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Edited Transcript of KCR1V.HE earnings conference call or presentation 6-Feb-20 9:00am GMT

Q4 2019 Konecranes Abp Earnings Call

Helsinki Feb 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Konecranes Abp earnings conference call or presentation Thursday, February 6, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Eero Tuulos

Konecranes Plc - VP of IR

* Rob Smith

Konecranes Plc - President & CEO

* Teo Ottola

Konecranes Plc - CFO & Member of Executive Board

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Conference Call Participants

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* Artem Tokarenko

Crédit Suisse AG, Research Division - Research Analyst

* Erkki Vesola

Inderes Oy - 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

* 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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Ladies and gentlemen, good morning, and welcome to the Fourth Quarter and Full Year 2019 Analyst and Press Conference of Konecranes. My name is Eero Tuulos, and I'm the Head of Investor Relations at Konecranes. It's my great pleasure to welcome here Rob Smith, the new President and CEO of Konecranes. And then we have also a familiar face here behind the tables of Teo Ottola, our Chief Financial Officer.

Rob will share with you first on full year 2019 highlights and then our thoughts regarding -- some of our thoughts regarding 2020, and then Teo will continue with a more detailed discussion on our performance in Q4.

And now without further ado, so, Rob, please.

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Rob Smith, Konecranes Plc - President & CEO [2]

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Thank you, Teo Ottola (sic) [Eero]. And welcome everyone to those here at the Savoy in Helsinki, and to those on the webcast with us as well.

I'm proud and delighted to have joined Konecranes this week. And after having spent a good amount of time getting to know our company prior to my start, I'm increasingly enthusiastic about Konecranes, its exceptional qualities, its talented people and our strong potential. That said, we have a lot of work ahead of us, and the Konecranes leadership team and I look very forward to welcoming you to our Capital Markets Day on the 11th of June in Finlandia Hall, where we'll be proudly explaining our strategy for going forward. So please save that date, and I look forward to seeing many of you again in person. And those on the webcast, look forward to meeting you.

Moving on to our financial performance in the fourth quarter 2019. Konecranes finished 2019 in line with our expectations. In the full year, our sales grew 5.4% and the adjusted EBITA margin finished at 8.3%, improving from the previous year. However, the performance between our various businesses was a bit different. Our Industrial Equipment business continued to struggle in the fourth quarter. Our Service business recorded a solid fourth quarter with strong growth in the agreement base value and a clear improvement in the adjusted EBITA margin. And our Port Solutions business continued its solid performance in the fourth quarter, on the back of a tough comparison year-on-year based on a very large order in the fourth quarter of 2018.

I'll discuss our demand outlook and financial guidance in more detail later in the presentation, but I summarize here. Our overall demand environment is showing signs of some stabilization. And we expect 2020 to be another growth year for Konecranes. And finally, our Board is proposing the dividend to remain at EUR 1.20 per share for 2019, and it will be paid out in 2 equal installments, one in April and one in October.

Let's move now to the key figures from the year. Orders received in the fourth quarter totaled EUR 781 million, representing a decrease of about 16% year-on-year. The decrease was driven from our Industrial Equipment business and the Port Solutions, where especially the large Khalifa Port order received in 2018 fourth quarter made it a tough comparison on a year-on-year basis. On a comparable currency basis, our sales grew 1.5% in the fourth quarter and approximately 4% on a full year basis. And our consolidated adjusted EBITA increased 2% to EUR 87.3 million in the quarter and the adjusted EBITA margin remained flat at 9.4% in the fourth quarter of 2019. Free cash flow in the period was about EUR 33 million and clearly positive.

Let me say a couple of words to the fourth quarter 2019 market environment in which our Service and Industrial business -- and Industrial Equipment business plays. In the fourth quarter, the activity in the world's manufacturing sector recovered slightly. That said, the recovery remains on a fragile footing and operating conditions in the intermediate and investment goods sectors continued to deteriorate in the fourth quarter. The macro weakness was driven by Europe, where both the PMI and the capacity utilization continued to slide. While operating conditions weakened also in the U.S., they remain clearly at a level above the eurozone. And in the U.S., the manufacturing capacity utilization rate improved slightly at the end of 2019. With the exception of Russia, in the fourth quarter the manufacturing sectors grew in the BRIC countries.

Our Port Solutions business worked in the following market environment in the fourth quarter. The global container throughput declined sharply at the end of 2019, but that was after reaching an all-time high in August of 2019. Over the full year, the global container throughput decreased about 2.5% versus 2018. Our Port Solutions business continued to perform well in the fourth quarter. We received a strategically important order for 18 Automated Rubber Tired Gantry Cranes from Turkey-based Yilport Holding, marking our first Automated Rubber Tired Gantry project in Europe. The deal is the largest ARTG order in the Western Hemisphere to date, and it's going to cover 3 terminals, 1 of which is in Sweden and 2 in Portugal. Very significant and strategic order for us.

The 2020 demand outlook now. This year, after a period of declining macroeconomic conditions, our overall demand environment is showing signs of some stabilization, while the demand in European countries continues to weaken within the industrial customer segments, the rate of which is slowing down. In North America, the demand environment is relatively stable overall and remains on a higher level compared to Europe. In Asia Pacific, we're seeing early signs of improving demand conditions, with the caveat that we're watching the coronavirus in China very carefully and taking that into our considerations. Despite its recent decline, the global container throughput continues on a good level. And although there's some hesitation in final decision-making amongst some port customers, the longer-term prospects for orders related to the container handling business remains good overall.

Let me share our financial guidance for 2020. We're confident in 2020. Including the MHE-Demag business, we expect our sales in the full year 2020 to increase 7% to 10% versus 2019. And furthermore, we expect our EBITA adjusted margin in 2020 to improve versus 2019, partly thanks to past and ongoing cost-savings initiatives that we expect to benefit our P&L during the course of this year.

I'd like to hand to Teo to take you through the detailed financial results. Okay. Teo.

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

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Thank you, Rob. And Rob mentioned the cost savings in his remark, and this slide is actually describing the situation regarding those ones. So probably, the most important one here is the mid row there on the lower side of the slide, P&L impact year-on-year. And there we are noting that we cut some EUR 12 million cost savings as a result of the activities completed, which is a couple of million more than what we were anticipating 3 months ago. But then at the same time, the estimate for 2020 full year, we have lowered that from EUR 37 million to EUR 34 million, which you can see here on the slide. So this EUR 34 million is the number benefiting us from the activities done so far in '20 in comparison to '19. And then, correspondingly, we have increased the number for '21 from EUR 11 million to EUR 14 million as an estimate for next year.

Rob talked about the order intake and sales on a group level, but maybe a couple of comments regarding these ones. First, the order intake. So it is a decline in an year-on-year comparison. However, from this slide, we can clearly see that the fourth quarter of '18 was very high, and the comparables were tough. As a result of that one, sequentially, order intake from the third quarter of '19 actually rose towards the end of 2019.

And then on the sales side, when we take a look at the growth of 1.5 percentage points with comparable currencies and then split that through the BAs, so actually in Service and Industrial Equipment, with comparable currencies and external sales, growth was very minor or even a small decline. And the growth actually came from the Port Solution business towards the end of 2019.

The adjusted EBITA on a group level, EUR 87 million. Like Rob noted, exactly the same percentage as a year ago. The development was varying from one business area to another one. On group level, the gross margin declined as a result of challenges in Business Area Industrial Equipment and the result improvement thus came more from the synergy savings and higher net sales than anything else.

Group order book continues to be in a good level, EUR 1.8 billion, a bit more than EUR 100 million more than a year ago. When we take a look at the order book for 2020, so it is actually around EUR 70 million higher than we had 1 year ago for 2019. So we have about EUR 70 million more in the order book for the current year than what we had 1 year ago, helping our sales development then during 2020.

These pie charts haven't really changed that much over the quarters, now that MHE-Demag will be consolidated in our numbers from the beginning of 2020. So obviously, by the end of this year, the regional pie chart will look a little different, so that the Asia Pacific share will go probably to around 20% of our total pie.

And then when we go into the business areas, so we can start with Service, as usual. Service order intake, EUR 250 million. On a comparable currency basis, orders decreased about 1% in an year-on-year comparison. The decline came from modernizations and retrofits. So it is the project-related business within Service where customers who are saving on CapEx are not so keen on placing orders. This challenge we have had in the first half of 2019 as well, not so much in the third quarter, but now again in the fourth quarter. That is something that is sort of adversely impacting the order intake in the fourth quarter. Parts orders did well. Field service orders declined a little bit in a year-on-year comparison.

When we take a look at the situation regionally, so there actually, EMEA did pretty well, whereas order intake decreased in Americas and Asia Pacific. Then even if there has been a little bit slowness in the order intake, so the other aspect of the growth in Service business, the agreement base, grew very nicely. So a growth of more than 8% with comparable currencies in a year-on-year comparison is a very good level. And we are very, very glad and happy about this development. Also, the sequential improvement in the agreement base was quite good towards the end of 2019.

Sales with reported currencies increased, but on comparable currencies decreased or was basically flat in an year-on-year comparison. Sales also did pretty well in EMEA, also APAC, but decreased in the Americas. And the modernization delivery situation impacted also the sales, particularly regarding the Americas. And then from the product mix point of view, parts actually did better than the field service sales in the fourth quarter, meaning that the product mix from the margin point of view was actually improving. Order book is more or less on the same level as a year ago. Obviously, the modernization retrofit weakness in the order intake during 2019 is having its impact on the order book as well.

Then when we take a look at the adjusted EBITA, this is a very, very good result, EUR 61 million, 18% margin in the fourth quarter in a situation where sales with comparable currencies didn't actually grow. Gross margin improved as a result of good execution. So things went well during the fourth quarter. Also, the product mix helped. Like I said, there were more spare parts and then at the same time the synergy benefits that we have been getting were supporting the profitability in the fourth quarter as well.

Then moving on to Industrial Equipment. Industrial Equipment orders were EUR 316 million, and the external orders with comparable currencies declined by about 7% in an year-on-year comparison. Orders actually declined in standard cranes, process cranes and components in an year-on-year comparison. And here, taking a look at the situation regionally, so when Americas had a little bit weakness in the order intake in Service, so actually, the crane order intake regarding Americas was quite strong. In the crane business, the weakness was probably more on the EMEA side than on the Americas side.

Then when we take a look at the situation sequentially, which is important from the market development point of view, so we can note both the standard crane and the component order intake was quite flat sequentially, signaling also this kind of sort of balancing within the environment -- within the demand environment. Sales, EUR 336 million. And also here, growth with reported currencies. But then when we take a look at comparable currencies and external sales, so basically, we are in a flat situation year-on-year.

We had a very challenging quarter from the profitability point of view in Industrial Equipment, only EUR 0.6 million EBITA and very low margin in comparison to EUR 14.8 million a year ago. The basic problem and the challenge we have here is in the process crane business, where we had a couple of challenges. One of them is that we have 1 project, which is -- which has quality issues, and the rework cost that we are talking about regarding that project is more than EUR 5 million, something between EUR 5 million and EUR 6 million. Partially as a result of that, but also otherwise, we have then gone through quite a big portion of the process crane project base.

And as a result of this one, we have taken a more conservative approach in certain balance sheet value questions and work in progress, percentage of completion values have been lowered. And also then, we have added some provisions. And this impact is roughly in the same ballpark as the quality issues in this one major program. So we are talking about more than EUR 10 million gap year-on-year as a result of these 2 things regarding certain process crane projects.

Additionally then, we have been having a similar kind of cost increases as we have been having also in the third quarter and second quarter regarding the ongoing footprint optimization in France and Germany. Our sales mix was weaker than a year ago as a result of lower component deliveries. So component order intake has been on a lower level than a year ago for quite some time. And as a result of that, the mix is weaker. And then also, we had some costs arising from the national strikes that we had in Finland, particularly in December, impacting our company. Then when we take a look at the order book, so EUR 650 million roughly on a comparable currency basis, order book increase of more than 8% year-on-year.

Port Solutions order intake, EUR 264 million. This is a decrease of almost 1/3 or actually 1/3 in comparison to the previous year. But again, the comparables were tough because of the very big Khalifa deal in the fourth quarter of 2018. And sequentially, order intake actually improved a little bit from the third quarter number. We did well in orders in ARTGs, in mobile harbor cranes. We could have gotten more in standard cranes even though there the whole year was good, but not regarding the fourth quarter. And then regarding lift trucks, which is often seen as an indicator about -- of the demand going forward, so order intake was lower than a year ago, but sequentially flat.

And then when we take a look at the sales, sales increased 4.6%, on a comparable currency basis 4.8%, a very good sales growth and a good delivery situation towards the end of the year. This is also visible in EBITA. So profitability was good, very good actually in the fourth quarter, EUR 32 million. Adjusted EBITA margin 9.9%. Gross margin increased on an year-on-year basis. The product mix was not really better than a year ago, it was probably somewhat weaker. But as a result of good execution and higher sales in the fourth quarter, so the result reached almost 10% mark in the adjusted EBITA. Order book also continues to be good, EUR 960 million roughly, 5% or slightly more than 5% up in an year-on-year comparison.

Then a couple of comments on the cash flow and balance sheet situation. Net working capital developed in the wrong direction, so to say, towards the end of the year after a very good development in the third quarter. We are within the targeted range in net working capital terms, but of course the deviation in the fourth quarter was in the wrong direction. This impacted the cash flow slightly. Cash flow was positive, as we heard Rob say, but not as good as it was in the third quarter of 2019.

And then this is reflected, not very much, but reflected a little bit on the net debt situation at the end of '19, EUR 655 million. And of course, comparing to the end of '18, one has to remember the impact of the IFRS 16 lease standard. This one is obviously excluding the MHE acquisition price as this was paid only in the beginning of 2020 and not at the end of 2019, so about EUR 140 million, EUR 145 million more net debt as a result of that one. And the capital employed is very high here, as a result of the cash that we had at hand at the end of the year to be able to make the acquisition in the very beginning of 2020.

This actually concludes the presentation, and then we can go 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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So let's start with the people in the room here. Any questions from the audience? Great. Erkki?

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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, regarding the sales growth guidance for this year. How much is the MHE acquisition impact? Is kind of, say, 4% is the good ballpark figure for that?

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

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The MHE-Demag sales in 2019 were roughly EUR 170 million. Actually, the sales were higher, but there is component sales from Konecranes Demag -- or Demag actually to MHE. And this -- when you eliminate this one, so the impact is about EUR 170 million. So this is approximately 5%. So the organic growth that we are looking at here is 2% to 5% assuming that MHE sales would stay on the same level as they were in '19.

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Erkki Vesola, Inderes Oy - Analyst [4]

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And then coming to the EBITA margin guidance. How large a role did the EUR 34 million savings from the program play in your margin improvement? I mean would the margins actually have -- will they come down excluding these due to mix issues, et cetera?

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Teo Ottola, Konecranes Plc - CFO & Member of Executive Board [5]

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Well, the mix -- if we start with the mix. So the mix will probably be weaker in Industrial Equipment than what it was in 2019 as a result of the order book structure. So there is less component order book now than what we had 1 year ago. This may, of course, change in relation to how we get orders going forward. Also, in the Port Solutions, the mix will probably be weaker. The weakening will not be as much as it was in '19, but it will be still weaker than in '19, according to the estimate today. In Service, we are not expecting a very significant mix change one way or the other. Mix improved actually in '19 in comparison to '18, but we are not really expecting a major change one way or the other. Regarding the cost savings of EUR 30-plus million that are particularly in Industrial Equipment Area and are related in Industrial Equipment. So obviously, that is very important for Industrial Equipment, but we do not quantify the improvement potential as such in the guidance that we are giving.

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Eero Tuulos, Konecranes Plc - VP of IR [6]

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Thank you. Any more questions in the room here, in the audience? If not, we can then open up lines. Please?

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Operator [7]

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

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [8]

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So Sebastian here from Commerzbank. It's around Industrial Equipment to start with, and maybe we can take it one by one. First one is on the order funnel. As I joined the call later, can you just talk around the components outlook to you? And let's start with that one. And then the other question I would have for Industrial Equipment is on the platform, the introduction of new products, this S and M platform. Can you just remind us of the timing when these will be launched and will ultimately then make it also to the order book? And can you also remind us of the potential contribution that might have for the full year, in terms of the total revenues? Or if that's the order sequentially first?

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

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Okay. So if we start with the component outlook, so now the funnel in the component business is quite unchanged on a sequential basis. And also, when we take a look at the order intake, so that has actually been quite flat on a monthly basis already since late summer. So we have been talking about this kind of stabilization regarding the component business already for quite some time, and that continues to be the situation also towards the end of fourth quarter. Now it's very difficult, of course, to say that which way does it turn, whether the next change will be up or down. But on a monthly basis, it has been quite stable now for several months.

The new products. So then when we take a look at those ones, so the ramp-ups are ongoing and particularly the new Wire Rope hoist product that is important and the interesting one is now in the phase that we have done the first deliveries, and they are at the customers, and the customer feedback is very good. So we are confident that these products will be good, and this particular product will be very good. I do not think that it will be having a big impact in the P&L for 2020. So it is more like an impact that we would be seeing '21 and beyond from actually all of those new products, also including the chain hoist and particularly then the heavier platform for process use.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [10]

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Okay. That's helpful. And then a few on Service and quickly on the agreement base. You have been always pointing to about 5% of the envisaged growth rate ambition for the growth going forward. Now we have seen the agreement base going up 8% organically. And any change to the original planning? Or are you just seeing that the pickup rate by, especially the Demag customers, is better than expected earlier?

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

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I would say that the agreement base growth target, what we have been talking about, 6% to 7% on an annual basis, continues to be valid. So 8% for last year is a good result, and we are happy with that one. On a long-term basis, of course, things tend to stabilize and the 6% to 7% continues to be a good target. The Demag potential is there, and it has continued to be there, and we have learned to utilize it better over time. However, when we take a look at this growth, for example, so it is not only coming from that one. So there is a significant increase in the agreement base of other cranes as well. So it's a combination, not only Demag or not only third-party cranes, but it's a combination of all that. And now particularly in a situation where the order intake is a little bit on the low side as a result of lower modernization, so we obviously welcome the agreement base growth even with a greater joy than maybe in a situation that the order intake would also be up 3% to 5% on an annual basis.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [12]

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Okay. And if I may, then just finish off on the Service side with a margin question. I think we had obviously very decent contribution margins in prior quarters. And quarter 3 then it slowed. And you also then hinting to the need for adding a bit more capacity or any personnel on the ground. Now we've seen, again, a very decent margin in the quarter 4. I think you hinted to mix as the reason here. How should we think about the margin trajectory going forward when it comes to Service?

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

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We have been hinting a little bit into the product mix possibly deteriorating a little bit as we go more towards the growth ambition. And that was, I think, partially the discussion in connection to the third quarter as well. Now what happened in the fourth quarter is that, unlike maybe those expectations, so the mix continued to be very good, and it actually improved in an year-on-year comparison also, so that the spare part business has been doing very well over the months and over the quarters. I would still, however, say that we will start investing more in growth. We will start to have some initial costs as a result of these growth ambitions. And it will then mean that we believe that the sales -- the EBITA margin for Service business will continue to improve, but not with the pace as it has been improving now, for example, in 2019, where the improvement rate has been very high.

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Operator [14]

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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 [15]

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This is Tomi from DNB. Maybe a question on the mix commentary you said for the Industrial Equipment and Port Solutions. At the same time, you are guiding for profitability improvement in 2020. So can you just elaborate, explain a little bit further that where is the profitability improvement coming in 2020, especially driven by the comments you made in terms of mix of the different business?

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Teo Ottola, Konecranes Plc - CFO & Member of Executive Board [16]

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The commentary regarding Industrial Equipment profitability is mostly linked to 2 things. One of them is, of course, the cost savings that we have been talking about, now the number of EUR 34 million that we have as an improvement estimate for next year in comparison -- sorry, for this year in comparison to last year. So this is primarily Industrial Equipment. And this will create a positive delta to the Industrial Equipment profitability. At the same time, of course, we now -- as we saw the fourth quarter result for Industrial Equipment was poor, as a result of certain project issues that are, by nature, onetime, at least regarding those projects. So of course, the expectation is that the -- it will not be continuing like that, and this creates another improvement potential. We are not necessarily counting too much on growth regarding Industrial Equipment.

Then when we take a look at the Port Solutions and the potential mix impact there. So first of all, like I said, the mix impact -- the negative mix impact is not as much as it was in '19. So there will probably be negative impact, but it might not be as significant as in '19. And then in Ports, we are of the opinion that the margin that we are going to see in '20 is -- could be quite flattish in comparison to 2019. And there, of course, the mix then would be balanced by growth. So the order book increase in an year-on-year comparison that we have, the EUR 70 million. So the majority of that, obviously, is in the Port Solutions business, and that will be then driving the growth for the Port Solutions from the sales point of view in 2020.

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Tomi Markus Railo, DNB Markets, Research Division - Analyst [17]

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Okay. And then maybe a bigger-picture question to Rob. Hope to see you in the coming weeks and months. Can you maybe describe a little bit your first thoughts in terms of opportunities and maybe also the challenges, urgency, Konecranes needs to be tackling? I know you have been in-house for a couple of days, but any first thoughts.

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Rob Smith, Konecranes Plc - President & CEO [18]

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I appreciate the opportunity to share some first impressions. I think we've got a great company. And I'm very, very motivated by the excited, motivated, confident people I have met in our company. I've had an opportunity to see a couple of our sites, but not all of our sites. What I really intend to do for the next several months is go understand our company through the eyes of our customers. And we've given guidance for 2020 today. What I'd like to do is come back with my Konecranes leadership team on the 11th of June and talk about our strategy going forward. And that will be one that we've solidified together. We've built it through the eyes of our customers. It will have very important elements to it and key actions underpinning it, and that's something I'd like to talk about when we see one another in the Finlandia Hall.

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Operator [19]

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We will now take our next question.

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

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It's Manu Rimpelä from Nordea Markets. My first question would be related to these temporary cost or cleanup costs that you took in Industrial Equipment. And have you -- with the new CEO, Rob, coming in, so have you looked at the kind of backlogs in all of the divisions and also the projects you're delivering that would it be fair to say that you kind of feel confident that there isn't going to be any further need to take some provisions, write-downs or any other costs related to the existing backlogs of our business?

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Rob Smith, Konecranes Plc - President & CEO [21]

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Teo covered that very well in his comments earlier. Maybe you want to touch on those again, Teo?

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Teo Ottola, Konecranes Plc - CFO & Member of Executive Board [22]

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Yes. I guess that the -- if I understood correct, so maybe the essence of the question is that, what is to be expected going forward. And obviously, so that when we take a look at the manufacturing footprint and we take a look at the operations, so we are evaluating the situation all the time. And then we make decisions accordingly and according to the market situation, according to our own strategy. So the decisions will come if there is need for those. And if there is no need, so then obviously we will not conclude anything else.

Regarding the projects or processes that we have ongoing now, and I think that if you take a look at the French and the German situation, so Vernouillet and Wetter. So there, we have progressed now to a situation regarding France that there is no more production at the site, which then means that these additional temporary costs that have been caused by the French factory, so they would not be in the operative result anymore. If there is cleanup costs and those kind of things, they would then most likely be booked in the adjustments. They should not be significant.

When we take a look at the Wetter situation, so the changes that we are doing at the factory, the layout changes, the process changes and the other improvement activities that have been ongoing for quite some time, so the estimate today is that we would be ready, but with those ones by the end of the third quarter of this year. So this will mean that, that temporary cost will probably continue, but it might not be on the level where it has been throughout 2019. So maybe this -- I forgot to add this to Tomi's previous question about the improvement potential. So there is probably an improvement potential in relation to these temporary operational costs regarding Wetter and Vernouillet in an year-on-year comparison also, to the Industrial Equipment business.

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Rob Smith, Konecranes Plc - President & CEO [23]

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And as Teo mentioned earlier, the root cause of the problems in the several process crane discussions have been understood. And as a result of that, the other process crane projects on similar natures were checked and adjustments were made, as Teo talked about earlier.

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

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Okay. If I may just follow up on the Port side. So you obviously put this large first automation -- full automation delivery in [this well] some time ago. And are you started to kind of deliver on that already? Or is this still in the design phase? And have you gone through also the backlogs in the Port business that there isn't any reason to expect that you would have to do [a remed there] and you would find some extra costs there?

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

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The project in -- the Israel project is proceeding according to the plan. We are within the time schedule. And there have been certain acceptances regarding that project as well. So we are confident that, that one is ongoing well. Then when we take a look at the project portfolio and the project execution in the Ports, for example. So obviously, we have an ongoing review regarding those ones. And of course, there are changes every quarter, to the positive and to the negative one. And there have been projects in the Ports area that have been going well, and then there have been projects that have not been going so well. And they are all booked in the numbers, to the extent that we are aware at this point in time.

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Manu M. Rimpelä, Nordea Markets, Research Division - Head of Equity Research of Finland & Senior Analyst [26]

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Okay. And final question. I might have missed this, but any comment on how do you think around working capital for 2020? Do you think you will be able to release more capital now that we get to production model in Industrial Equipment?

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Teo Ottola, Konecranes Plc - CFO & Member of Executive Board [27]

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I think we didn't actually comment that, but I would still say that sort of existing target setting that we have regarding net working capital of being below 15% of [all-in formal] sales is a good proxy going forward as well. So as much as I would like to say that we will be able to make significant progress in 2020, so cautiously, I would say that we would rather make -- keep the same target setting. We will be -- going forward, we will be concentrating on operational improvements that will be involving, for example, inventory management, for sure. But how quickly can we then expect results from those ones is another question. So net working capital will probably continue to be driven more by project timings than anything else, still in 2020.

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Operator [28]

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We will now take our next question.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [29]

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Magnus here with UBS. Just a couple ones for me. So can we report growth in the service contract base? And is there any chance you could give us the growth rate for the Demag business specifically?

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

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We would rather not, so that it is a combination of several things. It's a combination of Demag installed base, it's a combination of Konecranes installed base, and then the -- also, of course, third-party cranes. It is also reflecting a little bit the way to change the way that the business is being done. So we tried to get as much as possible of the work done for the customer to be put into the agreement mode. So it's a combination of those and separating different things there from -- on a quarterly basis is not necessarily meaningful. The question is then that, what kind of updates on those things would be then available for the CMD. You may remember -- some may remember that we had an update on those things during the previous CMD in 2017.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [31]

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Perfect. And in regards to the Wetter, their issues, could you give us a potential figure for what the absolute impact was in the quarter?

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Teo Ottola, Konecranes Plc - CFO & Member of Executive Board [32]

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The absolute impact is in the ballpark of EUR 3 million.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [33]

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Perfect. And a final one. I mean, we just heard one of your competitors potentially stepping away from their terminal [parity] system business. And it's quite interesting to read quite recently. So are you stepping into this market? I mean do you feel that this business provides top line synergies for you?

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Rob Smith, Konecranes Plc - President & CEO [34]

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I think the appropriate thing to say is it's too early to comment on that, but we noted that development as well.

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Operator [35]

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We will now take our next question.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [36]

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This is Tom Skogman from Carnegie. I wonder if you could elaborate a bit about on the impact from the Finnish strikes on Q4 and whether there will be any impact on Q1 and full year 2020.

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

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Yes. The impact of the strike in December or towards the end of '19, impact is in December, is in the ballpark of EUR 1 million. So it is not huge, for example in comparison to some of the quality issues that we had, but it is there. Taking a look at the 2020, so the strike continued for approximately as long a period in '20 as in '19. So the impact is, again, in the ballpark of EUR 1 million. It is probably a little bit less for 2 reasons. One of them is that, obviously, we learned to manage the situation a little bit as time went. And then also, we can catch up -- sort of part of the issue is probably still during Q1. So it will be less for '20 than it was for '19, but the difference is not big.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [38]

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Okay. Can you confirm, despite being early days, that the worst in terms of EU items start to be over here? Because it's been really a very large cash flow consumer the last years to look at these EU items. So can you confirm that you're kind of past the peak? Or is it so that you're now just start to plan that we should do some major exercise also in Port Solutions in the next 5 years?

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Rob Smith, Konecranes Plc - President & CEO [39]

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I think it's a discussion for the 11th of June.

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Operator [40]

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(Operator Instructions) We will take our next question.

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Artem Tokarenko, Crédit Suisse AG, Research Division - Research Analyst [41]

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It's Artem from Crédit Suisse. My first one is around the bridge in Industrial Equipment for next year. Could you maybe help us with understanding a bit better how you expect pricing versus raw material inflation and employee inflation to play out? And also maybe give us a bit more color on how you expect the year-over-year impact from Vernouillet and Wetter mix and other one-offs which you had in industrials, to evolve in 2020?

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

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Yes. If we start with the pricing or cost inflation/pricing situation, so -- and we have been referring to there having been some, let's say, maybe a little bit more challenges in the pricing environment, particularly regarding Industrial Equipment towards the end of last year in comparison to what it was earlier. And that has been true. I think that, however, we have been able to manage the situation pretty well, so that we have, by and large, been able to compensate the inflation with price increases. However, this has meant that when we take a look at the procurement activities that we have done, so actually the pricing has not been enough to compensate, but we have had a need to look for other savings in the procurement area, which we obviously would be doing also otherwise. But I mean in this case, it has meant that the productivity improvement that we have got from the procurement point of view, so we have needed that to be able to compensate in a way the cost inflation that there has been. This will continue to be an issue for this year, because the demand hasn't really started to recover from the level where it was. So the pressure will continue to be there. And -- but we believe that we will be able to manage that again through some of the productivity improvement topics also in 2020.

Then to the other question regarding the split, Wetter/Vernouillet, and the cost impact for this year. So Wetter and Vernouillet have been roughly 50-50 of the additional cost in '19. And now that the Vernouillet cost will basically go away and vanish from the first quarter onwards, so it will create an improvement of about half of the cost that we have had as a result of these things. And this -- the total amount that we are talking about -- have been talking about in 2019 is somewhere between EUR 10 million and EUR 15 million. So half of that.

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Artem Tokarenko, Crédit Suisse AG, Research Division - Research Analyst [43]

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Right. And just on the pricing comment, so that I understand correctly. Those productivity improvements, that comes on top of your cost savings which you have announced?

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

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Those have been on top of the ones that we have now been talking about. These would have been otherwise something that would have been visible on our bottom row, but now is in the cost because it has been used to compensate for the inflation.

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Artem Tokarenko, Crédit Suisse AG, Research Division - Research Analyst [45]

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Right. And last question on industrial. Those problematic projects which have caused cost overruns in Q4, are they finalized now? Or do you expect them to continue into next year -- into 2020?

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Teo Ottola, Konecranes Plc - CFO & Member of Executive Board [46]

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These are, by and large, finalized, so that there are some that are open, but the majority of those are finalized. The one that we mentioned as a big individual project with quality costs, so that one is not finalized. So this includes a cost estimate of the challenge, but we are quite happy with the estimate -- well, not happy because it's a high number, a negative number, but we are quite confident that the estimate is -- the ballpark is correct.

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Artem Tokarenko, Crédit Suisse AG, Research Division - Research Analyst [47]

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Right. And my second question is about Ports. When I look at H1 '19 orders, they were very strong and much higher level than current run rate. Could you maybe remind us the size of large orders you booked in 2019 and how tough, in your view, is the comp in H1 '20, given where -- given current demand environment?

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Teo Ottola, Konecranes Plc - CFO & Member of Executive Board [48]

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We had now -- Eero, help me if need. We had the Israeli order in the first half. That was in Q1. We announced some other big ones...

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Eero Tuulos, Konecranes Plc - VP of IR [49]

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In Q1.

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Teo Ottola, Konecranes Plc - CFO & Member of Executive Board [50]

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In Q1 or Q2.

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Eero Tuulos, Konecranes Plc - VP of IR [51]

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Q2, it was a strong quarter for us, but we didn't have any single large orders, but it was an exceptionally strong order quarter for us.

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Teo Ottola, Konecranes Plc - CFO & Member of Executive Board [52]

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The comparables we can actually probably see here as well. So that when you take a look at the Q1 and Q2, so that the comparables will -- they will not be easy, let's put it this way.

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Artem Tokarenko, Crédit Suisse AG, Research Division - Research Analyst [53]

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Right. And I guess, in current market demand environment, are there any big projects you're looking at which can be finalized this year? Or it's more customer hesitation probably will not allow this in the near term?

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Teo Ottola, Konecranes Plc - CFO & Member of Executive Board [54]

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There are relatively sizable projects in the pipeline today, as the situation usually also is, and this is not an exception of that one. The pipeline as such is in a relatively good shape. The question is exactly what you were pointing out. So that what does the hesitation in the decision-making mean? Does it mean that the decisions get done? Or will they be postponed and delayed? That is -- the timing question is, of course, of relevancy.

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Artem Tokarenko, Crédit Suisse AG, Research Division - Research Analyst [55]

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Right. And my last question is around Services. Could you maybe help us with where your penetration is now into the market base and also in terms of sales growth versus growth in the installed base and the contracts? When shall we see sales growth starting to catch up with the clearly much faster growth in your installed base on the agreements?

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Teo Ottola, Konecranes Plc - CFO & Member of Executive Board [56]

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The agreement base growth starts to be visible actually from the moment that we basically get the agreement. So the invoicing, obviously, doesn't start the next day. But basically, when the contract is enforced, so we start to do the activities in relation to the agreement. So basically, to the P&L, so then, theoretically, it, in a way, always come with a small delay. But -- so if we take a look at the annual value, so the annual value will be in the P&L theoretically after 6 months, because it is an annual value and we start at a certain given period of time. The relation between the agreement base value and the sales then is almost 100%. So that there is not leakage in that. So that the agreement base that we have, so it will be invoiced going forward. The Demag opportunity and the utilization rate of that one, despite now the growth rate that we have been having, 8%, which is a great number. Obviously, we are in the very beginning of that journey from the potential point of view. So that there continues to be a significant potential in that respect going forward as well.

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Operator [57]

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

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [58]

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Yes. This is Tom from Carnegie again. Can you please just remind a bit about these impacts from MHE-Demag on PPAs? Will there be any impact? And then will you have some kind of large integration costs in the beginning of 2020 on this?

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Teo Ottola, Konecranes Plc - CFO & Member of Executive Board [59]

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We have been talking about an integration cost element of roughly EUR 6 million, and not all of that will come during this year, but some will probably materialize during this year now that we are doing the integration planning and actually the integration also at this time. So that will, of course, be clarified then going forward. There will be an impact on the PPA, if that's what you ask. So there will be an impact. That will depend on the allocation that we will then do by the end of Q1. So we would rather not start to guess on the numbers, but there will be, let's say, as -- there will be several millions, EUR 5 million, maybe more on the PPA as a result of this one. This is more a guess than a knowledge at this point of time because the calculation, obviously, has not been done, [done ready .

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [60]

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And then is MHE now in the -- it's not in the order book, as far as I can see at the moment.

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Teo Ottola, Konecranes Plc - CFO & Member of Executive Board [61]

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It is not at the...

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [62]

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The reported order book by the end of 2019.

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Teo Ottola, Konecranes Plc - CFO & Member of Executive Board [63]

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You are correct. So it is not in the order book. It is not in any of the numbers at the end of '19, because the deal was closed on the 2nd of January. So it will be basically in the Q1 numbers practically fully. But in the opening balance sheet for 2020, it is not included.

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Tomas Skogman, Carnegie Investment Bank AB, Research Division - Head of Research of Finland [64]

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How large is the order book, just to get a feeling? When you give this sales guidance it's just nice to see what are these base production.

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

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It is, yes. Now -- of course, now that when you take a look at the MHE as a whole, and then you think that the -- or take into consideration that the size is about 5% of the total group, so I mean the other indicators that you might want to take a look at, like balance sheet value, for example, as a whole, so they are pretty nicely in line with that one. Also, the profitability, as we have been discussing earlier, so taking this elimination of internal sales into consideration, so the profitability is not significantly different than from the, let's say, Konecranes stand-alone or legacy Konecranes in this respect. And the same applies to the order book as well. MHE has a little bit different -- has had a little bit different way of having the order book and the order intake entry regarding the agreement base than what Konecranes has. So we will then need to figure out how to unify that one going forward. But it will be done by the end of Q1. So we will be able to report numbers with consistent accounting practices.

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

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So that concludes then our conference today. Thank you for the active participation and looking forward to then returning back to -- in these circumstances again then in late April. Thank you very much.

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

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Thank you.