CEO's review

Interim report Q3 2019 | October 24, 2019

Interim CEO Teo Ottola:

Konecranes CEO

We ended the third quarter with mixed performance. On the one hand, we saw order intake in Business Area Service return to a growth path and Business Area Port Solutions record yet another solid quarter. On the other hand, however, the performance in Business Area Industrial Equipment was increasingly affected by the deteriorating macroeconomic environment, along with temporary costs related to the optimization of our manufacturing footprint in Vernouillet, France and Wetter, Germany.

Beginning with Service, the annual value of the agreement base grew 6.4 percent year-on-year in comparable currencies, well in line with our targets. While project-related order intake continued to track below its long-term average, orders overall grew 3.6 percent from the previous year on a comparable currency basis. The adjusted EBITA margin of 16.2 percent remained approximately flat both year-on-year and sequentially.

In Port Solutions, strong demand for Straddle Carriers boosted order intake in Q3. On a comparable currency basis, the year-on-year order growh in the business area was 3.9 percent. The general sentiment among port customers continues on a good level despite hesitation in the decision-making among some port customers. The demand for Lift Trucks among our industrial customers started to level out. Year-on-year sales growth in Port Solutions exceeded 16 percent in Q3, and the orderbook remained above EUR 1 billion at the end of September. Volume growth helped to boost the adjusted EBITA margin to 8.2 percent in the quarter.

Moving to Industrial Equipment, we had a challenging quarter. Weakening macroeconomic conditions were reflected in external orders, which fell 9.7 percent from the year-ago period in comparable currencies. On a comparable currency basis, external sales fell 6.1 percent and the adjusted EBITA margin declined to 2.9 percent in Q3. The weakness in profitability was driven primarily by lower volume, weaker product mix and low productivity at our factory in Vernouillet, along with lower efficiency as a result of changes that are currently being implemented at our factory in Wetter. In addition, market softness has begun to limit our ability to fully absorb cost inflation with price increases.

We expect the profitability in Industrial Equipment to remain on a low level also in Q4, and see it as unlikely that the adjusted EBITA margin in Industrial Equipment would improve in full-year 2019 compared to 2018. Consequently, the adjusted EBITA margin improvement will slow down in full-year 2019 when compared to the improvement pace of the past couple of years.

To build a better long-term foundation for Konecranes, we continue to drive further efficiencies throughout the company, and in Business Area Industrial Equipment in particular. Many initiatives are already underway and we booked a further EUR 48 million of one-time costs related to ongoing activities in Q3. Together with the EUR 17 million restructuring costs recorded in Q2, the total restructuring amount stands now at EUR 65 million. We expect the corresponding run-rate savings to reach EUR 37 million by year-end 2020 and the amount to fully benefit our P&L by the end of 2021. The clear majority of these costs relate to Vernouillet and Wetter. The high restructuring amount booked in Q3 weighed heavily on EPS, which came down to EUR 0.04 for the Group.

On a more positive note, Business Area industrial Equipment made three significant product launches in Q3: an innovative all-new S-series standard crane with a synthetic rope; a new highly modularized and compact M-series process crane; and a new higher-performance C-series electric chain hoist. The new products will cover a substantial part of Industrial Equipment’s sales and include 20 patented key innovations that bring tangible safety and productivity improvements to our customers. Sales of the new products have already started, with a gradual roll-out across regions taking place in the coming quarters. The new products are planned to replace our current offering in the next two years, allowing us to reduce the number of product platforms from 20 down to 14. We expect the new products to strengthen our leading market position and act as a key driver in our pursuit for long-term profitable growth also in Business Area Industrial Equipment.