Thank you for standing by, and welcome to the Cargotec Corporate Quarter One 2015 Interim Report. At this time, all participants are in a listen only mode. If you wish to ask a question, please press star one to ask a question over the phone. I must advise you that this conference is being recorded today, Tuesday the twenty-eighth of April 2015. I would now like to hand the conference over to your speaker today, Paula Liimatta. Please go ahead, madam.
Good afternoon, ladies and gentlemen, welcome to Cargotec's conference call on January-March 2015 report. My name is Paula Liimatta, and I'm Head of Investor Relations. Today, we have a small live audience here in Helsinki as well as people on the phone lines. We will start with the presentation by our President and CEO, Mika Vehviläinen, and CFO, Eeva Sipilä. After that, we will begin a Q&A session. Mika, please.
Thank you, Paula, and good afternoon. From my behalf as well, thank you for joining this Q1 conference call. Let me run through some of the highlights first. Obviously, we're quite pleased with our Q1 overall, with all the relevant numbers improving. The orders grew roughly 9% overall. If you take into the fixed currencies, there was a 2% order growth. When we go through the different business areas, we of course see that there was a considerable differences between the business areas with a very strong growth seen in Kalmar, and also good growth in Hiab. We had a considerable decline from very high Q1 2014 into the MacGregor. I, however, like to make the point that the 228 was still a reasonable number for MacGregor, considering it's a one quarter number.
Again, we had a very strong quarter one in 2014 there. The order book strengthened by 12% from the year-end. If one wonders how the math works between the order intake revenue and the order book, obviously the uplift on the order book is driven very much by the currency changes. The dollar strengthening, of course, is increasing the size of the order book, considerable number of orders being in U.S. dollars. The sales grew 18%, which of course is an excellent achievement from the business areas. I'm particularly pleased of the fact that, even if you exclude the currency impact, which is about 8%, but actually underlying revenues also increased by 10%, which is a very good achievement on its own.
Operating profit, of course, improved remarkably from the pretty low number of the Q1 2014. The cash flow was also sort of reasonable, I would say, roughly at the same size as the EBIT as well. We are targeting as a group to sort of have a cash conversion over one over the year. Obviously, this was a fairly good achievement considering that the rapid sales growth grew, for example, the net working capital and a few other items at the same time. Relatively pleased with that number again. We also announced today additional saving measures in MacGregor on top of the profit improvement programs we are already running, and we will cover that a bit more in detail in the MacGregor part.
A few words maybe on the market environment, as quite a few things are happening there. Let me start with the MacGregor market environment and the marine industry overall. First of all, on the merchant side, the Q1 was a fairly low activity, one of the lowest we've seen for a while. The bulk ship order intake that we saw sort of mini boom happening from the second half of 2013 until the first quarter of 2014, and that was still visible very much in our order intake in a year ago, has of course effectively gone away. There is an overcapacity in the bulk ship markets at the moment, and the freight rates are also at an extremely low level. We do see quite a high activity at the moment in the container ship sector.
A number of companies are now clearly planning to invest more for the, these called ultra large or Triple-E, 18,000-20,000 TEU ships. As well as then we also see sort of activity around the feeder ships, all sort of, and driven by the shipping companies' need to drive further efficiencies in the container and obviously still a strongly growing container traffic overall. The activity around the container ship sector was not visible in our numbers at all. We expect that order intakes in that area should start to be visible in our second half of 2015. In offshore market, obviously everybody is aware of the fact that the oil price being very decent, a number of oil companies have announced CapEx. The cycles are, however, is very long on that one.
Many of our products go actually into production phase of the sector. Also obviously different markets, whether you are a sort of major oil core or national oil company, have a slightly different investment profiles. In our case, the activity level in the offshore market remained at a healthy level. Actually, about half of the order intake in the first quarter 2015 came from the offshore sector. We still see that activity level to remain fairly high for a while at least. It's obvious that we will not be sort of immune for the developments happening in the oil industry and offshore sector. We would expect then order intake potentially will start to slow down perhaps in the second half of the year, at least by 2016.
Revenue impact and slowdown then started to happen at the 2016, 2017. What this all means for the MacGregor is first of all, the order intake was still I would characterize as decent at EUR 228, but obviously not at the same level as it was one year ago. In the capital market day in end of last year, we were indicating that we expect the MacGregor revenues to be roughly at the same level than 2016 and 2015. Now, looking at the current activity and our own sort of pipeline, we actually expect that MacGregor revenues will be slightly down from 2015 - 2016.
The difference is not quite as drastic as many people might expect looking at the shipping orders and shipping industry. That's driven really by the long cycles, the fact that we expect the container ship activity to sort of continue to be fairly active in second half of 2015, and again, the still active situation in offshore industry contributing positively also in 2016 revenues. We expect actually our margin in 2016, relative-wise or percentage-wise to improve in 2016 compared to 2015, driven by the improvement programs we have going on in sales services and internal efficiency, as well as the additional savings program that we announced today. In the other sectors, we actually see overall market situation to be very favorable at the moment.
In Kalmar's case, the overall container handling equipment and services saw very positive development. We see that positive development continuing at the moment. U.S. market obviously very visible in our numbers already. Also we are actually seeing increasing activity and increasing more optimistic about the situation in Europe as well, and expecting a growth there during this year as well. In Asia Pacific, China is relatively sort of stable, but we see increasing activity in the rest of the Asia Pacific actually picking up quite nicely. In Hiab's case, obviously, the U.S. market is continuing to growth and again, very visible in our numbers. We actually had a slight decline in our revenues in the first part of 2015, but we see the market activity picking up.
In Hiab's case in Europe as well, the latest truck sale, new truck sales forecast actually now would indicate a 5% growth in Europe, which would be roughly the same growth rate as people are expecting from the U.S. this year. Overall, I think we are getting more optimistic about Europe than we are still a while ago. Looking at the key numbers, again, we looked at the growth in terms of the orders, order book and sales, and the significant improvement in our operating profit. A couple of more things maybe to point out. Our net debt increased somewhat from the end of the year, although it of course was down from the year-to-year basis.
That increase in the debt and gearing was really driven by the payment of the dividends during the Q1. Secondly, with the sales growth happening, that obviously tied up somewhat more net working capital. We are still optimistic about our cash flow development and capability. As we have said, we expect our gearing to be below 50% in the next 12 months or so, really driven by the improving both profitability and cash flow. I also wanted to point out maybe that it's not visible in this number, but it's invisible in our P&L calculation, is that you actually saw increase in our fixed costs. Part of that, of course, is coming from the translational impact in the currencies.
It was also coming partly from the sort of considered investments that we already indicated during the capital market days. Our R&D investments grew about 20% year-over-year. We are clearly investing further into the product development, especially around automation and some of the software parts. Also you saw some increase in our fixed cost in administration. Again, efforts to sort of put more rigorous control systems and reporting systems and transparency into our business in terms of IT investments. Overall, maybe one more comment regarding the currency impact. Obviously, we sort of spelled out the differences in terms of the fixed currencies and others in orders and sales. It's good to note that practically all of the currency impacts in the first quarter were so-called translational impact.
As we have guided in the past, we expect the transactional impacts only start to become visible slightly during the Q2 and more into the second half of the year due to the hedging of our business as well. With that one, I hand over to Eeva Sipilä, who will cover the business area separately.
Thank you, Mika, and good afternoon to everyone on my behalf as well. Looking at the MacGregor numbers more in detail first. As our CEO already indicated, EUR 228 million for orders is in the current markets, something we are quite satisfied with, considering that really there was little or no activity in the bulk segment and in the container vessel segment activities yet, not yet reflected in the cargo handling orders.
At the same time, offshore will continue on a good level from an order point of view. Sales were up to EUR 282 million. This is something we have been indicating already a few quarters before. This is now obviously a result of us starting to deliver the orders received in late 2013. Profitability was 4.4%, slightly better than the comparison period. Obviously, still in the comparison period, we had a few million EUR extra costs related to the M&A.
M&A and then certainly volume supported somewhat of an improvement as well. A few words still on the savings measures announced today. It's important to note that the development initiatives in sales services and design to cost continue and are now very nicely ramping up. This is something we announced in connection with the new organizational announcements in MacGregor in October. What is now obvious from the market situation is that we need to add some savings measures on as well. We'll start the regulatory negotiations with personnel and unions.
We estimated a reduction of employees as of today is around 220 people. We are targeting EUR 20 million of annual savings. We would expect this EUR 20 million to be fully visible in 2016. Obviously it's not, it will not all be visible yet this year as we will be sort of ramping up and consulting the actions with personnel. However, the restructuring cost estimate will impact this year, and that is roughly EUR 5 million. Going into Kalmar, we had a strong start for the year on all elements. Order intake of EUR 455 million is something we're very happy with.
It includes a significant continuation order from London Gateway on the automation front. It obviously indicates a very strong run rate in the smaller equipment, both on the port side as well as in the industrial and distribution sides especially in the U.S. Sales were also up to 21% to EUR 395 million, and we really actually had a very good delivery speed throughout our organization to the extent that we actually were able to sort of take some April deliveries already into March. Hence we're expecting less of a quarter-over-quarter impact than when we go into second quarter. Obviously also encouraging in Kalmar is the profitability.
7.4% is certainly helped by volumes, but it's also an indication that we continue to make progress on the profitability improvement actions we have been working on in the past two years. Going into Kalmar, sorry, going into Hiab then from Kalmar, we're most proud about the blue line indicating the operating margin. We now have five quarters of a very, very positive trend in Hiab and reached 9% operating margin in the first quarter. Order growth was also positive 17% up to EUR 256 million.
That also is visible then in our order books, so we have a good start for the year in that sense. Sales were more modest. We're still very much on the sort of flat levels we've seen in the past quarters as well, and this is very much a European phenomenon in the sense that the in the Hiab business, clearly the America's market situation is positive. We see some early signs of picking up in Europe, but not visible in the sales yet. Ramping up then on a few group level items. Cash flow conversion rate of roughly one was again a good start for the year.
We certainly have more work ahead. However, considering seasonally, we typically ramp up operations, and then, that was visible and is visible in our balance sheet when you look at inventories, for example. Considering that, we are happy with EUR 52 million, but have obviously quite a ways to go still in the remaining quarters as well to reach our targets on the full year. Looking at the mix of Cargotec's portfolio, maybe the biggest change are changes are visible in the geographical mix rather than the business area portions.
Especially worth noting is the decreasing percentage in EMEA, Europe, Middle East and Africa, which is then taken up by growth in both Americas and Asia Pacific. Obviously on a group level, we're happy for the balance, but at the same time, obviously do hope that the European economy starts to recover as well. Another angle on the mixes is then and as we know, there's quite a lot of interest on the geographical splits within the business areas and due to not least the currency market volatility. You see here the highlights on each of the business areas.
MacGregor is and continues to be a very Asia Pacific driven business, as that is where the main shipyards are.
In Kalmar we and Hiab, in both we see a clear increase in the share of Americas driven by the improved economy in the U.S. With that, I think it's back to the summary words by our President and CEO.
Thank you, Eeva. Just very quickly, obviously very satisfied with the progress we are making, especially with the progress we are having in place in Hiab and Kalmar. We are also very confident and comfortable with the targets we have set for ourselves for 2016 with the 8% operating margin and 13% return on capital. As you can see, we are making progress towards that direction, both in terms of the EBIT improvement as well as the impact of the return on capital employed. We obviously reiterate the outlook we have set for this year, which is that we are expecting our sales to grow and our operating profit to improve from 2014. With that one, I think we are done and open for questions.
Thank you, Eeva and Mika. As said, we will start with the questions from the conference call, sorry, from the live audience here in Helsinki. Please wait for microphone and state your name and company to benefit those people on the phone lines.
Pekka Spolander from Pohjola Bank. First, two questions about MacGregor. Could you talk a little bit more about the timetable of this new cost savings program? You indicated that the slowing demand we will see it in sales later this year or 2016. What about the timetable of these savings actions?
The savings actions will be done by the different segments depending on their prevalent situation. The first negotiations for the potential employee reductions actually have gone out today, primarily in Norway and Sweden, and in a number of our services locations where these are actually part of the ongoing sales program, and we are sort of optimizing our services footprint. Some of these will be happening fairly quickly and provided that we reach an agreement with the union discussions, those, sort of, reductions in employees and co-cuts will actually happen by the summer. We would not exclude further potential reductions and negotiations during the second half if the market situation goes.
We really have to see that unit by unit and see where the activity levels are and we try to react to those ones sort of proactively so that we are actually be able to stay ahead of the curve when the sort of slowdown of the activities will come. As Eeva was indicating, the full EUR 20 million will be fully effective throughout the next year, visible in there, and obviously in this year that those savings will come in force as the reductions and cost saving measures happen.
Okay. Thank you. The guidance for MacGregor's this year margin, if I recall right, in February, you indicated that the margin would be somewhere between the fourth quarter last year, which was 8%, and the full year last year, which was 5.2%. Is this still the guidance you can give?
I think our current estimate is saying that it'll be closer to the last year margin than the Q4 at the moment. We'll have a slightly more pessimistic. It is driven by partly the sales mix that was of course visible in the Q1. Despite the high volumes, the margin was not as in the Q4. Obviously also the offshore activity. A number of those projects are percentage of completion, so it's impacted by the order intake development and then also the currencies actually play a role in there. Some of the offshore activities is priced in NOK. Some of the costs are in dollars, and with the percentage of completion methods, those have some impact on the margins as well.
Finally, the Hiab margin was very strong in the first quarter, and typically we have seen that the first quarter is the lowest margin during the year. Is this something we could expect also this year?
Yeah, I think so that the logical development in Hiab margin, I'm very satisfied with the margin considering that the sales volume was relatively low. Obviously we would expect the transactional impact coming through from the currencies in the second half especially. One needs to be careful. If you look at the geographical distribution, you see that roughly 40% of the Hiab revenues are in, in U.S. One needs to be slightly careful that doesn't translate directly into transactional benefit because some of the products are actually done, and primarily the tail lift business is actually U.S. supply chain and manufacturing. Services is a considerable part of the U.S. business as well, and that's obviously with the local costs.
I would say roughly half of the Hiab revenue is actually U.S. originated, if I would use that word. The other thing that will be visible there as well is the fact that in U.S. we are primarily in the direct mode. We have our own sales companies, our own sales and services operations. The SG&A obviously will go up as the currencies will translate. We estimate the transactional impact, positive impact for Hiab to be roughly EUR 10 million this year.
Thank you.
Operator, we can take the questions from the people on the phone lines now.
Okay, thank you. As a reminder, it's star one to ask a question. Your first question come from the line of Johan Eliason from Kepler Cheuvreux. Please go ahead.
Hi, this is Johan at Kepler Cheuvreux. Just a question a little bit on next year as you are guiding to some extent on Cargotec for 2016. You are obviously targeting an 8% group margin by 2016. As I recall it, that was basically on the assumption that you would be able to manage that in a flat top-line scenario. When you say that MacGregor will only be down slightly, and I guess we should, considering where the cycle is heading, should see the other divisions growing. What sort of effect do you think the other top line would have if it comes from the Kalmar and Hiab divisions on that margin target for next year?
Well, we haven't really gone into the details to fully try to understand the top-line development for next year in the, in the other businesses. Obviously, with the MacGregor, when the lead times are so long, we have a better visibility and understanding how that develops, and obviously paid more attention on that one with the fluctuating market situation. I think the 8% expectation still stands. Again, I think as we have indicated in the past, we expect the Hiab and Kalmar to contribute to that 8% positively with MacGregor being in and below that 8 percentage points. Obviously, with the current revenue development, we expect the weight of the MacGregor would go down as well for the 2016 compared to the 2015.
Yeah. Exactly. Just if on the Kalmar, these projects, are there any risk remaining to the old problem projects?
Practically, no. I mean, the projects are mostly closed. I mean, there are some very few remaining tails left in there. Nothing significant that would any sort of take place anymore.
How are these big project? Part of it was auto-auto, also automation related. Is there a new round of automation projects coming, you think? Now you have a lot of references up to show to the market or what should we expect now going forward from that sort of projects, big projects?
Thank you, Johan. Picking it up, actually, I forgot to mention that in my market outlook. We actually are looking at the automation market development quite positively at the moment. We recorded two significant orders into Q1. One was the next phase of the London Gateway, the automation for the Port of Brisbane as well. Overall, we see the inquiries and interest around automation growing. There are a number of these ports that are actually taken or are to be taken into commercial use during the first half of 2015. I think we are more and more proving the fact that the automation is delivering its promises. The savings in terms of labor costs, safety and environment are actually delivering against those promises.
I think the overall interest towards the more automated port terminal, as driven by the efficiency requirements of the ports, is increasing.
Great. Many thanks.
Maybe if I may just to make the point, because I know this sometimes is a point of confusion. The project cost overruns we had primarily in 2012, 2013, and 2014 were almost exclusively related to the large crane, so-called STS crane build-outs, not in the automation projects per se.
Thank you. Your next question comes from the line of Antti Suttelin from Danske Bank. Please go ahead.
Thank you. A question about the cost cutting in MacGregor. I just wonder how you made the calculation about 220 people and EUR 20 million savings. That, you know, that would indicate average cost per employee by, you know, being EUR 90,000. Cargotec average is something like EUR 58,000. Is it really so that MacGregor cost per employee is so much higher than the group average?
No, it's not. Obviously, this savings target includes other than direct personal costs. We are using significant amount of external resources, subcontracted resources, for example, in engineering and project implementation. Obviously, that's the first area we will cut when the activity level will go down. There are also other cost saving initiatives, related to sort of running costs, discretionary costs, et cetera. Overall, those savings measures will amount to EUR 20 million. Large proportion of that one will obviously come from the own personnel reductions. All, you're absolutely right in terms of average cost. However, the sort of qualified engineering cost, of course, in Scandinavia are well above our average costs as well.
Okay. Should I understand that part of the EUR 20 million saving is actually related due to lower volumes? You know, the EUR 20 million is not fixed cost reduction. Part of that is because of simply volumes going lower.
It's usually showing actually in our indirect or a part even in direct lines as well. The EUR 20 million is the overall cost saving. Some of that is again, coming from our own personnel, and some of that is coming from the sort of outsourced or third-party personnel as well.
Okay. Finally, can you just, as a curiosity, indicate what is the average cost per employee in MacGregor in relation to group average?
It's considerably higher because MacGregor has very little of its own production and blue-collar workers. This is a little bit on top of my head, but the average, if you said correct, did I remember you saying about EUR 50k, right?
Yeah. Cargotec average is EUR 58 thousand.
EUR 58 thousand. This is a rough my sort of rough estimate, actually. I looked this while ago, but I can't remember exactly. It's somewhere in around EUR 70 thousand-EUR 80 thousand. That difference is really primarily from the two factors, more expensive locations, for example, Norway, and second, less sort of blue-collar workers because of the MacGregor business model is different.
I see. Thank you.
Thank you.
Thank you very much. There are no further questions from the telephone line. Please continue. There are just 1 question coming through from the line of Jaakko Kero from Nordea. Please ask your question.
Hi. Thanks for taking my question. This is Jan. Just on you used to report on on the MacGregor, you used the word, is the purchase price allocations. I'm just wondering going forward, what should we think and what was, what was the level? It's been like two and a half million a quarter. How does it look from here on and for how long?
roughly EUR 10 to about EUR 10 million per annum. Right, Eeva?
Yeah, for the, so the first five years, that's a good number. It starts to reduce.
Okay. Okay. maybe just, maybe you did it in the beginning, I just didn't catch it. It's just a refresher of what is your CapEx and tax guidance for the year.
On the CapEx side, we will be below depreciation. We had a very slow start in the first quarter, so that's not necessarily any indication of the full year level, but we will be well below depreciation, which approximates some EUR 80 million on an annual level. Then on the tax rate, best indication so early in the year would be to use 30%. We're obviously working to be a bit below that, but at this point of the year, is quite a lot of moving elements still.
Okay, thanks. That was all I had.
Thank you very much. Your next question come from the line of Johan Edvardsson from ABG. Please go ahead.
Yes, hello, guys. Hope you're all well. I have a question on the transaction exposure on the currency. You mentioned EUR 10 million in transaction alone in Hiab. What is the total transaction exposure for the whole group? How is that expected to play out going forward also in 2016?
Well, it's good to understand that the growth in Americas is coming from areas where the supply chain is also in the Americas. As you may remember from our earlier comments, Kalmar has its supply footprints in a better balance in that sense, the sales versus where it is sourced and where it is supplied. The big growth in Kalmar Americas numbers is coming from terminal tractors, which are Kansas assembled product. We're not actually expecting much of a transactional impact in Kalmar as we see it now, or marginal if something. Also in MacGregor, looking at it now, we run a pretty big part of the business in MacGregor in U.S. dollars today.
Obviously we get translation, but transaction not to any significant extent. This sort of up to EUR 10 million impact on Hiab is our assumption based on today's rate of roughly 1.1. Assuming of course, that the sort of no other things move, I would not dare to venture into projecting currencies into 2016. If you know the rates, you tell me.
I was more thinking about, given that you have hedged your H1 exposure in 2015, that you have implied on an impact in 2016, just by using the unhedged rates in the first half, right?
The Hiab comes through earlier in a sense. We have a four-six month hedging period. That's why we're expecting a small benefit already in second quarter, as I said, assuming this current level and then a bigger impact in the second half. If the currency stay on this level, then there's no further impact into 2016. Of course, if you're assuming further changes, then it could be the case. This is based on our current view. There's a lot of moving elements, so it's not very exact science, obviously, to estimate this forward.
Mm. Sure. Thanks. Also, I was just wondering about the cost of EUR 5 million for the EUR 20 million savings. It sounds very attractive in that sense. What does that include, and is there a risk for further costs or, yeah, for achieving those savings?
We're pretty comfortable with that amount. This is almost exclusively related to the compensations for the redundancies.
Okay. Thanks a lot.
Thank you.
Thank you very much. There are no further questions at this time. Please continue.
Thank you, operator. Do we have any more questions from the live audience here in Helsinki? No. Are there any further questions from the people on the phone lines?
No further question at this time. Once again, star one to ask a question. There are no question coming through. Please continue.
Okay, thank you. If there are no more questions, I would like to thank you for all your attention today and wish you good evening. Thank you.
That does conclude our conference call today. Thank you all for participating. You may all disconnect.