Thank you for standing by, welcome to the Cargotec Corp. Q2 2014 Interim Report Conference Call. 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 will need to press star and one on your telephone. I must advise you that this conference is being recorded today on Friday, the 18th of July, 2014. I would now like to hand the conference over to your speaker today, Paula Liimatta. Please go ahead.
Hello, and good afternoon, ladies and gentlemen. Welcome to Cargotec's January to June 2014 conference call. My name is Paula Liimatta, and I'm head of investor relations. Today, we have a small 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. Mika, please.
Good afternoon from my behalf as well. Thank you for joining us on the beautiful sunny day here in Helsinki. I will go first through the highlights shortly, then let Eeva to go through the business area performances and more in detail as well. First of all, on highlights, we were extremely pleased with the strong order intake we had in the second quarter, also pleased for the fact that that order intake was actually across all three business areas. The orders grew 19% in MacGregor, although very much driven by the acquisitions. In Kalmar 15% and in Hiab 26% order intake. Actually, within the fixed exchange rates to order, growth would have been even higher at 24 percentage points. Sales declined. With fixed currencies, the sales would have been flat.
The sales decline was primarily driven by the declining Kalmar sales. The Hiab sales on year-on-year they are flat, as well as the MacGregor relatively flat. I think in MacGregor it's still very visible that we are still bottoming out from the previous downturn on the shipping and our organic sales were still, especially merchant, very, very low during the Q2. Obviously, we expect order intake that is coming in strongly to sort of change that situation in the coming quarters and years as well. Operating profit it was very clearly very disappointing for us and obviously primarily driven by the big project losses and cost overruns recorded in Kalmar. Without that we would have seen that more clear improvement across the different businesses.
The operating profit excluding the restructuring charges for the landed at EUR 4.7 million or 0.6% of the sales. Cash flow from operations increased to EUR 24 million. That large project loss in Kalmar was also of course mostly cash related as well. Taking into account, I'm fairly pleased with the progress we are able to make in the cash flow considering the overall situation. We also came out with a separate release today announcing that we are reversing the decision to list MacGregor separately, simply saying the drivers that were in place in 2012 when the plan for the listing was announced are not there anymore.
We have actually executed the primary acquisition targets we already had in mind at that time, both Hatlapa and Pusnes, have built a strong platform for growth. From the cycle point of view as well, so from the management bandwidth point of view, considering the need to integrate and build the MacGregor growth platform for the future, the drivers for the listing are simply not there at this stage. January, June figures, we will be looking these in a moment in more detail. Again, good growth in order intake. Growth obviously in order book with the book-to-bill being positive. Then a decline driven almost exclusively by the Kalmar project losses, declining to EUR 4.7 million, cash flow recovered.
Also worthwhile of course note, to note that our interest in bearing net debt increased to EUR 847 is clearly not within the range we planned that to be, and the plan obviously is that with the increased profitability and improved cash flow during the second half, we will plan to drive down the gearing and the net debt in the second half of the year as well. Obviously driven by the Kalmar project losses, the EPS was negative in the quarter as well. With that one, I'd like to hand over to Eeva who will cover the overall performance trends and then the business areas more in detail as well.
Thank you, Mika, and good afternoon to everyone on my behalf as well. This picture illustrates quite well on the graph on the left-hand side the fact that we're continuing to have a good book-to-bill ratio in the business, and that's obviously helpful going forward. We're now in a situation that our order book is some EUR 300 million up from the beginning of the year. The graph on the right-hand side is obviously unsatisfactory and reflects the EUR 39 million booked in Kalmar. Just for the sake of clarity, we have really treated that the Kalmar project losses throughout the past couple of years as operative issues, so we do not exclude them in our reporting.
The only thing that is excluded is the restructuring costs related to the footprint changes we have ongoing in Hiab, which we have discussed already last year. Going then into the business areas more in detail because I think this overall number hides a few items worth certainly pointing out to you today. Starting with MacGregor, as our CEO already mentioned, both on the order intake and sales level, the contribution of the acquisition is very visible. We are still coming from a sort of coming very slowly due to the length of the cycle in this business, very slowly starting to see the organic sales to come through from the sizable order book.
That is something we expect to be more visible during the second half. It's a bit of a mixed market, many reasons for optimism, but certainly there's on the short term, there are also the demand supply imbalance as well as on the offshore side, clearly increased focus on returns on capital, which are slowing down investment decisions as customers obviously do more work and before going ahead with their investment plans. Profitability, it was 5.7% for the quarter.
If you strip out the PPA, which is the acquisition related cost that will be with us for the coming years, the percentage was 6.6%. This is in line with the improvement. It was 5.9%, the same number in the first quarter, and that is in line with the improvement we have been saying. Actually, considering that there was no organic sales contribution, this does illustrate that our mix is improving and meaning that our offshore profitability is catching up on the merchant side. That's obviously positive going ahead.
Turning then into Kalmar, we are pleased with the order intake, especially as this order intake comes very much from the traditional Kalmar business, i.e., no big projects included in this number. Very much terminal tractors, forklifts, spreaders, behind this number. Actually, coming, looking at the geographic spread, we were continue to be slightly disappointed with the Asian contribution. We had higher expectations in the beginning of the year for order intake in Asia, but there is still clear hesitancy among customers. The Americas and they are really standing behind this positive order intake development. Sales were clearly down from a year ago.
Last year, the same quarter was actually very busy from a big project revenue recognition point of view, and that contribution is obviously at these stages when we are working on the final project. Revenue-wise, there is very little contribution. Unfortunately, the cost overruns are at the same time more than visible. Excluding the EUR 39 million, profitability was 6%. Again, showing that the rest of the businesses are improving. We have worked ahead on the profit improvement program, certainly. We are confident that we will make it, and we are on track as we also mentioned roughly a month ago.
Into Hiab, actually a surprisingly high order intake number considering the market situation hasn't really changed. This is still very European dependent, but we had very good success in the defense orders. Big order from Australia and also a smaller important order from Finland. That EUR 46 million altogether obviously explains a lot of the order intake growth. When looking at this year's sales, it's good to bear in mind, as we said in both of those press releases, that there will be no sales contribution from these defense orders this year. Underlying that is actually our sales for the quarter, which were flat year-on-year.
That we have a similar expectation for the full year, looking at the sort of the truck and construction market outlook still in the short term in Europe. Profitability continuing to pick up, obviously very pleased about that development. We are seeing really the progress on the profit improvement actions initiated partly last year, intensified earlier this year. If one wants to sort of identify the main topics, even if it's as discussed earlier, this is really a wide range of activities ongoing throughout Hiab, and it really covers the whole Hiab team. One could nevertheless note the price realization, product costs, and overall lower operating expenses as the main positive reasons for this development.
As said already three months ago, we are ahead of schedule in the EUR 40 million run rate improvement program, and we do expect to be ahead of schedule and hence, the run rate we will achieve during the fall, and not the year-end as was the original plan. That may be on the business areas going into cash flow. As our CEO already mentioned, this, we consider the number satisfactory, certainly considering the Kalmar project losses which had a negative impact on this. Which meant that our net debt at the end of June is higher than we had planned or hoped.
Work on this area continues, if anything, with more focus due to this. We have a wide area, wide array of actions ongoing in specific key net working capital area to improve on this during the second half. Looking at the pie charts on the portfolio of Cargotec. Maybe the only visible change is really that acquisitions made in MacGregor, which have increased the relative share of MacGregor in the Cargotec portfolio. As well as due to their location and of their main sales main customers, the share of Europe has also risen a bit in the pie chart. I think that covers maybe the main highlights on the numbers.
I give it back to our CEO.
Thank you, Eeva. Regarding our market or outlook for the year 2014, that remains unchanged. We still expect the sales to grow from 2013. We also expect the operating profit excluding restructuring costs for this year to be higher or improving from the last year. Regarding our strategic focus, that remains unchanged. We have communicated these five areas in the past. The turning Hiab's high business potential into profitability, as can be seen from the numbers. That plan is clearly tracking, and we are actually ahead of the schedule in terms of the profit improvement in the Hiab's operation. Building MacGregor growth platform with the successful integration of the acquisitions. We are clearly seeing now the number of synergistic orders or cross-selling possibilities coming through in our numbers.
Not only are the acquired companies performing well in terms of the order intake. We are also seeing the order intake improving through the cross-selling possibilities that we are now realizing between the different entities. Ensuring Kalmar's competitiveness and profitability in mobile equipment. Again, we are satisfied with the progress in there. Although, of course, the high project losses are now masking the improvements we are doing in Kalmar. The program itself and profit improvements related to that are progressing well within the Kalmar as well. Profitable future growth in services and in Kalmar especially and MacGregor. This is clearly a future upside for us. I would say that here, the improvements will not be visible for some time. Improving our operational excellence and profitability in services both in Kalmar and MacGregor is having an attention at the moment.
Quite a lot of work ahead of us, and the results will be expected at a little bit later stage. Last but not least, building Kalmar as a sustainable leader in container handling automation. We still see a lot of interest in the container handling automation. Number of the important projects that have been actually engaged in the last two years or so are actually now becoming operational into commercial use. The London Gateway is in commercial use. The Brisbane Terminal was opened a while ago, with the customer clearly communicating significant financial benefits coming through the automation. We expect Port of Los Angeles becoming operational in the fall, late summer as well, et cetera.
We start to see quite a lot of proof points coming through with both in terms of greenfield operation as well as so-called brownfield automation operations, i.e., turning existing port facilities into automated ports. Are quite excited about the long-term growth potential in the automation business as well. With that one, I'd like to thank you for the attention. I think we open for Q&A.
Thank you, Mika and Eva. Ladies and gentlemen, we are now ready for your questions. Let's start with the questions here in Helsinki. Anyone? No? Operator, we can take questions from the conference call participants.
Thank you. If you wish to like, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. That is star and one if you wish to re-. Your first question comes from the line from Juergen Siebrecht. Please ask your question.
Yes. Good afternoon. First question on Kalmar. Last time you were a bit cautious on the demand outlook, now you have generated quite a good order intake in Q2, and you sound quite optimistic. Could you update here on your expectations regarding investment activity of the ports? Also, on Kalmar, how confident are you that we have seen all cost overruns now with Q2? What makes you confident in this regard? Maybe on the marine cycle, could you also update here what your view is? Maybe also split by the merchant and the offshore side. Lastly, maybe on load handling, I mean, you're doing good margin progress here in that business. At the moment it's more flattish, you say, on the top line.
How large you would see here the operating leverage if at some point markets would grow again? Thanks.
Thank you. Go ahead.
It's Paula here. I forgot to mention that we also have Head of Kalmar, Olli Isotalo here to answer your question. Let's start with the Kalmar-related question. Olli, please.
Okay, thank you, Paula. The first question related to Kalmar was our order intake. Really the last month, the order intake in mobile equipment as Mika earlier mentioned here, has been positive, and especially in the North America, in the same segment. In North America, I think it's a combination, a healthy market and our own internal actions, basically why we are a bit more optimistic over there in mobile equipments. We also see the activity ongoing, even though as mentioned here earlier, we have not booked any big automation orders recently, but we see the activity in that front, which is increasing and some very concrete discussions also ongoing. What was the second part of-
The cost of runs, yeah. Mm-hmm.
Surprisingly. Yes. What is our confidence level of that we have seen now all? Well, this is obviously a question that I have been answering before. Of course, the order backlog in the existing, let's say the old, so-called old, order backlog, is getting very small. I think it's something like around EUR 30 million at the moment. That is one of the reasons. The second reason is that, after all the investments to project management, processes, tools, Project ERP, and so forth, that I believe we have quite successfully been implementing in most of the projects. We have also not had this one big one where we failed. It does not change the fact that we are confident that we were able to do that in the other projects quite well.
Now even this big one, it's included and annual controls are in place. It's have been quite a comprehensive study related to this one. As you can understand, after this type of a surprise, a lot of changes in the management and many temporary measures also in place to ensure the awareness.
Okay.
I think we have now obviously gone through all the remaining projects and our level of confidence of having further surprises is not having further surprises is high on that line. As Olli said, quite satisfied, especially with the North American market. Europe also doing quite well and you probably have seen the actually the world container traffic forecast to pick up again, driven by the outlook on the global trade as well. Asia being the weak spot at the moment or soft spot in terms of the activity level being lower, but still good. Also very pleased that in terms of the mix, actually, the orders are coming now from the businesses that we traditionally have enjoyed good margins as well.
In terms of the other things you had to question about the MacGregor and the both merchant and offshore. First, it's good to remind ourselves that we are dealing with the business with extremely long cycle. The big order uptake that started to be visible in the merchant marine in 2013 is still not showing in our numbers. Organically, our merchant marine sales are still bottoming out. Our Q1 and Q2 were still very low. We obviously expect that order intake that we have started to book actually from the Q1, 2013 to gradually start to be visible in also in our revenue numbers. With the increase in volume, we expect, of course, the increasing margins coming through as well. It'll take a while.
Now in terms of the actual order intake outlook, the June was softer month in merchant marine. Generally, as Eva already said, the end market orders or the actual merchant marine market has had a situation of unbalance for quite a while. Even though the scrapping at the moment is at all-time high, there are still more volume or more sort of capacity coming that the market is actually requiring. The end market continues to be soft and that's visible in the charter rates as well. It's quite difficult to see where that's going at the moment, but generally, there is a feeling of softness in the, in the merchant marine at the moment.
Again, from MacGregor's point of view, we are still not actually seeing even the order peak that we've been now dealing with for the last six quarters or so being visible in the numbers. That will probably only start to happen more visibly in the next year. In terms of the offshore, even though there are sort of doubts about the overall offshore market, it's good to remember that especially the deep sea still has a high level of activity. Clearly, the current offshore production wells are sort of diminishing in terms of their capability and capacity, and people are looking for new sources. The deep sea is still from cost point of view, a competitive alternative.
Proportionally, our share of revenue comes much more from the deep sea, where the mooring capabilities, where you need floating platforms, and then the seabed production that requires a lot of lifting capabilities are. Within the subsegment, we especially are dealing with in the offshore, we still see a strong demand continuing on that front. We are not particularly worried about the offshore situation. We have seen strong in order intake coming through last year and this year. We expect the market to remain relatively strong in the future there as well. The last question was around the Hiab and we've seen good markets. Actually, we had a record year in North America last year.
We have seen a strong demand, especially in products like truck-mounted forklifts in North American market this year, driven by the new truck sales, driven by the replacement cycle with some of the large distribution chains, for example, and by the construction industry activities in North America. Europe, I think, is fairly flat, still a mixed picture. The only market I would actually say that we have seen a clear upturn is U.K., where the construction activity is picking up and that starts to be visible in our order intake as well. Overall, still sort of mixed, fairly flattish picture in terms of the Europe. Obviously looking at the truck sales indicators and what's reported in there as well, there are no clear sort of uptake visible in that market as well.
Our expectation regarding Hiab revenues, as Eeva was already saying, is fairly flat for the year.
Okay, if markets would grow and volume would grow, would you have a considerable operating leverage in that business, or would you judge this rather low?
There is obviously an operating leverage in there because a lot of the sales and marketing in our case is fixed costs as we are operating proportionally quite a lot of our sales companies in there. Obviously, we are doing our own assembly. We are not that integrated downstream, so the operating leverage there is somewhat lower. Obviously the volume would certainly help in terms of margin. Our profit improvement target for the EUR 40 million run rate is based on the assumption of the flat revenue.
Okay, thanks.
Your next question comes from the line from Elina Riutta. Please ask the question.
Yes. Hello. Can you hear me? Okay. I have two questions on MacGregor. First of all, how much of sales in Q2 came from offshore?
We haven't given a specific revenues there, but it's been an increase in proportion, and I would say in the neighborhood of about 30, 40 percentage points in there. The improvement in the margins, as Eeva was already saying, actually is not coming from the merchant marine, where we are still having the low volumes throughout the Q2, but we clearly are now seeing an improvement in our offshore margins, and that's explaining the sequential improvement in the margins in MacGregor.
Okay. Can you talk a bit about where the improvement in margins is coming from now in offshore?
It's a number of factors. We are now, as the plan has been along, deleveraging some of the supply chain benefits that we've been able to do in the merchant side, in the offshore side as well. For example, in our offshore cranes, we have moved the production from the European production facilities into our joint venture in China, and we are able to get the better cost base in our supply chain. Obviously, partly the offshore margin is improved by the improved mix of the Business acquisition, or as we call it now internally, MLS, has a better margin mix than the traditional or the older offshore businesses in MacGregor. Both improvement in the existing businesses plus additional better margin coming from the Aker Pusnes acquisition.
Okay, thank you. Still on MacGregor, the change in management that you announced over the summer, do you expect that to have any impact on the integration of the acquired businesses into MacGregor and the extraction of synergies?
No, we don't. The change was driven by personal reasons of Eric Nielsen. It had nothing to do with our financial performance, nor numbers. The integration program is actually progressing very well. We are tracking it very closely, and we are very happy to start to see the, especially the cross and top-line synergies starting to come through. Again, the long cycle, of course, means that the synergies coming from the supply chain leverage and procurement and others will only be visible when once we start to deliver the equipment. We are hitting our targets, so, quite well in terms of top-line synergies and with the cross-selling opportunities now.
Okay, good. Thank you.
Thank you.
Your next question comes from the line from Pekka Spolander. Please ask this question.
Hi, this is Pekka Spolander from Pohjola Bank. I have a question about Hiab margin. Typically, it has been stronger during the second half. We have seen quite a clear seasonal pattern during the year. Now we have two very strong quarters behind in the first half of the year. Do we expect that we will see this normal pattern again this year, which would raise the margin quite clearly from last year's levels during the second half?
Well, actually, maybe it's a little bit dangerous to look at the last year. I mean, if you look at the longer term typical Hiab margin, the quarter three actually tends to be the soft quarter because of just for the simple fact that we are so European-based business. A majority of the Hiab revenues is actually coming from Europe, and there, of course, July and August are not the great months for truck sales, nor the crane sales in that matter. Last year, we had an, I would say, somewhat unusually good quarter three. Overall, I would say that you can expect the quarter three to be relatively soft and not necessarily to see same rate of improvement there just because of the holiday timing and the typical revenue activities.
Then again, the Q4 tends to be a strong quarter for Hiab. Again, I would say that that's the pattern you will see there. Obviously, again, sort of the Savings initiatives are now sort of kicking in and we expect to be ahead of our plan of the run rate there. That should be visible in the rest of the numbers as well.
Okay. Thank you. About the service side, its performance was quite good during the second quarter. Do you see this as an indicator that the general activity is really picking in most customer sectors at the moment?
I would say so that in the shipping side, the service activity is picking up. It's been very low as sort of the ship orders have been trying to save costs as much as possible. We are maybe returning to a slightly more normal level there, but we are still far away from ideal activity. The other thing that should be driving that is of course our own internal improvements. I can maybe turn to Olli here as well, but I would say in Kalmar side, it's partly maybe driven by market activities, but a lot of that is our internal operational improvement. What would you Olli say on the Kalmar services side?
[Inaudible] Yeah. It's correct. maybe one additional thing is this expected boom of the crane race, crane heightening and crane upgrade projects, which have been postponed because of the postponed P3 decisions. This P3 decision that turned out to be P2 now but does not really change the fundamentals. We believe that that can be an additional positive thing in the coming months.
Okay. Thank you.
Your last question comes from the line from Antti Suttelin. Please ask the question.
Hello this is Antti from Danske Bank. Please without the cost overruns. That leads me to a conclusion that your first half EBIT margin has been-
Antti.
Yes.
Could you please repeat your question? We lost you from the beginning.
Okay. Can you hear me now?
Yeah. Yes, we do.
Yes. Underlying EBIT margin for Kalmar without cost overruns seems to be 6.1% for the first half of this year, while it was 6.3% in 2013. I'm kind of surprised that there is no underlying improvement in the Kalmar EBIT margin, even if you have this 40%, EUR 40 million cost reduction target.
The main difference there comes just from the fact that the revenue level of the sort of the top line was clearly weaker in the Q2 2014. That is for the same time, 2014. If I look at the underlying improvement by the division and product area, we clearly see that improvement tracking according to the targets.
Okay. it was a top line issue, not really a, a margin issue.
That's right.
Okay. Would you by the way, still expect 2013 sales for Kalmar to increase? I think this is something you have been indicating in the past.
Actually, that's a fair, a good question, and no, we do not expect that. The, the fairly low level of activity in Asia is one contributor. The other one is that we had a probably more optimistic view in terms of the services growth for this year and this uncertainty around the P3 decision that would have actually directed potentially significant volume changes between the different parts. Would have then dictated some of the investments that we are expecting, especially in the crane refurbishment business that Olli was saying. Now with the P3 decision canceled and people sort of reformulating their plans with the winners and losers changing places. That has clearly postponed some of these decisions and by several months, and that's also impacting the sales growth opportunities for this year.
Right now we are, probably expecting Kalmar in terms of revenue to be roughly at the last year level or slightly below last year's level.
Okay. Thank you. Then on MacGregor, how do you see this cyclicality going in terms of orders and sales? I mean, you have been indicating that you are expecting an uphill in sales because of increased ordering. Now when we look at the ship ordering statistic, they indicate that underlying ship ordering is going down again this year. How should... what does this mean for MacGregor order and orders and sales? When should the MacGregor orders start falling and when should sales start falling after having gone up?
If I take the offshore first, there is a probably more direct correlation there between the orders and sales slightly and shorter, cycles. We are not seeing yet. We probably see the offshore sort of flattening out but, still remaining fairly strong. In the merchant marine it's been really quite a rollercoaster for the last few years and, typically just to sort of give you an idea of the long length of the cycle, we were still shipping, equipment last year, that was ordered at the height of the boom in 2008. Typically, and this varies, quite a bit depending on equipment and the type of ships, et cetera.
From the ship order to MacGregor order, it's anything between 6-18 months approximately, and then from MacGregor order to the shipment, it's another 6-18 months. You have anything between 12-36 months cycles in here. Again, seeing the order book increasing in the first quarter 2013, one would expect, you know, the earliest signs of that one coming through this year, which we have not yet seen. We are still bottoming out in terms of the merchant marine deliveries in the first half of this year. That activity should start to creep up now, but probably be more visible in 2015. Again, from order point of view, I think it's quite hard to...
I mean, the issue with the with the sort of unbalanced end market has been with us for quite a while now. That did not prevent that order uptake to go up 2013 and the first five months of this year. It's really hard to tell where the market is heading for the rest of the year. If one makes an assumption that the order intake would slow down now for the second half, that would start to be visible in the MacGregor order book at the earliest second half of late next year, effectively.
We could see still a positive order intake development in the first half of 2015?
Yeah, because of the delay for moving the ship orders into the equipment orders.
Okay, that's helpful. Thank you very much.
Thank you.
Thank you. There are no more questions at this time. Please go ahead.
Thank you, operator. Do we have any questions in Helsinki? If not, I would like to thank for all participants and wish everybody very nice and sunny summer holiday weekend. Thank you. Bye-bye.