Konecranes (KCR.HE), a global leader in the manufacturing of cranes and lifting equipment, reported a strong second quarter with record high comparable EBITDA margins across all business segments.
Despite a decrease in demand compared to the previous year, the company achieved a 13% increase in sales, surpassing €1 billion.
The improvement in profitability was attributed to higher volumes, effective price inflation management, and strategic execution. The company's order intake remained robust, with significant growth in the Service segment and strong performance in Industrial Equipment and Port Solutions.
Konecranes remains optimistic about the demand outlook, particularly in the industrial customer segments and the global container handling market, and expects an increase in net sales and comparable EBITDA margin in 2024.
Key Takeaways
- Konecranes reported a 13% increase in net sales to €1.032 billion, with significant growth in EMEA and the Americas.
- Comparable EBITDA margin rose to 14.3%.
- Sales in APAC grew by 5.7% year-on-year, reaching €396 million.
- EBITA increased by 22.1% to €87 million, primarily due to pricing impact and volume improvement.
- Order intake in the Service segment reached an all-time high, with Port Solutions sales growing by 25% year-on-year.
- The company's net working capital was €458 million, below the target of 12% of rolling 12-month sales.
- A positive net of inflation pricing impact is anticipated, with a favorable delivery mix expected for the year.
Company Outlook
- Konecranes anticipates an increase in net sales and an improvement in comparable EBITDA margin in 2024 compared to 2023.
- The company expects to maintain a positive net of inflation pricing impact and a favorable delivery mix for the year.
Bearish Highlights
- Demand has decreased compared to the previous year.
- The Industrial Equipment segment saw an 11% year-on-year decline in external orders, with a clear decrease in process cranes.
- Order intake in the Board Solutions segment declined by 27% year-on-year.
Bullish Highlights
- Record high comparable EBITDA margins were achieved in all business segments.
- The company reported healthy order intake with strong performance in various segments.
- Return on capital employed exceeded 20%.
Misses
- The order book remained at a similar level to the previous year, indicating no significant growth in new orders.
Q&A Highlights
- Konecranes is confident in the future growth and profitability of the Industrial Equipment division.
- The company is performing in line with its own plans and expectations for Industrial Equipment.
- Executives expressed optimism about demand in North America, Europe, and Germany, with strength in various industries including power, logistics, and defense.
- Tariffs on STS cranes will not impact Konecranes' deliveries as the cost will be passed on to customers.
- The company is exploring bolt-on acquisitions and cautious capital allocation.
- Pricing adjustments will be made to compensate for inflation while maintaining long-term customer relationships.
- Konecranes' efficiency improvement program is expected to yield significant profit and loss improvements by the end of 2025.
Konecranes has demonstrated a strong quarter amidst challenging market conditions, with a focus on strategic execution and efficiency improvements. The company's diverse product portfolio and global reach, combined with prudent financial management, have positioned it well for continued growth and profitability. The market will be looking forward to the Q3 interim report due on October 25 for further insights into the company's performance and strategic direction.
Full transcript - None (KNCRF) Q2 2024:
Kiira Froberg: Here with me today, I have our President and CEO, Anders Svensson; and our CFO, Teo Ottola. Before we start, a kind reminder, this presentation contains forward-looking statements. Next, Anders and Teo will walk you through our Q2 results. Anders will start with the group numbers, after which Teo will focus on the business segments. The presentation is followed by a Q&A as usual. But now, Anders, the stage is yours.
Anders Svensson: Thank you, Kiira and welcome also from my side to this webcast for the result of the second quarter. The headline of the quarter is record high comparable EBITDA margin in all business segments. The demand environment remained healthy during the second quarter, even if it was down 11% on a strong comparable in the previous year. Sales execution was strong and we delivered above €1 billion of sales, up 13% versus the previous year and that gave us record high comparable EBITDA margins of 14.3%, and it was actually all-time high in all business segments. And the profitability improvement was mainly driven by higher volumes and also by price inflation management, and a strong strategy execution. I am moving to the market environment and start with our industrial customer segment. If you look at the manufacturing capacity utilization rate, starting in the EU, it was down sequentially and also down on a year-over-year comparison with 2.3 percentage points. In U.S., however, sequentially, it was up. And if you look on a year-over-year comparison, it’s actually quite flat. If we then move into the global manufacturing PMI, that was in expansion. However, if you look at the eurozone, still in contraction while U.S., China, India and Brazil, clearly in expansion. I move over to our Port Solutions customer segments. And here, we normally look at the global container throughput index. And if you look at this, it continued on a high level. And on a year-over-year comparison, it’s up 6%. And that should talk about the strong market climate for our Port Solutions customers. I’m moving to the group order intake and net sales, starting with order intake. We had a healthy order intake of €968 million, and that was down 11.5% versus a strong comparable in the previous year. However, the order intake is the strongest we have had in the last 4 quarters. And if you look into the different segments in Service, we had an all-time high order intake. In Industrial Equipment, we were above the 300 and on the same level as in Q1 and actually ahead of the Q3 and Q4 of the previous year. And then you look into ports also here above the €300 million and the strongest order intake in the last four quarters However, in the comparable 1 year ago, there were two significant order intakes. The first one was – and the largest one was to Port of Virginia, 36 automatic stacking cranes at the value of above €130 million. And there was also another one to Copenhagen, Malmo Port. Our net sales execution was strong. We delivered €1.032 billion, and that was up 13% versus previous year. We had an increase in all 3 segments. Geographical-wise, we had an increase in EMEA and in the Americas and a decrease then in APAC. And the mix for the group was slightly positive for the quarter. Moving into the group order book. And here, our book-to-bill for the quarter was slightly below 1, thanks to the strong sales execution. And if you compare it to the previous year, we are 12% down versus Q2 ‘23. As you can see, that was a bit of a peak in the order book. Since then, we have improved our delivery capabilities and also reduced lead time to customers. So going into the second half year with almost €3 billion order book is a strong position. Then I move into our group comparable EBITDA. And here, we delivered €147 million, and that was 50% up on the previous year, where we did €98 million. And that gave us a margin of 14.3% for the quarter. That was up 350 basis points versus the previous year. And the group – the comparable EBITDA margin increased in all segments and were all-time high then in all segments as well and as I said in the beginning driven by volume leverage, price inflation management and strong strategy execution. If you look at the gross margin, it also improved on a year-on-year comparison. Now we normally look at our financial target and our performance to watch our financial targets. So if you look at the quarter isolated, it’s very strong, of course, both the group and all segments are within the profitability range and actually, in the top half, the profitability corridor. You can’t look at one quarter isolated, of course. So when we look at rolling 12 instead, we can see that group are now within the profitability corridor at 12.3% on a rolling 12 basis, service as well 20.8%. And you can see a strong performance also from Industrial Equipment and Port Solutions, getting quite close to their profitability corridors as well. So that looks very good. If we instead then also cover sales growth target, which was to grow above nominal world GDP, if you look at the previous year, ‘23, we had a growth of 20.5% in comparable currencies versus ‘22. And so far, this year, we are running at 7.8% growth in comparable currency. So also here, I think we are delivering on our targets. Then I move into the demand outlook. And within our industrial customer segments, we say that our demand environment within industrial customer segments has remained good and continues on a healthy level. And we have seen that during ‘23 and also the first half year here of ‘24. The demand environment has remained good. We don’t – we are not saying that there is no uncertainty anymore in the market. Of course, there is, but we see it as quite stable on a good and healthy level within the Industrial segment. Interest rates are, of course, impacting customers negatively in the decision-making process, not that they cancel or discontinued projects, more that they take a longer time on decisions when it comes to the larger projects such as process cranes, not affecting standard crane and component deliveries in the same way. Funnel continues to be strong, also containing process cranes to a large extent, and we see good inflow of new cases also into the funnel. Then if I move to the port customer segment, we said that global container throughput continues on a high level and long-term prospects related to global container handling, remains good overall. And if we look at the pipeline here, it’s also in a very good state. The short-cyclic products, projects of different sizes you know as well as we do, that this is a project business fluctuating mainly depending on timing of decision-making in larger customer projects. And we haven’t had a really big project in the last couple of quarters, as you are aware. I think delivering a €300 million plus without those kind of projects, it’s a very good level for us. And now we see if we look at the second half that there are some projects that come more into a decision-making process with customers. So we’re looking positively towards that. Then I go into the financial guidance for 2024. Starting with net sales, expected to remain approximately on the same level or to increase in 2024 compared to 2023. And then we say that comparable EBITDA margin is expected to improve in 2024 compared to 2023. And as you know, we upgraded this statement in June. So with that, I would like to summarize that that we are very happy with our performance in second quarter and also in the first half of the year. We’re looking forward to the second half of the year. And with that, I would like to invite our CFO, Mr. Teo Ottola to dive a little bit more into our financial numbers. So go ahead, Teo.
Teo Ottola: Thank you, Anders. And before going into the business segment numbers, so we could take a brief look at the group profitability bridge. So this is the comparable EBITA bridge between Q2 ‘24 and Q2 ‘23. Of course, this one looks very good so the year-on-year improvement now is €49 million as a comparison, of course, if we take a look at the first quarter. So there, the year-on-year improvement was only €6 million. Now this is a clear step forward, obviously, in this respect. The improvement year-on-year and of course, also Q-on-Q basically comes mainly from 2 aspects. One of them is the underlying volume and the other one is net of inflation pricing. So as Anders mentioned, so our sales grew by 13%. The price impact in an year-on-year comparison is around 5%, maybe a little bit more, but this gives us a very good underlying volume improvement in a year-on-year comparison, which obviously is visible in the overall leverage of the company in the second quarter. Then if we take a look at the price impact, so this 5% price increase in comparison to the situation a year ago. So it is more than inflation. So this is giving us a net of inflation pricing benefit in a year-on-year comparison. In comparison to the Q1, so we didn’t basically have any underlying improvement in Q1 in a year-on-year comparison because the sales was not that high. We did have net of inflation pricing impact also in Q1. But in the second quarter, it was somewhat more. So then when we take a look at this Q2 versus Q2, again, so fixed costs continued to be well in control. And this, of course, emphasize the impact of operating leverage. Also, the execution as a whole, so efficiency of the operations was very good. And this is also a positive delta in comparison to the previous year. We had good execution in Q1 as well in a year-on-year comparison. So this is maybe not a difference from a sequential point of view, but definitely on a year-on-year basis. So underlying volume improvement, net of inflation pricing and good execution overall throughout the company contributed to the big delta that we have in Q2 versus the situation 1 year ago. Then if we move into the segment level [Technical Difficulty] is not with service as usually, order intake, €406 million. This is a growth of 8.5% with comparable currencies year-on-year. We had growth both in field services as well as in parts of the regions we had growth in the Americas and EMEA, but a decrease in APAC. Agreement base grew also 5.7% year-on-year. Sales, €396 million that is 8.8% higher than a year ago in comparable currencies. Again, growth both in field service as well as parts and also from the regional aspect or regional perspective, so all regions actually increased in sales in Q2 versus a year ago. Order book, basically on the same level as we were 1 year ago. Then EBITA on an extremely good level, €87 million or 22.1%, a good improvement [Technical Difficulty] then by the pricing impact as discussed, of course, underlying volume improvement and also from the execution point of view, the quarter was good, and all of those contributed nicely to the profit improvement. Industrial Equipment, their ordering was €305 million [Technical Difficulty] decline in external orders of approximately 11% in a year-on-year comparison, again, with comparable currency. We had year-on-year growth in standard cranes as well as in components, but we had a clear decline in process cranes. So the process cranes funnels have continued to be good. But as Anders mentioned, the decision-making times have become longer. And as a result of that, the process crane order intake was lower than what we had a year ago. Then again, in a sequential comparison, if we take a look at that one so standard cranes actually increased in order intake. In components, we had a decline sequentially process cranes were more or less on the same level as they were in Q1. The component order intake decline is primarily as a result of the price increases that we made in Q1. And usually, there is pre-buying as a result of that – that was the case now as well. And Q2 orders were lower and exactly the same as we had 1 year ago also. Sales, €327 million. That is external sales from the external sales point of view up 6.8%. We had growth in all major business units and of the regions in EMEA and Americas, whereas decline in Asia Pacific. Order book grew by some 5.8% in an year-on-year comparison, then due to EBITA, excellent result here, €32 million, 9.8%. This is almost 4 percentage point improvement year-on-year, of course, driven by volume here as well. But primarily actually strategy execution, so the – for example, the optimization program that we have been running for industrial businesses, impacting mostly industrial equipment has been generated benefits. We also had onetime positives in the amount of roughly €4 million here as a result of the project settlements that we did during the second quarter. Then on the Board Solutions side, we have order intake of [Technical Difficulty] million, that is a decline of 27% in comparable currencies year-on-year. We had very good order intake in mobile harbor cranes as well as in straddle carriers of the regions. If you take a look at that one, so we had actually growth in APAC, whereas we had a decline in the other regions. And again, sequentially, order intake actually increased as a result of the same business units as we had a year-on-year comparison as well. So [Technical Difficulty] straddle carriers. And then if we take a look at the early cyclical product groups like lease trucks, growth year-on-year, sequentially a slight decline from port service, also important one. So there, we had year-on-year more or less flattish situation [Technical Difficulty] had growth. Sales were on a very good level. This is a very high growth of 25% year-on-year, €348 million. We had very good deliveries in RTGs. We also had very good sales in port service, which, of course, is supporting the mix going forward or now as well. And then when we take a look at the EBIT, €36 million or 10.5% here also like in Industrial Equipment, an improvement of almost 4 percentage points, of course, driven by the underlying very big volume improvement, but also definitely price. And then mix was particularly good for Port Solutions in this quarter as a result of the high share of service and, for example, RTGs.
Kiira Froberg: Stay off. I’m sorry to interrupt. Apparently, there is some problem or issue with your microphone. So could you take this one?
Teo Ottola: Okay. Okay. Okay. But I don’t need to repeat everything? Okay. Okay. Good. Then when we take a look at the net working capital and free cash flow, so there, net working capital reached €458 million, this is 11.2% of rolling 12-month sales. So it is in target of being below 12% of rolling 12-month sales. But sequentially, we have an increase here. It is actually coming basically from all the business segments. But one of the big reasons is the project timing within Port Solutions. Consequently, free cash flow in the quarter was quite low, driven by the net working capital increase, but, when we take a look at the rolling 12-month situation, so our cash conversion still continues to be on a good level. And then as a final slide before the Q&A. So gearing and return on capital employed, our net debt was €438 million at the end of the second quarter, of course, up from the first quarter as a result of the dividend payment gearing 27%. And then when we take a look at the return on capital employed, actually now on a, let’s say, comparable basis, we are reaching the level that is above 20%. So a very good level driven by the profitability improvement. And this one concludes actually the presentation, and then we can go into the Q&A.
Kiira Froberg: Thank you, Teo. Thank you, Anders. Once again, my apologies for the bad audio quality. I hope it gets better now from now on. So why don’t we start with the Q&A then. [Operator Instructions] And maybe we start with the questions from the line, please. So please, operator, go ahead.
Operator: [Operator Instructions] The next question comes from Daniela Costa from Goldman Sachs. Please go ahead.
Unidentified Analyst: Hi, good morning. Thank you for taking my question. It’s Elara here on behalf of Daniela. So my first question is around free cash flow. And in particular, so you had a sequential increase in net working capital this quarter. So my question is how should we think about the evolution in the second half of the year? And then second question on pricing. I wanted to ask, do you think this pricing level is sustainable? Did you have like major like raw mats benefits this quarter, which you think might not be repeated going forward? Thanks.
Teo Ottola: Okay. So if we start with the free cash flow question, correct. So net working capital increased from Q1 to Q2 generating lower cash flow than for the second quarter than previously. This is, however, in-line with so-called normal fluctuation. And the target that we have set to ourselves on a midterm basis is that we should be below 12% of rolling 12-month sales. And now we are at 11.2%. So we are within the target. There are no major changes in, let’s say, terms and conditions with customers. So there is no structural change. This is more like project timing topic, the balance between inventory and advance payments when it comes to the Boards business, and of course, also when it comes to the process cranes in industrial equipment. So not in dramatic, nothing alarming. We are within the target. You asked about the H2. So that will also then depend on the project timing. And that is the reason why we actually usually refrain from giving any guidance on the cash flow due to it being, let’s say, very difficult to estimate as a result of the timings. And then, of course, it’s always the one-time event then at the end of the quarter that what the balance sheet situation there is. But like I said, nothing to be concerned about in this respect. So about the pricing or – the pricing impact what we have been saying all along is that we are expecting to be able to do is more positive delta as a result of net of inflation pricing impact. This has been the case for several quarters in the past, and we believe that we will continue to be able to do that going forward as well. Second quarter from that perspective was somewhat better than the first quarter and was somewhat better than the previous quarters, say, Q3 and Q4 from the delta point of view. This is primarily as a result of the mix. So the impact mostly comes from ports and it’s also driven by the product mix and how the timing of the deliveries has come about. But the basic thing is that we will be able to – we believe that we will be able to do a small positive delta as a result of the net of inflation pricing. Raw materials, I think you asked about those as well. Now that the raw material costs have been going down, we have benefited from that one to some extent, for example, in the second quarter, we will most likely benefit from that a little bit going forward as well because of the cost levels of the raw materials being what they are versus the pricing earlier. But this is not, in a way, a structural gain. So this will even out over time. But for Q2 and maybe to some extent, in the near future, we will be seeing a small additional positive delta as a result of this.
Unidentified Analyst: Very clear. Thanks.
Operator: The next question comes from Antti Kansanen from SEB. Please go ahead.
Antti Kansanen: Hi, guys. It’s Antti from SEB. A couple of questions from me as well. First one is on kind of the mix comments that you made, firstly, on the industrial side regarding slower orders and process cranes versus components and standard cranes. So I wanted to kind of better understand, will this have a major positive mix impact on margins going forward, as I assume that there’s still kind of a margin difference between the lower margin process cranes and the rest? And on the same theme, then on the ports, I also wanted to understand how big of a impact the positive mix has all on Q2? And would you expect that starting to normalize going forward?
Anders Svensson: If I start and then you complement. So looking at the industrial side then first on the order intake here. So given that process cranes are a little bit more affected due to high interest rates in the decision-making process, then standard cranes or components that will, of course, have some effect on deliveries, but since the lead time of those are much longer, that effect gets diluted. So we don’t expect that mix change in order intake will have a significant effect – positive effect on the margins going forward. There can be some effect in some quarters, but then again, it’s fluctuating since it’s project deliveries, much like on the port side, but in smaller scale. And then your question on ports. And here, it’s more about what kind of deliveries we have in each quarter, and those are project deliveries. If we deliver them in a quarter of products with an averagely higher margin than other products then in that quarter, margin goes up. And if we have a good service sales quarter, then margin goes up. So it’s more dependent on project deliveries than the underlying sort of sustainable, continuous business, which we have all the time. So, that mix is dependent on project deliveries, and that will vary in quarters going forward as well. So if you want to complement anything or...
Teo Ottola: Maybe just a couple of additions. So yes, of course, part of your question was that, is there still a margin difference between process cranes and for example, components, yes, there is. So of course, if this kind of a thing would continue. So structurally, it would be impacting margins. But like Anders said, we are not really believing that there would be a structural change. This is more like a timing topic, and process cranes funnels continue to be good. So the expectation is that the that the orders will flow in at some point of time as well. As an overall comment regarding the mix, though, we can note that we are now slightly more, let’s say, optimistic or positive on the mix impact as a whole for the group this year. In the beginning of the year, we were a little bit hesitant of the opinion that maybe the mix is even negative. But now we can say that based on the current understanding, the overall delivery mix will be somewhat favorable this year in comparison to what it was the year before. And this is primarily driven by service. So the higher share of service and a good share of port service with imports are some of the drivers that are impacting this comment.
Anders Svensson: And I think it’s good to say as well that process cranes is a little bit like the ports projects in terms of order intake, it’s a bit lumpy. And also here, when you don’t get so much in one quarter, the probability that you will get more in the next quarter increases. So we don’t see a structural change that there will be no process claims going forward. So I think that’s important to state as well.
Antti Kansanen: Okay. That’s very clear. I guess you kind of touched upon my second question already, but that was more on the guidance upgrade in June and kind of the reasons behind. I mean, obviously, these Q2 margins or at least much stronger than I had expected. But was this more about the mix comments that you mentioned that you see a stronger mix for the full year? Or are there something on the strategy execution that is actually moving well ahead of your plans? Or what were the main reasons?
Anders Svensson: I think we have several reasons here. One is, of course, we had a good volume leverage in the quarter that gave us a good result. We had, like Teo said, positive mix, both for the group and then especially in Port Solutions. Teo also touched the price inflation situation, which was maybe more positive in the second quarter than it usually is. Very clean quarter in terms of performance, no performance issues in either process crane side or in the port side, which can sometimes impact somewhat negatively. And then we had a €4 million legal case that was decided in our favor that, of course, also helped the result positively in the quarter. We are still expecting for third quarter an improvement year-on-year, but we are not maybe expecting that it’s at the same level as the second quarter.
Teo Ottola: And maybe to clarify that the mix was not a major reason behind the upgrade in the financial guidance. It was more the other things that Anders was describing like strategy execution. So the operational efficiency that we are more comfortable with now maybe than earlier. And then, of course, the net of inflation pricing as well.
Antti Kansanen: Okay. That’s clear. Congrats on a great quarter. And thanks for the answers.
Anders Svensson: Thank you.
Operator: The next question comes from Tom Skogman from Carnegie. Please go ahead.
Tom Skogman: Yes. Hello, it’s Tom here from Carnegie. Great to see good numbers. I assume you have had some good orders a couple of years now, and it’s filtering through in sales. Then I can see that number of employees was up by only 2% year-on-year. So clearly, less than sales and growth, but when I look into next year, the order book is a bit down and number of employees is actually up. On the other hand, you have this new modular products coming that should give a lot of savings, but I don’t really know whether that will lead to mainly savings on the supply side? Or will you need less own employees to deliver these? And what do you think about this kind of number of employees going into next year? Is there any kind of reason to consider some cuts in order to keep the great momentum going as you probably will have less help from top line next year as it looks now?
Anders Svensson: Yes. Thanks, Tom. If you look at our performance, if you go back to 2022, during 2023, we increased number of employees by 64. And then you look in this quarter, number of employees increased roughly 70 people. And we got roughly 70 people with the acquisitions we made, roughly 60 with the Cox acquisition in April and roughly 10% we the [indiscernible] acquisition. So that’s very much aligned with the number of people coming in through acquisitions. So we are generally not increasing number of people. And if you compare to the level of 2022, I think we have shown internal efficiency improvement quite significantly. It has to do a lot with our strategy execution and what we decided to prioritize in the company as well to drive efficiency and to drive value add for our customers. I – we talked about the order intake previously. It is lumpy when it comes to the process side of the industrial segment and the port side. I mentioned that we are positive regarding the process side in the second half of the year as well as projects come into decision-making with port customers in the second half of the year as well. So I think you need to look more on an annual basis when you look at order intake development. And of course, it will shift from year-to-year a little bit. And some of those port projects, they offer deliveries in 3 years from now. So you can’t really look at half year and sort of compare it.
Tom Skogman: Can you however give some comment on the order backlog beyond the current year and what is for delivery this year?
Anders Svensson: We do that once a year in the annual report. I don’t have the numbers in my head. But we did that. So if you look at the annual report, you will find that. And of course, that’s updated. But as we have stated, we didn’t get any significant orders in the first half year. So it’s mainly there was significant large orders that has a really long lead time. Most of the other products are delivered within sort of 12 to 18 months even if they are big products.
Teo Ottola: It is correct what Anders is saying that we are not actually disclosing in the appendix is the order book timing on a quarterly basis. Maybe it’s fair to say at this point of time anyways, that the decline that we have in the order book is not for the current year. So the order book for the current year is now on par or actually slightly higher than what it was 1 year ago for ‘23. So your point about order intake and order book going forward. So the decline in the order book is for the years beyond this year when we take a look at the current situation.
Tom Skogman: Yes. And then I wonder about the gross margin and SG&A cost development. I don’t think you mentioned that much in your presentation about that, and you have done some pretty big changes to how you distribute [indiscernible] for instance. So how is the margin improvement split between these items?
Teo Ottola: The – these – let’s say that the two main items that we have in the optimization program are the platform renewals or reduction of number of platforms as well as renewals of platforms. And then, of course, go to market, which you are now referring to in your question. We are maintaining the same forecast for the overall results of this optimization program, €40 million to €50 million. As we have been having, it had an impact in the second quarter as well. Several millions, less than 5 term but several millions anyways. And then to your question, do we split the savings between these two main items? So unfortunately not. So we are just saying that both of these topics have had an impact and will have an impact. And they have been – we have been able to proceed with them as planned, by and large. In some cases, even quicker than what we planned. And we are happy with the results of the program from the financial point of view. But the more accurate split we unfortunately do not disclose.
Anders Svensson: And I think one addition to that, it’s so you see that we get snowed in on only talking about the optimization program. Let’s remember that, that is the initiative in Industrial Equipment primarily with some effect for as well. The strategy execution program is much, much wider. So when we talk about strategy execution and performance as a component in the improvement is much wider than just the optimization program. I just wanted to highlight that.
Kiira Froberg: Thank you. Let’s now take the next question from the line, please.
Operator: The next question comes from Tomi Railo from DNB. Please go ahead.
Tomi Railo: Hi, Anders, Teo and Kiira. It’s Tomi Railo here from DNB. Congratulations on the strong set of numbers for the second quarter. A couple of questions. Firstly, wondering about the Industrial Equipment as we see order backlog is down, your run rate orders are roughly €300 million per quarter, suggesting sort of €1.2 billion sales for full year. Do you believe that you can grow or stay flat sales for the Industrial Equipment for this year compared to last year?
Anders Svensson: Yes. So, I think I mentioned it, and Teo mentioned it. Standard cranes are growing, components are growing, where we are not growing is in the process crane, which is then, as you can understand, quite a lot down. And then what we see in our sales funnel in a number of projects in the value in the sales funnel regarding process cranes, it’s actually very strong. And we see that those projects are coming closer to decision-making. So, from that perspective, and given that we have similar performance as in Q1 and better than in Q3 and Q4, we are very confident about the Industrial Equipment going forward in terms of order intake and in terms of growth as well. Then I want to also remind that when we launched the strategy, we wanted to grow significantly faster than the market in service and significantly faster than market imports. And we said more in line with market in Industrial Equipment. And the reason was that we felt that we had more to do in terms of fixing stability and profitability before we focused on growth. And we are still working on – I think stability we have, to a large extent, already completed, and we are now working with the optimization program as the main engine on the profitability phase, while we of course, already on some parts are in the growth phase like components, for example in standard cranes. But there are still some things that we are working on to fix in terms of the profitability phase. So, I think we are very much performing in line with our own plans and in line with our expectations when it comes to Industrial Equipment. And we are not worried about the lower order intake in process cranes in the first half year.
Tomi Railo: Good. Maybe a follow-up to that. So, essentially, I know that you don’t give a divisional guidance. But if you were to ramp the sales or sales increase this year is more tilted to services and Port Solutions because I have some difficulty to calculate growth unless the backlog is sort of faster deliveries in Industrial Equipment at the run rate is €1.2 billion of orders.
Anders Svensson: So, you are correct that the strategy is that service and ports should go quicker than Industrial Equipment, just like we communicated in the Capital Markets Day, and that’s still the target. There are elements, as I said, within Industrial Equipment, where we have a growth focus and that is also being delivered on, and that is the standard cranes and the components, and we have not had a growth focus in the process cranes and rather a stability and profitability focus in that side. And I think the team has been fantastic in performing that and they are improving and coming into the growth phase as well going forward in a much better shape than where we were 2 years ago.
Tomi Railo: Excellent. Thank you. And then if you could just maybe describe a little bit the end market conditions, if there is any surprises, which show strength with weakness, if you can comment.
Anders Svensson: Yes. If we start with the demand outlook, I think I have gone through that already. So, if we then look into the geographical markets, and I think that has been covered quite well also in toes [ph] run through. But Americas, especially North America is performing very well and stable on a very strong level. Europe, somewhat improving. And I would say Germany in Europe, maybe above expectations. If you look at the macro indicators, you would assume that it’s not performing very well at all. And for us, it’s actually doing better than macro indicators would indicate. Northern Europe also quite strong. Southern Europe, a bit weaker. Middle East quite strong. And then in APAC, we have much more competition, but I think we are holding our market share in the top tier market. Anything to add, Teo, on that?
Teo Ottola: Nothing to add.
Tomi Railo: Yes. Just a follow-up and clarification in terms of the customer industries, any particular positives or negatives to highlight from there, what you see in metals, energy, pulp and paper, automotive, general manufacturing?
Anders Svensson: Yes. So, starting with the strongest one, I would say it’s power where waste-to-energy, nuclear, etcetera, is very strong. We have logistics on the port side as well, very strong. General manufacturing, I think is performing at a very good level, maybe not strengthening from now, but very stable at a good level. Other strengths we have seen in automotive. Aerospace has been strong for us as well. We have seen strength in green steel also in the quarter. Otherwise, metals is maybe not at any peak. That is at an okay level. Pulp and paper has been weak. We have seen some tens of coming back in pulp and paper, which is positive. And then, of course defense, I would say it’s also a strong sector currently. I think that summarizes most of it. And the rest of the sale are flat.
Tomi Railo: Excellent. Thank you very much. I will leave it there.
Kiira Froberg: Thank you. Let’s now take the next question please.
Operator: The next question comes from Mikael Doepel from Nordea. Please go ahead.
Mikael Doepel: Yes. Thank you and thanks for taking my questions. I just first want to come back to the earlier question around the mix. I mean it’s obvious that the mix place a role in terms of profitability depending on what you did. But given that you have an order backlog now for the equipment side of your business both for industrial as well as port, your visibility into the second half revenue should actually be quite good there, partly also on the service side. So, my question is really that do you see any meaningful change in the mix in your revenues in the second half of this year compared to what you saw in Q3? That would be my first question.
Anders Svensson: Yes. Maybe if I take a high level and then Teo your compliment. We said that the mix was slightly positive for the group now, flat in service, slightly down in Industrial Equipment and then positive imports. And that is exactly the mix that we are expecting for the rest of the year as well. Then of course, within that, you have mix between the products. And those are dependent on project deliveries. And of course, on the longer deliveries, we have good visibility on the more short cyclic products. We have less visibility. So, we are not giving any mix forecast either going forward, more than what we have said regarding the sales outlook and the profitability outlook. But there will be no significant changes.
Mikael Doepel: Okay. So, no significant changes H2 compared to Q2, I guess is what you are saying?
Teo Ottola: Maybe I will add a little bit to the mix within the ports where it actually was very good now in the second quarter. So, maybe we do not expect with imports the mix to continue exactly on a good level as it was now in the second quarter. This doesn’t take away the earlier comment that we believe that now in a year-on-year comparison. Overall, the mix for ‘24 will most likely be slightly better than ‘23. But I mean this isolated Q2 from the ports point of view was really good. So, maybe that can even out a little bit. But then of course, in relation to the mix between the different segments, like Anders pointed out, so there of course, it’s crucial that what other deliveries and what is the share of sales in service versus Industrial Equipment versus ports?
Anders Svensson: We also expect a better mix this year than the previous year, still, even if it’s maybe not at the same level as in Q2, but still a better mix than the previous year.
Mikael Doepel: Okay. Understood. Good. And then my second question is on the larger order you mentioned, I think in the opening remarks as well and also commented here now. Given some better activity there, I think you mentioned process cranes at least and some big orders not be finalized there, but you also see improved activity on the port side on some bigger projects there, or is this only related to the Industrial Equipment business?
Anders Svensson: No, I think that must have been a misunderstanding. It’s primarily related to the port side, and it’s not increased activity. It’s timing of the customer projects. So, when the customer comes to a decision-making in those larger projects, and that we see at – that timing, we haven’t seen in sort of the first half year for the larger projects. We now have some of those customer projects that we have been following for years that are coming to a decision process in the second half of the quarter. Then we also said that if we don’t see an structural change of process cranes, even if there are delayed decision-making in the industrial side. And if you don’t get projects in one quarter, then the likelihood of getting them in the sequential quarters increases. So, that comment was mainly related to ports, but it’s also somewhat applicable to the industrial side.
Mikael Doepel: Yes, because you also said that you see good sales funnel there also versus cash.
Anders Svensson: Yes. And that hasn’t changed. The sales funnel has been the same in process cranes all the time actually. It’s more decision-making timing.
Mikael Doepel: Okay. That’s very clear. Maybe just a final one, I am not sure if you want to add anything. I think Teo already went through this a bit in the presentation. But in terms of the short cycle product demand, any commentary there around that in terms of what you see the market right now going forward?
Teo Ottola: We are seeing the, let’s say, environment going forward relatively similar to what it has been, which is of course in line with our demand outlook as well, particularly for the industrial side. So, the markets have been good. We are expecting a healthy situation going forward as well. And this is applicable to the short cycle part of the business as well. So, nothing dramatic, no major changes, I think that when we discuss those short-cycle products regarding ports, for example. So, some – one of them was going up year-on-year, the other one Q-on-Q. So, you cannot really find a very clear direction one way or the other. So, from that point of view, stabilities maybe – expected stabilities maybe the word to be used.
Mikael Doepel: Okay. Well, that’s good. Thank you very much.
Kiira Froberg: Thank you, Mikael. We have also received some questions through the chat function. So, maybe this would be a good time to take those. And we could start with one question regarding the newly announced U.S. tariffs on STS cranes. So, what will be the impact of the newly announced 25% U.S. tariffs on STS cranes on your business and the STS crane industry as a whole?
Anders Svensson: Yes. Thanks. So, the tariff is being implemented on the 1st of August this year. And it’s applicable for deliveries from the 1st of August into U.S., which means that all orders being delivered after that we will have to pay the tariff.
Kiira Froberg: All Chinese.
Anders Svensson: All Chinese, that is important.
Kiira Froberg: Yes.
Anders Svensson: So, also Konecranes Chinese manufactured are facing the same tariff. So, we have some order backlog on that being delivered in the beginning first half of 2025. The cost related to that is 100% taken by the customer according to our contracts. So, it’s not having an impact on Konecranes in terms of our deliveries where they are being affected by this. And of course, that we have an outsourcing network in different regions, we can then produce the similar products in other regions to avoid the tariff, puts us in – from that perspective, competitive position. However, we should also know that the cost level in China is very competitive to other regions. So, we offer our customers different alternatives. They can buy Chinese produced and pay the tariff. They can also by European. And we are also setting up that we can supply BABA [ph] qualified equipment going forward.
Kiira Froberg: And maybe overall so how these tariffs will impact on the industry as a whole. So, that’s maybe a little bit too early for us to comment on that kind of generic commentary. Then next question from the line, is the improved – or not in from the line, from the chat. Is the improved balance sheet and outlook likely to result in any change in capital allocation for example, in share buybacks or M&A, especially given your new Board Chairman, any insight?
Anders Svensson: No. I would say we – it’s the same comment as we have said previously. We have activated ourselves in M&A, focused on bolt-on acquisitions. And then we can widen our geographical reach. We can widen our product portfolio. And we are also looking into other sort of solutions for customers in the material handling industry. But with that said, we are not going on a rampage to spend everything we can on acquisitions. It’s important that we make the right acquisitions at the right time. And we still have the whole sort of the whole range of things we can do with the money. So, all the way from paying back loans to buying our own shares to increasing dividends, etcetera. So nothing is basically excluded. But it’s of course, a better position to be in than not having that position.
Kiira Froberg: And then a third question from the chat, how about pricing on new equipment now when some raw material prices are coming down? Teo, Anders?
Anders Svensson: Yes. So, the effect normally for us on raw material changes is not significant because we don’t buy a lot of raw material. We buy a lot of processed material with a lot of value add inside it. So, it’s not a significant effect. Should it be sustainable that steel prices go down, we would over time then adjust ourselves, of course. We tend to compensate inflation with pricing towards our customers and make sure that we are not on the negative receiving side there. But our intention is not to make a lot of extra money on pricing. We are there long-term with our customers. However, if we should adjust every time the steel raw material goes up or down, we would have to do that all the time. So, this will sometimes be a bit positive for us. And at other times, it would be a bit negative for us. Like Teo said, in the second quarter, it was a bit positive. And then of course, if you look at the larger products like steel structures for ports product, etcetera, that is of course, adjusted when we quote new projects with a new material. And there is a natural hedging when we get the order from the customer. We, at the same time, place the order to the supplier. So, there is a natural hedging there for us to eliminate the project risks from that perspective.
Kiira Froberg: Good. Thank you. I think we still have a couple of minutes’ time so we can take one last question from the line, please. Operator, go ahead.
Operator: The next question comes from Panu Laitinmäki from Danske Bank. Please go ahead.
Panu Laitinmäki: Thanks for taking my question. I just wanted to ask about this efficiency improvement program in the industrial business. How much of the targeted kind of earnings improvement had you now achieved? And how much is still left of the total number that you are aiming at?
Anders Svensson: Yes. So, we have said that this program will yield €40 million to €50 million profit and loss improvement in a run rate at the end of 2025, and it will come with a €40 million to €50 million cost to achieve that. In 2022, we had €1.5 million. In 2023, roughly €11 million. And we have also said that, we estimate that we will deliver roughly €11 million also this year. And then the rest will of course be after that.
Kiira Froberg: And this is not the Industrial Equipment side...
Anders Svensson: This is on the Industrial Equipment, but then you have the service side which we haven’t actually talked about. But it’s a few million, but we haven’t said that in number. So, this is on the Industrial Equipment side.
Panu Laitinmäki: Okay. Thanks. But out of the €11 million this year, did you kind of get half in the first half, or was it kind of more loaded to first half?
Teo Ottola: No, we have been getting half in the first half. So, it is not back-end loaded.
Panu Laitinmäki: Okay. Yes. Correct. Thank you.
Anders Svensson: Thank you.
Kiira Froberg: Thank you everyone. I think that we have now run out of time. So, it’s time to conclude this conference. Thank you for all the questions and active participation. And as a reminder, we will report our Q3 interim report on October 25. So, we will be back here in the studio then at the latest. And I would like to wish you all a very good summer. Thank you.
Anders Svensson: Thank you. Bye-bye.
Teo Ottola: Thank you. Bye-bye.
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