Good afternoon, ladies and gentlemen. Welcome to Cargotec's Q1 2018 results briefing. My name is Hanna-Maria Heikkinen, and I'm in charge of investor relations. In Q1, Kalmar's operating profit increased, good demand in Hiab continued, and MacGregor continues to recovery slowly. Today, our CEO, Mika Vehviläinen, will go through the group level development, and then our CFO, Mikko Puolakka, will continue with the business areas financials and outlook. After the presentation, there is a possibility to ask questions. Please, Mika.
Thank you, Hanna-Maria. Good afternoon from my behalf as well. Maybe as a starter, generally speaking, I'm not a big, sort of friend of explaining numbers through the currency changes, et cetera. When I reflect and look at the Q1 numbers, one can't avoid the fact that the currencies played such a major role when I look at the impact and the finances during the Q1. If I look at year-on-year currency changes, there is a 17% difference between the U.S. dollar and euro within that one. Obviously, that gap will close down and narrow considerably if the currency stay roughly at the current level towards the end of the year.
If I look at that and the results in those sort of context, I'm relatively satisfied with the progress and it also makes me very confident about our progress and capabilities and our performance moving forward. Overall highlights on the Q1, obviously, very good and strong demand continues in Hiab. Operating profit margin was roughly at the previous year's level. We had an improvement in Kalmar operating profit, primarily thanks to the cost-saving measures we have taken in there. In Hiab's case, the currencies played a major role in the Q1. The impact actually on the U.S. dollar/euro exchange on Hiab result on Q1 was EUR 8 million. However, the full- year impact is still estimated to be on that EUR 20 million-EUR 25 million level we have indicated.
Very clearly the currency impact should slow down and soften up towards the end of the year. MacGregor results declined. We are clearly now scraping or hitting the bottom in terms of our revenues, whilst we see the market recovery starting to take shape. Orders grew in Hiab as well as in MacGregor slightly and declined slightly in Kalmar. To put that in context, I'm still relatively happy with the Kalmar orders. We had a large sales event last year in the mobile equipment side in U.S. with EUR 70 million order intake, and we did not organize a similar event this year in Kalmar. Overall, the equipment, especially the equipment demand in Kalmar continued at a good level.
Obviously, currencies played a major role when you look at the order intake, and we will come back to those ones in individual business areas later in the presentation. In current or, sort of, incomparable FX rates, the orders would have increased by 7% points in Q1 2018. Looking at the market environment, the growth in sea traffic, especially in container traffic, continued at a strong level. We see that as a relatively good demand continuing in our equipment, really primarily driven by replacement investments and also industrial side in Kalmar, the equipment demand continued in good level as well as the services demand.
There is still a strong interest in automation in many part of the areas. We also clearly see that the customers are very careful in their investment decisions, the investments tend to take place at smaller, relatively small, sort of phased levels at this stage. We landed one small automation customer again in Q1 2018. In Hiab's case, demand continued strong. European order development, demand continued to accelerate further. Also in U.S., demand continued and strong level. In U.S. dollars, our order intake still increased in U.S. as well. In the merchant sector, the market is starting to recover. We see signs of that one in many different forms, the market recovery is likely to be a slow one.
In offshore, even though there is a number of, sort of, activities and different kind of inquiry levels is increasing, it is unlikely to realize into the orders anytime soon. We are still fairly, sort of, hesitant on expecting any fast recovery in the offshore sector. Overall, if I look at the order intake, again, MacGregor, only slight increase year-on-year in orders. The drivers were very different in there. In the merchant sector, we actually saw an order increase of 47% compared to year ago. We clearly start to see the signs of market recovery in there. Whereas in offshore, actually, orders declined further.
We had a timing issue in terms of the RoRo ferry sector that has been remaining really stable, but from timing point of view, actually didn't land any significant orders during the Q1. Here Hiab demand was particularly strong, and of course, especially when we look at this in constant currencies, the order development was strong throughout all business areas. In Kalmar, as I already said, a good demand in equipment side. Also, we saw order increase in the crane sector. However, the automation order still remained at the low level on that one.
Order book has increased 8% compared to the end of the year 2017, but obviously we are down year-on-year level. However, as we have discussed in the past, the order mix is more sort of, attractive from our point of view, and the composition of the shorter cycle businesses, such as services and equipment business, is larger in the Q1 order book. As such, one needs to be careful of drawing too many conclusions in terms of the revenue impact, from the actual sort of, overall order book size. Again, currencies played a major role in revenue recognition or revenues as well.
Sales grew both in Kalmar and Hiab compared to Q1. In MacGregor, we are now actually clearly seeing it's the bottom of the revenue curve at the very low EUR 126 million of revenues only in Q1, where the sort of the services now play a fairly major role of the revenue mixing on that one. The sort of the favorable mix is, of course, visible also in our gross margin development that continued to tick upwards. This is really a question of mix. It's a mixture or result of the good work we have done in our equipment renewal and cost points in equipment, as well as our progress in the project margin work we have been doing to the improving project management.
In terms of services and software, it's now 33% of our Cargotec total sales on our way to the 40% or EUR 1.5 billion target we have set for ourselves in next to three to five years' time. Again, the headline numbers don't look that great. Only 1% growth in services. However, in constant currencies, the story is quite different. 9% improvement in Kalmar Services revenues. 10% improvement in Kalmar, in Hiab Services revenues as well, constant currencies. One can see that the in our services business, U.S. dollar is a fairly major component. In MacGregor, in constant currencies, we would have been flat. Similar story what we already see in actually in Q4. Merchant Services were actually slightly recovering already, whereas the offshore sales, they're still declining.
The offshore sales decline throughout the last year was so strong that I think in the comparable quarters when we move ahead, that impact will sort of move away in there. Overall, in constant currencies, the total services revenues would have increased 7% . When we look at our software business, which is almost all in U.S. dollars, that obviously again, had an impact. In constant currencies, our software sales would have stayed at the relatively same level. The terminal operating systems or port ERP systems stayed roughly at the last year's level. However, I'm particularly satisfied about the strategic progress and the market progress we are making now in our software sales.
One example of that one is a major breakthrough we had in with the COSCO Shipping, where they actually now have selected to standardize their port ERP systems into the Navis system. It's a subscription-based deal. This is an example of also the very large port operators now reconsidering the in-house systems and the relatively sort of diversified ERP landscape they still have in their operations. Overall, COSCO Shipping now operates about 38 ports worldwide, and we expect them to start the transformation to the subscription-based Navis systems at least in around five ports already during this year. Another highlight of the good progress we are now making in software space is the commercialization efforts we are doing around the Xvela platform platform, which is our digital platform for information exchange between the carriers or the shippers and the ports, and maybe a few words about that one.
If I look at today, the container flows from port to port between the ports and in the shipping. It's an surprisingly inefficient industry. Overall, we estimate based on the studies we have done together with McKinsey & Company, that the industry loses about EUR 17 billion every year due to the inefficiencies. The information exchange is done with the fairly old-fashioned and sort of insufficient methods today. The ports and ships are not able to share the visibility of the loads and loading and unloading plans well enough. What Xvela platform is able to do is to share confidentially the information about the ship loading, unloading, and stowage during the journey and enables both the shipping lines as well as the ports to optimize the loading, unloading, and stowage during the one ship's voyage. This will result to the more efficient loading, unloading.
The ship will spend less time in ports. That will enable them to either drive more capacity or do more slow steaming, both of them resulting to higher revenue or lower cost or both. In the port side, that actually will result to less moves, less operating costs, and again, more efficient operation and higher capacity utilization in the ports as well. Six major shipping lines have now selected Xvela platform as the platform. The initial deployments are starting on that one. Again, the revenue ramp-up of this one will be relatively slow because it's a subscription or SaaS-based services. Again, obviously this will have a major impact in the profitability when the adoption of that platform will move forward. Strategically, we are more interested in driving the penetration of the system and the platform today than in the short-term revenues of profitability.
When successful, Xvela platform will provide a digital platform for also other new services between the shipping lines and ports in the future. From the sort of software business, let's move back to the business areas. I hand over to my colleague, our CFO, Mikko Puolakka. Mikko, please.
Thank you, Mika, and also good afternoon from my side. Let's start with Kalmar's performance. Like Mika indicated already earlier, currencies had a significant impact on Kalmar's orders and sales. With actual currencies, the orders declined by 3%. Calculating with the comparable currencies, the orders grew by 3%. We saw a very good demand on mobile equipment, especially for terminal tractors in the U.S., and also for forklift trucks. We also got a good number of crane orders, especially or like for the rubber-tired gantry cranes. However, as indicated also by Mika, the automation project orders remained on low level. The sales grew by 2%, and with comparable currencies, 8%.
Like we have been indicating already earlier in the previous quarters, we have had some bottlenecks in the supply chain in Kalmar. That situation has stabilized but is not off the table yet. We had a good performance in Kalmar services, both in spare parts as well as in maintenance contracts. Sales in services grew by 9% in comparable currencies. Kalmar was able to improve the operating profit slightly by keeping the costs on a lower level in Q1 than year ago. Moving to Hiab, where the very good development that we saw already in quarter four has continued also in Q1. Like in Kalmar, also in Hiab, the currencies played a significant role, especially in the year-on-year comparisons.
Orders were record high in the Q1 and grew by 7%. As Mika indicated, when calculating with comparable currencies, the order growth in Hiab was 14%, significant improvement in comparable currencies. The demand for Hiab's products and solutions was especially strong in EMEA, supported by the strong economic growth in the region. The demand was especially strong in loader cranes. In our Americas region, the demand for Hiab's solution remained on a very good level. We did not get any large orders in the Q1 of this year. Hiab's sales grew by 2% with actual currencies, and then 9% with comparable currencies.
Like in Kalmar, we have had in Hiab, supply chain bottlenecks, especially in our European operations, but those are more or less stabilized, so have not gotten worse in Q1. Hiab's operating profit declined due to currency and fixed cost related reasons. The currency impact was approximately EUR 8 million in the Q1. The fixed cost increase is very much stemming from the investments which we are doing in tools which are supporting sales and service operations. These investments aim at improving Hiab's operational efficiency as we go forward. Moving to MacGregor, where the markets are gradually turning to the better. We saw order growth in merchant shipping sector, especially in the cargo handling solutions. In MacGregor, we did not get any single major order during the Q1.
Demand for merchant shipping services grew while the offshore service demand was still on a very low level. Now we have included also the Rapp Marine numbers in our Q1 results. Rapp Marine case, deal was closed in the beginning of February. Like in Kalmar and in Hiab, also in MacGregor, the currencies had a quite significant impact. In comparable currencies, MacGregor orders grew by 7%. Sales declined in all MacGregor divisions due to the fact that those good orders that we have been receiving in the past few quarters, those start to generate revenue later this year then, and as well as in next year. MacGregor's operating profit declined primarily due to lower sales, we are seeking also continuously additional cost optimization potential.
As the next one, let's move to our cost savings program. The Cargotec-wide EUR 50 million cost savings program, which we started in mid-2017, has yielded so far EUR 12 million of savings to date. EUR 10 million of these savings came in 2017, and now in the Q1, we got EUR 2 million from the EUR 50 million program. MacGregor's EUR 13 million cost savings program, basically the actions have been completed, and the savings in the Q1 were EUR 4.5 million. Kalmar's production transfer from Sweden to Poland has been completed and now we are in the production optimization mode. Of course, we continue also on the product cost to design to cost activities in order to mitigate also the raw material price increases.
We anticipate that we have roughly EUR 30 million restructuring charges from these ongoing programs during 2018. Having a short look on the key financials for the Q1. We apply now since the beginning of the year, the new IFRS 15 standards, and the 2017 comparison period numbers have been restated according to these IFRS principles. The restatement impact was for Q1 sales 2017 sales EUR 1 million, and in operating profit EUR 300,000, so quite small. Overall, as indicated already earlier, our sales declined by 2%, but again, eliminating the currency impact and looking with comparable currencies, the sales grew by 4%.
Operating profit was EUR 57 million and reported operating profit was EUR 53.2 million. We had approximately EUR 4 million restructuring charges. These are mainly related to the EUR 50 million company-wide restructuring program. Next, let's move to the cash flow, which was very weak in Q1 . There are no kind of fundamental long-term trends behind this cash flow change. This is very, very much driven by the working capital increase both in Kalmar as well as in Here. The longer lead times, what we are now having, because of the supply chain bottlenecks and shortages are causing extended lead times in the overall delivery process.
Due to this reason, we are having higher inventories at the moment, which are then burdening or have been burdening the Q1 cash flow. We anticipate that the situation should be improving once we can get the lead times shorter and sorting out the supply chain bottlenecks. We have a very strong balance sheet. Gearing was 41.5%, so clearly below our 50% target. We do not have any major debt repayments upcoming during this year. Also, as you can see in the coming years also the debt repayments are very nicely balanced across the years. We have paid the Rapp Marine acquisition price in February when the deal was closed.
Our return on capital employed was 9.4% on the same level as in quarter 1, 2017. Our long-term target here is to get the ROCE to 15% in the next three to five years. The main driver for the improving ROCE will be the profitability growth. Last but not least, our outlook for 2018. We reiterate the guidance for this year and expect the operating profit to be above last year's EUR 258.6 million. With those words, I would hand over back to Hanna-Maria.
Thank you, Mikko. Thank you, Mika. Now there is a possibility to ask questions. We will start with the questions from Ruoholahti. Are there any questions?
Thank you. It's Antti Suttelin from Inderes. Regarding MacGregor and the disappointing order intake, we know that shipyards over last year, I think their order intake grew by some 70% or something of the kind. When will the activity in merchant vessel orders at shipyards start to show finally at MacGregor?
It's very difficult to give the exact timing of the orders. Maybe one indication which we look at is what we classify as a hot projects and project becomes hot when we know that the particular ship we are aiming for has been ordered from the shipyard because then it gets concrete. In Q1 last year, the hot project list was about 30 ships and today it stands at 130 ships. We clearly see a kind of a number of prospects increasing at this stage, especially merchant side. As I already said, the merchant marine or especially the cargo handling orders went up by 47% on Q1. Against that one, we had still a declining trend in offshore side.
Also a bit of more, I think a timing issue on this ro-ro ferry side, we did not land practically any orders in Q1. That's usually pretty steady sort of EUR 100 million business for us on an annual level. Expect that to be still moving fairly steadily forward. I do think we will see strong indications of the merchant side recovering, but it will be a relatively slow. We don't see any very fast recovery on that one. We don't see much of that impact in revenues this year. This will be the lowest revenue year, roughly in the ballpark of last year. That's of course visible in MacGregor result at the moment. The offshore side is still even though the interest levels are up, I think the order recovery will take longer in there.
Thank you. A follow-up on that. You haven't seen MacGregor, or you have not seen any kind of indication that you had lost in the competition?
No, we have seen no indication on that one. We have been out of the some of the markets for a while in China, which then been done by this scrap-to-build national policy, where the deals have gone to the Chinese shipbuilding or ship equipment building companies and primarily the TTS Group ASA has been in a strong role on that one. That's one of the drivers for TTS Group ASA acquisition is the strategically stronger position in China as well.
Yeah. Finally, regarding TTS Group ASA, everything going as planned and still the closing during the current quarter?
Yeah. That's still the plan, and everything is going according to plan at the moment.
Thank you.
Are there further questions from Ruoholahti? If not, we will continue with the international questions. If you would like to ask a question, please signal by pressing star one on your telephone keypad. We'll take our first question. Please go ahead. Your line is open.
Hi, Mika, Mikko, Magnus Raabe from UBS. Thanks for taking my questions. I'll take them one at a time. How did your organic sales growth develop in Hiab in EMEA in Q1, and what was the similar growth in Q4?
Yeah, this is Mikko Puolakka. If we are looking the organic growth, actually, TTS Group had a fairly small impact on the numbers. Roughly, EUR 10 million one should take out from sales if you want to calculate the kind of organic growth numbers.
That was on the EMEA growth in Hiab in Q1 sales growth?
This is basically related to all acquisitions that we have done. Last year, we acquired the Argos business in Brazil. Now in the Q1 of this year, we acquired the Rapp Marine in MacGregor. If we are to kind of look only the European-related acquisitions, Rapp Marine is pretty much the one which is related to the European business. It would be then less than EUR 10 million in the European sales.
Yeah, Mika here. If you talk about Hiab growth in EMEA, the growth was about 6 percentage points in revenue. The US declined roughly 2 points, but again, in constant currencies or in U.S. dollar basis, that also grew in Q1.
Okay, got it. Thank you so much. Continuing with Hiab, could you possibly quantify the impact on EBIT from the supply chain issues in the quarter?
It's really mostly in lost revenues. As you can see that the our order intake is growing clearly faster than our revenues are increasing at the moment. We're building backlog on that one. I would say that if I combine Kalmar and Hiab supply chain, which is really more leading to a sort of longer lead times, we talk about so a few tens of EUR millions of lost revenues in Q1.
Okay. Okay. Nothing material on the EBIT portion there?
No. I mean, there are some cost elements, obviously, because we need to babysit them, some of the supply chain processes, et cetera, but that impact is not that significant.
Got it. Thanks. Finally, how do you find pricing in Hiab at the moment?
We are pushing, we are doing price list increases due to the raw material and currency changes. Probably more important tool than the actual list price increases are the sort of the price discipline. We tend to sort of, we try not to give discounts as much as we have done in the past and being sort of tougher on the pricing and others. We are looking at the sort of somewhere between 2%-5% price increase efforts in our product lines.
That's a list price increase?
Yes.
Brilliant. Okay. Got it. Thank you so much.
Thank you.
We will now take our next question. Please go ahead. Your line is open.
Thank you. I have a question which may be asked the other side of the previous one. In terms of the Kalmar and Hiab revenue trends, how much would you say the effects has been from deliveries that were previously postponed due to the supply chain issues? As in any catch-up effects yet?
No, if I start with Hiab, there is no catch up. I think we are see lead times in sort of 15 weeks, in some cases well over 20 weeks in certain product areas as well. Due to the fact that the orders are coming in so strong, we have not been able to catch up on those lead times at the moment, even though the factory capacity is going up all the time. Also I would say in Kalmar side, we really haven't seen.
Yeah.
a significant catch up at this stage. We've really pushed kind of orders or deliveries from Q4 to Q1. You will see the same push effect from Q1 to Q2 now.
Okay, thank you very much. In terms of Kalmar, the business more broadly, do you see demand in Kalmar as mostly maintenance CapEx, or do you see greenfield CapEx just in small size orders?
We small, mostly see sort of, a small CapEx taking place at the moment. As I said, the equipment side demand is good. If I look at our mobile equipment business, we now have had several months of a strong demand and order intake in there. I was also pleased on some of the crane business that we achieved in Q1, but sort of larger projects, larger automation projects clearly have been all being pushed back at this stage.
Okay. Last question would be what sorts of effects you've seen on margin from this mix?
Generally the mix is. If I look at the order backlog at the moment, the mix is, I would say more favorable for us at the moment. Obviously for the couple of things, the MacGregor portion of that one in terms of the gross margin is lower. That generally increases the gross margin. Also in Kalmar's case, generally the equipment and services business obviously has a higher margin than the related larger pro-project and crane project business does. The backlog mix is obviously more favorable for us at the moment.
Yeah. Okay, thank you very much.
Thank you.
Please state your name before you're posing your question. Your line is now open.
Yeah. Hi, this is Johan Eliason at Kepler Cheuvreux. Can you hear me?
Yeah, Johan, we can hear you fine.
Yeah, good. On services, you said Kalmar services grow 9% in comparable currencies, which is a really strong number. How much is that actually organic? I think you had this acquisition in Australia, if I remember it, impacting the service part.
It's not really I think the EUR 1 million is probably coming from the acquisition. Yeah. These people are nodding their head here, so EUR 1 million was the right number. It's primarily organic. I mean, we've been investing this for quite a while now, as you know, in terms of the sales force, systems, equipment and other. It's good to see that that's starting to bear fruit now. We already saw a relatively good increase in 6%-7% in Kalmar last year. That strong progress is clearly now continuing in Q1 as well.
Are you seeing spare part capture going up significantly in any particular regions or what's driving this?
No, it's, I mean, the services comes from a small stream, so it's the spare part capture rates. We are getting better at that one. We are better in doing maintenance agreements. We are monitoring attachment of maintenance agreement with our equipment. We have increased our sales force in services, so it's coming from many small improvements that we are doing across the whole sort of, smorgasbord in a way.
We have also launched last year the Webshop, both in Kalmar and in Hiab for the spare parts as well. One additional channel for the customers to buy spare parts.
Is that generating a good take up?
It is. I mean, we see actually a good take up on that one. In Hiab side, so far that channel has only served dealers, and we are now in consideration of actually opening it up for direct for customers as well. That should hopefully give us additional opportunities as well.
Yeah.
With the service growth coming through like this, that should have a positive margin mix, I assume, going forward. Can you confirm that on the major crane projects, you're sort of still at breakeven, or are you increasing your expenditure there, as we speak?
That business operates roughly at the break even.
Yeah. Good. Just on the supply chain issues, I guess the most important thing to see here is when we can see the negative impacts on the cash flow reversing. Do you see this for this year, or do you think you will have to carry these higher inventories the whole year into 2019?
It's somewhat hard to predict because the main bottlenecks at this stage are not necessarily in our own hands entirely. If I look at the different parts of the performance, first the sort of upstream supply chain to us, then I look at our manufacturing performance and then our downstream. The good news in the upstream is that at this stage, a very large proportion of our suppliers are actually having their on-time deliveries happening on time. However, you only need about, you know, at this, if I remember right, about 4% of our suppliers are not hitting their on-time deliveries at this stage. The problem, of course, is that that missing percentage can still delay the entire product to be getting out of there.
Having said that one, so the on time deliveries are in the better shape, but the on time or the lead times for those deliveries are longer. As some of the supply chains are fairly complicated, how long we get equipment from China or components from China, for example, our sort of inventory levels in our factories have gone up due to the uneven lead times on that side. The factory performance actually has seen a very good improvement in the last quarter or so the metrics is that I look at our manufacturing performance have been improving. We have another issue in our downstream, clearly at the moment, because of the supply chain, our own organization as well as our dealers have got a more careful and built buffers in the, in the lead times and others.
We have also ready goods inventories that have gone up at the moment. We have issues both upstream and downstream. We expect to start to recover from those ones, but I think it'd be too early to promise that we would be clearing all of that out throughout this year. I would expect that to move to the positive territory. Again, part of that performance relates to our sort of supply chain capabilities to improve their capacity and lead times as well.
You would still, I hope, expect to see an overall positive cash flow from operations this year or?
Absolutely. I mean, if you compare to last year, you saw very clearly as the Q1 tends to be tough for us anyways as it was last year. I do expect the cash flow to recover throughout the year. I don't necessarily expect the whole inventory issue to go out from this year either.
Yeah. Finally, just on these cost savings, just recreating so I understand the numbers correctly here. On the EUR 50 million group-wide savings, you say, the cumulative savings are EUR 12 million out of which EUR 10 million is in 2017. Is this sort of a run rate number that you have achieved? If you look at Q1 separately, is there a year-on-year in benefit yet in those number or is it just a run rate by the end of 2000 or Q1 2018?
This EUR 2 million is comparing to the beginning of 2017 cost level. Basically one can consider it as a kind of run rate, run rate saving already as we speak now.
It's good to remember that this savings program is somewhat back weighted. Effectively, what we are doing is primarily removing our back office activities in different operations. This global business center, we've been ramping up the global business center. We have, Mikko, now what, 200 plus?
Almost 200.
Almost 200 people in the center today. There is upfront cost on that one. Then we are moving country by country, moving into the new operational mode. We have done some of the measures in Finland and Sweden. We are moving to the next countries as we speak. We clearly start to see some of the benefits coming through. Because of the front end investments, the savings tend to be back-end weighted as well.
One has to remember that part of this EUR 50 million savings program is also coming from the indirect procurement savings. Actually most of this EUR 12 million generated so far is coming from the indirect procurement savings, like traveling, like logistics, like buying certain external services at a lower price than what we have done in the past.
Okay. Thank you very much.
Please state your name and ask a question. Your line is now open. Please make sure your mute function is turned off.
Good afternoon. It's Manu Forsskåhl from Nordea Markets. My first question would be on Kalmar. Can you please comment on the way you see Sorry, how you see your utilization rates in that business going into 2018? Obviously, we've in previous quarters discussed that you need to win more orders to kind of be able to maintain good utilization rates. Can you just talk through how do you expect the kind of profitability and the utilization rates to evolve this year?
Are you talking about overall Kalmar or specific business? Sorry, I'm not sure if I understood.
Yeah, I guess we talked about the lack of bigger orders putting pressure on the project business, especially in 2018.
Yeah.
Do you have an update on that?
Yeah. The order backlog in the project business remained roughly at the Q4 level. We had some deliveries, but we also got some orders, nothing major. Overall the backlog is fairly steady on that stage. We are still very much on sort of mode that we need to review the market progress and, if necessary, then draw conclusions. There is no major urgency around that one at this stage.
Yeah, we got, in the Q1, we got a quite nice number of orders for example, RTGs like rubber-tired gantry cranes. These kind of large cranes.
We are basically in a situation where we are taking it day by day to see whether we need to cut costs, or are you seeing that the pipeline is kind of building up in terms of improving larger order activity? Or why are you waiting with the potential cost savings actions?
We don't really need a sort of feel that there's a particular pressure. We have number of automation deals that we have done, three in the last three or four months. There are certain technology commitments that go with those deals and we are still believers in terms of the automation uptick. We're clearly seeing that that's going to take place at a slower rate, at the more phased approach, but we still believe that that's a good business opportunity for us, and it's also strongly that capability is strongly supporting, of course, even the existing business today. Because when you look at the existing business and demand, having the automation capabilities built in, even though they would not be part of the product offering today, is an important sort of competitive advantage for us.
Okay. Following question on MacGregor. Just to confirm that I understood correctly. Did you say that you expect MacGregor sales to be roughly flat this year?
Yes.
We should see the kind of acceleration starting to take place in the coming quarters, or at least bottoming out of the sales.
That's true.
Final question on the services business. That was 7% organic growth in services business excluding the currency. Do you really do you see that you are kind of should we start seeing an accelerating pace because we are coming from a very low level, and what kind of ambitions do you have if you think about the services sales growth for the next couple of two to three years? Obviously you have this group wide target as percentage of group sales, but that is dependent on the equipment business. If you just think about service sales alone and the growth rates, what level would you be happy with?
The target we have set is EUR 1.5 billion together with software, and I think we are on the way to that target. Obviously, I mean, the needle in the service is not going to move fast upwards either because it's coming from relatively small streams. You need to win it by spare part, by spare part and customer by customer. Very clearly the hard work that our services organization has done in the past two years or so has sort of started to bear fruit, and it's visible in our numbers.
Okay. Thank you.
Thank you.
We'll take our next question. Please go ahead. Your line is open.
Yes, this is Tom Skogman from Carnegie. I was wondering, first of all, if you have seen any kind of sauce that's from the political situation, you know, in discussions with customers.
We have not actually directly. I mean, obviously a lot of speculation around the topic. The whole situation of course is very, very unclear at this stage. I mean, what we of course are seeing, especially in the port side, is that the sort of larger one-time investments are not taking place as we speak. It could well be that the political environment or is one element of that one, but I have no direct evidence or customers quoting that directly. There are a number of factors that are affecting that one.
Okay. I wonder about TTS. When is it fair to expect it to be consolidated given the knowledge you have at the moment?
We stated that we expect that to be closed at the Q3, and obviously this is out of our hands in a sense that that really depends on the competitive authority decisions and we will follow on that one. I would say that that's the earliest timeline that we have available at this stage.
It could be consolidated already from the beginning of the third quarter, that's still possible?
I think, when we say Q3, I'm probably at this stage looking more towards the end part of the. The earliest I think we would be seeing, would be the Q4.
Yes.
It could well slip further as well. Again, this is depending on the competitive authorities, and also in places like China and Korea. The predictability of that one is not particularly good. Obviously, we are already in discussions, especially in countries where this is possible, but, again, it's sort of not directly in our hands.
Okay. Then trying to get a better understanding about what's happening in Kalmar. If you go back to 2012, we have had sales of EUR 1.4 billion, then EUR 1.6 billion, EUR 1.5 billion, EUR 1.6 billion, then the two last years, EUR 1.7 billion, and the last year down to EUR 1.6 billion. What I understand is that this mobile equipment as a share of the business is growing pretty rapidly. You know, how large share of Kalmar sales is coming from the mobile equipment this year and the last two years?
Mikko, overall it's a good question. I mean, in hindsight, of course, when we talk about the market, when all the numbers are out from 2017, we clearly saw that 2017 was a fairly soft year for port investment. Now that the reported numbers from all the relevant players are out, if I quote them on top of my head, ZPMC port crane business, if I remember correctly, declined by about 22%-23% . Konecranes Terex port business declined by about 11% last year. What I have understood from Liebherr Group's announcement is that their port crane business declined about 10% last year. Kalmar revenues declined by 6% last year. We did relatively well, but it's quite clear that the market was soft last year.
Now, if I look at the demand at the moment, it's clearly being steady or I would say even a sort of strengthening now on the equipment part. Part of that is coming from port. Also the industrial side is showing the strength there. I don't know, Mikko, if we actually see that the services proportion is increasing at this stage, but if the mobile equipment, I don't think it actually has moved in terms of proportion that much up.
Not that much.
Yeah.
I mean, if we take mobile equipment and the related services, it has been 75% of total Kalmar. The increase is coming, like Mika said, mostly from the services which are related to mobile equipment.
Given you have moved your production to, you know, Poland last year, you should have a pretty significant cost advantage to your peers. Do you see that you're gaining significant market shares in the mobile equipment?
I don't think we are gaining significant market shares. I mean, we are the market leader. We remain to be a market leader. We obviously want to sort of ensure our sort of profitability remains at the best in the marketplace at the moment as well. On the reach stacker side, I think our market share has been relatively steady if slightly improving on that one. The heavy forklift truck market is more difficult to estimate because it's so fragmented on there. I think it's the revenue improvements are probably very much due to the good demand as well. I haven't really seen a, or can't see a significant market share shift between the players at this stage.
From our point of view, we, our target is to remain the market leader roughly at today's market share, but very much then driven by also protecting and improving the profitability on that business.
Yes, thank you. Finally about your best understanding on MacGregor's profitability on an EBIT level this year, given the lack of offshore orders? You know, will it still improve this year given its sales flat guided? The guidance was the flat sales kind of excluding any impact from the.
Yeah, I think the flat sales is still, I mean, the order we, as you know, we saw the order started to uptick a little bit there towards the end of last year and slightly up again in Q1 as well. That, those, or slight order upticks should start to be visible in our revenues in 2019. They're not so much in this year. As Mikko was saying, we are clearly monitoring the situation, the demand in different parts of the organization and are looking at the different cost, further cost-saving measures if necessary.
Okay, thank you.
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Yes, this is Tomi Railo from SEB. Just on the group-wide cost savings, can you tell us are those visible on the group cost level? What is the guidance for the group cost level for 2018?
The savings are actually not that much visible at the group cost or the corporate cost level because most of these savings are done in the business area. Most of this year to date or to date, project to date, EUR 12 million is visible actually in the business area's own costs partially above the gross profit and partially below the gross profit. The best proxy for the corporate costs would be more or less on last year's level, roughly EUR 40 million.
I believe it was, around EUR 8 million in the Q1. Any particular reason why, it was, a bit low?
Typically this Q1 is a bit lower. Not necessarily all service providers are sending all their invoices in the first three months' time. The year starts always a bit lower.
Thank you.
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Hi, this is Magnus from UBS here with a follow-up. Just on one of your earlier comments, posted by a question from you on inventories. Did you say something that dealers build up buffers in equipment due to longer lead times? You mentioned something about downstream issues. Could you clarify that?
It's not so much buffers, but the, when we have had difficulties, as we saw in Q3, people are building sort of expectations. Typically, for example, we've seen now cases when we looked at that one, that we have said that the delivery time is, say, seven weeks. The, our own organization or the dealer takes the view that, well, you know, it probably could be as much as 10 weeks, and then they sort of, that's the customer promise that is done. We actually now are able to deliver. Our on-time delivery performance actually is getting pretty good again.
We deliver it in seven weeks, in some cases in six weeks, and suddenly we have a situation that the customer is not ready to receive the equipment in, within that timeframe. We have some of the front, sort of ready equipment at this stage that is sort of there too early from the customer promise point of view. I think that will sort of when people start to build confidence back onto the, back on to the deliveries that issue will disappear. We have obviously have a number of kind of ready equipment that we are unable to recognize the revenue fairly quickly now.
Go ahead. Can you mention any, is those the specific, equipment from Poland again, all the same?
Yeah, it is. I would not be particularly concerned about the kind of, building of buffers in a sense that most of the equipment we deliver is customer specific. They are usually manufactured to a particular order. There's a customer and a deal behind that one. They are not sort of ordered just in case into the stock. We do very little of that one.
Yeah, that's all. Great. Thank you.
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Hi, it's Antti Kansanen from DNB. I got a question regarding the longer lead times. Do you see your customers reacting by placing orders more earlier than usually? Is it the organic growth that you're seeing in orders a fair representation of the underlying demand? Secondly, do you see your competitors suffering of the same supplier or lead time issues so it's not affecting or going to affect your market shares or pricing? Thank you.
It is the underlying demand actually that is driving that very much. We are very sort of conscious or careful of avoiding the situation where we would still start to build sort of orders or stock in there. As I said, because the effectively, to a very large extent, our equipment is always built for a specific customer case. We don't really have a standard product as such. If I look at then the competition situation, Palfinger AG of course is the one that is quite visible, a direct competitor to Hiab. Very clearly, they have suffered from the same supply chain issues. At this stage, when you look at, for example, the loader crane business, obviously ourselves as well as the Palfinger AG is having longer lead times.
The actual single biggest bottleneck that is forming in Europe at the moment is actually the installation capacity. I believe in places like France, the lead times for installation can go up as much as six months at this stage. The biggest bottleneck right now is funnily enough, is not the manufacturing capability of the equipment vendors, but the installation capability out in the field.
All right. Thank you. Secondly, just a clarification on the previous question on the workload issues in Kalmar automation projects. Are you saying that the current number of activity related to these smaller automation deals and other orders is enough for you to see that the workload situation, the utilization and therefore the profitability will remain satisfactory going in later this year and next year? Or are you expecting or pricing in a pickup in customer activity in there?
I don't expect any quick pickup on customer activities as the clear the need is there. Talking to customers, they understand the benefit. The labor costs are still clearly rising faster than the productivity of the terminals, and this is the situation they have to sort of face in the coming years. We are kind of balancing the technical requirements and capability with the order book we have at the moment.
All right. Thank you.
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Manu Forsskåhl from Nordea Markets with a follow-up question. Can you comment on the pricing situation in Hiab? I think you mentioned that you are raising prices to some degree to offset the raw material costs. Are you able to offset these U.S. dollar impacts in the U.S. business that most of your competition also produces their equipment in Europe, so they have the same impact from dollar? Can you comment on that?
I would say so that in terms of raw material prices, the product development we are doing is able to compensate, at least at this stage, the raw material price increases. We still are looking at the declining product cost compared to the previous year. At the lower decline rate than we saw in the previous few years because despite the good work that we do in design to cost and product renewals, the raw material prices are slowing down that progress at the moment. We are able to push some of that into the customers as well on the range that I indicated earlier. It's very clear that the currency change and difference right now, especially in Q1, is way too big to be able to compensate that one with the customer pricing.
As you said yourself, most of the competition is facing the same situation. There is usually a limit how much you can sort of, push the customer pricing without getting to a negative reaction on that one.
Is it fair to say that if the dollar stays at the current level, you will be gradually able to start offsetting the impact of the EUR 20 million-EUR 25 million hit you expect from dollar to the EBIT in 2018? You could actually get a potentially gain from price increases if the momentum in the U.S. end market remains strong from demand point of view.
Certainly. I mean, we are doing a number of things to offset for that one. The customer, or the pricing increases is one factor, and you need to do that gradually. Obviously you're looking at our supply chain as well and the components, et cetera, and different other ways to fight for the currency impact. Obviously, and as Mikko was saying, the impact of the currency will be diluted towards the end of the year. The difference with today's rate is still that EUR 20 million to EUR 25 million, and the impact of clearly the biggest in Q1 in the neighborhood of EUR 8 million.
Okay, thank you.
We will now take our next question. Please go ahead, your line is open.
Hi, this is Johan again. Just a short question on automation projects. You took a small order in January, I believe it was, from for a pilot EUROGATE Wilhelmshaven. I saw that the CEO of EUROGATE at the annual conference a few weeks ago said they will clearly focus on automation going forward to be competitive. Is it mainly referring to this pilot project, or you're actually seeing that they are taking further steps already in automation? What could EUROGATE alone imply for you in terms of order value if they decide fully on automation?
The EUROGATE deal was actually already done in Q4. Even though I think the announcement came out, there was another deal that we did in Q1. The EUROGATE is good example of, in a way that the potential, when they deploy the automation fully into the scope that we have agreed will be substantial. At this stage, all we are doing is doing a kind of trial project in one of their ports and only in one area of one of that port. Initially, only a selected number of equipment in there. The deal value is sort of relatively low at this stage. Obviously, again, the sort of the potential is there once they are satisfied with the technology and will deploy that fully, that can be a substantial opportunity for us.
Very clearly, I mean, when I look at that as a good example, our expectations a while ago, and we clearly were too optimistic in our expectations at early part of 2017. We have seen this coming down and port operators approaching this whole area very conservatively with this kind of phased investments and moving very gradually and slowly ahead.
Okay. Thank you very much.
It seems like that there are no further questions. Thank you for very active participation in this event. We will publish our Q2 result on July 19 in the middle of hopefully hot Finnish summer. Before that, we will also host an event with the President of MacGregor, Michel van Roozendaal, and Head of our Sustainability, Carina Geber-Teir, here in Helsinki on May 21. You are also warmly welcome to that event. Thank you.
Thank you.