Strong cash flow the highlight of the corona year – enabling an increased dividend
Unless otherwise noted, the figures in brackets refer to the corresponding period in the previous year.
“Caverion’s adjusted EBITA improved in the fourth quarter compared to the previous quarters of the year. While our results have been impacted by the second wave of the corona pandemic, I am pleased with our ability to manage the crisis. We have continued developing our digital, smart technology and sustainability offerings across our divisions. At the same time, we have continued to root our performance management practices across the Group, increasing our competitiveness further. When the growth starts after the crisis, we are fit and well positioned to meet new customer demand. In the fourth quarter, our focus was on executing our restructuring and productivity improvements announced in the beginning of November. The resulting savings will be at least EUR 25 million for 2021.
Our order backlog decreased by 3.7 percent to EUR 1,609.1 (1,670.5) million in the fourth quarter. Order backlog increased in Services, whereas in Projects there was a negative impact from the downturn. The share of old projects started in 2016 or earlier was only 1.4 percent of the order backlog in Projects at the end of the year. The economic environment had an impact on both revenue and profitability. Project business revenue was also affected by our continuous selectivity approach in projects and the closure of our large projects business in Denmark. Our fourth quarter revenue was EUR 579.3 (589.0) million, down by 1.7 percent or 1.0 percent in local currencies. Measured in local currencies, the Services business revenue grew by 5.3 percent, while the Projects business revenue declined by 11.1 percent in the fourth quarter. The Services business accounted for 65.3 (61.5) percent of Group revenue.
Our fourth quarter adjusted EBITA was EUR 22.5 (33.7) million, or 3.9 (5.7) percent of revenue. In Services, although the demand environment remained rather stable, our ad-hoc works were impacted by corona. In the Industry division, the quarter saw a positive impact from earlier postponed shutdown services. In Projects, the pandemic continued to impact our productivity to a certain extent. The restructurings completed in the quarter also impacted productivity. EBITA was EUR 6.3 (22.5) million, or 1.1 (3.8) percent of revenue. EBITA was impacted by one-off restructuring costs amounting to EUR 7.7 million and write-downs on the last remaining major risk project in Germany totalling EUR 7.7 million. Compared to our earlier estimate being the end of 2020, the project is now expected to be completed by the end of the first half of 2021. The execution has been delayed due to corona and other reasons beyond Caverion’s control. Due to the potential negative effects of the downturn on project forecasts, we also made an overall critical assessment of our Projects business risks when closing the year. Measured by the start year of the project, our margin slippages in the Projects business have clearly decreased each year in recent years. Our risk exposure related to projects is smaller going forward due to various efforts we have made in project management, execution and financial steering.
Our cash flow was again strong and continues to be the highlight of the year. Our operating cash flow before financial and tax items improved to EUR 81.3 (80.6) million in the fourth quarter, despite being negatively impacted by previously postponed authority payments due to corona totalling EUR 6.8 million. Our liquidity position has remained strong and our leverage is at a record low level. All this enables an increased dividend proposal for 2020 compared to previous years. At the end of the fourth quarter, our interest-bearing net debt amounted to EUR 118.6 (168.4) million, or EUR -10.6 (31.5) million excluding lease liabilities. The net debt/EBITDA ratio was -0.2x (1.4x). Our cash and cash equivalents were EUR 149.3 (93.6) million. We made one small acquisition in Austria in the beginning of 2021 and are actively looking for further acquisitions.
Caverion published its sustainability targets during the quarter. The purpose of Caverion is to enable performance and people’s well-being in smart and sustainably built environments. Our target is to create sustainable impact through our solutions, with a positive carbon handprint 10 times greater than our own carbon footprint by 2030. Going forward, we are actively striving to make the sustainability impacts we enable visible and measurable to our customers throughout our offering.
The year 2020 was very demanding for our employees. We have focused on employee safety throughout the year and our teams have vigorously fought the virus and taken all necessary actions in their daily work. Fortunately, all of our infected employees have so far recovered from Covid-19. Our people have shown very strong performance and I want to sincerely thank all our employees for their hard efforts during this exceptional year.
Looking forward into 2021, our target remains to come out of the crisis as a stronger company than entering it. We expect the economic environment particularly in the first quarter still to be challenging. The second half of the year looks more promising. We expect that a significant amount of the governmental and EU-level stimulus packages will be directed towards sustainable investments enabling smart buildings and cities. Even if our general outlook for this year is positive and we expect to improve our performance, Caverion will only provide a guidance for 2021 once the level of uncertainty caused by the pandemic on Caverion’s operating environment and operations has diminished. Our mid-term adjusted EBITA margin target of over 5.5 percent (launched in November 2019) is valid and we see good opportunities to improve even beyond that in the future.”
The outbreak of the corona pandemic had a major impact on the operating environment in 2020. The overall market and demand situation started to weaken in mid-March. Thereafter Caverion experienced more workforce absences as well as more work site delays and closures especially in April-May. Most of Caverion’s operating countries were also locked down in the early part of the second quarter, after which government restrictions and the impacts on Caverion’s business started to clearly ease up in June. At the beginning of the third quarter, the corona pandemic was well contained in most Caverion countries, after which the second wave of corona became more visible at the end of the third quarter, again increasing the risk exposure. In the fourth quarter the situation was more stable compared to the second quarter, but the corona pandemic impacted operations more than in the third quarter. This was visible particularly in the Projects business, whereas the Services business remained more stable. On a positive note, Caverion did not experience any major constraints in the supply chain during the year.
In order to minimise the negative financial impacts from the pandemic on its operations, Caverion implemented cost saving actions and adapted its resources. In most of the operating countries, the key flexibility measures were the use of temporary lay-offs and the reduction of subcontracting. Furthermore, due to the lengthened corona crisis and the resulting downturn, Caverion carried out proactive streamlining and adjustments of its operations during the fourth quarter. These actions included personnel reductions, reorganisation and operating model development. Due to the increased uncertainty around the market outlook as a result of the corona pandemic, the President and CEO and the top management of Caverion also decided to voluntarily lower their compensation for 2020 in the spring of 2020.
The impacts of the first wave of the corona pandemic were more visible between mid-March and the end of May, at which time there were site access restrictions and less ad-hoc works, negatively impacting revenue and profitability. Government restrictions and the impacts on Caverion’s business started to clearly ease up in June. At the beginning of the third quarter, the corona pandemic was well contained in most Caverion countries, after which the second wave of corona became more visible at the end of the third quarter. In the fourth quarter, however, market demand in Services was rather stable and comparable to the third quarter. In division Industry, the corona situation postponed certain annual shutdowns in Finland until 2021 despite increased activity in the fourth quarter. Overall pricing environment tightened somewhat in Services as of the second quarter.
There was still a general increasing interest for services supporting sustainability, such as energy management and advisory services.
The impacts of the first wave of the corona pandemic were more visible between mid-March and the end of May. There were more workforce absences as well as more work site delays and closures. However, the previous order backlog supported the Projects business revenue in the second quarter.
At the beginning of the third quarter, the corona pandemic was well contained in most Caverion countries, after which the second wave of corona became more visible at the end of the third quarter. In the fourth quarter, there was somewhat further reduced business activity in Projects.
The demand for new construction projects was negatively impacted by the corona pandemic, however less for renovation construction. Pricing environment generally tightened in Projects as of the second quarter. Stimulus packages did not yet impact general demand during 2020.
A large part of Caverion’s services is vital in keeping critical services and infrastructure up-and-running. This includes ensuring the continued functioning of energy and transportation infrastructure, health facilities, pharmaceutical and food industries, food retail and logistics as well as facilities and services used by public authorities. An important share of these services needs to be performed regardless of the corona pandemic. Going forward, the economic stimulus packages provided by governments and the EU are expected to increase infrastructure, health care and different types of sustainable investments in Caverion’s operating area. There was however no visible impact yet from such new governmental or EU-level stimulus packages in the third quarter.
At the beginning of the third quarter, the corona pandemic was well contained in most Caverion countries, while the second wave of corona started to be more visible at the end of the third quarter, again increasing the risk exposure. The second wave of corona is currently leading to renewed lockdown measures also in Caverion countries and increasing the negative business impacts in the fourth quarter. Any further restrictions such as limiting industrial operations and shutdowns or temporary close-downs of premises or construction sites would further impact Caverion’s revenue level and also profitability.
The corona crisis has led to a global downturn, but it is still unclear how deep and how long the downturn will be and what will be the speed of the economic recovery. The business volume and the amount of new order intake are important determinants to Caverion’s performance going forward. While the digitalisation and sustainability megatrends are in many ways favourable to Caverion, a global downturn will most likely negatively impact the general level of demand and the pricing environment also for Caverion’s offering. Most likely the demand for new construction projects will decrease, but there may also be an impact on smaller ad-hoc services and projects.
The corona crisis and the resulting downturn may also promote additional demand and new opportunities for some of Caverion’s solutions. As an example, remotely controlled buildings are helping customers to save time and money, but also enable to operate the buildings more safely. Special requirements also apply to ventilation and air-conditioning systems, increasing the demand for ventilation related upgrades based on new guidelines and requirements.
Despite corona and its economic effects, the overall megatrends in the industry, such as the increase of technology in built environments, energy efficiency requirements, increasing digitalisation and automation as well as urbanisation remain strong and are expected to promote demand for Caverion’s services and solutions over the coming years. Especially the sustainability trend is expected to continue strong. Increasing awareness of sustainability is supported by both EU-driven regulations and national legislation setting higher targets and actions for energy efficiency and carbon-neutrality.
The corona crisis and the economic downturn are in general expected to impact the demand environment negatively in Services, especially in ad-hoc services and small service projects. However, Caverion’s Services business is by nature more stable and resilient through business cycles than the Projects business. As technology in buildings increases, the need for new services and digital solutions is expected to increase. Customer focus on core operations continues to open up outsourcing and maintenance as well as technical building management opportunities for Caverion. In some cases, the demand for smaller ad-hoc work in empty buildings may also increase. There is a continued interest for services supporting sustainability, such as energy management. In Cooling, there is a technical change ongoing from F-gases into CO2-based refrigeration, providing increased need for upgrades and modernisations. Stimulus packages are also expected to gradually impact general demand in the Services business.
The corona crisis and the economic downturn are in general expected to impact the demand environment negatively in Projects. Most likely the demand for new construction projects will decrease, but on the other hand, renovation construction is expected to continue increasing. The current circumstances also allow doing repairs and many types of installation projects for unoccupied properties and sites. From the trends perspective, the requirements for increased energy efficiency, better indoor climate and tightening environmental legislation continue to drive demand over the coming years. Stimulus packages are also expected to gradually impact general demand in the Projects business.
Guidance for 2021
Caverion will provide a guidance for 2021 as soon as the level of uncertainty caused by the pandemic on Caverion’s operating environment and operations has diminished.
Order backlog at the end of December decreased by 3.7 percent to EUR 1,609.1 million from the end of December in the previous year (EUR 1,670.5 million).
At comparable exchange rates the order backlog decreased by 3.5 percent.
Order backlog increased by 0.7 percent in Services compared to the previous year, while it decreased by 8.8 percent in Projects.
In the second half of the year, the impacts of corona were more visible in the Projects order backlog.
Services business order backlog was less affected by corona during the year.
Caverion’s liquidity position was strong and Caverion had a high amount of undrawn credit facilities on 31 December 2020. Caverion’s cash and cash equivalents amounted to EUR 149.3 (93.6) million at the end of December. In addition, Caverion had undrawn revolving credit facilities amounting to EUR 100.0 million and undrawn overdraft facilities amounting to EUR 19.0 million.
The Group’s gross interest-bearing loans and borrowings excluding lease liabilities amounted to EUR 138.7 (125.0) million at the end of December, and the average interest rate was 2.7 (3.0) percent. Approximately 46 percent of the loans have been raised from banks and other financial institutions and approximately 54 percent from capital markets. Lease liabilities amounted to EUR 129.2 (136.9) million at the end of December 2020, resulting to total gross interest-bearing liabilities of EUR 267.9 (261.9) million.
The Group’s interest-bearing net debt excluding lease liabilities amounted to EUR -10.6 (31.5) million at the end of December and including lease liabilities to EUR 118.6 (168.4) million. At the end of December, the Group’s gearing was 60.4 (73.6) percent and the equity ratio 18.9 (21.5) percent. Excluding the effect of IFRS 16, the gearing would have amounted to -5.4 (13.7) percent and the equity ratio to 21.5 (24.6) percent.
Caverion raised a 5-year TyEL pension loan of EUR 15 million on 29 April 2020.
On 15 May 2020 Caverion issued a EUR 35 million hybrid bond, an instrument subordinated to the company's other debt obligations and treated as equity in the IFRS financial statements. The hybrid bond does not confer to its holders the rights of a shareholder and does not dilute the holdings of the current shareholders. The coupon of the hybrid bond is 6.75 per cent per annum until 15 May 2023. The hybrid bond does not have a maturity date but the issuer is entitled to redeem the hybrid for the first time on 15 May 2023, and subsequently, on each coupon interest payment date. If the hybrid bond is not redeemed on 15 May 2023, the coupon will be changed to 3-month EURIBOR added with a Re-offer Spread (706.8 bps) and a step-up of 500bps.
The previously outstanding EUR 66.06 million 2017 Hybrid Capital Securities were redeemed in full on 16 June 2020 in accordance with their terms and conditions.
In June a one-year extension option to move the maturity of RCF (100M€) and term loan (50M€) from 2022 to February 2023 was utilised.
Caverion’s external loans are subject to a financial covenant based on the ratio of the Group’s net debt to EBITDA. The financial covenant shall not exceed 3.5:1. At the end of December, the Group’s Net debt to EBITDA was -0.2x according to the confirmed calculation principles. The confirmed calculation principles exclude the effects of the IFRS 16 standard and contain certain other adjustments.
The Group’s operating cash flow before financial and tax items improved to EUR 157.6 (143.7) million in January-December and cash conversion (LTM) was 158.5 (139.5) percent. The Group’s free cash flow improved to EUR 137.3 (74.0) million. Cash flow after investments was EUR 127.8 (64.5) million.
In October-December, the Group’s operating cash flow before financial and tax items improved to EUR 81.3 (80.6) million. Cash flow was negatively impacted by previously postponed authority payments due to corona totalling EUR 6.8 million paid in the fourth quarter. The final postponed authority payments totalling EUR 3.3 million will be paid in in the first half of 2021. The Group’s free cash flow was EUR 76.9 (24.4) million. Cash flow after investments was EUR 74.2 (21.4) million.
The Group’s working capital improved to EUR -160.4
(-100.9) million at the end of December. There were improvements in all divisions except for Industry compared to the previous year. The amount of trade and POC receivables decreased to EUR 506.5 (527.2) million and other current receivables to EUR 30.2 (32.6) million. On the liabilities side, advances received increased to EUR 252.2 (216.2) million and other current liabilities to EUR 273.3 (269.2) million, while trade and POC payables decreased to EUR 188.0 (194.1) million.
There have been no material changes in Caverion’s significant short-term risks and uncertainties compared to those reported in the Half-year Financial Report 2020. Those risks and uncertainties are still valid.
The impacts of the corona pandemic and the consequent economic downturn on Caverion, and the actions taken by the company are summarised separately after this section and described earlier in the report in the “Market outlook for Caverion’s services and solutions” and “Operating environment in the fourth quarter and in 2020” sections.
The first wave of the corona pandemic and the consequent economic downturn negatively impacted Caverion’s business in 2020. After major impacts in the second quarter, the impact reduced and was more limited during the third quarter, with somewhat increased impacts again in the fourth quarter.
The second wave of corona was visible in the fourth quarter of 2020, again increasing the risk exposure. The second wave of corona led to renewed lockdown measures also in Caverion countries and somewhat increased the negative business impacts.
Caverion’s business is exposed to various risks associated with corona and the economic downturn. These include, for example, suspension or cancellation of existing contracts by customers, lack of demand for new services, absenteeism of employees and subcontractor staff, closures of work sites and other work premises by customers or authorities and defaults in customer payments.
Apart from its immediate effects, the corona pandemic has also led to a global economic downturn, which in many areas can negatively impact the general demand and the pricing environment also for Caverion. However, a material part of Caverion’s offering is of such nature that customers will need these services also during a downturn.
It is still unclear how long the corona pandemic will last, how deep and long the consequent downturn will be and what will be the speed of the economic recovery. The business volume and the amount of new order intake are important determinants to Caverion’s performance in 2021. Large-scale vaccination against the corona virus is expected to improve the overall risk situation going forward. Caverion estimates that the first half of 2021 will still be negatively impacted by the corona pandemic, after which the operating environment is expected to improve.