Earnings Call: Q1 2019

Apr 25, 2019

Afternoon, ladies and gentlemen, and welcome to this news conference regarding Cargotex Q1 twenty nineteen Results. In Q1, our orders received grew in all business areas and comparable operating profit remained on last year's level. My name is Hannah Mayhaykien, I'm in charge of Investor Relations. And today, our CEO, Micha Benfilan, will start with the Group Development. And after that, our CFO, Micha Polakka, will continue with the business areas, financials and outlook. After the present, there is a great opportunity to ask questions and get great answers. Thank you, Hanna Maria. Good afternoon from my behalf as well and thank you for joining the quarter one conference call for Cargodec. I know it's a very busy day today, I appreciate your participation. During the Q1 twenty nineteen, the strong demand for our solutions continued. Our orders received increased for the fifth consecutive quarter with 19% increase in CALMAR, 11% increase in HAYAB and 33% increase in Macrogo, although from obviously fairly low level. Although the comparable operating profit remained in last year level, operating margin was not satisfactory from our point of view. This was due to the supply chain issues in Hayab. However, we have a number of corrective actions taking place. The situation is already improving, and I am confident that we will see further improvement in the coming quarters. Mikko Polakka will cover Hayab more in detail during the business area specific presentations. Few words about the market environment during the Q1 twenty nineteen. Global container throughput grew slightly 0.4% during the Q1. This slight growth was contributed mainly for the pre shipment with the anticipation of increase in tariffs between The U. S. And China during the Q1 that is now postponed. Market is expected to show a robust growth in content traffic this year with the market growth estimates varying between 44.9% for the 2019. Construction activity remained at a good level in our key markets in U. S. And in Europe. In the macro growth area, the market improved slightly in merchant sector, but still remains well below the historical levels and to activity in the offshore side is still at a very low level. As said, orders increased by 18%, an increase in all business areas. The total order intake exceeded €1,000,000,000 with the 33% improvement in MacGregor continuing the slight trend we have seen towards the end of last year. High up order intake was €341,000,000 This is the second highest order intake in quarter in High up's history only exceeded by the Q4 last year. Also in Kaomar, we had a record order intake with €560,000,000 of orders. I was delightful that this came from multiple sources and not from any single larger order. Obviously, the strong order intake fifth consecutive increase is now showing in our order book, which is 27 higher than in Q1 twenty eighteen. We are now seeing the order book trending up slightly in MacGregor, and we have a record order book both in Kalmar and in Hayab at the moment. Sales increased by 11%, and we saw increase happening in all three business areas. But as I already commented, the operating margin was disappointing due to the difficulties we still faced in Q1 in High AB. I'm very satisfied with the progress we are making in our strategic key focus areas in Services and Software. Calmer Services corrected by the comparable currency exchange and adjusted for divestments grew by 5%. IAP Services continued strong growth with 11% growth and MacGregor is now showing signs of service recovery with another quarter of service growth of eight percentage points. Total in Cargodec level services sales increased by 5% adjusted for currencies, acquisitions and divestments. The strong development in our software businesses continued with the sales increasing by 18% and orders by 56% from Q1 last year. This is primarily attributable for the good progress we have made in our automation software. Also during the Q1, we closed an important software acquisition for us, C2Slabs, with their Octopi cloud based terminal operating system intended for smaller and mixed cargo terminals that will further enhance Navi's position as the leading terminal operator solutions provider. Yes. Currently, we're well on our way to our target of €1,500,000,000 of services and software revenues. With that, I'd like to hand over to my colleague, Mikko Puolak, our CFO, who will cover the business area specific results. Thank you. Thank you, Mika, and good afternoon also from my side. So let's start with Kalmar. And Kalmar had a very good in all financial metrics. Orders grew, as Mikael indicated, 19% and the growth came across all Kalmar divisions, also in all geographical areas. Kalmar order book is now above €1,100,000,000 and this has grown by €100,000,000 since the beginning of the year. Kalmar sales were up by 8%. And when we eliminate the impact of our two divestments last year, the Sivartel bulk business divestment as well as the Calmar rough terrain container handling business divestment, then sales grew even 11% year on year. Reported service sales were flat, but also when we eliminate the previously mentioned divestments, services sales grew in by 5% year on year. CALMARB profitability improved by 13% and was €32,300,000 and the profitability improvement came to great extent from the top line, I. E, sales growth. So all in all, very good quarter for Kalmar. Then moving to High Up, where we had also very good development in orders, like Mika said already earlier. Orders growing by 11% year on year. All major divisions in high up I. E. Loader cranes, truck mounted forklifts as well as services grew very well. And also orders grew in all geographical areas. IATA order book is now close to €500,000,000 and this of course offers a very solid basis for the revenue growth in 2019. High sales grew by 14% from 2018. And when we eliminate the Effer acquisition, which we did end of last year, then higher sales grew by 8%. Service sales grew 11% and very much in line with our long term service growth targets. Despite the good growth in sales, the higher operating profit, however, declined. And this is to great extent driven by the inefficiencies and additional costs arising from the supply chain disturbances. We have taken several corrective actions and measures and the situation continued to improve throughout quarter one. I would say that currently the issues are mainly related to our Starcart assembly operations as well as loader crane installation capacity. And we are very actively working on fixing those. And the positive matter, of course, here is that this is not so much anymore the external component supplier issue, but very much in our hands, so pretty much for us to be fixed. And as Micah said also, we expect this situation to improve now in the second half going forward. Then moving to MacRegor. MacRegor orders grew by 33%, but still the orders were on a fairly low level because of the very, very low markets. The order growth came mainly from Roro business, primarily from the Roro division where the orders were very low in the early part of last year. MacGregor total sales were up by 10% and service sales were up by 8%. Service sales came mostly from the Merchant segment. Looking at the MacReCord profitability, yes, there is a small absolute improvement despite the profitability did not significantly improve despite the sales growth and the improvement kind of low improvement came because of the low capacity utilization what we have in certain areas, especially in the rural as well as in the offshore divisions. Also the Radmarin integration is still ongoing and Radmarin is delivering at the moment more or less breakeven results. Then looking the consolidated financials, also like Mikael indicated, the highlights of the quarter were definitely the orders and sales growth in all business areas. Those were clearly the bright spots. Profitability, excluding the items affecting comparability remained on last year's level. We had roughly €6,300,000 restructuring and other cost items affecting the comparability. And these items are related to the company wide restructuring program, so mainly personnel related layoff costs and then the TTS related acquisition costs. Earnings per share for quarter one was €0.48 Cash flow from operations was weak if we compare to previous years. However, it improved from quarter one last year. Cash flow was €31,000,000 and it is still very much impacted by the supply chain disruption as well as growth in receivables, accounts receivables as we are doing quite high invoicing towards the end of the quarter one. Our final position is strong. Our cash and the committed unused credit facilities were €451,000,000 at the March. Net debt has increased now in quarter one, and the primary driver for the net debt increase is coming from the IFRS 16, where we took €192,000,000 lease liabilities in the balance sheet in early twenty nineteen. This is also highlighted in our gearing, gearing 63% currently. And if we eliminate the IFRS 16 impact, then gearing is 49%. As you can also see from the chart, we have a very well balanced maturity structure, no major debt repayments coming in a single individual year. ROCE was 7.8% more or less on last year's level. Our long term target for ROCE is 15% and this requires still work especially on the profitability side. And then last but not least, our outlook for 2019. We reiterate our guidance for 2019 and expect our operating profit comparable operating profit for 2019 to improve from 2018. And with those words, I will then hand over to Maria on the questions. Thank you, Mikko. And thank you, Mikko. We will start with the questions from Rohallatin. Are there any questions from Rohallatin? Yes, there are. Okay. Afternoon, Ityrki from Indres. Actually three questions from me. First, this is more for Iko. Could you provide us a comparable order growth numbers by division, I mean eliminating for all the M and A actions as you provided for sales? Yes. For Kalamarti orders growth, if we take the let me just take the orders. If we take Talamar, the order organic growth for orders, let me check the exact numbers now. Maybe if you take the second question, why are Yes. You for That's fine. Now this was the fourth quarter in a row when your moving twelve month gross margin declined slightly. When do you actually see that the actions that you have taken improving profitability start to show in gross margin? Is it already in the second quarter? Or do we have to wait until second half of this year? I think the margin cost is driven by multiple factors. One is the mix, and we see sort of product mix within the different business areas also to affect that one. But at this stage, we see this is primarily be an issue now, of course, with the high up and we do see the high up situation gradually improving. We already saw improvements within the quarter itself. March already been clearly better in terms of deliveries, and we expect that positive development now to gradually improve throughout the year. So we expect the Q2 to be better than Q1 and then improvement for the year. Okay. Thank you. And finally, going forward, regarding your current SG and A level, is it something that we should model in for the rest of the year as well? We expect actually further productivity improvements on SG and A. I mean, we have the company wide €50,000,000 savings program that Mikko was referring to, and that is delivering savings already within this year. And then also within the business areas, we have a number of productivity measures that we are in the process of executing. So for Kalmar, we report the reported order growth was 19%. And when we kind of clean up the divestments, then the growth was 26% year on year. For High Up, the reported orders were 11% growth. And when we eliminate the Efra acquisition, then it's 5%. And then for Macregor, the reported order growth was 33%. And when we eliminate the Ravmarin acquisition, then it's 28%. Then we will continue with the international questions. We will now take our first question. Please go ahead caller, your line is open. Good afternoon. Thanks for taking my question. I would like to talk about Hyab. Are deliveries still limited by the supply chain Or are the issues now mostly on the cost side? And would you say there's a significant backlog for urgent delivery? Or are lead times still stretched? I'm just trying to understand delivery phasing for the rest of 2019. Right, Tim. And maybe I'll take that one. Yes, the supply chain, at this stage, we still have issues, but a lot more limited issues in terms of availability of the components. Right now, the primary issues are actually around our Polish facilities, which is a loaded crane manufacturing facility that are to do probably with, I would say, the maturity of the operations, the fact that it's a relatively new factory that has had a very, very strong order increase within the two years of operations. And then also the labor availability and labor rotation within that market that is also part of the issue in there. There is a long list of corrective actions that we are currently executing on that one, and we see gradual improvement taking place in there. When it comes to the lead times, this varies from product area to area quite a lot. I would say that the some of the product areas are now within a few weeks of delivery times and the longest lead times are extending well towards the end of this year at the moment. But it's very product specific at the moment. Our on time delivery numbers are coming up are actually considerably up compared to the same time last year or even towards the end of last year, but we still have long lead times in certain product areas. We are obviously also following up on capital base and activities with the long lead times. We have not seen any further changes in cancellations. Those remain at the normal level. Okay. Thank you. And is this issue still negatively impacting on mix? Yes, is. I mean, generally, what we see, obviously, first of all, the loader crane as such is a good business for us, so we are not able to execute quite what we need in there. And within that product area, specifically, the deliveries of smaller, more simple cranes that have a lower margin are usually easier to do. There we have less delivery issues. And the more complex heavier cranes are where we have further or I would say more restraints at the moment. Moment and there we have more delivery restrictions and that's affecting the mix of the deliveries as well. Okay. Thank you. And if I may take a second question on MacGregor and TTS. Is the acquisition still expected to close in Q2? And in terms of profitability for MacGregor, either from MacGregor standalone or MacGregor TTS combined, Do you have a view on what kind of revenues or market activity are needed for the division to return to historical margins or to go to the sort of low single digit margin range? On the TTS case, this is still with the Chinese competitive authorities. We still expect this to be resolved during the quarter two. In terms of the margins, obviously, we have a limited visibility on the TTS situation. They have reported their Q4. So far, it was slightly positive numbers on that one, not that different from the MacGregor numbers. Obviously, after the closing, we still expect the synergies to be at the level that we have indicated earlier when the deal was announced, that should then drive the profit improvement even with the existing market conditions. Thank you. You. We will now take our next question. Please go ahead caller. Your line is open. Hi, Mikael and Mikhail, Magnus here with UBS. A couple of questions for me. So how does the capacity utilization look in Kalmar Of course, the backlog is up a lot. So do you think you can sustain the current delivery rate on the equipment side there and without seeing any bottlenecks in margin? The capacity situation varies again from product area. We see actually the ordering increases coming pretty much across the board from different product areas, which is in a way good news. I would say that for certain products for the North America logistics sectors, we are now serving or selling towards the very end of this year or early next year capacity already. And in certain other areas, we are actually having a situation. But overall, I would say that the delivery and capacity situation in Kalmar is in better shape that is in Hayab at the moment. We still have further improvement opportunities, but the situation is not as critical. Got it. Thank you. And could you just give us some flavor on how large addressable market opportunity is for Oktopia compared to Navios? It's considerable. I mean, when you talk about the smaller terminals and mixed cargo terminals, you will have thousands and thousands of different small ports. And the idea, of course, is that it's impossible to serve that kind of small market segment with on premises software and dedicated teams. Oktopai solution will be a cloud based SaaS based solution. We will obviously take an advantage of the Navis network and Navis brand name to leverage on that one. But it will be it will enhance Navis sales to a certain extent. But obviously, the revenue per customer will be relatively limited, but will be against SaaS revenues also that will be the kind of revenue profiles that we are seeking into further software expansion. Okay. But do you think that sort of the market could be of a similar size or half the size? Or any view on that makes a difference? It will be smaller than the current Navis market, which is a very large market. But again, the penetration is probably a bigger driver there than the actual size as such. For sure, absolutely. That's very useful. And finally, could you expand a bit on how you think the mix is going to change in the year going into Q2 versus Q1? I think we will see the situation gradually improving in high margin product areas, and I would see that, that will then reflect on the gradual improvement on the product mix from the Q2 onwards. Okay, got it. Thank you so much. Thank you so much. Thank you. You. We will now take our next question. Please go ahead. Your line is open. Hi, this is Johan Ekta, Chevreux. Just a question on those numbers that Mikko mentioned on the order intake. Was that adjusted for both acquisitions and currencies or just the acquisitions? Only with the acquisitions. The currencies had 1% to 2% unit impact on the orders. But basically, the M and A acquisitions and divestments have the major impact on the kind of order change. And then associated income was slightly negative. When should we expect to see that number turn positive again considering your significant increase in orders for larger should improve when the percentage of completion or the kind of progress in those projects will advance. Some of these orders we have been receiving in the latter part of last year. So it takes some time before we get bigger volumes in the days. Throughout And 2019. Yes. Then on your net working capital situation, still sort of increasing during Q1 versus end of When should we see the big release coming? This is very much related to the, I would say, our Star Card operations, especially in high up to a certain extent in Kalmar, we have still some backlogs. So gradually, when we are sorting out supply chain related issues, then we expect also that the working capital, the inventories should be then notably down from the current levels. Should be sort of in line? Yes, gradually in the second half of this year. Yes. Okay, good. And then just some IFRS 16. You said the debt you've assumed there. And depreciations related to that, how much will that take? Basically, have estimated that the IFRS 16 has roughly €7,000,000 positive impact on 2019 results. Okay. But the depreciation impact, how much was that in the quarter? And how much do you expect for the full year? Let me check from the notes. We will now take our next question. Please go ahead. Yes, if we look the depreciation, it's roughly euros on the machinery and equipment and then €6,000,000 on Land and Buildings, mainly Buildings. So it's basically the note number six in our interim report. And when you compare the quarter one twenty nineteen depreciation versus the quarter one twenty eighteen depreciation, that's more or less the difference, roughly €10,000,000 No. 35 on the interim report, if that helps you, Johan? Yes, that was No. Six. Do we have further questions from the line? We do have one more question queued up over the phone. Okay. Thanks for taking my question. In the context of the growth seen in the software and services through the Navis automation solutions such as BlueTracker, can you comment on the possible impact or opportunity that the IMO 2020 software regulations or any further regulations provide for Calmar and the software business going forward? I would say that there is not a direct impact from the IMO regulation. Generally, I would say that the pressure that the sustainability and the CO2 has in that one. But obviously, when the industry overall is seeking for a more sustainable way of conducting business and shipping to digitalization is one of the best leverages that the industry would have in terms of the kind of more accuracy of the shipping arrival times, how the ships are loaded and unloaded and optimizing that one has a potential larger impact on CO2. So indirectly, the requirements for the maritime industry for much more sustainable transportation will benefit our software industry. Thank you. Thank you. We do have further questions queued up over the phone at this time. We will now take our next question. Please go ahead. Your line is open. Yes. Hello. This is Karl Buchlitz from ABG. Thank you for taking my question. My first one concerns Kalmar. How should we think about margin development in the coming quarters? I mean, if we look at Q2 'eighteen, the year on year margin development was fairly negative. So perhaps that was a temporary effect. And how should we think about Q2 twenty nineteen versus Q2 twenty eighteen? Think in terms of Kalmar margin improvement, we will see further improvement on the year. I mean, overall, if you look at our guidance for the year, I mean, it's fairly clear that MacGregor's contribution for the margin improvement this year is not going to be great. So the margin improvement will come from Kalmar and higher business Okay. And I mean, we expect, let's say, accelerating margin improvement? Or will we see a development in line with the Q1 improvement? Or how should we think about this? I think the kind of you will you would expect to see a sort of a gradual improvement from this one onwards. I think if you look at the profile from last year, it's not that far off. Okay. And then I have a more long term question. If we look at your ROCE target and let's say, percent, In your own view, how far ahead in time are we from reaching 15%? And how do you plan on reaching it? Is it mainly focused on improving margins? Or is it in terms of having a more efficient capital base? The capital has a fairly slight impact on the ROCE. Obviously, we have a lot of opportunities in our supply chain to get the specialty inventory level down. But the biggest lever by far for the ROCE is improving operating margin. I mean one needs to remember in our assets, so we have a considerable chunk of goodwill about €1,000,000,000 and that sets kind of the limits on the kind of asset side for the improvement. So the big lever here is that and again, when we look at our target of reaching the 10% operating margin, that should then lead us towards the 15% ROCE as well. Okay. Thank you. Okay. Thank you. We will now take our next question. Sorry, it's Leo Carrington from Credit Suisse. For the FX transaction effect for 2019, how do you expect this to play out in terms of timing and magnitude? Sorry, was the question related to ForEx impact? Yes, at the EBIT level. Yes, mean, we have not separately guided the ForEx impact for this year, but gradually, should U. S. Dollar, euro remain on this kind of levels, we should start to see some tailwind for High At the moment, High Up has not yet been benefiting too much from the strengthening of the U. S. Dollar. And the reason is again related to these supply chain issues. We have been hedging the deliveries still on rates, which are failing somewhere mid last year and the delivery due to the long lead times, those deliveries will be now done in quarter one, quarter two this year. So that's why you have not necessarily been seeing that great impact, positive impact from the currency yet. Okay. Thank you. And a broader question. What's driving the service growth in Kalmar and Hyatt? Is it just the increase in focus from your organization? Or is there a change in customer desire to have third party service versus in house? I think it's primarily been our own efforts. The market's been there all the while and increased focus, changing people, changing system processes, doing more sales efforts in there and tracking better our installed base and understanding our capture rates. Quite a large number of efforts and we've been on this track now for nearly three years. It's good to see that throughout 2018 and now into 2019, those efforts are now starting to pay off. Obviously, you need to do that by market by market, customer by market to win back the business. Effectively, we have left somebody else to eat our lunch in the past years, and now we are now recovering from that one. Thank you. And last question for me. On the acquisitions, excluding TTS, would the acquisitions made in the last year be in line with their respective divisional margins in 2019, I. E, have the recent acquisitions been accretive or dilutive to group margins? In the RAP case, actually, the it's a fairly breakeven business as well, but RAP. So it's and that's why you see actually that part of the sales growth in MacGregor, a quite large extent actually came from RAP with a similar sort of breakeven results to the MacRegor business. So it doesn't really have an impact. In High Ups case, the effort actually is dilutive, the the Efres gross margin and operating margin is lower than the average in higher base, but it's very much according to business plans we have made there. So it's tracking according to that one. This stage, it's dilutive for higher numbers. The impact of that one is not that significant. If I remember right, Mikko, if we did 10.7% operating margin in high up without the effort, it would have been 11.1%, if I remember correctly. Yes. Okay. That's very helpful. Thank you. Yes. Yes. Hi, it's Johan here again. I don't know what happened. I was cut off. But just two questions. How do you see pricing developing? I think you talked about price hikes that you pushed through last year, but because of long lead times, you have not yet seen those in revenues and margins. Is this still the case? Are pricing still going up? And then secondly, you have won a big number of automation projects over the last year, although not all of them are at a big value. How is the pipeline for automation projects going forward? And is it still the sort of 10 to a couple of tens of millions that we should expect? Thank you. Thanks, Johan. On pricing side, yes, absolutely true. I mean, the and this supply chain situation is sort of impacting us in many different ways. And one off, of course, that has been the fact that even though the list price increases were done already sort of mid last year onwards, the actual they haven't really beaten to the margin situation so much. We will again see gradual those price increases that we put in effect last year to actually flow through our margin improvements now from Q2 onwards. And also from the I would say, a raw material component point of view, we see a little bit easing of the pricing pressures. So that's part of the expanding and margin improvement we will be seeing through this year. In terms of automation, we landed one automation deal, one sort of midsized, I would say automation deal and one small one in Q1. We see the activity level roughly at the same level as last year and mostly sort of phased investments. There are no larger sort of one sort of very large automation deals in the near term sort of funnel at this stage. So I would say pretty much you would expect this and we expect this level to continue what we saw last year. Excellent. Thank you. Thank you. We have one last question queued up. Please go ahead caller. Your line is now open. My name is Serge again. Could you give us a flavor on how the activity level has started in here in April compared to what you saw in Q1? We still see the higher demand actually this year to remain at a healthy level. If I look at our own sales funnel and the market indicators, we expect the situation for the time being remaining favorable for us. Okay, perfect. And then on MacGregor, finally, could you talk me through a little bit activity level you see on the different vessel type? I think you called out the RoRo in particular as being good this quarter. But what do you see for the other debts? Overall, the level of activity, of course, is slow. RoRo has a specific impact for because it's been one of the more profitable businesses for us. And as last year activity was exceptionally low, it's now visible in our revenues and partly explains why we don't see margin expansion even though we see kind of a little bit sales growth happening in there. We are very pleased to see again that the RoRo activity has now returned early this year and that pipeline looks better and that's been there favorably for us in terms of future revenue and margin on that area. Otherwise, on the merchant side and offshore side, the level of activity in different vessel types is well below the historical normal level. I think overall, one would expect in container side, for example, that the demand is shifting partly from the very large vessels into more into the feeder type of vessels. We see some demand, but well below the historical level for general cargo and bulk ships. Okay, good. Thank you. Thank you. There are no further questions in the phone queue at this time. So there are some further questions from Rohl. Erke, please go ahead. Hi, It's Erke from Indrais again. One final question from me. The component issue now more or less resolved. What are the other internal issues you are referring to and that you're now is it personal churn or is there something else to that? And what do you say, how easily and how fast can these problems be solved? They are primarily related, I think, the maturity of some of the pros proceeds, and we are tackling them with quite an intense program in terms of the further resources and capabilities into organization. And then the one further issue is the, I would say, the very hot job market, we would say, the whole Eastern Europe. But from our case, of course, particularly in Poland, and there are certain measures we have taken to secure to sort of lower the rotation or attrition of the labor force in there. I think these improvements are biting gradually, but as we have guided earlier, we expect that the first half to be more difficult than the second half and this improvement will be flowing through gradually somewhat better Q2 and then further Q3 and Q4. Okay. Thanks. There are no further questions, so it's time to thank you for the active participation. Our Q2 report will be published on July 18. See you then. Thank you. This will conclude today's call. Thank you all for your participation. You may now disconnect.