Cargotec Corporation

Welcome to Cargotech's second quarter results call. The quarter was sixth consecutive quarter with good results. We also completed the demerger. My name is Haki Vesikallio. I'm from Cargotech's investor relations. Today's results will be presented by Cargotech's CEO, Kasimir Lindholm, Cargotech's and HIEP's CFO, Mikko Puolakka, and HIEP's president, Scott Phillips. Please also pay attention to the disclaimer in the presentation, as we will be making forward-looking statements. With that, over to you, Kasimir.

Thank you, Aki. So welcome on my behalf as well. My name is Kasim Lindholm, CEO of Cargotech. We had a sixth consecutive quarter with good results. Really happy with the performance overall. And then, of course, reached a very important milestone in the demerger that is now completed. I will come back to both these items later on in the presentation. Haieb's strong profitability continued, and we saw a record quarter for MacGregor regarding comparable operating profit. We started the sales process of MacGregor, and we have also specified the outlook for Haieb and MacGregor, and our CFO Mikko Puolakka will come back to that topic in a few minutes. We achieved some milestones that are historical and significant for Cargotech during the second quarter. Haiep published new performance targets and Scott Phillips will come back to those a bit later on. We also announced that Scott Phillips will become CEO and Mikko Puolakka CFO of standalone Haiep. HIEB already had previously a very strong management team in place. And on top of that, this announcement, of course, gives very much strength and certainty for HIEB moving forward. And on top of that, we have been able to recruit strong candidates for a HIEB management team more on the functional side. We were also able to settle a dispute with one of McGregor's customers. This was very important for us because that gave the platform to start the sales process of McGregor. It is also important to understand that out of the one billion euros of order backlog that mcgregor has we only have roughly 30 million now in offshore in the old projects so mcgregor is more and more a product slash solutions service spare parts company going forward and that of course give gives a totally different profile for mcgregor in the future So that settlement was very important. And also here, our CFO Mikko Puolakka will go through what that meant looking at the numbers. The demerger was completed. Kalmar standalone company on the 1st of July. This has been, of course, interesting and actually quite complicated project to run. We started after the D-major announcement on the 27th of April in 2023. It took us roughly two months for starting and planning the project from a resource perspective, timing perspective, and then we really started the project in July 23. So in 12 months, we have been able to complete all the tasks on the legal side, on the IAM IT side, process side, recruitment, organizational changes and so forth. More than 200 people have been working on this project on a daily basis and I would really like to thank everybody involved who has done a tremendous job in completing the de-merger and now we have a standalone company in Kalmar going on its own journey. So a huge thanks to everybody and a big milestone in Cargotech's history. And finally, also financial information reclassified following the demerger. And also here our CFO Mika Puolaka will go through what is the status now on the balance sheet side regarding gearing and so forth in today's cargo tech. Order books received increased and continued to increase in McGregor, and then on the high-up side, a slight decrease. I wouldn't draw too dramatic conclusions out of this decrease on the high-up side. If you look at the quarters back here in the picture, you can also see that we have historical fluctuations between the quarters. Order book also declining. Now we are on a normalized level all in all regarding the order book. So we are back to levels pre-COVID. That is also reflected on the sales side. All in all, in HIAB, we are down to a normalized level on the sales side. And here again, McGregor continued to increase top line due to good order intake in 23 and continues so in 24. Eco-portfolio sales, no dramatic changes there on a stable and good level. Then comparable operating profit, we are on a historically high level in Cargotech. Of course, here very strong start to the year in Hayab of almost 16% also in the second quarter. And here, of course, you can see the real turnaround of McGregor. You can also see here in McGregor numbers that we are now to a large extent out of the project business and you see a much more stable business in McGregor going forward and that can now be seen here in a second. quarter and due to these strong results in Q1 and Q2, we have made some adjustments to the outlook and also here Mikko, Puola, Karo, CFO will come back what changes we have and upgrades we have made there. Cargotech then all in all second quarter on 13.1% comparable operating profit, so strong performance in the second quarter. With that, I'll give the word to Scott Phillips, who will go through the numbers and the situation in Hayepp. Over to you, Scott.

Thank you, Kazimir. and greetings everyone from my side i'm scott phillips president of high up business area and so i'll guide you in the next few minutes through the results in the quarter and in summarizing the quarter three key points here actually four key points one is is that we were able to continue delivering a strong profit despite the lower sales i'll come back to that in a bit more detail in a few slides we did have a decline sequentially in year-over-year and orders received And I'll give you a bit of color on that as well. Strong cash conversion in the quarter, clearly above 100%. So that's excellent execution on the team. So big thanks to all the high ebers out there and all of the support personnel within Cargotech. And then as a consequence of the last 12 months order intake, we're announcing a planning phase that we're kicking off, initiated around an efficiency improvement program. I'll give a bit detail on that in a few slides as well. So despite the fact that we are at a similar level of commercial quotation activity for the sixth quarter in a row, we had a 7% decline in order intake primarily due to delayed decision making as our customers remain cautious in making investments due to the continued high cost of financing and the lingering economic uncertainty. We continue to see softness in our construction segment across all markets and geographically. Germany and France remain the most challenged markets. In North America we see delays in decision making which caused a slight negative variance versus same period last year. And that summarizes the order intake story in total. Moving to the figures, our order book stands at 676 million euros, which puts our open order book at 33% lower level compared to the same comparison period last year. So as Kazimir mentioned, we're converging towards more normal levels in the five to five and a half month range, if you'll recall back to pre-COVID times. And our lead times are well within our target range for all products. So that's an important milestone for us to achieve in executing our supply chain strategy. Moving to the quarter, our order intake was 348 million euros versus 375 last year. That's 3% decline in orders for the first half of the year at 734 million euros versus 755 million euros in 2023. And then with the decline in the order book, which was in line with our order fulfillment and lead time planning we have been executing for the past two years, we saw a decline in our sales versus same period last year of 11%. High of sales were 433 million euros for the quarter, 847 million for the first half of the year versus 917 million in 2023, which represents an 8% decline for the first half in the same comparison period. Service sales, however, increased in the quarter and in the first half versus comparison period last year by 2 and 3% respectively. For the quarter, our services represented 27% of our sales and for the first half of the year, 25%, which is an improvement in both the quarter as well as the first half of the year compared to last year. So despite the lower level of sales, the team did an excellent job executing our plans, which allowed us to deliver a return in line with our expectations. The combination of prior pricing actions due to the rapid inflationary environment, controlling our fixed costs, working in our own operations to implement lean and working with our suppliers to reduce costs allowed us to mitigate the decline in profitability versus the decline in sales. So for the quarter, I have delivered 69 million euros of comparable operating profit or 15.9% return. And as I mentioned earlier, cash conversion clearly above 100%. So overall, really pleased with the team's execution and performance. As a consequence of looking at the last 12 months order intake, it's clear to us that we need to initiate planning for efficiency improvement program. We're targeting 20 million euros in improvement, which should be visible in next year's results. So we feel strongly convicted in the fact that these are necessary actions to start planning for in order to secure both our short-term as well as our long-term targets. And coming back to remind everyone about our long-term targets that we communicated in the Capital Markets Day, we target still a 7% CAGR over the cycle, a comparable operating profit of 18%, a return on capital employed greater than 25%, allowing for structural change in the business in the next five years. And we remain strongly convicted and committed to our science-based target initiative company. Then moving into a section near and dear to all of our hearts, we've continued to shape the industries that we serve and just wanted to highlight in particular three of our many product launches within the quarter. The first switch moving left to right is our Hayab EX High Pro Crane. It's an energy-efficient and electric vehicle-ready solution. It provides unprecedented efficiency with regards to energy savings up to 30% with its advanced all-new hydraulic systems. And at the heart of this solution, of course, is our Space Evo control system with the latest in intelligent control technology combined with our Oldsburg's V200 valve and PFD function. The EX High Pro offers smooth and fluid simultaneous movements, reducing pressure drops and heat generation. So we feel strong with evidence that we'll reduce the total operating costs for our customers while at the same time enabling a reduced CO2 footprint as well. Then moving to the right, proud to introduce Waltco's new MDV liftgate series. This liftgate series was launched in June. It features multiple industry-leading safety and efficiency features. So, for example, LED lights are mounted on a column that illuminate the work area of the platform to increase visibility. Intuitive controls save time and reduce the risk of injury. And the liftgate series offers a perfect balance between lifting capacity and low weight. Really pleased with the fact that it's designed with fewer moving parts for reduced maintenance requirements, which will reduce our customers' overall total cost of ownership. And all models in the series have a reduced weight, which will help us to enable our customers to have a reduced carbon emission footprint, as well as to reduce the overall vehicle energy consumption. Then last but certainly not least, proud to share with you that we've introduced a line of red parts components that have equivalent performance specifications to original parts but can have a shorter lifespan without compromising on quality and safety as a new member of our services portfolio. It's a portfolio of cost-effective parts suited for the maintenance and repair of equipment that's nearing the end of its first usage life cycle. So the new offering will help our customers operate their older HIAB equipment even more efficiently and even at a safer and lower operating cost so really pleased with these developments so overall a strong quarter for hyab of course characterized by pressure still that we experience in our demand overall i'd still characterize this as on quite a stable level with regards to our last six quarters so with that i'm I'm going to turn the floor over to Mikko Polaka.

Thank you, Scott, and good morning also from my side. Before going to Cargotec's consolidated financials, a few words about MacGregor, where the turnaround continued to progress really, really well in quarter two. McGregor's orders grew by 26%, very much supported by the active car carrier vessel markets. Also, services contributed really nicely to the McGregor order growth. It's also good to note that we have not taken and we do not plan to take any orders which would include new technologies. McGregor's order book is now at 1 billion euros. And as Casimir said already earlier, the offshore represents now roughly 70 million euros of this order book. And out of the offshore order book, only 30 million euros anymore is related to this problematic loss-making offshore project. So the order book of loss-making projects is getting smaller and smaller towards the end of the year. When we look at MacGregor revenues, it's also good to note that in Q2 we had to reverse 39 million euros of revenues due to the offshore monopile project dispute settlement and the closing of that project. So if we exclude that 39 million euros revenues reversal, McGregor's quarter two underlying sales growth was an impressive 41% year on year. On profitability, McGregor delivered the highest quarterly comparable operating profit since Q4 2014. The profit improvement was primarily driven by the merchant vessel related revenue growth The offshore business made still a 4 million euros loss, however the loss was smaller than in the comparison period and we expect offshore to continue to improve also performance as the loss making projects backlog is getting smaller and smaller. If we take into account the 39 million euros top line reversal, McGregor's comparable operating profit margin in quarter two would have been 9.1%. As we made the settlement for the offshore monopile project, we booked for that project 29 million euros non-recurring items, one of costs. This is the net profit impact of that project settlement and it's a net impact of the 39 million euros sales reversal and then we have been reversing also 10 million euros of project related costs. that 39 million euros minus the 10 million is the 29 million euros net effect of the project settlement. And this 29 million euros has been reported below comparable operating profit in items affecting comparability, as we do not continue such a product line anymore. Before going to Cargotex consolidated financials, a couple of words about reporting Kalmar as discontinued operations. Like in the first quarter, also in quarter two, Kalmar has been reported as discontinued operations. We have removed also Kalmar from Cargotex segment reporting. And now also at the end of June, Kalmar has been completely carved out from Cargotex balance sheet. The Kalmar net assets, which have been carved out from Cargotex balance sheet at the end of June, were 586 million euros. And on top of that, as a result of the demerger, we booked a 1 billion euros demerger profit in quarter two. And this is visible on the last line of the Cargotex consolidated results. This demerger profit is actually the difference between Kalmar's market cap on July 1st, that was about roughly 1.7 billion euros, and then deducted by the previously mentioned carved out net assets of close to 600 million euros. So that results the over 1 billion euro demerger profit. These are the continuing operations key financials, and here I will comment the January-June cumulative first-half performance. Orders were up by 8%, very much driven by MacGregor. Despite the flat sales, the comparable operating margin improved significantly, and here a very nice contribution from both businesses, Hyup and MacGregor. During the first half, HIAP's comparable operating margin improved by 60 basis points compared to 2023, and MacGregor's comparable operating profit margin an impressive 500 basis points. The items affecting comparability, 32 million euros during the first half of this year, are purely related to McGregor. So all demerger costs are reported under the discontinued operations. And here, in the continuing operations, we have only revenues and costs related to the McGregor & Hyatt business. Out of these 32 million euros, 29 million euros is related to the previously discussed McGregor Monopile dispute settlement. And earnings per share was 1.21 euros, and it would have been 50 cents higher without the McGregor Monopile project impact during the first half of this year. Quarter two cash flow was 89 million euros and improved significantly from the comparison period. It's good to note that this cash flow includes still Kalmar. However, the continuing operations cash flow would have been approximately at the same level. HIAP made clearly the largest contribution to quarter two cash flow and the cash flow improvement in HIAP came not only from the profitability but very much also from the networking capital which declined 30 million euros during the second quarter and part of this decline came from the inventories. Cargotex Q2 cash flow includes roughly €20 million negative impact from the MacGregor Monopile Dispute Settlement. After the Kalmar carve-out from Cargotec's balance sheet, Cargotec's balance sheet is really strong. It has been strong before the demerger, and as you can see, it's very strong also after the demerger. Our net debt is only 18 million euros and the 2% gearing is all-time best in Cargotec's history. We do not have any interest bearing debt maturities this year. The next maturity is in 2025, when we have a 100 million euro bond coming to the end. Our liquidity is on an excellent level consisting of 336 million euros of cash, a fully unused committed revolving credit facility of 330 million euros and then on top of that we have a 150 million euros commercial paper program which is also completely unused at the moment. And then we have specified our outlook for HIAP and MacRecord for 2024 based on the solid first half performance in both businesses. For HIAP, we estimate HIAP's comparable operating profit margin to be above 13.5%. And for MacGregor, we expect comparable operating profit to exceed 55 million euros. And to be clear, these are the floor levels for both BEAs, so it's also allowed to be on a higher level. And by that, then I hand over the microphone back to Aki for the Q&A.

Thank you, Mikko. Thank you, Scott and Kasimir. I will welcome both gentlemen back to the stage. And once they are ready, we are ready to start the Q&A session.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Antti Kantonen from SEB. Please go ahead.

Hi, guys. It's Antti from SEB. Thanks for taking my questions, both on high end for Scott. If I start with the outlook for second half for kind of sales and earnings. Could you comment a little bit about kind of the delivery times and the backlog rotation which has been quite extraordinary in the past couple of years. Are we now getting back to let's say a normal delivery times if you look at the truck production and things like that just to

Yeah. Hi, Auntie. So thanks for the question. With regards to delivery times, we are getting back to more normal levels in terms of the combination of what we're seeing from the truck chassis cabin deliveries from the many truck OEMs we partner with, as well as from our side. Frankly speaking, on our side, we've been at or below our target levels for quite some time now. but as you pointed out it's important that that those two deliveries are synced up and that's starting to converge together nicely there are a few fluctuations that we should that we see in different geographies but on balance it's starting to come back to more normal levels and then regarding kind of the full year guidance the margin of 13.5 i mean you're obviously much above that on on the second half and i understand that it's only a floor but but

you should have a pretty good visibility on the second half kind of delivery outlook. So what's kind of the uncertainty that would bring your full year margins towards the lower order guidance floor?

Yeah, there are certain product lines that we're relying on the conversion of orders that we still take within the year. So that's probably the first level of uncertainty, just allowing for the variance around that realization. Number two, as we talked about, we're kicking off planning for an efficiency program. So we're allowing also for space for additional one-off costs that would most probably be reflected in operating expense. So just wanted to give ourselves a good level of room, if you will, to declare that on the bottom end, we see us at 13.5% or above. And as we get better visibility, as times are still quite uncertain, then we might revise the guidance yet again at the end of Q3.

All right. And then lastly, on the demand side, and apologies, I came a little bit late on the call, so perhaps you're repeating yourself. But could you talk a little bit about the U.S. market? Did you see any kind of change in trends during the second quarter on the demand and I mean, the orders are slightly down, but I guess, like Kasimir said, no more volatility, but any kind of, say, bigger moves on the underlying demand conditions.

Yeah, underlying demand conditions remain on quite a good level, very favorable even compared to 2022, as I've been repeating for the past several quarters. However, what we do see, there are two factors I think that are important to note. One is that we still see the delayed in decision making. We experience this across the board in all product lines where the time from a lead company over our threshold percentage, then to the time of conversion has gotten a bit longer. And that's what we saw in Q2 in the US market. The second factor is that the operating utilization of our loader crane equipment was a tick below our expectations. So therefore, Not reading a whole lot into that one, but nevertheless, those are two data points we keep a close eye on. So, repeating, underlying demand factors still look quite good and stable compared to the prior six quarters. What we do see is a change in time to decision, a slight downtick in utilization of loader cranes, whereas that was contrasted by a slight uptick in Europe.

All right. Thanks so much. That's all from me.

The next question comes from Johan Eliasson from Kepler-Chevreux. Please go ahead.

JOHANN ELIASSON Yeah, hi. It's Johan at Kepler-Chevreux. One question again for you, Scott. I think you in the Q1 call sort of referred to some worries about pricing in the second half of this year, depending on where the demand would be. How are your view on pricing in the second half looking right now? Is there any change there? Thank you.

Yeah, Johan. So thank you for the question. As I commented before and also during the CMD, we're always going to be under pressure. Our customers, just like ourselves, are going to demand for the best price point. However, we still target a net price change that's positive year over year. And we look at that aggregately as well as by product line. So we still remain confident in terms of an unbalanced net positive price change for the year over year. So therefore, we still see the same set of factors at play as we've talked about in each of the prior quarters. And then I think I also alluded to in the CMD during the Q&A that we did see a higher level of discounting for last year. We've gone out to the market and adjusted market list pricing in line with the discount level that we were at last year. So we see that stabilizing quite nicely for the balance of the year thus far. And we see the same picture for the second half of the year. All of that, of course, is against this level of uncertainty that we're still dealing with.

Okay, excellent. And this new cost-cutting you announced partly to hit your short-term development and partly to hit your 18% margin target. Is that more for the longer-term 18% margin target, or are you seeing something in the demand which looks stable but at a little bit of a lower level than a year ago?

Great question. Actually, both, to be perfectly blunt with you. So if you think about the actions that we'll take that will hit, we'll realize above gross profit. That's much more about the long term, largely driven by design to cost and other product design driven initiatives. Similarly, working on implementing lean within our own operations, which we've seen help us to reduce order fulfillment cycle time, improve cash conversion. That should also stick long term as well. Some of the actions that we'll take, however, below gross profit in terms of adjusting fixed cost would then be much more about the short term and honestly just reconciling the math of the last 12 months order intake versus the conversion of sales moving forward.

Okay, excellent. And then maybe a completely different question to Mikko. Obviously very strong balance sheet as you point out and hopefully you are getting some cash for the McGregor business as well when and if that is sold. What sort of expectations should investors have on returns going forward? Have you discussed that in any way? I mean, where do you see an optimal gearing for the remaining HIA, for example, going forward? And what could be potentially then envisaged as some extra returns to the shareholders through extra dividends or share buybacks or similar? Any input on that would be appreciated.

Yeah, thanks for the good question. Too early to say about the extra dividends or share paybacks. Of course, we need to bear in mind also that we have ambitious M&A or inorganic growth objectives also for high-up So hopefully we can also use part of that strong balance sheet for the M&A purposes. Of course, taking a very close look on the financial parameters of the acquisitions and not get blinded by the strong cash position. Definitely this kind of 2% gearing might not be the optimal level for the company or for an industrial company. So it's also next year then for the board of directors after the McGregor exit has taken place to evaluate if there is a need to change return dividend policies or such going forward.

Okay, looking forward to that. Thank you very much.

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

Thank you. I have a few questions. Firstly, starting on high up. Did you get like a raw material cost tailwind in high up in Q2, and how do you expect this to develop going forward?

Yeah, I wouldn't say that in Q2 we saw much tailwind from raw material pricing as we're still converting backlog, but definitely an overall improvement in the cost curves of our bill of materials.

Okay, but was there like a sequential improvement in what you had in previous quarters? Slightly. Okay. Then on MAC record, maybe the same question as was for HIAP's guidance earlier. So I appreciate that you increased the guidance, but still it's kind of more than 55 for this year implies. kind of lower second half than what you delivered for first half. So what are the uncertainties that you see in macrocore in second half that you guide this as a floor, given that you have now settled this customer dispute and the offshore losses probably should be lower?

I would say that the main uncertainties are related to the Merchant Project order book deliveries. Even though MacGregor has an order book of one billion euros, it's good to note that this order book has a very long delivery time due to the vessel construction timetable. So part of this order book can be delivered even in 2026, depending on the vessel construction. So it's very much dependent, the second half profitability on the timing of the merchant equipment deliveries.

Yes, and the milestones in the different deliveries towards customers. And again, like in the HIAP case, if and when we feel that we have more visibility, we might come back to this topic then as part of the Q3 report.

Okay, thank you. And then the final question. Still on the HIAP cost savings, to be clear. Is this so that the demand turned out in Q2 to be weaker than you expected, so you are now launching new measures as a response to that?

Yeah, just a matter of looking at our last 12 months order intake, very similar to the factors that caused us to announce the program that we executed last year, Q3. Very similar factors there. Combination of taking advantage of being able to accelerate efforts to secure long-term better cost curves above our gross profit. At the same time, looking at the prior 12 months order intake, making some adjustments in our fixed cost base in line with order intake now that'll convert later into sales.

All right. Thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Tom Skogman from Carnegie. Please go ahead.

Yes, hi, this is Tom from Carnegie. I wonder about these savings in hire, whether that will also have some impact on the footprint, or are you happy with the manufacturing footprint?

Yeah, if you think about our savings program, we're looking at structurally all possibilities, so that's certainly part of our planning process.

So there might be changes to the footprint?

Well, we're certainly always going to look at evaluating potential changes in the footprint, Tom, and that'll be certainly part of the analysis phase that we go through now that we have initiated the planning.

Yeah, and can you specify what you mean by design to cost? Is it more modular products or just changing the type of components that you use?

Yeah, I'd say especially in three different buckets. So there's standardization and simplification, much like in our new WDV liftgate product that we just launched, a similar way of thinking about less parts, more commonality across part families. So that's certainly part of it. Two, then looking at where we might be able to reduce cross sections and weights, material specifications in our product that would come at a lower cost point. without sacrificing performance. And then, of course, three, certainly hitting your point, designing much more modularity in our products, taking more advantage at being able to then have commonality and our key in differentiating technology across the full scope for our portfolio, much like we're doing now in our loader crane business, one of the keys of the Space Evo that I talked about with regard to the EX High Pro crane that we just introduced. Those three buckets combined with other logical changes that we can make to make our products more manufacturable and hence reduce the cost of producing.

Is this new X-Hypro creating like a new main product or a niche product or will there be different sizes of these launchers?

There will be different sizes, but it's part of a broader, more comprehensive product launch, and there will be other announcements to come through the balance of the year.

So it's like a new main product. That's how we should see it.

Correct.

It's really a big launch.

Correct.

OK.

Yeah.

Part of a broader launch. I have to ask about this McGregor profitability. I didn't fully understand Mikko's comment there. What is really now the underlying margin in the merchant business? You said there were like four million losses of offshore, but then there were something, you know, how you book these disputes. So can you repeat that to make it really clear?

Yeah, so when we had to reverse basically 39 million euros of revenues, that kind of artificially to certain extent boosts the comparable operating profit margin in MAC record. So if we exclude this 39 million euros revenue, reversal, McGregor's Q2 comparable operating profit would be 9.1%, which is a significant improvement year on year. So roughly 2% unit impact coming from this project settlement. And then in the overall McGregor picture, the offshore basically diluted, as mentioned, by 4 million euros, still the profitability.

So the margin is kind of 10% in the merchant business now?

Around that level, a bit higher even.

Okay, thank you.

As a reminder, if you wish to ask a question, please dial pound key 5 on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Thank you all for the great questions and for the great answers. We will be back in October when we publish our third quarter results on 23rd of October. See you then. Thank you.