Cavotec SA

STO:CCC

Earnings Call Transcript

[Mikael Norin, Group Chief Executive Officer]

Thank you very much. Good morning, everyone, and welcome to this audiocast. My name is Mikael Norin. I'm the CEO of Cavotec. And as usual, I have our CFO, Glenn Withers, on the call with me today. And the topic is our Q3 report for 2020. As you may have seen from our report, the overall market situation continues to be challenging in the third quarter due to the COVID-19 situation, and that had consequences for both revenues and order backlog. The uncertainty during the quarter has impacted the decision-making of our customers with delays to the delivery of existing projects as well as getting the final approval for new projects taking longer than previously. As usual, Glenn will talk about our quarterly performance in detail shortly. But before that, I really would like to spend a few minutes on how we look at the future because this situation will pass. And I therefore think it's important for anyone interested in Cavotec to understand our plans for what we believe are long-term growth markets. Despite the challenging landscape at the moment, we are not wavering from our belief that we have a window of opportunity right now to position ourselves at the forefront of what will be rapidly growing market segments and where we can be the #1 player. One recent example of how we are executing on this strategy is the MoorMaster NxG, which made its debut in the global launch earlier this week. And if you haven't seen it yet, I highly recommend that you take a look at MoorMaster.com, where you can find more information about it. Now we have completely redesigned MoorMaster with the aim of opening up new, large, untapped market segments such as typical container terminals. The focus has been to make it easier for customers to transition to automated mooring. So in addition to improved performance, the redesign has focused on faster, easier installation with less downtime. Also remote monitoring and easier maintenance, sorry, is at the forefront of the new design. All of this in a unit with a smaller, more streamlined footprint and on top of that, what I think is a very good design. We've already signed the first order for MoorMaster NxG, and we're very proud of having been selected as a key partner to ASKO Maritime in Norway as they are planning the introduction of the world's first fully autonomous zero-emission vessels. And this is really the future of shipping we're seeing. Another milestone for us will be the new innovation center in the Netherlands that will open in early 2021. Focusing primarily on the maritime sector, the new center will be in charge of our research and development for what we call profitable sustainability solutions. The center will bring together our capabilities within areas such as artificial intelligence, remote connectivity, high-power, high-speed electrical charging and battery technology. So those are 2 examples of how we are actually going on the offensive, even in the present environment. And talking about the present environment, I think this is probably a good point to hand over to Glenn to talk about the third quarter in detail.

[Glenn Withers, Group Senior VP & CFO]

Thank you, Mikael, and good morning, everyone. I'll start with orders. We continue to see strong interest in our solutions in selected areas especially for the MoorMaster and Shore Power systems. However, our order backlog decreased 7% when you compare it to the end of this year's second quarter to EUR 91.6 million, and that was 16.5% less than the same quarter in 2019. The decrease is related to the delays that Mikael spoke about specifically in final decisions on a number of projects in Ports & Maritime. On the other hand, the order backlog for Airports & Industry was slightly higher when compared both to the previous quarter this year and to the previous year, and that's due to orders for a couple of airport expansion projects in the Middle East worth close to EUR 7 million. Now turning to revenue. That decreased 22.5% in the third quarter compared to the same period in the previous year, and that's to a revenue reported of EUR 37.5 million. It's broadly in line with the year-to-date comparison where we've reported revenues of 20% less than the prior year-to-date. Looking at the division level, the revenues for Ports & Maritime decreased 21.9% compared to the same period the previous year, and that's reported revenue of EUR 16.6 million. However, there was higher activity in the Nordic regions versus other regions especially for deliveries of MoorMaster solutions to the Port of Tallinn and of Helsinki. For airports, the sales of individual ground support and fueling products developed well in the quarter, but there were no large project deliveries in the quarter. Revenue from our industrial customers though were slightly higher than the previous year, and that's partly due to the pivot that we've talked about before towards new OEMs and new geographies. In total, Airports & Industry division revenues decreased 23% when compared to the same quarter in 2019, and that's on a reported revenue of EUR 20.9 million. In both divisions, Services remained negatively impacted by the COVID situation mainly due to travel restrictions or ongoing travel restrictions. The proportion of the Services revenue compared to total group revenue was 21% in the third quarter. And whilst that proportion of Service revenue in this quarter is in line with our expectations, it's worth mentioning that it is on a lower base of project deliveries. Moving now to profitability. Our EBIT decreased to EUR 0.7 million, and that compares to EUR 3.1 million we reported in the same quarter last year. This quarter, that 7 -- EUR 0.7 million is a margin of about 2%. The profit decrease, which is really due to the negative volume impact that I talked about earlier, was partially offset by savings in employee costs, consulting, traveling expenses. Some of the savings have also come from the government support programs. Currency exchange differences amounted to negative EUR 2.7 million in the quarter. And actually, if you look at the comparison to last year, that's a large EUR 4.9 million negative swing versus the same period last year. And that's predominantly due to the currency fluctuations that we're seeing during the pandemic. Moving on to our cash performance. I'm very pleased to report that the operating cash flow, despite the lower revenue, amounted to EUR 3.5 million in the quarter, and that represents more than 100% of the EBITDA reported in the quarter. Cash and cash equivalents at the end of the quarter amounted to EUR 16 million. And finally, to summarize, we continue to have a strong balance sheet and strong cost and cash management in place. This gives us a platform and a strength to continue to invest in the future growth of Cavotec. And with that, I'd like to hand back to you, Mikael.

[Mikael Norin, Group Chief Executive Officer]

Thank you, Glenn. Well, Glenn mentioned investing in future growth. And as I said earlier, we believe that now is the right time for us to do that. Actually, the interest from our customers in finding solutions which increased productivity but simultaneously offer sustainable operations has grown even more as a result of the COVID situation. A good example of that is our high-power, fast-charging solution for port e-trucks, which recently won an important industry award. With our solution, we've made it possible to convert heavy-duty port trucks to electrical power. This is a pilot project with our partner at the Port of Long Beach in California, and it provides us with really a lot of leading experience on how to convert with our more than 30,000 diesel-powered trucks operating in ports around the world to more sustainable and cost-efficient electrical operations. So with these steps, and there's more to come, we continue to position ourselves to leverage on global trends as our customers are searching for a way to achieve more safe and efficient operations with a smaller environmental footprint. And I'd like to mention that we in early October held an investor information meeting in Stockholm, where we gave an update and more details of our strategy and our growth plans. So for those of you who did not attend in person or online, I recommend watching the presentation on our website, and you'll find that in the Investors section. With that, thank you, everyone, for your attention. And that concludes our prepared statements, and we're now opening up for questions.

[Operator]

[Operator Instructions] Our first question is from Karl Bokvist of ABG.

[Karl Bokvist, Analyst]

Yes. So my first question as to if you can provide a bit of more insight into the different end markets. And of course, you say that Ports & Maritime is a bit weaker, and it's about the delayed decision-making and so on. But -- and you mentioned that the Industry is quite flat year-over-year, but could you shed some further light here in perhaps what's going on within Airports and which parts of the Industrial segment are you seeing improving throughout -- yes, throughout this quarter?

[Mikael Norin, Group Chief Executive Officer]

Thank you, Karl. Well, in terms of how we look at the market, I think the common denominator is uncertainty and as we tried to explain it in the report, and it comes down to really the decision-making of our customers. What we've seen is that -- and this goes for both Airports and Ports & Maritime, is that each step is taking longer and that new steps have been added by the customer for their decision-making process. So that slows everything down. And we have a number of projects and especially in Ports & Maritime that we were expecting in Q3, where we have actually come to an agreement with the customer or, I should say, the customer's organization. We have negotiated the price. We have agreed on the scope. We've agreed on the delivery and so on. And it has been progressed by the customer's organization all the way to the final sign-off. And that could be a CEO or what we're seeing more and more actually the decision is going all the way to the Board of Directors of the customer's organization. And that's where it gets stuck. So it's very difficult to -- and I think it's a general anxiety around taking decisions because of the uncertainty that everyone feels. But things are moving, although they're moving very slowly. And I can mention we actually, this morning, got an LOI for a MoorMaster project, and we're hoping for a firm order within a couple of weeks' time. So things are moving but very slowly and as I said, there are more steps involved. And that goes for both Ports and Airports. Industry has held up a little bit better because the investment decisions are of lower value. It's more of what we call flow business. So that has come back a little bit more than the other divisions.

[Karl Bokvist, Analyst]

Understand. And did I understand you correctly though when you said the -- that you've come to an agreement with the customers with certain projects regarding price, scope and et cetera, et cetera? These projects that you're mentioning here, that you highlight, have these already been booked into your actual order book?

[Mikael Norin, Group Chief Executive Officer]

No. This is what I was saying, that they have not. They have progressed all the way to the final sign-off by the customer, whoever is the top decision-maker, often the CEO. But as we're seeing more and more, those final sign-offs actually so that they can issue the purchase order goes to the Board of Directors. And that is what happened with several projects that we were expecting. So no, these are projects that we're still expecting to see, Karl, and we have not been able to book because we have not been able to get the final deal.

[Karl Bokvist, Analyst]

Understood. So -- and then the other thing that you mentioned when it comes to delayed deliveries, which means delayed in terms of actually booking sales, do these have to do with your inability to get access to customer sites? Or has it to do with the supply chain or anything else here?

[Mikael Norin, Group Chief Executive Officer]

That's a great question. Let me try to clarify what we mean by that. It's basically the same dynamics going on and that is that a lot of these projects, the actual delivery date has been agreed with the customer. When you get to that point, the customer has to sign off and say, yes, now I'm ready to take delivery.In some instances, we also have -- as part of the payment terms, we have prepayment of a part of the order value of the whole, which means that the customer then has to issue that payment to -- so that we can deliver. And the same thing there is just that decision-making, that final decision has just been slowed down. And it's often, yes, brought to a much higher level than in the past, and that slows down also our deliveries and thereby our ability to invoice and get the revenue.

[Karl Bokvist, Analyst]

Understood. And because -- then I think you -- we've talked about this before in terms of your focus on smaller-ticket orders and things like that, so just thinking about the duration of the backlog and your ability to -- if things start to improve, the orders that you receive and can almost ship out during the same quarter, just what kind of visibility would you say that we have into assessing whether or not the Q4 and perhaps Q1 sales could be -- continue to be down quarter-over-quarter in case we see improving orders but that the lead times might be a bit longer?

[Mikael Norin, Group Chief Executive Officer]

Well, I think the thing, again, is uncertainty, Karl. It's very difficult to forecast because we really don't know what's going to happen. Again, with the decision-making, we are at the mercy of our customers both when it comes to new orders, old orders, flow orders, project orders, but also when it comes, as I said, the final decision-making on a lot of taking delivery of existing projects. So I've never experienced a situation where -- in my career where it's so difficult to have a view of the future, even the short-term future because it changes from week-to-week, the sentiment that we hear in the market. And it's often very tied to the latest headlines in the media about the COVID situation. It also varies, of course, from region to region and even country to country as the COVID situation varies globally. So I really don't want to speculate about that, Karl.

[Glenn Withers, Group Senior VP & CFO]

Karl, probably the only thing I would add is -- you asked about the timing of recovery. Mikael has answered the part about timing relative to market. That part really is uncertain. We have a flow business both in Industry, in Services and a little bit in Ports, actually. If -- and one of the things that happened in the third quarter was the flow orders were less than we expected compared to what we would normally see in a post-summer period. If and when those -- the orders come back faster -- again, the caveat about the uncertainty. But if and when that flow business comes pretty fast, that it's within the same -- a lot of the orders are within the same -- delivered in the same month of the order especially spare parts and a lot within the same quarter. So I'd add that to the answer.

[Karl Bokvist, Analyst]

My final question has to do with the imports fee, MoorMaster NxG and also a bit on the other parts of the product development. So the NxG here, I can imagine that you're doing such a lot of new functions in terms of sensors and connectivity that you mentioned and so on. But with even MoorMaster NxG have a completely different pricing method than the former ones, that you would focus more on a subscription base, do you think that you can perhaps see a bit of positive pricing on the product? And I think you mentioned easier access to maintenance and things like that, but would it be fair to assume that the number of modularized components and so on has increased, so the input cost per MoorMaster is better for you as well?

[Mikael Norin, Group Chief Executive Officer]

Two dimensions to my answer, Karl, and it's a great question. Thank you. Two dimensions. The first will be that, obviously, if you can reduce the total investment for a customer, it opens up a wider market. And for us, that has been about really reducing the footprint of the product because -- and also the way that it is installed because a large part of transitioning to automatic mooring is not only the equipment itself, it is also the installation time especially because it means that, that particular berth has to be taken out of action. You cannot use it for ships at the time. So with a modular approach to the installation, it means that we can be much, much, much faster. We're talking about 50% to 90% reduction of installation time. Another aspect is also when it comes down to the footprint is that there is very often, especially for container terminals, limited space between the end of the quay and the port crane. Sorry, I'm getting very technical here, but it's an important aspect. And that has been restricting us in the past. There's a lot of the cases where terminals have been interested, it just could not physically fit the equipment without very, very expensive and time-consuming modifications to the whole berth. So that drastically reduces the investment, that total investment cost for converting to MoorMaster. But secondly, you are spot on when you talk about other business models. And we are also looking at expanding the market for MoorMaster by going to -- by being able to offer product as a service or, very specifically in this case, mooring as a service. So that is something that we are also looking into and we're doing a lot of work around. I hope that answers your questions, Karl.

[Karl Bokvist, Analyst]

Yes. Yes. And my follow-up also, I mean, do you see a -- or maybe if I can ask in -- with your R&D funnel, if you're looking at similar things on the Shore Power side.

[Mikael Norin, Group Chief Executive Officer]

We have said that we haven't made any secret of the fact that we believe that Shore Power -- I mean if you saw it in our investor information meeting, we believe that Shore Power is a very important market segment for us and where we can actually be a #1 player. And that's what we're looking for. And we have several examples of technology and products already that we -- where we are the #1 player. And I can mention that the ASKO Maritime project, where we will be supplying the automatic mooring with MoorMaster NxG, they have also decided to partner with us for the high-power, high-speed charging that they're going to need for those electrical ferries. So it shows again that we have a market-leading position in that field. So yes, it's an area where we will be spending more time and investing in for the future.

[Karl Bokvist, Analyst]

All right. Then I apologize here, but a final question then. I mean your balance sheet now is actually net cash excluding leasing. And you have highlighted in the past partly that you want to achieve organic growth first, but you could be looking at selective inorganic growth opportunities, too. So just here, I mean the balance sheet is no doubt strong enough for it. Do you see any possibilities here for M&A activity given the potential to consolidate and strengthen your position in times when the market is weak?

[Mikael Norin, Group Chief Executive Officer]

M&A is dependent on finding the right targets for acquisitions. So we are -- I can tell you that we are looking at the market and looking to see what is available. We are primarily interested in what we call technology white spots to be able to complement those pushes within the areas where we believe that we are strong. And when we do find those, then, yes, we are definitely open to acquiring that technology. So it's constantly -- we're constantly evaluating in between or choosing between if we're going to develop something ourselves or if it is readily available in the market and we could acquire the technology through an acquisition.

[Operator]

[Operator Instructions] There are no further questions at this time. Please go ahead, speakers.

[Mikael Norin, Group Chief Executive Officer]

Thank you very much. Well, with that, we thank you all for your attention today, and we wish you a very good rest of the Friday and a good weekend. Thank you.