Hiab Oyj (HIAB) Earnings Call Transcript & Summary

Welcome to Cargotec's third quarter results call. The quarter was the seventh consecutive quarter with good results. My name is Aki Vesikallio. I'm from Cargotec's Investor Relations. Today's results will be presented by Cargotec's CEO, Casimir Lindholm; Cargotec and Hiab's CFO, Mikko Puolakka; and Hiab's President, Scott Phillips. After the presentations, there will be a Q&A session. Please also 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. And welcome also, from my behalf, to this webcast. We're looking at really good Q3 from a Cargotec perspective and, again, like Aki mentioned, seventh quarters in a row with good and stable results. Orders received increased in both businesses. We'll come back to that a bit later. And we had a really strong operating performance, strong profitability and, I would say, exceptionally strong cash flow in the businesses. The sales process of MacGregor is progressing according to plan. We'll come back to that a bit later as well. And then we specify the outlook for Hiab and MacGregor for the full year. So orders received increased in both businesses, partly driven by postponements from the second quarter. Scott will come back to that a bit later. But all in all, 14% up year-on-year, and 16% then in Hiab and 12% in MacGregor. So all in all, we are very pleased with the performance regarding orders in the third quarter. Looking at where we are from an order book perspective, strong quarters now, several of them in MacGregor, the order book has increased. We're above EUR 1 billion in order book in MacGregor, so strong starting point towards not only '25, but also '26 and onwards. In Hiab, the order book has normalized. We are on a level where we used to be pre-COVID, and we have a roughly 5 months order backlog going into the fourth quarter and then gradually into 2025. The sales going in different directions here in the businesses, of course, MacGregor now you can see the strong order intake also being shown on the sales side. And in a similar fashion, Hiab trending a bit downwards. And again, we are coming towards the normalized levels. And as we have referred to previously, the EUR 370 million mark regarding orders is what we have seen now since Q4 2022 in Hiab. And now we can see that sales is also starting to stabilize in that area. Eco portfolio, no dramatic changes here either, on a quite stable level also in Q3 '24. Comparable operating profit on a very good level. Q3 normally is a bit softer compared to the other quarters. We are in holiday season, both in Europe and in U.S. But despite that strong performance by Hiab above 15% operating profit and also MacGregor showing a strong Q3, despite that we still have some loss-making projects in offshore, but service and merchant performing on a really, really good level. And that means all in all, Cargotec on almost 12% comparable operating profit for the quarter. So we are really happy and pleased with the performance overall. Regarding the transition of Cargotec, we are progressing according to plan. So when we announced the demerger and the separation of Kalmar on 27th of April in 2023, from that day, it took us 14 months to list Kalmar. And all in all, 16 months to separate Kalmar totally from Cargotec. So this is work done according to the plan, we had almost 1.5 years ago. So really happy with the performance of both our internal and external people. They have done a tremendous job in separating Kalmar. Only a few DSAs left towards the end of the year. And at the same time, partly the same team started the preparations of the carve-out of MacGregor already in the spring, and that work is also progressing according to plan. So internally, a lot of good work done in both these areas. Then regarding the MacGregor sales process, we have had some positive developments during October, and we are targeting the signing of the deal by year-end 2024. And of course, we'll come back in this area as soon as we have something to communicate. The carve-out preparations here, again, proceeding according to plan, and we started that project internally early in the spring. Then regarding the evaluation of MacGregor as such, there is roughly a percentage of fixed cost increase when we are moving towards a stand-alone MacGregor, the way we see it now. We are strengthening the organization in the areas of, for example, treasury and IT. So there will be an increase of roughly 1% when we look at the stand-alone MacGregor. And then that's not the listed version of MacGregor. So maybe good to note. And with that introduction, I'll give the word and the floor to Scott Phillips, who will present the Q3 report for Hiab, and then onwards Mikko Puolakka for MacGregor and for the Cargotec Group. The floor is yours, Scott.

Thank you, Casimir. All right. I'm having trouble here with the remote. So let's see if I can get that in order. So good morning, everyone, and welcome to the Hiab portion of today's earnings report. The quarter's strong profitability was a reflection of the high-quality execution of our plans by the entire Hiab team. So really proud of the job the team has done year-to-date and in the quarter. Three key points to note. Our demand remained at level for the eighth quarter in a row. I will provide a bit more context in the next slide. And Casimir, I think, teed that up quite nicely earlier in terms of how to think about the quarter. We had excellent cash conversion of 160% in the quarter and we continue to innovate industry-leading solutions, which I will highlight for on the last slide. So going into the order intake is EUR 361 million for the quarter representing a 16% increase versus prior year and pushed our year-to-date order intake to a level slightly above last year's first 3 quarters to EUR 1.095 billion or 3% above prior year. Our order book is EUR 636 million or EUR 264 million lower than last year's level, which is a 29% decline. And as mentioned before, we are back to a level of about 5 months' worth of coverage as a result of the order book, which is quite a normal level for us if you think about pre-COVID level. Our positive deviation can mostly be attributed to key orders that slipped into quarter 3 that we expected to convert in the previous quarters. So when adding the last 2 quarters order intake, we are well in line with our preceding quarter's run rate. So the right way to think about it is, we're still on quite a stable level for the eighth quarter in a row. We saw a slightly larger increase versus the comparable period in the Americas as compared to Europe and on quite a stable level in Asia Pacific. Within Europe, Germany continues to be quite a challenging market for us from a European perspective. We are still seeing a continued increase in activity level. But at the same time, we see a longer and longer process that's undertaken by our customers to make decisions. The key driver for this continues to be the high level of financing costs combined with an expectation that they will be lower in the near future. So customers are still hesitant to make the purchase decisions. As a result, I'd say we're at a normalized level in our order book. And so therefore, that will characterize our level of revenues moving forward. So as a result of this situation, our revenues for the quarter were 8% below last year's level of EUR 420 million. Year-to-date, our revenues are also 8% below 2023 levels. Service sales remained quite on a good level at EUR 112 million versus EUR 113 million in the comparable period from last year, but increased 200 basis points as a percent of our overall sales from 27% to 29%. We were somewhat impacted by the container congestion in the U.S. due to the port strike. So despite the reduction in revenues, we delivered a strong level of profit of EUR 59 million or 15.3% in relative terms versus 62 million and 14.7%, respectively, during Q3 of 2023. The team continues to execute well on our sourcing and supply chain actions as well as a bit of help from price realization as well. So the profit -- and the combination of the good level of profit and the decline in our net working capital enabled a strong cash flow. So overall, the results for the quarter were on quite a good level. Really pleased with that. And then moving into our last slide for the Hiab portion. Really just to announce or highlight 4 of our innovations within the quarter. The first of which is an eUltima hooklift. This is the world's first plug-and-play hooklift designed specifically for electric trucks. Built with sustainability in mind, the multi-lift eUltima is designed to deliver exceptional performance and efficiency, which clearly sets the industry standard. It features a seamless integration by utilizing the truck's electric power takeoff for power ensuring easy installation and optimal performance with energy-efficient controls. And it's also made from MULTILIFT Ultima ZERO recycled fossil-free emissions-free steel. This, therefore, reduces the production of carbon emissions by 15% as well as the active emissions by 25%, and we did this in partner with our trusted steel supplier partners. The second innovation, I'd like to highlight then, is our iZ.18R HD Recycling crane. This is a new recycling crane in a critical space for us, which is equipped with our latest and greatest control systems, which enable improved productivity and safer operations. And the model signals an entry into the 18 to 19-ton meter market, offering a sturdy resistant mechanical structure platform. So we think that the physics-based outcomes that will be enabled by this crane will set a good standard for the industry. The third innovation I'd like to highlight is our iQ.708 HIPRO crane. This offers a design that balances weight, lifting performance and dimensions that contribute to increased safety, valuable payload increase and expanding the range of truck installation options for customers. The improved performance in an optimized frame regarding dimensions and weight allows for smoother operation and more productivity for our customers. It's also equipped with our latest control systems, which enable an increase in productivity and safer operations. Then finally, I'd like to highlight the Talon, which is a versatile system design with a focus on interoperability. It's capable of loading, unloading, and securely locking various in-service payload modules for transportation. The system combines the functionality of in-service products with the latest advancements in automation and technology, and offers a significant reduction in the cycle time of the overall duty cycle of this particular load handling solution system. So really proud of the innovations that we've released to the market in the quarter and proud of the work that the team has done in delivering excellent results within the quarter. So with that, I'd like to turn it over to Mikko, who will guide you through the rest of the presentation.

Thank you, Scott, and good morning also from my side. Going then to MacGregor. So really nice progress in turnaround if we look at previous quarters. When we look first, MacGregor market activity, the merchant vessel market was really strong in quarter 3. According to the Clarkson's research, shipyards got now 1,723 merchant vessel orders during January-September 2024, and actually, Clarkson has now upgraded the 2024 merchant vessel estimate by 17% to over 2,200 vessels. So markets, especially in the merchant container and car carrier vessel areas are progressing really nicely. The shipping companies are now ordering container vessels, for example, to secure deliveries as the shipyards are fully booked until 2028. Also in MacGregor's case, the service orders grew nicely in quarter 3. MacGregor's order book is now over EUR 1 billion, and this provides a very good visibility to the coming year's revenues as we go forward. It's good to note that from this order book, from this EUR 1 billion order book, 40% will be delivered in 2026 and later. So there is a quite long delivery time from this current order book. It's also good to note that out of this EUR 1 billion order book, roughly EUR 15 million of orders are any more related to the loss-making offshore wind projects, and most of those projects will be delivered now in the latter part of 2024. MacGregor's profitability improved significantly, thanks to the growth in merchant vessel revenues and smaller losses in offshore. We continue to adjust the offshore cost base, and we are currently planning to implement further headcount reductions still in 2024. If we look to MacGregor profitability without the offshore business, MacGregor's quarter 3 comparable operating profit margin was 13.5%. So really strong performance as the restructuring actions have been really successful. Let me next illustrate a couple of Cargotec consolidated financials. And again, as a reminder, these are the Cargotec continuing business financials, i.e., Hiab and MacGregor numbers, both for this year's actuals as well as for the comparison period 2023. After 9 months, our order intake is up by 10% year-on-year. This is mostly coming from MacGregor, which has been growing 22% during the first 9 months. Hiab is also up by 3%. Cargotec's year-to-date September sales was flat. MacGregor sales grew 20%, and that growth has, to a large extent, offset the Hiab sales decline of 8%. However, despite flat sales, the 9 months comparable operating profit improved significantly. In Hiab, it came from the commercial and sourcing actions, which have helped us to mitigate the inflationary pressures. In MacGregor's case, the merchant business growth and the reduction of offshore losses have been the main contributors to MacGregor's profitability improvement. You'll see that we have incurred EUR 34 million of items affecting comparability during the first 9 months. EUR 29 million of this are related to the quarter 2 happened pile-gripper project settlement and the rest of the costs are related to the preparations for MacGregor becoming a stand-alone operations, and for the sales preparations. Our cash flow continued to develop very favorably EUR 148 million in quarter 3 and EUR 411 million during the first 9 months of 2024. The main drivers for the positive cash flow was the strong EBITDA in both business areas, a reduction in accounts receivables and then also inventory reduction, especially in Hiab. In Hiab, the cash flow from operations was EUR 100 million in quarter 3. And as Scott mentioned, 160% cash conversion. As a result of strong profitability and cash flow, we have now a very, very solid balance sheet with EUR 64 million of net cash and minus 5% gearing. This is the first time in Cargotec's history when we have a negative gearing. We have EUR 125 million of bonds and other loans maturing in 2025, and we anticipate to repay those from the current cash balances. And our average interest rate on the interest-bearing liabilities was 1.5% in September. Based on the solid performance during January, September as well as based on what we anticipate to book as revenue from our order book during quarter 4, and based on what we estimate for the fixed cost development for quarter 4, we have decided to specify the outlooks for both business areas. So for Hiab, we estimate the comparable operating profit margin to be above 14%. And for MacGregor comparable operating profit to be above EUR 65 million. These are the floor levels for both BA profitabilities in 2024. And by that, then I hand the microphone back to Aki for Q&A.

Thank you, Mikko. Thank you, Casimir and Scott. So please welcome back to the stage. And with that, we are ready for the Q&A session.

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

It's Antti from SEB. A couple of questions from me, and let's start with Hiab. Just a question on, Scott, what you mentioned on orders slipping from second to third quarter. Are you now referring to the larger orders that you flag on the release? Or is it more like the underlying demand kind of that there was a shift in those smaller orders as well?

And absolutely, the first. It was a consequence of a couple of large orders that slipped into Q3 from Q2.

Okay. That's clear. And then the second theme is the growth in the U.S. or in Americas, which is, I guess, the best geography for you. How much is this kind of the market strength? Or how much is this you kind of expanding your network in the states, which you have been talking about for some time that that's maybe a longer-term strategy, but is it playing out already?

Yes. Largely, it's with existing customers. So I'd say it's an underlying demand from the existing business. At the same time, we've converted a couple of orders that weren't in our original planning as a consequence of the actions that we laid out in the CMD that we're taking in North America. So largely from existing underlying demand, a little bit of increased demand from expanding our access into new opportunities.

Okay. And then the last one on Hiab. I mean, I guess the demand is slightly uneven in terms of geographies or even product group. So is this posing any additional challenges regarding cost base or kind of capacity utilization? I mean, you were referring Germany that it continues to be weak. Are you seeing any kind of a new needs to address the cost base or with the savings that you have already announced, are we kind of on a good level entering '25?

Yes. So far, we see we're on a pretty good level entering into '25 relative to what we communicated in the prior quarter with the cost savings actions. We've taken into account the demand result that we saw in Q3. So, so far, I think we're positioned quite nicely.

All right. And then a couple of ones on MacGregor. And the first one is a bit kind of a technical one. Regarding the backlog, how much is there a service business within the backlog? Are you kind of booking 1 quarter of sales? Or how should I think about it when I try to understand how much, let's say, equipment revenues we should expect for the next 5 quarters?

Yes, there is roughly 1 quarter of sales in -- of revenue sales in the backlog. Spare parts, of course, they go fairly fast, but approximately 1 quarter.

Okay. So kind of if we think about that you are saying that there's roughly EUR 630 million revenues for the next 5 quarters. It's Q4, it's kind of total sales and then for '25, it's mainly equipment sales?

Correct.

And then just a clarification on the increased cost level. Is this 1 percentage point on MacGregor margin that we should think about that the impact is?

Yes, that's basically MacGregor operating profit margin, yes, impact.

And the last on MacGregor is something that Casimir, you said that there was a positive developments in October. I don't know if you want to expand that a little bit. I'm guessing probably not, but any further comments?

Just that we have approached the next phase of the sales process. And again, coming back with any communication around that process as soon as possible and as soon as we have things ready, but targeting signing towards the end of the year.

The next question comes from Panu Laitinmäki from Danske Bank.

I have a couple of questions. Starting from MacGregor. Just to clarify, did you say that the margin without the project losses was -- or the offshore losses was 13.5% in Q3.

Yes. If we eliminate the offshore division result from MacGregor results, then the profitability would be 13.5% in quarter 3.

Yes, and 12% for the full year, year-to-date.

Okay. And then how long do this continue? I mean I thought that when you settled this big one in Q2, it would be materially lower in the loss side. But how does it look?

Yes, the offshore losses were approximately EUR 6 million in quarter 3 and the anticipation is that the losses are getting smaller going forward and as mentioned we are doing additional restructuring to eliminate the remaining losses.

And most of the loss-making projects that we have left in the order backlog will be delivered this year and a few of them in Q1 and Q next year. And out of the totally more than EUR 1 billion in order backlog, there is EUR 15 million of loss-making projects still in offshore. So we're heading towards the end of the losses in the old projects in offshore.

Okay. And then just to clarify, I think, you said like 1% fixed cost impact from MacGregor as when it's kind of separated. So is this like a percentage point of EBIT margin? Or how should we kind of think of it?

Yes, it's the percentage point in EBIT margin. So if MacGregor would have, for example, 13.5% without the offshore losses, then it would be 12.5% with kind of stand-alone costs. In MacGregor's case, we are not making MacGregor as stand-alone as a kind of listed stand-alone Kalmar. Kalmar, we are preparing it for a potential divestment for a company, which has then other capabilities to run the rest of the kind of listed company or kind of group capabilities.

All right. And then I still have one on Hiab. So coming back to the demand discussion. So you had like 16% growth in orders in Q3 and then it was negative in Q2, and you described that it's been stable for 7, 8 quarters in a row. But like what are your expectations going forward? Is it going to continue being stable? Or do you expect this to improve Q4 or early '25? Or kind of what are you expecting? And what are you seeing in the market?

Yes. As mentioned before, if you think about the key driver for the activity level being the higher financing cost, all of our solutions are ultimately financed. Given that there's an expectation in the market that in the near term, there could be lower financing costs, we still see that driving longer decision-making time, which ultimately is impacting the overall demand picture in terms of order intake, one. So therefore, I expect to see still a relatively stable level of demand moving forward. there aren't any indicators of movements either direction, up or down.

Okay. Just to clarify. So you mean that customers are delaying decisions because they see that the rates are coming down and they're waiting until they are down or not the direction that is encouraging them?

Yes. Sorry, I'll clarify that. So as I mentioned earlier, the activity level from a quote perspective is still on quite a high level. But what we are seeing is even the deals that we win, the conversion from lead to order won is longer than it used to be. So therefore, that's why we characterize that as delayed decision-making. That's still the case today. Given that the banks, both in Europe and the U.S. have indicated there could be lower rate cuts in the following 12-month period. If you are financing a deal today, there is a risk that you finance it at a higher cost than you would, let's say, 6 to 12 months from now. So that naturally is causing hesitation in pulling the trigger for a new order today and leads ultimately to customers continuing to sweat assets with an expectation of lower financing costs in the near term.

The next question comes from Tom Skogman from Carnegie.

I wonder about the MacGregor merchant order book margin compared to what has been delivered, is there any trend we should know of there?

Well, thanks, Tom. I mean we haven't communicated earlier what is the margin in the order book that we have for MacGregor, but of course, the market as such is very positive, and we have been building the order backlog not only for '25, but also for '26 and partly '27. So I think that's the main change to take into account that 40% of the order backlog is towards '26 and onwards. So I think that's the message and the strength in the order backlog of MacGregor.

Yes, I would say that in our merchant -- MacGregor merchant business, the margin has not been historically the issue. It has been the overall market has been just low. So I would say that the project margins today are on the same level as they have been in the past. The profit improvement is very much coming from the volume growth, thanks to the 2.5 years strong order intake.

And just to repeat, what Casimir said earlier, there is only EUR 15 million related to this loss-making offshore projects left in the order book.

Yes. So from that perspective, you have -- you're totally right on that, that totally including in offshore, then of course, the margin in the order backlog is clearly better than historically, if you take in the order backlog from offshore into the game.

Yes, I was kind of just zooming in on the merchant business because the delivery times get longer, they have a higher certainty about everything and with delivery times getting extended, you should probably get some kind of margin benefit just because you always have risks and delivery times get extended. So I was just wondering about that. But if there is no change, there is no change.

Yes. I mean, of course, we are all the time now in a good and positive market, striving for better terms and conditions in MacGregor and especially in the merchant business. So that is, of course, the case. But as such, we haven't communicated the margin levels, except for then the challenging projects in offshore. And like we have had also in the past, the deals are hedged back to back. So when we quote to our customers, of course, we are also looking at the supply chain at the same time for the projects.

And then I would like to ask about Hiab. You have not said so much about customer behavior in different end markets. So do you -- I guess, the construction segment is kind of the swing kind of sector here. So what do you see especially in things that go to construction and perhaps also consumer goods-related stuff when we are at the end of this interest rate cycle.

Yes, yes. So construction still remains challenging. Obviously, the most challenged areas in construction are Nordics, Germany, France, still quite challenged. There's been a mixed picture in the Americas, if you will, still quite strong on the building materials sector. All of our customers reported and those that are yet to report so far, the results have been quite strong on their side. However, they're still being cautious because of the financing cost and managing the balance of asset utilization. On the retail side, as you mentioned, Tom, it's a bit of a mixed picture, but still holding up quite nicely. However, we keep a close eye on our large rental customers fleet utilization, and that's been a bit cyclical up and down if you look back on the prior 6-month period. So we're keeping close eye on that. More will be revealed in that sector, I'd say, in Q4. So we'll keep a close eye on that.

Okay. And then finally, about capital allocation. That starts to be very important for investors to know how you think, given you already have net cash and when you sell MacGregor, you will have loads of money in the balance sheet. And of course, it's a Board decision. But I guess you can still help us to understand how are you preparing to speed up acquisitions? What are you doing right now before you get the money? Or should we expect large extra dividends instead? Or how do you think?

I think in the broad context, we'll come back to all these questions as part of potential communication of MacGregor deal and then latest, of course, in early February as part of the Q4. But all those elements are, of course, on the table, both regarding the strong M&A strategy for Hiab and supporting that one. And of course, also the extra dividend and so forth are on the table in those discussions. But of course, first, we are focusing fully on the sales process of MacGregor and then we'll come back to all these topics. Preparations, of course, done in all these areas. And then at the end, it's a Board decision to bring some of these topics to the AGM in the spring.

But perhaps Scott could still give some kind of feeling, what you are doing, screening for acquisitions like with a different ambition level compared to 1 year ago and how many cases do you study or something?

Yes. Thanks, Tom, for drilling into that. I'd go back to what we communicated during the CMD. Our areas of focus are still in the 4 attractive segments that we see growth potential over the next 3 to 5 years. From an organic perspective, we'll continue to double down our investments in facilitating and hopefully accelerating the energy transition to sustainability in our sector. We'll continue to invest in our services portfolio and the digitalization of our solutions that will help and aid in growing our services business to deliver better outcomes for customers. We continue to have a focus that is guided by looking at M&A opportunities largely that are bolt-ons, that are logical for the spaces that we're exposed to that are aligned to the attractive spaces and any opportunities for close adjacencies to the spaces we communicated in the CMD. And so therefore, we remain active in continuing to manage and build the funnel of opportunities, when the time is right to start to take action on those opportunities. And all of which has to be aligned to our strategy, all of which we look for the opportunities that will provide a clear catalyst to increase our services opportunities. And all of which will have to align us to markets in which we think we have a clear opportunity to lead or be closely leading in order to drive the technology standard for the industry that we're competing in, and align to customers that really count on life cycle services to drive their productivity outcomes. Those are the areas where we know we compete the best.

And maybe, on top of that, Tom, I mean, of course, we are, as a company preparing ourselves for the future from -- one part is, of course, the carve-out that is ongoing that we started already in the spring regarding MacGregor so that we are ready as soon as possible. And then from an [ IMIT ] perspective, ready to support the growth journey for Hiab. And of course, there's a lot of work done also within Hiab in improving processes and efficiencies, so that when Hiab goes on the growth and M&A journey, then of course, it's easier to integrate businesses into common systems and processes going forward. So all that work is being done as we speak, and we started that already a year ago. So that is also supporting the future of the growth in Hiab.

The next question comes from Erkki Vesola from Inderes.

It's Erkki from Inderes. A couple of questions from me. First, Scott, regarding the postponements in Hiab orders from Q2. Didn't have time to read the report line by line, so could you provide any ballpark figure regarding this?

Yes. The right way to think about it, if you look at our prior quarter's run rate, adjusting for seasonality, we're within a couple of percentage points if you add together Q2 and Q3 versus where we would expect to have been given the prior quarter's run rate. So the level of orders that slipped into Q2 would have made for quite a repeat level of order intake for Q2 versus prior quarters. And then Q3 would have looked a bit more normal in terms of the 10% to 15% seasonality decrease that we see from the vacation period in most of our geographies in Europe.

So just on top of my head, it's anywhere between, say, EUR 10 million, EUR 20 million?