Konecranes Q3 earnings – Q&A
One of the busiest days of the year took place again last week, as our Q3/21 earnings were published on Thursday. On the same day we hosted our traditional analyst and investor webcast together with our CEO, Rob Smith, and our CFO, Teo Ottola. Since then, we have hosted several 1:1 sell-side analyst and investor calls, as well as a group meeting, hosted by Carnegie.
Here are the key discussion topics and questions so far.
Q: Please comment on your Q3 order intake. How do you expect your order intake to develop in Q4?
In Europe and in North America, the demand environment has reached the pre-COVID-19 level. Year-to-date, our shorter-cycle products have had strong demand and especially in the beginning of the year, there was some pent-up element. In Q3, Industrial Equipment components, standard cranes and process cranes all declined sequentially. However, it was only a slight decline for components and for standard cranes the comparison period (Q2) was unusually strong. Q2 also had a single large process crane order worth approximately €35m.
As for Q4, within our industrial customer segments in Europe and North America, the demand environment continues stable. In Asia-Pacific, the demand environment remains below the pre-COVID-19 level outside China.
As for Port Solutions, global container throughput continues to be at a record high, and long-term prospects related to global container handling remain good overall. Our pipeline looks healthy, but timing of customer decision-making remains always a bit of a question mark, and as a result of this, our Port Solutions order intake declined sequentially in Q3.
One should not forget about the COVID-19 pandemic that continues to cause uncertainty and volatility. Though the vaccinations are rolling out in many countries, there are still regions that are heavily affected by the pandemic.
Q: Your Port Solutions order intake was somewhat disappointing in Q3. What happened?
A large part of our Port Solutions business is project business, and thus the order intake tends to be lumpy by nature. The cumulative order intake from the previous three quarters (Q4/20-Q2/21) was unusually good, as in Q4 we booked a couple of larger project orders which were postponed by the outbreak of COVID-19. Container throughput continues record high and, in our view, the long-term prospects related to global container handling remain good overall, and our sales funnel looks good. The lower order intake in Q3 results from timing of customer decision-making and should not be interpreted as weaker business prospects.
Q: Your Q3 sales increased only marginally year-on-year despite the comparison period was much more impacted by the COVID-19 related restrictions and lockdowns. What happened?
Global component availability, customer delays and supply chain issues had a negative impact of €60m on our sales. Year-on-year, sales grew in Port Solutions, stayed flat in Service and declined in Industrial Equipment.
Q: How did the component shortages, logistics delays and other supply chain issues impact your sales in Q3 and in YTD21?
In Q3, component shortages, customer delays and other supply chain issues, had an approximately €60m negative impact on Konecranes net sales, out of which €20m was in Industrial Equipment, €20m in Service and €20m in Port Solutions.
In Q2, the negative impact of component availability and other supply chain issues was €35m, out of which €20m in Service and €15m in Industrial Equipment.
In Q1, COVID-19 restrictions, quarantines and illnesses, together with component shortages and logistics issues, had a negative impact of approximately €10-15m on Service sales and €10m on Industrial Equipment sales.
So cumulatively, the YTD impact of component shortage and other supply chain issues (including Q1 COVID-19 and other impact) is some €120m.
Q: How do you expect component shortages and logistics availability issues to impact your sales and profitability in Q4 and beyond? How about the inflation?
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 ease in near future, and based on some latest estimations, the situation might even get somewhat worse particularly in Industrial Equipment in the first half of 2022. We have an action list we are working on to reduce component shortages. We have reiterated our guidance and expect full-year 2021 sales to increase from the previous year.
As for the inflation, so far, we have been able limit its impact on our performance with our own actions and will continue to follow the situation carefully, and take actions, if needed.
Q: You posted an all-time high Q3 adjusted EBITA margin in Service. What drove the positive development? On the other hand, sales were somewhat disappointing in Q3. What happened?
Service profitability growth was driven by improved productivity and positive sales mix. Component availability and other supply chain issues had a negative impact of €20m on our Service sales.
Q: How did your sales mix develop in Q3 and what shall we expect in full-year 2021?
Our sales mix on group level improved year-on-year. Mix improved in Industrial Equipment and Service and stayed roughly the same in Port Solutions.
Based on the orderbook we expect improved mix at Group level in 2021; no major change in Service, improvement in Industrial Equipment and no major change in Port Solutions.
Q: How much of the cost savings you made in Q3 last year were temporary by nature?
Both Q3/20 and Q2/20 included temporary savings that have not repeated since then. These were mostly governmental subsidy and shorter working week related. The volume of those temporary indirect personnel cost savings was approximately €10m/quarter in Q2 and Q3 last year.
Since Q4/20, our quarterly personnel costs have remained rather stable, and our current personnel cost level has been reached with structural changes.
Part of the cost savings that started in Q2 last year are cost avoidance by nature, for example traveling. These costs have not yet come back, and it is difficult to estimate when or how big they return. Like many others, we are actively looking at our cost base and aim to adjust it aligned with sales.
Q: In Q3 you booked again some ~€20m of adjustments. What do they include? What kind of restructuring programs do you have in place?
More than half (€15.5m) of these costs were transaction and integration planning costs related to the merger with Cargotec. The remainder was restructuring costs. Majority of them relate to a voluntary early retirement scheme in India. As a part of our process cranes turnaround, we target at reducing our process crane capacity there.
Q: Despite the component availability and other issues, you maintain your sales guidance for 2021. Could you elaborate on this?
After Q3, our YTD sales are 0.2% behind YTD20 sales, and despite the ongoing issues, we have been able to close the divide in Q2 and Q3. Our order book is record high, and our short-cycle products have seen good order intake in 2021, which helps our in-and-out ratio compared to the previous year. We expect the component availability, customer delays and other supply chain issues to continue, but we have also many mitigating actions in place.
On a full-year basis, we expect Service sales to grow, Port Solutions to remain roughly on the same level as last year and Industrial Equipment sales to decline due to component availability and customer delays. Port Solutions’ sales execution has been better this year than what we expected.
Q: In your Q3 report, you talk about planning of assessing increased collaboration between your Service and Industrial Equipment business to enhance customer focus and drive further efficiencies. What do you mean by this? Are you planning to combine the two businesses?
As said, we have decided to assess increased collaboration between the two Business Areas. No other decisions have been made yet, as we have only started the assessment. It is too early to speculate on the possibility of combining the two businesses, but it is something we have discussed every now and then over the years. It cannot be ruled out, however.
Q: In your analyst and investor call, you mentioned labour shortages, especially lack of service technicians. Could you please elaborate more on that? How will the potential labour inflation impact your profitability?
Lack of service technicians is not a new phenomenon to us; we are constantly looking for new employees. This year, the situation has become somewhat more difficult, and we have been lacking service technicians in some regions, for example in the US. As said, labour availability is not new to us, and we have been training service technicians ourselves for a long time. Surely, it is easier and faster to find someone who is immediately ready for the job, but we can and we do train people ourselves.
We are preparing for a slightly higher wage and salary inflation for next year compared to the inflation level during the last couple of years. The wage and salary inflation rate varies between countries, and we are offsetting the impact with our productivity gains as well as with pricing.
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We will continue with virtual roadshows next week – two days hosted by SEB. The world has started to open again, and in the coming weeks, we will host some investors at our office in Finland. We look forward to start travelling ourselves after our Q4 results in February.
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.
Best wishes,
Kiira and Tomi
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