Konecranes Plc

Good morning, everyone, and welcome to Konecranes Q4 Earnings Conference. My name is Kiira Fröberg, and I’m the Head of Investor Relations at Konecranes.

Here with me I have our Interim CEO and CFO, Teo Ottola. Before we start, I would kindly remind you that this conference is to discuss Konecranes’ Q4 earnings.

Securities laws in the United States and in some other jurisdictions restrict us from disclosing any information on the contemplated merger with Cargotec. Information regarding the merger can be found at www.sustainablematerialflow.com.

Until the completion of the merger, Konecranes and Cargotec will operate as separate and independent companies. As for our today’s agenda, Teo will present you our Q4 results and the presentation is followed by Q&A, as usual.

Teo, please go ahead.

Thank you, Kiira. And as Kiira already shared the agenda, all the contents of the presentation very familiar, let's start with some of the group highlights, and then take a little bit deeper look at the different businesses, followed by the cash flow balance sheet comments.

And then after that, we can then move into the Q&A. Here are the highlights for the fourth quarter.

It was actually a good end of the year '21. All of our business areas performed very well towards the end of the year, particularly from the profitability point of view.

We have 11.9% adjusted EBITA margin for the fourth quarter of '21. This is 1 percentage point improvement on the previous year.

Service rates as high as 21% in the fourth quarter, industrial equipment 6.2% and port solutions 8.5%. When we take a look at the overall market sentiment during the fourth quarter, so there were actually no major changes in comparison to the third quarter, it was relatively similar.

Even though, of course, one has to say that the market volatility as a result of the COVID and Omicron variant definitely are not over and have not been over. Our overall order intake in the fourth quarter grew 4.2% year-on-year in comparable currencies.

One has to remember here that actually the fourth quarter of '20 was also a very good quarter for orders, as was the fourth quarter of '21 as well. So this 4.2% improvement is actually also against tough comparables one year ago.

Maybe one comment already here in relation to the order intake, these so-called short cycle product orders particularly referring to the component business within industrial equipment and to lift truck business within port solutions, so they have stabilized -- all the order intake has stabilized and particularly regarding the component business also sequentially declined now in the fourth quarter, even though for both of those, the absolute level of order intake still continues to be very good. Component availability, customer delays and other supply chain challenges have continued to affect our fourth quarter sales.

However, the mitigating activities that we have been able to do have actually prevented the delayed backlog from increasing from the levels of Q3. So actually, we are roughly on the same level with late backlog as we were at the end of Q3.

This is good. And at the same time, it has meant that we have been able to grow 1.5% year-over-year sales.

And I don't mean that in absolute terms it would be good to have a late backlog more than 100 million, but the fact that it hasn't increased during the fourth quarter is actually good. And thanks to the efforts that the whole organization has done regarding those topics.

We had good order intake, as discussed. And as a result of that, the order book at the end of the year is more than 2 billion.

So a good start for '22. We have a new financial guidance.

We can take a look at that in a moment. We have updated the demand outlook for Q1.

And then we also have a Board proposal for dividend €0.88, exactly the same amount as one year ago. When we take a look at the numbers, so the main percentages regarding the fourth quarter we already took a look at sales orders EBITDA.

But if we take a short quick look at the full year numbers. So for the full year, the order intake increased 16.4% in comparison to 2020.

Sales were higher than a year ago only slightly, 0.2% higher than a year ago, but the profitability improvement of 1.6 percentage points obviously is a good one and we are very happy with that one. Free cash flow for the full year €138 million, let's say clearly less than a year ago.

2020 was exceptionally good from that point of view, but '21 still decent as well and net debt 542 million at the end of '21. Then if we jump into the market environment a little bit and take a look at the graphs that we are usually having in the presentations.

First of all, of course, the PMI in general, they continue to be on quite high levels, suggesting still growth. Obviously, maybe from the peak levels, they have been going down a little bit similarly, maybe slower growth, but growth anyways.

And when we take a look at the utilization rates, so in EU, the utilization rate has taken a small dip downwards, but we are still above the pre-COVID levels in the EU. And when we take a look at the USA, so there the improvement has continued despite the supply chain challenges that also, of course, which are visible in there as well.

Then the BRIC countries, as we know, we do not have the utilization rate available, but the PMI, except for Brazil, are above the 50 point in the BRIC countries as well. Then if we go to the port solutions, so here, of course, the overall macro-indicator container throughput has been doing very well for quite some time.

This has continued the year-on-year growth. A couple of percent is not a huge number as much, of course, but the level where we are is very good.

And this, of course, continues to provide good opportunities for our port businesses. The demand outlook and our take on the market environment of course to our own business is visible here.

First of all, we need to continue to say that the volatility due to the COVID-19 pandemic is not over. When we take a look at the industrial customer segments within Europe and North America, the demand is on a healthy level.

In Asia Pacific, the demand environment remains below Europe and North America. And when we talk about the healthy level, for example, in Europe and North America, at the same time, we do not expect any major change in the demand environment from fourth quarter to the first quarter.

Global container throughput continues to be at record high, and this of course means that mid and long-term prospects relating to the global container handling business remain good overall. Even if, of course, we also here need to say that the volatility in the order intake has always been there and probably will continue to be there, but the overall sales pipeline within the port business continues to be on a good level.

Here is our financial guidance. We are expecting net sales to increase in '22 in comparison to '21 and also we are expecting the adjusted EBITDA margin in '22 to improve from the level of '21.

Now taking a look at the sales guidance in particular, so of course we have a significantly higher order book than we had one year ago. That's good news at the same time.

Then when we have been talking about component shortages and supply chain challenges, so it is very likely that those will continue to impact our operations, at least during the first half of '22, maybe even longer, and the risks in relation to the component availability continues to be there. And if we take a look at our focus areas for the beginning of the year, so clearly this component availability situation is one of the clear focus areas going forward into this year also.

Then a couple of these slides, so order intake €892 million, and we already discussed the state of good level of Q4 '20 as well as Q4 '21, so these have been very good quarters both. And the sequential improvement from the third quarter of '21 particularly comes from the port solutions business in our case.

Then when we take a look at the split by business areas and regions, so this slide obviously is and has been quite stable. So there haven't been major changes on a rolling 12-month basis in this slide, and this looks very familiar to us all.

Group order book, as already discussed, more than 2 billion. Of course, delayed backlog continues to be there, even if it did increase from the third quarter to the fourth quarter, but this 100 million or slightly more than 100 million, there obviously is a bit late backlog that we would rather have delivered to the customers.

But also excluding that one, the order book is on a very good level. And the adjusted EBITDA margin 11.9% versus 10.9% one year ago, driven by positive sales mix and continued focus on the strategic initiatives, as we have been doing throughout the year and also across margin on a year-on-year basis continued to improve in the fourth quarter.

And then if we go a little bit deeper into the businesses and once again, let's start with the service business. So service order intake was €308 million.

That is a very big increase in comparison to the previous year 28% with comparable currencies. We had one very big modernization deal that we booked in the fourth quarter of '21, more than €45 million actually and this is obviously impacting this picture quite a lot.

However, even if we were to exclude that one, we would still have year-on-year growth in the order intake in the service business. Field service orders as well as parts orders increased on a year-on-year comparison.

And then when we take a look at the order intake by region, so there was an increase in Americas and EMEA; however, a decrease in Asia Pacific. And actually if we take a look at the sequential situation, so it was similar from the region point of view.

So EMEA did very well, Americas had an increase even excluding the nuclear mod [ph]. But we had a slight decrease or a decrease in Asia Pacific from the third quarter to the fourth quarter.

Then when we take a look at the service agreement base, €290 million at the end of the year, 1.7% growth year-on-year with comparable currencies. And in a sequential comparison, we are almost exactly on the same level as we were at the end of the third quarter.

Service sales €332 million. That is an increase of 2.7% with comparable currencies.

Field service sales as well as parts sales increased and sales increased actually in all of the regions. And then when we take a look at the order book for service, so obviously once again the nuclear mod order that we received in the fourth quarter of '21 is making an impact in the fourth quarter, but also otherwise our order book obviously is on a higher level than what would be normal, and this is primarily driven by the supply challenges that we have been experiencing as a result of component shortages basically throughout '21.

And then when we take a look at the adjusted EBITDA, an excellent result for service business 21%, adjusted EBITDA margin €69.7 million. There were sales growth which supports of course this from the leverage point of view, positive sales mix, gross margin continued to improve.

One should not, of course, forget the continuous improvement that we have been able to do in the service business. And also costs have been contained very well.

Then moving into the industrial equipment and industrial equipment order intake first, €275 million, that is actually a growth of 9.3% with external orders and comparable currencies, which is maybe the most relevant indicator there. We had an order intake increase on a year-on-year comparison in basically all major business units; standard cranes, process cranes and components.

But then when we take a look at the situation sequentially, so actually from the third quarter, order intake declined in components, as was already mentioned, but also in process cranes whereas the standard crane order intake continued to do very well also in the sequential comparison. And then when we take a look at sales, €332 million, sales 3.2% increase again with comparable currencies and external sales, which is the most relevant one.

Sales increased in standard cranes and components, but decreased actually slightly in process cranes. This, of course, improved the mix from the margin point of view and sales increased in all the regions; Americas, EMEA and Asia Pacific.

And here we have then the adjusted EBITDA, 6.2%, €20.6 million. There is an improvement both in euros as well as in percentage on a year-on-year comparison.

Higher sales, progress on the strategic initiatives and positive sales mix have been driving profitability improvement. Gross margin improved here as well as in service also.

The order book 710 million, an increase of 12.6% year-on-year. Then port solutions and port solutions order intake first, €355 million.

This is a decrease or decline of 12.5% in comparison to the situation a year ago. However, when we take a look at the sequential development, so this is obviously a big improvement.

So Q4 '20 was an excellent order intake quarter for the port business. If we take a look at the business units that did well on a year-on-year comparison, so Mobile Harbor cranes, port service actually did pretty well on a year-on-year comparison.

But then, of course, there were these big deals in other business units in Q4 '20. And then if we take a look at the sequential situation or development from Q3 to Q4, so there particularly automation solutions did very well in the fourth quarter of '21 in comparison to the previous quarter.

Sales €338 million, there is a decline on a year-on-year comparison unlike in the other [indiscernible]. This was of course mostly driven by the order book timing.

And then when we take a look at the port solutions, adjusted EBITDA 8.5%, €28.8 million. In euros almost exactly the same as a year ago in margin, an improvement as a result of lower sales.

Project management execution has continued in a good level. Sales mix was slightly more positive as well.

And also here gross margin actually improved on a year-on-year comparison. Port solutions order book also on a high level €984 million.

And then a couple of comments on the cash flow as well as balance sheet, starting with the net working capital. Net working capital €425 million and the, let's say, net working capital in relation to rolling 12-month sales also has been increasing a little bit.

However, still the level where we are today. It’s a decent level.

We have said that as long as we are below 15%, it is in line with our, let's say, short and mid-term target setting. Of course, situation is different from what it was one year ago.

We knew that the net working capital development would be going in this direction. And, of course, the supply chain challenges that we have been experiencing have not really helped the inventory management from this point of view.

And taking all of that into consideration, this is a good achievement. Free cash flow improved in the fourth quarter in comparison to the previous quarters.

But, of course, once again the exceptional 2020 is very different from the free cash flow generation in comparison to the last peak. And then when we take a look at the balance sheet gearing, net debt gearing has been trending down at net debt figures we already discussed.

Net debt was somewhat lower than a year ago and also somewhat lower than at the end of the third quarter. Return on capital employed has been slightly trending up as a result of improved profitability, but also then somewhat lower capital employed that we have been having throughout '21, maybe with an exception of the fourth quarter here.

Now we have a couple of minutes' time before we go into the Q&A. And one additional slide that we wanted to show regarding new climate targets that we have.

So now obviously the latest research and the research for quite some time has been suggesting that the planet, we all globally, are in a hurry to cut emissions to be able to limit the global warming to 1.5 degrees. We, as Konecranes, obviously want to be part of the solution here rather than part of the problem in this respect, and that's why we also have set targets to ourselves regarding the emissions.

These targets that we have set have been validated by the SBTi. So what we are now here and what we have been announcing, so they are in line with this 1.5 degree scenario.

In brief, the targets are that when we take a look at the Scope 1 and Scope 2 emissions, which are own operations as well as purchased energy. So there we are aiming at reducing the emissions by 50% by 2030.

And then when we take a look at the Scope 3 emissions, which is the value chain emissions, so basically other purchased goods and services as well as our own products in customer use, so there we are also aiming at reducing the emissions by 50% by 2030. However, so that when we take a look at this Scope 3, so we have defined it so that it is actually the use of sold products and then steel purchases, and this combination is all together about 70% of all of our Scope 3 emissions.

So we have been a pioneer in this one and we continue to be on a good path on -- limiting global warming path as well. I think that this was the last slide.

It was in the presentation as such. And then I think we are ready to move into the Q&A session.

I'm looking at Kiira for configuration for that.

Yes, that's correct. Thank you, Teo.

Just a kind reminder before we start the Q&A. So due to the securities laws in the United States and other jurisdictions, we won't be taking any merger-related questions this time around either.

So that's the usual practice. Now, operator, please let's open the line for questions.

Hi, Teo and Kiira. Magnus here from UBS.

The line is a bit bad, but I’ll try anyway. First, without expanding on the specifics and the contents of the press release and this morning, what triggered the release?

Could you discuss a little bit about that? Even if not the content, it's not particularly obvious from the content of the release.

I can take this one. Magnus, as we stated, so we can't take any merger-related questions in this call.

So please, let's take that offline. And now, next question.

Sorry for that, Magnus.

No, all good. On the profit margin, they’re very solid across the board obviously.

But I wanted to single out service in particular, which shows it was a good quarter, but a whole year for that matter. Is the mix sustainable at these levels and what should we be expecting into '22 in terms of mix impact?

Is it possible that we can see a sustained margin improvement if volumes continue to run as we expect?

Yes, so the mix has been maybe a little bit on the positive side in the service business. And that was the case in the fourth quarter as well.

I would maybe not exaggerate the impact of that one, so typically the mix changes within service business are quite modest. And that is probably the case now as well.

So it has been helping a little bit the margin development, but it is by no means the primary driver for that one. The primary driver for the improvement in the margin has been the continuous improvement that we have been able to do in the operation.

So the execution that we have within the business, it is also, of course, the digital services and digitality as a whole technical development that we have been able to do for the products that we are offering within the service business. And many other, let's say, improvement activities that we have been doing.

We have been centralizing activities. We have been improving customer experience and those kinds of topics.

So while the mix plays a role, so it's not maybe a decisive one. I would say so that going forward, we do have a margin improvement potential in all of our businesses, including service.

Of course, volume and the leverage as a result of the volume definitely is an important one. I think that one of the biggest risks for '22 from the profitability point of view continues to be the component shortages, let's say, supply chain disturbances.

So if we do not have components, we cannot deliver not in equipment businesses, but not in service business either, because many of the spare part deliveries and other material deliveries are depending on that one. There are, of course, then, let's say, concerns about the access to the customers.

Once again, if we do not have access to the customer side, it is very difficult to deliver our service offering. This may be a pandemic-related topic.

Otherwise, maybe restrictions will be fewer going forward. But who knows what will happen going forward.

So these type of things, our ability to deliver as a result of the component shortages, potential restrictions at customer sites, or maybe the risks in there, but the profitability improvement potential we have in all of our businesses.

That’s super good color, Teo. Thanks a lot.

Maybe before I move on to my second question, just an expansion on the -- actually, if we do this way instead. How do you see net pricing moving into Q1?

I think we have seen a pretty good execution of that also so far this past couple of quarters. Is it likely they will continue to deliver on that in the early part of next year?

Yes, that is of course a good add-on on the discussion that we just had. Inflation obviously and the interest rate environment obviously continues to be one of the risks for '22 as well from the macro point of view, but also from the individual company's point of view.

We have been able to do relatively well with, let's say, cost inflation mitigation point of view. So that we haven't -- as we had been discussing before, we haven't really taken a net of inflation pricing hit or margin hit as a result of that.

So the ingredients for that one have been cost mitigation. So even if there is inflation, we have been able to mitigate some of the inflationary impact by procurement and by productivity improvements that we have been doing ourselves.

And then, of course, we have also been passing on the inflation into the customer price system. So far that has been going well or decently at least.

We believe that we will continue to be able to do that, at least in the near future. But, of course, the interest rate environment from that point of view continues to be a risk for everybody.

But so far decently and like I said in the fourth quarter either, we cannot really say that the margin would have suffered as a result of net of inflation pricing topics, including the activities that we have done ourselves. And we expect we can continue on the same path, at least in the near future.

Okay. Thank you so much.

Good morning, Teo. It's Aurelio Calderon from Morgan Stanley.

I've got a couple of questions. The first one is around the margin development that we've already seen across the board, but obviously there's been a good improvement in industrial equipment.

What was the contribution from process cranes there, i.e. was it positive or are we still kind of in the red in that business?

And the second one is, you mentioned that components order intake declined quarter-on-quarter. Is this an indication of kind of softer industrial production growth?

As you mentioned growth, that’s slower growth or is this more a shift towards kind of longer cycle products?

Yes, if I start with the latter one. Let's say, so that the stabilization or slight decline sequentially in the short cycle products components, why not lift trucks as well, is at least partially as a result of the very good beginning of '21.

So if we take a look at the component business overall, so there was probably pent-up demand in Q1 and Q2. And now that in Q3 and Q4, we have not seen a similar kind of, let's say, pent-up demand, so sequential development has not been as positive as it was in the beginning of the year.

And I think that the same applies to the lift truck business, which was doing very, very well from the order intake point of view during the first half of '21. Now the slight slowdown sequentially in these businesses and the fact that the order intake still continues to be on a very good level, so it doesn't actually seem now that the demand would be going away.

It may be signals that things are stabilizing and the underlying demand in the marketplace continues to be there. Of course, we will be much wiser after two or three quarters, but this is the way that it looks at the moment.

And we are actually of the opinion that when we take a look at the demand environment now in Q1 in comparison to Q4, we are not foreseeing major changes in that overall -- not within the component business, for example, either, even though there was a sequential decline from the third quarter to the fourth quarter. Slower growth may be as a result of the PMIs and also according to the macro estimates, inventory pressures.

Who knows how the overall market will react. But on a short-term basis from our point of view, Q1 looks pretty similar to Q4 from the basic demand point of view.

Now, Aurelio, I gave such a long answer that I forgot your first question. Would you mind repeating that one?

Yes, that's all right. The first question was around the profitability and the development seen in the process cranes business and kind of your expectations going forward for the business line?

Yes. So the process crane profitability turnaround that we have been working on for quite some time already is definitely one ingredient in the industrial equipment profitability improvement that we have been able to see.

So it is one of the strategic initiatives that we have within industrial equipment and it has given benefits. Now, when we take a look at that business over a longer period of time, so there is actually quite a lot of improvement potential within that initiative still going forward particularly for the reason that the lead times in this business is not quite long.

So, of course, the lead time from order to deliver it and safe recognition can be quite long, and therefore it takes a while. We continue to be of the opinion that this year we'll be with black numbers for the process crane business or engineered order crane business as a whole.

And then I think that you were also asking what was the profitability in Q4? So that is a little bit too detail.

We rather not comment the actual profitability of a business line separate

That's perfect. Thank you very much.

Good morning, Teo. It’s Antti from SEB.

I had a question on the '22 guidance regarding profitability. How should we think about this?

Is this mainly a volume and earnings leverage impact? And how should we think about kind of a mix and gross margin on a group level?

One would assume that the longer cycle businesses take a larger role on growth going into '22, which traditionally have been perhaps less profitable for you. So kind of in which business units would you kind of see the most margin uplift potential at this point?

Maybe without commenting directly that how do we see the margin uplift potential in different businesses, one could maybe say so that if we take a look at it from the mix point of view. So we are not really expecting a major change in mix in comparison to '21.

Maybe if we take a look at the industrial equipment, so the mix might even be slightly better than what we have been seeing now. This is, of course, as a result of the component business having been doing pretty well.

From the order intake point of view, even if it was sequentially down, but like I said, it is still -- the order intake still was good. But the difference is definitely not big.

Service might be having slightly weaker mix, but the net impact in either of those is not significant and not for port business either. So we are not seeing a major mix impact.

When we take a look at once again '22 as a whole, so of course it is a lot of the leverage from the sales point of view. Absolutely.

That is clearly a part of it. In addition to that one, we all know the inventory pressures.

We will need to be able to improve our efficiency and productivity to be able to tackle that one. And then we, of course, continue to in a way advance our strategic initiative; this industrial equipment, productivity improvement, profitability improvement being one of those.

So it's going to be a combination of those. But then, once again, the order book being on a good level, so the key question is that how the component availability, how the supply chain challenges play out in '22?

And how can we actually get the volume out? So this is, in a way, one of the clear questions also boiling down to the margin improvement potential across the various businesses.

Thanks, Teo. And maybe following up on that one, if we kind of see a bit more challenging environment regarding the component shortages and the bottlenecks, what is kind of your strategic thinking going into '22?

And what are the negative impacts we should see? Is it revenue recognition getting delayed or are you may be shifting towards maybe spending a little bit more extra cost on ensuring component availability and pushing for deliveries?

How do you think about this in '22?

Yes, there are probably those risks as well. And, of course, we already have, to some extent, being, let's say, spending a little bit more to be able to get the components, the right kind of components at the right time into the right place.

And, of course, we all know what has happened to the freight cost and transportation cost overall. So that obviously has impacted us as well.

The challenge and the difficulty in the supply chain disturbance topic continues to be that the challenges appear quite unexpectedly so that when you are relying on a component or substructure to arrive at a certain date, and then it doesn't, so then it obviously creates a hassle at the manufacturing and the project execution side. And this is the kind of challenge that we have been having there.

And, of course, those kinds of components that one can have a little bit extra in inventory, it's a good idea to have those. The problem, of course, with the, let's say, microchips, for example, is that it's very, very difficult to get them to be there in excess stores so that you actually need to order it for the specific purpose.

But additional cost, yes, that is possible. Delays, either as a result of ourselves or as a result of the customer site being delayed, would have an impact on revenue recognition.

I guess you are absolutely right there.

Okay. And then the second question was also regarding profitability.

Q4 earnings leverage was very impressive, especially in services and I was perhaps expecting that the cost base would be kind of increasing year-over-year with some reversal of temporary savings? And you are growing into '22.

So kind of that puts pressure on increasing the cost base. So how should we think about that?

Is there a need to, let's say, increase hiring, more personnel and adding kind of the fixed cost base to prepare for the growth that you're seeing this year?

Yes, an excellent question, Antti. The cost base what we have been discussing in the previous earnings calls as well is a valid one.

What we actually have seen now in the fourth quarter already, even though one cannot necessarily say that we somehow would have entered new normal in any way, but we actually have seen an increase in the other fixed costs, I would say, not necessarily on the labor side in a near comparison, excluding inflation, but on the other fixed costs. And what we have been discussing earlier, obviously, is that one of the key things to manage for our company, but probably for many other companies as well going forward, is that if and when the new normal comes, so how can you actually control the other fixed costs, including personnel, but particularly also the SG&A type of costs.

We have seen an increase in comparison to the situation a year ago. We recognize that we are managing it.

So it's all under control from that point of view, but like we have been discussing, it is having an impact. We are also, of course, when the volumes, if and when the volumes increase, so we obviously need to hire people, more technicians, factory workers, but also other people.

So, of course, this is a topic that will need to be managed very carefully. We have been doing well so far.

But now the fourth quarter actually is the first one where we can see this kind of another fixed cost increase in comparison to the situation a year ago. But like I said, we are managing it, we recognize it and we are planning activities on how to make it -- how to optimize this one going forward.

All right. Thanks so much.

Hi. It's Tomi from DNB.

Just to maybe clarify something on the deal as you mentioned that there were still dealers, but you were able to mitigate those. So you mentioned the 100 million late backlog.

And in the third quarter, delays 60 million in the second quarter, 35 million. Is there a number still for the delays impacting fourth quarter, or are you saying that there were no, in a way, new delays in terms of numbers in the fourth quarter?

We are saying that the net number for fourth quarter is very close to zero. So it's not zero.

There have been pluses and minuses. And in some businesses, we have even been able to reduce the late backlog to some extent during fourth quarter.

But the net-net is not really deviating much from the situation that we had at the end of the third quarter. So yes, there have been movements one way and the other, but that is the overall conclusion.

So Q4, from that point of view, went better than Q3 that there was a significant increase in the third quarter. In the fourth quarter, we were able to stay on the same level.

If that can be considered a positive thing, that's then another thing, but at least it didn't increase.

Okay, good. And the second question, even though you are not commenting to the previous questioner on the profitability for divisions this year, but maybe you could help a little bit on the sales, in a way, ranking for this year.

In which division you see strongest and lowest growth?

Yes, that is, of course, a good question. And maybe at this point of time, we do not want to give a very -- let's say very good split on how it could be or how it should be.

And the reason for that one obviously is that we have a good order book, basically in all of the businesses. So there is this potential in all of the businesses.

And then at the same time, as we have been discussing, we recognize that we will need to manage the component availability situation very, very carefully. So maybe that split is then to be discussed more a little bit later during the year.

So at this point of time, we are mostly to say or we are just saying that we are expecting the net sales on a group level to increase from '21.

Thank you.

Hi. It's Erkki from Inderes.

Can you hear me?

Yes, we can.

Okay, very good. Just a detail regarding your P&L.

It seems your material and external service costs combined, their share of sales is trending down on a rolling 12-month basis for quite some time, which seems a little bit strange considering the component market situation, et cetera. Is there something more fundamentally [indiscernible] or is it just a reflection of better mix and better pricing?

Is the current level sustainable?

It is not a bigger fundamental change from the point of view that we would have been able to figure out a new way of doing things. It's primarily driven by mix.

And the way that it is primarily driven by mix, it is not necessarily even the mix between the business areas but it is the mix within the businesses. Because when we take a look at ports businesses is actually an excellent example of that one where we have port service and then on the other hand, we have, for example, ship to shore cranes in the same business.

So the structure from the P&L point of view when you take a look at the different line items; materials, external services, direct labor, indirect labor, so it's very different depending on the business. So it is being driven by the mix and not directly by structural changes to a massive extent or then by pricing for that matter.

So, of course, we do structural changes, we outsource, we in-source it, et cetera. But this is primarily driven by mix.

Going forward then, judging by what you see, how do you see your mix improving this year? Should this level be pretty stable going forward or trending either way?

Relatively stable from the margin point of view, like the stats maybe, a slight deterioration regarding service, maybe a slight improvement regarding industrial equipment, both most likely quite stable. But then again, of course, as we know, the mix will be impacted by the order intake this year, of course, and then also by the delivery situation regarding all of our businesses.

Fair enough. Thank you so much.

Hi. It’s Massimiliano Severi from Credit Suisse.

Thanks for taking my questions. My first question would be, if you could maybe provide some color on the margin difference within port solutions and especially between the lift truck business and the more projects like business of key and yard cranes, that would be very helpful?

Yes. And we have not unfortunately given a split on how the, let's say, across margins or EBITDA margins would be sort of in each and every business.

What we have generally discussed, this applies to the port solutions, but it applies to the industrial equipment as well is that typically the more you have steel or other raw materials involved in the product offering, the lower is the margin as a result of the steel in some cases, in many cases being more like flow through material whereas the actual value that we are providing is in the componentry or in the software that we are providing to the customers, and this is impacting into the profitability levels. And that's why, for example, here actually industrial equipment; this may be easier to explain as an example.

The component business, which is not including the crane structure, the steel structures, is of higher margin than heavy cranes. And a similar logic applies in the port business, but the product offering within the ports is very, very versatile arranging like discussed from both port service to very heavy cranes.

So it varies a lot, but the steel content is a key driver. Typically, the more steel and the heavier steel structures, the lower would be the margin to begin with.

And there are may be exceptions to this, but that is the basic rule. A more accurate description than that we have unfortunately not given on the specific business units within the business areas.

Yes, I'm sure it was helpful. And my second question would be, would you expect margins to be higher in H2 than in H1, especially because I would expect the price increases to kick in over time, as you grow over your backlog?

So would you expect margins to be higher in H2 versus H1?

Margins in H2 do typically have been higher than in H1 in historical perspective, but that has not been directly driven by pricing but by volume. From the seasonal perspective, our sales are higher in the second half of the year typically.

And when sales are higher, the coverage for the fixed cost is better. And as a result of that one, the margin is then higher.

The pricing does not necessarily impact or it doesn't have an impact on the seasonality pattern, because, of course, the idea with the pricing and other cost inflation mitigation that we have is that these are ongoing activities and they should be in a way protecting us from margin erosion in all types of quarters, be it Q1 or Q4. So the volatility in the margin is much more depending on the volume than on the actual pricing sequence, if you will.

Okay. Thank you.

So you would not expect any unusual seasonality in profits within the guidance due to the price increases that you put up in 2021. Am I correct?

No, not due to the pricing increases that we have made in '21, and there’s maybe one other, let's say, relevant aspect in relation to this one. The price increases that we, in a way, implement, so they are of course for the order intake that we get.

And now when we get the order and deliver the order, there is typically a delay. And in some cases, the delay is very long and it depends a little bit on how the order book will be delivered.

The order book margin, again when we take a look at that and compare it to the order book margins that we have been having several quarters ago or a year ago, so in like-for-like comparison, we are not seeing a major change; not to the better, not to the worst. So the starting point for '22 is not really significantly different from '21 in that respect.

Thank you very much.

Hi. This is Tom Skogman from Carnegie.

I have a couple of questions. First of all, why was the tax rate so low in Q4?

Yes. So there are basically -- if we take a look at the full year first and compare '21 to '20, so actually now what we have been discussing as being the main driver for our tax rate historically having been quite high is that the restructurings that we have been having in various countries, we have not necessarily been booking deferred tax assets as a result of the losses that we have done due to the restructuring programs.

And this has basically in the previous years in, say, '19, '20, it has kept our sort of tax rate quite high. Now when we take a look at '21, so actually we did not have these type of major restructuring costs that would have been in countries where we would not have been, let's say, comfortable in booking tax assets.

And I guess that we also generally had less restructuring costs than what we have had in the previous years. The reason why this impact came then so strongly in the fourth quarter is particularly that actually in '21, we were actually able to utilize some of the previous losses for which we had not booked deferred tax assets.

So we had not taken the benefit in a way into the P&L earlier. And now some of these countries actually towards the end of '21 made a profit.

And as a result of this, we were, of course, able to utilize the tax assets that were never booked into the P&L or balance sheet early on for prudency reasons. So we were benefiting now from the conservative deferred tax asset booking methods that we have been utilizing earlier.

This is a very technical long explanation, but the deferred tax asset topic as such is somewhat technical and complex. As an addition to that one, and this may be your next question anyways, so we are not actually expecting that the tax rate would be this low going forward.

So it is fair to assume that the tax rate going forward will be about 25, maybe 26, 27, 28 like we had been discussing already earlier, because this '21 just now had a couple of good things in it; no restructurings in countries where we do not book deferred tax assets. And then we were able to utilize some of the previous NOLs that were not in the P&L.

Okay. And then you have earlier said that PPA will go down drastically in '22.

Can you now give a guide as for the full year '22 PPA?

That is a good question. Out of the memory, I would be saying that there will be a 5 million decrease year-on-year from '21 to '22 in PPA depreciation.

And if this goes wrong, we will, Tom, correct this one to you then separately.

I think you have said earlier that it should go down to the level of less than €20 million and you have 33 years.

Yes. And now it goes in, because there are smaller steps and then there are bigger steps.

And I think that '22 still is the one where the step is smaller and maybe the next step will then be bigger because of course there are sort of assets that have very different lifetimes in there. So we will need to check, but Kiira has actually checked it.

Yes. Teo, 5 million decrease was actually a pretty good guess.

So it's in that ballpark.

Okay. Thank you.

Okay. And then freight cost, it's very understandable that it used to be a cost item where there was hardly any volatility and now it has been a shock in '21.

But I would assume that you have agreed with customers going into '22 that they need to share this risk or then you move the cost or so. Can you just kind of indicate what kind of cost delta, what kind of lower cost should we expect from this going into '22 compared to '21?

Yes. I would rather maybe say so that now that we have been able to cope decently well with the inflation regarding this particular cost item as well, and we haven't taken a major hit as a result of that mitigating actions, customer price changes.

So I do not expect a major change in this respect from the net of inflation pricing point of view for '22 either. So that, of course, it -- you were right that the surprise element is always worse than something else.

And typically in our situation, if any of the cost items goes down, it is easier to manage of course from the customer pricing point of view than the other way around. But historically, we haven't been making major gains in cases where costs go down either.

So I would not count really on that one. I would rather say that we will -- the net of inflation margin effect would be modest also in '22.

Okay. And then the service mortgage cyclicality, you have improved the margin in service impressively.

I just wondered when the next normal recession comes and sales go down 10% or so? And so what will happen to demand, because your Service President indicated to us that the share of kind of fixed costs have increased there with all these IP investments.

So is that kind of -- would the margin take a hit in service immediately just from this if volumes go down, that the share of fixed costs have gone up basically?

If the volumes go down very quickly, the service margin would not be immune to those kinds of changes either. So there is -- and I think that what Fabio has indicated regarding the cost structure as such is obviously true.

We have, of course, been building a backbone from the digital development point of view. It gives great advantages to the customer.

Its benefit is that it is scalable upwards. And of course then if the volume goes out, then obviously there is an impact in the other direction from the cost absorption point of view as well.

But then again, if you take a look at our, let's say, previous downturns and the volume changes in the service, so we have been able to manage and mitigate and control the situation quite nicely. I do not think that fundamentally, things would have been changing much, even if maybe there has been a shift in the cost structure.

But I think that the agility that we have built into the service business continues to be there.

Okay. Thank you, everyone.

Unfortunately, we have now run out of time and we need to conclude today's conference. As a general reminder, Konecranes will issue Q1 Interim Report on April 27.

Have a great day, everyone, and thank you.

Thank you.