Konecranes Q2 earnings – Q&A
Our Q2 earnings were published on July 27, 2022, and here are the key discussion topics and questions so far.
Q: How do you expect your order intake to develop in Q3 and beyond by each Business Segment?
The worldwide demand picture remains subject to volatility due to the war in Ukraine and COVID-19 pandemic having increased inflation and material availability concerns.
Within industrial segments, in Europe and in North America, our demand environment is on a healthy level; yet there are some early signs of weakening. In APAC, the demand environment has started to show signs of improvement after COVID-19 related lockdowns and restrictions.
Container throughput continues high, and our long-term prospects related to container handling remain good overall.
That said, we are not expecting another record-high order quarter. Our short cycle product orders remained good in Q2 and were higher than expected. Although sales funnels remain high, there is more uncertainty, and we expect the short cycle product orders to decline sequentially. Port orders tend to be lumpy by nature. Customer decision-making remains always a bit of a question mark, and order intake was strong again in Q2. The long-term Port Solutions sales funnel looks good and continues to include also larger projects.
Q: How did the component shortages, logistics delays and other supply chain issues impact your sales in Q2?
In Q2, our sales were impacted by these issues and our late backlog grew by some €40-50m. Cumulatively, the late backlog was some €160-180m at the end of Q2. However, it does not fully reflect the situation. For example, when a delivery postponement is agreed with a customer, the delivery is not reported in late backlog anymore, although in reality the delivery is late compared to the initially agreed delivery time. The increase in late backlog was mainly due to material/component shortage.
Q: How do you expect component and material availability issues and inflation to impact your sales and profitability in Q3 and beyond? Now in Q2 you again stated that inflation had a negative impact on your Industrial Equipment profitability. Will the situation improve in Q3 given your price increases?
It is difficult to estimate how long and how much the component availability and other supply chain issues will impact our net sales. We do not expect the situation to normalize this year, as the war in Ukraine has only worsened the situation. That said, we expect our delivery capability to improve in H2.
As for the inflation, so far, we have been able limit its impact on our Service and Port Solutions performance with our own actions, both pricing and internal efficiency improvement related. However, as we stated already in connection with our Q1 report, we did not increase our component prices enough last year, which has impacted Industrial Equipment margins negatively in H1. We raised our component prices in Q1 and again in the beginning of June. It takes some 6 months for the price increases to become visible in the results, and Q2 profitability for components (and Industrial Equipment) was lower than a year ago, as expected. In H2, we expect the earlier implemented price increases to gradually start to impact our profitability.
Q: Your Service profitability did not continue its impressive year-on-year improvement trajectory in Q2. What happened? What are your expectations going forward?
Although Service sales grew by 6.8%, on a comparable currency basis, the increase was only 0.8%, and driven by pricing. The underlying volumes declined. The decrease in the adjusted EBITA margin was due to lower productivity which again resulted from material and component availability and COVID-19 related challenges (China lockdowns, employees in quarantine etc). We also lack service technicians in some regions.
Our Service orderbook is record-high due to the delayed sales as well as high orders, and we have been able to combat inflation with our own actions, so we have the ingredients for continued profitability improvement. The lower productivity in Q2 resulted from material shortage and COVID-19, and as we expect the material availability issues to ease and thus our delivery capability to improve, there should not be any reason for us not being able to continue our recent track record However, it all comes down to delivery capability.
Q: How did your sales mix develop in Q2 and what shall we expect in full-year 2022?
Our sales mix on group level improved year-on-year. Mix improved in Industrial Equipment, remained flat in Port Solutions and declined slightly in Service. Based on our orderbook, we expect no major change in the mix for 2022, no major change in Service, slight improvement in Industrial Equipment and no major change in Port Solutions.
Q: Your Industrial Equipment adjusted EBITA margin declined again year-on-year in Q2. What happened? Do you still expect to reach black figures in you process cranes business this year?
Industrial Equipment profitability was impacted by low sales volume and inflation. We have increased component prices both in Q1 and Q2, but after the price increase, it takes some 6 months for the impact to become visible. Our black figure target for process cranes is at risk as we have had to redirect our planned production from our Zaporizhzhia factory to other production sites. In Q2 (as in Q1), the negative impact of the production redirection was €1m, and as it is operational cost, it has not been included in adjustments.
Q: What do you mean when you say you continue to drive efficiency improvements throughout the company?
We continue to drive efficiency improvements throughout the company, and it may require headcount reduction. Since the beginning of June, our Service and Industrial Equipment segments have been focused under one leadership. Following this change, we have started to identify opportunities for efficiency improvement and simplification of our industrial business model. However, driving efficiency improvements is not limited to our Industrial businesses only.
We do not comment in detail on our plans, as these projects are always local in nature, and we cannot share any information on them before talking to our works councils and local employee representatives. We will keep you updated once we have some news to share.
Q: You have several factories and significant operations in Germany. How much were your energy costs in 2021 and what was Germany’s share of the costs? How dependant is Konecranes on natural gas?
In 2021, Konecranes’ energy costs were less than €15m (electricity and gas). Germany represented €7m of the costs, out of which around €3m was gas (incl. natural gas, propane and LNG). We have five production sites in Germany, and natural gas is used in three of them, mainly for heating but also for production (eg. paint and hardening shops).
Q: You issued a profit warning and lowered your full-year guidance in July. What should we think about your profitability development in H2?
Our updated guidance is as follows: Konecranes expects net sales to remain on the same level or to increase in full-year 2022 compared to 2021. Konecranes expects the adjusted EBITA margin to remain on the same level or to decrease in full-year 2022 compared to 2021.
Even with the updated guidance, we expect our “normal” seasonality to prevail and H2 sales and adj. EBITA-% to be higher compared to H1. As for the year-on-year comparison, we have not given any half-year commentary but refer to our full-year financial guidance.
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On Thursday, we were on the road in London and met UK based investors. Next week, the IR team will be taking some time off and enjoying the Finnish summer. We will continue investor roadshows and meetings again in mid-August.
In case you have any questions or would like to discuss with us, please do not hesitate to contact us – we are here to help you! You can find our contact details on IR contacts webpage. But please, kindly note that in August, there may be some delay in our answers due to summer holidays ?
We wish you all a great summer!
Best wishes,
Kiira and Tomi
