I -- did I understand this wrong?

[Mikael Norin, Group CEO & Director]

No, you are partly right. It is MoorMaster, it's manufactured or assembled, I should say, at that facility. But it is also providing other products for our Ports & Maritime segment mainly. But it is also providing products for our industry segment.

[Operator]

And there are no further questions on the telephone lines at this time. Please go ahead, speakers.

[Mikael Norin, Group CEO & Director]

Thank you very much. Well, if there are no further questions, thank you for your attention, and have a great afternoon. Bye.

[Operator]

This now concludes the last call. Thank you for attending. Participants, you may disconnect your lines.