Good morning, everyone, and welcome to Konecranes Q2 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 our presentation includes forward-looking statements. Soon, Teo will present you our Q2 results. The presentation is followed by Q&A, as always. Please, Teo, the stage is yours.
Thank you, Kiira, and welcome on my behalf as well. The structure of the presentation is very similar to what it usually has been, so we will start with the Q2 group highlights, and then we will discuss a little bit more in detail the business segments, and then, a couple of comments on balance sheet, before we go into the Q&A. Let's start with the Q2 highlights. Actually, the second quarter of 2022 was quite similar to the first quarter, both from the operating environment point of view as well as from the performance point of view. We continued to have very good, very high order intake in the second quarter, but at the same time, our profitability declined year-on-year.
Our adjusted EBITA margin declined to 7.7% from 8.6%, one year ago. This was mainly due to low sales volumes, which was again caused by component and material availability issues as well as COVID-related challenges. Profitability declined in all segments. When we take a look at the overall market environment, it actually remained good in Q2, despite the war, despite the pandemic, macroeconomic concerns including inflation. Our order intake grew by almost 20% in comparable currencies year-on-year and surpassed EUR 1 billion level again now for the second consecutive quarter. We were very close to the record levels of the first quarter in the second quarter order intake.
Also, the so-called short cycle products, notably components in industrial equipment and lift trucks in ports, continued to do very well and actually also now in the second quarter slightly better than what we expected ourselves. From the sales point of view, like already said, we were suffering as a result of the component and material shortages and other supply chain constraints. Our sales in a year-on-year comparison decreased slightly in comparable currencies. When you take into consideration the price increases that we have done in a year-on-year comparison in a way as a result of the inflation.
Actually our underlying volumes are quite a bit lower than what they were one year ago, and this is of course also creating the profitability challenge and the decline that we are seeing in the numbers. When we take a look at the order book, of course the continued very high order intake as well as some of the delivery challenges that we have been having meant that the order book had another record at the end of Q2, more than EUR 2.8 billion at the end of June. We are expecting the market volatility caused by the ongoing war, the pandemic and other macroeconomic concerns to continue.
The demand environment has remained good, however, uncertainty has increased and we have updated our demand outlook for the third quarter to be in line with the current understanding of the market sentiment. Also, as we do not expect the situation with the supply chain constraints to normalize in near term, we have lowered our full year guidance ahead of the half year financial report a couple of weeks ago. Even if the material issues and constraints are by no means over, they will continue. The situation will continue to be tight.
However, we feel that in the second half of the year, we expect our delivery capability to improve in comparison to the first half and also some of the price increases that we have earlier done are starting to impact our profitability positively during the second half of the year. Looking ahead, we will continue to drive efficiency improvements throughout the company. Since the beginning of June, our service and industrial equipment businesses or segments have been focused under one leadership. Following this change, we have started to identify opportunities for efficiency improvements and simplification of our industrial business model. In June, we announced that Anders Svensson has been appointed as Konecranes' new President and CEO. He will assume his role on October 19.
He will be starting in his new role as late as October, so we have also decided to postpone our planned capital markets day to the first half of next year instead of the second half of this year, as we were discussing earlier. Of course, on behalf of the Konecranes leadership team and employees, I want to wish Anders a very warm welcome to Konecranes, and I look forward to our future cooperation. When we take a look at this slide, here we have actually more of the numbers. I think that we went through quite many of them already. Maybe worth noting is the cash flow from this slide. Our free cash flow was negative by approximately EUR 31 million.
This is primarily driven by the net working capital development as a result of the inventories being on a higher level than at the end of Q1. At the same time, maybe a comment regarding the net debt, it rose to EUR 700 million. At the end of Q1, it was about EUR 545 million. The increase is of course as a result of the cash flow, but also as a result of the dividends that were paid during the second quarter. A couple of words on the macro environment, market environment first starting with industrial businesses and familiar pictures here, utilization rate for EU, if we start with that one.
Actually, the manufacturing capacity utilization has been quite steady during the first half of 2022, and it is slightly above the pre-pandemic levels, when it comes to the EU. If we take a look at the picture in the middle, there is the utilization rate for U.S., it has actually continued to improve during the first half of 2022, and despite there is a small dip at the very end of the second quarter, so still we actually are on a higher level than the recent peaks in the middle of 2018. If we take a look at the PMIs for these same markets, EU and U.S.A., so they are suggesting expansion. We are above 50 points limit.
However, maybe a little bit slower pace of growth than what we have been having previously. Taking a look at the emerging markets, Brazil, India, and China, so there the PMIs also are above 50. Demand environment for Port Solutions, we can see it here. Actually, the container throughput has been quite stable during the first half of 2022. There has been some fluctuation, but overall quite steady, and at the end of May, we are approximately at the same level as we were one year ago, which level is actually very high in historical comparison. This is our take then from the macro data to the demand outlook. Of course, it goes without saying that the demand picture remains subject to volatility due to the topics that we have discussed.
When we take a look at our industrial customer segments in Europe and North America, we are seeing that the demand environment is on a healthy level, even though there are some early signs of weaker demand. In Asia Pacific, the demand environment has started to show signs of improvement. Of course, this is COVID related to the extent that COVID restrictions were there quite strong still in the beginning of the second quarter and now things look a little bit better from that point of view. When we take a look at the container throughput, that continues on a high level, and long-term prospects related to the global container handling remain good overall.
Financial guidance, which we actually, as mentioned, issued already ahead of the actual report, we are expecting net sales to remain on the same level or to increase in full-year in comparison to 2021. Regarding adjusted EBITA margin, we are expecting it to remain on the same level or to decrease in full-year 2022 in comparison to 2021. A couple of group-level numbers very briefly. Almost 20% order intake increase with comparable currencies like discussed. We had growth in all regions. We had growth in all reporting segments. When we take a look at sales, EUR 787 million, with comparable currencies, almost exactly the same number as a year ago.
We had increase in industrial equipment and service, but then we had a decrease in a year-on-year comparison in Port Solutions in the second quarter. Pie chart by businesses and by regions, there are no major changes here. Obviously, the Port Solutions share has maybe from the sales point of view declined slightly. However, now that when we take a look at the order intake, which has been very good for Port Solutions, of course, there will be catch-up coming a little bit later. From the regional point of view, EMEA continues to be by far the biggest. It has been around 50%, a little bit lower or higher now, 49% at the end of the second quarter.
Order book has been increasing quite a lot dramatically actually at both ends of Q1 and Q2 in a sequential comparison. Now we have in a sequential comparison more than EUR 300 million, clearly more than EUR 300 million, EUR 340 million increase in the order book and in a year-on-year comparison actually more than EUR 800 million improvement in the order book. As we can see from the percentages there, it's actually increasing in all of the businesses.
The adjusted EBITA that was EUR 60.9 million, 7.7% as discussed. As already mentioned, the decline, which is both in euros as well as percentage, was as a result of the low sales volumes caused primarily by component and material shortages and other supply chain issues, labor availability to some extent, and then cost inflation in certain places like in industrial equipment where we still had a gross-margin decrease in a year-on-year comparison as a result of cost inflation. On group level, however, gross margin remained on the same level as it was one year ago. On group level, there was no gross-margin deterioration really in a year-on-year comparison.
Let's move into the reporting segments and start with service as we usually do. Service order intake EUR 297 million. That is growth of more than 15% actually with reported currencies. Now, of course, the currency impact is quite big, particularly in service. With comparable currencies, the growth was almost 9%. We had growth in both field service as well as spare parts. We had order intake increase in all of the regions, but particularly in Americas in a year-on-year comparison. When we take a look at the Q&Q comparison, Asia Pacific was particularly strong like already indicated in the demand outlook as well.
When we take a look at the service agreement base, EUR 310 million, a little bit less than 10% growth with reported currencies to a bit more than 3% growth with comparable currencies. There is also sequential growth in the agreement base in the second quarter in comparison to the first quarter. Sales and order book. Sales was EUR 319 million, with good growth of 6.8% with reported currencies. However, with comparable currencies only 0.8%, suggesting that also in service, the underlying volume actually was lower than what it was a year ago because we have price increases included in service business as well. Sales increased in Americas, but decreased in EMEA and APAC.
Service order book, of course, on a very high level, EUR 457 million. This is including some of the big modernization deals that we have been getting earlier, but nevertheless, in a historical perspective, a very high order book for service business. Then, to the adjusted EBITA, so EUR 49.6 million or 15.5%. There is a decrease both in euros and in margin in EBITA for service. This decrease is basically as a result of two or three actually different reasons. One of them, of course, is the underlying volume that was already discussed. So we are effectively lower than a year ago, which was in a way as a result of the component shortages and labor availability.
At the same time, our productivity was a bit lower than usually, and this is also kind of driven by material shortages. When the spare parts, for example, or other material is not at the right place at the right time, planning service jobs becomes very difficult and it creates a little bit inefficiency in the system. This is something that we can see in service in Q2. Maybe as a third item, the product mix, maybe from the field service parts point of view was slightly weaker now than in the Q2 last year or in Q1 this year for that matter.
I guess that the productivity topic in a way is the decisive one here, so that is something that has been affecting maybe most of these items. Gross margin decreased as a result of the productivity, like already discussed. Moving on to the industrial equipment. Industrial equipment order intake, EUR 385 million, 16% growth, basically. However, when we take a look at the external orders with comparable currencies, growth is about 6%. We had order intake increase in all major business units, Standard Cranes, Process Cranes, and Components.
However, if we take a look at the same with comparable currencies year-over-year, so actually Components is the only one that clearly grew in a year-over-year comparison, whereas Standard Cranes and Process Cranes were quite a bit on the same level. Regionally, orders received increased in all of the regions. Sales EUR 275 million. Again, 7% growth. When taking a look at the sales increase, external sales with comparable currencies 1.3% only. Their sales increased in Standard Cranes and Components, but there was a decrease in Process Cranes. From the profitability point of view, adjusted EBITA was EUR 2.7 million, 1% margin.
The decrease in the adjusted EBITA margin was, of course, as a result of the low volume. The underlying volume was lower than a year ago here as well. At least partially in relation or definitely partially related to the pricing topic. We have not been covering inflation in all of the business units fully. As you may remember, we communicated that we have increased prices already earlier, but that it takes a little bit time before that will be visible in our P&L, and it was not really visible that much in the second quarter yet. Gross margin decrease on a year-on-year basis. Order book looks good here as well.
It has been increasing in Q1 and Q2 sequentially, both of those, quite a bit, reaching EUR 962 million at the end of Q2. Port Solutions order intake. Very good order intake, EUR 403 million. That's a growth of 47% with comparable currencies. When we take a look at the situation year-on-year by business unit. Basically it was a strong quarter across the board. Also, when we take a look at the sequential comparison where the actual order intake came down, but still particularly these shorter cycle product groups like Lift Trucks and Port Services and Lift Trucks in particular continued to do very well from the order intake point of view in the second quarter as well.
Orders increased in Americas and EMEA, but decreased in Asia Pacific. Sales, EUR 237 million, that is a lower number than a year ago, by 2% on a comparable currency basis. There was not necessarily major amount of, let's say, delivery issues from the project business point of view. This is partially at least the order book timing topic. However, when we take a look at some of the other businesses like the Lift Trucks that was already mentioned, so there of course the China lockdowns that we had in April and May impacted our factory as well. So there is of course this kind of a pandemic impact in the Port Solutions sales to some extent as well visible in the second quarter.
Adjusted EBITA, EUR 16 million, 6.7%. Again, lower both in euros as well as margin. Lower sales due to timing of customer deliveries is the main reason. Here gross margin actually improved in a year-on-year comparison in comparison to the second quarter of last year. Order book, this picture looks very similar to the industrial equipment order book improvement. Q1 and Q2 have been increasing quite a lot in a sequential comparison, EUR 1.4 billion or more than EUR 1.4 billion being the order book at the end of June. Still a couple of comments on cash flow and balance sheet before we go into the Q&A.
Net working capital and free cash flow, we can see that here net working capital was EUR 474 million. That is 14.9% of rolling twelve-month sales. There is an increase, like mentioned already, mostly as a result of inventories or work in progress actually. In this case, advance payments have continued to come in pretty nicely, but it hasn't been enough to compensate for the increase in inventories. We have been communicating that we basically should be under 15% threshold, for us to be in a way satisfied with this one. We are very close to that level now. But of course this is quite a lot, driven by the large backlog and the delivery challenges that we have across actually the businesses that we have.
Free cash flow EUR -31, as already discussed, driven by the same topic as just mentioned. From the balance sheet point of view, equity and net debt. Equity of course shows the impact of the dividend payment, as does net debt, partially or as well, EUR 700 million net debt at the end of Q2, and gearing 55% a good level. As such, no issue there. Adjusted return on capital employed 13% at the end of Q2. I think that this concludes the presentation, and then we can go into the Q&A.
Thank you, Teo. Before we open the line for the questions, we already have at least one question in the chat, so we could start with that one. You flagged a softening of macroeconomic indicators from high levels. Is this just contextual and to show awareness of the changing macro environment, or are you already seeing reductions or delays in customers' tender activity within your pipeline in Q3?
The overall sales pipeline, so when we take a look at sales funnels, including offers and hot offers and the whole categorization that we have there, they continue to be strong. There is not that kind of reduction in the sales funnel number as such. However, in addition to general macro cautiousness, this comment is driven by the discussions that we have been having with the customers. I think that this uncertainty that we have been referring is reflected in the customers' comments. Customers are clearly requiring more decision-making time, particularly if the case is a relatively large project. It takes more time to make a decision.
Some of the customers have also come in and said that they do not want to proceed with the plans that we already have in the offer base in a way, not necessarily a cancellation of an order, even though some small ones may have been there as well, but very small ones. It's mostly a funnel question. This kind of, let's say, hesitation is taking place more than what the situation was before. Now, of course, the demand level with what we have been having has been excellent. So more than EUR 1 billion orders for Q1 and Q2, so a small deterioration would not be a big thing in, as such. This is in a way, the comment conveys some of the considerations that customers are having.
There is maybe a little bit nervousness on the inflation, on the rate hikes, on the raw material prices going down, and these kind of things that people are thinking, and they are reflected to some extent, at least, in our discussions with our customers. This is of course, mostly now regarding the industrial side. When we take a look at the port side, maybe this kind of a discussion has been maybe less there, and the funnel is as strong there as it has been.
Thank you. I think we can now open the line for questions. Please, operator, go ahead.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel. Our first question comes from the line of Magnus Kruber at UBS. Please go ahead. Your line is open.
Yeah. Okay. Magnus here with UBS. A couple of questions from me. You know, I'd say this is probably the first quarter in a long time where margins has come in a bit below expectations on the service side, and you already called out the lower volumes as being the main reason behind that. But you also talked about potentially improving situation for deliveries into the second half. Assuming that the volumes remain low or slightly down year-over-year as in this quarter, should we expect the same margin drag to carry over into the second half? That's my first question.
Of course, the margin development is to a large extent volume-driven. There is no doubt about that. I think that the situation, what we have now, is that when we take a look at the underlying service volume, so it is below the level that we had previously. Based on the demand that we have in the marketplace and the order book that we have, that shouldn't be the case. This is primarily a delivery issue we will need to be able to deliver more.
Now the productivity issue that I flagged and mentioned, this is mostly in relation to the component availability, but from the point of view that when it is uncertain or let's say the supply chain works in a way that it's very difficult to forecast when we have certain parts at which place, for example. This creates, in a way, an inefficiency in the overall business. Provided that we can eliminate that one, gross margin as such should still be developing in the right direction. If volume is very low in comparison to previous year, for example, then of course, eventually it will create a fixed cost issue, which is in a way below gross margin.
We do not see a systematic issue in the margin development of service. Provided that we can deliver and we can plan our own activities efficiently, we should be able to be on the track where we were before.
Secondly, you know, you comment related to supply chain again. Is there any way you can help quantify, add some color around the improved capacity delivery into the second half?
We-
What does that mean on-
Yeah.
Ideally per business area, if it's possible.
Yeah. The quantification is, of course, difficult, but maybe what I can try to describe a little bit how we see the situation. Now when we take a look at the second quarter, and particularly, after the lockdowns have, you know, been removed, in China, so we have seen fewer and fewer categories of material that has been in short supply. That the number of escalations that we have from the material availability has become smaller. It in a way, you know, sign that the material availability will be improving, gradually. Why I say gradually is that we cannot, unfortunately say that we would be out of the woods as of now.
The reason is that there can still be surprises, and then many of the components that we need are actually configured. A subcontractor has raw material to which he in a way fabricates it according to dimensions that we require, and then we utilize that. For this to improve from the actual improvement of the component availability, it can still take time. We are saying that things are going in the right direction. We will not be out of the woods in near term by the end of the third quarter.
This will still continue to be challenging, but we are going in the right direction. Of course, I understand that quantifying in euros would be nice, but we would prefer not to do that because there is still the risk for additional surprises and let's say escalations that we are not maybe aware of today regarding various components. This is of course not only a material topic, it's also our internal processes and of course its labor availability. Labor availability has largely been driven and impacted by of course our capability of hiring new service technicians, for example, but also sickness leaves as a result of the COVID pandemic. Guessing how that will be going, you know, in various parts of the world is also to some extent challenging.
Absolutely. I appreciate it. Thank you. Just the final one: With respect to the revenue seasonality in the third quarter, following on to my second question, should we expect that to be a relatively normal?
Seasonality model definitely would be there this year as well. That is definitely our expectation. The second half from that point of view obviously would need to be better than the first half. Maybe if you take a look at it from the so-called financial guidance point of view, we are now saying that the net sales would be on the same level or higher than what they were in previous year for the full year. Then when we take a look at the first half of this year, we are actually slightly behind. We are not much behind in reported currencies, but we are slightly behind. This maybe gives you some kind of a view also as to how the guidance has been constructed.
Perfect. Thank you so much.
Thank you. Just as a note, if we can, try to limit yourselves to two questions per person, just in the interest of time and fairness, so we get to everyone. The next question comes from the line of Antti Kansanen of SEB. Please go ahead. Your line is open.
Yeah. Hi. Good day, Teo, and thanks for taking my question. First the question on the backlog. If you look at the product groups that you are kind of seeing the longest lead times or extension of lead times and kind of the biggest backlog build, because of the supply chain issues, what would you kind of highlight there? How much of kind of a price is impacting to the discrepancy between your backlog and order growth and the modest sales growth? I mean, how much more kind of a price increases do you have in the orders compared to what you are delivering today? That would be the first one.
Yeah. Yeah. Maybe we can start with the latter part of the question and how much we have, in a way, price increases now in the second quarter numbers in comparison to the situation one year ago. It's maybe something like 7% or so. If we take a look at the inflationary impact of price increases into Q2 numbers, it's maybe 7% in comparison to the previous year. We cannot, of course, calculate that exactly, scientifically, but that's the ballpark. It is lower in ports because of the longer lead time and somewhat higher in service. This is roughly the group level number.
When we take a look at the order intake now, there are product categories where, of course, the prices that we are quoting now are significantly higher than what we are having this less than 10%. It's because if there is a very high steel content, for instance, that has been impacting a lot. There are tens of percentage points of difference in some product categories, and in some others it may be that it is around 10% or so. An average from there is very difficult to say. The order book is of course then somewhere there in between.
The inflation as it has been accelerating, sales inflation in a way is on a lower level than order book, which is on a lower level than the order intake that we get today. This is also good to remember when evaluating the order intake so that there is underlying price increases that are impacting. Now, I answered with such a long answer to the questions that I have forgotten the first part of the question. Would you mind, Antti, repeating?
Yeah, sure. I mean just the backlog build and kind of the extension of lead times, which are kind of important industrial equipment, which are kind of the product groups that this is the most substantial issue.
We actually can maybe note so that we have basically in all of the product categories the delivery times are longer now than what they normally would be. That goes for service as well as for component business in industrial equipment and cranes as well. Particularly in some product categories in the Port Solutions business, we have a very high, like very, very big sort of prolongation in the delivery time. Maybe I do not want to go into the product groups by like that, but there are delivery times or can be 50% or more longer than what they normally would be, 50%-100% longer than what they normally would be in so-called normal circumstances.
Okay. The last question from me would be kind of you already mentioned that the demand for the short cycle businesses, Components and Lift Trucks surprised you positively on the second quarter. Do you have any color on what's actually driving this demand? Because I would imagine that your lead times are quite long, so the kind of the deliveries for your customers are longer than normal, and then you are seeing these kind of increased macro uncertainties, especially in Europe. I was a bit surprised that the customers are still willing to order or place so many orders that you saw on Q2. Do you have kind of any indication what is kind of driving? Is there a pricing impact or something that you could put your finger on?
That is a very good question. I think that this is probably then at the end of the day, it's of course a game between the delivery time and the price for the customer. I think that the underlying reason to some extent, at least may be behind the strengths of the Components business and Lift Trucks, for example, is that there is a relatively big replacement demand inbuilt into these product categories. Unlike if you take a look at the Standard Cranes or Process Cranes for that matter, which are basically for new capacity expansions. Maybe these kind of smaller ticket items that are for replacement, for instance.
They are easier decisions for customers to make even in an uncertain situation than the bigger ones. Like I think I already said that when we take a look at the uncertainty that we are now hearing from the customers, it is quite a lot so that the bigger the project is that the customer is in on an industrial side. The bigger the project is, the more hesitation and discussion and decision-making time there is required, which would be in a way suggesting that people are maybe a little bit more cautious making long-term CapEx type of things, whereas then Components or Lift Trucks can be replacement items. This is more of a guess than a fact, but I think that it would make sense from the behavior point of view.
Okay. Sounds reasonable. Thanks.
Thank you. Our next question comes from the line of Massimiliano Severi of Credit Suisse. Please go ahead. Your line is open.
Yeah. Hi. Thanks for taking my question. My first question would be maybe on the impact of China lockdowns, and if you could maybe help us quantify how much of sales were impacted by this in both Port Solutions and I think also in Components, given that you have a factory in China also for Components as well.
Yeah. Good question. We would rather not, let's say, quantify the impact in euros, but what of course we can conclude is that we have basically three factories in China. One of them is the lift truck factory that we already discussed. The other one is in Xinxiang, which is a component/assembly factory, and the third one then towards the northern part of the country. I think that if we take a look at the lift truck factory, for instance, it is a smaller factory than what we have in Sweden, but it was more or less closed in April and May. It definitely had an impact.
When we take a look at the Xinxiang, so I think that we were not closed for such a long time, maybe a little bit for a while.
Not because of the lockdowns.
Not because of the lockdowns. The material availability of course was an issue as a result of the overall environment during the lockdowns being difficult so that the material flow was in a way impacted negatively by that one, and it created slowness into that one. Of course, I mean the service business naturally in a way suffers from lockdowns because you cannot visit customers. There are all of these impacts. Throwing a euro number per BA, it probably wouldn't serve the purpose.
Clear. Thank you very much.
It's been one part issue.
The second question would be maybe on industrial equipment side. If you could maybe help us getting a sense of what is in the backlog in terms of industrial cranes, Process Cranes and Components. Maybe if you do have cancellation fees on clearly Process Cranes are projects, so you cannot cancel them. Do you have cancellation fees for orders on industrial cranes and Components within industrial equipment?
The split of the businesses within industrial equipment is roughly so that generally about 50% of the business is Standard Cranes. About 25%-30% is Components, and then the remainder, say 20 or so, is Process Cranes. I don't think that the order backlog significantly differentiates from that split. However, that of course the Component order intake has been quite good now, so there is maybe a little bit higher relative share of the Component order in order book than what it normally would be. And of course, the Component order book would be in a way shorter as well than for the other businesses. Actually, both Process Cranes and Standard Cranes are projects.
Standard Cranes are projects, but they are much more or less pro-projects, and the idea is to get advanced payments also in those ones. At least in a historical perspective, we have not really in crisis situations, we have not really seen cancellations in either of those. We haven't really seen them that many in Components business either. When we take a look at this situation, overall, one could maybe say so that there are no big cancellations or a wave of cancellations or anything like that. There have been individual single cancellations from the order book, but they are not in any way meaningful.
I think that a good guidance can be got from the previous crisis even though, of course, every situation is different. Even in financial crisis or then subsequent crisis, we have had a very limited number of cancellations overall in our business.
Clear. Thank you very much.
Thank you.
Sorry, we still have people waiting for questions, so now you need to shorten your answers.
Yeah.
so that we have enough time to.
I'm sorry. Yes
Take all the questions.
I will try.
Please, operator. Go on.
Thank you. The next question comes from the line of Panu Laitinmäki of Danske Bank. Please go ahead.
Thank you. I just wanted to ask about FX. If I look at your annual report, you keep the sensitivity to U.S. dollar change so that every 10% weakening against euro should improve your EBIT by about EUR 37 million on an annual basis, which is a quite sizable number. The question is that is this a rule of thumb that we could use for kind of from here forward? Did you have much of an EBIT impact from FX already in the first half of this year?
Now that you asked me to answer shortly, there comes a very difficult question which is very difficult to answer shortly, but I try. Unfortunately, I would be very glad to be able to say that we would be able to use that as a rule of thumb, but unfortunately we cannot. That is in a way a theoretical number, and it's including also the project business. In reality, the project business is something that is always agreed separately with customer. The currency changes that are happening are taken into consideration, and then the projects are typically hedged. The rule of thumb that you can use though is the transaction exposure, which is 10%, EUR 10 million.
This is something that comes from the flow business, which is then depending on how quickly or for how long a period we hedge the flow business, and we typically hedge one to two quarters. We haven't seen much of an impact in Q2. We will probably see some in Q3, and I think that if the euro/dollar stays like this, the full impact will be there somewhere between Q4 and Q1.
All right. Thank you.
Thank you. Our next question comes from the line of Tomi Railo of DNB. Please go ahead.
Hi there, Kiira Fröberg. This is Tomi Railo from DNB. Just wondering if you have had any large orders in industrial equipment or Port Solutions during the quarter, which you haven't yet published. What I'm thinking of is, of course, the underlying levels and EUR 1 billion orders. You are changing it a little bit, the market outlook, but what kind of visibility and guidance would you have for the third quarter demand levels?
There have been big deals within the Port Solutions order intake also in the second quarter. Now I will turn to Kiira to ask whether there are something that has not been announced.
We haven't really announced that many deals this quarter because, of course, always when we announce a deal, so it needs to be accepted by the customer and that process sometimes takes quite a long time. The bigger deals have not been as big as the one deal was in Q1, which was I think the second-largest or so. There have been bigger deals, yes.
Sizable deals.
Yes
Definitely. Yes.
Yes.
Yes.
In industrial equipment, there was also I think a couple of bigger deals, but not as sizable as the Q1 nuclear project from the U.S.
We would actually like to repeat what we said already, basically at the end of Q1, that we are not really expecting another record high quarter from the order intake point of view. Okay, Q2 was very close to Q1. In retrospect we were maybe too pessimistic at that time. Again, like discussed, these sizable deals, so they happen in a quarter where the customer is willing to make the decision. The exact estimation of the timing is of course challenging.
Second question, but also maybe a follow-up to the previous. Any comments on the third quarter level? Really the second question was the profitability development in the second half. Now given your guidance, of course, and what we know for the first half, likely not up, but best case flat or like most likely down, where do you think the, let's say, easing is coming from business line point of view? You mentioned that you will have better delivery capabilities, and also the price increases start to impact profitability positively in the second half. Where is your assumption most sort of based on?
I think that I will have to say that this challenge that we have been having, so it's actually with all of the businesses. If we take a look at the component availability, for instance, and some of our internal process topics as well. It's impacting service and industrial equipment as well because the same factories are being used and the same subcontractors are being used, at least partially. Of course, service is impacted by labor availability, maybe more than anybody else, but regardless. I think that also, even though ports has maybe a little bit different set of suppliers, of course, we are using similar same componentry as well, but also different.
I think that the situation should be looking better also from the port's point of view. Even though, of course, now, we already said that in the second quarter, project deliveries were not actually causing a massive issue from the availability point of view. This was more like a timing topic.
Thank you.
Thank you. Thank you. Our next question comes from the line of Tom Skogman of Carnegie. Please go ahead. Your line is open.
Yes. Hi, this is Tom from Carnegie. I wonder whether there are some kind of discussions regarding customers going for nearshoring and about the competitive position in you know, especially stacking yards in Port Solutions after Kalmar are walking out of this business. Will that be like a big change for you?
Well, if we take a look at, let's say, nearshoring as a whole, I'm not 100% sure what you are specifically referring to. But I think that the overall supply chain constraints that everybody has now seen is maybe causing discussions within companies that maybe it's not good to have all the eggs in the same basket. But having nearshoring as a concept would probably make sense. These kind of changes and discussions, we are of course having those discussions within our company as well.
They are definitely interesting from our point of view because they can of course create additional demand for our cranes because cranes are typically not moved even if the production is moved from one place to another one. Of course the competitive dynamics within the port's business. We will then see how it will form itself over time.
Okay. Yeah. You have not seen any kind of real discussions with customers starting nearshoring projects or so. It's more kind of a speculative kind of level at the moment?
Well, I think it's maybe speculative from the point of view, but I think that quite many companies are discussing these topics internally. There are plans and contingency plans and those kind of things being done on where your supply network would need to be going forward. These kind of discussions are ongoing. Where it will then lead in practice is probably more speculative.
Okay. Given the tight situation in Germany with gas, I wonder how large share of industrial crane sales come from Germany?
The Wetter facility that we have is a significant part of the supply chain, and it's the core of Demag production platform, obviously. It has an impact, or it is a significant site for us. We are using gas, of course, for heating. We are using gas also for certain production processes. I think that if we have time to manage, we can probably manage the production processes in another way as well. In case something happens very suddenly, so of course it will be causing disruptions to our production as well. A lot of spare parts and Demag componentry in general is coming from Germany. Of course, if there is a massive issue with gas in Germany, I think there is also the topic that what is then the sub-supplier's capability of supplying. That is maybe another topic, a very important one as well.
We have five production facilities.
And from a-
Sorry, Tom. We have five production facilities in Germany, and three of them use natural gas in a way or another. Mainly for heating, but then also for some production parts.
Out of sales then, how large is Germany out of industrial crane sales if people just turn to us in Germany just overall?
Okay. Germany, we haven't given the actual sales per country, but Germany is a very important country. U.S. is bigger, but Germany is basically the second-biggest country for us in the industrial area. It is, of course, important. I think that when we started about the macro environment and obviously we have been studying this internally so that are the customers more pessimistic in Germany than what they would be elsewhere in Europe, say Nordic countries or South European. Maybe there is more this kind of uncertainty discussion with the German customers which may come partially from the reason that you are asking it as well.
The gas topic, et cetera, is on top of the people's minds.
Okay. Thank you.
Thank you. Our next question comes from the line of Erkki Vesola of Inderes. Please go ahead. Your line is open.
Hi, Kiira, and the rest. About component availability impact on the deliveries and sales in Q2, could you give us any kind of ballpark figure how big that was? tens of millions, maybe?
Okay. You mean the late backlog increase in the Q2. We didn't write that in the report. The reason, of course, is that now that we have had these supply issues, so we are of course changing the delivery times towards the customers. As we do that, in a way, it's not any more visible in the overall late backlog. Yes, it is tens of millions that the additional impact has been during the second quarter, probably something between EUR 40 million and EUR 50 million, and it brings the cumulative late backlog number somewhere EUR 160 million-EUR 180 million or something like that.
This is not, in a way, again, factually completely 100% correct because there are these transitions, but it gives you an indication on how it has been developing during the second quarter in comparison to the previous quarters.
Okay. Thank you. The second issue is personnel costs. How big cost increases should we model for 2022? Regarding personnel availability, do you have to recruit by just offering higher wages or how do you solve this problem?
We need to pay competitive wages, of course, as everybody else. Of course, at the same time, we try to make sure that we would be able to attract people also with other means, training, and career opportunities also for the service technicians. These are the kind of things. We are seeing the inflation currently somewhere between 4% and 5% for wages.
Okay. Thank you so much.
Thank you. I think that we start to run out of time here. It's time to conclude the conference. Thank you everyone for the participation and good questions. As a reminder, we will issue our Q3 interim report on October 26 this year. I wish you all a great day and great summer. Thank you.
Thank you very much.