Cavotec SA

STO:CCC

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and thank you all for standing by. Welcome to today's Cavotec Investors Call. [Operator Instructions] I must also advise that this call is being recorded today, Friday, the 23rd of February 2018. I would now like to hand over the call to your speaker, Mikael Norin. Please go ahead.

[Mikael Norin, Group Chief Executive Officer]

Good morning, everyone, and welcome to this audiocast. My name is Mikael Norin, and I'm the CEO of Cavotec. And with me today, I have, as usual, our CFO, Kristiina Leppänen. We're going to present our Q4 and full year 2017 report today. Before getting into that, I should say that it is cold and flu season, as you probably know also where you are, and we are a little bit sniffly around the table here today. So I hope that you have patience with us because of that. Let me briefly take you back to my Q3 comments, and I told you then that we had started to work on a plan for putting Cavotec back on the path of profitable growth. And I will actually start today's presentation by following up on the progress and give you some perspective on where Cavotec is in that development. Kristiina will thereafter go through our financial performance, and I will conclude by summarizing the transformation process, the high rated change that was initiated in the fourth quarter and what our coming steps are. As you know, Cavotec has experienced a few years of stagnant growth despite our strong customer relations and the technology that we have. And 2017, as you see, was no different since the Cavotec Group showed lower revenue growth and an unsatisfactory profitability. Now Cavotec is a company with great potential, and this is personally why I have decided to join Cavotec as CEO in July of last year. I have led transformation processes several times before in my career, and I know when I see a situation with potential. Although it is also my experience that it takes time to fully turn around the ship of this size. I am confident that the challenges that we experience offer a lot of opportunities to long-term get back to a path of successful growth. In the third quarter, after joining the group, I interviewed the employees and customers all over the world to truly understand what is behind the challenges we face, and very soon the reasons for our situation became clear. We're working from a position of strength in terms of our customer relations and the technology we have. But a fragmented structure, weak internal accountability and processes, have prevented us from reaching our full potential. Over the years, our internal structures and processes have simply not kept up with the pace of our growth, and they moved from a product to a system supplier that we're going through. So this means that we have grown to a point where the way we currently operate is not sufficient. We need to have long-term clear strategies, defined processes, effective planning and better use of our resources in place. So at the end of 2017, we decided to streamline and simplify decision-making in Cavotec. We did this by creating 3 business divisions, Ports & Maritime, Airports & Industry and a new services division to support the development of our aftermarket business. The new organizational structure, which became effective on the 1st of January this year, assigns each division clear profit and loss ownership, so from product development through to sales and delivery to secure that all aspects are taken into account when doing business in our markets. So this will also increase the transparency of our operational performance and assure optimum capital allocation. So based on our findings, we also initiated almost 50 improvement projects across the group. And we have used an internal umbrella name called A New Day for this transformation plan, and it covers everything from customer and key account management to procurement SLP deployment, production planning, et cetera. And we have actually involved more than 200 people across the group for this journey, and they're all fully behind it. So each senior manager is responsible for a certain number of projects, and they report progress continuously. In this way, we secure momentum, transparency and accountability. Almost all of the projects started in the fourth quarter of 2017, about 1/4 of them will be completed at the end of the first quarter this year, another 1/4 by the midpoint of the year and the remainder before the end of 2018. We're just at the beginning of this transformation, but we intend to report on the progress of these projects on a quarterly basis to keep you fully updated on where we are. And with that, I'd like to hand over to our CFO, Kristiina Leppänen.

[Kristiina Leppänen]

Thank you, Mikael. We can conclude that 2017 was not a financially strong year for Cavotec. However, we did achieve revenues for the full year, which were in line with the previous year, although down somewhat in the fourth quarter. Revenues increased by 0.4% to EUR 212.4 million for the full year, but decreased by 6% to EUR 56.6 million in the last quarter. The development is mainly explained by strong business within our Airports & Industry division in all quarters, while revenues in Ports & Maritime was weaker during the last 3 quarters compared to the previous year, driven by low investment in the container terminal market. Revenues in the Airports & Industry division increased 1.3% to EUR 33.6 million in the last quarter. We continue experiencing increasing interest in our offerings, including cooling systems, converters and fueling big systems in the airport sector as well as reused and radio remote control systems in the mining industry. Revenues in Ports & Maritime decreased 15.1% to EUR 22.9 million in the quarter. The investment climate remains low with the limited number of big orders and delays of closing project opportunities, which has been the case in the last 3 quarters compared to the previous year. However, we do expect increased activity with better market conditions in the medium term. This is especially evident in the MoorMaster market. Fourth quarter EBIT, excluding nonrecurring items, decreased by EUR 1.6 million to EUR 6.9 million and EUR 2.5 million to EUR 9.6 million for the full year. Overall, the progress means that the adjusted operating margin was strong, 12.2% for the quarter and 4.5% for the full year. The ongoing review of our balance sheet, which was initiated in the third quarter, resulted a goodwill impairment of EUR 18.3 million in the last quarter for INET Airport Systems. This was when an acquisition made in 2011 in U.S. The impairment loss reflect the current value of these operations and will have no cash effect. It is important to clarify that the technologies coming from the acquisition are essential for Cavotec and will remain an important component of our turnkey solutions for customers in the airport sector. The last quarter EBIT, including nonrecurring items, was minus EUR 12.5 million and minus -- a negative EUR 18 million for the full year. The impact of U.S. new tax reform resulted in a noncash write-down of deferred taxes EUR 6.6 million. As an outcome of improved working capital management, we saw an excellent progress in our cash flow towards the end of the year, and the cash flow from operating activities ended positive at EUR 18 million in the last quarter, resulting in full year cash flow from operating activities EUR 12.9 million. The net debt decreased to EUR 20.4 million at the end of the year. Regarding the dividend, I would like to inform that the Board of Directors will propose a dividend of CHF 0.02 for the shareholders’ approval in our Annual General Meeting on April 12. With that, I would like to hand over to you again, Mikael.

[Mikael Norin, Group Chief Executive Officer]

Thank you very much, Kristiina. During my first 6 months with Cavotec, I've come to know an organization that has many strengths. We are highly customer-centric and exceptionally market-focused. We are also incredibly well positioned in terms of fundamental market trends, specifically around safety, automation and the environment. And we have outstanding innovative technologies suited to meet the demands of these trends. For those of you who follow us on social media, I hope that you have noticed the announcement made by the United Nations this week where they singled out Cavotec's automatic mooring and charging technologies as key technologies for a sustainable future. I haven't met Cavotec customers all over the world since I started. I can also confirm that the group is widely respected, and we consider an attractive, innovative and technology-driven partner with, which they want to work. Our work to improve internal structures and processes will, however, be crucial to leveraging these strengths. From having met so many of our employees and having led transformation processes of this nature several times before in my life, I'm confident that we will be able to get back to path of profitable growth. Our people and technologies together with the actions we're taking will set the stage for that sustainable and profitable growth. We have a strong position in our markets, while our challenges, which we are now addressing with force and determination, are all internal. So this actually means that we are truly masters of our own destiny, and this is something I keep repeating to everyone in Cavotec, that this is actually a great place to be. Now we have in our presentation talked a lot about our internal work to become successful, what sometimes it's referred to as how we play. And this is, of course, key to our future success. But for us, it's also important to understand what our market looks like and what our potential -- or what potential that market can provide to us, which is sometimes referred to as where to play. And I can tell you that there is a huge potential, and we will actually focus on describing this potential and the developments we see in our markets at the Investor Information Meeting that we're planning to hold in April 11 in Stockholm. And of course, you are more than welcome to join us then. With that, we are now opening up for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Erik Paulsson.

[Erik Paulsson, Analyst]

This is Erik Paulsson of Pareto Securities. I have 3 questions, if I may. First of all, you talked about those 50 transformation projects that you have started with, and you also say that you will report and how they go on a quarterly basis. How will that actually be seen in the reporting? How will you report them?

[Mikael Norin, Group Chief Executive Officer]

Would you like to ask the other 2 questions also, Erik, and I'll take all of them afterwards.

[Erik Paulsson, Analyst]

Sure. The second is on the CapEx cycle. We have seen now a start in the -- an upturn in the CapEx cycle for certain industries that we've seen are different end markets such as shipping, et cetera. We have not really seen that in your numbers even though you're talking about the more positive shipping market and the harbor markets, et cetera. When do you think this will be more visible in your numbers in terms of order intake, et cetera? And then the third question is regarding tax guidance for 2018 since we have this new tax regime in the United States.

[Mikael Norin, Group Chief Executive Officer]

All right. Thank you, Erik. Starting with our transformation plan, what we call A New Day. And what we're doing is that we are keeping track of when the projects have started keeping track of all the percentage progress during the projects, and we, of course, keeping track of that they meet the deadline. So this is what we're going to be able to be transparent about, how many projects have started, how many have concluded and where are with you in the transformation journey. Talking about the market, and if I understood your question correctly and specifically around the market for our Ports & Maritime business, and as we have said, we've seen softness in that market during 2017. It is encouraging that we see more activity similar to what you commented on in that market, and we are more positive about the outlook for that division this year. Address the tax issue, Kristiina?

[Kristiina Leppänen]

Regarding the taxes, yes, basically, what we have done all in all is that we have initiated the tax planning program, I mean, already some months ago. And of course, now we are considering the U.S. impact along the whole planning process and in order to reduce that effective tax rate in the mid and long term.

[Erik Paulsson, Analyst]

So regarding the tax guidance, you cannot give like a number. There is more that we can see that it's going to be reduced, I assume.

[Kristiina Leppänen]

No exact number itself, no, that we are not giving at the moment.

[Operator]

Our next question comes from the line of Carl Ragnerstam.

[Carl Ragnerstam, Analyst]

First of all, could you please describe the current situation within INET as well as the past 5 years development of this with you on it. And as far as I know is that INET have had that problem since basically 2011. Could you please describe what measures you have been taking to reach the turnaround and when we can expect that?

[Mikael Norin, Group Chief Executive Officer]

Well, first of all, Carl, as you know, we don't single out individual units for external reporting. What we talked about in this report is the evaluation of the balance sheet that we have done and the goodwill that we had as a result of that acquisition. I can tell you that, among all of the transformation projects that we have initiated in general, it's to look at how we use our resources, it's to look at production planning, it's to look at efficiencies across our supply chain. And of course, the airport unit in the United States, what we formally called INET, is part of that program.

[Carl Ragnerstam, Analyst]

Do you have enough comment on this development for the past 5 years? Is it positive or negative development?

[Mikael Norin, Group Chief Executive Officer]

We don't comment on individual technologies or product units.

[Carl Ragnerstam, Analyst]

Okay. I have one more. So it's probably if we can see in the -- I saw you have obviously done a fantastic job with the working capital in the quarter. How much of that is a seasonal effect? And how much of that is from working capital management? And what improvements have you done?

[Kristiina Leppänen]

It is, of course, a combination because we started in the -- at the end of Q3, both the improvements in place. I mean, the action plan. And we saw an outcome, mainly on the collection of the over dues. At the same time, what happened in Q4 when you talk about the seasonality is that we actually moved from POC receivables to trade receivables, but we were also able to collect those at the end of the year. Also, we saw improvement on the reduction of the inventories. And answer to your question, I mean it's possible, it was seasonal, but absolutely something that we carry on.

[Carl Ragnerstam, Analyst]

Okay. I have a couple of more actually, so I'll go on, if I may. So you reported nonrecurring items also, a EUR 19.4 million, of which EUR 18.3 million was impairment of goodwill. What was the EUR 1.1 million related to?

[Kristiina Leppänen]

Half of that was related to the management restructuring in few entities. And then also we did the revaluation on one of our assets in Norway.

[Carl Ragnerstam, Analyst]

Okay, great. And also you guide for better market in the medium term within Ports & Maritime. Will you remain with the current cost base until the market turns? Or how should I think about the cost side of that business?

[Mikael Norin, Group Chief Executive Officer]

Well, we have taken a hard look at our cost base that continues to be a focus area for A New Day. And of course, we're going to make sure that we don't build up cost until we see the activity in the market, and that activity translating into orders for us.

[Carl Ragnerstam, Analyst]

Okay. So that's -- will mean that you, you will have some cost cutting in the short term.

[Mikael Norin, Group Chief Executive Officer]

Well, we would keep an eye on our cost basis.

[Operator]

No further questions at this moment. Please go ahead. No further questions at this moment, sir. Please go ahead.

[Mikael Norin, Group Chief Executive Officer]

In that case, if there are no further questions, I would like to thank you for participating in today's call. And just to reiterate that we will have an Investor Information Meeting in Stockholm on April 11, and I hope that many of you, you will be able to participate in that. Thank you very much. Have a good day and a good weekend.

[Operator]

So that does conclude our conference for today. Thank you all for participating. You may all disconnect.