Thank you for standing by and Welcome to the Cargotec Corporation Q3 2014 interim report. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. At which time, if you wish to ask a question, you'll need to press star and one on your telephone. I must advise you that this conference is being recorded today, Thursday, October 23, 2014. I'd now like to hand the conference over to your first speaker today, Ms. Paula Liimatta. Please go ahead.
Good afternoon, ladies and gentlemen, welcome to Cargotec conference call on September 2014 report. My name is Paula Liimatta and I'm Head of Investor Relations. We today have a presentation by our CEO, Mika Vehviläinen, and CFO, Eeva Sipilä. After that, we will begin a Q&A session. Let's start with the presentation. Mika, please.
Thank you, Paula. Good afternoon from my behalf as well. I will run through some highlights quickly and then hand over to Eeva. First of all, orders grew YOY by 15% total into EUR 829 million. If you look at them fixed currencies, the orders actually grew even further, 17%. The growth was very much driven by the order growth in MacGregor. Their orders grew 61% YOY. Slight increase in Kalmar and very slight decrease in Hiab, but no material changes in those two. The sales grew by 12% YOY to EUR 840 million. Again, the acquisitions, actually, all of that around EUR 100 million increase the acquisitions in MacGregor constituted about EUR 60 million of that sales increase.
The other roughly EUR 40 million came from the organic or existing businesses. Operating profit improved into EUR 48.4 million compared to EUR 35 million last year or 5.8 percentage points. The cash flow was a delight for me at least. It shows that we are on a track of improving our net working capital utilization and our cash flow improvement that total into EUR 63 million on Q3 although there are still plenty of opportunities for us to improve in this front as well. Also, we announced today a reorganization of MacGregor to drive better effectiveness in the organization. I will come back to that one later in my presentation. Looking overall at the numbers, not much to add on my previous comments.
A good development both in orders as well as the revenues and a 37% improvement in operating profit as well as obviously in the earnings per share as well. The interest bearing net debt is still rather high and above our long-term target of 50%, but is now heading to the right direction with the improvements in the cash flow. With that one, I'd like to hand over to Eeva who will cover the business area and performance bit more in detail.
Good afternoon, ladies and gentlemen, on my behalf as well. Looking first on the group level performance figures. Book-to-bill in the third quarter very even with the sales growth of 12% - 4% organic number and the rest came through acquisitions. Based on the order book we had at the end of June, we were very focused on increasing the delivery speed in Kalmar, and we were happy to see that come through in the third quarter deliveries and contribute to the sales number. Looking on the right-hand side, we have the profitability graph and profitability jump clearly up as was expected after the very disappointing second quarter.
Let's look at the numbers more by business area. First starting with MacGregor. There, the market on the merchant side was characterized as stable. If you look at it YOY, obviously quite high growth. 15% is the organic growth number in orders. 61 if you include the two acquired businesses. Then obviously if you look at it quarter-over-quarter it was down. We consider, as said, the market stable, and this was more related to the lumpiness of the order, or order intake in this business.
However, it's good to note that we do mention in the report specifically that the market outlook has somewhat weakened and the market expectations on when supply and demand will balance in merchant shipping have been delayed due to the weaker economic environment and that obviously reduces the attractiveness of adding new capacity, i.e. buying new ships. We do expect somewhat tougher market in going further. On the offshore side, also a very similar stable situation on the cargo handling side. As we've commented earlier, there is a, in the whole industry, a clear push for improved returns and cash, and that is delaying investments.
The recent dip in the oil price is also obviously additional uncertainty on the, on the market. However, we do feel that in the deep sea segment, support vessel side, where we are mainly active, the increased expectations on production and focus on the returns are actually will support the business environment going further. Sales growth was still very much only due to the two acquisitions. It was actually negative if you look at the organic number, and that obviously is a drag to our margin development as we have said earlier. This quarter, specifically, obviously a disappointment, the 2.9%, even if you add the PPA number, it's of about 100 basis points.
It's still unsatisfactory, very much due to the sort of mix we had in the quarter. Lower than average profitability and, as said, with no support on the volumes at these levels, the mix adds a bit of volatility in one specific quarter. Going at looking at Kalmar, a very, I would say, stable market there as well on the equipment side, healthy in the services side. We clearly see the container throughput numbers, the global growth supporting the replacement and the service business. Geographically, North America has been very strong.
In this industry, actually, which may be a surprise for some of you, Europe is actually also in this healthy category, whereas in Asia, South America are more in the satisfactory part. As said, order intake growth of 4% is very close to the container throughput growth expectation for the year. We are most happy about the profitability improvement, 8% margin, finally an almost clean quarter for the business. That obviously now helps to show the real result level of Kalmar, which has been hidden under the project overruns in the past quarters. We still had an additional EUR 3 million costs in the final project.
This is due to the fact that during this quarter we received new information on the how long it takes for us to be at the site to support the customer. That lengthening goes further into next year than originally planned, and the EUR 3 million is the provision for that expected cost. Overall, profit improvement program is proceeding. The EUR 40 million run rate improvement we have as a target for the end of this year is on track and work continues in on the profitability arena in that sense. Moving to Hiab. Steady profitability here. We've actually had the pleasure of already showing for a couple of quarters a new profitability level.
Despite the seasonal weakness in the third quarter, we're happy obviously to show a continued strength in the margins. As said, YOY comparison orders sales very much flat. You should note if you're comparing quarter-over-quarter, that in the second quarter, we had a very sizable military order that hiked that number up. That's maybe just good to remember. Overall, as said, profitability improvement program is proceeding with as you can now very much see from the numbers, we are ahead of schedule, like we've said already for some time, and we will, we are about to reach the EUR 40 million run rate.
That's, but obviously some still work to be done in under that program. Looking at the group cash flow, this has been obviously a big focus area for us. Post the two acquisitions made, we are very determined to deleverage our balance sheets, and the main medium for that is obviously the cash flow from operations. Still, as our CEO mentioned, a lot of room for improvement on the inventories and accounts receivable side, but what we are seeing progress and traction of the improvement actions we have been working on. That's good to see. Going into the portfolio, no real big changes. I think maybe just to highlight on the right-hand side.
The very strong market situation in North America, that we are benefiting from both in Hiab and Kalmar is also showing, coming a bit through on the group level numbers with an increased share from the Americas continent. I think that pretty much wraps up the numbers and I'll hand the floor back to our CEO.
Thank you, Eeva. A few words on the MacGregor. Before I talk about the specific measures we have taken, I'd like to elaborate maybe on the market situation a bit further. As you know, we have gone from the 2008 boom year into a very low levels until the sort of summer of 2013, where we had a sort of mini boom going in terms of the merchant ship orders. That ship order peak lasted till roughly summer of 2014. If you look at the underlying market, it's good to make the note that the order, they're very much driven by the bulk ships.
The bulk ship orders now have started to come down, and the expectation for the bulk ship market for the next year is lower than it was in 2013 or 2014. However, we have developed a sizable order book in that area. That order book is not yet visible in our revenues. That's good to note again that the cycles are long in this industry. As Eeva was saying, the actual revenue on the organic-Still slightly down on Q3. The order book that we've been developing coming from the Boxships is not yet showing in the revenue.
However, in the container ship, the actually the expectations for the next year are more in the growth or nearly double in the sort of, number of deliveries in there, and also the ship sizes are increasing there. It's still a relatively mixed picture in the overall shipping market in there. We are clearly not happy with the MacGregor results. 2.9% operating profit in this quarter was really caused by a mix of some deliveries that were clearly below satisfied profitability, and as such, don't characterize the result level that we expect in MacGregor over this year either.
However, we are still far away from the profitability levels that MacGregor had enjoyed two years ago, and we need to take measures to drive that profitability level up in these uncertain market conditions. As a result of that one, we are reorganizing in MacGregor. We have set up a new organization consisting of six new product divisions that are actually organized by the customer or ship type. We have also formed a new global single integrated services or Lifecycle Services division as well. We believe that there are upsides actually by organizing this one in terms of our cross-selling capabilities, looking at our portfolio and offering by ship type and by customer type, and thus driving better top-line performance that we have said and so far done with the product-based organization.
Secondly, it's very clear that especially the organic, service business in MacGregor is not at the level in terms of profitability, nor the revenues that this kind of business should be. By organizing into a new global lifecycle support division, we believe that we have good possibilities to drive better services business moving forward. We also see opportunities to exploit and explore synergies more effectively across the different product divisions by investing into the common marketing, sales, sourcing, engineering, and R&D functions that will be also formed as a part of the reorganization. We believe that the new organization will be more effective and enables to do faster decisions closer to our customers and be more business-focused.
We will drive these changes and the improvements through dedicated program structures similar to the program structures that we have already had in place for a while, both in Hiab as well as in Kalmar, where they already are yielding results today. That's on the MacGregor. Then last but not least, no changes in our outlook. We still expect the sales to be growing from last year and the operating profit to exceed last year's level. Thank you very much.
Thank you, Mika. Now we are ready to take your questions. In addition to Mika and Eeva, we have the head of Hiab, Roland Sundén, here in Helsinki to answer your Hiab-related questions. Today, we could start with the questions from the conference call participants. Operator, please.
Thank you. As a reminder, if you wish to ask a question, please press star and 1 on your telephone and wait for your name to be announced. That's star and 1 on your telephone. If you wish to cancel your request, please press the hash key. Your first question today comes from the line of Antti Koskivuori from Danske Bank. Please ask your question.
Yes. Hi, this is Antti. Shipping and MacGregor-related question. We all have seen the fairly, I would say, dramatic weakening of overall ship contracting over the past few months. When will this start to hit MacGregor orders? Yeah, that's my question, please.
Okay. First of all, one needs to maybe look at by ship type. It's absolutely true that when you look at the bulk ship orders, we have seen a clear slowdown in order intake, sort of, from the summer 2014 onwards. As said, we have seen the order intake going up in that we still actually expect further orders in that category, moving forward. If that slowdown continues for that particular segment, I would say that we will probably see a slowdown in order intake in six-nine months from the slowdown of the ship orders.
On the other hand, if you look at the estimates from the analysts like Clarksons, there is an expectation that we actually will see a further growth in the container shipping segment going to next year. If I remember the Clarksons numbers roughly, we expect nearly doubling of the container ship deliveries into 2015 compared to 2014. Many of the companies have actually announced fairly heavy investment programs, and they're really driven by the efficiencies that the larger container ships can drive. Also good to remember that these new ship types are considerably larger than the old ones, so the order and delivery size per ship will be also growing. In the offshore side, there is a certain uncertainty related to oil prices and the increase in cost in offshore.
However, we actually see a fairly stable market activity there at the moment. It's good to note that our sweet spot is the deeper sea exploration and production. That's still expected to grow at a much faster rate than the overall offshore segment as such.
It's kind of, well, you know, I mean, I just, you know, the numbers are down sort of like 70% YOY all ship types combined. You know, I'm surprised to hear that you don't see much impact on cargo. Like can you remain fairly confident and positive about MacGregor business?
As I said, this is a question of cycles. It's very clear that when the bulk ship orders are now, the ship orders are going down, that will start to hit our order numbers for that equipment that goes for the bulk ships. It's primarily cranes from our side and then the hatch covers. That slowdown will be visible in our order intake in that segment then into six-nine months. At the same time, the expected increase in container ship is probably going to increase our order intake in the container lashing systems again. A mixed bag and then you combine that one with the sort of length of the cycle and how the revenues are lying up.
The impact of this one will be more prolonged and hard to see. Again, good to remember that even though we saw a very hard peak in the ship orders on the sort of mid-2013 to mid-2014, our revenues are still organically down Q3 2014, just showing how long the cycles are in this industry. The shipyard capacity has gone down during the hard times in the last few years. That has also meant that the existing shipyards are now actually some of capacity constrained, and that will also further lengthen the cycle. Which is from our point of view, not necessarily a bad thing because it also smoothens some of the impacts of these ones.
Okay, thank you. Another question. fourth quarter margin for MacGregor, is it Will it be, you know, same magnitude as in third quarter, or should it be somewhat, better?
As I said, the number in the Q3 is not reflecting the profitability level we see in the business. It was a combination of some of the deliveries that we took also provisions against. We have guided the MacGregor profit margin to be down from the last year, and our view on that has changed. The 2.9%, you should not take the 2.9% as an indication there we are landing either.
The Q4 shouldn't include any of these, bad deliveries that you had in Q3?
No, it should not.
Okay. Final question on Hiab. We saw the profit warning from Palfinger a few weeks ago, citing weaker demand in Europe. What would you comment, how do you see the situation?
Actually, when I look at the overall Hiab market, my views have not changed from the previous quarter. It's a market there. The US demand is quite strong, and the European demand has been fairly flat. Actually, I'd like to hand over maybe to Roland Sundén, who started as a president of Hiab in May, and he can talk a bit more in detail about how we see the market situation at the moment.
Yes, thank you.
Overall, we see Europe market being flat, maybe somewhat softer, and with a little bit more uncertainty in it. If I speak for Hiab, I'm quite impressed of the resilient order intake and sales we are performing as we speak. Europe is big. In some countries, like in certain Scandinavia countries, if I exclude Finland, it's doing well. We are doing well also in the Western Europe. A bit soft in the Central Europe. As you know, Southern Europe has gone through a very, very big downsize since the financial crisis. We see some signs of picking up from a very, very low level.
I guess the concern is that this weakness started to hit in September, i.e., late in the third quarter. Now the question is: How does Q4 demand look like in Europe?
Yeah. I would say overall, when I look at the market, as Roland was saying, it's fairly stable in Europe. Even if I look at order inflow in October at the moment, we don't see any changes in the overall market situation.
Okay, thank you.
Thank you. Your next question comes from the line of . Please ask your question.
Yeah, hi, this is Johan. Just following on this Hiab thing. Do you think you're taking market shares currently in Europe?
Roland?
It's. Market share in Europe is hard to talk about because there, as you know, there is very few countries where it's official statistics. I'm positive. I think we certainly defend our market positions, and in some markets we are gaining.
One of the,
Sorry, if I can continue on that one. Is our focus very much has been throughout the year on the improving our profit margins. We've been pretty hard in terms of pricing. We certainly are not proactively looking for market share. Our priority very much has been on the, on the margin and profitability at the moment.
Okay, great. You haven't given away anything from these cost savings in Hiab, you would say?
No. On the contrary, I think we have had a fairly good price realization. We have introduced a much more strict price management tools and so forth. We, like our CEO was saying, is that we are really focusing on the bottom line and not pushing on the top line and end up with a lot of inventory sitting out there that we have to discount later on.
Great. A question on MacGregor and this reorganization you're launching now. Is this a sort of more dynamic effect you're expecting to sort of adjust to the market situation? Or can you give any numbers on what sort of is EBIT improvement you would be expecting from this going forward?
We probably come back in terms of the impact on the MacGregor in connection of the Capital Markets Day in November. This is not about efficiency. The reorganization as such is not aiming to reduce the cost. MacGregor actually is generally speaking fairly and a highly efficient organization. This is more about the effectiveness. I see that we can better leverage the synergies between the product divisions and ship types by reorganizing different ways, driving better cross sales, a larger sales by ship types, having more effective services organization, and then taking some of the synergies better into consideration in R&D engineering and sourcing across the divisions.
Okay, great. Finally reverting to your ongoing programs in Kalmar and Hiab. Are you now satisfied with the manufacturing setup and the cost structures you do have in these two manufacturing divisions?
I think one can never be fully satisfied with the cost structures and manufacturing setup. One big step of course has been taken with the rundown of the Swedish production facility for Hiab and effectively, I believe Rolando Loader Cranes is coming to the end of the production this month in Sweden. Then the Polish factory has been now ramping up. Obviously we are continuously reevaluating our current product production footprint and looking for further efficiencies as well.
Nothing you have decided on yet?
Nothing that we have decided yet, no.
Okay. Many thanks.
Thank you. Your next question comes from the line of Simon Sigvardsson from DNB. Please ask your question.
Yes. Hi, it's Simon here from DNB. I had a question on Kalmar, where you have said before that you maybe saw a risk of late penalty costs coming in. I was just wondering how that is developing and, yeah, the discussions with the customers.
No changes on that one. I think what we have said at the moment that, if we have made provisions against those late delivery penalties and if there would be any surprises, those surprises would be at the maximum at the sort of EURO single digit million level, and that situation still remains the same.
Okay. That's great. In MacGregor, are you able to quantify how much in EUR terms, these deliveries, have big negative effect that was in the quarter?
No, we have not to go into that detail.
Okay. Was it execution related issues or was it completely mix related issue that there was a specific segment that had more deliveries or something like that?
I think there were certain specific deliveries and contracts that were executed. Of course, the times have been hard and some of the estimates were probably not as accurate as they should have been. We have now, whilst I took over the MacGregor, we have of course reevaluated the business and sort of gone through the existing order backlog and the deals in there and this came as a result of those reviews.
All right. On the integration in MacGregor of Hatlapa and Pusnes, how is that developing and did these businesses contribute positively or do they have a loss in, in the quarter?
No loss. If I start with the Pusnes side, it's actually developing pretty much according to our business plans, and it's the profitability level is satisfactory. Pretty much in line what you have seen that being as a part of the Aker business earlier. In the Hatlapa side, the merchant marine side has been, I would say somewhat disappointing, not because of the performance itself, but because of the cycles in there. The offshore part of the Hatlapa that was acquired also is actually doing well with the very strong order intake. In terms of the actually synergy realization, we are on or ahead of the target in terms of synergistic orders that we've been able to book from the business and cross-sell opportunities.
We are also ahead of the target in terms of the procurement, saving realization and material cost. Again, because of the cycle time, for example, these savings in the material costs, are not gonna be visible in this year's EBITDA, as the deliveries will only take place in the coming years.
All right. A final question on the cash flow and balance sheet. What exactly you're doing and what kind of actions relate to the cash flow? What your target is for the net gearing end of this year and also going into next year?
Just maybe I start with the target. We have said our target is to be actually below 50% in the gearing and also that we would expect to reach that target by the end of the next year. That's still the case. Lot of hard work going in there. Primary focus is in the frontline inventories. There we still have room for improvement, but we are working hard on that one. Accounts receivables with our customers is another key area of focus. We have, for example, running weekly cash calls with all of our sales companies and sales forces to sort of make sure that we are on top of that one. The large projects we have had in the Kalmar have also tied into networking capital.
As I said, I'm satisfied with the number, but there is still a lot of opportunities there to drive for the reduction in our networking capital.
Okay. Thank you very much.
Thank you. Your next question comes from the line of Jürgen Seebach from HSBC. Please ask your question.
Good afternoon. A question on Kalmar and Hiab. You had a good margin here in Q3 in both divisions. To what extent mix has helped potentially in this regard? Another question on Kalmar. You mentioned here the container throughput. From that side, you seem to be relatively positive. Is there any help or support for port investments, especially in the USA from canal extensions? Could you elaborate on that issue also? Thank you.
If I start with Kalmar. Actually the container throughput activities are at a healthy level. The forecast is also around 5% with more than 5.6%, if I remember correctly, growth in there. We actually see a healthy level and activity in Europe as well at the moment. Many of the container ports, even in Southern Europe, like in Italy, actually, there is a decent growth in the container traffic at the moment. Overall, I would say the activity in the ports in terms of the, not just the operational activity, but in terms of inquiries and investment preparations has continued on a good level. On that one, the US also doing well in there. Some of that is visible of course or having as a result of that.
Generally, I would say almost a bigger driver for us in US is the replacement cycle of the equipment now that we see causing a healthy demand for us. In there, Asia Pacific demand is satisfactory, so it's not growing at the rate that it used to be in the past, but it's fairly stable at the moment. In terms of the profit margin. Sorry, you were breaking up during the question. Will you mind repeating that one?
Yes. On Kalmar and Hiab, the margin development, to what extent, mix, for example, or other things than more efficiency have been drivers behind the development in those two divisions?
If I start with Kalmar and Roland can then take the Hiab question. The mix actually on overall level is not helping us there. Actually, it's more a question of bottom up improvements in all product areas across the board. If I look at the mobile equipment, which together with the services is almost 6 or roughly 60% of the Kalmar revenue. The gross margin mix actually has been negative in a sense that, for example, the terminal tractor demand in US has been particularly strong where the margins are somewhat lower and then in some of the other mobile equipment higher. In each product category, when you look them one by one, we have been able to drive the improvements in terms of procurement savings Design to Cost and operational efficiencies and manufacturing setup.
It's not really coming from the mix, it's more coming from actually improvements on each single product line, per se. Roland, if you don't mind commenting on the Hiab side.
Yeah. Hiab is fairly straightforward to explain too. It's certainly to focus our offering to profitable products and have a good mix and focusing on the profitable segments out in the markets. In particular, it's also to be better on price management. We have increased prices for many of our products, including also on the service side. That have contributed well. We have done a great job on procurement cost reductions and Design to Cost efforts. Those are the basic areas, classical profit improvement kind of activities and areas.
Okay, thank you.
Thank you. As a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. That's star and one on your telephone. If you wish to cancel your request, please press the hash key. Your next question comes from the line of Elina Riutta from Evli Bank. Please ask your question.
Yes, hello, this is Elina Riutta from Evli Bank. A question on MacGregor profitability first. Is this a question of projects taken in weak market conditions being de-delivered now or are you seeing cost overruns on projects?
I would say overall, if you look at the profit margin on MacGregor this year, which are down from last year, it's primarily a factor of still low volumes. Again, one needs to remember that we are still going downhill in organic growth. The 2013 deliveries were down from 2012, and the 2014 deliveries are down from 2013. The volume is impacting that one. You're absolutely right, of course, also that the deliveries that take place today have been taken at very tough market conditions. That's certainly one impact.
Particularly deep in the profitability in the Q3 was of course result of the performance plus then two unfortunate deals and deliveries where there was sort of as I said, unsatisfactory profit margin especially related to those ones. They are not representing sort of the typical level we are on at the moment.
Okay, thank you. You don't see a risk of kind of escalating costs in any of the projects that are now being delivered?
I mean, obviously the MacGregor usually deliveries or projects. Most of the MacGregor deliveries are actually single deliveries. The project accounting is generally not having a big share of the MacGregor part, and they tend to be much more in size and shorter in time limitations compared to the sort of, for example, the large projects you do in Kalmar side. Effectively a system delivery rather than project deliveries.
Okay, thank you. One more question on Hiab. How much double costs are you still incurring because of the moves in production?
This year, of course, we have seen a double cost. We've been running now effectively two factories in parallel and there are two factors in here. There are obviously factory overheads where we are effectively going to have 0 costs on the Swedish factory next year. The other issue, of course, is that the hourly manufacturing costs are obviously clearly lower in Poland than they have been in Sweden. We are not yet hitting those numbers that we aim for in Poland. They are of course already much better than we would be able to ever achieve in Sweden because of the lower cost base. There is a learning curve in ramping up the factory. Overall, that impact roughly would be estimated to be in the neighborhood of, I think, EUR five million for the year.
Okay, thank you.
Thank you. Your next question comes from the line of Johanna Lissåker from Kepler Cheuvreux. Please ask your question.
Yeah, hi again. Just to follow up, I was wondering if you could say anything on how much remains of these, projects in your backlog after this quarter in Kalmar.
About EUR 20 million.
You only delivered 10 in the quarter, roughly?
I mean, effectively most of these projects are now towards the end, so you have this kind of typical tails being there. As Eeva was already saying earlier, some of the customers have decided to sort of delay the opening of the terminals, which means that our people need to be on site to support that one. As the, kind of the, construction processes are start to be over, the costs related to these ones are considerably smaller. You have a lot less people on site, and they just need to be maintaining and ensuring some of the integration and final assembly kind of things. The three million cost was, again, it was not a cost overrun.
It was a provision for the cost by the fact that we now take a view that people need to be on site longer than we originally estimated.
Yeah. These EUR 10 million, they were actually delivered on sort of a 0 profitability now, as you have already taken the related charges to them previously?
Absolutely, yes.
Yeah. Great. Thank you.
Thank you. Your next question comes from the line of Tom Skogman from SHB. Please ask your question.
Yes. Hi. Looking at the order book in MacGregor, you of course get a bit fooled by the acquisitions, but the reported number is up 48% YOY. Perhaps you could help to tell how much it's up organically or you know, when you compare apples to apples. Then on the back of ship orders already placed, I know that you earlier have said that you're confident you will show sales growth in 2015, also that the outlook for 2016 is very promising. Could you kind of, you know, update what your stance is on this?
Sorry, we have some problem in the line. Would you mind, sorry about that one. There's, for some reason, I think the problem is in this end. You were breaking up.
Right. What I want to know is the order book, how much is up when you compare apples to apples in MacGregor YOY ? Also on the back of ship orders already placed, you can probably be very confident to show sales growth in MacGregor next year, but it's a bit hard to understand with these long lead times what the outlook is for 2016. Could you update there just on how it looks based on what you know today?
Yeah. Okay. You know, first of all, not that easy math. There are many variables on that one. If I look first of all, again, the orders, they are up 64%, if I now remember correctly. The organic order growth was 15%. Eeva, did I get it right? Yeah. Thank you. I did. 15% up, and the other part was coming then from the acquisition. How this is then going to lay out on the 2016, as I said, the order peak in ship orders that we saw from 2013 to 2014 is still probably going to be visible in our orders also going to the next year.
If the things will remain the same, that would mean that bulk ship-related orders would go down on then moving into the 2016. If the market doesn't recover in there, the expected growth in the container ships in next year would mean that there would be some orders booked into the container ship-related equipment deliveries in 2015 and further orders booked on that ship type on 2016. Again, this is a sort of if you, if I put some rules of thumb view, one would expect from the ship order into our equipment order a 6 to 9 months sort of timeline and then another six to nine months into the deliveries in that one. One sort of 12 to 18 months from the ship order into the revenue recognition from our point of view.
This has been slightly longer cycles actually this time around, which is of course visible in our revenue as well as I said, as the shipyard capacity actually has gone down compared to the situation couple of years ago. That has led to the sort of capacity constraints in there, and that's pushing back the cycle somewhat.
Does this mean for MacGregor that you see sales growth in 2016, even if ship orders remain at the current low level?
I think First of all, I would say that with the current order backlog, one would expect the revenue growth on 2015. The 2016 revenue growth is still partly depending what will happen in the first half of 2015 as well. I wouldn't sort of go and hazard a guess on the 2016 revenue level at this stage.
Okay. Thank you.
Thank you. As a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. That's star and one on your telephone. Your next question comes from the line of Johan Edvardsson from ABG. Please ask your question.
Yeah. Hi. I've just got a question on the cost saving progression in next year. How should we think about that? You said that EUR 20 million this year, roughly per business area and EUR 20 million next year. Where are we at the current, run rate? How much should we think in a year-on-year comparison in the second half of next year?
That is exactly the EUR 40 million run rate improvement. What we have also said is that we are ahead of that curve in Hiab. Hence we would expect to arrive there faster. In regarding in Kalmar, we are actually on exactly on target regarding that one. This, the sort of start will be now first time visible because the project cost overlap in sort of mask the underlying improvements that we actually see happening in Kalmar.
How should I think then? I guess it's not the full EUR 40 million profit improvement year-on-year next year then, but closer to EUR 30 perhaps. Still in Kalmar, that would imply 10% margins in the second half or something like that. Is that your target?
I think in connection with Capital Markets Days, we'll of course come back more into the targets and potentially also a little bit longer-term targets. Generally the guidance for the year is given in connection of the annual results, so early part of the next year.
Okay. The 8.8% that you get when adjusting for this extra EUR 3 million in Kalmar this quarter, that's going to increase from your point of view?
I think the quarter number you saw was a sort of first cleanest quarter you've seen for a while for Kalmar. I mean, as such an indication of the profitability level that the underlying business has.
Okay. How much is that impacted by the mix of mobile equipment being much higher today than one year ago, for example?
Obviously, the underlying mix helps in terms that you had less project deliveries and less project cost overruns in there as well. Certainly that helps on its part as well. Really, when we look at that profitability improvement, we are again trying to look at that from the neutral point of view in terms of the top line. We are not counting on any specific improvements in the mix or volumes whilst driving that one.
Okay. Just finally on MacGregor. I mean, if adjusting for these special issues that you had this quarter, where would you say the current run rate margin is for MacGregor?
Well, we haven't said anything other than as I said, we will be lower than last year. Well, that should be pretty obvious by now, looking at the first three quarters. I think the second quarter is more probably representative of the roughly of the levels we are seeing now than the third quarter certainly was.
Okay. I assume that with some sale growth next year, you would expect margins to improve still in MacGregor.
The dynamic should of course play in that way that, unbarred, considerable delays in deliveries. The order backlog is such that one would expect that to drive the volume increase for next year, because again, we've been going down organically even this year. With the improved volumes, one would expect to have a slight, or improvement in the margin then.
Mm-hmm.
Again, the challenge in the MacGregor is that when I talk about the improvements coming through the reorganization and some of these ones, especially in the product businesses, the time lag on realizing those are of course considerable. If I am able to drive down the Design to Cost initiatives, say, during next year, they will not be visible until the deliveries hit the radar in 2015 or 2016. Again, one of the improvement areas for us certainly moving forward is, as in any part of really Cargotec, is the services business. One will of course, services in a better business in that sense that the cycles are shorter and there you can actually drive improvements faster.
Yeah. Just, if you look at the mix, it sounds like even the outlook, that will continue to be a burden with offshore increasing perhaps even more as a share of revenues and deliveries going forward. Is that correct or?
That, that was a good point that we did not mention. The, the current situation is that offshore is not dragging down the results anymore. We see our offshore profitability now starting to exceed our profitability in merchant marine. We've been getting the required scale in offshore. We've been able to leverage some of the operational capabilities we had in the merchant side into the offshore side. Now, for example, our deep sea crane production is now in our joint venture in China, and that's a competitive factor for us. The merchant marine are now clearly suffering from the low volume and the pricing pressures, whereas the offshore situation has been somewhat different. At this stage and moving forward, I would actually expect the offshore business to be more profitable than the merchant marine business. Yes.
Okay, thanks a lot.
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