Konecranes Plc (KCR) Earnings Call Transcript & Summary

Good morning, and welcome, everyone. My name is Kiira Froberg, and I'm the Head of Investor Relations at Konecranes. Here with me today, I have our Chairman of the Board, Mr. Christoph Vitzthum; and our Interim CEO and CFO, Teo Ottola. Before we start, a kind reminder, the presentation contains forward-looking statements. Christoph will start and then Teo the will follow. And in the end, we will have a Q&A. [Operator Instructions] Thank you. Christoph, stage is yours.

Thank you, Kiira. Very good morning, and welcome to everyone on my behalf as well. As you have seen earlier this morning, we announced that the planned merger between Konecranes and Cargotec has been canceled. The U.K. Competition and Markets Authority, the CMA, issued its final report earlier today and blocked the planned merger. The remedies which were conditionally approved by the European Commission were not effective in addressing the CMA's concerns. The completion of the merger would require approvals from all relevant competition authorities, and as a result, Konecranes and Cargotec have today decided to cancel the merger. We are, of course, very disappointed of this outcome. We did receive approvals in the European Commission, in China and in 9 other jurisdictions. The merger control process has been extensive, and the investigation is thorough. And although the remedy package offered removed all overlapping businesses, it clearly did not satisfy the concerns of the U.K. Competition and Markets Authority. At the same time, in our view, further remedies would have not have been in the best interest of our shareholders. as they would have changed the strategic rationale for the entire merger. Therefore, the planned merger was canceled, and Konecranes will now continue to drive our strategy and pursue our own value creation potential on a stand-alone basis. Despite the disappointment of the canceled merger, as the Konecranes Chairman, I'm convinced that Konecranes has great potential for continued growth and value creation as well as a promising future. We will continue to build on the core competencies of Konecranes, its leading market position and technology, the unique service offering we have as well as our talented and committed people. In recent years and throughout the pandemic, Konecranes has done an excellent job in improving its customer offering, operations and profitability, and we will continue to explore new business concepts and profitable growth potential in Material Handling. Konecranes plans to host a Capital Markets Day this autumn, and the exact date will be announced later. The Board of Directors has also started the process to find a new CEO for Konecranes. Meanwhile, our CFO, Teo Ottola, will continue to lead the company as interim CEO. We have also, as you have seen, decided to cancel the AGM as scheduled for tomorrow as we want to consider -- reconsider certain items on the agenda as well as to ensure shareholders' rights. The AGM will be convened later. Thank you on my behalf, and I'll hand over to Teo now.

Thank you, Christoph. Good morning. Welcome also on my behalf. I would actually like to talk a little bit about the Konecranes strategy. We are a world leading company in lifting businesses, meaning that we are offering productivity and safety enhancing sustainable lifting solutions as well as maintenance services for lifting equipment of all makes. We aim for seamless and integrated material flow also beyond industrial cranes and port cranes. We do this by real-time tracking. We provide advanced services with complementary relevant software to improve the productivity and safety of our customers. When we take a look at the boxes that we have on this slide, leader in technology, being the first one here. So we are actually a technology leader in our own field. We have a very wide digitalized offering, and we are actually using common componentry across the offering. This common componentry allows us to have maximum reliability, optimized design and allows smart features to be implemented, smart features that are specifically designed for lifting equipment. When we take a look at the other box, strong market position in all business areas. We are actually clearly a global leader in industrial equipment and industrial service. Our service offering is unique. We are providing industry-leading maintenance services for all types and makes of lifting equipment. We do this in a preventive and predictive manner to benefit our customers. In Industrial Equipment, we will continue to strengthen our position as global leader in lifting equipment. Also in Port Solutions, we are a major player in the design, manufacturing and servicing container handling equipment. The third box or attractive opportunities for growth, we actually will continue to leverage on the global megatrends, including digitalization, productivity, sustainability as well as, of course, our own core competencies, as Christoph was already saying. Service continues to be our growth engine. We have an unparalleled offering there. At the same time, the outsourcing opportunity is there and by attracting more customers to outsource maintenance, we have good growth opportunity in that business. In Port Solutions, the long-term prospects relating to container handling continue to be good. And also the megatrends being electrification, automation and digitalization are actually benefiting us as our relative competitive strength is, for example, in those areas. Number four, our long-term financial target or profitability target is 11% group adjusted EBITDA margin. In 2021, we reached 9.8% on a full year basis. We have a long history of improving our profitability within the service business. Our ambition is to continue improving in there as well. In recent years, we have been focusing a lot on improving the profitability on the Industrial Equipment. The work there will continue. When we take a look at the guidance for 2022, we actually have guided higher sales in '22 in comparison to '21 and also improving adjusted EBITDA margin in full year '22 in comparison to the year before. Number five, solid financial position. We have a healthy balance sheet, which is, obviously, a good starting point for the development going forward. And then number six, last but not least, our strong long-term commitment to sustainability. We are a sustainability pioneer in the industry. We are working towards a decarbonized and circular world and economy for our customers and the whole planet. We are, obviously, focusing on using carbon footprint, both in our own operations as well as regarding the products that we are delivering to our customers. We have actually, on the next slide, a little bit more detailed topics on this one. We actually published earlier this year our new climate targets, we are -- and these targets are in line with the ambition of limiting the global warming to 1.5 degrees. And this -- our targets and the alignment is actually verified by the science-based target initiative so that we are in line with the global target there as well. When we take a look at the targets that we have and take a look at the Scope 1 and Scope 2 emissions, which is the emissions from our own operations as well as the purchased energy. So there, we have a target of reducing the emissions by 50% by 2030. This can be done by utilizing renewable energy by improving fuel efficiency and also by improving, let's say, the energy efficiency within our own operations otherwise. When we then take a look at the Scope 3 emissions, which is the value chain emissions, the emissions of the products that we are selling to our customers as well as the whole of other procured goods in addition to the energy. So there also, we are aiming at a reduction of 50% by 2030. However so that when we take a look at the purchased goods, we are including only steel-related purchases into that one. This combination is about 70% of our total value chain emissions. And maybe worth mentioning still that we are actually committed to using 100% renewable electricity in our own factories by the end of 2022. This slide actually completes the presentation, and we can move into the Q&A.

Thank you, Teo and Christoph. Please, operator, we can now open the line for questions. And meanwhile, we have received a couple of questions through the chat function. And I think, Christoph, the first one could be for you. So what should we think about the 2021 dividend and the dividend policy going forward given you have canceled tomorrow's AGM?

Yes. Like I mentioned earlier, we have canceled the AGM. There are certain issues that the Board needs to reconsider, the dividend being one of them and we will revert to that as soon as we have something to say.

Yes. Thank you. The next question would be regarding the canceled merger, and I think this is also Christoph, to you. Was it even an option to divest Port Solutions?

If the question is divesting the Konecranes Port Solution as a total, I assume that's the question, it was not an option for us. It was exactly as I explained earlier, taking further steps in remedies would have canceled the rationale for the deal altogether. And therefore, this was never an option.

Yes. Then we have a question on the merger-related costs. And Teo, I think this would be for you. So how much has the process cost?

So far now when we take a look at the so-called transaction costs that are costs needed to -- for the planned closing of the merger. So those costs amounted to EUR 56 million at the end of the year. And then obviously, we will be updating this number as we report Q1 numbers out. The overall estimate of the transaction costs that we gave previously, that was 125 for both companies combined. So this continues to be a valid estimate at this point of time.

I guess we could now take some questions from the line, if there are any.

[Operator Instructions] We have one question from the line of Johan Eliason from Kepler Cheuvreux.

This is Johan at Kepler Cheuvreux. Can you hear me?

We can.

Yes, good. So just a minor question. You reiterated your guidance for the full year. And there's obviously a lot of moving parts as we speak here right now. Can you sort of give us some comfort on your supply chain and your order backlog that makes you comfortable with this guidance?

Yes, we can discuss that a little bit, obviously. I mean the order backlog that we had at the beginning of '22, obviously, it was very big as a result of the relatively good order intake that we had in '21. Also partially, of course, as a result of the late backlog for not being able to deliver as a result of the component shortages. So the starting point from that point of view to this year was actually quite good. However, at the same time, obviously, one has to remember also the comments that we have been saying earlier about the component shortages and other supply chain disruptions. So the component shortages, as we have commented since the third quarter, at least of last year, so they will continue to impact our operations during '22. We have been saying that at least during the first half of '22 as it is very difficult to see to the second half of '22. But overall, the component shortages and other supply chain challenges, also labor availability in some areas is impacting -- has impacted and will continue to impact. And now, of course, as a result of the situation in the world today, so there may be even more volatility into the availability of materials and also, of course, fluctuation into the cost items. Now having said all this, of course, we have evaluated all of those things together, and we are maintaining our guidance as it was given also in the very beginning of February.

Okay. Good. And can you just remind me your sort of exposure to Russia in that backlog, in general, sales exposure and sourcing exposure from Russia, Ukraine?

If we start with the Ukrainian situation, obviously, we have a sizable factory in Ukraine, which, obviously, has not been operational since the beginning of the conflict and war. And of course, that capacity we will need to replace from other places. The overall annual value that has come through that factory is EUR 20 million, EUR 30 million roughly. But of course, when we take a look at the overall order book within and -- let's say, commitments that we have towards the customers, the number is bigger, maybe some EUR 40 million or so. We will need to find alternative ways of managing that or those customer commitments. This may, obviously, costs for redoing some of the projects. It may cause impairments, et cetera, but that is roughly the volume that we are talking about when we talk about the Ukrainian factory. Then when the actual sales in Ukraine -- so customer sales in Ukraine are quite limited. In Russia, our exposure is usually depending a little bit on the year, EUR 50 million to EUR 60 million sales. We are not taking new orders in Russia at all now. So of course, it will have a certain implication to the volumes for us on a long-term basis. Then when we take a look at the order book in Russia, so we actually have their all businesses that we have, we have service, we have industrial cranes, and we also have port projects. And the situation regarding all of those projects and ongoing existing commitments, of course, needs to be handled case by case. We will surely come back to this topic in connection to the first quarter report.

And we have one more question from the line of Antti Kansanen from SEB.

Yes. It's Antti from SEB. A couple of questions from me as well. If you think about now your strategy going forward, and I guess the merger with Cargotec would have notably increased the company's scale, but obviously also created a more diverse structure with various different businesses. So how should we think about your strategy going forward? Is it focused on your core competencies in industrial cranes and port cranes and growth is organic by nature, perhaps complemented with bolt-on M&As? Or are you kind of seeing the benefits of scale for you individually as well, so targeting perhaps a bigger -- another bigger M&A or moving to a new verticals or anything like that. .

Do you want to start?

Okay. Okay. So well, of course, regarding everything what you said about the core businesses -- current core businesses, of course, holds true. We want to grow within our businesses where we are today. We also want to do bolt-on acquisitions as we have been doing earlier. And I was already referring to the outsourcing opportunity within the service business, for example. Having said all that, we have been over the years already, we have been talking about, let's say, about this, I guess, seamless material flow also beyond industrial cranes and port cranes so that we are looking at, let's say, potentials within the wider material handling. And this is, of course, something that we have been doing for quite some time, and we will continue to investigate those kind of additional growth opportunities. We do not have anything to report on those kind of activities, but it has been part of the sort of way of doing things, and it will probably continue to be that way as well. Maybe Christoph, if you want to...

No. I think Teo summarized it extremely well. I'd just like to highlight the fact that we are, of course, working on, as Teo already earlier mentioned, on improving the profitability of the company. We have a strong balance sheet that enables us to make strategic moves. And when we have something to say, we will say so.

Okay. And then I guess you already referred that it's been quite a lengthy process. So has there been some work, individual investments, footprint optimization, et cetera, it has been less undone or been on hold because of the pending merger? Is there something kind of you will now bring forward? Any comments on this?

No, there hasn't been anything specific that we would have been putting on hold. So it is, of course, clear that the merger work, the merger control, the integration planning has taken a lot of time and effort from the organization. There is no denying that one. But I wouldn't say that as a result of that, we operationally would have left some things undone when it comes to, for example, our industrial businesses, industrial service and industrial equipment or for the ports business for that matter either.

Okay. And then lastly for me, and I guess we will discuss this more in detail when you report Q1. But if you kind of look at the outlook in Europe and we have seen kind of accelerating raw material costs again and higher energy and oil prices. Obviously, a lot of geopolitical uncertainty. So is this something that you see creating some cautiousness on your industrial clients to invest in their European production and there is this something that you are concerned regarding your profitability development going into back half of this year as the kind of cost inflation kicks in?

Well, maybe if I start with the latter part of the question, which is the cost inflation and particularly the volatility that we are now seeing in the cost items in a way so that the raw material costs go up and down, depending on the overall situation. So that is obviously something that requires careful management and particularly the volatility within the steel cost for us, for example, is not an optimal situation. So because we have a certain period open between the offer and when it is closed with the customer. So it doesn't make things easier from our point of view. At the same time, this kind of a mechanism has been in the company in use for quite some time. We think we know how to deal with it. But of course, the abrupt changes in the costs create maybe some complexities. Then when it comes to the overall cost inflation. So there, of course, the idea is that we will be -- need to be able to mitigate the impact of that one by improving our own operations. And then also by in a way, transferring the additional cost to the customer prices. When one takes a look at the demand situation. So now -- and for example, Q1, so our overall market outlook when we came out with the '21 numbers was that we are not expecting to see any major change in comparison to the market environment in the fourth quarter. We haven't changed that comment in any way. So the situation from that point of view is roughly the same. At the same time, then these kind of changes that we are seeing in the world now, so they typically are not visible immediately in our order intake or customer appetite because the projects are typically quite long by nature, maybe apart from the Russian business, obviously, where I already said that we are not taking new orders. But when we take a look at the situation in general, we will learn over time. Now it is too early to say.

[Operator Instructions]

Meanwhile, we have a couple of questions online. So first, regarding the syndicated term loans of Cargotec and Konecranes side in 2021. I guess this is for you, Teo. Do you already know what the cancellation of the merger means in regards to those term loans?

No, I guess this is a question regarding the so-called backup facilities in the event of the merger taking place. So the backups will basically be canceled as a result of the merger being canceled.

And then we have another question. This is acquisitions related. So do you need to strategically strengthen Port Solutions with M&A in some certain fields as the merger has been canceled? For example, terminal tractors, spreaders, et cetera.

I think we'll be looking at a variety of strategic options going forward. Obviously, the cancellation of the merger creates also an opportunity for us to expand into other areas that we are not currently in, and this we'll look at.

Would we now have additional questions from the line, please?

We have one question from the line of Magnus Kruber from UBS.

I just wanted to follow up on the raw material impact question, we had a couple of -- how -- I mean, I think we have seen unprecedented spike in prices at the moment. When do you expect that to hit the P&L? And do you -- at this point, if the prices remain where they are, do you expect you to be able to offset them fully?

When it was visible in the P&L is typically quite a lot depending on the length of the order book for that particular product. And maybe it's fair to say that when we take the average length of the order book, we are somewhere -- we typically have been somewhere about, let's say, 6 months or so. But now, of course, it is maybe even a little bit longer as a result of the supply or delivery challenges that we have been having. And on top of that, you will then have the inventory turns. So that before these spikes are fully visible in the P&L. So it will take a little bit of time. What we are seeing in the P&L now in a way is the inflation that we had, say, half a year ago or so, that is now coming through, particularly to the equipment business. Service is different. So in service, obviously, the component prices come in quicker. And of course, the labor inflation comes immediately into the whole operation.

Okay. I guess if we don't have any more questions from the line, so it's time to conclude our conference. Thank you for the active participation and good questions. I hope you all a great day. Thank you.