Good afternoon, ladies and gentlemen. Welcome to our news conference regarding the Q3 quarterly report. Today we actually are going to talk about the profit increasing and the sales improving too. Mikko Puolakka, our CFO, will talk about the business development in the areas, at first, Mika Vehviläinen are talking about the group results. My name is Carina Geber-Teir, and I'm actually standing in for Hanna-Maria Heikkinen, who is not available today. At first, we start with the presentations, and after that, we have time for a lot of questions. Mika, please.
Thank you, Carina. Good afternoon from my behalf as well, and thank you for joining the Cargotec Q3 2019 conference call. In Q3 2019, the good operating profit development trend continued in Cargotec. I'm especially pleased with the progress we are making both in Kalmar as well as in Hiab. In MacGregor, further actions are being taken to improve the financial performance of the business. As usual, I will cover some of the group-level development issues first, and then our CFO, Mikko Puolakka, will cover the business areas more in detail as well as the detailed financials and the outlook or guidance for the year. Regarding the highlights for the Q3, obviously we saw the strong improvement in operating profit continuing there, and I'm very pleased with both the Kalmar, the operating profit increased by 24%, and in Hiab comparable operating profit increased by 41% compared to the Q3 2018.
MacGregor financial performance is a disappointment for us at the moment, we are addressing the issue as we speak. The Q3 2019 is also the first quarter that we are actually now consolidating the TTS numbers into our financial figures, and Mikko will cover that a little bit more in detail in the business area specific information. Happy to see that finally the TTS acquisition that took a long time to get required authority approvals, especially from China, is now completed. The strategic rationale remains strong on that one. With the combined services operations, we are able to address a very large installed base with nearly 20,000 vessels in our combined installed base with the TTS and MacGregor service operations. The TTS joint venture setups in China give a clearly improved strategic position for MacGregor in the extremely important Chinese shipbuilding market.
Obviously with the combined operations, we are able to drive cost synergy savings that are estimated to be in the neighborhood of EUR 25 million-30 million on annual level. Regarding the acquired business, we have about 600 colleagues joining us from TTS as of August onwards. In TTS term, estimated revenues for the remaining of 2019 are about EUR 50 million and comparable operating profit roughly at the breakeven level, with 26% of the revenues coming from services. We expect to close the closing balance sheet during the Q4 2019, we also estimate that with the drive of the synergies and efficiency requirement in MacGregor, the restructuring cost from the combined operations will be about EUR 40 million in 2019. With that one, let me move into the market environment.
Overall in container traffic, we saw the growth continuing about 2.6% so far this year. The forecast from the analysts is expecting a further growth throughout 2019 and somewhat higher growth in 2020. I also like to take this actually opportunity to discuss the situation in port automation projects, as I believe that there has been a considerable shift in the industry regarding the automation projects and prospects moving forward. In the last 12-24 months, the industry has gained a lot of experience in automation implementation. We have seen the performance and competitiveness of the automated terminals to continue to improve. In my discussions with customers, and I have met quite a number of large terminal operators in the last few weeks, the discussions are not anymore if one should automate. The discussions are entirely about how one should go about the automation.
I would say that the train has now left the automation station already, this progress will be inevitable. This does not mean, however, that we will see an explosive growth in orders. We see very little so-called greenfield developments where we would have entirely new automated terminals to be invested, but primarily the automation will happen within the existing ports, so-called brownfield implementations and phased investment. Right now in Kalmar, we have 10 automation projects in the implementation phase. These implementations are very important for us to standardize the technology and add new capabilities that our customers require for further automation projects. I would say that the automation progress is now inevitable. Also I would like to point out that I see that progress happening even in adverse economical conditions, and that view has been confirmed by our customers.
To retain the financial competitiveness and cost efficiency in terminals, the automation is clearly required by our customers, the confidence about automation capabilities has clearly increased in the industry remarkably in the last 6-12 months. Regarding the Hiab market environment, we still see the construction output developing favorably. 3% growth in Europe. In U.S., the growth was lower. This is primarily a supply constraint related to availability of manpower and materials. In housing starts, we saw further growth happening in the last three months in the U.S. again. In MacGregor, the market remains weak. The bright spots would be the RoRo, where we see actually continuing demand developing favorably. On the bright side, on offshore side, has been the fact that about 300 offshore support vessels have been recommissioned during this year.
That hopefully will then lead into the actual new vessel development in the coming years. Also, we have seen the service demand growing in MacGregor that is also visible in MacGregor service growth numbers as well. Orders declined compared to comparison to good. Order development has continued in Hiab, where we see further growth happening again in Hiab sector. In Kalmar, the orders declined. We did not sign any large project orders during the Q3. This business, by nature, is lumpy. We also saw a slowdown in some of the mobile equipment in certain product divisions in certain markets as well. Overall, I would say that the pipeline in Kalmar is still strong. We have not seen any cancellations of any of the larger projects we are currently engaged in, and we still view the market overall quite favorably. In MacGregor, we saw orders increasing.
As a sign of the weak market conditions to MacGregor, organic orders actually declined by approximately 5%. Our order book is at extremely good level at the moment, EUR 2.2 billion, and it's of good quality, and this obviously gives us a confidence for the rest of the year as well as moving then into 2020. Sales increased by nearly EUR 100 million and operating profit was up by 18%. Obviously, this improvement coming from good development in Kalmar and in Hiab. Also very happy to see that the continuing progress in our strategic focus area around software and services. In Q3, the Kalmar services grew 4%. This is the lowest growth percentage we have seen for quite a few quarters.
The primary reason for that one is that as our drive to also improve further our service operations profitability, we actually stepped out from a number of fairly large maintenance agreements in Kalmar during the last few months, and that has then slowed down the growth % but improved our profitability in the business as well. Good progress continued in Hiab with 14% growth in services. In MacGregor, the service growth % was 27%, obviously helped by the combination of the TTS numbers. The organic growth was about 9%, which was still very satisfactory number. Software sales, we saw 11% growth, primarily driven by the increase in the automation software sales.
The service and software sales are now 34%. On the rolling 4-quarter or 12 months basis, the service and software revenues are now EUR 1.2 billion, and we are well on our way to the EUR 1.5 billion that we have set as our financial target in that area. That one I'd like to hand over to Mikko Puolakka, who will cover the business area in more detail.
Thank you, Mika, and also good afternoon from my side. Let's start with Kalmar, where we had a strong improvement in profitability in quarter three. Kalmar orders were almost EUR 400 million, declined 19%, like Mika indicated. The decline is very much coming from two elements: automation and project orders, which can be lumpy and which can vary several tens of millions of EUR per quarter, depending on what type of and what types of orders we get. The other element is coming from mobile equipment orders, where we saw in certain product categories like reach stackers in China, order decline in quarter three. On this same note, it's also important to notice that Kalmar order book is almost EUR 1.1 billion, so on a very good level. Kalmar sales grew 2%. The growth came primarily from services as well as from certain mobile equipment product segment.
Service sales growth was 3%, we saw nice development both in spare parts as well as in other type of services like maintenance services. Like Mika indicated, we reorganized and terminated some of our service contracts in the ambition to drive the profitability in the service area going forward. The comparable operating profit for Kalmar was almost EUR 48 million. This is 24% improvement year-over-year. The profitability improvement gained from higher sales as well as favorable product and service mix, services and certain mobile equipment product categories, as well as software profitability in quarter three. Let's move to Hiab, where we saw actually a very nice development in all financial metrics. Orders grew by 4% and were above EUR 300 million. Also, it's important to note that our quarterly orders fluctuate a certain extent in Hiab.
The quarter three is quite often lower than quarter two because of seasonality, our customers being on holiday season, especially in the Northern Hemisphere. We saw a strong order development in Americas, +27%, driven by truck mounted forklift as well as loader cranes. In Europe, we had a decline in orders as we had fairly high demountables orders in the comparison period in 2018. Hiab sales were up by 18%. Growth was 12% if we exclude the EFFER acquisition which we completed end of last year. Also our actions to improve the supply chain have been continuously yielding better and better results during 2019, and has been also supporting our sales development in quarter three. Services also continue to grow. Service sales were up by 14%, and this is also in Hiab driven by both spare parts as well as different kind of other service contract.
Impressive profitability improvement in Hiab. Comparable operating profit was EUR 34 million, 41% improvement. This is very much driven by the sales growth. Let's move to MacGregor. As Mika indicated, the TTS numbers have been now consolidated into MacGregor numbers since 1st of August 2019. The markets remain challenging both in merchant and offshore sector. Orders grew by 10%. If we exclude the TTS acquisition, our orders in MacGregor actually declined by 5%. The TTS-related orders were EUR 21 million in quarter three. The equipment orders related to container and bulk vessels declined. We saw a good development, for example, in the Ro-Ro vessels. Services orders were up by 30%. Around 80% of our quarter three orders are now related to the merchant sector, 20% to offshore. The MacGregor order book increased significantly.
This is very much driven by the TTS acquisition. The TTS business-related order book amounted EUR 218 million at the end of September. MacGregor sales increased by 31%. If we exclude the TTS acquisition, the sales growth was 17%. Despite the difficult market, we were able to grow very nicely our service business at 27%, including M&A, 9% excluding TTS. Also in MacGregor, well in line with our long-term growth target. MacGregor quarter three profitability was a disappointment, like said also by Mika. We made almost EUR 6 million comparable operating loss. There are basically three reasons for this low performance. We had low capacity utilization across several product lines in MacGregor during quarter three. We have had some single million project cost overruns still in quarter three in certain offshore projects.
The overall price pressure in the market is quite significant as the markets are highly competitive. We have our offshore restructuring program ongoing as we speak now. We are reducing the capacity in that sector, and also the TTS integration activities are proceeding according to our plans. If we look our year-to-date first nine-month performance, good to notice that even though the Q3 orders were down more or less by Kalmar, it's good to note that the year-to-date orders are actually on last year's level. Sales are up by 11%. All business areas grow sales year-on-year, and even excluding the TTS and EFFER acquisitions, we have been able to grow our year-to-date sales by 9%. Good to note that we have been growing our service and software sales by 9% during the first nine months. The comparable operating profit was EUR 190 million.
This is up by 10%. Then the IFRS operating profit is up by 26%, amounting to EUR 162 million. Earnings per share was almost EUR 1.4, to be exact, EUR 1.39 per share, and this is also up by EUR 0.23. Our cash flow continued improving. We are now at EUR 153 million in our cash from operations after nine months. This is some EUR 110 million better than last year. The cash flow improvement is coming from two sources, one being the profitability improvement, and then the second area being our conscious actions to improve the supply chain situation, both in Kalmar and in Hiab and this is resulting to lower networking capital levels. Cash flow continues to be our focus area also going forward. Our financial position is strong.
We issued two bonds during Q3, one for EUR 100 million and five years, the second one for EUR 150 million and seven years. Thanks to the renewal of the long-term debt portfolio, we have been also able to reduce our average interest rate to 1.8% versus last year's 2.4%. Our net debt has increased by EUR 300 million since the beginning of the year, almost EUR 200 million of this increase is coming from the IFRS 16 lease change, approximately EUR 100 million is coming from the TTS acquisition, including also the debt what we have taken over. Our gearing is 65% including the IFRS 16, excluding IFRS 16 impact, 52%. The return on capital employed improved from end of last year, 8.6% now end of September, last year it was 8%.
The improvement came from the profitability improvement at the main driver for the ROCE development. Last but not least, our outlook for 2019. We reiterate our profit guidance and expect our comparable operating profit for 2019 to improve from 2018. With those words, I could then hand over back to Carina.
Thank you, Mikko, and thank you, Mika. Now it's time to open up for dialogue, and let's start with questions from Helsinki. Any questions?
Thank you. Good afternoon, it's Erkki Vesola from Inderes. Talking about your gross margin, it seems to have been on a fairly constant decline for several quarters already, and you have been compensating this by squeezing the SG&A. How long will these trends continue?
Fill in with the details. It's true, actually. If I look at from 2017 to 2018, we had a decline in gross margin. From 2018 to 2019, we have also experienced gross margin. However, the difference is that the decline from 2018 to 2019 on gross margin is solely coming from MacGregor gross margin. Actually, in Hiab and Kalmar, we have stabilized the gross margin development already for this year. I'm actually quite kind of confident about the capabilities to actually return some of that gross margin in Hiab and Kalmar. The supply environment has softened. We clearly, when I look at our sourcing, are able to see several pockets of opportunities in sourcing to drive the cost down, which is adverse or the opposite situation that we had in 2018 where it was more seller's market.
Also the pricing actions we've been taking on the product side, both in Kalmar and Hiab should be yielding further results as well. I would say that on that one we have stabilized, and I would expect to be quite positive on that front there. I think MacGregor, clearly the difficult market situation has led to the situation where the pricing pressures are there, and then when the older projects have sort of ended now from sort of 2016 and 2017 into 2018, that has led into quite a clear decline in the MacGregor gross margin, which is part of the profitability issue we have. Perhaps to add there is that we have done also price increases in the previous quarters, and these have certain lead time as we have still fairly long lead times, especially in the Hiab product.
Certain price increases have been made, and those will be then later this year.
Okay. If I may continue on your SG&A, is the current level on a rolling 12-month basis sustainable either in terms of euros or percentages?
We are looking also on the SG&A. Overall, we have productivity improvement measures, not only on the corporate level where we have this company-wide shared service program ongoing, but also we are looking at other areas in the SG&A, like the sales efficiency, these kind of activities. You can see also from our business area results that we have incurred certain restructuring costs, both in Hiab and in Kalmar as well, in addition to MacGregor. These are related to the productivity initiatives, what we are doing the other years.
Thank you.
Any more questions from Helsinki? If not, we can continue with the international questions. Ladies and gentlemen, if you would like to ask a question over the phone, please press star one. A voice prompt on the phone line will indicate when your line is open. We take our first question. Please go ahead, caller.
Hi, Mika and Mikko. Magnus here from UBS. A couple of questions from my end. First, could you expand a little bit on how your year-over-year demand trend developed over the course of the three months in Q3, and also if you can give us some indications on how Q4 has started? That would be my first one.
If I start with the Hiab, we've seen the positive demand trend continuing in the business. Mikko was pointing out as well, one needs to be careful not to look at sequentially, because also last year, Q1 was the highest order. It declined on Q2 and then declined further on Q3. That's the seasonality we see. On year-on-year, we have seen a continuous improvement happening across all the quarters in there. If I look at the Q3 demand, Mikko already mentioned that one large government or military order last year in demountables that was not repeating. If you exclude that one, the European development was also positive. In Europe in Hiab's case, it's quite a mixed bag. We've seen softening market in U.K. I guess the Brexit fears around that one. Also Sweden and Denmark, as well as Benelux have been somewhat softer.
The rest of Europe actually has shown good demand development continuing there as well. In Kalmar side, the project come and go. I think it's more a question of lumpiness and the timing of those projects. The pipeline still looks good on that one. Clearly, at least from my point of view, I see the strengthening of the belief on need to automate, to increase in the industry all the time. Although that obviously takes a while to sort of land on the order books and deliveries there as well. On the mobile equipment in certain areas, like in China, we saw a sort of softening of the market on there as well. That, of course, against a fairly strong Q3 demand that we saw across the different product lines in last year as well. MacGregor market remains to be weak.
I mean, both in merchant as in offshore, overall the order intake was down organically about 5%.
Got it. Thank you so much.
Q4, I don't think I've seen any major changes on the demand as such.
Perfect. That's very clear. On the TTS acquisition, could you talk a little bit about the savings and the facings of those savings as we go forward in the next one to perhaps three years? Could there be more restructuring coming through on the TTS part in 2020 than you have just announced?
Quite a lot of the restructuring will happen and land as we have now kind of warned or indicated in the Q4. We expect the savings to be in the ballpark of EUR 10 million from the TTS-related integration. Obviously, we are looking for MacGregor-related direct savings, especially in offshore area. The remaining then happening in 2021, 2022. Some of the savings due to the Chinese competitive restriction are pushed back by that whole separate period and only land in 2021 there as well. We expect that within end of 2021, we will have reached that EUR 25 million-EUR 30 million savings.
Perfect. Finally, I'm sorry if I missed this a little bit, could you develop on the components within the positive mix impact in Kalmar again, please? I just missed that.
I think certain mobile equipment deliveries generally have a higher margins than some of the project deliveries. We had a very good delivery in software, including the Navis portion of the software in Q4. You would say that the mix was favorable pretty much across all the product portfolios.
Okay, it was also a favorable mix within software. Is that right? I think the balance between equipment service and software was relatively similar between Q2 and Q3, but margins were quite significant.
Actually in services, we had a relatively low growth in Q3, primarily because we stepped out from a number of the larger maintenance agreements that did deliver on top line, but didn't deliver adequately under the bottom line. That both obviously help on the mix as well.
Okay, got it. That makes sense. Perfect. Thank you so much.
We take our next question. Please go ahead, caller.
Thank you. It's Leo Carrington from Credit Suisse. Just to follow on profitability. In Kalmar, how do you see the mix changing in upcoming quarters? It sounds like everything was fairly favorable in Q3. How sustainable do you think that mix is going forward? Then in Hiab, would you say the margins are now back to more normalized levels, or are there still more efforts that can be taken in Poland to improve margins further and get productivity at that factory at optimal levels?
I would say that the Kalmar mix would remain probably fairly constant moving forward. If you look at the order backlog mix, that's fairly similar on the PC in terms of deliveries as well. I don't think the Q3 was exceptionally positive in terms of mix either. I think you'll see the similar improvement moving forwards as well there. As we discussed on the gross margin side as well and on a previous question, as I said, that gross margin side has stabilized now in Kalmar, and we expect that to improve moving further. In Hiab, the Q3 tends to be a difficult quarter for us. Obviously from a relative operating profit, we actually came down from Q2 as expected, and then again, we expect to bounce back on Q4. Again, we expect the sort of further improvement year-on-year on Q4 as well.
We certainly had a sort of primary supply issue in two main factories, one related to truck mounted forklifts and the other one related to loader cranes in Poland. We've seen improvement happening in both of those locations, and there are further opportunities. It's a gradual improvement. We have not suffered from any major component shortages anymore, so the improvements are primarily coming from our own operational development, and that's obviously a continuous improvement. I would expect further improvements happening in the Q4 in those areas.
Okay, that's very helpful. Thank you.
We take our next question. Please go ahead, caller.
Hi, it's Antti from SEB. Thanks for taking the questions. First one on Hiab's order intake and the organic growth numbers. If we kind of exclude the EFFER impact on the growth in Europe especially, what kind of a growth rates organically did you see in Q3?
Hiab orders grew 4% in quarter three, including EFFER, and then excluding EFFER, the order growth was actually negative. Orders declined by 2%.
Okay. You mentioned that in Europe In the comparison figures, you had some big orders. If you compare that impact to the EFFER one, which one was larger?
If we would look the organic, like Mika said, if we would take the organic development in Hiab in quarter three and excluding this military order in demountables, then we would have grown in quarter three this year.
Okay. On the other hand, America showed quite strong order growth. Would that have been positive without the contribution of one large order that you flagged in the report?
Yes. Correct. That would have been.
Okay. Then maybe still coming back to the segment's profitability if we compare it year-over-year, which I guess are representative in terms of seasonality. Can you quantify at all if there was any impact from positive or negative mix and then from the supplier and component shortage issues? Is that kind of earnings leverage that we can get from the headline figures a fair representation of what is your operating leverage in that division currently?
I would say that when you look at the Kalmar and Hiab the primary driver for the profitability improvement was the volume. We did not decline any further. I say the gross margin was stabilized but did not give a positive impact on that one. The operational leverage, it was not yet that visible. By far the biggest factor there clearly was on year-on-year basis was just the higher delivery of sales volumes.
Okay, fair enough. Maybe a bit more technical question regarding the one-offs, which were a little bit higher than expected. What kind of a level of quarterly one-off costs should we expect going forward on Q4 and then going into 2020?
We expect some EUR 50 million one-off costs related to quarter four. Out of these, EUR 40 million are related to MacGregor, like we indicated also on the TTS slide. The total year one-off costs are expected to be somewhere in the ballpark of EUR 70 million-EUR 75 million.
Out of which majority would land in quarter four. 2020, I would say that it's a bit too early to say at the moment because it depends also on the progress of the TTS integration.
Okay.
In addition to the corporate buy savings, obviously is also the productivity initiatives happening in the business areas and Kalmar and Hiab as well, there we are now trying to leverage the investments we've done in our capabilities and drive the further productivity there as well. It's more a continuous improvement basis, but some of that will land into restructuring as we move forward.
Okay. That's all from me. Thanks.
We take our next question. Please go ahead, caller.
Thank you. This is Antti from Danske Bank. I would like to ask about the service contracts that you terminated in Kalmar. Can you quantify what magnitude of sales they generated last year and also what their EBIT contribution was last year?
I can't even remember that number myself, Antti, but I would say that they were not non-significant. We talk about tens of millions of EUR of service contract revenues in an annual basis with very low, or in certain cases, even negative EBIT margin. Obviously, not very much point on being there. We have tried to renegotiate some of them and we were not able to do that one. In some certain other contract areas, we've been able to come to a more successful conclusion. We effectively have stepped out of those ones. I would say without those ones, you would have seen the growth rate in Kalmar to be closer to what you saw in the previous quarter.
Okay. Secondly, you appeared quite upbeat with regards to automation projects at ports. Would you mind talking a little bit more about this? Is this something that you see materializing into orders potentially in Q4 or early 2020 as you see it now?
I don't necessarily see that landing soon, but I think now that's why I wanted to flag that because I think the discussion around automation has now moved from should I automate or not? Does it make sense or not? You don't have that question anymore. Everybody I meet in the industry is talking about how should I now automate it. The biggest driver is that when you look at the existing automation projects, their performance clearly has gradually improved. When you look at the cost competitiveness of those terminals now, whether it's in U.S. West Coast, whether they are in Australia or elsewhere, they are clearly able to actually show very high competitiveness against the manual terminals. I think that's what has shifted now to customer thinking around that one.
Again, as I said, I don't think you see a lot of major greenfield projects that would then sort of have a big impact in terms of order intake. We will start to see more and more the consideration about how do I go about doing the brownfield? What should I do in terms of my current terminal to actually start to increase the automation stage? I see a number of terminal operators showing me the cost curves when it comes to the labor cost development, and at the same time with the consolidation of the shipping line area, the pricing pressures they are under.
The balance of power clearly have shifted between the terminals and the shipping lines, and the terminals are getting under further development and the kind of you will see the cost curves going up and the pricing curves going down, and that's what's really pushing now the sort of the automation forwards. As somebody told me that I'll have to automate or I'm not going to be in the business very soon. Again, one needs to be careful. I don't think we see any quick explosion of orders here. I think this will happen. As I said, I think my own thinking here is that the train has now left the station. It's moving ahead, but it's still picking up speed slowly.
Okay. Finally, if I may, how would you assess Kalmar's competitiveness in supplying an automation solution? Are you competitive enough against other suppliers, including the Chinese?
Absolutely. I think the Chinese suppliers might talk about involvement in many of the automation projects, but I don't think they've done much in terms of the actual automation capabilities and software outside China. Most of the automation-related Chinese equipment is done by the automation providers such as ABB and Siemens. In terms of equipment-related automation, if you look at the 10 projects we are currently in implementation of, that's quite clearly the leading portfolio with the very demanding technical features that customers are requiring there, both in intermodal markets as well as this sort of integrating the port and logistics facilities together. I think from the technology capability point of view, we are in extremely competitive position now.
Okay. Thank you. That's all. Thank you.
We take our next question. Please go ahead, caller.
Hi, good afternoon. It's Manu here from Nordea. My first question would be on Hiab. If I could just ask once more about the organic order intake trending Q3. I think you reported EUR 307 million of Q3 orders, that included EUR 31 million larger one-off order. If I strip that out, I think you said that even with that stripped out, your growth would have been positive. Did I understand that correctly?
That is correct, yeah. Excluding EFFER orders would have been EUR 289 million for quarter three this year.
If I exclude this EUR 31 million larger order to get the kind of base order trend, then that would have been down.
Last year, we had EUR 294 million, including this fairly sizable, demountables military order. This year, our orders were EUR 289 million, excluding FR.
Okay, fair enough. I get it. The second question is on Hiab. Could you still comment about the order intake trends during Q3? Did you kind of see any change in this July or June compared to end of September, start of October?
No, I don't think they were actually kind of EUR 100 million a month, fairly steady orders, obviously some seasonal variation depending on market. Nordics, usually July is somewhat softer. In middle Europe, we move to August as well. We haven't seen any particular trend forming there. We see fairly steady demand continuing in all the market areas. As I said, Europe is a fairly mixed bag, so we clearly have seen some of the markets, especially U.K., kind of slowing down when they are moving towards this potential Brexit there as well.
Okay. On the TTS, I think you showed here on the slide that you have EUR 50 million of sales that you expect to generate in 2019. Just to confirm that is for the whole of TTS for full year 2019 and not the number you are going to consolidate?
That's correct. The big difference, of course, when you go back, look at TTS reported numbers, is that they reported the consolidated numbers, including the joint ventures. We will report the Chinese joint ventures on equity basis, and that of course has been about 30%, if I remember maybe correct, of all the TTS revenue. That leaves the gap there.
Okay. In terms of MacGregor, can you comment about your thinking around that? Obviously, there's a very big restructuring and cost-cutting exercise going to be done in the fourth quarter. When do you think that you would be able to reach black figures again on the kind of excluding-
Our ambition level must be that the next year would be a break-even or a slightly positive year for us. That's where we are targeting.
Okay. Then on the Kalmar and Navis outlooks, you were very clear about the way you think around the prospect of automation orders. If you kind of just think about the current developments, you're seeing some slowdown in China and then these bigger orders are lumpy and although they will continue to be on the table, but are you seeing that customers are getting more hesitant in terms of their decision-making, that they still fully agree with you that they need to automate, but do you feel that they have the urge to do it, or are they kind of more in a wait and see mode given the uncertainty overall in the global economy?
I think there's probably an element of sentiment on the decision-making overall in there. I would say that the automation decisions are more driven by the pressures related to the pricing environment and the cost development and efficiency measures. I think in that sense, potential downturn in economy is not necessarily impacting that. We have seen some other industries actually that has even some cases forced automation development because the efficiency gains are becoming more important on that one. I think it's somewhat independent from the overall economic development. Obviously overall the kind of the decision-making around investments in this kind of uncertain environment is potentially slowing things down. We have not seen any cancellations or nature, but obviously, as we can see from orders, decision-making in certain areas might have slowed down.
If you look at the order intake you had in these larger orders or automation orders, can you just remind us about the kind of level you had in 2018 and what you've booked so far in this year? I mean, do you expect to be able to still book something in the fourth quarter or will these orders then be shifted into 2020 potentially?
If I would say so that in the automation, the quarterly orders, they have been varying, I would say from EUR 50 million, EUR 50 million, EUR 60 million to EUR 120 million per quarter. That's why we have said that it's quite lumpy if we are looking at past quarters. Q3 this year was actually, funnily enough, even though I just talked very positively about automation, this was the first quarter we actually didn't land any significant new automation deals. It was maybe some very small projects in there. That clearly had an impact there as well. Again, my discussions with customers and we see the pipeline being there, question only is the kind of speed of decision-making and obviously how the deals land and if you have different suppliers.
If I may ask you still about do you have the 2018 number, for instance, for the full year, which would be a bit more comparable than the quarterly fluctuations?
If the automation and project business is approximately EUR 400 million in revenue. That's giving the kind of rough proxy also for the orders.
The year to date, it has been running at the same level this year?
More or less.
Okay. Thank you.
The year to date numbers, we are not actually that far off from the last year in there. Also, the other thing is that, especially in this automation side, these order lead times are particularly long. A lot of the orders we landed actually in 2018 are actually primarily driven in revenues in 2020 as well. I'm quite comfortable of taking a few ref orders in between as well. It doesn't really impact our revenue profile that much. Of course not all orders which are landing on automation and project division are automation orders. There are also manual equipment, manual cranes.
We take our next question. Please go ahead, caller.
Yeah. Hi, this is Johan at Kepler Cheuvreux. Coming back to the TTS acquisition. I think you said or explained one of the reasons for the weak profitability in MacGregor on TTS, but when I read the note, it looks like TTS actually had a positive contribution on the EBIT line by EUR 1.9 million or so. Could you explain this?
TTS had a positive impact in that ballpark. Like Mika said in the beginning of the presentation, we anticipate roughly break-even result plus minus zero result for the full year, i.e., for this period when we have been consolidating the business. MacGregor's low profitability is coming very much from the kind of MacGregor original business, the project cost overruns, offshore business, low capacity utilization, and then the overall very competitive market where the sales margins are very tightly competed.
Okay. The associated income you reported was a negative EUR 1 million this quarter. Is anything of that coming from the joint ventures in TTS now or how has those been accounted for if you don't account them on the revenue line?
As the JV numbers have not yet been verified, we have not included any numbers from the TTS joint ventures yet in the results. Target is to get those into the quarter for the full results.
That is then mainly relating to the Kalmar division. If I look at the margin in Kalmar, I must say it's really impressive. Having looked at this business for the last 15 years, I think this 11.5% margin I get if I exclude the joint venture income here is clearly the highest you've ever reported. You say this is not a one-off in the quarter. Should we continue to expect good profitability at this level or is there any sort of seasonality now? Historically, to my knowledge at least, it's the fourth quarter that tends to have the best margins in Kalmar and not the third quarter.
I would say overall that if you take a longer timeline, and you have looked this a long time, there clearly has been a steady improvement in Kalmar profitability. Except last year, we managed to screw it up ourselves with the supply chain issues. That was an anomaly in that one. The underlying improvements were there, but they were obviously not visible as we were not able to get the equipment out as such. Now that the supply chain situation has stabilized, the improvements what we have seen in the mobile equipment business in terms of operating profit improvement, the improvements from the continuous growth of the services, and then the improvement in the project execution in our businesses in the automation side and project side have actually led to a situation. That's when we indicated this 10% operating profit target.
We clearly saw improvement opportunities within Kalmar. We are now delivering against those ones when we got away from that unfortunate 2018 numbers.
Is it still so that you're running the sort of the software and the automation projects business on a break-even level? The main profit driver remains the mobile business with its services attached to it.
If you go a little bit further back in the history, we had years where the project business was a loss-making as well. I think overall project execution capabilities have clearly improved over the last three, four years in there. That's of course partly we've gone away from these kind of oopsies, as somebody called them technically.
Yeah. Now we saw your peer Konecranes this summer walk away from their margin target. You still have your 11% margin target, but obviously not to a firm year, but I think you set them in 2017 and said they would be reached within 3 to 5 years. That's 2020 to 2022 or so. Are you still comfortable with that, or are you seeing the different cycles in the different divisions that you have now, obviously with the weaker expectations on MacGregor, for example, making the 10% target realistic or unrealistic? How do you feel about that?
When I look at and we track that target against in all our businesses, we track against our annual plans. We also track against the strategic target. I would say that we are mostly on track. The big deviation that is of course, very visible now this year as well, is the deviation in MacGregor, where we are actually down EUR 20 million or so against the last year, which is very unfortunate. We obviously need to sort out the situation. We are taking the actions now in there to make sure that we return to the break-even slight positive next year with that one. The big question for us and then sort of the biggest unknown in our future of operating profit improvement would be around the market recovery in MacGregor.
Obviously, there is a very big leverage when the market returns in there, but that's very hard to predict at this stage. On all the other areas, when you look at what piece sort of when we broke down that target at the end there, we are getting that from, we are actually tracking very well against that target.
Okay, excellent. Just finally then on these supply chain issues you had, I think you mentioned last year that the inventory buildup, et cetera, that you experienced during this poor period piled up for an extra EUR 100 million-EUR 150 million in cash. Now you mentioned that you have released some of that. Is there still more to come from that item or have you released what you saw as unnecessary capital tie-up last year?
Yeah, I would say that definitely we are not yet optimally operating. We have done some short-term kind of perhaps one could say more brutal actions in order to get the deliveries out and improve the inventory levels. As we have also opened in our recent Kalmar and Hiab Stargard visit there are long-term opportunities to improve the end-to-end supply chain, basically from the order to the cash end-to-end process. That will take some 18-24 months to extract the full benefits from those long-term developments.
You mean this EUR 100 million and EUR 150 million number is rather in 18-24 months than by year-end?
We have for example, in automation some deliveries happening in quarter four. For those we have been now building a work in progress. When those happen then, for example, that will release some cash in quarter four. There are certain short-term results which we expect to become visible already in quarter four. As said some of these more process-related developments take some more time to land in the net working capital.
Okay. Thank you very much.
We take our next question. Please go ahead, caller.
Yes. Hello, this is Karl Bokvist from ABG. Thank you for taking my questions here. Of course, very solid development in both Kalmar and Hiab in terms of margins. I'm just a bit curious here. We've touched upon it, but if we go into Q4 here, how should one think about margin improvements year-on-year? Because if you looked at sort of incremental margin in Kalmar, it was more than 100%. I mean, what should one expect in Q4? In terms of Hiab, the incremental margin was a bit better, but shouldn't you also receive some tailwinds from just the fact that you don't have any more headwinds on the supply chain side?
I mean, you could say that the comparison point will be quite soft, obviously, when you look at our performance, unfortunately, from last year. It's quite clear that we will have year-on-year improvement. I do think that we see continuous improvement happening in the supply chain situation, and I expect a pretty favorable sort of development year-on-year, especially in Kalmar and Hiab. The situation in MacGregor will be difficult in Q4. Overall, we are looking profit improvement in 2019 compared to 2018, and this improvement is coming from Kalmar and Hiab while MacGregor is weaker than last year's. That's basically indicating that the absolute and relative profitability in those SPUs or business areas should improve.
Understood. Just one final follow-up there.
Yeah.
Yeah, sorry. Okay.
Yeah, I was just finalizing that the profitability for those two business areas, Hiab and Kalmar, is expected to improve on a full year basis.
All right. Thank you. Did I just understand it correctly that you intend on taking about EUR 50 million in charges in Q4?
Correct.
All right. Perfect. Thank you. Just related to that really, what is your view on restructuring charges in Kalmar and Hiab going forward? Do you feel that you are quite pleased now, and there is no need to do anything further?
Out of this EUR 50 million, EUR 10 million is related to other two business areas, i.e., Kalmar and Hiab. We are doing certain actions as we speak in improving the productivity in these SPUs and core business areas, and those will incur those restructuring costs. As said earlier, I would say that it's a bit too early to give guidance for 2020 restructuring costs as we have not yet guided the year as well. We have indicated in the past the investment we have done in tools, approaches, and capabilities enable us now to start to drive the productivity. I would expect that productivity drive to continue also in 2020, and that will then ultimately lead to some kind of restructuring costs in 2020 as well.
Understood. Just final question from me, and that has to do with, let's say that Hiab enters a scenario in 2020 when organic sales growth is, let's say, 5%-10% negative. What is your view on the business today in terms of your margin resilience? It's been a couple of years since we saw negative organic growth in those ranges, but that year margins really declines quite significantly.
I think couple of things as we talked about already, productivity, I do think that helps us. We have opportunities in the gross margin to sort of return in on that one. Those will obviously help quite a bit. We have work on, I think like many other peers, quite a lot with the very detailed plan B execution plans as well. Especially in Hiab, we have quite a few opportunities. We still have a too large manufacturing footprint with too many facilities. Right now we are not in the position to be able to address that one because of the strong demand and delivery situation. If the demand would go down, that would enable us to sort of address that manufacturing footprint and cost associated on that one as well.
I'm fairly comfortable with the margin resilience I have both in Hiab and Kalmar at this stage and the preparations we have done to potential slowdown.
Thank you.
We take our next question. Please go ahead, caller.
Yes, this is Tom Skogman from Carnegie. I was wondering about this kind of overhead cost cutting. You have moved some people to Bulgaria, et cetera, and you have earlier communicated that E&L savings in 2019 and 2020 will be EUR 10 million and EUR 20 million respectively from this exercise. Now I can see that the internal number of employees is up by almost 30% year-over-year. I wonder what's really going on there and what can I not see from these numbers?
Yes, that we have this overall EUR 50 million cost improvement program, Cargotec-wide cost improvement program. EUR 30 million is coming from the indirect procurement-related savings. EUR 20 million from this consolidation of the back-office activities. We have said that this consolidation of the back-office activities, the savings there are coming towards the end of the kind of execution period, i.e., 2020. The reason for that is that when we are moving work from the countries to the center we are having double costs during the transition period. From that point of view, we expect to see savings in 2020 for this exercise. On the indirect procurement area, we have been progressing according to the plan, and the cumulative savings are close to EUR 30 million in that area. I was actually looking at these headcount numbers just recently.
I mean, by far the biggest driver in headcount increase, of course, is the M&A. We have added the EFFER and TTS operations that have altogether added several hundreds of people into our operations. We've been also adding headcount in our manufacturing facilities. We've gone to double shifts in some of the factories due to the delivery situation, so that's adding quite a lot of headcount. The third area of addition actually has been around the services, direct personnel there. We are growing services. We obviously been hiring service personnel on that one. If I look at the kind of SG&A-related personnel development, that's actually in the negative territory. We are actually this year taking out probably some hundreds of positions in SG&A position in the businesses as well.
Obviously the growth in the volumes and the growth in services as well as the M&A is then delivering more headcount.
Building our models, is it kind of right that the saving in 2019 from this is like EUR 10 million, and that's split between Hiab and Kalmar mainly? Next year's EUR 20 million savings, that is kind of mainly seen on lower corporate overhead costs, or will that be also split into Hiab and Kalmar?
Hi, I have Kalmar and MacGregor. For example, this centralization of the back-office activities that is touching all our three businesses, not so much the corporate. Some extent there, but mostly the benefits are in the SPU business. Most of the headcounts that we are taking out, and we are talking about several hundred people, is actually coming from our country operations, the back office in the regions and countries. Those are business-related headcounts. They are then replaced by more central services.
Okay. I wonder about the health of the TTS order book. You have had control over that asset for three months. I assume you have started to have some feeling about the health of the order book, and the pricing or sales margin in the order book. How does it look?
Overall, I think the processes, bidding process, et cetera, we are fairly satisfied what we see in DTS. There are few, less than one hand of identified projects that are a bit of a more question mark that they are now addressing. That's part of the closing balance sheet discussion there. I would say overall it's been fairly positive and with a couple of identified issues that we are now addressing.
Okay. Will those be booked as EO charges or will you book those as, if you do some order book corrections, will that be booked as normal earnings then?
It's too early to say. It depends on the items, whether they are related to the original purchase part price, whether they are related to the order book. That is something what we are now currently as we speak, going through, and that is expected to be finalized in quarter four. Maybe to sort of open that up a little bit when Mikko talks about this restructuring cost he indicated in Q4. Some of that, of course, is personnel-related and restructuring-related, the synergy savings and savings. There will be some assets that we need to renew in light of the current market situation. Then, for example, facilities is a fairly item. We have sort of long-term leases coming from both sides that we plan to discontinue as a part of the kind of streamlined operations as well.
Okay. Was there some impact from FX on EBIT in the third quarter?
Insignificant. Very small. For example, on the top line, the impact was 1% unit positive.
The dollar has strengthened a bit. Shouldn't that start to help Hiab especially in the coming quarters?
In the coming quarters, yes. At the moment we are still delivering the fairly long order backlog from the previous quarters.
All right. Thank you.
We take our last question. Please go ahead, caller.
Hi, it's Emmanuel here from Nordea again. I would have a follow-up question on Hiab. Could you help me to understand if I look at the Hiab margin performance in 2016 and 2017, then compare that to kind of what you're delivering now in Q2 and in Q3. It looks to me that your deliveries margins are still kind of clearly below what you did in 2016 and 2017. You're talking about having solved most of the supply chain issues. With the kind of strong growth you have been saying, so you should be able to get that operating leverage. What is really different today compared to where we stood in 2016 and 2017?
Obviously the question is that do you think that the kind of margin level is closer to where we are today rather than where we were in 2016 and 2017 if you are able to solve the issues you have?
I guess you talk about comparable operating profit %, right?
Yes.
Yeah. The biggest single difference actually comes from the EFFER acquisition, although it's a profitable operation, the kind of the percentage operating profit and the percentage gross margin are lower than in the rest of the Hiab business. That on its own has already a dilutive effect. I'm turning to Mikko here if you remember the actual number. Yeah, it's something like 1%. 1% unit comes from EFFER alone. As we said, we clearly lost gross margin because of the supply chain challenges and the cost increases from 2017-2018, and that's now stabilized. We need to sort of try to turn that back on with the pricing increases and better sourcing initiatives there. We also lost, obviously in 2018 with the supply chain challenges and related costs. We are not out of that one yet.
I mean, the situation is improving, we have put heavy cost on that one. Obviously our cost level overall in SG&A is higher. We have invested more into the different process development, CRM systems, service management tool systems, higher R&D, on the digitalization efforts as well. Part of the profitability improvement sort of or profitability change has come from a higher cost level that we operate in. We are now looking at productivity improvements in Hiab at the same time as well, we do want to invest for the future capabilities as well. If you look for example, quarter 2 this year, we had roughly EUR 50 million higher sales than now in quarter 3, and we did in quarter 2 14.1% operating profit. It's also a bit this low quarter 3 season, which now impacted the profitability.
Okay. If I compare to 2017 when you had EUR 50 million of less sales but 39.4% margin, so I can shave off like 1% from EFFER then some step up in investments and then still some double cost or extra cost from just sorting out all of these issues related to supply chain and factory footprints and so forth.
Yes.
Is there a fundamental reason beyond those why the margin should be different?
I think you captured it pretty well.
Okay. Thank you.
There are no further questions at this time. I would like to turn the call back to our host.
Okay. It seems like there are no further questions online. Thank you for a very active dialogue. Please remember that our full year results will be published the 6th of February. Thank you all. Have a good day.