Konecranes Q3 earnings – Q&A
Our Q3 earnings were published on Wednesday, October 25, 2023. Here are the key discussion topics and questions so far.
Q: How do you expect your order intake to develop in Q4 and beyond by each Business Segment?
We gave the following demand outlook in connection with our Q3 report: Our demand environment within industrial customer segments has remained good and continues on a healthy level, despite the weakened global macro indicators and some signs of weakening in all three regions. Global container throughput continues on a high level, and long-term prospects related to global container handling remain good overall.
In Q3, component orders increased year-on-year but declined sequentially, and remained on a healthy level. Standard crane orders continued on a good level with year-on-year growth.
The activity in Ports continued good. Exact timing of customer decision-making (and the quarter when the orders are booked) remains always somewhat hard to predict. Our quarterly order intake has been rather lumpy from the historical perspective, and in Q3 orders declined after six quarters with very strong orders. The long-term Port Solutions sales funnel looks good and includes projects of different sizes, and we expect that Q3 was the trough for 2023 Port Solutions orders. That said, we do not expect order intake to return to Q1-Q2 levels in Q4.
Q: Your Port Solutions orders declined almost 50% in Q3. Why is this? How worried should we be of the order decline and the demand situation?
Our Port Solutions orders declined 48.5% in comparable currencies. We are not worried about the situation as fluctuation in orders is normal in the Port Solutions business, and Port Solutions orderbook continues on a very high level (€ 1.8bn at the Q3-end, up +15.5% Y/Y). Prior to Q3, we had six quarters in row with an order intake either approaching or exceeding €400 million. It is unusual for orders to continue this high for such a long time. In most Port Solutions product categories, 2024 is basically already sold out and we are building 2025 revenues. Overall, the activity among Port Solutions customers continues good and we have projects of different sizes, also large ones, in our sales funnel. Timing of customer decision-making has always remained a bit of a question mark, and is nothing new to the business. After several unusually good order quarters in a row, many may have forgotten about the normal dynamics of the Port Solutions business – lumpy order intake and timing of customer decision-making.
Q: How does the demand situation look like in terms of different end markets (customer segments / geographies) in Service and Industrial Equipment?
Within our industrial customers, the demand environment continues on a good, stable level. Europe is behind North America, but there are regional differences. While the demand environment in Northern Europe continues on good and stable level, there is more macro-related uncertainty and hesitance in Central Europe. APAC has macro-related uncertainty and also more price competition, and is generally rather stable. Overall, customer decision-making is taking somewhat longer. However, new sales cases keep coming to our sales funnels and also move forward.
When it comes to customer segments, power and metals continue on a good level, whereas raw material related segments, such as mining have more uncertainty. Also general manufacturing and pulp and paper and have some softness.
Q: There seems to be a lot of discussion about nearshoring / friend-shoring. How visible is this in your business? What kind of changes are you seeing?
It is true, there is definitely discussion around the topic, but it is not easy to estimate how much of those talks would have realized yet. We consider that in case near-shoring becomes a trend, it would be supporting our business, as usually any changes in production footprint would work in our favour.
In the last couple of years, it has become evident that dependency to a limited number of countries or subcontractors is risky, as long supply chains have demonstrated their vulnerabilities. There is a need for alternative supply chains, and we, as many other companies, are studying different alternatives.
Our demand environment has continued good despite the weaker macro indicators and increased uncertainty, but it would be too early to say that nearshoring/friend-shoring is driving it. When it comes to our own supply chains and production footprint, we review them on a regular basis.
Q: How strong is your pricing power? When you book new orders, how has the pricing developed? Do you see more pricing pressure compared to the previous quarters?
Regarding the competitive environment in general, we can conclude that the competition is getting tougher from the pricing point of view. However, Konecranes is a global company, and the situation is not similar everywhere. One example of regions with a tougher price competition is Asia-Pacific and particularly China, where competition has become tougher than it was some time ago. However, we continue to be confident that we will be able to pass on any cost inflation to the customer prices. When looking at our profitability, the positive pricing impact has come through since Q1 this year and we are not expecting our capability to deteriorate. However, the positive pricing impact (year-on-year comparison) is not expected to as big in the coming quarters as it was during the first half of 2023. This was the case already in Q3 on Group level compared to the somewhat higher pricing impact in Q1-Q2.
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 which is resistant to macro environment changes. In the financial crisis back in 2008-2009, Service sales declined by 10-15% on an annual basis. Equipment businesses have been significantly more volatile historically, and during the financial crisis, order intake of our then equipment businesses 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: Have you seen any customer cancellations? In the past downturns, how many orders have the customers cancelled? How large prepayments do you usually receive?
We haven’t seen any major customer cancellations in Q3 or before. In previous downturns, cancellations have been rather limited, as for larger products (standard cranes) and projects (process cranes and ports projects), customers pay down payments. For large projects, payments are made in milestones throughout the project. List price products (most of Service, components, lift trucks) don’t have prepayments but in case of cancellations, we can deliver the products to other customers.
Q: Your Q3 comparable EBITA margin improved to 12.3%. What are your expectations for the remainder of the year and for 2024? Is this level sustainable on a long-term basis?
We have guided for growing sales and increasing comparable EBITA margin vs. 2022. We do not give guidance on Business Segment level. Our Q3 was strong – sales increased mainly thanks to volumes and pricing. Profitability development was also driven by volumes and pricing, and profitability improvement in all three Business Segments mainly driven by volumes and/or pricing.
At our Capital Markets Day in May, we introduced new financial targets for Konecranes, and we aim to grow our sales faster than the market and reach a comparable EBITA margin of 12-15% as soon as possible but no later than in 2027. Q3 was the first time when we reached the profitability range on a quarterly basis, and we continue to work hard to reach our financial targets on an annual basis.
Q: Could you please remind us how much your Q3 earnings were impacted Industrial Service and Equipment optimization program in the third quarter and how much would we expect in the following quarters? How much is left of the savings impact of the program?
We have not given exact numbers on the optimization program. However, we can conclude that in the third quarter, the positive impact was some millions of euros in Industrial Equipment. Also, the fixed costs and the overall cost management are on a good level, and they are also supported by the optimization program. The program is proceeding according to our plan, and in Q3, we also booked €17.5 millions of items affecting comparability as a result of the agreement that we have made with our employee representatives in Germany. We maintain our target of €40 to €50 million of P&L benefits by the end of 2025.
Q: How did your sales mix develop in Q3?
Our sales mix on group level weakened year-on-year. Mix improved in Service and Industrial Equipment, but weakened in Port Solutions, as well as cross business segments. On full-year basis, we expect sales mix to deteriorate in 2023 versus last year, and the sales mix to be weaker in the second half compared to the first half of 2023.
Q: Please remind me of your full-year guidance. What should we think about your sales and profitability development during the second half of the year?
Our guidance is as follows: Konecranes expects net sales to increase in full-year 2023 compared to 2022. Konecranes expects the full-year 2023 comparable EBITA margin to improve from 2022.
We do not expect as clear seasonality in 2023 as we normally have had. In Q4, Y/Y sales growth and profitability improvement is expected to be lower than during the first half of 2023, as the last year’s H1 comparables were rather low. Last year, our delivery capability and sales execution improved towards the end of the year. This year again, our first half was clearly stronger than last year. We also expect that pricing impact will stabilize from now on.
Q: Given your very strong free cash flow and limited CapEx, would it make sense to embark on a share buyback program?
We have not done share buybacks for quite some time. However, share buybacks are in our toolbox and our Board of Directors has an authorization from the AGM to do share buybacks, if they so decide. So far, the primary means to distribute profits to Konecranes’ shareholders has been dividends, and that has, in our opinion, served also the owners rather well. We do not have any categoric view whether we should or should not do buybacks. We will continue to discuss share buybacks within the company and with our Board of Directors.
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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.
We wish you all a great November!
Best,
Kiira and Tomi
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