Good afternoon, ladies and gentlemen, and welcome to Cargotec's January June 2012 report conference call. My name is Paula Liimatta, and I'm Head of Investor Relations at Cargotec. Today, we will proceed in the same way as before. We start with a presentation by our President and CEO, Mikael Mäkinen. After that, we have time to answer your questions. We will start with the questions from the live audience and then from the people on the phone lines. Before asking a question, please wait for a microphone and state your name to benefit the other listeners. I think we are ready to start. Mikael, please.
Okay. Thank you, welcome everybody. As usual, I spend 15-20 minutes on the January-June interim report. Highlights in Q2, I put here as a first point, the strategic foundation in Asia established. What do I mean by that? We will come back a bit later on one slide. I think it's very important to remember now we have told you about the groundbreaking ceremony of joint venture with Rainbow Heavy. Now, just a few days back, we told you about the joint venture with Sinotruk. The joint venture with Sinotruk is actually our very important step in getting into the Chinese market and the Chinese export markets as well. Sinotruk is the biggest producer of heavy cranes, and with this joint venture, sorry, heavy trucks.
With this joint venture, we feel that now we have a way of penetrating the Chinese market in a totally different way that we could not do alone. Sinotruk has more than 1,000 sales establishments in China and so on. I'll come back to that a bit later. Now we know what we are in Asia for the load handling business, for terminals. With the two acquisitions that we have made, one joint venture and one acquisition, we have also laid the foundation and know how to proceed from there. The order intake increased 17% year-over-year, a very good figure. Sales grew by 7%. Operating profit was flattish 4.8%, and that's why I put the bullet point under that priority in improving profitability. This is really what we are working on right now.
Last but not least, the June 12 guidance is valid. If you look at the figures... I was just talking about the various points, order intake, fairly good in this market situation. Sales good. Are we happy with the operating profit? Of course not. We knew from the very beginning that year 2012 will be very much focused on deliveries towards the second half of the year. Performance development, as said, it's going in the right direction in terms of orders in terms of sales, but the EBIT improvement should be faster. You have to remember, as you will see on the marine slides, that the marine size of the marine business has been going slightly down, and that has a negative impact on the profit from that business as well.
It has to be offset by the pickup of load handling and terminals. Marine, as you might have seen in the market, very much is focusing on offshore today. The offshore orders are the ones that continue to grow. At the same time, the order intake has been fairly slow on normal cargo handling ships and normal ships. How will it go on from here onwards? Difficult to say. I believe that we will have some time, still a low order intake, shipyard order intake for ships, and that will reflect our order intake as well. As said, a quarter of our orders they're from offshore. Offshore is doing very, very well at the moment. Sales remained in marine at a healthy level. Profitability was exactly as our expected level.
We have told you that over the time, we will not be able to stay on the 14.8, 15% EBIT level. That those were the orders taken during the real boom times. Now, we are going down to normal level. We see some gradual recovery of the service business in marine as well. Terminals. It's automation. It's big, big projects, big complicated projects, and we managed to cleanse a number of them. That's why our order intake grew by 57% year-over-year, and sales by 28%. Profitability, yes, it improves. Are we happy with that? No. That's again, here, priority number one, how to improve the profitability. You have to remember that on big cranes, the profitability is lower. Big projects always consists of a combination of big cranes and other equipment.
That has an impact on the profitability as well. There's a change in the product market mix as well. This is normal. Service business was low, that has been fairly interesting in the terminals market that you see that service business is not picking up as much as we thought. Is there any reason for it? Maybe some customers are insourcing, some customers just postponing their service. Difficult to say. Competitive situation. When the market is going down, and we have these huge challenges, of nobody knows what's happening with the European economy, what's happening with the world economy. Of course, people are going a,fter the projects that are out there. The competitive situation is fairly tough at the moment. Okay. We are used to that. It's no problem.
That's why we made a joint venture in China with Rainbow Heavy to offset that. That's why we want to go to higher value markets. That's why we bought Navis. That's why we bought the automation company in Australia, so that we can be more resilient to this kind of changes. R&D costs during 2011, 2012 have been and will be on a fairly high level. We are really taking a step change here. Why is that? We saw the automation projects coming. We need solutions for automation. We have got some interesting orders exactly because of that's why we are able to be the market leader in the segment.
The investments in R&D and the port technology will continue, of course, they will not go on forever. We take the step change, we do R&D, when that's ready, we can take it to a lower level. Again, fairly confident that we know what we are doing, how we are doing it takes time. That's why you cannot see a very fast recovery in this business. Load handling. Profitability was weaker than normal. Let's start with that, let's start with the market. Market was good. It was good in the United States. At the same time, the uncertainty in Europe was, of course, increasing, which shouldn't be a surprise to anyone. Orders grew by 7% year-over-year, sales by 5%. Operating margin, 2.6%. Why is that?
Of course, there's a competition. There are these normal things. There are certain one-off type of costs in the second quarter. That's why we have put in the bullet point here that in this the normal level should be reflected in the second half of the year. Again. You have to remember here that we are talking about very small amounts. I mean, when we are talking about very small amounts here when it goes up and down. I think it's well under control. How will it look like at the end of the year? We still need to sell trucks, cranes for trucks that will be ordered in August, September, October.
Fairly confident that we are going in the right direction. Gross profit came down a bit. It's a mixed question. Nothing dramatic. Cash flow. Working capital is the real big thing. Of course, we cannot live with a figure like this. We cannot live with this type of figures. We are now building up for the big deliveries towards the end of the year. Now, it's actually, from that point of view, the worst point. We are accumulating source resources, buying in component, having half-rate, half-made products and so on. I'm quite confident that the direction will change very well in the second half. Service.
Yeah, I always get the question of why is our service, why is it only less than 30% of your sales? This is a market where you never have or you don't have these huge, big steps in service. The way to increase the service sales would be to increase the manpower sales. There, the profitability is not as good as on, for example, spare parts and projects. 4% sales growth, yes, it's going the right direction. Of course, I would like it to be even faster. Americas, as I said, on load handling and in projects, Americas has been a very good market for us. Order intake, sales has been good.
At the same time, lower order intake, lower sales in on the marine side is reflecting that the APAC number is coming down a bit. No dramatic changes to either direction. A few slides about the strategy. Let's start with the terminal strategy. I said earlier that we had a groundbreaking ceremony of our Rainbow Heavy joint venture. The picture you can see here on the slide is really giving you a view of what we are trying to do in China. We are building up a production facility where we can, together with our partner, produce bigger cranes competitively, Are on shoreside, easy transportation. You have to remember, transportation cost is a fairly big part of a project delivery. That's a more strategy.
If you really look at the number one again, profit goes over sales growth. The whole organization knows that we are talking about profit now. Yes, we can leave orders untaken if we don't feel that they are on the right profitability level. Point number three, the big projects that we have got, we have to have a good execution of those projects. Offering development, as I said earlier, more automation, that's why we have the R&D cost, the peak in the R&D cost this year. We put a lot of effort in increasing our portfolio or our way of offering to the customers. I believe that this is really the market that will be the driving force in the future. It's big automation projects where the terminals try to reduce their cost.
There's a huge pressure on that from the market because you have to remember that the shipping lines want to change to low speed. They go at lower speed, it takes longer time from start to end. Where can they catch up the time is that the terminal is as efficient as possible. How can you cut hours, minutes, seconds in when you offload and unload containers? That's by terms of automation. Load handling. I was talking about, here you see the picture of Sinotruk. Sinotruk truck with our crane. I'm very happy that we managed to get a partner like Sinotruk for China because they are, as I said, they are the biggest truck manufacturer. They have the biggest network in that country. They have good export markets.
I think that together with them, we can really develop the load handling business in the developing world. I put here also Brazil and Russia. Brazil is an interesting market. We need a solution one way or another in Brazil. Brazil is a bit overheated today, so we see how it should be done, how it should not be done. Russia is developing fairly slowly for load handling equipment. We are working on how to establish ourselves in that market as well. Lower cost base. How can we lower the cost base for the products? There's all the time a pressure from the market. Of course, partly we will have the solution via Sinotruk in China. We have to look at product design, everything. The route to the market.
As I've said sometimes that if you build your own network for China, it takes, according to our calculation, six to 10 years. It costs more than what we are going to pay for the, for our part of the joint venture here. You will never. You will have 20- 30 outlets there. You will never cover the whole country. Really, we have to look at the route to the market. Key priorities, once again, 2012. It's not growth. It's nothing else than improving profitability. We are looking at all costs, all ways of improving the profitability. The strategic foundation that I was talking about in the beginning, that's. I have to stress that I'm extremely happy with what we have established here, what we have enabled.
Now we are a well-established player in both terminals and load handling in Asia. It's a very, very good foundation for continuing to build those businesses. In marine, we believe that we need some kind of a growth platform. What are the growth opportunities? Are they joint ventures? Are they acquisitions? What are they? That's something that we are working on all the time. Of course, not to forget our ERP system. I believe that if you want to have a company, a very, very profitable company, you need a fair, very good ERP system that you know every time, every minute where you are on the cost sides. And have a very good management accounting to follow it up in different market situation.
Remember that all calculations or all studies show that the market hiccup or recession that we had five years ago, it usually takes 10 years before it's restored to normal markets again. We are five years into that. I'm 100% sure that during the next X years, we will see another shock. My job is to see that our company is ready for any kind of market situation. We haven't seen it yet. I don't know when it's coming, but it's very important to be prepared for it. The outlook, we haven't changed that. I think, Paula, with this, I will end my presentation and, of course, answer any of your questions, comments. Thank you.
Okay. Thank you, Mikael. We can now start with the questions from the live audience, please.
Yeah. Pekka Spolander from Pohjola Bank. A couple of questions. I would like to start with the load handling. You mentioned that there were some one-time type costs in the second quarter. Could you open a little bit what kind of costs we are talking about? Related to load handling, as you mentioned that the truck market has been quite strong. Last week, Cummins came a profit warning and indicating that the U.S. truck market is quite rapidly weakening. How do you see that situation?
First, if you take load handling and talk about the one-time costs, it's a few millions of different type of small costs that we decided we take it now. There's nothing big, dramatic or something that I would like to bring up as the. They are one of kind of costs, and that's why we put them into the business. They are done, taken over. If you go to Cummins and the load handling market, yes, of course, we are prepared for a possible lower order intake. One has to remember that it's not always so. I would like to stress this, that it's not always so that when the truck market goes down, automatically load handling goes down. It's a combination of what's happening.
Again, what we see in U.S., without mentioning any names of any customers, it's the big distribution companies. There is consumption of something in U.S. that is driving this. Of course, you are totally right that if it goes dramatically now down the truck registration, of course it will have an effect on us. It's not automatically so that if they go down or if they go up, we will follow it. Of course, we have seen, I mean, the big truck manufacturers in China, for example, they feel they went down from about 25%, 10,000, 2010 to 2011. They believe that they are on last year's level this year or could go 5% down.
Now it's dependent on if there is some recovery or infrastructure measures that the Chinese government is taking. There is no dramatic change there yet.
Thank you. The second question about the terminals that you are quite confident that you can improve the margin in coming quarters. Could you talk a little bit about the measures, what kind of measures you are taking? I have in mind that you refer to the tight price competition, and of course, that might raise the question about the profitability in the new orders you have taken. Could you comment also that?
Yes. First of all, as I said, big cranes have lower profitability than what we call mobile equipment. That's just a fact. Second thing is that, of course, we know by now the biggest portion of our order book for the rest of the year. It's a combination of if it's deliveries to developed or developing countries. That's also a fact that developed countries have higher margins than developing countries. The equipment are more advanced and so on. Again, it's not a one of not this and that. Tight competition, yes, there is tight competition, and there are orders that we have not taken because of that. Orders that could have been very interesting for us, but we have given them to competition.
Have to stress the fact that the Rainbow Heavy joint venture is a must. If we don't get that working, if we would not have that, then it will be very difficult on the big crane market. The main competition is of course ZPMC from China. You have to be on an even playing field, and you have to do it together with a partner in China. I don't think that overseas company just establishing itself in China, you get a few percentage, but you have to have a local partner who knows how to drive down costs.
Thank you. The third question about the Polish unit. What kind of capacity utilization you have there at the moment? Are you happy with that?
Fairly happy with that. Fairly happy with that. That, and of course, we start to be on a level that we have to see what shall we do now. Shall we take in more workforce and so on? Fairly happy. It has gone according to our plans.
Thank you.
Do we have any other questions from the live audience? If no, I think we can start with the questions from the people on the phone lines. Operator, please.
Just to remind telephone participants, to register a question, please press star 1 on your telephone keypad, and to cancel, please press the hash or pound key. Our first question comes from the line of Tom Skogman. Please go ahead with your question, sir.
This is Tom Skogman from Handelsbanken. In the profit warning you sent out in June, you still kept the message of an improving EBIT margin in both load handling and in terminals. I cannot see that comment in the report today. Have you changed your view on that or how should we see it?
This is Eeva Sipilä. I think we wanted to make very, very clear what is our guidance. If you read very closely the report that you actually find in the load handling part a comment on that, when we are discussing the second quarter operating profit that we feel that that was, that was burdened as our CEO was mentioning, with some extra costs and hence the run rate, operational run rate is better. That of course then when you look where we are now year to date, it gives us some... It doesn't mean that we have changed the target. In terminals, we obviously have, it's more of an uphill.
If you look at where we are year to date, doesn't mean that the target would be different. I think that it's fair to say here that we need to sort of focus on that we do the right things. In some areas, we might try to improve the terminals load handling result by having cost savings in central costs. That of course helps to ensure the overall guidance whilst it only has an indirect impact on the terminals margin. There's quite a lot of deliveries at the year-end, and that is also a sort of part of the uncertainty which that are we able to deliver everything we have planned in December?
That could then when we talk in absolute terms on relatively low small numbers, so the margins can fluctuate. I think it's just fair to understand that the target hasn't changed, but there is based on where we are year to date, some uncertainty. I think it's more important that we kind of guide you on how we are going during the second half, and then you can make your own conclusions on where we will end up with.
Okay. Thank you.
Our next question comes from the line of Sebastian Ubert. Please go ahead with your question.
Yes. Good afternoon, ladies and gentlemen, it's Sebastian here from UBS. My question would be also regarding your second half guess that guidance still implies a bit profitability of above 7% for that Q3 and Q4, assuming that there are some good deliveries in Q4 and you have good fixed cost absorption. What would be your roadmap then to achieve that guidance? You must be well above 7%, at least in the fourth quarter. Would that then also be your run rate for 2013? Thank you.
Do you want to take it, Eeva? I can take it.
Yeah, I can follow, continue on that. Well, first priorities in order to achieve the second quarter profitability is deliver our the order book we have without surprises, without any hiccups. That is obviously, you can. There's work to do both on the volume side and, but also of course in the project business as we highlight in the risk section. We obviously that's what we aim for. At this point of the year, we start to have a relatively good visibility on the on what we can deliver and where we are based on order book. It is really based on that.
We of course still can have some areas of course, where we still can have an impact during the six months for this year. I think more importantly when thinking about your question on run rate to 2013 is that obviously in both load handling and terminals, the new management is looking through how to improve the business. You saw our CEO presenting a short wrap up of the summary. There will be actions in under those quite a bit initiated then as we go ahead.
In that way, I would certainly think that our run rate and what we aim for in 2013 is different from what we can achieve in the second half, just because of the fact that the second half is already ongoing. Time puts some pressure on the things you can achieve.
Okay. Maybe one follow-up question, if I may, regarding the higher margin equipment which has been spilled from Q1 into Q2, as you have indicated with the Q1 numbers. How much of that margin improvement in the terminals business was driven by this higher margin equipment?
Well, as you see from the margin, the sort of, we still have a lot of work to do. What happened is that, yes, we were able to deliver the equipment that we were stuck with in inventory from March during the second half. That was mainly a reflection of then that, you have some certain orders during the year, depending a bit on their timing where margins can fluctuate. It tends to always be the case, but in our first quarter, because of the overall very weak start, it was kind of the effect was more visible than otherwise.
I think we comment in the slide also on the changes in product to market mix, indicating that there are some areas where we have lost on the better higher margin equipment and some of it we can influence and some of course is dependent on just where the market is and where it isn't. We kind of need to just be flexible enough with our own setup that we adapt to the market changes.
Okay. Thank you. Our next question comes from the line of Elina Rantanen. Please begin your question.
Yes. Hello. A follow-up to the previous question on the deliveries that were delayed from Q1 into Q2. Is it so that because of these delayed deliveries, Q2 EBIT margin in terminals is now exceptionally high? That it has that effect on Q2, that you kind of got the higher margin project from Q1 in Q2 now?
No, that's not the case. I think that should be very clear from our guidance as well, that cannot be the case. As said, as I was replying to Sebastian, I think the sort of the kind of impact of that transfer between the quarters is maybe getting a bit too much attention. I think the year to date is a good number to look at where we are in terminals and as said, the sort of last year's rate is where we want to go.
Obviously then also further as we get our act even tighter and get a better grip of the business do some of the changes that the new management is now planning based on the strategy.
Okay, good. Thank you.
Next question is from the line of Antti Vamperi. Please go ahead with your question.
Hi. I have one question on your working capital. I see your accounts receivable have grown by 7%. Have you seen changes in availability of financing for customers?
I think we see the, an impact of the financing market more in certain orders be taking very long to materialize because It takes more time for customers to arrange the financing. Of course, most visible this is in the marine business where shipyards have quite a lot of challenges to get financing. I think our accounts receivable growth is quite well in line with our sales growth, and that is a reflection of the sort of business volumes in our business. Of course, the financing market is something we need to follow.
I would more say that that has will then have implications on order intake, the development at how well can customers get financing and go ahead with their capacity plannings plans.
Thank you.
Our next question comes from the line of Erkki Vesola. Please go ahead with your question.
Hi, it's Erkki from Swedbank. A question on the U.S. Department of Defense frame agreement that you guys have. How much of that was there in Q2? I mean, was there more than $50 million? How much is there still left of the frame agreement? When do you expect it to be first ordered and then delivered? Thank you.
You're talking about order intake?
Yes.
Yeah. How much, Eeva, did we have in...
We have received roughly. I think we have, this is Paula. We have received roughly 800 plus. Now we got 766. It's somewhere between 800 and 815 total currently.
In terms of number of equipment
Yeah.
Yes.
1,900.
Yeah.
Okay. Okay.
Half of it is in.
In the order books still?
Yeah.
Yes. About the timing of these deliveries, any hunch on that?
Time of the deliveries?
Yes. I mean, if we're talking about frame agreement, of course they materialized first in actual orders.
Yeah.
Deliveries.
The frame agreement is five years. It's fairly difficult to see. Depends then on the U.S. government, how, when they take delivery. The deliveries will start next year.
Okay. Fair enough. Thank you.
As just to clarify, and half of that frame agreement is in the order book. Okay.
Do we have any further questions?
Our next question comes from the line of Antti Saro. Please go ahead with your question.
Paul here. Hi. It was just a quick question. You mentioned within terminals that, you had this ongoing significant investment in port automation, which has led to a spike in R&D. I think you referred to it first in Q1. Where do you see this spike in R&D tailing off, please?
It will be on this level during 2012. It's spiking off. 2013. If you look at the run rate, you can use that run rate for this year.
Okay. Thank you. Second question, you mentioned that there's been a focus very much on profitable order intake only. I noticed the order intake surprised in this quarter. Would it be fair to assume that we, surprising order intake in this particular quarter is already with that margin focus, and that's why you're comfortable with the full year EBIT margin guidance reiterating?
Yeah, you have to remember that the big order intake during quarter two is of course it will not be delivered this year. That's fair to say. Secondly, we also said that there is a pressure from the market. What I tried to say is that we cannot take the projects at any price. We have put very much focus on profitability instead of growth.
Thank you.
Thanks.
Our last question from the telephone lines comes from Tom Skogman. Please go ahead with your question.
Just about the R&D spending, how much will they be up in 2012 compared to 2011 in total? That is my first question, and then I can take another one after that.
Maybe, Eeva, you give that.
Yeah. The R&D costs in the first six months were EUR 38 million, which is a EUR 10 million increase year-over-year, or first half of 2012 compared to first half 2011.
They will be up by more or less EUR 20 million in the full year of this year?
now I'm not sure I caught you. EUR 38 million for the first six months, as our CEO indicated, that would be the run rate.
The delta is about.
To use for the full year.
It's about EUR 20 million, yes.
Yeah. Delta. Sorry, yeah.
Yeah.
Yeah, that delta on year-over-year, yes.
My next question would be about restructuring needs. We see that in the marine business, the order book is now shrinking quite quickly and you still have a good profitability there. We know also that in the other businesses you have already very good sales levels if you compare to your history, but the margins are so much lower. Will we see some major restructuring initiatives within soon or how will you secure the profitability?
Of course, Tom, of course we have to look at the costs all the time, and that goes for all the three business areas. We will inform you when and if we have any plans for that. That's all I can say. Of course we are all the time looking at the cost. Costs are not only restructuring, they are, I mean, they are spending on R&D from outside parties. They are all kind of other costs as well.
Then finally, could you give a like a midterm update about how your planned listing of Marine in Singapore is proceeding? What kind of conclusions have you reached so far? Do you have anything to say at this moment?
No, no. We will come back to that when we come out with the Q3. We are continuing studying that. We have nothing new to tell you on that in that respect.
Okay. Thank you.
Thanks.
I have no more questions from the telephone lines.
Okay. Do we have any questions in Helsinki? Yes.
Pekka Spolander from Pohjola Bank. About the order inflow in marine, it seems to stabilize now around something like EUR 108 million. Do you think that this could be sustainable if the total, shipping markets or ship building market is still declining? I mean that can you compensate the decline in bulk business by the offshore business?
Yes. Yeah, that's a good question. That's how we see it, that this is roughly the level where we are. It's not only offshore, it's also RoRo ships where there are interesting projects, where the revenue per ship is much, much higher than on a bulk carrier. It's also a question of the mix.
Thank you.
Okay. Operator, do we have any more questions from the people on the phone lines?
There are no more questions on the phone.
Okay. I think it's time to thank you and wish you all nice summer. Thank you.
Yes. Have a nice summer.