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Edited Transcript of CGCBV.HE earnings conference call or presentation 22-Oct-19 12:00pm GMT

Q3 2019 Cargotec Oyj Earnings Call

Helsinki Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Cargotec Oyj earnings conference call or presentation Tuesday, October 22, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carina Geber-Teir

Cargotec Corporation - SVP of Communications

* 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

* Antti Suttelin

Danske Bank Markets Equity Research - Head of Research of Finland

* Erkki Vesola

Inderes Oy - Analyst

* Johan Eliason

Kepler Cheuvreux, Research Division - Analyst

* Karl Bokvist

ABG Sundal Collier Holding ASA, 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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Carina Geber-Teir, Cargotec Corporation - SVP of Communications [1]

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Good afternoon, ladies and gentlemen. Welcome to our news conference regarding the Q3 quarterly report. And today, we actually are going to talk about the profit increasing and the sales improving, too. Mikko Puolakka, our CFO, will talk about the business development in the areas. And then at first, Mika Vehviläinen, are talking about the group results.

My name is Carina Geber-Teir, and I'm actually standing in for Hanna-Maria Heikkinen, who is not available today. At first, we start with the presentations, and after that, we have time for a lot of questions. But Mika, please.

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

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Thank you, Carina. Good afternoon from my behalf as well, and thank you for joining the Cargotec Q3 2019 Conference Call.

In Q3 2019, a good operating profit development trend continued in Cargotec amidst (inaudible) with the progress we are making both in Kalmar as well as in Hiab; MacGregor, further actions are being taken to improve the financial performance of the business. As usual, I will cover some of the group level development issues first and then our CFO, Mikko Puolakka, will cover the business areas more in detail as well as the detailed financials and the outlook and guidance for the year.

Regarding the highlights for the Q3. Obviously, we saw the strong improvement in operating profit continuing there, and I'm very pleased that both the MacGregor and Kalmar, there the operating profit increased by 24%; and in Hiab, comparable operating profit increased by 41% compared to the Q3 2018. Obviously, MacGregor financial performance is a disappointment for us at the moment and we are addressing the issue as we speak. The Q3 2019 is also the first quarter that we are actually now consolidating the TTS numbers into our financial figures and Mikko will cover that a little bit more in detail in the business area-specific information.

Happy to see that, finally, the TTS acquisition that took a long time to get required authority approvals decision from China is now completed. The strategic rationale remains strong on that one. With the combined services operations, we are able to address a very large installed base with nearly 20,000 [resales] in our combined installed base with the TTS and MacGregor service operations. The TTS joint venture setups in China give clearly improved strategic position for MacGregor, an extremely important Chinese shipbuilding market. And obviously, with the combined operations, we are able to drive cost synergy savings that are estimated to be in the neighborhood of EUR 25 million to EUR 30 million on annual level.

Regarding in the acquired business, we have about 600 colleagues joining us from TTS as of August onwards. In TTS, estimated revenues for the remainder of 2019 are about EUR 50 million and comparable operating profit roughly at the break-even level with 26% of the revenues coming from services. We expect to close the closing balance sheet during the Q4 2019, and we also estimate that with the drive of the synergies and efficiency requirement in MacGregor, the restructuring costs from the combined operations, will be about EUR 40 million in 2019.

With that, let me move into the market environment. Overall, in container traffic, we saw the growth continuing, about 2.6% so far this year, and the forecast from the analysts is expecting a further growth throughout 2019 and somewhat higher growth in 2020.

I'd also like to take this actually opportunity to discuss the situation in port automation projects as I believe that there has been a considerable shift in the industry regarding the automation projects and prospects moving forward. In the last -- over 24 months, the industry has gained a lot of experience in the automation implementation and we have seen the performance and competitiveness to automate the terminates to continue to improve.

In my discussions with customers, and I have met quite a number of terminal -- large terminal operators in the last few weeks, the discussions are not anymore if one should automate; the discussions are entirely about how one should go about automation. I would say that the train has now left the automation station already and this progress will be inevitable.

This does not mean, however, that this will see an explosive growth in orders. We see very little for greenfield developments where we would have an entire new automated terminals to be invested. But primarily, the automation will happen within the existing ports, so-called brownfield implementations, and phased investment.

Right now, in Kalmar, we have 10 automation projects in the implementation phase and these implementations are very important for us to standardize the technology and add new capabilities that our customers require further automation projects.

I would say that the automation progress is now inevitable. And also I would like to point out that I see that progress happening even in adverse economical conditions, and that view has been confirmed now by our customers. To retain the financial competitiveness and cost efficiency in terminals, automation is clearly required by our customers and the confidence about the automation capabilities has clearly increased in the industry remarkably in the last 6 to 12 months.

Regarding the higher market environment, we still see the construction output developing favorably, 3% growth in Europe. In U.S., the growth was lower. Clearly, this is primarily a supply constraint-related availability of manpower and materials. And in housing starts, we saw further growth happening in the last 3 months in the U.S. again.

In MacGregor, the market remains weak. The bright spots would be the RoRo where we see actually continuing demand developing favorably. And also on the bright side, on offshore side has been the fact that about 300 offshore support vessels have been recommissioned during this year that hopefully will then lead into the actual new vessel development in the coming years. Also, we have seen the service demand growing in MacGregor that is also visible in MacGregor service growth numbers as well. Orders declined compared to -- in comparison. The good order development has continued in Hiab, where we see further growth happening again in Hiab sector.

In Kalmar, the orders declined. We had -- we did not sign any large project orders during the Q3. This business by nature is lumpy. We also saw a slowdown in some of the mobile equipment in certain product divisions, in certain markets as well. But overall, I would say that the pipeline in Kalmar is still strong. We have not seen any cancellations of any of the larger projects we are currently engaged in. And we still view the market overall quite favorably.

In MacGregor, we saw orders increasing. However, as a sign of the weak market conditions, the MacGregor organic orders actually declined by approximately 5 percentage points. However, our order book is at extremely good level at the moment at EUR 2.2 billion and it's of good quality, and this obviously gives us confidence for the rest of the year as well as moving then into 2020. Sales increased by nearly EUR 100 million, and operating profit was up by 18%, obviously improvement coming from good development in Kalmar and in Hiab. Also very happy to see that the continued progress in our strategic focus areas around software and services.

In Q3, the Kalmar services grew 4%. This is the lowest growth percentage we have seen for quite a few quarters, and primary reason for that one is that as our drive to also improve further our service operations profitability, we actually stepped out from number of fairly large maintenance agreements in Kalmar during the last few months and that has then slowed down the growth percentages, but improved our profitability in the business.

Good progress continued in Hiab with 14% growth in services. In MacGregor, the service growth percent was 27%, obviously helped by the combination of the TTS numbers. The organic growth was about 9 percentage points, so still very satisfactory. [Number] and software sales, we saw 11% growth primarily driven by the increase in the automation software sales. Service and software sales are now at 34% of our -- and on a rolling 4-quarter or 12-month basis, the service and software revenues are now EUR 1.2 billion and we are now on our way to the EUR 1.5 billion that we have set ourselves a financial target in that area.

That one I'd like to hand over to Mikko Puolakka, who will cover the business area in more detail.

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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. Let's start with Kalmar, where we had strong improvement in profitability in quarter 3. Kalmar orders were almost EUR 400 million, declined 19% like Mika indicated and the decline is very much coming from 2 elements, automation and project orders, which can be lumpy and which can vary several tens of millions of euros per quarter depending on what type of -- and what types of orders we get. The other element is coming from mobile equipment orders where we saw in certain product categories like reach stackers in China, order declined in quarter 3. On this same note, it's also important to notice that Kalmar order book is almost EUR 1.1 billion, on a very, very good level.

Kalmar sales grew 2%. The growth came primarily from services as well as from certain mobile equipment product segment. Service sales growth was 3% and we saw nice development both in spare parts as well as in other type of services like maintenance services. Like Mika indicated, we reorganized and terminated some of our service contracts in the ambition to drive profitability in the service area going forward.

The comparable operating profit for Kalmar was almost EUR 48 million. This is 24% improvement year-on-year, and the profitability improvement came from higher sales as well as favorable products and business mix services and certain mobile equipment product categories as well as software profitability for the third quarter sales.

Then let's move to Hiab, where we saw actually very nice development in all financial metrics. Orders grew by 4% and were above EUR 300 million. Also it's important to note that our quarterly orders fluctuate. To a certain extent, in Hiab, the quarter 3 is quite often lower than quarter 2 because of seasonality, our customers being on holiday season, especially in the Northern Hemisphere. We saw strong order development in Americas, plus 27% driven by truck-mounted forklift as well as loader cranes. And then in Europe, we had a decline in orders as we had really high demountables orders in the comparison period in 2018.

Hiab sales were up by 18%. Growth was 12% if we exclude the Effer acquisition, which we completed end of last year. And also our actions to improve the supply chain have been continuously yielding better and better results during 2019 and that has been also supporting our sales development in quarter 3. Services also continued to grow. Service sales were up by 14% and this is also in Hiab, driven by both spare parts as well as different kind of other service contract. Impressive profitability improvement. In Hiab, profitability was -- comparable operating profit was EUR 34 million, 41% improvement and this is very much driven by the sales growth.

Then let's move to MacGregor, and as Mika indicated, the TTS numbers have been now consolidated into MacGregor numbers since 1st of August 2019. The markets remain challenging, both in merchant and offshore sector. Orders grew by 10%. But if we exclude the TTS acquisition, our orders in MacGregor actually declined by 5%. TTS-related orders were EUR 21 million in quarter 3. The equipment orders related to container and bulk vessels declined, but we saw a good development, for example, in the RoRo vessels. And services orders were up by 30%. Around 80% of our quarter 3 orders are now related to the merchant sector; and then 20% to offshore.

The MacGregor order book increased significantly. This is very much driven by the TTS acquisition and the TTS business-related order book amounted EUR 218 million at the end of September. MacGregor sales increased by 31%, and then if we exclude the TTS acquisition, the sales growth was 17%. Despite the difficult market, we were able to grow very nicely our service business, 27%, including M&A and then 9% excluding TTS. Also in MacGregor, well in line with our long-term growth target.

MacGregor quarter 3 profitability was a disappointment, like said also by Mika. We made almost EUR 6 million comparable operating loss and there are basically 3 reasons for this low performance. We had low capacity utilization in several -- across several product lines in MacGregor during quarter 3. We have had some single-million project cost overruns still in quarter 3 in certain offshore projects. And then the overall price pressure in the market is quite significant as the markets are highly competitive.

We have our offshore restructuring program ongoing as we speak now. We are reducing the capacity in that sector and also the TTS integration activities are proceeding according to our plans.

Then if we look our year-to-date first 9 months performance. Good to notice that even though the quarter 3 orders were down more or less by Kalmar, it's good to note that the year-to-date orders are actually on last year's level. Sales are up by 11%. All business areas grow sales year-on-year. And even excluding the TTS and Effer acquisitions, we have been able to grow our year-to-date sales by 9%.

Also good to note that we have been growing our service and software sales by 9% during the first 9 months.

The comparable operating profit was EUR 190 million, this is up by 10%. And then the IFRS operating profit is up by 26% amounting to EUR 162 million. Earnings per share was almost EUR 1.40. To be exact, EUR 1.39 per share, and this is also up by 23%.

Our cash flow continued improving. We are now at EUR 153 million in our cash from operations after 9 months. This is some EUR 110 million better than last year. The cash flow improvement is coming from 2 sources, one being profitability improvement and then the second area being our conscientious actions to improve the supply chain situation, both in Kalmar and in Hiab, and this is resulting to lower net working capital levels. And cash flow continues to be our focus area also going forward.

Our financial position is strong. We issued 2 bonds during quarter 3, one for EUR 100 million and 5 years, the second one for EUR 150 million and 7 years. Thanks to the renewal of the long-term debt portfolio, we have been also able to reduce our average interest rate, 1.8% versus last year's 2.4%.

Our net debt has increased by EUR 300 million since the beginning of the year and EUR 200 million -- almost EUR 200 million of this increase is coming from the IFRS 16 change and then approximately EUR 100 million is coming from the TTS acquisition including also the debt that we have taken out. Our gearing is 65% including IFRS 16. And then excluding IFRS 16 impact, 52%.

The return on capital employed improved from end of last year, 8.6% now end of September; and last year, it was 8%. The improvement came from the profitability improvement, the main driver for the ROCE development.

Last but not least, our outlook for 2019. We reiterate our profit guidance and expect our comparable operating profit for 2019 to improve from 2018.

And with those words, we can hand it back over to Carina.

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Carina Geber-Teir, Cargotec Corporation - SVP of Communications [4]

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Thank you, Mikko, and thank you, Mika. Now it's time to open for a dialogue and let's start the questions from Helsinki. Any questions?

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Questions and Answers

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Erkki Vesola, Inderes Oy - Analyst [1]

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It's Erkki Vesola from Inderes. Talking about your gross margin, it seems to have been on a fairly constant decline here in the -- for several quarters already and you have been compensating this by squeezing the SG&A. How long will this trend -- these trends continue?

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

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It's 2 actually. If I look at from '17 to '18, we had a declining gross margin. And from '18 to '19, we have also experienced gross margin. However, the difference is that the decline from '18 to '19 in gross margin is solely coming from MacGregor gross margin. So actually in Hiab and Kalmar, we have stabilized the gross margin development already for this year. I'm actually quite kind of confident about the capabilities to actually return some of that gross margin higher than Kalmar. The supply environment has softened. We clearly, when I look at our sourcing, are able to see several pockets of opportunities in sourcing to drive the cost down, which is adverse or in the opposite situation that we had in 2018 where it was more seller's market. And also the pricing actions we've been taking on the product side both in Kalmar and Hiab should be yielding further results as well.

So I would say that on that one, we have stabilized and I would expect to be quite positive on that front where I think MacGregor clearly difficult market situation has led to the situation where the pricing pressures are there and then when the older projects have sort of ended now from sort of '16 and '17 into '18, that is really quite a clear decline in the MacGregor gross margins, which is part of the profitability issue we have.

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

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And perhaps to add there is that we have done also price increases in the previous quarters and these have certain lead time as we have still fairly long lead times, especially in the Hiab product. So certain price increases have been made and those will be then later this year.

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Erkki Vesola, Inderes Oy - Analyst [4]

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Okay. If I may continue on your SG&A, is the current level on a rolling 12-month basis sustainable in terms of euros or percentage?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [5]

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We are looking also on the SG&A. So overall, we have productivity improvement pressures not only on the corporate level where we have this company-wide shared service program ongoing, but also we are looking other areas in the SG&A like the sales efficiency, these kind of activities. And you can see also from our business area results that we have incurred certain restructuring costs both in Hiab and in Kalmar as well in addition to MacGregor, and these are related to the productivity initiatives what we are doing in the other SBUs.

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Carina Geber-Teir, Cargotec Corporation - SVP of Communications [6]

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Any more questions from Helsinki? If not, then we can continue with the international questions.

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Operator [7]

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(Operator Instructions) We take our first question.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [8]

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Magnus here from UBS. A couple of questions from my end. So first, could you expand a little bit on how your year-over-year demand trend developed over the course of the 3 months in Q3? And also if you can give us some indications on how Q4 has started. That would be my first one.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [9]

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If I start with Hiab, we've seen the positive demand trend continuing in the business. And Mikko's putting out as well one needs to be careful not to look at sequentially because also last year, Q1 was the highest order and it declined in Q2 and then declined further in Q3. That's the seasonality we see. But on year-on-year, we have seen a continuous improvement happening across all the quarters in there.

And if I look at the Q3 demand, we had one -- well, Mikko already mentioned that one large government or military order last year in demountables that was not repeating. So if you exclude that one, the European development was also positive.

In Europe, in Hiab's case, it's quite a mixed bag. We've seen softened marketing. In the U.K., I guess the Brexit fear surrounds that one. Also Sweden and Denmark as well as Benelux have been somewhat softer. But then the rest of the Europe actually has shown good demand development continuing there as well.

In Kalmar side, the projects come and go. So I think it's more a question of lumpiness and signing of those projects. The pipeline still looks good on that one. And clearly, at least from my point of view, I see the strengthening of the belief on need to automate to increase in the industry all the time, although that obviously takes a while to sort of land on the order books and deliveries here as well.

On the mobile equipment, in certain areas like in China, we saw sort of softening of the market on there as well. That's, of course, against a fairly strong Q3 demand that we saw across the different product lines in last year as well.

MacGregor markets remain to be weak, I mean both in merchant as well in offshore. Overall, the order intake was down organically about 5 percentage points. In Q4, I don't think I've seen any major changes on the demand as much.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [10]

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Perfect. That's very clear. And on the TTS acquisition, could you talk a little bit about the savings and the phasings of those savings as we go forward in the next 1, 2, perhaps 3 years? And could there be more restructuring coming through on the TTS part in 2020 than you have just announced?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [11]

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Quite a lot of term restructuring will happen and land as we have now kind of warned or indicated in the Q4. We expect the savings to be in the ballpark of EUR 10 million from the TTS-related integration. Obviously, we are looking for MacGregor-related direct sales especially in offshore area and the remaining then happening in '21, '22. Some of the savings due to the Chinese competitive restrictions and this whole separate -- are pushed back by that whole separate period and only landing in '21 there as well. But we expect that within '21, end of '21, we will have reached that EUR 25 million savings.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [12]

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Perfect. And then, finally, and I'm sorry if I missed this a little bit, but could you develop on the components within the positive mix impact in Kalmar again, please? I just missed that.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [13]

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I think that certain mobile equipment deliveries generally have higher margins than some of the project deliveries. And then also we had a very good delivery in software including the Navis portion of the software in Q4. So overall, you will say that mix was favorable pretty much across all the product portfolios?

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [14]

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Okay. So there was also favorable mix within software, is that right? I think the balance between equipment, service and software was relatively similar between Q2 and Q3, but margins were quite...

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Mika Vehviläinen, Cargotec Corporation - CEO & President [15]

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In services side, we had -- actually, in services, we had a relatively low growth in Q3 primarily because we stepped out from a number of the larger maintenance agreements that did deliver on top line but didn't deliver adequately under the bottom line. That obviously helped on the mix as well.

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Operator [16]

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We take our next question.

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Leo Carrington, Crédit Suisse AG, Research Division - Research Analyst [17]

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It's Leo Carrington from Crédit Suisse. Just a follow-on on profitability. In Kalmar, how do you see the mix changing in upcoming quarters? It sounds like everything was fairly favorable in Q3. How sustainable do you think that mix is going forward?

And then in Hiab, would you say the margins are now back to more normalized levels? Or there are still more efforts that can be taken in Poland to improve margins further and get productivity at that factory at optimal levels?

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

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I would say that the Kalmar mix would remain probably fairly constant moving forward. If you look at the order backlog mix, that's fairly similar then on what we see in terms of deliveries as well. So I don't expect -- I don't think Q3 was exceptionally positive in terms of mix either. I think you'll see the similar improvement moving forward as well in there and as we discussed on the gross margin side as well on a previous question. As I said, that gross margin side has stabilized now in Kalmar and we expect that to improve moving further.

In Hiab, Q3 tends to be a difficult quarter for us. Obviously, from relative operating profit, we actually came from Q2 as expected and then, again, we expect to bounce back on Q4. So again, we expect the sort of that further improvement year-on-year on Q4 as well.

We certainly had a sort of primary supplies issue in 2 main factories, one related to truck-mounted forklifts and the other one related to loader cranes in Poland and we see improvement happening in both of those locations and there are other opportunities. It's gradual improvement. We have not suffered from any major component shortages anymore. So the improvements are primarily coming from our own operational development and that's obviously a continuous improvement. I would expect further improvements happening into Q4 in those areas.

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Operator [19]

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We take our next question.

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Antti Kansanen, SEB, Research Division - Analyst [20]

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It's Antti from SEB. First one on Hiab's order intake and the organic growth numbers if we kind of exclude the Effer impact on the growth in Europe especially. What kind of growth rates organically did you see in Q3?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [21]

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So Hiab orders grew 4% in quarter 3 including Effer. And then excluding Effer, the order growth was actually negative. So orders declined by 2%.

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Antti Kansanen, SEB, Research Division - Analyst [22]

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Okay. You mentioned that in Europe, you had some -- in the comparison figures, you had some big orders. If you compare that impact to the Effer one, which one was larger?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [23]

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If we would look the organic, like Mika said, if we would look -- take the organic development in Hiab in quarter 3 and excluding this military order in demountables, then we would have grown in quarter 3 this year.

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Antti Kansanen, SEB, Research Division - Analyst [24]

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Okay. And then on the other hand, America showed quite strong order growth. Would that have been positive without the contribution of one large order that you had flagged in the report?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [25]

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Yes. Correct.

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Antti Kansanen, SEB, Research Division - Analyst [26]

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Okay. And then maybe still coming back to the segments' profitability. If we compare it year-over-year, which I guess are representative in terms of seasonality, was there -- can you quantify at all if there was any impact from positive or negative mix and then from the supplier and component shortage issues? Or is that kind of earnings leverage that we can get from the headline figures a fair representation of what is your operating leverage in a division currently?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [27]

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I would say that when you look at the Kalmar and Hiab, the primary driver was profitability improvement was the volume. We did not decline any further. I say the gross margin was stabilized, but did not give a positive impact from that one. And the operational leverage is -- was not yet that visible. So it's, by far, the biggest factor there clearly was -- year-on-year basis was just the higher delivery of sales volumes.

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Antti Kansanen, SEB, Research Division - Analyst [28]

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Okay. Fair enough. And then maybe a bit more technical question regarding the one-offs were a little bit higher than expected. Is there -- what kind of a level of one-off costs should we expect going forward on Q4 and then going into 2020?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [29]

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We expect some EUR 50 million. One, of course, is related to quarter 4, out of this EUR 40 million are related to MacGregor like we indicated also on the TTS slide. So the total year one, of course, are expected to be somewhere in the ballpark of EUR 70 million, EUR 75 million, out of which majority would land in quarter 4. 2020, I would say that it's a bit too early to say at the moment because it depends also on the progress of the TTS integration.

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

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There in Q3, in addition to the corporate savings, obviously, so also the productivity initiatives happening in the business areas and Kalmar and Hiab as well where we are now trying to leverage the investments we've done in our capabilities and drive further productivity there as well. It's more a continuous improvement basis, but some of that will land in the restructuring as we move forward.

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Operator [31]

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We take our next question.

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Antti Suttelin, Danske Bank Markets Equity Research - Head of Research of Finland [32]

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This is Antti from Danske Bank. I would like to ask about the service contracts that you terminated in Kalmar. Can you quantify what the magnitude of sales they generated last year and also what their EBIT contribution was last year?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [33]

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I can't even remember that number myself, Antti, but I would say that if you talk about tens of millions of euros of sort of service contract revenues, on an annual basis, it's very low, or in certain cases, even negative EBIT margin and obviously not very much point on being there. We try to renegotiate some of them and being not able to do that one, whereas in some certain -- other contract areas, we've been able to come to a more successful conclusion. And so we effectively have stepped out of those ones. And I would say without those ones, you would have seen the growth rate in Kalmar to be closer to what you saw in the previous quarter.

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Antti Suttelin, Danske Bank Markets Equity Research - Head of Research of Finland [34]

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Okay. And then, secondly, you appeared quite upbeat with regards to automation projects at ports. Would you mind talking a little bit more about this? Is this something that you see materializing into orders potentially in Q4 or early 2020 as you see it now?

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

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I don't necessarily see that landing soon, but I think now that's why I wanted to flag that because I think the discussion around automation has now moved from should I automate or not, does it make sense or not to you don't have this question and more. Everybody I meet in the industry is talking about how should I now automate. And the biggest driver is that when you look at the existing automation projects, their performance clearly has gradually improved. And when you look at the cost competitiveness of those terminals now, whether it's in U.S. West Coast, whether they are in Australia or elsewhere, they are clearly able to actually show very high competitiveness against the manual terminals. And I think that's what has shifted now the customer thinking around that one.

So again, as I said, I don't think you see a lot of major greenfield projects that would then sort of have a big impact in terms of order intake but we will start to see more and more the consideration about how do I go about doing the brownfield, what should I do in terms of my current terminal to actually start to increase the automation stage.

And people are -- I've seen a number of terminal operators showing me the cost curves when it comes to the labor cost development, and at the same time, with the consolidation of the shipping line area, the pricing pressures they are under. So the balance of power clearly has shifted between the terminals and the shipping lines and the terminals are getting under further development and the kind of you will see the cost curves going up and the pricing curves going down, and that's what's really pushing now the sort of automation forward and that's somebody told me that I'll have to automate or I'm not going to be in the business very soon. Again, one needs to be careful. I don't think we see any quick explosion of orders here. I think this will happen. I think as I said, I think my own thinking here is that the train has now left the station. It's moving ahead but it's still picking up speed slowly.

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Antti Suttelin, Danske Bank Markets Equity Research - Head of Research of Finland [36]

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Okay. And finally, finally, if I may, how would you assess Kalmar's competitiveness in supplying and automation solution? Are you competitive enough against other suppliers including the Chinese?

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

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Absolutely. I think Chinese suppliers might talk about the involvement in many of the automation projects but I don't think they've done much in terms of the actual automation capabilities and software outside China. Most of the automation-related Chinese equipment is done by the automation providers such as ABB and Siemens.

In terms of equipment-related automation, if you look at the end projects we are currently in implementation of, that's quite clearly the leading portfolio with the very demanding technical features that customers are requiring. They are both in intermodal markets as well and they're sort of integrating the port and logistics facilities together. And I think from the technology capability point of view, I mean we are in an extremely competitive position now.

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Operator [38]

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We take our next question.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [39]

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It's Manu here from Nordea. My first question would be on Hiab. If I could just ask once more about the organic order intake trend in Q3. So I think you reported EUR 307 million of Q3 orders and then that included EUR 31 million, like larger one-off order. And if I strip that out, then I think you said that even with that stripped out, your growth would have been positive. Did I understand that correctly?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [40]

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That is correct. Yes. Excluding Effer, our orders would have been EUR 289 million for quarter 3 this year.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [41]

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But then if I exclude this EUR 31 million larger order to get kind of base order trend, then that would have been down?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [42]

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Last year, we had EUR 294 million including this fairly sizable demountables military order. And this year, our orders were EUR 289 million excluding Effer.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [43]

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Okay. Fair enough. Then I get it. Then the second question is on Hiab. I mean could you still comment about the order intake trends during Q3, that maybe you kind of see any change in this July compared to -- or June compared to end of September, start of October?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [44]

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No. I don't think that we actually got EUR 100 million a month and fairly steady orders with some seasonal variations depending on the markets. So Nordics usually July is somewhat softer and then in Middle Europe. We move to August as well, but we haven't seen any particular trend forming there. We see fairly steady demand continuing in all the market areas. But as I said, Europe is a fairly mixed bag. So we clearly have seen some of the markets, especially U.K., kind of slowing down when they are moving towards this potential Brexit there as well.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [45]

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Okay. Then on the TTS, I think you showed here on the slide that you have EUR 50 million of sales that you expect to generate in 2019. So just to confirm that, that is the kind of -- for the whole of TTS, for full year 2019 and not the number you are going to consolidate.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [46]

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That's correct. I mean the big difference, of course, when you go back and look at TTS reported numbers is that they reported the consolidated numbers including joint ventures. They've been reporting Chinese joint ventures on an equity basis and that, of course, has been about 30% if I remember maybe correct about the TTS revenues. So that leaves that, yes, there.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [47]

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Okay. And then in terms of MacGregor, I mean can you comment about your thinking around that -- obviously, there's a very big cost restructuring and cost-cutting exercise going to be done in the fourth quarter. So when do you think that you would be able to reach black figures again on a kind of -- excluding (inaudible).

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Mika Vehviläinen, Cargotec Corporation - CEO & President [48]

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Our ambition level must be that the next year will be a breakeven or a slightly positive year for us. That's where we are targeting.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [49]

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Okay. And then on the Kalmar end market outlook, so I mean you were very clear about the way you think around the prospect of automation orders. But if you kind of just think about the current development, so you're seeing some slowdown in China and then I mean these bigger orders are lumpy and although they will continue to be on the table. But are you seeing that the customers are getting more hesitant in terms of their decision-making, that they still fully agree with -- that they need to automate? But do you feel that they have the urge to do it or are they kind more in a wait-and-see mode given the uncertainty overall in the global economy?

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

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I think there's probably an element of sentiment on the decision-making overall in there, but I would say that the automation decisions are driven by the pressures related to the pricing environment and the cost development and efficiency measures. So I think in that sense, potential downturn in economy is not necessarily impacting that. We have seen some other industries actually that has, even in some cases, forced that automation development because the efficiency gains are becoming more important on that one. So I think it's somewhat independent from the overall economic development. But obviously, overall, the decision-making around the investments in this kind of uncertain environment is potentially slowing things down. We have not seen any cancellations major, but obviously, as we can see from orders, the decision-making in certain areas might have slowed down.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [51]

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And if you look at the order intake you had in these larger orders, so automation orders, so can you just remind us about the kind of level you have in 2018 and what you've booked so far in this year? Obviously, I mean do you expect to be able to still book something in the fourth quarter? Or will these orders then be shifting to 2020 potentially?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [52]

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If I would say so that in the automation, the quarterly orders, they have been varying I would say from EUR 50 million -- EUR 50 million, EUR 60 million to EUR 120 million. So that's why we have said that it's quite lumpy if we are looking third-party orders.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [53]

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Q3 this year was actually, funnily enough, even though I just talked very positively about automation, this was the first quarter we actually didn't plan any significant new automation deals. Some very small projects in there. And that clearly had an impact there as well. But again, I -- my discussions with customers and we see the pipeline being their question only is the kind of speed of decision-making and obviously how the deals land and the different suppliers.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [54]

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If I may ask still about the -- do you have the 2018 number, for instance, for the full year, which will be a bit more comparable than the quarterly fluctuations?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [55]

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Well, if the automation and project business is approximately $400 million in revenues, so that's giving the kind of rough proxy also for the orders.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [56]

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And the year-to-date, it has been running at the same level this year?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [57]

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More or less.

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

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Year-to-date numbers, we are not actually that far off from the last year. In there also, the other thing is that especially in this automation side, these order lead times are particularly wrong. All the orders we landed actually in 2018 are actually primarily driving revenues in 2020 as well. So I'm quite comfortable taking few orders between as well. It doesn't really impact our revenue profile there.

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [59]

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Not all orders, which are landing on automation and project division are automation orders. There are also manual equipment, manual crates.

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Operator [60]

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We take our next question.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [61]

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This is Johan at Kepler Cheuvreux. Coming back to the TTS acquisition, I think you said or explained one of the reasons for the weak profitability in MacGregor on TTS. But when I read the note, it looks like TTS actually had a positive contribution on the EBIT line by EUR 1.9 million or so. Could you explain this?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [62]

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TTS had a positive impact in that ballpark, and like Mika said in the beginning of the presentation, we anticipate the roughly break-even result plus/minus zero results for the full year, i.e. for this period when we have been consolidating the business. So MacGregor's low profitability is coming very much from this kind of MacGregor original business, the cost overruns, offshore business, low capacity utilization and then the overall very competitive market where the sales margins are very tightly competed.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [63]

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Okay. And then the associated income you reported was a negative EUR 1 million this quarter. Is anything of that coming from the joint ventures in TTS now? Or how have those been accounted for if you don't account them on the revenue line?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [64]

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We have not yet taken -- as the JV numbers have not yet been verified, we have not included any numbers from the TTS joint ventures yet in the results. The target is to get those into the quarter 4 results.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [65]

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Okay. So that is then mainly relating to the Kalmar division. If I look at the margin in Kalmar, I must say it's really impressive. Having looked at this business for -- over the last 15 years, I think this 11.5% margin I get to, if I exclude the joint venture income here, is clearly the highest you've ever reported and you say this is not a one-off in the quarter. Should we continue to expect good profitability at this level? Or is there any sort of seasonality now? Because historically, to my knowledge at least, it's the fourth quarter that tends to have the best margins in Kalmar and not the third quarter.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [66]

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Yes. I would say, overall, that if you take a longer time line and you have looked at this long time, there clearly has been a steady improvement in Kalmar profitability except last year. We managed to screw it up ourselves with the supply chain issues. So that was an anomaly in that one. The underlying improvements, they're there, but they're obviously not visible as they were not able to get that equipment out as such. And now that the supply chain situation has stabilized, the improvements, what we have seen in the mobile equipment business in terms of operating profit improvement, the improvement from the continuous growth of the services and then the improvement in the project execution in our businesses in the automation side and project side have actually led the situation. And that's when we indicated this 10% operating profit target, we clearly saw improvement opportunities in Kalmar. So we are now delivering against those plans and we got away from that unfortunate 2018 numbers.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [67]

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And is it still so that you're rounding the sort of software and the automation projects business on the break-even level so the main profit driver remains the mobile business with the services attached to it?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [68]

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Okay. Again, if you look at -- if you go a little bit further back in history, we had years there the projects business was lossmaking as well. I think overall, project execution capabilities have clearly improved over the last 3 or 4 years in there and that's, of course, partly we've gone away from this kind of oops-ies as somebody called them technically.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [69]

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Yes. And now we saw your peer, Konecranes, [some] walk away from their margin targets. You still have your 11% margin target, but obviously not too firm here. But I think you set them in '17 and said they would be reached within 3 to 5 years so that's 2020 to 2022. So are you still comfortable with that? Or are you seeing the different cycles in the different divisions that you have now obviously with the weaker expectations on MacGregor, for example, making the 10% target realistic or unrealistic? How do you feel about that?

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

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When I look at that, we track that target against -- in all our businesses, we track against our annual pass. We also track against the strategic target. And I would say that we are mostly on track. The big deviation to this, of course, they are visible now this year as well is the deviation in MacGregor where we are actually down EUR 20 million or so against it last year, which is very unfortunate. We obviously need to -- need to kind of sort out the situation. We are taking the actions now in there to make sure that we return to the breakeven to slightly positive next year with that one. But then the big question for us and then sort of the biggest unknown in our future operating profit improvement would be around the market recovery in MacGregor. Obviously, there is a very big leverage when the market returns in there, but that's very hard to predict at this stage. And all the other areas when you look at what we sort of -- when we broke down the targets at the end there we are getting that from, we are actually tracking very well against that target.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [71]

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Okay. Excellent. Then just finally then on these supply chain issues you have. I think you mentioned last year that inventory buildup, et cetera, that you experienced during this period tied up for an extra EUR 100 million to EUR 250 million in cash and you mentioned you have released some of that. Is there still more to come from that item? Or have you released what you saw as unnecessary capital tie-up last year?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [72]

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Yes. I would say that definitely we are not yet optimally operating. We have done some short-term kind of perhaps one could say more brutal actions in order to get the deliveries out and improve the inventory levels. But as we have also opened in our recent Kalmar and Hiab Stargard visit, there are long-term opportunities to improve the end-to-end supply chain basically from the order to the cash, the end-to-end process, but that will take some 18 to 24 months to extract all benefits from those long-term developments.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [73]

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So you mean this EUR 150 million number is rather in 18 to 24 months than by year-end?

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

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We have, for example, in automation, some deliveries happening in quarter 4 and those are -- for those we have been now building work in progress. When those happen, then for example, that will release some cash in quarter 4. So there are certain short-term results, which we expect to become visible already in quarter 4. But then as said, some of these more process-related developments take some more time to plan in the net working capital.

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Operator [75]

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We take our next question.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [76]

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This is Karl Bokvist from ABG. So of course, very solid development in both Kalmar and Hiab in terms of earnings. I'm just a bit curious here, we've touched upon it, but if we go into Q4 here, how should one think about margin improvements year-on-year because if you looked at sort of incremental margin in Kalmar, it was more than 100%. So I mean if we -- what should one expect in Q4?

And in terms of Hiab, the incremental margin was a bit better, but shouldn't you also receive some tailwinds from just I think the fact that you don't have any more headwinds on the supply chain side?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [77]

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I mean you would say that the comparison point will be quite soft obviously when you look at our performance unfortunately from last year, so it's quite clear that we will have year-on-year improvement. I do think that we see continuous improvement happening in the supply chain situation and I expect a pretty favorable sort of development year-on-year, especially in Kalmar and Hiab. The situation in MacGregor will be difficult in Q4.

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [78]

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Overall, we are looking at profit improvement in 2019 compared to 2018 and this improvement is coming from Kalmar and Hiab while MacGregor is weaker than last year's. So that's basically indicating that the absolute relative profitability in those SBUs or business areas should improve.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [79]

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Understood. Just one final follow-up there. Yes. Sorry.

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [80]

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Yes. I was just about to say -- yes. I was just finalizing that the profitability for those 2 business areas, Hiab and Kalmar, is expected to improve on a full year basis.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [81]

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All right. And did I just understand you correctly that you intend on taking about 50, 5-0, million euros in charges in Q4?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [82]

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Correct.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [83]

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All right. Perfect. And just related to that really, I mean what is your view on restructuring charges in Kalmar and Hiab going forward? Do you feel that you're quite pleased now and there's no need to do anything further?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [84]

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Out of this EUR 50 million, EUR 10 million is related to other 2 business areas, i.e., Kalmar and Hiab. So we are doing certain actions as we speak in improving the productivity in these SBUs and all business areas. And those will incur those restructuring costs. And as said earlier, I would say that it's a bit too early to give guidance for 2020 restructuring costs as we have not yet ended the year as well.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [85]

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We have indicated in the past the investments we have done in tools, process and capabilities enable us now to start to drive the productivity, and I would expect that productivity drive to continue also in 2020 and that will then ultimately lead to some balance there in restructuring costs in 2020 as well.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [86]

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Understood. And just one final question from me and that has to do with let's say that Hiab enters a scenario in 2020 when organic sales growth is, let's say, 5% to 10% negative. What is your view on the business today in terms of your margin resilience? It's been a couple of years since we saw negative organic growth in those ranges, but that year, margins really declined still quite significantly.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [87]

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I think a couple of things has been talked about already, productivity. I do think that helps us. We have opportunities in the gross margin to sort of return on that one. Those will obviously help quite a bit. And then we have them at work, and I think like any other BUs, quite a lot with a very detailed plan B execution plans as well. Especially in Hiab, we have quite a few opportunities. We still have 2 large manufacturing footprint with too many facilities, and right now, we are not in a position to be able to address that one because of the strong demand and delivery situation. But if the demand would go down, that will enable us to sort of address that manufacturing footprint and costs associated on that one as well. So I'm fairly comfortable with the margins resilience I have both in Hiab and Kalmar at this stage and the preparations we have done to the sort of potential slowdown.

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Operator [88]

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We take our next question.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [89]

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Yes. This is Tom Skogman from Carnegie. I was wondering about this kind of overhead cost-cutting. You have moved some people to Bulgaria, et cetera, and you have communicated that P&L savings in 2019 and '20 would be EUR 10 million and EUR 20 million, respectively, from this exercise. And now I can see that the internal number of employees is up by almost 30% year-on-year. So I wonder what's really going on there and what can I not see from these numbers?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [90]

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Yes. We have this EUR 50 million -- overall EUR 50 million cost improvement program, Cargotec-wide cost improvement program. EUR 30 million is coming from the indirect procurement-related savings and then EUR 20 million from this consolidation of the back-office activities. And we have said that this consolidation of the back-office activities, the savings there are coming towards the end of kind of execution period, i.e., 2020. And the reason for that is that when we are moving work from the countries to the center, we need -- we are having double costs during the transition period. So from that point of view, we expect to see savings in 2020 for this exercise.

On the indirect procurement area, we have been progressing according to the plan and the cumulative savings are close to EUR 30 million in that area.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [91]

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I was actually looking at these head count numbers just recently, and by far, the biggest driver in head count increase, of course, is the M&A. So we have added the Effer and TTS operations, and all together, added several hundreds of people into our operations. We've been also adding head count in our manufacturing facilities. We go into double shifts in some of the factories due to the delivery situation. So that's adding quite a lot of head count.

The third area of an addition actually has been around the services direct personnel where we are growing services. We obviously have been higher in service personnel on that. But if I look at the kind of S&G-related personnel development, that's actually in the negative territory. We are actually this year taking out probably some hundreds of positions in SG&A position in the businesses as well. But obviously, the growth in the volumes and the growth in services as well as the M&A is then delivering more head count.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [92]

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Building our model, is it kind of right that the saving in 2019 from this is like EUR 10 million and that's split between higher Hiab and Kalmar mainly? And then next year's EUR 20 million savings, that is kind of mainly seen on lower corporate overhead costs? Or will that be also split into Hiab and Kalmar?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [93]

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I have Kalmar and MacGregor. So this -- for example, this centralization of the back-office activities that is touching all our trade businesses, not so much the corporate. Some extent there, but mostly the benefits are in the SBUs.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [94]

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Mostly the costs that we have taken out, and we are talking about several hundred people, is actually coming from our country operations, the back-office in the regions and countries. So those are business-related head count and they are then replaced by more central services.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [95]

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Okay. And then I wonder about the health of the TTS order book. You now have had control over that asset for like 3 months, so I assume you have started to have some feeling about the health of the order book and the pricing and the -- or sales margin in the order book? How does it look?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [96]

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Overall, I think the processes, bidding process, et cetera, we are fairly satisfied what we've seen in TTS. And there are a few -- less than one hand of identified projects that are a bit of a more question mark that we are now addressing and that's part of the closing balance sheet discussion there. But I would say, overall, it's been fairly positive with a couple of identified issues that we are now addressing.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [97]

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Okay. And will those be booked as yield charges? Or will you book those -- if you do some order book corrections, will that be booked as normal earnings?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [98]

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It's too early to say. It depends on the items whether they are related to the original purchase price, whether they are related to the order book. So that is something what we are now currently as we speak going through and is expected to be finalized in quarter 4.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [99]

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Okay. So that opens it up a little bit. When Mikko talks about these restructuring costs he indicated in Q4, some of the costs is personnel related and restructuring related, the synergy savings. There will be some assets that we need to review in light of the current market situation. And then, for example, facilities is fairly big item where we have sort of long-term leases coming from both sides that we plan to discontinue as part of the streamlined operations as well.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [100]

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And was there some impact from FX on EBIT in the third quarter?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [101]

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Very small. And for example, on the top line, the impact was 1% unit positive.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [102]

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The dollar has strengthened a bit. That's not helped Hiab, especially in the coming quarters?

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [103]

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In the coming quarters, yes. At the moment, we are still delivering the fairly long order backlog from the previous quarters.

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Operator [104]

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We take our last question.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [105]

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I'm Manu here from Nordea. Again, I would have a follow-up question on Hiab. Could you help me understand if I look at the Hiab margin performance in 2016 and 2017 and then compare that to kind of what you're delivering now in Q2 and in Q3. I mean it looks to me that your deliveries margins are still kind of really below what it did in '16 and '17 but we are talking about having solved most of the supply chain issues. So with the kind of strong growth you have in sales, so you should be able to get that operating leverage. So what is really different today compared to where we stood in '16 and '17? And obviously, the question is that, do you think that kind of the margin level is closer to where we are today rather than where we were in '16 and '17 if you are able to solve the issues you have?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [106]

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I guess you talk about comparable operating profit percentage, right?

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [107]

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Yes.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [108]

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Yes. And the biggest single difference actually comes from the Effer acquisition. Although it's a profitable operation, the kind of the percentage operating profit and the percentage gross margin are lower than the rest of the Hiab business. So that, on its own, has already a dilutive effect. I'm turning to Mikko here if you remember the actual number.

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [109]

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Yes. It's something like 1%.

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Mika Vehviläinen, Cargotec Corporation - CEO & President [110]

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1 percentage unit comes from Effer overall. And then as we said, we clearly lost gross margin because of the supply chain currencies and the cost increases from '17 to '18. That's now stabilized. We need to sort of try to turn that back on with the pricing increases and better sourcing initiatives there. We also lost obviously supply chain challenges and related costs. We are not out of that one yet. I mean the situation is improving, but we have with heavy costs on that one.

And then obviously, one, our cost overall in SG&A is higher. We have invested more into the different process development, CRM system, service management tools systems, higher R&D and then on the digitization efforts as well. So part of the profitability improvement sort of -- or profitability change has come from Hiab cost level that we operate. And we are now looking at profitability improvements in Hiab at the same time as well. But we do want to invest for the future capabilities as well.

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Mikko Puolakka, Cargotec Czech Republic s.r.o - Executive VP, CFO & Member of Executive Board [111]

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Then if you look, for example, quarter 2 this year, we had roughly EUR 50 million higher sales than now we're in quarter 3 and we did in quarter 2, 14.1% operating profit. So it's also a bit low quarter 3 season, which now impacted the profitability.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [112]

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Okay. And if I compared to 2017 when you had EUR 50 million of less sales but 39.4% margins, so I can shave off like 1% from Effer and some step-up in investments and then still some double cost or extra costs from just sorting out all these issues related to supply chain and factory expense and so forth? Or is there a fundamental reason beyond those why the margins should be different?

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Mika Vehviläinen, Cargotec Corporation - CEO & President [113]

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So I think you captured it pretty well.

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Operator [114]

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There are no further questions at this time. I would like to turn the call back to our host.

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Carina Geber-Teir, Cargotec Corporation - SVP of Communications [115]

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It seems there are no further questions online. Thank you for a very active dialogue, and please remember that our full year results will be published 6th of February. Thank you all. Have a good day.