Konecranes Plc

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

Erkki Vesola - Inderes Oy Tom Skogman - Carnegie Investment Bank AB Tomi Railo - SEB Enskilda Pekka Spolander - OP Financial Group Manu Rimpelä - Nordea Markets Philip Saliba - HSBC Bank Plc Antti Suttelin - Danske Markets

Hello, everybody, here in Helsinki and all of you on the phone lines as well as on the Web. My name is Miikka Kinnunen, the Head of Investor Relations at Konecranes, and welcome to this Konecranes first half 2017 result presentation.

We will start as usual with introduction by our Chief Executive Officer, Mr. Panu Routila, and then the business areas as well as some balance sheet items will be covered by our Chief Financial Officer, Mr.

Teo Ottola. So, without further ado, I'd give the floor to Panu.

Thank you, Miikka. I'm excited to present you now the hall-year financial report 2017.

Our second quarter financial performance exceeded our expectations, particularly in terms of profitability and cash flow. Our order intake and sales grew moderately on a comparable combined company basis, while our adjusted EBITA clearly exceeded the previous year's level.

Similar to the first quarter, the order intake growth was strongest in the Business Area Port Solutions. We are pleased that its orders received grew across the port product portfolio and the cross promotion of our extended offering seems to work well.

Order book for most of our Konecranes new Gottwald and Konecranes Noell product has increased as our MHPS acquisition brought continuity to these businesses. Order intake growth in Business Area Industrial Equipment was led by the crane component business in EMEA and Americas.

We are very grateful for the trust that our customers and distributors have placed in us. There are also signs of increased investments within the process industries, including steel, paper and waste-to-energy.

In the second quarter, EBITA margin expanded as gross margin improved and fixed costs were down on a year-on-year basis. We saw continued clear improvement in service and this Industrial Equipment EBITA margin.

The integration of MHPS is running somewhat ahead of our expectations. While maintaining the targeted EBIT level synergies of €140 million per year by the end of 2019, we now expect to implement €45 million synergies on a run rate basis by the end of 2017, whereas earlier it was announced to be €35 million.

The key microeconomic drivers are increasingly supportive in our end markets, coupled with our determined actions to boost our own financial performance. We look forward to posting a solid second half year performance.

Let's now take a look on some of the key indicators in more detail. On a comparable basis, orders received in the second quarter totaled €719 million, representing an increase of 3.8%.

The value of the order book at the end of March totaled €1.6 billion, which was 4.4% higher than in the previous year on a combined basis. Group sales increased by 1.3% to €797 million.

The adjusted EBITA increased by almost €9 million to being €51 million and the adjusted EBITA margin improved to 6.4%. The consolidated operating profit totaled €30 million and EPS was €0.17.

In the second quarter, free cash flow remained very strong at €85 million, thanks to improved profitability and positive change in the net working capital. Our interest-bearing net debt amounted to €542 million at the end of June, although we paid dividends €82 million in April.

The European Union manufacturing capacity utilization rate continued to improve moderately in the second quarter. This was visible in higher demand products and services among our industrial customers.

The US capacity utilization rates showed an uptick in the second quarter after having slightly declined since the end of 2014. Demand of our products and services was mixed.

Orders for standard industrial cranes and crane components rose from the previous year, but orders for crane services and heavy duty industrial cranes did not grow. Based on the purchasing managers indices, economic activity improved in emerging countries compared to the previous year, although there were some signs of softening momentum toward the end of the period.

Nevertheless, we saw higher demand to our products and services also in Asia-Pacific. The global container throughput was robust as it increased by approximately 6% on a year-on-year basis in January to June 2017.

Regionally, the intra-Asian traffic growth has been particularly strong year-to-date. Asia to North America container volumes have grown too.

And the widening of the Panama Canal has supported the Asia to East Coast North America container traffic above expectations. Correspondingly, demand for container handling equipment increased in the Americas and Asia-Pacific.

Particularly small and medium-sized orders improved across the whole product portfolio. Our market outlook is now as follows.

Economic indicators related to manufacturing industries have strengthened, which appears to improve the customer's willingness to proceed with their investment plans. Demand situation in Europe is gradually improving within the industrial customer segments.

Business activity in the North American manufacturing industry remains mixed. Demand in Asia-Pacific is showing signs of bottoming out.

Global container throughput growth has improved and the prospects for the small and medium-sized orders related to the container handling equipment have strengthened. Our financial guidance for 2017 is now.

The sales in 2017 are expected to be close to or lower than the comparable combined company sales in 2016. We expect the adjusted EBITA to total €205 million to €225 million in 2017.

The comparable combined company's operations comprise Konecranes' operations without the divested STAHL CraneSystems business, but do include the acquired MHPS business. As I said in the beginning of the presentation, the integration of MHPS is running somewhat ahead of our expectations.

We implemented run rate synergies of €30 million already during the first half of 2017. We now expect to implement €45 million.

Earlier, it was €35 million synergies on a run rate basis by the end of 2017. The P&L effect of these actions is expected to be €15 million to €20 million in 2017.

We are in the process of optimizing our industrial crane manufacturing in several countries, including Austria, Canada, India, South Africa and Switzerland. In addition, a potential closure of our lift truck factory in Italy is being discussed with the employee representatives and local authorities.

While there is still much work left to do for the rest of 2017, we are already planning our integration activities for 2018. We are keeping the target of €140 million EBIT level synergies per year by the end of 2019 intact.

The synergy program itself remains the same in scope as well. We have continued confidence in the plans as we have developed these much further.

This slide, therefore, contains essentially the same levers as we have shown already before. The following slide contains the group financial performance, still in graphics.

And I won't repeat the previously mentioned figures anymore now here, but I will just mention some highlights before Teo will tackle them more detail in the business area level. Group's orders received grew in the Americas as well as in APAC, but were lower in EMEA.

Order intake growth was related to Business Area Port Solutions and Business Area Industrial Equipment. Sales growth related to the successful deliveries and the strength in order book in Business Area Industrial Equipment.

Business Area Service sales were close to the previous year's level, which actually matched our expectation for the second quarter. The slight decrease in the Business Area Port Solutions sales related to the timing of deliveries.

Order book growth related to the Business Area Port Solutions and Business Area Industrial Equipment. However, as we know are looking at the comparisons to the combined company figures, I should add that the previous year's order book for MHPS included deliveries for the next 12 months only, which explains a part of the growth.

The group adjusted EBITA margin improved, mainly thanks to the cost-saving measures already implemented in 2016 and 2017, as well as successful delivery execution. Gross margin improved and fixed costs were lower on a year-on-year basis.

On a comparable rolling 12-month basis, group sales are rather evenly balanced between the business areas. Business Area Service generated 36% of sales, Industrial Equipment 34%, and Port Solutions 31% of the sales.

In terms of the geographies, Europe, Middle East and Africa represented exactly half of our sales, whereas the Americas generated one-third of it. The share of Asia-Pacific is at 17%.

Now, Teo will take the business areas more in detail. Teo please.

Thank you, Panu. And let's start with Service as usual.

So, Service order intake for the second quarter was €251 million. That is a decline of 1.3% year-on-year.

Currencies continued to help us a little bit in the second quarter, so the decrease with comparable currencies would have been about 2.5%. Sales fell by 2% to €298 million; and also there, with comparable currencies, the decline would have been slightly more.

Sales increased in EMEA and APAC, but they decreased in the Americas. And then, if we take a look at the situation by business units, within Service, so part sales continued to outperform that of field service.

Adjusted EBITA for the second quarter was €41 million and the margin 13.8%, a good improvement both in euros as well as in margin, especially taking into consideration that the sales declined slightly. The improvement is due to positive sales mix – spare parts having a bigger share of the sales than a year ago; better productivity, mostly as a result of the integration activities, for example, in the Northern America, which both are leading to higher gross margin than a year ago; and then, also lower fixed costs.

When we take a look at the order book, so that was €218 million. Agreement base or contract base, the monetary value, €243 million and 617,000 pieces or units approximately.

Here, from the service point of view, the comparability challenges relate mostly to the agreement base because, of course, as we can see, 2013 and 2016 agreement base is with Konecranes' standalone basis. And then, also now, during the second quarter, we have been doing a little bit redefining when it comes to the contract base of MHPS.

And as a result of that clarification, so now the monetary value has actually declined a little bit from the first quarter and the number of units has actually increased from the level that we announced in Q1. So, unfortunately, Q1 and Q2 are not very well comparable with each other as well.

So, now, we feel that we have the ballpark correct. It may be that there are some adjustments to the unit numbers or value, as we continue with the integration.

But by and large, we should be on the right ballpark. If we take a look at the contract base with Konecranes' legacy, which we can compare better, so one can note that we had slight growth in the contract base during the second quarter of 2017 from the end of first quarter.

Then Industrial Equipment. Industrial Equipment orders received was €309 million.

This is a decrease of 2.6%. And also here – sorry, this is an increase of 2.6%.

And also here, the currencies help us a little bit. So, the increase actually would be slightly less, about 1.8% with comparable currency rates.

Orders grew in EMEA and APAC, but they were basically flat in the Americas. And then, if we take a look at the business units again, so one can say that the order intake both in industrial cranes as well as in components rose.

And when taking a look at industrial crane, so the order intake declined in the Americas, but rose in EMEA and APAC. And then again, on the component side, there was an increase in EMEA and the Americas, but they declined in APAC.

Sales rose as well, like orders, by 4.8%. Maybe 2.7% or so with comparable currencies.

And reached €297 million approximately. Adjusted EBITA for Industrial Equipment, €6.2 million, 2.1% as margin.

So, here, the improvement both in euros as well as in percentages is very good. And the improvement, of course, partially comes from higher volume because the sales increased, but also from higher gross margin and lower fixed costs.

And the higher gross margin was due to mix partially because there were some good margin projects delivered in the second quarter as well. And then the lower fixed costs, obviously, as a result of the restructuring activities that we have been doing during 2016 and 2017.

Industrial Equipment order book, €571 million. There is an increase of 3.8%.

However, here, of course, we have the comparability issue that the MHPS order book for 2016 is only for the deliveries during the next 12 months. So, the comparability is limited.

The decline from the first quarter order book to the second quarter order book is because of currencies. And then, of the business areas finally, Port Solutions, so order intake, €262 million.

This is an increase of 4.8%. And actually, here in Port Solutions, the increase would've been even slightly higher with comparable currencies.

Orders grew in the Americas as well as APAC, but fell in EMEA. And then, when we take a look at the product groups, so actually the order intake increased for most of our product groups, as well as Port, Service.

Sales, however, fell by 1.7% and were approximately €238 million. Of course, the decrease in sales is in relation to the timing of deliveries.

But as we mentioned already at the end of Q1, so also the order book for the remainder of 2017 was lower than what it was one year ago. So, partially, and maybe specifically even, this one is explaining why the sales declined in an year-on-year comparison.

Then from the profitability point of few for Port Solutions, the adjusted EBITA, €13 million; margin, 5.5%. Both euros and margin slightly lower than a year ago.

Of course, affected by slightly lower volume in sales, but also as a result of somewhat lower gross margin. The mix was actually slightly better.

Gross margin was still a little bit weaker. But as this is project business most, of course, there is natural fluctuation in the margin levels from one quarter to another one.

Order book for Port Solutions, €870 million. And here, of course, we have exactly the same comparability challenge with the last year, as in Industrial Equipment.

Maybe one needs to remember, regarding this one, that the order book that we have now at hand. So, for legacy Konecranes products, for example, so we have about €60 million lower order book for the deliveries in 2017 than what we had one year ago for 2016.

So, there is, in a way, an embedded sales decline as a result of the order book for Port Solutions. Delightfully, the order book for many of the new products that we have in the family, as a result of the Gottwald and Noell product portfolio.

So, the order book for those – many of those is very good now at the end of Q2. Then a couple of comments on cash flow and balance sheet.

Net working capital, starting with that one, €306 million and 9.4% of rolling 12-month sales. This is, of course, in a historical perspective an excellent level for us both in absolute terms and in relation to sales.

One of the best that we have ever had. We continued to have good advance payments in the second quarter and also we were actually able to reduce the amount of accounts receivable, as well as inventories from the end of Q1 to the end of second quarter.

I would still say that the inflow of advances was more important than the two other things, but there were these three positive things that all contributed favorably to the net working capital. Free cash flow, of course, as a result of the net working capital development and decent result in the second quarter continued to be very good in the second quarter, actually on the same ballpark as in the first quarter, at about €84 million, €85 million.

And now, the year-to-date free cash flow is €173 million. And as we can see from the graph, so in a historical perspective, this is a very good achievement for the first half of the year.

This is, obviously, reflected on net debt and gearing. So, our net debt level, €542 million, did not really move much from the end of Q1, even though we paid dividends during second quarter.

And, of course, then the gearing is on a very decent level at 43%. Capital employed, what you can see on the right-hand side, has declined from €2.2 billion to about €2 billion.

There is a technical reason for that. It is that we had a very high cash level, cash at hand at the end of Q1 because we were preparing for the dividend payments as well as some of the repayment of our debt.

And now that that has been conducted, so the capital employed has come somewhat down. And, of course, then also the return on capital employed improved because of the profitability, but also because of the lower capital employed than at the end of Q1.

And this one concludes the presentation and then we can go into the Q&A.

Thank you, gentlemen. Yes, I propose that we start with questions and ask first from the audience here in Helsinki.

So, please state your name and company name before you ask a question.

Hi. Good morning.

It's Erkki Vesola from Inderes. Two questions.

First, you painted quite a rosy picture regarding the market outlook for the second half. Should we expect order intake increase across the board during the second half on a year-on-year comparison?

Maybe I would say first that, in Europe, the optimism is continuing, kind of positive trend. In Americas, optimism is rising a little bit.

In APAC, basically, there are some industries which show a little bit improvement, like steel industry, automotive, mining and maybe waste-to-energy industries. In the Service business, the market situation is stable, but not robust.

In Port business, basically, we could say that there are no big discussions of big orders at the moment, but rather a stable level of small to medium-sized orders being discussed at the moment. I would not say that this is a very strong market situation, but somewhat continued optimism overall.

Okay. Obviously, we should do the math.

And then, the second question regarding the accelerated synergies. In which division should we particularly expect this to show?

We have to note that, in the synergies, they are not linear. In Service business, the synergies have been maybe a little bit more faster than in the other businesses.

They will vary during the time to come between the different businesses. So, I would not go and state now in which businesses we would actually expect the synergies to come next and which order.

We have all seen that actually we have been quite nicely able to carry out the synergy projects and some projects, and that's going quite well as planned.

Okay, thank you.

Maybe as an addition to that one, so even though we have changed the guidance for the run rate synergy savings at the end of the year, so we have not changed the estimate for the synergy savings from the P&L point of view. So, we are still saying that maybe €15 million to €20 million of the synergy savings would be visible in the P&L, which basically means in a way that even though we feel that we will be able to achieve more by the end of the year, so some of the synergy savings will become effective, so come a little bit later during the year than what we thought maybe a while ago.

So, these are, of course, small changes, but the P&L estimate is unchanged from Q1 situation. So, all in all, actually the integration activities are going internally very well.

I'm very happy that, on the other hand, that we have been able to make sure that our business people in the sales, in the operations have not been distracted by the integration activities, but continue actually a good level of activity at the core business itself.

Hi. This is Tom Skogman from Carnegie.

First on – you said now that the P&L impact is unchanged from the synergy savings, but that seems to be one of the key reasons to the guidance upgrade. Can you please explain?

Well, yes, the synergy savings, P&L impact as such is unchanged. However, what we have been able to see is a little bit more savings from the programs that we had, for example, in 2016 and it has come a little bit quicker than what we anticipated, which is partially explaining, of course, why the second quarter result is a little bit better than what we estimated ourselves.

So, you will have to take a look at all of these saving activities in in one go. And then, of course, also it is so that it's very difficult for us to separate that what is actually a synergy saving and what is saving otherwise in a way, so that this is also something that makes the calculation a little bit complex.

Then on the internal costs and net financial, they were quite high, much higher than in Q1. So, what kind of level should we extrapolate ahead?

Do you mean the fixed costs are…?

If you take the group EBITA and then take away the divisions, you can call it the internal. The remaining part – and those costs were far higher than in Q1.

So, it's like we don't have any annual really kind of long track record [ph]. It is hard to know what to estimate.

Yeah. In the fixed cost, we have had some factory rebranding costs that have not been booked in the adjustments, but rather in the direct fixed costs.

We have also have had some additional legal costs that have not been booked as adjustments and part of the synergy calculation as such.

So, they were extra high. This quarter and we'll start to come down or…?

There is also one technical thing. And it is that actually, in the first quarter, where the unallocated costs were about €4 million, so we were actually burdening the business areas with about a couple of millions costs that now, from this on, will be booked as an unallocated cost.

So, really, the increase in the unallocated has actually been from €6 million to €9 million, which is above €3 million from Q1 to Q2. Going forward, we feel that the quarterly burn rate will be somewhere between these two numbers, not as high as in the second quarter, but higher than the six that we, in a way, underlying had in the first quarter.

And the technical change, why we have had to do with this is, of course, in relation to the integration as well, so that we have changed the way of accounting, the so-called central services that we have in the MHPS entities, to make sure that we do not burden the BAs with the costs that are by nature internal, like you said, whatever term one wants to use then.

And then, on that financial, they were also much higher than…

In net financial…

Taxes were positive. I mean, just continuing that…

Yes. The net financials has been a little bit challenging from Q1 to Q2 because there were one-time gains in Q1 and one-time expenses in the second quarter.

I would say so that the full year estimated somewhere around €50 million for financial items. A little bit, of course, depending on two things.

One of them is the currency fluctuations because we will need to book part of the FX differences there and we cannot estimate that. And the other one is that if we have refinancings going forward in the second half because that would then, of course, expense part of the, let's say, earlier arrangement fees that we have had.

Let's say, €50 million around for the full year and a normalized quarter could maybe be something €12 million to €13 million if we didn't have anything extra. But it may go up and down a little bit from one quarter to another one because things are taking place, like repaying debt and issuing new debt, like we did in the second quarter, for example.

And taxes will normalize, I guess?

Tax rate, of course, is on this very low level due to the STAHL divestment and the low tax burden as a result of that one. And the normalized tax rate, excluding that one, would be significantly higher.

And like we said, in the first quarter, also it's higher than 30%. So, it would be clearly higher than 30% if we didn't have the STAHL divestment.

So, it will unfortunately for next year normalize, yes. Not for this year.

This is the estimate for the tax rate for the full year.

But will it be a very low single-digit figure also now in the second half, the tax rate?

The tax rate is now 12% and the tax, what we use, for the second quarter is always at the same time the estimate for the full year tax rate. So, for this year, 12% is our estimate.

For next year, STAHL divestment impact will not be there. And it will normalize to a much higher level unfortunately.

I could add to that. Tax rate is not calculated on quarterly result, but on the year-to-date result.

And then, the dollar exposure, the dollar has now started to weaken. Could you educate us on the translational and transactional exposure now?

Let's say, if the dollar would weaken 10% to the euro.

We haven't done a new analyze and we cannot say for sure that what it will be after the, let's say, MHPS combination. I can refer and remind us from what the logic was for Konecranes standalone.

It's probably not significantly different from that one. And if we take a look at the transactional impact, which will be visible in the margin as well, so the logic was that a 10% change would be, let's say, €6 million to €7 million in profits and is having a margin impact because it is a transactional change.

And, of course, a weaker euro would be better for us. And then, when you take a look at the translation impact, so there I would say – so that from our sales revenue, maybe 20% to 25% is US dollar.

And then, of course, we go back to the old discussion that we don't want to say that how much the translation impact would be because we don't want to discuss the profitability levels in different countries. But, there, you can, of course, calculate with, let's say, average profitability what the impact would be.

If you check our annual report, so we have made a much more detailed calculation for Konecranes standalone in 2016, this calculation we do not have available as of now. So, it will be updated for the annual report naturally, but it's a very detailed one and that we don't have.

But this transactional exposure that you mentioned is for the old Konecranes and we don't really know now how much is kind of exported in MHPS from euros to the dollar counters and how large a share of that is then kind of project business where you have a set price based on each contract and how much is kind of true transactional exposure?

We do know, of course, part of that. This 10%/€6 million to €7 million, so this is for Konecranes standalone.

And the impact that comes from MHPS is smaller from that point a view because the Americas business in relation to the dollar business is small. But what exactly is the number?

So, we still want to calculate that. It's not as much more as the sales revenue would indicate coming from MHPS in total.

And then, finally, on pricing, in Q1, you were pretty upbeat, stating you and also competitors have high prices in certain products in certain geographies, if I remember right. Could you update kind of the current situation, if you really start to see a change in the sales margin?

What we said was that the market prices were going upwards and we said that we do follow on that. We can now state basically that the cost inflation, we have been able to push into the market prices, maybe even the market prices have been going a little bit above the cost inflation level and seems that we have been successful in pushing that forward in our pricing structure.

Is it industrial crane products or service or is it…?

It's more related to the Industrial Equipment business.

Okay, thank you.

Tomi Railo, SEB. Just if you could generally talk about the service development, is it still being impacted by your own sort of cleaning actions or choosing agreements and so on, what's happening in the marketplace because we should maybe theoretically and in practice have seen a pick up in the market?

As I said already earlier that the market situation as such is pretty stable, not robust, but pretty stable. We have, of course, been putting a lot of effort in the integration activities as well as the IT system implementation and we did actually take a decision that we did not seek for such a growth at the moment.

This year, that was already earlier communicated. Next year, the growth agenda will be higher in the priority.

And then on the upgraded guidance, you are implicitly guiding for second half profits either to decline by €10 million or then be flat or increase by €10 million. Can you explain the elements behind your thinking and sort of the sources, should I say, to conservatism?

And perhaps still on the currency issue, you said that you are not in a way having an estimate of the currency impact, but still I assume that there is some element in the guidance or am I wrong?

Do you want to take the currencies first, Teo?

Well, maybe if we try to handle this as an entity – the whole question because they are all related to each other. So, I would say so that the main reason for not having a similar improvement in profitability in the second half, as we had in the first half, is purely the volume.

We had €30 million improvement in H1 year-on-year and now it is like you said. So, it is between minus 10 and plus 10.

And now, while I referred already to the order book for the Port Solutions and we know that there is going to be a gap to the profitability as a result of having lower volume, depending, of course, a little bit that what gross margin you use, but you will easily end up to a gap of €15 million or so. So, then we, of course, know that we have the synergy savings that will come through.

There have been some millions now in the first half already, but there will be more in the second half, so that the annual level will be maybe somewhere between 15 and 20. So, this will not entirely maybe compensate for that, but most of it.

The mix will most likely be slightly weaker, not necessarily disastrous, but somewhat weaker. So, there will be a couple of millions there.

We will have a little bit tail impact from the old cost-saving programs, what Tom already asked about. And then, of course, we have been seeing a slightly higher gross margin or actually quite a lot higher gross margin in some businesses in the first half and we expect that some of that we will be able to maintain in the second half.

And then, when you calculate all of those numbers, so you end up between minus 10 and plus 10 in the calculation. But the big thing is the volume, as a result of which there will be a gap in the profitability.

And then the other big thing is the 10x [ph] savings that the – sorry, the integration savings that will come to help us there in the amount of maybe, let's say, €10 million to €15 million for the second half. Currency impact, what you were referring, the translation impact and the transaction impact is, of course, included in our thinking when we have been doing the guidance.

One detail on – you said the timing, especially in the Port, for example. You said that the second quarter was impacted by timing of deliveries.

So, those revenues should be coming presumably back in the third quarter or fourth quarter.

Well, Teo already said earlier that we have actually €60 million less order book for the second half of this year in the Port business. So, that is what he was talking about in the volume.

I understand the order backlog, but some of the slippages in the second quarter should come back.

Some of the slippages will be in the third quarter. But, however, the big picture is that at the end of the first quarter, we had a lower order book for the second quarter than a year ago, which is visible in our sales.

And now, we have a lower order book for the remainder of 2017 than what we had a year ago. And this is in a way the big picture.

And, of course, order intake can sort of change part of that to a limited extent in Port Solutions, of course, but more in Industrial Equipment and quite a lot still, of course, in Service. So, this is there, of course, in a way, that we do not know yet.

But as we are at the half of the year already. So, from the Port Solutions' point of view, the order book, we should know pretty well.

Perhaps I could add that, in terms of – talking about the timing of deliveries in the second quarter, it's not a question of slippage. So, we're delivering exactly as agreed with the customers, according to the time schedule every quarter.

And it just happens to be so that there are deliveries this year than more deliveries going beyond this year.

Finally, because I think the order backlog, one of the reasons has been, for example, the component side, is the order backlog overall healthier than a year ago. When you refer to the mix issues coming to the second half, is it better or weaker?

All in all, the mix is a little bit weaker. And this is partially – or let's say, quite a lot depending on the Port Solutions again because the RTG order book is lower now than what it was a year ago.

Then when we go into the Service, so technically the order book is somewhat stronger, but the difference is very, very small because now there is the spare parts, but the difference is very minor. And in the Industrial Equipment area, you are right, so the mix impact is supposed to – it's most likely going to be a bit negative compared to the second half of 2016, but not because of the components.

So, components order book actually is relatively strong now at the end of the second quarter. So, this is not the explaining.

It's the, let's say, what is within the industrial cranes area, not the mix between industrial cranes and components, but what is the mix within the industrial cranes. Complex explanation, but it is a very sort of versatile topic as well.

Pekka Spolander from OP Financial Group. About the Port Solutions, could you comment the demand and the activity in major segments inside Port Solutions and especially how do you see the activity in large port projects at the moment.

I said already earlier that these small to medium-sized projects, there is a nice sales funnel on those. In the lift truck business, especially in Europe, we see actually rather strong market situation.

We are very happy that the mobile harbor cranes that now came to us to increase our and enlarge our product palette are selling well. We have been publishing quite a lot of deals and there is a nice pipeline of discussions ongoing.

So, that seems to have also somewhat increased market activity. Otherwise, I would rather not go into the details between the different product groups.

But what about those large or very large port projects? Do you have some discussions going on with clients…?

Well, actually, there are discussions ongoing, but we do not expect to book anything this year.

Okay, thank you.

This is Tom from Carnegie. I'm just a bit curious about this port situation because, six months ago, you were actually pretty negative on the demand outlook.

And it turned out that you have had very strong orders. And now you're increasingly optimistic about the order outlook situation here.

Is it just hard to read or what has really changed compared to what you believed six months ago?

Well, first of all, if we look at the container throughput indexes, they have now increased compared to what the situation was six months ago. We have been able to book, yes, quite nice orders and that is, of course, due to the activity in general, but also we think that our competitiveness is very good, our product palette and enlargening of the product palette is very good and, therefore, the cross-promotion is actually bringing fruits.

So, our offering is now actually very good towards the customers, and that's why we are actually getting the orders.

Should we say that – as we said earlier, so that especially now, what's been a positive surprise is the new products, Konecranes Gottwald and Noell products, which we did not obviously have a very good experience on half a year ago, and that's been really a pleasant surprise, not so much on the Konecranes side.

So, you mean that cross-selling has been – with strong order, they have had some new products brought to the market just when you acquired MHPS that have proved very successful. Which one is it?

Let's say that in the mobile harbor cranes business, actually our order book is now highest since 2008.

All right then. Then on Service, of course, a big reason for this acquisition is the growth agenda, to get dynamic top line synergies in the service.

So, can you help us now to understand how you plan this because we still don't see any growth in orders in service and you're really focusing on the profitability, but how should we model this ahead and what will be your genuine actions next year?

We will give more light on that in the Capital Markets Day where we will actually bring to you the growth agenda for the service business. We have continuously said this since actually end of last year already that the Service business has now concentrated on the profitability, on the activity itself – base activity, I mean the IT installation and now also in this integration activities.

We have been shutting down a lot of, let's say, branches, especially in the US, combining, consolidating them. And also, we have been actually giving out – giving up some of the unprofitable businesses.

So, I'm not worried on the situation. The growth agenda will come there for the next year onwards.

And you said both in Q1 and now in Q2 that you are focused very much on the US in closing or merging shops, will that start in in Europe now? So, we'll see…

Well, the overlap was biggest in the US. An now, we have moved over to the European side and then certain countries are well on the way – also on the, let's say, taking out the overlap.

Okay, thank you.

Shall we move now to the phone lines. So, operator, please, do you have questions over there?

Good morning. Can you quantify the impact from the Services closures that you’ve done in terms of the sales on the Service business?

Sorry, can you repeat, Manu, please?

Could you quantify the impact on the service sales that you have taken from closing some of the lower profitability or even loss-making units?

We haven't quantified it. What we have been saying is that that if we take a look at the core businesses that we have, so field service and spare part business, so we have continued to grow basically all the time, but we haven't really quantified that how much would be as a result of the machine tool service, what we have been discussing or other, let's say, smaller service entities.

Okay. Continuing with Services, so has the mix changed meaningfully towards more spare parts in this year compared to last year?

The mix has changed and it has changed so much that you can actually – you can see the impact in the gross margin when we analyze that. But we are not talking about several millions.

So, it's not in the millions that it would be impacting the profitability. You can see it, but it's not causing the improvement by itself.

And then just a clarification on the financial expenses comments you gave, to so you said the run rate of €12 million to €13 million, is that – on a quarterly basis, is that including the refinancing that you have done or should we expect that to be lower in 2018 [indiscernible] refinancings kick in.

That would not be including the refinancing. This €12 million to €13 million would be the run rate basically that we have as now without doing any extra activities regarding refinancing or having, let's say, major FX gains or losses that we have to book in the financial items.

The €12 million to €13 million includes the refinancing you have done so far basically in this year?

No, it doesn't. So, the €12 million to €13 million is clean from all, let's say, one-time type of activity.

So, the refinancings will have a beneficial impact on that.

Where do you see the run rate for financial expenditures, if you just take the kind of underlying financial [indiscernible] looking into 2018?

Well, if you take a look at 2018, so then, of course, it is like Miikka said me that we will be seeing a, let's say, positive impact as a result of lower interest cost. But we haven't commented that yet.

So, we will come back to that once we sort of have the whole refinancing plan at hand.

Okay. And then final question on the cash flow.

Very impressive cash flow in the quarter. And you're running – seasonally, Q2 has historically been the highest quarter.

So, how do you think about the cash flow profile going to the end of the year and make that for the full year as well?

Well, I think that we said, at the end of Q1, that we are expecting that the net working capital turns will – let's say, the net working capital sales, what is now at 9.4 or so, will deteriorate a couple of percentage points. And we would still say that, so that it will deteriorate towards the end of the year and we are not changing the 15%, let's say, target as such.

But, of course, the current situation being what it is, we are expecting and hoping that we will be below 15 at the end of the year, so that the weakening would not be 5 percentage points, but a couple of percentage points. And then, as to the guidance of the whole cash flow, so that we do not give as such.

There you see that based on the profile we should expect the kind of normal seasonality where year-end net debt is lower than the second quarter?

Well – sorry, are you referring – did you say investment cycle or…?

Sorry. Should we assume a normal type of seasonality despite the kind of slight working capital buildup you expect in the second half where the year-end net debt ends lower than the second quarter?

We would be expecting, regarding the net working capital, a seasonality where the situation will be a couple of percentage points weaker towards the end of the year than what it is today.

Okay, thank you.

Yes, hello. Thank you for taking my question.

Just wondering, regarding Q2 2016, you mentioned the unusually large single heavy duty crane orders, can you remind us of the approximate value of those? And secondly, also relating to the large heavy-duty cranes, in general, are you in discussions?

Or if you would see a pick up, where would you expect this to be visible or from which end market would this come?

There were a couple of bigger orders in the second quarter, particularly in the Americas in industrial crane area. But they were not so big that it would, in a way, significantly change the whole picture.

It does – what it does mean is that the industrial crane order intake, for example, in the Americas as a result of the high comparables or tough comparables was down, but there was nothing in that sense unusual in that one, so that these kind of deals do take place from one quarter to another one.

On competitive reasons, we do not give out any details on the discussions on the crane business for the future now.

Okay. And on the Port side, I mean, if we look at the regions where you have booked major orders recently, so if we look at the East Coast, if we look at Europe or Indonesia, in general, would you say these are growth regions where you potentially have a better market access compared with peers or what is driving your success in these regions?

Is it the market access that you have been particular there or is it really more related to these new products that you have?

Well, first of all, we have traditionally already had a good market position in these areas as such, long-standing customer relationships and so forth. As already said before, the cross promotion is bringing fruit.

So, we are now able to actually offer larger, let's say, product offerings and that helps us well. In general, probably, we have also been somewhat lucky that these regions are now also somewhat growing and that actually helps the customers to make the investments.

Okay. Thank you very much.

Yes, hi. I have two questions.

They're both on the synergies. And the first one.

You didn’t raise the €140 million. But let me ask, now versus three months ago, are you more sure that you will not ever raise this guidance or are you perhaps a little bit less confident that you will not raise this guidance?

I think, Antti, you know the answer, but I'm not going to answer this question.

More confident or less confident or equally confident?

We have been confident since the beginning of this €140 million and we continue to be confident of this €140 million. If there is a reason to increase it, then we will increase it if there is a reason.

If there is a reason to decrease it, we will decrease it at that time.

Okay. Then there is something I need to clarify.

You said the P&L impact for 2017 is €15 million to €20 million, was that right understood?

Yes.

Okay. And then I think you also said that, in the second half, the P&L impact will be between €10 million to €15 million, was that right?

Yes. The P&L impact that we have now had in the first half of this year, I think we said about €2 million for the first quarter.

And now, we have been having, let's say, maybe €3 million to €4 million now in the second quarter, so that this €5 million to €6 million altogether in the first half and, of course, then the remainder will need to come during the second half. The reason why it is not a definite number is that we also have this kind of small negative one-time impacts as a result of the synergy actions that we do not book as adjustments because, by nature, they are not supposed to be adjustments.

One good example is like removal cost of the service branches. So, when we move from one place to another one, so this is a one-time cost, but this is not eligible for an entrustment.

And these kind of things sort of impact these sequence slightly.

Okay. I'm just comparing this first half synergy with the first-half EBITA improvement.

EBITA improved by €30 million first half versus a year ago. And you said that the synergy was only a fraction of this?

Correct.

What was the rest about?

Correct. But now we're talking about two different things.

So, when we talk about the synergy savings, we only talk about the program that will then eventually lead to €140 million, the run rate of which will be reached after three years. We have had several cost-saving programs earlier in 2015 and 2016, both in Konecranes as well as in MHPS legacy.

And these cost-saving programs are giving benefits for us, especially now during the first half of 2017. And this is actually the big, big reason why the profitability has improved in the first half of 2017 as much as it has.

And then secondly, the delivery execution has actually brought fruits as well.

Okay. And these other reasons are not something that you expect to impact also second half?

Well, the programs that we did, for example 2016, that are now helping a lot the first half of 2017, so there is a tail impact for the second half of 2017, but it is not very significant, and that's why we are not quantifying it as such. And then we have also been discussing later that we will – earlier that we will need to invest in certain things and certain functions, et cetera, going forward and these additional investments in fixed costs will probably eat part of that benefit, but there will be a small impact from these so-called earlier programs to the second half of 2017 as well.

But it is nothing compared to what we had in the first half of 2017.

Yeah. Okay.

Let's wait and see. Thank you.

Yes. Thank you, operator.

And before I finish, I’d just remind you to sign up for the Capital Markets Day if you haven't done so. The invitation was sent out late June, which contains the instruction for registration.

So, please check that out. Otherwise, thank you for participating and see you after the third quarter results.

Thank you.

Thank you.