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Edited Transcript of KCR1V.HE earnings conference call or presentation 24-Oct-19 8:00am GMT

Q3 2019 Konecranes Abp Earnings Call

Helsinki Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Konecranes Abp earnings conference call or presentation Thursday, October 24, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Eero Tuulos

Konecranes Plc - VP of IR

* Teo Ottola

Konecranes Plc - CFO, Interim CEO, President & 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

* Leo Carrington

Crédit Suisse AG, Research Division - Research Analyst

* Manu M. Rimpelä

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

* Sebastian Growe

Commerzbank AG, Research Division - Team Head of Industrials

* Tomas Skogman

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

* Tomi Markus Railo

DNB Markets, Research Division - Analyst

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Presentation

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Eero Tuulos, Konecranes Plc - VP of IR [1]

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Good morning, ladies and gentlemen, and welcome to the Third Quarter 2019 Analyst and Press Conference of Konecranes. My name is Eero Tuulos, and I'm the Head of Investor Relations at Konecranes. I'm here with Teo Ottola, CFO and Interim CEO of Konecranes. Teo will present you the financial performance of the company in the third quarter, and then we'll have a Q&A session following that.

And now, Teo, the stage is all yours.

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [2]

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Thank you, Eero. And let's jump directly into the third quarter '19 highlights. It was a mixed performance for the third quarter for us. On the one hand, we made good progress with our service growth strategy. Our service agreement base grew with comparable currencies more than 6%. Also, we came back to the growth path in service order intake with a growth of 3.6% with comparable currencies. When we otherwise take a look at the order intake on a group level, so like I said, service order intake grew.

Also Port Solutions orders grew in the third quarter year-on-year. But then in Industrial Equipment, we really clearly started to see the weaker macroeconomic conditions and the order intake for Industrial Equipment declined. As a result of that then the whole group order intake declined slightly by 1.4% year-on-year.

Sales on group level increased by 3.8% with comparable currency rates. However, despite of that one, we had a decline both in absolute EBITA as well as in relative EBITA, so EBITA margin in the third quarter.

The group level adjusted EBITA margin declined to 8.6% from 9.3%, and this is as a result of the Industrial Equipment, where we had a couple of reasons for the low profitability there. One of them is lower volumes. The other one, weaker product mix from the margin point of view and then also temporary operational costs in France and Germany. We will be coming back to those in a while. While the adjusted EBITA margin declined in Industrial Equipment, so it improved in Ports to 8.2%, and it stayed approximately flat in an year on (sic) [year-on-year] comparison for Service.

To drive efficiencies, we have continued the cost saving plans and we have updated those ones. We booked another EUR 48 million restructuring costs now in the third quarter, mainly in Vernouillet and Wetter or in relation to Vernouillet and Wetter. And these actions that we have now decided during the third quarter, together with the ones that we already had in the second quarter after the closing of the EUR 140 million program, so we are aiming at EUR 37 million savings so that the full P&L impact would be with us in 2021. We have reiterated the financial guidance, and we have updated the demand outlook to reflect weaker macroeconomic conditions.

On this page, we have then the key figures. So order intake, EUR 715 million, like I said, 1.4% down year-on-year. Sales, EUR 841 million, up 3.8%. Adjusted EBITA, EUR 72 million or 8.6%. Then the restructuring costs, obviously, burden our net result and the EPS only on a low level. However, free cash flow, EUR 81 million, a good achievement for the third quarter. And then net debt at the level of EUR 670 million. And now in comparison to the situation a year ago, one has to remember that the IFRS 16 change has increased our net debt by approximately EUR 120 million from '18 to '19.

These are the figures by business areas, and we can grow those through when we go to the business area slides in more detail. And then to the market environment, the macroeconomic conditions continue to deteriorate during the third quarter. These have impacted our customers' CapEx appetite and investment appetite in Europe but also to some extent in the U.S.A., where these operating conditions started to weaken also during the third quarter. Now consequently, also, the utilization rates for our customers have declined, both in EU and in the U.S.A. during the third quarter. When we take a look at the emerging markets or big, big countries in particular, so there, the manufacturing conditions have stayed flat or slightly improved in Brazil, India and China, whereas then Russia has continued to be in the contraction territory also during the third quarter.

Taking a look at the market environment regarding the Port solutions. So there, actually, the overall demand environment continues on a good level. The container throughput index has been developing well and actually reached a new all-time high even during the third quarter of this year.

And this is our updated market outlook. Like I said, we have updated it to reflect the weaker macroeconomic conditions regarding the industrial customers. And now the -- within the industrial customer segments, the demand environment in Europe continues to soften. Overall and generally, the demand environment in North America is better or on a higher level than in Europe, but we have started to see some signs of weakening also in North America, whereas then Asia Pacific continues to be relatively stable overall. And like I said, container throughput continues to be on a good level, prospects for new orders remain stable. However, there are some port customers that are clearly showing some hesitation in their decision making. So the overall sentiment is impacting to some extent there as well.

And our financial guidance, like I said, we are reiterating it. We are not changing. We are expecting full year '19 sales to increase 5% to 7% year-on-year. And then we are also expecting the adjusted EBITA margin to improve compared to full year 2018.

Now regarding the Industrial Equipment, we have been saying earlier that we would be improving the adjusted EBITA margin there. However, now we see it unlikely that within the Industrial Equipment, the adjusted EBITA margin would be improving this year compared to the last year. And therefore, also for the group level, the improvement pace from the previous couple of years will slow down in 2019 when it comes to the EBITA margin improvement.

This is the slide on the cost savings and related restructuring activities. It's a busy slide. The message here is on the 2 bottom lines, so where we are saying the cumulative restructuring costs now we booked EUR 48 million in the third quarter together with the EUR 17 million that we booked already in the second quarter. So with those activities, we are expecting to reach run rate savings of EUR 37 million by the end of 2020 and then the full P&L impact by '21.

The slide where we have the P&L impact year-on-year, so this is including the tail impact of the EUR 140 million program that we closed in the second quarter. So this will give a combined impact in an year-on-year comparison to the P&L from the cost saving activities that we have been deciding so far.

And then, again, the group order intake and sales in graphical format. So Service and Port Solutions orders increased, whereas in Industrial Equipment it declined. And the same actually applies to sales. So Service and Port Solutions sales improved. But in Industrial Equipment, there was a decline.

And group adjusted EBITA, like I said, EUR 72.4 million versus EUR 74.5 million. It's a decline in euros as well as in relative performance. And as already mentioned, so it's because of the Industrial Equipment profitability due to sales volumes, mix and temporary operational costs. Gross margin declined on a year-on-year basis. This is particularly as a result of the product mix that is now weaker in the third quarter than what it was a year ago.

Group order book continues to be on a good level. We are at EUR 1.9 billion versus EUR 1.6 billion a year ago. So we have approximately EUR 300 million more order book now than a year ago.

And then business areas and regions split. So this is rolling 12 months slide. So obviously, it doesn't show much change in comparison to the previous reporting.

Then if we jump to the business areas and start again with Service. So like I already said, we have done good progress with the growth strategy there. The order intake increased by 3.6% with comparable currencies. There was growth in order intake, both for field service as well as for parts. And then order intake also increased in all 3 regions. So a relatively balanced growth story from the order intake point of view.

Agreement base value increased even more in percentages than the order intake, 9.1%, even with the reported currencies, however, with comparable currency, 6.4%. And also sequentially, we are looking at the good growth in the agreement base. We are very happy about the agreement base growth that we have seen in the third quarter.

Sales reached EUR 312 million. That is 3.2% higher than a year ago with comparable currencies. Again, here also, sales increased in all 3 regions. But here, field service growth outperformed that of part sales, maybe having a slight negative mix impact within the Service. Order book is higher with reported currencies. However, in Service, the order book is slightly lower with comparable currencies, and this change is due to the modernization order intake. So in the third quarter, our modernization order intake was not lower than it was a year ago. But as we had a little -- only little modernization orders in the second quarter and also in the first quarter of 2019, so the order book for modernizations is now on a lower level than what it was a year ago. So this is explaining why the order book is slightly lower than a year ago.

And then the Service adjusted EBITA, EUR 50.6 million, 16.2%, EUR 2.5 million more in euros, but the percentage is exactly the same as a year ago. Gross margin, which is important for our performance ability, improved, but only slightly. So basically, we are almost at the same level as we were 1 year ago.

Then Industrial Equipment. And before we actually go into the numbers in detail, so one highlight to mention regarding Industrial Equipment is product launches that we did in the third quarter. So we actually launched in one go 3 different products for Industrial Equipment. The one that we can see in the picture is the so called S-series, so it's hoist and crane. And we have high expectations regarding this one. We are expecting this to be a game changer in the industry for the innovative abilities that it has in comparison to the older generation. The easiest one to spot externally is the rope. So it's a synthetic rope in this hoist, but there are also quite many innovations that help the everyday use of the crane-like Follow Me hook positioning and those kind of things that will make it very easy for the operator to use the crane.

In addition to the S-series, we have launched a new chain hoist product, and we also have launched a new M-series crane for process use. So it's a process crane platform. Altogether, these 3 product launches, so they are actually including about 20 patents. So there is a lot of innovation in those, and we are expecting these to help us boost the profitability within the Industrial Equipment going forward.

And then now to the numbers. So the order intake was EUR 284 million. The number that tells more about actually how the market feels is the external orders with comparable currencies, and that came down as much as 9.7%. And the decline was due to the component order intake as well as process cranes, while standard crane orders actually increased in the third quarter. The comparison number was relatively easy in that respect. But nevertheless, the standard crane order intake rose in an year-on-year comparison.

Also, EMEA did relatively well in the order intake. We actually had orders growth in EMEA, and particularly as a result of the standard crane order intake. The sentiment, however, still continues to be a little bit downbeat in EMEA, but we had projects that the customers wanted to continue with during the third quarter quite nicely in the area of Europe.

Then on the sales side. So sales decreased by 3.4% to EUR 282 million. And again, when we take a look at the profitability impact, so more important is the external sales with comparable currencies that came down about 6%. The volume was impacted by customer postponements, so some of the customers did not want to receive the cranes. This may have had something to do with the macroeconomic environment as well. And that then, in a way, lowered our sales for the third quarter.

The sales decline then, obviously, is visible in our adjusted EBITA as well, which declined to 8.3% (sic) [EUR 8.3 million] or 2.9% margin. And the -- like I said, the decrease attributable to lower volumes, this 6% decline in the volume, weaker product mix, which in practice means that the order intake for our component business has been going down already for a longer period of time than for other business units within Industrial Equipment.

And the gross margins for component business are by far the highest within the Industrial Equipment. So in a way, there is more low gross margin business within the sales in the third quarter than there was 1 year ago. And then we have the temporary operational costs that are particularly in Vernouillet in France and then in Wetter in Germany. In Wetter in Germany because we are changing the layout and we are ramping new products. And then in France because of low productivity. Then when we take a look at the order book, so that was EUR 665 million, also quite a lot on a higher level than what we had a year ago.

Then Port Solutions. Port Solutions overall had a solid good quarter. The orders received were EUR 249 million. That is an year-on-year increase of roughly 4%. The growth was driven by port cranes and solutions. Straddle carrier product group did particularly well. Orders grew in EMEA and Americas, but fell in Asia Pacific. Maybe a comment about the lift trucks, which is, in many cases, considered as being the pre-cyclical product group within our scope.

So now the order intake for lift trucks did decline in the third quarter in comparison to the situation a year ago. So maybe this hesitation in the decision making of the customers is visible there. Even though one has to say that the bigger decline comes from the industrial customers rather than from the port customers. So we are selling in the -- we are selling lift trucks naturally also to industrial customers and not only ports.

Sales rose quite a lot, 16.5%, reaching EUR 306 million and based on the good order book that we had. And the sales increase, then, naturally is feeding into the adjusted EBITA as well. So EUR 25 million and 8.2% margin. So there is an improvement both in euros and margin. Gross margin decreased as a result of the product mix being weaker than a year ago, but the margin was more than enough to -- sorry, the volume was more than enough to compensate for that one.

And then also within the Port Solutions, the order book continues to be on a good level, more than EUR 1 billion and approximately EUR 200 million higher than a year ago.

Then cash flow and balance sheet before we go into the Q&A. So net working capital declined now in the third quarter. So we are at the level of 12% of rolling 12-month sales. This is, of course, good news for the free cash flow as well, which did well in the third quarter, EUR 81 million, and now the rolling 12-month cumulative number is on a high level. But the EUR 81 million for one -- for the third quarter is a good number for us.

And this is then also visible in the gearing and return on capital employed. So net debt, EUR 674 million, and gearing at the level of 55%. Capital employed and -- or return on capital employed, in particular, however, stays roughly on the same level where it was in the second quarter as well.

And that actually concludes the presentation, and then we can go into the Q&A.

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Eero Tuulos, Konecranes Plc - VP of IR [3]

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Yes. Let's start by taking questions from the audience. So maybe starting with Erkki there.

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Questions and Answers

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Erkki Vesola, Inderes Oy - Analyst [1]

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It's Erkki from Inderes. Couple of questions for me. First, on the EUR 37 million savings program, how much should the P&L impact be in 2020? And linked to that, how well does savings show in Industrial Equipment versus other divisions? And finally, will it be visible -- how will it be visible on different group P&L lines? This is the first one.

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [2]

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Yes. So this one -- now we have combined the both -- the tail impact of the EUR 140 million program that we closed in the -- at the end of Q2 and then the new program. And from this slide, you can see that the P&L impact -- year-on-year P&L impact in 2020 will be EUR 37 million altogether. And then the remaining part for '21 as a result of this program will be EUR 11 million. So in a way, EUR 10 million for the fourth quarter of '19, EUR 37 million for the full year of '20 and EUR 11 million for the full year of '21.

The -- actually, this one as well as the tail impact of the EUR 140 million savings is mostly Industrial Equipment. It's not only Industrial Equipment, but it is mostly Industrial Equipment because those have been the activities within the synergy program that have been materializing towards the end of the overall 3-year program. And then obviously, as we can see, so in the Industrial Equipment area, we have, let's say, more need to improve than in the other 2 areas. So majority -- a vast majority of the activities will be Industrial Equipment related.

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Erkki Vesola, Inderes Oy - Analyst [3]

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And the P&L lines. Is it only on materials or on personnel cost as well?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [4]

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This will be particularly the ones that we have here now in the third quarter and in the second quarter as well. So this is mostly Wetter and Vernouillet. And not all of it, but a majority -- a clear majority of the cost is personnel related. So it will be visible on the personnel line. It will be visible both above and below gross margin, okay? We do not disclose the gross margin percentage as such, but when we talk about it and the development within the gross margin. So it will be visible on both above and below.

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Erkki Vesola, Inderes Oy - Analyst [5]

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Okay. And then secondly, you said that some customers in the Industrial Equipment, they didn't want to receive the cranes. What does this mean in terms of your physical inventory and cash flow linked to these? Because I mean, is this is a big issue?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [6]

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This is not so far a big issue. And from the inventory point of view, we would need to be able to reduce the level of inventory anyways, but this is not causing a major issue regarding that one. This is typically the kind of thing that customer is late in his building project or maybe some of the deliveries of other equipment that he's about to receive are late, or then maybe in some cases, he has wanted to delay it because of his own production situation so that it is only delaying the commissioning of the crane, which then basically means that we cannot recognize the revenue and obviously we cannot invoice, depending a little bit, of course, on the payment terms. But these postponements are not so big that they would be having a major impact on the cash flow. And so far, we haven't really seen any cancellations. So these are postponements.

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Eero Tuulos, Konecranes Plc - VP of IR [7]

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So next question, please. Antti?

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Antti Kansanen, SEB, Research Division - Analyst [8]

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It's Antti from SEB. The first question would be on the Industrial Equipment demand trends. And could you again kind of remind us how you've seen the demand for components and standard cranes developing in the past 12 months? And how was it on Q4? Kind of when did you see the demand peaking in these product groups?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [9]

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The component order intake peaked in the first half of 2018, after which it, in a way, declined to a little bit lower level towards -- during the second half of '18. We did not have a significant change from that level -- the H2 level, during H1 in '19. So it was lower than H1 '18, but roughly on the same level as it was during the second half of '18. And now when we take a look at the situation, so we are -- we said already -- I think that we said regarding the second quarter that we start to be on a lower level than in H2 '18, and we continue to be on a lower level than H2 '18. So it has been going down.

If we take a look at the monthly data that we get now, so you can see that it is stabilizing in a way, but a couple of months is too short a period to comment that one. So we will still need to wait the -- let's say, fourth quarter and then maybe Q1 next year to be able to see that what the trend is, but at least the fourth quarter. But the monthly data is showing in a way, a stabilization at the moment.

The standard crane demand peaked during the late of '18 and Q1 '19. Q2 was on a weaker level than a year ago. And now Q3, we -- this is probably a bit of, say, positive surprise that it is higher than a year ago; however, it is not higher than sequentially. So if we take a look at it and compare it to the second quarter, so it is slightly down, but it is slightly up year-on-year. So in the second half of '18, the standard crane demand was not that great yet. So it's actually improved in Q4 and Q1.

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Antti Kansanen, SEB, Research Division - Analyst [10]

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Okay. And then also maybe on the Service modernizations because you didn't see a decline there, was that more a function of a easy comparison period? Or did it kind of -- how did it move from what we've seen in the first half?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [11]

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It was more of a question of easy comparison period. So the first half of '18 also regarding the modernizations was very good. And the second half of '18 was clearly lower so that now the -- when we had a big decline year-on-year in the second quarter, so it was in relation to the low level overall and then a particularly high order intake in the second quarter of '18. This doesn't take away the fact that if we take a look at the long-term average of modernization orders. So it continues to be in a lower level in the third quarter than what this average is. So we are on a lower level, but a year-on-year comparison is not looking that bad.

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Antti Kansanen, SEB, Research Division - Analyst [12]

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Okay. And then maybe jumping on the Ports side and regarding your backlog that you have right now. How should we think about potential sales growth going into 2020? How is your backlog deliveries there if we compare to a year ago and then if we assume that the short cyclical business is maybe a bit weaker as you're indicating? So what's the balance of it?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [13]

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Yes, the vast majority of this delta that we have here in the order book is for next year's deliveries, not all of it, but the vast majority. So this is, in a way, giving a good starting point for our Port business for next year. So this is EUR 200 million, the delta. And it is, in a way, when we take a look at this situation -- this time situation for next year, so it is not exactly EUR 200 million, but it is relatively close to that, how much better it is than 1 year ago for 2019.

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Antti Kansanen, SEB, Research Division - Analyst [14]

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Okay. And then maybe jumping back to Industrial Equipment. The new product launches that you are making right now, will they have any, kind of, a negative impact on productivity or costs in the operating systems when you are ramping them up and kind of changing the production method and so?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [15]

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There -- regarding the chain hoist, for example, we can say that there have been some because this is part of the Wetter, Vernouillet discussion that we're having. So actually, the new chain hoist, which is not the one in the picture, but anyways that is going to be built in Wetter. And now at the same time when we are changing the factory layout for example, in Wetter, we are ramping up the new product. And in a way, it is linked to the same discussion. When we then take a look at the S-series that we have here and the M-series, so at least from the information systems point of view, we are not going to have these kind of challenges. And then, of course, it can be that there are, let's say, normal ramp-up slowness, but we do not expect that to be significant.

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Antti Kansanen, SEB, Research Division - Analyst [16]

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Okay. And maybe final question then on all of the restructuring that you're making in the production footprint and taking out costs. Should we assume some negative impact in sales in terms of are you kind of actively exiting some markets that, that you can't serve from the remaining production platform or that have been underperforming or something like that?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [17]

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These new product launches that we are going to have or we have had, so these aren't going to make it possible for us to reduce the product platforms from around 20 to around 15. So this is -- these are not the combinations of the old ones. These are completely new ones , but they are allowing us to reduce the existing number of those. However, I don't think that this would be a geographical reach question. It is, of course, possible that some of the product platforms have been serving a certain customer segment that would then, in a way, not be happy with the new programs exactly. So that is possible, at least theoretically. I would not expect that impact to be very big for the reason that, for example, this S-series is superior as a product. So it would be very difficult to figure out why somebody would not accept this as a production equipment.

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Antti Kansanen, SEB, Research Division - Analyst [18]

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Okay. And maybe just squeezing one more in. The restructuring cash impact, how should we think about that? And then as a CFO, how do you look at the balance sheet in terms of net debt-to-EBITDA going into 2020? Any worries in there?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [19]

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There are no worries from the balance sheet structure point of view. The cash flow question, obviously, is good. So we have been doing a lot of restructuring activities, and those restructuring costs are mostly cash costs. So there are impairments, but the clear majority and the vast majority of these are cash costs. Now if we take a look at our balance sheet and the provisions number that we have there and the restructuring provisions that we are going to have there, so in ballpark terms, half of the debt that we have in the balance sheet regarding those ones will be paid in 2020. And -- let's say, a little bit more than half will be paid during 2020, and then the rest will be paid a little bit later.

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Eero Tuulos, Konecranes Plc - VP of IR [20]

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Thank you. Do we have any more questions from the audience here? If not, we can then open up the lines for questions.

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Operator [21]

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

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Leo Carrington, Crédit Suisse AG, Research Division - Research Analyst [22]

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It's Leo Carrington from Crédit Suisse. I was wondering if you could elaborate a little more on Industrial Equipment margins and also the impact of these new listing platforms. Firstly, on the margins, I -- most of your comments about 2019 margins in Industrial Equipment likely being down year-over-year. But how are you thinking about 2020? And maybe aside from the volume effects, can you quantify the moving parts for next year in terms of the magnitude and timing of the extra operational costs incurred from moving some production from France to Germany and these ramp-up costs?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [23]

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Okay. So if we start with the ramp-up or with the extraordinary cost or temporary costs in Wetter and Vernouillet, so now the total amount of those costs for the third quarter were something between EUR 4 million and EUR 5 million, a little bit depending on how you calculate, but let's say ballpark is there. We are expecting these costs to continue during the fourth quarter, not with as high impact, with a somewhat lower impact, but to continue anyway. We are expecting that the Vernouillet part of that will be fading away during the first quarter of next year. And then in Wetter, the transformation will continue so that there will probably be costs still during the first half of 2020, but the amount will be smaller than what we have now been seeing.

Then when we take a look at the Industrial Equipment product offering and the product -- new product offering, so this obviously has not really impacted from the margin or volume point of view too much on the 2019 numbers and will not be impacting significantly from the sales point of view in Q4 either. However, what we can say is that all of these 3 new launches, so the product offering will be, let's say, more efficient for us to produce so that we would be seeing a benefit from the production point of view and then when we take a look at the pricing of this product.

So most likely the chain hoist product, we are not going to see a major change in the pricing in comparison to the previous generation. When it comes to the S-series, what we are taking a look at now here, so there, the number of features and innovations in this are such that we are expecting that at least with the options that we have included in there, so we would be able to improve the margin also as a result of the pricing.

The M platform, which is for the process crane, so that is more modular and it is definitely easier to manufacture for us. Then it is, of course, project-based deals. So there, let's say, the pricing impact is more difficult to say than in the other 2 product categories.

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Leo Carrington, Crédit Suisse AG, Research Division - Research Analyst [24]

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That's very helpful. And just in terms of these new products, does this replace your entire product offering in Industrial Equipment? Or is it some proportion of it?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [25]

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It doesn't replace entirely everything so when we take a look at the chain hoist. So the idea is that it will replace. So there is basically almost one on one replacement over time. When we take a look at the S-series, so this one here, so it will be replacing a significant part of it, but not all. So this is for -- at least currently, this is for certain capacities only. So this is for the volume capacities in a way, those that are being requested most, but not for all capacity, so it will not be replacing everything.

And then the M platform. So that will not replace everything either. And the reason for that one is that the -- in the process crane -- the process crane needs are so versatile and different by customer groups that we cannot push everything into one platform. But the idea is that the -- also the M platform would be replacing more than one platform so that there is a significant scope, but not 100%.

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Operator [26]

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We will now move on to our next question.

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

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It's Manu Rimpelä from Nordea Markets. My first question would be on the pricing and cost inflation. I think you commented in the report that you're seeing pricing getting more challenging to pass on cost inflation fully at the moment. So could you comment on how do you think around that going forward? And will pricing turn from a tailwind, which it has been so far, into a headwind going forward? And how much headwind do you think that, that could incur in the kind of 2020 or Q4?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [28]

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The pricing challenges that we are seeing, so they are mostly now in relation to the Industrial Equipment. And it is, as you can see also from the order intake, the demand is going down. And in -- at the same time, there is inflation still both from material point of view as well as from the labor point of view. And in these kinds of circumstances, it is difficult to push all the inflation into the customer prices.

What we are -- of course, it's very difficult to say that how the market will develop going forward and what will happen in Q4, et cetera. But of course, what we are convinced of is that when we go into the new products that we just were discussing, the 3 new launches, and when we get the ramp-up regarding those ones done, so then also this one becomes easier for us because they are, let's say, better from the customer value point of view and they are also more efficient to manufacture and produce.

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

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Okay. And then could you -- just going back to some of the previous questions related to this Wetter and Vernouillet cost from this kind of moving production and so forth, so you quantified it to be EUR 4 million to EUR 5 million in Q3 and somewhat less in Q4. But can you remind us what it was in the first half of the year or kind of a full year 2019 number and then full year 2018 number?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [30]

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We haven't -- I think we haven't given exact numbers for the previous quarters, so -- but we have been saying that it has been million -- some millions per quarter, so that we, in a way, have been kind of alluding to EUR 2 million to EUR 4 million per quarter in Q1 and Q2. So this is somewhat higher number than what we have been having. And now I do not recall for sure that when was the first quarter that we were seeing this impact. Does Eero remember regarding what was the, in a way, '18 number as a whole?

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Eero Tuulos, Konecranes Plc - VP of IR [31]

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So we saw impact in the second half of '18, but -- yes.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [32]

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Okay. So we're kind of -- going into 2020, we are looking at the delta maybe in the range of EUR 10 million to EUR 15 million of kind of less potential, EUR 10 million less of these temporary costs, if you still incur some in the first half of the year. Would that be like a fair assumption?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [33]

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Yes. Basically, if you take a look at and if you assume EUR 4 million per quarter, so of course, that would be EUR 15 million or so. Maybe it was a little bit lower than -- or is it a little lower than at the end of the day. But anyways, we -- like I said, we would be able to get rid of the Vernouillet during Q1 and then the Wetter project will be finalized during the third quarter according to the current understanding.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [34]

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Okay. And then could you talk a bit about the Port Solutions order outlook? And especially, how do you see these kind of bigger automation orders? What is your sentiment among customer discussions? Are you seeing that they are kind of all agreeing that you need to invest into automation, but they are just uncertain about the timing or what's the discussions going on at the moment?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [35]

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I think it is roughly like you said. So if we take a look at the sales funnel as a whole for the Ports business and compare it to the situation that we had, for example, a year ago, so it's not very much different from that one. There is maybe a little bit more hesitation when it comes to the short-term decision-making, which would, for example, mean the lift trucks. At the same time, some of the customers are more hesitant. But then in the overall sales funnel in the ballpark size is roughly the same as it was. The customers are keen on doing automation. And we have, like we always have, so we have under negotiations, projects. But let's say that the likelihood for any big projects to materialize now during the fourth quarter or so, so that then obviously depends completely on the decision making time schedules that the customers would be having.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [36]

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Okay. And then final question. I mean, could you comment about, historically, how has a typical Industrial Equipment cycle look like? I don't think we can kind of get the underlying numbers from your old reporting structure. So what kind of peak to trough decline have you seen in 2015, for instance, or the like 2011, '12?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [37]

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Yes. So I do not now recall exactly what kind of a percentages we would be having. And then of course, we all remember the catastrophe scenario that happened back in 2009. So we know that the percentages can be tens of percentages. But let's say, as long as the downturn is not really very, very strong, so of course, it shouldn't be on those levels. But peak to trough historical comparison and reflecting that to the future, so I think that is a risky statement that I would rather refrain from making that statement here.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [38]

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Maybe then I try to ask you the other way around. I mean, if I look at your new equipment orders from the old Konecranes structure, then I think you had like, excluding 2009, so we haven't really seen years where orders would have been organically down more than 5%, 6%. So I mean, is there kind of any reason based on what you're seeing as of today to believe that things should be materially different from the past years?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [39]

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Well, at the moment, it seems to be so that even though the macroeconomic environment is getting weaker, so we are not really seeing any that kind of a drop off a cliff that we had in, for example, in 2009. That's the way that things seem at the moment. So there is no panic in the -- in our market or so. But it is so that there is, let's say, slowering or, let's say, hesitation amongst the customers that applies also to the industrial area and then the -- in certain countries, of course, the macro data looks quite gloomy.

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Operator [40]

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

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Tomi Markus Railo, DNB Markets, Research Division - Analyst [41]

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Yes. This is Tomi from DNB. Is there any way you can quantify the components decline in orders year-on-year or sequentially? Are we talking about the high single digits, double digits or so?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [42]

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We are not quantifying the -- any, let's say, business unit numbers as such. But we are seeing it is a clear decline in a year-on-year.

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Tomi Markus Railo, DNB Markets, Research Division - Analyst [43]

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And secondly, still, if you can give us some flavor on the fourth quarter when you comment that you expect the margin to be low also in the Industrial Equipment, now you are tracking sort of EUR 8 million level on clean EBITA in the second and third quarter. I'm just wondering, if the footprint change impact is getting lower, would you say that you would see bigger impact from the mix point of view into the fourth quarter compared to the third quarter where the component decline started to impact you?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [44]

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I would say that the mix impact probably is less in the fourth quarter than what it was in the third quarter. And it is based on the fact that in the fourth quarter, in any year's fourth quarter, so the crane deliveries will be anyways as a percentage, a higher percentage of the total. And now when we take a look at the situation as it is today, so most likely, the mix will be negative in the fourth quarter in Industrial Equipment, but not as much negative as it was in the third quarter.

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Operator [45]

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We will take our next question. (Operator Instructions)

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [46]

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This is Tom Skogman from Carnegie. I want to avoid mistakes building an EBITA bridge and that's why I have to ask this EUR 37 million savings that come through next year. So they don't, of course, include these extra temporary costs in Vernouillet and Wetter. But what about these lower cost of goods sold that you expect from the new products? Is that kind of included in this?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [47]

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That is a good question. And partially, they are. So when we take a look at, for example, the chain hoist when it is being manufactured in Wetter, so the Wetter productivity improvement that we have in these savings is partially including the chain hoist production. But when we take a look at the S-series or M, so basically that impact is not visible in these slides numbers.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [48]

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And how large are they expected to be then on top of the EUR 37 million? I guess, it's a volume dependent, but please can you help us somehow?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [49]

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Excellent question, and there will not be an excellent answer to this one. So the ramp-up period for those products will be anyway relatively long. So we are talking about a couple of years. And we rather not specify the monetary impact, at least not in advance what we are expecting as a result of that one.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [50]

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Okay. Then I wonder about these EU items. They seem to exceed all kinds of expectations all the time, and they were extremely large this quarter. And what is now the guidance for Q4 and for especially perhaps for next year, when these changes continue? Will we finally start to see these coming down? Or will they just continue to be on this abnormally high levels?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [51]

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The Q2 and Q3 numbers that are now in relation to the Wetter and Vernouillet. So they now mean that we have booked the vast majority of the costs that are in relation to those 2 factories. There will be most likely more in the fourth quarter, but the number as a result of those -- these activities will not be near as high as it was in the third quarter.

Then having said that, so obviously, we will need to take care of the competitiveness of the company going forward as well. And we cannot out rule the possibility of having other things to be done that will then benefit our P&L going forward from the savings point of view. But regarding the topics that we have now been discussing regarding Wetter and Vernouillet, so vast majority or majority of the costs is now booked by the end of the third quarter.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [52]

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Okay. And how large share of Industrial Equipment sales do you expect to come from new products next year?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [53]

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We do not want to, unfortunately, discuss that publicly at this point of time. We will need to take a look at how the ramp-ups go and how we take it from there. So we will come back to this after we have seen that what the achievement in reality has been.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [54]

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But is it closer to 10% or 50%? Just to get an understanding, how much have you really renewed of your products?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [55]

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Well, the total exposure of these ones will be more than 50%. So that, in a way, if you take a look at it from the component volume point of view, but it is not happening during next year.

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Operator [56]

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(Operator Instructions) We will take our next question.

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Antti Suttelin, Danske Bank Markets Equity Research - Head of Research of Finland [57]

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This is Antti from Danske I'm struggling with your second -- sorry, third quarter earnings. Because if I look at your slide, it seems to me that you had EUR 14 million synergy benefit year-over-year, then you had 5% higher sales year-over-year, but your adjusted EBITA is down year-over-year. So it seems to me that you had a massive underlying reduction in profitability. Could you explain what really caused this massive decrease in profitability underlying?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [58]

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Yes. So now you take a look at the savings number. And then also regarding the volumes, so there, one has to remember that of the volume increase, part of that is inflation. But if you carve-out inflation with a reasonable assumption, you end up having the volume impact on a positive side of something like, let's say, EUR 3 million to EUR 5 million. So the ballpark would be this one. So that's on the positive side. So then when we take a look at the negative side, so we were discussing the Wetter and Vernouillet EUR 4 million to EUR 5 million. Then if we take a look at the product mix, both regarding Industrial Equipment and Port Solutions and maybe slightly weaker in the Service, so we are taking a look at another EUR 5 million or so.

Then we have -- when you take a look at the P&L, you can see that we have an increase in our unallocated costs about, let's say, the EUR 3 million, EUR 3.5 million maybe, which is corporate level development projects that we have been doing and is increasing our cost base. Then in addition to that one, we have added fixed costs in our businesses by, let's say, EUR 3 million to EUR 5 million roughly, this is of course including inflation as well. But nevertheless, to be able to invest in product development, for example, in IT systems and those kinds of things. And then, I guess, this leaves us a gap of maybe EUR 2 million to EUR 3 million. And then it is like we have been saying also earlier so that this EUR 14 million that we are reporting here as a saving in the third quarter.

So when we have that P&L impact, so there is -- there typically is maybe from EUR 1 million to EUR 2 million out of this EUR 14 million is something that is in a way an additional ramp-up cost to get this EUR 14 million implemented during the quarter. So we have been reporting this always exactly the same way. So we don't report here as a deduction this, let's say, extra sort of ramp-up that we have. But in reality, it is there. So it comes from 4 to 5 different items that are then, unfortunately, negative and if I calculate here, so it roughly matches with the starting EBITA and ending EBITA in a year-on-year comparison.

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Antti Suttelin, Danske Bank Markets Equity Research - Head of Research of Finland [59]

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Okay. But how should we think about these synergies or cost savings? Is this something that keeps your earnings steady because you make all kind of increases? Or is it that -- should they improve your profitability going forward?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [60]

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They should, of course, improve our profitability, and they are improving our profitability with the number that we are reporting here. So then, of course, we can discuss that what is this, let's say, EUR 1 million to EUR 2 million additional implementation costs that we were talking about. But otherwise, the underlying number, obviously, is increasing our profitability and then the things that we are otherwise doing. So we will naturally need to invest also into the future of the company. So there are things that we will need to do regarding product development.

There are things that we will need to do regarding information systems and those kinds of things. They will be then benefiting us going forward. It is, of course, a little bit artificial to split the savings from certain programs like this. But the reality, of course, is like somebody already asked that these restructuring costs are, of course, very, very big. And we feel that we need to tell that how much, let's say, annualized savings we will be making regarding those ones going forward.

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Antti Suttelin, Danske Bank Markets Equity Research - Head of Research of Finland [61]

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Yes. And next year, you've said that you will have additional savings benefits, but what about this development initiative? So we also have a new set of development costs next year, basically erase these savings benefits.

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [62]

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I'm sure that we will have development initiatives also going forward. So there is no way that the company like us can only save itself into the growth. So it is clear that we will also need to have development activities. And now if we take a look at the fixed cost increases that we have been having, for example, now in this calculation for the business, is let's say EUR 3 million to EUR 4 million, so it is not huge, taking into consideration also that the business volume has increased. Not exact -- the volume hasn't increased 5% like we discussed, it has increased less, because part of that 5% is inflation, but it has been increasing nevertheless. So it is clear that we will need to also have development activities. But of course, we do not want to go into the guidance for next year now. So that discussion is then a little bit later on.

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Operator [63]

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We will now take our next question.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [64]

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Sebastian here from Commerzbank. I'll try to limit it to 2. On Services, can you talk about the agreement base and what has been driving the very strong increase quarter-on-quarter? And especially, what do you expect for the next quarters to come? So how is really agreement-based development and then the exploitation, so to speak, of the installed base at MHPS developing? And the second one around services for modernization. Sorry if I missed it, but it has been obviously very soft in quarter 2 and with that also put a strain on, on the numbers in quarter 2 in particular. How has this played out in quarter 3? And if you talk about your sales staff, what is currently going on in terms of modernization demand within the Service bucket?

If I may throw in a third question around the restructuring aspect, and your earlier comment that you will need to take care of the profitability and productivity of the company going forward. It all sounds like there's a structural sort of necessity to it. Will you ever still break out those costs related to these improvement measures as restructuring charges, i.e., as nonrecurring? Or how should we think about that going forward?

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [65]

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Okay. So if we start with the service agreement base, so the target, what we have been talking about, is to be able to grow something like 6% to 7% on an annual basis regarding the agreement base. So this is very well in line with that one. The growth has been somewhat lower in some other quarters, sometimes it has been on this level. So we are doing good success in attracting also, sort of, Demag customers into the agreement-based model. The increase in the third quarter, so there is nothing particular in that from the processes point of view. So we have been continuing doing exactly the same kind of things that we have been doing also earlier. Of course, from one quarter to another one, there can be then a number of bigger contracts to be won and maybe now in the third quarter. So there were some that were relatively big ones. But from the process point of view, we have been continuing with the same process throughout 2019 and, let's say, late 2018 as well. And like I said, the target level is to grow more than 5% on an annual basis, preferably it is 6% to 7%.

Modernization orders. Yes, I think we discussed already. But let's repeat it. So it is so that the modernization orders did not decline year-on-year. But the reason for that mostly is that the third quarter '18 modernization orders were much lower than second quarter '18 modernization orders. So the mods business and order intake continues to be lower than the average, and we are expecting it to continue to be lower than the average in the near future. Then further down the road, one cannot know, but in the near future, we are not expecting it to significantly increase.

Then the third question regarding the restructuring costs. So if we need to do structural changes and if we have significant cost -- onetime cost as a result of those ones, so I think that we would and, of course, the question to the audience as well, I would be thinking so that it's a benefit from the comparability point of view to have it on a separate row because then it is easier to separate that from the ongoing operations. So my thinking is that we would be booking significant restructuring costs as an adjustment going forward as well.

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Eero Tuulos, Konecranes Plc - VP of IR [66]

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Thank you very much. So that concludes then today's conference, and thank you for active participation. And I look forward to seeing you again in February. Thank you.

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Teo Ottola, Konecranes Plc - CFO, Interim CEO, President & Member of Executive Board [67]

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Thank you.