Cargotec Corporation

Welcome to Cargotex third quarter results call. The quarter was the seventh consecutive quarter with good results. My name is Aki Vesikallio. I'm from Cargotex Investor Relations. Today's results will be presented by Cargotex CEO, Kasimir Lindholm, Cargotex and HIEB CFO, Mikko Puolakka, and HIEB's President, Scott Phillips. After the presentations, there will be a Q&A session. 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. And welcome also from my behalf to this webcast. We're looking at a really good Q3 from a cargo tech perspective. And again, like Aki mentioned, seven quarters in a row with good and stable results. Orders received increased in both businesses. We'll come back to that a bit later. And we had a really strong operative performance, strong profitability, and I would say exceptionally strong cash flow in the businesses. The sales process of McGregor is progressing according to plan. We'll come back to that a bit later as well. And then we specified the outlook for Hayeb and McGregor for the full year. So orders received increased in both businesses. partly driven by postponements from the second quarter. Scott will come back to that a bit later. But all in all, 14% up year on year, and 16% in Hayeb and 12% in McGregor. So all in all, we are very pleased with the performance regarding orders in the third quarter. Looking at where we are from an order book perspective, strong quarters now, several of them in MacGregor. The order book has increased. We're above a billion in order book in MacGregor, so strong starting point towards not only 25, but also 26 and onwards. In high-yield, the order book has normalized. We are on a level where we used to be pre-COVID, and we have a roughly five months order backlog going into the fourth quarter and then gradually into 2025. The sales going in different directions here in the businesses. Of course, McGregor, now you can see the strong order intake also being shown on the sales side and in a similar fashion, high trending a bit downwards. And again, we are coming towards the normalized levels. And as we have referred to previously, the 370 million euro mark regarding orders is what we have seen now since Q4 2022 in Haaya, but now we can see that sales is also starting to stabilize in that area. Eco-portfolio, no dramatic changes here either, on a quite stable level also in Q3 2024. Comparable operating profit on a very good level. Q3 normally is a bit softer compared to the other quarters. We are in holiday season, both in Europe and in the US. But despite that strong performance by Hayab, above 15% operating profit, and also MacGregor showing a strong Q3, despite that we still have some loss making projects in offshore, but service and merchant performing on a really, really good level. And that means all in all, Cargotech on almost 12% comparable operating profit for the quarter. So we are really happy and pleased with the performance overall. Regarding the transition of Cargotech, we are progressing according to plan. So when we announced the demerger and the separation of Kalmar on 27th of April in 2023, From that day it took us 14 months to list Kalmar and all in all 16 months to separate Kalmar totally from Cargotec. So this is work done according to the plan. we had almost a year and a half ago. So really happy with the performance of our both internal and external people that have done a tremendous job in separating Kalmar. Only a few TSAs left towards the end of the year. And at the same time, partly the same team started the preparations of the carve out of McGregor already in the spring. And that work is also progressing according to plan. So internally, a lot of good work done in both these areas. Then regarding the McGregor sales process, we have had some positive developments during October and we're targeting the signing of the deal by year end 2024. And of course, we'll come back in this area as soon as we have something to communicate. The cover preparations here again proceeding according to plan. And we started that project internally early in the spring. Then regarding the valuation of McGregor as such, there is roughly a percentage of fixed cost increase when we are moving towards a standalone McGregor, the way we see it now. We are strengthening the organization in the areas of, for example, treasury and IT. So there will be an increase of roughly 1% when we look at the standalone McGregor, and then that's not the listed version of of McGregor, so maybe good to note. And with that introduction, I'll give the word and the floor to Scott Phillips, who will present the Q3 report for HIEB and then onwards Mikko Puolak for McGregor and for the Cargotec Group. The floor is yours, Scott.

Thank you, Casimir. All right, I'm having trouble here with the remote, so let's see if I can get that in order. So hey, good morning, everyone, and welcome to the HIAB portion of today's earnings report. The quarter's strong profitability was a reflection of the high-quality execution of our plans by the entire HIAB team. So really proud of the job the team has done year to date and in the quarter. Three key points to note. Our demand remained on a stable level for the eighth quarter in a row. I will provide a bit more context in the next slide. And Casimir, I think, teed that up quite nicely earlier in terms of how to think about the quarter. We had excellent cash conversion of 160% in the quarter, and we continue to innovate industry-leading solutions, which I will highlight four on the last slide. So going into the order intake, it was €361 million for the quarter. representing a 16% increase versus prior year and pushed our year-to-date order intake to a level slightly above last year's first three quarters to 1.095 billion euros or 3% above prior year. Our order book is 636 million euros or 264 million lower than last year's level, which is a 29% decline. And as mentioned before, we are back to a level of about five months worth of coverage as a result of the order book, which is quite a normal level for us if you think about pre-COVID level. Our positive deviation can mostly be attributed to key orders that slipped into quarter three that we expected to convert in the previous quarters. So when adding the last two quarters order intake, we are well in line with our preceding quarters run rate. The right way to think about it is we're still on quite a stable level for the eighth quarter in a row. We saw a slightly larger increase versus a comparable period in the Americas as compared to Europe and on quite a stable level in Asia Pacific. Within Europe, Germany continues to be quite a challenging market for us from a European perspective. We are still seeing a continued increase in activity level, but at the same time, we see a longer and longer process that's undertaken by our customers to make decisions. The key driver for this continues to be the high level of financing costs combined with an expectation that they will be lower in the near future, so customers are still hesitant to make the purchase decisions. As a result, I'd say we're at a normalized level in our order book, and so therefore that'll characterize our level of revenues moving forward. So as a result of this situation, our revenues for the quarter were 8% below last year's level of 420 million euros. Year to date, our revenues are also 8% below 2023 levels. Service sales remained quite on a good level at 112 million euros versus 113 million in the comparable period from last year, but increased 200 basis points as a percent of our overall sales from 27, 29%. We were somewhat impacted by the container congestion in the US due to the port strike. So despite the reduction in revenues, we delivered a strong level of profit at 59 million euros or 15.3% in relative terms versus 62 million and 14.7% respectively during Q3 of 2023. The team continues to execute well on our sourcing and supply chain actions, as well as a bit of help from price realization as well. So the profit and the combination of the good level of profit and the decline in our networking capital enabled a strong cash flow. So overall, the results for the quarter were on quite a good level. So really pleased with that. And then moving into our last slide for the HIAB portion, really pleased to announce or highlight four of our innovations within the quarter, the first of which is an e-Ultima hook lift. This is the world's first plug-and-play hook lift designed specifically for electric trucks. Built with sustainability in mind, the multi-lift e-Ultima is designed to deliver exceptional performance and efficiency, which clearly sets the industry standard. It features a seamless integration by utilizing the truck's electric power takeoff for power, ensuring easy installation and optimal performance with energy efficient controls. And it's also made from Multilift Ultima Zero recycled fossil free emissions free steel. This therefore reduces the production of carbon emissions by 15% as well as the active emissions by 25%. And we did this in partner with our trusted steel supplier partners. The second innovation I'd like to highlight then is our IZ18R recycling crane. This is a new recycling crane in a critical space for us, which is equipped with our latest and greatest control systems, which enable improved productivity and safer operations. And the model signals an entry into the 18 to 19 ton meter market, offering a sturdy and resistant mechanical structure platform. So we think that the physics based outcomes that will be enabled by this crane will set a good standard for the industry. The third innovation I'd like to highlight is our IQ708 High Pro Crane. This offers a design that balances weight, lifting performance, and dimensions that contribute to increased safety, valuable payload increase, and expanding the range of truck installation options for customers. The improved performance and an optimized frame regarding dimensions and weight allows for smoother operation and more productivity for our customers. It's also equipped with our latest control systems, which enable an increase in productivity and safer operations. Then finally, I'd like to highlight the Talon, which is a versatile system designed with a focus on interoperability. It's capable of loading, unloading, and securely locking various in-service payload modules for transportation. The system combines the functionality of in-service products with the latest advancements in automation and technology and offers a significant reduction in the cycle time of the overall duty cycle of this particular load handling solution system. So really proud of the innovations that we've released to the market in the quarter and proud of the work that the team has done in delivering excellent results within the quarter. So with that, I'd like to turn it over to Mikko. We will guide you through the rest of the presentation.

Thank you, Scott, and good morning also from my side. Going then to McGregor, so really nice progress in the McGregor turnaround if we look at previous quarters. When we look first McGregor market activity, the merchant vessel market was really strong in quarter three. According to the Clarkson's research, shipyards got now 1723 merchant vessel orders during January, September 2024. And actually Clarkson has now upgraded the 2024 merchant vessel estimate by 17% to over 2200 vessels. So markets, especially in the merchant container and car carrier vessel areas are progressing really nicely. The shipping companies are now ordering container vessels, for example, to secure deliveries as the shipyards are fully booked until 2028. Also in McGregor's case, the service orders grew nicely in quarter three. McGregor's order book is now over €1 billion, and this provides a very good visibility to the coming year's revenues as we go forward. It's good to note that from this €1 billion order book, 40% will be delivered in 2026 and later. So there is quite a long delivery time from this current order book. It's also good to note that out of this 1 billion euro order book, roughly 15 million euros of orders are any more related to the loss making offshore wind projects. And most of those projects will be delivered now in the latter part of 2024. McGregor's profitability improved significantly thanks to the growth in merchant vessel revenues and smaller losses in offshore. We continue to adjust the offshore cost base and we are currently planning to implement further headcount reduction still in 2024. If we look at MacGregor profitability without the offshore business, MacGregor's Q3 comparable operating profit margin was 13.5%. So really strong performance as the restructuring actions have been really successful. Let me next illustrate a couple of Cargotech consolidated financials. And again, as a reminder, these are the Cargotech continuing business financials, i.e., Hayab and MacGregor numbers, both for this year's actuals as well as for the comparison period 2023. After nine months, our order intake is up by 10% year-on-year. This is mostly coming from MacGregor, which has been growing 22% during the first nine months. Hyab is also up by 3%. Cargotex's year-to-date September sales was flat. MacGregor's sales grew 20%, and that growth has, to a large extent, offset Hyab's sales decline of 8%. However, despite flat sales, the nine months comparable operating profit improved significantly. In high up, it came from the commercial and sourcing actions, which have helped us to mitigate the inflationary pressures. In McGregor's case, the merchant business growth and the reduction of offshore losses have been the main contributors to McGregor's profitability improvement. You see that we have incurred 34 million euros of items affecting comparability during the first nine months. 29 million euros of this are related to the quarter two happened pile creeper project settlement and the rest of the costs are related to the preparations for McGregor becoming a standalone operations and for the sales preparations. Our cash flow continued to develop very favorably, 148 million euros in quarter three and 411 million euros during the first nine months of 2024. The main drivers for the positive cash flow was the strong EBITDA in both business areas, reduction in accounts receivables, and then also inventory reduction, especially in high up In HIAP, the cash flow from operations was €100 million in Q3, and as Scott mentioned, 160% cash conversion. As a result of strong profitability and cash flow, we have now a very, very solid balance sheet with 64 million euros of net cash and minus 5% gearing. This is the first time in Cargotex history when we have a negative gearing. We have 125 million euros of bonds and other loans maturing in 2025, and we anticipate to repay those from the current cash balances. And our average interest rate on the interest bearing liabilities was 1.5% in September. Based on the solid performance during January-September, as well as based on what we anticipate to book as revenue from our order book during Q4, and based on what we estimate for the fixed cost development for Q4, we have decided to specify the outlooks for both business areas. So for HIAP, we estimate the comparable operating profit margin to be above 14%, and for MacGregor, comparable operating profit to be above 65 million euros. These are the floor levels for both BA profitabilities in 2024. And by that, then I hand the microphone back to Aki for Q&A.

Thank you. Thank you, Mikko. Thank you, Kasimir and Scott. So please welcome back to the stage. And with that, we are ready for 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 six on your telephone keypad. The next question comes from Antti Kansanen from SEB. Please go ahead.

Yeah, hi, it's Antti from SEB. A couple of questions from me and let's start with Hayab. Just a question on, Scott, what you mentioned on orders slipping from second to third order. Are you now referring to the larger orders that you flag on the release, or is it more like the underlying demand kind of that there was a shift in those smaller orders as well?

Yeah, hey, good morning, Antti, and absolutely the first. It was a consequence of a couple of large orders that slipped into Q3 from Q2.

Okay, that's clear. And then a second theme is the growth in the US or in America, which is, I guess, the best geography for you. How much is this kind of the market strength or how much is this you kind of expanding your network in the States, which you have been talking about for some time, that that's maybe a longer term strategy, but is it playing out already?

Yeah, largely it's with existing customers. So I'd say it's an underlying demand from the existing business. At the same time, we've converted a couple of orders that weren't in our original planning as a consequence of the actions that we laid out in the CMD that we're taking in North America. So largely from existing underlying demand, a little bit of increased demand from expanding our access into new opportunities.

Okay. And then the last one on HIEB. I mean, I guess the demand is slightly uneven in terms of geographies or even product groups. So is this posing any additional challenges regarding cost base or kind of capacity utilization? I mean, you were referring Germany that it continues to be weak. Are you seeing any kind of a new needs to address the cost base or with the savings that you have already announced, are we kind of on a good level entering $25 billion?

So far, we see we're on a pretty good level entering into 25. Relative to what we communicated the prior quarter with the cost savings actions, we've taken into account the demand result that we saw in Q3. So, so far, I think we're positioned quite nicely.

All right. Thank you. And then a couple of ones on McGregor. And the first one is a bit kind of a technical one. Regarding the backlog, how much is there service business within the backlog? Are you kind of booking one quarter of sales or how should I think about it when I try to understand how much, let's say, equipment revenues we should expect for the next five quarters?

There is roughly one quarter of revenue sales in the backlog. Spare parts, of course, they go fairly fast, but approximately one quarter.

Okay. So kind of if we think about that, you are saying that there's roughly 630 million revenues for the next five quarters. It's Q4, it's kind of total sales. And then for 25, it's mainly equipment sales.

Correct.

Okay. And then just a clarification on the increased cost level. Is this one percentage point on MacGregor margin that we should think about that the impact is?

Yeah, that's basically McGregor operating profit margin, yes, impact. Okay.

And the last on McGregor is something that, Kasimir, you said that there was a positive development in October. I don't know if you want to expand that a little bit. I'm guessing probably not, but any further comments?

Just that we have approached the next phase of the sales process, and again, we're coming back with any communication around that process as soon as possible and as soon as we have things ready, but targeting signing towards the end of the year.

Okay, sounds good. That's all from me. Congrats on another great quarter.

Thank you.

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

Thank you. I have a couple of questions, starting from Matt Gregor. Just to clarify, did you say that the margin without the project losses or the offshore losses was 13.5 in Q3?

Yeah, if we eliminate the offshore division result from McGregor results, then the profitability would be 13.5 in quarter three.

Yeah, and 12% for the full year to date.

Okay, and then how long do these continue? I mean, I thought that when you settled this big one in Q2, it would be materially lower in the loss side, but how does it look?

The offshore losses were approximately 6 million euros in Q3 and the anticipation is that the losses are getting smaller going forward. And as mentioned, we are doing additional restructuring to eliminate the remaining losses.

And most of the loss-making projects that we have left in the order backlog will be delivered this year and a few of them in Q1 and Q2 next year. And out of the totally more than a billion euro in order backlog, there's 15 million of loss-making projects still in offshore. So we're heading towards the end of the losses in the old projects in offshore.

Okay thanks and then just to clarify I think you said like one percent fixed cost impact from MAC record as when it's kind of separated so is this like percentage point of EBIT margin or how should we kind of think of it?

Yeah it's the percentage point in EBIT margin so If MacGregor would have, for example, 13.5% without the offshore losses, then it would be 12.5 with kind of standalone costs. In MacGregor's case, we are not making MacGregor as standalone as a kind of listed standalone Kalmar. Kalmar, we are preparing it for a potential divestment for a company which has then other capabilities.

run the rest of the kind of listed company or kind of group capabilities all right and then I still have one on higher so coming back to the demand discussion so you had like 16 growth in orders in q3 and then it was negative in q2 and you described that it's been stable for seven, eight quarters in a row, but like what are your expectations going forward? Is it going to continue being stable or do you expect this to improve Q4 or early 25 or kind of what are you expecting and what are you seeing in the market?

Yes, as mentioned before, if you think about the key driver for the activity level being the higher financing cost, all of our solutions are ultimately financed. Given that there's an expectation in the market that in the near term there could be lower financing costs, we still see that driving longer decision-making time. which ultimately is impacting the overall demand picture in terms of order intake one. So therefore, I expect to see still a relatively stable level of demand moving forward. There aren't any indicators of movements either direction up or down.

Okay, just to clarify, so you mean that customers are delaying decisions because they see that the rates are coming down and they're waiting until they are down or it's not the direction that is encouraging them.

Yeah, sorry, I'll clarify that. So as I mentioned earlier, the activity level from a quote perspective is still on a quite a high level. But what we are seeing is, is even the deals that we win, the conversion from lead to order one, is longer than it used to be, so therefore that's why we characterize that as delayed decision making. That's still the case today. Given that the banks both in Europe and the US have indicated there could be lower rate cuts in the following 12 month period, If you are financing a deal today, there's a risk that you finance it at a higher cost than you would, let's say, six to 12 months from now. So that naturally is causing hesitation in pulling the trigger for a new order today and leads ultimately to customers continuing to sweat assets with an expectation of lower financing cost in the near term.

Okay, that's clear. Thank you.

The next question comes from Tom Skogman from Carnegie.

Please go ahead.

Yes, hello, Scott and Kasimir. I wonder about the MacGregor merchant order book margin compared to what has been delivered. Is there any trend we should know of there?

Well, thanks, Tom. I mean, we haven't communicated earlier What is the margin in the order book that we have for McGregor? Of course, the market as such is very positive and we have been building the order backlog not only for 25, but also for 26 and partly 27. So I think that's the main change to take into account that 40% of the order backlog is towards 26 and onwards. So I think that's the message and the strength in the order backlog of McGregor?

Yeah, I would say that in our McGregor merchant business, the margin has not been historically the issue. It has been the overall market has been just low. So I would say that the project margins today are on the same level as they have been in the past. The profit improvement is very much coming from the volume growth, thanks to the two and a half years strong order intake.

And just to repeat what Casimir said earlier, there is only 15, 1.5 million euros related to this loss-making offshore projects left in the order book.

Yeah, so from that perspective, you're totally right, Tom, that totally including an offshore, then of course the margin in the order backlog is clearly better than historically if you take in the order backlog from offshore into the game.

Yeah, I was kind of just zooming in on the merchant business because when delivery times get longer, you have a higher certainty about everything. And with delivery times getting extended, you should probably get some kind of margin benefit just because you always have risks when delivery times get extended. So I was just wondering about that. But of course, there is no change.

Yeah, I mean, of course, we are all the time now in a good and positive market, striving for better terms and conditions in McGregor and especially in the merchant business. So that is, of course, the case. But as such, we haven't communicated the margin levels except for the challenging projects in offshore.

And like we have had also in the past, the deals are hedged back to back. So when we quote to our customers, of course, we are also looking the supply chain at the same time for the projects.

And then I would like to ask about high up. You have not said so much about customer behavior in different end markets. So do you, I guess the construction segment is kind of the swing segment. a swing kind of sector here so what do you see especially in you know things that go to cost construction and perhaps also consumer goods related spots you know when we are at the end of this interest rate cycle

Yeah, so construction still remains challenging. Obviously, the most challenged areas in construction are Nordics, Germany, France, still quite challenged. There's been a mixed picture in the Americas, if you will, still quite strong on the building materials sector. All of our customers that have reported and those that are yet to report, so far the results have been quite strong on their side. They're still being cautious because of the financing cost and managing the balance of asset utilization. On the retail side, as you mentioned, Tom, it's a bit of a mixed picture, but still holding up quite nicely. However, we keep a close eye on our large rental customers' fleet utilization, and that's been a bit cyclical up and down if you look back on the prior six-month period, so we're keeping a close eye on that. More will be revealed in that sector, I'd say, in Q4. So we'll keep a close eye on that.

Okay, and then finally about capital allocation. That starts to be very important for investors to know how you think, you know, given you already have led cash and you sell McGregor, you will have loads of money in the balance sheet. And of course, it's a board decision, but I guess you can still help us, you know, to understand You know, how are you preparing to speed up acquisitions? What are you doing right now, you know, before you get the money? Or should we expect large extra dividends instead? Or how do you think?

I think in the broad context, we'll come back to all these questions as part of potential communication of the McGregor deal, and then latest, of course, in early February as part of the Q4. But all those elements are, of course, on the table, both regarding the strong M&A strategy for Hayeb and supporting that one, and, of course, also the extra dividend and so forth are on the table in those discussions. But of course, first we are focusing fully on the sales process of McGregor, and then we'll come back to all these topics. Preparations, of course, done in all these areas. And then at the end, it's a board decision to bring some of these topics to the AGM in the spring.

But perhaps Scott could still give some kind of feeling, you know, what you are doing, you know, screening for acquisitions. Is it like with a different ambition level compared to one year ago and how many cases do you study or something?

Yeah, thanks, Tom, for drilling into that. I'd go back to what we communicated during the CMD. Our areas of focus are still in the four attractive segments that we see growth potential over the next three to five years. From an organic perspective, we'll continue to double down our investments in facilitating and hopefully accelerating the energy transition to sustainability in our sector. We'll continue to invest in our services portfolio and the digitalization of our solutions that'll help and aid in growing our services business to deliver better outcomes for customers. We continue to have a focus that is guided by looking at M&A opportunities largely that are bolt-ons, that are logical for the spaces that we're exposed to, that are aligned to the attractive spaces and any opportunities for close adjacencies to the spaces we communicated in the CMD. And so, therefore, we remain active in continuing to manage and build the funnel of opportunities when the time is right to start to take action on those opportunities. and all of which has to be aligned to our strategy, all of which we look for the opportunities that will provide a clear catalyst to increase our services opportunities, and all of which will have to align us to markets in which we think we have a clear opportunity to lead or be closely leading in order to drive the technology standard for the industry that we're competing in. and aligned to customers that really count on lifecycle services to drive their productivity outcomes. Those are the areas where we know we compete the best.

And maybe on top of that, Tom, I mean, of course, we are as a company preparing ourselves for the future. One part is, of course, the carve out that is ongoing that we started already in the spring regarding McGregor, so that we are ready as soon as possible. And then from an IEM IT perspective, ready to support the growth journey for for HIAB and of course there's a lot of work done also within HIAB in improving processes and efficiencies so that when HIAB goes on the growth and M&A journey then of course it's easier to integrate businesses into common systems and processes going forward. So all that work is being done as we speak and we started that already a year ago. So that is also supporting the future of the growth in Haiep.

Okay, thank you. The next question comes from Erki Vesela from Indeers. Please go ahead.

Hi, guys. It's Eki from Indra. A couple of questions from me. First, Scott, regarding the postponements in higher borders from Q2, didn't have time to read the report line by line. So could you provide any ballpark figure regarding this?

Yeah, the right way to think about it, if you look at our prior quarter's run rate, adjusting for seasonality, We're within a couple of percentage points if you add together Q2 and Q3 versus where we would expect to have been given the prior quarter's run rate. So the level of orders that slipped into Q2 would have made for quite a repeat level of order intake for Q2 versus prior quarters. And then Q3 would have looked a bit more normal in terms of the 10% to 15% seasonality. decrease that we see from the vacation period in most of our geographies in Europe.

So just on top of my head it's anywhere between say 10-20 million? Roughly. Okay thanks and then

It's also good to remember also that like we announced for example in quarter three we had 16 million euros of defense orders defense logistics related orders and some of these orders are such they do not necessarily repeat every quarter so like there has been also in the past quarterly fluctuations it has not been a kind of dead man's brain curve, the order intake, but there has been these quarterly fluctuations and it's going to be also fluctuations going forward. But like Scott said, looking at the longer term history, it has been on the average on the stable level.

Yeah, makes sense. And then, Mikko, you had quite a low group tax rate in Q3. What's the expectation for a full year? I mean, assuming that MacGregor will remain in your books until the end of the year.

I would say that roughly 26% would be the proxy for the full year. So clearly higher than what we saw in Q3. That's the kind of best estimation at the moment. Okay. That's all from me. Thank you.

The next question comes from Antti Kansanen from SEB. Please go ahead.

Yeah, hi. Thanks for the follow-up. opportunity. This is a question for Scott on the interest rate sensitivity in HIAB. I mean, you're not really selling big projects, so I wanted to better understand what portion of your clients actually is reliant on external funding. Is it kind of the smaller players versus the larger fleet operators doing it, funding it with an operating cash flow? And I mean, If the delay is more like that clients are waiting to see what the level of lower rates is on their underlying businesses, I mean, construction seems a really obvious one on that front. So maybe you can talk a little bit more about that.

Yeah, for the most part. Thanks, Antti, for the follow up. But for the most part, all of our solutions are ultimately finances are part of a bigger integrated solution. So whether it's a small client or a larger firm or a bigger account for us, ultimately the deals are financed. Perhaps the defense logistics could be an exception to that one. So just like we would do in our own personalized, we're looking to renew the lease on our automobile now. versus perhaps the interest rates are going to be at a much better level next year, then the tendency would be to wait for that, whether it's extending the lease or just being able to delay that decision-making until a time at which the financing cost will make the total acquisition cost much more attractive on a payback case basis. That's driving the behavior in customer markets.

Okay. So, I mean, It seems that your clients are kind of the fleets are aging and they're sweating the assets. So assuming that there's at least a similar level of demand going into, let's say, back half of next year, there should be a lot of pent up demand. Are you prepared from production point of view to kind of match it or post that?

That's a lot of what our supply chain strategy is all about that we've been busy executing the last couple of years. The partnership with our suppliers continues to get better and better. We're well positioned in terms of our overall factory footprint and being located in a good position relative to the end markets that we serve. So there's always more work to do, but we feel like our level of resiliency in terms of our upside flexibility with regards to capacity is better than it was even a couple of years ago, for sure.

Okay. And then another one is kind of the nature of the defense-related business. Is it kind of, in a sense, you flag that it can fluctuate from quarter to quarter, so if the best expectations is that we're going to see this kind of fluctuation, but probably on a higher trending level in a sense that the budgets are coming up?

Well, I think about it this way. The right way to think about it is the timing at which those convert is extremely difficult to call. So therefore, we're rarely 100% accurate in terms of timing. We make a good estimate, and then often it can come earlier or it could come later. So therefore, you see some of those deals slipping from quarter to quarter.

Right. Okay. Thank you.

The next question comes from Tommy Raylow from DNB. Please go ahead.

It's Tommy from DNB. Still expanding a little bit on the end market. Drivers of orders in the quarter in high orders up 16%. You announced a couple of larger orders, for example, in construction. But just directionally, where construction and infra orders up stable or down here and here and maybe kind of where were the pluses and minuses if you can comment the end markets directionally

Yeah, thanks for the question, Tommy. Quite stable year over year. The markets that are most challenged are those that I've talked about through earlier. So the Nordics continues to be quite challenged, France and Germany within Europe. It's slightly more positive in the Americas, in particular North America. So that remains relatively stable year over year.

And how about waste and recycling, defense and other forestry, agriculture and wind?

Yeah, overall, a bit of a mixed bag. Waste and recycling, I'd still say if you look at our year-to-date figures, is still relatively stable. I think as I alluded to earlier, we're 3% up in order intake, so that's a good proxy for waste and recycling year over year. And then apologies, I think you asked about defense logistics. Again, I'd say it's relatively in line with the 3% up year over year.

Thank you. And then service sales were flat essentially in the quarter, year and year. You wrote that the orders increased. Any kind of further comments on that increase and then kind of the general customers' mood, activity in terms of servicing? What's your expectations also there for the fourth quarter?

Yeah, I'd say in the quarter we had a bit of seasonality effect that hit us harder slightly this year versus last year. We were also somewhat impacted by the container port strike, perhaps a bit in the southeast part of the U.S. with the weather events towards the end of the quarter as well. Fleet utilizations were slightly below our theoretical expectations, both in Europe and the Americas. So kind of a combination of those factors.

right thank you the next question comes from Mikhail dople from Nordea please go ahead thank you a couple of question on on the up still here coming back to do your car what about the about the US market and the retail side I didn't quite catch that safe just could repeat what you said about the I think you talked about a mixed picture. You talked a bit about fleet utilization. You mentioned something about Q4. If you just could repeat that, please.

Yeah, absolutely. So thanks for the question, Mikhail. So what I was alluding to there is that we keep close eye on the large rental fleet customers that we have. So think Ryder, Penske, and others similar. Their fleet utilization has fluctuated. We've seen some prior months up, some down. we tend to get a batch amount of orders towards the either Q4 or Q1 of the following year. So over the next two quarters, we'll learn more about the picture of demand relative to that exposure and in particular in the Americas.

All right. That's very clear. Thanks for that. And then just another one as well relating to pricing. pricing in the overall business in high up. I mean, how would you describe the current market dynamics from that point of view and any expectations going into the final quarter of the year?

Yeah, it's remarkably similar to the prior seven, eight quarters. We certainly are under constant price pressure. Customers, given the high financing cost, the inflationary environment that they experienced, especially in 21 and 22, each of those deals have been under tremendous price pressure. We have a strategy, as I alluded to during the CMD, where we target to have a net profit price change that's positive year over year. And we've been able to achieve that from a mix of price change across the broader portfolio. So overall, it's still a similar environment today as it has been for nearly two years.

Okay, that's very clear. Thank you.

The next question comes from Ponu Leighton-Maaki from Danske Bank.

Please go ahead.

Hi, thanks for taking my follow-up question. I wanted to ask about high-up and the price-cost kind of tailwinds. I assume you're not quantifying it, but if you kind of think about Q3, was the kind of input cost decline bigger than you had in Q2, and how do you expect this to continue? So basically, the question is that how long do you expect to get a tailwind for your margins from good pricing and maybe lower raw material and component costs?

Yeah. Yeah, thanks for the follow-up, Panu. So it's relatively stable sequentially in terms of the contribution of cost versus price quarter to quarter. And of course, we just have visibility now to roughly five months of order book. So therefore, that's really the visibility that we have relative to the contribution between price and cost. Beyond that, we can give a bit more color when we come back with the Q4 call.

Okay, but you wouldn't think that the orders that you are taking now would be kind of having lower gross margin than the ones that you are delivering?

You know, we still have the same parameters in which we evaluate deals. So therefore, we've got fairly good visibility of what the gross margin picture would be in orders that we take today. And certainly, we don't go after deals that would be illogical for us to pursue. Okay. Thank you.

The next question comes from Tom Skogman from Carnegie.

Please go ahead.

Yes, hi, this is Tom again. Reading what I've written here, I realized I don't fully understand this McGregor margin, but you said 12% year to date. Is that without the loss making offshore projects or without offshore in total? Because part of the offshore business will remain, of course. What I want to understand, what is the margin for continuing this?

I would say that it's still clearly above 10% even for the remaining part of the offshore business. We have not gone into such details that we start to break down so much in detail. But like I said, the merchant business services without the entire offshore business which has been still as a total loss making. The quarter three margin was 13.5%. And if we would exclude the problematic projects, McGregor would have been also with those numbers clearly above 10%.

The understanding is that what you're selling is including this the offshore business, which is not this kind of offshore wind related business, to my understanding. So that will also be sold.

Correct. That will be also sold. But as also mentioned, we have approximately 10 projects making roughly 15 million euros in the order book. And except for a couple of those projects, the rest will be delivered during this year.

Currently, most of the equipment business in McGregor is related to merchant.

what is the the direction in the order book for for this kind of continuing offshore business i mean that should also be on in a growth mode right so so the modern outlook should be better there for next year than for this year right but we we haven't taken any new orders uh in the old project business since uh april uh 2023 so we are delivering on the old

or the backlog and then I think it's more a decision for a potential new owner to take a look at offshore that you want to play in that market or not. We have decided not to enter into new projects in offshore before we have full control of the old projects and we exactly know what is the cost and what are the margins and what is the market ready to pay for these products and solutions. So again, we haven't taken any new orders in offshore since April 2023.

For new technology.

For new technology. So again, I mean, so there is a profitable service business and there is a smaller profitable products and solutions business within offshore repeatable business as such. But of course, from a size perspective, it's quite a small business these days.

Yeah. And how many people work in the offshore business in total?

We are down roughly to above 150 people today, including the service technicians. So it's, of course, a clearly smaller business today than compared to a couple of years ago.

And the total offshore share of the order book, you said only 15 million for these loss-making projects, but the total figure?

The total number is around 70 million euros, out of which 15 million euros are these loss-making projects.

So it's roughly between 5 and 10 percent of the total order backlog is offshore. So again, a quite small part of the business as such.

And then finally, given you have a very good visibility for McGregor, what kind of top-line sales growth do you expect next year, just in a range?

I think for the top line, and that's one reason why we came out now quite clearly with the fact that we have 40% of the order backlog goes into 26 and beyond. There are limitations regarding the shipyards and the shipyards are full. So now when we are taking new orders, they are then for production 26 and 27 mainly. So in that sense, I mean, you can't expect that the McGregor top line will increase substantially going into 2025, because again, the shipyards are full, the capacity is full for 2025. And we are to a large extent covering 2025. And again, 40% of the order backlog goes into 2026 and beyond.

All right. Thank you. Thank you, Tom. Thank you for the question. So it's one hour mark and time to conclude the session. So thank you for the great questions and great answers. We will be back with the result release next year and the exact dates will be communicated later during this year. Thank you. See you. Thank you.