Good afternoon, ladies and gentlemen. Welcome to Cargotec Q3 2016 results briefing. My name is Hanna-Maria Heikkinen, and I'm in charge of investor relations. Key message in our Q3 report was that our operating profit margin improved. The market environment in MacGregor remains challenging, and we announced new cost savings program today. Our CEO, Mika Vehviläinen, and CFO, Mikko Puolakka, will go through the development in more detail level. After the presentation, there is possibility to ask questions. Please, Mika.
Thank you, Hanna-Maria. Welcome on board as well. Your first new announcement. Good afternoon, good morning from my behalf as well. Welcome to Q3 announcements. Without further ado, the highlights for the Q3 there obviously is that the profitability in Hiab continued to develop favorably. However, the market situation as very visible is still very challenging in MacGregor. Our order book from the end of the year 2015 has declined. That decline is coming primarily from MacGregor. Our sales declined 8% year-on-year to EUR 864 million. That decline came solely from MacGregor, both Hiab as well as Kalmar had increased revenues year-on-year in Q3.
Operating profit was somewhat down against the difference coming solely from the MacGregor development and operating margin improved to 7.7% from 7.4% one year ago. Our operational cash flow was still satisfactory at EUR 34.4 million, roughly at the same level as it was one year ago. Due to the positive operating profit and cash flow development, our gearing is now down to 41.6%. Market environment overall from January to September is such that the container traffic growth continued but at a lower pace than it has done in the previous years. We still see the drivers of further investments to be in place, larger ships driving up to 30% increase in yard capacity.
The new traffic routes due to the Panama Canal expansion and Suez Canal driving for new port investments as well as the efficiency in need increases in ports driving automation are still very much in place. Due to the situation in shipping area, which is very demanding at the moment, we are seeing strong consolidation of the shipping lines around the alliances as well as the real mergers and acquisitions. Those mergers and acquisitions as well as the alliances are then driving further price concessions on the port operators. At this stage, it's somewhat unclear for the port operators how the new traffic volumes will be landing due to the changes in the shipping line set up. That uncertainty caused by consolidation of the shipping lines is then clearly delaying our customers' decisions.
I said we still see the strong drivers behind that one and our order pipeline still looks strong in Kalmar. I come back to this one in a moment. In Hiab's case the sort of the activity in construction building remains favorable in U.S. and also in Europe although of course that country by country variations are clear in here as well. The marine side, both the merchant marine as well as the offshore are clearly suffering. Very few bright spots available in that one. If I look at overall numbers and obviously one of the headline numbers that is catching attention at the moment is the 19% decline year-over-year in order intake in Q3. I want to sort of tackle that one right away.
If I look at that one, business area by business area, first of all, the decline obviously is coming very strongly from MacGregor. Due to the strong position we have in our product segments and due to the segments we are in primarily around the container shipping, bulk ships, et cetera, market is affecting our numbers there and sort of it is what it is in terms of the market situation in there. Those declines are very visible also in MacGregor order numbers. In Kalmar's case situation is somewhat different however. If I exclude the large project deliveries and automation orders from Kalmar order numbers in Q3, actually the remaining sort of the base business of Kalmar had an increase in order intake.
Last year in Q3 we scored two very large project automation deals with total value of EUR 85 million. This year simply we did not land any significant orders in automation or projects. This is primarily due to the fact that customers very clearly are right now delaying their decisions due to the shipping line consolidation that I mentioned earlier. We still see the drivers to be in place when it comes to the order intake in Kalmar market environment with the increase in shipping size, sea traffic routes, et cetera. We still see our pipeline remain strong in Kalmar. Obviously, the timing of these orders is still a question mark. Hiab's case also the orders declined. We scored one large military order into the India market last year in Q3.
Without that military order, we were fairly flat year-on-year in Hiab. Generally Q3 is somewhat soft quite often for Hiab due to the holiday season in middle Europe, et cetera. If one is, for example, concerned about the U.S. market, our order intake in US in Hiab actually increased by about 4% year-on-year in Q3 2016. Overall, I see that we have timing issues in orders in Kalmar as well as in Hiab in the sort of special larger projects landing both in Hiab and Kalmar. MacGregor market situation remains difficult, I see more stronger pipeline and good outlook still remaining both in Kalmar's and Hiab's case.
If I look at the order book, it's good to remember that Kalmar order book actually is at the same level as it was at the end of 2015. If I look at the profitability of that order in the order book at the moment actually is more attractive than it was at the end of the year with the better mix in there. We have had some delivery issues in mobile equipment due to the production changes in our order book log for accepting the mobile equipment has increased from the year ago. Operating profit due to the lower volume decreased somewhat into the EUR 66 million range, but margin actually improved to 7.7%.
Cash flow being EUR 74.5 million, and debt coming down due to the good improved cash flow there. The restructuring costs that are affecting primarily Kalmar and primarily around the move from the production from Sweden to Poland that will drive further efficiency and margin improvements in mobile equipment business was affecting the earnings per share in Q3. With that one, let's look at the detailed analysis business area by business area, and I'll hand over to our CFO, Mikko Puolakka.
Thank you, Mika. If I start then with Kalmar. Kalmar's order intake declined 16%. As Mika also mentioned there, customers postponed bigger investment decisions. I need to point out however also that, during the comparison period, i.e., in quarter three 2015, we had EUR 85 million of orders but automation orders, and excluding those basically we would have been on last year's level or even slightly above. Kalmar's order book strengthened around 5% from 2015 year-end levels and amounting to EUR 922 million.
If we look Kalmar's sales grew 6% year-on-year, being EUR 436 million, and profitability was 8.3% versus 8.8% year-ago. Profitability was to some extent impacted by the increased investments in automation and software development. Also the mix had a negative impact on our profitability in Kalmar. Also the service business was not developing in line with our expectations, and we have put in place a some program to correct that. Moving to Hiab. Hiab's order intake declined by 8% as we did not get similar kind of large defense orders as we did during the comparison period. Otherwise, the core business development in Hiab was good. Hiab's sales grew 9% and profitability continued to improve.
EBIT margin excluding restructuring costs was 13.4% versus 11% year ago. In general, we can say that we have been growing faster than the market in Hiab, and the profitability improvement in Hiab is very much driven by higher volumes and improvement in the delivery capability as well as a few products which we have been investing in the past years. Moving to MacGregor, where the challenging market environment continued. MacGregor's order intake declined 38%, and the order book decreased 21% from 2015 year-end. Sales for MacGregor declined 42% year on year, and the profitability excluding restructuring costs was 1.7%, a decline from last year's 4.8%.
On the positive side, we have a new joint venture in China announced very recently. This joint venture is expected to strengthen the market position and local connections in the Chinese market. MacGregor and Nanjing Luzhou Machine Company Limited from China have signed the joint venture contract in September 2016 to form the CSSC Luzhou MacGregor Machine Company. LMC will own 51% of this joint venture and MacGregor 49%. We have also started new measures to tackle the lower market environment in MacGregor. As you have seen today, we have announced a EUR 25 million cost savings program related to that.
Looking a bit more detail into that program, as the market situation in MacGregor is challenging, these cost savings are definitely needed. In addition to the ongoing or already completed programs which are expected to create this year EUR 30 million savings, we have now launched a new program which will target to lower the 2017 cost by EUR 25 million from 2016 level. These savings measures include amongst other items, business reorganizations and personnel reduction. It is estimated that these measures would especially impact operations in Norway, in China, Sweden, Finland, and Singapore. According to the preliminary estimates, the savings measures seek a reduction of approximately 260 full-time equivalents.
The savings measures are estimated to result in restructuring costs in the final quarter of 2016 and then in the early part of 2017. Moving to cash flow, we can also indicate that our cash flow developed nicely, it being EUR 74 million in quarter three on the same level as a year ago. Our gearing, thanks to the good cash flow, has improved 42%. No notable other changes in our working capital except that the advances received have declined. This is because of the slow orders, project type of orders in Kalmar and MacGregor. Looking at sales mix, business area sales mix, higher share of net sales have increased. Kalmar was still the biggest segment however.
Kalmar is equaling almost half of the total Cargotec sales. Typically, EMEA is still the biggest geographical segment equaling 41% of our net sales. APAC's share has decreased due to the low orders, especially in the MacGregor area. Moving to the segment information. Kalmar's geographical mix is rather balanced, more or less one-third in the three regions. EMEA is clearly the biggest in Kalmar's business, and no major changes in the sales. Also in Hiab mix has remained rather unchanged, EMEA being the largest region, basically where all product lines have had a nice growth now in the first 9 months. is still an area for Hiab also with the development as you can see from the right side.
APAC remains the main region for MacGregor due to the industry concentration. When looking our financial metrics, we are definitely moving to the right direction. Operating profit margin was 7.7%, and the annualized return on capital employed was 10.6%. With those words, I would invite Mika Pekka to continue with the strategy.
Thank you, Mikko. A few words about strategic implementation before we open up for Q&A. Our three strategic must-win battles, as most of you remember, are services, digitalization, and leadership development. In services, we have made progress in many areas. We have launched a new webshop for our spare parts. In Hiab and MacGregor we enhanced our cooperation with shipping lines regarding the spare parts delivery acceptance. Overall, I would say financially at the moment, obviously MacGregor Services business is under pressure because shipping lines looking for every possible saving, but we are doing all the right measures in there and able to protect our position there very well despite tough market conditions.
I'm also satisfied with our services performance in Hiab, where the services are growing and especially considering the in-house based development over the last 10 years, it's good to see that against that development we are able to develop our spare parts and other services development into the growth in Hiab. One area that I'm not entirely satisfied with is the services development in Kalmar. Obviously, there are some market related outside factors related to customer safety investors in certain ports are under pressure financially, but also very clearly we have had some internal execution issues. I'll continue by changing some of the structures and reporting lines regarding our services business. As well as team starting a more sort of a focused program driving the implementation and revenues in Kalmar's services business on the weekly basis follow- up.
I'm very confident that that program will deliver the results and deliver the potential we have in that service itself. In digitalization, we continue the investments based on our new Cargotec IoT cloud-based platforms, and we have a number of initiatives going on, where we work together with our customers in all of our segments, developing new products and solutions for further delivery into the market. To leadership development, we have gone through the top 200 executives in Cargotec with them, sort of heavy 3-day workshops, and we'll be expanding the leadership development activity next year into the top 800 in Cargotec.
Overall, very clearly, we have invested into the strategic initiatives, and we will continue to invest into our R&D that is delivering better product margins and more competitive products into the digitalization and some of the service development. Of course, we have invested very heavily into the global services and financial platforms overall, roughly EUR 100 million over the last few years. It's very clear that we are now getting to the stage where we can start to take an advantage and leverage those platforms, driving further changes now set up and then delivering operational efficiency and savings into our support functions in the future in this area as well. In terms of our guidance, that remains unchanged.
We expect our sales to be flat or slightly down from the 2015 level, and we expect our operating profit to improve from 2015 level of EUR 230.7 million. With that, I would like to thank you for your attention and back to Hanna-Maria.
Thank you, Mika. There is a great possibility to have questions, and we will start with the questions from Ruoholahti, if there are any. It seems that the presentation was crystal clear here. We will continue with the international questions.
Thank you. If you would like to ask a question at this time, please press the star or asterisk key, followed by the digit one on your telephone. Please ensure the mute function on your telephone is switched off to allow your signal through to our equipment. If you find your question has already been answered, you may remove yourself from the queue by pressing star two. Once again, that's star one for your question. We will take an opening question from Manuel Rumpfhuber of Inderes. Please go ahead. Your line is open.
Good afternoon. My first question would be on the Kalmar. How do you see the orders for these larger projects and automation business? What confidence do you have that we will see them returning and by when would you expect those orders to return and the kind of uncertainty related to all this consolidation being resolved? maybe a follow-up question on that, but you mentioned that the order backlog stands at the same level as it was at the end of 2015. Should we interpret that it indicates the sales could be 2016 stable compared or 2017 sales could be stable or lower than 2016?
Thank you for the question. First of all, as I said, the base business in Kalmar is actually performing very well, and we are up year-on-year, but we simply didn't land a single large order in Q2, Q3, which of course is unfortunate. In the springtime, I was a lot more optimistic about that one, but we didn't, I think, consider carefully enough what's happening in the shipping side due to the huge pressure in there and that consolidation now actually enabling then the shipping lines to drive better deals with the ports and hence causing uncertainty in the port side. That clearly has made a port sort of decision makers pause and look what will be happening on that one, and that was very visible on that one.
We are still very confident that those orders will come. It's just physics will drive that partly, as I said, bigger ships or yard capacity required. The business case for the automation is quite obvious, and I think we see, for example, yesterday the announcement from one of our competitors that these larger deals still take place and automation will also advance on that one. The timing of this one is something that is a question mark and it will be possible that some of that will already happen in the Q4, but that's by no means certain for us. I think this consolidation phase and uncertainty with the shipping lines is estimated to last roughly 6 months, but of course, some of that time has already elapsed as well.
What stage of that one will then that sort of decision makers pull the trigger is a question mark as well. That will happen whether it will happen next 3 months or 6 months remains to be seen. As you said, and you said the sort of the backlog is now roughly at the same level as the end of last year. How the backlog then profile is somewhat different, and we have delivered the larger projects. Now that they're thinking about the backlog at the end of 2015, we have more sort of short-term, higher profit deliverables in our backlog. When part that's due to the delivery difficulties we have had in the mobile equipment that has then contributed to the mix of Kalmar, as Mikko also talked about that one.
The profit margins in the backlog are now better than they were at the end of 2015. Now of course, pretty much depends on the larger orders and the timing of those ones, how much we can then help on top of the existing backlog into the 2017 revenues.
Okay, thank you. The second one question would be on MacGregor. Can you just give us some idea about how the orders we saw in the third quarter, how those relate to the shipyard orders? Are you already taking orders on those ships, what shipyards received at the start of this year, meaning that we are kind of already seeing at a very low level? Are you still taking orders for those ships that were ordered at the end of 2015 when activity was at a very much higher level?
No, I think those are all gone. We are clearly sort of taking orders for the latest. Obviously, we've seen a couple of things are happening clearly. From the ship order to our orders and the capacity coming out, you probably are likely to see shorter periods. Again, the ship delivery times are extending. The shipyards have more capacity. They are not in a particular hurry to sort of push the ship out as fast as possible. That tends to always happen in downturn. Many of these yards in China, for example, Korea, have an employment effect as well. That is postponing the delivery times, which is of course visible in MacGregor revenue decline partly as well.
If you look at Clarksons estimates, they estimate when it comes to merchant marine, the ship order numbers should actually have increased in 2017 compared to 2016. Order numbers. The delivery numbers are still going down. If I look at our order backlog development, we estimate also that the MacGregor revenues in 2017 will be lower than they were in 2016.
Okay. Final question. On a group level, the order book stands now almost EUR 350 million below the level of 2015. How should we think about the timing of that book? Is it similar to last year, that kind of thinking about 2017? We're starting from a EUR 350 million lower level or is there some reason to believe that a larger part, as you said, in Kalmar, will be delivered in 2017?
Yeah, I think the dynamics of course are very different in all three business areas. In Hiab, besides the difference really mainly come from the timing of those large military orders which tend to have a very long delivery time, and we have not landed those now. Lately there hasn't been a market for that kind of orders. Overall, I think we see a very good positive development. If I look at the Hiab markets outlook, I think sort of slight positive movement going on in Europe with the improvement in the construction sentiment. The truck registration numbers are expected to grow in 17 for the compared to 16. U.S. the construction industry remains at a very high activity level.
The truck registration numbers based on the IHS Markit statistics are actually expected to grow roughly 10% from 2016-2017. I have a fairly good sort of feeling and sentiment when it comes to the Hiab market outlook and the order intake. MacGregor, as I said, it is what it is unfortunately. The market is very difficult and it's, yet I think too hard to sort of predict where we reach the bottom on that one at that stage. Kalmar is really a, the base business is doing well. The backlog is better actually than it was a year ago. The pipeline on that business looks very strong as well. The big question here is now the timing of the larger deals and when they will start to realize.
We're obviously looking at the repeat orders for the existing automation cases and the expansion of those ones, and as well as then the new potential deals and the timing and the likelihood of winning those are both of course always a question mark.
Okay, thank you.
We will take our next question from Antti Sutinen at Danske Bank. Please go ahead. Your line is open.
Thank you. This is Antti. I would have a few questions on Kalmar and then on MacGregor as well. Would you say that the big ship related capital expenditure in the terminal industry is still increasing? Has it flattened out or is it falling at the moment?
If I take that one first, Antti, I would say that we haven't even yet seen much of the big ship related investment in there. Many ports today, they handle these bigger ships, for example, turning the ship around during the loading, unloading, which is highly inefficient. We've seen some of that due to them partly by investment into the newer. We see some of that from the crane furnishing, but I would say that we are early stages. One has to remember that many of those ships are only now being delivered and are entering the traffic.
Okay. That driver should improve in your opinion?
Yes.
Okay. Then automation. In what geographical regions do you see most demand for automation?
Well, I take one area which is on purpose which is of course small but it's sort of interesting, I would say laboratory, which is Australia, where we are now automating the fifth port. I think in, like in many other technologies and industries, you start to see these tipping points happening where so much of the market is already automated that the pressure for the existing players to either. You have to do something. If you know that your competition is operating at 20%-30% lower operating cost than you are, you start to see that market gravitate towards them. Obviously we are far from that in any of the other markets. Surprisingly, I would say that we see that in all markets.
For example, China, even though of course the decline probably in the volumes is maybe the strongest and there is a plenty of capacity available, we see many of the Chinese ports contemplating and planning and some of them implementing automation solutions today as well. Those are primarily driven not so much by the labor cost savings, but the access to the labor and in some locations also land utilization and efficiency questions. In U.S. I think the business case for the automation is a very strong one with the very high cost of unionized labor, but that unionized labor is probably one of the reasons why the progress has been quite slow there.
We are seeing marks on that one, and I think the current ports, two ports that are operating in Los Angeles are both viewing the development and the performance they are achieving quite favorably at the moment. Europe, again, same labor sort of cost issues there as well. There are a number of ports we are in the discussions in terms of actually starting the automation project as well. Again, the timing of this one is a question mark. Obviously, even though the market is becoming harder for the ports in a way that the container traffic growth is slowing down, the consolidation of the shipping lines is actually putting more pressure into the ports.
One can take also the view that this is actually could be favorable for the automation development because the further financial pressure for the ports will start to drive them to seek for further efficiencies because the port business traditionally has been quite a profitable business. The financial pressure to do these investments has not necessarily been there.
Yeah. Okay. If you could just clarify what you mean by alliances, asking for better deals with terminals, do you mean that they are pushing simply prices lower?
Yeah, exactly. I mean, what they will do is, what we're hearing them doing is they consolidate the volume. As you know, in many of the larger ports, you have number of operators. Let's say Rotterdam or Hamburg as an example. If you're an alliance, one of your shipping line might have gone to an operator A, the other one has gone to operator B, and maybe the third one to operator C. What you do now is that you combine your volumes and then you go back to the A, B, and C and say that this is my combined volume now for you, what's your best price? That's what's usually happening at the moment.
Obviously, so if you're A, B and C, and you don't know whether you're going to land that alliance deal or not, that certainly will put sort of consideration in your investment decisions.
Yes. Thanks. That's all for Kalmar. A couple of quick questions on MacGregor. First of all, is the EUR 30 million cost cutting program now fully visible? Was that fully visible in Q3?
This is Mikko Puolakka. It's not fully visible yet. We have done EUR 24 million from that compared to last year in the first 9 months. You will see some impact, some positive impact from that during quarter four. By the end of the year, it should be EUR 30 million.
Okay. I would like to ask, where is currently, the average employer cost per capita or per employee in MacGregor? Where are we now?
We don't disclose those numbers. We are also quite heavily weighted to the more expensive countries. I don't think actually the average employee number necessarily gives you the answer because we have, for example, factory and assembly and service operations in China where the costs are average. Then again, we have some fairly heavy operations in Norway, where the average employment cost is quite high. As you have seen from the previous restructuring announcements and the restructuring announcement today, many of the cost saving measures are targeted for higher cost countries such as Norway, England, Sweden, and others. You will see higher than average labor cost savings coming from these things announcement.
Yeah. What I would like to know is how your P&L looks like. What is variable cost and how much is labor cost? Okay, let's rephrase this. What is your total personnel cost in MacGregor currently?
That we have not disclosed.
Okay. That's all. Thank you.
ourse very specific. There is relatively little direct labor in a production. We have very, very few production facilities. A lot of the challenge is to be specific on that one is the absorption rate. So some of the costs are either fixed or direct costs, even if they are involved in certain products, projects or others as well. That tends to vary. We are... And that's why also when we talk about the savings, we don't talk about fixed costs alone, but it's a combination of fixed and indirect costs as well because the labor moves between the indirect and fixed or direct and fixed depending on the project. I mean, the project volumes are down
It's very important that we tackle also under absorption as well as the direct and fixed costs there as well.
Yes. Thank you very much.
We will take our next question from Johan Eliason at Kepler Cheuvreux. Please go ahead. Your line is open.
Yeah. Hi, this is Johan. I was just curious what you said about this, the Konecranes, sort of announced yesterday. Did you say that the automation part is still to come and you are tendering for that one?
My understanding is the deal, and is that it's, it is including the automation and obviously some Konecranes. First of all, congratulations if they are able to close the deal. I also view it from the positive angle in a sense that first of all, it confirms that port operators are willing to invest. Secondly, it also confirms that people are leaning into automation and willing to invest into automation. It also shows, by the way, that how sticky this automation deals are because it's an existing customer of theirs, that there are certain and very specific software structures around the automation that are, and it just shows how important is winning these customers. The automation deals and software related deals tend to be quite sticky.
That's good evidence of that one as well.
Yeah. Yeah, maybe it wasn't so surprising that they would win this one on the East Coast, obviously. Now, I was also intrigued by the value of that one. Do you have similarly big size to EUR 100 million plus type of orders in your pipeline?
I don't think we have anything. It depends how you order. My understanding is that this was a multi-year large deal that they ordered number of... If you look at our larger automation deals, they have tended to come in phases. If you look at the London Gateway, we are now on phase IV of 5, I think, if I remember correctly. TraPac at the Port of Los Angeles, we have done, I think, three phases, if I remember correctly, and I could be off one or two phases on this one. There are still both in London and TraPac room and space for further expansions as well.
They will end up being probably in the small part that some customers are actually doing this so that they make different investments and sort of turn the port into the automated ports, phase by phase or key by key. In this particular case, yesterday, I understand they actually did a deal for the whole yard at one go.
On Kalmar, in the beginning of the year, you sort of warned a bit about the margin in the first half of the year, and you expected it to improve in the second half. We look at Q1 margin in Kalmar was down year-over-year, but Q2 was up, and now Q3 margin is down year-over-year. What's your expectations here for the full year? You said you have a good backlog and it's more mobile equipment. Should we expect a strong Q4 delivery period with equally strong margins, or what's happening here?
Yeah, honestly speaking, I think the Kalmar margin development has been somewhat of a disappointment for us, and there are number of factors affecting that. Mikko also elaborated this. First of all, according to our strategy, we have increased our investments in software development as well as automation. Those, they are also increasing our costs there according to our plan. The delivery mix hasn't been quite what we expected. We have had some delivery issues in our mobile equipment because of the plant change from Sweden into Poland. We have lost labor in our Swedish factory at faster rate than we were expecting. The Swedish employment market is very, very good. Hence, we have not been able to keep up the plant production volumes there as the Polish manufacturing capability is not yet in place.
We need to actually expand the factory there to enable that one. We are behind in deliveries in there and that's increased the backlog, and that's one of the better increase. The project deliveries actually have gone according to plan and are at better profitability than have been in the past. Still, obviously, the mobile equipment business is more favorable for us. The third element, and the one I'm personally quite disappointed is that the services business has not progressed quite as well as we planned. It's practically flat year-over-year. I understand we have some headwinds in certain markets due to the customer situation. Also, frankly, we have room for improvement in our execution, and that's now put on the sort of weekly follow-up and a program mode to enable that.
I expect us to be able to recover in the services side and start to show growth. Together with the mobile equipment business will improve the margins of the Kalmar. Now, the question of course is that the new larger deals, if and when we get those ones, tend to be at lower margin than the existing ones, and they tend to improve all the time. The timing of those orders and related deliveries will of course then have a sort of impact on the proportional margin of the Kalmar as well.
If I understood you correctly, I noticed that the associated income has gone up quite a lot, and I guess a big chunk of that goes into the Kalmar division, which to some extent is related to this big project. How much R&D costs did sort of specifically hit Kalmar year-over-year for the first nine months?
In total, in our R&D costs, let me check the exact number. We are talking in total, in the R&D spending for the whole Cargotec, roughly EUR 90 million for the full year, out of which, something like, EUR 60 million would be going to Kalmar full year level.
How much was that last year? What's the delta?
The delta is roughly, we are talking about, let me now check. If we think the year to date number, we have been spending EUR 66 million year to date, out of which EUR 57 million, or basically EUR 57 million compared to last year. Out of the EUR 66 million, EUR 40 million goes to Kalmar.
Okay. Just, we've seen this fantastic development in Hiab with the strong margin, as well as the Polish plant seems to be ramping up, and you talked about the problems in Sweden for Kalmar. Should we expect something similar to happen when those issues for Kalmar are solved?
Yes, absolutely. I mean, we expect the sort of, just, you know, having one production plant less will obviously impact directly our fixed production overheads decline. Then there's labor cost, which is about one third in Poland compared to the one we have in Sweden. There will be direct cost related impact on that one as well. Those improvements will not be visible in 2020 until the second half. We still have costs related to the actual transfer and the production ramp-up. You should start to see some of the impact coming through in the second half of 2020 and fully visible in 2018. Very clearly we have of course learned in Hiab's case that it takes a while for the new production facilities to ramp up.
The difference of course with the Kalmar is that we already have an existing production operation that we are just expanding out there, so we should be able to reap the benefits faster than we did in the Hiab's case.
Okay, great. Thank you.
We will take our next question from Philip Saliba of HSBC. Please go ahead, your line is open.
Yeah, hello. Just a question on the new restructuring program on MacGregor. What would be the restructuring costs associated to that? What would be the split for 2016, 2017?
We have not yet finalized all the. Of course, the negotiations need to take fully in place. The estimation would be somewhere in the range of EUR 30-35 million for the total program. The bookings of those one-time costs are depending then on the finalization of the negotiations. If the negotiations can be completed by the end of this year, then some of that can be booked already for 2016.
Okay.
I think it depends mainly on the person negotiations.
Okay. Relating to MacGregor, what are the margins in the order book? Are they on a similar level as in the first nine month sales or is it a better margin order book?
Roughly at the same level. When I look at that one, we've been able to maintain the MacGregor profitability despite quite a heavy decline in revenues, and that's coming from two factors. One is of course that we have been able to saving costs, up to EUR 30 million by the end of this year I think. The other issue is that we've been able to improve our gross margin. As we have discussed in the previous calls and capital market days, we have started number of initiatives in terms of the project management controls and the kinds of costs, et cetera. Our gross margins have improved in MacGregor all the time. I think my confidence is able to manage that backlog and the gross margins there is clearly higher now.
Okay. In terms of positions below the EBIT line, adjusted EBIT is roughly the same level as last year. We have some differences in terms of net financing costs, which was up by EUR 3 million. We had quite a low tax rate in the last year and a higher one this year. Could you maybe elaborate on these issues briefly?
Yeah. In interest expense we had a EUR 3 million additional interest booking related to a VAT correction what we have done for several past years in certain countries. That increased the interest expense by EUR 3 million. Without that, the interest cost would have been roughly on last year's level. What comes to the tax rate, it depends very much on the business mix. Which kind of countries we have the revenues coming from, and that fluctuates the tax rate between the quarters and years.
Okay. Then, in terms of MacGregor, you also mentioned that you see high risks of cancellations and postponements of ship deliveries, and also that some of the clients prefer to, yeah, purchase parts from decommissioned ships. That is something that was not mentioned in the last report. How substantial are these risks and these effects? Or how substantial could they also be going forward?
It's probably more a reflection of a change in CFO than the change in market situation. Mick was being more prudent in booking. I would say overall obviously MacGregor market situation, the cancellation and postponements are a risk. The postponements is something that we actually witness all the time, and that's very clearly visible in the declining revenues as well. In terms of cancellations, we have received very few. I can think of one specific offshore cancellation that happened earlier this year that was of any significance. The postponements in terms of deliveries is clearly sort of happening at the moment. If I look at some of the external reports, depending on the ship size, the cancellations tend to be sort of somewhere in the ballpark 5%.
I think our case is lower than that one. Postponements in ship deliveries are about 30% of the total volume now. That's very visible in our numbers as well.
Okay. Okay. You said that in general you were performing better than the market. If we look at each segment by segment, what do you mean by that in terms of figures and maybe also relating to your peers, could you go into more detail regarding that?
If you recognize that by seconding MacGregor, if you started the bright spots at the moment, the Ro-Ro car ferry business is doing quite well. Not declining. There are some positive signs on that one as well, and we have a very strong manager there, we are very happy with that performance in there. Some of the specialty fishery research vessels, et cetera, are doing quite well, which is very typical, I guess, in the offshore. If I get down, these are sort of replacement businesses, we are tracking quite well there. Obviously, in terms of the actual sort of market position, in harder times than the smaller players tend to bolster more, we see some of that progress in there as well.
On the other areas, I would say that not a significant shift in markets. There are markets who tends to be quite strong both in the bulk side as well as on finish side, but the market conditions are of course quite rough at the moment.
Also here you think you did better than your peers so far?
It's always interesting when we go out first in reporting. At least the track record I think for the last quarters has been that we've been clearly outgrowing the markets. Very clearly when we started to see a turnaround in 2013 when we did 3% operating target, we made the decision of being very focused on profitability rather than top line, and that started to show the results, and we withdrew from number of product demand combinations that we didn't feel like we are having the required profitability level. I would say that towards the end of last year in sort of Q3, we came to a conclusion that we are now thinking so well in our profitability target that we can actually become more assertive in the marketplace again.
Obviously, we have now for three, four years invested more heavily in R&D. Our products are clearly more competitive, both from the cost point of view, but more importantly from customer point of view, for feature and functionality. There was an IAA show which is the largest sort of transport-related show a little more than a month ago, we launched a record number of new products in there. We actually have seen that reaction from the market already in the sort of strong order intake we took for the new products of further timeline as well.
Okay. Thank you very much.
Higher sales growth that has been 15% during the first nine months. It's clearly higher than the overall market for the, if you think the GDP development in any of the markets.
Thank you very much.
We will take our next question from Christopher McMahon of BNP Paribas. Please go ahead, your line is open.
Good afternoon. Yeah, just a follow-up question on that. You mentioned that you have seen some Hiab in North America and that market is collapsing basically on when it comes to the truck market on the heavy-duty side at least. Also on the construction side for the truck industry, although not as much, but still you report growth. Is that only your market share gains or is it so that your orders and your sales are lagging orders for the industry to sort of modernize fleet then?
A few things maybe on that one. First of all, the Hiab sales tends to be better correlated with the construction indices than it is directly with the truck registration because obviously, only about 10% of trucks will have a lifting equipment there. We have seen this in the past. The construction industry in that way is more telling probably for direct truck registration. I might challenge you a little bit in terms of the collapse. The truck registrations to my understanding, they have come down this year compared to last year, which was one of the highest in the memory, but it's still at a relatively high number.
If you look at the truck registration numbers this year compared to the past five or six years, they still are at a pretty high level. Now if I look at the latest IHS forecast for next year, I think they're expecting over 15% to grow about 10% again next year. In that sense, I'm quite satisfied. As I said already earlier today, we had a sort of year-over-year increase about 4% in our order intake in Hiab in U.S. markets as well.
Okay. I think, I mean, truck production is down almost 50% year-over-year on the heavy side, for some producers. That's why I'm a bit concerned about-
Yeah, of course, one needs to remember that a big part of the truck market is sort of the heavy-duty, long-haul lorries that we have or trucks that we have very little to do about this as well in there. We saw the same the other way, if you remember when we had this sort of a year of Euro V/VI truck registration boom, was it in 14 in Europe where the truck registration numbers actually shot up quite a lot. We didn't see any of that one in Hiab again, because many of those trucks were used for the sort of long haul where the fuel saving integrations were again. Actually, I'm always a little bit careful when I look at the truck registration numbers.
As I said, only about 10% of that one is sort of Hiab any equipment related, and even less to the load train development. In that sense, sort of the application specific indices, especially around the construction tends to follow up our revenues better than the pure truck registration numbers.
When you mentioned trucks or construction activity, how big is your exposure to the UK in here?
U.K. is one of the largest markets we have had in Europe, fairly high exposure. We saw some visitation actually in terms of orders immediately after the Brexit. We have seen those orders now realized. The construction activity continues still at a high level. We have obviously an issue because most of the products we manufacture are imported into U.K. We have hit the pound, we should be okay in that sense till sort of mid-next year. I'm looking at Niko here, yes, if he's nodding. Obviously after that one, the pound continues to some level that will have somewhat of an impact in the U.K. revenues then.
Just a final question on MacGregor. If you look at charts on vessel contracting, which quarter would you say represent your order intake in Q3? Was that Q1 orders for vessel contracting or is it more like Q2 or what's the lag roughly now?
I'm sorry. I'm not sure I followed you on that one.
Sorry. If you look at vessel contracting on, on the data we have from Clarksons. Would you compare that with your contracting or your order intake in the third quarter, which quarter would you say that your order intake would represent if you look at Clarksons vessel contracting, basically, if it's a six-month lag from a vessel contracting to your orders or if it's a three months or so?
That's actually a slightly difficult question to answer directly because it really depends a little bit on ship type and the customer executive as well. What we have seen in the past is really roughly 12 months sort of from the ship contracting to our order contracting. Right now I would say that the pipeline is getting lower, one would generally see lead times go down as well. You would probably look at the shorter order to order cycle. At the same time, as I said, however, the delivery cycle could be longer because shipyards don't have necessarily the urge to push the ship out from the shipyard as well. You have those two things sort of working against each other now.
Cool. Thank you very much.
We will take our next question from Tommie Weil at SEB. Please go ahead. Your line is open.
Yes, thank you. Still continuing on the MacGregor. What's your view on the order intake for the fourth quarter? Do you think we could go still below the third quarter level or would you expect a even weaker development in the fourth quarter?
I don't expect a weaker development purely because the base business is doing quite steadily and well. If I remember now correctly, we didn't land such large projects on Q4 last year. Year to year, I don't expect a similar kind of trend you saw in Q3. Overall, as I said, I expect the base business to actually continue to perform well. The pipeline looks quite, looks actually strong in there overall, one would expect that to remain at least same level as it is at the moment. The big question is that whether we will land any bigger orders or not, and that's really difficult. Clearly we see the tendency for customers to sort of postpone.
There has been one automation deal, for example, we have discussed that from early this year, and it's been postponed. Now we are talking about potential pilot only in the first half of or first quarter of 2017. These things then have to really been slipping lately and it's sort of very difficult for us to commit to say that whether we land any of those on Q4 or not.
My question was actually relating to the MacGregor business, but.
Sorry, I heard Kalmar.
Yeah.
Sorry. In MacGregor, actually, I don't expect that to be worse in Q4 than it was in Q3 on a CQS sale basis. If I look at the sort of year-on-year basis, I think obviously the number already last year was lower, I think 179. We start to sort of, I think, soon get to the level that you will not see sort of decline in the order numbers anymore as we are sort of already showing the sort of weakness in the Q4 last year.
Okay.
We've ordered Q3 orders and probably we'll see it first time that we will not see such a dramatic difference in order intake anymore in Q4 during their base.
Okay. If we look at the fourth quarter profits, would you be able to say whether it can be on black numbers in the fourth quarter? We have seen a sort of gradual decline from the first quarter, second, third quarter. There is, of course, a risk of postponements and only EUR 3 million in the third quarter. You are launching a cost savings program. What's your sort of feel for the fourth quarter?
The feel is that we do our best to see black numbers always in annual basis and hopefully also on quarterly basis. The challenge of course is that when you get such low numbers as you said yourself and you do sort of, you know, EUR 10 below EUR 10 million profitability on quarterly basis. One little slip in project or something out of somewhere can easily take that into a negative territory quite easily. In that sense, if you are looking at the rough yet numbers that you have seen in the previous few quarters and into Q4 as well. The target very much is to keep it at sort of profitable but not a significant profitability there.
Thank you.
We will take our next question from Tom Skogman of Carnegie. Please go ahead your line is open.
Yes, thank you. If I continue on the same subject but looking into next year, and take your comment about what we take out into account from MacGregor, it looks like your sales will be around EUR 600 million for MacGregor next year, if you don't have any worse kind of slip between sales or deliveries. Can you first comment on that? If that is right, is your cost cutting that you announced today enough to, you know, safeguard at least as good profitability as in 2016? Or can you fall into red numbers?
Yeah. When it comes to the revenue, I want to take a other view and it's slower than in 2016. Of course, you kind of have that base there between services business that has declined, but it's probably starting to sort of be at the bottom of that. You have the Ro-Ro business, which is actually continuing at a very steady rate. There are some things that are kind of holding it back and that's it. The target very clearly is to be profitable throughout the cycle. That also concerns next year. EUR 25 million is the cost savings that we have now started the planning and we announced today as we are starting the labor union related discussions in those five l ocations.
We obviously continues to plan and look at the further cost saving potential that will be able to add up to the market conditions.
All right, thanks. My second question is on Hiab Kalmar. Let's exclude MacGregor in your answers here. What I would like to get is an update on key changes to cost items in 2017 compared to 2016. I think about the transfer of production to Poland for Kalmar, and then you have IT and R&D spending going up and then some other cost items that you would like to highlight.
Okay. Are you talking below or above the line items? So in the first, so we have now booked MacGregor, I think, and onto the Mikko here as well in terms of what we have announced prior to today that restructuring charge.
Basically EUR 8 million, we have booked in restructuring costs in Kalmar so far, and up to EUR 2 million in MacGregor.
The EUR 25 million that we announced today, that restructuring charge is obviously to come. Some of that probably this year, some of that next year. The EUR 8 million that Mikko just mentioned is related to the Lidköping restructure. There is more to come in there as we ramp down the production in there. There are certain costs that are related to ramp-up of Poland and the investment related to that one. Those will continue for the first half of 2017. You are not going to see a financial benefit coming from the Swedish to Poland change in the first half. Those impacts will be visible in the second half. We have.
Pasi-
As I said, continued the investment. We plan to continue the investments in the R&D because they clearly are yielding results and making us more competitive, and that will help us both in terms of top line market share, as well as you can see that in a favorable cross margin development. Obviously we have had a sort of, maybe increase. We increased R&D at 20%, from 14 to 15, and I think end of Q2 we had increased at 17%, on that one. You can see that rate now sort of proportionally going down as we start to reach higher levels in there. I would sort of expect that growth to actually decline, growth to decline, but not the actual expense to decline we move the event.
We have also, as I said in my presentation, looking at the certain efficiency gains. We have invested quite heavily to our financial and HR platforms and systems. They start to be now having a very high coverage, and it's very clear that the next phase of the development will then start to drive further efficiency in our, especially in our different support operations. We are looking into how do we drive those cost improvements moving into the next year.
Is it fair to say that kind of fixed cost savings 2017 from this transfer to Poland from Sweden more or less match the incremental increase in costs that you will get from increased spending on R&D and IT? I mean, will this more or less balance each other? That means, of course, that you will have more, it will be easier in the second half next year than in the first half or next?
Well, those are not of course the only cost items. As I said, we are looking into other cost items at the moment as well. Some of the investments that we have done should be actually starting to yield benefits in our fixed cost structure as well. That's something that is under review at the moment, and we will come back to that one.
All right, thanks.
We will take our next question from Johan Eliason of DNB. Please go ahead your line is open.
Yeah. Hi again. Just to follow up. Just about a year ago, you launched a profit improvement potential for the Kalmar-
Business. Now there seems to be some delays, et cetera. Are you comfortable with the numbers you indicated EUR 60 million to EUR 100 million? What proportion of that do you think you've already achieved in, in the way of getting there? Thanks.
Yeah. I remember that slide. I actually we did an update on that one while ago, so I can actually update on that and that you... Some of this cost related, some of those were, depending on the top line improvements. We have invested according to those targets into the automation and software business. Our software business is actually ramping up and hitting the targets that we have set for our... We are actually ahead of the target in terms of that one, but it's then, still, small enough to be that visible in there. The automation business is obviously behind in terms of the order intake at the moment due to the fact that it's just taking longer than we anticipated.
We still strongly believe in the automation and the fact that it will start to drive the revenues and profitability from that one. The one that I'm most disappointed in at the moment in terms of the planned improvement has been the traction in services. Partly, as I said, it's the market has been a bit more unfavorable than we thought and but very much also there we have had, I think, execution issues in sort of making sure that we in our local organizations, the service is getting the traction it requires, and we have done some changes in the sort of organizational setup, and we are putting a strong project, product, project management organization in place to track that now on a weekly basis, so we are taking corrective actions.
That's the one that I would say is behind the plan at the moment. I'm confident that we can correct that one. In terms of efficiency targets and production layout plans, targets and planning according to the targets as well. If I look at the targets we set for ourselves and where we are in terms of the revenue at the moment, the biggest single sort of gap in terms of performance at the moment comes from the fact that services has not increased as we were planning to do at the moment, and that's one we need to correct. Otherwise, I think we are pretty much going according to those plans.
You would still be able to reach somewhere around EUR 60 million improvement if it continues according to these expectations?
Target. I don't see actually fundamentally when I look at that target setting and what we said in there, all the pieces are in place to make that happen.
Yeah. I saw that on these container liner alliances, the Ocean Alliance got the U.S. approval last week. Do you think, that will, get your pipeline going now?
Certainly it requires obviously for them to be able to make the deals with the port operators, they need to have the approval for these alliances. That's the first step on that one. I would imagine, and I know for a fact that the commercial discussions been ongoing as well, and with the approvals that hopefully then leads to the deals between the alliances and port authorities. If the deals happen in the clarity in terms of the volumes is actually. Generally you sort of talk about these as 5-year deals or so because obviously they need to be long enough to kind of enable the investments.
The co-commercial contracts done between the shipping lines and the port operators that gives clarity for the port operators then to be able to plan and execute their investment spending plan. That's sort of the order that these things need to happen.
Yeah. Maybe no short-term improvement on that side, but hopefully next year or?
We will see.
Yep. Excellent. Thank you.
Our next question comes from Petra Sårfors of OP Financial Group. Please go ahead. Your line is open.
Hello, this is Petra. I would like to ask about the Hiab margin. Very strong margin again and better than expected. The 9-month margin is now 13.8%. When we look at the history, the fourth quarter margin has seasonally been typically the strongest, is that something we could expect also this year? When looking forward, what is the underlying margin in here? What is your feeling at the moment? Is it somewhere between 30%-40% we have at the moment?
The, I would say that the current margin indication is a probably a fairly good basis for the Q4 as well. I mean, we said that the Q2 was exceptionally high due to the high delivery. I think the Q3 is probably kind of a good indication of the underlying performance.
Okay. Thank you.
We will take our next question from Philip Saliba at HSBC. Please go ahead, your line is open.
Yeah. Hello. On the EUR 13 million verdict, could you just give an indication when the local jury could make a decision on that? How high do you see the likelihood? Once the decision is made, would it mean it could also be booked in the very same year? Could that be sort of a time lag in terms of P&L booking?
Well, the EUR 13 million is initial jury verdict. It has not been confirmed. The judge needs to actually confirm. My understanding is that hasn't even happened yet. If the judge confirms the verdict, then we will appeal directly. Our own view on this one is that the likelihood of this coming through is quite small, and that's why we have said that we are not going to book it into our results at the moment. I think it's generally you can ask that sort of these kind of fairly complex commercial matters to be handled in local juries, not necessarily sort of a very kind of, I would say good way to handle these issues.
Okay, thank you.
We have no further questions in the queue.
Okay, thank you for active participation. Summarizing still the key messages, our operating profit margin improved. We announced a new cost savings program to safeguard the profitability in MacGregor . Our financial statement review will be published on February eighth. Looking forward to meet you then.