Hiab Oyj (HIAB) Earnings Call Transcript & Summary

Good morning, all. Welcome to Cargotec's Investor Media and Analyst Call. My name is Carina Geber-Teir, and I'm heading comms at Cargotec. We have had some busy days this week. And based on the recent announcements and our stock exchange release from this morning, we will now talk about the refocused strategy of Cargotec. With me here in the studio, I have our CEO, Mika Vehvilainen; and our CFO, Mikko Puolakka. We will start this call with a presentation by Mika, and following that, we will have a Q&A session with both Mika and Mikko. Please pay attention to the disclaimer. And Mika, I will hand over to you now, please.

Thank you, Carina. Good morning from my behalf as well, and thank you for participating for this Cargotec refocused strategy info session. As you know, we announced yesterday our cancellation of merger with Konecranes. Obviously, this planned merger was our priority. However, we have seen for quite a while now the uphill battle we have with the competition regulators, and hence we've been working together as a team in Cargotec developing an alternative direction. It is a direction that will deliver strong shareholder value for Cargotec owners. So today, I'm very pleased to share this new strategic direction with you. So let me share with you how we are going to build a new path forward. The future Cargotec will be a more focused company. We will drive sustainable growth around our core businesses, and I'll come back to the definition of core business in a moment. We will leverage our competitive advantages in our market positions, our technology offering and our service capabilities. And we will leverage our strong balance sheet to accelerate the growth through mergers and acquisitions and investments in our core capabilities. So how does this new plan look like? First of all, our strategic direction remains the same. Our focus remains in driving sustainability and profitable growth. So we know where we are going, but we need to also streamline and refocus. What does this mean then in practice? So here are some of the main ingredients, and I come back to these ones bit more in detail during the presentation. Hiab remains very much core of our strategy. It is a high-growth, high-performing business, and we plan to accelerate the growth further in Hiab. In Kalmar, we will focus our offering around mobile equipment and horizontal transportation and related services, leveraging the strong market position we have, our services business and capabilities in automation, robotization and electrification. And we are planning to exit the heavy port crane business. We have also announced today that we are starting a strategic evaluation around the options for MacGregor. So why have we decided to do so? The selected core businesses are our most profitable businesses. They are the businesses where the market structures are attractive and our market positions are strong. They are also the businesses with a high proportion of recurring revenues from our services business where we still have a lot of opportunities to develop them further. And also from the product replacements, we have an installed base of tens of thousands of equipment with relatively short life cycle, and that drives the continuous revenue from the product replacements. And these businesses represent the higher growth opportunities for us both organically as well as inorganically. With these choices, we have a considerable higher financial performance almost from the outset with a better and higher growth opportunities. So how does this new Cargotec would then look like? The future Cargotec business will be built around our market-leading products and services. Our services business is progressing well. We had another record year in 2021, and we have great growth opportunities still. We have significant room for sort of self-help, still improving our basic services areas such as spare parts, capture rates or maintenance contract attachment rates. But increasingly, we have opportunities to drive our advanced services through our digitalized offering and increasing number of connected products in our installed base. Our equipment business is growing through underlying megatrends such as e-commerce, urbanization, construction and moving sort of the delivery and logistics chain as such, but also through the technology evolution and technology changes as the introduction of the automation, robotization and electrification will drive up the equipment value. It's a huge installed base of tens of thousands of equipment. These product areas have high recurring revenues coming from services, but also from the continuously happening product replacement business. In these product areas, we also have great opportunities to grow inorganically through M&A, through product adjacencies and regional expansions. So how does the future product portfolio would look like? Hiab remains obviously as it is, and we have great opportunities to expand that business further. In Kalmar, our focus will be around mobile equipment, Bromma, which is a fantastic business for us with strong market position and good profitability; and horizontal transportation, where we are clear #1 in the market today and we have a clear technology edge against the competition there as well as well as then all the related services, leveraging our capabilities in automation and electrification. We plan to exit the heavy port crane business either through ramping it down or potentially looking for a buyer for that business. As I already said, we are now starting the strategic evaluation of the MacGregor business. So what are these changes then meaning from the financial point of view? First of all, these are the targeted 2021 numbers that you're already familiar with, with revenues about EUR 3.3 billion and operating margin of 7%. Now if I look at this business by business, obviously, Hiab numbers remain as they were in '21 and MacGregor numbers stay as they were in '21. To help you to better understand then the implications, we have now split the Kalmar business into the focus areas and areas that we plan to exit. In Kalmar's case, that means that roughly sort of EUR 100 million of the revenue with the heavily negative operating margin is moving out of the business. And the remaining Kalmar business was operating actually at a double-digit operating margin. It's also important to notice that the core businesses actually enter the '22 with the record high backlog in the core businesses, around the mobile equipment and Hiab with EUR 2.1 billion of order backlog. That gives us a great basis to actually move forward. So if you look at this change and take a hypothetical assumption that the MacGregor would not be part of the Cargotec business anymore, we would have exited the heavy crane business, how would have '21 numbers look like in Cargotec case? That would have meant that our revenue would have been around EUR 2.6 billion, our operating margin would have been about 10.1%, service sales about 31%. It's also a very well-balanced portfolio with both Hiab and Kalmar being about EUR 1.3 billion to EUR 1.5 billion revenues. It's also good to note that these businesses, the so-called focus businesses, have delivered a combined double-digit operating margin for all last 8 years. A few words about all of the businesses. Hiab obviously is an excellent business. It has a great track record of delivering profitable growth. Between 2013 to 2019, before the COVID impact hit, Hiab has actually grown 7% on average over the years. This growth is supported by the mega trends, urbanization, construction, e-commerce and other modes of delivery and logistics growth as well. In Hiab, we plan to continue to drive the growth at the twice the rate of the market. There are also great opportunities in Hiab services, again, self-help, spare part capture rates, maintenance contract attachments. But more and more and increasingly, we see opportunities to add value and drive value for our customers through the digital development and high number of connected products, giving a better customer insight. Also in Hiab, the technology plays increasingly important role and the electrification -- with the electrification of the truck fleets and then automation making the deliveries more easily for lower qualified operator are important value drivers for our customers. And the technology development and investments in Hiab will further drive opportunities for growth and margin expansion. Also, as Hiab has multiple adjacent opportunities, we have a solid pipeline of acquisitions, and we also have a track record of delivering successful acquisitions such as the Effer and Galfab that was announced at the end of last year. And we keep on pursuing those M&A opportunities, both in terms of product adjacencies as well as the geographical expansions. In Kalmar, we will shift our product focus. Kalmar mobile equipment is a great business. It has delivered over 10% operating margin in all last 8 years and it has grown actually in average about 4 percentage points. Again, here, the megatrends in terms of the logistics shifts and changes in the industry are driving the underlying growth, and our market position is great. We are actually #1 in most of the product categories in here. Compared to the heavy port crane side, the market structure is considerably more attractive with large number of smaller customers. And the steel content, for example, of those products is a lot less. And the technology intensity is growing and our sort of technology advantages is going to deliver us even stronger position there. Our technology position is very strong, and we are leading the market, for example, in electrification and robotization. And all of these products are now available in electronic -- electric format as well. As I already said as well, we are now starting the review on MacGregor. MacGregor is a good business with a very strong market position and good growth prospects. Now the question for us is, does that fit into our refocused strategy? MacGregor is a market leader in all of its main segments, both in Merchant as well as in Offshore. And the growth outlook actually for MacGregor right now is good. There has been a change in cycle in merchant sector, and we see rapidly changing energy environment driving good opportunities in offshore both in terms of the renewables, i.e., offshore wind, as well as we are likely to see sort of further expansion and investments in the oil and gas sector as well as the European sort of energy landscape is changing due to the Ukrainian war. Also after the acquisition of TTS, MacGregor team has done a fantastic work to put the business in a great shape And then we are looking at the future direction on the Cargotec, MacGregor does not necessarily fit into that one, but it's a good business with the right owner. Hence, we have started the evaluation of the strategic options, including the sale. Now let me share with you next what you should be expecting from us in the next 12 months. As said, we are now starting the strategic evaluation around MacGregor and we will keep you updated as that evaluation is going forward. We also plan to keep you updated on the other actions, including the port and heavy crane business, and our plan is to hold a Capital Market Day later this year with a more detailed information. In terms of the capital allocation, moving forward, obviously, we will accelerate the M&A pipeline in our core businesses around Hiab and around the core Kalmar product areas. We are continuing to drive the competitive advantage we have in technology by investing into electrification, robotics and digitalization. And we maintain a very strong focus on our mission climate actions because the climate changes and the sustainability is a great business opportunity for us. Obviously, as a part of these changes, we are then also reviewing the operational mode and the group functions with the refocused businesses. The great thing for us, of course is that despite the uncertainty introduced by the merger, our top leadership as well as the leadership levels in the next 2 layers have remained pretty much intact. This, of course, gives us a great basis to move the strategy forward at the rapid pace. Also good to note that these changes do not impact our '22 guidance. Our guidance still remains that the comparable operating profit in '22 will be higher than it was in 2021. Now I think that -- I truly believe that the refocused Cargotec is an attractive investment opportunity. In all of our core businesses, we are either clear #1 or at least a strong #2. These are also markets that are highly attractive from their structure point of view, and these are markets that have underlying growth that is visible in our numbers as well. We also have a very strong balance sheet and we can leverage that balance sheet by investing into the M&A and investing in our technologies. And we will have a very strong businesses, hyper operating margin businesses that will produce further cash flow for those investments. The climate change is a great business opportunity for us, and we keep on investing on those opportunities by accelerating our efforts in electrification, robotization and digitalization. We are making good progress in our services business. We still have significant opportunities both in terms of the more basic self-help type of efforts as well as more and more in the advanced services through digitalization and connected products. And the ambitious climate focus and the commitment for the sustainability remains very much in core of our strategy. So personally, I'm very excited about the new focus strategy. I am absolutely convinced that this will deliver significant value for our shareholders, our customers and our employees. Thank you for listening in.

Thank you, Mika. A great opportunity with a lot of actions. I think we are ready for questions together with Mika and Mikko. Please, operator, do we have any questions?

[Operator Instructions] Our first question comes from the line of Aurelio Calderon from Morgan Stanley.

I've got 2. I'll take them one at a time, if I may, please. The first question is around how easy you think it will be to exit the heavy crane business in Kalmar and all the services that you do for those large cranes, could you see any risk of losing those, if those would be part of the potential kind of discontinued operations? Or if you still plan to service those cranes? And if so, what is the rate that you may lose those sales?

First of all, in terms of exit, we will exit that business. So we are obviously looking for a potential buyer that portfolio would fit into that one. But in case we can't find a buyer, we will simply ramp down the business. We will not take any further business on that one. The services business, we plan to retain. And I think we have the capabilities and a great team to actually service those ones. We already today do quite a bit of third-party services and credit modification, et cetera. So I see good opportunities to retain in that business as long as we have the capabilities to serve our customers well.

Okay. And in terms of any potential dis-synergies from the exit of the heavy crane business and the MacGregor business, are the business really integrated from a procurement standpoint? Or are they really independent and run as kind of 4 different legs of your portfolio?

There obviously has been sort of certain shared sort of sourcing, but the sourcing comes from a very different sort of sources in a sense. Because MacGregor, of course, the sourcing primarily happens next to the ship building, so in Chinese -- close to Chinese shipyards, in Korean shipyards, et cetera. Whereas in the heavy crane side, we will then source next to our production facilities as well. And again, as we plan to sort of actually exit sort of the -- potentially the -- all the heavy crane side as such, again, we would not necessarily seek for the synergies. Our future business will be more around the sort of smaller and higher profitable equipment.

Okay. That's great. If I can just squeeze one more in. On Hiab, you're mentioning that you would be looking to new product adjacencies or expanding geographically. Is there a focus in the U.S.? Or would you try to expand even more in APAC?

Both. And obviously, there are still a good number of sort of smaller local companies that usually have high -- relatively high market share locally with product offering. And in Hiab kind of business, the barrier to entry is quite high. So typically, you would say that if you are below 20% given product market share in any given market, it's very difficult to make a profitable business because customers require a good service network and presence because, obviously, the equipment is mission-critical. So we can identify and see a number of sort of local champions, both in APAC as well as in Europe as well as in U.S., Galfab being one example of that one in U.S. where we have a sort of continuous discussions going on. So the pipeline overall is relatively strong. But obviously, a lot of these businesses that we talk to are family-owned and they have their own set of dynamics, and sometimes, it takes quite a while until those deals are actually carried out. But we keep on developing the pipeline and that looks very promising.

And the next question comes from the line of Antti Kansanen from SEB.

Sounds like a quite value-adding plan, if I may say so. But I have a couple of questions on the exits. First of all, on the Kalmar side. And if you don't manage to sell the business and you are ramping it down, what would that kind of look like? What are the dedicated assets that you have in that business, the amount of personnel that you have and so forth?

Yes, Antti. If we are not able to sell that one, then first of all, we have existing commitments that carry out until, Mikko, 2024, '25?

Late '24, early '25.

Yes, late '24 in terms of -- obviously, are committed to sort of carrying through those projects. It's a very asset-light business model. We don't have any manufacturing. All of those cranes are subcontracted primarily in China at the moment, and also the personnel related directly into the sort of design of that one is quite limited. Quite a lot of the engineering work after December, that joint venture in China, was actually moved into the external engineering services company as well. So -- and potential employment effects and restructuring is relatively modest because it is a sort of high -- sort of a very asset-light business model we are in already.

On Kalmar business area, assets employed at the end of last year was approximately EUR 630 million. And the majority of that is related to the mobile equipment, so the high-volume equipment business.

Okay. And then on MacGregor, I mean, it didn't sound like that it would be a core asset in the case of the merger would have gone through. So is this something that you have been in planning and discussions already regarding potential buyers and so forth? Or are you now kind of starting that process from today onwards? How should we think about the timetable of finding a buyer for that asset?

As you know, it's very hard to predict what the time tables in this one is. We are now starting the process. Obviously, it's been under consideration for quite a long time. But right now, this is a good time to look into that one because it's very clear that the market has turned around after. This was an extremely long -- much longer sort of downturn that I think anybody expected in maritime sector. And it's good to see now that both the merchant and marine sector had a very strong vessel order intake in '21. And then also changes in the offshore environment are making this a good time to consider the potential exiting that business.

Okay. And then the last question for me would be on the core on the remaining businesses, and the services share was roughly 30% last year. So what are your expectations going forward on accelerating the service growth beyond the equipment growth? And what are kind of the relevant target levels that the new businesses can achieve over, let's say, 5 years or even longer?

I think we will come back to the more detailed target setting. I am aware that we don't have all the sort of numbers yet there, later this year with the Capital Market Day when we are progressing with the plans. But if you look at our services business in Kalmar and Hiab, we've been growing at a good clip, sort of close to a double digit, some years, double-digit numbers, some years, high single-digit numbers. As I said, it's a sort of still a very good opportunity for us. We still have quite a bit of work sort of self-help-wise in terms of still driving in certain markets the spare part capture rates, still driving the higher attachment rates in maintenance agreements. Our performance by market to market still varies, and we need to sort of bring up the whole performance level to acceptable level. And increasingly, we see opportunities in sort of more and more products are connected. We get data from there. We get good insights on that one, how do we develop more advanced services together with our customers as well. So I think it's an excellent growth opportunity. And I would say that the growth numbers you would see, and I see no reason why we should not be able to at least maintain that level going forward. There simply are lot of opportunities just sort of taking the service market that is already there today.

And then regarding investments in these core businesses, is there something that you've been holding back throughout the merger process that we now perhaps see accelerating CapEx or accelerating M&A after the future now looks clearer in that regard?

I don't think as such, the CapEx requirement. As you know, we have a very asset-light operating model. And as long as the current capacity in our manufacturing locations will stay, I don't see an increase in CapEx requirements. It certainly show that in -- from a technology point of view, can be -- we can sharpen further and focus even further the capabilities we have developed, for example, around the port automation now more into directly into the horizontal transportation and then around the mobile equipment. And also some of that capabilities, as I already said in my presentation, in Hiab, we require more and more robotization and automation capabilities also as that offloading and loading becomes more automated down the road as well.

And the next question comes from the line of Johan Eliason from Kepler Chevreux.

Congratulations I think this was obviously a logical move after the deal fell apart. Maybe it should have been with insight down the other way around, but who knows? Just on MacGregor. So that was obviously on the table already before you joined the company to sort of be separated out. What makes you think it's -- it will be possible to do this time around? And I noticed you say something about legal comments, if you are able to sell it or so. I mean, you have this Chinese joint venture. Is -- would it only be possible to sell it to your Chinese joint venture partners? Or could sort of Korea and Japanese guys also did for the business?

Well, first of all, of course, we have not done any -- this is -- we're yet to sell that. We are starting the evaluation around that one. And of course, the devaluation then will include the potential buyer analysis and others, et cetera. I'm not aware of any legal restrictions we would have in our joint venture businesses in terms of change of ownership as such.

Okay. I thought you wrote something in the presentation here, something about legal. I thought they were related to those, but it's not.

No, I think the -- obviously, like all of these changes, they are subject to the sort of employee representative discussions and agreements in there as well.

Okay. That's it. Okay. But this time around, why do you think it will be possible to sell it rather than in 2012?

Again, we have not made the final decision to sell it. But I think when I look at the 2012, simply I think it was a good value creation opportunity, but I guess it was, maybe a year or 2 or 3 years late at that stage. Because what we saw happening, of course, was the down cycle starting. That obviously impacted the valuation of the business as well. Now the down cycle has been considerably longer than I think anybody expected in the maritime sector. And if you look at now the market development, we see very good growth prospect for the business. And usually, that's the better opportunity to look for potential seller -- buyers if we decide to do so.

And then on the larger port cranes which are closing down or maybe finding a buyer for, can you say anything about the installed base? What sort of market share would they be having out there? What sort of service business are you having with them today?

It's part of the reported service business in Kalmar, but it's a smaller -- clearly smaller part than the mobile equipment related. It's good to remember that a lot of the port service business is in-house as it's heavily unionized. So by far, our biggest service businesses around the mobile equipment and related services where you have a lot of industrial and smaller customers who are quite used to sort of outsourcing the service opportunities.

Now, I mean, you have historically said this has been a breakeven sort of business. I guess that included the stradds and the shuttle carriers as well. But is it fair to assume that all the profits you had was from the service business, so this comparable operating profits of minus 20.8% is basically matching the profits you have from the service business?

The 2 profitable parts of that business have been the services business and then the straddle business. And in straddle, as I said, we have a very strong market position, and we have a very, very strong technology offering there as well at the moment. And really, I mean, the evolution, and I've been around this, quite committed personally also for the port automation for a number of years, and I think that's still going to happen. But very clearly, what we see that the -- in the heavy side that automation is overshadowed by the -- effective the very high steel content you have on those cranes, the very heavy competitive pressure coming from Chinese suppliers who are also investing into automation and the market structure that has a very high buying -- you have a very concentrated power base of both operators buying that equipment. And you compare that to mobile equipment, which you have considerably smaller customers, high spread of customers, large number of customers. Your market structure is considerably more healthy. The barriers to entry are higher there because you require the services networks and resale networks to be able to do that one. We have -- the straddle business is a very good business for us. We plan to maintain that one. The staddles are actually manufactured in the same facility in Poland as our mobile equipment as well. So there are synergies in there as well. And as we already discussed partly in previous question, we plan to maintain all the services offering also for the crane business when that's available.

[Operator Instructions] We have one more question from the line of Massimiliano Severi from Credit Suisse.

This is Massimiliano. I have 2 actually. The first would be on automation projects. Do you see disadvantages in not being able to have a full suite of products anymore? I mean in the past, you had also Navis, and now you're exiting larger cranes business. Do you think it's a headwind for the Kalmar one sales going forward? Or since it is OEM-agnostic, you can sell it basically to everyone and you don't see headwinds from like similar, the large crane businesses?

Yes, that's a good question. And I think you have touched that partly already. And so our thinking around the port automation has, of course, heavily evolved over the years. So we started with the thinking that there will be a complete package and sort of almost pre-integrated automation solutions for greenfield ports. And that included automation systems, from Navis, our own automation system and then related products. When we now look at the automation market, and I think that's still sort of continuing, but it's very clearly almost exclusively on the brownfield implementation. And it's done piece by piece, port area by port area and key by key. And it's very clear that sort of a complete offering is not really required because most of the customers are buying these in separate packages at the moment. We can still offer the automation sort of control system, TLS, as we call it, Kalmar One, for the customers who would like to connect the equipment in the same areas as well. So that certainly will be available from us as well. But we see it's quite important that the equipment competitiveness we have in the straddle options is just at extremely strong at the moment, and we will be very much focused on delivering those capabilities.

Yes, makes sense. And my final question would be on the Stargard factory in Poland, it was part of the divestment package. In case you find a buyer for the crane businesses, would it potentially be something that you could dispose or sell it to a client? Or now Stargard is back, part of the core businesses and it will stay in Cargotec's perimeter?

A good question, and I probably should have been more clear. The only sort of heavy side that actually has been manufactured in Stargard was straddles. And now that the straddles will remain in our portfolio, all the operations we have in Stargard will remain. When we talk about the heavy port cranes sites such as the ASCs and gantry cranes and STSs those are actually not manufactured in Stargard. They are manufactured by external parties, primarily in China. So as I said already, that part of business is very asset-light. We don't have any of our own manufacturing operations there.

And we have one final question from the line of Erkki Vesola from Inderes.

Mika, Mikko, can you hear me?

We can hear you fine, Erkki.

Yes. Well, if you discontinue with, for instance, RTGs and RMGs, don't they have the same customers as the straddle carriers have? I mean, is there a risk of losing customers when you kind of narrowed your offering?

I think what we have already seen actually is that the -- these are very large buyers with a very sort of high own technology development and need. And very clearly, when we look at all the deals that we have had lately in the last few years and all the deals that are upcoming, people buy specific products based on their own competitiveness. And this kind of complete solutions are not really very much in the cards anymore. And we feel that our technology offering is such competitive in the straddle business that will sort of continue. And we don't really see a sort of a combination of the different crane types on that one. And if one needs these straddles can connect again. We then connect it to the automation system by our own or by a third party.

Okay. And then still coming to the port crane profitability. You mentioned the Chinese competition. But what wage would you be put on the lack of volume there? And has there been poor execution, et cetera? What's your take on that?

Yes. I think it's a fair comment. I mean, one thing we have to admit that the plan to actually move the heavy crane business into the Chinese joint venture, was, I think, on a high level, a good one. But in hindsight, of course, the competitiveness of that business did not remain at the level we were in there. We did not have the volumes that are probably required on that one. But simply, it's -- from a market structure point of view, it's a very challenging market because you have a very concentrated buying power, heavy Chinese competition and a lot of steel content on the product structure. So it's that combination, I think, there are limits on how good that business can be, even if you execute very well.

Okay. My comment is that you are going in the right direction. So congratulations for that.

Thank you, Erkki.

And as there are no further questions, I'll hand it back to the speakers.

Thank you for the great questions. Thank you, Mika, Mikko. And as Mika already mentioned, we will come back with the Capital Market Day later this year. But meanwhile, there will, of course, be the Q1 result, the 27th of April. Thank you, and stay safe.

Thank you.

Thank you.