Konecranes Plc

Eero Tuulos – Head-Investor Relations Panu Routila – President and Chief Executive Officer Teo Ottola – Chief Financial Officer

Leo Carrington – Credit Suisse Manu Rimpela – Nordea Bank Jonathan Hanks – Goldman Sachs Antti Suttelin – Danske Bank Karl Bokvist – ABG Sundal Collier. Sebastian Growe – Commerzbank Magnus Kruber – UBS Leo Carrington – Credit Suisse Manu Rimpela – Nordea Bank Antti Kansanen – DNB Markets

Ladies and gentlemen, good morning, and welcome to Third Quarter 2018 Analyst and Press Conference of Konecranes. My name is Eero Tuulos, and I’m the Head of Investor Relations at Konecranes.

I’m here today with Panu Routila, President and CEO of Konecranes. Panu will focus on the Group highlights, and Teo Ottola, our Chief Financial Officer, will then continue with a more detailed business area discussion.

After both presentations, we’ll have time for Q&A. But now Panu, the floor is yours.

Thank you. Thank you, Eero.

We made very good progress towards our targets in Q3, in line with our plans. To begin with, we continued to track slightly ahead of our synergy savings plan, with EUR 98 million run rate savings reached in our third quarter.

Following our good progress, we now expect the run rate savings to reach EUR105 million to EUR 110 million by the year-end, which is at the higher end of our previous target range. On a comparable currency basis, Group sales increased by 7.8% from the year-ago period, with all business areas recording solid sales growth.

Higher net sales along with EUR 40 million of P&L level cost synergies delivered in quarter, helped to improve the Group’s adjusted EBITDA margin by two percentage points to 9.3%. Q3 was a solid quarter also for business area service.

Orders grew at a slightly lower rate compared to Q2 due to slower modernization activity. That said, Field Services and Parts continued to record solid growth.

On a constant-currency basis, order intake in Service increased by 4.8%, and the value of the agreement base increased by 3.2%. Compared to the year-end 2017, the annualized growth of the agreement base value was approximately 6%.

Business area Industrial Equipment recorded solid year-on-year growth in external orders. With comparable currencies, external orders increased 5.5%.

The growth was strongest for components and continued to accelerate from the first half of the year. We can be particularly pleased with the overall order intake for standard cranes, which grew for the first time during the current economic upcycle.

While order intake in Port Solutions was still relatively weak in Q3, this was largely due to the timing of projects. Last week, we already announced an order of 54 automated rail-mounted gantry cranes by Abu Dhabi terminals for the expansion of its terminal in Khalifa Port.

The order is the second largest ever received by Konecranes and a testimony to our proven technology, delivery expertise, and service support. We have agreed not to disclose the exact value of the order.

However, what I can say is that the typical price of an ARMG crane is in the range of EUR 2.5 million to EUR 3 million. The order is booked in Q4, and we expect the full order intake in Port Solutions to be around the same level, or even slightly higher than in 2017.

Our own demand environment with the industrial customer segment continue to improve in EMEA and Americas despite increased uncertainty in the world economy. That said, signs of stabilization have become visible, and we have updated our demand outlook accordingly.

We have reiterated our financial guidance for full-year 2018 and remain confident of our performance also in the longer-term. Then let’s look at our key figures a little bit more in detail.

Orders received in the second quarter totaled approximately EUR 770 million, representing a decrease of 3.3% with comparable currencies. The decrease was driven by Port Solutions, and Teo will discuss this more in his remarks.

But as I already mentioned, the second largest ever order received, the situation year-to-date basis has been corrected. On a comparable currency basis, the Group sales grew by 7.8% to approximately EUR 800 million in the third quarter.

The consolidated adjusted EBITDA increased by EUR 20 million to EUR 74.5 million, and the adjusted EBITDA margin improved to 9.3%. Free cash flow in the period was approximately EUR 22 million positive.

I will leave the business area discussion to Teo, but I would still like to highlight here external orders and sales that we have started to report separately for Industrial Equipment. This is due to strong growth in internal transactions between Industrial Equipment and Port Solutions.

In the third quarter with comparable currencies, external orders and sales in Industrial Equipment increased by 5.5% and 6.1% respectively. Activity in the world’s manufacturing sector continued to expand in Q3, although at a slowing pace, reflecting the reduced predictability in the global economy.

The U.S. remained a bright spot, although worries about trade wars and tariffs weighed on the degree of optimism among purchasing managers in Q3.

We also have seen certain cases where customers’ decision-making is taking slightly longer. So far, however, the cases have been isolated and have had only a limited impact on us.

Changes in trade policies also require us to adjust our own operation. That said, with global supply chain and manufacturing network, we are in a good position to do so when needed.

Global container throughput continues to run at a high level, although the growth has stabilized in the recent months. In January-August, global container throughput increased by approximately 5% year-on-year.

As I mentioned earlier, despite the increased uncertainty in the world economy, our own demand environment with the industrial customer segment continues to improve in EMEA and Americas. That said, signs of stabilization have become visible, and we have updated our demand outlook to reflect this.

In APAC, the demand environment remains stable. Regarding the Market Support Solutions, global container throughput continues at a high level, and the prospect for orders related to container handling remain stable.

We are confident about 2018. Therefore, we have restated our financial guidance for the full year; our sales to be approximately on the same level or higher than in 2017, and our adjusted EBITDA margin to improve from last year.

The additional guidance information that we have provided for 2018 remains also unchanged. We continued to make good progress with integration in the third quarter.

Following our good progress, we now expect run rate savings to reach EUR 105 million to EUR 110 million by the year-end, which is at the higher end of our previous target range. Otherwise, our integration-related targets remain unchanged.

We continue to target EUR 140 million of total cumulative run rate synergies and expect EUR 130 million of restructuring costs and EUR 60 million of integration-related CapEx by the year-end 2019. Our confidence in reaching these targets continues also to be strong.

Operationally, our integration and restructuring activities progress on many fronts, with the focus now on Industrial Equipment. We consolidated Demag’s manufacturing operations in Fengxian, China to Jingjiang.

We continued to roll out Konecranes’ IT system to Demag businesses with SAP go-lives in India and a number of countries also in Europe. And lastly, we continued to make good progress with our product platform development, to name a few.

Our run rate synergies reached EUR 98 million in Q3, meaning that we have achieved EUR 80 million of additional run rate savings in the quarter. As said, we have narrowed our target range for the full year 2018 and now expect the run rate savings to reach EUR 105 million to EUR 110 million by the year-end, which is at the higher end of our previous target range.

The corresponding cumulative P&L impact of those actions remains at approximately EUR 70 million in 2018. EUR 62 million of this was delivered already in the third quarter.

You can see now also a more detailed split of the realized cumulative restructuring costs out of the total EUR 130 million, EUR 95 million was booked by the end of Q3. And finally, our target of EUR 140 million annual EBIT level synergies by the end of 2019 remains unchanged.

Let’s then continue with a few more words on the Group’s financial performance without repeating too much of the previous. Teo will then discuss the numbers in more detail on the business area level.

In the third quarter, the decrease in order intake was driven by Port Solutions, where the decrease was largely only due to the timing of project. As I already mentioned, the overall market sentiment for Port Solutions is on a good level, and we expect the full-year order intake in the business area to be around the same level, or even higher than in 2017.

Orders received increased in EMEA, remained approximately flat in APAC, and decreased in Americas. Our reported Group sales increased 7.2% year-on-year, with all business areas recording solid sales growth.

The value of the order book at the end of June totaled approximately EUR 1.62 billion. With comparable currencies, this was 1.2% lower compared to the year-ago period.

The order book increased in Service and Industrial Equipment but decreased in Port Solutions. Group adjusted EBITDA increased to EUR 74.5 million, and EBITDA margin to 9.3%.

The improvement in the Group adjusted EBITDA was mainly attributable to synergy cost-saving measures, higher net sales, and improved sales mix, as well as successful delivery execution in Port Solutions. Material and salary inflation were absorbed by our customer prices increases.

On a year-on-year basis, the Group level gross margin improved. On a comparable rolling 12-month basis, the split of Group sales between the business areas and the three geographical regions has remained roughly unchanged from the previous quarter.

Each business area contribute approximately one third of the Group sales, with slightly more than half of the sales coming from EMEA, one third from the Americas, and the rest from APAC. With that, I now hand over to Teo for the detailed walk-through of the business areas, and then, after that, continue with the Q&A.

Teo, please?

Thank you, Panu, and let’s go to the business areas so that we start with the Service business. So, Service order intake in the third quarter was EUR 242 million.

That is 4.8% higher than a year ago with comparable currencies, like Panu already mentioned. Now, the reported growth is almost the same at 4.4%, so in the third quarter, the currency rate did not play a major role in making the numbers less comparable with the reported way.

The order intake increased in Field Service and parts, whereas in the modernizations, like Panu mentioned, the order intake was lower than a year ago. When we take a look at the situation geographically, the order intake actually grew in all of the regions, EMEA having done particularly well now in the order intake in the third quarter.

Sales and service business was EUR 296 million. That is 8.5% higher than a year ago with comparable currency rates.

Field Service and part sales increased and, unlike in the order intake, so from the sales point of view, also modernizations actually grew in a year-on-year comparison. Sales increased in all three regions.

And then, if we go back a little bit to the parts and Field Service sales, so actually the parts sales outperformed that of Field Service, meaning that the product mix from the margin point of view was a little bit more favorable than a year ago. And then, when we take a look at the adjusted EBITDA, EUR 48 million, a 16.2%, a very good improvement both in euros as well as in margin.

The improvement is due to, of course, volume growth, synergy cost savings, improved sales mix, like already mentioned, and then also a very good cost control particularly regarding fixed costs in the third quarter in a year-on-year comparison. Order book and agreement base, order book, EUR 240 million.

That is now pretty much on the same level as at the end of the second quarter; however, more than 8% with comparable currencies higher than a year ago. And then, when we take a look at the agreement base, agreement base number also EUR 242 million.

There is a year-on-year improvement of 3.2%. And then, when we take a look at the change to the end of 2017, which is a relevant comparison point as well, so it’s EUR 11 million more.

And if you annualize that growth, you end up with about 6% annualized growth for the agreement base. So now, regarding the Service business, so – and in particular the sales, sales revenue there, so the good order intake that we have been having in the beginning of the year, Q1 and Q2, has started to convert into the sales.

And there volume development in the whole Service business has been good. Industrial Equipment and Industrial Equipment order intake that was EUR 295 million.

This is a growth of 12% year-on-year. However, this number is including the internal orders.

And now from the end customer demand point of view, maybe a more relevant point here is the external orders that grew 5.5% with comparable currency basis. The external orders grew in components as well as in standard cranes, whereas the process crane order intake was quite flat in a year-on-year comparison.

Actually, component order intake did very well, and the growth accelerated, like Panu already also mentioned, from the beginning of the year. And geographically, when taking a look at the Industrial Equipment business, so Americas region actually did pretty well across the product areas within Industrial Equipment.

Sales, EUR 292 million, again, a growth of 12%. This is including the internal sales.

And when we take a look at the external sales growth, was approximately 6% with comparable currencies in a year-on-year comparison. Profitability, adjusted EBITDA, EUR 14.6 million, or 5%.

Also here a good improvement, both in euros as well as in margin. The profitability improvement came from the volume growth and also from the synergy cost savings.

Gross margin decreased slightly in the Industrial Equipment business. However, that is mostly due to a higher internal sales volume and the margin and the profitability in the internal dealings actually slower than in the external ones.

So there is a technical explanation to the gross margin decrease. Industrial Equipment order book, EUR 572 million.

That is 2.2% higher than a year ago. And then, Port Solutions, Port Solutions order intake, EUR 240 million.

This is a decrease with comparable currencies of about 16% in year-on-year terms. And the order intake grew in mobile harbor cranes, also in Port Solutions service, and there was a slight growth also in lift trucks.

But then, when we take a look at the biggest business unit, which is the port cranes, so there actually only RTGs grew, and all the other product groups within port cranes declined in the order intake in a year-on-year comparison. And this explains the decline in the full Port Solutions order intake in the absence of the Abu Dhabi deal obviously from the Q3 numbers.

And then, from the sales point of view, EUR 262 million, and there is an increase of 8.8%. So the order book for the Port Solutions business has been good throughout the whole year, and this is visible as higher sales also in the third quarter.

Adjusted EBITDA, EUR 20.5 million, or 7.8% improvement in profitability as a result of volume, so higher sales, somewhat better product mix, and also a good project execution both in the ongoing projects as well as in the projects that have been completed fully during the third quarter. And then, finally, for Port Solutions, the order book, EUR 813 million.

Of course, now this one also excluding the Abu Dhabi deal and the decrease of 5.8% in comparison to the situation one year ago. Then, before going into the Q&A, a couple of comments on the cash flow and balance sheet, net working capital naturally first.

Like usual, networking capital, EUR 427 million. It continued to develop in the wrong direction in a way by about EUR 20 million now during the third quarter.

This was as a result of the higher net working capital in Service business, as well as in Port Solutions business. We are, however, still below our short and mid-term target of being below 15% of rolling 12-month sales now at the end of the third quarter as well.

The cash flow for the third quarter was actually positive so that the cash flow from operations was more than enough to compensate for the net working capital increase. But as we can see from the right-hand side of the slide, so the free cash flow for the year-to-date situation still is slightly negative by EUR 3.3 million.

And in gearing and return on capital employed, so our net debt actually first. So our net debt was EUR 620 million, about EUR 20 million less than at the end of the second quarter as a result of a slightly positive cash flow in the third quarter, gearing almost exactly at 50% at the end of the third quarter, and the adjusted return on capital employed at 12.5% at the end of the third quarter.

And now, we can go into the Q&A session.

So let’s start with questions from the audience here in the room. So do we have any questions here?

No questions here, so then we can move to the telephone questions, so people on the line. Please go ahead.

Good morning, thank you for taking my question. I would like to ask on profitability.

Clearly all divisions benefited from good mix, as well as synergies and good demand. On the mix front, how sustainable do you think this is?

And also on a similar note, how sustainable is the good growth in Port Solutions service? A second question would be can you remind me on the progress of the SAP rollout program and indicate, if possible, what kind of ongoing cost is associated with this rollout program and when we could expect that to normalize down?

Thank you.

I will answer couple of parts of this, and Teo can then continue if I forget any part of it. Firstly, the mix was somewhat favorable and seems to be continuing somewhat favorable as well.

The growth now in Service business has been clearly our target. We have been putting a lot of effort in the growth in Service business.

We have gradually seen that coming actually late the last year and continuing all throughout this year, and we expect that to continue. We continue to put a lot of effort on the Service business growth.

I was particularly delighted now to see that order intake growth was now being also converted into sales growth in Service business, and that was a good point. In Port Solutions, now of course the first part of the year order intake has been somewhat lower.

But now the order already booked – which will be booked for the Q4, our largest-ever order from Abu Dhabi terminals will actually correct that situation and make sure that our order book continues to be on a good level also for next year. Regarding the SAP rollout you were asking, Konecranes, we were before the acquisition putting a lot of effort in the SAP rollout, that we reached inside the Konecranes something like 70% installation rate.

After the acquisition, we dropped somewhere below 50%, and now we are going to reach the 75%, 80% during next year, probably already. So we are putting a lot of effort on that and continue the rollout.

The system is excellent, and we gain quite a lot of synergies using the same system throughout the whole company.

Maybe a couple of additional comments on the mix in particular. So if one takes a look at the product mix as we have it today, so of course from the Industrial Equipment point of view, like Panu pointed out, so as long as the component order intake continues to be stronger than the order intake on general in Industrial Equipment, so the mix impact will stay on the positive side.

Then, when we take a look at the Service business, so there of course now in the third quarter, and I think that also in the second quarter, parts outperform the Field Service. That is probably something that, as a structural thing, would not necessarily continue.

So the product mix within Service should be stabilizing so that we are in a normal situation regarding that one so that, on a long-term basis, maybe it’s not wise to count on all the time improving product mix within service. And then, when we take a look at the Port Solutions, so the mix in the order book actually at the moment is relatively okay.

However, we have to say the same way, as we said one quarter ago, that the mix impact will be sort of not as positive as it was for the third quarter during the fourth quarter, so that the mix impact in a year-on-year comparison will be weaker for Ports than it was in the third quarter. So, from that point of view, there is maybe somewhat of a negative delta.

Then regarding the SAP question and the cost level for that one, so of course the implementation cost that will arise as the result of the SAP rollout, for example, to the legacy MHPS entity, so that is a capitalized. Also, it will be going into the balance sheet, and that is part of the EUR 60 million CapEx that we have announced as a CapEx need for the integration.

And then, the sort of additional operational cost that comes as a result of that, so then in a way is within the synergy framework otherwise. But the big implementation costs will be capitalized.

Thank you.

So take the next question please.

Thank you. It’s Manu Rimpela from Nordea.

My first question would be related to the Services. Could you please expand a bit more about the growth that you saw, strong growth in the organic sales in the quarter that kind of – what other measures – or where is it coming from because you’ve been talking about tapping into the install base of the Terex acquisition.

So could you just kind of help us to explain in practical terms that where is that growth coming from, that are you selling more spare parts now into these acquired cranes? And is that maybe something that could continue still for a couple of years as you kind of ramp up the spare part sales, meaning that the mix impact will still remain strong?

Or is it then driven by something else?

In general, I think I will not go into all the details here, but what we can in general say is a Service growth, that we have a number of KPIs which we have started following, one being actually the capturing of the Demag install base into our agreement base. And we have seen very favorable development on that.

The second is also actually increasing the retention rate of the agreement base, and even that has been continuing also. And then, the third point is actually our share of the wallet of our customers spending in the maintenance of the cranes, and that has also been increasing now due to our activities and due to our action plan on that has been working favorably.

I think commenting on the future would be somewhat premature. Just an overall comment that we expect the Service business to continue, while that is very much in our hands, we have a very good action plan what we are carrying out there.

We have the organization with which we can do that, and we have the software, the Service business, management software with which we are capable of actually doing that.

Maybe a technical addition to the Service revenue growth. So now that in the first and second quarter we commented that the order intake, particularly for service and particularly in the first quarter, there were quite a lot of modernizations that we got as orders.

And then, in the second quarter, we commented that the order intake growth was actually very widespread, so it came from basically all of the service product. And now, when we take a look at the sales development now in the third quarter, when the order intake that we got in the beginning, if the year has started to convert into sales, so then it is of course reflecting this mix that we have been having in the first half of the year.

So there have been modernizations in the invoicing, but there has also – generally one can say that it is a quite, let’s say, widespread improvement in sales, and also geographically quite widespread. Then regarding the mix comment and the future there, so there I’d just maybe repeat what was the comment regarding the first question as well, that in the Service, it might not be wise to expect that the mix will be continuously improving.

It may, for the time, being a little bit because of the Demag install base type of thing. But structurally, there is nothing that would suggest that the spare parts should be a significantly bigger portion, going forward, of the Services.

And then, maybe to add just that, in some countries, we have seen very high growth rate in the Service business, so to mention a few, maybe USA, India, for instance, Germany have been very favorably done by the growth.

And then, if I might just follow up on the Service business, how should we think about the Q3 versus Q4 seasonality in terms of the margins? I mean, we all know that Q4 is always the strongest quarter because of the highest sales.

But is this mix impact in Q3 going to lower that seasonality, or if you just help us to understand the difference?

Well, maybe the best way to take a look at the mix impact now for the fourth quarter is that I would not count on improving mix year-on-year, so maybe a neutral mix assumption from the situation at the end of the fourth quarter would be a safe assumption. Then the reality, of course, is that the service also is a volume business, so that the margin development that we are going to see in the fourth quarter of this year is very depending on what the sales for the quarter in question will be.

Okay. And then, the synergies, can you comment how roughly the synergies are split between the divisions?

That we have not commented and we will not comment it either now.

Right. And then on synergies, sorry?

Yes, so maybe one more question still, but let’s then try to limit the questions now in the beginning for – to two each, but then Manu, so still the question you had in mind?

Final question on the synergies. So, I mean, I think your P&L impact this year is EUR 42 million, and your P&L – or your EBIT has increased only by EUR 35 million, and then at the same time you have had growing sales.

So what has been the offsetting impact of those synergies year-to-date?

There are maybe three main things that one can think of. And if we start again with the more technical ones, one of them – or let’s say two of them are actually in relation to the currency.

So if you take a look at the reported numbers, so there is, particularly in the first half of the year, so there the currency impact has been negative both from translation point of view and from transaction point of view. And I think that already in connection to the second quarter, we said that the transaction impact is roughly of similar size as the translation impact for the second quarter, for example, so that – and the translation impact on the EBITDA is roughly the same percentage as the translation impact is on sales.

So these two actually have quite a big impact on the profitability. And the third one is then the additional fixed costs that we have talked about already in the beginning of the year so that we have said that we want to invest EUR 50 million more during 2018 on R&D and IT.

And of course, this is then on top of the normal inflation of the fixed costs and variable costs, as well as a cost increase in the P&L bridge, so to say. Then if you take a look at the bridge for the third quarter alone, where you have much less currency impact so there is a small negative impact from the transactions still in the third quarter.

But there I guess that you will end up with a neater equation, in a way, from the synergies to the reported EBITDA.

Thank you. I’ll get back in the line.

All right, so next question please then.

Hi, thanks for taking my question. I just wanted to ask on the demand outlook, you’ve added a bit of a caveat of saying signs of stabilization are visible.

I just wanted to check, was that just kind of a comment on general macro and PMIs coming off a bit? Or was that a comment on something you’re seeing in your actual demand figures?

Yes, this comment is more coming from the general macro environment, and generally PMI’s getting more kind of volatile, or so on, rather than us seeing actually anything on our funnel – our funnel continues – sales funnel continues to be strong. So we do not see there anything yet.

And then just to follow up from that, I mean, obviously your kind of demand outlook for Port Solutions is unchanged. I’m just wondering, could you give a little bit more color on how your kind of Ports customers are thinking about the general macroeconomic uncertainty, trade tariffs, et cetera, et cetera?

How do they think about that impacting their investment decisions? Do you think it’s something they maybe kind of see and potentially delay investment decisions to see how these things pan out?

Or do you think there’s other drivers of what makes them actually pull the trigger on investments?

Well, this is quite a mix of different effects. We can see, for instance, U.S.

steel industry. We can see that they are actually very eager to do investments and modernizations at the moment, and that keeps us very busy in the U.S.

If we look overall situation, on the other hand, we have seen in some isolated cases it actually takes a little bit longer to take decisions by customers. So it’s quite divided situation.

Okay, thank you very much.

Thank you.

Thank you, Jonathan. So next question please then.

Thank you. On synergies, if I look at your synergy slide, it seems that you are promising EUR 50 million P&L impact for this year.

And if I look into what is happening with your number of employees, it seems to me that you may be down something like 450 employees, average 2018 versus average 2017. And this each multiplied by your average employee cost would suggest to me that personnel savings make about half of the EUR 50 million promised P&L impact.

Now, my question is, going forward, there should be EUR 70 million left for 2019 and 2020. How will this EUR 70 million additional P&L impact in 2019 and 2020 divide between personnel and other synergies?

I will not comment that exactly because we have certain negotiations ongoing at the moment in different parts of the world regarding potential decreases in the number of people, and it would be premature to give the outcome of those discussions right now.

But if it’s about EUR 50 million this year, is personnel still playing a role? Will it have an impact, or how are you thinking?

Are you planning to go along with the current number of employees and all remaining synergies coming from somewhere else, like subcontracting or something like that? Or what is your thinking?

Please could you expand a little bit more than that?

So much I can say that there is most probably going to be still decreases in the number of personnel. You’ll have to deal with that now.

And then, can you just remind me about the Industrial Equipment, the internal and external sales? Why is there such a difference – is that where are the kind of internal sales going?

The internal sales are going to both Port Solutions and Service. And the reason why it is going both of them is that the component supply in our organizational structure resides within Industrial Equipment.

So when Port Solutions need a trolley for an RPG, so this trolley is assembled at the factory in Hyvinkää, which factory happens to belong to the Industrial Equipment organization. And now, let’s say so that the – for example, the spare part flow that goes from Industrial Equipment supply to Service doesn’t fluctuate that much from one quarter to another one.

It is relatively stable. The challenge from the numbers interpretation point of view comes from these Ports deals because the ports’ external order intake is lumpy, which then means that actually also the internal order intake and the internal deliveries from our Industrial Equipment factories to the Ports business fluctuates quite dramatically from one quarter to another one.

And this phenomena has been there as long as we have been having these business areas separately, and now the fluctuation has been so much that we have then concluded that it might be a better idea to just give the external orders and the external sales separately so that, particularly from the order point of view, it is easier then to draw conclusions on the end customer demand.

Okay, thank you. That’s all.

Thank you.

Thank you, Antti. So we can take the next question, please.

Yes, thank you for taking my question. I have two of them.

So first of all, I’m a bit curious about market growth within Industrial Equipment and Port Solutions. Is it mainly general market improvements, or is it driven by market share gains?

In Port Solutions, it’s difficult to calculate market shares because the bigger ones are mostly products and so, and I would not. I think we have been working quite effectively on this, and as we see the ports continue to invest, and that has given us the growth there.

We have a very good technology, our service execution – our delivery execution is excellent, and our service support gives customers a benefit to continue with us and actually gain new customers. So that’s a good point.

In Industrial Equipment, it’s a variety of differences between the markets and between the component – between the business units. And like I said already earlier, EMEA and Americas were favorable, and also the component business was working favorably.

Standard cranes, we did now first time really in this economic cycle, see growth, a true growth there, and so forth.

Okay, thank you. Then my second question concerns pricing.

Are you still able to implement net price increases to offset the cost inflation? And will you implement any further, going forward?

Very important one that I mentioned in the second quarter report was that we did a price increase in the component business, and we were even considering that what will be the effect in the order intake in third quarter. The order intake actually came very good in the third quarter even in component business, where the price increases were most visible, and therefore it gives us a very continued belief that we can increase the prices along the cost inflation in average.

Okay, thank you very much. I’ll get back in line.

Thank you.

Thank you. So we can take the next question, please.

Yes. Good morning, everybody.

Three questions from my side, mostly clarifications that I meant to say. And firstly, on these internal cost saves that you are booking between the Industrial Equipment and the Port Solutions, my suspicion and understanding is that you eventually must state, to a certain extent, what Industrial Equipment gets as the margin, and on the contrary, Port Solutions might look a little better.

So could you just clarify, and if my suspicion was correct, give us an idea about margin on these internal cost saves? And the second question that I have relates again to Service, and sorry for that, on the mix part.

You are talking about parts for the Field Service. What I would be interested in is where do you recognize the software-related, i.e.

even more preventive maintenance-related service business. The background clearly is that I would assume that the software part comes in at a much better, higher margin than is the case eventually for the classical and the more personnel-intense Field Service.

And the last question on Industrial Equipment, I do recall that in quarter two you were saying that the footprint adjustments did weigh on the overall growth that you wanted to recoup in the quarter three. So of the 6% external organic growth that you had in quarter three, could you give us an idea if the catch-up is done, or if there’s still, what I can say, a little spill-over eventually to be expected for the fourth quarter?

Thank you.

I will answer maybe first the Service. You were asking about the software also in the Service part.

We have been stressing to our customers basically the preventive maintenance packages, and furthermore, it is actually even more the predictive maintenance which is possible through the IoT, our lifecycle Truconnect services where we can actually connect to customers’ equipment to our remote monitoring center and give predictive maintenance packages to our customers. Regarding the Industrial Equipment footprint, those activities that were started in Q2, the catch-up has been done.

And then Teo maybe comment internal-external.

Internal pricing logic, yes. So actually, when internal Industrial Equipment sales to Service, so the logic is that there is first a full cost, and then there is a margin on top of that one as an administrative decision.

I will not comment what the margin is, but when Industrial Equipment sale is to Service, so there is a profit included, and neither party wins or loses, at least not significantly. When Industrial Equipment is supplying to Port Solutions, there is full cost, but not really a margin on top of that.

So there is a little bit different logic behind this one. And of course, the logic is that because we want to maintain a possibility to follow the full pipeline profitability per product, which we would lose if we would be putting a lot of margin on that one.

So this means that, at least in theory, what you say is that maybe Industrial Equipment, in comparison to an external customer, takes a small hit, and the Port Solutions gains a little bit. The impact is not necessarily significant.

So I would not necessarily start to model that into the excels to be able to eliminate that impact because it is not so big that it would make the numbers look different.

Okay, very clear. And if I may just quickly come back to the comments you made earlier, Teo, on the currency translation and transaction, I understood, and it was always bugging me that you said that the overall impact from currencies was very close to the sales impact.

Is this rightly understood, or did I get something wrong on your earlier remarks?

You got it right regarding translation. So when you take a look at the translation impact on sales, so the currency impact is now, let’s say, half a percentage point or less in the third quarter, which means that the impact also on the EBITDA is more or less roughly the same percentage on EBITDA.

But, that is – the down side of this one, of course, is this is only translation. So in addition to that, there is transaction, which is coming, for example, from our exports from Europe to the U.S.

And this transaction impact we still have as a negative number also in the third quarter numbers, and the reason is that we have hedged the flow business a couple of quarters ahead. So, I mean, when the currencies move, so the impact will be coming to us, but it will be coming to us with one to two quarters delay when it comes to the transaction impact.

So, as a summary, the translation impact for the third quarter is modest. The transaction impact is still there as a negative number in our Q3 numbers.

Okay, very clear. Thank you for that update.

Thank you, Sebastian. So let’s move to the next question then, please.

Hi, Panu, Teo. Magnus here from UBS.

A couple of questions. First, I would like to return to the question on Service margins.

Of course, it was very strong growth in this quarter. Would it be possible for you to give some indication of how much the Port had an impact in this?

And should we expect the same mix in Q4 as in Q3?

Yes. Well, like I already said, so I will say that the safest way to do it would be to assume that there is no mix impact one way or the other in the fourth quarter in comparison to the fourth quarter of 2017.

Okay. Then also, we already talked a little bit about the net pricing as well, but is that comment also valid in the U.S.?

Can you offset all raw material inflation in the U.S. market?

That is valid globally.

Yes. You also mentioned in the text in the report that you could or might need to adjust your operations from the full impact of the tariffs.

Could you expand a little bit on that?

No. It would be tempting, but I will not give any indication, no.

And finally, then, another bookkeeping on these internal orders. I mean, the big order you booked now for Q4, when should we expect the internal ordering basically most in Q4, or would it spread out?

That is a good question, and I have to say that I do not exactly even know how the sequencing will be going, because, of course, I mean, the production planning will be started immediately, of course. That is clear.

But then, what is the timing when this production planning is then put into the order intake in our internal system from Port Solutions to Industrial Equipment? So I think that we will need to come back to that discussion at the end of the fourth quarter to see that how much there was internal orders between the BAs.

Would it be fair to say, because you have quite a lot of big orders in Q2 as well, might they have been internally booked in Q3?

Some of them probably have, but it is also so that when we have very long projects, I mean, the delivery times can be between 1 to 1.5 years, or even 2 years. So of course, then when we are delivering in batches, so then also the internal orders come in batches during a very long period of time, so that the internal orders that are being booked now, so they can very well be as a result of the deals that have been made a very long time ago.

That is actually one of the reasons why we are giving the external order intake separately so that, if you want to model the customer growth, external customer growth, so it is wise to use that number instead of trying to do the whole internal order intake, because estimating that will be a very challenging thing.

Thank you, Magnus. I think we have time for a couple of more questions.

I know that we have some questions on the line. So let’s…

Absolutely, I’m all done. I’m all done.

Thank you so much.

Thank you.

Thank you.

So next questions, please.

Thank you for taking my follow-up question. It was obviously good to see the growth in Industrial Equipment and Service is finally picking up, as we’d expect, due to the late cycle CapEx exposure.

However, is it fair to say this growth has been slow to rise? And now that the growth has come through, can you see, is that built-up demand for cranes in the markets?

Or did the markets overall simply not grow over the past I guess six to nine months overall? Or have you even been losing share in the first part of the upcycle?

Firstly, regarding the Service business, this has been our plan that we actually last year spent most time in integration activities, and said that we will be capable to get into the growth mode in this year, which we have now demonstrated being capable of doing. Regarding the Industrial Equipment, we started to see the component business grow last year, and then we mentioned that we typically see 10 to 12 months later the standard cranes business to pick up.

And now we can demonstrate that. Maybe that will be best to be said on that question.

Okay. And do you think that is reflective of the overall market as well as what you see in your own sales funnel?

I think it’s overall market, but also I think we have been probably doing a little bit better than the market.

Okay, right, thank you.

So we still got the last question. So please go ahead.

Thanks. Just a couple of housekeeping questions.

Can you give us an idea about the remaining restructuring costs that will be booked in – how much in Q4, and will this be lower in 2019? Also on the financial costs, so do you see that the kind of current run rate for the total financial cost is reflective of where we kind of should see them ending up?

And then also on the tax rate, how should we think about it going into 2019?

Yes. About the restructuring costs, so the cumulative number is EUR 95 million now, and the estimate for the whole program is EUR 130 million.

So there is EUR 35 million in a way to be booked according to the original time schedule. We cannot, unfortunately, give a guideline as to how much would be booked in the fourth quarter and how much would be booked in 2019 for the same reason that Panu already referred to, so that these items are not ready and they are not decided, and it would be unfair to start to speculate with the timing of those numbers.

When it comes to the financial expenses, so now third quarter was a bit different from the first and second quarter from the point of view that this FX portion, I mean the unhedged, or let’s say non-hedged accounting hedge costs were basically zero in the third quarter so that the third quarter is maybe more representative for the financing costs than what the Q1 and Q2 have been. So the same comment applies what we said already in the beginning of the year, that we expect we will be saving for the full year EUR 12 million in interest costs as a result of the refinancings.

And then, the problematic areas is that the FX portion is very, very difficult to forecast. And therefore, we cannot really give an accurate guideline to that one.

I mean, the hedging costs, or hedging difference that is in the financial items is obviously not speculative from the content point of view, because we are hedging the actual deals with that one. But the reality is that it is not, according to the IFRS hedge accounting, feasible, and that’s why it is booked there.

The tax rate estimate, 28% is the number at the end of the third quarter, and that is then the estimate for the full year, as well, by definition.

All right. Thank you, Manu.

And then there’s one more question or so.

And any comment on 2019 tax rate?

Well, of course, what we can say is what we have been saying earlier as well, so that we, of course, are working towards being able to lower the tax rate going forward. But of course, I mean, in reality, the best way of being able to do that is to combine our operations in the front-line countries and to be able to get rid of loss-making countries where we will not be able to book tax assets.

So that, of course, the strategic direction would be towards lowering the tax rate.

Thanks.

So this one last question, then. Thank you.

Hi, it’s Antti from DNB. Thanks for taking my follow-up question.

A question on the cross-selling to the acquired Demag cranes. If we look at the agreement-based growth now for a couple of quarters that you’ve been focusing on this growth in services, is this a reasonable assumption, going forward, the quarter-on-quarter growth on the agreement value and on the number of cranes that you have in there?

And the second question related to that is the Field Service personnel. Do you have enough resources, enough capable technicians to take on this growth?

And are you seeing any issues on hiring new capable labor in your key regions? Thank you.

Firstly, regarding your cross-selling question, I think roughly you can calculate with a same one. Regarding the Field Service function, we do need to recruit somewhat more people.

We are doing that continuously. And we haven’t seen tremendous problem actually getting the people, so we are capable of recruiting good people and training them to be great service technicians.

All right. Thank you.

Thank you.

Thank you, everybody. And that concludes our third quarter conference, and see you again and here again in three months’ time.

Thank you so much.

Thank you.

Thank you.