Konecranes Q2 earnings – Q&A
One of the busiest days of the year took place again this week, as our Q2/21 earnings were published on Wednesday. On the same day we hosted our traditional analyst and investor webcast together with our CEO, Rob Smith, and our CFO, Teo Ottola. We also hosted 1:1 sell-side analyst calls on the results day and had several virtual 1:1 investor meetings, as well as a group meeting, hosted by UBS yesterday. The investor meeting continue today.
Here are the key discussion topics and questions so far.
Q: How do you expect your order intake to develop in Q3 and beyond?
Within our industrial customer segments, in Europe, the demand environment has reached the pre-COVID-19 level, while in North America the demand environment is still behind the pre-COVID-19 level. In Asia-Pacific, the demand environment remains below the pre-COVID-19 level outside China.
Our shorter-cycle products have had two quarters with strong demand and there has been some pent-up element. Thus, we do not expect the shorter-cycle demand environment to sequentially improve.
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.
One cannot either forget about the COVID-19 pandemic that causes uncertainty and volatility. Though the vaccinations are rolling out in many countries, there are still regions that are heavily affected by the pandemic.
Q: How did the component shortages, logistics delays and other supply chain issues impact your sales in Q2?
In Q2, component shortages and other supply chain issues, including logistics and customer delays, had an approximately €35m negative impact on Konecranes net sales, out of which €15m was in Industrial Equipment and €20m in Service. Port Solutions was not immune to these issues, but the impact was not as clear nor noticeable as in the two other businesses.
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 H1 impact of component shortage and other supply chain issues (including Q1 COVID-19 and other impact) was some €55-60m.
Q: How do you expect component shortages and logistics availability issues to impact your sales and profitability in Q3 and beyond? How about the accelerating inflation?
It is difficult to estimate how long and how much the component shortages and logistics availability issues will impact our net sales. We do not expect the situation to ease in near future, neither deteriorate significantly, and we will do our best to manage the issues. 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.
Q: Your Service sales and adj. EBITA-%, as well as the agreement base development, were somewhat disappointing in Q2. What happened?
Overall, nothing has changed with our Service business logic or dynamics during the past quarter or the pandemic.
In Q2, the component shortages and other supply chain issues had a negative impact of approximately €20m on our sales. The component shortages also impacted our sales mix negatively, as the share of higher margin material content was lower than usual. The mix change is expected to be short-term, but as the component shortages and supply chain issues are expected to continue in Q3, the Q3 mix may be negative year-on-year.
In Q2 last year, at the height of the global COVID-19 related lockdowns and restrictions, we had some temporary factors that lowered our personnel costs, and thus impacted the profitability positively.
As for the agreement base, the pace of new agreements and scope expansions has been sluggish. Companies are being cautious, and we need to work hard to win new deals. Despite the flat development in Q2, our Service agreement base has demonstrated its resiliency during the pandemic.
Also, of our three businesses, Service has the most exposure to USD due to our prominent presence in the US. The FX continued to be a headwind for Service orders, sales as well as the agreement base in Q2.
In case you are interested in our Service business, please sign up here for our Service Investor Update on August 30, 2021.
Q: How did your sales mix develop in Q2 and what shall we expect in full-year 2021?
Our sales mix on group level improved year-on-year. Mix improved in Industrial Equipment, deteriorated slightly in Port Solutions and weakened in Service.
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 Q2 last year were temporary by nature?
Both Q2/20 and Q3/20 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 Q2 you booked again some €10m of adjustments. What do they include? What kind of restructuring programs do you have in place?
More than half (€7.1m) of these costs were transaction and integration planning costs related to the merger with Cargotec. The remainder was restructuring costs. The ramp-down of production at our Montceau-les-Mines site was completed now in Q2, and we do not have any published larger-scale restructuring programs ongoing at the moment.
Q: Are you satisfied with your current level of net working capital (NWC)? What could be done to improve this? How do you expect NWC to develop in 2021?
We maintain our mid-term NWC target of less than 15% of rolling 12months sales. Our NWC level was very good at the end of Q4/20 (10.6% of R12m sales), and as we said back then, one should expect the level to increase when the order growth starts. This was already somewhat visible at the end of Q1/21 and even more visible at the end of Q2/21 when the level had increased to 12.4%. We are still below the recent typical NWC levels of 13-14% of sales.
Q: Why is your tax rate somewhat elevated?
In H1/21, the Group’s effective tax rate was higher, 31.0% (28.5%) due to restructuring costs, which are non-deductible in taxation. We have used recent years’ levels as a basis for this year’s estimate for these non-deductible costs as well, and we tend to be rather conservative when booking deferred tax receivables.
With the Q2 releases published, our IR team is finally able to take some time off and will be out of office next week.
We wish you all a great rest of the summer,
Kiira and Tomi
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