Cargotec Corp

OMXH:CGCBV

Earnings Call Analysis

Cargotec Posts Strong FY2023 Results, Plans Demerger

In 2023, Cargotec had a robust year with revenues increasing by EUR 500 million. The strong commercial execution led to a near 20% return on capital employed. The company saw orders received decline from the previous year but maintained a high sales level at EUR 4.5 billion, driven by increased service sales and eco portfolio growth. Operating profit topped EUR 500 million, with an 11.2% margin, though one-off restructuring costs impacted profitability, especially in Hiab. Cash flow reached a historic high due to profitability and a EUR 180 million reduction in net working capital. Dividend per B share increased by 59% to EUR 2.15. Looking ahead, Cargotec projects Hiab's 2024 operating profit above 12%, Kalmar's above 11%, and MacGregor's to improve from 2023. A demerger plan for Kalmar has been approved, set to finalize by mid-2024.

Stable Performance and Positive Outlook

The company has delivered a strong performance throughout the year, highlighted by four consecutive quarters of stable and robust operations. Sales touched the impressive EUR 4.5 billion mark, with operating profit at an exceptional 11.2%, crossing the EUR 500 million threshold. Service sales showed an upward trend, bolstering confidence in the company’s growth strategy.

Diverse Business Contributions and Order Book Strength

Diversified business sectors, including Kalmar and MacGregor, have significantly improved from 2022 levels, with Hiab also exhibiting growth. The order intake has re-stabilized to pre-COVID levels, with Q4 picking up the pace mainly due to Hiab's robust performance, leading to an overall figure of roughly EUR 4 billion for 2023. The order book stands firm at EUR 2.8 billion, offering a solid foundation going into 2024.

Proactive Cost Management Amid Order Intake Fluctuation

There has been a noticeable decrease in orders, particularly in Hiab and Kalmar, which has led to a responsive reduction in workforce and operational costs—approximately EUR 50 million was booked in relation to the cost-saving program announced in Q3. Despite these shifts, the company maintains its proactive approach to profitability and efficiency.

Investment in Services and Eco Portfolio Expansion

The company continues to invest in service and sustainability initiatives, witnessing growth in service sales and a notable improvement in the eco portfolio across all business units. This strategic pivot towards eco-friendly products and services not only aligns with global sustainability trends but also positions the company on a trajectory of responsible growth.

Encouraging Developments in Hiab Business

Hiab’s quarter was marked by improved order intake and sales stabilization. However, a one-off cost impacted the operating profit. An 83-84% year-over-year increase in cash flow demonstrates strong financial control, while a growing eco portfolio aligns with customer demand for sustainable solutions. Hiab now boasts 35,000-36,000 connected units to boost customer safety, productivity, and sustainability.

Record-Breaking Performance and Future Prospects for Kalmar

Kalmar finished with a record year, stabilized demand, and a high order book delivery. Despite encountering some slow decision-making in larger equipment and destocking in terminal tractors, the company sees this as temporary, with good order backlog visibility into 2024. Inflationary pressures and component availability have been effectively managed, as evidenced by the consistent results.

MacGregor’s Remarkable Turnaround and Future Outlook

MacGregor stands out with an EUR 80 million operating profit improvement. There's a strong order intake in merchant and service businesses, with effective cost-control strategies in play. MacGregor heads into 2024 with a EUR 1 billion order book, reinforcing its potential for profitability. Significant restructuring savings of EUR 14 million in 2023 set the stage for an additional EUR 9 million in savings for 2024.

Robust Financial Health and Dividend Proposal

The company's healthy revenue growth, profitability, and prudent cost management have fueled a nearly 20% return on capital employed (ROCE). The Q4 cash flow reached an all-time high, supported by strong profitability and a significant reduction in net working capital. This financial robustness has prompted the Board's dividend proposal of EUR 2.15 per share, set to be reviewed in the forthcoming AGM in March 2024.

Earnings Call Transcript 2023-Q4

[Operator]

Welcome to Cargotec's Full-Year 2023 Results Call. My name is Aki Vesikallio. I'm from Cargotec's Investor Relations.Today's results will be presented by Cargotec's CEO and Kalmar's Interim President, Casimir Lindholm; CFO, Mikko Puolakka and Hiab President, Scott Phillips.The presentation will be followed by a Q&A session. Please pay attention to the disclaimer in the presentation as we will be making forward-looking statements.With that, over to you, Casimir.

[Casimir Lindholm, executive]

Thank you, Aki.Also welcome on my behalf. It is, of course, great pleasure here to present a very strong year, 4 consecutive quarters in a row with stable and good performance and it is a step change compared to the historical numbers. Orders received down from last year, I'll come back to that a bit later on. Sales, of course, on a very high level of EUR 4.5 billion. We have positive news also that service sales increased. Eco portfolio increased. And I will come back to those figures a bit later as well.Then all 3 businesses contributing in a very positive way. Of course, Kalmar and MacGregor on a completely different level compared to 2022, and also Hiab improving from previous years. So, we are on an 11.2% operating profit level, above EUR 500 million. Orders received, we are back on pre-COVID levels. Q4, as such, I think positive compared to Q3, mainly strong order intake from Hiab. And Scott will come back to that a bit later on. All in all, orders on a roughly EUR 4 billion level in 2023. Now the order book is on EUR 2.8 billion level. And then if we look back to the pre-COVID levels, we are above those levels.So taking out '21 and '22 that were special years, we still have a good order backlog going into 2024. And of course, the operating profit then. Quarter-by-quarter, we see a very good trend in all businesses. We have some one-offs that both Scott and Mikko will comment later on, especially in Hiab, partly in Kalmar, and those are mainly connected to the cost saving program that we announced in Q3. And I will come back to that as well in a few minutes.Service sales, all in all, also here, very positive development in '23. We had a bit slower levels in service orders in Q4. But all in all, '23 also here, very positive and good development. That said, I think this is the area in all 3 businesses where we have a lot of potential going forward, especially in Kalmar and MacGregor, but also in Hiab. So, this will be one of the key areas where we focus going forward.Eco portfolio also here, positive numbers, positive improvement in '23. So, we have increased in climate solutions and in circular solutions and we see a positive trend in all businesses in the eco portfolio side as well. Then coming back to Q3 and the cost savings program that we announced, that we have been working on then in the fourth quarter, and we see results in this area as well. This was, of course, our way to safeguard profitability going forward.We have a clear drop in orders compared to '22 numbers in Hiab and Kalmar roughly EUR 400 million less in order intake compared to the record high 2022 levels. So, we responded to that, and we have worked a lot in this area. And you can see that we have roughly EUR 50 million booked as costs attached to the cost saving program in the fourth quarter, roughly 10 in Hiab and 5 in Kalmar.All in all, we look at a reduction of roughly 300 roles and you will see that that comes with a bit of a lag, both regarding internal and external resources over in Q4 and then Q1 and Q2 this year. Then on top of that, we have made a lot of adjustments in MacGregor offshore business, roughly 350 roles impacted by those initiatives. Also here, the restructuring cost EUR 13.5 million in '23. We still have some costs to come in 2024. Especially then in the first and second quarter, we'll see the reduction that we have been working on.As a consequence of this, we are not anymore in MacGregor in 3 divisions. The offshore division is now underneath the merchant division and it's called equipment and solutions. So, we'll only have equipment and solutions and service within MacGregor because the offshore business is clearly smaller than in the past.With that said, I'll give the word to Scott. Scott will present Hiab Q4 and 2023 results.

[Scott Phillips, executive]

Thank you, Casimir, and greetings from my side. So, I look forward to take you through the results for our business area.Hiab in Q4, I'd characterize the quarter from a headline financial perspective. The key highlight for us was the fact that order intake did improve year-over-year, finally starting with a 4 rather than a 3. And what I would characterize is, is that, that puts us on a nice, stable level, both with regards to order intake as well as sales.The disappointment in the quarter, of course, was our operating profit, which was heavily impacted by one-off cost, as Casimir has already alluded to. And I'll give you a bit more color on that one in a few slides. One of the key highlights for us as well, both in the quarter as well as the year is the substantial increase in cash flow. We had an increase of roughly 83%, 84% year-over-year. And in the quarter, we had a similar, if not a slightly higher increase in cash flow. So, good job by the team overall, great partnership with all of our distributors as well as customers. So really pleased with that result, and that sets us up nicely for the year to come.So then, diving into the numbers. As I said, we had a stable order intake level. And I'd say, for the fifth quarter in a row, we're on a pretty good level. And to put it in a bit more context, in Q3, I think I alluded to, we had a large order that just in terms of completing the transactional process not able to book in Q3, therefore, moved to the right in Q4. So just to put it into proper context, I'd say, it puts us on quite a nice stable level in the EUR 375 million to EUR 380 million range, adjusted for the reduced working days in Q3. So, we're really pleased about that.Inflation in interest rates are still impacting customer orders in certain geographies. However, what I'm pleased to report is that the lead times in our truck OEM partners did increase and improved throughout the quarter. As a consequence, there was a heavy amount of usage in our maintenance and repair capacity utilized for installation. So, we had a slight uptick in our revenue curve on the installation side. But overall, relatively stable there, but it did impact slightly the orders that we received on the services side. So, that resulted in this flat development that Casimir alluded to as well. And I'm quite pleased even though the curve is on a steady decline in terms of the order book, that means that we've been quite effective in converting the backlog that we built up in the latter half of '21 and throughout 2022. So, quite pleased with that.We go into '23, I think it's still a really good level. We've got a significant amount of the year covered in the order book, and we've got nice momentum in terms of converting that throughout the business. So more to follow on that one in the subsequent quarters to come. In terms of the sales side, as I mentioned before, we're on quite a stable level. In quarter 4, we were at EUR 450 million of sales versus EUR 456 million in the prior year. That's down 1% in actual exchange rates. In constant currencies, we were actually up 1%.Our service sales were on a similar level as last year at EUR 114 million versus EUR 113 million last year, and that represented both a 25% contribution of our overall revenues. So, quite strong operational execution, both in terms of our service and sales operations as well as our supply operations. And our supply chain continues to develop and get stronger. So, really proud of the entire team in that regard. We have a heavy focus on partnering with our suppliers, and they've supported us quite nicely throughout the year.And then in terms of then the residual earnings from that sales profile that I just described, it was a disappointment overall in the quarter from the perspective that we delivered EUR 48 million versus prior year at EUR 62 million. So, that's a 22% decline, or 10.6% relative operating profit versus 13.5% last year. So, we're not pleased about that. However, we were affected heavily by the one-off cost of roughly EUR 16 million. As Casimir told you earlier, EUR 10 million of that was due to restructuring costs with the cost savings program that we announced last quarter. There was an additional EUR 6 million that we had taken decisions to make investments to grow in attractive market segments, which were materialized and booked as operating expense in the quarter. So therefore, had a significant impact on the overall results. However, without those one-offs, we were at 14.2%, so roughly a similar level to last year, with not quite a strong operating leverage as we'd like. But nevertheless, I feel like we've got some nice momentum going into 2023 to continue to deliver on quite a good level at or above our expectations.I'd like to end the Hiab section highlighting a couple of things that we're very proud of. As Casimir alluded to earlier, our eco portfolio orders and solutions are growing. We're quite pleased about the fact that we had a significant increase year-over-year in our overall order intake. We ended on a level of 31%, so right about our expectations. In terms of the connected units, which is key for us in terms of shaping the future development of our business as well as our customer operations, we had a 34% increase year-over-year in connected units. So, that brings us up to a level of 35,000, 36,000 connected units. And that's going to enable us to significantly improve safety, productivity and sustainability for our customers.And then along the lines of sustainability, I'd love to highlight a recent innovation that we've launched to the marketplace is our Generation 3 electric power take-off for our loader crane business, covering a broad range of products in 3 different classifications of offerings from light, standard and heavy-duty, covering our range up to 40 tonne meters. Our light and standard duty electric power take-off represent a step change in the industry and design, and that the design is integrated into the base frame. And that's both an advantage for the use phase and the duty cycle, but at the same time, it's a big advantage in reducing the installation time.Our heavy-duty range is still installed into the truck chassis, but we have 41 kilowatt power available battery electric power solution. So the power that we're able to deliver can be maintained throughout the load cycle, which is unmatched in the industry. So, we're really proud about that. And most importantly, we know that we are enabling safer, more reliable and a significant noise reduction for the entire operator experience. And then also there's a big advantage to our customers in allowing the operations to commence earlier in the day, as well as to end later in the day with the reduced noise. That's a huge productivity gain for our customers. So, please come check out our hiab.com for more on this product as we're quite proud of it as you can tell.So with that, I'm going to turn it back over to Casimir to tell you about Kalmar.

[Casimir Lindholm, executive]

Thank you, Scott.Then over to Kalmar. Very strong finish to the year. It's all in all a record year in Kalmar. I'm very happy to present that. Demand, I would say, stabilizing. I'll come back to that a bit later on between the quarters. And, of course, we have done a great job in delivering the record high order book. And the profitability was on a good level throughout the 4 quarters, and then the cash flow was a record high in Q4. So, a really good job at the end of the year. So, we are seeing demand stabilizing.We look at the fourth quarter. Now, we have 2 quarters in a row on the EUR 400 million level. So that's good. And then keeping in mind then that we have a strong order backlog for 2024. We still see some slow decision-making regarding larger equipment, and we still have the destocking issue within terminal tractors. But I think that will, over time, of course, normalize. And again, the order book gives a good visibility, especially for the 2, in some cases, up to 3 quarters for 2024. And then on top of that, we have the adjustments on the cost side ongoing. So, I think we're in a good place looking at 2024.Then, of course, when we come from '21 and '22 on a record high level in orders and then coming down to this new level in '23, we can see that the sales is then going down. And we are adjusting, as I said, then the cost side to this lower order intake compared to the record '21 and '22. Service sales was growing in constant currencies. And again, emphasizing, I think this is an area where we have clear potential in Kalmar going forward, both regarding growth and profitability.Then comparing the quarters. Here, the cost saving program and one-off cost was EUR 5 million. So without those, we would have been on a 14 percentage level regarding operating profit. And as you can see, all 4 quarters in '23 on a very good and stable level. We have some losses also from heavy cranes still in these numbers, although they are single digit. And to a large extent, then heavy cranes is out of the portfolio going into 2024. Some few millions left in the order backlog. And maybe on top of that, good to emphasize, I mean, we have been really successful in managing the inflationary pressures and component availability, and that can see be seen in the results as well.Then some milestones. The EV side is developing. We have been successful in deliveries of electric reachstackers and heavy forklifts, and we see first repeat orders in this area. So, that's very positive. And we can see that also in -- of the overall 1/3 of the orders in light and medium, forklifts are now of electric versions. As mentioned before, also on Cargotec level, the eco portfolio is increasing. Last but not least, we are developing the third generation of our electric terminal tractors and that development continues.With that, I'll give the word and the floor to Mikko. Mikko will present MacGregor results and then go into Cargotec level results.

[Mikko Puolakka, executive]

Thank you, Casimir, and good morning, also from my side.MacGregor was a really a big bright spot for Cargotec in quarter 4, but also in full-year 2023 by delivering EUR 80 million comparable operating profit improvement for the full-year '23. MacGregor's solid order intake continued in merchant and service business. The offshore orders were only 10% of MacGregor's quarter 4 orders. So, we have been still very restrictive with the offshore order intake in order to make sure that the MacGregor turnaround continues.MacGregor starts the 2024 with EUR 1 billion order book, which gives a very good basis for improving the profitability in '24 and also visibility beyond '24. Profitability, as mentioned already earlier, is a special highlight. MacGregor delivered EUR 13 million comparable operating profit. And this was mainly driven by 3 reasons. We had a favorable sales mix, meaning that merchant and service revenues grew. Also, our fixed costs in MacGregor were lower, driven by the previously mentioned offshore restructuring. And then we had a significantly lower project cost overruns in offshore projects compared to quarter 4 2022.The MacGregor full-year '23 comparable operating profit was EUR 33 million. The offshore full-year loss was roughly EUR 30 million. So if we exclude the offshore part of the MacGregor business, MacGregor profitability would have been for the full year 10% already. At the end of the year, we had still in offshore project portfolio, a handful of loss-making projects, and these we are planning to complete in 2024. And as mentioned already earlier, we continue with MacGregor restructuring. Last year in '23, we delivered EUR 14 million cost savings, and we plan to execute another EUR 9 million in '24.If we look the highlights of 2023, so many records what you can see here were broken in a positive manner. So, we had an excellent year in terms of P&L KPIs in terms of cash flow and also what comes to the balance sheet. Basically, I would say that for these financial highlights, there are 3 main drivers. First of all, our revenues grew by EUR 500 million. Together with the very strong commercial execution, we have been able to extract nice profitability from that revenue growth. Then the MacGregor turnaround has been progressing very nicely, significant improvement in there. And then thirdly, also the heavy cranes losses have been significantly low as mentioned already by Casimir earlier. And these have had a significant impact on all these KPIs.Excellent development in eco portfolio, sales revenues there almost EUR 1.5 billion. And the positive thing is that the eco portfolio revenues have been growing faster than the traditional product sales growth, so in line according to our strategy. And really super strong cash flow and then profitability, driving our ROCE to almost to 20% at the end of the year.If we look our cash flow, quarter 4 was all-time high in Cargotec's history. It was very much coming from the very strong profitability in our all 3 business areas. And then we have been able to reduce the net working capital by roughly EUR 180 million during the fourth quarter, mainly coming from the inventory reduction. Inventories went down by EUR 111 million. Both Kalmar and Hiab had roughly a cash conversion of 90%. So with cash conversion, I mean, the cash flow against the operating profit.Typically, these businesses, Hiab and Kalmar have had a cash conversion of 100% or even above 100. But still during 2023, we have been constrained by the supply chain. And that has led to suboptimal net working capital development. MacGregor had a cash conversion of over 100%, and this was driven mainly due to the strong orders in merchant and the related advance payments.Our balance sheet position is very strong, giving, of course, a solid basis now to be separated companies and also to pursue further M&A activities. Our gearing was 10%. And if we exclude the IFRS 16 lease liabilities, our gearing would be actually 0. Our debt portfolio or maturity portfolio is very, very smoothly distributed across several years. And basically, during 2024, we have EUR 100 million bond, which is maturing in March.The Board of Directors' dividend proposal for the AGM is EUR 2.15 per B share. This is a 59% increase from previous year. And this dividend payment represents 40% dividend payout ratio, and about 4.1% dividend yield. Dividend would be paid on 10th of June 2024. In line with our strategy to separate our 3 businesses, Kalmar, Hiab and MacGregor, we have decided now to provide for 2024, a separate outlook for these 3 businesses. This outlook is provided on the same basis as these 3 businesses have been reported also in 2023. In the outlook, we have taken into account that Kalmar and Hiab start 2024 with some 30% lower order book compared to 2023. We have also taken into account the cost savings program, what Casimir already mentioned earlier, the EUR 50 million cost savings program and those benefits on our fixed costs in 2024. And based on the estimate, we expect Hiab's comparable operating profit to be above 12%, Kalmar above 11%, and then for MacGregor, we expect MacGregor comparable operating profit in millions of euros to improve from 2023 level, very much driven by the favorable sales mix. So, meaning lower offshore sales versus merchant and services, and then the offshore restructuring where we expect another EUR 9 million cost savings in 2024.And with that, I would hand it over to Casimir for the other big news of today.

[Casimir Lindholm, executive]

Thank you, Mikko.And then we continue into the last section of the presentation. Kalmar demerger plan approved by Cargotec Board today, and then I will go through what that really means and what are the sequences here that we are planning. First of all, a quote from our Chairman of the Board, Jaakko Eskola. I quote "The planning and evaluation of the demerger has progressed well. The Board of Directors with the support of certain major shareholders, has after careful consideration decided to propose the separation of Kalmar from Cargotec by means of partial demerger to increase shareholder value". Jaakko Eskola, Cargotec's Chairman of the Board of Directors.So by this decision by the Board, we'll continue on the path we have been since the 27th of April in 2023 when we announced our intentions. So when the Board has now approved the demerger plan, we continue on work in all the streams. And then we are planning to have an AGM on the 30th of May when the final decisions by shareholders should take place. More detailed information, of course, as part of prospectus then in May, and we are also planning Capital Markets Day for Cargotec with focus, of course, on Hiab and MacGregor, and then a separate one for Kalmar.On top of this, we are, of course, continuing to look for a solution for MacGregor during 2024. And as earlier stated, that will most likely take part in the second half of 2024. The structure of the planned transaction is as follows. There are no changes here. At the end of the day, there will be 2 separate stock-listed companies in Helsinki; Kalmar in '24 and Hiab in '25. That is according to the original plan that we communicated 27th of April 2023.Kalmar Board of Directors proposed to be elected by Cargotec Annual General Meeting; Chair, Jaakko Eskola; Member, Teresa Kemppi-Vasama; and Member, Tapio Kolunsarka. On top of this, of course, we are in the recruitment process for additional Board Members, then to be presented to the AGM end of May.Then today, we also announced Kalmar's management team. And here, first of all, happy to announce that Sami Niiranen will join on the 1st of April, first as President of Kalmar and then CEO to be of Kalmar. On top of that, we have a change in the Cargotec leadership team. Carina Geber-Teir will join Kalmar on the 1st of April and other recruitment then is Mathias Hoglund, HR, joining Kalmar 1st of May. And with this team, we are confident that we are ready for a separate listed Kalmar. And this work continues in that sense that we are seeking still one role then to have a full Kalmar leadership team in place in front of the partial demerger.The timeline is as follows. Then Sami Niiranen to join 1st of April. Then we have the Q1 results end of April, prospectus during May, the Capital Markets Day before the AGM, then separate for Kalmar and separate for Cargotec, with focus on Hiab and MacGregor. Then the AGM, 30th of May, and then planned completion of demerger, 30th of June. And then the plan is to have the 2 separate shares available on the stock market 1st of July. Then going live regarding Kalmar.This was the final part of the presentation. Last but not least, I would like to thank all Cargotec employees for excellent work in 2023. It was a very, very good result that we're able to present today, a lot of hard work behind this one. And of course, a lot of interesting things that we are planning for 2024. And then, of course, thank you to all customers, shareholders for the trust.And with that, we'll open up for any questions that you might have. And then, please, Mikko and Scott, join me here on the stage.

[Operator]

[Operator Instructions] The next question comes from Antti Kansanen from SEB.

[Antti Kansanen, analyst]

I wanted to start with MacGregor and looking into '24 and trying to get the earnings outlook right. So, could you comment a little bit about your backlog? How much you expect to deliver that during '24? Also, any information on the magnitude of the ongoing offshore projects, '24 versus '23?And maybe thirdly, are there any concerns about sales mix in a sense that the equipment business is growing faster than services next year? Just trying to get my margin assumptions right?

[Mikko Puolakka, executive]

Thanks for the good questions. Firstly, from the order book, we anticipate that roughly 40% of MacGregor's close to EUR 1 billion order book would be delivered in 2024. And then, of course, on top of that, we have the EUR 300 million, EUR 350 million service business, which is a fast cycle business and will, of course, be booked in order intake and also delivered during 2024. What comes to the loss-making projects, as mentioned, there is a handful of projects. There is one larger project and then a couple of smaller projects, the smaller projects or most of these projects are actually from the percentage of completion point of view, already almost at 100%, but unfortunately not completed by the end of the year of 2023. So, some tails we will unfortunately still have in '24.And then what comes to your question concerning the mix, I would say that we anticipate MacGregor's revenues to most extend merchant and services. Both merchant and services have been already in the past highly profitable businesses, and the MacGregor profitability improvement in 2024 is very much also expected to come from the positive development in merchant and services combined. Then those cost savings from the offshore business, the EUR 9 million, what we are still expecting to deliver from offshore fixed costs.

[Casimir Lindholm, executive]

Maybe adding to that out of the order backlog in MacGregor, the offshore portion is below 10% of the full order backlog. So, give a picture of how small part of offshore is now going forward. And as stated before, during the presentation, it's now a product line underneath what we call equipment and solutions, which used to be merchant.

[Antti Kansanen, analyst]

Yes. I mean, is there any way to kind of quantify how much left is in the offshore? You talk about one larger and couple of smaller ones. But maybe remind me what was the situation a year ago?

[Mikko Puolakka, executive]

At the moment, we have roughly EUR 70 million of offshore order book left and it is not all loss-making projects. So, there are also these traditional offshore products like cranes, which we have been delivering over the decades and traditional products. So it's a handful of, let's say, loss-making offshore winter projects, which, as mentioned, are already in a very late stage of the completion. And in 2023, we said that we have 20 loss-making projects, and now we're down to a bit more than a handful. So, that's how much has been delivered in 2023. So it's a smaller portion than in the past.

[Antti Kansanen, analyst]

Okay. That's very clear. And then the final one is from Scott regarding Hiab. And apologies if you have to repeat yourself. The line was a bit breaking during your presentation. But could you talk a little bit about demand? I mean, we saw a sequential improvement in orders. Was this kind of a seasonal thing driven by a couple of larger deals that you've got? How have you seen kind of the end demand developing and kind of now that we are entering into '24, what's the outlook regarding that one?

[Scott Phillips, executive]

Yes. Demand, as I said earlier, and it probably was my voice. So apologies for the voice to all of you. Demand is on a good stable level. The third quarter was a little bit lower than the normal seasonality due to the fact we had a large order moved to the right. So that materialized in the fourth quarter. So, that propped up the quarter a bit. So adjusting for that order, all 4 quarters ended last year on relatively the same level, and that was the same level as Q4 last year.So with the combination of still the 2 headwind variables in terms of interest rates and inflation, demand still remains muted a bit on that level. However, there's a bit of optimism coming from the reduction of the truck lead times, which we saw materialize throughout quarter 4. And then if the European Central Bank and the Fed in the U.S. continue down the path of reducing interest rates, then that bodes well. Of course, that's all uncertain depending upon the level that inflation materializes that sequentially throughout the first half of this year, I suspect.

[Operator]

The next question comes from Panu Laitinmaki from Danske Bank.

[Panu Laitinmaki, analyst]

Firstly, maybe continuing on the same topic for Kalmar. So, I mean, orders were stable sequentially compared to Q3. But what are you seeing going into '24 and first half? So, do you see that the demand is improving? Or is it like flattish at this level? And how long do you think that like terminal tractor, a destocking will continue?

[Casimir Lindholm, executive]

Thanks for the question. I think it's a bit too early to say how it looks in '24. Now, we have only 2 quarters in a row on a stable, roughly EUR 400 million level. So, I think we need to come back to that one after Q1 or latest after Q2 to get a real pattern. And as mentioned already in Q3 and Q4 reports then, terminal tractors, the destocking situation is normalizing at some point of time, of course. But a bit too early to say where we are there. It's on a downward trend, but after the high orders in '21 and '22, I think we produced a bit too much for the market. So it needs to normalize. And let's see in the coming quarter, if we can be more, let's say, open and have full visibility of that one.

[Panu Laitinmaki, analyst]

Okay. Then on Hiab's margins. Just on the EUR 6 million, I mean, why do you flag this as a one-time cost? What does it include, if it's like investment to growth?

[Scott Phillips, executive]

Yes. I'll tell you the exact -- the composition of the EUR 6 million. I wouldn't be able to go into. However, it is a one-time investment to help us to grow into attractive market segments, which I'll be very happy to provide a lot more color on the impact that we expect to gain from those investments in an upcoming Capital Markets Day.

[Panu Laitinmaki, analyst]

But the idea is that this was just Q4 specific [ than year ].

[Scott Phillips, executive]

Correct.

[Panu Laitinmaki, analyst]

Okay. Maybe a final one, if I may, on the guidance. So it's quite clear. But then how should we read that? So, I guess there is some buffer, if you say about 11 and 12. But, I mean, how much is this? Is this something that you could specify going forward? Or any thoughts on kind of how should we read those statements?

[Mikko Puolakka, executive]

These are basically the -- this is the floor what we are expecting to deliver. So for Kalmar, above 11%; for Hiab, above 12%, and then for MacGregor, an improvement from last year's EUR 33 million. We have not specified the, let's say, upper limit. If there is a need and a reason to specify the guidance more throughout the year, then we would do that. But that's the kind of floor what we are expecting to deliver at least in 2024.

[Operator]

The next question comes from Tom Skogman from Carnegie.

[Tomas Skogman, analyst]

Yes. This is Tom Skogman from Carnegie. I have a couple of questions. So when I look at the Board's proposal for the AGM, do I understand it correctly that both Hiab and Kalmar will have A and B shares, if I start there?

[Casimir Lindholm, executive]

Thank you, Tom, for the question. I mean, that is then a decision to be taken later on as part of the AGM. So, there is no official decision yet on that topic.

[Tomas Skogman, analyst]

Okay. And what can you now say about future head office cost compared to the old Cargotec structure that we saw in '23? I understand it's still a bit early, but I guess it's good for everyone just to get these kind of numbers right in our model. So, what are we looking at for changes basically?

[Mikko Puolakka, executive]

Yes. If we would look on, let's say, as-is basis, so we would have 3 businesses throughout the year. Basically, our headquarter costs would decline from last year's EUR 51 million by EUR 10 million as we have announced in connection with the quarter 3 results that we aim at reducing the group cost by EUR 10 million. Of course, with the Kalmar demerger on 1st of July, part of the headquarter functions would move to Kalmar. So definitely, the ultimate headquarter cost or the group cost will be very different if you compare '24 to '23. But I would say it's a bit early at the moment yet. We will need to be a bit closer to the demerger date to give indications for that.

[Tomas Skogman, analyst]

But is it fair like to -- I mean, despite these EUR 10 million savings to expect rather that the combined cost for Kalmar and Hiab basically will be higher, around EUR 60 million or so despite this EUR 10 million savings?

[Mikko Puolakka, executive]

There are most probably certain dis-synergies as we have certain functions, which we need to duplicate, which are currently just as a one function for Cargotec. On the other hand, we also expect, and that's part of the rationale of the demerger that there will be also other operational benefits and improvements, which are arising from this demerger. So some of the dis-synergies will be offset also then by the benefits from the demerger. And this is part of also the equity stories and the Capital Markets Day's message is what we are planning to then disclose more towards the end of May.

[Casimir Lindholm, executive]

And then looking forward, of course, we have expectations that the standalone Hiab and Kalmar, then in the first 2 years to 3 years, will work a lot with efficiency regarding both systems and processes. So, that's the expectations at this stage then. But too early to say and give numbers on that, but that is, of course, our expectation that it will be a simplified structure and very focused from a process and systems point of view when you're focusing on one business instead of in a conglomerate, we have several businesses. And especially from the past, all the systems have been created for once upon a time, 5, 6 different businesses. So, that's an expectation, but we haven't put any numbers on that yet.

[Tomas Skogman, analyst]

And then on the EO costs that you have guided for the completion of demerger, I think it was EUR 60 million, if I remember correctly. So is this just going to advisors? Or what is this money kind of going to?

[Mikko Puolakka, executive]

Yes, it's correct. In 2023, we incurred EUR 23 million. And therefore, this year, we expect or estimate EUR 60 million. Part of this goes to advisory, so legal advisory as an example. We have legal entity separations. We have IT separation. So, there is quite a lot IT and administrative work needed to separate the 2 businesses. So, tons of details behind these numbers.

[Casimir Lindholm, executive]

And I mean, we have -- it's quite an exercise. We have roughly 200 persons working every day on this project. So the complexity regarding, for example, the IT carve-outs is there for sure. And we are in 50 countries, and we have legal separations, I think, in 40. So it's an exercise from a legal perspective and a systems perspective of magnitude, what we are conducting here.

[Mikko Puolakka, executive]

The biggest effort related to the demerger is definitely the legal entity separation and the IT separation. As like Casimir mentioned, we have had an IT set up by the system, several different applications for different purposes, which need to be now separated for Kalmar and the other businesses. So, that's a major effort behind this separation cost.

[Tomas Skogman, analyst]

Okay. Then I would like to ask Scott about -- to get a bit more color on the demand by different geographies and different products is still. So, that's kind of the heavy side is the weak side. And is Northern Europe now weak because of the weak construction markets, et cetera?

[Scott Phillips, executive]

Yes. For us, you're spot on, Tom. The heavier products, especially heavy cranes have been impacted more versus the light medium cranes and then other product lines that we have in the portfolio. Having said that, we've seen a nice offset in some of the other parts of the portfolio exposed to different segments, but it certainly is a construction segment that has been hit the hardest.Our overall demand in the Nordics has been down, but not as substantially as it otherwise would if we were better penetrated in the heavier cranes within those geographies. So for us, perhaps as compared to a few competitors has not been as represented as big of a headwind as it otherwise would. But you're absolutely right, the Nordics down up in other areas. Overall, revenue mix as well as the order intake mix actually stayed quite stable versus 2022. So about 55, 35 and 10 for us, 10 in APAC, 55 Europe, 34, 35 in North America or the Americas.

[Operator]

The next question comes from Tomi Railo from DNB.

[Tomi Railo, analyst]

It's Tomi from DNB. A follow-up to Scott, actually. I was also going to ask about the end market split. You said construction hardest hit. So, you would assume that, that share has fallen maybe to 20% level? Or is that correct from 25%, I believe, it was earlier?

[Scott Phillips, executive]

Yes. It's in that range, 20% to 25%, still roughly a split 50-50 between the renovations and repairs, so from the installed base versus new construction. One thing to keep in mind, however, what that exposure is, is that our -- we have different products outside of loader cranes that would be exposed to that market. So, that somewhat muted the -- or offset the reduction that we had in the heavier cranes. Otherwise, you're exactly right, that percentage mix would have gone down more. But because we had a substantial pickup in demand on other products that were exposed there, the overall exposure stayed relatively stable.

[Tomi Railo, analyst]

And would you say that construction has troughed?

[Scott Phillips, executive]

Most substantially in the Nordics.

[Tomi Railo, analyst]

Okay. And then a question on the service profitability. Can you comment what was the outcome for '23 overall? And at Capital Markets Day, you mentioned roughly 19.6% for the services. Has that remained the level or improved? And maybe also a follow-up, if there's any major differences between the businesses?

[Scott Phillips, executive]

Yes. We certainly had a nice uptick in the services profitability year-over-year. So, a really excellent job by the team there. And we will provide more color on that in the Capital Markets Day.

[Casimir Lindholm, executive]

And overall Cargotec level, we have stated that we are roughly on a 10% OP level regarding the products and roughly 20% on service. And of course, there are differences between Hiab and Kalmar and the divisions, but roughly those levels. And of course, we are targeting to grow service in all 3 businesses and profitability over the years to come. That is one of the cornerstones in all 3 businesses strategy going forward.

[Operator]

The next question comes from Antti Kaunonen from SEB.

[Antti Kansanen, analyst]

Yes. I just wanted to follow up on the cash flow. Mikko, you mentioned the cash conversions on Kalmar and Hiab, but maybe digging a little bit deeper. If you look at kind of the working capital, the sales levels on these 2 businesses, and I mean, Kalmar's mix has a little bit changed over the years. So, what's kind of your normal working capital levels through the cycle for both of these businesses?

[Mikko Puolakka, executive]

Overall, I would say still that like also, I said that the cash conversions have been around 90% for Kalmar and Hiab. So that basically indicates that the net working capital levels are still, let's say, not an optimal level. I would say, the main topics are still related to the inventory turnovers. When it comes to accounts payables or accounts receivables, I see those on a good level. But the inventories there, both in Kalmar and Hiab, we have room to improve. And it is still stemming from, for example, in Hiab's case, the truck delivery schedules changes there and when the products can be delivered and such things. And then in Kalmar's case, it's still, in certain cases, missing components and then also to a certain extent, this previously mentioned destocking as well.

[Antti Kansanen, analyst]

Okay. Are you seeing any kind of new issues regarding kind of freight and availability because of the Red Sea issues? Is this something that could jeopardize working capital improvements during '24?

[Mikko Puolakka, executive]

We have seen in some areas, and we anticipate in some areas a bit longer lead times. But I guess the COVID environment and the aftermath of COVID has also, let's say, helped us to understand and make the supply chains a bit more flexible. So here and there, we can have some delays. But at least so far, too early to say that kind of nothing dramatic at least.

[Scott Phillips, executive]

Yes. I would echo that in Hiab so far, and we're looking at this daily. Nothing imminent. At the same time, I would expect that we should see a bit of extended lead times, perhaps impact more on the truck OEM side, which, of course, impacts our ability to convert our inventory and the revenue. Maybe a bit of impact in Tier-2, Tier-3 suppliers, both within that supply chain as well as our own. But as Mikko said, we've learned over the last 2 years, 3 years how to cope with that. So, we have a lot more resiliency and flexibility in our end-to-end supply chain. So far, it looks like it's quite manageable with the potential risk for a bit of delays.

[Mikko Puolakka, executive]

In Kalmar, we anticipate that in some of the divisions, we might see a couple of weeks delays here in Q1 or Q2 depending on how the situation develops in the Red Sea. So nothing dramatic, but some delays to be expected.

[Antti Kansanen, analyst]

Okay. And just then a detailed confirmation on Mikko. When you talk about cash conversion, you are referring to operating cash flow and EBIT?

[Mikko Puolakka, executive]

Yes. It's basically the EBIT after the items affecting comparability and then versus operating cash flow.

[Operator]

The next question comes from Mikael Doepel from Nordea.

[Mikael Doepel, analyst]

Just a couple of questions here. Firstly, on pricing. I mean, given the market environment that you see out there seems to be bottoming out a bit. But at the same time, I guess demand is declining. Just wondering how that is impacting your pricing across your new equipment and service businesses when you head into 2024? Are you seeing any price pressure currently? Or how would you describe the situation?

[Scott Phillips, executive]

Yes. I can take it for Hiab first. On our side, always there's price pressure. Our customers would absolutely love us to provide our offering at lower pricing. Having said that, we expect, for pricing, at least the way we see it in the beginning of the year to be quite stable sequentially. So in that regard, heavy negotiations. These conversations are always ongoing. We are under pressure constantly from competitors that also are trying to ensure that their factory order books stay on a good level and they fill the factory. So where we need to, we have an extremely professional pricing function, an emerging capability on our commercial excellence side, good partnership between those, our supply operations and our R&D team. So far, we've been able to cope with this fairly well, and we expect that to continue into this year in 2024. But it will be a constant pressure point throughout the year, but we feel pretty good about our ability to cope with it.

[Casimir Lindholm, executive]

Yes. Similar in Kalmar, I mean, the price adjustments that were made in '21 and '22, I mean, we do not expect anything similar going forward. And the prices have stayed on that level. And then on top of that, there are some regular yearly price increases also now in '24, but a similar situation to compared to Hiab and Kalmar.

[Mikael Doepel, analyst]

Okay. That's clear. And then a couple of questions on the service business. If we start with 2023, you talked about capture rates, spare part capture rates in that business, which have developed positively in the years, but you are still quite far, far behind some of the kind of best-in-class operators on that front. So just wondering if you could describe how that capture rate developed for Europe in 2023?

[Scott Phillips, executive]

Yes. I can take that starting with Hiab. We've seen a nice development in Hiab. We teed up on our November 15, 2022, Capital Markets Day that we would target to be at 47% capture rate. And that's about where we ended in the year. So that's a good improvement continuing over the past 3 years. Keys to us to get to the target level and if you recall back to then, if you've seen the material either during the presentation or after, we think we can get to a level of 60% and critical for us is given the mix of our sales that go through our channel partners, then it comes down to visibility to the installed base.As we increase the amount of connected units, which I described earlier as well as better and better partnership models with our dealers and importers, then we're getting all the time much better control over the installed base. Then we're able to partner with our channel distribution partners to go out and capture our full entitlement better and better as time develops. I'd say that we still have 2 years to 3 years, most probably to get to levels approximating or getting close to those target levels of 60%. So, those are the 2 or 3 things that we need to do better moving forward. And we feel like we've got clear action plans to go from where we are now to where we desire to be. And we'll talk about this more in our upcoming Capital Markets Day as well.

[Casimir Lindholm, executive]

From a Kalmar point of view, I mean, growth in service was 8%, if you take into account the currency. So, we are growing in that sense. There are couple of elements that will help us grow going forward. One is, of course, we have delivered on the multi-high backlog, so we get more -- a bigger installed base. So, that's one part. Then, of course, in this interest environment, we see some of our customers using the equipment longer than maybe the normal life cycle that will increase the need for service and spare parts and even in some cases, refurbishment. Then last but not least, I mean, we need to work more actively on the installed base and the customer base. I think we have clear potential in growing service in Kalmar in the years to come. And again, it's one of the cornerstones in the strategy for the standalone Kalmar.

[Mikael Doepel, analyst]

Okay. Well, that's very clear. And then just finally, if I may, how resilient do you see the service business now going into 2024? I mean, what are your assumptions for that business overall on aggregate level? Is the base case going to remain stable revenue wise? Or how would you expect it to develop?

[Scott Phillips, executive]

Yes. I'd say, starting on the Hiab side, we see strong resiliency in the service business. Given the mix of our recurring revenue versus the non-recurring revenue, the recurring revenue is growing at a -- continues to grow at a much faster rate. So that bodes well. And that's all about harvesting the opportunities from the installed base. And the better we do that, the higher the probability is. We can increase our net promoter scores with our customers. We know those that are promoters are -- now they're 95% likely to repurchase. So that's -- as Casimir stated with Kalmar, it's clearly central to our strategy in Hiab. But moving forward, I'd see good strong resiliency in the services business, good level of stability and opportunities to continue to grow that business.

[Casimir Lindholm, executive]

Yes. On the Kalmar side, I think, I mean, looking the 15,000 units where we have a good visibility of the activity, the activity is on a good level in the second half of '23 regarding the usage of the installed base. So, we expect the service business to continue at least on the levels where we are. And, of course, we have an ambition to grow in service in Kalmar as well. And the same goes for MacGregor.

[Operator]

The next question comes from Erkki Vesola from Inderes.

[Erkki Vesola, analyst]

It's Erkki from Inderes. Just a housekeeping question regarding orders and sales division in Kalmar in '23. I mean, between large ports, smaller ports and then inland terminals, what were the changes in '23?

[Casimir Lindholm, executive]

We haven't specified the split there between large ports, small ports and terminals. But it's, of course, the strategy change is quite big in Kalmar, where we are not any more a big ports company. We're very much more into smaller ports and terminals regarding the solutions and products that we now have in place in Kalmar. So it's leaning more towards that than the large ports in the past where we had the heavy cranes and the end-to-end automation project. So, that is a big change. You can also see it from the order backlog.In the past, the order backlog then converting into sales and profits was slower because we had a project business there and the heavy cranes there. Now, we are only in product, services and spare parts business. So, you will see the order backlog then converting faster compared to the past. But we haven't opened up specifics around, which part of the business in terminals, small ports or larger ports, how that developed?

[Erkki Vesola, analyst]

Yes. If I can recall it correctly, a couple of years back, the share of large ports was around 30%. Am I assuming right that it still has come down?

[Casimir Lindholm, executive]

Yes. And also just the fact that we only have a couple of millions left of order backlog in heavy crane. So if you compare to those figures, absolutely, that share has been coming down.

[Operator]

The next question comes from Tom Skogman from Carnegie.

[Tomas Skogman, analyst]

Yes. I have some follow-up questions. So in Kalmar, how large were the heavy crane losses in 2023?

[Mikko Puolakka, executive]

It was EUR 7 million versus EUR 20 million in 2022. So, EUR 13 million less losses. It was very much according to our expectations. So, actually, the delivery of the remaining order book for the heavy cranes proceeded as expected.

[Tomas Skogman, analyst]

And then in MacGregor, I know you have touched upon that the margin was 10% in merchant last year. But could you still give out exact numbers on the offshore losses and what was kind of the losses coming from these bad projects to get the understanding of the other parts of the offshore business?

[Mikko Puolakka, executive]

Well, in general, we have said that, basically, the offshore losses overall not taking into account what is bad or what's good. The offshore losses were EUR 30 million. So without those, MacGregor would have delivered over EUR 60 million positive result comparable operating profit in '23. And as said, we have still a handful of projects, offshore projects which need to be delivered in '24. But in most of those cases, the project percentage of completion is very close to 100%.

[Casimir Lindholm, executive]

And compared to '23, then as stated before, we had 20 loss-making projects in '23 and now we're looking at a handful. And one of those is a bigger one. So then you get roughly the magnitude, how it looks for '24 compared to '23.

[Tomas Skogman, analyst]

Okay. And then about MacGregor's order outlook. You know what vessels have been ordered. So, you have a pretty good visibility on at least the direction of orders this year compared to '23. What can you say about that? And then I heard Wartsila saying a couple of days ago here that -- or yesterday that yards are now expanding a lot in Asia to build up more capacity. So, perhaps you could give your views on this a bit as well?

[Mikko Puolakka, executive]

Yes. Overall, if we are looking at the vessel contracting activity and the projections for 2024, it looks solid from MacGregor point of view, very similar kind of a structure what we have seen for 2023. So, for example, car carriers or pure truck carrier type of vessels specializing in electric vehicle transportation from one continent to the other, as an example. So, very much kind of merchant vessel-driven activities, also container vessels in the sales funnel as well.

[Casimir Lindholm, executive]

And I mean, overall, we see the market that is positive. And again, the order backlog for MacGregor is on a very good and healthy level for '24, covering to a large extent what we expect regarding sales in '24.

[Tomas Skogman, analyst]

But do you expect order growth in '24 in MacGregor? I mean, you know what vessels have been ordered in other segments.

[Mikko Puolakka, executive]

Difficult to -- we don't guide the order intake. And, I mean, MacGregor's orders are still -- they are project orders. They can be lumpy. So, we would refrain on giving an exact order intake number or direction. But overall, we don't see any reason why MacGregor's 24 market would be any worse than '23.

[Casimir Lindholm, executive]

No. And on top of that, of course, we have been very conservative regarding the margins and the risk that we take in, for example, in offshore. So that impacts there. Of course, you could be more aggressive. But we have -- given the past, we have decided to be quite conservative there. And you can see a quite low order intake in offshore in '23. And we're not anticipating to grow that in '24, not with any large number at least regarding projects. So, that's also something to keep in mind regarding MacGregor.

[Tomas Skogman, analyst]

Okay. And then a final question to Scott. Is there any meaningful difference in your and Palfinger's service offering and where you're doing service business?

[Scott Phillips, executive]

We do a lot more direct service as compared to Palfinger. And, of course, we're positioned that way most substantially in the U.S. as compared to Palfinger. Of course, as you've heard from their team, that's an area of focus for them to build up, and we see that they are. But nevertheless, that's been an area where that served us well, and there's additional opportunities for us to continue to look at the mix of our own service versus the service that we do through our channel partners. But at this time, we like the mix. However, we're looking at opportunities where we can both increase our own, as well as service coverage through our distribution partners, Tom.

[Operator]

There are no more questions at this time. So, I hand the conference back to the speakers for any closing comments.

[Aki Vesikallio, executive]

Thank you for the great questions, and the great presentations and answers, gents. We are back on the last day of April when we publish our first quarter results. Stay tuned.

[Casimir Lindholm, executive]

Thank you.

[Scott Phillips, executive]

Thank you.

[Mikko Puolakka, executive]

Thank you.