Hiab Oyj (HIAB) Earnings Call Transcript & Summary

Welcome to Cargotec's Third Quarter Results Call. My name is Aki Vesikallio, I'm for Cargotec's IR. Today's results will be presented by our CEO, Mika Vehvilainen ; and CFO, Mikko Puolakka. After the presentation, there will be a Q&A session. And please pay attention to the disclaimer in the presentation as we will be making forward-looking statements. Strong performance continued in our core businesses, Kalmar and Hiab. We achieved, again, all-time high comparable operating profit. Also, orders received increased in all business areas. But on the other hand, we expect that supply chain challenges and market uncertainties will continue also going forward. As we already achieved our 2021 comparable operating profit level, we specified our outlook for 2022. And we now estimate that our comparable operating profit will improve by EUR 88 million to EUR 118 million compared to 2021. With that, over to you, Mika.

Thank you very much, Aki, and good afternoon from my behalf as well, and thank you for joining the Cargotec Q3 '22 call. As Aki said, our strong performance continued also during the Q3. As you know, the Q3 is typically a weakest quarter for us in the year due to the seasonal fluctuations and being able to deliver such high revenues as well as a record operating profit during the Q3 was a very good achievement from us. I'm especially happy to see the strong performance in our services business where the strategic focus is clearly delivering results for us, and our services businesses grew by 22%. Even more delightful is the great progress we are making in our Eco portfolio. Eco portfolio revenues have actually now increased by almost double 97% and are already representing 27% of our revenues. The investments we have done in the technology and services to drive the sustainability in our industry. Together with the fast changing landscape where our customers are more and more under pressure regarding sustainable solutions is clearly delivering results for us. Looking at the market then overall, first of all, what we see from our operating equipment data connected all over the world, the high capacity utilization is still continuing. We saw a slight decline sequentially from Q2 to Q3, which is, of course, partly explained by the seasonal variation. Overall, we see the stabilization of the data also year-on-year. Obviously, a lot of the equipment is now running at the capacity. And as we are now able to deliver more and more new capacity on-stream, we accept those running ours to stabilize at a relatively high level at this stage. Overall, obviously, the market uncertainty is increasing there. If I look at some of the key indicators for us, the content traffic is still growing. The container shipping traffic is still actually almost at the full capacity utilization. We still see congestion continuing in the ports. Overall, we expect that the container traffic is still growing during Q4 as well as during the next year. We start to see some slowdown in the building sector and construction activity at the moment, and obviously, such as housing starts.  I think it's also important to remember that when you look at some of the statistics and we start to see potentially some decline in some of the indicators as well, we start to decline from historically high levels. So if you look at the sort of the absolute numbers now in a number of the indicators over the last 6, 7 years, we are still operating at a very high market activity in many of the segments as well. In ship side, we see slowdown in ship contracting. This was to be expected. The shipyard capacity starts to be full due to the very high contract activity in '21 and early part of '22. And that, together with the higher prices and inflation in for except steel prices is clearly slowing down the ship orders there as well. Our orders increased in all businesses and the new record high as well. Now putting that in context, one needs to remember there is some positive impact there coming from currencies and also from the inflation now. Overall, one would estimate that our equipment pricing is about 10% higher than it was in the respective quarter in 2021. So overall, in terms of the volume of the equipment, one starts is the stabilization of the order intake, but the order and the demand is still continuing at a strong level. When I look at our sales finance forward and the performance year-to-date, we still see the strong demand curve continuing at this stage. This strong order performance is bringing a new all-time high in terms of our order book, which now stands at EUR 3.7 billion. And obviously, this gives us an excellent starting point going into the next year. We see no activity in terms of cancellations at the moment. I think the capacity utilization runs still very high. And obviously, the increase in prices and the inflation is also giving us some protection in terms of the cancellation together with the different contracts that we are renewing including penalty clauses, et cetera. Again, as I said, the Q3 tends to be our lowest quarter in a year and the fact that we were able to deliver such a strong performance in terms of revenues and profitability, all great thank you for all the people in Cargotec who have worked very hard to be able to make this happen despite the continuing challenges in our supply chain. We still see those supply chain issues continuing into the Q4 and at least the first half of next year as well. So we are in no way sort of out of the woods in terms of those challenges, but we are working very hard to enable those deliveries to happen. Very satisfied with the services. This, of course, has been our strategic focus area for a number of years now. And very clearly, the high equipment running in [ hours ] and especially the work we have done in terms of self-help, driving higher spare part capture rates, better services performance, better utilization is delivering results for us, and strong sales growth was visible in all of our different business areas. The targeted strategy focus remains in solving and being the global leader in sustainable cargo flow for our customers. We are solving the logistics industry's sustainability issues by investing in technology and delivering better services for our customers. Now exactly, almost 6 months ago, 2 quarters ago, we announced a refocused strategy, and we are now actually executing on that one. The refocus strategy had 3 elements on that one, strategic evaluation of MacGregor business plan to exit the heavy crane business in Kalmar and reviewed the operational model to support refocused group. Now already last quarter, we were able to announce the strategic exit from the heavy crane business in Kalmar, and we are now in the final phase of asset transfer in there. The deal is effectively now done from our side. During the Q2 and Q3, we were able to conclude a review in our operational model to support the refocused group. The work in MacGregor's strategic evaluation is continuing and progressing and we will update the market when we have any conclusions from that one. Regarding the operational [ mold ] changes, we are actually making our businesses more independent, owning more of the capabilities in-house to be able to drive focused strategic performance and deliver results. As a result of the changes in operational mode, we are moving more than 100% from the group focus areas into the business areas. In Cargo, we have very successfully developed and driven our digitalization and technology developments, partly through the central capabilities in our group level. Now we believe that our actual development is mature enough to be able to move all of those assets and especially the great talent we have in our digitalization and technology capabilities directly into businesses where the alignment and sort of integration into our customer-facing activities will be even better. We are also moving all sourcing activities, including direct as well as indirect sourcing into the business areas for them to be able to drive that more effectively. And sustainability and technology functions are also moving to a great extent into the business areas. Now from a group point of view, this means that the Cargotec will be more and more focused only on the listed company duties as well as then providing the back office services and processes for our business areas.  The investments that we have done in technology and development and services are now clearly yielding results, as you can see from our numbers. And we keep on sort of going down that road. Our R&D investments grew again about 7% in Q3. A couple of examples of that one. In Hiab, we are really looking to sort of go into the new application areas as well to sort of build more resilience in the business. And one important breakthrough for that has been a rail segment that has been -- not been a sort of strong point for Hiab in the past, and we have achieved major breakthroughs on that one. In solving our customer climate challenges, we are delivering increasingly market-leading capabilities, for example, more than 500 Kalmar hybrids straddles.  Just to give you an example, those 500 hybrid straddles now operating are yielding more than 400,000 tons of CO2 sort of savings in our customer operations. We keep on investing in the innovation and transformation and be very focused on providing sustainable solutions. A great example of that one is that the first in our industries, Hiab, has now introduced the first products that are built from the fossil-free steel. Last but not least, our services are performing very well, and we keep on adding and driving more advanced services. An example of that one is the new high-performance services that enables us to drive sort of the customer optimize performance and help them to be even more effective and even more sustainable in their operations. And with that one, I'd like to hand over to Mikko, who will cover the financials and business area performance. Mikko.

Thank you, Mika, and good afternoon also from my side. Let's first have a look on Kalmar, where we had an excellent performance in quarter 3. Solid demand continued in quarter 3, even when taking into account that we were still partially limiting our terminal tractor order intake during the quarter. Kalmar orders grew by 12%. And it's also good to remember that we had last year in quarter 3, roughly EUR 25 million heavy cranes orders. So on a like-to-like basis, Kalmar quarter 3, order growth was as high as 19%. This is also the first quarter for a while when Kalmar order book declined slightly from the previous quarter, thanks to good delivery volumes. Kalmar sales grew by 40% year-on-year. Deliveries progressed well in all divisions, including also services despite continuing challenges in getting components on time and in needed volumes. We have seen also delays in transportation. If we clean the currency impact from sales growth, the quarter 3 sales growth would have been 33%. Out of this, 33% in Kalmar, roughly 1/3 comes from price increases and 2/3 from volume growth. So strong deliveries in quarter 3. Kalmar's profitability improvement was very much driven by volume growth. And then if we look at the kind of new Kalmar setup, so excluding the heavy cranes, Kalmar profitable quarter 3 comparable operating profit was close to 11%. Then moving to Hiab, which delivered also a very good quarter despite quarter 3 being often seasonally the lowest quarter within the year. Making Kalmar demand in Hiab was robust across all Hiab divisions. Like Mika mentioned, Hiab launched also some new products during quarter 3, like the loader cranes and these have been attracting also good demand from the market. Hiab sales was up by 23%. Here, the currency impact was approximately 5% units. In Hiab, we were able to deliver both equipment and services reasonably well despite the continuing component and truck chassis availability issues. And in Hiab, also the profitability improvement was very much driven by the higher delivery volumes. Moving to MacGregor, which had another good quarter in the order intake after the EUR 301 million of orders, which we won in the second quarter. In MacGregor, the orders growth was very much driven by merchant vessels like car carriers as well as then services had a good quarter as well. MacGregor order book starts to be now on a very good level. It's already 57% higher than a year ago. However, the quarter 3 sales was still a fairly small number or low number due to the fact that the past quarters, higher orders start to generate revenue more or less starting from the second half of 2023. Merchant vessel and services profitability improved year-on-year, while the low margins in certain offshore wind projects still continue to dilute the overall MacGregor results. If we look MacGregor year-to-date September comparable operating profit, that was minus 1.1%. However, when we exclude the offshore wind business, which has been very low profitability, MacGregor year-to-date comparable operating profit would be 4.2% positive. A couple of highlights from quarter 3. Our order book continued to increase. And like Mika said, this EUR 3.7 billion will provide a good basis for our 2023 revenues. We start to have a sizable Eco portfolio revenues, almost EUR 700 million year-to-date. This is a 51% year-on-year growth. Our comparable operating profit has developed nicely, up by 31%, very much driven by the good performance in our core businesses, Kalmar and Hiab. The core businesses quarter 3 comparable operating profit was 10.6%. It's good to remember that this number includes also all Cargotec group overhead. So taking a very prudent view on that profitability. Unfortunately, we booked EUR 43 million items affecting comparability in quarter 3, EUR 11 million of this is related to the heavy cranes exit, which we announced in the second quarter. And in that connection, we also said that in the third quarter, we would book certain costs still related to that exit. This EUR 11 million is related to project related liabilities. Additionally, in order to be prudent, we have booked in MacGregor, a EUR 18 million provision. This provision is related to MacGregor's U.S. government-related business. Our quarter 3 cash flow was good, and this was very much driven by mainly Kalmar and MacGregor orders related to advance payments. Despite the good cash flow, our net working capital is still very much higher than it should be for the kind of current volume levels. Inventories, especially work in progress as well as goods in transit. Those have been the biggest reasons for abnormally high net working capital. These inventory items have been very much impacted by component shortages as well as earlier mentioned transportation delays. Despite having a higher net working capital than normally, we have a good liquidity situation. At the end of September, our cash was EUR 432 million and committed long-term unused credit facilities were EUR 300 million. 1Our gearing has continued to improve now 30%, very much driven by good cash flow, and this is very well within our 50% target. The average interest rate on our loan portfolio was 1.3% at the end of September. And we do not anticipate this dramatically to increase due to the fact that approximately 60% of our debt is with fixed interest rates.  Due to the strong quarter 3, we have specified our full year outlook. We expect the full year to be at EUR 320 million to EUR 350 million comparable operating profit. This would mean that our full year result would improve by EUR 88 million to EUR 118 million from 2021. We have a relatively wide range in our guidance, and this is simply due to the fact that we do not anticipate any improvements in the supply chain compared to previous quarters. Therefore, the deliveries to customers may be delayed with the short notice and if we don't get the needed components. Naturally, should these kind of delays come, those could have any direct impact to our profitability. So a short reminder about our Capital Markets Day before we finalize. We have a Capital Markets Day on 15th of November, and warmly welcome to that event.

Thank you, Mikko, and thank you, Mika. So operator, we are ready for questions.

[Operator Instructions] We'll take our first question from Massimiliano Severi from Credit Suisse.

Congrats for the quarter. My first question would be on the Kalmar business and [ printing ] 9.7% margins. I was wondering whether now the price cost issues that you had in the past are fully normalized or there are still some pricing that has to come through? Secondly, if you could maybe comment on how much of the large cranes orders are left to be delivered after Q3.

Yes, in Kalmar, I would still say that -- Like I said, the quarter 3 performance was very much driven by very high volumes or improved volumes. We have been increasing prices. But in Kalmar, we still have fairly long lead times for the product. So I would say that we have been able to maintain the kind of cost and customer price ratio on a healthy level, but it's a kind of continuous constant kind of catching up and fighting against the inflation. When it comes to the Kalmar heavy cranes order book, we are talking about roughly EUR 80 million of order book. We expect to deliver most of that during next year.

Perfect. And my second question would be more at the company level, so both Kalmar and Hiab. You mentioned the price increases of around 10% year-on-year. I was wondering whether you could comment on the price increases that you actually see in your backlog? So what could we additionally see going into Q4 and Q1 in terms of pricing.

Overall, if I look at our pricing from '21 to year-to-date now at the moment, we have increased our prices roughly about 20% in our equipment business. As Mikko was saying, at the same time, we see continuous inflationary pressures. And at some stage, I guess, at least I was expecting that some of that would start to ease off when we move to the second half of this year. But very clearly, we still, despite the raw material decreases, there are other drivers that are still driving the pricing pressures for our component higher. And we have now actually done already a number of pricing increases since Q2 to sort of answer those ones. So to a large extent, we've been able to defend our margins on that one. The other aspect in the margin is the sort of inefficiency in our operations because due to the supply chain issues, we have not sort of been able to deploy, for example, or the direct staff all the time. So the indirect cost has also sort of increased somewhat, and that has had a slight negative impact on the margin. We've been able to sort of counteract those pressures also by delivering higher volumes.

We'll take our next question from Magnus Kruber from UBS.

Hello Mika, it's Magnus Kruber from UBS. I'm staying with Kalmar and the margins there. I mean there was a very strong quarter, obviously, in Q3. But how do you see the -- I think in Q2, you commented about adverse mix going into Q3. Did that materialize at all? Or is it something we should expect to see more into Q4?

I think it didn't materialize quite as badly as we may be expected. The deliveries overall in Q3 were higher than we expected. There were, for example, one large EUR 20 million delivery that was expected to be materializing in Q4 and we were able to slip that already in Q3. But it's good to remember that the core Kalmar business going forward has actually delivered over 10% operating margin for the last 6, 7 years overall and there are a number of measures taking place to be able to drive that to a higher level going forward as well. So when the proportion of the heavy crane business is declining now quite quickly as Mikko was pointing out with the backlog declining. One should expect overall [ comer ] margin to sort of start to clearly improve as well.

Okay. Got it. So there was some negative impact, but not as bad as anticipated. And going forward, it should get better, that's the conclusion basically?

Yes. In Kalmar's case, like mentioned, if we exclude the heavy cranes in quarter 3 results, Kalmar quarter 3 comparable operating profit would have been almost 11%. So heavy cranes was diluting to certain extent, Kalmar results, and that continues still to be for some while until we have delivered that order book.

Okay. Got it. And then just generally, I mean, Q3, again, solid quarter. How should we think about seasonality into the fourth quarter?

It's a very good question because it doesn't, in a way, old Q3 for us. Typically, as you know, we don't deliver such a strong Q3, but with the backlog and a lot of very hard work from the organization, I would say maybe a slight sort of easing off of some of the supply chain issues, but they're still considerable that helped us. You saw in our guidance for Q4 as well. And as you saw, the guidance was actually fairly wide in that sense. And I think that tells you the story about the uncertainty and the fragility of our supply chain at the moment. So I think we will land somewhere between those numbers, but it really depends on how well are we able to deliver and especially how well are we able to receive the components during the Q4.

We'll take our next question from Johan Eliason from Kepler.

It's Johan here at Kepler Cheuvreux. Just a question. You mentioned service orders were up 20% in the quarter, I guess there's currency impact on that. Could you just sort of indicate what the current service growth, excluding currencies would be? And then on MacGregor, obviously, a good order level, but slightly down sequentially. Now you mentioned core carriers being big orders. We know that orders are lumpy from MacGregor, but it's clearly so that the good order intake right now is quite important considering the divestment process you are in. Are we still seeing a very solid pipeline from the huge container shipping boom of last year? Or what's the outlook for MacGregor order intake coming quarters?

Johan take the second question first and Mikko will mix the numbers on the services. So yes, I mean the large order boom on the 21' and also the sort of large level of orders in the beginning of this year will carry the MacGregor. The time from the ship order to our [ econet ] order has been longer than we expected and for a number of reasons. So I think we will still see a good order uptake regarding the containers and as we already said, a good demand with the car carrier fleet as well on that one. As you also Johan pointed out yourself, it's a lumpy business, so you never know how every quarter will be. But I would say there is still quite a few miles left from the large order boom in '21, '22 to turn into our orders. Additionally, I would say that the offshore activity very clearly is up at the moment. It did not materialize into our orders. The orders were I think 4/5 of the orders were in services and in the merchant side at the moment. But I think there is a material chances that we see improvement in the offshore demand as well moving into the next year. Next to the service question.

Yes. Coming back to your services question. So the currency impact on services orders and revenues is approximately 5% units during quarter 3.

We'll take our next question from Panu Laitinmäki from Danske Bank.

It's Panu from Danskebank. I just had 2 questions on MacGregor still. Firstly, on the profitability. I think you have had these problem projects burdening profitability. What is the status of this? Do you expect them to kind of end when we go into next year? And then secondly, about this provision that you made. Just wondering what is this? And is this -- Is there a risk that the provision wouldn't be enough and this could somehow escalate?

Yes. If you look at the MacGregor, I think it's first good to note that the revenue is still at extremely low level. I mean, historic low levels at the moment. So the order intake we have now started to see coming has not turned into revenues and the fact that we are able to deliver a black sort of comparable operating number with such a lot of revenue is a good achievement. And that's coming really from the good progress we have made in services and also the fact that the merchant marine is improving despite the fact that the revenues in there are still level. And as you said, the challenges are clearly in offshore side. Those projects are sort of progressing and I think their impact into the next year will be significantly lower than it has been for this year. Simply, I think we will start to see a different mix. And as Mikko was pointing out also, we will start to see the revenue improvement moving into the 23% coming from the order backlog as well. So I think it will be less of an issue clearly moving into the next year. Regarding the potential penalty fees related to a U.S. government project, there were some issues regarding the document handling of that one. This is our prudent estimate of that one. And at this stage, that's our best understanding of the potential penalty level.

Okay. Can I talk about these projects? So is this kind of an obstacle for the divestment, so that you need to complete the projects first before kind of trying to sell the asset? Or how do you think about it?

No, it's not actually. The project itself is, I think, fairly far down the road. It's not a particularly large project. But in these kind of issues, the penalties are not directly tied into the size of the project, actually. So we expect to sort of either have it sold or covered as a part of the potential exit of the MacGregor then.

We'll take our next question from Antti Kansanen from SEB.

It's Antti from SEB. Just one question on demand. And obviously, the volumes regarding orders are still holding up on a fairly high level. And you mentioned that you are still pushing through some price hikes. So if you look at the businesses, which you would yourself think that react first to a downturn. Are you seeing any kind of a negative sequential or within the quarter weakening? Have you seen any kind of pressures on getting the price increases through to your customer base? So any cyclical weakness that you are seeing at the moment?

We are still seeing the strong demand continuing. Now of course, it gets a little bit more tricky because the in inflation is kicking in. So as I already indicated, actually kind of on the actual volume and Hiab and Kalmar order increases were a little bit less moderate, but still a very strong demand obviously there. If I look at our internal indicators and what we see, we see no signs of decline, actually, for example, in Kalmar, the 90-day sales funnel is actually continuing to be at the very high level. So obviously, we are fully aware of the market uncertainties as everybody is, but it's not visible in our own demand. The second question is a very good one. We do start to see more pushback in pricing increases. I think, and it's a little bit funny situation because, obviously, people start to see the raw material pricing declines already happening, for example, in steel. Then again, the energy costs are going up. The labor costs are going up at the moment. But clearly, the acceptance for the marketing price increases in the last couple of months has been -- The resistance has been higher than it has been in the past, but we are still able to push them through.

All right. And then I guess you mentioned kind of the supply chain issues you expect them to continue what is first half of next year. So, is this more kind of, say, a broad level assumption? Or kind of what are you seeing there? Should we also think that this will kind of continue the same with the inflation that even though the price increases are improving the delivery mix, you're still kind of seeing volatile and increasing costs throughout the first half of next year.

Yes, I wouldn't at least trust on improvements on that one at the moment. As I said, there is a -- if you want to be on an optimistic side, you probably see there is a slight easing off on the supply chain. And obviously, you see our revenue numbers. But to a great extent, it's still a very fragile situation. And from day-to-day and from component to component, the situation can change quite dramatically as well. There is still COVID impacting our supplies, for example, you have labor shortages coming from that one another label showed issues. I think the energy situation in Europe might have some sort of surprises for us in this coming winter as well. Not directly for us. I think our energy situation and supply seems to be pretty well guaranteed. But again, the supplier base is probably more under sort of threats there as well.

Sure. And then perhaps last housekeeping question regarding kind of the one-off costs. What's the guidance for Q4? How much is left on the things that you have guided from before?