Konecranes Q3 earnings - Q&A
Our Q3 earnings were published over 1.5 months ago on October 26, 2022. We have been busy with meeting investors in Helsinki, London, Paris, Geneva and Zürich, as well as preparing various year-end related materials and deliverables, and it has taken time to update the blog – our sincere apologies for that!
Here are the key discussion topics and questions post Q3 earnings.
Q: How do you expect your order intake to develop in Q4 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 North America, the demand environment remains active. In Europe, the level of uncertainty is higher compared to North America, and the demand environment has started to show signs of weakening. In APAC, the demand environment is stable.
Container throughput continues high, and our long-term prospects related to container handling remain good overall.
That said, we expect order intake to decline sequentially in Q4. Our short cycle product orders declined in Q3 but remained on a healthy level and were higher than expected. Although sales funnels remain high, there is more uncertainty. 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 Q3. The long-term Port Solutions sales funnel looks good and continues to include also larger projects.
Q: As the economy is expected to slow down and there is a lot of discussion on recession at the moment, how many customer cancellations have you seen? In the past downturns, how much orders have your customers cancelled? How large prepayments do you usually receive?
We have not seen any major customer cancellations. In previous downturns, cancellations have been rather limited, as for larger products (eg. standard cranes) and projects (process cranes and Ports projects), customers pay down payments. Down payments are usually 10-25 % of the product/project value. For larger projects, payments are made in milestones throughout the project.
List price products (eg. components and lift trucks) do not generally have prepayments. In case of cancellations, we can deliver the products to other customers.
Q: How did the component shortages, logistics delays and other supply chain issues impact your sales in Q3?
In Q3, our late backlog grew by a couple of tens of millions of euros. We do not want to disclose the number, as it does not reflect the real-life situation that well, as when a delivery postponement is agreed with customers, the delivery is not reported as being late, although it is late compared to the original schedule. The cumulative late backlog is at the moment some €200m, excluding delivery postponements agreed with customers.
Q: How do you expect component and material availability issues and inflation to impact your sales and profitability in Q4 and beyond? Now in Q3 you again stated that inflation had a negative impact on your Industrial Equipment profitability. Will the situation improve in Q4 given your price increases?
It is difficult to estimate how long and how much the component availability and other supply chain challenges will impact our net sales. We do not expect the situation to normalize this year or in the beginning of 2023. That said, our delivery capability improved in Q3, and although the challenges are not over, we expect the situation gradually improve also going forward.
As for the inflation, so far, we have been able to largely mitigate 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 earlier, we did not increase our component prices enough last year, which has impacted Industrial Equipment margins negatively this year. We raised our component prices both in Q1 and Q2. It takes, however, at least 6 months for the price increases to become visible in the results. Although in Q3 Industrial Equipment profitability was behind last year, the gap was smaller compared to the previous quarters. We expect higher salary inflation next year compared to this year.
Q: How did your sales mix develop in Q3?
Our sales mix on group level improved year-on-year. Mix improved in Port Solutions and Industrial Equipment and remained flat in Service.
Q: Your Service profitability was record high in Q3. What was driving the improvement? What are your expectations going forward – is this is a sustainable level?
In Q3, Service profitability improvement was driven by sales growth (8.8% on comparable currencies), which resulted from pricing, and continuous improvement. The underlying volumes declined slightly compared to last year. Gross margin and fixed costs remained approximately on the same level as last year.
Our orderbook remains record-high and so far, we have not had pricing issues in Service. There is no structural reason for why we would not be able to improve our profitability also in the future. That said, Service is volume business: in case of lower volumes, productivity is also lower impacting profitability negatively. Q2 was a good example on this - the lower sales volume led to a lower profitability.
Q: Your Industrial Equipment adjusted EBITA margin declined again year-on-year in Q3. What happened? Do you still expect to reach black figures in you process cranes business this year?
Industrial Equipment profitability continued to be impacted by cost inflation. We increased our component prices both in Q1 and Q2, but after the price increase, it takes some 6 months for the impact to become visible, and thus, our Q3 profitability was lower than a year ago, as in Q1 and Q2 and as expected. However, in Q3, the gap was smaller than in Q1 and Q2, as some of the pricing impact became 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 Q3 (as in Q1 and Q2), the negative impact of the production redirection was €1m, and as it is operational cost, it has not been included in adjustments.
Q: In the Q3 report you said that you will optimize Industrial Service and Equipment business? What do you mean by this?
Yes, we plan to optimize our Industrial Service and Equipment operations globally. This is a natural next step after our decision to focus Service and Industrial Equipment segments under one leadership.
The planned efficiency improvement actions, and simplification of our industrial business model are essential for Konecranes’ long-term success. The actions are planned to cover several areas and functions, such as go-to-market model, product platform harmonization, streamlining of manufacturing and logistics, and business support functions, and target mainly at Industrial Equipment business segment primarily outside of Finland.
The positive annual EBITA impact of the planned actions is currently estimated at €30-35 million, and we plan to achieve it by the end of 2025. The related restructuring costs are expected to total €30-35 million. We expect most of the restructuring costs to be booked during the first 12 months or so from now, and we have started the first negotiations with employee representatives.
Q: Your Port Solutions adjusted EBITA margin improved Y/Y in Q3. What drove the positive development? Is the level sustainable?
Port Solutions profitability improved year-on-year due to higher sales and positive sales mix. There were a couple of one-off like operative items with a positive impact of around €1-2m. Despite the year-on-year sales increase, Port Solutions suffered from material availability challenges.
Q: Your free cashflow was negative again and your net working capital has increased since the beginning of the year. How worried are you about the situation?
We are not worried. Our inventory levels (WIP and semi-finished goods) have gone up as we have not been able to make deliveries due to material availability or customer delays. Our cash flow is also largely driven by the payment schedule of our port projects (prepayments and milestone payments).
Q: How resistant are you to macro environment changes? How cyclical are your Service and equipment orders/sales?
More than 40% of our business is service (incl. Port Service) which is more resistant to macro environment changes. In the financial crisis back in 2008-2009, our Service sales declined by 10-15% on an annual basis. Our equipment businesses are significantly more volatile, and order intakes in financial crises declined by 40-50% on an annual basis. Currently we have a record-high orderbook which will help us navigate better in a downturn compared to the past.
Q: Please remind me of your full-year guidance. What should we think about your sales and profitability development in Q4?
Our 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.
We expect our “normal” seasonality to prevail, and Group level Q4 sales and adjusted EBITA margin to be better compared to the previous quarters. We also note that our last year’s Q3 was weaker both in terms of sales and profitability, whereas Q4 sales and profitability were record high. This year, we had higher sales and profitability in Q3.
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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 close to the year-end, there may be some delay in our answers due to holidays ?
We wish you all Happy Holidays!
Best,
Kiira and Tomi
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