Cargotec Corp

OMXH:CGCBV

Earnings Call Transcript 2021-Q2

[Aki Vesikallio;Cargotec Corporation; IR Director]

Welcome to Cargotec Q2 2021 Conference Call. My name is Aki Vesikallio, I am from Cargotec's Investor Relations. The results will be presented by our CEO, Mika Vehviläinen and CFO, Mikko Puolakka. After the presentation there will be an Q&A session. Please pay attention to the disclaimer in this presentation. And remember that due to the securities law, for example, in the U.S., we are not allowed to discuss the merger with Konecranes in this call.

[Mika Vehvilainen, CEO & President]

Thank you, Aki. Good afternoon from my behalf as well. Thank you for joining the Cargotec Q2 2021 conference call. Before I start, a small personal note actually. Tiina Aaltonen, who has been -- or is the Assistant for the Finance Department and Investor Relationship, is having her last work day today. And she's been with us for 16 years, and that's more than 60 quarters. So, thank you, Tiina, for great work, and all the best on your future retirement as well. And now the actual quarter itself. So, it's been a roller coaster ride for the last 12 months. Obviously, we had probably the shortest downcycle in the history. And, as you know, from September onwards, we have seen a strong demand returning. Really now, I highlighted that the record orders we have taken in both, in Kalmar and in Hiab, and overall, also highest order intake ever in Cargotec's history.Looking at the highlights on that one, strong demand, especially in Hiab and Kalmar mobile equipment. We also improved order intake in our automation solutions as well as in MacGregor, but to a lower level as such. And then, the quarter did not include any major automation orders as such.Sales increased by obviously stronger demand, by 13%. And it's good to see that the services business is returning back to growth. The COVID restrictions are still impacting the services growth. But it's good to see that despite the somewhat difficult environment, we are able to return on that. And, obviously, one driver is the increasing usage of the equipment and required services there as well.Also, operating profit increased together with the revenue. Very happy with the MacGregor, despite the fact that they had a lower revenues than a year ago, they are able to improve their operating profit. And obviously, this is driven by the efficiency efforts we are taking in MacGregor. And have to say that looking at the market outlook now for MacGregor, we are in a good place to take benefit of the market growth with the good financial performance underlying that one.Also, excellent performance from Hiab where we were able to turn the good demand into positive operating profit development. Less so in Kalmar where we had a number of issues related to the supply chain as well, and Mikko will go through some of the details more in his part of the presentation as well.Equipment running hours, this is again comparing the Q1 now to Q2. As you see that there is still some modest growth, but when we actually now looked into the details of this one, we start to see that very large part of the equipment is now operating at the capacity. So we are not expecting to see major running hour numbers moving forward here, where this actually is ending up as visible in our orders. Of course, is that more capacity is required in market in terms of the new equipment, as a lot of the equipment is now operating at the maximum capacities in these respective operations.Market environment actually was strong pretty much throughout all of our segments. Container traffic grew by 13%. We expect the whole year to show a strong growth, and also, we expect that growth to continue into the '22.Also, construction output, both in Europe as well as in North America, has been at the strong level. We expect that growth to somewhat sort of slow down towards second half as the labor shortages and material shortages are slowing down the excellent growth rates we have seen. And this is obviously having a clear positive impact for Hiab, as are the other economic activities, such as the distribution, et cetera, as well.In MacGregor, the market has clearly shown a turnaround in there. So far this year, we have seen 735 merchant ships ordered. That's actually more than the whole last year together. And I think it's quite clear that looking at the current Clarkson estimate of 1,065 ships, that's probably going to be a higher number in Clarkson. Obviously, we'll update their estimates in September.The offshore oil and gas market is still actually relatively low, but we see very strong activity increases in offshore wind. And it's quite interesting to see actually that about half of the ships ordered in offshore segment are now actually into the offshore wind applications as such. So, good growth there, and we are in a very strong position to take advantage of that growth in MacGregor as well.As said, record-breaking orders, both in Kalmar as in Hiab, we broke the new -- old record in actually Q4 in Hiab. We broke the record again in Q1, and we got to the new EUR 100 million level with more than EUR 500 million of orders in Hiab, really driven by the very strong underlying market activity, and then the price increases.Both in Kalmar mobile equipment and in Hiab, we have driven a number of price increases. Most cases 2, in some cases even third price increase already within this year. Overall, the price levels have increased about 10% from the beginning of the year. Obviously, not all of this will be visible in this year, as the delivery times are extending into the next year.However, we believe that the current price increases will actually be adequate to cover any increased cost in components and other material cost visible for us at the moment as well. And obviously, we will see a big part of the benefit coming through then on '22, where the price level increases are in full effect.MacGregor has also seen increase in orders. This is not yet materially impacted by the good order volume intake in merchant ships. That will be most likely visible early as at the end of this year, most likely during '22. But then offshore wind is showing good positive development as well as the MacGregor services there as well.This obviously has resulted into an extremely good order book of more than EUR 2 billion, and it's good to note that this order book is of exceptionally good sort of mix in terms of the Hiab and Kalmar mobile equipment having a lion's share of the order book now moving forward.Sales and comparable profit improved. When I look at our supply chain situation, we estimate that we missed about EUR 20 million in top line due to the supply chain situations. Overall, our own processes and factories and systems are actually working without any major limitations. At this stage, there are some COVID related restrictions in certain factories, but that has not been a case for us.In the supply chain side, on component availability, we do not see any major single issues there as such. But there is a wide range of smaller problems, and they tend to vary from one to another from week-to-week as well, and that's slowing us down somewhat. Some of the engine availabilities and a very wide range of materials impacting that somewhat. But, overall, a relatively good performance considering the circumstances, and no major -- particular concerns at this stage.Good to see the services returning despite the COVID restrictions, and service orders actually increased by 27%, an excellent number as such. And when you look at the business area specific, of course, the Hiab numbers stands out.The year-on-year comparison, of course, is partially driven by the fact that in Q2 '20 the COVID impact had a major impact on Hiab installation volumes and accessories, and obviously, that market has now returned, and is partly helping. But also, we see, obviously, with the high equipment activities and demand for services growing, and the demand for spare parts and also moving to the good direction.We continue to execute our strategy. It's very clear that the sustainability is becoming a main driver or major driver for our customer segments as such. We keep on investing into the right technologies. And the strong financial position we are in today, especially after the exit of the Navis, enables us to continue our strong investments into the right technologies to serve our markets in robotization, automation and electrification. And overall, we see the market demand for that kind of solution, developing very favorably for us.Good example of that one is Kalmar. Today, for example, in electric heavy forklift, already more than 30% of the demand is now electric, and we see the same development happening in there. In some of the products, we are already in second-generation of electric vehicles, and all of our equipment will be fully electrified by the end of this year.Also, we announced a cooperation to sort of lead the market and technology research together with SSAB, in terms of the carbon-free steel development. I'm very happy to look into opportunities in that market as well.With that one, I'd like to hand over to our CFO, Mikko Puolakka, who will cover the business areas.

[Mikko Puolakka, Executive VP & CFO]

Thank you, Mika. And good afternoon, also from my side. Let's start with Kalmar where we had really a very extremely strong quarter -- like Mika said, a record quarter for quarter 2.The demand was strong, very much driven by the macro outlook. Also, the announced price increases -- we have done several price increases this year, as well as customers' anticipation for the longer lead times. Growth came to a great extent from mobile equipment, and more specifically, especially from terminal tractors, but also other container handling equipment, and also forklift trucks and services were performing very well.We did not book any major, or basically any automation orders in quarter 2. But in the Automation and Project division, we got certain replacement type of investments, for example, straddle carriers to manage the existing capacity in the larger cranes.Looking at sales development. The supply chain and logistics bottlenecks were impacting to a certain extent Kalmar quarter 2 sales. Mika mentioned earlier, on Cargotec level, approximately EUR 20 million, roughly half of this is related to Kalmar. So missing components, certain logistics bottlenecks prevented us to deliver all the plant deliveries in quarter 2. Those will be made in quarter 3 and quarter 4 this year.The sales growth was very much driven by the mobile equipment orders which we received in the second half of last year. The Automation and Project division sales declined due to the low order intake during the last 12 months. Services sales development was very good.Looking at Kalmar profitability, it was flat year-on-year. And here, the main drivers were the extra costs related to handling the missing components, product -- lower productivity due to missing components, as we have to move products from place A to B, kind of interim warehouses, and then back to the production, when the missing components have been received. Also, the transportation is more expensive nowadays compared to 6 months ago.Also, the lower Navis sales impacted our Kalmar profitability to a certain extent, as less license deals were booked and recognized as revenue in quarter 2.We have also accelerated investments in our R&D activities, and this is related to robotization and electrification, like also Mika described in the previous slides.We completed Navis divestment on 1st of July. So Navis numbers will not anymore be -- will be consolidated into Cargotec and Kalmar results as of 1st of July. The enterprise value was EUR 380 million. And we will book in quarter 3, a EUR 240 million operating profit impact -- positive operating profit impact from this transaction. This will also have a positive impact on our gearing in quarter 3.Then, looking Hiab, where we have had basically a very excellent quarter in all metrics. Orders developed very nicely. This was an all-time high in Hiab's history. Strong demand in all product categories as well as in services, driven also -- services driven also by the high utilization rates.In -- if we are looking at the geographical development, the strongest demand was in USA., and Europe coming in the second place.Looking Hiab's order book, also, I would say, extraordinarily high. This represents more than 2.5 quarters of sales, also very much reflecting the supply chain situation, where we have had longer lead times due to the suppliers' ability to cope with rapidly increasing volumes.Hiab sales increased by 30% year-on-year. And also, there, we have had some delays, approximately also EUR 10 million in Hiab, due to the missing components and also transportation delays. We expect to catch up this also in the coming quarters.And then looking Hiab's profitability, very good development. Operating profit up by 82%, and strong development also in the relative profitability driven by the volume increase, as well as the productivity improvements which we have done in 2020.And then moving to MacGregor where we have seen now recently positive development arising from the market activity improvements. MacGregor has had now 2 consecutive quarters where the book-to-bill has been above 1, also illustrating the market development. Strong development in all divisions in merchant, in offshore, as well as in our services.Looking at the sales. Sales declined, and this is coming from the fairly modest 2020 orders, as the markets were quite low that time. Service sales increased now 10%. If you remember, our quarter 1 service sales were down by 18%, and now the improvement is very much coming from the high utilization activity at our rates, at our customers. So the shipping lines are running very, very -- at a very high capacity utilization, and the services are needed for that.Good development in operating profit. Positive -- fourth positive quarter now in the row. And the improvement here is coming very much from the good service performance as well as the cost reduction activities which we have done basically during the last couple of years. We still continue with the cost reductions, and our objective is to reduce fixed costs by EUR 13 million this year compared to last year, and we are progressing well with this plan.Few highlights about our key figures. If we look the first 6 months, our orders are now almost EUR 1 billion higher than last year. Despite our sales being 2% below last year's level, we have been able to improve the operating profit, including all items affecting comparability significantly.And the items affecting comparability amounted EUR 52 million, significantly lower than last year. The biggest items in this line were: the merger-related costs, approximately EUR 17 million; the purchase price amortization, EUR 8 million; and Navis' divestment-related transaction costs, EUR 5 million.Our net income was EUR 60 million, better than during the first 6 months of 2020, which is, of course, very visible also in the earnings per share. And now, even though our ROCE is still fairly low, we are in an upward trend there, as the operational performance has been improving.Looking our cash flow, EUR 13 million for quarter 2, improvement from last year's quarter 2. We had a strong contribution to cash flow from the profitability from EBITDA, approximately EUR 73 million. But then our net working capital increased by EUR 60 million. And here, the biggest component has been the inventory development, especially work in progress, where we have had some semi-finished products because of the missing components. These will be delivered in the latter part of the year.Balance sheet has remained strong. Our gearing in quarter 2 -- more or less on the quarter 2 level -- quarter 1 level. And also, the liquidity has remained on the same level as in quarter 1.As I mentioned earlier, the Navis divestment will have a positive impact on our gearing. Should -- if the Navis divestment would have taken place at the end of June, our gearing would have been approximately 30% instead of 60%. So significant impact from this transaction.We have also refinanced the majority of our 2022 maturing debts, and we have only one bond amounting to EUR 150 million maturing next year. So from that point of view also, nice debt maturity profile.And for the outlook for this year, we estimate that this year's operate -- comparable operating profit will improve from last year's level when it was EUR 227 million.And then with those words, I would hand over back to Aki.

[Aki Vesikallio;Cargotec Corporation; IR Director]

Thank you, Mikko. Now operator, we are ready for questions.

[Operator]

[Operator Instructions] We'll now move to our first question over the phone.

[Artem Tokarenko, Research Analyst]

That's Artem from Credit Suisse. My first question is about the strong level of order intake in Hiab and Kalmar. I think last quarter, you have been very vocal about the fact that you've seen a lot of pre-buying from your customers ahead of some shortages. And I think this message is now a bit more moderate now. So, I guess, my question is, do you think a lot of this demand is due to pre-buying? And how should we think, I guess, how Q3 has started sequentially compared to Q2 maybe?

[Mika Vehvilainen, CEO & President]

Question. I do think there is an element of pre-buy still there. We've been quite assertive with our pricing in the first half of this year. As I said altogether, we have increased the prices number of times. And, I would say, average, probably about 10% price increase from the beginning of the year. And that certainly is probably driving some of the buying behavior. But it's good to remember that the underlying market is also very strong, whether you talk about the container output, port activity, logistics activity, construction and that really drives the customer demand as well.And we can also see that in our equipment running hours, and the fact that most of the equipment is running at full capacity at this stage as well. Back to the question related then to Q3, what we have seen so far in July is actually pretty much the same pace continuing, as we saw in the Q1 and Q2. And this is after all the price increases now effectively have come in force already. So there seems to me that the underlying market also shows a strong demand, but I do believe that there is an element of pre-buy in the numbers we have seen during the first half.

[Artem Tokarenko, Research Analyst]

And my second question is around margins. I think Konecranes today commented that they see intensifying cost inflation into H2. So maybe could you run us through major bridge components which we need to be aware of for H2, like mix, cost savings, cost inflation, et cetera?

[Mika Vehvilainen, CEO & President]

If I look at the different components on the cost inflation, certainly, we have seen price increase pressures in many of the components as well as on steel. It's good to remember that we have existing supply contracts in place. So these cost increases -- price increases come through delayed -- Looking at the -- from -- analyzing from our situation, we see that the price increases that we have put in force are roughly at the level that we see also in terms of the cost inflation coming through. So we expect overall impact to be pretty neutral for us for this year.In terms of the mix, as we have seen the mix has turned now -- in the last quarter is quite clearly more favorable for us with the higher and higher proportion of the Hiab and Kalmar mobile equipment from our backlog.

[Artem Tokarenko, Research Analyst]

And my last question is about larger automation o4rders in Kalmar. I think earlier this year, you mentioned that there is a very strong pipeline of bigger orders. But time wise they might be closer to the year-end. So I guess how do those look like?

[Mika Vehvilainen, CEO & President]

So it's very much the same. I think as I have said previously, when we look at the previous cycles, usually, the large port CapEx indexes or the investments happen about 12 to 18 months after we see the traffic popping up. So we -- as we have seen the traffic starting to accelerate really from the Q3, especially Q4 onwards last year, I think we are looking at the earliest at towards the end of this year, many of them potentially only realized in '22. But the pipeline is there and it's healthy.

[Operator]

We now move on to our next question over the phone.

[Magnus Kruber, Associate Director and Research Analyst]

K. Magnus here from UBS. A couple of questions. I think, could you comment on the supply chain costs you incurred in Kalmar in the second quarter specifically?

[Mika Vehvilainen, CEO & President]

Yes. I mean, there are 2 types of costs. The one we just discussed was related to the cost of components and raw materials, and as I said, that impact is pretty neutral. In addition to that one, obviously, the kind of the logistics -- logistics uncertainty in terms of the material availability as well as the shipments, is causing some of the reshuffling of the production, as well as certain tactical shortages. The components that seem to be shifting from 1 week to another, are causing some extra work in there. So where we see cost pressures is clearly on some of the indirect costs related to the shuffling on the production line as well as then the -- obviously freight rates have also been on the rise as well. We expect those to have some marginal effect then in this year.

[Magnus Kruber, Associate Director and Research Analyst]

So in quarter maybe low single-digit millions in the quarter?

[Mika Vehvilainen, CEO & President]

If I remember right, you look at the freight rates, that impact was 0.1% or...

[Mikko Puolakka, Executive VP & CFO]

Yes, yes.

[Magnus Kruber, Associate Director and Research Analyst]

And the reshuffling. Is that same magnitude relatively limited then?

[Mika Vehvilainen, CEO & President]

I probably -- it was visible in Kalmar, if you look at those numbers. And I think the Kalmar equipment, I think that -- because of the nature of the equipment affected it has type of trucks. So the component shortages are probably more acute there, and that has caused a bit more reshuffling there than in Hiab where there is less microchips and electronics involved with the products. And there was some impact on the cost that was visible in the Kalmar operating profit number.

[Magnus Kruber, Associate Director and Research Analyst]

And continuing on the same topic, you also -- we also believe that you will kind of continue to see some of this into Q3, but it will ease towards year-end. Could you sort of give us some more color on the nature of the shortages in components issues you have so we can sort of try to quantify the probability of this easing?

[Mika Vehvilainen, CEO & President]

First, the good news is that our own processes and factories are actually operating smoothly. So we -- this is really down to the ensuring the availability and timing of the services. I think the Q3 is going to be difficult in many of the areas still. And this is really coming directly from our suppliers, and many of them indicate better availability when we move towards Q4 then. And so, I think we will see the peak of these shortages probably during the Q3, and then coming from our -- again from our suppliers, easing off the situation towards the Q4.

[Magnus Kruber, Associate Director and Research Analyst]

And also just finally, obviously, had a very solid momentum in Kalmar mobile equipment. Any chance you can give us some color on the -- on how the margin mix looks in the backlog compared to what you are delivering in the quarter? And also if there is any risk to those margins on the back of the supply chain issues?

[Mika Vehvilainen, CEO & President]

Not as such. As I said, there has been a number of pricing increases there as well that should compensate for the supply chain or the supply and component, the raw material cost increases there as well. The U.S. market and some of the logistics products are having a particularly high demand. They tend to have a somewhat lower margin than the heavier container moving equipment as such, so that will have some impact on there. But we do see overall, obviously, the margin developing favorable, when we are able to ramp up the volume and deliver against that backlog.

[Operator]

We now move on to our next question over the phone.

[Antti Kansanen, Analyst]

It's Antti from SSAB. And firstly, on the backlog, and obviously, on the Hiab and the Kalmar mobile equipment side. Could you talk a little bit about how much do you expect to convert to sales this year of your backlog? And how much is stretching into next year, and kind of talk a little bit about delivery times in Hiab and Kalmar mobile on the new orders that you are walking today?

[Mika Vehvilainen, CEO & President]

I think if you would receive an order for Hiab today, you would most likely depend a little bit on product areas, look at the Q4, but in many instances, also Q1 or Q2 deliveries already today.The situation in Hiab is not necessarily that critical. However, because as you know, the truck delivery times have extended as well. And obviously, you don't need the other. You need them both to be able to start the operations as well.So, so far, what we are looking is to try to match the truck delivery delays on there. Same is true, again, bearing from one component to other. Some of the -- as I said, the U.S. logistics equipment, we -- certainly, if you place an order today, you would be looking at first half 2022 deliveries. In certain other equipment, you could still get into the Q4 production slot. But overall, we would be looking 4 to 6 months delivery times at this stage.

[Antti Kansanen, Analyst]

Okay. So, I'm just looking at the backlog on Hiab, and it hasn't really been ever on this kind of levels that it is today, so is it kind of the truck delivery times, is it suppliers? What is kind of the biggest constraint on your, let's say, sales and delivery bookings for the second half?

[Mika Vehvilainen, CEO & President]

Almost entirely on the supply of the components. Again, and obviously, we are asking a lot from our suppliers if you think about how fast the market moves from sort of -- really from -- in last 12 months. The factory capacities and the processes as such are not an issue with may be in some limited number of factories some of the COVID restrictions still in force limit how much you can ramp up the capacity. But I would say that's almost entirely depending on just our supply chain able to cope with higher-than-expected demand.

[Antti Kansanen, Analyst]

And then maybe lastly on the demand in Hiab, and this was already asked. If you look at the order levels, they are 30%, 40% above kind of pre-COVID H1'19 levels. And surely, there's some pre-buying in there. But in which areas do you see that the market demand is actually substantially higher than it has ever been before, if you look at your client industry segments and product segments as such?

[Mika Vehvilainen, CEO & President]

It's a great question. When I look -- if you -- one way to maybe look at that, if you look at the higher business overall from really 2012-'13 onwards, it's been growing about 6% to 8% CAGR. So if you would look at the '19 number and then would assume that '20 would have been a normal year, and then you add the '22 on there -- actually, after the Q2 -- Q1, we were still pretty much within that trajectory. So you could say that we were compensating for the '20 dip, but overall, the growth numbers were in line what we have seen now for a number of years over there.Now, when you look at the Q2, you could say that we are going over that trajectory and somewhat, maybe EUR 100 million, EUR 200 million on that one as well. And there is probably, as I said, an element of pre-buy. But it's good to remember that there is a very solid growing market underneath that demand as well.

[Antti Kansanen, Analyst]

And then lastly, just on the one-off costs, and I guess that was mainly related on the merger side. So could you remind us on also other restructuring expenses that you expect for full year, and what the number should roughly be on the second half?

[Mikko Puolakka, Executive VP & CFO]

Yes, we have incurred now in the first half of this year, EUR 16 million costs related to restructuring, mainly in MacGregor and some smaller items in Hiab. For the full-year, we expect EUR 40 million, so roughly similar number for the second half.

[Operator]

[Operator Instructions] We'll now move to our next question over to Phone.

[Aurelio Calderon Tejedor, Research Associate]

It's Aurelio, Morgan Stanley. A couple of questions from my side, if I may. The first one is mainly on kind of the underlying demand drivers in MacGregor. We've obviously seen the first half very strong in terms of contracting in the market. And if I look at kind of your vessel exposure, things like container ships are up significantly. But I know there's obviously a significant lag between an order that has been placed for a vessel and you get the order. So if you could remind us how big that lag is?And also, on orders question, I guess, some of the players out there, I think, Hapag-Lloyd last -- or last month announced an order for 6 ultra-large container ships, and they said that they think that all the orders have been placed now in the market. Do you see these trends outside of container ships, or do you think the trend is stronger for longer?

[Mika Vehvilainen, CEO & President]

First of all, it's very clearly that the container ships have been leading the pack now in terms of the orders, and we will take our fair share of that growth in that one. And, again, as I said, I would expect earliest of those orders to be visible in -- towards the end of this year, most likely next year. And it is typically 6 to 12 month cycle for us for the orders. Although, of course, shipyard capacity as such, is lower than it has been typically. So shipyards should be able to process the ship orders faster than they usually do on that one.The -- when I look at the bulk ship market, we know that traffic actually and the capacity is on the rise at the moment. China, for example, is consuming huge amounts of coal at the moment, and there's quite a lot of traffic happening there at the moment. We see the activity level increasing in the bulk ship market as well. It's not yet fully visible in there, or not that much visible in the order intake. We do expect that you will see an increase in number of bulk orders moving into the second half of this year as well. And the third element I already highlighted is the offshore wind market. There, we clearly see a very high level of activity at the moment.

[Mikko Puolakka, Executive VP & CFO]

And then also the RoRo activity has been improving this year compared to last year.

[Aurelio Calderon Tejedor, Research Associate]

And maybe one question related to Hiab. And obviously, if I look at your margins, you're kind of back to 2017 levels, and I understand that a lot of that has been driven by volumes. But in terms of what you're doing in that business at the underlying level. I know that you had in your kind of to-do-list to optimize the footprint. Is that something you're considering, given the level of activity that you're seeing at the moment? And did you have any impact this quarter from U.S. dollar movements?

[Mika Vehvilainen, CEO & President]

The footprint optimization is going on as we speak. Overall, we have taken -- took a study to take actually a number of productivity measures in Hiab in the second half of last year. They start to be now visible partly in numbers. So obviously, the revenue and the margin improvement is there. But also the cost level has been under control despite the higher volume intake. The services business is expanding very well. We are doing an excellent job there as well. And then, our pricing function, and we really have put quite a lot of effort in improving our pricing processes as well in the last 12 months. And all of those are visible, and will be visible also going in the second half.

[Operator]

We now move to our next question over the phone.

[Antti Kansanen, Analyst]

It's Antti from SSAB. This is kind of regarding the capital allocation, and your balance sheet is getting much stronger obviously after the Navis divestment. So underlying markets seem very strong notably in Hiab than Kalmar. So is it time to maybe accelerate growth investments, whether that would be M&A or investing in the sustainability portfolio? Or what are you planning to do in that front next 12 to 18 months?

[Mika Vehvilainen, CEO & President]

Absolutely. I mean the financial position we are in, and together with the strategy -- and if you look at the drivers and the market regarding sustainability, put us in a fantastic position to really start to accelerate further. So you will see us investing more into technology to enable more sustainable material flows. And -- but most likely, we are quite active in an M&A market, looking at the potential targets there as well.

[Antti Kansanen, Analyst]

Any plans to kind of increase the capacity, whether it's Hiab or Kalmar mobile, as kind of the market seems to be peaking or -- not peaking, but growing on a level that it hasn't been before? Any ideas on that front?

[Mika Vehvilainen, CEO & President]

Not really necessary. I mean, as you know, we are in this asset-light operating model, so we are assembly operations. And the way we can increase capacity is moving into the second -- in some cases, potentially to a third shift as well. And our view at the moment is that, even with the higher demand at the moment, they do not need actually CapEx to answer that. The only potential concern would be somewhat adding capacities, of course, the labor availability in some -- especially in some locations and -- like in U.S. at the moment. So that's probably more an issue for us than any CapEx requirement.

[Operator]

Just to confirm to our speakers, we have no further questions queued over the phone. I do apologize, one is just queued. Just to confirm participant, we're not receiving any audio across your line. You may be on mute.

[Tomas Skogman, Head of Research of Finland]

This is Tomas Skogman from Carnegie. So I can see that other items affecting comparability were almost EUR 5 million in Kalmar, while there is almost no tied in the other divisions. I assume this relates to the merger cost that you have there. And I've seen also, you have increased this restructuring or these merger-related costs. So can you explain what has kind of triggered this big increase in the merger related costs? And what type of integration planning are you allowed to do and how do you do that at this moment?

[Mikko Puolakka, Executive VP & CFO]

Yes, I can take that. So, in Kalmar, the other items affecting comparability numbers in quarter 2 are mainly related to the Navis divestment there. And then, when it comes to the Cargotec level merger-related costs, those are, at the moment -- majority of those are related to the merger control related process. So the integration we do to a great extent with our own resources with some external support, but the majority of those costs are related to the merger control. And we have increased the transaction-related costs from kind of jointly cost -- joint costs which are coming from Cargotec and Konecranes from EUR 50 million, what was in the prospectus, to EUR 70 million. And this increase is coming from the extra work or additional work what we are now taking in the merger control process, and what we have announced just before the end of June.

[Mika Vehvilainen, CEO & President]

Maybe if you can use this opportunity on the merger. Sorry, Tom, I was just going to say this is not related to your question, but there seems to be, especially in the media, some sort of misconception related to this -- last phases of the merger control on Phase 2. And we agreed together with the competitive authorities, the so-called stop-the-clock process, which effectively freezes the process for a very short period, if I remember right, 20 days. And that's really to enable our team to gather the necessary documents, and also for both parties to take some of the summer breaks. And this was done in a good cooperation -- with the good cooperation with the competitive authorities, and it was just a short technical delay that both parties agreed. And there has been, I think, some misconception around that one.

[Tomas Skogman, Head of Research of Finland]

And then I realize it's very hard to estimate what will happen to the supply chain in the third quarter. But is the best kind of understanding you have at the moment that you are capable of increasing sales in Kalmar and in Hiab by more than 10% in Q3 compared to the Q2 level, despite the holiday season, and despite the supply chain uncertainties? Or is this kind of too aggressive?

[Mika Vehvilainen, CEO & President]

It's a great question. And I think you pointed quite correctly, it's good to remember that seasonally, always Q3 tends to be weak because of the holiday season. That, of course, relates partly to our activities, it relates to the supply activities, and it relates to customer activities as well. So, generally, Q3 tends not to be stronger than Q2, and we still see some of these restrictions. So at this stage, I would not try to estimate. There are -- as I said, it's a very tactical situation at the moment, and it keeps on shifting from day-to-day and week-to-week as well at the moment. What we do hear from most of our critical suppliers at the moment is that we do see better availability towards the Q4 then.

[Tomas Skogman, Head of Research of Finland]

Okay. And then I wonder about this increased steel price, your supply equipment to vessels where you have a huge steel content. You supply large, automated projects involving large cranes like automatic stacking yards with a great steel component. So I would just like to understand a bit about how much has, for instance, the price of RTG crane used in -- or R&D used in a project? How much has that increased because of the steel price increase here?And then I just also as part of this wondering at the shipyard level, do they have like good steel agreement somehow that they -- that's kind of explaining partly why the orders are skyrocketing now that they have had options to use low-cost steel for orders for a certain period of time, and after that the orders could start to fall back again also.

[Mika Vehvilainen, CEO & President]

Yes. If I look at the areas, it is primarily around Kalmar heavy cranes automation systems and MacGregor where the steel content is the highest. We do not really have an exposure for the steel prices because effectively, what happens is that, we kind of contract steel price at the same time maybe a contract for the customer as well. So it's back-to-back arrangement. And as such, we know from the moment we closed the contract what the price is for the steel components on that one. Same is true for MacGregor, but even more so in MacGregor, quite often, we actually do not necessarily participate directly into the steel sourcing, but the shipyards does it on our behalf. And again, they do generally back-to-back with their customers as well. So for the business areas that have the largest steel components, we don't really have an exposure.Obviously, steel really impact our mobile equipment and Hiab path. And there, we really are, as I said, being quite aggressive in sort of pushing our price increases. Again, the steel components -- proportion of the overall cost is considerably lower in those product areas.

[Tomas Skogman, Head of Research of Finland]

Yes. I'm just wondering about these dynamic kind of effects and order behaviors et cetera, whether shipyards have had options for attractive steel prices, boosting orders now, and whether the rate -- or the increased steel price could postpone automation orders for you even more because the price of the cranes have gone up by 30% or so by -- because of the steel price increases?

[Mika Vehvilainen, CEO & President]

Yes. I don't think the actual steel prices are up quite that much. Obviously, when you look at the steel prices, we tend to look at the stop prices, and we have seen some amazing increases in there. Generally speaking, people do buy within the certain frame agreements that -- where the price movements, of course, are a little bit more modest.

[Mikko Puolakka, Executive VP & CFO]

And I would say also that one of the reasons why large automation deals have not materialized yet is that, customers are having hands full in their existing terminals. So it's quite difficult to carve-out say 1/3 of the terminal just to -- kind of reserve it for the automation purposes. So, like Mika said, these are coming to a certain extent with the delay when volumes are increasing.

[Tomas Skogman, Head of Research of Finland]

Yes. And then perhaps finally, I saw that Maersk's terminal state is that their focus is now really moving to automation of brownfield terminals from extending ship to shore. So do you expect this could lead to kind of significant orders for you as a company next year already?

[Mika Vehvilainen, CEO & President]

I mean, obviously, I do -- ultimately all of the current larger container terminals will be automated. The business benefits are there. The question really is about the pace. And especially when we talk about the brownfield, as you know, it's not going to happen overnight. So effectively, what you see happening with Maersk and other companies is that generally, you move to one port piece-by-piece into automation. So you will see good business coming through, but on smaller sort of portions, and over a number of years there as well.

[Operator]

We now move on to our next question over the phone.

[Magnus Kruber, Associate Director and Research Analyst]

Magnus from UBS again. And first there is follow-up on Tomas' question there when it comes to the back-to-back agreements on the large cranes, in particular. Obviously, the raw material cost component is, obviously quite sizable for those products. So when you say that you have back-to-back agreements, do you typically offset the -- shall we say the nominal cost inflation you're facing on those products? Meaning that, even if you do that, do you still face a margin headwind on those products if cost inflation is, say, 30% or so?

[Mika Vehvilainen, CEO & President]

Well, yes.

[Magnus Kruber, Associate Director and Research Analyst]

Can you tell us the mix about how the margins move?

[Mika Vehvilainen, CEO & President]

Yes. Every deal, of course, is a negotiation on these particular sites. But we do know -- first of all, we do not have surprises in terms of the underlying cost because at the moment, we strike the deal. We do know what the steel cost for that will be. Obviously, then pushing that increased cost that we are having a full visibility on into the customer is always sort of a negotiation issue. And in this business, generally, the margins are continuously under pressure. But I don't really see fundamental changes. I think everybody understands the -- kind of the situation we are in, that cost pressure is related to that one. And it's same for the old suppliers.

[Mikko Puolakka, Executive VP & CFO]

And in addition to sourcing activities we have...

[Magnus Kruber, Associate Director and Research Analyst]

But it's more like...

[Mikko Puolakka, Executive VP & CFO]

Yes, in addition to sourcing activities, we have, of course, also design-to-cost activities, which are aiming at improving the product margins. And sometimes some of these activities will be used to compensate cost increases or price pressure sometimes. We can enjoy more about the design-to cost-activities.

[Magnus Kruber, Associate Director and Research Analyst]

Okay. But it's more a sort of a pass-through, in a way, those...

[Mika Vehvilainen, CEO & President]

It is pass-through. And as Mikko was saying, for example, we just announced an introduction of new RTG, which is one of the heavier crane products. And one of the improvement there is, it's a lighter structure, which also means that there is less steel involved in that product. So that's part of the work you do always.

[Magnus Kruber, Associate Director and Research Analyst]

And then, to comment on the lack of labor in the U.S., I think in particular, I just wanted to check if you have started to see any labor cost inflation moving up in any of the markets?

[Mika Vehvilainen, CEO & President]

I think it will be an issue. It's already visible in the production in U.S. in terms of just people not showing up, and they are supposed to show up even if you have done an agreement with them. So it's been a certain sort of struggling there, less so maybe on the European and Asian manufacturing facilities. Services, technicians is another one. There is a shortage of those ones and difficult to find new ones. So I would expect that you will see actually labor cost inflation happening in the second half of this year.

[Magnus Kruber, Associate Director and Research Analyst]

And just finally, I'm not sure to what extent you can comment on this, but I think the time it took before you filed in Europe with the antitrust authorities was a bit longer than you originally anticipated. Is there any sort of particular reason for that, that you could sort of help us with?

[Mika Vehvilainen, CEO & President]

I don't think so. I mean, one thing we've done, of course, is that we benchmarked the -- our filing process to other filing processes being going on. And we are pretty much in average in terms of the schedules involved. There is always quite a lot of pre-work involved on that one. Of course, these are complex products. And there is quite a lot of data that authorities are requiring, and they just putting together the required data and submitting that to authorities, is no small fit. And we talk about millions of documents in many of these cases, so that requires its own time to put it together as well. Thank you.

[Operator]

Just to confirm there are no further questions queued over the phone at this time.

[Aki Vesikallio;Cargotec Corporation; IR Director]

Okay. Thank you for great questions and great answers. Our Q3 results will be published on 28th of October. Stay safe and healthy.

[Mika Vehvilainen, CEO & President]

Thank you.

[Mikko Puolakka, Executive VP & CFO]

Thank you.