Welcome to the Cargotec Corporation Q2 2015 Interim Report. I will now hand over to our first speaker today, Paula Liimatta. Please go ahead.
Welcome to Cargotec's conference call on January 2, 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 a presentation by our CEO, Mika Vehviläinen, and CFO, Eeva Sipilä. After that, we will open Q&A session. Mika, please.
Thank you, Paula. Good morning from my behalf as well. We have a surprisingly large audience here in Helsinki today, considering it's one of the few summer days we have had so far. Let me start with the highlights of the second quarter. I will also talk briefly about the market environment. Then I will hand over to Eeva to talk about the numbers more in detail. Let's start with the orders. The decline year-over-year, 11% which of course looks like a significant drop. I would like to put that a little bit in context. The second quarter of 2014 was one of the highest, if not the highest order intake in the corporate history.
We had one very large military order for Hiab, and that one is taking into account when one looks at the Hiab order intake. There were also significant orders for both bulk ship market as well as the offshore in the second quarter of 2014. The order intake of the second quarter of 2015 of EUR 887 million is actually fairly solid number still and we are relatively satisfied with that one as well. One is to also take into account that our order book is still increasing and was up 6% from the 2014 year-end and stands at EUR 2.3 billion.
Also, if you look at the MacGregor, although the orders declined significantly, we are still looking at a very solid order book in MacGregor, which will obviously help us moving forward. Sales grew by 16% year-on-year, driven by of course the MacGregor deliveries. Also, we saw a very satisfactory increase in the Kalmar revenues as well. Whereas the Hiab was relatively stable, still good progress in USA, but in Europe and especially some of the other regions in South America and Asia Pacific, we saw a decline in revenues. Operating profit is continuing to progress to the right direction. Obviously, year-on-year comparison is not really relevant in a sense that the Q2 2014 was characterized one very large project overrun cost.
Even if you exclude that one, we saw a solid progress in our operating profit across the different businesses. Also very satisfied with our cash flow that stood at EUR 101 million. There were a few very large project payments that helped in that one, but also the operational cash flow as such is progressing into the right direction as well. I'm also very satisfied that when I started in the early spring of 2013 in Cargotec, we set up a profit improvement and profit acceleration programs for Kalmar and Hiab, targeting EUR 40 million run rate improvements by the end of 2015. We actually been able to close those programs now ahead of the schedule, and that's obviously very visible both in Hiab as well as in Kalmar current profitability trend. Obviously, the work continues.
We still see many good opportunities to drive the improvement in the Kalmar as well as in Hiab moving forward. We also want to shift our focus more from the pure operating profit improvements into the profitable growth in these business areas as well. If you look at the market environment, it's obvious that the marine market at the moment is facing serious challenges. In the merchant side, especially the bulk ship orders are down considerably compared to same time in 2014 and 2013. That's not expected to recover anytime soon. There are a number of orders placed at the moment for very large container ships. That market is actually moving ahead at a very satisfactory rate. Those orders are not yet visible in our own as the equipment orders for those ships have not been placed.
We expect to start to receive equipment orders for large container ships during the second half of 2015. There are also smaller segments in the merchant marine that actually look very good. Our RoRo business, driven by the interest for the new car carriers, actually looks quite promising moving ahead. Obviously, the oil price situation and now including of course the potential lifting of the Iran sanctions is having an impact overall on the offshore sector. It also starts to be visible in our market situation. We are in a fortunate situation that our segments we are serving in offshore are not impacted as drastically as some of the sort of, for example, drilling markets have been impacted.
We are mostly in the deep water, which is still expected to grow moving forward, as well as more in the production rather than the exploration and drilling phase as well. It's very clear that the tight offshore situation and the CapEx restrictions are starting to be visible in our operations as well. On our other business segments, the outlook is actually quite a lot more positive. In Kalmar's case, the demand for the container is still growing. One expects that market to grow more than 4% over the year. Actually the cargo flow situation is positive in all the different markets and continents we are serving.
There is also a considerable sort of replacement cycle that we already see in USA happening at the moment and would probably require to be happening in Europe in the near future. However, the biggest driver actually for the Kalmar market in the coming months and years is not going to be so much the pure container flow and the increase of the container flow, but the arrival of the new so-called mega ships, the 18,000 TEU ships. Overall, about 135 vessels have been ordered or are going to be ordered, and that practically means that by 2017, every major port in Europe and USA will have one mega ship serving or visiting that port every day.
That will have a significant impact for the infrastructure requirements in these ports, one should not forget the cascading effect, i.e., the current large ships serving those markets will be then actually moved to so-called secondary routes. Again, ship sizes in those ports will be increasing. The other trend, which is partly related to the efficiency requirements driven by the large ships, is the automation trend, and we see the interest towards the port automation increasing continuously as well. From Hiab's point of view, the load handling market continues pretty much as we saw in the Q1. USA is still very strong. The new housing start is at a very high level in the U.S., and we see the U.S. market continuing at the moment at a good pace. The Europe, the situation is actually overall very varying.
Markets like UK actually are progressing very well. The German construction market was actually fairly weak during the beginning of the year and obviously some of the markets are suffering in an overall level. Overall, we saw the European market to be weaker than we probably anticipated in the connection of the Q1. We still see the positive signs there. For example, the order intake towards the end of the period was quite strong. That growth expectation obviously has not materialized in Europe so far. If one looks at the overall our numbers and as I said, Eeva will cover them more in detail, including the different business areas. The operating margin, obviously at 6.2% is heading to the right direction, but still room for improvement and we are working on that one very much.
Cash flow, as said, was very satisfactory. Obviously connected to operating profit and cash flow, very satisfied with the reduction in our net debt that now stood at EUR 735 million. As we have communicated before, our long-term target for the gearing is to be below 50%, and we are well under way to reach that target with the current cash flow profile. Earnings per share was partly impacted by sort of one on tax structuring that will actually benefit us in the long run. Eva will probably to that one a bit more in detail, as well as the financing cost, part of that one related to the hedging losses that are incurring with the increased currency in there.
Eeva again will comment the currency situation by business area more in detail in her presentation. With that one, those were the sort of overall highlights, and I'll hand over to Eeva to talk about the business area.
Thank you, Mika, and good morning to everyone on my behalf. Let's start with MacGregor. With order intake of EUR 220 million is obviously a clear indication of the challenging market we are facing, both the merchant marine as well as the offshore market. At the same time, sales are growing EUR 308 million for the quarter. This is supported by the good order intake we had in late 2013 from a lot of bulk ships. Those are now being delivered with the typical order to delivery time lag that we have in the MacGregor business.
This unfortunately means that these standard basic bulk ships are lower margin deliveries, and that is visible in the operating profit margin of 4.1%. The 4.1% in the quarter is unsatisfactory. We also had some internal issues in some of our offshore deliveries. We do expect that we can do somewhat better in the second half. Overall, this the market situation is such that we are now expecting MacGregor full year operating profit before restructuring to be about 5%. The restructuring costs booked in the quarter, EUR 2.9 million are a result of the announced restructuring measures in our previous quarter.
As you may remember, we said that there will be around EUR 5 million of restructuring costs from that program. This EUR 2.9 is an indication of the progress of those negotiations. We do still have some negotiations ongoing with personnel in a few countries. Overall, we're satisfied with the progress of the effectiveness and savings programs. As you may remember, we have quite a lot of actions ongoing, specifically in the services side and that's which is specifically important for the 2016 outlook.
As the new equipment side will be reduced, we do focus on the service side and then to build a relatively better actually mix for 2016 than what we have seen. Finally, one important highlight is that we have the new head of MacGregor starting now in two weeks time, and he will also obviously be able to fully focus and help us push the business further in the challenging market situation. We're obviously benefited by the fact that we do have the own operation model in MacGregor that is used to cyclical business and volumes going both up and down.
Now we need to leverage on that. Going then into Kalmar, good quarter, strong in orders and sales. I think the orders, EUR 450 million, coming without any bigger projects, is an indication that the underlying health of the container handling market is good. As Mika already said, it is well balanced over geographically as well. We had a good delivery quarter, although as we already said in April, we didn't expect a quarter-over-quarter growth. The sales EUR 391 million were very much on the same level as in the first quarter.
Profitability, 7.3% is also something we're satisfied with and indication of the fact that the profit improvement program is coming ahead. Obviously, there's always is and will be some variation in the mix between the quarters. That's just good to note and keep in mind. Going then into Hiab, the order situation is obviously sort of good to note the EUR 40 million comparison and difference that made us year-over-year comparison very tough. Excluding that, it is of course also visible that the business is still not yet growing. We see some positive signals in Europe, but based on just the numbers from the quarter.
Let's say, the markets, and the focus going ahead, we think we can be more growth oriented and that will be an important shift change now, as we clearly with the 10.7% margin, have proved that Hiab is sustainably on a very different level of operating profit than it has been in many years. It is good to note that this 10.7 is very much underlying. We only had a very small transaction positive impact from currencies in this quarter. As you may remember, we said in April that we expect a sort of $5 million-$10 million EBIT boost from the strong USD, if everything remains the same.
The currency rate, surprisingly, if you look at the euro-dollar, the currency rate at the start of the second quarter and the end of the second quarter is very same. Our guidance in that sense remains intact. Our hedging period is 4 - 6 months. From that, you can calculate quite well that the sort of clearly higher euro rates we still had at the end of year, early this year are now coming. Those hedges are, have expired and we're now going ahead into the second quarter with somewhat of a currency boost. Obviously we're very happy that this double-digit level has and can be achieved without the currency boost.
That gives us confidence on the improvement trend into 2016, where we at least have no visibility into what the currencies can or will be in at that time. Looking at the cash flow, as Mika already mentioned, Q2 was strong. It should be. We are very focused in both Hiab and Kalmar on besides the profit improvement on the cash conversion. That's a strong theme for the full year. Certainly good to note that in second quarter we had several bigger milestone payments in projects that helped boost that number specifically. You shouldn't expect as high a number in the third quarter.
Looking at the geographical mix, maybe a few comments. You obviously see the Americas market strength in an increased share of that market. Then also the APAC number going up is very much a reflection of the MacGregor high sales still. As you see from the next page, MacGregor sales, a big portion of those, of that really does come from Asia Pacific. Then in both Hiab and Kalmar, you see the positive influence of the U.S. market that we've been able to take advantage of in the first six months of the year. With that, I think we're ready for the target and outlook comments. Mika, please.
Thank you, Eeva. I said we are progressing to the right direction. The ROCE, return on capital employed targets we have set for ourselves of over 13% is well in our sights when we move into next year. We see good solid progress both in our capital employed as well as in the operating profit moving into the right direction. It clearly identifies further opportunities to drive the improvement in Kalmar and Hiab and obviously in MacGregor. Number of similar programs have been started. We start to see the traction of those programs, and as such are confident be able to manage the situation in MacGregor as well, into 2016.
Obviously, our guidance is unchanged with the revenues expected to increase in 2015 compared to 2014. Operating profit exclude restructuring costs also improve from the last year. With that one, I think we are ready for questions.
Thank you, Eeva and Mika. We will start the questions from the live audience here in Helsinki. Wait for a microphone and state your name before asking any questions.
Hello, Elina Ryhänen from Evli Bank. You said that there were some internal issues with some deliveries in offshore. Could you elaborate a bit on what these were?
Yeah. There were, some of the larger offshore projects that we delivered in during the current quarter had certain complexity in terms of technology and other issues that actually meant that the margins were not quite what we were forecasting them to be.
Still on MacGregor, Wärtsilä commented last week that they are seeing some customers wanting to postpone deliveries. Are you seeing anything like that?
We have seen the sort of, I would say normal situation in this kind of cycle where there's a question of postponement and even, and limited cancellations in some of the projects. It's something that we are managing internally. I don't see a significant issue there.
Finally, I think Volvo commented last week that they believe that the U.S. truck market has peaked. How do you see this?
Well, obviously there are different truck markets as well. We are primarily driven by the construction industry in U.S. and also the general, the heavy truck market as such is a different situation. One thing that I think is also driving overall softening of the truck orders in U.S. is that the delivery times have extended now, to a very long situation, and that's probably an incentive of means that people are not necessarily. My understanding is that if you want to order a truck in U.S. at the moment, you would have to effectively wait for next year to get that one. As well, if you look at the construction industry activity U.S., that's actually, continues to increase at the moment. I think we saw another very strong quarter in terms of housing starts there.
Johan Dahl from Nordea Markets. Two questions from me. Firstly, on the, you have the 8% EBIT margin target for 2016, and I looked at the Q1 report, and you kind of clearly stated we are going towards the target in the Q1 report but then no mention in the Q2 report. Is that just a coincidence or should we read something into that? The second question would be on the MacGregor cost savings. Do you feel that the EUR 20 million you comment or communicated at the Q1 result is going to be enough given the, well, what you're seeing in the offshore market and the overall MacGregor order intake at the moment?
If I start with the second one, as I have short memory. The thing we announced in MacGregor is really a very proactive approach for the market situation we see developing in front of us. The challenge I think we and many of the other companies are working with, we all see the weakening of the market situation. At the same time, the actual current activities within the divisions is quite high level. We are still delivering high quantities as you can see from our revenues, et cetera. As such, sort of potential further reductions would have to be done when the activity levels that permit.
At the moment, we are obviously reviewing the situation and continuously, and I can't rule out further potential reductions in MacGregor when the situation builds and does sort of entail as well. When it comes to the 8% target, that's very much still our target for the next year. It's obviously clear that when you look at the target setting, the, which we'd announced in the connection of the capital market day in, was it in October or November? Last year, the market situation in MacGregor has deteriorated, and that makes the challenge the target setting more challenging than it was at that situation. We see very solid and good progress happening in Kalmar and Hiab, and we are still aiming for that one.
I would say that the risk level obviously has increased from the, where we have been in six, seven months ago.
Okay. Thank you.
Pekka Spolander from Pohjola Bank. One more question about MacGregor. In first part of the report, you commented 2016 outlook, and you said that you expect slight decline on sales but somewhat improving margin. Can you update this outlook at the moment?
I think we still see that in a similar way that the we will have a decline in revenues due to the order intake we are seeing at the moment. At the same time, the mix is going to be better for next year. We have a large number that soft margin in the Q2 was very much driven partly by that offshore issues we saw that we see as a temporary. Also secondly, there is a very high concentration of these bulk ship crane deliveries on that one, which were done in a very competitive market situation, primarily for the Chinese shipyards.
We expect the revenue mix to be more favorable and obviously the proportion of the services where we are making good progress in terms of profit improvement to increase in 2016. That as such should then result to a more favorable mix as such. When I talk about the improvement in profitability, I talk about the relative improvement, not the absolute. Obviously, the absolute profit is likely to decline from 2015 - 2016 due to the revenue decrease. As Eeva was saying, the MacGregor business model and has been proven in time after time, we have a very little manufacturing in-house and also quite a big part of our engineering, other resources are partly done with the partners.
I think the business model is pretty sustainable and is able to take this kind of revenue declines as well.
Thank you.
Tommi Råman, SEB. You have also commented earlier that you would expect MacGregor revenues to grow slightly 2015. Is that still valid?
Still the case. I mean, we have seen in the, in the revenue and we expect that to continue in the second half as well. This year we will grow in revenues and next year we will start to decline.
Second half, order intake, levels, you said that there are some sort of container activity now coming in. Would you say that EUR 220 million is close to bottom? Should we expect that second half quarters would be somewhat better or are other business, sort of segments still dragging?
I would say, if I look at MacGregor, you probably look at the roughly same levels, maybe slightly better. We will see more merchant orders coming on from the container side and hopefully if we secure the deals. The offshore activity is probably declining from first half to second half. Somewhere in the ballpark of what we saw in the first half overall.
Then perhaps to Eeva, you mentioned that Kalmar mix obviously varies between quarters and so on. Was there any indication for sort of, what happened in the second quarter or what we should expect in the second half?
We are expecting Kalmar margin to develop favorably during the year. I think the overall we target a clear improvement in 2015 versus 2014. Even if we will have some quarterly variations. You know, that not every quarter is always better than the previous one.
On the financial items and the tax issue, fairly high tax rate in the second quarter, if you can comment on that?
If I start with the financial items, I think that sort of EUR 12.44 million net financing cost for the six months is a pretty good indication of the full year speed as well. Obviously, the sort of currency fluctuations do have an impact on the hedging result and that may vary it a bit, but not to a significant degree. It is more related to the sort of absolute amount of debt we have and the cost of that which we do report. On the tax row. No change or on a full year guidance.
We've said that to be on the cautious side, you can use 30%, but we do aim to be below that also this year. In the second quarter, we had one specific structural change in our business, which has a sort of the tax consequence comes before the benefit in a way. That then hiked the second quarter number to around 40%. These type of structural changes we need to do to optimally support our business, but as I said, in a year's time it does sink in the overall. This is not the first time we've had such and will not be the last one either.
Okay, if there are no further questions here in Helsinki, we can start with the questions from the conference call participants. Operator, please.
Thank you very much. To ask a question over the phone lines, please press star one and wait for your name to be announced. Star one to ask a question over the phone lines. We have a question from the line of Antti Suttelin. Please go ahead.
Hi, thanks. Two questions. First of all, new guidance for MacGregor EBIT margin for this year was 5%. Can you just remind what was the previous guidance? Then secondly, you seem to have downgraded slightly global container throughput growth from 5% - 4%. What drives that? Thanks.
Question. We said in conjunction with the first quarter earnings re-report that we aim to improve the MacGregor margin slightly in 2015 versus 2014, when it was 5.2% excluding restructuring. This new guidance is now a deterioration to that we will be in about 5%. No improvement materializing due to sort of the outlook we see for the second half when it comes to lower orders, less percentage of completion deliveries coming.
I can take the container side. That's true. I mean, we have not actually downgraded. That's coming from the outside market. Drewry, which is sort of the authority in container traffic, I think, downgraded their estimate from 5.3 to 4.3, if I remember correctly. As I said, I mean, that's still a good number, but that's really not the main driver at the moment in ports. The, the replacement cycle is a big driver that looks in our sort of core business in mobile equipment at the moment, especially driving the numbers, especially in North America. The, the bigger driver will be this arrival of the larger container ships that will then start to impact the infrastructure and efficiency requirements, not just in the large ports, but obviously with the cascading effect on that one.
That will require further investments and then I think the automation into the forefront of the port thinking as well, and that's a significant driver.
Okay. thirdly, if I may, I mean, considering MacGregor are low order intake volumes, would you say that the order intake margins are getting lower now that the levels are so low? Do you see such of a trend that order intake margin would be weakening from levels where they have been?
That varies from segment and product. It goes to another, but it's very clear at the moment that especially in the categories that are declining, such as some of the offshore markets, the pricing pressures are there more clearly than they were one year ago. In certain other markets, such as containerships and RoRo, the market situation actually it looks fairly positive, we don't necessarily see the same pricing pressures in there.
Okay, thank you.
Thank you very much. Your next question comes from the line of Sean McLoughlin. Please go ahead.
Yes, good morning. Two questions from me. Firstly, on Hiab. Just wondering the margin is now firmly into double digits. Do you think this is sustainable level for the margins that we should look at going forward? Secondly, if you could just help me understand the high tax charge you had in the quarter. Thank you.
I start with higher than Eeva and then tax charges. Yeah, I firmly believe that that's very much sustainable. The margin was not impacted by material by currencies yet. There will be a upside on that one going to second half now, the benefit of finally transactional. We've been driving the program through with the very fundamental changes in the product cost, operational cost, and margins. We see further opportunities to further improve the Hiab operations and moving forward as well. I look at that very much and sustainable with an upside potential in that one. Eeva, would you like to comment on the tax charge?
Maybe, Sean, you missed my answer a few minutes ago. I was basically saying that in the second quarter we had one specific implementation of a structure to better support our business and that has a tax implication. That is now booked in the second quarter, which explains the 40% roughly tax rate. For the full year, we're still guiding on for you to use 30% to be on the cautious side, but we do aim to be below 30% for the full year. There's no change in the so-called operational side of this business.
Obviously, at this point of the year, it's still a bit early to estimate more exactly the tax rate due to the fact that we have from the previous years some tax losses in some countries. Depending on where the profit comes from, it can impact the outcome then slightly.
Thank you.
Thank you. Your next question comes from the line of Tom Skogman. Please go ahead.
Yes, I have two questions. I'll take them one by one. First of all, can you please specify the U.S. dollar impact by division and split it into 2015 and 2016 based on the current spot rate so we know, you know, how big the impacts will be in millions of euros for this year and next year by division?
Eeva.
If I start from the orders where we had the group in impact was 6 percentage points. That is in per business area, 7 in Kalmar and Hiab and 5 in MacGregor. If I go to the sales line, where we had on the group level the 9 percentage point impact in second quarter, there it's a bit opposite that it was somewhat higher in MacGregor, so 10 percentage points there, the 9 in Hiab and Kalmar at 8 percentage points. No dramatic changes in between the business areas on that side.
Going into operating profit, as we said earlier, the Kalmar business is very well-balanced geographically, so we don't really see much transactional movements, or to the positive or to the negative. And hence, no, nothing really to comment on that. Similarly in MacGregor. In Hiab, we have part of the U.S. business is exported from Europe, and there when it is sold in dollars, we against European competition, we obviously do have a transaction exposure, which in this year with the current currency rates is a positive impact.
What I said on the call earlier, we said already in April that it could impact the $5 million-$10 million additional boost on the EBIT line in Hiab, this specific transaction element. As the sort of currency rates were surprisingly stable in during the second quarter, if you look at the starting and ending rates. We have had no reason to change that view. We said already in April, majority is on the second half because the hedging times are 4-6 months. Basically we had some support in June, to make it very simple, coming through in the higher bottom line.
So you can expect somewhat sort of improved and outcomes from this specifically. Again, assuming that things don't change, the higher market does change quickly and obviously it's also related to what our competition does and doesn't do from a their pricing standpoint of view. It's not only related to currencies per se or our actions alone.
As it looks now, should we expect another EUR 5 million-10 million boost for Hiab being 2016 and that is the transactional exposure. What about the translational boost on EBIT looking into next year as well?
really dared to venture into speculating the currencies in, into 2016. As said, the sort of changes in Q2 were surprisingly small. If things stabilize in the euro/dollar on this 1.1 level, then there's not much additional coming in 2016 per se on top of what comes through in 2015. But of course it is very much dependent on what happens in the currency markets, which are driven a lot by the political situation. I think it's better we come back to that closer to year-end. Our targets per se for last year, for next year were set with no big assumptions from currency.
It doesn't impact the 8% or the 13% target. We'll obviously be able to discuss this more than in the coming quarters as we see where the global situation takes us.
Then my other question about is about MacGregor. I think to me the situation is very different in the shipbuilding world compared to 2010 when we had the last crisis. Now the financial health is very weak with many shipbuilders and many shipping companies as well. Do you see a risk that this recession plays out in a kind of an unpredicted way? If we have a lot of surprising cancellations and delays, can you react quickly enough somehow then to adjust your own cost base to this? Because I see a risk that things could really move quickly, if we have DSME, you know, going into bankruptcy or something like that happening.
I look at that situation first of all on the, on the financial health of the shipbuilders, and it's not great of course, but I wouldn't change that situation as drastically, change. There has been actually quite a bit of consolidation in the last few years around shipbuilding. If you look at how the changes in order intake now on ships is impacting different countries. The biggest impact by far is in China at the moment, where the bulk ships are almost entirely built. There is a quite a big order reduction happening in China. I'm fairly confident that the Chinese government will step in, and we have seen some measures on that one to support the local industry, and there has been a considerable consolidation, which I expect to continue into Chinese ship, shipbuilding.
Korea actually has suffered in a relatively small way because they are the primary builder of these larger container ships, and there the order intake is in a quite healthy level. Obviously the shipping lines themselves are very varying in terms of their financial conditions, but generally not in the great shape. We are continuously monitoring the potential delays and cancellations as we did in the last time this kind of crisis hit. As I said, we obviously see some delays, and willingness to sort of not to open the letter of credits at the time and pushing the revenues back. I have not seen this kind of drastic change in the market situation.
I think this is more as a business as usual in this kind of situation that we are managing.
All right. Thank you.
Once again, star one to ask a question over the phone lines. No further questions coming through from the phones. Please continue.
Do we have any further questions here in Helsinki? Yes.
Still on the sort of underlying, seasonality on higher extremely strong result in the second half. Would you expect the normal sort of slightly weak, third quarter and then the best quarter, in the fourth quarter?
Yes. To be t he case, primarily driven by the Europe has been such a large market for Hiab than the holiday season tends to have an impact on that one as well.
Are there any further questions from the conference call participants?
No further questions from the phones.
Okay. If all the questions have been asked, I would like to thank everyone, everybody for attention today and wish funny summer. Thank you.