Hiab Oyj (HIAB) Earnings Call Transcript & Summary

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

Thank you, Aki. So, before going to the second quarter results, a few words around the planned separation of Kalmar and Hiab. The work is progressing according to plan. All streams are up and running. And as example of that preparation, we have recruited Sakari Ahdekivi as CFO of Kalmar. Sakari joined us on the 1st of July, just as an example of how we are preparing for what to come. Then to the second quarter. All in all, a strong quarter for Cargotec. Record high comparable operating profit. We have orders that are below the previous quarter and comparable quarter. I'll come back to that a bit later. Sales increased by 25%. And there are some circumstances there that we will explain in more detail, that was a bit higher than we even anticipated. And then really happy to see the comparable operating profit clearly improving in all 3 business areas, and particularly strong development in MacGregor compared to last year's second quarter. So orders are back on pre-COVID level, and we can see that in '21 and '22, of course, we had extremely strong orders. We are back in a more normalized world in that sense, looking at the historical development over the last 5 years. That said, we are still on a clearly above historical average regarding the order book. And that is, of course, a strong message for the end of -- and the second half of '23 and give us a good look at '24 as well. We will, of course, take actions as we announced in the Capital Markets Day in November last year. We are looking at actions to protect our margins and stay above the 10% margin, even if we see some challenges in the market compared to the strong '21 and '22 order intake that we had. The sales developed, as mentioned before, even a bit stronger than we anticipated. One part of it is that we have semi-finished goods that we were able to deliver. We got maybe a bit more components to those than anticipated, and that improved the sales even above our expectations. And that, of course, then had an impact, and a positive impact on the operating profit as well. Again, here, all 3 business areas contributing in a very positive way to the operating profit. Service orders, and this is, of course, strategically a very important area for us -- continued to grow. This is a part where we invest also going forward to make sure that we are improving on the service part, both regarding orders and profitability. And again, here, all 3 business areas performed on a very good level. The Eco portfolio is key for us going forward as well. We'll invest in R&D to make sure that we are also in the future strong in the Eco portfolio. We continued to grow Eco portfolio sales by 26%, and again, an area where we'll invest more in the future, where, of course, one example is electrification within Kalmar that is key for us going forward. With that, I will leave over the word to Michel. Michel will go through the results for Kalmar.

Thank you, Casimir. Thank you. And good morning, good afternoon. My name is Michel van Roozendaal, President of Kalmar. And also from my side, a warm welcome to Sakari, who is going to strengthen the team of Kalmar. I'm really a happy President here to be reporting to you a record comparable operating profit in Kalmar. Last quarter, we had the highest percentage. Now we have the highest comparable operating profit in absolute euros. The margin expansion is driven in essence, and we come back to that in a bit more detail by the higher deliveries. But also our commitment to decarbonization, helping our customers on their journey to make cargo handling, heavy load handling more sustainable was basically underpinned by 2 main events. We introduced the fully electric straddle carrier at an event in Rotterdam in the Netherlands, and also, we see growing orders for our electric portfolio. So we are basically living up to our commitment towards decarbonization. We did see, however, indeed, some softening in demand. Orders are, in essence, back to pre- COVID level. Let me dive into a bit more detail here. As said, we see some slowness, and that's mainly because in essence, in the larger project side, people are taking a little bit more time to define their orders. Service orders are, however, stable, which is good. That basically is a commitment to our relationship with our end customer and the fact that our total fleet is being maintained and really people are relying on Kalmar for doing that. In the comparison period, you'll see a bit of a difference between Q2 of last year. We had a very significant large order, which basically explains the essence of the change there. But we -- of course, we like large orders. And again, the order book remains above historical average, both in units and in value. So we see some softening, but at the same time, it brings us back to a more normal pre-COVID situation. If I then talk about the sales side, we see a robust execution of both the equipment and the service delivery. I come back to talk about that because execution is really a focus area for us, for Kalmar. Really, we like to sort of execute like clockwork, and we see that happening there. We see an improved efficiency in supply chain management, basically testimony of the point I just made. But it is true that volatility remains. We still see some challenges with our supply chain with certain components that makes our job a little bit more difficult because every now and then we are surprised by yet another supplier who has shortages, which makes our life a bit more difficult. But stronger execution has resulted in decreased lead times, and that is also seen by our customers. They now can see that lead times are back to a normal situation, and that also means that they need to no longer order with a view that deliveries are coming in more than 1 year time. So that in part also explains, I guess, some of the softening of the order there. And then service. Again, we are executing very, very, very strongly on the service side and our service capture rate is growing and it's driving continued growth in service sales. We're getting a bigger part of the pie from a service perspective, and we're pleased with that. If I then move on to the real, I should say, proud result we have, margin expansion is driven to a large extent by higher deliveries, but we're pleased that we have that, and we have that ability. We are levering up quite nicely, and that has led to this very, very strong level of operating profit. Margin is supported by this deliveries of these semi-finished goods, which we're waiting basically on the yards because 1 or 2 parts were missing. And when these parts were coming, it was easier to deliver those. But still, we see that our factories, our supply chain, our teams have worked hard to make that happen and have learned to be agile in this very volatile environment, and we're pleased that we are able to deliver those units to our customers who are in need of those units because they rely on that to keep global supply chains going and to have their industrial operations moving on, based and working with Kalmar equipment. Successful management of inflationary pressure of component availability is important, but also means that we are able to sort of like translate that into a price level to our customers and see our customers also accept those price levels that are a reflection of the inflation, which is real, both in commodities like steel as well as in components, which have also a large labor component. And we all know that labor has come, of course, with wage inflation everywhere. So that we are able to manage in a good way. And then last but not least, as you might remember -- you will remember, we have discontinued, stopped our heavy crane business and also the losses as a result of that as we are limiting the execution of that leftover portfolio. They have once more been reduced. So in that sense, a solid quarter, not entirely unhappy to use the Finnish expression. And with that note, I am happy to hand over to Scott Phillips.

Thank you, Michel. Good morning, everyone, and welcome to the results section for the Hiab business area. Overall, I would summarize the quarter as one in which our teams delivered excellent performance, both operationally and financially, with all key performance indicators improving both sequentially and year-over-year, with the exception of the order intake, which remains at a lower level compared to last year's run rate by 17% for the third quarter in a row due to the continuation of delays in purchase decisions amongst most of our customer segments. Our focus on operational excellence and the effective collaboration with all of our suppliers has led to a nice improvement in sales, which resulted in improved profitability versus last year's comparable period, which also led to a good sequential improvement in cash flow, which I'm quite pleased about. Additionally, I'm quite pleased with the development of our Eco portfolio solutions, which contributed to 27% of our order intake and 24% of sales in the period. So excellent progress by our teams in developing and commercializing our sustainable offering. And then, speaking of the offering development, I'm pleased with the overall impact our innovations over the past 5 years are having to our results, as approximately 40% of our equipment sales are coming from innovations within this period, delivering improved safety, productivity and lower carbon footprint for our customers. And during the first half of the year, we had also a number of new product launches, 2 of which I would like to highlight. One of which is the launch of our new 135 tonne meter super heavy crane under our Effer brand, so the iQ.1400, offering our customers 39 meters of super -- 39 meters of vertical reach with an all-new power and motion control system operated by our Olsbergs branded CombiDrive 4 remote control, giving the operators unparalleled power, precision and ease of use. With this solution, our customers will have unmatched lifting and reach capability on a smaller vehicle chassis, enabling lower operating cost and reduced carbon footprint. So we're quite proud of that. The second innovation I'd like to highlight is the new Universal Control Unit for ZEPRO tail lifts, which gives our customers a reliable and an intuitive user control interface to help the operators have smoother, safer and more efficient way of operating the lifting systems. So now I will guide you through the figures for the quarter, starting with our order intake. We had a 1% decline sequentially and 28% decline year-over-year in our order intake. Now this is coming off of a tough comparable period. You'll keep in mind that we had 2 important factors. One, we had a number of large orders that we knew would not repeat; and secondly, we had a significant amount of pre-buy effect in advance of a price increase that we had announced earlier in the quarter that materialized in Q3. Additionally, the underlying run rate is still driven by 3 factors that I talked about last quarter, and that's lead times for truck chassis, which still remain well over 1 year with unstable delivery precision, if you will, at still more than double the period before 2021. Acquisition costs remained much higher due to inflation and the interest rates are, of course, 4 to 5x higher. So these factors are -- continue to lead our customers and channel partners to delay purchase decisions. I highlight again that the quote activity in the quarter remained at a good level in all geographic regions. So overall sentiment remains the same amongst customers we serve compared to the prior quarter. So turning your attention to the sales. Our team of more than 4,000 colleagues together with our partners delivered a solid result in the quarter of EUR 485 million, which is our highest quarter to date, representing a 12% improvement sequentially and 20% growth versus last year's second quarter revenue of EUR 404 million, with all divisions contributing to the positive variance. The volume growth, much like we reported last period, is a combination of unit volume and price effect with each contributing about equally. I'm really pleased with how our sourcing and supply chain teams together with our suppliers are executing on our plans to build flexibility in our end-to-end processes, enabling our divisions to continue to perform well in converting the backlog, despite the fact that we continue to experience unexpected component shortages. Now wrapping up on the operating profit side. The team delivered a strong result as our sequential earnings improved by 33% on 12% growth in revenues and 31% year-over-year on the 20% sales growth I talked about in the previous slide. The change in profitability was mostly due to sales, also helped somewhat by slightly improved gross margins. So all in all, a solid quarter. Really proud of the execution that our teams, our channel partners and our suppliers have helped enable this strong result. So that wraps it up from my side. So I'll hand it over to you, Mikko.

Good morning also from my side. If Kalmar and Hiab performed well in quarter 2, so did MacGregor with the EUR 10 million comparable operating profit for the second quarter. In quarter 2, about 90% of MacGregor order intake was related to merchant ships. Service orders grew almost 17%. We continue to see very lively merchant vessel market, especially in car carriers, heavy lifting and container vessels. However, as we -- many of us know, many shipyards are full at the moment, offering delivery times for 2025 or even beyond. And therefore, more -- some merchant customers of MacGregor may not always see the urgency to place the orders with MacGregor immediately. This is very visible in Merchant division quarter 2 order intake. Offshore wind market is also active and on a good level. However, we have been very, very selective with the offshore orders as we want to first stabilize that business's financial performance. MacGregor quarter 2 sales growth came from merchant and services supported by the past quarters, I would say, 4 quarters orders. Offshore sales was flat. The quarter 2 profitability was very much driven by the service and merchant sales growth as well as favorable product mix, especially the merchant deliveries. Offshore was still loss-making, even though the loss was slightly smaller than 1 year ago. We estimate that most of the loss-making projects in the offshore business will be completed this year, some tails still going to '24. MacGregor first half comparable operating profit margin was 3.4%. If we would exclude the offshore wind business, that margin would have been 9% in the first half. We continue with MacGregor offshore restructuring, and our target is to reduce costs by EUR 14 million on annual basis during this year. A couple of highlights of our financial performance. As you saw already earlier, we have a very solid order book, where the larger share of orders are now reflecting the price increases what we have been making during '21, '22. Even if MacGregor Offshore is loss-making, it's good to remember that offshore division order book represents roughly 4% of Cargotec's order book. So it's a fairly tiny portion of the overall order book. Eco portfolio equipment and the services sales has continuously grown and was 30% of our total sales now in quarter 2. Our first half comparable operating profit increased by 90%, driven especially by strong performance in our core businesses, Kalmar and Hiab. In addition, MacGregor first half result improved by EUR 24 million and also the heavy cranes, which we are exiting as we speak. Heavy cranes profitability was EUR 9 million, better year-on-year in the first half. Kalmar and Hiab 24% -- 23% sales growth took the core business's profitability to all-time high level, 14.7% in the second quarter. And Cargotec quarter 2 operating profit was EUR 151 million, all-time high. This is 12.5%. We had in our operating profit EUR 8 million items affecting comparability. Out of this, EUR 6 million was related to the planned separation of Kalmar and Hiab. When looking our cash flow, despite the strong quarter 2 EBITDA, which was EUR 179 million, the quarter 2 cash flow was only EUR 41 million, slightly better than 1 year ago. Cash flow was still very much burdened by the high net working capital. The quarter 2 net working capital growth was EUR 136 million. Now this time in quarter 2, the net working capital growth came mainly from accounts receivables, due to the high revenues in the quarter 2. Inventories grew EUR 30 million compared to over EUR 100 million growth in quarter 1. Despite the high net working capital, we continue to have a strong balance sheet and liquidity. Our gearing was 32%. The increase from December was mainly driven by the EUR 87 million dividend payment, which we did in April. We have been able to keep our cost of debt at a low level. 60% of our interest-bearing debt is with fixed interest rate. And our current average interest rate on liabilities is 2.7%. During the next 12 months, we have roughly EUR 300 million of bank loans and bonds maturing, and these maturities we plan to cover from existing cash, future cash flows and then also partially refinancing with new loans. And our guidance for this year is unchanged. We have our guidance in 2 parts: the core businesses, meaning Kalmar and Hiab minus the group costs, we expect to improve from 2023. And after the first half, these businesses are 96% -- EUR 96 million better year-on-year. This improvement is very much coming from the volume growth and then also the measures to mitigate the inflation impact. And then the second part of our guidance is related to MacGregor, and we expect MacGregor result to be positive and in -- the profitability drivers here are mainly the volume increase in merchant and services, as you have seen in the first half of this year, and then also the ongoing restructuring of MacGregor offshore business.

Thank you, Mikko, and thank you also, Casimir, Scott and Michel. And I would like to welcome you back to the stage to join me for the Q&A session. Operator, we are ready for the first question.

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

First on -- well, basically, both Kalmar and Hiab, if you look at kind of your backlog situation and your delivery schedules, how long is kind of the lead times? How much would you expect that you kind of realize into revenues in second half? What I'm trying to get is that, now that we are seeing the order patterns perhaps normalizing, when do you expect that to kind of hit your production volumes and kind of the P&L metrics in both of those divisions?

Yes. A valid question. For Kalmar, I would explain that as follows. In the past, we saw -- and that is during the difficult time with these supply chain disruptions, we saw lead times being north of 12 months between 12 and 18 months. And now it's normalizing back to a pre-COVID situation of, say, 6 to 12 months from an order backlog. And of course, you have to realize logically that there is no backlog for service in essence because that is mainly spare parts, which are book and turn mostly in the months, if not faster. But for the new build, we are covered to a very large extent for the rest of '23, but we have a backlog that basically stretches into '24 and for some specific projects, even a little bit later than that. So we are quite well at that stage and [ doubt ] with a solid backlog over the rest of the year and then stretching into the next year.

Yes. And from the Hiab side, Antti, we have a little bit over EUR 1 billion of backlog. That also takes us into 2024. We certainly have some of our factories where we will adjust production levels through the balance of the year. So we expect those to materialize with -- should have a relative, similar impact to the P&L as we've seen in the prior months periods up to this year. So we're well covered. In terms of lead times, we're still a bit constrained by the truck lead times, which, of course, I mentioned as an impact to our order intake, still a slight impact in terms of our ability to convert. Our internal lead times are back to pre-COVID levels, so we can go as fast as the truck chassis availability would allow. So we're well positioned in that regard. But with the truck OEMs still at well over 1 year of lead time, it's -- it'll still remain -- we expect that to remain throughout the balance of the year.

And I mean, you were referring overall that kind of the order levels are now back to pre-COVID levels. Obviously, pricing is much higher today. So I'm just thinking where you see kind of the underlying demand in the market and the sales funnel at the moment? I mean, I guess there's now a negative impact that people are waiting for those lead times to kind of show it then and are postponing decision-making. So would it be a fair assumption that the underlying demand is perhaps a bit higher than what your order intake kind of indicates right now?

Yes. That's absolutely correct from the Hiab side. The underlying demand factors still are quite strong. Quote activity still remains on balance, at a good level. But of course, the word -- amongst all of the geographies that we serve and customer segments, or the decision-making is delayed to a large extent.

And yes, from a Kalmar perspective, Antti, I would simply concur with how you answered your own questions. So yes, I agree.

And then in MacGregor's case, like I said, it's very much that the overall market activity is actually on a good level, but due to the congestion in the shipyards, customers don't necessarily see the urgency to place the order with MacGregor as the vessel delivery times are longer than what MacGregor's delivery time is.

And then perhaps the last question from my side is on pricing. And I mean now that there's a bit of hesitancy to order, is there any pressure on price realization? I mean, I guess, you're seeing still component prices not falling, but some of the raw materials have come down substantially. So is there a pressure to maybe correct your prices downwards going forward?

Yes. From a Kalmar perspective, I would say, commercially, there's always been price pressure. None of our customers liked it when we had to adjust prices. So that is a constant reality in the outer tranches, if you like, for our sales force. At this stage, we don't expect that we need to reduce prices so that we are holding. But indeed, the upwards development is basically tapering up or has tapered off.

Yes. And from the Hiab side, I'd say this -- I'd echo the same thing that our customers would, of course, love for pricing to come down. I think that there is a bit of a wait-and-see mentality in that regard as component pricing, just as you alluded to, Antti, has not come down to a level that matches some of the commodity price indexes for various factors. Energy logistics as well as labor components are significantly up. Now logistics have come down if you compare year-over-year, but still at a much higher level as compared to pre-COVID levels.

The next question comes from unknown caller from number ending in 8457.

It's Panu Laitinmaki from Danske Bank. I have a few questions. Maybe continuing on the previous topic on pricing, how much roughly was pricing impact on the order intake in Q2? Was it already kind of flattish or was there an increase?

What we would say, if I widen that, we've roughly seen over the last 2 years a price increase in total of about 20%. And of course, that's a bit of a mix, if you like. It's not all across the board, a solid 20%. So that's how I would answer that question.

Yes. Sequentially -- from the Hiab side, sequentially flat year-over-year, up about 10%.

And then I have a couple of questions on Kalmar. I mean, can you in any way quantify what was the impact from this semi-finished product deliveries on margins or revenue in Q2? And also, I mean, I recall that previously you commented that the heavy cranes should make a single-digit million loss this year. So is this still the case? And what I'm kind of trying to get is the underlying margin in Kalmar, if you strip these 2 factors out?

I commenced with the latter. Indeed, the losses of the heavy cranes are in a single-digit area and are improving in the comparable, should I say, quarter -- second quarter of last year. So that is getting better. We have, if I remember correctly, about EUR 4 million less compared to what we had about 1 year ago. So that is basically being executed according to plan. Then, indeed, it is true, and that was also the headline that the bulk of the margin expansion is related to our ability to sort of have these semi-finished goods basically being transferred into finished products, if you like. So that's been helpful. I think that has been a trend for total of Cargotec. At the same time, of course, we are working to make our supply chains more efficient. But in this case, we would clearly see that the big explanation for our good quarter 2 result has been basically our ability to have a very, very strong execution of our backlog, and our customers are happy with that.

On Cargotec level in quarter 2, we were able to deliver roughly EUR 90 million more than what we anticipated in the beginning of the quarter, and this is mainly related to Kalmar and Hiab. If you remember, couple of years ago, we had a development to other direction. We were thinking that we deliver a certain volume, and we were not able to deliver that because of the component availability. Now it's going a bit to the other direction, like happened in quarter 1, reflecting the very volatile supply situation still the truck chassis availability as well as then component availability, as elaborated by Michel and Scott.

A final question on the working capital. I mean, cash flow didn't really increase as much as the earnings. And I would assume that the working capital will kind of be released when you are able to deliver. So like what are your thoughts on this? When should we see the cash flow released from that?

The expectation is that we should start to release some cash from the net working capital in the second half of this year. As also mentioned in my section, actually, the inventory growth in the second quarter was already smaller than what we saw in the first quarter when it was more than EUR 100 million. And that in the second quarter, it was, well, only EUR 30 million, still growing. But the biggest growth in the net working capital in the second quarter was in accounts receivable, of course, which will then materialize as cash in the latter part of this year.

The next question comes from Tom Skogman from Carnegie.

Congratulations on a good set of numbers. I wonder about the dollar impact in this quarter and also all this kind of your exposure to the dollar kind of changes, I assume that deliveries in the second quarter came from orders booked and the dollar was very strong. Is that right?

Yes. Overall, if we look what was the currency impact or if we look the orders and revenues in comparable currencies using the last year's currency rate, we had approximately 2% units headwind in orders and in sales.