Cargotec Corporation

Welcome to Kargatech's first quarter 2023 results call. On this historical day, as we announced both record-breaking results and a plan to separate Kalmar and Hayab. This is also the first result call for our new CEO, Kasimir Lindholm. Welcome. In the first quarter, our comparable operating profit was record high, driven by our core businesses and strong development in sales. Underlying demand for our solutions remained at a good level. My name is Aki Vesikalli, I'm from Cargatex IR. Today's presenters will be Kasimir Lindholm, CFO Mikko Puolakka, Kalmar's President Michel Van Roosendaal, and HIEP's President Scott Phillips. Please pay attention to the disclaimers in the presentations as we will be making forward-looking statements. Kasimir started by covering the quarterly highlights and group level figures. After him, Michel Van Roosendaal will enter the stage and cover Kalmar's first quarter, followed by Hiep, presented by Scott Phillips. Our CFO Mikko Puolakka will go through MacGregor's quarter, as well as financials and outlook. After that, Kasimir will get back on stage to present our plan to separate Kalmar and Hieb. After the presentations, there will be a wrap-up with a Q&A. With that, the stage is yours, Kasimir. Thank you, Aki.

So, comparable operating profit margin above 10%. We started off the year in a very good way. Orders received also on a healthy level. Come back to that a bit later. Sales increased by 26%, especially then in Kalmar and Hayab. And really glad to see comparable operating profit improving in all three business areas. Orders received continue to improve in McGregor, and both Michelle Scott and Mikko will then talk more about the order and the order mix. But all in all, we see that the orders are on a good and stable level now. And that is especially true looking at 2023, where we find that we have a solid order book in all three business areas. We had a strong development in sales, especially in Kalmar and IAB. There are particular reasons for that, and Scott and Michelle will go through it in more detail. But all in all, a great start to the year, also from a sales perspective, and that was the main driver for the record high operating profit. Service continued on a good path, improving quarter by quarter here. And again, really strong message here that service sales is improving in all three business areas. All in all, service share was 32% of total sales. The ECO portfolio also continued to improve and is on a good level. All in all, the ECO portfolio share is 32% of Cargotech total sales in the first quarter. With that, I will give now the word and the stage to Michelle. Please, Michelle.

and I have the pleasure to present the Colmar result. Very happy to present to you record comparable operating profit. You'll see that also the orders for our strategically important ECO portfolio are continued to increase, and we have also now started the production of our electric range, which is testimony of our sustainability journey. If you look at a bit more detail, we see steady demand for Kalmar. The flip side is that some of the larger projects are taking a bit more time before orders are being awarded, but at the same time, we see an order book that is very solid and service orders that are continuing to be very strong. The order book is such that it basically covers, in essence, the rest of this year, if you realize that there are no order backlog, in essence, for the service side, and also spreads into next year. If we then look at the sales side, very strong development compared to Q1 of 22, 31% increase, and also service sales, which is maybe less spiky, shows a consistent growth of 18%. What is important is that we have our capture rate, which means the part of our own business we capture is gradually and continuously increasing, which is testimony of our ability to basically perform the service business in an efficient and performant way. At the same time, we see on the flip side some persisting tightness and volatility of component availability, which is still a challenge for our output. In general, the improved efficiency on the supply chain makes that we have had the ability to reach this very strong sales level. If you then continue to look at margin expansion, I'm very pleased to show to you the historically highest percentage of CalMAR, 13%, which is the highest percentage we've ever had for a comparable operating profit. If you compare that to Q1 of last year, it's more than double, and of course, the percentage is from 7.6% to 13.0%. Why is that? It's driven by higher sales and also our ability to have good management of inflationary pressures. In general, we are starting or have started our lean journey and we believe we will continue to be able to perform strong on this side. Also, we have announced last year, you will recall, that the exit of our heavy crane business and the losses which are underlying there were €4 million lower. That has led to this 13% profit margin. Thank you. I'm now handing over to my friend and colleague, Scott Phillips. Scott, welcome to the stage.

Thank you, Michel, and good morning from my side. So in summarizing the quarter, we had a strong start to the year. And as Casimir had alluded to earlier, the strong start was largely supported by a big increase in sales year over year. Orders were declined year over year and sequentially slight improvement. I'll go into more details about that one. All enabled from the continued excellent operational execution in the business, both in our factories as well as our suppliers. Strong effort from all the team that we have at HIAP, so really proud of the job that everybody is doing. Our services business continues on a nice trajectory. Sales are up 21% year over year, as indicated earlier. Also, at the same time, I'm pleased with very nice positive operating leverage, so well in line with our target framework. Then going into the orders, we're about in line with consensus, a slight sequential improvement. We still have a nice, strong backlog coverage of over 1.1 billion, so we're nicely covered for the year. We did have a year-over-year decline of 21%. Keep in mind, it's off of a rather strong comparable, as at quarter one last year was our third highest quarter in the history of Hayab. But a nice start to the year nonetheless. We had, at the same time, continued challenges from really three factors that are pulling orders down. We have the continuation of long lead times and challenges with certain availability of components. That combined with long lead times of truck chassis, the overall general inflation, and then the interest rates are certainly having an impact on delaying orders, although I must say that sequentially throughout the quarter we see a nice development in terms of order activity, so really pleased about that. Then moving to the sales side, nice development, both sequentially as well as year over year. We had a 27% improvement on sales at 432 million euros. Our service sales also improved nicely. As I mentioned earlier, equipment sales up 28% year over year. So really pleased with the strong start to the year. Great execution, as I mentioned, from all of our key stakeholders and colleagues within HIAB, as well as our suppliers. And I must say that a big thank you to our customers as well, as we've been able to calculate our net promoter score year over year. So the strong services execution and the focus on customers has enabled us to improve our net promoter score by 40%. And if you go back to the capital markets day presentation, that translates into strong percentage of repurchase. So we're really excited about that development. And then moving into operating profit, we have a nice both sequential development as well as year over year. As we were up 14 million euros in absolute value, 29% in terms of relative change year over year. So that delivered 14.2% results. So we're happy with that. That's well within our target framework and a nice strong start to the year. At the same time, we are still under pressure from the relationship of our pricing as we target to offset inflation. With the continued long lead times, we are still slightly lagging. So excellent execution with the team to manage their fixed cost base in order to continue to deliver to our target profit framework. So really pleased with that one. So overall, I'd say it's a strong start to the quarter, strong confidence shown from our customers, and of course, really exciting news for the day. So with that, I'll turn it over to Mikko, and he'll talk about McGregor.

Thank you, Scott. On McGregor, this was the fourth quarter in the row when McGregor order intake was actually developing in a nice way. 80% of McGregor quarter one order intake came from merchant or services related orders. In merchant, especially from car carrier type of vessels and container vessels. We start to have a sizable order book in McGregor, almost 960 million euros. So very good basis for the coming quarters revenue development. At the moment still the orders have, fairly long lead time so for example in quarter one we did not yet see a sizable revenue uptick from from the order book so so this is expected now for the especially for the second half of the year to contribute then in revenues and then on profitability small positive result for the quarter one very much driven by the excellent performance in services and also the merchant division was performing well offshore division was still loss making and as you recall also from the previous quarters we have started or we are executing the offshore restructuring program and targeting to 14 million euros cost savings during this year Couple of financial highlights on Cargotech level. As already discussed by Scott and Michel, we have an excellent order book, almost 3.5 billion euros. And that is mostly covering the full year equipment sales estimate already. So good basis for this year's revenues. Our eco-portfolio sales are almost 350 million euros, so almost one third of Cargotech revenues, quarter one revenues, are coming from eco-portfolios, for example, from electric equipment and services, showing basically the strong development in our sustainability strategy execution. comparable operating profit like discussed already earlier 112 million euros 85 percent improvement there very much driven by the core businesses strong performance calmer and higher 12.4 percent for the first quarter and then also comparable operating profit including one of costs of eight million euros which were related to mcgregor the operating profit improved by 177% in Q1. Our cash flow improved from last year's Q1, but it was still burdened by the high net working capital, especially by the inventory increase. We have still component availability challenges like described by Michel and Scott, and this is resulting to kind of extraordinarily high working progress, more than 300 million or roughly 300 million euros working progress equipment, which is waiting for components. So this is still burdening our cash flow, but gradually, hopefully we see also improvement in the supply chain. Our balance sheet is very strong, gearing 26%, no major debt repayments during this year. And we are also well hedged against raising interest rates with 60% of our loans in fixed interest rates. And then where we reiterate our guidance for this year, we expect Kalmar and High Apto Core businesses comparable operating profit to improve from last year, supported by the strong order book. And then in McGregor, we expect McGregor results to be positive this year, very much driven by the improvement in merchant and services, and then the restructuring in our offshore business. And then I would hand it over back to Kasimir to the second big news of today.

Thank you Mikko. So on top of a strong start to the year, strong financial performance in the first quarter, we have other exciting news. So this morning, board of directors at Cargotech decided that we're going to investigate and plan a potential separation of Kalmar and There were other strategic options also involved in that process, but this one was the one that the board decided upon. And this journey starts today and it will be going into a planning phase here during Q2 and onwards. At the end, we're looking to separate Kalmar and Hayab into two focused world-leading and standalone listed companies and through that unlock shareholder value. The technical aspect is that we are planning to separate Kalmar through a partial de-merger. The listing of Kalmar would happen in Helsinki and is expected to take place in 2024. So we will need this year for planning and execution later on, if the board finally decides to go ahead with the plan. At the same time, we'll continue to focus on turning around McGregor. And like Mikko was referring to, we see positive things happening, especially on the after-sales service side and merchant business in McGregor. And then the focus is on turning around the business in offshore. At the end, if the planned actions are completed, there would be three separate businesses, Kalmar, Hayab and McGregor, like announced already last year. All the actions are subject to shareholder approval and normal local legal requirements, but we do not need approval from authorities in this process. And the aim around it and the separation is, of course, to support Kalmar and Hayab in their journey regarding growth, both organic and inorganic growth. And this would also mean that Kalmar and Hayab would not compete for the same resources, for example, equity or investments. The rationale behind it is that we will, by doing this, unlock full potential of Kalmar and Hayab. clear strategies, clear structures, easier governance, all the way down from board to management, focus on one business. And there is no real cross-selling or operational synergies between Hayab and Kalmar, and they could focus on their own business to 100%. And again, as mentioned before, there wouldn't be competition around capital allocations, for example. I fully believe that both Kalmar and Hayab would be more agile. They would be more focused both internally and externally towards customers, but also internally regarding processes and systems and so forth. It would simplify the overall structure and give transparency both to investors and owners, and in that sense also accountability all to boards and management. It is also a great opportunity for our employees at Cargotech because we, of course, need to develop Kalmar and Hayab to become then separate companies. And there are a lot of functions that needs support and needs to be established within Kalmar and Hayab. And on top of that, a very exciting journey within this project. As mentioned before, we see no real overlap regarding customers or sales channels between Kalmar and Hayab. And the focus in their own business is a positive one. And again, also giving more power to the M&A journey, especially regarding Hayab going forward. Today, of course, we have Cargotech on top in this conglomerate model, and Kalmar, Hayab, and McGregor as business areas. During this transition period, the aim is then in 2024 to have Kalmar as a separate listed company. Then over some period of time, Cargotech would continue with Hayab and McGregor as business areas, and then we are heading and trying to find a solution for McGregor in 2024. And at the end, there would be the targeted structure where we have Kalmar and Hayab as separate companies. The structure as such, listing like mentioned before, listing happening in Helsinki, then ownership of Kalmar and Hayab would be that the Cargotech shareholders would be owners then in Kalmar and Hayab going forward. There is also another strong message here that we do not need any equity. We do not need capital for this transaction to happen and to go through. And again, we do not need any permission from authorities. So it's very much an internal planning project and execution. But of course, at the end of the day, we need shareholder approval. Next steps and time plan. We will start the investigation and the planning. And this includes, of course, the full organization, our employer representatives. And then when we know more, we'll come back to you regarding this topic and communicate when things progress. And again, during 2023-2024, we need If we go through with this project, we need approval from Cargo Tech Board of Directors regarding the partial demerger plan, and then shareholder approval later on. During 2024, again, aim to have Kalmar as a separate listed company in Helsinki and continue to look for a solution for McGregor. And at the end of the day, we would have Kalmar and Hayabe as separately listed companies. in Helsinki. That was the end of the presentation, and then we go to the Q&A.

Thank you, Kasimir. Thank you, Mikko, Michelle and Scott as well. I will welcome the gentleman back on stage. And with that, we are ready to start the Q&A. Please, operator, please go ahead.

The next question comes from Markku Moilan from Nordea. Please go ahead.

Hello, this is Markku from Nordea. Thank you for the presentation. I have actually one question regarding this plant demerger. So if it takes place, how does it affect the outstanding bonds? Does it need approval from the bondholders, or are you required to redeem the bonds if the demerger takes place, or what is the impact to the bondholders at this stage? Thank you.

Yes, during the planning process, of course, we would be also contacting the lenders, including also the bondholders, and then there are various ways either to get the waiver or then possibly redeem the bonds. So, this is something to be evaluated now also as a part of this planning process.

Okay, thank you. That's all from me.

The next question comes from Ponu Leiton-Maki from Danske Bank. Please go ahead.

Yes, thank you. I have two questions. Firstly, on Kalmar's margins, I mean, it was a very good level. And when we see numbers that we haven't seen before, it always kind of raises the question that was there something exceptional? How sustainable do you see this level going forward? So can you please talk about it? Like, how did it be so good? And what do you see going forward?

Yes, thank you for the question. We were pleased with the margins. There is no extraordinary element, but we had a favorable mix at this stage for the slightly more profitable units. At the same time, it's testimony of our ability to execute and perform on the margin expansion operational excellence. At the same time, we see ahead of us some challenges more around the volatility of the components availability and the mix. At this stage, we won't make any statements as to how sustainable that would be going forward, but we were pleased with the quarter.

Okay, thanks. Then on the Planet D merger, can you kind of, I understand that you are going into planning phase now, but any kind of initial thoughts How would the companies look like? How would you split the group costs into these new companies? And then did I understand correctly that like high up will remain as the cargo tech and then Kalmar spinned off? So is it so that MacRecord will remain in high up until it's divested or how does it play out?

Thank you for the question. Yes, like in the last pictures there, they would describe that, yes, McGregor will stay within Cargotech and, of course, Hayab as well when we enter into 2024. And then we haven't come that far in the process that we would be able to talk about how fixed cost will be split going forward. But that is, of course, an exercise that we need to do as part of also building the functions within Kalmar and Hayab. so that they can be stock listed companies and have listing readiness on their own. So that is exactly one of the key parts of this process, how we plan the organizations. And of course, there will be both internal and external recruitment processes during this time, if the plan as such is approved later on.

Okay, thank you.

The next question comes from Johan Eliasson from Kepler Chivriax.

Please go ahead.

Hi, it's Johan at Kepler Chivriax. Sorry, I haven't been able to see your presentation. There seems to be some technical issues for me. But I was just wondering about one wording about this demerger. You say partial demerger, but it's pretty clear that that the Kalmar business will be sort of handed out to Cargotech's existing shareholders. So it's not like the Cargotech holding will sort of partly remain with Cargotech, just to make that clear.

Yes, you are correct. It's a partial demerge, meaning that basically Kalmar related assets and liabilities are carved out from the current listed Cargotech OIJ, and there will be a new listed company with the new company identity code. And the current Cargotech shareholders would own with the same proportion the newly established Kalmar listed company. So yes, partial demerger.

Good. And you plan to keep the same share structure with high voting shares and low voting shares?

This is something what will be evaluated also as a part of this planning process. So once we have more clarity on the planning, this will then be also kind of opened more.

Yeah, excellent. Now, just timing wise, I mean, you want to sell MacGregor, but you weren't able to do that last year. Is the merger of Kalmar sort of dependent on that you have somehow secured a potential buyer of McGregor before you do this? I mean, otherwise you would be risking here sitting with this not so well performing unit. And then the follow on that one is that presumably you will get cash for the McGregor divestment. Will those only go to the HIAB shareholders one day when the MacGregor part is divested? Is it linked in any way?

Thank you for the question. It is not linked in any way. All the three processes here are going on their own, but the aim is to find a solution for McGregor in 24. But that of course requires that we're able to turn around McGregor in 2023, and it was a good start in Q1, especially then in service and merchant businesses. But it's not linked, so if we wouldn't be able to find a solution, for example, in early 2024 for microwave, that doesn't stop the columnar process.

Okay, good. And then just on the operational numbers. order and revenues obviously deviated in the quarter for obvious reason. But I was just wondering how much of the sort of growth in orders were price related and how much was it in the sales development that was price related of the growth there? Thank you.

Yeah, I would say that overall, If we look at quarter one order intake, there is a certain element of price increases still, as we have been basically increasing throughout 2022 year prices every quarter to a certain extent. We have not disclosed specifically by the business areas, but I would say that the price element is getting smaller and smaller as we proceed now with the quarters as already quite sizable price increases were made last year And in the revenues? In the revenues I would say depending a bit on the business it's ranging the price increase impact is ranging from one third to two thirds

Okay. And this is valid for Kalmar Hiab, I suppose.

Yes.

Yes.

Yeah. Excellent. Thank you. Please state your name and company. Please go ahead.

Hello, this is Antti from SEB.

Thanks for taking my question. I'll start from the operational side and a follow-up on the previous question on profitability and margins. I mean, we've seen this kind of a very strong margin development now in Q1 for many of the industrial companies. Should we be a bit cautious going into the back half of this year? I mean, you've done a lot of price increases. Now you're seeing a lot of deliveries going out and perhaps the inflation is moderating. But how will kind of accelerating labor costs and things like that impact the delivery margins going into second half? And I mean, you're not raising your prices anymore. So should we be a bit cautious on how this trend continues throughout the year?

In general, you are right that there is some moderation in the inflation. On the other hand, there is labor cost increases. What we have seen, for example, in the component prices is that in some areas, the raw material costs have been declining, but then on the other hand, the energy costs as well as labor costs have been offsetting. So all in all, one could say that actually the component prices has remained fairly stable. We need to keep an eye on our own labour cost development and in some areas we have done some moderate price increases still during this year in order to offset the inflation impact. So overall we We are keeping a close eye on the margin development and are doing, of course, our internal development actions designed to cost activities in the business areas to reduce the cost of raw material, but then keeping an eye also on the prices.

Yeah, Antti, allow me to give a little bit of flavor, if I may. I agree with your statement about caution, but let me add one element which is relevant for Kalmar, and that is the freight cost, which is a non-significant component. And we see that actually coming down at this stage, but I do agree that we will be cautious for the back half of the year.

I mean, I'd imagine your clients are always asking for lower prices and lower prices, but is this something that is starting to pick up now that we are seeing this moderating in inflation and perhaps some of the end demand is cooling off as well. Is there a pressure of lower prices?

Is there a pressure of lower prices? There's always a pressure of lower prices because we got competitors there. At the same time, there is still an element of demand. At this stage, we are at equilibrium between supply and demand with the price level, which is currently being quoted and being accepted by customers.

Okay. And then a couple of questions on the demerger plans. I mean, I just want to clarify something regarding any shared resources between Colmar and Hayev, especially on the production side. So there is none, there's nothing that would kind of trigger any extra capex for either of the businesses as the demerger has been executed.

Yeah, no, speaking from high upside, and I think I can talk for Michelle as well, the answer to that one quickly would be no. No need for additional CAPEX, and at this time, no issues with shared operational facilities.

It's good to remember that from the manufacturing point of view, we do not have shared factories, but there are certain shared platforms like IT systems, which would need to be separated for this kind of demerger purposes. And we have a shared service operations, of course, where we need to also see how to arrange that to support also the demerged Kalmar.

Okay, and then perhaps just a couple of technical questions helping to value the businesses individually. So Mikko, maybe you can remind what has kind of been the maintenance capex levels of the two businesses, the work, the sustained working capital levels, the cash conversions, the returns on capitals and so on for Hayab and Kalmar separately. If you, you know, go back, let's say five years.

Yeah, I would say we have not disclosed the business area specific CAPEX numbers, but overall on Cargotech level, we are talking about 80 to 100 million euros CAPEX. As we are in the assembly only operations, the CAPEX as such is a fairly small amount in our business. The cash conversion like described also in the capital markets, they has been typically for Kalmar and High Up at 100% or in some years even above 100%. However, due to this component availability situation at the moment, the cash conversion for both businesses has been below 100%. But in a more normal situation, expected to be strong cash generating businesses.

But am I correct on remembering that Kalmar has a bit more favorable working capital versus Hayab where you perhaps hold more inventories or am I wrong here?

I would say that in Kalmar's case in history it has been so that we have had the heavy cranes where we have had the advance payments and that has been kind of bringing additional cash in in Kalmar but otherwise I would say that the cash generation profiles for Kalmar the new Kalmar and for Haiep would be very very similar and the returns on capital employed I remember maybe you had the number for the core business on CMD but

Does that differ materially between the two?

In Hayap's case, it's somewhat higher than in Kalmar's case due to the slightly higher profitability, rolling 12 months profitability, but very strong rosy numbers for both businesses.

All right. Thanks so much. All from me.

Please state your name and company. Please go ahead.

Hi, this is Tommi Ailo from DMV. A couple of questions. Firstly, Tommi, you mentioned other options were involved with regards to potential split. Can you just share a little bit what you meant with other options?

Yes, thank you for the question. There were options where there were different roles that Cargotech could play in the future. Those were the main discussions, being at the holding company or then the separation like we're seeing now today. So those were the main discussions that were part of the strategy process, that what would be the potential role of Cargotech.

Okay, so you're not suggesting that there has been an approach from outside the company or industry, private equity or something?

No, this was purely around strategy of the organizational setup. Internal discussions from a strategy point of view, that's what would make most sense going forward. But this one is the one that we feel that, and the board feels that this unlocks the potential on a market cap valuation point of view, the best way forward for CargoTech.

Thank you. And then maybe operationally, high up orders down 21%. I know you, or we know the comparison, but can you just explain a little bit geographically, where did you see weakness and then by end markets, where was the weakness coming from?

Yeah, in terms of the geographical piece, thanks for the question. A little bit weaker in Europe versus the US. And in terms of end markets, more impacting on the, let's say, the heavier side of the business versus the smaller equipment solutions.

And as a follow-up, would you pinpoint that building, for example, weakness was visible

Can you repeat the question, please?

Yeah, so in terms of construction-related activity, building-related activities, did you see weakness there?

Not driven from the end user activity levels. Actually, sequentially through the quarter, there was improvement in activity levels there. It's much more the three variables I talked about earlier. The combination of high inflation, long lead times, interest rates are four to five X higher. So it is creating some delays in decisions around certain equipment solution purchases. So less to do with the end user markets.

Okay, and then a final question, if you can say anything about the April activity, are we trending similarly in Kalmar and Hayab demand point of view?

I mean, overall, if we are looking at the activity levels, whether it's an equipment utilization activity or what we see from the customer side sales funnel point of view, very similar kind of activity levels what we have seen throughout the quarter one overall. No changes in that area.

Yeah, just as a follow-on, I wouldn't talk about what type of activity we're seeing so far within the quarter that we're not yet reporting. But as I stated earlier, sequentially throughout the first quarter, we did see a nice uptick of overall quotation activity. So we're a bit optimistic in that regard, but too early to talk about the current period.

Great. Thank you.

Sorry, Mikko, but I don't really understand this in the offshore. When you have this big provision in the fourth quarter, I mean, what does it mean for kind of the margin going forward for the offshore, I mean, when you did the cleanup in the fourth quarter?

Yes, we have still loss-making projects in offshore, and those continue to burden the offshore division result until those projects have been finalized.

Okay. And then I wonder whether you, one, whether it has been a consideration that columnar and high up, if they get a great evaluation on the stock market, if they, you know, could see a chance to use their own share, you know, in acquisitions. I mean, has it been a problem for cargo tech that you have been forced to do all acquisitions with cash given the low valuations?

No, I mean, that's part of the journey going forward and the planning and the financial structures balance of Kalmar and Hayab going forward and the financial solution. at the end that with what kind of balance sheet and what kind of equity they go forward. That is part of the planning phase as well. But so far that has not been a burden or a problem for Cargotech to do M&As. But then of course, stated before, when you have three businesses competing about resources, then you, of course, have to prioritize during the journey. And then if this plan goes through, then they are on their own and then the focus is only on one business. out of one valuation and one balance sheet in the respective companies. So it clarifies things and I think it improves decision making going forward.

And do you have any early estimate how large the new head office costs will be that we should add and perhaps in R&D?

No, we don't have any estimates that this part of the planning process, look at the organizations in Haab and Kalmar. Parts of those needs to be strengthened to become listed companies in the future, especially regarding the functions. But that is part of the planning process then to look at the headquarters on Cargotech level today. And there will be a lot of opportunities for our employees in new and interesting roles and responsibilities within Hayab and Kalma.

to R&D. Yeah, what comes to R&D expenditure, we do not have at the moment anymore R&D expenditure on group level. After the latest operating model change, what we implemented last year, basically all R&D type of activities have been moved to the business area so that roughly 100 million euros what we have had in the past is basically in those three, our three businesses.

Reading your statement, it sounds like one alternative is also to spin out McGregor as an independent company and not sell it. Is that right? Do I understand that right?

I think it's a bit early days for that conclusion. We will continue to focus on the business, and that goes for all three business areas. That is the most important thing to drive our day-to-day operations. And then the functions in this case will focus on planning of things that is to come. Regarding McGregor, we're looking for a solution in 2024 too early to go in any direction on that one. First of all, we need to turn McGregor around and have a good 23, and then we take it from there.

Okay, thank you.

The next question comes from Pony Leighton-Markey from Danske Bank.

Please go ahead.

Thank you. I just wanted to come back to the demand topic. Basically, you said in high up that you saw an improvement sequentially during the quarter. So I'm wondering, what is the magnitude? How big was the improvement at the end of quarter compared to how it started? And basically, the same question for Kalmar. What did you see there? Was the trend weakening towards the end of quarter or otherwise?

Yeah, basically, though, I'll comment the same way I did earlier. Thanks for the question again is the quotation activity increased nicely through the quarter. The magnitude, which I can't comment on, but a good strong development in terms of the quotation activities. But nevertheless, the decisions are being delayed due to the factors that I shared earlier.

Janice, a comment from Kalmar, and I made that comment in my brief pitch, is that notably the slightly larger projects take a bit more time to be decided and awarded. So that means that some of the demand is basically pushed a little bit backward. Only comment to make.

So you basically say that things take longer, but the pipeline as such remains fine, or how do you see it?

I would agree with that. Of course, there is a mix between some of the various vehicles we sell and the slightly more, if you like, complex projects. The comment is basically referring to the slightly larger projects.

Just to reiterate, the underlying demand drivers remain quite healthy as we laid out on the slides earlier.

Okay. Maybe finally, how much would you describe that out of Colmar's demand is something that's replacement for the customers?

A fair bit. I won't give you any numbers, but we got a 65,000 total vehicles out basically all over the world. Many people come back to Colmar and there is a natural economic life cycle. There is an underlying demand, if you like, which basically doesn't mean that there is a growth in the application. It's basically the replacement cycle. Given the strength of Colmar, given the fact that we got 65,000 vehicles out there, that demand for replacement is quite, I should say, substantial and gives a strong underlying continuous demand, which is less affected by the cycles.

Okay. Thank you.

Please state your name and company. Please go ahead.

Hi, this is Antti from SCB.

Thanks for taking a follow-up. And apologies, Scott, if you already mentioned, but could you talk a little bit about what you're seeing in terms of the truck makers' production and delivery volume improvements? I guess that's been curtailing the growth in your business. So is that improving? Is that impacting? the industry lead times, your own lead times, positively, and how do you see that playing out throughout the year?

Yeah, thank you, Antti. The way we're seeing it is you've seen a few reported results so far from the truck OEMs, and you see a decent year-over-year improvement in overall sales volumes. It's a mix with regards to the lead time. The lead times still are an issue, and from two dimensions, not only the overall time but then also the precision or the variability around when the chassis arrive. And it varies by markets. I can't comment or I'd prefer not to comment at the real granular level by country, but we do see a different situation depending upon the geography. So we've yet to see an overall improvement enough that will allow us, let's say, to maximize the potential that we would have given our inventory position and the order backlog to be able to convert further the inventory and the backlog into sales. So we look forward to a continued positive development on the truck OEM side.

And what is currently your own, let's say, average lead time that you can now let's say, promise to your clients if they are ordering on the second quarter?

Yeah, well, our lead times in terms of being able to recognize, let's say, invoice the unit is still the controlling factor is the truck lead time. From a product line perspective, as well as each of our factories, we're actually well within our target corridor of being able to deliver according to our planned lead time. So if we were to see truck chassis lead times get back to, let's say, pre-Q3, Q4 levels of 2020, then we would be able to adjust quite quickly to accommodate those improved lead times.

And would you imagine that this would encourage more demand from our clients? Is this a big pain point regarding actually, you know, firming orders and so forth? Or are everybody just used to the new situation and ordering with long lead times?

It's a mix, depending upon the product line. In some cases, you're exactly right. And in others, again, it depends. As, of course, Miko and Mika talked about in previous quarters, there is a level of demand that was driven by securing manufacturing slots in the future. So that has materialized in some of our sequential and year-over-year development order intake in past periods. But overall, I would say it would be a favorable development from a customer side if lead times were to continue to improve over time. As I mentioned earlier, the underlying demand drivers are still in quite a good level.

All right. Very helpful. Thanks so much.

The next question comes from Erki Vesela from Indias. Please go ahead.

Hi, guys. It's Erki from Indias. Just to make sure, are there really no operational synergies whatsoever between Hayab and Kalmar, for instance, in the Poland factory and the linked supply chain? And linked to that, how will the manufacturing structures evolve after the demerger, or what will the changes be? if there are any changes in the manufacturing setup.

Yeah, it is. If you look, for example, our Polish factory, the Stargardt factory, we have separate buildings. So HAIAP is a separate manufacturing or assembly operations and Kalmar. We have some joint sourcing activities, but at the moment it's difficult to estimate that what kind of possible negative synergies there could be. Expectation is that no major negative synergies expected. Otherwise, the manufacturing operations, as discussed earlier, are business area specific. And then we have certain common platforms like the ERP system, like the shared services operations, which are to be separated should the demerger be approved.

And then just, we already talked about the headquarter functions, but is it so that you are not at all concerned about the potential negative synergies by doubling the headquarter functions? I mean, establishing HR, IT and other control functions.

This is something that needs to be evaluated during the planning phase. Of course, we need to be careful in the sizing calculations for Kalmar, and then, of course, the remaining Cargotech headquarter functions. But ultimately, of course, splitting one into two might increase to a certain extent the cost, as we need to duplicate certain competencies. But on the other hand, like Casimir said, there are multiple other synergies like agility, transparency, capital allocation, which in our opinion outweighs the possible moderate cost increases.

And for example, regarding systems, it's not guaranteed that when you have many businesses under one umbrella, that it makes it cheaper. That is not always the case. So I think there are opportunities in the other direction as well to simplify all the way from the governance to running the business processes, interfaces and so forth. So I think there's a lot of opportunities as standalone companies to be specialized and more focused and more agile.

Okay, looking forward to further information probably in the coming months. Anyway, thank you so much, guys. That's all from me.

There are no more questions at this time. So I hand the conference back to the speakers.

Okay. Thank you for the great questions and for your interest today. Thank you gentlemen from the great answers. We will come back with our second quarter results on 20th of July. So until that, stay tuned.

Thank you. Thank you very much.

Thank you.