Afternoon, ladies and gentlemen, welcome to Cargotec's Conference Call on First Quarter 2012 Report. My name is Paula Liimatta, I'm the Head of Investor Relations at Cargotec. We will have today presentation by our President and CEO, Mikael Mäkinen. After the presentation, we will have time to answer your questions. We will start the questions from the live audience, then from the people on the phone lines. Before asking a question, please state your name and company. I think we are ready to start. Mikael, please.
Okay. Thank you everybody. As usual, I will go through the next 15 minutes through Q1, then you have a possibility, as Paula Liimatta said, to ask questions. I will discuss the details of the three business areas then on one slide each. In general, one could say that the market activity was healthy. Yes, the order intake was a bit lower, but I mean, there are big projects in marine. There's a good pipeline in terminals. Nothing that I'm very worried about. Sales grew by 4%. I will come back to that a bit later, as we have a number of equipment that are waiting for dispatchment.
They are ready from our side, but it's customs clearance, it's paperwork, it's payments and so on that are delaying them. That, of course, is one of the reason why the operating profit margin was 4.7% during Q1. We are continuing the preparation for the marine, possible marine listing in Singapore. The work goes on, and we will come back to that later this year. We don't see any reason for changing the guidance. One quarter is a very short blip in our type of industry. I'm very confident that we will reach the guidance that we gave at the beginning of this year. Looking at the figures, yes, there's something that I'm disappointed in. Of course, the operating profits, I'll come back to that. Actually, a consequence of that, the cash flow.
In cash flow, one has to remember that the order intake in marine was heavily towards the end of the first quarter. Means that we got the orders, but we did not get the down payments. Second thing to the cash flow was the fact that I said earlier, quite a number of machines, ready-made machines, work in progress, waiting to be assembled, dispatched, especially dispatched. But even with these negative things, I would say that the earnings, EUR 0.42 per share for the first quarter wasn't that bad. On slide 5, when we look at the performance, yes, you can see that the disappointing quarter one. As I told you, there are reasons for it and doesn't really change my view on where we are. Let's have a look at the marine.
This is the first time when we look at the different business areas in Marine, load handling, terminals separately. Marine. You know that the Marine order intake was a bit lower. Number of ships being ordered at the beginning of the oil and end of last year, beginning of this year was lower than before. On the other hand shipyards have shorter delivery times at the moment. Ship prices have gone down t hat usually indicates that there is a coming up ordering activity. One also has to remember that although the number of ships were smaller, we are shifting from traditional cargo ships more towards offshore type of vessels. Sales remained healthy. Although the order book has gone down, it's still on a healthy level. Profitability 13.5%, well in line with our expectations and how we forecasted it.
There will be a recovery towards the end of the year. I would say that the order intake will recover. Also, we saw some gradual recovery of services. A few words about terminals. Terminals was, of course. I frankly have to tell you that yes, no, I'm not at all happy with the result of terminals. No. My job is, of course, to see that what, if any, changes has to be done in the way we operate and so on, very quickly to analyze the situation. I'm more looking at it from the point of view that the predictability, why were we not able to predict that we will deliver a smaller number of equipment than we produced?
At the same time, one has to remember that R&D was double in quarter one year-on-year. We are spending on R&D now because we have a number of big upcoming projects. We have a big order book to be delivered. They require R&D. I also feel that we are really in a very strange situation. The terminal business will change now. Bigger projects, more very innovative. You have to decide if you want to be in or out in this game. As I said, delayed deliveries, biggest portion of them not at all related to us at all, but on the customer. There is nothing unusual. It's not so that the customer has financing problems or so. It's just the fact that it's difficult to match the deliveries in a quarter.
We also have to remember that the service business was lower in as a share of the sales during that this quarter. Last but not least, the product mix. Of course, the profitability of our various products vary, and you can have a quarter where you have an unfavorable product mix. Quite confident that we can correct those things and have a better predictability. Plus, as I said earlier, no change in the guidance for the full year. Load handling, th e market was fairly good in our traditional markets. Growing in Asia. Good growth in U.S. There we saw an order intake growing 22%. The biggest growth was in Americas.
As we have a very short time between the order and delivery, 2-4 months, that means that also the sales grew by 12%. We have a good order book, good sales. Now we just have to deliver. That means that the profitability improved to 3.8%. That's also partly due to volume, but also partly due to the actions that we have taken, the way we have built up this business, supply chain, and so on. Is 3% a good result? No, it's not at all a good result. We haven't changed the long-term goal of 10% for the group. It's at least it's on the right direction.
I'm pretty sure that Axel Leijonhufvud and his team, they have a fairly good grip on how the business should be developed. Gross profit, still, as our CFO usually said, should stay above 20%. Yes, it's above 20%, so there is no big drama on that level. Cash flow, as I said earlier, goes hand in hand with the delayed deliveries from terminals. You don't get paid for the products, and they are in your working progress. Again, here I see a temporary situation like this. You can see historically also that there's a big variation between the different quarters. Service, small growth. In our type of business, very difficult to see that there will be a dramatic growth of service, as at the same time the new equipment is growing.
Not a dramatic change in the distribution, geographical distribution of our sales. Yes, APAC is a bit smaller than again, on the comparable quarter. In MEA on the other hand, the growth is not coming from the E part, Europe. It's coming from Middle East, Africa part of the red part of the pie. Again, here I think that the development is fairly good. Yes, at the same time, you have to remember that Americas had a fairly good result. Key priorities, just to remind you, Asia still very important for us. I think we start to have a critical mass in Asia. If 40% of our sales come from Asia, it's already a more than a billion dollar, billion euro business built in Asia.
It's a sizable part of our operation. That requires all the time, how can we be stronger? How can we have a better reach to the market for certain products and so on? Load handling, strengthening our market position. Again, here, many initiatives in the pipeline that we cannot talk about today in detail, but that's also going the right direction. The joint venture that we have in China. Due to local authorities, there is a 1, 2-month delay. Nothing dramatic. Typical Chinese to get all the paperwork done so that we can start or continue the construction of our site, start to deliver heavy cranes from there. We have to see how we can find further growth opportunities for Marine. Marine has a very good market position, extremely strong operating model. Can we grow?
Can we have new products, new market, whatever it is? That's one of our priorities at the moment. Further development of service. Services, as I said, takes time. Next, the Cargotec ERP system that we are rolling out right now. It's needed in most of our sites out there. Leveraging the building blocks in terminals. Yes, we have the building blocks. Yes, we have a very disappointed, very disappointing first quarter. On the other hand, I see that because we have the right building blocks, we are in a very, very good position to capture the market as there are a number of very interesting projects out in the market. We have not changed the guidance for the year. We expect the sales to grow and operating profit margin to improve compared to 2011.
I don't see based on one quarter any reason to change that outlook. We have also said that Marine will continue on a good level. Sales might decline slightly from previous years. Too early to say if it's a plus or a minus. As you have seen, sales in terminal load handling term will grow due to the order book. That's now a very short. I think that we can have more time for questions. Please. Okay.
Okay. We can take first questions from the live audience. Do we have any questions? No? We can then move on the people on the phone lines. Operator, please.
Ladies and gentlemen, if you have a question at this time, please press star followed by one on your telephone keypads. Once again, that's star followed by one on your telephone keypads. We have a question from Tom Skogman. Please go ahead, sir.
Yes, this is Tom Skogman from Handelsbanken. I was wondering about the terminals profitability. First of all, has something major happened to the profitability of Navis? Secondly, when you talk about delivery, hiccups or delays, is this relating to one or many individual projects? Will this mean that we will see a much stronger sales growth already in the second quarter for terminals?
Okay. Thank you, Tom. First of all, Navis. No nothing has changed on the Navis side. You have to remember that due to IFRS, actually we are still in the period of, I mean, delivering it at zero margin because we are still eating of the order book that Navis had when we bought the company. That should gradually now disappear, and you see the margin going coming through. This is only a technicality. Second thing, if it's a one delayed projects or... it's quite a number of projects, and they are ready machines waiting. There are some of them outside our factory countries in close to our customers in customs, some waiting for dispatchment.
Yes, of course, you should see that coming through fairly soon. Anything else, Tom?
Well, I was looking also at the SG&A costs. When you look on year-over-year, there's still a strong growth. Will they start to fade off from now on? They have EUR 121 in Q1 and EUR 97 million in Q1, 2011. Bu then In Q4, they were EUR 178. What will happen from now on?
Eva, do you wanna comment or do you have the figures there? I can continue.
You're talking now about Cargotec in total, Tom?
In total. Yeah, that's the one you report. Yeah.
So, um.
I'll give you the-
Yeah. The SG&A cost is obviously up and the R&D expenditure our CEO discussed is obviously partly included part in that number as well. There's some other increases as well. I think it's obvious with this result, especially in terminals, that we need to very closely analyze what's, what we want to do and what we can prioritize or reprioritize for the remainder of the year.
As such in the other two segments, they are very much in line with the plans and in that sense is no surprises. Naturally, the fact is that with somewhat lower volumes, the SG&A and relatively speaking is a bit too high.
You don't have any plans for any major cost cutting just because of all the big disappointment in terminals at the moment. You don't see any immediate need again for that.
Of course, we have to tell all the time, look, I look at this and of course we are as I said, I'm very disappointed in the result. Of course, we have to look at the cost, but there is no kind of a big chunk of unnecessary costs. As I said, this is a deliberate decision to beef up the R&D just because we need it for the future.
Okay.
Small. Yep.
Thank you. Our next question comes from Sebastian Übert. Please go ahead.
Yes. Hey, Sebastian here from UBS. Question regarding the terminals business. Can you give us an indication of how much of the revenues that have been delayed and by when do you expect those to be executed? That is my first question. Regarding the load handling business, can you also shed some light on the development in the European markets? That would be quite helpful. Thank you. Quite helpful.
Okay. Eva, do you...
Regarding the terminals, the unfortunate fact is that the delayed part is the part where we have a better margin. One of the challenges we have in terminals is still that we don't have even equal profitability between the different products and that hits us in quarters like this. It's not we're not necessarily talking about, but we're talking about several tens of millions in anyway. It's I said it's both the volume and the mix which then hits the operating profit.
Then the load handling. Did you write this down?
Yeah. Sebastian, can you please repeat the load handling question?
Yes. I was wondering how that has been developed in the European areas, as you were quite optimistic on Asia Pacific and on the Americas. You'd have just left a few words about the European situation and how do you see there the development going through this year?
Yeah, I was optimistic. I was talking about U.S. because there we have seen a very fast growth. Asia of course a fast growth but starting from a low level. If you go to Europe, it's as I said after the last quarter, I mean the further south you go the less positive it is. If that helps you. I mean it's if you take North Central Europe, it's on a fairly good level. Yep.
Maybe one follow-up question, if I may, on the Marine segment. You flagged that you will see more orders coming from the offshore segment. Can you give us an indication of how much of the order backlog is related to the offshore segment and how that is presented in the actual order intake?
Yes. Offshore, of the orders received in Marine for the quarter was, 25, roughly 25% was offshore. That's, and we are very, very happy with the number. Because of the order backlog, obviously coming from a longer time still from the backlog, we talk about 10% plus. It didn't yet change. Of course, if the order intake continues, with this it will also have an impact during the remainder of the year than on the order book.
Thank you.
Thank you. Once again, just remind participants that star followed by one to register a question and the hash or pound key to cancel. We have a question from Pekka Spolander. Please go ahead, sir.
Pekka Spolander from Pohjola Bank. Hello. I'd like ask about the marine feeling, how you feel the market. When I'm reading the comments and listening to your comments, I might get an impression that the market is a little bit weaker now than you expected three months ago. Is this the way we should think, and how do you look at the coming quarters in marine side?
No, I don't. I think we already when we published our annual result, we said that we see that the market is weakening. My view has not changed in the last three months, no. We see... It's always like this wave movement that we have seen it going down. We have seen some companies, for example, where the order intake for marine equipment is four to six months earlier than us, that they have shown fairly good order intake during the first quarter. I would say that it's a wave and that means that it should... Our order intake should increase quarter by quarter during this year.
Okay.
That's my view today.
That we might expect that the order info somewhere between EUR 200 million-EUR 250 million might be also something we can see in the coming quarters.
Okay. That's your guess.
Oh, yes.
My guidance is that we see that it will be increased quarter by quarter.
Okay. My second question concerns the cost side. How do you see the cost inflation at the moment?
Eva, do you wanna comment that, do you have or not?
Well, I think overall, it is the pressure is less than it was a year ago, which is not as such unexpected due to the fact that there is somewhat of uncertainty in the market. In that sense, okay. The challenge, of course, at the same time is that we also have the pricing side is not an easy side either. The uncertainty affects that as well. Well, close follow-up, but so far no bigger surprises in the cost inflation, rather along our expectations.
Okay. Thank you.
Thank you. Our next question comes from Tomi Railo. Please go ahead.
Hello. Good afternoon. couple of questions. First, if, is there any chance of quantifying the R&D increase or absolute amount for the first quarter? You said, Mikael, that you doubled the amount, what sort of level impact it had in the first quarter in terminals?
Yeah. I think we can say that we are talking about roughly EUR 10 million in total now in the first quarter of 2012, which is as our CEO was saying, double what it was in first quarter of 2011.
That was for terminals?
This was for terminals specifically, yeah.
Okay. Okay. Thank you. The second question is on the sort of guidance elements. There is a sentence in the report that although terminals didn't progress as planned, we are confident on the improvement for the full year. Is this the same as sort of the expectation on improved profitability for next quarters, or is this the same as you have indicated earlier that the terminals profit should improve from last year's level?
Well, I think our guidance is on Cargotec EBIT percentage to improve from last year's 6.6%.
In that sense, if you do the numbers and read our what we say about Marine, I think it does assume that both Load Handling and Terminals need to improve, but it doesn't it is not more specific than that on any individual segment. We are referring to the overall Cargotec improvement, which we in which our guidance remains intact.
If I just continue, it has been rather clear earlier that the terminals profit improvement as well as Load Handling profit improvement should offset the Marine with softening.
That is what I referred to. If you do the math-
Yes.
Read our guidance on Marine.
You repeat that comment?
We repeat that.
Despite of the miss, of terminals in the first quarter?
Yes, we repeat our guidance. Yes.
Thank you. Our next question comes from Iiris Kemppainen . Please go ahead, Kemppainen.
Yeah, Iiris Kemppainen from. In terms of R&D cost do you expect that this will double year-on year in the coming quarters as well? What kind of levels should be seen?
The budget is for is significant increased. Also bearing in mind that what our CEO was saying about the automation project and then of course also another impacting our numbers of course, some issues still can be reassessed if we so desire but that has been defined so in that sense, the first quarter is a good proxy for the full year unless we do something differently.
But just to remind you that it's of course included in the guidance.
Yes. In Marine I think you said in Q4 that we either expect that orders will accelerate right from Q2 but now it is a little bit sounds that the market is quite weak so should we expect the acceleration from Q3 instead?
Q3. Who knows that it will accelerate I think it is more correct to. What do you call acceleration and what do you call increase? Too early to say.
Okay and see one question that could you just repeat your acquisition target that's all both in Load Handling and Marine and anything you could say were not imposed.
Sorry, I couldn't hear you.
Your acquisition targets.
Okay. Already when we said that we are investigating the possible listing of Marine in Singapore already and at that time we said that we have a fairly ambitious growth target for all three business because we want to be the market leader in all three businesses and that means acquisition targets in all the three business areas, then it will happen which business area first, which comes after that too early to say but it is for all three ones and we have also said that maybe you will not see many of the very small acquisition , I mean those store acquisitions that we did over that years that are EUR 10 million, EUR15 million. I am talking about acquisitions in EUR 30-50 million plus.
Okay. Thank you.
Thank you. We appear to have no further questions at this time. I'll now hand back to you.
Okay. If we don't have any more questions on the people on the phone lines, I think we are ready to wish all a good day. We don't have any more questions here in Helsinki either. I would like to thank you all and wish you nice spring. Thank you.
Thank you.