Good morning and good afternoon, ladies and gentlemen, welcome to the Cargotec Corporation Q2 2011 interim report. At this time, all participants in listen-only mode until we conduct a question and answer session, and instructions will be given at that time. I would like to hand over to the chairperson, Paula Liimatta. Please begin your meeting, and I'll be standing by.
Good afternoon, ladies and gentlemen, and welcome to listen to Cargotec's second quarter 2011 presentation. Today, we have a small live audience here in Helsinki and also people on the phone lines. We will start with the presentation by our President and CEO, Mikael Mäkinen. After that, we will have time to answer your questions. Before asking a question, please ask for a microphone, state your name and company. We are ready to start now and Mikael, please.
Okay. Thank you. Welcome, everybody. Following the normal procedure, we go through the monthly, or sorry, the quarterly report for 20-25 minutes, and after that, we have time for questions and clarifications. January to June, market activity was good in both segments and all geographies. I'll come back to some details a bit later. It picked up in most parts of the world. Order intake in Q2 grew by 4% and sales by 25% year-on-year. Operating profit increased to 6.8%. I'll come back to the details a bit later. Although we are ramping up production, we have some more stocks being built up for coming deliveries, our cash flow remained healthy. We also started a global competence center for container terminals in Singapore. I think that's a...
It's a small center, but it's a very vital part in our reformation of the terminal business. Market environment. If you take the load handling equipment, developed positively. As you can see from here, the demand for loader cranes, truck-mounted, tail lifts grew rapidly. As I've said in Q1, recovery in construction-related customer segment in United States is low. It's still low. I think it will be low for a considerable period. Let's have a look at the container handling equipment in ports. There, as we have said here, rubber-tired gantry cranes was very strong, and that's because of the activity in ports. If you look at the market in general, I must say that there is a big number of projects. They are related to automated ports. They are related to upgrading ports for bigger ships and so on.
A considerable number. We have seen the projects developing, discussions being more intense. We have not seen many of the orders, but I'm quite confident that they will come in in Q3 or in Q4. I'm quite positive about the container handling market. Marine, healthy level. We have seen big ships, for us, very interesting ships being ordered. Interesting for us means that there's a big revenue per ship for us. As I've told you before, some ship types might have 6x- 8x higher revenue per ships than a normal, very simple cargo vessel. The fact that the bulk ships, number of them, or being ordered is going down is not a very big concern for us. I also on the marine market see a fairly healthy development.
In load handling and terminals, we have seen a good improvement in service as well and different types of modernization packages. On the other hand, marine service, as I already told you after Q1, marine service is recovering, but there is not a big recovery at all. I think that that's a shift in the market. The shipowners are much more cost-conscious than before the crisis. To expect a huge recovery in marine service, I think it's unrealistic. A good development, yes. Key figures, order intake. In my opinion, a good order intake, taking into consideration that we have not seen the big projects in the order intake yet. Giving us an order book of EUR 2.3 billion.
You have to remember that we had a huge, big order book in marine, and now we are more on a normalized level. Good sales. On this level, a good operating profit. EUR 54 million is a good. 6.8% is okay. If you then, we will go into the details. There are areas where I'm happy and there are areas where I'm less happy in the development. Cash flow, not on a high level as we have seen one year before, but still on a very good level, and we are working very much on. I think that this is a good figure, EUR 71 million for the first half year. Industrial and terminal order intake, 25% growth year-on-year. Half of it coming from EMEA. Strong growth in Asia-Pacific.
If you look at the figure, compare it to Q1, it looks like it's going down. On the other hand, if the normal base business is on this level, if we add to that bigger projects, we are on a healthy level. Meaning that I see the coming quarters as very interesting from the order intake point of view in industrial and terminal. Marine. We had a lot of bulk carriers one year ago, now offshore is recovering, container is recovering. If you now look at the trend, it could look worrying that you come from EUR 309 million, almost like a downwards trend. The number of projects we again here see in the pipeline is very interesting. I don't see us going fast down.
I see coming quarters being very interesting in marine as well. Please bear in mind that we are on a much, much higher level than we were before. There's a timing issue. In big projects in terminal, in marine, one quarter is a very short period. If the order is coming the 1st of July, yes, it goes into the next quarter and so on. Fairly positive. Sales. Industrial and terminal, yes, that's where we are ramping up. Grew by 34%. Marine, 12%. Well in line with what we have said about the forecast for this year. Industrial and terminal operating margin, 4.5%. Yes, it's the right direction. Yes, it's not a catastrophe. No, it's not an area where we could be very happy about that.
I would have liked to have it on a higher level. What is happening here is that we see, as you have seen in many other companies, that there is a cost inflation. There's a pressure on costs. We cannot, although we would like to do it, we cannot as quickly as we would like to pass it on to our end customers. There's a squeeze in the market. There is actually a squeeze on some of the components that is affecting us. It doesn't change our target for this year or our long-term target, no. We reach it, the long-term target, not as fast as I would like us to reach it. On the other hand, we are also ramping up.
We must have a good capacity for coming orders, for maybe an even more difficult market condition in terms of costs. That's why you see us building up some of our stock. On the other hand, Okay, I'll come back to the gross profit a bit later. Marine. We have said that we will not be on this very high level, that we will come down to a normal level, which is about 10%, and this is many quarters ago, and we are still on a very good level. What's happening here? We have a good mix. Yes, the boom order intake is over, still the order intake that we take is on a very good level.
I'm even more confident than before that we will always see a double-digit margin here and maybe a figure that is well above 10 as well. We have a very good operating model here in marine. Gross profit. Some comments people were worried about. It's going down. Now it has turned back. We are incurring some costs. That's why you don't see the gross profit development coming fully through to the profit of the industrial and terminal. You have to remember here as well that this includes both marine and terminal and industrial. Again, a good development going in the right direction.
Cash flow, as I said, yes, lower than one year ago, but now we are in a normal situation where you have to order components, you have to have something in stock, you have to be prepared for good output and short delivery times. Still a good figure. Service. Service is recovering slowly. Yes, if you look at that graph, you take two, four, six quarters back, it's almost flat. There's not a dramatic increase here. I think we are working on it all the time. We would like it to be better. Marine is slow, industrial and terminal is growing. That's how I see it. I hope that we will get a faster recovery here in the future, but we also have to be realistic.
Earnings per share continue to improve almost EUR 0.70 in one quarter. I think it's not a bad figure. It's actually a very good figure if it can start to be on that level. This quarter, EMEA slightly bigger than Asia- Pacific. The small percentage changes, that's only a question of deliveries, how the deliveries are timed, so you cannot draw any big conclusions from this graph. The following slides are exactly the same slides that I have shown you before. I just have them here as a reminder for you that this is a strategic journey that we are going, and the focus areas are these four areas. Service takes time to develop it.
Customer and customer segments, I think we have done a great job here in understanding our customers and working together with them on. I think that we took a very, very big step in this direction when we acquired Navis. We have a very different dialogue with our customers now because we are the only one in the world who can offer the whole chain from Terminal Operating Systems, automation, equipment. There we have done a big, big improvement. Emerging markets, India, Brazil, Russia, Africa, China. I have promised you that China, we have to have a solution for China. One way or another, we have to see that we are anchored well in China within this year. That work is ongoing. Internal clarity, that's the one project.
Common processes, ERP systems, that's only for us to be even more efficient and to reach even higher EBIT than we have in our today's targets. Priorities for 2011 have not changed. Responding to the growing demand. Yes, we are still responding to the growing demand. We see that there's a lot of business out there to be taken. Service growth, we talked about that. Customer segments, yes, we have also said that over the time, we will see how many customer segments can we afford to have. Do we have to divest something to be able to invest in some other areas even more? Position in the Chinese market, I told you about that earlier as well. The work is ongoing. The ERP. Outlook. We have not changed the outlook.
We estimate that the sales will grow approximately 20% this year. The operating margin to be approximately 7%. I think that's it. Bearing in mind that there is a cost pressure on the market as well. It's not an easy journey. It's not at all an easy journey. We are well on the way. I think that the fact that we have a fairly healthy market situation helps us. Here, thank you very much. Now, I think it's time for questions and clarifications.
Okay, ladies and gentlemen, we are now ready for questions. In addition to Mikael, we have our CFO, Eeva Sipilä, answering your questions. Let's start with the questions from the live audience here in Helsinki. Erkki, please.
Thanks. It's Erkki Vesola from Swedbank. Question regarding industrial terminal. Do you see more cost pressure on the Hiab or the Kalmar side currently? That's my first question.
Actually, it's roughly the same on both sides. Yes, because it's a component. People are talking about some raw materials are not going up, they are going down, but we are actually not buying raw material, we are buying components.
Okay, how quickly, if at all, do you expect to catch up with your own or by your own price increases going forward?
Of course, you have to remember that, I would say that the market demand today is on a 75%-80% level of what it was, which means that all the competitors still have capacity to produce. Which means, other way answering that it's not that easy to catch it up. Of course we have, I mean, in some markets you can do it quicker, in some markets it takes a longer time.
Finally linked to that, do you have to say no in a number of projects because the pricing gets on an unhealthy level?
Yes, of course, there are projects where we say no. If we feel that there are some projects where the price level goes to a level which I don't want to take. I think it's better to say no in that case. I mean, they are not that many. Yes, we have a limit. We are not trying to fill our factories. We are trying to make results.
I mean, has that number increased?
No. No, it has not increased, no.
Okay, thanks.
Is there coming some big orders in the harbor automation business under this year?
As I told you, after quarter one, there is almost 10 big projects in the world. Very difficult to say when they will materialize, who will get the orders, and so on. The number is so big that, yes, a number of them will be ordered from someone within this year.
I'd like to ask about United States. Do you think that you are going to stay there? Is there coming some changes, for example, in production?
In the States?
Yes.
Stay there, yes, of course, we are going to stay there. It's an important market. It's the biggest economy in the world, and there are a number of big pro-port projects there. Of course, we have our production facility in Kansas, Ottawa, we have in Texas. Yes. Yes, we are going to stay there for production as well for especially the U.S. market.
Okay. oh, one more question in Helsinki.
Yes, Erkki Vesola again. One more question regarding marine. Do you see what's the effect of a changing mix in the marine side, more containers, offshore and so forth versus bulk of that where you used to deliver more gear? Margin implication there.
There is not a big margin implication in the mix, no. The more complicated the ship is, the less number of ships we need. It's that. No, I don't see. I mean, offshore vessel could be 8x more revenue for us compared to a simple ship. A container ship could be twice or 3x more. You have to look at the various ship types.
I.e., the recent trends should be favorable to you?
Let's say that it's, at least it's not unfavorable to us. Let's put it this way.
Okay, thanks.
As I've said many times about ship types, when you look at the ship types, remember that we have nothing to offer for tankers nor cruise vessels. Those ship types are of no interest to us. The rest of the ship types are.
Operator, please. Now we're ready to take
Just one more.
Oh, one more.
If you look at your order book, is it the right conclusion that you have won more market share in this industrial and marine business?
I think that we have won market share in some ship types, and maybe we have lost in some. Overall market, I would say that roughly the same. We are the biggest in the market, but I would not say that our market share has neither dropped nor increased.
Now I think we are ready to take questions from the people on the phone lines. Operator, please.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star key followed by one on your telephone keypad. Once again, that's star one to register a question and the hashtag or star key to cancel. Our first question comes on the line of Johan Eliason from Cheuvreux. Please go ahead.
Yeah, hi. I was just wondering a bit about the marine outlook. If you take your backlog into consideration, what do you now see will happen with the bulk ships coming down and then potentially the container offshore coming up? Are you confident on a fattish revenue development next year? Is there some sort of risk that there will be a gap in between these developments and there might be a downward development in your revenues?
Actually, I don't think we have given any guidance for 2012 yet. Answering your question, today, I wouldn't say that there is a huge risk or opportunity, which means gap either or in positive or negative way.
Okay, good. Just coming back to the margin in industrial and terminal, you say you are getting leverage through, but then the costs are going up and there's price pressure. When is there anything decisive that could eventually make these margins also trend up a bit more significant in line with the volume development? What needs to be happen? What needs to happen?
Of course, our customer needs to understand that they have to pay more. If that's unrealistic to think it that way, I would say that it's a slow, slower progress than I thought maybe one year ago. There's nothing super specific that need to happen. It's a daily work. Of course, when the market is picking up, then you can be more selective on the projects and be able to take only those projects where the margin is high enough. I think that's. There's no magic solution to this.
Is the, in any way related to more Chinese player trying to enter, I guess, the port side of the market? Is that the, an issue for pricing for you or?
Of course there is, As I said that maybe 75%-80% is the utilization rate. Anyone can today offer on any project, and they don't have a capacity constraint. Yes, there will be capacity constraints on components, but not on their own production. If you add to that we are seeing some of the Chinese player being very aggressive in some markets. The total, yes, of course, yes. The answer is yes. That's why I've said that we have to succeed in China because if you don't succeed in China, you will not succeed in anywhere in the world.
Okay. Thank you very much.
Thanks.
Next question comes from the line of Tom Skogheim from Handelsbanken. Please go ahead.
Yes. Hi, this is Tom Skogheim. I have two questions. First, on the port side, when you not have booked any products really this quarter, but if you get them in Q3 or Q4, are the delivery times in these kind of products short enough so it has a severe impact or material impact on sales already next year? That's the first question.
Yes, they will. I mean, when we talk about these 10 projects, some of the projects are mega, mega projects that are discussed now. They will not have an impact on 2012. Some of them are the medium-sized projects. They definitely have an impact 2012.
Okay, thanks. The second question is about the underlying leverage. I realize there is a lot of squeeze on your prices compared to component and raw material cost. What is happening to the underlying fixed cost absorption? Is it going as planned? When you get back the sales margin in the industrial and terminal business perhaps next year, it's all good or what is happening underneath?
I would say that it's going exactly as we have planned. Yes. I don't know, Eeva, do you want to add something or?
Yeah. I think overall the absorption is going in the right direction. Of course, we have a bit of development issues ongoing that add some costs that were mentioned early on the ERP and the sort of developments in Singapore and the like. Again, they are very much in line with our strategy and very conscious decisions so w e will continue with them.
Just looking at the number of employees, they are up in industrial and terminal by 18% year-on-year, which is not as much as the sales number is up, but it's still a significant number. I'm just wondering about these cost cuts compared to the. You know, you're hiring a lot of people now at the moment, it seems to me.
Yeah. That's correct. I think we have about an 800-900 per-person increase within industrial and terminal and close to 500 of that is from acquisitions. The Navis is obviously a bigger one, where we have some other ones. Then the rest of the increase is then partially related to the ramp-up of our operations to deliver the higher volumes, and then some investments in headcount as well related to these projects I mentioned.
Okay. Thank you.
Ladies and gentlemen, once again, press star one to register a question and the hash or pound key to cancel. Our next question comes from the line of Pekka Spolander. Please go ahead with your question and state the company name.
Pekka Spolander from Pohjola Bank. Hello.
Hello.
I have two questions. First, concerning industrial and terminal, you have reorganized your production structs quite a lot. Is all this job done already or is there still something to do? Will we see some pressure on the margins from these actions? Related to this, do you still have some extra inventories, for example, in different places because the organization is not yet finalized?
Okay. Eeva, do you want to take the inventory or I can also take it?
We have a bit still of duplicate inventory when it comes to the ramp-up in Poland, between Tampere and Poland. That will, as we've indicated, that is going according to plan and will not be an issue in 2012.
Okay.
If you talk about the your first question, no. I mean, of course, it's not the kind of, as we have seen, a revolution where we have had to close a lot of factories and so on. There is an evolution, yes, that maybe we have to reduce a bit here and add in another area, but it's more like normal business.
Okay. nothing special going on at the moment?
Of course, there are special things going on at the moment. More on...
Okay.
No, nothing related to that. Sorry, I have to answer that. Yes. Nothing related to that. No.
Okay. Then about the margin in marine, as you said that you have already indicated that the very strong margin will gradually come somewhat down, but actually we haven't seen that. What should we expect for the coming quarters? What's behind actually after this very strong performance? Is the sales mix different or the costs favorable in marine or what explained this very favorable development?
It's actually during the time when we ramped up and when we had this very high order book and we came to this 15.8, and we thought that it will come. We looked at history, how will it come down. During that same time, we made the marine machine even more efficient. It was very difficult for us to say that, "Hey, how will it be over the in the medium term? Will it go down? Will it go down to 10? Will it go down to 12?" Now we can see that it's a very well-functioning machine. You can see that there we are, we have a good volume increase. We don't have an increase of number of employees.
It's all these small things that are still ongoing in marine, and they compensate for whatever pricing squeeze there is in the market. It's just a positive development. Again, nothing magic. Many, many small things. Very, very competent organization.
Related to this, have you already delivered all these, let's say, high margin orders you took before the financial crisis, or is there still something in the order book?
Something small, yes. I mean, not substantial. Not a substantial amount anymore.
Okay, thank you.
Thanks.
We appear to have no further questions from the phone at this time. I hand the conference back to you.
Okay. Do we have still one question in Helsinki?
Yes, Erkki Vesola from Swedbank again. Regarding your Polish factory, it's been running up more than a year already. How would you describe the capacity utilization there? On the other hand, you talked quite a lot about building up the kind of new sourcing chain there closer to the factory. Where do we stand now?
Capacity-wise, I don't remember. Those of you who have seen the factory, you can see that there are actually three parts of the factory. There's the left part, the central part and the right-hand part. So if I just give you a rough figure, two-thirds are full in the factory. That's tells you something about the capacity. We have, Eeva, added about 100 people to that.
Yeah, during the first six months of the year...
Yeah.
100 people additional, which is then according to plan.
According to plan. Again, going back to Tom's question earlier that this added number of 900 people, 500 from Navis, and then we have added 100 in Poland and then there are in few other places. I don't see it very dramatic. Your second question was?
About the sourcing chain.
Sourcing chain. Yes, we are building up the sourcing chain, and it takes actually a longer time than we optimistically had thought. Maybe according to our plan, yes. Sourcing chain, what has happened in? Why is there a squeeze on components in the market as well? There are, there were many small manufacturers of components and medium-size in our industry. Some of them were closed down during the recession. Some of them managed to survive. Some of those who managed to survive, they are not financially in a very good shape. It's not only to move. Yes, we could maybe find cheaper components in former Eastern Europe, but we are a bit scared of going with some components there because if the sub-supplier cannot financially, and we have to start supporting it financially.
It's yeah, it takes, it just takes time. It's well on the way, but it takes, it doesn't happen overnight.
Okay, fair enough. Thanks.
Operator, do we have more questions on people on the phone lines?
There are no questions on the phone at the moment. Thank you.
Okay. I think it's time to conclude the second quarter and wish you all very nice and sunny summer. Thank you.
Yes, thank you very much.
Ladies and gentlemen, thank you for your participation today. This concludes today's conference. You may now disconnect your line. Thank you.