Cavotec SA

STO:CCC

Earnings Call Transcript

[Operator]

Hello, and welcome to the Cavotec Q3 Report 2018 Call. [Operator Instructions] Today, I'm pleased to present CEO, Mikael Norin. Please go ahead with your meeting.

[Mikael Norin, Group CEO & Director]

Good morning, everyone, and welcome to this audiocast covering Cavotec's Q3 report. As said, my name is Mikael Norin. I'm the CEO of Cavotec. And with me today, I have our CFO, Kristiina Leppänen.As most of you have probably seen, there's a lot going on in Cavotec at the moment. We have recently announced the second phase of the transformation of Cavotec in the form of a restructuring program. And this morning, in a separate communique, we announced that we will conduct a rights issue of approximately EUR 20 million. Now these initiatives are all part of the whole growth transformation of Cavotec, a journey that we embarked on about a year ago now. So when talking about our current performance, let's start there. I'm pleased to say that we have come far in our transformation of Cavotec. A New Day, our new transformation plan, is progressing really well with 2/3 of the 50 projects completed. And it's also very encouraging to see clear signs that this transformation is starting to take hold. Higher-quality decision-making as a result of the new processes that have been introduced has increased the cost control in the group. And this translated into higher gross and EBIT margins in the third quarter. Now we do still suffer from the soft order book at the end of 2017. And in addition, we continue to have some start-up issues in our new production facility in Italy. But it is against this background satisfying that we, despite the challenges, achieved revenues for the first 9 months of 2018 that were in line with last year, considering local currencies, although they were down around 5%, including exchange effects. Now we are furthermore on the right track with regards to our order intake, which increased 11% year-over-year in the first 9 months. The order book was at the end of the quarter worth almost EUR 105 million, which is 7% higher than at the same time in 2017 and 22% higher than at the end of last year. Now with regards to the production issues in our Milano facility, I feel confident that they are being addressed under the leadership of our new Chief Operations Officer, who joined at the beginning of the quarter. The issue should be overcome by the year-end. All in all, the promising development supports us when we now accelerate the pace of our transformation. At the beginning of October, we announced the second phase in the transformation with a program to address structural inefficiencies in the group. This program will focus on reducing SG&A and other inefficiencies and is targeting annual savings of about EUR 10 million by 2021. Now we believe we can deliver a significant portion of those run rate savings already in 2019.The reduction headcount as a consequence of the restructuring is estimated to be around 100 people, spread across multiple locations. In addition, the program will include a reduction in the number of legal entities the group has today. This is expected to improve the effective tax rate and also result in lower administrative costs.Short term, however, the restructuring will result in one-off costs expected to amount to about EUR 7 million. A majority of those will be accounted for in 2018. Now this obviously puts pressure on our balance sheet. And we have come to the conclusion that the transformation would benefit from a strengthened financial position.Today, we, therefore, announce our plans for a new rights issue of approximately EUR 20 million with preferential rights for Cavotec's existing shareholders. I have to say it's very encouraging that the transformation of the group has the full support of our major owners. The entire rights issue will be covered by a subscription and guarantee undertaking from our largest shareholder, Bure Equity AB. And the Fourth Swedish National Pension Fund as well as several other large shareholders have expressed their intention to subscribe fully or partially to the rights issue. This will give us the full firepower that we need to swiftly execute on the restructuring. And it also will provide us room for quick actions on growth opportunities that we see.And with that, let me hand over to our CFO, Kristiina Leppänen, to talk about Q3 in greater detail.

[Kristiina Leppänen, Group CFO & Investor Relations]

Thank you, Mikael. Let's start with the order intake. In the third quarter, it decreased 5% to EUR 37 million compared to the same period of last year. This is explained mainly by delayed airport orders in the U.S.A. and Asia. But it is also a nature of our business that the order intake fluctuates between the quarters and between the divisions.In the third quarter, we saw Ports & Maritime increasing the order intake over 40% compared to the same period 2017. The increase is mainly explained by the orders in the shipbuilding industry and the development of the ports on the U.S.A. East Coast. The interest for the MoorMaster continues to be strong and is primarily linked to the e-ferry market in Northern Europe with new orders in the third quarter. The order intake in Airports & Industry decreased 19% compared to the same period 2017, following a very strong order intake in the second quarter. Demand was low in Asia and decreasing in the Middle East while the European market continued to show strong development.If we then turn to the revenues, let's start with the group view. Revenues in the third quarter for the group decreased about 5% (sic) [ 5.9% ] to EUR 49 million compared to the same period 2017. The decrease is due to pending deliveries for Ports & Maritime projects in China as well as delayed deliveries due to our production challenges in the new production facility in Italy.For Ports & Maritime, the revenues decreased 3.8% to EUR 18.4 million. The decrease is, to a large extent, explained by low order intake in the second half of 2017, postponed deliveries in China and delayed deliveries due to our earlier mentioned internal production challenges. For the Airports & Industry division, we saw revenues coming in at EUR 30.8 million, which is 7% lower than the same period last year. The decrease is due to delays in airport projects in Middle East and U.S. while industry partly compensated for the lower sales.Group EBIT for the quarter amounted to EUR 2.8 million, corresponding to an EBIT margin of 5.7%. This figure includes a nonrecurring income of EUR 0.7 million due to the lower value of an extraordinary warranty cost at the end of a project. The increase in EBIT was driven by improved operational profitability and better turnaround cost control. The operating cash flow amounted to EUR 4.3 million. This stronger cash flow is explained by continued improvement in our working capital management. Cash flow from financing activities was minus EUR 6.5 million as a consequence of partial repayment of loan and payment of the capital reduction to the shareholders.I will now move on and talk about our year-to-date performance. As Mikael mentioned, Cavotec order intake increased over 11% year-over-year in the first 9 months. And the order book was at the end of the quarter worth EUR 105 million. Revenues for the 9 months remained stable when we exclude currency exchange effects but decreased about 5% to EUR 148 million when excluding the FX impact. The development is primarily explained by the soft order book at the end of 2017 and postponed deliveries, as mentioned earlier.EBIT for the 9 months amounted to minus EUR 2.8 million, an improvement of approximately EUR 3 million. This year's figure includes nonrecurring items of EUR 6.5 million. Net debt amounted to EUR 31.3 million compared to EUR 20.4 million at the end of 2017. The increase is mainly explained by higher CapEx during the first 9 months, mostly related to the new production facility in Italy.With that, I would like to hand over to you again, Mikael.

[Mikael Norin, Group CEO & Director]

Thank you very much, Kristiina. So we have now, as mentioned, completed 2/3 of the transformation projects in A New Day. We have streamlined and simplified decision-making. We have created 3 business divisions with clear profit and loss ownership. We have introduced a new services division. We have strengthened our top management team considerably. And we continue to see demand from our customers, and we are starting to see tangible results from the transformation.However, we also need to once and for all address our structural issues from the past. We need to organize ourselves in an efficient way and operate with scale to achieve sustainable profitability and cost competitiveness. The restructuring programs supported by the rights issue will address these matters. It is very encouraging that the transformation had such strong support from our major owners in the journey to make Cavotec a growing and profitable company.And that concludes our prepared statements, and we are now opening up for questions.

[Operator]

[Operator Instructions] And the first question comes from the line of Erik Paulsson from Pareto Securities.

[Erik Paulsson, Analyst]

This is Erik at Pareto. I have four questions. First one is on -- it seems like the transformation program is bearing fruit on the cost side, which is very good. And given that it seems like we are on the top of the cycle now and you are very late cyclical, how should we look upon future order intake from now and going forward?

[Mikael Norin, Group CEO & Director]

All right. I will answer one question at a time, Erik, so thank you for that. We continue to see demand in the market. And we believe that we are very well positioned when it comes to fundamental market trends that will continue regardless of the cycles. I'm talking about safety, automation, environmental concerns and so on. And we have the technology suited to meet these trends. Now we have in the past not been able to fully capitalize on that. But with the transformation, the investments that we are making into our markets and so on, we believe that we are going to be in a better position to get the full effect of that demand in the market.

[Erik Paulsson, Analyst]

Okay. So regarding order intake, can you give somewhat -- like some kind of outlook regarding order intake for 2019? Or is that too difficult to do?

[Mikael Norin, Group CEO & Director]

Well, what I can say is that as we continue to see strong demand from our markets, it varies from 1 division to another, from 1 quarter to another, but we're not concerned about the market outlook for this business. As I said, we're very well positioned. It is more about our ability to capitalize on that. And that's part of a -- a major part of the transformation is to set us up to be able to do that. We have recently concluded a training of our sales force. We have invested in tools, a CRM system, for example, to be able to do that as well.

[Erik Paulsson, Analyst]

Okay, great. And in terms of the transformation plan, you talk about full savings of EUR 10 million in 2021. How much can we expect in 2019?

[Mikael Norin, Group CEO & Director]

Well, what we've said is that we expect significant savings already in 2019. I can't get into any more detail than that at this point because it depends on how we are able to execute on it. But our ambition is to execute on the majority of those initiatives already in 2018 so that they can bear fruit in 2019.

[Erik Paulsson, Analyst]

Okay. And the final one regarding the rights issue. And I mean, your current cash position is slightly down since last quarter. But at the same time, you have this EUR 7 million in one-off costs for Q4, I guess, right? Are there other like short-term costs impacting your cash flow in the near term here?

[Mikael Norin, Group CEO & Director]

Well, I mean, the -- our cash flow position that we -- in terms of expecting is around the cost of the restructuring program. And then also we announced the reversal of a court verdict in the United States some time ago. And that court case has now come to a conclusion, so there will be a payment made as a result of that as well.

[Operator]

And the next question comes from the line of Karl Bokvist from ABG.

[Karl Bokvist, Analyst]

I have a few questions myself, but I'll limit myself to just a few of them to begin with here. But if we start off by talking about the rights issue, you mentioned that it's important to strengthen your financial position but also for potential growth opportunities. If we talk about growth opportunities, is this mainly when it comes to acquiring or developing other product areas? Or is it expanding into other geographic regions?

[Mikael Norin, Group CEO & Director]

It's a great question. The rights issue is mainly designed to be able us to quickly execute on the restructuring and the transformation. But it also gives us a little bit of a war chest when it comes to looking at growth opportunities. And they are both of an internal kind in terms of rebalancing our sales force, where they are located, investing into marketing, et cetera, but also looking at development that we believe that we need to do in terms of our products and so on. So it really is across the board.

[Karl Bokvist, Analyst]

Okay. And is it -- if we talk about product improvements and innovation, is it more investments in organic R&D or a potential to acquire additional technologies?

[Mikael Norin, Group CEO & Director]

This is something that we are evaluating at the moment, where we will get the highest return for those investments.

[Karl Bokvist, Analyst]

Okay. And when it comes to the start-up issues in the factory, is this more of a -- well, perhaps not common but still -- but perhaps logical? I mean, is it that one production line had some issues and you needed a few extra components? Or is it -- or can you shed some light on what caused the start-up issues?

[Mikael Norin, Group CEO & Director]

Well, as you know, it's not unusual when you are starting up a new facility that you have teething problems. And they often cut across the whole processes, from our supply chain being able to deliver in time and at the quality we expect to then having an efficient flow in the factory. And that is what we are addressing now. And we've come quite far, and I'm convinced that we're going to have overcome these issues by the end of the year.

[Karl Bokvist, Analyst]

Okay. And then just a final one before getting back in line here. If we look at the order book that you have and look at deliveries, if we exclude the start-up issues and some perhaps bottlenecks in the delivery issues, would we have seen a flat development or even growth in this quarter when it comes to sales?

[Mikael Norin, Group CEO & Director]

Well, I think we also needed to recognize that we have seasonal variability also when it comes to sales in this group from 1 quarter to another and from 1 division to another. And the Q3 is not historically not the strongest quarter for us also because you have the vacation period in July in Northern Europe and in August in Southern Europe. So it's difficult to strip out one particular aspect. But of course, if -- without these issues that we had in Italy, that would have helped us, no doubt.

[Operator]

[Operator Instructions] And we have a follow-up question from Erik Paulsson from Pareto Securities.

[Erik Paulsson, Analyst]

Just a follow-up regarding MoorMaster. Because I attended the Trelleborg Capital Markets Day here during the summer. And in their -- one of their business areas, offshore and construction, they're launching this MoorMaster-type-like product. And I wonder if you have seen them out there talking about this program and trying to selling it to your customers. Or how do you see the competition in that market now here going forward?

[Mikael Norin, Group CEO & Director]

We are aware of what competitors we have in each of our product areas, naturally. We are not worried about competition. And we're definitely not worried about competition in an area where we have been active for many years and where we have built up a track record of very successful performance with those customers. And then when it comes to competition in new technologies, generally it's actually a good thing because there are more people out there spreading the word in the market. So that's actually something that we look forward to.

[Operator]

And we have a follow-up question from Karl Bokvist from ABG.

[Karl Bokvist, Analyst]

So if we look at the recent orders for this year and compare it to the order book of 2017, do you see a profitability improvement of your recently won orders? I mean, can we -- have you seen your internal sales efforts and project estimates and so on and so forth? Have they started to come through when you see much better profitability potential of your newer orders?

[Mikael Norin, Group CEO & Director]

Well, we don't comment on individual profitability per order or per market. What I can say is, of course, that the initiatives that we have within what we call commercial excellence also aims at improving the quality of each and every order that we take in the group. We are training the sales force in what is generally called value-based selling, for example, so that we will get the highest possible outcome of each project. We are also being very careful when we bid for new projects that we have looked at the -- any possible risks associated and that they are taken care of. We have also, as we announced earlier this year, hired a new competence in the area of project management to make sure that we have quality in our projects and in the deliveries.

[Karl Bokvist, Analyst]

Okay. And if we look at both Konecranes and Cargotec, they have reported quite strong port activity recently both in terms of smaller mobile equipment and for cranes. Is this an area where you are also seeing growth, I mean, if we not only look at the MoorMaster but also for your cable reels and maritime power and so on?

[Mikael Norin, Group CEO & Director]

We do see a pickup especially compared to last year. And as you know, we had a soft order intake in Ports & Maritime the last -- the second half of last year. And we do see a pickup in that. And we see -- as you've seen, we see strong order intake actually in this quarter in Ports & Maritime. So we see that there is solid demand in the market.

[Karl Bokvist, Analyst]

Okay. And then my final question is -- or is twofold perhaps. But I was wondering if you could perhaps shed some more light on why airport orders were delayed in the U.S. and Asia regions. And also what has -- in your view, what has caused the decreasing airport demand in Middle East and the low demand in Asia, please?

[Mikael Norin, Group CEO & Director]

Well, the project delays are customer-initiated. So this is not something that we control. There's several large projects that have been postponed. And that's the reason for that.

[Karl Bokvist, Analyst]

Okay. And when you say postponed, is it due to the general market environment? Or is it specifically related to some of these airports?

[Mikael Norin, Group CEO & Director]

It's difficult to give a general statement on that. It really varies from project to project. It can be anything from the specific conditions in that market, for example, where a new airport is being planned. It can be planning permission issues. It can be political issues. It can be a number of factors. It can also be that the general contractor responsible for that particular project is taking their time and so on. So there's no one general answer to that question.

[Karl Bokvist, Analyst]

Okay. And the final one here, given as you mentioned, your organizational structure, have you seen tariffs and the raw material price increases starting to impact your operations? And what is your view on mitigating the impact of any such potential impact going forward?

[Mikael Norin, Group CEO & Director]

We have not seen any impact of the potential turbulence in the market coming from things like a potential trade war and so on. We have not seen anything on that. In terms of being prepared for the future, what we're trying to do is make sure that we have a flexible operation so that we can flex up with demand but also flex down if demand for any reason will be weaker in the future.

[Operator]

As there are no further questions, I'll hand back to the speakers.

[Mikael Norin, Group CEO & Director]

In that case, thank you very much for your attention this Friday morning, and that concludes the call. Goodbye.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.