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Edited Transcript of KCR1V.HE earnings conference call or presentation 27-Apr-17 8:00am GMT

Thomson Reuters StreetEvents

Q1 2017 Konecranes Abp Earnings Call

Helsinki May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Konecranes Abp earnings conference call or presentation Thursday, April 27, 2017 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Miikka Kinnunen

Konecranes Plc - VP of IR

* Panu Routila

Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board

* Teo Ottola

Konecranes Plc - CFO, Deputy CEO and Member of Executive Board

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Conference Call Participants

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* Christer Magnergård

DNB Markets, Research Division - Head of Equity Sales and Research

* Johan Eliason

Kepler Cheuvreux, Research Division - Analyst

* Manu Rimpelä

Nordea Markets, Research Division - Senior Analyst

* Philip Saliba

HSBC, Research Division - Analyst

* Tomas Skogman

Carnegie Investment Bank AB, Research Division - Research Analyst

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Presentation

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Miikka Kinnunen, Konecranes Plc - VP of IR [1]

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Hello, everybody. Welcome to this Konecranes First Quarter 2017 Interim Report Presentation. My name is Miikka Kinnunen. I'm the Vice President of Investor Relations at Konecranes. And today, with me, I have our CEO, Mr. Panu Routila, who will cover the group figures as well as also the latest topics on the integration of the acquired MHPS business; and then followed by a presentation by our Chief Financial Officer, Mr. Teo Ottola, who will discuss the business areas as well as the cash flow and balance sheet items. We continue with the Q&A afterwards, and I will shortly mention about our forthcoming Capital Markets Day that is planned for December.

Without further introduction, I will give the floor to Panu Routila.

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [2]

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Thank you, Miikka. I am very excited now to present the first interim report of the new combined company. The first quarter was a defining step in the history of Konecranes, as the acquisition of MHPS business was completed on January 4. The first months of the combined company have been proceeding, as planned. The acquisition has been very well received by our customers and employees. The integration of MHPS is underway in many different areas, and I will cover the key topics related thereto later in this presentation.

We had a strong start to 2017, as our comparable company, combined company, order intake grew by 11.8%. The star performer was the Business Area Port Solutions, which saw a clear increase in the demand for most of its products and services. Within industrial customers, particularly the demand for ports and crane components, improved in all regions.

Group sales were 4.7% below the previous year on a comparable basis, mainly due to Business Area Port Solutions, the sales decrease in Business Area Port Solutions related to the timing of deliveries and exceptionally high sales of certain products in the comparison period. Despite the sales decrease, our comparable adjusted EBITA margin expanded by 3.3 percentage points to being 4.5% of sales. We can be very satisfied that the comparable EBITA margin improved in all of our business areas on a year-on-year basis.

Free cash flow was very strong on the back of the improved profitability and positive change in the net working capital. Coupled with the proceeds from the STAHL CraneSystems divestment, this significantly strengthened our balance sheet and our interest-bearing net debt amounted to EUR 536 million at the end of March.

The macroeconomic indicator started to support the order intake in the first quarter. Market sentiment has actually become more positive, and this is reflected in our market outlook.

Let's now take a look at the key figures in somewhat more detail. On a comparable basis, orders received in January to March totaled EUR 735 million, representing an increase of 11.5%. The value of the order book at the end of March totaled EUR 1,605,000,000, which was 7.1% higher than in the previous year on a combined basis.

Group sales decreased by 4.7% and were EUR 683 million. The adjusted EBITA increased by EUR 22 million to being EUR 31 million. The adjusted EBITA margin improved to 4.5% of sales. The consolidated operating profit totaled EUR 226 million. The operating profit includes the adjustment of EUR 205 million. The biggest item was the EUR 280 million capital gain from the divestment of STAHL CraneSystems. As a result, the earnings per share was very high being EUR 2.50.

Finally, as I already mentioned, cash flow was outstanding, which lowered our net debt to be as low as EUR 535 million.

The European Union manufacturing capacity utilization rate continued to improve slightly in the first quarter. This was visible in higher demand, products and services among our industrial customers. The U.S. manufacturing capacity utilization rate showed an uptick after having slightly declined since the end of 2014. However, the total industrial capacity utilization rate did not yet show an improvement. Demand of our products and service was mixed. Order for parts and components rose from the previous year, but orders for crane service and industrial cranes did not grow.

Based on the Purchasing Managers' Indexes, economic activity improved in emerging countries in the first quarter. Correspondingly, there are signs that the demand for industrial cranes and components may be bottoming out in those countries.

Following a recovery in the second half of 2016, the global container traffic remained robust, as it increased by approximately 5% on a year-on-year basis in January to March 2017. Correspondingly, the market for port cranes saw signs of a recovery in the first quarter of 2017. Particularly, small and medium-sized investment projects were more active.

Our new market outlook is as follows. Economic indicators related to manufacturing industries have strengthened, which appears to improve customers' willingness to proceed with their investment plans. Demand situation in Europe is gradually moving and improving. Business activity in the North American manufacturing industry remains mixed. Demand in emerging markets is showing signs of bottoming out. Global container traffic throughput growth has improved, and the prospects for small and medium-sized orders related to container handling have somewhat strengthened.

We have now issued financial guidance for 2017. The sales in 2017 are expected to be close to the comparable combined company sales in 2016, which was EUR 3,278,000,000. We expect the adjusted EBITA to total between EUR 195 million to EUR 215 million in 2017. Comparable combined company adjusted EBITA was EUR 184 million in 2016. The comparable combined company's operations comprised Konecranes' operations without the divested STAHL CraneSystems business, but including the acquired MHPS business.

In the first quarter, we have delivered initiatives, which could be implemented quickly. These are related to our U.S. service operations as well as procurement. Our industrial crane manufacturing plant in Edmonton, Canada will be closed. We have also increased the maturity of the initiatives, with plans developed for all 2017 activities. Our next step are now to focus on implementing and delivering 2017 synergies and continue to plan and take actions, which will deliver synergies in 2018 and 2019.

Approximately half of synergies for 2017 have been already now implemented on a run-rate basis. These are mainly from front-line service integration in the U.S. and procurement activities. The overall synergy target stays the same in amount as well as timing. One-off restructuring costs and CapEx are also unchanged.

The synergy program remains the same in scope as well. We have continued confidence in the plans, as we have developed these further. This slide, therefore, contains essentially the same levers as we have shown before, the changes are now here molded.

The following slides contain the group's financial performance still in graphics. And I won't repeat the previously mentioned figures anymore here, but I will just mention some highlights before handing over to Teo, who will tackle them more in detail on the business area level. Groups orders received grew in EMEA as well as in APAC, and were stable in the Americas. Order intake growth was mostly related to Business Area Port Solutions. All in all, we can be satisfied that our sales organization has not been distracted by the integration. The sales decrease mostly related to Business Area Port Solutions as well due to the timing of deliveries and exceptionally high sales of certain products in the comparison period.

Order book was higher than the year ago in all business areas. However, as we are now looking at the comparisons to the combined company figures, I should add that the previous year's order book for MHPS included deliveries for the next 12 months only, which explains a part of the growth.

Adjusted EBITA was EUR 31 million, corresponding to 4.5% of sales. The group adjusted EBITA margin improved mainly, thanks to the cost-saving measures implemented in 2016, as well as successful product execution. Gross margin improved, and fixed costs were lower on a year-on-year basis.

On comparable rolling 12-month basis, group sales are rather evenly balanced between the different business areas. Business Area Service generated 36% of sales; industrial equipment, 33%; and port solutions, 31% of sales. In terms of geographical breakdown of sales, the share of Europe, Middle East and Africa has climbed to just over 50%, whereas the share of Americas has decreased toward 30%. The share of Asia Pacific is broadly unchanged.

Now Teo will continue with the business areas.

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO and Member of Executive Board [3]

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Thank you, Panu. And in this business area reviews, we also compare to the combined company's numbers for 2016, wherever that is possible. And let's start with the service.

So service order intake was EUR 246 million. There is a slight increase year-on-year. But now, the currencies have been supporting us in the first quarter. And with comparable currencies, we are looking at the decline of approximately 1.7% in the order intake. The order intake rose in EMEA, but declined in Americas. And then if we take a look at the picture from the business unit's point of view within service, so parts order intake outperformed that of field service and then supported the product mix slightly.

Sales grew by 1.6% to EUR 285 million. That sales growth also is explained by the favorable currency rate changes. So with comparable currencies, we are looking at a slight decline.

Sales increased in the Americas, unlike the orders, whereas sales decreased in EMEA and APAC. And regarding EMEA, one has to note that the decrease is mostly due to some relatively big modernization deliveries that took place in the first quarter of 2016. So the comparable numbers were tough in the EMEA's case.

Service adjusted EBITA was EUR 33 million. That is 11.6%, which is a very good result, taking into consideration that we are taking a look at the first quarter of the year. And the improvement in euros was about EUR 6 million. And with the modest sales growth, this is a good achievement. The improvement mainly comes from lower fixed costs. The product mix was somewhat better. However, the gross margin was more or less flattish on a year-on-year comparison.

Then when we take a look at the order book and the contract base. So here in the order book, we have the compatibility issue that Panu already mentioned. So the MHPS 2016 order book only contains deliveries for the next 12 months. For Service, this is probably not a major challenge, as the order book is relatively short anyways. And the order book is slightly increasing from the situation a year ago as well as from the end of 2016.

Contract base numbers here in the monetary value, EUR 257 million for Q1, obviously includes the MHPS contract base, whereas the historical numbers 2013 to 2016 is Konecranes stand-alone. And if we take a look at the Konecranes stand-alone contract base development from the end of 2016 to the first quarter of '17, so we are seeing a small increase in monetary terms of about EUR 2 million or so. So the contract base for the Konecranes legacy at least has been increasing during the first quarter.

Then going to the industrial equipment. And again, first, the order intake, EUR 271 million. That is a decrease of 1.8%. The orders grew in EMEA and APAC, but fell in the Americas. And again, if we take a look at this from the business unit point of view, so crane component orders increased. And actually, they increased in all the regions. The industrial crane orders also rose on a year-on-year comparison in EMEA and APAC, but declined in the Americas, mostly due to the -- again, the tough comparables. So Q1 '16 included some relatively large heavy-duty crane orders in the Americas, and this is impacting the comparison number, of course.

Sales fell by 1.5%, and were about EUR 250 million for the first quarter of '17.

And then when we go into the adjusted EBITA. So we note that the EBITA was minus EUR 0.5 million for the first quarter. There is a very good improvement of more than EUR 13 million in a year-on-year comparison and a good achievement, especially taking into consideration that the sales was actually slightly lower. The improvement in EBITA comes both from improved gross margin as well as from lower fixed costs. And of course, both of these things, gross margin and fixed costs, are as a result of the restructuring and cost-saving activities that both companies actually, both Konecranes and MHPS, have been doing during 2016.

Additionally, we have had, let's say, good margin deliveries during the first quarter. And also the project execution, meaning the deliveries have been running well during the first quarter of '17, which has further improved the gross margin during the first quarter of 2017.

Order book for industrial equipment, EUR 575 million at the end of the first quarter. The comparable number is EUR 530 million. But here, we start already to have a little bit the challenge with the comparables, as in the industrial equipment, we have some orders that are for deliveries beyond 12 months.

Then port solutions. And port solutions, January to March, orders were EUR 247 million. That is an increase of as much as 44%. The orders grew in the Americas as well as in EMEA, whereas the orders fell in Asia Pacific. And again, when one takes a look at the situation from the product group point of view, so there was order growth or order increase actually in quite many of the product groups, for example, in mobile harbor cranes, in RMG cranes, AGVs, so Automated Guided Vehicles, lift trucks as well as then port service, which is now reported within the port solutions.

Sales, however, fell by about 18% to EUR 181 million, and this was mostly due to timing of deliveries. So in the first quarter of 2016, we had a relatively -- we had -- in a couple of product groups like mobile harbor cranes, for example, and RTGs, we have very big deliveries that we did not have correspondingly in the first quarter of '17. And this is then -- this means that the sales decline is as much as almost EUR 40 million. The sales decline did not actually have an adverse impact on the EBITA. The EBITA actually improved, EUR 2.6 million. It was exactly 0 in the comparison period, and now EUR 2.6 million positive. And exactly as in industrial equipment, so also in port solutions, the gross margin improvement as well as lower fixed costs were the reason for the improvement. And also here, in port solutions, a little bit like in industrial equipment, so we had some good margin deliveries during the first quarter. And the project execution regarding those ones was excellent, as a result of which the gross margin, particularly for the first quarter of '17, was high.

And then on the port solutions order book, so there the order book is EUR 812 million. And again, of course, in the port solutions specifically, this comparability challenge is probably the biggest because the order book tends to be the biggest in the port solutions. So this, let's say, year-on-year comparison from the order book point of view is not necessarily meaningful.

Then before we go into the Q&A, so a couple of comments on the cash flow and balance sheet. So of course, the balance sheet structure is very different now than what it was at the end of 2016, and we do not have comparable combined numbers for the balance sheet. So for example, in this net working capital graph, so the 2016 numbers are Konecranes stand-alone numbers, whereas then the Q1 '17 is obviously on a combined basis. The big picture becomes clear with this graph as well, and it is that the net working capital management during the first quarter of 2017 has been excellent. Our net working capital of rolling 12-month sales is below 11%, which in a historical perspective is a very, very good level. The structure between Konecranes legacy and MHPS legacy when it comes to net working capital, so the difference in the structure, is not actually huge. So this improvement mostly comes from the cash flow that took place during the first quarter. And the main reason behind this one is the advanced payments, especially in the Port Solutions Business Area that have created the good net working capital situation. Actually, we are of the opinion that this good level that we have now might deteriorate to some extent during 2017, and we still maintain that the good midterm target for us would be to have the net working capital to rolling 12-month sales below 15%.

On the right-hand side of the slide, you can see the free cash flow. And this, of course, the same story continues here. So the free cash flow was EUR 88 million for the first quarter. It is an excellent result, of course, especially when one takes a look at the historical years, where we can see that the Q1 has been a little bit challenging in 2014, '15 and '16. Now it was very good, but of course, driven by the same thing that I already discussed. So the net working capital advance payments within Q1 have been very good.

The good cash flow of almost EUR 90 million then, of course, feeds into the gearing and return on capital employed as well. So here, of course, also the -- as the balance sheet structure is very different than what it was in '16. The graphs look a little bit funny, but the equity is naturally higher as a result of the share issue. The net debt at EUR 536 million then leads us to a gearing of roughly -- or let's say 40-plus percent, which is not that much different than what we had towards the end of 2016. Of course, now here, one has to remember, when taking a look at the net debt, that this is now after a very good net working capital situation in the first quarter. And this is before we paid dividends for 2016. So currently, the net debt is on a higher level than what we can see here at the graph at the end of 2017.

And then finally, capital employed and return on capital employed. Of course, from the balance sheet structure point of view as well, this looks different than our Konecranes 2016 stand-alone history, which is -- which we are seeing here as well because the capital employed obviously is much higher as a result of the acquisition. And then this, in a way, 2017, [rosy curve] will then be comparable with itself, but not very easily comparable for the history of 2016.

With these comments on the gearing and return on capital employed, I first hand over to Miikka for a small advertisement regarding our Capital Markets Day, and then we can go into the Q&A.

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Miikka Kinnunen, Konecranes Plc - VP of IR [4]

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So thank you, Panu and Teo. So before we proceed to Q&A, let me just mention that the plan is to arrange a Capital Markets Day in Germany near Düsseldorf, 14th and 15th of December. The plan is that the presentations would take place on Thursday, 14th of December. And then for those interested, there would be a possibility to attend a site visit in Wetter, which is nearby Düsseldorf on the following day, 15th, Friday, December.

Now can you please mark the days in your calendars? And we will send the formal invitations in a press release and also direct invitations to the people we have contact details for in due course.

All right. Should we take first if there are questions here in the audience in Helsinki before we proceed to the phone lines?

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Questions and Answers

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Research Analyst [1]

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This is Tom Skogman from Carne. Can you please help us to build some kind of an EBITA bridge how you have reached this guidance? It's kind of there are so many moving parts. It's a bit hard to understand just from the number.

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [2]

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I'm very happy that this question came because Teo has an answer already.

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO and Member of Executive Board [3]

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Well, of course, now the improvement for the first quarter in the profitability has been very good. And of course, I mean, if you calculate then the rolling 12-month EBITA number now and compare that to the guidance, so of course, the additional improvement potential looks very thin. And there are a couple of reasons why this is the guidance. One of them is that we had a very good fixed cost development in the first quarter of '17 in comparison to Q1 '16, and we do not expect that our fixed costs would be that much lower than in during the comparable period going forward. So we will, in a way, in comparison to the first quarter, we will lose a little bit on the fixed cost area. The other one is then that our gross margins, especially now concerning industrial equipment and port solutions, very extremely good in the first quarter. And we do not believe that those gross margins would continue as such. There are various reasons for that. One of them, of course, is a mix, which is not necessarily a huge impact in either of the BAs. But for example, in the ports area, so the fact that the sales for lift trucks and port service rose even if the total turnover went down. So the -- it brought a positive impact to the mix. And also, then, we had both very good margins from the -- let's say, good margins from the -- good projects from the margin point of view delivered during Q1. And then, also, we had a very successful project execution, both in port solutions as well as in the industrial equipment. So all in all, our gross margin development will not be as good in the coming quarters as it was in Q1. And then as a third one, there is the sales development. So now, sales was, of course, down in a year-on-year comparison in the first quarter. It might be also down a little bit going forward. And of course, we will need to be able to catch up with the sales decline from the profitability point of view as well. So all of the 3, basically, topics that can be there, so volume, gross margin and, let's say, fixed cost development will not in a way -- or let's say, the gross margin and fixed cost development will not continue on as favorable level as it was in Q1.

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [4]

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So the guidance has been set at the level where we feel confident being able to attain.

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Miikka Kinnunen, Konecranes Plc - VP of IR [5]

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All right. Any further questions? Or operator, what's the situation on the phone lines? Do we have questions over there?

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Operator [6]

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Yes, sir. We will take our first question from Johan Eliason from Kepler Cheuvreux.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [7]

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Yes. Congratulations to the deal and a good start. Just one question regarding your cost benefits. You talk about this run rate initially this year, EUR 35 million. And it seems like you have completed a lot of the actions already in Q1, primarily this service front in the U.S. Will this imply that most of these cost benefits that we will see in this year will be to Service division? Or how will actually the [point] of the first year cost benefits look like -- between the division, sorry.

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [8]

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Yes. Thank you, first, for the definition of a good start, because we also feel very proud and privileged on the first quarter. The integration synergies, obviously, are not linear during the whole year and not even during the 3-year period. What we are doing, as we already mentioned, the integration in the U.S. has been actually somewhat faster than we even expected it to be. The continuation of the work now continues actually in different other parts of the world, service being maybe a little bit ahead of the other business areas, but the other business areas are following up also quite nicely there. Do you want to say some words, Teo, about this cost level and...

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO and Member of Executive Board [9]

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Well, if we take a look at the synergy run rate discussion of, let's say, EUR 35 million at the end of 2017 as a run rate, so this will most likely mean that for the full 2017 fiscal year, we will be seeing about half of that as a cost saving for the whole of 2017. And part of that was already -- or some of that, maybe a couple of millions, was already visible in the first quarter. The reason why we are saying it like this, that only -- if we say that half of the synergy plans have been, in a way, decided or executed by the end of Q1, and still the run rate will only be EUR 35 million at the end of '17, obviously, depends on the fact that those things that have been quicker to implement have been implemented. And the ones to come now in the future will be somewhat more difficult to implement at least more time-consuming. And therefore, in a way, the planned realization speed will slow down from the end of Q1 towards the end of 2017. But like I said, we are confident we will be able to reach the run rate level of EUR 35 million.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [10]

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Excellent. Can you give some detail on how you expect it to hit the divisions this year and for the full EUR 140 million?

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [11]

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We have given already in the slide here, also presented what we are confident giving out, and we don't give any further details on that EUR 140 million. But actually, what we have been so far able to achieve gives even more confidence for us to reach the EUR 140 million level during the 3-year period that we have already announced.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [12]

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Okay. Then just a minor -- other question. If I look at the way you report the crane maintenance number and the value of those and compare with, let's say, a year ago, it looks like the value per crane has come up by some 9% or so. Is that because Demag's service contracts carried a higher value per crane? Or what's the reason behind that?

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO and Member of Executive Board [13]

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Well, yes, there hasn't been any major change, of course, in the underlying Konecranes contract base or legacy Konecranes contract base. So the structures of the contract base are somewhat different. The definitions of the contract base, of course, are somewhat different. So the -- let's say, this kind of, let's say, impact, so it comes from the differences in the structures in the order contract basis.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [14]

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Okay. And then the final, just a minor thing. I noticed you mentioned that you have sold your SANMA manufacturing in China. Is that just manufacturing capacity being sold? Or are you selling some brands as well? Or what's happening in China?

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [15]

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We basically sold SANMA brand in China, but we keep the factory where SANMA products have been produced. So it was basically the brand that was sold.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [16]

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And did Demag come with a similar sort of Chinese brand position?

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [17]

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I'm sorry, I didn't hear the question well.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [18]

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And the reason for that is that Demag came with some sort of a strong local Chinese brand position? Or why did you sell the SANMA brand?

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [19]

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There's basically 2 reasons for that, the first point being that the -- let's say, the Chinese-style market had gone quite a lot downwards. And we feel that we have a very good product portfolio now that we can have for offering in China.

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Operator [20]

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We will now take our next question from Manu Rimpelä from Nordea.

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Manu Rimpelä, Nordea Markets, Research Division - Senior Analyst [21]

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Just getting back to the first question by Tom on the guidance, I actually missed the first part of it. But just starting with EUR 184 million as a base for last year, and then you did EUR 22 million more in Q1 compared to last year. You have EUR 60 million, EUR 70 million of synergies coming on the P&L run rate this year. And then you also have the existing cost savings programs of the Konecranes Group, which probably adds some EUR 5 million to EUR 10 million this year. So it's very hard to get to the low end of your guidance range number, and I understand that gross margins will slightly come down. But actually what the kind of -- if you run the numbers, it's been flat. So we're going to see quite a significant decline in the gross margins in the second half of the year or from Q2 onwards. So can you just help me to bridge the gap a bit more? You already said something about it, but just more details if you can, please?

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [22]

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Teo will be happy to go again.

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO and Member of Executive Board [23]

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I would be happy to go again, yes. So I think that the logic of what you said is correct, maybe kind of a small correction in the way that when we talk about the, let's say, cost savings plans that we did in 2016 and for the tail impact for 2017, so that basically came through already in the first quarter of 2017. So basically, this improvement potential is already included in the Q1 number. So one shouldn't calculate that twice, not for the second, third or fourth quarter in 2017 going forward. Then there is also certain sort of pressure for fixed cost increase because we are a bigger company now, and there are certain resources that we will need to add. We haven't done that yet, but we expect that we will need to do some of that going forward in 2017. And then, of course, also, there is a cost inflation that we will need to be able to cover one way or the other. And these things, to calculate it together, make us a little bit cautious on the fixed cost improvement potential in, let's say, year-on-year comparisons between Q2 and 3 and 4 and the corresponding period a year ago. And then, yes, I think you probably heard the gross margin comment already. But it is so that in the first quarter, particularly in both of the, let's say, equipment business areas, both port solutions as well as in the industrial equipment, those gross margins were very good now in the first quarter. And we do not expect those levels to continue. And then the, let's say, small volume decrease for the remainder of the year in a year-on-year comparison as well as a third explanation.

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [24]

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So I want to repeat again that we have set now the guidance at the level where we feel very confident attaining.

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Manu Rimpelä, Nordea Markets, Research Division - Senior Analyst [25]

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Okay. And maybe a follow-up on that. So obviously, we're going to have a cost inflation, but how do you see pricing environment developing? And have you see any benefits of this increased market positions you have following this acquisition?

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [26]

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We have seen some changes in the marketplace that some of our competitors have been actually increasing prices. And we see that the overall market price environment is somewhat increasing.

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Manu Rimpelä, Nordea Markets, Research Division - Senior Analyst [27]

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And have you pushed through price increases yourself as well?

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [28]

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I feel confident saying what I just said. But further than that, I cannot comment.

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Manu Rimpelä, Nordea Markets, Research Division - Senior Analyst [29]

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Okay. And then on the Service's margins, so you already explained partly why it was so strong, but just to make sure that I understand the logic. So you had more spare and wear part sales than in the prior quarter despite that your sales declined, and that [compares] it? For a follow-up, have you seen that you've been able to sell more spare parts in, let's say, into the kind of chain [aspect] that you acquired the MHPS services business?

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [30]

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Well, first of all, in Service business, I think our long-term work is paying off and actually helps in the fixed cost level. Regarding the spare parts, I would say the sales has been also on a good level.

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Manu Rimpelä, Nordea Markets, Research Division - Senior Analyst [31]

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Okay. And then just finally, a couple of housekeeping questions. Can you just give us some estimates how do you see the net financial expenses developing this year? There's some one-offs in Q1, if I understood correctly. Will we see more of those financial income? And also, do you have an estimate for the full year tax rate? And the PPA, should we assume that, that slows at the same rate that's in Q1?

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO and Member of Executive Board [32]

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Okay. So net financials first. So the Q1 was an exceptional one. So there was a relative -- there were a couple of relatively big one-time gains in the financial income. This will not be repeating itself. So the quarterly net financial income will be between EUR 10 million and EUR 15 million going forward. It, of course, depends on what the FX differences are. Those are very, very difficult to estimate. But let's say, interest expenses and other costs in relation to that one, will be EUR 10 million to EUR 15 million. The full year, full year financial expenses, let's say, EUR 40 million plus maybe a little bit would be an approximation. Then if we take a look at the tax rate, so of course, the official tax rate estimate is the 13% that we are reporting now. This is, of course, very difficult to build down into pieces because we have the STAHL divestment gain, included there -- and one could think -- say so that the tax rate, excluding this one-time gain, so it will be, for this year, maybe 30% to 35% depending on that, if there are restructuring costs. So how much of those restructuring costs we can then book deferred tax assets for. But the full year sort of -- the system is that we always book the tax rate for the quarter that we estimate for the full year. So it is basically this 13% that we have in the report at the moment. The third question was PPA. So the PPA for this year will be roughly EUR 40 million. So it is about EUR 10 million per quarter. It will go down, let's say, a little bit next year, but more significantly after 2 years, because the order book PPA is active for 2 years. So after 2 years, then it will be declining more significantly.

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Manu Rimpelä, Nordea Markets, Research Division - Senior Analyst [33]

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Okay. And finally, can you just comment on the nonrecurring items as well? Where do you expect that to land this year?

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO and Member of Executive Board [34]

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Yes, we haven't -- we are not capable of giving a guidance on the restructuring cost as such. So we are of the opinion that the EUR 130 million that we have given for the full program over the 3 years is still a valid number. But the actual timing of that one to different fiscal year, so that we cannot unfortunately comment.

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Manu Rimpelä, Nordea Markets, Research Division - Senior Analyst [35]

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I think you used something like EUR 80 million in this year and EUR 50 million in 2018 of restructuring cost base. Is that still the best guess at the moment?

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO and Member of Executive Board [36]

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We are not commenting that guess already and other guess regarding that one.

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Operator [37]

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We will now take our next question from Philip Saliba from HSBC.

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Philip Saliba, HSBC, Research Division - Analyst [38]

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Yes. First question. On the port solutions business, we have now seen the second quarter in a row that was quite strong. We haven't seen that at your competitor -- at your local competitor. Can we assume you're gaining market shares? And also, has there been any exceptionally strong project in this order intake? Or does it come from a very broad range of products? And how do you see it going forward going into the next month now that we have the ocean liner consolidation pretty much done? When do you expect this also to go on into the next quarters?

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [39]

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First, maybe commenting, as we have now extremely good offering due to the MHPS acquisition, now our product offering actually is much broader than it was before. Secondly, as we have not given any big press releases of any bigger projects during the first quarter, this would mean actually that this good order intake is divided into many several smaller or medium-sized orders.

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Philip Saliba, HSBC, Research Division - Analyst [40]

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And do you believe you have gained market shares overall? I mean, it looks like if we...

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [41]

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Market shares varies between different product types, and we do not comment at the moment different market shares.

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Philip Saliba, HSBC, Research Division - Analyst [42]

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Okay. And then if I look at the different ranges, one on your adjusted EBITA guidance for this year, what would need to happen in order to achieve the upper end and the lower end, the first range? And then secondly, you also have, let's say, some range on your synergy targets from MHPS. So what would need to happen in order to reach, let's say, the upper end, which is EUR 150 million rather than the lower end?

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [43]

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Well, firstly, regarding the synergy targets, we have announced a EUR 140 million synergy during the 3-year period, and we feel even more confident currently of that number. We have not changed it at all, actually. Then regarding the guidance range, maybe, Teo, you want to say a few words about that?

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO and Member of Executive Board [44]

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Well, generally, one could, of course, say, that the fixed costs are easier to estimate and forecast than the 2 other variables, which are the gross margins and the volumes. So of course, when thinking that are we at the lower end or at the higher end? So of course, depending on the order intake this year and how much of that order intake this year, we can still push sales out. And then, of course, it comes from the gross margin. So what is the product mix, for one thing. And then, of course, what is the project execution? So meaning how the deliveries go. And probably, the variables are more in those sales volume and gross margin than in the fixed cost side.

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Philip Saliba, HSBC, Research Division - Analyst [45]

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And if I look at your current order book, which has strengthened, what is the rotation? Like how much of it do you expect still to flow into this year's sales, especially looking at the port solutions business? Can you give an idea how much of that will still be built this year?

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO and Member of Executive Board [46]

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Yes. Well, this one is -- it's a valid question. Unfortunately, it's a little bit difficult to answer now the MHPS order book, like discussed. So we don't have exactly the comparable number for 2016. One can maybe note, sir, that if we take a look at the port solutions order book from the legacy Konecranes point of view, so we are looking at roughly a EUR 50 million lower order book for the deliveries of 2017 and what the situation was at the corresponding period at the end of Q1 in 2016. So there is, in a way, an infield decline in sales when it comes to the port solutions as a result of the order book. MHPS order book may balance this to some extent, but we still need to spend a little bit more time on analyzing how the order book logic goes between Konecranes and MHPS legacy businesses. When it comes to the general length of the order books, so of course, the rule of thumb is that it is about for half a year. But the reality, of course, is that it varies significantly between the different businesses. So in Service, obviously, it's generally very short; in ports, generally long. And industrial equipment is somewhere there in between.

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Philip Saliba, HSBC, Research Division - Analyst [47]

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Then the same question for the industrial equipment, can you give an indication there? How much -- how does it look like on a comparable Konecranes basis versus last year?

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO and Member of Executive Board [48]

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We are slightly ahead of last year in comparable Konecranes. Not much, but some millions ahead of last year.

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Philip Saliba, HSBC, Research Division - Analyst [49]

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Okay. And then if I look at the sequential decline that we have witnessed in the industrial equipment orders, this does not relate to your component business, which has picked up. And so this means, overall, your heavy cranes have declined in order intake. How many quarters of, let's say, cyclical recovery would we need until we would also see, let's say, improved CapEx spending on your customer side relating to more of these heavy cranes?

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [50]

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I commented during the last quarter presentation that this is typically 6 to 10 months behind, and that can be maintained.

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Operator [51]

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We will now take our next question from Christer Magnergård from DNB.

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Christer Magnergård, DNB Markets, Research Division - Head of Equity Sales and Research [52]

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Christer Magnergård from DNB. Two questions. The first one, on cost savings, you said that roughly 50% of the run rate will be actually seen in the P&L this year from the synergies. Can you -- is that a fair [proxy for sales] for '18, '19? So that the run rate we see in '18, about 50% of that should be -- actually materialize in '18, in the P&L? We'll start with that.

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [53]

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We have previously said that about 50% of the run rate in 2017 can be calculated to be achieved in 2017. For 2018 and '19, we have not given any numbers, and then being (inaudible). So we will come back to that later during the time when we are able and willing to give that number.

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Christer Magnergård, DNB Markets, Research Division - Head of Equity Sales and Research [54]

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And the second one is on working capital. Can you also repeat what you said there, that was there very low working capital in Q1, but a normal run rate is slightly below 14%? Was that roughly correct? Or...

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO and Member of Executive Board [55]

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Well, we said that the Q1 situation is very good, and it may be abnormally good. So we might -- or the situation might deteriorate a little bit going forward towards -- later in 2017. And we aim to keep it, let's say, lower than 15%, of course. And how much weaker could we then be towards the end of 2017? Very difficult to say. But maybe somewhere there between 12% and 14% would be a guess that one would make if one has to make it now. We have been -- in the Konecranes legacy, we have been anything between 12% and 17% depending on the timing. And like I said, the structure as such between MHPS and Konecranes actually doesn't -- those structures do not differ from each other dramatically.

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Operator [56]

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There are no further questions in the phone queues at this time.

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Miikka Kinnunen, Konecranes Plc - VP of IR [57]

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Any further questions from Helsinki? Apparently not. So many thanks for participating today, and see you again in July. Thank you. Bye.

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Panu Routila, Konecranes Plc - CEO, President, Head of Business Area Equipment and Member of Executive Board [58]

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Thank you.

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO and Member of Executive Board [59]

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Thank you.