Good day and welcome to the Cargotec Corporation Q3 2015 interim report conference call. At this time, I would like to turn the conference over to Ms. Paula Liimatta. Please go ahead, ma'am.
Good afternoon, ladies and gentlemen, and welcome to Cargotec's conference call on January, September 2015 report. My name is Paula Liimatta, and I'm Head of Investor Relations. Today, we have a live audience here in Helsinki and people on the phone lines. We will start with the presentation by our CEO, Mika Vehviläinen, and CFO, Eeva Sipilä. After the presentation, we will begin a Q&A session. Mika, please.
Thank you, Paula. Good afternoon from my behalf as well. Thank you for joining this conference call or being here live in Helsinki. Let me first of all state that I'm really satisfied with the Q3. It was a very strong quarter for us. If I look at the highlights of the quarter, the orders increased 9% to EUR 907 million from EUR 829 million from last year. If you look at the underneath that one, so 9% increase in constant currencies would have been about 3% increase overall. Underneath that number, of course, there has been a very strong variations.
If I look at the constant currencies and the changes, the MacGregor order intake was down by 25%. Kalmar order intake in constant currencies was up 18%. Hiab order intake was up 13% on constant currencies. The 18% growth and 13% growth respectively in both Kalmar and Hiab was, of course, extremely good result. I think it's a great example of the strength we have in the company at the moment. The work we have done in the last two to three years in investing into better products through our increased investments in R&D and increasing in the effectiveness of our organization are now starting to bear fruit and very visible in the good market development we had both in Kalmar and Hiab.
The order book strengthened by roughly 1 percentage point due to the obviously development in orders and revenue. Sales grew 10% year-on-year and about 4% in constant currencies to EUR 928 million. The operating profit obviously improved significantly from last year, being at 7.4% of our revenues or EUR 68.3 million compared to the EUR 48 million of last year. Operating profit, including the restructuring charges was EUR 61.9 million, thus there were about EUR 5 million and plus restructuring charges. Almost all of that was related to the restructuring and cost saving efforts we are undertaking in MacGregor. Most of these were related to the restructuring we are doing in Germany at the moment.
Also very satisfied with the cash flow development, it was clearly over 100% in terms of cash conversion and came to EUR 74.5 million during the Q3. If I look at the market environment, so far this year, first of all, it's very obvious for everybody that market for the marine cargo handling equipment is in a weak situation at the moment for many parts of that one. However, the demand for the cargo handling equipment for large container ships improved during the Q3. We, for example, booked a significant order for Hapag-Lloyd container handling and storage equipment during the August. We still see the investment in the large container ships driving the demand there for the time being.
At the same time, the situation with the bulk carriers is quite difficult and the demand for cargo handling for that class of ships as well as for the offshore vessels is clearly slowing down and was slow during the Q3. There are bright spots in addition to the container handling or container ships as well. The demand for RoRo continues at the healthy level. Also with the slowdown of the offshore segment, we clearly see a need and interest for other specialty vessels such as research vessels and fishery vessels to increase during the Q3 as well.
The demand for container handling equipment, or I would say the demand overall and activity level in ports in all of our regions was at the good level in Europe, in Asia, and especially so in USA. Although the container volume forecast have been taken somewhat down lately, that's really not driving the investment level in ports at the moment. The biggest drivers there for the time being will be the increase of the size of the ships. With that will require further efficiencies and new infrastructure for ports. Also generally, the competitive pressures around the ports will drive need for investment for further efficiency, such as automation. Also the replacement cycles are or replacement market is still expected to continue strong in the ports as well.
For Kalmar in the industrial logistical segments, the demand was very healthy, actually again in all regions, but especially so in U.S. The heavy forklift trucks that we manufacture as well as the terminal tractors both enjoyed a very brisk demand during the Q3. For Hiab, for the load handling equipment, the demand was especially strong in U.S., and our revenues and especially the orders developed very strongly in U.S. as well. The demand for the load handling equipment for Hiab overall is up and at a healthy level in Europe. Although one has to say that the demand, of course, vary significantly from one market to another, depending on the economic situation and construction activity in the different European markets.
Looking at the key figures in summary, again, very pleased with the order development, very pleased also with the revenues as well as the operating profit as well. I'm very satisfied with the cash flow development as well. The strong cash flow also means that our gearing end of the Q3 is below 53%, and we are well on the way to reach our target of 50%. The strong cash flow, of course, is also very visible in our interest bearing net debt that is down to EUR 678 million, obviously with the improved EBIT and reduction of the debt, our debt to EBITDA ratio starts to be on a good level as well. Also, very satisfied with the earnings per share.
If you look at the cumulative number of EUR 1.67 per share from the January to September, we are obviously well ahead of the similar levels from the last year as well. With that one, let's take a look at the performance by segment. I hand over to Eeva.
Thank you, Mika. Good afternoon for everyone on my behalf as well. Starting with MacGregor, obviously the market situation is challenging as discussed already and reflected in our order intake. I think in the circumstances we're actually relatively pleased with the EUR 200 million order intake in the quarter. Sales were still clearly higher. You all remember the long order to delivery lead time between there, and hence we're obviously still delivering on the previous year's order intake. Sales started to come a bit down on from the previous quarter, and this is of course with the trend that will continue.
We are working very hard to make sure that the profitability is safeguarded and also that we have expectations on, in areas certainly to improve that as well. We have discussed the services area and the Design to Cost areas several times in these calls already earlier. Hence the 4.3% was a stable quarter in that sense. Quite a lot of restructuring, unfortunately, obviously affecting the operating profit due to the measures we are taking, but obviously necessary measures in order to have the right cost base going into next year. Moving into Kalmar, we're very satisfied with the order intake.
I think we've now been able to have three quarters in a row where we have had the pleasure of booking several bigger orders, and that obviously helps to achieve the levels where what we are reporting today, EUR 463 million for the quarter. This has considerably strengthened our order book as we then go look ahead. Sales growth was 6%, and we achieved just surpassed the EUR 400 million benchmark then for the quarterly sales. Most importantly, obviously, is the profitability improvement. 8.8% margin is a very strong margin for Kalmar, thanks to a good mix and very good deliveries overall in the quarter.
Going into Hiab, also order intake growth here, which we are very, very happy about. As you know, we've had a clearly more stable top line here for quite some time. Now we're sort of starting to see the impact of the new products and our efforts. Certainly, we're doing a very, very good job in the U.S. market specifically. Sales was a very good growth year-over-year, and also an improvement in this area, which we are very happy about. Profitability reached a new high, best ever, 11% now in this quarter.
Hence obviously we're continuing to reap the benefits of the profitability improvement measures taken in the past two years. Considering it was a summer quarter, so we're certainly pleased with being able to have the good sales level and further improvement in profitability. Our CEO already mentioned the cash flow. We are very happy about that, even somewhat better than we expected. We certain cash inflow coming in September that we were expecting October. All in all, I think the message is very much the same.
We continue very focused activities in our business areas to ensure that the cash conversion is good and this will then help to achieve our gearing targets in the near future. Looking at the balance of our sales, be it business area wise or geographically wise, it continues to sort of look even a more balanced pie chart, if you may. Clearly still the MacGregor high deliveries are visible in the share of MacGregor actually still increasing for year to date as well as Asia Pacific in the quarter.
This is supported by this slide where you see the sort of geographical mix by business area. As said, the strength in the U.S. market is obviously visible nicely in Kalmar and Hiab numbers. We are very happy with our market activity in those markets. With that, I think it's again back to Mika.
Thank you, Eeva Sipilä. Again, the Return on Capital Employed is heading to the right direction towards our 13% target for 2016. Obviously in terms of the guidance and outlook, probably no surprise to everybody that we are able to hold the current guidance, i.e. We will improve in terms of revenue and profitability compared to 2014. With that one, I think we are done with the presentation and hand over to Paula Liimatta.
Thank you, Eeva and Mika. Okay, ladies and gentlemen, as Mika said, we are ready for your questions. In addition to Eeva and Mika, we have Michel van Roozendaal from MacGregor here to answer your MacGregor related questions. Let's start with the questions from the live audience here in Helsinki and then continue with those of our conference call participants. Here in Helsinki, please wait for a microphone and state your name and company. Thanks. Thank you.
Hello, Elina from Evli Bank. On Kalmar, you mentioned that it's supported by a good mix support. Could you elaborate a bit on that? Is it still that there's a lot of mobile equipment and not really that much project? How much of sales is?
First of all, the, as you can see from the order intake overall, it's in a very healthy level. Underlying that one is a very strong demand still for our mobile equipment and really across the, I would say, all three regions, Asia Pacific, Europe, and especially USA. Then USA also the industrial sector is especially strong. On top of that one, we have, as Eeva was saying, enjoyed a number of larger project deliveries that actually have a mixture of mobile equipment as well as then, and especially RTGs as a, as a heavier cranes in there. I'm not actually off the top of my head able to answer the how much is the mixture between the project sales and the mobile equipment. I wouldn't think there is anything exceptional. It's a fairly steady mix that we have seen in the previous quarters there.
The improvement in profitability is not coming so much from the changes in mix. It's really coming through the underlying profit improvement efforts in all the different businesses.
MacGregor, I think you said with the Q2 results that you expected this year five, and year to date is good.
I think we expect the Q4 profitability to be roughly aligned what you have seen in the previous quarters this year.
Still on MacGregor and next year, saying the report that two-thirds of the order book is the profitability on that similar?
Maybe you want to take that one.
Changing it to the merchant fleet. That has a slight impact on the profitability in favor of a higher number.
Okay. We can move to questions from conference call participants. Operator, please.
Thank you. If you would like to ask a question at this time, please press star one on your telephone keypad. Please press star one to ask a question. Thank you. We'll take our first question from Antti Suttelin from Danske Bank. Please go ahead. Your line is open.
Thank you very much. Hi, this is Antti Suttelin. On Kalmar, please. You know, you've had a very successful 2015 order intake in Kalmar. Given what you write in the report and what we heard today from Konecranes, i.e., global container throughput has turned to a decline over the past few months. How should we think about the impact of this on Kalmar's order intake prospects for 2016, please?
Thank you, Antti Suttelin. First of all, the world container traffic has not turned into decline, but the growth rate has been adjusted down from the previous forecast. The expectation from Drewry, which I think is the authority in this area, has downgraded their estimate. It's still forecasting a growth from a very large base. But however-
The same report actually drew itself points out that the investments in the ports are actually not in the sort of short, medium range, at least driven by the changes in the container volumes. It's driven by the fact that there are very large container ships coming. There are a very large number of those one coming to the primary routes, and that will then mean that the current ships from those routes are moving to the secondary routes. There will be cascading effects, and this will have a significant impact for the infrastructure changes and needs for ports in terms of the efficiency and reach, et cetera. Secondly, with the consolidation of the shipping lines, the ports are under further competitive pressure.
We need ports actually struggling to invest into improving their efficiency and competitiveness, including a clear increase in interest in automation as a project. Thirdly, there is quite a lot of old equipment out there from the sort of 2007, 2008 investment levels that is getting old. It's driven very hard in port circumstances. For example, U.S. We see a strong demand for replacement business, and we expect that replacement business needs to be accelerating, for example, in Europe. We actually have a pretty positive outlook when it comes to the sort of activity and the investment level in ports driven by these factors.
Well, I mean, it's, I need to say that I really think that over the past few months, the throughput growth has been negative. It may be that the full year outlook is still slightly on the positive side, but really I think I think it has been negative over the past few months, and if this continues in 2016, I would think it might have some impact. Let's see next year then. My second question would be, a striking success also seems to be the U.S. market for Cargotec as a whole in Q3.
Given what we see in industrial activities, in U.S. at the moment, are you worried that this strength may not last?
The industrial sector for us in U.S. is actually quite a small proportion of our revenues, probably a single-digit percentage, primarily around the terminal tractors, which is actually even that is not industrial. It's more to do with the logistics traffic that is driven by the local consumption. Replacement market is very significant one in there. In addition to that one, we have the heavy forklift trucks, but that's really pretty much the only industrial product we have in U.S. Our primary markets of course in U.S. are around the up that is driven by the construction activity. We see the development in housing starts. If I remember the number right, it's about 1.2 million now at the moment.
Actually the outlook on that one for the next few years is still positive, and that's the primary driver for the Hiab type of investments as well as then the replacement needs in, for example, logistics industries. There are clear bottlenecks at the moment in terms of, for example, for trailer deliveries and some of the truck deliveries at the moment that are actually would have meant that we would have had higher sales in U.S. if those bottlenecks wouldn't have sort of slowed down. The delivery time, some of the road equipment is actually up to a six months at the moment. Then the port activities are continuing with as discussed just in the previous question. We see a good level of activities in the ports going forward as well.
Yeah. All right. Thanks a lot. That's all for now.
We'll now take our next question from Johan Eliason from Kepler Cheuvreux. Please go ahead. Your line is open.
Hi. This is Johan at Kepler Cheuvreux. I couldn't hear what Elina was asking about the MacGregor profitability outlook very well. If you could repeat that question and the answer to it as well. The second thing on MacGregor, you know, you have this bulk exposure that is obviously coming down. We have seen bulk as order intake for the to the shipyard being down some 90% up until August this year. On the other hand, then the containers are growing. The shipyard order intake is up 125% year to date, well August is. I was just wondering how much have your container order intake, it grown? Is it in line with this above 100% that the shipyards are seeing?
Do you still have the bulk of the container orders, coming to you in terms of the demand for the deck equipment, in the coming quarters? Thank you.
Thank you for that one. If I try to remember what Elina asked, she had really two questions. One was around the profitability guidance for this year, our answer was that we expect the profitability to be roughly at the same level in the Q4 as we have seen in the previous quarters this year. She asked about the order and mix for the next year, if I remember. She's nodding her head, yeah. Michel answer was that we actually see the weight moving more into the merchant and the proportion of offshore being smaller in 2016. That might have a slight positive impact for the mix was Michel's answer on that one, if I captured it correctly. The second question I'll let Michel to answer himself.
Yeah. For the second question was around the container demand. We see indeed that be positive. We also announced some orders in our press releases, EUR 21 million for a number of container vessels. Overall, I'm not sure to what extent we have so much of an increase as you just quoted, but overall, that is a segment which is showing relatively good growth for our lashing bridges and hatch solutions.
If I may come back to MacGregor, I think a couple of years ago when the Capital Markets Day, you sort of indicated the value per container ship, it was 13,000 container type that could be up to $10 million or roughly 10% of the total ship value. Now I think the ship values are going up and down. Your share of a big sized container ship, is it still maximum around 10% or has it come down or up post these recent acquisitions?
Good question. Actually, it depends quite a lot on the scope, and it can be up to a 10% when we provide the whole solution, the kind of the cargo handling system. For container ships, the announcement they did in August around the delivery of such a delivery. There are, in some cases, customers actually doing most of the design and in some cases the construction themselves. There we are then more a kind of equipment provider or sub-subsystem provider in which case the value can be also considerably smaller. It depends on the type of solution the customer. I don't know, Michel, if you have anything to add on that?
Yeah. Indeed, I believe the percentage is probably a little bit below the 10%. Indeed, repeating a little bit what Peter was just saying, if we do the hatch covers plus the complete lashing systems and the bridges, that would be our maximum scope, including the design. Again, with the vessel price rising, these are percentages probably a little bit lower than the 10%.
There's not a price issue on that percentage point, that the prices for you have come down over the last couple of years, apart from obviously the pass through for the steel part.
That is a constant in terms of obviously, a margin perspective. We don't see excessive margin pressures in that segment compared to a couple of years ago.
Okay, great. Thank you.
We'll now take our next question from Sean McLoughlin from HSBC. Please go ahead. Your line is open.
Thank you. I have two questions. Firstly, on this, what appears to be a structural trend in container ships to upgrade to larger ships. This is driving investment in ports. At which stage of this upgrade cycle are we? In other words, if we take, say, the top 30, 40 ports globally, how much would you say have already, as a percentage of them, already actually taken this upgrade? Or are we the very early stages, therefore, we can expect to see potentially multi-year demand. Secondly, on Hiab, if you could just specify among the European markets, which were the strongest and the weakest and what's driving that? Thank you.
All right. Yes. Yes. Thank you. If I take the first part, we are at early part, very early parts of the cycle. We see a number of orders replaced for the large sort of, 20,000 TEU or 18,000 TEU ships. Not that many of them are in traffic at the moment. Number of them are in construction now at the moment, but we would still expect, actually most of the sort of the, I would say, the volume of that one coming into the traffic in 2000, probably later 2016, 2017. Michel, I don't know if you have anything to add on this.
That is true. You see, Maersk, for example, but also some of the other Chinese lines who've recently started ordering these. A number of, I'd like to speculate, but maybe between 10 and 20 of these would probably be the total, which is in order books at this point.
The second question was around Hiab, and I try to remember now what it was.
The breakdown of among European markets. You said they were varied. Yeah.
Probably the strongest market we see in Europe at the moment is U.K. Again, if you look at the indexes and activity that drives here, it's actually more to do with the construction industry activity generally than with the truck registration because there are so many different kind of trucks. It's generally the delivery type of trucks that are related to construction industry activities and deliveries that are biggest drivers. As you well know, the U.K. construction activity is in a pretty healthy level. U.K. is clearly doing very well at the moment. Some of the Middle European markets are fairly okay. Sweden is doing quite well at the moment as well.
I would say that there are some encouraging signs in France in some of the fleet orders, but it's fairly stable at the moment. Then, of course, markets like Finland are down quite a bit at the moment. What did I miss in terms of market?
Well, I think if you want to be optimistic in areas like Spain, you actually see the numbers coming up, but of course, from very low levels. Relatively speaking, we're far from being yet a sort of Southern Europe coming coming back in a big way. That's certainly one positive market.
Percentage terms then, Southern Europe numbers start to look pretty good. I say what I was saying from the very small base.
Okay.
Great. Thank you.
We will now take our next question from Paul de la Tissière from Stifel. Please go ahead. Your line is open.
Yes, sir. Good afternoon. It's Paul de la Tissière here from Kepler Cheuvreux. Just two questions. Firstly, looking at the MacGregor and Kalmar divisions in terms of port upgrades, you mentioned that the largest, the super container size ships now, you've seen orders for port upgrades. As the current ships now move on to the secondary routes, how big is this, potentially this market for you in terms of the number of ports that could be needed at upgrade? Is the competitive environment the same for the smaller ports as it is for the bigger ports? Secondly, you mentioned, I think a couple of quarters ago, an EBIT margin target of 8% for 2016. I'm sorry if I missed this, but are you...
Is that still your expectation for at the group level? Thank you.
If I start with the port activities, and yes, you're absolutely correct that these ships are coming on stream, and it will have an impact, as you said, fall into the sort of secondary markets then receiving the ships that used to serve the primary routes, and thus also need. The impact comes in many shapes and forms. First of all, in many cases, the actual cranes that are related to the onloading and offloading of the ships are not having a sort of, are not either long enough or high enough for that one. In some cases, that might lead to the ordering of the new cranes. We have not been particularly active on that market lately as it's very competitive.
Also in many cases, the port operators actually decide to, rather than ordering a new one, is to actually renew and then sort of refurbish the existing cranes. In that market, we are clearly a leading service provider. For example, we announced now lately a very large crane upgrade project. If I remember, like eight ship-to-shore cranes we are doing in Spain as well. That activity in our services business is certainly going to increase due to that one.
The second impact overall is that you will actually receive a larger number of containers at one go, and that has an overall sort of impact for the ports in terms of requirements for efficiency, so mobile equipment, backing areas, and then also obviously starting to drive more and more consideration for the automation to be able to handle higher throughputs at the shorter time period. We see that impacting in many different shapes and forms and generally very positive trend for us. The second part of the question was related to this 8% EBIT target, and obviously, we stated this target in our Capital Markets Day almost a year ago. When we did that target at that stage, of course the outlook for MacGregor was quite different.
I think oil was around $85 a barrel at that moment. The target is now more challenging, but that's still our target. Against the changed outlook of the MacGregor, obviously balancing that one is that the improvements in operational and profitability and activity both in Hiab and Kalmar are actually ahead of the schedule and our expectations as well. We are still targeting for that.
Sorry, just going back to one more, just going back to MacGregor, just so I understand, how much of the current orders for container deck equipment is replacing the lost business or the slowdown in business in the bulk ships? Looking ahead, what could you see, imagine a situation where the orders for the container ships would overtake what you had from the bulk ships before? Or is that too much of a loss combined with the oil services business, excuse me, the offshore business?
Over to Michel.
Very simply, the combined business is actually forecast from an order perspective for next year is actually declining. It is indeed true that on the container side we see an uptick. It is not big enough to basically replace and compensate for the loss on the bulk side, which was an earlier person on the line quoted very dramatic numbers, which are near 20% of the decline in volume on the bulker side. The container is not large enough to compensate for that.
Container is, of course, considerably smaller than the bulk ship.
Okay. That's great. Thank you.
The next question comes from Simon Dybvik Tønnesson from DNB. Please go ahead. Your line is open, sir.
Yes. Hi. It's Simon from DNB. I was wondering about the strong order intake in Kalmar and Hiab. How much of that was driven by the underlying market versus you taking market shares, as you highlighted that new products, for example, were very well received here in the quarter?
It's a little bit early probably to make a judgment entirely on that one. I think overall the, in the higher market segments, the market is growing at the moment. As I said, the U.S. construction activity also the more healthy environment in Europe are driving growth. I would say that very, whereas in the last sort of 18-24 months, we've been very careful with our activities in Hiab, focused very much on profitability, probably lost some market share due to that one by sort of making choices on that one. I don't think we lost any market share certainly anymore in Q3.
Obviously with the market mix improving where we are, sort of proportionally stronger in U.S. than we are, for example, in APAC or Europe, probably means that's working in our favor as well in Hiab's case. We are doing very well in U.S. at the moment, and there, that's an area that our market share is the strongest as well. In Kalmar's case, this is more a guess at this stage than based on intelligence. You look at the strength of the order book, et cetera, we probably are taking some market share there as well.
It's just that we have invested quite heavily in the R&D and rolled out quite a number of new products in Hiab's case, also in Kalmar, the next generation products in the last sort of 18 months or so, and that's starting to show in the product demand as well.
I also wondered about if you could comment a bit on your work of increasing the share of service in each of the divisions? How that is proceeding.
Yeah. I would say that the first priority we have had in each of the business areas and services to get the operations in a better shape. We have sort of replaced or brought in new management in all three business areas. In some cases, if I take MacGregor as an example, we actually had to do some cleanup initially in terms of looking at some of the services areas that have not been that profitable and even have some reductions in there. Once we have a strong foundations on the services, and I think we are still working partly through that one, we will start to grow that. The first priority in all three business areas is clearly improving our spare parts business.
We are investing in the new logistics systems in there. We are investing in the better availability on that one. We are adding more intelligence in terms of our spare parts pricing. There's a number of different initiatives that are starting to drive that one. In the short term now, if you look at the strong order book we have had in terms of the equipment, it's quite clear that the service proportion is probably not going to grow proportionally faster as we have seen healthy demand now in the equipment side. I think right now we are very focused on getting world-class operations in place, starting with the spare parts and then starting to drive the services business up from a very strong base we will have.
Okay. My last question on the MacGregor EBIT margin. If I look in the past, back to 2004, I think the lowest margin was like 6%. You have it, for example, in 2008, 2009, 9%-10%, peaked at around 14.5%, now it's down to more 4%. What is the main things that have changed compared to the past?
I think that couple of things. First of all, the MacGregor mix has changed, and that's probably the main driver. First of all, the proportion of the offshore has been higher than it has been in the. If you look at the peak year, that was almost all of that merchant. It was done with the sort of situation where the MacGregor business model with the very asset light and not being manufacturing almost anything in-house, we were able to scale. It was a seller's market, and that certainly helped us. The steel prices started to come down at the right time for us on that one. That helped as well.
You look at the situation today, the offshore part has a higher proportion, and we have not been as profitable in offshore as we have been on the merchant side. During this year, within the merchant side itself, there was a very competitive market for the bulk ship. A lot of speculative buying that means that it's more difficult to tell the value for the end users. Also a lot of that business went to China, where the competition was very heavy. The mix also on the merchant side was more negative than it had been in the previous years. It's very clear that we need to better develop our operations in MacGregor, and the competition is intensifying.
Very clearly the measures and actions we have now taken in Kalmar and Hiab are proving successful, and we are now applying the same lessons learned and same methodology into MacGregor as well, and we expect that to sort of start to yield results. One of the differences, of course, is that as the cycles are so much longer in MacGregor, the visibility of those results will come through more slowly than it did in Hiab first and then obviously now in Kalmar as well.
Okay. Great. Thank you very much.
We'll take our next question from Antti Suttelin from Danske Bank. Please go ahead. Your line is open.
Thank you. Hi. This is a follow-up on Kalmar. You know, just to get a little bit perspective on this big ship opportunity. If we take Kalmar order intake for the first nine months, it's EUR 1.5 billion. EUR 1.4 billion is the number. How much of this number is according to your assessment because of big ships? How much of this number is because of bigger ships coming on stream? I would say that the, and this is a more, I mean, obviously I can't give a specific point. Customers are not necessarily always sort of justifying their investments to us very clearly.
I would say that, quite a small part of that one is actually still bigger ship investments where I can directly pinpoint that one of course are crane refurbishment and some of that one. I would still say that a big part of that opportunity is ahead of us at the moment. Customers are still getting their hands around that one. One needs to remember that those container ships are only starting to be built primarily at the moment. The bigger drivers, I think so far has been in mobile equipment. It's been the increased activity overall. Replacement cycles, again, there is a lot of older equipment that starts to come to end of the life.
We have seen this coming through now for probably a year or two in terms of the spare parts consumption by vehicle going up, which is usually an indication that the lifetime end is starting to be closer. That's a big driver there, the volume driver, and then some of the industrial application we touched as well. I think the bigger part of the need for efficiency in terms of automation investments, train refurbishments, et cetera, is still ahead of us.
Yeah. I'm just trying to balance this opportunity against the challenge that may be because of lower container throughput restricting some capacity expansion. You think this driver is so big and important that it will outweigh the challenge from dropping order from dropping container throughput?
It will certainly outweigh the challenge in the short to medium term. It's very clearly, of course, that in the long term, the container volumes would go down more on a permanent basis. Obviously, the need for further capacity additions go down. At the moment, for example, if you look at the capacity increase investment plan, That's not higher number than the container output number is at the moment, and the factors we have just discussed are a factor there. Then again, one can take an, you know, a view on that one, what's the long term. Generally, we have known, and I don't expect that to change, that the container traffic will always grow faster than the world trade.
Yeah, that's reasonable. Thank you.
We'll take our next question from Johan Dahl from Danske Bank. Please go ahead. Your line is open.
Hi, this is Johan Dahl from Danske Bank. I had a follow-up question regarding the US market. We're saying that we're taking more market shares for Kalmar. I was wondering, regarding the new product line that we have launched, how much of the growth comes from the new product line and how much comes from the old product line?
Well, we haven't actually introduced these, the new product lines in terms of categories. What we have done is that we have, we are introducing a new generation of products. I'll give you a couple of examples. We introduced a new generation of terminal tractor about a year ago. So-called T2 model, as we call it now, is actually have a very great demand at the moment and is very likely to take market share. At the moment, it's a considerable improvement for the previous one. In the mobile equipment elsewhere, the so-called G-Generation, is now taking. Actually, we have introduced the G-Generation products now in the reachstackers, empty container handles, and also forklift trucks in the U.S. Again, they have enjoyed a good success in there as well.
Okay, perfect. Thank you.
Our next question comes from Paul de Tissière from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes, it's Paul de Tissieres. Just BPT follow-up questions. Just on MacGregor, I know you announced some further additional restructuring measures at your last quarterly results. Just to confirm, have you identified any new ones since? That's my first question. The second question, just for general interest on a read across, you mentioned at Hiab you'd seen your orders in France pick up. Could you just elaborate that a little further, please? Thanks.
I'm sorry, Paul, I missed the second question there. Would you mind repeating that?
Yeah. On Hiab, you mentioned that you'd seen some pick up in orders from France, which perhaps were construction related. If you could just expand on that, please?
Yeah, I take that one first, if I still remember your question. The, it's probably less indication of the market than our ability. We have had some large key accounts that are actually driven primarily by replacement markets, and we have enjoyed good success in that market, and that's driving the demand at the moment. Probably less, I think the market as such is still on the soft side, but we have just been quite successful. Again, the replacement market also in truck side, of course, is a real factor as the truck registration have been significantly down since the financial crisis. You see some of that one coming through. The MacGregor, maybe Michel can elaborate, but if I just start, as he was not here in the last quarterly announcement.
We thought about the reduction of roughly 200 people at that stage. After that one, what we have announced separately has been a reduction of roughly 100 people out of our manufacturing and development facilities in Germany. Since then, there has been some further activities. Maybe Michel could give an overall picture also where we are in terms of the headcount reduction.
Basically, headcount reduction in four brackets, in four buckets. One is, and you elaborated on that earlier, Mika, is around inefficient service operations, which was executed a little bit earlier on. We have around Hudiksvall, total about 100 people. Recently we announced some further reduction in our Norwegian offshore operations. At this point in time, at the end of this year, we will have reduced our headcount by about 300 people, coming down from maybe 1,700.
Okay. Great. Thank you.
Is to remember that the business model that have been deployed in MacGregor for many years means that we are our fixed cost base is quite a bit lower than most of our competitors. The out of our revenue, we actually manufacture less than 20%.
Yeah. Yeah, right model, we basically rely heavily on contract manufacturing. At this point in time, about 15%What we use is being produced within four walls of our own factory.
Further also in our engineering side, about one-third of that one is contracted. We have capabilities to actually flex quite a bit in terms of volume there as well.
Just two questions. Can I first ask on MacGregor, what orders from the offshore business are you seeing, if any, at the moment? Which specifically, where are they coming from? Secondly, on Kalmar, I noticed that in Q2, your margin was 7.3%, excluding restructuring costs. That's now risen to 8.8%. Is there potential to get that higher or not?
Let me start on the offshore side. We see weakness basically in all segments, but it's not down to zero. One specific element I'd like to highlight is offshore wind. That is a segment which is actually now showing some positive signs compared to what we've seen in the past.
Thank you, Michel. In terms of the Kalmar, yes, indeed, a good improvement in there. I think we still are obviously working hard and the progress we have in terms of pushing our operating profit further up. We will not certainly be satisfied and staying at this level.
Do you have a target at all internally for Kalmar?
We haven't given any specific targets by business area. I think these are probably some areas that we will come back in our Capital Market Day.
Great. Thank you.
We'll take our next question from Tom Skogman from Handelsbanken . Please go ahead. Your line is open.
Yes, this is Tom from Handelsbanken. Congratulations on a good set of numbers. I have three questions. First of all, I'd like to get some kind of clarification on automation projects in Kalmar. I mean, you have, this is a huge, you know, hugely speculative market that looks very interesting. Can you give some numbers? How many ports or terminals are considering this compared to what has been done historically? How big part of this is kind of in some kind of an active phase at the moment?
Thank you, Tom. If I start with that one. A couple of points maybe. I would say that I wouldn't think there's a single large container port operator who is not thinking about automation at the moment. It certainly, if we run through a number of business cases. I look at that one, and it's a very highly attractive business case in terms of the many of the Western ports. Generally, your labor costs tend to be 30%-40% of your operating costs. We have seen in the automated ports we have done, for example, in Australia, that you're able to take roughly half of your workforce out. We talk about very significant cost savings. Further, obviously the safety will be significantly improved.
We actually have not seen any serious accidents anymore in the ports that we have automated. Thirdly, in things like environmental issues, the emissions and noise, you will also have significant reductions. The business case is very compelling. Obviously, the industry is fairly conservative as well. Also, I think the one thing that sort of confirms the case for automation, if you look at the ports we are automating today, London Gateway, the Australia, others, we have actually seen a repeat orders effectively almost in all of them. Their ports have continued investing, so expanding the automation through the port, which I think is an evidence of, or verifies also the attractive business case you have in there. The overall industry level in terms of interest is quite high.
At the moment, if I look at the very active projects, actually there are not many that I would expect to be closing in the sort of next quarter or so. We are not seeing any larger projects, materializing very fast. Overall, I'm, we are very optimistic about the market outlook on that area.
All right. Thank you. Then I wonder about the US dollar impact by division and the outlook for the dollar impact the next quarters, please.
We will hand that over to Eeva.
Yes. Thank you. Obviously the U.S. dollar impact had a positive impact in the sales of all of our business areas. Basically instead of the 10% reported growth on Cargotec level, with constant currencies, the growth was 3%. That's basically meaning that we had some around 5% growth in MacGregor and Hiab. In Hiab in the third quarter and Kalmar growth was negligible from a sales point of view.
As discussed from the profitability point of view, it is Hiab where we have exports from Europe from a sort of the EUR base to the U.S. market. Since the currency hasn't really changed much in the quarter actually, we are at this 1.1 levels roughly. There's no change to what we've said earlier that in Hiab we are expecting a EUR 5 million-EUR 10 million improvement on the EBIT line directly due to currency.
Second quarter we said it was about EUR 1 million and it's close to EUR 3 million is the sort of most scientific number we can conclude in the third quarter. We are in line. As said, we don't really see any further changes now in the short term. That's kind of what.
What has come through from the sort of, weakening of the euro coin compared to a year ago.
Remember that if you look at the heat of U.S. sales numbers, roughly half of that one is actually created in U.S. It services a local manufacturing for some of the products. The other half is primarily Euro-based export.
Of course, you have a translation exposure, let's keep that. Finally about your Capital Markets Day in order to avoid unnecessary speculations when you have talked about the refined strategy. Are you planning to do some major changes to your strategy, or is it really some kind of more fine-tuning, or do you even consider, you know, portfolio reshuffling, selling some division or something?
Yeah, I'll keep the excitement up and hope to see many of you in the Capital Markets stage in London in end of November.
All right. Thank you.
As there are no further questions in the queue, that will conclude today's question and answer session. I would now like to turn the call back to Miss Paula Liimatta for any additional or closing remarks.
Thank you, operator. We still have one more question here in Helsinki.
Hello, this is Elina again. On MacGregor, have you seen any customers wanting to delay making deliveries? Do you believe that is going to be an issue towards the end of the year that deliveries start slipping?
The current forecast, and deliveries are a constant reality in this business. We have included that reality. We don't see that risk, which will accelerate at this point in time.
You are seeing some delays in deliveries already?
Not more than before. That's a constant factor also because it also is sometimes a technical reason. We have currently a view of what these delays are, and they are built in our product.
Still on that, have you seen any cancellations?
We've not seen any significant cancellations.
Thank you.
Thank you for all of the very good questions. I would like to end the call now and wish you all very good day. Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.