Good morning, ladies and gentlemen, welcome to the Cargotec Corporation Q3 2011 Interim Report conference call. At this time, all telephone participants are in a listen-only mode until we conduct a question and answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press Star then zero on your telephone. I would now like to hand over to the Chairperson today, Ms. Paula Lehtomäki. Please begin your meeting, madam, and I shall be standing by.
Good morning, ladies and gentlemen, welcome to Cargotec January-September 2011 conference call. We have a small live audience here in Helsinki and people on the phone lines. We will start with the presentation by our President and CEO, Mikael Mäkinen, and after that, we will have time to answer your questions. Before you answer a question, please state your name and company to benefit the other listeners. I think we are ready to start. Mikael, please.
Thank you. Welcome, everybody. As usual, I will give a 15, 20-minute brief of the January-September result or quarter three result. After that, there's time for questions and answers. Highlights for the first nine months. Market activity. Is it too close or what? Okay. Market activity remained healthy in both the segments and all geographies. That's of course a very interesting situation that so far it has been good. Of course, I will come back to how we look at the future, but looks healthy and good. Order intake and sales grew by 19% year-on-year, which is a very good number in this market situation. I'm quite happy with the overall operating profit of 7.2%.
I mean, of course, there's much room for improvement. We are on the right path. We tied more capital into the business, the main reason for it is of course the very fast ramp-up that we have had. We have a lot of deliveries towards the end of the year, early next year. That affects our cash flow. We also signed a number of important terminal contracts, port terminal contracts during Q3. I'll come back to that a bit later. This morning, we also announced a new operating model as of January 2012. I will look at that a bit more in detail later. Market environment. Strong activity in all markets. One exception, same as I have said during the previous quarters, is the construction-related segment in the U.S. We don't see any recovery there.
On the rest of the markets, good development. Looks good. Although when talking to our customers, there is a small sign of uncertainty. What will happen to the world? It's not really any tangible yet, but there's something that could flat out the market, could go down a bit, or could continue as until now. Difficult to say. Still, more positive than negative. High number of containers. How is it possible that the number of containers is growing and growing? The main reason for that is that more and more goods are put into containers. Container is the main way of moving goods these days. Also, as I said earlier, big automation projects were signed during this quarter. Marine also healthy.
Remember that we are in all ship types except tankers. It's different revenue per ship, depends on the ship type. You cannot just look at Clarksons' overall figure. You have to go more in detail. How many Ro-Ro ships are there? How many offshore vessels? So on. Didn't look that bad at all. Service, you will see that there is a growth, very small growth. Services are, in our business isn't the easiest type of service. It's not, as I've said many times, it's not mandatory service. It's a service that either the customer does himself or he outsource it to someone else. The figures. Order intake, very good. Giving a good order book. Also the sales in the quarter was good.
When sales goes up in the businesses it of course has a positive impact on the operating profit. Also on that line, fairly happy. Not at our target level. Many areas where we could develop. Many areas where I would like to have a faster recovery of the operating profit or growth of the operating profit. I'll come back to that also a bit late. Cash flow, as I said, much lower than, for example, one year ago. I think we are on top, or I know that we are on top of it, so I'm not too worried about that. Industrial and terminal orders grew by 45% year-on-year.
Good achievement, you have to keep in mind that the big London Gateway order is not in these figures. We announced it before the end of quarter three, it's booked on quarter four. Here's a very interesting picture of the big projects that we have got during quarter three, beginning of quarter four. The interesting thing in this picture is that we have dots worldwide. We have TraPac, the west coast of U.S., we have Venezuela, we have a big project in Africa, we have London Gateway outside London, we have a big project in the Philippines. There's market activity in the whole world. How is that possible? On the terminal sides, more and more big ships are coming into operation. Those big ships, they need bigger ports.
The ports have to be upgraded, bigger cranes, more automation to be more efficient. I think that the interesting thing here in this picture is the fact that those dots are all over the world. I also believe that this is the way it will be in the future as well. Personally, I don't believe in a worldwide collapse of the market, but I think that we will see many years of uncertainty. That's why global companies like us, we have to go to those markets that are active. We have to reduce our capacity in those markets that are less active. I think that the world has changed. There will not be a worldwide recession. There will not be a worldwide growth for the coming years. I think we are well equipped for that kind of development as well.
We have already a big activity in Asia. Asia will be the growth engine. We have a good foothold in South America. We could be better in Africa, but that's coming and we have a good foothold in India as well. Marine, of course, we are not at this 2008 levels, high order intake levels. Remember that at that time, people were ordering not 1 ship or 2 ships, they were ordering 10 ships or 20 ships. On a normalized level, I think that we are on a fairly good level with this order intake between EUR 200 and EUR 300. We see some recovery in the offshore area. That's maybe new. Sales grew 19% year-on-year compared to previous quarter. That's a seasonality.
Depends on when our projects take delivery of the bigger projects. Can vary between quarter and quarter. Operating margin in industrial and terminal was flat. Yes, I know that many of you feel that, "Hey, why is it not growing?" We have to remember that we had to grow lower sales here. The fact is that component prices have been going up faster than I anticipated. I think that's something that is very strange when we are not at that level where we were 2008. That's just a fact. We cannot pass on all the costs that we would like to our customers. We can pass it on, but we cannot pass on more than that to our customers.
We are on the right path. We are going towards the recovery of this business. Of course, I will come back to one of the solutions a bit later. I'm not happy with this figure, but I'm happy with the way it's developing. Marine profitability continued very strong. We have been able to keep an extremely efficient operating model in Marine. We have guided that, yes, we will come down to a lower figure. Of course, that's what will happen. It will not happen overnight. We are not talking about the figure of the 2008 level. We are talking about the double-digit figure also in the medium term. Then I'm talking about 2-3 years. Very happy with the development there.
Of course, we try to keep it as high as possible, naturally. Gross profit development. Market were a bit concerned during the recession when the gross profit went very low down to 14, came up, slight downturn. Now it's going up again. Good development here as well. Cash flow, as I said, that's reflected in the growth of industrial and terminal. We have many measures in place to see that we are doing the right corrective measures wherever needed, whenever, wherever we can do that. Service. If you look at quarter one 2010 up till now, slight growth, very small growth. We are putting in place more measures, but they take time.
I think that besides growing the service, it's also extremely important that we take care of the new business, new solutions, new products. We cannot rely on service as saving the company. I think that the whole company has to be in good shape. Earnings per share. Yes, the tax was a bit higher in quarter three, but I think that if you want to have a some kind of guidance for the full year, use the average tax rate for the first nine months, and that then you are correct. Not very big change in the various geographical regions. Yes, small recovery in U.S. that brings down then to other regions, but fairly similar pictures what we have seen before.
The strategic focus areas that I've been talking about very much. Customers, yes, we are doing a lot of activities, and I think one of the results is the big orders that we have got, is that we have managed to get the organization much more customer-focused than before. Emerging markets, yes, good achievements during the year. China, we made a joint venture with Rainbow Heavy. Now we know that we have a competitive base for producing our products. Russia, just a few days back, you saw that we signed an agreement with Rosmorport, which means that we are together with Rosmorport, which is the government authority developing the ports and terminals in Russia, developing new terminals and how to handle cargo in Russia. I think this is also a very interesting step.
Services, we are doing a lot of things, a lot of development in services, it takes time. Internal clarity, we have been working a lot on the internal processes. The processes are now in place. We have to harmonize the information system. That's our one project. Further development of industrial and terminal organization. You have seen what we meant by that. This morning, we announced a new operating model, that's actually for internal clarity and to accelerate the strategy implementation. What are we going to do from the first of January in 2012? We are going to have three external reporting segments, marine, terminal and industrial will be split into terminals and load handling. I got a question this morning that why don't you call it Hiab and Kalmar?
No, this is not old Hiab and Kalmar. The reason for that is that it's a totally new way of looking at it. I'll try to explain it to you. When we combined Hiab and Kalmar, why did we do that? We had to get out the synergies from production, from processes, from all the back-office functions, and we could not manage to do that if the units were separate. At the same time, we were developing the strategies, how can we go on forward from here? The cornerstones for the terminal strategy was to have competitive production of our products, which means joint venture in China, and that's done. Second thing, we had to go up the knowledge ladder. We had to have more knowledge.
We had to not only provide products, but real solutions and understand our customers. For that, the solution was Navis. We have competitive production, we have Navis, we know the whole chain, and we have got some big orders. Terminals is in place, and it needs much more focus than before. That's why we have to now lift out terminals, see that it's really capitalizing on what we have built there. Load handling, on the other hand, has developed, main part of load handling products are, of course, old Hiab products, and then you can compare it to some of the competitors. Have we lost market share? Have we gained market share? My guess is that we have lost some market share, and we will not let that continue.
We want to have much more focus on load handling, a much stronger strategy on being number one in the world. That's why we take it out and call it load handling. We are adding products on terminals. Why is it not Kalmar? Because we have Bromma products, we have Navis products, we have new products coming that are not Kalmar products. That's why it's called terminals. It's a solution-based business instead of old product-based business. Load handling, same thing. We are going to look at how can we be number one in this segment in the world. Might require, I don't know. There are acquisitions, joint ventures, new products, whatever it is. I want to have more focus on that as well.
Last but not least, of course, we have got a lot of comments from people like you from the market that, hey, the visibility isn't there when you divide when you have all the products in one basket. Of course, this will help to that as well, that we will have better visibility, easier KPIs to explain to you what's happening in the different areas. I'm extremely happy on what we have done, and I'm actually very happy that we combined them, and that way we could very quickly get the processes in place, get the multi-assembly units where the combined production is done, and get the service together. Many good things have happened which could not have happened if we haven't gone that way, and now we come to the next stage.
Services continues, not an external reporting segment because it's actually products are sold through the three businesses, external businesses. The regions, they will be responsible for sales in the respective markets. At the same time, we have said that, hey, now the businesses are big, strong. They have to handle many of their own activities which we have also earlier centralized. Why centralizing them? That we get, again, same way of doing everything from development discussions to financial reporting. We are going to streamline that organization. The processes are ready. The businesses have to manage that themselves. I think that we are able to take out some cost here and also give more autonomy to the businesses. In my opinion, a good development. 2011, we haven't changed the outlook.
Grow approximately 20% and operating profit margin estimated to be approximately 7%. Exactly the same. We have gone this over the year exactly in the same path, and I think that we are going the right way, and I'm actually very happy that irrespective of the market. I think that that's one of the strength of our company, is that we are a global company. We can manage, as you saw, we can manage projects in South America, in the Philippines, in London. We know how to manage in this uncertain situation. Okay, Paula.
Okay, thank you, Mikael. We are now ready to start with the questions from the live audience. We have also our CFO, Eeva Sipilä, here to answer your questions. Audience, please.
What about that Hiab is for sale or are you going to sell it, part of it, for example, to Chinese companies? Are the Chinese companies interested in Hiab because you are now cooperating with the Chinese companies very much?
Yes, I think the Chinese companies are interested. Are we going to sell it? No. No. No, that's not the plan. The plan is to have more focus because we have said that those segments that we are going into, we are going to be the world market leader. That's what we are going. That's how. That's my aim, that we will be the world market leader on load handling as well. We might need some partners, yes. I don't know how it's done, but in detail. No. No, that's not why we are splitting it up.
Hi, it's Erkki from Swedbank. The industrial terminal orders during the first three quarters of this year were more than twice the marine orders, i.e., there's a gradual sales mix change going on. Taking into account the margin difference we have in these two business areas, so there's kind of embedded margin deterioration scheme from 2012 onward. How would you comment on that and intend to tackle this issue?
First of all, yeah, I mean, if you look at the figures, you are totally, you are totally right. That's an analysis that you can make. First of all, we have to remember that marine still has a very healthy long order book. We are not talking about that it will disappear overnight, neither the order book nor the profitability margin in marine. Secondly, all our activities, including the splitting it into load handling and terminals, are aiming for that we have a better visibility and that we can bring up the profitability of those businesses. Yes, I understand your question. Am I concerned?
Of course, life will be much easier if there will be a huge, huge marine order book as well. That's our job. We haven't changed our long-term targets of 10%.
Thanks.
Okay, I think we can take questions from the people on the phone lines now.
Thank you, madam. If you do have a question at this time, please press star one on your telephone keypad. Our first question comes from Sebastian Huber of UBS.
Yes, good morning. It's Sebastian Huber from UBS. Just a quick question on the new reporting structure, and streamlining of the organization. Do you also expect some restructuring charges to come up? If yes, by when and how long do you think that this new focus, especially in load handling Will take? We have seen that Palfinger is preparing for a potential acquisition in China. Do you see there the risk of further losing market share or being number two in that market? What is your China strategy? Thank you.
Yes, if I start with the second question, what is our China strategy? As I've said, now we know how to proceed on the terminal side. If you go to load handling, one of the big questions is how can you distribute your products in the big markets, China and India? That's definitely. It's a good question. We are looking at many alternatives there. I think that we will, or I know that we will one day have a good solution for that. One thing that you have to remember about load handling is, of course, yes, I said that maybe we have lost some market share in some markets and so on, but it's not so that we haven't had any load handling organization.
We have thousands of people who have sold the products, order intake there has been good as well. It's not so that we start from scratch. We just want to have more focus on that. That includes acquisitions, as I said, distribution in developing markets, new products, and so on. We are not starting from scratch. The first question was? Yeah.
Okay. Good morning, Sebastian. This is Eeva Sipilä. Answering your second question on the possible restructuring costs. We've just today announced the plans, and we'll start union negotiations in Finland and Sweden, obviously we don't yet know the outcome. However, we have given you a full year guidance, which you should use as the base for this year profitability. We come back to next year's guidance in three months.
Do you expect that you can give us a little more color on the new structure on the Capital Markets Day on the 17th of November?
We will certainly in our Capital Markets Day discuss the Cargotec development. I'm sure this new organizational model will be part of that discussion. Obviously all that material will then also be publicly available on our website.
Okay. I have one follow-up question, please. Some companies have indicated that payment terms have somewhat weakened, especially that prepayments are not being paid as high as it was in the past. Do you also see this development at your company?
We don't see a change in the prepayment pattern or the size of them. I think overall, obviously in a situation like this, accounts receivable collection is highly important to avoid bad debts. We have put a lot of effort and will continue to do so on that part.
Thank you, Eva. Thank you, Mikael.
Thank you.
Just as a reminder, if telephone participants wish to ask a question, it's Star followed by one on your telephone keypad. Thank you. Our next question comes from the line of Tom Skogman. Please go ahead with your question.
Yes, this is Tom Skogman from Handelsbanken. Could you elaborate a bit more on the marine order intake outlook by ship segments? How long can you stay at these sales levels where you are now, given the outlook you see? On the industrial terminal side, could you give an update about what's happening to the cost structure with component sourcing in Poland and so forth?
Okay. If we look at the marine, first of all, we see, as we have said, higher activity in the offshore sector, which I think is very good for us because the possible order intake per ship is very much higher there than in many other ship types. How long will it continue? Yes, we have seen that the overall order intake for ships has been coming down. Now, on the other hand, we have also seen some new activity on the container market. I mean, in the short term, I'm not too worried. We will see.
It's difficult to say, but I think that actually if you now look at the level, yes, it has been coming down from the 2008 level, but it's on a healthy level. The forecast from here onwards for our interesting ship types is fairly, I should say, flat or slightly positive. Of course it might change. I mean, the whole. There are so many question marks there. I'm not too worried about that in the short term. At the same time, we have to remember that we have a good order book, so it's not so that it will stop overnight even if there would be a few months with very low ship ordering in the world.
The ramp-up of Poland has been going very well. We have employed more than 100 new people there this year. We continue employing more people there. The ramp-up has been very good. It's going exactly according to our business plan, so that's the good thing. If you then ask about the components, yes, there are certain components where the price increases have been much more than they should be in this kind of market situation. That's something that we have to tackle. New suppliers, new designs for the products to lower the costs and so on. Eeva, do you want to add something to this or... No?
No, that's fine, yeah.
Okay.
Would you like to add something else to that component to why the margins are not going up despite much higher sales all the time in industrial terminal? Is it a pure component cost issue or is it, have you hired a lot of overhead people or what are other things?
No, we haven't hired, actually, we haven't hired a lot of overhead people, so that's not. It's the whole transformation of ramping up the new factories, product mix. There are so many components to this. I think that the component pricing is the biggest component of this not being able to ramp up the profitability as quickly as I would have liked it to be.
Any light in the tunnel when that will normalize, your pricing compared to component pricing?
Yeah. Do you want to say anything about that, Eeva? Or, I mean-
Uh.
Of course, we would like it to be tomorrow, but...
Yeah, I think there is no sort of immediate relief probably available. That is why we are initiating more actions on the terminal and load handling side of the business is to get to where we want to be in profitability. Of course, you can always discuss that if we really run into a serious economic downturn, then probably the silver lining of that recession...
Mm.
is then a component price. The situation should change. I think it is so uncertain, it's very difficult to predict at this point. I would be surprised if prices go up from this level. As said, it is a challenging time to be estimating.
Thank you.
Of course, we are quite positive that we are doing the right actions. As Eva said, I mean, the splitting of industrial and terminal into terminals and load handling, I think that's so we get more focus, we get more... The organization, industrial and terminals, was maybe or was good for the back office functions, good for the processes, but it was too big to manage. I think that will help this profitability improvement as well. At least it's easier for us to pinpoint where the possible problems are.
We have no further questions at this time.
Okay. Do we have any more questions from the audience in Helsinki? No? If there are no more questions on the people on the phone lines, I think it's time to thank the audience and wish you a good day.