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Edited Transcript of CCC.ST earnings conference call or presentation 31-Jul-19 8:00am GMT

Q2 2019 Cavotec SA Earnings Call

LUGANO Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Cavotec SA earnings conference call or presentation Wednesday, July 31, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Glenn Withers

Cavotec SA - Group Senior VP & CFO

* Mikael Norin

Cavotec SA - Group CEO

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Conference Call Participants

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* Karl Bokvist

ABG Sundal Collier Introduce - Analyst

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Presentation

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Operator [1]

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Hello and welcome to the Cavotec Q2 report for 2019. (Operator Instructions)

So today, I'm pleased to present CEO Mikael Norin and CFO Glenn Withers.

Please begin.

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Mikael Norin, Cavotec SA - Group CEO [2]

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Good morning, everyone, and welcome to this audiocast.

My name is Mikael Norin. I am the CEO of Cavotec. And as usual, I have with me our CFO, Glenn Withers, today. And the topic of this presentation is the Q2 2019 Cavotec report.

Let me start by putting the report into context. At the beginning of May, we presented new financial targets for Cavotec at our Investor Information Meeting in Stockholm. And at that meeting, we spoke about how the turnaround of Cavotec is a 3-step process and how we as a result of this process are targeting to reach an annual adjusted EBIT margin of more than 7% within 2 years and more than 10% within 4 years as well as an annual organic revenue growth of at least 5% from 2020 and beyond. Now we spoke about how the first step is now concluded and how we have from the beginning of this year turned our attention to the second step of the transformation of Cavotec. And that is to locking in the improvements achieved during the previous 18 months, and thereby we can progress towards our profitability target. We're also this year laying the groundwork for the third step, and that is profitable growth from 2020 by focusing on commercial and operational excellence throughout the organization.

I have to say it is with this background very positive that our progress so far is tracking perfectly to this plan. And our adjusted EBIT increased to EUR 3.6 million for the quarter and close to tripled compared to the first half of last year to EUR 6.4 million. And this corresponds to a margin of 6.4% compared to 1.7% during the same period last year. And the fact that the profitability improved significantly for the second quarter in a row, we believe, is a strong sign that our measures in step 1 of the transformation are paying off. And Glenn will in a minute talk about our financial performance in more detail, but let me address one topic, and that is the variation in order intake and revenue when comparing to the previous period. Our performance in any quarter is impacted by the timing of large project orders and deliveries, and this is something we are used to. Now take the impact of timing of large orders on our order intake this period as an example. If we compare to the first half last year, we had several large orders across the divisions then. However, this did not repeat in the second half of the year, so the conclusion is that when it comes to large orders, 1 period should not be used as a predictive of future periods, be that in a positive or negative way. And we realize that this may be frustrating to you as investors, and we have a long-term plan to increase the share from our day-to-day business and to add recurring revenue from services, which will result in a more stable performance from quarter to quarter.

To support those plans, we have developed a large range of service products, from inspections to comprehensive maintenance agreements, to answer to the needs of the different markets in which we operate. And we can now offer complete solutions to cover the total life cycle of our products and systems. We launched a new IT service module in February, and that allows us now for the first time to manage the customer aftermarket experience in a fully integrated way. So from claims management to quote, to the dispatching of service technicians. And we will also be able to measure the performance and the utilization rate of our field technicians. And for spare parts, very importantly, we're developing repair kits per product and setting a worldwide pricing policy, which we have not had previously. All in all, we are building a service business that provides total life cycle support for our customers and an attractive return for us. And I have to say we're quite pleased with how the Services business is developing since the launch a year ago.

With that, let me now hand over to Glenn to talk about the quarter in more detail. Glenn?

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Glenn Withers, Cavotec SA - Group Senior VP & CFO [3]

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Thank you, Mikael, and good morning to all of you on the call and the Webex.

I'll start by talking about the order intake and which decreased when compared to the same quarter last year. You already heard Mikael talk about the variability that we can see from quarter to quarter, and this quarter really is no exception. I think the decrease that we see in order intake is more about last year's record order intake in the first 2 quarters, and it is about our current performance. To highlight that point, the order intake this quarter was only 3% lower than the last 12 months average order intake. Then looking at the second quarter on its own this year, the one thing that we can talk about that's different in the business is that, since the transformation, we are prioritizing quality in our orders in terms of scope, risk, delivery and commercial conditions. It was lower order activity during the second quarter in both of our divisions. [At least] we did see a pickup in June with several MoorMaster orders in Europe as well as several fueling orders in the U.S. And then the final comment on order intake is that our order book at the end of June was 7% higher than the one we entered the year with. And that -- when we compare that number of EUR 107 million to our order book history, it's actually at a pretty good level.

Then turning to our top line. Our revenues of EUR 51 million are up about 11% compared to the same period in 2018. And that increase comes from strong revenues within Ports & Maritime, particularly coming from good delivery performance on large orders, and then partly offset by a 3% reduction in Airports & Industry. If you compare that performance in the second quarter, it's almost the opposite story of the same performance in the same period last year, where we were reporting a strong Airports & Industry growth offset by a weaker Ports & Maritime performance. I think that outcome reflects the benefit of our diverse product range and also the impact of the timing of large orders and delivery that Mikael referred to earlier.

Then looking at our profitability and also repeating what or reiterating what Mikael said earlier, we're really happy to report that the adjusted EBIT increased to EUR 3.6 million. That corresponds to a margin of 7.1% in the quarter and it's significantly higher than the same period last year. The main impact to that higher margin comes from the run rate savings achieved from the restructuring program that we've talked about a lot in previous quarters, and that's led to an improved profitability on stable revenues. It also shows we are starting to establish consistency in our profitability moving from 1 quarter to the next.

EBIT for the quarter amounted to EUR 2.5 million and that corresponds to a margin just under 5%. This was compared to a loss of EUR 7.8 million during the same period last year. To explain a bit about that variation, in this quarter, we had EUR 1.2 million in costs related to the restructuring program that we announced at the end of last year. And in the prior year, we had no restructuring costs, but we took a one-off charge of EUR 6.8 million to reflect changes that happened at that time and the U.S. litigation that we've also previously reported.

Then turning to our cash performance. We had a net cash outflow -- or net operating cash outflow of EUR 10.6 million in the quarter. And that's a big change from our first quarter, where we reported a net operating cash inflow of EUR 8.1 million. The main reason for the net outflow this quarter was that we made a large one-off payment of EUR 8.1 million to satisfy the previously reported judgment in our litigation in the U.S.A. That payment was fully in line with the expectations that we had and also fully in line with the accounting positions that we reported at the end of 2018. Taking out the impact of this large one-off payment, in the first half, we achieved a positive operating cash flow that represents about 2/3 of our reported EBITDA.

At 30 June, we had EUR 16 million of cash on hand and approximately EUR 36 million of undrawn loan facilities. And capital expenditure in the second quarter was a little higher than our first quarter with some expenditure on equipment and fittings mainly inside Italy and the U.S.

And finally, to summarize our financial performance so far this year. We have a reasonable order book. We have stable revenues. And we have had much improved profitability coming from locking in the benefits of the transformation and restructuring programs. Excluding the impact of the U.S. litigation payment that I mentioned earlier, we also had positive operating cash flow in the half. And finally, we've started to show consistency in our performance, particularly with 2 quarters of consistent profitability.

With that, I would like to hand over again to you, Mikael.

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Mikael Norin, Cavotec SA - Group CEO [4]

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Thank you, Glenn.

Well, to conclude. As you've heard now several times, we are sticking to the plan that we have communicated now over and over again over the past few quarters. Our focus this year, 2019, is on locking in the improvements achieved during the transformation and investing in our profitable core to ensure that we embed the competitiveness that we need when we want to start the third step of our transformation in 2020, which is profitable growth. Now that strategy for future profitable growth is very clear for us. We will build on the position that we have in terms of mega trends such as environmental concerns, electrification and automation so that we can offer products and solutions that meet our customers' challenges in these areas.

So because of this, I am quite pleased with this report and the fact that at the half year mark for 2019 we are well underway to deliver on our plan for improved profitability this year, followed by a clear path to profitable growth in 2020 and beyond. We know the market is there. We are well positioned to capitalize on that because of our customer relationships and the offerings that we have.

And with that, that concludes our prepared statements, and we'd like to open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We take Karl Bokvist at ABG Sundal Collier.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [2]

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Obviously, a very, very positive indication to see the strong margin development. First off here, I mean, can you talk a bit about the situation in Italy and how that has impacted both your sales deliveries and your profitability this quarter?

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Mikael Norin, Cavotec SA - Group CEO [3]

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Karl, well, I think we reported already in Q1 that we are pleased with the progress that we have made in turning around the situation in Italy. You know that we were struggling with the new facility there during last year and to reconfigure that so that it was up to the maximum efficiency. We continue to see good progress in Italy in terms of quality in the deliveries and in terms of improved delivery accuracy and so on, so quite pleased with the progress. And of course, that together with the other efforts that we've undertaken during the transformation has really been part of this increased performance, this increased profitability that you've seen.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [4]

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Yes. Understandable here. And I mean the actual margin improvement year-on-year is impressively significant here, so I'm just a bit curious. How should we think about margin development for the second half given you guided for flat to declining sales? And I mean, if we just take the sort of similar development year-on-year, we would almost be close to the 7% margin target. So I mean, how should we think about then just continued development for the year?

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Mikael Norin, Cavotec SA - Group CEO [5]

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Yes. I think -- let me start, Karl, by -- and thank you for the question because I really like to address some of the comments I've seen this morning after we released the report by being clear that, first of all, we are not seeing a decrease in revenues for the year compared to last year. That's not what we're saying, but beyond that, we would really like to stay committed to the targets that we have given. And that is that we're going to focus on improved profitability in 2019 and profitable growth from 2020. And I -- we are -- as you can see, we are in good shape on that as we enter the second half. I wouldn't want to go beyond that right now.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [6]

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Okay. And then if we -- perhaps if we can just turn to orders and demand here. If we look at, for example, on a rolling 12 months basis, they are still -- I mean, if we look on a rolling 12 months basis for Q2, they are slightly down. When would you expect to see a return perhaps on to an increase in orders? Is that it has to do with strategy, that this will, hopefully, come back in 2020 when you turn more towards growth?

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Mikael Norin, Cavotec SA - Group CEO [7]

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Well, firstly, I think it's important to again stress what we talked about earlier here, that our order intake in any quarter often varies, right, due to large orders. And as I said, in 2019, the focus is on profitability. And we are going to continue to target quality in our orders. That's an important step in how we're building up our sales machine so that we can make sure that from 2020, as we said, it will be profitable growth in the future. We are committed to the idea that you need to have profitability at its core before you start growing. To grow first and then try to fix profitability, I think, is incredibly difficult and that's not our plan. And -- but I would also say that, looking at the start of Q3 now and particularly in Ports & Maritime, we are quite pleased with how we see the orders progressing so that we are -- and we are staying on plan. The -- I think also -- I mean just to maybe to get ahead of all the possible question from you, from someone else. I mean if we look at the market, the market trends, I mean, the question mark would be around industry orders for our large OEM customers. And we have obviously been following what several of them have been reporting recently about softnesses in their markets, but I should say that we have, however, not received any signals that, that would translate into lower orders for us yet.

And remember also, I think, Glenn mentioned that we are a fairly diversified business. And in our other market segments in Ports & Maritime and Airports we see continued good activity levels in the market, and I think how the ferry market is developing quite strongly is a good example of that. And I hope you've noticed the 2 new MoorMaster orders that we recently announced here. And we also see continued activity in Airports, with many terminal expansions planned not least in U.S. I think also that important to remember that whatever happens short term, we are incredibly well positioned when it comes to long-term market trends and environmental concerns being one of them. I think, in these days of record-high temperatures and heat waves across Europe and North America and so on, it's we're keeping cool because we know that we have electrification and automation solutions to help our customers as they are more and more grappling with these challenges.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [8]

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Perfect. That's very helpful. Perhaps a question more turning towards Glenn now. And I'm just a bit curious how one should think about further restructuring costs going forward.

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Glenn Withers, Cavotec SA - Group Senior VP & CFO [9]

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Yes. Karl, first of all, for background, we've talked about our restructuring program that we announced last year that would generate about EUR 10 million in annualized savings and cost one-off of about EUR 7 million. That's the background for the restructuring that we've been doing. We're still working on that restructuring program. As we've said before, 2019 is all about locking in the benefits of the transformation and the restructuring. So that -- about the cost, which was your specific question, we've already reported about EUR 2.5 million in restructuring costs in 2019 across the 2 quarters. So approximately half/half between the 2 quarters. I do not see that cost rate continuing from now is the direct answer to your question. A large proportion, a significantly large proportion, of the cost [has burned now]. And so I would expect much smaller restructuring costs in the coming quarters, much, much smaller.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [10]

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Okay. Perfect. And I apologies if there is anyone else on the line here, but just a final question from me here because I -- just out of curiosity really. I -- where do you see that the most benefits have come in terms of savings and margin improvement in the organization?

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Mikael Norin, Cavotec SA - Group CEO [11]

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I think the transformation that we've gone through in the last 18 months have 2 main headlines there. The first is what we called A New Day, which was really about efficiency across the organization in terms of processes and so on. And from there comes a general cost consciousness. The second part was what we called the restructuring program, that we looked at the very fragmented structure that the organization had and where we closed down noncore offices, et cetera and so on. So it's really a mixed bag, or you could say it's across the whole organization and across the whole value stream, Karl.

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Operator [12]

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(Operator Instructions) As there are currently no further questions in the queue, may I please pass it back to you for any closing comments at this stage.

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Mikael Norin, Cavotec SA - Group CEO [13]

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Well, thank you very much, and thank you for participating in today's call. And we wish you a good day and a good weekend eventually. Thank you.

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Operator [14]

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This now concludes the call. Thank you all very much for attending, and you can now disconnect your lines.