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Good afternoon, ladies and gentlemen, and welcome to this news conference regarding Cargotec's Q1 2019 results. In Q1, our orders received grew in all business areas and comparable operating profit remained on last year's level. My name is Hanna-Maria Heikkinen. I'm in charge of investor relations. And today, our CEO, Mika Vehvilainen, will start with the group development and after that, our CFO, Mikko Puolakka, will continue with the business areas financials and outlook. After the presentation, there is a great opportunity to ask questions and get great answers.
Thank you, Hanna-Maria. Good afternoon from my behalf as well and thank you for joining the quarter 1 conference call for Cargotec. I know it's a very busy day today so I appreciate your participation. During the Q1 2019, the strong demand for our solutions continued. Our orders received increased for the fifth consecutive quarter with 19% increase in Kalmar, 11% increase in Hiab, and 33% increase in MacGregor, although from obviously fairly low level. Although the comparable operating profit remained last year level, operating margin was not satisfactory from our point of view. This was due to the supply chain issues in Hiab. However, we have a number of corrective actions taking place, the situation is already improving, and I am confident that we will see further improvement in the coming quarters. Mikko Puolakka will cover Hiab more in detail during the business area specific presentations. A few words about the market environment during the Q1 2019. Global container throughput grew slightly, 0.4%, during the Q1. This slight growth was contributed mainly for the pre-shipment with the anticipation of increase in tariffs between the U.S. and China during the Q1 that is now postponed. The market is expected to show a robust growth in container traffic this year with the market growth estimates varying between 4% and 4.9% for the 2019. Construction activity remained at the good level in our key markets in U.S. and in Europe. In MacGregor's area, the market improved slightly in merchant sector, but still remains well below the historical levels, and activity on the offshore side is still at the very low level. I said orders increased by 18% and increased in all business areas. Total order intake exceeded EUR 1 billion with the 33% improvement in MacGregor continuing the slight trend we have seen towards the end of last year. The Hiab order intake was EUR 341 million. This is the second highest order intake in quarter in Hiab's history only exceeded by the Q4 last year. Also in Kalmar, we had a record order intake with EUR 516 million of orders, and what's delightful that this came from multiple sources and not from any single larger order. Obviously, the strong order intake, fifth consecutive increase, is now showing in our order book, which is 27% higher than in Q1 2018. We are now seeing the order book trending up slightly in MacGregor, and we have a record order book both in Kalmar and in Hiab at the moment. Sales increased by 11% and we saw increase happening in all 3 business areas, but as I already commented, the operating margin was disappointing due to the difficulties we still faced in Q1 in Hiab. I'm very satisfied with the progress we are making in our strategic key focus areas in services and software. Kalmar services, corrected by the comparable currency exchange and adjusted for divestments, grew by 5%. Hiab services continued strong growth with 11% growth. And MacGregor is now showing signs of service recovery with another quarter of service growth of 8 percentage points. Total in Cargotec level services sales increased by 5% adjusted for currencies, acquisitions and divestments. The strong development in our software businesses continued with the sales increasing by 18% and orders by 56% from Q1 last year. This is primarily attributable for the good progress we have made in our automation software. Also during the Q1, we closed an important software acquisition for us, Cetus Labs, with their Octopi cloud-based SaaS-based terminal operating system intended for smaller and mixed cargo terminals that will further enhance Navis' position as the leading terminal operating solutions provider. We are currently well on our way to our target of EUR 1.5 billion of services and software revenues. With that one, I'd like to hand over to my colleague Mikko Puolakka, our CFO, who will cover the business area-specific results. Thank you.
Thank you, Mika, and good afternoon also from my side. So let's start with Kalmar. And Kalmar had a very good quarter in all financial metrics. Orders grew, as Mika indicated, 19% and the growth came across all Kalmar divisions also in all geographical areas. Kalmar order book is now above EUR 1.1 billion and this has grown by EUR 100 million since the beginning of the year. Kalmar sales were up by 8% and when we eliminate the impact of our 2 divestments last year, the Siwertell bulk business divestment as well as the Kalmar rough terrain container handling business divestment, then sales grew even 11% year-on-year. The reported services were flat, but also when we eliminate the previously mentioned divestments, services sales grew in Kalmar by 5% year-on-year. Kalmar profitability improved by 13% and was EUR 32.3 million, and the profitability improvement came, to great extent, from the top line, i.e., sales growth. So all in all, very good quarter for Kalmar. Then moving to Hiab where we had also very good development in orders, like Mika said already earlier, orders growing by 11% year-on-year. All major divisions in Hiab, i.e., loader cranes, truck-mounted forklifts as well as services, grew very well. And also, orders grew in all geographical areas. Hiab order book is now close to EUR 500 million and this, of course, offers a very solid basis for the revenue growth in 2019. Hiab sales grew by 14% from 2018, and when we eliminate the Effer acquisition which we did end of last year, then Hiab sales grew by 8%. Service sales grew 11% and very much in line with our long-term service growth targets. Despite the good growth in sales, the Hiab operating profit, however, declined. And this is, to great extent, driven by the inefficiencies and additional costs arising from the supply chain disturbances. We have taken several corrective actions and measures and the situation continued to improve throughout quarter 1. I would say that currently the issues are mainly related to our Stargard assembly operations as well as loader crane installation capacity, and we are very actively working on fixing those. And the positive matter, of course, here is that this is not so much anymore the external component supplier issue, but very much in our hands so very much for us to be fixed. And as Mika said also, we expect this situation to improve now in the second half going forward. And moving to MacGregor, MacGregor orders grew by 33%, but still, the orders were on a fairly low level because of the very, very low markets. The order growth came mainly from RoRo business primarily from RoRo division where the orders were very low in the early part of last year. MacGregor total sales were up by 10% and service sales were up by 8%. Service sales came mostly from the merchant segment. Looking at the MacGregor profitability, yes, there is a small absolute improvement despite -- the profitability did not significantly improve despite the sales growth. And improvement, kind of low improvement, came because of the low capacity utilization what we have in certain areas especially in the RoRo as well as in the offshore divisions. Also, the Rapp Marine integration is still ongoing and Rapp Marine is delivering at the moment more or less breakeven results. Then looking the consolidated financials, also like Mika indicated, the highlights of the quarter were definitely the orders and sales growth in all business areas. Those were clearly the bright spots. Profitability, excluding the items affecting comparability, remained on last year's level. We had roughly EUR 6.3 million restructuring and other cost items affecting the comparability and these items are related to the company-wide restructuring program so mainly personnel-related layoff costs and then the related acquisition costs. Earnings per share for quarter 1 was EUR 0.48. Cash flow from operations was weak if we compare to previous years. However, it improved from quarter 1 last year. Cash flow was EUR 31 million and it is still very much impacted by the supply chain disruption as well as growth in receivables, accounts receivables, as we are doing quite high invoicing towards the end of the quarter 1. Our financial position is strong. Our cash and the committed unused credit facilities were EUR 451 million at the end of March. Net debt has increased now in quarter 1 and the primary driver for the net debt increase is coming from the IFRS 16 where we took EUR 192 million lease liabilities in the balance sheet in early '19. This is also highlighted in our gearing. Our gearing 63% currently. And if we eliminate the IFRS 16 impact then gearing is 49%. As you can also see from the chart, we have a very well balanced maturity structure, no major debt repayments coming in a single individual year. ROCE was 7.8%, more or less, on last year's level. Our long-term target for ROCE is 15% and this requires still work especially on the profitability side. And then last but not least, our outlook for 2019, we reiterate our guidance for '19 and expect our operating profit comparable operating profit for '19 to improve from 2018. And with those words, I would then hand over to Hanna-Maria and the questions.
Thank you, Mikko, and thank you, Mika. We will start with the questions from Ruoholahti. Are there any questions from Ruoholahti?
Yes, there are. It's Erkki from Inderes. Actually, 3 questions from me. First, this is more for Mikko. Could you provide us comparable order growth numbers by division, I mean eliminating for all the M&A actions as you provided for sales?
Yes. For Kalmar, the orders growth, if we take the -- let me just take the orders. If we take Kalmar, the order organic growth for orders were -- let me check the exact numbers now.
Maybe if you take the second question while...
Yes.
That's fine. Now this was the fourth quarter in a row when your moving 12-month gross margin declined slightly. When do you actually see that the actions that you have taken improving profitability start to show in gross margin? Is it already in the second quarter? Or do we have to wait until second half of this year?
I think the margin, of course, is driven by multiple factors. One is the mix we see. So the product/mix within the different business areas also do affect that one. But at this stage, we see this has primarily been an issue now, of course, with the Hiab and we do see the Hiab situation gradually improving. We already saw improvements within the quarter itself, March already being clearly better in terms of deliveries, and we expect that positive development now to gradually improve throughout the year. So we expect Q2 to be better than Q1 and then improvement from there on.
And finally, going forward, regarding your current SG&A level, is it something that we should model in for the rest of the year as well?
We expect actually further productivity improvements on SG&A. I mean we have the company-wide EUR 50 million savings program that Mikko was referring to and that is delivering savings already within this year. And then also within the business areas, we have a number of productivity measures that we are in the process of executing.
So for Kalmar, we reported -- the reported order growth was 19% and when we kind of clean up the divestments, then the growth was 26% year-on-year. For Hiab, the reported orders were 11% growth and when we eliminate the Effer acquisition then it's 5%. And then for MacGregor, the reported order growth was 33% and when we eliminate the Rapp Marine acquisition, then it's 28%.
Then we will continue with the international questions.
[Operator Instructions] We will now take our first question.
I would like to talk about Hiab. Are deliveries still limited by the supply chain? Or are the issues now mostly on the cost side? And would you say there's a significant backlog for urgent delivery? Or are lead times still stretched? I'm just trying to understand delivery phasing for the rest of 2019.
Right. Maybe I take that one. Yes, the supply chain at this stage we still have issues, but a lot more limited issues in terms of availability of the components. Right now, the primary issues are actually around our Polish facilities because the loader crane manufacturing facility that are to do probably with, I would say, the maturity of the operations, the factory; it's a relatively new factory that has had a very, very strong order increase within the 2 years of operations. And then also the labor availability and labor rotation within that market; that is also part of the issue. And there is a long list of corrective actions that we are currently executing on that one and we see gradual improvement taking place in there.When it comes to the lead times, this varies from product area to area quite a lot. I would say that the -- some of the product areas are now within the few weeks of delivery times and the longest lead times are extending well towards the end of this year at the moment. But it's very, very product-specific at the moment. Our on-time delivery numbers are coming up, are actually considerably up compared to the same time last year or even towards the end of last year. But we still have long lead times in certain product areas. We are obviously also following up on cancellation activities with the long lead times. We have not seen any further changes in cancellations. Those remain at the normal level.
And is this issue still negatively impacting on mix?
Yes, it is. I mean generally what we see, obviously, first of all, the loader crane, as such, is a good business for us so we are not able to execute quite what we need in there. And within that product area specifically, the deliveries of smaller, more simple cranes that have a lower margin are usually easier to do. There we have less delivery issues. And the more complex, heavier cranes are where we have further or I would say more restraint at the moment and there we have more delivery restrictions and that's affecting the mix of the deliveries as well.
And if I may take a second question on MacGregor and TTS. Is the acquisition still expected to close in Q2? And in terms of profitability for MacGregor, either for MacGregor standalone or MacGregor TTS combined, do you have a view on what kind of revenues or market activity are needed for the division to return to historical margins or to go to the sort of low-single digit margin range?
On the TTS case, this is still with the Chinese competitive authorities. We still expect this to be resolved during the quarter 2.In terms of the margins, obviously, we have a limited visibility on the TTS situation. They have reported their Q4 so far with a slightly positive numbers on that one; not that different from the MacGregor numbers. Obviously, after the closing we still expect the synergies to be at the level that we have indicated earlier when the deal was announced and that should then drive the profit improvement even with the existing market conditions.
We will now take our next question.
Magnus here with UBS. A couple of questions from me. So how does the capacity utilization look in Kalmar at the moment? Of course the backlog there is up a lot. So do you think you can sustain the current delivery rate on the equipment side there and without seeing any bottlenecks emerging?
The capacity situation varies again from product area. We see actually the order increases coming pretty much across the board from different product areas, which is, in a way, good news. I would say that for certain products for the North American logistics sectors we are now serving or selling towards the very end of this year or really next year capacity already. And in certain other areas, we are actually having a situation. But overall, I would say the delivery and capacity situation in Kalmar is in a better shape that is in Hiab at the moment. We still have further improvement opportunities, but the situation is not as critical.
Got it. And could you just give us some flavor on how large the addressable market opportunity is for Octopi compared to Navis?
It's a considerable. I mean when you talk about the smaller terminals and mixed cargo terminals, you will have thousands and thousands of different small ports. And the idea, of course, is that it's impossible to serve that kind of small market segment with on-premises software and dedicated teams. So Octopi solution will be a cloud-based, SaaS-based solution. We will obviously take an advantage of the Navis network and Navis brand name to leverage on that one. But it will be -- it will enhance Navis sales to a certain extent, but obviously, the revenue per customer will be roughly limited, but it will be, again, SaaS revenues so that will be the kind of revenue profiles that we are seeking into further software expansion.
Okay. But do you think the sort of the market could be of a similar size or half the size or any view on that? It makes a difference, of course.
It will be smaller than the current Navis market, which is a very large market. But again, the penetration is probably a bigger driver there than the actual size as such.
For sure. Absolutely. That's very useful. And finally, could you expand a bit on how you think the mix is going to change in Hiab going into Q2 versus Q1?
I think we will see the situation gradually improving in higher-margin product areas and I would say that, that will again reflect on the gradual improvement on the product/mix from the Q2 onwards.
[Operator Instructions] We would now take our next question.
This is Johan at Kepler Cheuvreux. Just a question on those numbers that Mikko mentioned on the order intake. Was that adjusted for both acquisitions and currencies or just acquisitions?
This is adjusted only with the acquisitions. The currencies had 1% to 2% unit impact on the orders. But basically, the M&A acquisitions and divestments have the major impact on the kind of order change.
And then associated income was slightly negative. When should we expect to see that number turn positive again considering your significant increase in orders for larger equipment in Kalmar?
That should improve when the percentage of completion order kind of progress in those projects will advance. Some of these orders we have been receiving in the latter part of last year so it takes some time before we get the bigger volumes in the deliveries. But throughout '19.
Yes. And then on your net working capital situation, still sort of increasing during Q1 versus end of last year. When should we see the big release coming?
This is very much related to the, I would say our Stargard operations. Especially in Hiab, to a certain extent in Kalmar, we have still some backlogs. So gradually when we are sorting out supply chain related issues, then we expect also that the working capital especially the inventories should be then notably down from the current levels.
So it should be sort of in line?
Yes, gradually in the second half of this year.
Yes, okay, good. And then just some IFRS 16. You said the debt you've assumed there. And depreciations related to that, how much will that be?
Basically, we have estimated that the IFRS 16 has a roughly EUR 7 million positive impact on 2019 results.
Okay. But the depreciation impact, how much was that in the quarter and how much do you expect for the full year?
Let me check from the notes.
We will now take our next question.
Yes. Roughly -- yes, if we look to the depreciation, it's roughly EUR 4 million on the machinery and equipment and then EUR 6 million on land and buildings, mainly buildings. So it's basically the Note #6 in our interim report. And when you compare the quarter 1 '19 depreciation versus the quarter 1 '18 depreciation, that's more or less the difference, roughly EUR 10 million.
That's on #35 on the interim report, if that helps you, Johan.
Yes. Note #6.
Do we have further questions? Do we have further questions from the line?
We do have one more question queued up over the phone.
Okay.
In the context of the growth seen in the software and services through the Navis automation solutions, such as Bluetracker, can you comment on the possible impact or opportunity that the IMO 2020 software regulations or any further regulations provides for Kalmar and the software business going forward?
I would say that there is not a direct impact from the IMO regulation or generally, I would say that the pressure that the sustainability and the CO2 has in that one. But obviously, when the industry overall is seeking for a more sustainable way of conducting business and shipping, the digitalization is one of the best leverages that the industry would have in terms of the kind of more accuracy of the shipping arrival times, how the ships are loaded and unloaded. And obviously [indiscernible] that one has a potential larger impact on the CO2. So indirectly, the requirements for the maritime industry for more sustainable transportation will benefit our software industry.
You do have further questions queued up over the phone at this time. We will now take our next question.
This is Karl Bokvist from ABG. My first one concerns Kalmar. And how should we think about margin development in the coming quarters? I mean if we look at Q2 '18, the year-on-year margin was fairly negative. So perhaps that was a temporary effect. And how should we think about Q2 '19 versus Q2 '18?
I think in terms of Kalmar margin improvements, we will see further improvement on the year. I mean overall, if you look at our guidance for the year, and it's fairly clear that MacGregor's contribution for the margin improvement this year is not going to be great, so the margin improvement will come from Kalmar and Hiab businesses.
Okay. And because I mean should we expect accelerating margin improvement? Or will we see a development in line with the Q1 improvement? Or how should we think about this?
I think the -- kind of you would expect to see a sort of gradual improvement from this one onwards. And I think if you look at the profile from last year, it's not that far off.
Okay. And then I have a more long-term question. If we look at your ROCE targets and let's say 15%, in your own view how far ahead in time are we from reaching 15%? And how to do you plan on reaching it? Is it mainly focus on improving margins? Or is it in terms of having a more efficient capital base?
Yes. The capital has a fairly slight impact on the ROCE. Obviously, we have a lot of opportunities in our supply chain to get the inventory level down. But the biggest lever, by far, for the ROCE, is the improving operating margin. I mean one needs to remember in our assets we have a considerable chunk of goodwill, about EUR 1 billion, and that sets kind of the limits on the kind of asset side for the improvement. So the big lever here is that -- and again, when we look at our target of reaching to 10% operating margin, that should then lead us to our 15% ROCE as well.
We would now take our next question.
It's Leo Carrington from Credit Suisse. For the FX transaction effect for 2019, how do you expect this to play out in terms of timing and magnitude?
So it was a question related to Forex impact?
Yes, at the EBIT level.
Yes. I mean we have not separately guided the Forex impact for this year, but gradually it -- should U.S. dollar-euro remain on this kind of levels we should start to see some tailwind for Hiab. At the moment, Hiab has not yet been benefitting too much from the strengthening of the U.S. dollar. And the reason is again related to these supply chain issues. We have been hedging the deliveries still on rates which are tailing somewhere mid-last year and the delivery -- due to the long lead times, those deliveries will be now done in quarter 1, quarter 2 this year. So that's why you have not necessarily been seeing that great impact, positive impact, from the currency yet.
And a broader question. What's driving the service growth in Kalmar and Hiab? Is it just the increase in focus from your organization? Or is there a change in customer desire to have third-party service versus in-house?
I think it's primarily been our own efforts. The market has been there all the while and an increased focus, changing people, changing system processes, the more sales efforts in there and tracking better our installed base and understanding our capture rates, quite a large number of efforts and we've been on this track now for nearly 3 years. It's good to see that throughout the 2018 and now into '19, those efforts are now starting to pay off. Obviously, you need to do that by market by market, customer by market, to win back the business. So effectively we have left somebody else to eat our lunch in the past years and now we are now recovering from that one.
And last question from me. On the acquisitions, excluding TTS, would the acquisitions made in the last year be in line with respective divisional margins in 2019, i.e., have the recent acquisitions been accretive or dilutive to group margins?
In the Rapp case, actually, it's a fairly breakeven business as well at Rapp. And that's why you see actually that part of the sales growth in MacGregor quite a large extent actually came from Rapp with the similar, so the breakeven results MacGregor business so it doesn't really have an impact.In Hiab's case, the Effer actually is dilutive. So the Effer's gross margin and operating margin is lower than the average in Hiab is, but it's very much according to business plans that we have made. So it's tracking according to that one. But at this stage, it's dilutive for Hiab numbers. The impact of that one is not that significant. If I remember right, Mikko, if we did 10.7% operating margin in Hiab, without Effer it would have been 11.1%
That's correct, yes.
We have one follow-up question at this time.
But just 2 questions. How do you see pricing developing? I think you talked about price hikes that you pushed through last year, but because of long lead times, you have not yet seen those in revenues and margins. Is this still the case? Or are pricings still going up?And then secondly, you have won a big number of automation projects over the last year, although not all of them are at a big value. How is the pipeline for automation projects going forward? And is it still these sort of EUR 10 million to couple of EUR 10s of millions that we should expect?
Thanks, Johan. On pricing side, yes, absolutely true. I mean and this supply chain situation is sort of impacting us in many different ways. And one of course that has been the fact that even though the list price increases were done already sort of mid- to last year onwards the actual -- they haven't really bit into the margin situation so much. We will again see gradual those price increases that we put in effect last year to actually flow through our margin improvements now from Q2 onwards. And also from the, I would say, from a raw material component point of view, we see a little bit easing of the pricing pressures. So that's part of the expanding and margin improvement we will be seeing through this year.In terms of automation, we landed one automation deal, one sort of mid-sized, I would say, automation deal, and one small one in Q1. We see the activity level roughly at the same level as last year and mostly sort of phased investments. There are no larger, sort of one sort of very large automation deals in the near term for the funnel at this stage. So I would say pretty much you would expect -- and we expect this level to continue what we saw last year.
We have one last question queued up.
Could you give us a flavor on how the activity level has started in Hiab in April compared to what you saw in Q1?
We still see the Hiab demand actually this year to remain at healthy level. If you look at our own sales funnel and the market indicators, we expect the situation for the time being remaining favorable for us.
Okay. Perfect. And then on MacGregor, finally, could you talk me through a little bit the activity level you see on the different vessel type? I think you called out the RoRo in particular as being good this quarter. But what do you see for the other types?
Overall, the level of activity, of course, is slow. RoRo has a specific impact for because it's been one of the more profitable businesses for us. And as last year activity was exceptionally low, it's now visible in our revenues and partly explains why we don't see margin expansion even though we see kind of little bit sales growth happening in there. I'm very pleased to see again that the RoRo activity has now returned in early this year and that pipeline looks better and that will bear favorably for us in terms of future revenue and margin on that area.Otherwise, on the merchant side and offshore side, the level of activity in different vessel types is well below the historical normal level. I think overall, one would expect in container side, for example, that the demand is shifting partly from the very large vessels into more into the theatre type of vessels. And we see some demand, but well below the historical level for general cargo and bulk ships.
There are no further questions in the phone queue at this time.
Well, there are some further questions from Ruoholahti. Erkki, please go ahead?
One final question from me. The component issue is now more or less resolved. What are the other internal issues you're referring to that you're now tackling? Is it personnel churn? Or is there something else to that? And what do you say, how easily and how fast can these problems be solved?
They are primarily related, I think, to the maturity of some of the processes and we are tackling them with quite an intense program in terms of the further resources and capabilities in the organization. And then the one further issue is the, I would say, the very hot job market, really we would say across the whole Eastern Europe, but from our case, of course, particularly in Poland. And there are certain measures we have taken to secure -- to sort of lower the rotation or attrition of the labor force in there. I think these improvements are biting gradually, but as we have guided earlier, we expect that the first half to be more difficult than the second half and these improvements will be flowing through gradually some better Q2 and then further Q3 and 4.
There are no further questions so it's time to thank you for the active participation. Our Q2 report will be published on July 18th. So see you then. Thank you.
This will conclude today's call. Thank you all for your participation. You may now disconnect.