Konecranes Plc

Thank you, Kiira. Good morning, everyone.

Konecranes is in the process of going from good to great. Our strong Q2 results were delivered in an extraordinary market environment, thanks to the excellent teamwork and a high performance focus throughout the company.

Real time demand/supply balancing and cost flexing, both enabled by our digital telemetry capabilities, as well as progressing on our strategic initiatives delivered results this quarter. We ended Q2 with an adjusted EBITA margin of 8.2%, which is close to our profitability a year ago and up significantly from Q1.

We are well positioned for the challenges to come and our team is committed to staying on this high performance path. Throughout the crisis, our focus has been on the safety of our employees and on supporting the mission critical operations of our customers.

The lockdown did not mean no business. Both our Q2 order intake and our net sales were clearly impacted by COVID-19.

The month of April was the low point in our order entry. And by June, order intake in all of our three business areas was increasing along with the improving overall market conditions.

Significant regional fluctuations exist, though. Important to note is that despite the market uncertainty, we have not seen cancellations of significant orders in any of our business areas.

As the pandemic started to weigh on our business in late Q1, we rapidly responded and implemented actions to mitigate the impact on our business. Our TRUCONNECT digital telemetry paid a digital dividend in the quarter, assisting us in real time demand/supply balancing and in tailoring our service for our customers.

Cost flexing actions have been taken throughout our business. These have included temporary layoffs, reduced working hours, streamlined spending, and permanent cost adjustments.

At the same time, we have progressed our enterprise value creating strategic initiatives introduced in connection with our Q1 report – service revenue and profitability growth, industrial equipment profitability improvement, project management, lean operations and procurement excellence. Each of these strategic initiatives are delivering results already visible in the second quarter.

Looking ahead, we will continue to drive improvements throughout the company. We have reached an agreement with employee representatives and unions on discontinuing reach stacker production at our Montceau-les-Mines site in France.

We are also identifying opportunities for business process efficiency improvement within our admin and group functions. The COVID-19 pandemic has accelerated our need to examine all facets of our business to ensure our cost base is aligned with reduced and uncertain demand environment.

We've updated our demand outlook to reflect the somewhat improved market conditions versus Q2. We've resumed giving guidance for full year 2020 and today we provide additional color on our expectations for Q3.

Finally, we look forward to expanding on our strategic initiatives in the coming quarters and plan on hosting a Konecranes strategy presentation in November. Let's move to our financial performance and key figures in Q2.

Orders received in the second quarter were circa €582 million, down 29% from Q2 in 2019. Sales totaled €705 million, down 11% from last year.

The decline in both numbers is obviously due to the COVID-19 and the volatility and uncertainty it's been causing. Our consolidated adjusted EBITA was €57.5 million versus €67 million last year.

And adjusted EBITA margin was 8.2% and close to a profitability a year ago. Operating profit EBIT was €42.7 million, up from €38 million last year and the operating margin at 6.1% was also up from 4.8% last year.

The increase in the operating margin was primarily due to lower restructuring costs. Free cash flow in the period was €54 million positive versus €6.5 million last year.

And net debt increased slightly to €770 million, staying close to the amount we had in Q1. Moving to the market environment for our Service and Industrial Equipment businesses.

The second quarter ended in a markedly different environment versus where it started. In April, many European countries and North America, our strongest regions, were in the midst of extensive physical restrictions and lockdowns.

Throughout the quarter, the situation improved as many countries began to ease their restrictions. However, there is significant regional fluctuation.

In April, the global manufacturing purchasing managers index was under 40, at its lowest level since 2009. Towards the end of the second quarter, the manufacturing sector operating conditions began to improve, along with the easing of the coronavirus related restrictions and the PMI ended the quarter at almost 48.

However, still signaling contraction. In the Eurozone, manufacturing sector operating conditions weakened significantly at the end of Q1 and continued with steeper deterioration in April.

The PMI sank to its lowest reading since 1997. In the US, the manufacturing sector PMI was at its lowest figure for 11 years in April at the height of the lockdown.

In both regions, June marked a rapid improvement to the PMI, along with the easing of the manufacturing sector downturn, but the first half of 2020 still ended in a contraction territory. The manufacturing capacity utilization rates also showed sharp drops after Q1.

In the US, this was recovering towards the end of the second quarter. And in China, manufacturing sector operating conditions were at record lows in February due to the corona outbreak.

Since then, however, manufacturing PMI in China has continued to recover and ended the first half above 50 in the expansion zone. Manufacturing sector operation conditions remained in the contraction zone in Russia and in India.

And now, on the market environment for our Port Solutions business. Global container throughput plunged in February due to the outbreak of the virus.

Since then, the decline has stabilized which has been driven by positive developments in Chinese ports, while container throughput and ports elsewhere has continued to decline. At the end of May, global container throughput was approximately 7%, lower than the year before.

At the moment, the worldwide demand picture continues to remain subject to significant volatility due the COVID-19. The current demand environment within the industrial customer segments is showing signs of improvement in April in Europe and in North America compared to the second quarter, yet remains below the year-end 2019 level.

And currently, the demand environment in Europe is overall less volatile than it is in North America. While China demand conditions have improved from early 2020, the demand environment in the rest of Asia Pacific is weak.

Global container throughput has declined and many port operators are postponing decision making in the current environment. However, long term prospects related to container handling remain good overall, and the ongoing projects have continued and large customers are committed to their investment plans.

As already stated, we've resumed giving full year financial guidance. Based on the current order book and demand environment, Konecranes expects the full year 2020 net sales to decrease from 2019 and Konecranes expects the full year 2020 adjusted EBITA margin to decrease from 2019 as well.

In addition, today, we have provided more commentary on our expectations for the third quarter in our half year report issued a few hours ago. In line with our more positive market sentiment versus Q2, we expect our Q3 net sales to improve sequentially from Q2.

And given our ability to flex our operations, we expect our adjusted EBITA margin to also improve sequentially from Q2. Teo will now take you through the results of each of our businesses.

And you will see that all three of our businesses have significantly improved their results in Q2 versus Q1. Teo Ottola Thank you.

Thank you, Rob. And let's start with the Service business.

So, Service order intake in the second quarter was €209 million, and that is about 17% lower than a year ago. It is actually roughly the same decline both in reported and comparable currencies, so that the currency impact did not have a major impact now in the second quarter in comparison to the previous year.

Organically, so excluding the acquired MHE-Demag operations, the order intake declined by some 21% year-on-year. When we take a look at regions, our order intake actually decreased in Americas and EMEA, but increased in APAC thanks to the MHE-Demag operations.

And then when we take a look at the business units within Service business area, so orders both for field service as well as for parts, declined, maybe slightly more for parts, but not so that it would have had any significant impact on the product mix in the second quarter. Then when we take a look at the agreement base value, so that actually continued to grow, both year-on-year and sequentially.

So, the reported growth rate is 12.5%. This includes the MHE-Demag agreement base.

And when we take a look at the organic growth with comparable currency, so it is 7.5% year-on-year. And then sequentially, about 0.5% from Q1 to Q2.

And this is obviously an excellent achievement in the Service business in the market conditions where we have been during the second quarter. It's a proof of good team effort within Service and it is also a sign of the business model that we have regarding the agreement base being good, so that it yields results also in these kinds of market conditions.

When we take a look at the service sales, so that is down around 10% with reported numbers, and again, organically, excluding MHE, about 15% sales decreased also in Americas and EMEA, but increased in APAC for the same reason as for the order intake. So, MHE was the reason for that one.

And again, both field services as well as parts sales decreased in a year-on-year comparison. Then order book €250 million.

There is an increase as a result of the inorganic growth. When we take a look at the organic situation, so it is down with comparable currencies around 6.5%, 7% in a year-on-year comparison.

Profitability or adjusted EBITA in Service, €47.6 million and a margin of 17.2%. So, it is slightly lower in absolute euros than a year ago, but the margin actually improved and this is another excellent achievement in the Service business despite significant sales decline.

So, the EBITA margin has improved. The reasons are explained in the other bullet points.

So, we have been doing a lot of cost adjustments, both temporary and permanent adjustments when it comes to the personnel cost and also, of course, other spending has been flexed down as a result of the market environment. Also, the overall business performance within the Service in the second quarter was very good.

And this meant that the gross margins also improved quite nicely on a year-on-year basis even if there was not any significant impact from the product mix. So, very good result performance from the Service business.

Then going into the Industrial Equipment and Industrial Equipment order intake. So, that was €235 million.

This is a decrease of almost 30% with reported numbers and again organically excluding MHE. So, we are having a decline of more than 30%.

When we take a look at the business units in a year-on-year comparison, so the order intake decreased in standard cranes, process cranes and components. So, basically, in all of the main business units that we have within Industrial Equipment.

When we take a look at the situation sequentially, so sequentially, standard crane and component order intake declined from Q1, but actually the process crane order intake improved a little bit from the first quarter. Again, taking a look at the situation regionally, so Americas and EMEA orders declined whereas in APAC there was an increase as a result of the NHE, exactly like in the service business as well.

Sales, €270 million roughly. So, there is a decrease of 8% with reported currencies.

Organically, excluding MHE, roughly 12%. Here also taking a look at the business unit, so sales decreased in standard cranes and components, but actually increased in process cranes in a year-on-year comparison due to the order book that we had.

And this, obviously, then from the, let's say, margin mix point of view is slightly negative news as the gross margin in the process crane business is lower than in the standard crane or component business. And sales decreased in EMEA, but increased both in the Americas and Asia Pacific.

And in the result for Industrial Equipment adjusted EBITA, €4.5 million, margin 1.7%, this is lower both in euros as well as margin than a year ago, naturally mostly explained by lower sales and also the weaker sales mix. So, particularly the share of the component business was lower now in 2020 than in Q2 2019.

And then, these, let's say, negative things were balanced by the cost adjustment activities that we have done both during Q2, but also the ones that we have already initiated earlier and that are now bringing the results in the second quarter of 2020. Gross margin declined in a year-on-year basis, but that is because of the weaker product mix in comparison to a situation a year ago.

Order book, the €725 million. Again, excluding MHE, the order book decreased by some 8% from the situation a year ago.

And then, let's move to the Port Solutions. So, Port Solutions order intake, we have €184 million order intake.

This is a decrease of almost 40%. The MHE acquisition doesn't actually impact the Port Solutions numbers.

So, these are organic numbers at the same time, similarly as reported. And here, the order intake declined in all three regions.

Also, in basically all of the business units within the Port Solutions. Mobile harbor cranes did decently.

There was a decline in year-on-year comparison, but a relatively small one. And actually, sequentially from Q1 to Q2, there was even a slight increase in order intake there.

But for the most part of the business units, in ports as well, the decline was visible both sequentially and in year-on-year. Sales, €208 million, a 16% decline in comparison to the situation a year ago.

And then, when we take a look at the adjusted EBITA, €13.3 million, margin of 6.4%. This one also like in Industrial Equipment, is down both in euros as well as margin.

And again, the lower sales is the main reason for that one. To some extent, sales mix was weaker.

This is not a big difference, but it was in the adverse direction. However, gross margin increased on a year-on-year basis despite somewhat lower mix and this is now thanks to the good project execution within the ports business and obviously also the cost saving activities that we have been doing in in Q2, in particular, but also earlier.

And then, finally, regarding the Port Solutions, the order book, there is a decline of 12.5% in a year-on-year comparison. Then a couple of slides on the cash flow and balance sheet.

So, here we have – as we have typically started with net working capital and – net working capital. So, net working capital came actually slightly down from the situation at the end of Q1.

There was positive development in accounts receivable as well as in advance payments. So, the customers have continued to pay.

And also, the advance payments have been coming in pretty nicely. We have a higher inventory level now at the end of Q2 than what we had at the end of Q1.

So, this has been impacting net working capital in a way negatively. From that point of view, that is mostly because of the work in progress.

So, it's as a result of the project timings. To some extent, obviously, it is also as a result of the postponements of the deliveries due to the COVID-19 crisis.

Net working capital as a percentage of rolling 12-month sales continues to be roughly on the same level as it was in the first quarter as well. Rob already mentioned about the free cash flow.

So, it is on the positive side despite the inventory buildup that we have been having, thanks to the other items in the net working capital developing in the right direction and then also, of course, the profitability that we had in the second quarter. Then equity and net debt.

Rob also touched on the net debt as well. So, it was slightly up in a year-on-year comparison.

However, we are almost exactly on the same level as we were at the end of Q1. So, the free cash flow that we received during the second quarter was almost exactly in line with the dividends that we paid out during the second quarter.

And therefore, the gearing – or the net debt, and also the gearing, stayed roughly on the on the same level as they were at the end of Q1. Return on capital employed is trending downwards from Q1 to Q2, partially of course as a result of the absolute profits going down.

Even if in the second quarter, obviously, relative profitability was not that much down, but in absolute terms that one also was. And then, we have a little bit bigger balance sheet now than what we would normally be having because we are having €500 million cash at hand, which is maybe €200 million, maybe even €300 million more than what we would be having in so-called normal conditions.

But there is still some precaution as a result of the COVID crisis that has been ongoing. This concludes the presentation from my point of view, and I believe that Rob still would like to say a couple of words before we go into the Q&A.

Thank you, Teo. Before we jump into the Q&A, I'd like to conclude the presentation by highlighting that these first six months as President and CEO of Konecranes have underscored my conviction that our company has a very exciting future.

This is thanks to its exceptional qualities, its potential, and its very talented people. I'd like to express my thanks and my appreciation to all Konecranes employees and our business partners for their impressive commitment and strong teamwork.

During this corona period, we've become smarter, stronger and more resilient. And we will emerge from this period the same way we entered as the leader of the global lifting industry.

Thanks. And let's start the Q&A.

Let's now open the lines for questions please.

Good morning. It's Artem Tokarenko from Credit Suisse.

Thank you very much for taking my questions. My first one is around cost savings.

Maybe elaborate a bit on what was the contribution of temporary and permanent cost savings in the quarter? And also, more importantly, how should we think about those temporary cost savings continuing this year, up until when?

And also, would you expect some of those to be retained and maybe as a result Konecranes emerge stronger on the other end of this downturn?

Okay. So, thanks.

Thanks, Artem, for the question. So, I think that if we take a look at the cost savings as a whole, so we can maybe note first of all that the cost adjustments that we have done have been quite well visible on almost all of the P&L rows, what we have.

There are obviously a couple of exceptions. So, like depreciations obviously haven't been flexing too much.

But when we take a look at the direct labor and other variable costs, for example, so these have been adjusted downwards almost exactly in line with the sales decline. And these are, obviously, the kind of cost adjustments that that we intend to keep ongoing and doing because they are completely depending on the volume, what we are delivering to the customers.

When we then take a look at the so-called fixed costs or the costs, let's say, below contribution margin or below gross margin, so there also as a whole we have been adjusting the cost base down almost in line with how the sales volume has been coming down. There is a slight difference there between the labor costs and other operating expenses and one can note that we have been flexing more on the other operating expenses, so that as a percentage, so these have been declining more.

And I guess that that is understandable in the current situation when you take a look at these cost items. There are items like traveling in this one and now traveling has been practically completely halted during the second quarter.

So, obviously, we have been saving there quite a lot in comparison to what that cost level was before. We have also been saving on the fixed labor and not exactly as much as the volume drop has been, but quite decent there as well.

There, we have both permanent and temporary activities. And temporary activities are including time banks, they are including temporary layoffs, they are including shorter time, shorter work week and we are not giving an exact relation that how much is temporary and how much is permanent.

But both are included in that one. And our aim and goal, obviously, is to be able to continue to adjust the cost base in line with the demand.

And regarding these other operating expenses, one can maybe say that on a short term basis cost savings like traveling will probably continue to be there. At the same time, it would be maybe a little bit foolish to say that once things get normalized, so that none of the traveling would be coming back.

So, clearly, there is cost avoidance, part of which will come back when things get normalized. But we will then as a company just need to find other ways to reduce our cost base or adjust our cost base in line with the demand picture.

Artem, I think the important way to look at this is our ability to, in real time, adjust our demand and our supply and balance those together and flex our costs is one element of this. As one goes through this period, this period is far from being over, but one's going to have to be thinking very carefully – all companies are – on what's the cost base that they want to take forward.

And it's very important to get the balance between adjusted to the market conditions and a base that gives us the opportunity and ensures that we're ready to grab the growth opportunities that our strategic initiatives will be enabling for us. And so, we'll get that balance right and we're excited about the future we have in front of us, and we're committed to staying on this path of performance – the performance path that we're on now.

Okay. Thank you, Rob.

So, my second question is around very strong margins in the Service business. And maybe talk a little bit about how sustainable are those, especially in the context of your margin guidance for Q3 and also maybe dig in a bit deeper into the drivers of those margins.

I would imagine that mix from higher sales of spare parts as opposed to labor services where your engineers are maybe a bit restricted with accessing customer sites was a big moving part in there. So, I guess, the question, how sustainable that 17% you think is and also what was the mix contribution in the quarter?

Yeah. So, let's start with the mix.

So, the mix didn't really play a major role in the quarter. So, that was more or less unchanged from the situation a year ago.

When one takes a look at the performance as a whole, so one of the key things clearly here is that the cost adjustments that had been needed to balance the volume change, so they have been very successful. And here, we have been able to flex extremely well, both variable and fixed costs.

And some of the variable costs maybe even more than what the sales volume has been, so that one can say that the operational efficiency has been improving there within the second quarter, and that has helped further the gross margin to improve. Also, one can maybe note that now in the second quarter, in comparison to the previous quarters, so the inflation rate has been a little bit lower than what it would otherwise have been, probably as a result of the all of the COVID crisis.

And this has alleviated the inflation pressure, so that also from this kind of, let's say, business performance point of view, the pricing environment maybe has been from that point of view been a little bit less strict. That's then, of course, a good question that what will happen with the inflation going forward.

But now we have been doing a lot of activities regarding procurement, for example. And these activities that we have done together with the market environment probably have then slowed down the inflation a little bit, which is then also visible in the service business gross margin.

But I guess these operational improvements that we are doing in the Service business are bringing results in the second quarter. That's probably the main thing.

And to take that forward, I think that what you're seeing is a real demonstration of the robustness of the Service business model and its ability to penetrate further into the installed base, its ability to service more assets, its ability to improve the – or to increase the size of the agreement base in total and then of the individual contracts in the agreement base as they renew. And our strategic initiative is very much on growing the profitability and the revenue of our Service business.

And we're excited about the agreement base growth sequentially as well as year-on-year. And our strategic initiative and our expectation is to continue to improve profitability in Service in the years to come.

Thank you, Artem. Now, let's take now the next question.

Yeah, hi. It's Antti from SEB.

Thanks for taking my questions. And congrats on a great resiliency on the tough times.

Can you maybe open up a little bit on the Service performance during the quarter? What kind of activity did you see from clients and how did you operate when they were ramping down and ramping up?

What I'm trying to get is that, was there clients forwarding some scheduled maintenance actions as their capacity utilizations were lower? Did capacity adjustments play a supportive role for Service demand or a little bit more color on what actually happened during the quarter?

Sure, Antti. Look, the discussion about lockdowns did not mean no business.

This was very relevant to our Service business as well. Our Service team was very actively in the customers that kept their operations continuing.

And in some cases, the customers whose operations were shut down, still invited our services teams to come in to do mission critical maintenance and repair operations during that period of time. So, we were quite busy in the customers who were open.

And then, the beauty of the telemetry was it was giving us visibility to who was open and how – what was the dynamic in each of the markets we were operating in almost in real time. So, our Service business utilized the connection to its customers and the need for – the importance of our Service business in keeping those mission critical operations and material flow going during the crisis was very clearly seen in the activity level in the service business as we went through that period of time.

It picked up, of course, as more and more operations opened up and any maintenance that was delayed from the current quarter, we expect to catch up in the time to come as more and more customers open their operations.

All right. That's very clear.

And then, second on kind of the demand outlook now going into Q3 and you are a little bit optimistic on that compared to the previous quarter, is this just a reflection of a very weak April and May, or do you actually see a continuous gradual improvement from, let's say, the run rates that June ended up and July has begun and maybe a bit color on the different geographies and customer segments on the industrial crane side?

Sure. We talked about that.

Especially in Europe and North America compared to Q2, the current environment is showing signs of improvement. It's actually stronger and less volatile in Europe than it is in North America right now, but clearly better than it was in Q2.

And as we talked about, there was a dynamic in Q2 where, clearly, April was the lowest point and there was a recovering during the quarter. There's still quite a bit of volatility going forward.

And we're all watching the news. We all clearly are aware of surges or resurges.

And so, that's why it's important to be able to be balancing in real time and adjusting our demand/supply in real time.

Okay. And then maybe lastly to Teo, I know you mentioned that you're not giving the euro figures on this, but you previously have provided some P&L cost impact from the legacy saving programs.

So, could you comment how those impacted the second quarter and what's the outlook for H2 and next year and also how the Vernouillet and Wetter situation is impacting the profitability going forward?

Yes. So, those legacy actions that we have been having, so they have been bringing the results as we were discussing and actually we can say the euro amount, it is somewhat higher than €10 million now in the second quarter in comparison to the situation a year ago.

And it is not all, but it is primarily in the Industrial Equipment. So, this is partially obviously helping to combat the somewhat or actually quite a lot negative product mix impact that we have been having in the Industrial Equipment.

We continue to be committed to the number that we have given previously for this year, which was 34, and now, let's say, 10 to 11 for Q1 and Q2 have been coming in already there. Now, of course, as a result of all of the COVID, so it might not be meaningful to follow these activities on a detailed level because so many other things are being done as well but, but these activities are bringing the – roughly are bringing the results that we have been anticipating.

Regarding Wetter and Vernouillet in particular, so the Vernouillet situation is clear from the point of view that, from the beginning of this year, we have not had production there even if we continue to have some people still there during this year. But all of the production has been moved elsewhere.

So, that is not burdening the operational results. When it comes to the Wetter transformation or productivity improvement and layout changes, so these are ongoing and they are ongoing in line with our time schedule.

Whether we are exactly ready by the end of the third quarter or not remains to be seen, but there is no major change to the schedules that we have been telling before. These activities that have been ongoing there have had a small negative impact, obviously, like they had in Q1.

So, they have had a small negative impact in Q2. But now, like I said, there are so many activities all over in all of the entities ongoing as a result of the COVID, so these are not major things in this context anymore.

Thank you, Antti, for your questions. Let's now take the next caller please.

Thank you. This is Antti Suttelin from Danske Bank.

Hello. When you look at the Industrial Equipment business, that clearly stands out as the softest spot in Konecranes.

And my question would be, what is it that you think you can do in order to improve its performance? What are the factors?

And then, how soon do you think you can improve that business?

Thanks, Antti. That's very clearly one of our strategic initiatives, improving the profitability in our Industrial Equipment business.

We talked about that a couple of times in Q1 calls. And our team is doing what it said it would do.

We've focused on the turning around of our ETO business. We focused on several other of the industrial – of our strategic initiatives.

Really underpin that profitability increase. The project management execution in both Industrial Equipment and Ports has been nice and consistent this period.

The lean operations is going to continue to bring an increasing profitability in our Industrial Equipment business, as well as the procurement excellence that Teo was talking about a while ago, also going to impact that business. I'd point out to you the ETO projects team has done a real nice job progressing what we talked about last time as well, addressing unprofitable orders in the order entry and giving some of those back, the non-profitable business, renegotiating pricing in the existing order book and has set a mandate and a new threshold for orders coming in to ensure that the orders that we're taking on board.

And against those new levels, we have won new business during this quarter. So, fixing the existing order book and ensuring the new one comes in in good margins and then being able to execute at those margins and expand our profitability with productivity on the operation side and good cost savings on the material side gives us a sustainable route for continued improvement in the Industrial Equipment profitability.

Okay. And in terms of an acceptable or, let's say, target EBITA margin for that business, how do you approach that?

Should it be higher or lower than Port Solutions? We know that Port Solutions includes some service, which Industrial Equipment, as far as I understand, does not include.

On the other hand, we know that some of your notably similar peers, Columbus and Kito from Japan are making 10% or even more. So, how do you balance these competitive margins around you?

And where do you think you should be in that business in terms of EBITA margin?

I appreciate the question. And those, we'll be addressing that in greater detail when we give our strategy presentation in November.

At this point, I'd like Teo to reiterate the targets that we've given for each of our businesses, specifically to your question on the Industrial Equipment business so far.

Yes, we can maybe repeat the logic that we have been using before and Port Solutions and Industrial Equipment, in a way, target setting as we have defined it before. So, they have been very close to each other when it comes to the adjusted EBITA margin.

So, high-single digit margins we have been talking about there. And there, the logic is along the lines that you were also describing, so that that, by definition, the Port Solutions has on average higher material content or higher steel content as a result of the product mix, which is, in a way, maybe margin dilutive from that point of view.

At the same time, pp has service component in there, which Industrial Equipment doesn't have. These are, in a way, balancing each other out in a way that the target setting is very similar or has been very similar for Industrial Equipment and Port Solutions.

That's in a way the big picture. Then the reality, of course, is that in both of those business areas, it is very important that what the product mix is, so that the component business within Industrial Equipment is significantly more profitable than the process crane business and then there are differences within the Port Solutions as well.

So, in a short time interval, so these target settings are a little bit challenging because the mix can change one way or the other.

Thank you, Antti, for your questions. Let's now take the next caller please.

Magnus Kruber, UBS. A couple of ones from me also.

First, can you help us a bit with some comments on how July has started versus how June turned out across the three business areas?

I'm afraid, we didn't pick up your question, Magnus. Can you say that again, please?

Yeah. Apologies.

Could you help us with some comments on how activity in July has started versus how June has been across your three business areas?

We haven't really sort of commented the businesses separately, in line with how things have been going in July. But I think that we can refer to what was discussed a little bit earlier, so that when the activity in April and May was very low from the customer's point of view, so June has proven to be a little bit better actually showing improvement in all of the businesses.

And now, when our demand outlook is that things would be developing a little bit into the better direction in comparison to the second quarter. So, this is basically the only comment that we would be willing to say at this point of time regarding any specific data on how businesses are doing at the moment.

Okay, got it. And then, just following up the question on savings, could you help us a bit – quantify what level of savings you saw across business areas, at least which business areas saw the greatest margin support from savings, that would be very helpful.

So, when we take a look at the all of the business areas, one can conclude that the cost flexing and the cost adjustments have been rigorously and well done across the board. And like mentioned also earlier, so within almost all of the profit and loss statement rows.

So, overall, the picture has been good. And now that the Service margin has developed very well in a year-on-year comparison, so it is obviously not a surprise that the cost adjustments that we have been doing and the savings that we have been doing have been particularly successful within the Service business.

Then at the same time, the earlier activities that we have been doing, these Wetter and Vernouillet activities that we mentioned. So, those have particularly been helping the Industrial Equipment.

So, therefore, maybe from the cost adjustment and cost saving point of view, these are the kind of kind of comments to be noted.

I think that's one way to look at it, Magnus. I think it's important to understand that we're focused on the long term as well.

And so, balancing in real time, the short term and ensuring that we have the team and the structure and the assets and the capabilities and the robustness to capture growth opportunities in the future is a very important element in the overall picture as well.

Thank you, Magnus. Let's now take…

Hello. This is Tomi from DNB.

Just one detailed question. If you can confirm that there were no, let's say, positive provision releases in the second quarter, in opposite what we saw in the first quarter, for example, in Industrial Equipment.

There were no major provision changes. For example, reversing any of the ones that we did in the first quarter.

So, this is a clean quarter from the point of view that we didn't have major negative ones either. So, like discussed, so the overall business performance across the business areas has been good, but no major positive releases.

Thank you. And then, if you can comment, your level of confidence that the Industrial Equipment is on a solid footing now after that couple of quarters struggles.

And maybe also then, let's say, comment to the guidance for the third quarter of sales and margin improvement. Additionally, if you can comment on divisional performance.

Let me pick up on the first part of your question and we might need you to ask again the second part. Look, the Industrial Equipment team is on a very good way.

I think that the ETO turnaround that we discussed is on a very good way. Our team has improved the profitability of the existing order book and is ensuring that new orders coming in are meeting our expectations.

At the same time, the project execution is going very well. So, with the higher profitability on existing orders and a higher profitability on future orders and executing those with a productivity underpinning and a team very focused on customer segments that are bringing the attractive projects for us I think that's on a very good way.

And our team is – it's underway. It's well underway, and it's very committed to staying on its high performance path.

Would you ask the second part of your question again? We'll see if we can answer that too.

Yes. So, the group guidance of sales and margin improvement, if you can comment there a little bit divisionally.

Do you expect the performance continue on Services and Industrial Equipment as we saw the order backlog settling a bit up, whereas Port Solutions facing a little bit tougher third quarter? So, just a little bit divisional guidance.

We would rather not go into the divisional guidance regarding the Q3. Reason obviously being that there is a lot of uncertainty and we don't know how the situation develops regarding the COVID crisis et cetera.

So, therefore, maybe better stay on the group level guidance regarding Q3.

Thank you, Tomi. Let's now take the next question please.

Hi. It's Erkki Vesola from Inderes.

Regarding your guidance, you guide for sequential in adjusted margin improvement in Q3, obviously, at least – partly thanks to higher sales. Is there any reason not to expect notable sequential EBITA margin improvement also in Q4 if and when sales should increase, then see inflation as well?

We have not been commenting Q4 separately actually for the same reason as I just said about the Q3, so that the situation is uncertain. And, obviously, Q4 is even further away than Q3.

And therefore, of course, the visibility is somewhat weaker and, obviously, all the time evolving situation when it comes to the COVID, obviously, makes us a little bit careful regarding that one. So, the additional color in a way that we are giving is restricted to Q3 from that point of view that you were now asking.

Q4 is about…

[indiscernible] you obviously have a fairly nice order backlog to work on even if the order intake is a little bit subdued.

Q4 is about what the market environment is and what the COVID environment is. And you talk about an order backlog and we have that and we see that and the ability to deliver that has to do with, do we have teams that are able to access customer sites or port locations, do erections and installations and commissioning?

Are we able to access factories and install and commission new cranes and new technology? Are we able to access sites and perform service operations?

We very much hope so. And the conditions have improved versus where they were in the second quarter.

Should they continue to improve, that would be very good news for us. I think the overall guidance that we've given is important to understand.

It's a full year guidance. We're at month seven right now.

Catching up the profitability delta in q1 or catching up €90 million of sales delta in Q2 in the next five months, plus the order book that you described, plus the market environment, all those items were considered as we put our full year guidance out last week.

Thank you for taking that follow-up. It's Artem from Credit Suisse.

I have a couple. Firstly, on the – thinking about the exit run rate from Q2, I appreciate you're maybe not willing to comment on June explicitly, but just give us some sense on the magnitude of difference in the growth rates between April and June.

No, we would rather not quantify, but one can say that both April – April and May were on a low level and June was clearly better. But no specific numbers, unfortunately, I'm sorry.

Basically, if you're keeping track of the COVID and you're keeping track of the impact, and we are on a real-time basis with our digital telemetry. You're seeing the lowest trough in China in February and the increases since then.

You see the lowest trough in Europe and in America in April, continuing to get better during the second quarter. And we'll see where that continued market trajectory goes, and we'll see how the COVID develops over time, but our ability to adjust to that in real time gives us good confidence.

Okay, thank you. And just a follow-up on mix and EBIT bridge for the remainder of the year, if you could help us with that.

And also, on free cash flow, obviously, very good working capital management so far. How should we think about working capital development towards the year-end please?

Thank you.

I guess regarding the mix, we can note that it is likely that the overall Industrial Equipment mix will continue to be weaker than a year ago. And this is, of course, for the reason that the component order intake has been dropping, as has been dropping the order intake for the other business units as well.

But the order book is longer in the other business units and, therefore, the mix deterioration, maybe it was quite a lot weaker now in the second quarter, maybe not quite as much weaker, but it will be weaker in a year-on-year comparison going forward as well. We are also expecting that the Port Solutions mix will actually weaken towards the end of the year, so that it will be weaker than a year ago.

It was slightly weaker now in the second quarter, and it probably will continue to be weaker than a year ago in Q3 and possibly also Q4. And of course, now depending a little bit of how the order book then at the end of the day will be delivered.

In Service, we are not expecting any major change in the mix in a year-on-year or sequential situation.

Hi. Magnus here again from the UBS.

I just want to touch upon the Service contract base obviously grew healthily in the quarter despite everything. Why do we see such a big differential between the growth there and the decline obviously in the Service business?

That is probably at least one of the reasons is in relation to the customer relationships and those kind of things. And this is a little bit in line with how things were in the financial crisis as well, so that when the utilization rate for our customers operations declined, so it automatically reduces on a short term basis the need for maintenance activities.

Now, of course, in this crisis, we have had additionally the issue of the physical restrictions that has made it impossible in many cases to do the service activities. So, there has been delays and postponements as a result of that.

That has obviously then also impacted the order intake, not only sales, but also the order intake. Whereas then the agreement base growth is more depending on the longer-term strategies of our customers and their willingness to cooperate with us.

And that has proven to be very resilient model also in the past, so that even if there are issues in the world economy, so the customers continue to appreciate our concepts and they continue to subscribe for that one and actually not that many customers want to give up on this contract model even in tougher times. So, this continues on a much, let's say, more stable model than the order intake in general.

And one can also then say that the sales that we are generating from the agreement base, so the agreement base sales, so they are less volatile than the other sales in a way in the Service business. So, it works also that way.

By nature, it is a more stable business from the agreement base growth point of view, but also from the agreement base invoicing point of view.

That's obviously very attractive. Could you help remind what sort of the historical growth rate has been there, sort of longer term, like 10 years on the service base?

What's sort of the organic growth there looking like?

We have been aiming at growing the agreement base a little bit quicker than what the overall growth target for the Service business has been. But maybe one can say so that that has been probably the case, so that the agreement base has been growing slightly quicker than what the overall Service business has been growing over a longer period of time.

Thank you for the question. I think it's now time to conclude our today's conference call.

Thank you for the active participation and good questions. I would like to wish you all a very good summer.

Stay safe.