Cargotec Corporation

Welcome to Cargotex Q2 2021 conference call. My name is Aki Vesikallio. I'm from Cargotex Investor Relations. The results will be presented today by our CEO, Mika Vehvilainen, and CFO, Mikko Puolakka. After the presentation, there will be a Q&A session. Please pay attention to the disclaimer in this presentation. And remember that due to the securities laws, for example, in the US, we are not allowed to discuss the merger with Connect Race in this call.

Thank you, Aki. Good afternoon. for joining the Cargodec Q2 2021 conference call. Before I start, a small personal note, actually. Tiina Aaltonen, who has been or is the assistant for the finance department and investor relationship, is having her last workday today, and she's been with us for 16 years, and that's more than 60 quarters. So thank you, Tiina, for great work and all the best on your future retirement as well. And now to the actual quarter itself. So it's been a roller coaster ride for the last 12 months. Obviously, we had probably the shortest sort of down cycle in the history. And as you know, from September onwards, we have seen a strong demand returning. Really now, I highlighted that the record orders we have taken in both in Kalmar and in Haia, but overall also highest order intake ever in Cargodex history. Looking at the highlights on that one, strong demand, especially in Hayab and Kalmar mobile equipment. We also improved order intake in our automation solutions, as well as in MacGregor, but to a lower level as such, and the quarter did not include any major automation orders as such. Sales increased by obviously stronger demand by 13%, and it's good to see that the services business is returning back to growth. The COVID restrictions are still impacting the services growth, but it's good to see that despite the somewhat difficult environment, we are able to return on that one, and obviously one driver is the increasing usage of the equipment and required services there as well. Also, operating profit increased together with the revenue. Very happy with the MacGregor. Despite the fact that they had a lower revenues than a year ago, we were able to improve the operating profit. And obviously, this is driven by the efficiency efforts we are taking in MacGregor. And I have to say that looking at the market outlook now for MacGregor, we are in a good place to take benefit of the market growth with good financial performance underlying that one. Also excellent performance from Hayab, where we were able to turn a good demand into positive operating profit development. Less so in Kalmar, where we had a number of issues related to the supply chain as well. Mikko will go through some of the details in his part of the presentation as well. Equipment running hours, this is again comparing the Q1 now to Q2. As you see that there is still some modest growth, but when we actually now looked into the details of this one, we start to see that a very large part of the equipment is now operating at the capacity, so we are not expecting to see major running hour numbers moving forward here and where this actually is ending up as visible in our orders of course is that more capacity is required in market in terms of the new equipment as a lot of the equipment is now operating at the maximum capacities in its respective operations. Market environment actually was strong pretty much throughout all of our segments. Container traffic grew by 13%. We expect the whole year to show strong growth, and also we expect that growth to continue into 2022. Also, construction output, both in Europe as well as in North America, has been at a strong level. We expect that growth to somewhat sort of slow down towards the second half, as the labor shortages and material shortages are slowing down the excellent growth rates we have seen, and this is obviously having a clear positive impact for Hayab, as are the other economic activities, such as the distribution, et cetera, as well. In MacGregor, the market has clearly shown a turnaround in there. So far this year, we have seen 735 merchant ships ordered. That's actually more than the whole last year together. And I think it's quite clear that looking at the current Clarkson estimate of 1,065 ships, that's probably going to be a higher number, and Clarkson obviously will update their estimates in September. The offshore oil and gas market is still actually relatively low, but we see very strong activity increases in offshore wind, and it's quite interesting to see actually that about half of the ships ordered in offshore segment are now actually into the offshore wind applications as such. So a good growth there, and we are in a very strong position to take advantage of that growth in McGregor as well. As said, record-breaking orders both in Kalmar as in High Up. We broke the old record in actually Q4 in High Up. We broke the record again in Q1, and we got to the new sort of 100 level with more than 500 million of orders in High Up. Really driven by the very strong underlying market activity and then the price increases. Both in Kalmar mobile equipment and in High Up, we have driven a number of price increases. most cases two, in some cases even third price increase already within this year. Overall, the price levels have increased about 10% from the beginning of the year. Obviously, not all of this will be visible in this year, as the delivery times are extending into the next year. However, we believe that the current price increases will actually be adequate to cover any increased cost in components and other material costs visible for us at the moment as well. And obviously, we will see a big part of the benefit coming through then on 2022, where the price level increases are in full effect. McGregor has also seen an increase in orders. This is not yet materially impacted by the good order volume intake in merchant ships. That will be most likely visible earliest at the end of this year, most likely during 2022, but the offshore wind is showing good positive development as well as the McGregor services there as well. This obviously has resulted into an extremely good order book of more than two billion, and it's good to note that this order book is of exceptionally good sort of mix in the terms of the Hayab and Kalmar Mobile equipment having a lion's share of the order book now moving forward. Sales and comparable profit improved. When I look at our supply chain situation, we estimate that we missed about 20 million in top line due to the supply chain situations. Overall, our own processes and factories and systems are actually working without any major limitations at this stage. There are some COVID-related restrictions in certain factories, but that has not been an case for us. In the supply chain side, on component availability, we do not see any major single issues there as such, but there is a wide range of smaller problems, and they tend to sort of vary from one to another, from week to week as well, and that's slowing us down somewhat. Some of the engine availabilities and a very wide range of materials impacting that somewhat. But overall, a relatively good performance considering the circumstances, and no major particular concerns at this stage. Good to see the services returning despite the COVID restrictions and service orders actually increased by 27%, an excellent number as such. And when you look at the business area, specific of course, the high-up numbers stands out. The year-on-year comparison, of course, is partly driven by the fact that in Q2 2020, The COVID impact had a major impact on the higher installation volumes and accessories, and obviously that market has now returned and is partly helping. But also we see obviously with the high equipment activities, a demand for services growing and the demand for spare parts also moving to the good direction. We continue to execute our strategy. It's very clear that the sustainability is becoming a main driver or major driver for our customer segments as such. We keep on investing into the right technologies and the strong financial position we are in today, especially after the exit of the Navis, enables us to continue our strong investments into the right technologies to serve our markets in robotization, automation and electrification. And overall, we see the market demand for that kind of solution developing very favorably for us. A good example of that one is Kalmar. Today, for example, in electric heavy forklifts, already more than 30% of the demand is now electric, and we see the same development happening in there. In some of the products, we are already in second generation of electric vehicles, and all of our equipment will be fully electrified by the end of this year. Also, we announced a cooperation to sort of lead the market and technology research together with SSAB in terms of the carbon-free steel development and very happy to sort of look into opportunities in that market as well. With that one, I'd like to hand over to our CFO Mikko Puolakka, who will cover the business areas.

Thank you, Mika, and good afternoon also from my side. Let's start with Kalmar, where we had really a very extremely strong quarter. Like Mika said, a record quarter for quarter two. The demand was strong, very much driven by the macro outlook, also the announced price increases. We have done several price increases this year, as well as customers' anticipation for the longer lead times. Growth came to great extent from mobile equipment and more specifically, especially from terminal tractors, but also other container handling equipment and also forklift trucks and services were performing very well. We did not book any major or basically any automation orders in quarter two, but in the automation and project division, we got certain replacement type of investments, for example, straddle carriers to manage the existing capacity in the larger cranes. Looking at sales development, the supply chain and logistics bottlenecks were impacting to a certain extent Kalmar Q2 sales. Mika mentioned earlier on Cargotech level approximately 20 million euros. Roughly half of this is related to Kalmar. So, missing components, certain logistics bottlenecks prevented us to deliver all the planned deliveries in quarter two. Those will be made in quarter three and quarter four this year. The sales growth was very much driven by the mobile equipment orders, which we received in the second half of last year. The automation and project division sales declined due to the low order intake during the last 12 months. Services sales development was very good. Looking at Kalmar profitability, it was flat year on year. and here the main drivers were the extra costs related to handling the missing components, lower productivity due to missing components as we have to move products from place A to B, kind of interim warehouses, and then back to the production when the missing components have been received. Also, the transportation is more expensive nowadays compared to six months ago. Also, the lower Navis sales impacted our Kalmar profitability to a certain extent, as less license deals were booked and recognized as revenue in Q2. We have also accelerated the investments in our R&D activities, and this is related to robotization and electrification, like also Mika described in the previous slides. We completed NAVIS divestment on 1st of July, so NAVIS numbers will not anymore be consolidated into Cargotech and Kalma results as of 1st of July. The enterprise value was 380 million euros, and we will book in quarter three a 240 million euro operating profit impact, a positive operating profit impact from this transaction. This will also have a positive impact on our gearing in quarter three. Then looking at Hayab, where we had basically a very excellent quarter in all metrics. Orders developed very nicely. This was an all time high in Hayab's history. Strong demand in all product categories as well as in services driven also by the high utilization rates. If we are looking at the geographical development, the strongest demand was in USA and Europe coming in the second place. Looking at HIAP's order book, also I would say extraordinarily high. This represents more than 2.5 quarters of sales, also very much reflecting the supply chain situation, where we have had longer lead times due to the suppliers' ability to cope with rapidly increasing volumes. HIAP sales increased by 30% year on year, and also there we have had some delays, approximately also 10 million euros in HIAP due to the missing components and also transportation delays. We expect to catch up this also in the coming quarters. And then looking at HIAP's profitability, very good development, operating profit up by 82%, and strong development also in the relative profitability, driven by the volume increase, as well as the productivity improvements, which we have done in 2020. And then moving to MacGregor. where we have seen now recently positive development arising from the market activity improvements. McGregor has had now two consecutive quarters where the book to bill has been above one, also illustrating the market development. Strong development in all divisions, in merchant, in offshore, as well as in our services. Looking at the sales, sales declined, and this is coming from the fairly modest 2020 orders, as the markets were quite low that time. Service sales increased now 10%. If you remember our quarter one, service sales were down by 18%, and now the improvement is very much coming from the high utilization activity rates at our customers, so the shipping lines are running at a very high capacity utilization, and the services are needed for that. Good development in operating profit, fourth positive quarter now in the row, and the improvement here is coming very much from the good service performance, as well as the cost reduction activities which we have done basically during the last couple of years. We still continue with the cost reductions, and our objective is to reduce fixed costs by 13 million euros this year compared to last year, and we are progressing well with this plan. A few highlights about our key figures. If we look at the first six months, our orders are now almost €1 billion higher than last year. Despite our sales being 2% below last year's level, we have been able to improve the operating profit, including all items affecting comparability significantly. And the items affecting comparability amounted 52 million euros, significantly lower than last year. The biggest items in this line were the merger-related costs, approximately 17 million euros, the purchase price amortization, 8 million euros, and Navis divestment-related transaction costs, 5 million euros. Our net income was 60 million euros better than during the first six months of 2020, which is of course very visible also in the earnings per share. And now, even though our ROSI is still fairly low, we are in an upward trend there as the operational performance has been improving. Looking at our cash flow, 13 million euros for Q2, improvement from last year's Q2, We had a strong contribution to cash flow from the profitability from EBITDA, approximately 73 million euros, but then our net working capital increased by 60 million euros. And here the biggest component has been the inventory development, especially working progress, where we have had some semi-finished products because of the missing components. These will be delivered in the latter part of the year. Balance sheet has remained strong. Our gearing in quarter two, more or less on the quarter one level, and also the liquidity has remained on the same level as in quarter one. As I mentioned earlier, the Navis divestment will have a positive impact on our gearing. If the Navis divestment would have taken place at the end of June, our gearing would have been approximately 30% instead of 60%. So significant impact from this transaction. We have also refinanced the majority of our 2022 maturing debt, and we have only one bond amounting to 150 million euros maturing next year. So from that point of view, also nice debt maturity profile. And for the outlook for this year, we estimate that this year's comparable operating profit will improve from last year's level when it was 227 million euros. And then with those words, I would hand over back to Aki.

Thank you, Mikko. Thank you, Mika. Now, operator, we are ready for questions.

Thank you to our speakers. Ladies and gentlemen, as a reminder, it's Star 1 to ask a question over the phone today. Please state your name and company before posing your question. We'll now move to our first question over the phone. Please go ahead. Caller, your line is now open.

A good afternoon. That's Artem from Credit Suisse. Thank you very much for taking my questions. My first question is about the strong level of order intake in Kyab and Kalmar. I think last quarter you have been very vocal about the fact that you've seen a lot of pre-buying from your customers ahead of some shortages. And I think this message is now a bit more moderate now. So I guess my question is, do you think a lot of this demand is due to pre-buying? And how should we think, I guess, how Q3 has started sequentially compared to Q2 maybe? Yeah.

question I do think there is an element of pre-buy still there we've been quite assertive with our pricing in the first half of this year as I said all together we have increased the prices number of times and in I would say average probably about 10 percent price increase from the beginning of year and that certainly is probably driving some of the some of the buying behavior, but it's good to remember that the underlying market is also very strong, whether you talk about the container output, port activity, logistics activity, construction, and that really drives the customer demand as well. And we can also see that in our equipment running hours and the fact that most of the equipment is running at the full capacity. at this stage as well. And back to the question related then to Q3, what we have seen so far in July is actually pretty much the same pace continuing as we saw in the Q1 and Q2, and this is after all the price increases now effectively have come in force already, so it seems to be that the underlying market also shows a strong demand, but I do believe that there is an element of pre-buying in the numbers we have seen during the first half.

Thank you very much. And my second question is around margins. I think Corning Crane today commented that they see intensifying cost inflation into H2. So maybe could you run us through major bridge components which we need to be aware of for H2, like mix, cost savings, cost inflation, et cetera? Thank you.

If I look at the different components on the cost inflation, certainly we have seen a price increase pressures in many of the components, as well as on steel. It's good to remember that we have existing supply contracts in place, so these cost increases, price increases come through belayed. Looking at that, analyzing from our situation, we see that the price increases that we have put in force are roughly at the level that we see also in terms of the cost inflation coming through, so we expect the overall impact to be pretty neutral for us for this year. In terms of the mix, as we have seen, the mix has turned now in the last quarter quite clearly more favorable for us with the higher and higher proportion of the Hayabhan and Kalmar mobile equipment from our backlog.

Okay, thank you very much. And my last question is about larger automation orders in Kalmar. I think earlier this year, you mentioned that there is a very strong pipeline of bigger orders, but time-wise, they might be closer to the year end. So I guess, how do those look like?

So it's very much the same. I think as I have said previously, when we look at the previous cycles, usually the large port capex indexes or the investments happen about 12 to 18 months after we see the traffic popping up. So as we have seen, the traffic is starting to accelerate really from the Q3, especially Q4 onwards last year. I think we are looking at the earliest, towards the end of this year. Many of them potentially only realize in 2022. But the pipeline is there and it's healthy.

Thank you very much for taking my question. Thank you.

We'll now move on to our next question over the phone. Please go ahead, Kalle. Your line is now open.

Hi, Mika. Miko Akemangas here from UBS. A couple of questions. Could you comment on the supply chain costs you incurred in Kalmar in the second quarter specifically?

There are two types of costs. The one we just discussed was related to the cost of components and raw materials, and as I said, that impact is pretty neutral. In addition to that one, obviously, the logistics uncertainty in terms of the material availability as well as the shipments is causing some of the reshuffling of the production, as well as the certain sort of tactical shortages, the components that seem to be shifting from one week to another, are causing some extra work in there. So where we see sort of cost pressures is clearly on some of the indirect costs related to the shuffling on the production line, as well as then the obviously freight rates have also been on the rise as well. We expect those to have some marginal effect in this year.

Okay, so in quarter maybe low single digit millions in the quarter.

If I remember right, you look at the freight rates, that impact was 0.1% or? Yeah.

Okay, and the reshuffling is that same magnitude, relatively limited then?

Well, it was visible in Kalmar, if you look at those numbers. I think the Kalmar equipment, because of the nature of the equipment, affected it as a type of truck, so the component shortages are probably more acute there, and that has caused a bit more reshuffling there than in High Up, where there is less microchips and electronics involved with the products. There was some impact on the cost that was visible in the Kalmar operating profit number.

Okay, got it. Thank you. When you continue on the same topic, you also believe that you will continue to see some of this into Q3, but it will ease towards the year end. Could you sort of give us some more color on the nature of the shortages and component issues you have so we can sort of try to quantify the probability of this easing?

Certainly. First, the good news is that our own processes and factories are actually operating smoothly, so this is really down to ensuring the availability and timing of the services. I think the Q3 is going to be difficult in many of the areas still, and this is really coming directly from our suppliers, and many of them indicate a better availability when we move towards the Q4. I think we will see the sort of the peak of these shortages probably during the Q3 and then coming again from our suppliers easing off the situation towards the Q4.

Got it, that's clear. And also just finally obviously had very solid momentum in Kalmar Mobile equipment. Any chance you can give us some color on how the margin mix looks in the backlog compared to what you are delivering in the quarter and also if there is any risk to those margins on the back of the supply chain issues.

Not as such as I said, there has been a number of pricing increases there as well that should compensate for the supply chain or the supply and component raw material cost. increases there as well. The US market and some of the logistics products are having a particularly high demand. They tend to have a somewhat lower margin than the sort of heavier container moving equipment as such. So that will have some impact on there. But we do see overall obviously the margin developing favorably when we are able to ramp up the volume and deliver against that backlog.

Got it. Thank you so much.

We'll now move on to our next question over the phone. Please go ahead, Kala. Your line is now open.

Yeah, hi. It's Antti from SCB. Thanks for checking my questions. And firstly, on the backlog and obviously on the Hayab and Kalmar mobile equipment side, could you talk a little bit about how much do you expect to convert to sales this year of your backlog and how much is stretching into next year and Kind of talk a little bit about delivery times in Hayab and Kalmar Mobile on the new orders that you are booking today.

I think if you would receive an order for HIAP today, you would most likely, depending a little bit on product areas, look at Q4, but in many instances also Q1 or Q2 deliveries already today. The situation in HIAP is not necessarily that critical, however, because as you know, the truck delivery times have extended as well, and obviously you need them both to be able to sort of start the operations as well. So, so far, what we are looking at is to try to match the truck delivery. delays on there. Same is true, again, varying from one component to another. Some of the, as I said, the US logistics equipment, we certainly, if you place an order today, you would be looking at the first half 2022 deliveries. In certain other equipment, you could still get into the Q4 production slot. But overall, we would be looking sort of four to six months delivery times at this stage.

Okay, so I'm just looking at the backlog on Hayab, and it hasn't really been ever on these kind of levels that it is today. So is it kind of the truck delivery times? Is it suppliers? What is kind of the biggest constraint on your, let's say, sales and delivery bookings for the second half?

almost entirely on the supply of the components again, and obviously we are asking a lot from our suppliers if you think about how fast the market moved from sort of really from in last 12 months. The factory capacities and the processes as such are not an issue with maybe in some limited number of factories, some of the COVID restrictions still enforce limit how much you can ramp up the capacity, but I would say that almost entirely depending on just the our supply chain able to cope with the higher than expected demand.

Okay, okay. And maybe lastly on the demand in high-end, and this was already asked, if you look at the order levels, they are 30-40% above kind of pre-COVID H119 levels, and surely there's some pre-buying in there, but in which areas do you see that the market demand is actually increasing? substantially higher than it has ever been before if you look at your client industry segments and product segments as such.

It's a great question. One way to maybe look at that, if you look at the high-up business overall from really 2012-13 onwards, it's been growing about six to eight percent CAGR. So if you would look at the 19 number and then would assume that 20 would have been a normal year, and then you add on 22 on there. Actually, after the Q1, we were still pretty much within that trajectory. So you could say that We were compensating for the 20 dip, but overall, the growth numbers were in line with what we have seen now for a number of years over there. Now, when you look at the Q2, you could say that we are sort of going over that trajectory, somewhat maybe 100, 200 million on that one as well. And there is probably, as I said, an element of pre-buy. But it's good to remember that there is a very solid growing market underneath that demand as well.

Okay, thanks. And then lastly, just on the one-off costs, and I guess that was mainly related on the merger side. So could you remind us on also other restructuring expenses that you expect for full year and what the number should roughly be on the second half?

Yeah, we have incurred now in the first half of this year 16 million euros costs related to restructuring, mainly in MacGregor and some smaller items in high up. For the full year, we expect 40 million euros, so roughly similar number for the second half.

Okay, thanks so much. That's all from me.

As a reminder, ladies and gentlemen, it is star one on your telephone keypad to ask a question over the phone today. We'll now move to our next question over the phone. Please go ahead, Collier. Your line is now open.

Hi, Mika and Mikko. Thanks very much for taking my question to it already, Morgan Stanley. A couple of questions from my side, if I may. The first one is mainly on the underlying demand drivers in McGregor. We've obviously seen the first half very strong in terms of contracting in the market If I look at your vessel exposure, things like container ships are up significantly. But I know there's obviously a significant lag between an order that has been placed for a vessel and you get the order. So if you could remind us how big that lag is. And also, on top of that question, I guess some of the players out there, I think Hapag Lloyd last month announced an order for six ships. ultra-large container ships, and they said that they think that all the orders have been placed now in the market. Do you see these trends outside of container ships, or do you think the trend is stronger for longer?

First of all, it's very clear that the container ships have been leading the pack now in terms of the orders, and we will take our fair share of that growth in that one. Again, as I said, I would expect the earliest those orders to be visible towards the end of this year, most likely next year. It is typically six to 12-month cycle for us for the orders. Although, of course, shipyard capacity as such is lower than it has been typically, so shipyards should be able to sort of process the ship orders faster than they usually do on that one. When I look at the bulk ship market, we know that traffic actually and the capacity is on the rise at the moment. China, for example, is consuming huge amounts of coal at the moment, There's quite a lot of traffic happening there at the moment. We see the activity level increasing in the bulk ship market as well. It's not yet fully visible or not that much visible in the order intake. We do expect that you will see an increase in number of bulk ship orders moving into the second half of this year as well. And the third element I already highlighted is the offshore wind market. There we clearly see a very high level of activity at the moment.

Roro activity has been improving this year compared to last year.

Okay, that's very helpful. And maybe one question related to HiApp. And obviously, if I look at your margins, you're kind of back to 2017 levels. And I understand that a lot of that has been driven by volumes. But in terms of what you're doing in that business at the underlying level, I know that you had in your kind of to-do list to optimize a footprint. Is that something you're considering given the level of activity that you're seeing at the moment? And Did you have any impact this quarter from US dollar movements?

The footprint optimization is going on as we speak. Overall we have taken, took a study to take actually a number of productivity measures in high up in the second half last year. They start to be now visible partly in numbers so obviously the The revenue and the margin improvement is there, but also the cost level has been under control despite the higher volume intake. The services business is expanding very well. We are doing an excellent job there as well. And then our pricing function, and I think we really have sort of put quite a lot of effort in improving our pricing processes as well in the last 12 months. And all of those are visible and will be visible also going into second half.

That's great. Thank you.

We'll now move to our next question over the phone. Please go ahead. Your line is now open.

Yeah, hi. It's Antti from SCB. Thanks for the follow-up. This is kind of regarding capital allocation, and your balance sheet is getting much stronger, obviously, after the novice divestment. And underlying markets seem very strong, notably in Hayab and Kalmar. So is it time to maybe accelerate growth investments, whether that would be MFA or investing in in the sustainability portfolio? What are you planning to do in that front next 12-18 months?

Absolutely. I mean, the financial position we are in and together with the strategy, and if you look at the drivers on the market regarding sustainability, put us in a fantastic position to really start to accelerate further. So you will see us investing more into technology to enable more sustainable material flows. And most likely, we are quite active in the M&A market, looking at the potential targets there as well.

Any plans to kind of increase the capacity, whether it's Hayab or Kalmar Mobile as kind of the market seems to be peaking or not peaking, but growing on a level that it hasn't been before? Any ideas on that front?

Not really necessary. I mean, as you know, we are in this asset-light operating model, so we are assembly operations. And the way we can increase capacity is moving into a second, even in some cases, potentially to a third shift as well. And our view at the moment is that even with the higher demand at the moment, we do not need actually CapEx to answer that question. The only potential concern would be somewhat adding capacities, of course, the labor availability, especially in some locations, like in the US at the moment. So that's probably more an issue for us than any capacity requirement.

Okay, thanks. Just to confirm to our speakers, we have no further questions queued over the phone. I do apologise, one is just queued. Please go ahead, caller, your line is now open. Just to confirm, participant, we're not receiving any audio across your line. You may be on mute.

Yes, hi, this is Tom Scogmar from Conny. Can you hear me now?

Yep, we can.

All right. Good. So I can see that other items affecting comparability were almost 5 million euros in Kalmar, while there is almost no charges in the other divisions. I assume this relates to the merger costs that you have there. And I've seen also that you have increased this restructuring, what is in a merger-rated cost. So can you explain what has kind of triggered this big increase in interest? in merger-related costs, and what type of integration planning are you allowed to do, and how do you do that at this moment?

In Kalmar, the other items affecting comparability numbers in Q2 are mainly related to the Navis divestment. What comes to the cargo tech level merger related costs, those are at the moment, majority of those are related to the merger control related process. So the integration we do to great extent with our own resources, with some external support, but the majority of those costs are related to the merger control. And we have increased the transaction-related costs from kind of joint costs, which are coming from Cargotech and Konec range, from 50 million euros, what was in the prospectus, to 70 million euros. And this increase is coming from the extra work or additional work, what we are now taking in the merger control process. and what we have announced just before the end of June.

Maybe if I can use this opportunity on the merger. Sorry, Tomi, I was just going to say this is not related to your question, but there seems to be, especially in the media, some sort of misconception related to this last phases of the merger control on phase two. And we agreed together with the competitive authorities to so-called stop the clock process, which effectively freezes the process for a very short period, if I remember right, 20 days. And that's really to enable our team to gather the necessary documents and also for both parties to take some of the summer breaks. And this was done in good cooperation with the competitive authorities. And it was just a short technical delay that both parties agreed. And there has been, I think, some misconception around that one.

All right, thanks. And then I realize it's very hard to estimate what will happen to the supply chain in the third quarter. But is the best kind of understanding you have at the moment that you are capable of increasing sales in the column and higher by more than 10% in Q3 compared to the Q2 level despite the holiday season and despite the supply chain uncertainty? Or is this kind of too aggressive?

It's a great question and I think you pointed quite correctly. It's good to remember that seasonally always Q3 tends to be weak because of the holiday season that of course relates partly to our activities, it relates to the supplier activities and it relates to customer activities as well. So generally Q3 tends not to be stronger than Q2 and we still see some of these restrictions. So at this stage I would not try to estimate there are as i said it's very tactical situation at the moment and it keeps on shifting from day to day and week to week as well at the moment what we do here from most of our critical suppliers at the moment is that we do see a better availability towards the q4 then okay and then then i wonder about this increased steel price you know you supply you know equipment to you know

vessels where you have a huge steel content you supply you know large automated projects involving large cranes like automatic stacking yards with a great you know steel component so I would just like to understand a bit about you know how much has for instance the price of you know an RTG crane used in or RNG used in a project you know how much has that increased because of the Field price increased here. And then I just also, as part of this, wondering at the shipyard level, do they have good deal agreement somehow? That's kind of explaining partly why the orders are skyrocketing now that they have had options to use low-cost steel for orders for a certain period of time. And after that, orders could start to fall back again.

If I look at the areas which is primarily around Kalmar and heavy grains automation systems and McGregor where the steel content is the highest, we do not really have an exposure for the steel prices because effectively what happens is that we kind of contract the steel price at the same time maybe contract for the customer as well. So it's back-to-back arrangement and as such we know from the moment we close the contract what the price is for the steel components on that one. Same is true for MacGregor but even more so in MacGregor quite often we actually do not necessarily participate directly into the steel sourcing but the shipyards does it on our behalf and again they do generally back-to-back with the with their customers as well. So for the business areas that have the largest steel components, we don't really have exposure. Obviously, it will impact our mobile equipment and high-up partly, and there we really are, as I said, being quite aggressive in sort of pushing our price increases. Again, the steel components, proportion of the overall cost is considerably lower in those product areas.

Yeah, I'm just wondering about these dynamic kind of effects and order behaviors, etc. You know, whether shipyards have had kind of options for kind of attractive steel prices, boosting orders now, and whether, you know, the rate or the increased steel price could, you know, postpone automation orders for you even more because the price of the cranes have gone up by 30% or so because of the steel price increases.

I don't think the actual steel prices are up quite that much. Obviously, when you look at the steel prices, we tend to look at the spot prices, and we have seen some amazing increases in there. Generally speaking, people do buy within the certain frame agreements where the price movements, of course, are a little bit more modest.

So that one of the reasons why kind of large automation deals have not materialized yet is that customers are having hands full in their existing terminals. So it's quite difficult to carve out, say, one third of the terminal just to kind of reserve it for the automation purposes. So like Mika said, these are coming to a certain extent with the delay when volumes are increasing.

And then perhaps finally, I saw that Matt Terminal stated that, you know, their focus is now really moving to automation of ground field terminals from extending ship to shore trains. So do you expect this could lead to kind of significant orders for you as a company next year already?

I mean, obviously, I do, ultimately, all of the current larger container terminals will be automated. The business benefits are there. The question really is about the pace, and especially when we talk about the brownfield, as you know, it's not going to happen overnight. So, effectively, what you see happening with Maersk and other companies is that, generally, you move the one port piece by piece into automation, so you will see good business coming through, but on smaller sort of portions.

another number of years there as well all right thank you thank you we'll now move on to our next question over the phone please go ahead caller your line is now open

Thank you, Magnus, from UBS again with some follow-ups. And first, a follow-up on Tom's question there when it comes to the back-to-back agreements on the large cranes in particular. Obviously, the raw material cost components are obviously quite sizable for those products. So when you say that you have back-to-back agreements, do you typically offset the, shall we say, the nominal cost inflation you're facing on those products, meaning that even if you do that, do you still face a margin headwinds on those products if cost inflation is, say, 30% or so. It's a kind of dynamics about how the margins move.

Every deal, of course, is a negotiation on these particular sites, but we do know, first of all, we do not have surprises in terms of the underlying cost, because at the moment we strike the deal, we do know what the steel cost for that will be. Obviously, then pushing that increased cost that we are having a full visibility on into the customer is always sort of negotiation. and in this business, generally, the margins are continuously under pressure, but I don't really see fundamental changes. I think everybody understands the kind of situation we are in, the cost pressures related to that one. And it's the same for the oil suppliers.

In addition to sourcing activities, we have... But it's more like it. Yeah, and in addition to sourcing... In addition to sourcing activities, we have of course also design to cost activities, which are aiming at improving the product margins. And sometimes some of these activities will be used to compensate cost increases or price pressure. Sometimes we can enjoy more about the design to cost activities.

Okay, but it's more as a sort of a pass-through in a way.

It is a pass-through, and as Mikko was saying, for example, we just announced an introduction of new RTG, which is one of the heavier crane products, and one of the improvements there is it's a lighter structure, which also means that there is less steel involved in that product, so that's part of the work you do always.

Yeah, that's very good, obviously. That's great. And then to comment on the lack of labor in the U.S., I think in particular, I just wanted to check if you started to see any labor cost inflation moving up in any of the markets.

I think it will be an issue. It's already visible in the production in the US, in terms of just people not showing up when they are supposed to show up, even if you have sort of done an agreement with them. So it's been a certain sort of a struggle in there, less so maybe on the European and Asian manufacturing facilities. services, technicians is another one. There is a shortage of those ones and difficult to find new ones. So I would expect that you will see actually labor cost inflation happening in the second half of this year.

Got it. Thank you. And just finally, I'm not sure to extent you can comment on this, but I think the time it took before you filed in Europe with the antitrust authorities was a bit longer than you originally anticipated. Is there any sort of particular reason for that that you could sort of help us with.

Don't think so. I mean, one thing we've done, of course, is that we benchmarked our filing process to other filing processes being going on, and we are pretty much in average in terms of the schedules involved. There is always quite a lot of pre-work involved on that one. Of course, these are complex products, and there is quite a lot of data that authorities are requiring, and just putting together the required data and submitting that to authorities is no No small feat. We talk about millions of documents in many of these cases, so that requires its own time to put it together as well. Got it. Makes sense.

Thank you so much.

Thank you.

Just to confirm, there are no further questions queued over the phone at this time.

okay thank you for great questions and great answers our q3 results will be published on 28th of