Thank you for standing by, and welcome to the Cargotec Corporate Q4 2014 Interim Report Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you this conference is being recorded today, Tuesday, the 10th of February, 2015. I would now like to hand the conference over to your speaker today, Paula Liimatta. Please go ahead.
Good morning, ladies and gentlemen, welcome to Cargotec's conference call on December 2014. My name is Paula Liimatta, I'm Head of Investor Relations. Today, we have a live audience here in Helsinki, as well as people on the phone lines. We will start with the presentation by our CEO, Mika Vehviläinen, and CFO, Eeva Sipilä. After that, we will begin a Q&A session. Mika, please.
Thank you, Paula. Good morning from my behalf as well. Welcome to the Q4 2014 results announcement. I will cover first the highlights, and then I will hand over to our CFO, Eeva, who will then cover the performance by business area more in detail. As usual, we started orders. Orders on year-on-year declined on Q4 by 5 percentage points, I would highlight that I would not read anything into that one. First of all, EUR 914 million is still quite satisfactory level. We had a few very large sort of system and project orders at the Q4 2013. We did not record similar large one-time orders. This quarter, I would say the rest of the business, actually, the order intake was at healthy level.
We also see that the beginning of the year has been very healthy, and the demand outlook looks very promising for the 2015 as well. Overall, throughout the year, obviously, our orders have been increasing. All of three our business areas have actually had an increase in their orders throughout the 2014, we ended up with an order book of EUR 2.2 billion, which is up 11% compared to the 2013. The sales grew about 5 percentage points, including the acquisitions in there. Actually, without the acquisitions, the sales would have been relatively flat in there. MacGregor sales started to increase. Actually, we had a first time for quite a number of years, we actually started to see the organic growth of the MacGregor returning.
That was the first cubic organic growth for a number of years, and Eeva will talk more about that one in detail in a moment. We had a significant improvement in our operating profit, and it's very clear that the work that has been done in our organizations regarding the profit improvement, both in Kalmar and Hiab, is now paying dividends. The results are coming through as well as we obviously had a sort of good volumes and a healthy delivery mix in MacGregor as well. Again, Eeva will talk about the business area performance in detail in a moment. Operating profit as well, a significant improvement from the same time last year. We also announced earlier this week a new operating model for Hiab.
We are sort of very satisfied with the profit improvement plans and the acceleration of profitability in Hiab, and we felt that this is the right time now to move to the next phase. In addition to driving further profitability, the new organization will also facilitate better focus for the business and enables us to seek for further growth in the business in addition to the profit improvements as well. The dividend proposal, we come back to that one in a moment as well, is EUR 0.55 a share for this spring. If you look at then the whole year numbers, again, I said, orders up by about 9 percentage points throughout the year. All three business areas actually had a positive profit, order intake and increased their orders throughout the year.
The order book is up by 11 percentage points by the end of the year. The revenues increased somewhat by 6 percentage points. That increase came primarily through the acquisitions of MacGregor. Then in the Q4, the actually organic growth of MacGregor, the sales in Kalmar and Hiab declined a little bit. Again, operating profit was not satisfactory. If you look at the whole year, we still had a few issues, as you well know, especially in Q2, related to large project cost overruns.
Those are now behind us. The work we have done in terms of the profit improvement plans in Hiab and Kalmar and the pro-programs that are now on-ongoing in MacGregor are starting to yield results, and hence we had a significant improvement already visible partly in Q3 and then very well visible in the Q4 numbers. The cash flow from the operations was satisfactory in Q4, not quite at the same level as it was last year. Overall, we have been putting more focus on that one, and the annual cash flow is clearly improving. We are able to generate sort of positive cash conversion in our business, and that's also visible in our balance sheet as well.
Our net debt dropped to the close to EUR 700 million from well above EUR 800 million in last quarter, and our gearing is actually now below 60% as well. Overall, we are very satisfied with the progress we are making at the moment in Cargotec. With that one, I'd like to hand over to Eeva.
Thank you. Good morning everyone on my behalf as well. Going into the performance a bit more in detail. You see here on the left-hand side, the quarterly book-to-bill as our CEO already mentioned, a healthy order intake in the quarter and a good boost in sales. We're obviously happy for being able to sort of have very successful deliveries in the quarter, which then helped to take the profit also to the 7.4% level, and basically a sum of all business areas, all business areas delivering and with no sort of negative issues on hampering the performance. Looking first at MacGregor.
The chart I think is a very good illustration of the long lead times in the industry. This was the Q1 of organic growth we've seen in three years. At the same time, it was a quarter when there was a lot of turbulence and discussion around oil price. Nevertheless, we booked EUR 300 million worth of orders. And obviously the outlook going ahead is somewhat uncertain, but the fact remains that we have an order book that is up 50% from a year ago. So we're quite happy with the situation with which we start 2015.
Focus, focus in MacGregor is obviously on the internal improvement measures now going ahead, which we discussed already in the previous quarter. Good to note that the operating profit numbers in the graph are including all M&A related issues. The numbers do include the one-offs as well as the PPA costs. The only thing excluded is a small amount of restructuring costs. Going into Kalmar. Here, obviously the market situation is healthy. We've had good, a good solid growth in container throughput globally, and that is supporting the replacement business in imports throughout.
What was nice to note that we had a clear positive impact in the US from distribution center industry demand, supported by the economic improvement there. Actually Q4 was a positive quarter in Asia, which has been slower earlier in 2014, mainly Southeast Asia. Order intake was up 6%. Sales, we had a very tough comparison, so I consider the EUR 452 million quarterly sales a very good achievement. As said, we are now moving ahead closing the chapter of the project losses and hence we're being delivering on a satisfactory level, 7.6% margin for the quarter.
There's still work to improve, but we're happy with the improvement we've seen in both the mobile equipment business as well as the service business in 2014. Moving on to Hiab. Hiab was actually our best performing business area in the quarter as well as for the full 2014. Here it's, we can't really talk about market support. It's, the demand has been satisfactory. US has compensated for a flat or weak-ish Europe and the US outlook does look promising going ahead as well.
We, if you look at the quarterly order intake, it's good to note that the Q2 peak is explained by two big military orders, which are a bit bulkier and come or go. In that sense, the normal business has been, as said, flattish. In the circumstances where Europe has been, we're quite happy with that. Profitability is obviously our main delight. 8.4% is a good achievement and the business is moving well towards its 10% target that we have set for the business for 2016. The restructuring costs in the quarter were a bit high.
That was due to the fact that we closed now finally the Hudiksvall operations, which obviously is an important milestone in the Q4 as well. Now Hiab starts this year with a very competitive supply footprint. With that, looking then on the group level figures is again, cash flow as our CEO already mentioned, it was a good quarter. Thankfully a more stable, somewhat of a more of a stable year compared to 2013, but certainly going into 2015, we focus still very much on cash, especially in inventories accounts receivable, and we would hope to deliver an even more stable performance on this side in order then to further continue to deleverage the balance sheet.
The pie charts are not really much of a change. Obviously, the MLS acquisition is visible in the MacGregor increase in the share in Cargotec sales. At the same time, you do see a slight increase in the Americas. The obviously the increase in Kalmar and Hiab was more significant. Because Americas is not really a market for the shipbuilding business or for MacGregor, hence so, that on the group level diminishes the impact somewhat. But it's a good geographical balance going ahead. With that then really the earnings per share EUR 1.11 for the year. You may note that we had somewhat higher financing costs in the Q4.
This was due to an early repayment of Hatlapa capital loan. In conjunction with the acquisition of Hatlapa, there was a capital loan structure built which would have fitted the separation of MacGregor plans earlier. Now in the current circumstances, we felt it best to repay it early and that was a EUR 4 million expense in the quarter. Then obviously going into 2015, we're back on below 3% average debt cost and hence the, you will see the financing cost going down. Tax rate of 27% and then that as said is then the outcome is EUR 1.11 per share. The board proposal for the B share dividend is EUR 0.55 and EUR 0.54 for the A shares. With that, I leave it back to our CEO, Mika, please.
Thank you, Eeva. Just to sort of going back to the Cargotec Must Win Battles that we discussed and announced the renewal of them in the connection of our capital market days a few months ago. The top five sort of focus areas for us as a corporate are obviously still driving the Hiab. Now, of course, aiming for the best in class profitability and capital return, and I would say we are well on the way achieving the targets. With the new organizational structure, I think the focus and effectiveness of organization to drive the growth as well will be in a good shape. Obviously in MacGregor, number of internal programs that are now aimed for improving our profitability over the cycle.
In Kalmar's case, the single largest business in Cargotec is still the mobile equipment business, and we want to ensure that we remain highly competitive on that one. I'm very pleased with the performance last year. We were able to maintain our leading market share of roughly 40% globally on the business, while we at the same time improved the margins of the business as well. One of the bigger upsides in the coming years overall for Cargotec is definitely further development of our services business, both in terms of sort of revenue, but especially in terms of improving our profitability and quality of the operations, especially through for MacGregor and Kalmar.
We have actually changed the services divisions leadership in all of the three business areas, and this will be very much in our focus area now moving forward. Last but not least, driving growth in automation in Kalmar. Kalmar's has an undisputed leadership when it comes to the port automation at the moment. Many of the ports that Kalmar has been now automating all over the world in Australia, in US, and in Europe, are actually already sort of in commercial use or are actually coming into the commercial use during the 1st half of this year. We actually see the pipeline and interest towards the automation overall increasing all the time. We are quite optimistic about further development in the port automation business as well.
In terms of the outlook, we expect our sales and revenues to increase from 2014 into the 2015. This will be obviously helped by the increased backlog of roughly 11%, up to EUR 2.2 billion. We overall see the market conditions to be quite favorable for us. We expect the US economic recovery and growth to continue quite strongly. Nearly 40% of our business in Hiab is coming from the Americas, and well over 30% of the Kalmar business is also coming from the US With the Europe, although there are sort of, I would say, weak signs of some recovery and especially some markets, are actually looking quite promising. I think the UK truck registration was up 37% or so in January.
Overall, we are not counting on the European recovery for this year, and our market look is still flattish. We just have to wait and see how things develop in there overall. We also expect that the profit improvement programs that are tracking according to our targets are delivering to those EUR 40 million improvements we were seeking for both Kalmar and Hiab by the end of 2015. Hence expect our profit improvement and profitability increase from 2014 to 2015 as well. With that, I'd like to thank you, and I think we are open for questions, Paula.
Yes, thank you, Mika and Eva. We are now ready for your questions. As before, we start with the questions here in Helsinki. Please state your name and company before your question to benefit the other participants.
[inaudible] of Pohjola Bank. A few questions about MacGregor. Could you discuss a little bit about the offshore outlook and situation? What kind of feedback you get at the moment from the customers?
Yeah, I think there is a lot of concerns over the offshore situation. I would not claim that we will be immune for that one. I, again, I don't think the situation from our point of view is necessarily quite as dark as some people make it believe. Most of the equipment we actually deliver goes to the production and support phase of the offshore. First of all, the cycles are extremely long. The equipment we deliver for the ships at the moment are going to the oil fields where the decisions on the production have been done five or even 10 years ago. When the oil companies now are cutting CapEx and for example not necessarily starting a new field development, the impact of that one will not be visible in our business for many, many years.
When you look at offshore industry generally, I think the companies that are at the forefront of the new development and production, such as the exploration and drilling are seeing according to what we hear or impact of the slowing down because of the sort of, spot that we are serving, which is as a primarily around the support of the existing operations. Our actual activity level and order intake at the moment is still at healthy level. Obviously the one question is that, where does the oil go? The price has already, as we know, recovered somewhat from the lower points as well, and starts to be again sort of, commercially feasible for at least some of the offshore productions at this current level.
That said, we are not pretending to be entirely immune on that one, and we're obviously taking measures to be prepared for potential downturn there. If there will be a further sort of a slowdown of the investments and oil price would go even further down on that one, the numbers would be first visible for us, probably in order intake towards the end of the year and then potentially start to have an impact on 2016 revenues. At this stage, we are still quite comfortable with what we are seeing in there.
Okay. What about the margin in new orders coming from offshore segment at the moment?
No significant change on that one either.
The last one, if I recall right at the capital market date, you indicated that the MacGregor margin could be this year around the level we saw last year.
Mm-hmm.
It was 5.2%, and this would mean that this 8% in Q4 is not yet sustainable. Is that the right conclusion?
Well, the 8% in Q4 was a result of course, of volumes. Obviously we expect the volumes to increase into the next year as the backlog is quite strong. Also fact that it was sort of clean from the deliveries point of view, whereas in the Q3 of course, we had abnormally low sort of margin because there were issues with the very poor profitability deliveries. As such, I think where we are expecting to land in MacGregor this year is somewhere between the results of the last year and we are not going to reach this 8% either. If you put numbers somewhere in between those two, you're probably fairly at the right level.
Are there any other questions from the Helsinki audience? If no, operator, please, we can start taking questions from the conference call participants, please.
Thank you. Your first question comes from the line of Antti Suttelin. Please go ahead.
Yeah, thank you. On MacGregor, could you talk about? I didn't quite understand. We are seeing that the order intake was down 16%, the reported, and I think 46% on an organic basis if we exclude the impact from acquisition. This is a sharp change compared to what we saw during the nine-month period when order intake was up. Did I understand correctly that this was because of merchant ordering going down, but basically no impact yet from offshore demand falling? Is this correctly understood?
I think what I would overall say that the order decline in Q4, one should not read that as a sort of directional at this stage yet. As we have said in the past, and it's quite visible if you look at our quarterly order intake in MacGregor, it's a quite a lumpy business because some of the orders are very sizable. In Q4 last year, we had two very large orders and a sort of system sales. One was the United Arab Shipping, and the other one was for the Hyundai Heavy Industry, and I think they were over $100 million overall last year.
This year we did not land similar orders on the Q4, but I would still say that this is more to do with the quarterly variation than any directional issue at this stage. The merchant shipping market looks difficult. The expectation is that the bulk ship boom that we had from the early part of 2013 to sort of spring 2014 starts to impact the order intake in our merchant marine. At the same time, there are indications that the container ship market will start to sort of invest further this year again. Overall, I would say that the outlook on the merchant marine is softer, but I would not read too much in directionality on the Q4 numbers on that one yet.
Overall in offshore, actually the order intake was quite strong in Q4 as well, and we actually still see the activity at this stage to be at the high level.
You expect the merchant-driven ordering to fall in 2015, but do you expect offshore-related order intake to remain stable versus 2014?
I would say it is fairly safe to assume that we would see the merchant side order intake to start to go down somewhat in 15 compared to 14. The offshore really then that's a sort of $100 question at this stage. I think if I look at the activity and the pipeline at the moment, we are pretty comfortable with the first part of the year. obviously very much depends on where the oil price goes and how will the further decisions sort of be taken in this industry. That might impact then on the second half of the year. you know, that's really anybody's guess.
Okay, thank you. Then moving on to Kalmar. I think you have set a target of EUR 20 million underlying EBIT improvement in 2014 versus 2013. According to my calculation, you reached EUR 11 million increase. It seems that Kalmar is lagging a little bit behind your targets. Could you talk about this, please?
Certainly. If I look at where we set the targets and by product lines and divisions, we are actually tracking along the target. The mix of the sales was not quite well. We have invested quite heavily in the automation. We did not receive significant new orders in the automation division throughout 2014. As you see that, we were expecting the Kalmar top line to sort of increase somewhat throughout 2014. It did not materialize. Actually, we had a slight decline. That further investments in the automation division and then the lower volume in there meant that the automation division's profitability was well below our expectations.
On the other businesses, such as mobile equipment and services, we were actually tracking along the profitability targets. From our internal kind of tracking point of view, we are actually hitting the targets and hence are quite confident of that improvement coming through in 2015. You're absolutely correct because of the mix and the profitability issue in automation division, the full impact did not come through in the overall Kalmar numbers in 2014.
All right, all right. Lastly, FX, could you talk about the sensitivity of Cargotec EBIT to dollar, please?
Again, as I said, US market on its own is quite significant. It's the single largest market for us. Obviously the whole MacGregor business is effectively or to a large extent US dollar based. Some of those offshore could be Norwegian crowns as well, but to a large extent it's US dollar based. The reported currency of MacGregor actually is dollar, or the functional currency is dollar in MacGregor. Of course the Asian market. We have a significant exposure overall for the US dollar. Obviously we are hedging against that one, that is the significant change that we have seen in the US dollar/euro is actually not visible in our 14 numbers.
Actually, in Q4, I'm looking at data here, I think there was still slight negative impact from the currencies into our numbers. Due to the hedging, we will not start to see the dollar impact coming through until sort of midway throughout the Q2 of this year and then be fully visible on the second half of 2015.
All right. Okay. Thanks a lot. Thank you.
Your next question comes from the line of Johan Eliasson. Please go ahead.
Yeah. Hi, a few questions. Just in on the acquisitions in MacGregor, what sort of was the net additions to the EBIT line from those acquisitions post PPAs in 2014?
I look at the overall and we actually just did a review on those in the board of directors yesterday. We, against the business case we had for ourselves, we hit the order targets in both businesses, both in Hatlapa and Pusnes. We were below the revenue targets. This was primarily due to the Hatlapa missing the top line. That was really sort of in line what we have seen in the merchant marine development and the slower revenue uptake than we expected throughout 2014. That really started to only turn into growth actually in the Q4 2014. Hatlapa of course from the setup point of view is more capital intensive or heavier than the rest of the MacGregor, which is very asset light.
The, we have a fixed production operations in, in Germany, and that meant that the, in Hatlapa's case, we actually missed the EBIT number we had set for ourselves. From Pusne's case, we, they're somewhat below the revenue, but not significantly and pretty much on target in terms of the profitability on that one.
Did they add to profits at the bottom line this year or is that expected to be visible in 2015?
That should be mostly visible in 2015. Again, the issue here is that the slow cycles mean we hit our targets in terms of the material cost reductions, but they are primarily contracted cost reductions because most of the deliveries that we are now able to leverage the MacGregor procurement power are of course on the deliveries that we will be shipping out now in 2015 and start to see the margin improvement in there.
Good. Then just on the cost cutting program, you're basically saying that you're on track in both Kalmar and Hiab. Previously you said Hiab was a little bit ahead. What is the sort of remaining year-over-year impact in 2015? If you were on a linear case, you would have reached sort of EUR 20 million this year and then the remaining EUR 20 million in 2015. Is that the equations one should consider, or how is it looking into 2015?
Well, in Kalmar's case, we expect to hit the profitability improvement target program and be in the target by the end of the year. Again, like we saw in 2014, some of the automation projects and others might have an impact on the overall mix and then the visibility of that one might not come entirely through. Depends a little bit on sale mix, the sales mix and what's happening in other businesses. On the business itself, there, the targets have been set. I think we are tracking along fine and expecting the full results to be visible by the end of 2015.
Hiab, as you said, quite correctly, and that was maybe a sort of, I didn't quite say correctly, is ahead of the plan. It's of course, very visible in the 2014 numbers compared to the 2013 numbers. We have not changed the target, but I think effectively what this obviously means that the sooner we actually get to the target, and we expect to get there before the end of the year, Hiab can start to move and start to address other opportunities that are out there. Again, at the same time as we discussed, we clearly also start to look at Hiab not only as a profit improvement.
We've been very focused on sort of making even some cuts in terms of our product portfolio and country operations. I think with that stronger sort of foundation, we can start to turn to focus more into the growth opportunities there as well.
Finally, you also target an 8%+ margin in 2016. How important is growth in the service business to reach that 8% margin target?
They're not very dependent on the growth. When we looked into the sort of what needs to be happening by business area to reach the 8%, that's not really built on any significant changes in our top line. This is more coming through the programs we have in place. In MacGregor, it's really primarily driven by the improvement opportunities in our profitability in services. Obviously, we will seek for further growth, but like in Hiab's case, in some cases, you might actually cut some of your services portfolio because you're not able to reach the profitability levels you need. Boost some other parts, like a spare parts business to drive.
I'm more interested in the absolute profit and gross margin get generated from the services rather than the top line as such.
Mm-hmm. Okay, great. finally, just confirming. Are we finished with all the costs related to the Kalmar project overruns now?
We feel pretty comfortable with the situation. There are still some tails of the projects going on as the last commissions of those large cranes are done, so there are still some people on ground. In terms of the actually penalty demands and the performance and performance sort of guarantees and others, we feel that the risks are quite manageable. We would put the downside at the moment into a single single-digit million numbers at this stage.
Okay. Thank you very much.
Yeah.
Your next question comes from the line of Jan-Carlo. Please go ahead.
Hi. This is Jan-Carlo from Nordea. just when at the beginning of your presentation, you said that the year 2015 has started good in terms of orders. you did say something about offshore already, but how does this comment relate to the different business areas? Has it been unanimous or across them, or how would you describe it?
I would say that actually, when I look at the sort of movement in the backlog we ended up and then sort of the visibility we now have having the market activity, that applies to all three businesses. The one I probably would be the most concerned in terms of potential softness would be the more merchant marine. The offshore activities still at very high level, and both in Kalmar and Hiab, I think the market activity remains strong.
Okay. I think it was already asked, but I'll ask it again about these savings. I mean, could you put in terms of numbers, you had EUR 40 and EUR 40 for the divisions, EUR 20 and EUR 20 last year and this year. How much do you really see in numbers that was reached last year for Kalmar and Hiab, and how much do you still expect for this year? Just, I mean, it might have been said, but just checking on this.
It's valid for the. I started the Kalmar, so what's visible for you when you look at the overall result is 11. When I look at the divisions that they're under the program, I see 20. The EUR 9 million difference comes really that the performance of the automation and project division that was driven, not just by the project cost over losses, but the lower revenues and investments in the urban area. In that sense, then internally, we are looking at the 20, and we see that number moving then to the 40 this year. In Hiab's case, we actually are over the 20 that you can sort of calculate that result almost directly from the P&L from 2013 to 2014.
Obviously we expect the remaining part of that one to come through during 2015.
Okay. That's fine. Thank you.
Your next question comes from the line of Alina Druta. Please go ahead.
Yes, hello. My questions have been answered. Thank you.
There were no further questions on the telephones. We do have another question, comes from the line of Antti Suttelin. Please go ahead.
Thank you. Just making sure on MacGregor profitability. I missed a little bit what you said before, but did you raise the guidance for MacGregor margin for 2015? Previously, you said it would be in line with last year, and now you said something it would be between last year and something.
Correct. What we are looking at at the moment is somewhere, between the last year's and the data points we saw in Q4.
All right. Thank you.
There were no further questions on the telephones.
Thank you, operator. Do we have any more questions from the people in Helsinki office? If no, I would like to thank everyone for your attention today, and I wish you a sunny day. Thank you.
Thank you.
Thank you.