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Edited Transcript of KCR1V.HE earnings conference call or presentation 25-Jul-19 8:00am GMT

Q2 2019 Konecranes Abp Earnings Call

Hyvinkää Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Konecranes Abp earnings conference call or presentation Thursday, July 25, 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

* Panu Routila

Konecranes Plc - President, CEO & Member of the Group Executive Board

* Teo Ottola

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

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Conference Call Participants

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* Antti Kansanen

SEB, Research Division - Analyst

* Erkki Vesola

Inderes Oy - Analyst

* Leo Carrington

Crédit Suisse AG, Research Division - Research Analyst

* Magnus Kruber

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

* Manu M. Rimpelä

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

* Tomas Skogman

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

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Presentation

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

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Ladies and gentlemen, good morning, and welcome to the Second Quarter and Half Year 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 Panu Routila, the President and CEO of Konecranes. As usual, Panu will focus on the group level highlights; and then Teo Ottola, our Chief Financial Officer, will follow with more detailed discussion on our business area performance of the quarter.

But now Panu, the floor is yours.

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [2]

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Thank you, Eero. I'm pleased [that you] remembered my title and my name. Thank you. So good morning, everybody. The second quarter marked a key milestone in the integration of Terex MHPS. We reached the target of EUR 140 million in run rate cost synergies, 6 months ahead of our original plan. Despite completing the synergy savings program, which started at the beginning of 2017, we continued to drive further efficiency improvements. Some of these activities are already ongoing, having created approximately EUR 17 million in restructuring costs by the end of Q2. We expect these restructuring costs to equal the annual savings and the savings to benefit our P&L from Q4 onwards with a full bottom line impact by mid-2021.

Turning to our results. Group adjusted EBITA margin improved to 8.4% in the second quarter driven by Business Area Service and group synergy cost savings. In service, the adjusted EBITA margin reached 16.1%, up by 1.6 percentage points from the year ago period. The operating leverage in service continued to be on a very high level. We have improved the group's adjusted profitability consistently throughout the integration period and expect the margin expansion to continue also going forward. However, in full year 2019 the rate of improvement will be slightly lower than in the past couple of years. This is primarily due to the costs related to the ongoing optimization of our manufacturing network as well as the weakening macroeconomic environment especially in EMEA, particularly in German. I will discuss both of these topics more in detail later in my presentation.

Our order intake in Q2 was mixed overall on a comparable currency basis. Group's order intake grew nearly 7% year-on-year driven by Business Area Port Solutions. That said, order intake was slightly disappointing in service and industrial equipment both business areas recording year-on-year decline. And finally, we have reiterated our financial guidance for 2019, while updating our demand outlook to reflect the weakening demand environment in Europe.

Let's then take a look at our key figures in more detail. Orders received in second quarter totaled around EUR 823 million, representing an increase of nearly 7% with comparable currencies. Also, on a comparable currency basis, group sales grew 1.7% year-over-year. The consolidated adjusted EBITA increased by 12% to EUR 67 million, and the adjusted EBITA margin improved to 8.4%. Free cash flow in the period was EUR 6.5 million positive. Net debt increased approximately 16%. Without the adaptation of IFRS 16 Leases standard, net debt would have decreased from year ago.

As usual, Teo will discuss the performance of each business area in more detail, but a few points I will highlight now here. Starting with service business on a comparable currency basis, the annual value of the agreement base grew nearly 5% year-on-year, showing the progress of our strategy execution. Order intake in service declined as orders for modernization projects fell across all regions, particularly in EMEA. In a typical quarter, modernizations account for around 12% to 15% overall service orders. In Q2, however, the numbers were only around half of this. EMEA is an important market for modernization for us and customers have not made decisions on bigger projects in the region yet in this area.

With comparable currencies, order intake excluding modernizations grew approximately 2% in the second quarter both year-on-year and also sequentially. Order intake excluding modernizations grew in Americas and APAC, while being approximately flat in EMEA. In EMEA, the relatively weak order intake in our core service business was primarily due to integration-related legal entity consolidation in Germany. We expect the order intake into service to return to a growth path in Q3, but the lower level of modernization projects will make it somewhat challenging to accelerate order intake growth from 2018. In full year 2019, we expect the agreement-based value growth to stay at around 5%. Furthermore, we expect services full year sales growth with comparable currencies to outpace the growth rate recorded last year. And most importantly, the long-term growth opportunity in service business following the acquisition of MHPS has not changed.

In Industrial Equipment, despite a strong order intake for process cranes in Q2, the total external orders declined year-on-year. This resulted mainly from lower order intake for components globally. Order intake for standard cranes grew sequentially, but declined year-on-year. The year-on-year decline was primarily due to EMEA where order intake was particularly low in Germany, In Americas, we continue to record solid order growth for standard cranes in the second quarter. And finally, the order growth in Business Area Port Solutions continued to be strong in Q2. The growth exceeding 30%.

The global macro economic environment showed signs of decline towards the end of the quarter, weakening PMIs and continued uncertainty in the global economy began to impact our customers' investment appetite especially in EMEA and Germany in particular where the PMIs were among the lowest in Europe. Correspondingly, the euro area capacity utilization decreased during the second quarter. The manufacturing sector operating conditions weakened also in the U.S. during the Q2, although the market continued to expand. The U.S. manufacturing capacity utilization rate declined in the first half of the year, though it improved slightly in June. As for the emerging markets in the second quarter, operating conditions improved in Brazil and India, while both China and Russia entered the contraction territory at the end of the period.

The global container throughput index returned back to a growth path in the second quarter after recording year-on-year decline in February. At the end of May, the index was closed to its record high level. We have revised our demand outlook to reflect the changing macroeconomic conditions. Within the industrial customer segments, the demand environment in Europe, particularly in Germany, is showing signs of weakening. The demand environment in North America is stable and continues on a healthy level, while Asia Pacific continues to be stable. Global container throughput continues on a good level and the prospects for orders related to container handling remain stable overall, however, there are signs of hesitation in short-term decision making among some port customers.

We have reiterated our financial guidance for 2019, 5% to 7% year-on-year sales growth in the full year and improvement in group adjusted EBITA margin in 2019 compared to 2018. We also remain committed to reaching our post integration financial targets, however, given that the macroeconomic uncertainty is likely to be a headwind to us in the coming quarters, it can become a challenge to reach the target of 11% group adjusted EBITA margin already in 2020. The margin performance of service and Port Solutions has been well in line with our expectations, we are behind our targeted profitability in Industrial Equipment. Furthermore, weakening mix as a result of lower relative share of components will weigh on the adjusted EBITA margin of Industrial Equipment next year. We will continue to drive further efficiency improvements in Industrial Equipment and remain confident in our ability to further improve the profitability of each business area.

Continuing then with more details on our synergy savings program. We have now completed the integration-related synergy savings program successfully 6 months ahead of schedule. Restructuring costs related to EUR 140 million, savings target landed at EUR 139 million, exactly in line with our guidance. Restructuring related CapEx was EUR 15 million, which is below our earlier estimate of EUR 30 million. We continue to expect the P&L impact related to EUR 140 million, run rate savings to reach EUR 125 million at the end of this year. Furthermore, as already discussed, we expect those efficiency improvements that have already been started to benefit our P&L from Q4 onwards with the full bottom line impact by mid-2021.

Overall, the integration of MHPS has progressed exactly according to our plans. Similarly, the synergy cost savings have come through relatively went in line with our original expectations. Out of the total EUR 140 million amount, a significant part came from manufacturing operations, where we have closed 12 production facilities since the beginning of the integration. We exceeded the savings targets set for service operations and the targeted organization while work around product platform rationalization has taken somewhat longer than we initially expected. We continue to progress towards our long-term target of 11 to 14 platforms, however, we are not giving any precise timeline for this work.

Regarding the ongoing additional efficiency improvements, most of these relates to our factories in Wetter and Vernouillet. We have made good progress at both sites in Q2: In Vernouillet, we have now reached an agreement with local employee representatives on the closing of the factory in 2020. In Wetter, we expect a significant part of the planned headcount reductions to take place during the second half of 2019. That said, the ongoing reductions are likely to impact our output and profitability until the end of 2019. Weighing on our sales and profitability mainly in Business Area Industrial Equipment, but somewhat also in Business Area Service.

Let's then continue with a few more words on the group's financial performance in Q2. As already mentioned, our consolidated order intake in the first quarter was on a good level, but mixed when looking at the performance in each business area. With comparable currencies, group sales increased approximately 1.7% year-on-year, growth coming from all business areas.

Group adjusted EBITA increased to EUR 67 million and the adjusted EBITA margin to 8.4%. The improvement in the group adjusted EBITA was mainly thanks to synergy saving measures. On a year-on-year basis, the group level gross margin improved. The value of the order book at the end of June totaled nearly EUR 2 billion, which is our new record high and approximately 19% or EUR 320 million more than a year ago. Again, it is good to note that approximately EUR 100 million of the year-on-year increase in the order book will be recognized as revenue during financial year 2019, while the remainder will be recognized in the subsequent years.

And finally, a couple of words on sales by business area and region. On a comparable 12-month rolling basis, service contributed slightly more than 1/3, Industrial Equipment approximately 1/3 and Port Solutions slightly less than 1/3 of the group's total sales. The regional split has remained roughly unchanged from the previous quarter with half of the sales coming from EMEA, approximately 1/3 from the Americas and the rest from APAC.

With that, I hand over to Teo for a more detailed walk-through of the Business Areas, and then we will continue with the Q&A. Please, Teo.

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

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Thank you, Panu, and let's start the BA review with the service business. This time, we have taken to the first page the order intake and the agreement base value as well because both of those are, of course, giving a little bit light towards the future. And starting with the order intake, so the order intake in the second quarter was EUR 253 million, so that is a decline of 3.4% with comparable currencies. The decline came from modernizations, as Panu already mentioned, actually the modernizations came down in all regions, particularly in EMEA. One has to note and it can be seen also while taking a look at the picture here at the second quarter of 2018 was a very good order intake quarter from the service point of view, not only counting modernizations but also other businesses.

When we then take a look at the field service orders, so those obviously came down as the modernizations are classified within field service whereas tender order intake for parts increased in the second quarter year-on-year. Regionally, order intake increased in the Americas as well as in APAC, but came down in EMEA. Again, as a result of the modernization business. And then if we were to exclude the project-based modernization business, so then obviously in the Americas and APAC the growth would be there in this case as well, and also then in EMEA, we would be in an approximately flat situation in a year-on-year comparison. Worth noting, of course, is that what Panu also said that, that we would be having maybe a 2% growth both year-on-year and sequentially excluding the project-based modernization business from these numbers.

Unlike the order intake, so the agreement base value continue to grow. Our growth with comparable currencies was almost 5% and there we have been able to continue nicely on the growth path both year-on-year and sequentially. Then service sales, EUR 309 million, that is approximately 3% higher than a year ago with comparable currencies, sales grew in all regions. And then when we take a look at the -- again, the split between parts and field service such as the parts business did a little bit better from the growth point of view, also then contributing a little bit to the profitability positively of the service business.

Order book EUR 237 million at the end of the second quarter. This is slightly down in a year-on-year comparison, and again it obviously is as a result of the modernization lower order intake in '19. Service adjusted EBITA continue to improve both in euros as well as in margin, so we reached about EUR 50 million, with 16.1% improvement. Gross margin continue to improve and of course then the improvement was driven by the sales growth, volume was higher than a year ago, synergy cost saving, also operational improvement within the service business, and that should to some extent also the improved product mix from the situation one year ago.

Then moving on to Industrial Equipment and Industrial Equipment order intake that was EUR 330 million in the second quarter and there was a decrease of 2.5% year-on-year, maybe again from the market a demand point of view, a more meaningful trend is what happens with the external orders, those actually decreased by 3.4% as well in comparable currencies in an year-on-year comparison. This decline is as a result of the components as well as standard cranes, like Panu mentioned, the process cranes continue to do very well, and there was growth both year-on-year and sequentially in the process cranes. Standard crane orders continue to grow in the Americas, but they were down both in EMEA and Asia Pacific. Sequentially, standard cranes improved a little bit, so it was an year-on-year decline, but sequential improvement from the order intake point of view, whereas in components, we had a decrease both year-on-year and sequentially.

Sales EUR 293 million, this is again the total sales with external sales trends. So actually the external sales improved by 0.7% with comparable currencies in an year-on-year comparison, not helping too much our EBITA improvement, but the EBITA still improved both from the euros point of view as well as from the margin point of view, [I said] this improvement didn't come from the volume, because it was pretty flat in external sales point of view, but the improvement is mostly as a result of the synergy cost savings within the Industrial Equipment business.

Gross margin improved actually in Industrial Equipment as well year-on-year. And then when we take a look at the order book, so that continues to grow EUR 670 million almost on a comparable currency basis, improvement or increase of 14.5% in the Industrial Equipment order book. Then Port Solutions, Port Solutions order intake was EUR 304 million, that continues to be a very good level. So there is year-on-year growth more than 30%, without actually having any individual major big deals in the second quarter. The growth was quite widespread across several product categories, lift trucks continue to do well, mobile harbor cranes, straddle carriers continue to do well. And basically, almost all of the product categories were either growing or then at least being on the same level as a year ago. So very -- let's say, balanced situation from that point of view.

Regionally, orders grew in EMEA and APAC but fell in the Americas. And then when we take a look at the sales, sales was EUR 248 million on a comparable currency basis increase of 2% year-on-year. And then when we go to profitability, adjusted EBITA EUR 19.5 million or 7.8%. These are very much the similar or same -- almost same numbers as we had one year ago, the -- one of the main reasons why there was not improvement on the profitability was a product mix. So the order book that we have been delivering now from the margin point of view is lower than what we had a year ago. This was, of course, known already some time ago, and as a result of the mix, gross margin decreased in the ports business slightly in a year-on-year comparison. Order book here, of course as well a very, very good high number, clearly more than EUR 1 billion, and this one shows a good improvement year-on-year as well.

Cash flow and balance sheet, a couple of comments there. As usual, let's start with net working capital EUR 466 million. This is now higher than what it was a year ago and it's also higher than what it was at the end of Q1. The main reason for the higher net working capital is inventories and particularly work in progress within Port Solutions. So it is mostly a project timing question, we -- as a result of the project timing, we have more work in progress than what we had, for example, one year ago. Net working capital as a percentage of rolling 12-month sales, a bit more than 14%. Naturally, that the free cash flow as a result of the net working capital build-up was not very high in the second quarter, however, still rolling 12 months free cash flow continued to trend upwards also in the second quarter.

And then finally before going into the Q&A, so the gearing and net debt, net debt EUR 744 million, Panu already mentioned that excluding the IFRS change, we would be on a slightly lower level than what we were one year ago. So the lease standard impact is approximately EUR 120 million now in the second quarter of 2019, gearing about 60%. And then as a final picture, capital employed and return on capital employed. So return on capital employed at the end of the second quarter of 2019 on an adjusted basis 13.1%.

And then as a reminder, before we go into the Q&A, the date for our CMD, which will be held on November 21st in London. And then we can move into the Q&A.

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Questions and Answers

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

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Yes. So let's start by taking questions from the audience. We have Erkki here, so please.

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Erkki Vesola, Inderes Oy - Analyst [2]

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It's Erkki from Inderes. A couple of questions from me. First, on the Port Solutions order intake structure, you said it was widespread, so is the mix impact going forward is going to be flat somewhat in deteriorating or improving versus a year ago?

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

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When we take a look at the order intake in this quarter in particular, so the mix will probably be neutral to slightly negative in comparison to the current situation. However, when we take a look at the full of 2019, so there continues to be in comparison to '18, the -- let's say, deterioration in the mix in a way that we have earlier quantified as being about 1 percentage point and this still holds through for '19 in comparison to '18. And then -- but then when we take a look at this particular order intake quarter, so it doesn't deviate significantly from the current order book.

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Erkki Vesola, Inderes Oy - Analyst [4]

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And then on the new savings program, you said that EUR 70 million was booked in the second quarter. Are we going to see any more one-offs going forward?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [5]

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We will.

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Erkki Vesola, Inderes Oy - Analyst [6]

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How much?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [7]

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And could not say that.

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Erkki Vesola, Inderes Oy - Analyst [8]

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Okay. Then final, linked to the same topic. Did you mean that the run rate of [savings] -- EUR 70 million savings would be by mid-'21 after the P&L impact this year and next -- obviously this year, it's going to be very minor, but next year is kind of say, mid-single digit impact, a good guess.

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [9]

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Do you remember that or?

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO & Member of Executive Board [10]

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Yes, you're right. For this year, there would be very minimal impact and the run rate, basically, will start somewhere in the fourth quarter of this year, and then it will continue mostly probably in 2 phases, so that there will be a run rate savings in the fourth quarter and then there will be another one, which is maybe half a year later or so. And so that the full P&L impact will be there by mid-'21. So it is on a relatively long, so the run rate will be coming between Q4 and Q2 2020. And then the full P&L impact will be there by mid-'21.

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Erkki Vesola, Inderes Oy - Analyst [11]

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So the year-on-year improvement in 2020, you're not going to comment on that?

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO & Member of Executive Board [12]

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No, we are not commenting on that because the timing is a little bit of a question mark, but it means that the run rate will be accumulating during next year. So it means that the impact for next year will not be huge. So it is basically a little bit later timing than what we have been having on average regarding the EUR 140 million saving program. It just --

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [13]

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Which have been faster.

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO & Member of Executive Board [14]

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It has been faster in the EUR 140 million, it is just the way that this efficiency improvement is done, it's a technical reason behind.

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Antti Kansanen, SEB, Research Division - Analyst [15]

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It's Antti from SEB. Question on the declining order intake and demand for modernizations, components and standard cranes. How did you see this developing through the second quarter and now that we've started Q3, is it sequentially weakening and should we read into that being an early indicator of potentially weakening process crane, demand as well going into the second half of next year?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [16]

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Firstly, regarding modernizations, it was throughout the quarter. The effect and as we said already, it was particularly in Europe and especially really in Germany. The standard cranes, I think we said that sequentially actually standard cranes was sequentially quarter-on-quarter upwards. So I think that is kind of a positive sign as such, and now as we are just in the beginning of the quarter, it's too early to say something, but we remain somewhat positive on the situation there.

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Antti Kansanen, SEB, Research Division - Analyst [17]

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And you mentioned on the modernizations that you've seen some postponements on bigger upgrade. So are you expecting the demand coming back? Or how does it look like?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [18]

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So this is a situation that they have not been lost, the customers, it has been taking longer to decide. I'm not expecting them to be very quickly recovering. So probably a little bit longer to decide on the customers.

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Antti Kansanen, SEB, Research Division - Analyst [19]

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And could you remind what's the size of the modernization and within service rolling 12 months?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [20]

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Typically, it's 12% to 15% of the service business, now it was half of that. So that's where the effect came actually.

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO & Member of Executive Board [21]

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Maybe as a couple of additional comments regarding your original question, so that if we take a look at the component business in particular, so there, of course, the order intake was down year-on-year and sequentially. And when we take a look at 2018 and 2019, so the first half of 2018 was clearly better than the second half. And now when we take a look at the level where we are now, so we are on about the same level, slightly lower than what we were in the second half of 2018. So it is, in a way, there is a trend down because it's down year-on-year and Q-on-Q, but the level still continued to be roughly on the same level as the second half of 2018. But clearly lower than the first half of 2018. On the standard crane area, we are in the second quarter, we are roughly on the same level where we were on average during 2018. So it is down year-on-year, because Q2 was a good one, but it is up sequentially from the Q1, so that the overall level is roughly in line with the overall 2018. And then in process cranes, we are on a higher level in order intake now than what we were in 2018. But by definition, of course, that should be the last one in the cycle to react up or down.

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Eero Tuulos, Konecranes Plc - VP of IR [22]

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So then we can move to the telephone lines and open then for questions. Operator, please?

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Operator [23]

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(Operator Instructions) We'll now take our first question over the telephone.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [24]

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Magnus with UBS. A couple of questions from my end. I think you posted about [EUR 140 million] step up in savings run rate in Q2. Is it fair to say that the majority of that came in Industrial Equipment? And if so, that the division could have been loss making without it. Could you put some colors on the underlying dynamics and earnings headwinds that you have seen in Q2 and what we should expect going into the second half of the year?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [25]

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So we have had -- in Industrial Equipment, we have had these issues here in those 2 factories where we have had significant restructurings. And now that we have come to the conclusion in Vernouillet factory about the closing of the site together with the worker’s representatives. We expect the situation to easing up in intention, but not in effect for the P&L that continues to have effect on the P&L while we continue to pay the salaries, but the output of the factories is a lot lower than it should be. In Wetter, things are starting to improve, while the majority of the personnel reductions are going to happen now during the second half of this year, but there is still effect on the efficiency improvements on that factory as well. So those are the 2 major ones that have affected actually in the slower recovery of the Industrial Equipment business.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [26]

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Okay. Perfect. Second, you also point to some hesitation in short-term decision-making related to the ports business among some customers. Is that driven specifically by changes in supply chain routes during the quarter from some specific customers? Or is it sort of a more broad-based macro slowdown that all customers are feeling?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [27]

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It's more of a macro trend but it's difficult to say that it would be exactly in certain customer, in general. We still have had actually very, very good order intake in ports business knowing that we didn't have any single large order and still had such a good order intake for the ports business. So I'm quite happy of that.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [28]

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Okay. And finally, you mentioned specifically large order in U.S. for 2 pulp mill cranes, any chance you can quantify how much this contributed to growth in the quarter?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [29]

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We don't quantify the individual orders unless they are quantified in their respective press releases.

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Operator [30]

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We'll now take our next question over the telephone.

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Unidentified Analyst, [31]

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This is [Vikram], Danske Bank. I would have a question on the synergies, you have now upgraded the earlier (inaudible) [140] to 157. Why don't you give a full estimate, a full project rather than upgrading it step by step as it seems you have taken a practice now?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [32]

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I was pretty sure until that you are going to ask this question in this way, we have concluded that the original cost saving program of EUR 140 million has come to an end and we do not follow that anymore as such. We have completed it 6 months ahead and our people have really been working hard to capture that. I'm very proud of our whole organization that we did it. It's now done. Now -- we have consistently also said beforehand that we are going to do individual cost saving measures. Now we did these what that resulted in EUR 70 million restructuring costs and about the same amount of profitability improvement. We will continue, as our culture says, we will continue these efficiency improvements but we don't projectize them and we don't publish them in a massive program. So this should not be interpreted as a prolongation of the integration cost savings.

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Operator [33]

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We'll now move to our next question over the telephone.

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

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It's Leo Carrington from Credit Suisse. I have (inaudible) follow-ups Antti's question. But in terms of those additional restructuring measures announced today, is this -- would you say mostly in response to the lower demand outlook or more of a structural change? And also on structural changes, can you update us with how the process of harmonizing the product platform is going? I guess it continues to drag on margins Industrial Equipment, and if you can give any thoughts on what kind of margin this division can achieve in 2020?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [35]

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Okay. So first, regarding the restructuring measures, so these what we now refer to with the EUR 70 million. These became clear that they need to be done. That is not really I would say macro related, that is more of an efficiency improvement need what we saw, we saw that need coming and we wanted to take measures there quickly. Regarding the platform harmonization, we have been working very hard on that and I'm very proud that our organizations have been also able to a redesign some new products, some launches are coming pretty soon actually on those. And I would even say that they have been done pretty quickly, because we didn't want to only say that we select one or the other, as a product platform. We'd rather wanted to redesign a new one, which makes a lot of more improvement in the margin as such, and that's why it was important to do it that way. So now the platform harmonization, we continue to drive with this model that the platform, we have a similar platform for all of the different brands and that will bring margin improvements continuously in the future.

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

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And then separate question on input cost versus price. Previously, you've been successful in passing on the raw material and I guess now labor costs on to customers. Do you expect to be able to maintain this sort of pricing ability in a lower demand environment?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [37]

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We did -- still in Q2, we did some price increases in line with inflation and right now it seems to be going quite well.

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Operator [38]

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We'll now take our next question over the telephone.

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

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Manu Rimpela from Nordea. My first question would be on these components. So I mean, you talked about the demand for them being down I think sequentially and year-over-year as well. So how should we read that given the light of the falling leading indicators like PMI and industrial utilization rates?

I think that typically a leading indicator, so why shouldn't we expect component to continue the decline in the second half of the year and then that should start gradually impacting negatively the Industrial Equipment sales -- orders? And I felt that your comments were maybe a bit more positive on not expecting to see further sequential deterioration.

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [40]

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Yes, so the component business was somewhat lower in the -- throughout different areas, particularly now in EMEA. And though the difference was sequentially not that big, in the standard cranes, we actually saw even quarter-on-quarter an increase, which is actually relatively good sign. Probably the component business will continue a little bit with the lower level now onwards and that's probably due to the macro situation.

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Teo Ottola, Konecranes Plc - CFO, Deputy CEO & Member of Executive Board [41]

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Maybe as an additional color on that one. So if we take a look at the component business now in the second quarter for example. So it seems to be so that those brands that are more exposed to Germany and EMEA, but Germany in particular have been suffering more than the ones that are more exposed to the U.S., for example, which is in a way in line with the macro picture that the European situation is weaker than the situation in the Americas.

Then when you take a look at our comment regarding the 2020 target setting for example, so there we are referring to that we are expecting the Industrial Equipment product mix to weaken a little bit then and it is as a result of the lower order intake that we have now seen in the component order intake, particularly in component order intake relative to the order intake that we have, for example, in process cranes.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [42]

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And then asking on these additional cost savings, so I think you were pretty clear in saying that there would be more restructuring costs, which also means that there will be more savings. So are these potential restructuring cost and savings that get done after the second quarter?

So are they more reflecting then the demand picture of this demand start to soften you will start cutting more? Or is there actually still something like more structural that do you think you can do or has that already been kind of reflected in the EUR 70 million you have for Q2 announced?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [43]

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I just said already that these 2 what we're now done, these are more structural.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [44]

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And is there anything more structural left? Or is the rest then more about reflecting to changes in demand and typical every company cuts cost by 1% of sales to offset cost inflation type of cuts?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [45]

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I know that you would be eager to know my answer, but I'm not going to comment on that. Thank you.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [46]

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Okay. And then final question. Are you still standing, I think you in Q1 mentioned that you expect to kind of full year cost from these German and French production issues or cost cut closure issues to be in the range, like EUR 8 million to EUR 10 million. So are you still standing behind that number or have they increased?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [47]

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They are on the level what we already knew beforehand and expected before.

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Operator [48]

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(Operator Instructions) We'll now move on to our next question over the telephone.

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

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Yes, this is Tom from Carnegie. Can you first tell how large a [year ago] sales comes from Germany? And what are you really doing strategically to the factory in Germany? I cannot really understand based on what you're saying, what you actually are doing there.

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [50]

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Do you mean the German Wetter factory?

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

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Yes.

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [52]

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Okay. So what we have been doing is efficiency improvement in the factory comes from the fact that we noted that in Konecranes similar factory the efficiency was about 4x better than in the Denmark Wetter factory. And therefore, we started doing measures, we came to the conclusion with the workers representatives already November last year in doing some changes at the factory efficiency improvement and now they are actually in action. So we are carrying them out and it means that the Wetter factory will be considerably more efficient in the future. Now what is happening is that that it took quite a long while then to get these in action. And now we will start seeing the first number of people leaving the company during the second half of the year. Was that clear enough?

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

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So efficiency 4x higher is that output per employee or how do you measure it?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [54]

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That was output per employee, yes.

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

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And the share of Germany of sales?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [56]

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That we have not commented I think. But Germany significant for us, really significant.

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

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But just to get a picture, is it close to half of EMEA sales or how important is it?

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

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Well, we haven't really been discussing the country specific sales. Germany is an important from the sales point of view. If we take a look at the biggest country, so it is USA, China and Germany and then it's going to be USA, Germany or China depending a little bit on the cycle. Germany’s importance to us is actually much bigger than the sales in Germany because Germany is production hub. And Wetter is a very good example of that one, because the components that are being manufactured in Germany. So they are shipped all over the world where [Denmark] platforms are used. And the same applies to the ports business. So the factory in Dusseldorf and Wurzburg are having the similar role. So from the personnel point of view, Germany is by far the biggest country for us in the group.

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

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And then this -- that Manu brought up, these costs relating to the closure of the French factory and Wetter changes. So these EUR 8 million to EUR 10 million, those are kind of the costs that are not part of restructuring charges. These are these kind of what is really hitting EBITA adjusted this year and none of that will be left next year, is that rightly understood?

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [60]

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Unfortunately, the amount is quite higher, they are coming from the fact as mentioned that we are, for instance, paying 100% of salaries whereas the output of the Vernouillet factory is like 25% of where it would be. Then we still need to manufacture those 75% which is missing, and that directed to different other factories and that creates also additional costs. And then all the hassle that comes also from these closures, so that's included.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [61]

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Yes. But is it rightly understood if you build an EBITA bridge to next year, EBITA adjusted then this will -- these costs will not hurt next year at all anymore, so you have an EUR 8 million to EUR 10 million higher EBITA next year just from this?

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

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When we have been talking about Wetter and Vernouillet, for example, the comment has been that these costs that you were now referring to. So these ones would be basically vanishing by the end of 2019. And this is our estimate and this continues to be our estimate. So you are right. And it is basically so that if we take a look at the EBITA bridge for the second quarter, for example now, and take a look at the EUR 13 million synergy savings, the profitability or the profits improved by EUR 7 million, so there is approximately a gap of EUR 6 million in there. Part of that comes from the volume, because actually the overall sales volume netted with inflation was slightly down because our sales grew less than 2%. Then there was a product mix issue that we have been discussing regarding the ports business, which is maybe a couple of million. And then almost all of the rest is then this operational [inefficiency], maybe that we can mostly address to Wetter and Vernouillet. And this is a number between let's say EUR 3 million and EUR 4 million altogether -- or EUR 2 million and EUR 4 million, maybe EUR 3 million and EUR 4 million added with the tariffs. And then, of course, these kind of inefficiencies, so we try to get rid of that as quickly as possible, but the comment at the moment is that it would be last until the end of 2019. And it's not been booked in the restructuring cost that is -- you are right.

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [63]

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Unfortunately, it can't be done.

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Operator [64]

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There are no further questions queued over the phone at this time.

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Eero Tuulos, Konecranes Plc - VP of IR [65]

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Do we have any more questions from the audience? If not, then we conclude the conference call today and wish everybody a very warm and sunny summer. See you then in next quarter again.

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Panu Routila, Konecranes Plc - President, CEO & Member of the Group Executive Board [66]

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Thank you.

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

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Thank you.