Konecranes Plc

Miikka Kinnunen - Vice President, Investor Relations Panu Routila - President and Chief Executive Officer Teo Ottola - Chief Financial Officer, Deputy CEO

Antti Suttelin - Danske Bank Tom Skogman - Handelsbanken Capital Markets Philip Saliba - HSBC Manu Rimpelae - Nordea Markets

Hello everybody. Welcome to this Konecranes Fourth Quarter 2016 Financial Statement Release Presentation.

My name is Miikka Kinnunen, I'm the Head of Investor Relations at Konecranes. We will do as usual, let’s start with the presentation of our President and CEO, Mr.

Panu Routila who will cover the Group financials and he will give some words about the recently completed acquisition of MHPS business and then after that we will continue into the business area coverage by the Chief Financial Officer, Mr. Teo Ottola.

So without further ado, I will give the floor to Panu, please.

Thank you, Miikka. We had quite satisfactory performance in 2016, which makes us actually very well prepare for the integration of the recently acquired MHPS business that was closed on January the 4th 2017.

The profitability improvements despite the volume growth lack demonstrates that our actions to cut manufacturing capacity and the introduction of the new operating model based on our direct product line organization and P&L responsibilities have clearly improved our profitability and competitiveness. Coupled with streamlining of the middle management will lead to cost savings of more than EUR 30 million in 2016, which is visible in lower fixed costs.

The highlights of the quarter were the order from Virginia Port Authority for 86 automated stacking cranes valued more than EUR 200 million. This was the largest deal in the history of Konecranes ever.

With deliveries extending to 2020, it gives a good base load to our port cranes business. Service has prioritized profitability and efficiency over growth.

Our restructuring actions together with challenging market conditions, particularly among industrial customers in the Americas, held back growth in 2016. Furthermore, low investments within process industries and commodity sectors affected the demand for industrial cranes and components.

Likewise, weak growth in the container throughput and focus on M&A activities has affected terminal operators’ appetite for capacity investments and expansions at ports. From this perspective, the recent strengthening of the Purchasing Managers’ Indexes and return of growth in container traffic is a welcome development.

As you can see on the Slide Board proposes an unchanged dividend of EUR 1.05 to be paid for 2016. I would now also like to thank and take this opportunity to express my deepest gratitude to the long serving Board Member Mr.

Stig Gustavson, and Mr. Svante Adde, who have announced that they will not be available for reelection at the next Annual General Shareholder Meeting.

Let’s now take a closer look at some Group’s key figures for the fourth quarter. Group order intake grew by 16% from the previous year and totaled to EUR 595 million.

Sales increased by 1% on a year-on-year basis and amounted to EUR 613 million. Currencies did not have a major impact on these growth rates in the quarter.

At the end of 2016, our order book exceeded again EUR 1 billion actually and to be more precise, it was EUR 1, 38 million and roughly at the previous year’s level. The adjusted operating profit continued to increase strongly in the fourth quarter as it grew by 17% from the comparison period.

Adjustments that were related to the restructuring costs and transaction costs amounted to approximately EUR 21 million. Transaction costs increased from the previous quarter mainly due to the divestment of STAHL CraneSystems in Germany.

As usually, cash flow strengthened towards the year end which lowered gearing to 29%. The activity in the world’s manufacturing sector according to Purchasing Managers’ Index picked up steam in the second half 2016.

By area, growth was generally led by the US and Western European regions. However, the performance of the Asian region also improved.

Looking at the industrial production statistics, the European Union manufacturing capacity utilization rate slightly improved in 2016. From our perspective, the demand in most of our European businesses behaved correspondingly.

The US manufacturing capacity utilization rate declined slightly from 2015. The total industrial capacity utilization rate which declined heavily in 2015 due to commodity sectors stabilized in 2016.

Again, from our perspective, while certain market uncertainty continues in North America, there are already certain signs of an improvement in the marketplace. The year 2016 started on a weak note in Chinese and Russian manufacturing sectors but they finished the year in a growth mode.

This fits fairly well with our perception of the demand situation as well, which seems to be stabilizing following several years of weak trading conditions. Modest growth could be overall observed in India, in Brazil, the PMI pointed to a continued contraction in manufacturing output the entire year.

The global container throughput grew only by approximately 1% in 2016. Due to weak growth in container throughput and focus on M&A most of the terminal operator capacity expansion plans were put under review in 2016.

This affected also the demand for port cranes. However, the world trade has gained momentum noticeably at the end of 2016, which could suggest improving demand as we progress further in 2016.

Nevertheless, we remained fairly cautious of the near-term order prospects. The summary of the market outlook is that customers are cautious about investing due to modest volume growth in manufacturing and process industries as well as container handling.

The companies operating in emerging and commodity markets are particularly under pressure to save costs. The demand situation in Europe and North America is somewhat mixed.

Low growth in global container throughput has led to a slow decision-making among container terminal operators. The quarterly equipment order intake may fluctuate due to the timing of the large port crane projects.

Due to the very recent Terex‘s MHPS acquisition, Konecranes believes that it is not appropriate to provide financial guidance for the new combined business at the present time and intends to provide financial guidance in conjunction with its Interim Report January - March 2017 to be published on April 27th. This slide shows the personnel changes relating to the restructuring actions from the beginning of 2016.

In 2016, our total personnel decreased by more than 900 employees. More than 70% of the reductions were staff employees, which has clearly reduced our fixed costs.

The divestment of the Moroccan service company reduced the number of employees approximately 140 people which is also included in the abovementioned figures. In the fourth quarter, we reached approximately EUR 10 million cost savings bringing the full year figure to more than EUR 30 million.

Based in this – these already implemented actions, it looks like we have a potential to reach an incremental cost savings of EUR 10 million to EUR 15 million in 2017. The acquisition of Terex MHPS business was closed on January 4, 2017.

We are extremely proud to combine forces with MHPS. We want to provide a new home for Demag and Port Solutions from which these businesses can grow and become stronger as part of our joint organization.

We have the day one organization in place which can govern the integrated businesses. Following the outlining of the integration plans in the fourth quarter of 2016, we are now detailing them.

Certain quick wins have already been achieved in terms of cost savings and we continue chasing them as we speak. For example, some service branches have already been combined and certain management level savings have already been reached.

As we move forward in the coming months, we intend to launch implementation for other integration actions planned for 2017 as well. Having said all this, our key focus remain and will remain on our customers as taking good care of them is vital for our long-term success.

The sound industrial logic of the MHPS acquisition makes it possible for us to realize a long list of synergies. Based on the initiated integration work, we are confident on the targeted synergies of EUR 140 million within three years, of which EUR 35 million is expected to be implemented on a run rate basis by the end of 2017.

Like I mentioned on the previous slide, certain quick wins have already been realized. This slide contains new information about sources of synergies and their relative sizes.

I won’t go through all of the details here, but I will mention certain categories. Based on the initial synergy estimates, commercial synergies are estimated EUR 15 million to EUR 25 million, synergies related to technology and product platforms, EUR 20 million to EUR 30 million, manufacturing operations EUR 50 million to EUR 70 million, service operations, EUR 15 million to EUR 20 million and finally, organization and support EUR 15 million to EUR 20 million.

I would like to remind you also that the commercial synergies do not include longer-term synergy potential related to the untapped opportunities stemming from the combined installed base. Before I jump back to the fourth quarter financials, I want to mention that the divestment of the remedy asset was successfully completed on January 2017.

The final selling price was EUR 224 million and we expect to book an after tax capital gain of approximately EUR 200 million from the divestment in the first quarter 2017. The profit from the STAHL CraneSystems divestment will be used to amortize the loans related to the MHPS acquisition.

In 2016, STAHL CraneSystems sales outside the Konecranes Group totaled approximately EUR 130 million and its EBITDA was approximately EUR 26 million. Now let’s still look back at the fourth quarter numbers and figures before I pass on the word to Teo who will discuss the performance by business areas.

The fourth quarter order intake grew by 16% from a year before to EUR 595 million. Orders received increased in Americas, but decreased in EMEA and APAC.

Sales rose by 1% from the corresponding period in 2015 to being EUR 630 million. The value of the order book at year-end 2016 was EUR 1,038 million which us flat year-on-year basis.

However, due to the timing of deliveries, our comparable order book for current year’s deliveries is lower than the corresponding situation a year ago. In the fourth quarter, the adjusted operating profit increased by EUR 7.6 million to EUR 52.1 million and in 2015, it was EUR 44.6 million.

Similar to the third quarter, this was again the highest quarterly adjusted EBIT since 2008 which was the peak year in earnings. The adjusted operating margin improved to 8.5%.

This slide on the rolling 12 month basis, sales and adjusted EBIT shows nicely that our cost savings actions are delivering the results as the profitability is improving despite the lack of supporting volume of higher sales. Still some observations about the full year 2016 performance in 2016 the orders received fell by 2% to being EUR 1,921 million, orders received rose in the Americas, but fell in EMEA and APAC.

Group sales decreased and was roughly unchanged at EUR 2,118 million. In 2016, the adjusted operating profit increased by EUR 23 million to a total of EUR 141 million.

This was the highest number since 2008. The adjusted operating margin improved to 6.6%.

On a rolling 12 month basis, the share of service is unchanged at 44% of the Group sales. EMEA’s share has grown to 47%, Americas and Asia Pacific are slightly down at 38% and 15% of sales respectively.

And now I will pass over to Teo who will continue from here and we will jointly then be available for the Q&A session.

Thank you, Panu. And let's start the BA reviews with service as we usually have done.

The service order intake in the fourth quarter was EUR 190 million, that is down approximately 5% year-on-year. This time the currencies did not really play any major role here.

So with comparable currencies, the decline is exactly the same as the reported number. Sales was EUR 268 million, that is down 3% year-on-year.

Then if we take a look at the sales split regionally, so in the fourth quarter, sales grew in APAC, but they fell in EMEA as well as in the Americas. This is the quarterly view, when we take a look at the full year 2016, so we can know that the sales actually rose in EMEA and declined in the Americas and APAC and this picture for the full year obviously is more in line with the macro data that we saw Panu present earlier the utilization rates for manufacturing industries in EMEA and America for example.

The service adjusted EBIT was EUR 38 million roughly, that is a margin of 14.3%. So the EBIT improved both in euros as well as in margin even if the sales volume was lower than a year ago.

Gross margins were actually flat, so the improvement in the profitability basically comes from the efficiency improvement that we have done both in terms of cost-cutting, as well as system implementations and other, let’s say ongoing continuous improvement. When we then take a look at the net sales and adjusted EBIT on a little bit longer term perspective, so rolling 12 months basis, so here we can note that the sales are slightly down 2.5% with reported currencies whereas the EBIT has continued to improve as the case has been since the end of 2011 and now we have reached an EBIT margin of 11.4% at the end of 2016.

Contract base value is EUR 206 million, that is slightly down about 3% with comparable currencies. So we have discontinued certain non-performing, non-core businesses during the year and this has then meant that the contract base has declined slightly.

Service order book however is a little bit higher than what it was one year ago now at EUR 174 million and about 3% higher than a year ago with comparable currencies again. Then moving on to the equipment.

So equipment order intake was EUR 421 million, that is 25% higher than a year ago. If we take a look at the order intake by business units, we can note that the orders for port cranes obviously rose as a result of the Virginia order, orders for industrial cranes, crane components and lift trucks however fell.

And then if we delve more in detail into the industrial cranes, we can say that the standard crane order intake actually rose in the fourth quarter whereas then the process crane order intake that has been doing pretty well otherwise during 2016 so was down in the fourth quarter. Order intake regionally increased in Americas, again, as a result of the Virginia order but decreased in EMEA as well as Asia Pacific.

Sales for the fourth quarter EUR 365 million, that is slightly up 1.1% up in an year-on-year comparison. And then when we move into the – again the adjusted EBIT, so EBIT was EUR 21 million, that is a margin of 5.8%.

The EBIT is about EUR 6 million, almost EUR 6 million higher than a year ago, part of that of course is explained by slightly higher volume. However a maturity of the improvement comes from gross margin.

So gross margin was actually higher than what we had in Q4 2015. There are a couple of reasons behind that, one of them is that during the fourth quarter of 2015, we had a relatively big provision that we made in the accounts receivable, now the lack of that kind of an one-time cost obviously makes the comparison better.

At the same time, the efficiency improvement actions that we have done have meant that the gross margin has continued to improve. Product mix for the fourth quarter actually slightly weaker than what we had a year ago, but in net terms, the gross margin improvement is helping our EBIT in the fourth quarter.

Again, then on a long-term perspective, rolling 12 months sales, so then we can note as in the service side as well, that the sales are slightly down whereas now in the EBIT, we have a very nice looking trend from the beginning of 2016 onwards where we have been able to improve the profitability quite nicely. Obviously, the absolute level somewhat more than 4% EBIT margin is not satisfactory, but the direction definitely is the right one.

Then again on the order book, so order book EUR 865 million roughly, pretty much on par with the situation one year ago, the timing of the order book is different now, so more of the order book is beyond 2017 deliveries than what the situation was a year ago. And then still a couple of comments on the balance sheet and cash flow situation.

Our net working capital at the end of the year was EUR 304 million, that is 14.4% of rolling 12 month sales and this is in our targets. So our target is to be below 15% and as we can note from the graph, so the situation always has been better towards the end of the year and that is the case now as well, but we are about half a percentage points better than what we were at the end of 2015.

So the development has been in the right direction. That good development in the net working capital obviously is visible also in the cash flow.

Our cash flow – free cash flow was EUR 84 million, especially - a good level especially in comparison to 2015 when it was basically zero and then the proceeds of the disposal of the shares in Kito then mean that our cash flow before financing was then approximately EUR 48 million higher than the free cash flow for 2016. And the cash flow of course is then feeding into the net debt and gearing numbers, our net debt at the end of 2016 was approximately EUR 130 million, that is a decline of roughly EUR 70 million from the situation a year ago and our gearing is at 29.1% at the end of the year.

And then still before going into the Q&A, so the slide on return on capital employed, our 12 month rolling ROCE are at the end of 2016 was 10%, then when we exclude the adjustments, we are on the level of roughly 19% in return on capital employed for 2016, a slight improvement in comparison to the situation at the end of 2015. And now we can go into the Q&A session.

Thank you, Panu and Teo. So let’s go to the Q&A and first, I expect more questions to be coming from the phone lines.

So operator, would you please inform the participants that they can present their questions.

Thank you. This is Antti.

Order intake, Q4. What happened?

If I take off the EUR 300 million order, it looks like the underlying was really quite bad. So what happened there?

Thank you, Antti for the question. Firstly, why do you want to take it off because I want to keep it and you can’t take it off from us?

It’s a good order still. So we have to keep it.

And it gives a very good base load. It is true that if you don’t count that on the port side, the order intake was somewhat lower.

But I think on the other hand, we concentrated really on getting this big order because it’s an important one for our near-term and even, let’s say longer term. So it gives a very good base load for the next couple of years.

I estimate that in the near-term, let’s say the port side order intake will concentrate more on the smaller size of orders and that’s we will probably going to see in the near future here as well. But this big one is an important one.

Do you have, Teo, maybe something for the numbers as well there?

Maybe an additional comment on the order take essential now in the fourth quarter, we also had a relatively high cancellation or let’s say the amount of cancellations in euro terms was quite high. So we had about EUR 18 million cancellations, maturity of that came from one order only, but this cancellation obviously is then taken away from the order intake.

So it impacts that number as well.

Okay, and based on what you told about the leading indicators. When would you expect to potentially see some improvement in underlying demand?

Well, we don’t give, as we have said, we don’t give really a guidance at the moment. We can though state that traditionally, we have been a kind of late cyclical in our businesses and that would mean that there should be visibility seen maybe sometimes during the second quarter also.

Okay, and then finally, on Terex MHPS. I understand that you may not even – you said it’s – the 2016 performance, but what we know is that the business is usually very second half weighted.

Is there any indication that you could share how the second half was last year?

No way, Antti.

All right. Thank you.

Thank you.

Yes. Thank you.

I’ve got questions on synergies that are not included in this EUR 140 million. You mentioned today again about these service top-line synergies and of course you can speculate about improved pricing in equipment.

So have you already started to adjust some prices on equipment? And what kind of service top-line synergies do you see in short-term?

What were you really doing concretely to make that happen short-term?

Well, in the short-term now we are concentrating on the cost synergies. We have a vast number of activities that we are doing.

There is about 3000 different activities, what, that we are doing internally in the company. We have now the day one organization in place and we are working to get the target organization in place.

So there is a lot of work to be done there. At the same time, we have to still keep very active in the marketplace working with our customers, factories working with the deliveries.

So we should not turn introvert and we have to keep ourselves extrovert at the marketplace to ensure that our – let’s say even short-term order intake growth there. So, these are now, let’s say the activities that we are mainly doing.

Later on then we will go to the other activities and we have already told that there is a untapped potential in the service business. We also told earlier that it will take somewhat more years to come and for us to get it, so that with rather the middle to long-term perspective on that one.

We will be coming to that later on.

But did you think about just the equipment pricing, do you think you need new products to adjust prices? Or can you adjust your much stronger market position in pricing per month?

I would prefer not comment that question, just smile.

Okay, thank you.

Hello, thank you very much. Maybe, could you provide a detail on the Virginia Port order split?

So the EUR 217 million, I assume they all came in, in Q4 and I think the previous communication was in 2017, 2018 we should roughly see EUR 60 million coming from this order. Is this still correct?

Do you remember, Teo, the numbers, exactly how much what was in 2017?

2017 estimated sales are, let’s say, between EUR 40 million and EUR 60 million, so that would be the amount.

Yes, and that’s because of the percentage of completion method, deliveries will actually start in 2018.

Correct, no deliveries in 2017 yet. That is correct.

And in terms of the remaining order book, what is the length of it? Is it in terms of delivery schedule?

Is it mostly to be delivered in 2017 or what is the split in terms of delivery in 2017 and 2018?

Well, probably the best way to take a look at that is to view, what is the difference between the order book now and a year ago. When it comes to the deliveries for the next year, and now like I already mentioned, so now at the end of 2016, the order book is, let’s say, the order book, in relation to the order book size, it is lower for 2017 than what the situation was a year ago and that difference of the equipment order book is in the ballpark of 10%, comparable order book, it’s in the ballpark of 10%.

And then, you did quite well in terms of cost savings and also exceeded the target of EUR 30 million. However it seems quite, lot it’s also eaten up then by restructuring costs and the extra cost, especially in Q4.

Could you elaborate a bit on those? What to expect in 2017?

Yes, I am very proud that we could actually raise this EUR 30 million savings, had we said in the beginning of the year that we are going to reduce 900 people, it would have made a huge fuss everywhere. At the end, reducing 900 people and getting a EUR 30 million efficiencies is a very good achievement I have to say and combined together with the same time organization making the MHPS acquisition, all the legal work, all the operative work to be ready with the integration, I mean, that’s a fantastic job actually what the organization has done.

But can you provide some, let’s say some more picture on the restructuring costs are why below the adjustments and the adjusted operating profit?

Teo can say a few words about the numbers, but we already said here earlier that there is EUR 10 million to EUR 15 million coming in addition for 2017 profitability improvement from these restructuring activities that already have been carried out and implemented.

Yes, and if we take a look at the restructuring cost as such in 2016, the restructuring cost was EUR 15 million to EUR 16 million if I remember correct, excluding the impairment. So with the impairments, it was a little bit higher and in 2015, the cost was roughly the same for restructuring or let’s say one-time restructuring costs and they are of course, one can calculate the payout which has been decent.

Yes, the report contains a breakdown of this transaction cost or restructuring cost.

Correct.

And now in the fourth quarter the restructuring costs themselves were quite in line with the previous guidance and basically the full year figure was back in line with the figure we estimated already in the beginning of the year for the full year. So really the - I think the figure that you are now wondering is mainly coming from the transaction cost and the main factor is the divestment of STAHL CraneSystems that was signed during the quarter.

And then in terms of the declining order intake in the EMEA region, the last time you flagged some, let’s say some difficulties in core European markets like Germany orders coming in, is the decline now in Q4 also related to these core regions or is it coming from other EMEA countries?

Well, actually if we take a look at the EMEA and take a look at service first, so it is correct that the service sales came down slightly in EMEA. However, if we take a look at the order intake, so that was actually up in the service EMEA and if we take a look at the country split and we are writing also in the report that the market environment is a bit mixed within Europe.

So, generally, 2016 service has been quite strong and strong countries are for example, UK, Spain, maybe the Benelux countries Austria, Nordic countries, not as strong, but maybe on that side as well. But then there are also some let’s say, weaker countries.

And again, while service has been strong, maybe standard cranes have been relatively strong, process cranes on the other hand in the EMEA area throughout 2016 have been very weak and the same applies to the components that have also been relatively weak. So the market environment overall is mixed like we are writing in the report as well when comes to the EMEA.

And especially on the components side, I mean, after all they need to be delivered, I guess, I mean there is a replacement cycle or is it a rather matter of losing market shares? Or should those, especially the components now come in, in 2017 than that or?

It’s not that much of a replacement market at the moment, as such. I don't see a big negative trend though there.

So, I remain somewhat optimistic now on this side. Component order intake typically has been one of the first ones to recovery if the economic environment overall improves and if we take a look at now our component order intake in the fourth quarter specifically.

So, in a sequential comparison, in comparison to the third quarter, the situation actually looks better. So that especially in Asia Pacific the components order intake have recovered.

But it is like we have been pointing out many times, so it is extremely difficult and maybe even dangerous to draw conclusions based on one quarter only. So we would always need a little bit longer period to take a look at that.

But in the Americas area, the components order intake has stabilized and now in the fourth quarter in APAC it was actually higher than a year ago.

Thank you very much.

Thank you.

Good morning. My first question would be on the service business.

So do you see that you have now completed all these restructuring efforts and you are – you have right aligned the size of the order base as well the other ways we should start expecting kind of see more normal trend in terms of the orders and sales development in 2017 for the service business?

No, we wanted last year to kind of make sure that we are well equipped for the integration activities and that’s why we did quite a lot of work on that side in the service business as well, especially weakening in some countries and now we are actually well aligned to get the new MHPS service business integrated in our service business and return to the – I would say, more traditional situation there.

Okay, so, from a kind of a standalone Konecranes point of view, we should think about the demand growth should normalize to inline with GDP or growth in the installed base?

Yes.

Okay, and a second question is just on the services margin. Do you see that there is still these cost savings EUR 10 million to EUR 15 million you have for 2017.

So is that mainly on the equipment side or is that also going to come on the service business?

There has been of course quite a lot done in the equipment side, but also in the general overhead. So that will also affect by increasing the service profitability somewhat while they have been allocated to both of the businesses.

Okay. And then, two housekeeping questions.

Where do you see the non-recurring other restructuring costs? Do you have an estimate of those for 2017 and also the net financial items, I mean, given now you have all these transaction costs?

And where do you see those two landing rough in the ballpark for 2017?

We have the numbers, but we are not giving them out, that we don’t give the guidance so we are not giving any portions of it neither.

Okay. Thank you.

Thank you.

Okay. Thank you operator.

How about the audience here in the meeting room in Espoo, Finland? Do you have any questions?

Or everything is rather clear and we wish you a good continuation of the day and see you next time at the shareholders meeting perhaps or at the first quarter report presentation.

Thank you.

Thank you.