Cargotec Corporation

Welcome to this news conference regarding Cargotech's Q1 results. COVID-19 situation impacted our orders, operations and visibility already during Q1. The good news is that we have started the actions to safeguard our operations and our financial position is strong. Also our services, business and software business performed well during Q1. Today, our CEO Mika Vehviläinen will go through group level development and give an update regarding the COVID-19 situation. Then our CFO Mikko Puolakka will continue with the business areas, financials, and then Mika will be back to comment on the outlook. Please, Mika.

Thank you, Hanna-Maria. Good afternoon, ladies and gentlemen, and welcome to the Cargotech Q1 announcements. As Hanna already said, I will cover shortly the group-wide developments and sort of what's happening regarding the COVID-19 crisis. Mikko Puolakka, our CFO, will cover the business area, specific financials, and then some of the other financial numbers, and I'll discuss the outlook and the situation early April in the end as well. Overall on Q1, orders received decreased by 24%. First of all, it's good to recognize the fact that the Q1 2019 was an exceptionally high comparison period for us. The primary reason for the reduction in order intake is that we effectively lacked any large project orders especially in automation during the Q1 this year. Very clearly the practical issues related to closing the deals and also the uncertainty within the customers have slowed down the order intake in that one. However, the automation project pipeline still looks strong, and I believe in the long term, this will further enhance the demand for such solutions. Also, we saw some slowdown in other business areas towards the end of March, as well caused by the COVID-19. The sales remained on a strong level. We obviously have a very strong backlog at the moment, and this will help us also throughout the rest of the year. Our comparable operating profit also decreased from the last year. The biggest reduction being in Kalmar. Mikko will discuss this more in detail, but it's primarily driven by the change in mix. A larger part of the delivery is coming from the project deliveries and even within the project deliveries from heavy grain side, where we had lower margins and we have had some cost issues also regarding our supply chain in China. Hayab profitability decreased also, but this was almost solely driven by the fact that we had some last minute shipment issues and some of the larger shipments towards the end of March were not delivered until April. Without those shipment misses, Hayab would have actually exceeded last year's profitability. Even though MacGregor result was still negative, I'm actually pleased with the progress we are making. We are heading to the right direction. MacGregor is in the plan and we expect the business to improve from the last year overall. Obviously, the current situation with uncertainty and the financial market being in disruption, we have put a strategic assessment regarding the Navis business on pause at the moment, and we will return into that one later in the year when the situation is more clear. Regarding the COVID-19 impact, first of all, obviously, early part of the year, we saw some disruptions in our business in China, both in terms of the supply chain, our own factory operations, and customer demand. This has actually significantly improved during the Q1, and our operations in terms of supply chain are back in full force, and we have also seen the customer demand coming back strongly towards the end of the quarter as well. Obviously, with the spread of the COVID-19 virus, we saw some further impact then in our businesses in Europe and North America towards the end of the quarter. The increasing uncertainty and the restrictions by the different authorities is clearly slowing down the decision making, and this was most visible in our order intake, where we didn't land any of the expected larger automation orders during the Q1. As said, however, we still see a strong pipeline in there, and if anything, the demand for more automated solutions will certainly increase as a result of the learnings from this crisis. We had challenges in our supply chain coming from the different suppliers and closer of their factories as well and that affected some of the deliveries and obviously impacted the profitability also during the Q1. Regarding our own manufacturing facilities, our assembly units in Italy, Spain, Malaysia, and Ireland had been closed at some stage during the March. Some of these factories are already back in operations, and I would expect all of these manufacturing facilities being back on stream during the May time. However, there will be capacity limitations with the safety precautions we are taking in our manufacturing units. Obviously, we have had delays in delivery schedules and caused partly by the supply chain issues, but also for the fact that quite a lot of the shipment capacity has been taken out as well, and this causes delays in the shipments as well. The other issue we are dealing with is, of course, access for our customer sites, whether they are shipyards, ports or other sites as well. And this is impacting the project deliveries, commissioning, and obviously also for the specialists and services that are required actually physically on the sites. The visibility regarding the rest of the year is obviously weak. We do not know how the COVID-19 is going to sort of spread what restrictions there will be by the different authorities and how the customer demand will sort of behave towards the end of the year as well. Our focus very much is of course on the safety of our people, safeguarding our business, business continuity and our capability to serve our customers with the right services and on-time deliveries, cash and cash position that Mikko will discuss more in detail, and then adjusting our cost structure into this crisis situation. We have reacted very rapidly into this one by taking temporary measures in many parts of our organization. About 6,000 of our employees are now in a short week, four-day work team or respective salary reductions at the moment. And most of that has been effective from the April onwards. Also, I'm very proud of the fact that about 200 of our top executives have voluntarily agreed on 20% salary reduction across the board, and that has also become effective 1st of April. We have cut down our external services in different parts of operations, we have frozen our recruitments for the time being, and obviously our travel is minimized, also of course by the restrictions, but overall we are not traveling at this stage. We expect that these temporary saving actions have about 10 million saving effects per month for the time being. Obviously, we continue to monitor the situation and take further cost structure adjustments if required. The market environment Q1 is of course shifting very rapidly at the moment and what we see actually in terms of container traffic is sort of surges and drops in different places. With the strong consolidation of the container liners, we actually have seen about 20% capacity reduction in early part of the Q2, but that has enabled to maintain the cost or the pricing of the shipments at relatively high level. We also see different routing with the low fuel and bunker fuel prices at the moment. And all of those have different sort of impacts now in terms of container movements in other locations. For example, in U.S. many ports we saw first low volumes in the beginning of the year caused by the supply chain issues in China. We have now seen a surge of those volumes when the Chinese supply chain is coming back and then incapability of some of the ports to actually deliver those containers further. So we have congestion happening in other locations. So quite a lot of things shifting very rapidly as well. The construction output remained at the high level in Q1. And at this stage, it's quite difficult to project how that will develop in US and Europe throughout the rest of the year. Where we clearly have seen already a strong move is, unfortunately, a further slowdown of the ship order and ship contracting, where we see an impact actually for the drastic reduction both in merchant side as well as in the offshore side, and offshore side, of course, not being held by what we see happening with the oil prices at the moment as well. As said, orders decreased somewhat in McGregor. We saw a sort of slowdown in ordering taking in high up towards the end of the March. And again, the lack of large orders in Kalmar clearly impacted the project ordering. And in terms of the mobile equipment, We saw actually still a strong order intake in the sort of intermodal smaller container handling equipment. The logistics sector especially in US was fairly slow but actually has now shown some sign of light when we move into Q2 and especially e-commerce related deliveries actually are running at the very high level at the moment. The industrial side was relatively okay in Europe, but we have seen quite a rapid deceleration in some of the industrial segments in Europe at the beginning of April in there. However, our order book remains strong, and this, of course, gives us a very good basis for the rest of the year, as long as we can get this supply side and our own manufacturing units back in operations as we expect during the May. The sales remained high, helped by the big backlog, and as I said, some early issues in China, and then a little bit slowdown towards the end of March, partly driven by the issues with the shipments, ship capacity, and different constraints in the logistics chains as well. I'm particularly happy about our performance in services. Our services and software increased and continued to sort of grow during the Q1. In Kalmar, relatively flat, as well as in Hajab, and the demand continued at good level. In MacGregor, the 24% increase comes primarily from the inclusion of the TTS services. Without TTS addition, the MacGregor services would have been flat, but I'm happy to see that Good demand in our services business has continued, despite the practical issues related, for example, to site access, etc. Software sales increased still in Q1, primarily driven by the deliveries of the automation software as well, and the services and software constitutes about 35% of our sales during the Q1 2020. Then I hand over to Mikko Puolakka, who will cover the business area financials for us.

Thank you, Mika, and good afternoon also from my side. So as usual, let's start with Kalmar. In Kalmar, our orders were in quarter three, 334 million euros, a decline of 35%. This decline came mostly from the Kalmar automation related projects or orders where we had quite high orders in the comparison period. In general, there is a good demand for automation solutions, but customers are postponing investment decisions in this kind of uncertain market environment. We continue to see also a certain weakness in smaller mobile equipment, especially in that kind of mobile equipment which is used in industrial applications like wood processing, steel industry or car industry. Kalmar sales were 404 million euros, staying on last year's level. The sales for the automation and project business grew in Q1, and this is very much supported by the good orders that we have received during 2019. The sales for smaller mobile equipment declined due to the weakness in orders in the previous quarters. As Mika already referred, Kalmar comparable operating profit declined from the comparison period. It was 26 million euros, 21% decline. And this decline is due to two reasons. The first reason is that we had now, during quarter one, higher share of project revenues or revenues coming from larger projects, where typically the relative margin is lower than in smaller equipment or in services. And then, as Mika also referred, we have had some challenges in project business-related supply chain in China, and that was burdening also our Kalmar margins in Q1. Then, looking high up. In high up, our orders were 296 million euros, decline here 13%. Basically, we saw decline in all kind of equipment-related orders, and in all regions. Positive thing is that HIAB service orders grew by 13% in Q1, so showing there a nice development. HIAB sales declined with €302 million, and also, like Mika referred earlier, in his part, due to the coronavirus-related delivery or logistics chain delays. We were not able to deliver all planned deliveries during March, but those will be then delivered in quarter two. And higher operating profit for quarter one is 30 million euros, and this was very much impacted by the decline in sales. Then in MacGregor, where basically, in general, we have been progressing according to our plans and restructuring activities, what has been already announced earlier. In MacGregor, the orders for quarter one were 151 million euros. This is 8% decline. We saw a decline in the merchant ship orders, driven by the very low new-build orders by the shipyards. Our offshore-related orders grew, and this is very much driven by the orders received in the sustainable energy area. McGregor service orders grew by 20%, and this has been supported by the TTS, acquisition excluding TTS, the organic order growth would have been flat. McGregor sales were 153 million euros, here a 10% increase compared to the previous year quarter one, and the comparable operating profit was minus 5 million euros. Despite being a negative operating profit, It was according to our expectations for quarter one. There are basically two drivers for the loss-making quarter one. the low capacity utilization in certain offshore, as well as in merchant product lines, and then also the very low order activity and the tight competition concerning deals available in the market. We announced already in 2019 significant restructuring actions in MacGregor, and we are targeting to achieve 15 million euros cost reductions during this year. So far in quarter one, we have achieved 3 million cost savings. Then, Cargotech total financials, our order backlog is 1.9 billion euros. Like Mika said, offering a very good basis for the coming quarter's revenues, assuming that we can deliver that backlog in this corona environment. Comparable operating profit, 40 million euros. We had 13 million euros items affecting the comparability between the periods. And in this 13 million euros, we have a one 5 million euro booking related to the rainbow heavy industries associated company where we reduced our ownership from 8% to 6%. The net income for the period was 11 million euros, earnings per share 0.18 euros, and the rolling 12-month ROESI in Q1 was 6.5%. Our cash flow for Q1 was 23 million euros. This is slightly lower than in the previous year's Q1, mainly driven by the lower profitability. Our net working capital has increased. That's quite typical in the beginning of the year when we start to build the equipment for customers' orders. Of course, in this kind of situation, we need to monitor very closely our inventory as well as also the accounts receivable development. Our debt portfolio is well balanced. Our gross debt is approximately 1.1 billion euros. And here it's good to note that 83% of our debt portfolio or outstanding debt is long-term, so maturing after one year or later. Our gearing was 57%, and when we exclude the IFRS 16 lease liabilities, roughly 180 million euros, the gearing was 44%. Our liquidity position is very strong. At the end of March, we had 281 million euros of cash and cash equivalents in our possession. On top of that, we have a fully unused, committed 300 million euros revolving credit facility. We have 183 million euros of loans maturing in the next three, sorry, in the next four quarters. So the total net liquidity at the end of March was almost 400 million euros. On top of this 400 million euros, we have 150 million euros commercial paper program of which we have utilized at the moment 50%. And then we have roughly 130 million euros of unused bank overdraft facilities. In early April, we raised, in addition to the previously mentioned facilities, 200 million euros, two years bank loans. So overall, in the beginning of April, we had 800 million euros liquidity. And as you can see from the right side here, we don't have any major repayments coming up in the near future. The board proposes a dividend of 1.20 euros per B-share, and basically the dividend would be paid in two installments. The first installment, €0.60 per B-share, would be paid directly after the approval of the AGM. In practice, the payment would happen in the early part of June. In addition, the board is proposing to the AGM an additional approval or authorization for an additional installment of 0.60 euros per B-share. And this dividend would be paid based on the board's evaluation later However, the authorization would be valid until the next AGM. The 1.2 euros maximum dividend proposal represents approximately 55% dividend payout ratio when we calculate the EPS excluding the items affecting comparability. And with those words, I would invite Mikko back to talk a bit about the outlook.

Thank you, Mikko. On 27th of March we issued a statement where we said that at this stage the visibility is very poor and this exceptional situation Cargodeck estimated is not able to give a guidance for 2020. We will give guidance as the situation will further clarify itself. It is also quite clear that the Q2 2020 is going to be challenging for us. We see issues both affecting our supply side as well as uncertainty in the market affecting the demand from our customer side. The supply side will be affected by component shortages coming from our suppliers, potential closures of our own manufacturing facilities, and then uncertainty regarding shipment availability and logistics flows overall. On the demand side, obviously, customers' demand is hard to predict at this stage, and we see those both affecting the Q2 2020 considerably. Now, for the first few weeks of April, we have seen the order impacted negatively already. It's quite difficult still to draw any definite conclusions on those ones. The orders tend to be quite back-weighted for every week. And of course, we had an Eastern holiday also impacting the first couple of weeks in April. But we have seen a slowdown in demand being there. And obviously for the whole year, it is very difficult to give a specific guidance as to uncertainty regarding the COVID impact, customer demand, and the potential restrictions is still very high. It's a very challenging operating environment. One indication that we follow actually live and we can get data on a continuous basis is regarding the equipment that we operate in the logistics sectors. A lot of our equipment is today connected, and these are the numbers from the last, in April for the last week. Actually, I wouldn't worry too much about Africa because we have quite a small number of equipment connected, so that's not statistically relevant. We have seen the operational hours actually recovering in China, but they are still somewhat down in there. In Europe, actually, the reduction in operating hours after two weeks was considerably higher. And after three weeks, we still see operating hours being down roughly 12%. In US, the operational activity of the equipment is even further down. That's also a good indication for us to see where the market is going and as we clearly see at the moment there are restrictions in the logistics sector and how our equipment is operated and that certainly is going to impact our demand at least in the short term. However, I would say that if you look at sort of beyond the current crisis, I would say that our strategy is actually even more relevant than ever. The investments we have done in digitalization, services and connectivity are now clearly paying off in terms of the data and how we are able to support our customers. And those benefits are clearly visible to our customers and of course to our own organization as well. Looking into more long-term, it's very clearly that the lessons from this kind of crisis will further enhance the demand for automated, electrified and robotized solutions. And the investments we are doing in R&D and that we keep on doing in the future will put us in a strong position and Cargodeck will emerge from this crisis stronger company than ever, both financially and from the competitive point of view as well. Thank you very much. And I think we are now ready for Q&A.

Yes, exactly. Thank you, Mika. Thank you, Mikko. Could you, Mikko, kindly also come here, please, and then we are ready for the questions.

Ladies and gentlemen, if you wish to ask a question over the telephone, please signal by pressing star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. And please state your name before posing your question. Thank you. We will now take our first question. Please go ahead.

Hi, can you hear me?

You can.

Yes, okay, hi. It's Peter Tester, One Investments. I had a couple of questions, please. One was just on the order backlog, if you look at how that helps you understand how to prepare for the rest of the year. On CalMAR, how much of that order backlog is for execution in 2020? And is there a big difference between the smaller logistic units and the larger units?

Thanks for the good question. In Kalmar, I would say that we need to separate two parts of the order backlog. The project-related order backlog, one could say that it's in the average two years in the delivery time. And then in the services and the smaller equipment related backlog, that would be approximately maximum two quarters in the delivery time.

Has that been changing, that backlog period? On the smaller equipment?

You mean that has the backlog structure changed?

Yes, if you look at the smaller light equipment, roughly two quarters. If you look at the overall visibility or coverage you have, has that been changing in the current environment?

Not drastically.

And then on here, you have just under 400 million of orders. And we've obviously heard from some of the truck makers today that the environment is tough on construction and trucks in general. And I was wondering if you could give some sort of sense with needing some in-for-out orders still for the year. How do you think about preparing here for a more difficult environment, maybe for the balance of the year in terms of production structure or staffing and so on?

And overall, obviously, it's hard to predict at the moment. Most of the major truck manufacturers actually have stopped their production for the time being. And I think if you order a new truck at the moment, for many of you, the availability is somewhere in August. I think this will impact the high demand now in Q2. We should see that visible. We have taken the same short-term temporary measures as we have done in other businesses in terms of the four-day work week with the staff functions, cuts in executive salary, and then obviously some of the high manufacturing units have been shut down. primarily due to the kind of the restrictions by the authorities rather than our own will. Our unit in Poland for Hayabi is in shutdown for two weeks and we expect that to come back online now by May as well and obviously we need to monitor the situation and see how the truck manufacturers sort of production and the customer demand is behaving. We have quite a lot of flexibility and it's good to recognize that generally our sort of setup is quite asset light at the moment. We are not vertically integrated and we are having purely an assembly operation. So how do we play with our own suppliers and with the assembly capacity is going to be quite critical in the coming weeks and months.

Right. Okay. And then the other question I have is just on, say, cash flow and balance sheet. If you could give some sort of sense on how the cash advances part on your balance sheet, how you expect that to develop through the period?

If you refer to the advanced payments, what we have received... Of course, those are very much related to the Kalmar automation and project business. So typically with those large projects, we get the advance payments and milestone payments. And should the larger orders be postponed, then of course we would be consuming the advance payment balance as we are still executing the backlog project. So that kind of delay of new automation projects would then reduce the balance of advance payments.

If that would be the situation. Yeah, I understand. So it depends on the pipeline conversion, basically, versus the revenue. And then the last question was just on the short-term risk statement. You make a point about McGregor and the operating environment and so on with its two major customer segments. And then at the bottom of that, you say if this were to persist for the long term, there could be some write-down of risk to the goodwill amount. I was wondering whether that is something that's under consideration review at any point for the half year, or why is that in the short-term risk statement, I guess I would say?

Yes, we have, due to this very kind of exceptional situation, we have performed an extra goodwill impairment test for MacGregor now in the first quarter, at the end of first quarter, and as a result of that goodwill impairment testing, basically the headroom in the goodwill impairment testing has shrunk from 170 million euros to 7 million euros so at the moment we don't have a need to do the impairment but should the market outlook decline further from the current one there is this kind of risk and we have been highlighting and opening also the mcgregor goodwill impairment testing in our interim report in in in the note number three more in details right okay thank you very much thanks for your help we will go to our next question please go ahead oh good afternoon the tartan from credit swiss thank you very much for taking my questions

My first one is around the trading environment. Could you maybe help us a little bit with quantifying what you've seen in April in terms of demand, maybe in year-over-year terms across the three businesses, please?

Yes, I already said it's slightly challenging to draw too many conclusions. I would be a little careful with that one. First of all, our orders tend to be, even in the month, big back-weighted, and quite often they are back-weighted in a quarter as well. And then obviously had an eastern holiday. So after two weeks, we saw quite a significant reduction in the order intake year on year. Actually, last week was somewhat stronger again. So the eastern holiday clearly had an impact on that one. But I think it's an early days to draw any significant conclusions on that one. But I think it is clearly a downward trend and I expect that to continue on. on Q2, but how strong that trend is at this stage, too early to call?

Well, I guess maybe you can help to understand a bit better the phases throughout Q1, because in your statement, you're saying that it's a jam-packed of normal months. But if you look at year-over-year growth rates, this either implies that March declines very severely, or that Jan-February also down a year over a year. So maybe any color on how we should be thinking about the exit run rates for Q2 would be helpful.

Yeah, in MacGregor we didn't really see, I would say, there are not significant sort of trends there. I mean, obviously, there are larger one-time orders for ships, and there was not a significant trend as such within the quarter itself. In Hayab, I think the trend was quite visible. The January-February orders were still relatively good, and then we saw orders slow down in March, especially in the last two weeks of March. in there where we saw slowdown happening on the HAJAB equipment. In Kalmar, we saw slowdown first of all impacted in China in the sort of January, February timeframe, and then China coming back quite well in March. And then if you look at the mobile equipment, we saw the sort of intermodal container handling type of equipment actually be relatively strong throughout the whole first quarter, including the March. In the industrial segments, we actually saw a slowdown towards end of March. in the equipment side on that one. In the logistics sector, actually the early part of the year was slower than we expected in North America. And there has been now indications of actually that strength. And we know that especially the logistics around the e-commerce is actually running at relatively high rate. In the larger projects, it was fairly easy. I mean, the whole month was very quiet. We didn't land any larger orders on that stage. And it's hard to predict, but it could well be that the larger project orders would only land in the second half of this year and not earlier than that.

Okay, thank you very much. And in terms of those large orders, automation and projects, how much of that was in your order intake last year, please?

That was approximately, what would I say, large individual orders. We got roughly, if I remember correctly, six orders last year, amount 150-160 million euros for the full year.

Okay, thank you very much. And my last question is on cost savings. First, I just wanted to confirm I heard correctly, you're currently running at 10 million per month. And secondly, are those cost savings temporary or you expect some of them to be retained as maybe volumes start coming back and as market improves? Thank you.

Yeah, we have two types of cost savings. Some of our more structural that Mikko described already that have been ongoing already. before the corona crisis and then due to the crisis we have taken further temporary cost savings. Those temporary cost savings impact is roughly 10 million a month for those ones and they obviously are affecting as long as we have those measures in place. Obviously we are now monitoring the situation and forming a picture what is the demand shape going through this year, and then based on those ones, we then need to decide whether some of those savings are more structural and would have to be more sort of permanent, and which one of those would then return with the activity. So with the fairly poor visibility at the moment, it's too early to sort of decide where we are with those ones. The structural savings that we have communicated before, they are continuing as planned.

Okay, thank you very much. I'll go back to the queue. Thank you.

Thank you.

We will go to our next question. Please go ahead.

Hi, Magnus here from UBS. Could you give us some color on how HEAP's order intake declined in Europe, Americas, and APAC? Please, that would be helpful in Q1.

There is not a significant difference. The APAC is quite a small market in there. In terms of the US and Europe, I think we saw a fairly similar pattern in both places. Relatively strong January and February, and then a slowdown in the last two weeks of March, both in US as well as in Europe. Not a huge difference between those two markets.

Are we still declining in January and February in those markets?

No, January and February were fairly stable. I think they're roughly at the same level as previous year.

Perfect. Great. And then how is the current situation with Hieb and deliveries from Europe to North America?

It depends on the manufacturing facility we deliver for multiple factories. The main factories for North America have been the facility in Spain that actually has been shut down. We expect that to sort of come back in line now, the Irish factory that has been doing quite a large part of its business in the US is actually closed at the moment, but we expect that to return by May timeframe into the return. Further, you have had issues with, as I described, quite a lot of the container line capacity has been taken out of the traffic so that will also partly impact the shipment schedule so we have a certain situation where we are missing sales because even though the equipment is ready and we can't find the shipment for that one that's what happened with Hayab at the end of Q1 as well the equipment actually that we were supposed to ship was waiting for that one, but we couldn't get the shipment organized as well. So, the situation is very fluid because it's impacted by the component availability where we have issues, it's impacted by how we are able to open and keep our own facilities open and then the availability of the shipments as well. We certainly will, I think, struggle in all those three areas still in the Q2.

How many weeks has the Spanish and the Irish facility been closed respectively at this point?

Well, I think we'll be talking about a couple of weeks now.

Okay, perfect. And then finally, could you help us quantify the mix effect you saw in Kalmar on the ebitda?

Sorry, would you mind repeating that?

Yeah, sorry. Could you help us quantify the mixed effect on Calamar on the EBIT line, the adverse mixed effect from project business?

The mixed impact, I would say, would be somewhere between five to seven million euros, roughly five million euros for the first quarter. Perfect.

Thank you so much. We will go to our next call. Please go ahead.

Yes, hi, this is Antti from Ganske Bank. I would like to ask about your comments on the second quarter. I think you are making it quite clear that the second quarter looks bad, to put it in simple terms. And if I understand correctly, you are not even excluding the possibility of an EBIT level loss for the group. Is this mainly because of a severe top-line sales weakness, or is it some extra costs that you expect, or is it even a potential write-off of McGregor Goodwill that could bring your second quarter EBIT to a loss?

The second quarter, I think, is in a way, if I use the term perfect storm, in a way that we will I think have issues with the demand side, with uncertainty and still the restrictions being in place with our customers. So I would expect orders to be impacted by that one. And then it's also being impacted by the operational issues from our side, as we discussed already. So in terms of our delivery capability in Q2, we'll have a number of different operational issues and both of those will have a negative impact on our operating profit, the magnitude of that one at this stage is quite difficult to estimate. I mean, so much depends on the restriction, so much depends on our supplier's capability to deliver and our capability then to ship the equipment as well as the customer demand. And there are question marks around all of those topics. And I think Mikko already commented in terms of the headroom for the write-offs. We need to evaluate the situation again at the end of the Q2 and see where we are with that one.

Okay. And then second and final question. When are you going to test the McGregor goodwill at the next time? And related to that, do you sleep well with your balance sheet or how would you describe the situation? I know that you are still a bit away from your covenant levels, but how do you feel about your balance sheet given the challenges that there are in front?

Concerning the first question, we will test McGregor goodwill at the moment on a continuous basis. Basically, it's under scrutiny every day. Of course, we don't update the calculations every day, All the time when we are getting new information, we need to evaluate whether that information will impact the MAC record goodwill valuation. So, the answer there is that it's a continuous evaluation. What comes to the balance sheet, in our opinion, our balance sheet is solid. In some of our loans, we have 125% gearing covenant as a single covenant. And at the end of quarter one, our gearing was 44% when using the covenant calculation principles. So in my opinion, we have significant headroom in our covenants.

I actually think that at the moment we are, and of course this is also partly relative to the competition, in a very good position actually. We have about 800 million of cash or cash equivalents available at the moment and I would say that I looked at our balance sheet and cash position as an opportunity when we moved through this crisis and potentially how can we actually take an advantage of that one.

Okay, thank you.

Thank you.

We will go to our next question. Please go ahead.

Good afternoon. It's Manu Rindler from Noda Markets. If I may continue on the topic of the McGregor goodwill, could you talk about the fact that you changed the kind of assumptions, which I can fully understand, in your goodwill test, but Where do you see that kind of assumption could change? Because I guess that you're still doing the long-term kind of a review of the cash flow profile. So in the next couple of quarters, so where do you see is the kind of biggest risks that we could have to change the assumptions, which would lead them to a write-down?

Basically, there are two elements in the goodwill testing. One is the top line and profitability outlook, how we see the MacRecord business, both in short term, meaning the next five years, and kind of over the cycle growth rate. And the other element is then the weighted average cost of capital, i.e. the interest rate, what we are using for discounting the cash flows. Both have been updated now in quarter one, so we have taken down the long-term outlook we have reduced roughly 20% the next four years revenues, and then also over the cycle growth, we have reduced from 1.6% to 1.3%. So if there would be kind of further reduction in this short term, or long-term growth rates, those would then, of course, impact the goodwill valuation. And this, as mentioned also earlier in the earlier question, this is something what we evaluate now on continuous basis due to this extraordinary market situation, as well as the headroom in the goodwill impairment testing is at 7 million euros.

Okay, thank you. Then moving on to border intakes. I think you've reported around 13% decline year-on-year base and assuming that March would be some 40% of the Q1 and January, February, I think you said were roughly flat. So is it fair to assume that we had some 30% decline in March order intake?

Probably not quite in that stage. It was more visible. And again, I think early March was fairly okay. The last two weeks were already where we started to see a more significant decline in there. And at this stage, it's quite hard to predict how that will then evolve now in the Q2. Okay.

Do you have... break-even point for sales in Hiab? Or are you willing to share that with us?

That flexes obviously as well, depending on what we do in cost structure. The Hiab, one needs to remember, first of all, that we are still doing extremely well in services. That's still going strong and the proportion of the services increasing on that one. And the investments we have done in terms of the manufacturing setup and assembly also gives us a lot of flexibility. So we are in in quite a strong position in high up to actually better storm at the moment.

Okay. And then on the service business, so I mean, have you seen any bigger impact on the restrictions or do you expect that those will become bigger for the service business? Are you able to perform most of the services?

There has been actually restrictions in terms of customer access or access to customer facilities in shipyards, in ports and some other locations. So in that sense, I'm quite delighted that the services, despite those restrictions, has been performing quite well. And obviously, that's still a risk that we carry into the Q2 as well in terms of how those restrictions will potentially impact the services delivery in Q2 as well. But so far, so good.

Okay, and final question. Do you have a sense about the backlog quality that did you see, for instance, during the financial crisis? Did you see a lot of cancellations taking place in the backlog? And is there any difference between Hieb and Kalmar, for instance?

Well, Kalmar obviously has the project backlog that is pretty solid. So I don't think they will see, because these are generally ongoing projects. So I do think that they will actually progress. The delays, there are more to do with the practical restrictions, as we discussed, customer site access, etc. But I think that backlog is pretty secure, because those are heavy investments that have been committed by the customers in many ways. In the mobile equipment side more, we haven't really seen cancellations. What we are seeing is postponement requests by customers, partly driven by the practical issues of people working remotely, etc. I think we see some postponements of the backlog from Q2 to Q3 now, both in Hayabas as well in Kalmar. It's not a significant part of business, but there is some. We have seen very little in terms of cancellations.

Okay, thank you. No further questions.

We will go to our next question. Please go ahead.

Hi, this is Peter Testa again. I just wanted to ask a bit on the restart part of the exercise. And given the information you've had about your supply chain and how that's caused some difficulties in Q1, when you look at how you're preparing the restart with your supply chain, especially given your more assembly basis in your own facilities, obviously this is the critical point. When you look at the visibility that you're getting on part availability or Would you be looking for your supply chain to create some buffer stock to make sure there would be availability? How are you managing that supply chain restart to make sure it's smooth, and how long do you think it will take?

It's an excellent question, and it's an exercise, I think, where the transparency towards our customers and transparency to our supply chain is absolutely essential. So the sales and operational planning is going to be a key role to manage the capability to ramp up and run down when necessary and managing that while also being wary of the supply chain or a sort of networking capital and not accumulating too much of that one either. So it's something that we follow on practically a daily basis, both with our customers as well as with our I think the good news, of course, is that the backlog is still relatively high in all of the businesses at the moment. So we have quite a lot to deliver from our backlog. And then it's a more question of our delivery capability and the restrictions around that one. And for that one, we generally have a better visibility.

Okay, so when you look at your supply chain ramping up and making sure the full part availability is, you can ship the complete unit. Do you have a sense on going from the current situation to restarting? Is that something you would expect to be running smoothly by late May, earlier than that? What do you think?

I think what we understand, again, this is a fluid situation, but what we understand from the authority restrictions and all of our manufacturing locations effectively have been shut down due to the request from authorities is that the Some of them are already back in line, the Malaysian factory, for example, and what we understand from the local authorities at the moment, by mid-May, most of our manufacturing facilities would be up and running. We do observe, and of course, the safety is important for us, so we, for example, can't operate the manufacturing and assembly units at the full capacity because we keep safety distances within the manufacturing facilities, et cetera, so that will slow down some of the deliveries But in a way that also gives us a pretty good visibility for the supply side as well, because we have a fairly high backlog still in most of the factories. We know where the capacity restrictions will be. And so I think managing this one in the next couple of months is actually relatively easy, as long as we are able to predict our own manufacturing rates. correctly uh it gets more tricky down the road obviously where the sort of the demand side is more questionable right now it's more question of delivering to the backlog and and and having the right uh sort of understanding of our own capability in terms of the manufacturing capacity okay so you've been able to give the same visibility to your supply chain you're expecting on communication they should be able to start in parallel with yourself because you're able to give them firm orders basically

Okay. Thank you very much for the answer.

Thank you.

We'll go to our next question. Please go ahead.

Yes, this is Tom Stolmar from Carnegie. I would like to understand a bit better this high-yield situation still. So currently I understood that your factory is closed in Poland for a couple of weeks. But what about this truck delivery? Are there inventories of this somewhere? Is it the situation now that you will not have any trucks for several months to install your loading equipment on? And how do you then book revenues in your capital loss account?

There is a number of trucks already in the system at the moment to be delivered already. We have a certain amount, it varies a lot from location to location, market to market as well. In effort facilities, for example, in Italy, where the corona restriction hit quite early, we have a number of ready equipment that actually has been in the backlog and has customer orders. We haven't struggled to organize deliveries, getting trucks actually to pick them up. and deliver to our customers which are waiting for those ones as well so we have such a sort of buffer so build up backlogs there that we can as soon as we can get the transportation organized we can deliver and recognize the revenues on on those ones as well the the planned shutdown for the Poland is two weeks and that's primarily driven by the component availability the truck build up of course goes through the supply chain as well obviously depends on how soon they come back online as well. And it's not an immediate issue for us. There are trucks that are to be delivered, are it the dealers, et cetera, that we fully fulfill into the capacity. The question is more, I think, towards the end of the Q2, early Q3 to see where the situation is in there.

So is it, you know, As it looks now, for your revenues, Q2 and Q3 are equally bad, basically, then. Because if you don't have trucks to install on, I mean, I guess you cannot book, you know, a large share of the revenues if you cannot fully deliver it and install the equipment.

I think the Q3 is still too early to predict. Let's remember that we have a very solid backlog of about 400 million in high up. That is, you know, well over one quarter of deliveries already in the backlog today. And then we need to see how the sort of the demand will develop during the Q2 as well.

Of how much of this can you, of the revenues from Ukraine, can you book in your personal loss account if you cannot install it?

a very large majority of all our shipments is not our installation. First of all, we usually book the revenues upon the shipment or delivery as well. And it's good to remember, again, there are very large number of, if you look at the truck supply chain, they go through the dealers. The dealers still have a number of trucks available at the moment. So even if you would sort of order a new truck today, I mean, there is a backlog in there. And then you would look at the August deliveries there anyway, so.

Okay, and then on this goodwill discussion, could you help us to understand where the goodwill comes from? You have a bit more than 1 billion euros of goodwill and it has been on a high level for many, many years. So please help us to understand how it is split between the divisions and the different acquisitions you have done.

Roughly 50% of that is related to MacGregor, and this is coming from the offshore acquisitions some years backwards. You can see also in the note number 3 that the asset value in the MacGregor goodwill impairment testing is over 500 million euros. So that gives fairly good kind of information about the size of the goodwill.

Yeah, so it is prudence and the hot-lob acquisitions in particular that are, you know, at risk.

For example.

And yeah. All right. Thank you.

We'll move on to our next question. Please go ahead.

Hi, from UBS. I think we saw one of the truck OEMs this morning suggesting utilization of their fleet has come down by about 20% in Europe since the start of the year. Do you have any corresponding data for your fleet in Ukraine and how do you think that would impact your service business if utilization is similar for Ukraine?

There's some data actually in my presentation regarding the utilization at the moment, where we are about 12% down in utilization now in the mobile equipment in Europe and about 22% down in the US at the moment. Actually, you can look at it both ways. In the longer term, of course, if the running hours go down, that will impact the service requirements. What we are now doing at the moment is that when we actually see the variability in utilization to be quite high, we actually contact customers where the utilization has gone down to suggest that this might be a good time to actually do some of the preventative maintenance and do the maintenance rounds when the equipment requirement is not that high and then you play it the other way with there are also some customers where the equipment is running at the very high hours at the moment which also then means that there will be further maintenance requirements down the road as well but So in short term, actually, the lower utilization also gives you service opportunities. And obviously, we have the advantage that we have the visibility with our customers. Obviously, in the longer term of this utilization rates remain lower. That would mean that also the maintenance requirements would come down respectively as well.

Do you have any similar data for FIAB as you have for Kalmar?

We have not quite as much equipment is connected in the same way as in Kalmar, but the data we have actually is quite well correlated with the data I showed from Kalmar.

Okay, got it. And then I'll sort of return to the startup prospect specifically and return to Spain and Italy. Would we consider mid-May as a sort of initial startup data as well?

Again, this is very much driven by the decisions by the local authorities in different locations. What we understand and the indications have been is that sort of mid-May, pretty much all of our production facilities should be back online. But as said, the situation remains quite fluid and it's too hard to predict.

Yeah, absolutely. Got it. Finally, on component shortages, is there any particular component that you're sure of that you could highlight? And is there both issues with deliveries from within Europe as well as from China?

One of the biggest issues we are dealing at the moment is actually Volvo engines and the availability of the Volvo diesel engines to some of our mobile equipment. And that certainly we'd like to see sort of Volvo ramping up the production. Again, we have quite a large backlog. We have a good demand on that area. And we are now relying on other engine manufacturers to replace that equipment if it's so required.

Got it. Thank you so much.

Thank you.

We will take our next question. Please go ahead.

Yes, good afternoon. It's Tommy from DMV. I'm also trying to ask a little bit on the high up, maybe scenario-wise, if you would assume that the business sales fall to, say, 1 billion level, would you be comfortable that the business is able to remain stable at 10% profitability, for example, if you would just explain the operational flexibilities and so on.

I think with 1 billion of revenues and if you would adjust our operational activity in that one, 10% would be well within the reach and I don't see that to be a problem as such. I mean the operational flexibility, obviously that would require certain measures to be taken to achieve that as well, but they are well within our reach as well. The high-up situation overall is fairly interesting because we are pulling obviously our customers at the moment as well and the weekly basis on the last poll out of the 28 larger fleet customers we contacted 26 of them were believing that they will be back in full operations within a month and obviously one month take the view that that's fairly optimistic scenario and we are not basing our own planning on those scenarios as well i don't believe in the very sharp v in here And I think we kind of need to adjust our operation to be able to sort of take necessary measures as we see more visibility in the market.

Thank you. And the second question on pricing. Have you seen any pressure, for example, on the services pricing environment or indeed equipment as well?

No, we have not seen. I think the pricing is not coming up on discussions much at this stage. I think people are more concerned about the availability and the delivery times.

Thank you. We will go to our next question. Please go ahead.

Hi, it's Antti from NCD. Just two questions. First on HIEB, I'm touching a bit on what you said just a minute ago. We are expected to see a bit of a slower recovery in terms of volumes going into late 2020 and 2021. Do you think that this would be a time where you do some further cost restructuring on a more sustainable basis and not only on, let's say, the short-term COVID-19 impact?

Absolutely, I mean we discussed them and that for example when it comes to the current manufacturing footprint of the HIAB we are not in the optimal position at the moment. And the strong demand we have seen in the last two years has not enabled actually us to look into that one. And we have obviously done a number of different scenarios and plans on that one. And if we see that the demand would remain at the somewhat lower level now in the coming quarters, that certainly would be an opportunity for us to do some structural changes in there as well.

And what about Kalmar production setup? Is there a similar type of plant?

No, Kalmar is pretty much where it needs to be. We have three large manufacturing facilities, one in Europe, in Poland, one in US and a third one in China. And so that's a fairly optimal setup for us as it is.

Okay. And then a second question, I guess you mentioned that you're happy with your balance sheet and you have enough liquidity to maybe do some strategic moves during the downturn. Could you maybe elaborate where you see opportunities or where you would like to add something in your portfolio?

Well, I think let's see how this situation develops, but there are certainly a number of our competitors who will be more distressed than we are in this situation. And this might be an opportunity to then sort of do bolt-on type of acquisitions or look at the adjacent product categories. But it's a little bit early to speculate on that one, but clearly we want to sort of beef up our capability as well to do moves if those opportunities arise later in this year.

But do you want to elaborate at all in which businesses you see some competitors struggling at the moment?

Too early to look into that one, but I think it's primarily, I would be, I think the HIAB is quite an interesting area, especially there are still a number of sort of smaller competitors in there. The Kalmar business tends to be more consolidated and obviously after the TTS acquisition, the McGregor space is already pretty consolidated, but there are also adjacencies in all of these areas that we are looking into.

Okay, that's all for me. Thanks.

And there are no further questions at this time. Okay, thank you.

Actually, we have received one question online, and it's related to the final acquisition price of TDS. So can you please give an update regarding that?

Certainly, I mean, the closing of the balance sheet is still under the discussion. As far as I know at the moment, it's heading into arbitration and that arbitration is only taking place as far as I understand in 2021. So we do not expect to see any clarity on that one until next year.

Okay, thank you. Thank you for the good questions and good answers. Please stay safe and healthy. We are publishing our Q2 report on July 17. Hope to see you then.

Thank you.