Earnings Call: Q4 2020

Feb 26, 2021

Good morning, everyone, and welcome to this audio cast. As you heard, my name is Michael Noren. I'm the CEO of Kavatech, and I have our CFO, Glenn Withers with me today. And the topic is our Q4 report for 2020, so Cavatec's Q4 report. As we all know, the 2nd wave of COVID-nineteen resulted in partial lockdowns in many places around the world in the Q4 of last year. And this means that the market situation continued to be challenging for us, including delayed decision making by customers and postponed projects in our markets. Now we believe that we managed this Situation well though considering. In the quarter, we generated slightly higher revenue and EBIT versus the Q3 20 while the operating cash flow was considerably stronger. Our financial position continues to be strong, and we are well positioned to both handle with the current situation and to invest in the future. Now Glenn will elaborate more on our financial results in a minute, Let me first talk about how we see market growth returning when the pandemic is under control. The thing is that Despite the depressed business climate at the end of last year, we continue to be optimistic about the future. We remain committed to developing solutions that contribute to improvements in efficiency and productivity, while at the same time reducing environmental impact. We call these profitable sustainability solutions. We actually see the pandemic making key trends of efficiency, safety and sustainability that our solutions address more relevant and EPIR. Underpinning our optimism is some of the orders we won in the quarter that reinforces our leading positioned in the growing market for profitable sustainability solutions for the maritime sector. For example, we won automated mooring and automated e charging systems for the world's first fleet of 0 emission autonomous battery powered ships in Norway to Asko. I'm convinced that this project will be talked about in the future as the breakthrough step towards a fully autonomous maritime supply chain. In the coming years, I believe we will see a proliferation of on a shipping and 0 emission technologies being introduced in the maritime world. And talking about new technologies, we were really excited to book 2 orders in quick succession for our next generation automated mooring system, Moormaster NXG, so soon after the global launch in October. I think this is a testament to how Moore Master can revolutionize the way ships Enter and Lea Ports, with mooring in as little as 30 seconds to drastically reduce docking time. That leads to increased loading and offloading productivity in the port. And from an environmental which results in an hour less of heavy diesel emissions for every ship and every moor in sequence. Now our optimistic view of the future also means that we, despite the current headwinds, increased our investments in developing our Technology and Products. And in October, we announced that we will open a new innovation center in the Netherlands at the beginning of 2021, focusing on profitable sustainability solutions. And this will bring together the capabilities that we have within areas such as official intelligence, remote connectivity, high power, high speed electrical charging and battery technology. And I think with this introduction, let me hand over to Gilen to talk about the Q4. Thanks, Mikael, and good morning, everyone. As As you heard earlier, we continue to experience longer lead times to close the deals with our customers. Nevertheless, we did win several significant orders in the quarter. And in addition to the ones that Mikhail already mentioned, In particular, we secured orders for 2 separate Moore Master Systems in Australia and New Zealand. In aggregate, they were worth about €6,500,000 In addition to that, we also won several airport gate refurbishment projects in the USA during the quarter. The COVID effect, however, resulted in our order backlog decreasing 7% during the quarter. We ended at €85,000,000 In Ports and Maritime, the backlog was 3.5% lower, While in airports and industry, it was 11% lower prior to compared to the prior quarter. Now turning to revenue, it decreased 15.7% in the Q4 compared to the same period previous year and we finished at 40 €1,000,000 This is mainly as a result, as I mentioned earlier, of delayed projects related to the 2nd wave of COVID-nineteen And the continued partial lockdown in some markets that we experienced during the quarter. In a division level, revenue for Ports and Maritime Decreased to €17,800,000 That's a drop of 20% compared to the same period previous year. While on Airports and Industry, the revenue decreased 11% compared to 2019. Now that decline in Airports and Industry, if I split it Between airports and industry, we were down more in airports, while in industry, the profile was relatively stable Quarter on quarter. Despite those reductions, adjusted EBIT remained positive for the Q4 at €1,000,000 This corresponded to a margin of 2.5% compared to 11.8% in the same period of last year. The positive result again proved that our efforts to restructure our operations in the past Has improved our flexibility and our resilience to changes in volumes. In the quarter, we also continued to invest in the future and we incurred costs of €1,900,000 in relation to our plan to accelerate the development Products and Growth in the Forza Marathon sector. Including these one off costs, We reported a loss of €900,000 in the quarter. Something that also affected us in the quarter in a substantial way was the strengthening of the euro against the U. S. Dollar, especially towards the end of 2020. And this resulted in an FX loss of €3,300,000 in the quarter, which was €1,100,000 Negative swing versus the same period last year. I will point out though that virtually all of this impact It's due to unrealized balance sheet currency translations. I previously talked about The importance of a consistently profitable cash generating based business in Cava Tech. From the beginning of 2020, we focused A lot on our processes, follow-up and consistency. As a result, we've previously reported 3 consecutive quarters of positive and improving operating cash flow despite the significant top line impact from the pandemic. I'm happy to report that the Q4 was no exception to this and we reported a positive cash flow of €9,600,000 in the quarter, which was 7% higher than the previous year and for the full year represented about 116% of EBITDA. Cash flow from investing activities was €2,200,000 mainly due to investments in research and development for new products in Ports and Maritime. And you've heard us talk about those investments in the last few months. We closed the year with a cash balance of €19,200,000 up €6,000,000 during the year. This means that we're well positioned to continue to invest in future growth. And with that, Mikael, I'd like to hand back to you. Thank you very much, Glenn. For us as a management team, We remain very much optimistic about the future, as I said in the beginning of this presentation. But for us, it means that in the short term, We have to have one foot on the brake pedal and at the same time the other on the accelerator. So what we try to do is we have to both handle the short term market challenges due to COVID by controlling our costs and I think we've done a pretty good job of that. But simultaneously also to continue to invest in further strengthening our market positions, so that we are prepared for the expected recovery and growth in our markets. And I believe that behind the headline numbers in this report, we have shown in Q4 and during the year that we are very capable of doing just that. So in summary, we are more committed than ever to investing in profitable with Sustainability Solutions, so that we can take full advantage of the expected increase in demand as soon as the world returns to a more normal We have a lot of exciting things planned for the year ahead. So I hope that you stay tuned. And with that, I'd like to thank you for your attention so far. This concludes our prepared statements, and we're ready to open up for questions. Our first question comes from the line of Karl Bucharest of ABG Sundal Collier. Please go ahead. Thank you. Good morning, Mikael. Good morning, Glen. So let's perhaps start off. I think in the outlook statements of some other companies out We tend to see a sort of at least a sequential improvement in customer sentiment out there, even though it's, of course, still highly uncertain due to the pandemic. So I mean just to hear your flavor on whether or not you feel that Customers are getting a bit more optimistic about the future. Do you feel that in your end markets that It's just a similar type of appetite for investments as it was perhaps in the early fall or just to understand How your customers are viewing the situation? Well, thank you, Karl. I think we need to separate that question into our 2 different business areas. And we start with Ports and Maritime. We definitely see a lot of growing interest in these type of solutions that we offer. So our customers are trying to find solutions that Both increased productivity and simultaneously offer sustainability because of the pressure that they are on to improve in both of those areas. So we have a lot of positive interest from the market for that and we think that we're very well positioned. It may not look like that in the report today, but as I said, there's a lot of interest, a lot of conversations going on. Now airports, as you know, it's still a market that is heavily impacted by the COVID situation. And due to the uncertainty around the future passenger volumes, we see that the airports, which are They are the end customers for our solutions. They're still very hesitant to commit to new investments. We haven't seen any projects that we plan for the future to be canceled, but they keep being pushed into the future. So it's Really a story of 2 different a tale of 2 different stories. Understood. And just to get a sense of typically in Q4 For a company of your business, I can imagine that as you had the prior year that you had a bit of a good mix In terms of services and a bit of deliveries towards the end of the year, so I think you mentioned that services now are roughly 22 Percent of sales. And I think it was 20% or something like that last year. So just to understand, I mean, would Do you feel that services could have been even higher or services also impacted by COVID, for example? Well, services has been impacted during the year, Carl, because of travel restrictions, so that repair jobs and maintenance jobs and so on are very difficult for us to undertake with our customers as they come in. We have mitigated that by developing remote ways of conducting service with cameras and stuff like that. So I think the service team has done a really good job of that. And honestly, we're very encouraged by the fact that services continues to develop in a positive way and especially when it comes to long term service agreements for the installed base that we have. As you mentioned in the quarter, now services represent almost 22 percent of revenue. But what is interesting is that if I look at the portfolio of long term Service contracts that we have now, if we take like an annualized value of that, that actually grew 36%. That's still from a modest base, but We see us progressing on that quarter after quarter. So that is very positive, I think. And it shows that what we're doing and how we are Setting up the whole services organization is something that our customers are reacting very positively. Understood. And two more questions from me. The first This one has to do with you continue to or we continue to see a reduction in your Personnel base. Now part of this already has to do with your prior programs. But in case demand recovers quite Substantially, let's say revenues could return in a year or so to the kind of level we saw in 2019. Do you feel that With the lower personnel base, you still have the ability and capacity to handle those sorts of volumes. Well, what we did in during the transformation, Karl, is that we rebalanced our workforce so that we Have a base of permanent employees. And then on top of that, we have permanent employees so that we can flex with demand, and that's exactly what we've been able to do. That's one of the reasons that we've been able to react in so forcefully and in a fast way to the situation during COVID. So this is also what we will do when demand returns. We'll be able to add on top and temporary staff to be able to flex again without locking in That costs permanently for labor. Understood. And my final one has to do with What you call growth investments, euros 1,900,000 into growth investments within ports. What kind of Items are do these relate to? And since you called them a one off, how should we think about the possibility of Even more investments in the future. Yes. Let me start with Commenting on sort of why we're doing this and then Glenn can talk about the forecast spending for the future. But The interest in the market that we're experiencing now, the growth in interest and when it comes to these 2, efficiency, sustainability, workplace safety and so on. And we believe that we have a window of opportunity now to really solidify our leading positioned in some of these segments. So that's why we you've seen that we have reinvested, as we call it, our some of our earnings into and this is into sales, Marketing, industrial design, turnkey capabilities and so on. It's really to move our position up to the next Level in the market and so that we can be way ahead of our competitors when then these opportunities crystallize. And as you see then, that meant that in Q4, we spent about SEK1.9 million in OpEx related to these activities. Glenn, do you want to add something to that? Yes. Hi, Karl. I think that was a pretty good summary of it. The only thing I would add on top of that Is that I don't expect that level of expenditure to occur in Q1, the quarter we're in now. So Just to address the one off investment side of it, that's really the majority of that's happened already in Q4. And looking further ahead, I think it's more linked to what we've said earlier in the call that we remain really optimistic about The future and we're going to continue to invest over time in developing those profitable sustainable solutions For our customers, let me talk to that. Yes, understood. So going forward, it's more about stepping up investments in your regular Operations, regular OpEx, so to say, it's not that you will separately disclose it as nonrecurring items Some sort of things like that, I can imagine. It's more of a type of attributable to the ongoing business. Yes, correct. Okay. Perfect. Thank you. Thank you, Carl. And our next question comes from the line of Josh Schlescher of Kiel Investments. Please go ahead. Yes. Good morning, and thank you for taking my call. Regarding radio remote control, we're seeing Algon being acquired. And we also see that most of that market is actually operated by independent radio remote control Producers. How do you see your own position within that area? And could you Briefly talk about why you should not divest your own RRC unit. Thank you. Thank you. I'm going to start with the last part of your questions. And obviously, we don't comment on And in divestments or acquisitions until we decide to do those, and we have no plans about divesting radio remote controls. Radimotor controls for us is in many ways an enabler for the other products that we have in our portfolio. This is how we remotely control a lot of the other solutions that we have. And it's Important for us as the demand from the market to be able to manage equipment and systems more remotely. There's a trend in the market to move operators away from the actual workspace because of safety issues and other issues. So it's really enablers for us and the systems that we and develop our customized solutions. So we're not in the market for sort of mass and volume solutions that some of the other radar remote control companies may be. Excellent. Thank you. And if I could follow-up on that, could you say something about The level of revenues that you are generating from the ROC market? We don't report that separately. It's part of our Airports and Industry Business. Okay. Thank you. Thank you. And we have no further questions on the line at this time. Please go ahead, speakers. Well, in that case, I would like to say thank you very much from us for Your attention today, we wish you a very good Friday. And as I said before, we have a lot of exciting things It's planned for this year with Kavatech. We remain very optimistic about the future. I hope that you stay tuned and keep following us. Thank you very much.