Good day. Welcome to the Cargotec Corporation Q1 2016 Interim Report Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Paula Liimatta. Please go ahead.
Good morning, ladies and gentlemen, welcome to Cargotec's January-March 2016 interim report conference call. My name is Paula Liimatta, I'm Head of Investor Relations. Today, we have a small live audience here in Helsinki, as well as people on the phone lines. We will start with the presentation by our CEO, Mika Vehviläinen, after that, we have time for your questions. Let's start with the presentation. Also, I forgot to mention that our CFO, Eeva Sipilä, will be presenting as well. Mika, please.
Thank you, Paula. Good morning from my behalf as well, ladies and gentlemen. Thank you for joining the Q1 presentations. Let me start with the highlights for the quarter. The market situation in Kalmar and Hiab remained healthy, but obviously the shipping market situation is very challenging at the moment. I will come back to the market situation in a moment. The order book remained strong. Actually, sequentially, compared to the end of last year, we had a slight increase in our order book, but the orders were slightly down. This was really driven entirely by the order decline in MacGregor. In Kalmar, the orders remained flat year-on-year, and in Hiab, we saw a strong increase in orders. Sales declined 7%. This was really driven by two factors. First of all, the market situation is driving down the revenue in MacGregor.
Secondly, as we had communicated earlier, the timing of the deliveries in Kalmar was such that we saw some decline there as well year-on-year. The operating profit progressed according to our plans and increased by 12% into EUR 58.5 million, compared to EUR 52.3 million last year and was 7.1% of our revenue, compared to 5.9% last year. I'm also very satisfied with the cash flow from our operations. That was strong at EUR 90.8 million compared to EUR 51.6 million last year. During the first quarter, we also completed the acquisition of the INTERSCHALT company in Germany that is enhancing our strategy both in digitalization and software business as well as the services for marine industry.
Now, a few words about the market environment. The demand for container handling equipment and services as well as the interest for the automation solutions remained healthy. I'm aware that there are certain concerns expressed around the container handling and port investment, so I'd like to address that a little bit more in detail. If I look at our business and position, first of all, we have a very strong foundational business in Kalmar. We have more than 50,000 units out there today with the replacement cycle somewhere between five to eight years. Obviously, this gives us a very strong recurring revenue and driven by the replacement business in our, especially on the mobile equipment business. On top of that one, we have strong and profitable services business within the ports. Those gives us a strong foundation to build our other revenue.
The container flows have slowed down from previous years. The estimate for the growth this year is 2.1%, still a growth nevertheless. However, today the port investments are not driven by the growth in the container flows but by other factors. The two main factors are, first of all, changes in traffic patterns caused by the changes, especially in Panama Channel, as well as the previous changes in Suez Channel. The other and in a way more significant driver is the changes in ship sizes. We will see 53 new mega ships, roughly 20,000 container ships enter into market during 2016. This will drive necessary changes in the ports. The yard capacity in a port that is serving mega ships has to go up by roughly 30%.
It's also good to remember that this of course then cascades down. The ships that they're serving, the larger ports previously are now put on the secondary routes. Essentially, we will see the cascading and a need for capacity to be able to handle bigger ships going through the whole container port industry as well. We have spent quite a bit of time lately talking to our customers, understanding our own sales funnel and the strong demand. Actually, one of the large container port operators just came out there recently stating publicly that the current market situation actually drives for further investments, not less investments.
In the longer run, we still see interest in automation picking up. It's very clear that with the efficiency requirements for the ports and the need for automation, the business case is very lucrative. The sales cycles, though, in automation are long. We are not, for example, expecting any automation orders during the first half of 2016. The market for road handling equipment was strong in U.S. In Europe we see slight positive development as well. The story is somewhat different, obviously, in the marine cargo handling equipment, as well as in offshore metal markets have significantly declined in terms of the new ship orders. The bright spots in the marine business today is RoRo and special vessels, where we actually have seen a strong demand continuing. Let's look at the key figures shortly.
As said, orders, somewhat down, really driven entirely by MacGregor, and then order book sequentially slightly up, but down year-on-year. Sales slightly down, operating profit up. The cash flow from operations was close to EUR 91 million. This obviously helped in bring the net debt and the gearing down. It's interesting to note that despite the INTERSCHALT acquisition and the related cash expenditure on that one, we were still able to bring down our net debt and gearing during the Q1, really driven by the strong operational cash flow. The earnings per share increased by 9% on a year-on-year basis. With that one, I'd like to hand over to Eeva Sipilä, our CFO, to cover the business areas more in detail.
Thank you, Mika. Good morning for everyone on my behalf as well. Starting with the Kalmar numbers. We're very pleased with the order intake at EUR 454 million for the quarter. Comparing year-over-year, this is a good achievement considering that there were no big projects versus last year. In the same quarter, we had a relatively big repeat order from London Gateway. Sales were down 7%. This is in line with what we guided on three months ago. That due to the timing of deliveries in our order book, sales in the would be down year-over-year.
Thanks to the order book strengthening 11%, and as said, the good order intake, both actually increase our confidence that Kalmar for the full year 2016 will grow. Profitability, slightly down at 7% due mainly really to the volume question. In that sense, we are also satisfied with that level. Moving on to Hiab. The order intake grew very nicely, 8%. Here it's good to note, actually applies to the whole of Cargotec, but really that there were no currency gains in the numbers either on orders or sales. These are very like-to-like comparable numbers. Very happy with the sales growth of 16%.
Obviously, strong volume support operational leverage then led to a very, very high record so far operating profit margin of 13.2%. It was certainly supported by a very good mix. Also, fair to note a word of caution, as you may remember from our capital markets statements and what we also discussed three months ago. We are investing in growth in both Hiab and Kalmar in digitalization and further R&D and product development. In Hiab, specifically, those investments were not very significant in the Q1 , so you can expect some of the margin improvement to be in the coming quarters affected by higher fixed costs.
Considering where the market is, we do think that the, sort of, the payback on the investments made on the growth in Hiab will be earnings enhancing. Moving on to MacGregor. Obviously a difficult market, very well illustrated by the fact that orders were down 24%. Similarly also sales are significantly down. Here the highlight is definitely the margin, which I think illustrates well that the restructuring measures undertaken in 2015 have protected us against the volume drop. As you may remember from our Capital Markets Day message, we were aiming for a EUR 27 million decrease in costs.
In the Q1 , we were running at EUR 10 million lower costs. Very well in line with the full-year target. As you can imagine, the comparisons become a bit tougher towards the end of the year. We need to be a bit ahead in the first quarter. Good success in containing the market situation. Moving on to cash flow.
Still our CEO already mentioned this, obviously a highlight of the quarter and shows the sort of very strong operational performance in all the business areas, specifically driven by accounts receivable, where we've put a lot of effort on better processes and collection, and that is bearing fruit. Looking at the pie charts, if we start with the left-hand side, the sales by reporting segment, Kalmar, exactly in the same, our biggest business area with 44% of sales. It's worth noting that Hiab and MacGregor have basically changed places. Hiab is clearly now the second biggest business area.
Again, this was something we have been discussing with many of you already last year. Looking at the geographical segment, the further improvement in Americas is coming through quite well on the group level. If I take one slide more, obviously in Kalmar and Hiab specifically, that is where the Americas share is the highest, and further growth in both of them. With that, I think we're ready to move back to Mika.
Thank you, Eeva. Our return on capital employed, which is one of the key long-term targets for us at 15%, is progressing nicely towards the right direction and was at 10.8% level during the Q1 2016. A few words about our strategy that we actually communicated in connection of the Capital Market days in London end of 2015. The execution of the strategy is actually progressing well in all three key must-win battle areas: services, digitalization, and leadership. In services, we have launched in the early part of the year, number of new products, for example, the ProCare maintenance contract concept for Hiab. We have driven improvements in our spare part logistics and availability, and that will enhance obviously our margins and drive sales, but it will also reduce our networking capital at the same time.
We are hiring more resources in our services. We are enhancing our services sales capabilities and hiring more execution capabilities in our services, and that's visible in our headcount numbers, especially in Kalmar and in Hiab. We have done number of pricing adjustments, both for the hourly charges as well as spare parts, further enhancing our margins in services. Overall, very happy with the execution and progress we are making in services at the moment. Obviously, the INTERSCHALT acquisition is enhancing our services capabilities for marine industry as a part of the MacGregor, and then our software capabilities as a part of Kalmar in offering a strong market leadership in onboard loading computer and stowage planning systems.
In digitalization, we have obviously enhanced and strengthened our leadership and capabilities in that one, both in the leadership of the Cargotec as well as in our board of directors. We have opened up a new IoT cloud analytical platform for all of our businesses. We increased our R&D by 17% year on year during the Q1, enhancing further our product offering as well as our digitalization capabilities. During the Q1, we also organized a CargoHack, which was a very popular primarily focusing on Kalmar and new applications and capabilities into the container terminals. There were a lot more developers actually willing to join that we were able to handle during the CargoHack. During the Q1, we also launched the HiVision product concept, which is a virtually operated forestry crane for Hiab.
Really, I would say, still in the show in Bauma, in the construction equipment. We have had more than 1,000,000 hits in internet for that product. This is a pretty good for obscure product like a forestry crane at the moment. In leadership, we have started the new leadership development is a fact-based leadership development program that is enhancing our leadership capabilities and driving for more common performance-based culture within the Cargotec. Our outlook for 2016 remains unchanged. We have said that our sales are roughly at the level or slightly below our last year level, and our operating profit is expected to increase from 2015. With that one, thank you. I'll hand over back to Paul.
Thank you, Eeva and Mika. Now we are ready to take your questions. We start with the questions from the live audience here in Helsinki and then move over to the conference call participants.
Okay. Good morning. It's Manu Rimpelä from Nordea Markets. Could you just give us some more understanding of how do you see the investment step-ups and the R&D increase that we're seeing? I mean, obviously here, as you mentioned, a very astonishing margin, and that should come down as these investments step up. Just trying to understand what level that is. I mean, R&D, for instance, was up EUR 3 million compared to the previous year. Is that some sort of a guide or? Yeah.
Yeah. When you look at the higher margins, it was an exceptionally good quarter. I think we will certainly improve from last year, but I wouldn't sort of count to see that same similar levels in the coming quarters. This was really a product of, as Eeva was saying, good mix, high revenue, and then the fact that we have not been able to ramp up all of our resources in both in R&D services and sales and marketing quite at the pace we were expecting. Hence the fixed and indirect costs were not quite at the level that we were sort of expecting, and that partly explains the margin improvement. Eeva.
Maybe to add on that, we haven't per se changed the message from the Capital Markets Day where we talked about R&D on a group level increasing by some EUR 10 million, plus for the year. We also discussed the other sort of digitalization and tool systems related investments, where I believe we discussed the sort of EUR 15 million range roughly. There's very much still sort of valid the same message.
Okay. The second question on the market share. You're clearly stepping up the investments in here. Have you already seen that you are starting to take market share? Also in Kalmar, I understand that your order intake was- Better than at least some of the competitors we're seeing. Could you just talk about how you're seeing the competitor dynamics and are you starting to see a change?
It's a good question. The some of the markets are a little bit difficult to comprehend as there are not a very good sort of statistics or analysis available. If I look at our performance in Hiab and especially growth in Europe, I don't think the market, we were not at least expecting the market to grow at that rate, and I don't think it did so very clearly. We took market share, I think in at least in Europe and on Hiab's case. U.S. markets remained quite strong and that was reflected in our numbers. Then again, compared to the increases on our competitors' revenues, we were clearly growing faster than the competition there. I think there was an element of market share.
One needs to remember that we Hiab has actually lost market share in the last sort of three or four years and in during the 2013 or 2014 and 2015, we were very focused on improving the operations and bottom line. As we communicated now with the stronger sort of platform, we are able to enhance our operations and go for growth. Part of that growth is clearly coming from the market share capture as well. In Kalmar's case, if you look at the some of the competitors' announcement, one needs to remember that this is quite lumpy business. Many of our competitors are more on the sort of heavy crane side where the business is even more lumpy.
Our primary part of our revenue in Kalmar is coming from the large mobile equipment base and revenue as well as services in port. That gives us a sort of steady foundation. You will see larger projects and larger crane projects and automation be coming on top of that one. I, we still see actually very strong pipeline in the markets and in our sales funnel, and that's also based in the close discussions with our customers.
Okay. Just a final question on the services growth. I think the order intake was pretty much stable in the quarter, and that's definitely been a focus area for you. Are you starting to see those efforts bearing fruit already, or is it still too early and you would expect that growth to step up?
The Q1 was a little bit of an issue because January was quite slow, especially MacGregor. I think it was obvious that the customers had a sort of a spending holiday during the Q1, or during the January as well. The February and March revenue numbers in services were actually according to our targets, but we didn't quite hit the target during the Q1, effectively lost sort of part of the first month in those months. We see actually now that orders and the revenues tracking in the last two months pretty much according to our targets.
Pekka Spolander from OP Financial Group. First question about the MacGregor. Could you say that the bottom is close to us, or how would you describe the business cycle at the moment?
That's a good question actually that we didn't yet come back to solve. There, I think we need to sort of be more cautious than we've probably been in the past. We were still saying, I think in the Capital Markets Day that we expect the 2017 revenue to be level after 2016. If you look at the current market situation and ship orders, and our own orders effectively for the Q1 as well, I think the bottom will be now reached as the market looks at 2017. We actually expect our revenue still to go further down from 2016 to 2017 and 2017 likely to be the bottom now in the merchant side.
Offshore, of course, a little bit more tricky depending on the oil prices, but there are number of drivers aside of the oil price itself in terms of the future production output, et cetera, that would actually kind of encourage further investments to start to come back into the offshore side as well. The way that thing look at the moment, we would be bottoming out in terms of revenue in 2017. Our strategy very much is in MacGregor to contain the situation and to remain to be profitable roughly at the level we were in Q1. The benefit of course, of this type of business is that we have an exceptionally good visibility of the business, and we are able to steer our cost levels and investments based on the sort of the revenue outlook on the coming months.
Does that mean that you are planning some further restructuring actions in MacGregor?
We are taking actions as necessary. We actually did some restructuring one week or two weeks ago in Norway, further cutting the resources in the offshore side as well. We are sort of adjusting our business according to the business requirements. As I said, the good thing here is that the visibility, forward visibility is so good that it gives you ample time to sort of react into the situations.
Continue the service question also in MacGregor. The service sales were down from last year. I think that quite a many of us has expected that the service growth should support the margin and support the margin development in 2016 and also 2017. Could you comment a little bit more about the service situation, especially in MacGregor? [crosstalk].
I actually already partly sort of covered that one. The January was a very weak month in the MacGregor services. There was some sort of spending holiday in there. In February, March, we actually tracked according to our targets, and the services actually increased compared to the last year. Obviously, there is a concern that with the financial situation many of shipping lines are today, they are trying to save on everything including the maintenance. There are a couple of things that drive against that one. First of all, the installed base is increasing. The large shipping boom that happened in 2007 and 2008 and 2009 is actually now becoming to the first sort of obligatory maintenance period.
The sort of installed base and market is actually increasing against that one. Secondary, at least the customers who have the capability and sophistication clearly have actually looked back at the last sort of slump in the shipping area and found out that the savings in the maintenance in short term actually lead to the higher maintenance cost over the period of time. If you start to sweat the assets too much, then obviously your sort of the equipment wear and tear will go up and that will cause actually further maintenance spending in the longer run. Maybe one more additional fact is that when the ship orders actually have dried out as much as they have at the moment, you need to start to sweat the assets of your current fleet, and that actually increases your maintenance requirements as well.
The final question about MacGregor. Could you talk about the delays or possible delays, or have you seen any cancellations or cancellation risks?
We saw one cancellation in offshore side, Eeva it was EUR 8 or 9 million, if I remember correctly. That actually happened during the Q1. There are some delays, but nothing exceptional at this stage on either in offshore or on the merchant side.
Thank you.
Thank you. Now we are ready to take the questions from the conference call participants. Operator, please.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. Thank you. We'll take our first question today from Antti Sutila from Danske Bank. Please go ahead.
We have a few questions starting with MacGregor. Would you say that the contraction in ship ordering is now fully visible in MacGregor order intake in Q1? Or would you expect a further hit to come towards, you know, later quarters of the year?
I would say that that starts to be visible in Q1 in terms of if you look at the level of orders, which was particularly low in MacGregor reflects probably kind of the starting to be the bottoming out of the order intake.
There is no lag anymore. Ship ordering is instantly becoming visible in MacGregor order intake nowadays.
Well, the ship ordering as we know, has sort of slowed down considerably already during the Q4 last year as well.
There was another notable hit down in Q1 versus Q4.
Certainly in the, how would I say, the number of ships, it was bulk ship orders were affected, I think pretty close to zero. Again, orders for the sort of the container ships were still relatively strong at the moment. Obviously the value of our solutions and equipment by the ship type changes quite a lot. If you look purely at the number of ships, one would draw the conclusion, but the mix from the order value point of view is more favorable for us.
All right. Understand. If we look the book-to-bill ratio in MacGregor, I think it was about 80% in Q1. That number indicates that the sales levels would still go down in MacGregor. Now, I wondered what that means for EBIT, because if I understand correctly, you had all cost cutting visible in Q1.
That's right. I think as I just mentioned, we still expect the revenue to actually go down from 2016 to 2017. We then actually need to adjust our cost level according to those requirements. That might then require further restructuring if so needed. One thing to note that, obviously we are actually tackling the situation in MacGregor from the two different angles. The one is the cost level, and as Eeva was saying, we have taken about EUR 10 million out in the Q1 compared to last year. The other important factor here is the gross margin. The gross margin, actually first time for quite a while was up in MacGregor, and that's driven by the efforts we started a while ago in terms of design-to-cost, the project execution and sourcing.
Also the mix is turning more favorable for us away from the bulk ships and cranes that were very high, heavy price competition towards container ships and then roll services of course that also helps the gross margin. Really what we are trying to do to manage the profitability of MacGregor is efforts both targeted for the gross margin as well as for the costs.
All right. All right. Good. You know, on these certain concerns on container handling situation. You know, I think you said at the AGM that order intake would improve year-over-year for Kalmar in Q1. Now it ended flat year-over-year. I wonder if there was something special that happened in March.
Not really. We didn't land any larger orders in March compared to last year. That was really the difference. The base business was doing very strongly. There were no, not a sort of any larger crane orders, automation orders that would have helped us. As Eeva was saying, we had a very large sort of repeat order for London Gateway on the Q1 last year. This time in March, we didn't land anything. If I look at the sort of the pipeline at the moment and what we have in there as well as the order book, we are still very positive about the market and Kalmar performance in there.
All right. You were expecting some larger orders to land in March, but they didn't yet land in March. Is that the correct way to say?
Any orders there are, there are always are issues of sort of the timing of those ones and nothing atypical on that one.
Okay. Okay. finally on Hiab, could you just quantify just that we understand, if you had a normal mix and if you had this R&D cost step up already visible in Q1, how much would that have, you know, eaten up margin compared to what we saw in Q1?
I think if you look at the Hiab, you probably get fairly close if you take the sort of the ceiling to be the operating profit percentage in Q1 and the bottom would be the last year's performance. We will land somewhere between those two numbers into 2016.
Okay. That's clear. Thank you very much for your answers.
Thank you.
Thank you. We now have a question from Paul de Drée from Kepler. Please go ahead.
Yeah. Good morning. Firstly, congratulations on what looks like a very good set of numbers, and also congratulations on the fruits of your efforts in restructuring over the last few years, which seem to have come through very well. Can I just a few questions, if I may. Firstly, on this Interschalt acquisition. Especially, I'm looking at the potential of the Interschalt acquisition on Kalmar. How much of a driver do you think that's gonna be when we're talking about these extremely large container ships now arriving in port and the ability to get the containers off in a sensible and methodical manner to ensure that they leave the ports for their external destinations? Is this a very important acquisition for you?
It's a very exciting acquisition from our point of view. There are some direct and then there's indirect benefits on that one. If I look at the direct, first of all, the Interschalt acquisition gives us a market leadership, specifically in two software areas. It's the stowage planning systems, where we have more than 60% global market share after the acquisition there. This is a system that actually enables the container ships to do a more efficient planning of the stowing using the software. It's the loading computer that actually enables the ships, rather than doing the manual calculations, to actually do a very fast sort of loading planning into the there.
They're effectively, to give you a sort of picture, out of the 14 largest ocean carriers, we are supplying the system to 13 of them at the moment. There is obviously revenue streams, and I think we have an opportunity to enhance that revenue stream going forward. It's not a significant revenue stream. It's clearly below the Navis business today, but there are opportunities to enhance that one. Perhaps more importantly, there is certainly an opportunity to actually build around the services and ecosystem on that one. What we have now accomplished through the INTERSCHALT acquisition is that we have a clear market leadership, both in actual container terminals in terms of the operating system from Navis, and then we have now the leadership also in the onboard computing systems and software as well.
We introduced, I think we discussed this shortly in the connection of the Capital Markets Day, the cloud-based carrier services called XVELA, that actually enables the shipping lines as well as the carriers to share information and make the whole container flow more effective. This product is now on trial basis with many of the leading ports and carriers and we expect to actually run that services. That will be a subscription on sort of cloud-based services where we offer the software as a services for our customers.
Okay. Thank you. Sorry. I've had to turn my speaker on so I can read my notes. Can you still hear me?
Yeah. Yes, I can.
Okay, great. Just looking, concentrating on Kalmar again. You mentioned at the CMD that you thought that Kalmar was at the beginning of a multi-year sort of structural growth cycle, driven by, obviously in the face of falling global container volumes, the need for port authorities to re-reduce costs. One of the big problems I understand from reading the papers is the cost of employees, especially in the U.S. What, how is it, how do you think it's gonna pan out? Because obviously automation seems to be extremely compelling from a cost reduction point of view. What's the payback period of a port deciding to automate?
First of all, just maybe a reminder for all of us, the container volumes are not falling, but the growth is slowing down. The expectation is still over 2% growth this year. As we discussed, growth drivers actually are now elsewhere. The larger ships, the also the consolidation that is happening now rapidly in the ocean liner industry actually means that there will be winners and losers in the port side as the traffic is going to be pushed more between the different ports. This will actually require the winners to sort of be investing further. It actually requires the losers to enhance their operations as well, and that probably requires investments.
The traffic patterns, Panama and Suez will certainly drive investments, especially in the Americas in the coming years when the new traffic patterns are becoming more clearly. Then the automation, as you pointed out, the financial benefits are very clear. Typically, in the Western world, the labor costs are at least 40% of your operational costs. Now, with automation, you should be able to take out at least half of that cost. It's a very significant cost saving and doing our own analysis as well as discussing this with our customers, the payback is actually within a few years. The. It's for industrial investments, it's very attractive thing. Why this hasn't picked up faster, I think it's a fairly conservative industry. The sales cycles and planning is taking its time.
Obviously this is a very risky investment from customers' point of view, because if you plan the port to be an automated port, there is no plan B. The automation technology needs to work. You can't sort of replace the technology anymore with the manual work. There are only few ports today that are actually operating fully automatically today, and those references that they are now coming into commercial use will be very important to sort of convince the customers that this is the way to go. We see the continuing interest increasing in there. We mentioned them in capital market data, there are more than 70 operators or ports that are today actually in some phase of planning for automation and if anything, that number has gone up. The sales cycles are long, and as I said, we don't expect to land any automation orders and not many significant orders, during 2016 yet.
What's your market share in port automation globally and who is your nearest competitor?
The, it's a very typical sort of emerging technology where I am sure you will hear many different claims in terms of the market shares, it's really difficult to point it out. I would say that what's really mattering here is the references. We clearly are ahead of the any of the competitors in terms of number of references, the very high-profile ports, the Los Angeles TraPac automation, London Gateway. I would say that you will probably see a situation where markets become to a tipping point. If any market is close to that one, I would name Australia as well at the moment. They have now automated, if I remember correctly, three ports in Australia. Actually four ports. Paula is also pointing out to me, four ports.
I think we start to see a situation where the rest of the operators are actually forced to contemplate whether you can remain competitive without an automation as well. I think that will start to spread out. In the same way as the containerization changed the sort of the seafaring and actually redraw the maps of the ports, the automation will redraw the maps of the container ports if you don't join in the automation and the efficiencies it will bring to you.
Sorry, a couple of more questions. Hiab. What's driving Hiab in the United States? Is it construction sector the main driver of?
It's primarily construction sector. I know there has been concerns related to the slowdown of the truck registration. If you look in detail, the truck registration, obviously the slowdown has been most pronounced in the heavy segment where we the loading equipment is not used. It's a construction sector and there I would say even more the residential sector is typically sort of effort where you need truck-mounted forklifts and loader cranes for sort of dry walling, roof tiles, et cetera. That market outlook, of course, remains quite strong at the moment.
Okay. very briefly, two more questions. Number one, on you and your conglomerate, you've got three divisions that don't have huge synergies between them. Any thoughts of divesting one of them? Maybe Hiab because, you know, it could be a good fit with another operator, maybe like PALFINGER. Secondly, on your new CFO, obviously, good luck to your outgoing CFO, why did you choose the new CFO? What did you like about this person?
Okay. If I start with the kind of the portfolio. Actually, yes, we have three businesses, but in a way, if you look what the portfolio really is, there are about 15 different segments that are actually fairly, sort of, independent in terms of their, supply chain and distribution customers, et cetera. That's the portfolio we are looking. As we said in connection with the Capital Markets Day, there certainly are certain areas that we are not necessarily holding on to, either because they are not aligned with our overall strategy towards the becoming the leader in intelligent cargo handling, or that we don't see the possibilities to drive the performance in terms of profitability up to the level we are aiming as a group.
The way I look at that one actually at the moment is if you look at the segments we operate in, those 15 segments, they are usually global segments. They are quite small segments. We tend to be clear market leader or at least strong number two in all of those segments. The key to success for us is to leverage the capabilities of EUR 3.7 billion company for businesses that are sort of few hundred millions EUR or hundred millions EUR in size.
Most of the competition we are facing actually in these segments tend to be quite smaller companies, not particularly sophisticated operators, if I may say so, and really leveraging the capabilities in terms of business platform systems and then the technology capabilities through the digitalization and services development gives us a clear competitive advantage and drives for sort of further distancing us from our competition in terms of performance.
Great. The CFO?
CFO. Sorry, yes. I wasn't trying to avoid the question. we were looking for... I think we still have an opportunities to drive more efficiency and effectiveness in our financial platforms. We clearly done a very good job so far. We have now the SAP systems covering a very large part of our revenues. Many of the other business systems are in place. I was looking for somebody who has had the experience and track record actually driving sort of new type of business platforms and financial platforms that enable us to be more effective, but also driving further efficiency and cost savings coming through the utilization of those platforms. Okay, thank you, and congratulations once again. You have some very happy shareholders this morning.
Thank you. As a reminder, if you would wish to ask a question, please press star one. We'll now take a question from Johan Eliason from Kepler Cheuvreux. Please go ahead. Johan Eliason, your line is open. I'm sorry, Rene, don't they hear you at this time? Johan Eliason, we're unable to hear you. Can you increase the volume on your telephone? Okay, we'll now move to our next question from Tomi Railo from SEB.
Yes, good morning. I hope you can hear me better than the previous. A couple of questions if I can ask still on the MacGregor. If you can give the savings update and if you are still guiding or expecting the EUR 27 million savings to be reached for the full year.
Yeah. In MacGregor, the savings, in terms of Q1, we are about EUR 10 million below the Q1 2015. That was a combination of reductions in fixed costs as well as the reductions in indirect costs. We are obviously well on the way now to reach the EUR 27.7 million. As Eeva was already pointing out, obviously the gap between the spending last year and this year is narrowing out as we are heading towards the end of the year. I was very comfortable with that EUR 27 million at the moment.
Okay. The, I think you have also been talking about the sort of margin improvement in MacGregor as well as the profit improvement. I think the margin was slightly down in the first quarter, but you are expecting a sort of pick up in the margin in the rest of the quarters.
Yeah, sorry, I might have been unclear. I was talking about gross margin in that sense. The gross margin in MacGregor picked up from the last year. One of the challenges in MacGregor has been that the gross margin has been under pressure for two years now, coming down from the higher points and we've been working now very hard on the initiatives we started already in 2014 in terms of driving for better margin. That's really coming from many efforts, the project execution enhancements, the design-to-cost efforts we are doing also in MacGregor. Then obviously with the change in mix as well, that helps us to drive this. The... If you look at the how we are able to roughly maintain the proportional EBIT, despite the fact that our revenue declined by 25%, it was really a combination of the savings in cost, but also improvement in gross margin. We will be leveraging those tools further when we go forward.
Okay. Still to make sure, you repeat the guidance for all the divisions to improve profits, including Kalmar and MacGregor this year.
Yeah. What we actually have said in terms of guidance is that as a group, we will be improving profit. Obviously, the improvement comes primarily from the Kalmar and Hiab, and we sort of aim to keep the proportional EBIT roughly at the level we are now at in MacGregor. Obviously, that in terms of the absolute profit is going to be at the best if I remember correctly, at the level of last year's EBIT, actual absolute EBIT. Eeva?
Yeah, actually, because of the very low Q4 in 2015. The comparison is not a very demanding 2.6% EBIT margin. In that sense, we're with the 4.2%, we're now at the first quarter, we're well in line with that as well.
Finally, Eeva mentioned about the currency in the Q1 , but just to make sure that there was no material impact or any impact in the Q1 profits from the currency.
Yeah. There was no material impact. Slight negative impact, if you want to get very particular.
Okay. Thank you.
Thank you.
Thank you. We have a question now from Tom Skogman from Handelsbanken. Please go ahead.
Yes, hello. I got a couple of questions on Hiab. First of all, I would like to understand what you think about the cycles here. Now, Americas is 44% of sales, and historically it's been around one-third. In some construction equipment areas, you start to see that despite, you know, the good construction activity, continuing demand for some construction equipment is starting to go down just because of replacement cycles in the U.S. Where do you see that we are in the cycle in Europe, given that the construction environment is improving there?
U.S., I think the outlook at the moment, One is to be of course, somewhat careful with this one as the visibility in here be shorter than it is in the two other businesses. At the moment, we see actually still a strong demand for our products, also in U.S. Europe, I think is encouraging at the moment. As you said yourself, the construction activity is picking up in many of the locations, and especially of course, Southern Europe, it starts with the very low base, is looking quite promising. In that sense, if you look at the order intake in Europe and the revenue for the Q1, that looks pretty encouraging at the moment.
I mean, it's very hard to understand where we are in the replacement cycle in Europe in Hiab. I guess it, we have a great impact on the low fuel price for these independent truckers that buy your products. They are very eager to renew equipment that is old. Now when we have, you know, a better construction outlook also, I mean it's very easy to be optimistic. On the other hand, you know, we have already had some good times. It's very hard to understand.
Yeah, I think-
Then also...
Yeah, if I may, that's a great question. The difficulty in that one also it's that the market is so spotty. I mean, talking about Europe at the moment as a whole is quite difficult. Clearly, if you look at the markets where the construction activity has been now very favorable, like in U.K., you have actually had a real kick in terms of replacement market. The truck registrations increased significantly in U.K. last year, and our revenues actually in U.K. have come up quite significantly as well. You have other places like France, where the market and Southern Europe, which is the still to be able to pick up. Talking about Europe as a whole is somewhat demanding, but I would say that we haven't seen the full impact of an opportunity of the replacement cycle in Europe yet.
Okay. In China, what's happening with your joint venture in China for Hiab, and what are your plans there at the moment?
We had a sort of number of issues there that we needed to sort it out in terms of the actual operational mode and some of the product roadmaps, et cetera. We have done those changes during 2015. We changed the product ownership into the joint venture in terms of stiff boom, and from our own operations in Shanghai. We have the first products launched actually as we speak at the moment, and we are now starting to sort of track revenue from that one. Obviously the revenue so far has been not very significant, but we are now comfortable with the setup we have in China. We believe that we have the right sort of operational mode together with our joint venture partner, as well as the right products coming out now.
All right. Then, finally on Kalmar, how big part of orders in Q1 are this mobile equipment?
I'm gonna say, Eeva, if you're able to answer on that one.
Well, we haven't really commented on a quarter- by- quarter, but roughly, you may remember that from the sort of EUR 1.5 billion-EUR 1.6 billion annual sales revenue in Kalmar mobile equipment is sort of 500,000,000+ level.
Yeah. I would say that we didn't track any larger sort of crane orders in, in Q1. Proportionally probably we're higher than that one in mobile equipment in Q1.
Finally on FX. I understand what you have said that there is no impact, but I cannot understand that given you. I mean, you have hedges and the dollar rates that you're selling in Hiab must be much more favorable than one year ago with your hedges in place. I don't understand your comment that there is no impact from FX then.
The sales cycle in Hiab is around four to six months. Actually if you look at the euro-dollar rate in the Q1 and you go four or six months back, it is actually sort of surprisingly well along the sort of 1.1 level. I that is a pure reflection of really the sort of currency rates.
It's good to remind ourselves again that, roughly half of the revenue in Hiab in U.S. is actually coming from the local content as well. The other half is the, where the currency would have impact if it would have.
Yep. All right. Thank you.
Thank you. We now have a follow-up question from Paul de Drée from Kepler. Please go ahead.
Yeah. Hello. Sorry. two more questions. number one on Kalmar. With the arrival of these, super container ships, what's happening to the current stock of container ships, the large ones, but the slightly smaller ones? Are they increasingly now being moved onto the North-South route? 'Cause I gather most of the super container ships are gonna be on the Asia-Europe route. What are we seeing now on the North-South route, and is there any need for further port investment to upgrade, say, in South America or Africa to these larger ships?
That's an excellent point and absolutely. I mean, what will happen is that the primary routes that are now served by those ships are now taken over by the larger container ships. As I said, that actually drives quite a bit of investments because the impact for the yard capacities actually needs to go up by 30%. It's the peak capacity that actually drives the investment requirements, and the peak capacities are going to go significantly up. We will see the same phenomenon happening in the other ports now, where the ships that you used to serve, these ones are moving to the so-called secondary routes, North to South being in one of them as well. The investment requirements to handle the larger ship sizes is actually coming through the whole chain of ports.
Obviously, the situation is not particularly healthy at the moment. If you look at the, look at the growth in container capacity, which is, as I said, is slightly above two at the moment, the capacity increase coming through with these larger container ships is sort of a 4%-5% range at the moment. We clearly are starting to see the sort of overcapacity situation happening in the container ships as well.
Okay. Thank you. I saw a Bloomberg article from Monday, which talks about the U.S. and a lot of laws being passed now regarding emissions, and strict emission standards, and they want to go to zero emissions, say, in California. Is that an area that you're involved in?
Absolutely. I mean, that's one of the key competitive advantages we have at the moment, is that in terms of the electrification and hybridization of our products, we clearly lead the market at the moment. We have introduced sort of hybrid technology to our mobile equipment that gives you a 30%-40% savings in emissions and there. For many of our products, for example, our shuttles, we have introduced a sort of fast charge concepts that enable us to charge the equipment and run our electricity during the operation. I mean, this kind of development, I see very favorably is playing to our hands at the moment.
Again, we are in a lucky situation that, whereas we are financially able to outperform our competition in interport equipment market, that has also enabled us to drive further investments. I was already talking about a further 17% increase in our R&D at the moment. Again, in terms of technology enhancements and in both in automation, digitalization, electrification, et cetera, is enabling us to have a strong technology leadership here as well.
Okay. Sorry, just very briefly, two more. On MacGregor, what's your market share in the fit out of these new super container ships? Do you do quite a lot of them or not?
We do. The scope change varies quite a lot. In some cases, we are responsible fairly wide sort of scope of the product that includes the actual planning of the storage systems and then delivery of the total equipment. Our value can be sort of close to EUR 10 million per ship. In some cases, the ship owners are taking more sort of larger role in terms of the actually planning. We can sort of end up being a sort of almost a component or a supplier with doing the lashing systems, et cetera. In that case, the value drops to a few million euros on ship. We have a strong... Overall, our market share in container lashing systems globally is in the neighborhood of about 40%.
In terms of your flexibility at MacGregor, in terms of, you know, in the face of weakness, can you just remind us what percentage of your engineering is outsourced?
Our engineering, what we said in connection of the Capital Markets Day is about 1/3 of our engineering was outsourced. Obviously, now that we are driving for savings and the activity is declining, that part of the engineering is obviously declining. We are also, in some cases, have done cuts to our own engineering capabilities as well, especially in the offshore area.
Okay. Just so I understand my hear question, I mean, is there a need for any consolidation, do you think, within the sector players in the sort of the Hiab, the forklift truck, you know, sort of cranes? Or do you think the market's pretty stable?
From our point of the market is pretty stable and our market share in many of the segments we operate are so high. If I take truck-mounted forklifts, I think our market share is 66%. Our market share in mobile equipment is over 40%. Consolidated with that market shares, that kind of market shares, I mean, I think from the competitive authority point of view is going to be problematic and also, I'm not entirely sure that that would give us a synergies that would be beneficial enough for us. I think the markets obviously are getting tighter in some places. There is also a sort of element of natural consolidation with the weakening of the competition.
Okay, thanks. Then finally for the CFO, yeah, your net debt, EBITDA, what's it at the moment and what's the target?
We've had the target to be around two. This is the target already discussed a few years ago when we were doing the bond emission and following the acquisitions. And we are obviously have reached our target and are quite comfortable now. Obviously we continue to work on the cash flow and hence in that sense and EBITDA improvement. There is some room for it to come further down. At the same time, we hopefully find good acquisition candidates such as Interschalt also as usage of the cash.
Oh. No, no increased payout to shareholders?
Well, the board hasn't made any decision in terms of recommendation for the dividend for next year. We have to come back to that one.
Yeah. The dividend policy has been the same throughout the sort of Cargotec time.
Okay. Thank you very much.
Thank you everyone for very good questions today. If there are no further ones, I would like to thank you for your attention today and wish everyone a good weekend. Thank you.