Ladies and gentlemen, welcome to Cargotec's Capital Markets Day 2015. My name is Leena Lie, and I'm the Head of Communications, Investor Relations and Corporate Responsibility. I'm very happy to see so many of you here in London, and also warm welcome to those of you who are watching the webcast. Today, we are going to share exciting news and insights how Cargotec aims to drive profitable growth and become the leader of intelligent cargo handling. Our CEO, Mika Vehviläinen, will explain how we are transforming from an equipment company to a company that will shape the cargo handling industry. Our business area presidents will then explain that in more detail how they are going to drive that journey. Finally, our CFO, Eeva Sipilä, will round it up with the numbers.
At the end of each presentation, you will have the chance to ask questions, and also those who are watching the webcast can send the questions in via this webcast tool. Finally, after all the presentations, we will have breakout sessions where the business area presidents and service heads will discuss their businesses in more detail. Now without further, I would like to give the floor over to Mika Vehviläinen. Mika, please.
Thank you, Leena. From my behalf as well, very warmly welcome to the Cargotec Capital Market Day 2015. I have been the president of Cargotec now for roughly two and a half years. During those two years or so, we've been very focused on making the turnaround in HIAB and KALMAR and improving the profitability, lately of course, also containing the situation in MacGregor due to the cycle and tough competitive situation in marine industry. I'm very happy that today we are able to turn the page. Today is a very important day for us in Cargotec. Today, we will take our eyes off from pure profit improvement into a profitable growth and how we transform the company from a good equipment company to be the leader in intelligent cargo handling.
What you will hear from us today is how the turnaround in HIAB and KALMAR is delivering results and how the similar improvement plans that have been successfully executed in those two business areas are also in plan and also in place for MacGregor. We will be talking about how we transform Cargotec from an equipment company to a company that has world-class service offering and will be the leader in intelligent cargo handling. We are investing to ensure that transformation and position. We are investing into our business platforms. We are investing into R&D, and we will be investing into our capabilities, especially in digitalization and services. We will be discussing with you about our financial targets. Obviously, most important one being aiming to get to 10% sustainable profitability over the cycle in our business areas.
Olli Isotalo, Roland Sundén, and Michaël van der Meijden for business areas will talk about their plans more in detail today. Eeva Sipilä, our CFO, will discuss the financial targets more in detail in her presentation. Before I start, a few words about the Cargotec as such. We are about 3.5 billion EUR company. We operate through three business areas. MacGregor, the leader in load-handling solutions for marine industry, both for the merchant as well as for the offshore industry. KALMAR, the leader in ports and heavy logistics industries, especially for the container handling equipment. HIAB, the leader in on-road load-handling solutions. Services is still a tremendous opportunity for us in Cargotec. Only 24% of our revenues comes from services today.
We have clear plans in place how we are going to drive up that number, and you will hear more about that one. We have our three business area services heads here today as well, John, Craig, and Kristian, who will be part of the breakout sessions and discuss the services plans more in detail. In terms of geographic, MacGregor obviously is in a global marine business where most of the ships are today built in China and in Korea, but bought and used all over the world. In KALMAR's case, roughly 40% of the revenues comes from Europe, 30% plus comes from Americas, primarily from the USA, and about 24% from Asia Pacific.
In HIAB's case, nearly 50% comes from the Europe, 40% or so comes from the Americas, again, primarily from the U.S., and the rest primarily from the Asia Pacific. Let's first look where we are today. One of the major changes that has happened in the two years that I've been CEO, that we have had a tremendous change in our executive lineup. Out of the top 100 executives we have in Cargotec, 47 has been changed in the past two years. We have brought in new leadership from the world-class companies who know what the good looks like. The profitability improvement plans in HIAB and KALMAR are tracking well. We are very satisfied with the progress, and those same plans are now in place also in MacGregor, and Michel will talk more about those ones as well.
How have we been actually able to achieve this kind of turnaround in relatively short time? First of all, we have put a very clear focus on getting the visibility on our businesses. We understand today better where we are making money and where are the potential areas to improve. Secondly, we have put very strong focus, value-driven focus on what are we actually trying to improve, what's the value of the improvement, and when can we get that done. The whole effort has been done through the sort of value-based focus in different programs. The program structure we have in place ensures that there is an ownership focus, execution, and clear follow-up on that one.
That execution capability that we have built in the last few years is going to serve us very well when we look at our strategy execution and our transformation to be the leader in intelligent cargo handling. One important part of this one is the investments we have done to improve our visibility, our business platforms, and control environment. In the last four years, we have spent more than EUR 80 million in putting in place world-class systems. Our SAP as a financial backbone capabilities on top of that one, our human resources system, our pricing and channel management systems, our services systems, et cetera. We are probably about 70% through, we still see fairly heavy investments that we need to do in this area for the next 2-3 years. Another important area where we clearly have accelerated is the R&D.
We spent EUR 190 million in R&D since 2013. We are out-investing and out-innovating our competition at the moment. This starts to be visible in our numbers, it starts to be visible in the traction we get in the market. Again, the business area heads are going to talk more about the specific plans in the business areas themselves. We are building on a tremendous strengths in the company. This is one of the reasons why I personally decided to join the Cargotec, because I just saw that with these very unique and fundamental strengths, we have all the opportunity to build a great company. First of all, if you look at the Cargotec, we operate through three business areas. Underneath those ones, we have very specific segments. You will hear more about them in the business area presentations.
Within each of those segments, we tend to be either clear market leader or at least a very strong number two. Our market shares are anywhere between 20% to 60% or more in all of these areas. The mega trends in the world, as I'm sure you will be hearing many of the similar sort of seminars as well or meetings are obviously supporting us. All of our businesses are fundamentally growth businesses. Urbanization is driving for construction equipment activity. That will drive material flow needs, that will drive our demand. The consumer population is increasing fast. They estimate that 1 billion new consumers, sort of middle-class consumers, will come on stream in the coming years. They all want to have their color TVs and washing machines, and that will drive further cargo flows.
At the same time, the environment around our customers is changing. Our customers need solutions that are able to answer for those needs for further efficiency, better safety, and more sustainability. The intelligence in the equipment and solutions need to increase. I think we are in a terribly good position actually to be able to make that happen. Our brands are really category-defining brands. Very often when we talk about the truck trains, we talk about HIABs. There are many other examples where our brand is the same as the category itself. When I came in and I looked at some of the customer satisfaction, brand awareness, and other results, and I've been in business to business for more than 20 years, I never seen results like that one. Our NPS results in some of the product categories are over 80. Extremely unique.
Not only do our customers know our brands very well, not only our customers actually have a good satisfaction, but very often there is a strong emotional attachment for our products and our brands as well. The industry-leading innovations, we have very often invented the categories. The MacGregor hatch covers as a category, hatch covers as they are known today, were invented by the MacGregor brothers in Newcastle in the 1920s. The current sort of heavy forklifts and reach stackers were invented more than 100 years ago in southern Sweden forests by KALMAR. HIAB obviously invented the truck crane more than 70 years ago. We are very proud of that innovation tradition, and we are very committed to maintain that moving forward.
The strong execution capabilities, the improving profitability that enables us to invest, and the strong fundamental strengths we have in the company are a great foundation to build our transformation. Today, we are a good equipment company. We will be investing, making sure that we will be a good equipment company down the road as well. We keep on out-investing and out-innovating our competition in given sectors. We will be building on top of that one. Services is a clear improvement opportunity for us. By 2018, we plan to offer world-class service for all of us. The business area presidents and the heads of services are here today to talk about those plans in more detail, you will also have an opportunity to discuss with them in the breakout sessions about that one. Another important element of the transformation is the digitalization.
Everybody talks about Industrial Internet. Already today, we are in a very strong position in many of our solutions there. For example, our offshore cranes are continuously monitored and we are providing maintenance and advice from our services center in Norway. In some other areas, we still have room for improvement. By 2018, all of our equipment will be connected, whether it's through a fancy satellite connection or in a low cost or spare parts, it's probably just an RFID tag. We will be building data analytic analysis capabilities. That's very important part of our services offering moving forward. That will be also very important for our further R&D work, our customer engagement, and our own internal processes. Next year we will spend more than EUR 20 million in improving our capabilities further in digitalization. Third element of our transformation is the software.
Our customers need more efficient, safer, more sustainable solutions. The intelligence in our offering needs to increase. There will be more and more embedded software, but there will also be independent software that we are building on top of that one, and that will be already significant by 2018. Let me give you a couple of concrete examples. In container industry, container shipping industry today, we estimate that industry loses about EUR 17 billion every year due to the inefficiencies. We are in a very unique position to actually through MacGregor and KALMAR offering to offer solutions through the software that will optimize and make that industry more efficient. Olli, and then Andy Dvorocsik, who is the head of the Navis marketing and business development, will be sharing some of those thoughts in his presentation and then in the breakout session.
Let's take another example of that one. Truck cranes today, we've been putting engineering and development to make the lifting operation quicker in our HIAB products. We actually look at the inside of the customer, the actual lifting operation takes few minutes, but it can take up to 15 or 20 minutes for the customer to stabilize and secure the truck. With more software, more sensors, we should be able to automate that process, considerably improving the productivity of the truck driver as well. By 2020, more than 40% of our revenue will come from services and from software. We will be leading the industry, shaping the industry through intelligent solutions for our customers, consisting of world-class equipment, world-class services offering, and intelligence in embedded software and independent software offering.
There will be three must-win battles on a corporate-wide that will support that transformation. Obviously, services once more is an extremely important opportunity and will drive our growth and profitability in next three years. Leading in digitalization, we are going to put more capabilities and more investment into that one. We are already today in a strong position where we can build on. Last but not least, is to build world-class leadership. As I said, we have actually changed roughly half of our top executives in the last two years. We have now people in place who come from excellent companies. They know what the good looks like. What we need to do now is to build a common culture around this new leadership. Culture that is performance-oriented, has the right fast clock speed. That's the effort.
Our head of HR, Mikko Pelkonen, is somewhere there in the back, he's happy to answer any of your questions what we are doing in terms of leadership transformation in the coming years as well. Personally, many of the executives in this room, this will be a big investment time-wise for us in the coming year. Next, I thought I would discuss with you a little bit about the role of Cargotec as a group and the portfolio. I know that I have received many questions on that one on the two and a half years I've been with the company. We have given this quite a lot of consideration, lately, the conclusion we have come to is that this is the right base to build the value. Let me explain a little bit of the logic on this one.
If you look at again, the Cargotec, as I already said, is that we are actually a collection of fairly independent businesses, about 19 segments altogether, where we have a good position. These businesses are from sort of EUR 100 million to roughly EUR 600 million businesses. What we want to do down the road is to ensure that the agility and focus of the small business is maintained while we are able to leverage the scale of the larger business. We do that first of all by ensuring that we can provide the right capabilities when it comes to the digitalization, leadership, and services for those smaller businesses, leveraging the scale and the capabilities we have in-house. Secondly, we can provide those smaller businesses with the business systems, platforms, and intelligence that the smaller business could not do on their own.
Combining the agility and focus of smaller business with the capabilities of much larger business. Secondly, we will be shaping the portfolio. We will not shape necessarily the business areas as a whole. We will be looking at the underlying segments in there, and we are going to take a lot more assertive view on this one going forward. We have sort of put quite a lot of effort to understanding our business portfolio. We will continuously monitor that together with the board of directors as well. The plan is pretty simple. First of all, we are going to allocate more capital coming from our increase in cash flow for the businesses that are most attractive from our point of view. The attractiveness comes from the market structure and the inherent profitability.
It comes from the growth prospects, and it comes from the alignment with our strategy, especially around digitalization and services. Secondly, we will do mergers and acquisitions. Probably nothing huge in what we are looking at primarily at the moment is, again, enhancing our technology offering, primarily around software, some product gaps and automation. Secondly, we are also looking to accelerate our growth through potential mergers or acquisitions in the developing countries to accelerate our market entry in those areas. At the same time, we are also looking at disposing some of the businesses that are not core in our strategy moving forward or are not, to our view, able to meet the profitability targets we have set for ourselves moving forward.
As I said, we believe that this is the right structure and the right strategy moving forward, enabling us to reach 15% return on capital employed over the cycle in our group as a whole. Before I discuss the financial targets more in detail, a few words about the market conditions and market environment, and let me start with the shipping. Again, Michel is going to sort of talk about this a bit more as well. Obviously, especially when it comes to merchant side, it's been a rollercoaster ride for many years now. We probably have one of the lowest situations we ever had in this industry.
I think we are right now bottoming out in 2015, 2016. At the moment it looks like the forecast is actually projecting a fairly steady growth from 2017 onwards. The one industry that is particularly hard hit is the bulk ships at the moment. We still see a fairly good activity in larger container ships and also in the sort of so-called feeder ships. We also see good activity in ro-ro ships as well. In the offshore side, obviously the oil price is a big question mark for all of us and it has hit hard the investments in the offshore side. There are other technologies or other sort of applications that the offshore technologies apply today. You saw the announcement about the large wind farm need to deployment now.
Some of the research vessels, fishery vessels and specialty vessels are also now built in leveraging the technology in offshore side. Also, one thing that is happening, due to the sort of, slump in the whole offshore industry, the cost of the CapEx is actually coming down. The fact of the matter is that if we still assume the oil demand going up in the world with the lower CapEx, one would expect this business to start to turn around. Again, the projections similar to the one in merchant marine is that we are bottoming out in 2015, 2016. Actually in offshore side we show a relatively rapid increase in CapEx in the coming years.
We look at the KALMAR and Konti, obviously both KALMAR and partly also for the MacGregor, the container industry volumes are going to increase continuously. The container industry has a negative growth only once in its whole history, which was in 2009. The growth is slowing down a little bit, it's coming from a very large absolute base. This of course gives a good sort of ground for our future growth as well, there are actually a number of factors that Olli will also discuss more in detail that are actually accelerating that number. Larger ships, automation requirements, replacement cycles, et cetera. We are very confident about our environment around KALMAR as well. HIAB today of course partly, the projections are related to the truck registration.
Based on our analysis, and we've been monitoring this for quite a few year now, we actually correlate more with the construction industry as that tends to be the primary application for our equipment. We see the construction industry activity to continue at a good level in 2016 and 2017 in U.S., obviously it varies significantly from one country to another. For example, in U.K., we have had a very strong sales growth in the last two years. In some other countries, for like in France, the market has been pretty difficult in the past few years. Looking at our financial targets, we have now split that into two sort of separate categories.
The first one is the business area-specific targets, where we aim to have 10% operating margin in each business area over the cycle. The business area presidents will discuss those in more detail and about their plans how to get there. It's pretty obvious that with HIAB we are probably closest at the moment. We know where the gap is now coming from KALMAR, and Olli has very specific plans on that one. The MacGregor obviously is the one that we are furthest behind. Having said that one, we did hit 14% at the top of the cycle, but Michel is going to discuss about the actions we are taking there to ensure that we will meet the same target there as well. We plan for the growth. It's very clear that all of our businesses are in a cyclical industry.
We plan to grow whichever cycle is faster than the market growth, and that comes from our investment in R&D, our strong position, brands and other strengths I've been talking about. As a group, we maintain the two targets we have communicated in the past as well. Our gearing below 50%, Eva is going to discuss about the gearing more in detail in her presentation. Return on capital employed 15%. One can say that that's not a particularly high number, but again, Eva is probably going to touch that in her balance sheet. We have quite a lot of goodwill coming from the history as well that puts the limit on how high, how high can we go there. Then we also maintain our dividend policy of 30%-50% earnings per share.
In summary, ladies and gentlemen, I think we are in an exciting position to take an advantage of the strengths we have built in and the opportunities that the market will offer us. We have put in place excellent execution capabilities in last two years. They will now serve us well when we go ahead with our growth strategy and transformation. We are building on unique strengths in terms of our technology and innovation, our market positions and our brands. We are transforming this company from equipment company to a company that will shape the cargo handling industry. We are ensuring that transformation by investing into our control environments, investing into R&D, and investing in our capabilities also in the coming years. We will be shaping our portfolio to drive further shareholder value. Thank you very much.
Thank you very much, Mika. Now it's time for questions. I would like you to wait for the microphone and also state your name and company. Let's start over there.
Hi. Johan Eliasson from Kepler Cheuvreux. I remember when Cargotec, the last time introduced the 10% margin targets, talking a little bit about the investments and the margins just started dropping and dropping and dropping. How are you planning to balance going forward these investments versus how the margins will develop over the coming years? Thank you.
That's a great question. When I came in the Cargotec, we had that 10% target and one of the first things I did, I took that away because the problem I saw was that when I looked at the plans we had in place in the business areas, I couldn't get an alignment with the 10% target. There was nothing that would have got us from the current plans into the 10%. Then we introduced these profit improvement programs. We indicated about EUR 40 million improvement both in KALMAR and HIAB, and we have delivered that one ahead of the schedule. When I look at the 10% target now, we have plans in place how to get there, and these gentlemen will explain that a little bit more in detail.
As you probably saw as a part of the announcement, our initial target for this year was for next year, sorry, the 8% target. We took that away. It came from two reasons. One, of course, that the MacGregor situation in terms of absolute EBIT due to the cycle is first, and then it was in the capital market day when oil was still considerably higher more than a year ago. The other reason is that when we looked at the strategy and the opportunities, we decided that we are actually really going to pile up in terms of investments. We felt that that's the right thing to do at the moment. We could have got to the 8% if we would not have done the extra investment.
If you look at the market dynamics and what's happening around us, I think this is a good time to accelerate. That's something we need to balance all the time. I'm confident that we have the plan and this investment will actually serve us to get to that 10% as well.
Should we expect lower margins in the near term? I mean, not vis-a-vis the 8%, but where we are today, for example?
No, no, absolutely. I mean, what we said as a part of the announcement that we are still expecting to improve the profitability and return on capital employed from 15 to 16 as well. You will see us moving towards that 8%, but reaching that 8% frankly is quite challenging. I'm not ruling that entirely out, but then things would have to go like in American movies as they say.
Okay.
Hi, Simon Sigvardsson from DNB. I was wondering about potential disposal that you talked about on the non-core product areas. How much of sales could that be? Have you made any such analysis already now?
Yeah, there are few we are looking at. I would put somewhere between EUR 50 million-EUR 200 million in terms of top line.
On the investments, you said, EUR 20 million in additional spending, right?
Investments actually comes from different sources. The EUR 20 million is the specific capabilities we want to build in digitalization. On top of that one, if you look at our R&D spending, we will still plan to increase slightly from 2015 to 2016. Then we also done pretty heavy investments in the neighborhood of, I'm looking here, about EUR 20 million-EUR 30 million in terms of business system and control environment that we expect to continue on that level or actually slightly up again next year as we expect actually that SAP deployment would come to an end in KALMAR and HIAB end of next year as well.
Okay. Thank you.
Over there. First here and then back there. Yep.
Manu Rimpelä from Nordea Markets. just to make sure that I understood correctly. Did you say that it would be able to reach 8% this year if you would not have taken the extra investments into R&D and control systems and SAP?
Yeah, sorry if I was unclear. I was talking about 2016. 2016, 8% target that we set a year ago, when we looked at the numbers, obviously we came down from the KALMAR and HIAB are ahead of the plans, but then the MacGregor environment is much tougher. If we would not have done the investments we plan to do for next year, we would have probably been able to reach that 8%. Based on the new strategy, based on the investments we are doing there, we are not setting that as a target for us for 2016 anymore. We will be improving from 15 to 16, but reaching the 8% target next year is going to be very challenging.
Okay. To continue on the same topic, how do you see those investments developing in 17 and 18? Are they kind of gradually fading away as a headwind?
The R&D, I think we keep on as is. We are clearly seeing that outinvesting and so out-innovating our competition is yielding results. We see that in the better product costs. It's better product competitiveness, we plan to maintain that. And that's of course in relation to competition as well. In the business system environment, you would be probably looking for another two to three years of this level and then tailing out. Digitalization is obviously part of the R&D investments and some of the business systems as well. I think overall the sort of EUR 20 million level that we set for the next year is probably on the higher side compared to the next two years or so.
You mentioned the mergers in developed markets. Is this something that you would have considered even without the merger between your rival Konecranes and Terex? Is that kind of making you feel any different than before that acquisition was announced or transaction was announced?
That didn't actually change our thinking at all. I think it's if you look at today's portfolio we have, we are actually pretty much a developed country equipment company because our equipment usually comes to that place when the labor costs are or the consumption population is there. In the longer run, I now showed, for example, in HIAB's case, the U.S. market and European market with date and trend projections. It's very clear that in the longer term, the developing countries give us a tremendous growth opportunity when there are any more five guys in the truck cabin, for example, but it becomes cheaper to put a loader crane in there or when the port infrastructure is developing and the cost of that one.
In China, for example, there's quite a lot of consideration around port automation already today. I think the developing markets in the longer term are a tremendous growth opportunity for us. In some cases, we do that through greenfield, and Olli is going to talk about the example what we have done in China. In some markets, actually, especially when you look at things like HIAB, where you to win, you have to have a very good coverage in terms of the distribution and service networks. It might be faster and more economical to actually buy an existing operator and to get that infrastructure and immediate stepping in there. In KALMAR's case, it's slightly different because we are very focused on ports, so we can cover that very much with the sort of our own efforts on there.
MacGregor of course is a different ballgame in terms of the market and customers as well.
Okay. The final one from me. When you said that you're transforming from an equipment company to a more company which will change the cargo handling industry, is that something that you genuinely see that you have an edge in today, that you are better than all your competitors in somehow? Is that just something you see that you are being forced to do because the whole industry is changing?
No, I think we have genuinely. First of all, I kind of lived that through myself. I was 17, 18 years with Nokia in telecommunication infrastructure. When I started in telecommunication in the 90s, the operators were buying hardware, and you gave software and services free of charge. I've seen that transformation. I look at the port operators or fleet operators or many of the other industries. I actually see that same thing happening. People are changing. The industry requirements are changing. People need more efficiency, safety, sustainability, the intelligence in software will play that. We see customers also changing in the sense that there are people with more IT background and sort of digital background in there that also will drive that change. When it comes to our capabilities, we have. I'll give you one concrete example.
We have more than 400 software engineers today in Cargotec, and we plan to increase that considerably. I don't think there is anybody else in the industries we serve in that has nearly that capability today. We have today very unique positions, for example, with when it comes to Navis, as the clear leader today in port automation software and terminal operating systems. Those are great platforms and capabilities we can build on. Obviously, our market position and brand also helps us to sort of shape the customers and have an influence and impact with our customers as well.
The final question from the back.
Right. This is Tom Stønvold from Handelsbanken. I wonder about these investments, whether you could quantify, you know, really in millions how much more we'll spend and whether any division will be more burdened when it comes to profitability from the investments the next two years?
Why don't we do so that let's hear what the business area presidents have to say, and if this is still not entirely clear, I'm happy to sort of take that towards the end again.
Okay.
That probably gives you a good background on that.
I have another question. There's a very big conglomerate discount on the Cargotec share if you compare to many other Nordic capital goods companies. I'm a bit curious what you have thought about in the board about, you know, potential dismantling this conglomerate structure. Of course, the especially high multiples would be on Navis. Will you keep that under 100% ownership in the future?
First of all, if I take the Navis first, then the answer is absolutely. Actually, Olli is going to talk more about that. We see that as a great platform start to build further software offering into the ports and shipping industries as well. It's a great position we can leverage on, obviously we have built-in capabilities today that have a world-class sort of software business management capabilities, Andy here being one of them, and he's happy to tell you what we plan to do on top of that one. That's sure done it there. Again, what was the early part of your question? Sorry.
Just this general big discount.
Okay.
What can you do to get down the discount if you keep these structures, just to continue to improve?
Yeah.
operations or do you have anything else in mind when you, the board, have decided to keep this conglomerate structure?
First of all, I don't know, you guys are probably better on this one. Do we have a conglomerate discount or we just have a discount because we have a history of not always being able to deliver? Obviously, at least our own sort of confidence in able to deliver the numbers is better there today. We've given this quite a lot of consideration and we feel actually that right now for our shareholders the best option is to actually leverage the capabilities we can build in-house in terms of the, I discussed digitization, some of the business systems and it'll make us better company that none of the businesses as independent businesses could not afford.
Leveraging those capabilities and abilities across our businesses and take the scale benefit while maintaining that flexibility and focus of the smaller businesses is where we believe strongly that we can drive the best value.
All right. Thank you.
Thank you, Mika.
Thank you.
Let's move on. Roland will explain how HIAB will build value over the business cycle.
All right. Good afternoon, everyone. I'm Roland Sundén. I'm heading up the HIAB business. At HIAB business area, we have tripled the enterprise value the last 18-24 months. We are continuing to pursue the efforts to build such value also going forward, and do that over a complete business cycle. That's what I want to talk about today. In essence, I'm going to show you how we're going to do that in three steps. First being the key message today actually that HIAB has completed its turnaround. We are the most profitable business in Cargotec. We are probably most profitable also in the load handling industry. We are fantastically good to take that profit and generate cash. We have a very strong product offering. We have a new business organization in place.
Myself and my new leadership team, we are really triggered to now continue growing this business. That's my next message. We are investing to shape this industry also going forward. As a matter of fact, and Mika was alluding to that before, we created this industry and we're gonna continue creating and shaping this industry by investing more into new products, into digitalization, into service. We're gonna continue driving our efforts to optimize the value chain to the customer. That's actually my second message. The third one is that we would like to do this, and we will, and I'm confident we're gonna do, myself and my team, to build that and grow that value over a complete business cycle.
We do that by being very focused to certain very tailor-made market segments, have a complete product offering to these segments, be very asset-light, and then continue growing our aftermarket and service business even faster than the equipment business. Before going into these three areas, what I want to do is to show you a little bit more about HIAB and what HIAB is all about. HIAB is a EUR 900 million business. Basically, we're 2,600 people around the world. We are in a market that is very structurally attractive, very few players, and we are a dominant player on those markets we elect to be in. Basically, we have five businesses within HIAB now. I have five management team managing each of all these five businesses.
The first one, and I'm gonna talk a little bit more about the products, the loader cranes. You can see them everywhere in the U.K. It's so common in U.K., like Mika was talking about before, that people are not referring to cranes. They're referring to HIAB, even if it's a competitor crane. The tail lift business, you see them every day in the streets of London. You see the DEL brand in back of the truck, and it's a platform that we are using and the truck driver is using to load and unload his cargo. We invented the demountable business. In essence, it is a strong hook that you hook into the container and you pull it up on the truck itself. Fantastic product, and like I'm gonna talk about in a minute, quite a strong market position as well. The truck-mounted forklifts.
I don't know how many of you have seen that on the streets of London or in the UK. It's quite a common product, piggybacking back on the trailer itself and used by the operator wherever he goes to load or unload his equipment that he has. Forestry cranes. It's a heavy, sturdy variant of the loader crane used for timber loading and also heavy recycling. Let me bring you through on how these businesses are in the global context. Load crane is certainly the biggest market. It's EUR 1.3 billion market. It grows very much around the GDP. Depending on where you are around the world, it could be either from driven by the truck sales, but mainly actually from the construction equipment side, and constructions. Our position is very strong.
We have a market share above 25%. We are clearly number 2. We are controlling and being very dominant in the US market, but we're also strong, very strong in the Nordics and many other European countries. We are the leader in the knuckle boom market in China, and we are very strong also in Australia. DEL's business, smaller market, but fast-growing market. This is an example where urbanization is really driving that kind of a business, in particular in China, where the cost of labor is getting too high and the fleet owners would like to have more productivity and a much more safer operation. We see there, two times at least the GDP growth in average around the world. We are very strong in Sweden, Scandinavia, with a separate brand.
We are very strong with over 30% market share in the U.K. and equally as strong or even more in the U.S. with the Volvo brand. We have a global number one position, and the market share is at least 20, if not more, %. On the demountables, about equal size to the tail-lifts business when it comes to market. It's very much similar characteristics in that market as it is with the load crane business. We are the number one player, and we see good opportunities to further grow. We are very strong in the Nordics, fantastic market share in Austria and in Switzerland. We are strong in Australia. We're gaining market share in Germany, and we are start addressing also a very fragmented French market.
On the truck-mounted forklifts, it's a fantastic growth opportunity where this concept is not so well known in many countries around the world. In the UK, the penetration rate of truck-mounted forklift is about 2%-3%. That should be compared to a loader crane, which is about 7% of all trucks have a loader crane on them. It's a fantastic growth opportunity in these kind of markets. We see a possibility to further strengthen and expand our footprint with the truck-mounted forklifts. We are clearly number one. We have over 65% market share, a market share that is growing every day. On the forestry cranes, we are completing a turnaround program. We are renewing the product offering. We are clearly number two. We are very strong in Japan.
We are very strong in the Nordics, both those areas, more than 50, even 60% market share. We are now focusing on getting back on track in Central Europe and Eastern Europe. We are clearly number two, and we are striving to become an even better two going forward. Let me go into the first message today, how we now have created a very profitable growth platform. You guess what? The way to do that is actually you deliver to the promise. A year ago, I was standing in front of you at the Capital Markets Day in Helsinki, promising a lot of things. Considering all the tick marks in this area, I can tell you that when it comes to our sales and service execution, we have done a lot of good things.
We have now, for instance, a dealer management structure in place. A huge dealer management program is on the way being rolled out, and it's very well received by over 150 dealers worldwide. Likewise, on the product portfolio, I talked about modularization, which is a way to reduce the number of part numbers. We actually setting ourself a target that in the years to come, we're gonna half all our components and part numbers, but still be able to offer the customer equally good spread of product offering. Then we are working also on continually reducing the value chain complexity. We have now, if I take the last bullet there, optimize the distribution network, we have set forth what are the targets.
For each of the countries around the world, we know what it looks like now and how it's gonna look in two to three to five years from now. It's nothing that you really transform in a heartbeat. It takes a long time to, and a step-by-step approach, but we have started that work fully since early this year. I also said this year, a year ago, that we are gonna deliver on the bottom line target, 10%. I actually said we're gonna deliver that next year, but we are doing so well, so we're gonna actually deliver on that target one year ahead.
The way it goes, you can see on this graph, we are passing the competitors in average at least when it comes to profitability, and we are probably the most profitable load handling business in the world right now. This curve is not gonna continue like a rocket trajectory. It's gonna flatten out a little bit because we are investing more in the future. We're gonna keep it at least at this level and a little bit higher in the years to come. We have also done good work around the world, very quickly now to be cautious about the time. Basically, we have really retaken the initiative in North America. We have a very strong management team in place, and we have reinforced our whole sales network, including service in a very good manner.
We have managed to close deals for over 2,700 units. When it comes to key accounts, we're very happy about that. Christian Björk that is with me today, him and I, we will talk much more about service in the breakout session, where we are showing that we are actually at the very best practice right now when it comes to parts availability and how we are capturing future business. In Sinotruk, the joint venture we're having in China is progressing well. We have a new management in place, and we are now driving a much more focused business agenda together with our friends at Sinotruk. Finally, on this slide, I'm showing also that we have introduced a lot of products.
Over 45 new products in the last three years, actually next year we're almost going to introduce another 35-40 products as well. It's a big renewal program going on in here when it comes to our products. We are continue pushing for driving the new technologies. I want to show you some examples on that. Those examples are basically these three. We are pursuing very much in the heavy loader crane business. We're introducing five new cranes, and in that way we are strengthening our position. We are also introducing a new stabilization system. Mika was alluding to that before, that when the truck driver put up the crane and put up the stabilization legs and so forth, he better do that right.
What we have done is developing a software that helps the driver to put up the legs and stabilization system in a proper way. The crane is always telling the operator how far he can reach out and how much cargo he can carry. Actually, the crane itself is also computing how much cargo is actually already in the truck and how stabilized the whole system is. It's a revolutionary idea, and we introduced that some weeks ago. I can tell you that the orders are just ticking in, and our customers are very delighted to use that. The MOFFETT, my little favorite baby, the electric MOFFETT I talked about last year. It's a program we have developed and a product we have developed during three, four years. We have developed the electrical systems and the power systems ourself.
Actually, we introduced it with a great success, customer buying this concept because it's nice and quiet and environmental friendly. There's a big promotion in London for this from the transport authorities, we are tapping into that business opportunities. Customers would like now to have this electric, quiet MOFFETT also be used in off-road. We're developing a three wheel drive for rough terrain applications as well. A couple examples, highlights on what we are doing right now at here. Those new technologies are actually part of also our must-win battles, our key growth drivers. In the crane business, we would like to continue focusing more and more on the heavy segment. We would like to go further than we are right now. We are basically up to 100 ton meters.
We would like to continue to go to 200-300 ton meters. We would like to really focus on, and I'm confident we're gonna do, now into the Central Europe and Eastern Europe markets as well, driving these businesses. On the tail lifts, of course, we have to tap into the China market and so forth. We see a fantastic growth opportunity there. We're talking about double-digit growth, the first digit actually starts with a 2. We see a fantastic opportunity to positioning ourselves there while we are actually standardizing and globalizing our whole business model because that business is basically three domestic businesses, one in Scandinavia, one in UK, and one in the US.
What we're going to do is now combine and get the scales of economics and more common platform, common supply chain, and then step-by-step also including emerging market on our effort going forward. The truck-mounted forklifts has a fantastic growth opportunity, and we see great opportunities to penetrate more the Western North America and also into Continental Europe. Finally on the key growth drivers is actually on the service part, using more and more software applications to that and drive the capture rate up. We're going to talk more about that in the breakout sessions, but we see a great opportunity to capture more and very profitable business by using more and more connectivity and e-commerce. Those growth initiatives really are then supported by these four enabling for sustainable growth going forward. Optimize the value chain, the end-to-end value chain.
In particular, we need to become much easier to do business with. It's too cumbersome to configure our products. Sometimes it takes too long time to get that product delivered. We are continued driving to fine-tune and optimize our supply chain. To give you some numbers, our operating capital was % of sales in 2012 was around 25%. Now we're down to 16%. We have shaved off a lot of networking capital throughout these years. We're going to continue doing that going forward. On product innovation, I already talked about us introducing 35-40 new products next year. We're going to continue driving to introduce new control systems, new hydraulic systems. Guess what? We're going to make the cranes and other structure part more and more in composite materials.
We have a lot of big research program going on with universities around the world. Of course, we're going to tap into the digitalization efforts, and all our product will be connected in 2018, all new product we're delivering, meaning that we can tell exactly where all our products are in the world, what they're doing, and how do they feel, and when do they need to be serviced, and what kind of spare parts are going to be used. I see this as a fantastic growth opportunity also for the service business. The service guys are not going to rest. They're going to also expand into service and maintenance contract, and we are going to further expand our offering, and Christian will talk about that a little later. Our aim is to get to 10% operating profit over the business cycle.
Where are we at that now? In 2012, our break-even point here was around EUR 700 million in sales. Now it's less than EUR 600 million. We have taken the business from having a headroom to sales of 16%, now up to 34%. 34% headroom is quite comfortable, but we would like to drive that even further. We always can be profitable when the business is turning down, because it will, because it's a cyclic business we are in. If you take the last eigheight years and that cycle we have been through, the highs of 2008 and the lows of 2009 and 2010, if we take that and take an average EBIT, we have been roughly at 3%.
We take that business cycle, we paste that into current situation and look forward, we are already now at 7.7% EBIT over the business cycle. With these initiatives, driving also productivity, continue focusing on becoming more and more asset-light, we strongly believe and we are very confident there's not going to be too many Capital Markets Day in the future until we are there at the 10%, maybe one or two maximum. Okay? That leads me to my conclusions and a summary of what I talked about. We have been through a remarkable turnaround that Mika initiated two years ago, and I took over 18 months ago. We are extremely good on generating cash. We have a good management team in place, and we have an organization that works better than ever before, actually.
People are really turned in and tuned in to really drive this business going forward. We created this industry. We are going to shape it even more in the future by optimizing the value chain, driving innovation, tap into digitalization, connectivity, and drive the service business. This is how we're going to become the 10% or even more over a business cycle profitable company, by being very focused on few profitable market segments, be very asset-light, driven productivity, and have the right and good people in the right place driving this business forward. Thank you.
Thank you very much, Roland. I would like to invite the most burning questions now, bearing in mind that you will have whole 20 minutes to grill him afterwards. In the back there.
This is Antti from Danske Bank. On the turnaround, I would just be curious to hear how it happened because a few years ago you spoke about two main factors, one being component cost reduction, boosting the gross margin, and then the second was simplifying distribution. Is there something else on top of the... If you can please discuss how, what has been the main driver behind the profit improvement?
First, don't sell product you don't make money on, and go out to market that you don't ever gonna make any money on. I think that's actually activities that was already taking place in 2012 and 2013. Secondly was to manage the people out there in the field, not to discount away too much and give goodwills and pay warranties and so forth. There's much tougher price management. Thirdly was to get the engineers focusing on not developing new product at that time, but go after the cost and do that in a cross-functional team way. Then was to start tuning in with the customers and the dealers again, making sure that you deliver the stuff on time and build trust and credibility among our dealers and us, and get the confidence back that they can sell this product as well.
Those are the four or five areas that we have.
Good. Then if you could just for the sake of clarity say that what do you mean by this 10%, that target now? I mean, you are there already. Now should we expect, you know, the current level to continue or do you expect it to still improve the next couple of years? What should we think about that?
In order to have an average 10% over a business cycle, you know, you have to be north of 10% for sure at the peak when the market is high in order to stay at least in black numbers when it's really tough. Right now, if we take that, and take a typical historical business cycle curve and overlay our current way of working and our current profitability level, we are at around 7%-8%. 7.7%. Even though we are at 10%, Q3 was 11% operating profit, right. We need to be even higher in order to make the long-term target, which is 10% over the business cycle.
Thank you.
Gentleman over here.
Thanks. It's James Oldroyd from Lazard. I've got two questions for you. One is on that margin. Can you give us any idea where the peak, the potential peak margin is today? Because, I'm assuming that there's still some gain to realize from the design to build the gross margin improvements.
Yeah.
If you talk to Palfinger says that in Europe they're at 60%-70% capacity utilization. I imagine you're not that different. You know, that would suggest we're not at the peak of the cycle. Palfinger again, in some of its regions is very, very healthily into double-digit margins. If you could give me your thoughts on that. I don't know if you want to put a figure on the peak margin, but, can you confirm that it should continue to improve?
Yeah. I'm gonna try to answer it in, in a way where I put this business cycle management in the right context. What is important when you run a very cyclical business is that you manage the peak and the trough and actually try to squeeze them together. You have to accept that maybe you do business in a way that you don't peak up so high. On the other hand, you don't turn out so low. This is exactly what the management before me and I'm doing right now. You try not to be so vertically integrated. You're trying to just focusing on the sweet spot where you're really good in doing things, and then you let the others suffer a little bit when it's going down, right?
We have gone from a huge spread from +8% to -11% over a business cycle. If I think about historically, I mean that's almost 20%. Right now, I think we are ±5% to the current level. If you take 10% right now, we should try to get up to 15%, and we should try to stay above 5% at least. 10% is a little bit too much. I would like to come down. I don't have all the answers to, a span of 7% or 8% where I think we should be.
Thank you. That's a very, very precise answer.
Yeah.
The second question, I wonder if you could briefly explain how your dealer structure is organized. Is it how much of it is independent? How much of it is your own dealers?
Yeah.
How do you share the service business with the dealers? What do you think the potential in percentage of sales for service is at HIAB?
That's a very good question, I'm gonna save some of that to the breakout session later on.
Sorry.
No, no. We can take it. No. 70% of our sales are going through dealers right now, basically.
Seven?
Seven-zero.
Seven-zero.
Yeah. It's actually more than you think. At least when I think about the number of people we have within HIAB itself that sells direct. That's the first step. We think eventually we would like to go further. It's no panic. We need to first of all, take care of the dealers we have in a better way. That's why we introduced the dealer management systems that we are pursuing right now. In certain countries, I'm not gonna mention where and how and what, but in certain countries we need to change the way we're gonna distribute and sell our products because right now we have both our own resources, and we have our also independent dealers, and that can be sometimes very confusing for the marketplace.
For every country around the world, we have exactly how we would like it to be, and then we can compare notes where we are right now. We have a plan how to execute this step by step. It's not gonna be done in one year or two years. It's probably gonna take five years. Every long journey starts with a small step. Service business, we would like to, of course, drive the service business. You saw from Mika's slide, it's about 24% right now, right? We would like to come north of that, of course. It's.
For the whole of Cargotec?
No, for HIAB.
For HIAB. Both actually.
Yeah. No, that's the same number. In that sense, I'm just average, right? We would like to drive that further. What we really would like to do too, and that's part of the route to market restructuring too, is that make sure that our dealers are capturing the aftermarket business too, because in some markets we have our own service outlets and so forth in parallel with our dealers. We need to integrate that because we would like our dealers to be able to go through tough times too. That's why it's so important with service, is that you can go through a tough time in the business cycle and still be quite profitable. Okay?
Let's take the final question, if there are any. If not, I thank Roland, and invite Olli to the stage, where he's gonna tell how KALMAR is focusing on profitable growth.
Thank you, Leena. For the ones who don't know me or we have not met before, I have to say that I'm not one of the new guys. I originally joined KALMAR's pre-successor already in this business in 1993, so more than 20 years ago. There in between, I've been heading MacGregor almost seven years though, and now back in KALMAR. As been said already many times today, KALMAR as well, we too, we are ready to focus on growth. We are ready to turn the page. Bearing in mind, however, that the growth has to be profitable. We have been identifying four focus areas. Two first of them, win in automation and grow in software. Those are the areas where we are expecting more the growth coming. They are growth-oriented ones.
At the same time, they are requiring investments more than an average. Still, we are expecting clear profit improvement from the both areas as well. The two other ones sustain our global leadership in mobile equipment and especially spare parts excellence. I will talk about the digitalization separately. The two other ones, they are the areas where we are making most of the profits today. First of all, we are going to sustain the excellent levels where we are today, and we are expecting actually quite a lot further improvement from the both areas. Well, during my presentation, I will go through all these four focus areas, each and every separately. Before moving there, I would like to discuss about what is the baseline? Where are we today? What is the starting point?
First of all, we are very much focused on container terminals and inland terminals. Over 80% of KALMAR revenues are coming from terminals, ports and inland. That helps us greatly in keeping our eyes on the ball. We are either a leading or the leading company in almost everything what we are doing in the segments where we are operating. Maybe a special note at this stage, not giving a full presentation, but noting Navis playing essential part of our strategy when going forward, as you already got some hints from Mika, I will continue from that after a couple of slides. The market is big. I would say the opportunity is huge. The market itself, it's not limiting our growth. The good thing is that the market is growing.
Mika already showed this slide. I would like to emphasize that the baseline growth itself is not the main driver, or let's say not the only driver that is driving growth in KALMAR or too for our competitors neither. That is structural and other things that are triggering additional investments on top of the baseline growth. Currently, mega ships, or generally speaking, bigger ships, because these mega ships, they are triggering ships cascaded down in the value chain. Basically, all the container ports globally are facing bigger ships at the moment. They face the same peak load challenges when these bigger ships are calling them. During those peak hours, they need additional resources. Another example is Panama Canal expansion that is expected to be open mid-next year. Has already been triggering investments and will trigger more investments, especially on the East Coast of the U.S.
Automation, which is one of the topics today. Looking at how are we doing by ourselves from the financial point of view. I think we are doing pretty well today. We set the turnaround plans in 2013. We had a projection where we should be in 2015. Yes, indeed, we are exactly where we said two years ago we should be. That goes to the profitability. Looking at our internal plans at that time, if possible, we have actually been performing even better in the return on capital employed. Looking at the absolute figure here in the capital returns, it's good to bear in mind that a major part of that is goodwill in KALMAR's case. Is this good? Are we happy and satisfied?
The answer is yes and no. Firstly, it's good always to compare to your closest competition, to the similar type of companies, how, what we are. Answer is yes, because it's always good to notice that we are outperforming the competition and our trend is definitely better than most of the guys. At the same time, this is not the best league in the world when it comes to the financial performance. Because of that, we feel that the right benchmark when going further is actually the best Nordic engineering companies. Atlas Copcos, Wärtsiläs, you know, you know them better than I do. We feel that that is the right benchmark from the financial performance point of view in the future. Okay. That is the starting point. Now moving then to the four focus areas.
The first one, win in automation. That is nothing new. I think we have discussed about that at least twice in these forums, last year and the year before. These trends have been reconfirmed, and they have become more stronger. We believe that container ports of the world will be automated. It's only a question of speed. Automation is the future. There are several trends speaking for that. The bigger ships, space utilization, safety has become on top of the agenda of most of the customers. As you can imagine, many of you have been visiting a container port. A manual container port is an extremely dangerous place. Automation is the sustainable solution to that challenge.
The shortage or cost of labor, or both in many cases, of the skilled labor is driving investments, automation investments, even in the places you would not imagine being the first ones, like in Indonesia, where we have seen automation projects. The other angle to the same topic, which is basically even more or is speaking for itself even more, is the business case from the customer's point of view. This is not an exaggerated case. It's an indexed typical European manual container terminal. On the left-hand side, you see the terminal when operating in manual mode, and then the same terminal in automated mode. Basically, only the labor cost, direct and indirect labor cost savings, would make the business case.
On top of that, thanks to more sustainable, more smooth operation of automated equipment, you will get extra savings in maintenance, and especially, of course, the energy efficiency is greatly better. You will pay some more for the IT, and obviously, the investment itself needs to be paid back. Only the labor cost savings would make the business case. In the typical cases, when you are playing the figures, you can come to the payback times which are around three years, which is an exceptionally short time in this type of an industrial investment. This is the reason why we do believe on automation. It looks like that our customers are believing on automation as well. Because as we speak, we have over 70 terminal projects on our radar screen.
Some of them on a very, very initial phase, initial feasibility studies done, early discussions with Navis, KALMAR people, specialists. Some of them very concrete real projects already approaching the decision-making phase. What has changed here in between, if I compare what we have been discussing before, is that the number of brownfield terminals of the total is increasing very fast. Earlier, still two years ago, most of the people were talking about greenfields, because greenfield is technically more easy. You will see tomorrow, London Gateway, the ones who are visiting there, typical greenfield. Technically less challenging because no disturbance to the old existing operation. Meanwhile, brownfield is converting an existing terminal to an automated one, hopefully not disturbing the operation during the transition. More and more people are now looking at the brownfields since the good experiences from the greenfields. This is increasing.
If you put a price tag to all these known, I know this is a very hypothetical calculation, but if I put a price tag, a rough price tag, to all these projects that we have on our radar, this could be a EUR 5 billion opportunity. It's of course a question if you believe on linear growth or if you believe on exponential growth. I have a tendency to believe that we will see an exponential growth in the future. The question is, when does it start? When we are at such an early stage of automation, references are the most important sales argument. They are on top of everything else. From that point of view, our situation is good. If at the end of last year, there were 37 automated terminals, semi or fully automated terminals globally.
Thanks, Navis being part of the family, we have been involved in more than half of those terminals, either together with the Navis terminal operating system and KALMAR automation or separately. My point is that we are an essential part of automation today, and we know the space and we know the challenges, what are to be expected. Moving to the next focus area. If automation was something that we have discussed before, the next one is more new. Not completely new since we acquired Navis already five years ago. We in Cargotec, we have been identified, as Mika mentioned, software as a significant upside opportunity. The waste is EUR 17 million. The biggest waste in the industry, it is suboptimal pricing models, it's insufficient storage plans, not optimal sailing performance of the ships, et cetera.
Those are the sources what can be helped and tackled by using software in an optimal way. The industries, I'm now talking about industries because I'm talking about the same scope as we are currently serving through Navis or MacGregor. The industry is spending EUR 1.7 billion, and that is expected to grow very fast in the coming years. We are good, well-positioned in this space, thanks Navis and KALMAR software capabilities that we are having all together in the family. Moving to the third one, which is the mobile equipment. We are at the same time we are moving to our roots. Our track record in improving profitability in this area is good.
We have been able to cut the product cost 3% per year already several years in a row, and that we are aiming to continue. We have still room to go in the productivity on the current assembly sites that we are having. We have been coming to the industry both with the good enough products for the low-cost markets, but as especially with the high-end products, like 40% cost saving in the completely new driveline in the reach stacker, what you can see in the picture, to give you some examples. Even though we are global number one, having 40% of the market in the container terminals and 49% in terminal tractors globally. By the way, Konecranes' Terex merger will not materially change this picture.
They are both pretty small in these areas. We are not number one in every country in the world. That is our next focus on top of the cost and the innovations. To give you an example is from China. This is already an example that you see on our bottom line, is that we have put 25 new dealers in place in the mainland China since 2012. Thanks to that move, we are now covering the container ports through our own setup and the whole inland through the dealers and agents. Thanks to that, we have been gaining market shares back from our main competitor, SANY, on their local on their home market. Moving to services. More on the investment side, we have all the efforts we are putting to digital services.
We are able, like most of the competition, monitor the necessary data for predictive maintenance. Our approach is, however, to collect more data for the customer's benefit, more operational business data from the same machines, combining that in the future with the operational data. Makes us different compared to many of the competitors. Our customer promise in this field is to have or to provide instant insight for our customers to make immediate business impacts. As Mika said, target is at 2018 to have all the machines connected. From the profit improvement point of view, if that was more on the investment side in the short term, from the profit improvement point of view is our spare parts business, where we have been analyzing our performance.
We started it already two years ago, you see a big part of the results on the bottom line. It's part of the profit improvement you have seen already. We are only on half way. There is still room for improvement. We have been putting in place global inventory planning. New distribution centers take the stock levels down. We have been put in place common systems, tools and processes, we are working with the next generation e-commerce platform, to give you an example. Over last summer only, we were repricing over 30,000 OEM parts. Most of them we were reducing the prices to get them more adapted to the market prices. More intelligent pricing. We now then put all these four areas together, what does it mean from the profit improvement point of view? Obviously, it means the growth.
From the profit improvement point of view, we have identified and calculated that all this means about EUR 60 million-EUR 100 million profit improvement potential in KALMAR. I have tackled all the arrows, I will not going to repeat them for the sake of the time. Only the two first ones, I didn't mention earlier in the presentation. We have been investing a lot to processes, tools, and to the people on our project business capabilities. Some of you still remember that we had some challenges couple of years ago in that area. We think, actually we will end that phase in our development somewhere mid-next year, and we are moving to the normal continuous improvement phase. We can still leverage more our Rainbow-Cargotec Industries joint venture in China. We are not yet fully leveraging it.
For example, ship-to-shore cranes, we have been in a slow, steaming mode. That is the next product that we will deliver and provide from the joint venture setup, giving us a new competitiveness in that area. To summarize. Good, solid financial platform for further improvement, both what comes to the growth and profitability. We are aiming to win in automation, grow in software, sustain our global leadership in mobile equipment. While we are investing in the digitalization, we are expecting a great improvement still from the spare parts. All that leads to over 10% operating profit over the cycle. Thank you.
Thank you very much, Olli. Let's take questions. Okay. Start from here, then there, and then there. Three questions, we have to go for coffee.
Johan Eliason, Kepler Cheuvreux. Just wondering here, on the group level, you had a 40% target from services and software. Now you are already at 27% services, I assume, in KALMAR.
Yeah.
How big is software and how big is it expected to become?
Yeah. Software currently depends a bit how we count. We do not count the software today which is directly related to the automation. We count that separately. The software business as such of KALMAR currently is around 5%, 6% of the total.
You are at 32 roughly then versus a group target then down the road.
Yeah, you could say. The percentage on the services side is of course very pretty in the project business. Difficult, tricky in the project business because you can grow the percentage by either reducing the top line or growing the services. We are aiming to grow the services more than the market is growing, hoping that the percentage is going up.
Just on the SANY, on the mobile equipment, do you have any numbers for how the market shares have developed in China?
SANY's. Yeah. Yeah. We own currently 30% of the market in China. SANY is somewhat bigger. The rest, they are very, very small, almost non-existent. We are basically sharing the market with SANY in China.
Okay, gentleman next there.
Thanks. It's James Oldroyd from Lazard again. Two questions. The first on mergers. In some ways, it's very lucky that Konecranes and Terex tied up together, which doesn't seem to make much difference for you.
Mm-hmm.
Is there a danger that ZPMC could find a target that would give them access to the mobile equipment? They would have the full range and would that be a threat for you?
Mm-hmm.
Could you sort of evaluate the probability?
Yep. Of course, that is always a possibility. On the other hand, we know that ZPMC is, we know that the competition, including ZPMC, they are developing their distribution network globally. We have by far the best reach globally, thanks to that we have been developing that for decades. It's a long way to get to that level, and that's essence when been talking about mobile equipment and services by the way as well. I'm not overly concerned.
The second question is I'm aware that you're investing quite a lot in automation, and if you took out that investment, the margin today would be quite a lot higher. Could you give us an idea how much?
In euros that investment is, and is it likely to stay at that high level or will there be a point where it'll start to taper?
Well, first of all, it's a bit the picture that you have seen, it's a bit if you are comparing to the past, I mean, we have been losing money in some projects. They have not been automation projects, they have been actually traditional big crane projects, most of them. It's very important to understand that, yes, automation has not been a gold mine. It will not be a gold mine in a very short term yet, but it's going to be profitable. Especially the returns on capital are easily to get up thanks to the different structure and the very lean capital structure in t
Manu Rimpelä to choose there. Yeah.
Manu from Nordea Markets. You had this slide where you showed the container throughput growth, and it has this nice upward sloping line as we probably most analysts are prone to predict. If you look at the latest data on container throughput, it's actually declining as far as the data series I've been looking at. I'm just trying to understand that what would happen to KALMAR if we really see that container throughput starts to decline and what if it even happens to be declining next year? Also, how does all that fit into the kind of EUR 60 million-EUR 100 million profitability target improvement that you were kind of expecting by 2018? What if we see slower growth from container throughput? Just to kind of bed it in.
Well, I think I hope I had the latest information. That was the latest that we think. I think it is the latest. It was really so that the throughput estimates for this year and next year, they were taking down quite a bit. Still, from 4.5% to 3.3% or something this year. It's quite a change in short term, but it's still growth. On top of that, we have seen the growth really, as I said, in automation in the East Coast of the U.S. because of the Panama Canal expansion and so forth. There are other things that are triggering investments. Obviously, yes. As Mika said, 2000 and... Since container as it is today, it was invented originally 1956, ISO container.
Since that there has been only one year, 2009, when the global throughput has declined. That was only one year. I'm not overly concerned of that the container throughput would start to decline in the short or medium term. Obviously, if that is the case, it's a new situation.
Sorry. Peter Lawrence from J.P. Morgan Asset Management. Three quick financial questions, please. First, you talked about return on capital employed having exceeded your expectations, whereas profit's been in line. How much of that, if any, relates to the currency translation of the goodwill on the balance sheet? The second question, your business case for port automation, you're showing a 125% increase in profits.
Mm-hmm.
What does that fall to for the port operator when you take into account financial costs, assuming that this is all debt financed? Thirdly, the impressive chart on the profit improvement between 16 and 18. I just want to understand that that's from whatever you achieve in 15 through to 2018. It's nothing to do with the poor profitability in 2014.
No.
What is your-
Yeah.
What is your revenue assumption over that three-year timeframe? Thank you.
Yeah. Well, we have not been very specific with the top line growth, obviously we are aiming as the whole plan is based on growth. We are aiming to grow faster than the market. We are aiming to win and to gain market shares, first of all. Yes, the baseline is really the levels where we are today after Q3, which means basically 8%, 7.9%, if I recall right, was the exact figure. Maybe, Eeva, you can answer the first one.
On the return on capital. The biggest chunk of KALMAR capital in goodwill, it relates to the merger from Kone. We actually got it in euros, and it is euros. The smaller chunk on top of that is obviously related to the Navis acquisition, which is, which was USD. Actually that kindly is actually a sort of negative in the sense that we're sort of that goodwill is higher with the current currencies than it was a year or two ago.
The one, one in the middle, I'm sorry, but that is something that I have not been thinking. I don't have the figures in top of my head. How does it look after all the financial costs? It depends, of course, where the money is coming, and if it's and some of the cases, it's coming from the back pocket, and some is fully coming from the financial institutes. Yeah.
Thank you, Olli. In the interest of time, let's go now on coffee break.
Sure.
I would need you to be back here at 2:30 P.M. After that, we will hear MacGregor. It's the most interesting presentation coming up.
Before the break, you listened to Olli was the veteran. Here now you're looking at the new kid in town. My name is Michel van Roozendaal, I've assumed the role of President for MacGregor just four months ago. When I did so, some of my friends and some colleagues asked me, "Michel, your timing is a bit off. You've joined MacGregor in the midst of a perfect storm. Overcapacity on the maritime sector, offshore business down because of the oil price." I was thinking about that because they were right, in my past life I was also managing one of the maritime businesses. Then I was very, how would I say, happy to be taking the helm of a leader in the industry.
Now I can say, if I look at MacGregor after four months, it's a team with passionate, professional, loyal, hardworking people. Perhaps maybe with a bit of an engineering bias to make the perfect product even better. Then they were right, because when the super cycle was there, that was all what mattered. If I look at myself as my background, I think I can add value there, basically to add value to this competency for a leader as MacGregor, but also to bring back the focus on the business which is now needed in the current reality of the market. In this presentation, I'm gonna talk about. I'm gonna introduce defense play and offense play. As the coach for this team, I'm gonna focus now in this phase, reality of the market, on defense play.
Also as a leader in this industry, we're also going to be ready to play offense and prepare for that. The title is, We Are Improving Profitability. Throughout this presentation, I'm going to talk about four things here, and they are: first, how we are controlling costs, how we're taking the cost structure down to basically be in line with the reality of the market in terms of demand. Secondly, I'm going to talk about the cost of the products and also the projects we're executing, sorry. Then thirdly, a theme also which we see here today around service. How we have created a business. Service maybe was perhaps an afterthought in the past. Maybe service was something we gave away waiting for the new order. Now service is a business. With the new management team, we'll talk about it as well.
Fourth element is the so-called asset-light business model, which we have at MacGregor. Maybe unique in the industry, but basically means that we have a big majority of our manufacturing capability farmed out to contract manufacturing partners. First, let me sort of refresh our common memory and talk about what MacGregor is. First thing you have to keep in mind is that every second vessel on the ocean has MacGregor products on board. That's many. We are a leader in our chosen fields. We're either number one or a very strong number two. Tonight, some of you might perhaps go out and eat a curry or rogan josh, and perhaps the lamb meat doesn't come from Scotland, but from New Zealand.
That lamb meat came in with a reefer container, and very likely that container was carried with a latching system and a latching bridge on a vessel equipped again with MacGregor solutions. Maybe somebody in the audience drives a Lexus or another imported car. Very likely that that car was brought here on board of a car carrier with our deck technology. We're leaders in that industry. On the offshore side, we do many things: winches, mooring systems, cranes, et cetera. We have the biggest subsea crane in the industry. We are able to lift 900 tons. What is 900 tons? I'm an aerospace engineer, so I bring it back in planes, right? Think about a fully fueled Airbus A380. We can comfortably lift that. That's just a little bit over 500 tons. We do 900 tons. Again, we are a leader.
Every second vessel in the ocean has our systems there. Number one or very strong number two positions. The market obviously is in a bit of a difficult situation, as we said already. The first element I'm gonna talk about is cost reduction. We have taken a number of initiatives in 2015 to take our cost structure down. In total, about 300 people or in percent, 11%. We've done that whilst we've also invested in certain areas and certain geographies, lining ourselves up for growth and doing other good stuff. Let me just highlight a few things we've done. Just a few weeks ago, we've announced a merger of two of our Norwegian divisions into one new offshore division called Advanced Offshore Solutions, merging into one management team and obviously with savings from a headcount perspective.
Our Hatlapa acquisition, we have reached an agreement with Works Council to bring headcount down by 100-plus people. We've taken a number of initiatives, and also in the other divisions in Singapore as well. You might also see on the service side, we've taken out some people who were in non-value-add services in entities where they had no critical mass. Also there we have basically set ourselves up for growth. That's the first element, the organization. Second element is about the products we're selling. Here I'm gonna basically talk you quickly through two elements. What we do is mostly are projects. We have very few standard products off the shelf. When I entered the company, one of my findings was that we were relatively poor on project execution discipline.
Again, goes back maybe a little bit to these very, how should I say, loyal, hardworking engineers who wanted to make the project just a little bit better, but not necessarily to deliver the project on time and on budget. Part of the reason was that every division had their own system, basically ranging from a good system to an Excel spreadsheet somewhere. We've launched into initiative to bring that all together and basically use best-in-class processes and drive really our discipline in executing these projects on time and on budget. Second element is to do with the products. We do have products, and some of these projects obviously are built up out of components which are the same. In the picture, you see people looking at a starter cabinet.
We discovered that we had 7, 8, or I don't know how many different starter cabinets, all basically doing the same. When you open the hood, you found different components, and obviously not benefiting from the economies of scale. The initiative we call Design to Cost. Design to Cost basically makes that we are designing the projects in such a way, or the products I should say, that they are designed to the required cost structure and at the same time that we would also benefit from the economies of skill. The impact of that would be EUR 10 million and will be already, I should say, very visible in 2016. Third element, service. You're seeing that our service percentages have gone up and down, and we're currently at 20%. We're the laggard. We are below, if you like, the average of MacGregor.
We have created a new management team in 2015 with people coming from the industry. We've also separated the service business from the other businesses. Now we deal with service as a business in its own right, with focus, with profitability targets, and also processes which are world-class. For 2016, our aim is that we will have service in the mix to exceed 25% range, not just because of the changing mix from hardware to service, but also because the service business is growing. It's not just growing. Also, by virtue of this being a business now, the profitability will grow even further. The fourth element is the asset-light business model. I'm quite pleased with the previous generations of MacGregor, who are basically having the foresight in this cyclical nature to create again what we call an asset-light business model. What does it mean?
85%. 85% of our manufacturing is done by contract manufacturers. Our project engineers, 30% of them, they come from outside. The benefit is obvious. The benefit is that we can easily scale up. What is relevant now, we can also scale down without having to incur restructuring costs or without having any delay that under-absorbed resources. We can scale up and down easily, and that is a key asset in this cyclical business. All this, what does it lead to? The market is tough, right? Demand is down. As a result of that also, there is pressure on margins because there are, if you like, fewer orders and the same competitors are chasing these orders, right? However, with the measurements we've just showed to you, we are confident that we can show and will deliver a slight improvement.
We're not excited, but a slight improvement of profitability in 2016. The market is tough, but the market is not dead. We currently have 70% or so already in the pocket in terms of backlog. You've maybe seen some of the press releases over the last couple of weeks, we have scored quite a few nice orders and have a funnel which is pretty attractive at this point in time. We believe that we will go into the next year with about 80% of our equipment backlog in the pocket for 2016. That is healthy, we believe. We have the confidence that we can deliver a solid 2016. I told you as a coach, if I may say, defense play is the priority, but we're also as a leader, focusing on the offense play.
Mika referred to the MacGregor brothers going back to the 1920s. Some of our Norwegian companies go back to the 19th century, and the oldest product, which can be traced to a predecessor company of MacGregor, goes back to 1751. We've not been around for decades, we've been around for centuries, and we've seen a cycle or two in our days, right? We know that this cycle will turn at some point in time. Will it become the super cycle we've seen in recent years? Perhaps not, but the cycle will turn because the underlying reality of this business, the underlying drivers are fundamentally very sound. Trade is going to grow. Aspiring middle classes want to live the same lifestyle they see on the YouTube videos in America, in Europe, in Japan, everything, right?
People will continue to trade stuff, and they will be shipped with vessels with MacGregor Systems. Energy demand. If you listen to Bob von Bergen at BBC World, energy demand is going to double going into 2050. The underlying demand for energy will continue to grow and will also have an impact on the offshore business in which we are present. As a leader, we are confident that the foundation of our business is healthy. What are we doing? Last week, and some of our Norwegian friends here have seen that in the press, basically, we announced a job for offshore wind. Offshore wind mooring systems. You see that on the picture. What does it mean? Everybody wants green energy, but nobody wants to have a windmill in their back garden.
Also when you're on a beach, you don't want to gaze at a windmill on the horizon. They have to be a little bit further out, and that's where the water is no longer shallow, but deep. Our unique mooring systems, which we've developed for offshore, are labeling this new technology to basically have floating windmills. In that segment, we are the first, and it's also interesting because it goes a bit against the trend. Mika already referred to a number of other segments which are doing quite well. I'm not going to read them all out, maybe the mega-size container ships, there's the run for economies of scale, and we are there. We're benefiting from that.
In a market reality where the overall demand is down, and as a leader being present in many of these different segments, we are also benefiting from these segments. Also geographically, China. Tomorrow, I'll be flying to Shanghai, and on Wednesday, I'll be signing another LOI for a next joint venture. We are stepping up our presence in China. We are increasing our footprint. We have currently about 35%, 40% of our equipment business is in China because many of the shipyards are in China. The operators are worldwide, but our first customers are in China, and those people will want to do business with a team which is in China-based.
We have also announced a new actually appointed, and he's in place now, a new leader for our Chinese operation over there, and we are putting more and more capabilities into China and also signing more joint ventures in cooperation with Chinese partners. In this reality, we're also stepping up our game in China, which is again helping growth. From a, or should I say, offering perspective, I'm going to highlight two things. Again, service, right? First of all, we're leveraging on our installed base. We're also with digital interaction with our customers, we are making it easier to do business with us, but also making it easier for us to do business with our customers. Making sure that the right spare part is at the right location in the right quantity, basically using data. We're also using data to do remote diagnostics.
MacGregor OnWatch. I think Mika referred to a crane system where you can do remote diagnostics if there is any problems there. It becomes more interesting to deal with MacGregor if we offer also these data-driven, if you like, interfaces with our equipment. Ship type solutions. We have our divisions which are based around products. That's the right thing to do because we have the right focus. End users, basically the people who buy the ships of the shipyards, they operate, if you like, in a reality of a vessel type. Here, our total solution actually adds value. Here, I just give one example. We have a system which we've sold successfully to the first customers, which allows container ships to carry 10% more compared to the basic calculation when the ship was built.
Think about that in terms of return of investment. 10% more from the same ship. That's great. That is the type of solutions we bring to the end users, if you like. That is more and more appreciated by our markets. In that sense, our customers appreciate us as a market also going forward when the times will turn. In conclusion, defense play is the priority. In numbers, I talked through the organizational changes. I didn't highlight the number then. EUR 27 million will be the impact of the, if you like, structural changes we've made and headcount reductions. EUR 27 million will be visible in 2016. I talked about Design to Cost and our ability to control, if you like, the execution of projects.
EUR 10 million will have an impact in 2016. That's just the beginning, because we have many more projects basically coming. Thirdly, service. Our mix change, going from 20%-25% with even profitability driving up further. Solid background. Sorry, solid backlog, I should say. 80%+ for next year, basically already in the pocket. With all that, with the asset-light model we have in place, where 85% of our manufacturing takes place with contract manufacturers, and that percentage might actually grow over the next couple of years, we are confident that we will, albeit a slight improvement, improve profitability going into 2016. That will basically support our long-term corporate goal of delivering 10% operating profit margin EBIT throughout the cycle. Thank you for your attention.
Thank you very much, Marcel. I'm sure you have questions to him.
This might be very clear.
In the back there. Thank you.
Yes. This is Tom Stønvold rom Handelsbanken. I realize you have a better sales mix for 2016, you have a lot of cost savings coming up.
Mm-hmm.
Do you feel confident to say that 2015 will be the trough mark? You know, could it be that we turn down again in 2017 just because of, you know, fewer ships being ordered 2015 and the, and the long lead times in this industry? It's just a temporary relief in 2016 that you see?
If you go back to the slide Nick has showed, you did see that we believe we're now at the bottom. We don't see a huge acceleration, but we believe that the market will continue to grow from its low base where we are. Also, we believe that our profit margins are such that, and I use my words carefully, that we will see a slight improvement in 2016 compared to 2015. Yes, we are confident.
Isn't it so that, you know, vessel orders are down quite a lot this year, and given the lead times, you know, these will be delivered in 2017 and 2018 and not in 2016, the vessels that are ordered this year. You should have a top-line contraction again in 2017.
We don't believe that. We will see indeed a top-line contraction in 2016, but with the visibility we have at this point in time, again, I don't think 2017 will be a spectacular year. I realize what you say. There is always a delay there. We believe that, 2017 will be at a similar level of 2016, given what we currently see in terms of backlog and the funnel we have at this point in time.
Okay, thanks.
Do we have? Over here. Oh, there in the back first, I think.
Sorry, just a quick follow-up. It's Casey Parker of Utagodin to Tom's question. I'm just wondering if the mix by customer would be different from 16 to 17. It's interesting that it won't contract, but I'm wondering if some industries will be growing and offsetting shrinkage in others.
One mix change we see is that the offshore is maybe hit a little bit harder. There will be a more, a mix towards the merchant side. We also see bulk carriers being, I should say, particularly weak. That's offset by roll on, roll off carriers. That's offset by the large container vessels. That's, that is the mix we see, the shifts we see happening at this point in time.
This is Tom again. I realize the downturn is quite serious this time, and in your operating model through all these acquisitions over the years, you operate in very many different locations.
Mm-hmm.
To see this downturn as an opportunity consolidating to fewer places where to operate and really take structural actions and have better flexibility between different ship segments and products in the future.
That, that's a, that's a valid point, right? The roof count as such is for us maybe not necessarily a big problem because it is, with this asset-light model, we are not looking at a size, if you like, where we have to basically keep a factory, keep the chimney smoking. We are simplifying our organization, and I think the best example is our Norwegian consolidation. There we have two locations which are 70 kilometers away from each other. In that sense, we basically create one entity, but we don't necessarily have to close the building and put them all together physically. That in this digitalized work where people can work remotely, it's not necessarily needed. I think the asset-light model is really the answer to what you're saying.
If we would have had many factories ourselves, we would be closing factories and consolidating them, and we would reduce the number of locations. The way we currently have that set up with competent centers, I think we are at a stage in the right way how we are set up. Obviously, if things change, well, it's a dynamic reality. We constantly are reassess that.
Over here. What's the first one?
Casey Parker of Utagodin again.
Oh, sorry.
Sorry. Just, Rolls-Royce is obviously under a lot of pressure, and they have a new to this now.
Yeah.
They've said for the time being the portfolio is going to remain static, but we'll see. I'm just wondering if you think, if first of all you'd even be allowed to purchase, let's say, that part of Rolls, and secondly, if scale would help you at this point.
Rolls-Royce is such a large company that I am not going to comment on that one, right? What they will do, they are to a relatively small but not negligible part overlapping with what we are doing. Their main focus is on the engine side. Yeah, let me just keep it at that.
Sean McLoughlin, HSBC. Two questions. Firstly, if you could just give a little bit more color on you say there are more cost-cutting projects coming, what they would be and what kind of quantum we can expect and what may trigger them in fact? The second question, just on the order backlog visibility, if you can say what the percentage of orders 12 months before was for 2015.
Okay, let me start with the first one. What I did say was, this was not a reflection on the organizational restructuring, but it was a reflection on the design to cost and where we are looking at more projects to take out costs from our, if you like, hardware side of the equation. The organization, we believe we're currently there, and it wouldn't be fair to our people to announce here further restructuring on the organizational side. So that's the first answer to that. There we do see, and that's a bandwidth capacity, but also part of the investment we have in people is to basically focus on this design to cost. We have a couple of product categories where we are currently getting the benefits of, but there are more profits.
There are more product categories where we will have the same benefit to come from as well. The second question, could you repeat that? That was around the time horizon.
Just curious about 12 months ago, what your order visibility was had, looking into 2015?
I would have to guess because I simply don't know. What I do know is that 12 months ago, there was more slippage, so that there was more projects which have slipped. That is true. I don't recall that number.
Okay over there .Manu Rimpelä.
Manu Rimpelä from Nordea Markets. Maybe trying to ask the last question a different way. How much of the sales can you get in 2016 in terms of orders? Is everything you get in 2016 going into 2017?
I believe what I was saying is that 80% of our equipment backlog will be or of our equipment plan budget will be in the backlog entering the new year, right? That is the... Actually, we will have actually more than that because we make an assumption of some of these orders being slipping into 2017. That's a reality. We have an assumption there as well. That is really what we're doing at this point in time. Out of the orders
Maybe I can sort of fill on that one in as well. When it comes to the equipment sales as such, that's pretty much in there today. In certain categories, such as ro-ro ships and offshore, we actually do a percentage of completion accounting as well. In those categories, 2016 orders will also be visible in 2016 revenue as well. That's probably the missing piece in there.
Okay, just second question. If you look at your order intake, for MacGregor so far, I think we are running at something like EUR 650 million, year to date. Just trying to understand that if there's kind of no meaningful recovery in the way you see the market in 2016 in terms of orders. We probably end up, my guess would be somewhere EUR 800 million-EUR 850 million of orders. I'm just trying to understand what makes you think the sales will not decline in 2017 still? If you can just elaborate a bit more on that.
Well, what we believe, but that's difficult to say that with certainty, right? Because that is a longer time horizon. What we believe is that we will see a 17 from a total volume perspective, which will be somewhat similar to 16. That's basically the, right, the, well, what I can say.
Services, you mean?
Yeah, that's maybe a good point because when we talk about the numbers I just gave, they are all equipment numbers because the service business, in essence, has no backlog. When we talk about these backlog percentages, we talk about the equipment side of the house, and then we are expanding service. What we see is that we are growing the service business quite nicely. That will continue to be there if you think about remote diagnostics, if you think about advanced services. That will basically continue. The logic there is also, I should say, intuitively clear in a situation where people are maybe under more pressure, the asset, they want to sweat the asset a little bit longer.
As a result of that, they will be ordering spare parts and using the service organization for a longer period of time, and they would buy everything new. That is also an element which will be beneficial for us given our installed base we have.
The final question.
Hi. I have just two quick questions.
Sure.
Can you give me a little bit more color on the ro-ro and the mega container? Essentially, I think what's the mix in the ro-ro between ferry and car carriers, and what are the drivers for these two categories? On the mega containers, I think I remember I read some news on Maersk canceling their super containers in the DSME. I'm not sure, I mean, does other lines adding bigger vessels as well, or what do I miss here?
Okay. So valid points. First element, the majority what we do are car carriers. That's the larger volume at this point in time. We also have a number of other solutions on the roll on, roll off ferries, and even sometimes also on some cruise vessels. That is the majority is actually car ferries. There we see that it's a relatively small segment, but for us it's an attractive segment because we are asset number one in that segment. What you've indeed seen is that Maersk has canceled, or actually has not canceled, they have chosen not to exercise options, right? They're basically delaying that.
At the same time, you do see that UASC and some of the other ones, they are continuing to build these large container ships. That is this whole, if you like, race towards economies of scale, and which was also pointed out earlier, which will have an impact as well at the other segments for the routes which are maybe not ready for the 20,000 TEU vessels. Overall, Maersk is obviously already quite big, and they were the first ones to come out with these 19,000 TEU vessels. They've basically now slowed down that a little bit because they were ahead of the game.
Thank you, Michaël.
You're welcome.
I would like to give the floor to Eeva, who will then tell how everything comes together in the numbers.
Good afternoon, ladies and gentlemen. I'm Eeva Sipilä. I've had the pleasure of meeting most of you during the eight years I've been the CFO at Cargotec. I will present today a brief summary of where we've come from a financial point of view in the past two years, but more importantly, what our focus areas are for the next two years, as part of our strategic journey described here earlier today. We in Cargotec, we've identified four levers which we believe have the biggest impact on our shareholder return. Hence, we're following actions and we're ensuring that we execute on these four levers. Firstly, whilst we're very proud of the turnaround achieved in HIAB and KALMAR, we do see clearly more potential from a return point of view from turning our eyes also towards growth.
I won't repeat what Olli and Roland presented already earlier today, just building on that we have very clear priorities and areas where we want to work in the coming couple of years. Due to the sort of current market reality, obviously this growth aspect is more relevant for HIAB and KALMAR in our portfolio. Secondly, we are not giving up on the profitability improvement actions. Actually, the more we work in the areas, the more excited we are about still the potential we have, be it Design to Cost, be it supply chain efficiency, be it services, be it sales and distribution efficiency. A lot of, a lot of opportunity.
As was mentioned, we're building on, and copying some of the very well, well-working methodologies into the MacGregor turnaround as well. The third lever is return on capital employed. Here, obviously, lever one and two take care of the return side. What we're focusing on here is actually the capital employed and specifically networking capital efficiency, and I'll come back to that a bit later. Fourthly, obviously, in order to execute a growth strategy and enable the investments we've been discussing earlier today, we need a strong balance sheet, and hence, the keeping that, as a solid platform for all this continues to be very key going forward. I think the 9-month figures illustrate well the starting point where we are.
We've made good progress on profitability and the debt reduction. This is a good base to build on going further. Similarly, looking specifically on order intake, our book-to-bill, considering the very difficult market situation we're facing in MacGregor, we're actually very satisfied with the group level numbers and the starting point for our sort of next phase of the strategic journey. Some of you have raised concerns about the impact of China on our numbers due to the high % of sales to China in our numbers.
Whilst I don't want to undermine the importance of China to the global economy, I do want to highlight one specific factor, and that is that the big part of sales to China in Cargotec numbers comes from MacGregor. This is due to the fact that China is the biggest shipbuilding nation in the world. Actually, what we sell from MacGregor is bought and paid and delivered to customers anywhere in the world. I would just advocate that when you look at our demand outlook, do look at the global view as well and not sort of overestimate the impacts of one specific region or country. Going into the second lever of improving profitability, I took on purpose of a long-term view on this. I think it illustrates quite nicely the de-development we've had.
I mean, obviously, we were quite dependent on MacGregor at a certain period of time, now clearly a more balanced portfolio. The improvement in HIAB and KALMAR over this period is clearly visible. As we've stated today, the target for all of our business areas is 10%. Again, I'm not gonna repeat all the actions that were well described in the presentations of Roland, Olli, and Michel. Just building on that, we do believe we have the actions and the roadmap and very concrete plans to reach the 10% in all of our businesses over the cycle. Moving to return on capital.
This picture illustrates very well that the improvement in return on capital you've seen in the past couple of years comes very much through profitability, whether you look at it pre-restructuring costs or post-restructuring costs. The gray bar is indicating the capital employed are actually being relatively flat. In order for you to understand how we get from the current 10 to the 15, I think it makes sense to look at it by business area, because actually this group level masks some of the development we've been working on. Visually, this slide obviously is, it looks pretty dramatic. I think it's fair to note that, take consideration of the extremely high starting point we had in MacGregor.
We don't need MacGregor to deliver 60% for Cargotec to be at 15, I think it's fair to say. Here, we clearly see the difficult market situation in the red bars. The same time, you see our growth strategy, the acquisition made in late 2013 and the other one in early 2014, hiking up the gray gray pillars of capital employed. There's quite a bit of goodwill, obviously, coming from those two acquisitions. In the short term, as Michel was explaining, we need to focus on the red bars, the profitability. We do see potential in the services business on doing a better job in be it inventory or days of sales outstanding.
Other than that, I think there's, there's a clear path where we can bring MacGregor to double digits, but obviously in the current market situation, it, there's some challenges to sort of, jump it radically up. If we look at the picture in KALMAR, very different. A very solid improvement, actually, on both sides of the equation, both on the red bar as well as on the gray bar, going. Red bar going up, gray bar going down. Here, it is very much more of the same. There's not really new measures. As Oli was illustrating, we've done very well on product design, Design to Cost, supply chain. We think there's still more to do.
We're clearly doing a better job in projects execution, which helps on both of both parts of the equation. If we sort of compare ourselves to the best-in-class companies also Oli was referring to, there's still potential in this area, and that will all help us achieve the 15%. A very similar positive picture in HIAB. Obviously here it is the profitability that has really had a spiking impact on the black black line. If you look at our where we were in capital employed when we started in 2012, with a lot of work on the supply chain Design to Cost modularizations, all that, we've come a long way. I'm not necessarily thrilled, and I know Roland is neither on the year-to-date small hike up in the gray bar.
We've actually increased our efforts now and during the fall on to make sure that we're kind of driving, as Roland was mentioning, the end-to-end. It's a lot about better integrated business planning. We have a very clear and good view of our pipeline from suppliers to the sort of end markets. A lot of good opportunity here as well from a return on capital employed point of view. With this slide, I just wanted to kind of summarize why working capital is important when we talk about return on capital employed at Cargotec. It really comes back to our balance sheet, which is high on goodwill and low on fixed assets. The net working capital is where we have the levers, where we have the opportunity.
Whilst, we do look at the sort of group-level KPIs, it is important to understand that the actions we do and actual follow-up on the actions we do on the business area level, very close to the operation. All the business areas and their management teams have specific targets on that. That's obviously how we want to keep. It's been a successful model now in the past couple of years. Another key group-level KPI is obviously cash, and this is for you very visible on a quarterly basis, how we are progressing.
We're certainly happy on the trend, but also confident that we can do more and we also want to do more in order to build ourselves capacity to execute on the strategy. Balance sheet KPIs. For the debt investors in the audience, I on purpose took a very long view again on these two. It obviously shows very well also on the more short term, if we look at the past three years, the success we've been able to deliver and on the promises we made actually when initiating on the MacGregor growth strategy.
We were very much talking and promising to bring our gearing back to below 50, as well as bring our net debt EBITA to a level of two something. We're happy to be in at the levels where we are. Obviously, we're very intent on reaching the gearing target of below 50% in the very near future. As said, from a strategy point of view for the discussion today, I think we are in a level where we're sort of comfortable about talking about the next phase of the Cargotec journey. Which brings me to sort of the cash generation and what we do with cash.
As we stated today and reconfirmed, the dividend policy stays as it is, 30%-50% of earnings per share. At the same time, we do think that the businesses are and will generate free cash flow that will enable us to invest in both organically, be it in sort of software engineers, be it in additional tools to help us sell spare parts over the web or something like that, or be it then concretely some M&A opportunities we're looking to support our strategy. Both of those areas are important, obviously we need to focus on the cash generation to enable all of those important things.
A final point I wanted to make on how we're, how we're enabling the execution of what we discussed today, and that's our maturity profile. The 2015 pile here is very much commercial paper, which by nature is short term and will be rolled over. You do see from this picture very clearly that 2016, 2017 debt repayments are very low. In the short term we're very confident we can focus on what really matters, and that is the strategy execution and delivering the improved returns. Ladies and gentlemen, I wanna leave you with these four levers as a summary. Firstly, we are turning our eyes towards profitable growth in HIAB and KALMAR, as discussed today.
Secondly, we are continuing our work to further improve the operating profit margin in order to reach the 10% in all three of the business areas over the cycle. Thirdly, we're focused on continuing to improve the return on capital employed, which today is on a Cargotec level, roughly about 10%, and as disclosed today, the target now is 15% over the cycle. Fourthly, and the fourth key lever for us in improving shareholder returns is to make sure that we have a strong balance sheet that enables us to take the necessary actions. We know what we need to do.
We're building on the actions and the progress we've made in the past couple of years, and hence are confident that we can actually deliver on these four levers in the next years. Thank you.
Thank you, Eva. Any questions to her? Sir, here.
Thanks. Could you give the net working capital to sales for the three businesses? 'cause I imagine they're very different. What's the overall target? You said, I think it's 6.7. Where do you think it could get to?
Well, we don't, we haven't actually disclosed it on a business area level. It's, we do follow it up on, but that's why we sort of want to make sure that we kind of focus your attention on the sort of key group level items. I think it's fair to say that the higher business model ties most capital. You have a lot of small deals to thousands of customers versus then the extreme of MacGregor, where you have a very light asset light model with a lot of project execution. Obviously the differences are huge. We need to benchmark each of them to their potential rather than sort of give a target.
This, I think this 6.7 in a way illustrates quite well where we are today on the group.
Is there one of them where you have a particular potential to improve? I mean, HIAB is the one where it's the most relevant measure, so that's why. I mean, is it sort of 30% and you can get it down to 20? Without giving me the actual figure, but is that where is the focus?
The focus is in all three of them. I think the biggest potential is really in HIAB and KALMAR. I would say, in MacGregor, most of the balance sheet is really goodwill. There's, in that sense, there's not that much working capital. There is, as said, there's an element in services that of course you can always improve on, but the focus is really on those two. It comes down to sort of. We're not chasing a separate exercise on the returns. We're really, it is about the Design to Cost, the how we go with modularity. The less components, the less inventory throughout the chain, the better we are in managing ourselves and distribution frontline.
The thus inventory we have stuck somewhere because we planned it wrong and we couldn't deliver or we were late in delivering and all that, those type of things. Of course, service, spare parts, what was also mentioned today, how do we ensure that we have inventory in the right place? Of course, in order to win in spare parts business, you need to have availability. That is quite crucial. Of course, you need to make sure that you have it in the right places at the right time, and that's more difficult than it sounds.
A lot of what we've been doing on from the investment side onto the background is really enabling that visibility and making sure that we have the logistics that can then support immediate delivery to that. It's these type of very concrete actions that we're measuring kind of action by action, which then leads to a certain number per sale, sales. It's, you can't drive it by looking at the sort of percentage of sales. In a way, it's way too abstract. You do need to sort of break it at least three levels more down. I, as said, wanted to share with you a bit on kind of how it looks and I think there's still further potential on that number specifically.
Another question, I'm not sure if this is all a question for you, but, on.
The whole thing. Yeah
on acquisitions, the bit that definitely for you would be, do you have an envelope, an idea of size, would be the first question. In which area would you be looking most at the moment? Someone asked a very specific question about Rolls-Royce, but just it does seem that in MacGregor probably, there must be some assets available at very low valuation, so it might be tempting. On the other hand, do you want to increase, what is probably the most violent and long cycle business in the portfolio. What's your thinking on that?
I think maybe the one point to say on the size, is that in our industry, it's kind of hard to identify a lot of big targets in a way. It's or when you have such, then you actually run into, due to our market positions, into competition authority sort of considerations. I think most of the areas we're looking at are not necessarily sort of, hugely big. Of course, you can argue that in the sort of, if you look at the opportunity in software, one is not enough. Maybe you need to look at a sort of, several acquisitions to really sort of build on a platform.
That's maybe it can, of course, obviously add up even if it's smaller to begin with. I'm glad to hear that there's a lot of low-priced assets in MacGregor space. I have yet to see it. I think there's still a lot of people who are basing their numbers and valuations on better times. We see the difference in our MacGregor numbers, it is obviously very similar. I think it will take some more rocky riding before that, of course.
Some people have more fixed costs than you, though.
I think there's a lot of people out there who feel, who have more fixed costs than we do. It's tough enough for us, so I can only imagine how it feels there. That's. Of course, it doesn't mean that them having it tough, that for them to sort of then have the view that this is gonna be tough for a while and hence that it would sort of bring down their expectations. Never say never. I think it's an area. In right now, I would say then in the short term, we're more looking at the software and the market technologies spaces in income or even the market opportunities in the high end space just right now as we see it.
as said, I'm very much glad to hear if you're right then, or sort of on the, on the MacGregor space.
We can take one more question.
Yes, this is Tore Skogman from Handelsbanken again. We heard that HIAB's EBIT margin range is 5%-15% to reach this 10%, you know, over the cycle margin target in the division. I wonder what will happen to group costs, you know, when you increase investments, and what is the margin range for the entire group, given we also heard that MacGregor's margin should now trough at, you know, 4%, 5%. Should we have, you know, 5%-15% as a way of thinking for the whole group as well?
I think I heard Roland say that, it's right now 5-15, but he would actually want to shrink the 10% gap into more 7%-8%. Group cost point of view, we will be this year around a bit more than EUR 30 million in group costs. Clearly, what we've discussed today will have an impact on that number. Although, the way we work is when we're thinking about investments like digitalization, they're very business, the business case is very much business-driven. Actually the business areas will cover the bigger portion of those costs. But I think it's fair to expect that a group cost will go down, go up, I mean.
Starting with a three would be my sort of guidance for next year, but certainly closer to EUR 40 million than the EUR 30 million we'll have this year. At least that is sort of, you know, going into next year, and then we obviously hope that we start to also see the sort of profit coming in from those investments. From a group level point of view, we said today that we will improve on our operating profit margins. From the sort of 6.5 where we're now, we've said we will improve towards 8% during 2016.
Although we do think that reaching the sort of exceeding the 8% as was the target is, is challenging with the, with the, with the sort of parameters we see now. A clear improvement, we want to further improve. I think we're in a positive situation that we actually have 2/3 of the business clearly improving profitability. MacGregor, even that sort of, 1/3 or sort of, should I say more 25% going of the portfolio is also projecting a slight improvement. I think there's certainly in the next coming couple of years, potential for the group margin to further improve.
I understand that, but, when the next, you know, downturn hits, I think that's a key reason why Cargotec is so cheap in the stock market, that the cyclical troughs have been really hard for Cargotec, you know, margin-wise. How do you see now with this 10% margin target over a cycle, where is the, you know, the trough if you have a really, not talking about the financial, you know, meltdown, but you know, just a really bad cycle?
Well, if we're not talking about a financial meltdown, then probably 2009 is worse than it will be in the next downturn. I think that was partly a financial meltdown. As you heard from HIAB, we've considerably taken our break-even cost down. We have also now done it in MacGregor, even if it was an asset-light. Obviously, the sort of work done in KALMAR is we've actually had KALMAR being profitable even if with sort of very heavy investments and cost overruns in the project side. And that is our own internal execution. We're actually quite confident we can now manage that business in the black throughout the cycle.
As said, reaching the 10% average is something where we still need to work on. I mean, you need to sort of have your assumptions on the market whatever can happen. I think all those, all the three business areas are moving in the right direction and everyone is lowering their breakeven point. That obviously leaves Cargotec in a much better position than we have been in the earlier cycles. Of course, if the market changes, we need to act. I'm not saying we're ready for everything with today's the actions we have in place today. Certainly a lot readier than we were two, three years ago.
Thank you, Eva.
Thank you.
Finally, I would like to invite Mika to the floor and to wrap up all the presentations.
First of all, ladies and gentlemen, thank you very much for taking your valuable time to be here with us today. I certainly hope you have an opportunity also to participate on the breakout sessions. I think you have a chance there to meet some of our other executives who have not been up here and discuss some of the exciting plans we have more in detail. I certainly also hope that you have an opportunity to join us tomorrow for the London Gateway. If you have not been there, it's a pretty incredible site. It's I think the largest single private investment in UK at the moment, and the largest civil construction project going on in UK at the time. Of course, a great sort of opportunity for us to show what our technology can do as well.
You know, I've seen these presentations quite a few times by now. We tend to practice these ones. I'm still excited to see them. I'm really excited about what we have done, but I'm even more excited what we can do. If I look at the profit improvements, obviously we have created credibility and trust for ourselves that we can do that. The capabilities we have put in place in the last two years serve us very well. I think as Eeva and somebody else was saying that the more you work on that one, the more you find opportunities. We are nowhere near by getting to the top of our profit improvement programs. We can identify it every day we work on that one, there are new things coming up.
I think, for example, in Olli's presentation and others as well, it showed that there are potentials. Compared to the discussion we had earlier about the 10% operating margin target we had in the past, we certainly are a lot more confident today that we know where the money is, and we know how to get to that one. While we do that one, of course, we also take a very long-term view on this one as well. We are not only building a profitable and valuable company for 2017 or 2016, we are building a company that will be the winner in the next decade as well. The industry around us is changing. Our customers are changing very fast as well.
They need more efficiency, more safety, more sustainability, and I think we are in a fantastic position to build on that one. A lot of you are experts in that one. That's what's so appealing to me because if you look at that one, we tend to be we are the gorillas in our industries. We are not the monkeys somewhere else, or we are the big fish in a small pond, and that's the benefit we have. Because we have selected the segments we can be more profitable than anybody else. We can out-invest and out-innovate and have the scale to win in those ones and build on that capability.
When we talk about the transformation, it's an easy word to throw around, but to transform a company is actually pretty hard work. To transform what you have to something else is usually almost impossible. What we have done to enable that one is that, first of all, we have put new people in quite a few positions, people that know what's around the corner when you transform. People who know what a good services operation will look like, people who know how to run a good service or software business, and people who know what the industrial automation will keep, you know, coming around that one. We have also built capabilities. We have more software engineers than many of our competitors put together. That number will go up as well.
We have invested in our internal capabilities in terms of people, systems to enable the transformation as well. I'm very excited about what we can do in the next year or 2, and probably even more excited what we can do in the next 5 years or so.