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Edited Transcript of CGCBV.HE earnings conference call or presentation 18-Jul-19 12:00pm GMT

Q2 2019 Cargotec Oyj Earnings Call

Helsinki Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Cargotec Oyj earnings conference call or presentation Thursday, July 18, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hanna-Maria Heikkinen

Cargotec Corporation - VP of IR

* Mika Vehviläinen

Cargotec Corporation - CEO & President

* Mikko Puolakka

Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board

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Conference Call Participants

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* Antti Kansanen

SEB, Research Division - Analyst

* Erkki Vesola

Inderes Oy - Analyst

* Johan Eliason

Kepler Cheuvreux, Research Division - Analyst

* Leo Carrington

Crédit Suisse AG, Research Division - Research Analyst

* Magnus Kruber

UBS Investment Bank, Research Division - Associate Director and Research Analyst

* Manu M. Rimpelä

Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst

* Tomas Skogman

Carnegie Investment Bank AB, Research Division - Head of Research of Finland

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Presentation

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Hanna-Maria Heikkinen, Cargotec Corporation - VP of IR [1]

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Good afternoon, ladies and gentlemen, and welcome to this news conference regarding Cargotec's Half Year 2019 Financial Result.

In Q2, we saw good progress in Kalmar and Hiab, but the quarter was difficult in MacGregor. Today, our CEO, Mika Vehvilainen, will start with the group highlights, then our CFO, Mikko Puolakka, will continue with the business areas and the financials and outlook. After their presentation, there is a possibility to ask questions.

Time to start, Mika.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [2]

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Thank you, Hanna-Maria, and good afternoon, and welcome from my behalf as well to the Cargotec 2019 Q2 Conference Call.

In Q2 2019, we saw our comparable operating profit increase by 12% to EUR 64 million. We saw the good momentum in orders received continuing in Hiab, and we see market softness in MacGregor business reflected in decline in order intake. The Q2 2018 was a very strong quarter for Kalmar and obviously a very challenging conversion point, and we saw 24% decline in Kalmar orders compared to 1 year ago. However, we still see pipeline and prospects in Kalmar port investments to be in a very solid level, and I think this is more a reflection of the lumpiness of the business and timing of the orders.

As said, the comparable operating profit increased by 12%. We saw a very strong good improvement happening in Kalmar operating profit, and Hiab actually had a record-high operating profit by more than EUR 50 million.

MacGregor result and performance was obviously a disappointment from our point of view. We are addressing the issues, and Mikko Puolakka will cover more details about the root causes for the losses in his presentation.

We also saw a very important milestone pass this week with the Chinese Competitive Authority approval for the TTS acquisition that will now enable us to close the deal. This is a very good deal for us. The strategic rationale is very strong. With the combined installed base, this enables us to drive further growth in services with the good MacGregor services operations leveraging now those operations into the TTS installed base as well. This deal will also enable us to have a much stronger strategic position in the very important Chinese shipbuilding market with the TTS joint ventures with the largest Chinese shipbuilding companies. The overlap of the operations, this will also enable us to drive synergies, which we estimate to be around EUR 25 million to EUR 30 million on annual basis within the 3 years.

We are obviously aware that the market situation in marine at the moment is very difficult. However, this combination obviously enables us to address those headwinds much better than as standalone entities.

As a part of the Chinese Competitive Authority approvals, there are certain remedies attached to that one. The 2 main ones are related to, first of all, the need to hold certain MacGregor new equipment business separate from the TTS joint venture for the period of 2 years and then there were certain temporary requirements related to terms and conditions in new equipment business in China.

I do not see the second one to be material in any way as the market conditions ultimately set the terms and conditions. The practical implication of the first remedy is the fact that the potential synergies relate to combined MacGregor new equipment business in China with the Chinese TTS joint ventures will delay those related synergies for the first 2 years, but ultimately will not affect the total synergy potential.

We now expect to close the deal on 31st of July. And obviously, from 1st of August, we will start the integration and joint business development with the TTS organization.

Related to the market conditions, the growth continued in global container throughput and we expect that growth to continue also within the second half of this year. Overall, we still see the pipeline in port investments on a very solid level, and we expect further automation with the phased smaller investments continuing. However, we do not expect any large or single automation deal within this year.

In Hiab business, the construction indicators stayed at a good level both in U.S. as well as most of the Europe with limited few hot -- soft spots in European market, and that's obviously reflected in the good order development continuing in Hiab business.

However, in MacGregor business, compared to Q1, we clearly see more softening market and we now expect the total ship order quantity to actually decline from 2018, delaying the market recovery by another year in MacGregor.

As I said, overall orders declined. However, good progress continued in Hiab. In Kalmar, as I said, this is more a timing question. On year-to-date orders, Kalmar is still up from last year, which was already on its own a strong year. The difficult market conditions in MacGregor obviously also related and reflected on the MacGregor order intake.

Order book is, however, still 16% up year-on-year. The order book is of good quality. We also are in actually exceptional situation that we pretty much have a full year order coverage in almost all of our product lines for the remaining of the year.

Thanks to the strong order intake we have seen in the last 12 months and improving supply chain situation, we saw sales increasing 12%, and that's obviously driving then improvement in operational profit as well.

Related to the supply chain situation, we see continuous improvement taking place, but we are not out of the woods yet. We still experience certain component shortages especially in hydraulic area, but we see gradual improvement continuing both in Hiab and in Kalmar business.

Especially pleased that the good progress in our services and software business is continuing. In Kalmar, we saw 6% growth in services with the comparable FX and adjusted for the M&A we have done in the business and a strong 14% growth in Hiab services business.

The soft market condition was reflected in MacGregor with a 1% decline after a couple of quarters of actually increases in MacGregor services business as well.

Total services increased despite the difficult MacGregor situation by 6% adjusted for the FX and acquisitions and divestments.

Also strong sales growth continued in software, primarily driven by the growth in automation software. Overall, the service and software is 33% of our revenue. And on a rolling 12-months basis, our services and software revenue is now EUR 1.2 billion, and we are well on the way to EUR 1.5 billion target we have set for ourselves.

With that one, I'd like to hand over to our CFO, Mikko Puolakka, who will cover the business areas more in detail. Mikko, please?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [3]

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Thank you, Mika, and also good afternoon from my side.

So let's start with Kalmar where we had very strong profit growth in the second quarter. Orders, like Mika mentioned, declined 24%. But one should note that in Kalmar business, we have certain lumpiness in the orders, and the quarters are not like sisters and brothers when comparing to each other.

In the comparison period, when we are looking the orders, we had EUR 80 million queued more bank order in quarter 2 2018. And also we had in last year's quarter 2 fairly high mobile equipment orders. But overall, we would characterize that Kalmar sales funnel, as we speak today, is solid. So good progress in this area.

The order book in Kalmar is just above EUR 1 billion, EUR 1.1 billion, and this offers, of course, a very good basis for the rest-of-the-year revenues and also for the beginning of next year.

Sales were up by 10% year-on-year, EUR 427 million for the second quarter, and this is very much driven by the good order intake in the past quarters especially in the mobile equipment area.

Services sales increased by 10% for the quarter as well as for the year-to-date when comparing with comparable exchange rate as well as when excluding the divestments. And the service growth is very much in line with our long-term growth targets.

Operating profit for the quarter was almost EUR 38 million, a 49% year-on-year improvement. After 6 months, Kalmar operating profit is 30% higher than year ago. And the profitability improvement in the second quarter came very much from the sales growth as well as keeping the fixed costs on previous year's level.

Then moving to Hiab where basically all our financial indicators were very green during the second quarter. Orders were EUR 340 million, 13% year-on-year growth. We saw solid growth in both main markets, Americas as well as EMEA, and the growth in orders came especially from truck-mounted forklifts, loader cranes, demountables as well as from services. We announced also earlier today a very large truck-mounted forklift order. We made the deal in the second quarter, total EUR 60 million. And EUR 31 million of this order will -- has been booked in the second quarter and then EUR 29 million will be booked in the third quarter.

Hiab sales grew by 22% and were EUR 358 million in the second quarter. Excluding the Effer acquisition which took place end of last year, the Hiab sales growth would be 14%.

Like Mika said, also the supply situation has been gradually improving or continuously improving in Hiab, but like said, we see still potential to improve in certain areas there.

We had excellent service sales growth, plus 14% year-on-year both -- coming both from North America as well as from Europe. The acquisitions did not have any major impact on service sales growth.

Operating profit, record high, almost EUR 51 million for the quarter, plus 29% improvement compared to last year. And the profitability improvement is very much coming from the good improvement in sales.

Then moving to MacGregor where the performance was unfortunately very weak. The market recovery, like Mika said, has been postponed. The orders were down by 11%. Customers are very much spending their available funds, for example, to comply with sulfur emission regulations, so very low investments for the newbuild ships. Especially the cargo handling and offshore orders declined in the second quarter. We saw growth in RoRo orders even though the comparison point was also fairly low in last year's quarter 2.

A positive thing was that despite the difficult market situation, the service orders grew actually nicely and were 19% up from last year's level.

MacGregor sales declined by 5%, and operating profit was EUR 11 million negative. There were a couple of reasons driving this weak financial performance: first of all, the low sales impacted the profitability; we had some offshore project cost overruns during the quarter; and then also the capacity utilization was fairly low in the offshore division during quarter 2. And due to these reasons, we will look further cost optimization and address the productivity going forward.

Then let's have a look on overall Cargotec financials. If we look the 6 months performance: solid growth in orders; very good order backlog, like I said earlier, up almost EUR 2.1 billion; very solid backlog offering, good basis for the coming quarters revenues.

Comparable operating profit improved overall 6% on Cargotec level. And then the reported operating profit after restructuring cost and other items impacting comparability was EUR 104 million, there, 40% year-on-year improvement.

Our earnings per share were EUR 0.93 per share, and there also 70% improvement compared to last year's first 6 months.

Then if we look our cash flow. Cash flow continued to improve. Our year-to-date June 6-month cash flow is now EUR 72 million versus EUR 23 million a year ago. And the cash flow improvement is coming from basically 3 sources: improved profitability, then also we have booked special actions on inventory reduction as well as on addressing overdue receivables and then we received some advanced payments especially in the Kalmar automation business in the second quarter.

Our financial position is strong. We have currently EUR 456 million unused credit facilities as well as cash at bank. The net debt at the end of the quarter was EUR 876 million, and if we exclude IFRS 16 lease liabilities, then net debt was EUR 698 million.

Gearing was 49% excluding IFRS the impact and 62% as-reported.

Our debt maturity profile is unchanged, so no major significant loan repayments in the coming years.

Our return on capital employed was 9.1% at the end of June. There, nice improvement compared to the end of last year where we had 8%. And the ROCE improvement is coming more or less from the 40% higher operating profit compared to last year.

And last but not least, our outlook for 2019. We reiterate our outlook, which we published in the beginning of the year, and we expect the comparable operating profit to improve from last year's level when it was EUR 242.1 million.

So that's all from my side. And then I would hand over back to Hanna-Maria.

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Hanna-Maria Heikkinen, Cargotec Corporation - VP of IR [4]

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Thank you, Mikko. Thank you, Mika. Now it's time for questions, and we will start with the questions from Ruoholahti.

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Questions and Answers

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Erkki Vesola, Inderes Oy - Analyst [1]

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It's Erkki from Inderes. A few questions from me starting by could you provide us with a wrap-up of the improvement actions and their impact regarding the supply chain, issues that you have addressed especially in the Polish factory.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [2]

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There are quite a few of those ones, I would say, addressing many of the major areas. The supplier performance in terms of securing better on-time delivery for our suppliers has improved on the last 12 months, although we still experienced some difficulties in certain components. We have been increasing our labor force and capacity in the factories. We have addressed number of the bottlenecks in the production, production processes and systems as well as strengthened the management in those factories. So there are multiple different things. There is not one single silver bullet, but multiple process improvements that are still improving the process but they still have quite a lot of opportunities to improve the situation further.

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Erkki Vesola, Inderes Oy - Analyst [3]

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How long do you think then these actions will still continue?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [4]

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Well, we see continuing improvement carrying on throughout the whole year. Some of the improvements, I think, in our supply chain development are more fundamental and will address situation in the long run as well.

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Erkki Vesola, Inderes Oy - Analyst [5]

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Okay. And then coming to group gross margins. Should we look forward to stabilized or still continuously declining gross margin on group level? I mean are there any factors linked to sales mix, et cetera, that could affect that?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [6]

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Yes. In a way, funnily, the mix is improving because if you look at the MacGregor where obviously the -- generally speaking, the gross margins are lower due to the nature of the business, as well the MacGregor was only 13% of our order intake in the Q2 as well, so you actually see mix improving by just effectively by the more profitable business lines -- business areas growing stronger. There, obviously, the services' continuing growth will enable us to drive higher gross margins as well. Then again, on the automation growth and the project growth in Kalmar obviously has sort of decline, and in fact, those margins are lower than in services in some of the key product areas. So in that sense, it's a mixed bag, but I would say that there are probably more upside than downsides in the gross margin development.

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Erkki Vesola, Inderes Oy - Analyst [7]

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Okay. And finally, about the SG&A, it seems to have stabilized quite well. Looking forward, should we expect the same level of SG&A annualized retained or should we retain also in the future?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [8]

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Yes. The proxy for the 2019 SG&A cost is approximately EUR 40 million, EUR 40 million. So yes, on this, 4-0, yes.

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Hanna-Maria Heikkinen, Cargotec Corporation - VP of IR [9]

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Then we will continue with the international questions, so handing over to the operator.

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Operator [10]

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(Operator Instructions) We will now take our first question. It's from Magnus Kruber from UBS.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [11]

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Mika, Mikko, Hanna-Maria, Magnus with UBS. I have a couple of questions from my end. So first, could you expand a bit on how the year-over-year demand has trended through the quarter? Is there any difference between April and June and how has July started?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [12]

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Yes. No major changes there. I don't see any trend other than what you see in a quarterly level, on the monthly level either.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [13]

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Okay. Perfect. And here, I mean if I adjust for FX, structure and large orders, it looks like your underlying organic growth was down mid-single digit. Did I do those numbers right? And if so, how did your underlying order trend develop in Europe and North America especially?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [14]

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Well, if you look at the Hiab, the FX had a very little impact. I think if I remember right, Mikko, about EUR 2 million on Hiab. And obviously, one needs to be careful. You can't kind of exclude the large order and make a comparison point because obviously we have a key account -- large key account orders in other previous quarters as well. It's not sort of a -- it's higher than what we have seen in the past, but we see fairly large deals happening in the market then almost in every quarter as well. So as such, excluding that one, it's not a fair comparison point either.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [15]

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Okay. And then, finally, on gross margins, very solid in both Hiab and Kalmar. But for Hiab, I think in Q1, we discussed that you would have some improvement from pricing and lower raw materials coming through. Could you discuss a little bit how you saw it coming through in the quarter?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [16]

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I think that primarily the driver still in the Q2 was very much the increase in revenues, and the impact of the mix and the pricing was not that significant in Q2.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [17]

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Okay. So more into the second half on that then?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [18]

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Yes.

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Operator [19]

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

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [20]

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It's Manu Rimpelä from Nordea Markets. My first question would be on the MacGregor. So you talked about the weaker market for ordering activity and we can see it also from vessel orders. And if we look at your kind of Q2 level of activity, so are we starting to be in a situation where 2020 equipment sales are unlikely to grow compared to the level where we are in 2019 given the kind of long lag from shipyard orders to your orders and from orders to sales?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [21]

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That's a very good point. If we now expect the ship order quantity to remain roughly at the sort of same trajectory as has been so far, so we probably end up with maybe 1,000-plus ships this year. That will, in effect, mean that the MacGregor as a stand-alone equipment business is probably not going to be significantly different in 2020 compared to 2019. Obviously, the ballgame is changing from our point of view in terms of combining the entity, TTS and MacGregor combination. I still believe that we still have a good opportunity to drive further growth primarily from services business. As Mikko was saying, we still saw a strong order intake growth in services also on the Q2 and now our capability to start to address the installed base of TTS as well. I'm more optimistic about the services sales development this year and also moving to the next year.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [22]

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And how do you think around the equipment margins in a situation where then there is no growth in the top line in 2020? I mean the other way to ask it around is how big is the offshore business in terms of the sales? Can you give a sense of the cost base in that business?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [23]

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The offshore situation is a little bit interesting. We kind of see -- have seen for a while the increasing activity levels in there. We see dormant ships put impact to the operations, but the activity has not, as you can see from the numbers, not translated into the order intake as such.

It's also good to know -- of course, note that with the combination of TTS, our offshore exposure will go down. The offshore portion of the -- in the TTS business is considerably lower than in MacGregor, as such, so the exposure on that side will decline. But it's really hard to sort of put a finger and I think the visibility in offshore is a question mark for us. And there are a number of things that would drive for better market development. We see an increased activity. But the fact of the matter is, of course, that we have not seen that activity landing our order intake, at least as of yet.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [24]

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And can you remind us how much is offshore out of the equipment sales today?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [25]

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In MacGregor, it's been varying slightly between 20% to 30%. And in TTS, it's in the ballpark of 10 percentage points.

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [26]

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Yes.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [27]

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Okay. And then final question. I mean how do you see the -- getting back to Magnus' question on the Hiab order intake. So how do you see order intake kind of, as you said, we can't exclude the large orders, but do you see that the activity remains healthy and we should expect continuing growth in the second half of the year on the order intake based on the kind of demand trends you're seeing at the moment?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [28]

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I think the underlying market remains to be strong. Maybe the caution I would have there is that we have now landed in last 12 months a number of large key account orders in U.S. as well and we kind of start to see that pipeline being lower. The underlying sort of equipment business is still in a good shape as well, but potentially we don't see such large orders in the second half as, for example, we saw now on this one. Obviously, the Q3, we will still see the other half of that EUR 60 million order landing in those numbers.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [29]

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Okay. And then final question on the EBIT margin of the Hiab business. I mean if we kind of combine the first half numbers and kind of exclude the quarterly volatility in the Q1 and Q2 numbers, so how do you think about, you had 13.2% EBIT margin in the first half of last year and then 12.5% in the second half of this year. So looking at the moving parts, going into second half of the year, so you will probably be a little more -- and better-margin products with potentially some tailwinds from raw materials. So I mean how should we think about the kind of half yearly margin volatility in the second half compared to the first half of this year?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [30]

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Yes. First of all, good to remember that Q3 is also always seasonally weaker for Hiab. I mean if you go and look at the past year profiles, you always see it's the sort of seasonality variation there. So I'm always sort of a little bit cautious about the Q3 numbers. But obviously, I see the underlying performance improving and impacting favorably especially and should be again visible in Q4 numbers.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [31]

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Okay. But basically assume a normal type of seasonality and no major tailwinds from the kind of backlog factors, of course?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [32]

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Yes. I think if you kind of look at the profile from previous years and compare that to the current performance, you'd probably be able to sort of get a fairly good kind of understanding where we expect to land.

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Operator [33]

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We will now take our next question from Leo Carrington from Crédit Suisse.

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Leo Carrington, Crédit Suisse AG, Research Division - Research Analyst [34]

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I have a couple of questions. The first on MacGregor, please. When it comes to thinking about the margin and the unexpected negative EBIT development, how much of this was due to the offshore projects overruns? And did you see a scope for a piece of these costs into Q3 and Q4? Or is it perhaps a mix of factors?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [35]

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If you look at the kind of the loss of roughly EUR 10 million on Q2, about half of that came from the cost overrun in offshore. It was particularly related to one new technology introduction we did in the offshore area. We booked expected losses in the Q2 numbers now. Obviously, all the new technology introductions have always the risk factor in there. But at this stage, we do not foresee further cost overruns on that one. The other half came, really, from the weaker-than-expected sales.

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Leo Carrington, Crédit Suisse AG, Research Division - Research Analyst [36]

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Okay. That's helpful. And then on to software for the company overall. I mean there's been good momentum, I think, with orders announced in cargo boost, the Navis partnership with ZPMC, and generally the growth rate seems to have picked up. How does this compare to your expectations from maybe earlier in the year?

And also do you think you could also update us with where profitability in software is and how you expect that to develop midterm?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [37]

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The profitability in our software businesses is picking up. I would expect that by the end of the year, the software business should not dilute, at least in a significant way, overall Cargotec business operating profit percentages as such and that really comes from, primarily, from the sales growth happening there. The sales growth in the software business obviously coming from 2 primary sources, one is Navis and the other one is the automation-related software. The main growth right now is coming from the automation. We see a very good business demand and progress in Navis side. But at the same time, the traditional Navis business has been license-based software, and we are more and more transforming into the SaaS-based revenue, subscription-based revenue basis, and that obviously is slowing down the growth in there, but at the same time, the percentage of the recurring revenue in the Navis business is continuously increasing as well.

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Operator [38]

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We will now take our next question from Antti Kansanen from SEB.

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Antti Kansanen, SEB, Research Division - Analyst [39]

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Yes, it's Antti from SEB. Most of the questions have been already asked, but maybe coming back to Kalmar and the order trends and kind of the demand outlook in the mobile equipment. The order intake was weaker than in some quarters for a while, and can you just confirm that you don't see any weakening of customer activity or lower trend and/or is this something that we should take as a benchmark for H2 also?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [40]

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No, I don't think -- we don't foresee that. If I take the mobile equipment first, we had a particularly strong Q2 '18 in U.S.-related some of mobile equipment orders. I think partly the mobile equipment order situation is such that in certain equipment categories, we are now effectively selling March 2020 capacity. So that's not encouraging any faster order intake. That's probably one element in there.

Underlying demand, even I look at the data, we get some sales forces still pointing out the strong continuing demand in key categories. And also talking to the port operators, we see still a lot of activity and project acquisition activities going on. It's a timing question. There are certain deals that slipped from the Q2 on barge as well, so I see this more as a sort of lumpiness of that project business and some seasonality effect other than anything else. We have not seen any shift in the customer demand or thinking about the investment at this stage.

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Antti Kansanen, SEB, Research Division - Analyst [41]

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Okay. And then coming back to Hiab's profitability, sorry if this was already asked previously, but if you compare Q1 and Q2, there was a big step-up despite kind of ongoing production issue. So kind of was there something moving from H1 -- sorry, Q1 to Q2? And is H1 kind of a benchmark that we should take into account when assessing the latter part of this year?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [42]

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Yes. I think Q2 would was more kind of, I would say, normalized operational level. We still have further opportunities there to improve the margin. But then again, the Q3 tends to land lower for the seasonality effects, as said. But I think then we still have -- obviously foresee further opportunities to drive the underlying operating margin in Hiab.

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Antti Kansanen, SEB, Research Division - Analyst [43]

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Okay. That's great. And then last question is on the one-off cost or the restructuring items that you booked for Q2, which I think were quite high compared to estimate. Is there any guidance on what we should expect for the coming quarters as well?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [44]

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These onetime costs were related to our -- or restructuring costs were related to this company-wide restructuring program and then we have some continuous productivity improvement programs in our business areas, including, for example, also MacGregor. So those are the restructuring costs we booked in the second quarter.

For the rest of the year, we don't, at this point of time, give any guidance for the restructuring cost because we need to get first the TTS acquisition moving forward, the discussions with TTS and related activities. And after that, that we have then better visibility to the restructuring costs, which we can then also more open to the publicity.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [45]

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Yes, it's good to know that because we have been in direct competitive situation with TTS, our visibility, of course, in the numbers and operations in detail is not there. After the closing, we will obviously have a chance to sort of form a better picture on the synergy plans, and then at that stage, probably are better able to give you a better guidance on the expected restructuring costs and timing of those.

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Antti Kansanen, SEB, Research Division - Analyst [46]

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Okay. Sure. But if you would exclude any potential TTS related ones and then just focus on the same things that you have already booked costs, is there something less from those programs?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [47]

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Yes, there will be still some left for the third and fourth quarter as well.

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Operator [48]

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We will now take our next question. (Operator Instructions)

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [49]

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This is Tom from Carnegie. I have questions for all divisions, I'll take Hiab first and then follow with other ones. So Hiab orders have been now basically flat for 3 quarters, signaling some countries are up and some are down. So can you please highlight where you see the biggest growth and where you see the biggest decline in order?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [50]

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On that, Tom, are you referring to the orders or...

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [51]

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Orders, yes. The last 3 quarters are more or less on the same levels. So I guess when you look at, where do you see that the market still is growing and where is it falling?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [52]

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I think overall, we still have seen underlying growth in U.S. I mean if you look at the orders, and obviously, we will have seasonal impact on those ones as well so the year-on-year comparisons are in that sense fair as well. We had a strong Q4, but we typically have a strong Q4, and then we had a strong Q1, and again on Q2 on year-on-year basis growth. I would say that overall, the growth has been pretty evenly split between the North America and Europe.

Where we see weaknesses is actually few softer spots in Europe. In Q2, we saw certain softness continuing in Sweden, which has been an issue for a little while. And for reasons I don't actually know that much in detail yet, the Benelux had a sort of slightly softer outlook as well as in Denmark.

But the rest of Europe actually, as you saw, the overall numbers in Europe were still strongly up year-on-year.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [53]

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Okay. Then I wonder about TTS whether you have had any chance yet to look into the health of the order book. It's been a very long discussion with the Competition Authorities and the order book might have changed a lot during this year, though.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [54]

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No, we obviously, with the competitive status still is in-force until the 1st of August, we have no direct visibility in the order backlog. And that's obviously one of the first things we will do after the closing.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [55]

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Yes. But can you give some indications about the sale impact now for the coming quarters?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [56]

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Well, I think you would probably -- your visibility is probably a little bit as good as mine in terms of looking at what the TTS has been reporting in the overall numbers. It's also good to note, by the way, that in TTS numbers, they have consolidated the Chinese joint ventures entirely. Our plan is not to do so. So if I remember now right, and I'm looking at my colleagues, about 30% of the TTS revenues are coming from the joint venture. We will not book that in our books on top line, and obviously, then we will propose only booked operating profit. So what you will see effectively happening is that the proportional operating profit will go up, but the overall revenue will be slightly smaller than what the combined operation otherwise would have been.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [57]

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Okay. And then finally, about the Navis and this agreement with ZPMC, so could you help us to understand this -- your strategic thinking here because obviously Navis is a great argument by Kalmar equipment as well. I guess that was one of the reasons why you acquired that and now you tried to team up with your worst competitor here. So can you help us understand your strategic planning?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [58]

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First of all, the ZPMC contract was nothing new. It was a renewal of the existing strategic agreement that Navis has in place. Navis is a software business. It operates horizontally. It cooperates with all the major competitors of Kalmar. So there are a number of joint projects with Konecranes, for example, as well as ZPMC. So we are providing -- we are, by far, the market-leading TOS operator and hence we interface with all of the different automation and other manual systems in there. Like any software leader, it needs to also sort of cooperate with all the major market players.

In ZPMC's agreement with Navis, it's especially important for us in China where obviously ZPMC has a very strong position in overall project and ports and that then enables, of course, Navis to have respectively a very strong position in the Chinese market as well as in those very large sort of Chinese-dominated port programs that they are expanding into globally as well. And that enables effectively Navis sort of to piggyback on the ZPMC large projects globally and especially in China.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [59]

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Okay. And then finally, about Kalmar and order prospect in Singapore where they're moving the port outside of the city and we have seen now many Asian suppliers announcing very large orders from this. Do you have any hopes of booking some orders as well?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [60]

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I wouldn't like to comment on individual customer cases. But the PSA, which is the port authority in Singapore, is a very particular operator which has a very particular buying pattern and generally very tailored solutions and that does not represent the normal, I would say, normal buying behaviors in that sense. And hence, I'm always a little bit cautious about the prospects related to those projects.

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Operator [61]

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We will now move to our next question from Johan Eliason from Kepler Cheuvreux.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [62]

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It's Johan at Kepler Cheuvreux. Just a question, I might have missed it a little bit here. I think last year, you talked about this supply issue bringing up your net working capital by EUR 150 million that you expected to be released this year. So far, have you released anything of this related to this specific issue?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [63]

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Yes. We have released some few tens of millions of euros, but not the amounts like EUR 150 million. One has to take into account also that if we look overall Cargotec sales and especially the Kalmar mobile equipment as well as Hiab sales, so our businesses have been growing also quite significantly over the last 12 months. So that growth inevitably ties up certain working capital. But from the kind of improving supply chain situation -- through the improvement in the supply chain situation, we have been able to reduce a couple of tens of millions of euros from the working capital.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [64]

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Do you think you will be able to release up to EUR 100 million this year?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [65]

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It depends on, of course, on the going-forward working capital situation. But like Mika said also earlier, there are certain kind of longer term or fundamental changes and improvements what we can do and envisage to do also in our overall operations. And there, we see a very good potential to reduce the working capital.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [66]

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And then I think you said something about EUR 40 million annual level for SG&A. But you mean corporate overheads, don't you? Or what's the EUR 40 million otherwise?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [67]

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Yes, these are the corporate unallocated costs. Correct.

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Operator [68]

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We will now take a follow-on question from Manu Rimpelä from Nordea.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [69]

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I have a follow-up question on MacGregor. I mean how do you think around the full year profitability given that the Q2 saw a very sharp decline and it doesn't look like there should be expected any significant change in the level of sales for the offshore business. Should we assume that kind of stripping out the cost overrun, we should be running at the kind of similar type of level for the second half of the year in terms of losses? And once the cost savings measures start to kick in at some point, it will gradually start to improve, but will not happen over this year?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [70]

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We expect whole year in MacGregor to end up in a loss -- a slight loss situation, but we don't expect the profitability to be as poor as it was in Q2 in the coming 2 quarters.

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Operator [71]

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(Operator Instructions) We will now move to an audio question from Magnus Kruber from UBS.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [72]

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Just a follow-up from me here. How do you see competition in the U.S. forklift market developing now and your key peers have more competitive offering than before?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [73]

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We see our market share to remain very strong and the order book to remain at a very healthy level. I haven't seen any significant change since the -- we've been able to secure, I would say, all the major key account business in U.S. within this year.

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [74]

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And the recent EUR 60 million forklift order is a good example of excellent solutions what we can offer to the customers.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [75]

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Okay. So no pressure on pricing or anything like that, that you've seen emerging?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [76]

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No, not really.

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Hanna-Maria Heikkinen, Cargotec Corporation - VP of IR [77]

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Continue with the question from Ruoholahti.

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Erkki Vesola, Inderes Oy - Analyst [78]

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It's Erkki from Inderes again. I don't want to be a drag or anything, but coming back to the SG&A, I'm talking about the selling, general and administrative costs that you show on your group P&L. Is the current, say, 12-month run rate, is it something that is going to be there also going forward?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [79]

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Yes. If we are looking at the next few quarters, that would be more or less the run rate level, yes. That, of course, exclude -- that comment excludes any impact from the TTS acquisition.

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Erkki Vesola, Inderes Oy - Analyst [80]

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Of course. And then, finally, about the Hiab orders. I don't know if I missed this one, but how much was the Effer impact on the Q2 orders? The impact was something like 6%, wasn't it, in Q1 on growth rate?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [81]

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Yes. Just a second, I'll check the exact number. So Effer and you're asking quarter 2 impact, yes. So the Hiab orders grew 13%, and then excluding the Effer, the growth was 6%.

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Operator [82]

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(Operator Instructions) There are no further audio questions at this time on the telephone. Thank you.

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Hanna-Maria Heikkinen, Cargotec Corporation - VP of IR [83]

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Okay, thank you so much. Then it's time to close this news conference. Thank you for joining this, it's finally sunny in Helsinki. And our Q3 report will be published on Tuesday, 22nd of October. Thank you.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [84]

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Thank you.