Kalmar Oyj (KALMAR) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Kalmar's Q2 results webcast. My name is Camilla Maikola, and I'm from Kalmar's Investor Relations. Today's results will be presented by our President and CEO, Sami Niiranen; and CFO, Sakari Ahdekivi. The presentation will be followed by a Q&A. And please pay attention to the disclaimer as we will be making forward-looking statements. And now over to you, Sami.

Thank you very much, Camilla, and good morning, everyone. I'm proud to share with you Kalmar's second quarter's performance, showing a continued strong order intake and a steady progress in our key strategic initiatives. We managed to generate stable revenues and a resilient margin by successfully leveraging Kalmar's leading position in the market and driving excellence in our operations. Our orders received increased by 20% from last year, and overall demand was favorable in Q2. Sales returned to modest growth and increased by 1%. We delivered a resilient profitability of 13.1%, which was supported by the strong equipment profitability. However, there is an increased level of market uncertainties today affected by, for example, new tariff announcements and geopolitical tensions, which is posing a potential risk of slower global growth in the second half of 2025. We keep our guidance unchanged, and we expect our comparable operating profit margin to be above 12% in 2025. As mentioned, our orders received in the second quarter increased by 20% compared to last year and totaled EUR 450 million, reflecting positive activity and growth in both Equipment and Services. The order book remained on a good level. Despite prevailing uncertainties, the demand picture overall was favorable during the quarter. In ports and terminals, the demand remained strong globally and was reflected in some larger equipment orders such as straddle carriers. Overall, we saw strong growth in Europe and solid performance in AMEA. However, the U.S. distribution and customer segment demand was hampered by increased market uncertainty. Then moving on to our sales performance. Our sales in the second quarter were EUR 420 million. The sales returned to modest growth and was 1% and in constant currencies 3%. The softness in the Americas was visible in sales, and Europe was clearly the largest region, representing 44% of the sales. The book-to-bill was positive in both Europe and AMEA. Moving on, this slide provides us an overview of our well-diversified business with 4 strong customer segments. The Services segment share of sales was 34% in Q2, which is providing resilience to our overall revenue. Eco portfolio share of sales remained high at 44%, which is showing the strong interest towards our sustainable solutions. With an installed base of 68,000 machines globally and a strong presence in over 120 countries for sales and services, our extensive reach remains a significant asset. This robust foundation fuels our active acceleration of future service growth through innovative offerings and digital solutions. As a highlight and, in line with Kalmar's strategy of growing services, we have invested in relocating and outsourcing its genuine parts warehouse from Ottawa, Kansas to Greenwood, Indiana. In addition to the relocation of the U.S. distribution center, we have decided to relocate our European distribution center to a new facility in Metz, France. Both these relocations will consolidate operations, improve efficiency and support our long-term service growth. And today, we have over 1,400 own service technicians around the globe and 4 factories, which are located in Poland, the U.S., China and Malaysia. While the Q2 performance was strong, the global landscape continues to be volatile. The world today presents an increased level of uncertainties related to tariffs, ongoing geopolitical tensions and the global growth outlook. It's still difficult to draw definite conclusions on how these factors will affect our industry, the demand environment and global trade. However, we are monitoring the situation closely and have implemented tariff surcharges or tariff-related price adjustments across divisions to a majority of our customers. We are prepared to continue to act swiftly if needed. Due to the uncertainties, the market environment is currently expected to be more subdued in the second half of the year. So let's then take a closer look at our large base of our 14,500 connected equipment around the world. By following the activity of the connected fleet, we get a good view of the activity and demand in different regions. Overall, we see a positive development trend both year-on-year and quarter-on-quarter, which is indicating increased activity at our customer sites during the second quarter. However, at the same time, we have to remember that there are now more uncertainties in the market, and the softness in the U.S. can also be seen in the connected fleet activity in North America compared to last year Q2. The eco portfolio share of total sales has remained high and increased to 44%. Eco portfolio share of order intake was also 44% in Q2, which is demonstrating our customers' strong interest towards electrical and hybrid solutions as well as sustainable service solutions. The fully electric machine share of equipment orders for the last 12 months remained flat at 10%. Despite a slightly sluggish development, we continue to see significant potential with electrification. We have announced 5 orders booked in Q2, including 8 heavy terminal tractors to Cagliari RoRo Terminal in Italy, 2 empty container handlers to Depot Management in Finland, 11 hybrid straddle carriers and MyKalmar INSIGHT to Seayard in France, 14 hybrid straddle carriers to Hanseatic Global Terminals in France and 4 hybrid automated straddle carriers to Victoria Intentional Container Terminal in Australia. We have been pleased to announce some steps towards sustainable growth during the quarter. We have further expanded our automation offering by continuing to develop new and advanced automation solutions. An example of this is Automation as a Service, a subscription-based model designed to ensure successful and efficient deployment of automation in marine container terminals and intermodal sites. We also introduced a flexible and scalable Kalmar One Automation System as a stand-alone solution. With this, Kalmar is responding to the increasing demand from customers for a modular OEM and equipment-type agnostic fleet management solution that allows them to choose what to automate in their terminal operations and how to do it. We have also launched a digital application on the MyKalmar customer platform called Inspector, which helps to streamline daily equipment inspections. The application is compatible with both Kalmar and third-party equipment. In addition, we were proud to announce that the Science-Based Targets initiative has approved Kalmar's near and long-term science-based emissions reduction targets, verifying our net zero target by 2045. These ambitious targets align with the Paris Agreement, solidifying Kalmar's commitment to limiting global temperature rise to 1.5 degrees. Our business performance was good in the second quarter. The Equipment margin was strong. The Services margin was burdened by temporary impacts, which Sakari will come back to, and the order book has strengthened in both segments. On my last slide, I would like to remind you about our performance targets 2028, which we are fully committed to. So thank you all for now. And next, I will hand over to Sakari.

Thank you, Sami, and good morning also from my side. I will start with our traditional slide on our financial profile. Our financial profile has remained strong, and this gives us excellent possibilities for future growth. The highlight I would like to point out is the last 12 months orders received, which is now at EUR 1.8 billion, and we have a significant positive book-to-bill ratio if you compare that to our sales on the back of the 3 strong order quarters that we have had. So our order book has significantly strengthened from the level that we had 1 year ago. Our profitability, when looking at it through both gross profit and comparable operating profit margin, is on a good level, 12.7% now on an LTM basis for the comparable operating profit margin. Our balance sheet continues to be strong with a leverage of 0.4x EBITDA, and our return on capital employed is now at 20.7%. Cash conversion, slightly below 100% at 95% now for the LTM period. Then diving into the segments a little bit more in detail. On the Equipment side, all of our equipment divisions performed well in terms of orders received in the second quarter. Our Equipment segment orders increased by 28% compared to the same quarter last year. The global overall demand environment remained good; however, somewhat subdued in the Americas towards the end of the quarter especially. And as Sami mentioned, the global landscape continues to be volatile, and there is an increased level of uncertainties going forward. The profitability of the Equipment segment was very strong in Q2 at 13.9%. We have seen continued solid commercial performance with stable gross margins in Equipment, and our Driving Excellence program is supporting the margin development in the Equipment segment, especially. On the Services side, we saw an orders growth of 7%. So Services continues to be on a good growth track. And this is driven by -- especially by smaller contracts and also our spare parts. There are, of course, some variations across the regions related to the trade tensions, and the U.S. market is a bit softer at the moment, and this is also impacting our Services segment. When we look at the profitability, as Sami mentioned, this was burdened in the quarter by a couple of things to be mentioned here. One was the impact of tariffs. Whereas we did, of course, implement the price increases and adjustments related to the tariffs, there is a time lag in implementing those, and that impacted about half of the second quarter before the price adjustments actually came into force. The other thing we did in the second quarter is we have relocated and outsourced our warehouse activity of our spare parts in the U.S., and this had some impact on our operations during the second quarter, but these are of temporary nature. I would say that when combining the impacts of these 2 mentioned things to the profitability of Services, we are talking about slightly over 1 percentage point of margin. The execution of our driving excellence initiative is ongoing, and we are planning to reach EUR 50 million of gross efficiency improvements by the end of 2026. During the first half of '25, we have progressed with the implementation, and a run rate of approximately EUR 60 million has been reached in terms of annualized gross efficiency improvements. To date, the majority of the improvements originate from successful sourcing activities, and in addition to that, certain efficiency activities in process development in our functions. Our return on capital employed in the second quarter increased to 20.7%. Again, as before, it's worth noticing that the items affecting comparability, especially deriving from the demerger and listing process last year, have an impact on the 12-month rolling ROCE number. This impact is about 2.2 percentage points. So the normalized level would be at around 22%. Our leverage is at a strong level at only 0.4x EBITDA, and our gearing is approximately 15%. To be noted is that, of course, during the second quarter, we paid out dividends of EUR 64 million, which impacts the net debt position in the second quarter. Our maturity profile, you can see there on the right-hand side of the page, no major maturities in 2025. Our cash flow was not particularly strong in the second quarter, only EUR 22 million of cash flow from operations before finance items and taxes. We have had a very strong cash flow in the previous 3 quarters. And, of course, there are always some timing impacts from larger orders, the advances received and how the working capital is built up as a result of starting to execute those orders. But over a 12-month period, our cash conversion is still very strong at 95%. So this is more timing related when looking at one single quarter. And then I will finish off. Sami already mentioned this, but our guidance for 2025 remains unchanged. We expect our comparable operating profit margin to be above 12% in 2025. Thank you, and that concludes the presentation.

So we are now ready for the Q&A. So, moderator, can you please open the line?

[Operator Instructions] The next question comes from Mikael Doepel from Nordea.

I would like to start with kind of the market outlook, where you said that you expect a subdued -- more subdued market in the second half of the year. So I'm just wondering where that kind of estimate comes from. So if you look at your development within your sales funnel, for example, currently and your customer quotations, have you seen any changes there, most recently that would indicate the weaker demand in orders in the second half? That would be the first question.

Yes. Thank you for the question. And yes, that's what we indicated, more subdued in the second half, and especially, of course, because the tariff landscape, it's not fully clear yet. There are indications in different directions. So uncertainties exists, and that's basically the basis behind having, let's say, a little bit more cloudy view towards the end of the year. And then Americas market, as we could see already in Q2 as well, of course, is one of those more uncertain areas, I would say. And there is a couple of surrounding countries there as well in South America, I think. It's mainly because of that. And then I would say, like we discussed in the previous quarter is, indecisiveness is still existing with our customers.

Okay. But would you say, for example, in the U.S. that the demand, as kind of expected, to become incrementally weaker into Q3? I mean, obviously, the tariff uncertainties have remained more or less throughout the whole of Q2 already.

Yes. Let's say, if you look at the U.S. and especially the distribution segment, which is a big segment, an important segment for us, it started off quite well, I would say, at the beginning of the year. We talked about the gradual improvement, which now slowed down in Q2, we can say that. And that is expected to continue on a quite, I would say, a slow and low level, I would say. And then, of course, quarters, large orders' quarters, they are not equal to each other as well. So we have been successful now in Q1 and Q2 with materializing a couple of large orders as well. So I think the sentiment, it's a combination of different factors.

Okay. Okay. And then kind of on the same topic then related to your Services business, I'm thinking about the connected fleet activity. Are there any changes there most recently that would signal some weakness ahead? I mean, you had quite strong orders at the end of the day in the quarter, actually. But just wondering if there's any kind of signs that you see there that things could slow down?

No. I think in Q2, as we could see, we had a good fleet activity still. We were uncertain in the beginning of the quarter, as you remember, but then it turned out quite well. But there is this one indication, of course, compared to the last year Q2 in the U.S. that, that was on the red color side over there. But I don't know if you have anything from the last couple of weeks, any indications.

Not from July, but June, there was a little bit of a slowness also, indicating that people are hesitating and the activity level is somewhat lower, which can be seen in the comparison to the previous year's Q2 also. And then, if you look at the Container Throughput Index, there is quite a lot of volatile from Drewry, for example. From month to month, they change the forecast on the container throughput. So that gives us the uncertainty and the potential kind of impact on the slowness in the second half.

And there's also a dependency between the new equipment sales and the spare parts, for example, in the U.S. in distribution, where you sell less equipment. There's also impact on the spare parts. So that would be something that we could see.

Okay. Well, that makes sense. And then just to clarify on the comment on the June weakness in fleet activity. I guess, that was on a year-over-year basis, I would assume. And was this for U.S. only or globally?

That was U.S.

And globally?

Globally, I think it's -- globally, as far as I recall, it's fairly stable. And so it's really the U.S. part.

The next question comes from Antti Kansanen from SEB.

It's Antti from SEB. I wanted to continue with the same theme as before on the demand side. So could you talk a little bit about your outlook on second half in Europe? I mean, for second quarter, you flagged strong growth. And I guess the themes that you have been talking about regarding the more subdued demand seemed to be more impacting the U.S. and Americas broadly. So what's your outlook for European demand coming into second half of this year?

Yes. That's a good question. So, yes, Europe so far in the first part of the year, first half of the year, I think it has been very stable and performing very well. And, of course, some indecisiveness in certain areas, certain customers, maybe in Europe. But, otherwise, overall, both Equipment and Services have been performing well in Europe. But when it comes to the next couple of months or next 2 quarters, of course, this tariff discussion, which is not fully clear yet, between European Union and the U.S., of course, that is impacting with uncertainties as well. So that's what we see. So the visibility is not that long even in Europe. But of course, we have a full focus on different countries in Europe and focusing on Services, Equipment. And I think there is a lot of business opportunities in Europe. So we have good expectations on keeping Europe on a good level even towards the end of the year.

Okay. That's good to hear. And then maybe digging a little bit deeper into the U.S. side, I mean, did I understand correctly that you kind of saw softening demand in U.S. also within the second quarter? So it kind of not only compared to how you started the year, because start of this year was quite active, if I remember correctly. And I guess the second -- end of second quarter was -- sorry, end of first quarter was already a bit weaker. So I just wanted to understand maybe better, what's your analysis on your clients' behavior? Are there just uncertainty on their own business outlooks? Is it more uncertainty on the pricing environment that the equipment is going to be regarding the tariffs? What do you think will kind of need to happen for your clients to become a little bit more less hesitant to invest and more optimistic on expanding their fleets and replacing equipment?

Yes. It's all that what you mentioned basically. And especially in the distribution segment, the destocking is on a relatively good level, I mean, the inventories at our dealer's side. So that is not the big issue at the moment. It's this uncertainty around the tariffs landscape, price increases, of course, we have implemented some of them as well, and where is the market heading to and what kind of tariff deals and agreements will be established in the next couple of weeks, for instance. So I think it's that uncertainty that delays the orders. That's what we saw in the distribution segment for our terminal tractors now in Q2. And even, of course, on the service side, we had a bit of a hiccup there when it comes to tariffs. But okay, that was a temporary one in Q2.

And you're quite confident that the softness is not you losing competitiveness or market share, that it's the entire market, and when the demand comes back, you will be kind of there to address it.

Yes. We are ready to act and address it, absolutely. And now lately, as you remember, we have launched our electric terminal tractor called Phoenix as well. So we are ready with that product as well once the market will pick up. And the U.S. market has been slow since 18, 24 months back even. So now it was picking up a little bit in Q1, and now, it's slowed down again in Q2, but we are ready there. And as one example, of course, on the Services side, we are now relocating, outsourcing our warehouse distribution center there. And the whole target is, of course, to grow Services even more. So we want to be ready with both support as well as equipment.

And overall -- yes, I was just going to add that overall, what we really see is the tariff discussion in Americas in the surrounding countries, as Sakari also was mentioning. So there the hesitation and the indecisiveness is kind of waiting to get a decision on the tariffs.

And then there's a dependency on the overall economic activity as well. So how the U.S. economy develops will also drive the freight activity, and therefore, also the demand for the product.

Okay. Then the last question is then on profitability. And I mean, looking at the Equipment business, at least, in my opinion, very strong margins that you have been now generating. Would it be fair to say that when you're moving towards the 50% target that it's more about kind of getting the margins clearly on a higher level on the Services side rather than having, let's say, a major improvement potential on the equipment from the current close to 14% that you are running in Q2? Any comments on that one?

Yes. That's a fair statement. Absolutely. There is more room for improvement on the Services side. We are happy with the equipment margin, absolutely, which is a result of higher volumes and Driving Excellence initiative, good cost control and so forth. But definitely, we want to improve our services much more.

I think we've been consistently saying that that's where the potential is. And, of course, now the second quarter, as I mentioned, was a little bit exceptionally low due to the reasons that I explained.

Yes, that's clear. But then also, if we reflect the gross efficiency program that you are flagging on the presentation, would it then be also fair to assume that the remaining benefits are mostly visible on the Services segment from here onwards on margins there?

I wouldn't say that. I think the program is, of course, targeted to benefit both Equipment and Services.