Hello everybody, welcome to this Konecranes 4th Quarter 2016 Financial Statements Release Presentation. My name is Miikka Kinnunen, I'm the Head of Investor Relations at Konecranes. We will do as usual, let's start with the presentation of our President and CEO, Mr. Panu Routila, who will cover the group financials, and he will give some words about the recently completed acquisition of MHPS Business. Then after that, we will continue into the business area coverage by the Chief Financial Officer, Mr. Teo Ottola. Without further ado, I will give the floor to Panu, please.
Thank you, Miikka. We had quite a satisfactory performance in 2016, which makes us actually very well prepared for the integration of the recently acquired MHPS Business that was closed on January 4, 2017. The profitability improvement, despite the volume growth lack, demonstrates that our actions to cut manufacturing capacity and the introduction of a new operating model based on our direct product line organization and P&L responsibilities have clearly improved our profitability and competitiveness. Coupled with streamlining of the middle management, we reached cost savings of more than EUR 30 million in 2016, which is visible in lower fixed costs. The highlight of the quarter were the orders from Virginia Port Authority for 86 automated stacking cranes valued more than EUR 200 million. This was the largest deal in the history of Konecranes ever. With deliveries extending to 2020, it gives a good baseload to our port cranes business.
Service has prioritized profitability and efficiency over growth. Our restructuring actions, together with challenging market conditions, particularly among industrial customers in the Americas, held back growth in 2016. Furthermore, low investments within process industries and commodity sectors affected the demand for industrial cranes and components. Likewise, weak growth in the container throughput and focus on M&A activities has affected terminal operators' appetite for capacity investments and expansions at ports. From this perspective, the recent strengthening of the purchasing managers' indexes and return of growth in container traffic is a welcome development. As you can see on the slide, board proposes an unchanged dividend of EUR 1.05 to be paid for 2016. I would now also like to thank and take this opportunity to express my deepest gratitude to the long-serving board members, Mr. Stig Gustavson and
Mr. Svante Adde, who have announced that they will not be available for re-election at the next annual general shareholders' meeting. Let's now take a closer look at some group's key figures for the fourth quarter. Group order intake grew by 16% from the previous year and totaled EUR 595 million. Sales increased by 1% on a year-on-year basis and amounted to EUR 613 million. Currencies did not have a major impact on these growth rates in the quarter. At the end of 2016, our order book exceeded again EUR 1 billion, actually, and to be more precise, it was EUR 1,038 million, and roughly at the previous year's level. The adjusted operating profit continued to increase strongly in the fourth quarter, as it grew by 17% from the comparison period. Adjustments that were related to the restructuring costs and transaction costs amounted to approximately EUR 21 million.
Transaction costs increased from the previous quarters mainly due to the divestment of STAHL CraneS ystems in Germany. As usual, cash flow strengthened toward the year-end, which lowered gearing to 29%. The activity in the world's manufacturing sector, according to purchasing managers' index, picked up steam in the second half of 2016. By area, growth was generally led by the U.S. and Western European regions. However, the performance of the Asian region also improved. Looking at the industrial production statistics, the European Union manufacturing capacity utilization rate slightly improved in 2016. From our perspective, the demand in most of our European businesses behaved correspondingly. The U.S. manufacturing capacity utilization rate declined slightly from 2015. The total industrial capacity utilization rate, which declined heavily in 2015 due to commodity sectors, stabilized in 2016.
Again, from our perspective, while certain market uncertainty continues in North America, there are already certain signs of an improvement in the marketplace. The year 2016 started on a weak note in Chinese and Russian manufacturing sectors, but they finished the year in a growth mode. This fits fairly well with our perception of the demand situation as well, which seems to be stabilizing following several years of weak trading conditions. Modest growth could be overall observed in India. In Brazil, the PMI pointed to a continued contraction in manufacturing output the entire year. The global container throughput grew only by approximately 1% in 2016. Due to weak growth in container throughput and focus on M&A, most of the terminal operators' capacity expansion plans were put under review in 2016. This affected also the demand for port cranes.
However, the world trade has gained momentum noticeably at the end of 2016, which could suggest improving demand as we progress further in 2016. Nevertheless, we remain fairly cautious on the near-term order prospects. The summary of the market outlook is that customers are cautious about investing due to modest volume growth in manufacturing and process industries, as well as container handling. The companies operating in emerging and commodity markets are particularly under pressure to save costs. The demand situation in Europe and North America is somewhat mixed. Low growth in global container throughput has led to a slow decision-making among container terminal operators. The quarterly equipment order intake may fluctuate due to the timing of the large port crane projects.
Due to the very recent Terex MHPS acquisition, Konecranes believes that it is not appropriate to provide financial guidance for the new combined business at the present time and intends to provide financial guidance in conjunction with its interim report January-March 2017. Above-mentioned figures. In the fourth quarter, we reached approximately EUR 10 million cost savings, bringing the full year figure to more than EUR 30 million. Based on these already implemented actions, it looks like we have a potential to reach an incremental cost savings of EUR 10 million - EUR 15 million in 2017. The acquisition of Terex MHPS business branches have already been combined, and certain management level savings have already been reached. As we move forward in the coming months, we intend to launch implementation for other integration actions planned for 2017 as well.
Having said all this, our key focus remains and will remain on our customers, as taking good care of them is vital for our long-term success. The sound industrial logic of the MHPS acquisition makes it possible for us to realize a long list of synergies. Based on the initiated integration work, we are confident on the targeted synergies of EUR 140 million, within three years, of which EUR 35 million is expected to be implemented on a run rate basis by the end of 2017. Like I mentioned on the previous slide, certain quick wins have already been realized. This slide contains new information about sources of synergies and their relative sizes. I won't go through all the details here, but I will mention certain categories.
Based on the initial Synergy estimates, commercial Synergies are estimated EUR 15 million-EUR 25 million, synergies related to technology and product platforms EUR 20 million-EUR 30 million, manufacturing operations EUR 50 million-EUR 70 million, service operations EUR 15 million-EUR 20 million, and finally organization and support EUR 15 million-EUR 20 million. I would like to remind you also that the commercial synergies do not include longer-term Synergy potential related to the untapped opportunities stemming from the combined install base. Before I jump back to the fourth quarter financials, I want to mention that the divestment of the remedy asset was successfully completed on January 31, 2017. The final selling price was EUR 224 million, and we expect to book an after-tax capital gain of approximately EUR 200 million from the divestment in the first quarter of 2017.
The proceeds from the STAHL CraneS ystems divestment will be used to amortize the loans related to the MHPS acquisition. In 2016, STAHL Crane Systems sales outside the Konecranes Group totaled approximately EUR 130 million, and its EBITDA was approximately EUR 26 million. Now, let's still look back at the fourth quarter numbers and figures before I pass on the word to Teo, who will discuss the performance by business areas. The fourth quarter order intake grew by 16% from a year before to EUR 595 million. Orders received increased in Americas but decreased in EMEA and APAC. Sales rose by 1% from the corresponding period in 2015 to being EUR 630 million. The value of the order book at the year-end 2016 was EUR 1,038 million, which is flat year-on-year basis.
However, due to the timing of deliveries, a comparable order book for current year's deliveries is lower than the corresponding situation a year ago. In the fourth quarter, the adjusted operating profit increased by EUR 7.6 million - EUR 52.1 million, and in 2015, it was EUR 44.6 million. Similar to the third quarter, this was again the highest quarterly adjusted EBIT since 2008, which was the peak year in earnings. The adjusted operating margin improved to 8.5%. This slide on the rolling 12-month basis, sales and adjusted EBIT shows nicely that our cost savings actions are delivering the results as the profitability is improving despite the lack of supporting volume of higher sales. Still, some observations about the full year 2016 performance. In 2016, the orders received fell by 2% to EUR 1,921 million. Orders received rose in the Americas but fell in EMEA and APAC.
Group sales decreased and was roughly unchanged at EUR 2.18 billion. In 2016, the adjusted operating profit increased by EUR 23 million to a total of EUR 141 million. This was the highest number since 2008. The adjusted operating margin improved to 6.6%. On a rolling 12-month basis, the share of service is unchanged at 44% of the group sales. EMEA share has grown to 47%. Americas and Asia-Pacific are slightly down at 38% and 15% of sales, respectively. And now I will pass over to Teo, who will continue from here, and we will jointly then be available for the Q&A session.
Thank you, Panu. And let's turn to BA reviews with service, as we usually have done. The service order intake in the fourth quarter was EUR 190 million. That is down approximately 5% year-on-year. This time, the currencies did not really play any major role here, so with comparable currencies, the decline is exactly the same as the reported number. Sales was EUR 268 million. That is down 3% year-on-year.
Then if we take a look at the sales split regionally, so in the fourth quarter, sales grew in APAC, but they fell in EMEA as well as in the Americas. This is the quarterly view when we take a look at the full year 2016, so we can note that the sales actually rose in EMEA and declined in the Americas and APAC. And this picture for the full year obviously is more in line with the macro data that we saw Panu present earlier, the utilization rates for manufacturing industries in EMEA and Americas, for example. The service adjusted EBIT was EUR 38 million, roughly.
That is a margin of 14.3%, so the EBIT improved both in euros as well as in margin, even if the sales volume was lower than a year ago. Gross margins were actually flat, so the improvement in the profitability basically comes from the efficiency improvement that we have done, both in terms of cost cutting as well as system implementations and other, let's say, ongoing continuous improvement. When we then take a look at the net sales and adjusted EBIT on a little bit longer-term perspective, so rolling 12-month basis, so here we can note that the sales are slightly down, 2.5% with reported currencies, whereas the EBIT has continued to improve as the case has been since the end of 2011, and now we have reached an EBIT margin of 11.4% at the end of 2016. Contract-based value is EUR 206 million.
That is slightly down, about 3% with comparable currencies, so we have discontinued certain non-performing non-core businesses during the year, and this has then meant that the contract base has declined slightly. Service order book, however, is a little bit higher than what it was one year ago, now at EUR 173 million and about 3% higher than a year ago with comparable currencies again. Then moving on to the equipment, so equipment order intake was EUR 421 million. That is 25% higher than a year ago. If we take a look at the order intake by business units, we can note that the orders for port cranes obviously rose as a result of the Virginia order. Orders for industrial cranes, crane components, and lift trucks, however, fell.
And then if we delve more in detail into the industrial cranes, so we can say that the standard crane order intake actually rose in the fourth quarter, whereas then the process crane order intake that has been doing pretty well otherwise during 2016, so was down in the fourth quarter. Order intake regionally increased in Americas, again as a result of the Virginia order, but decreased in EMEA as well as Asia-Pacific. Sales for the fourth quarter, EUR 365 million. That is slightly up, 1.1% up in a year-on-year comparison. And then when we move into the, again, the adjusted EBIT, so EBIT was EUR 21 million. That is a margin of 5.8%. The EBIT is about EUR 6 million, almost 6 million higher than a year ago. Part of that, of course, is explained by slightly higher volume. However, a majority of the improvement comes from gross margin.
So gross margin was actually higher than what we had in Q4 2015. There are a couple of reasons behind that. One of them is that during the fourth quarter of 2015, we had a relatively big provision that we made in the accounts receivable. Now, the lack of that kind of one-time cost obviously makes the comparison better. At the same time, the efficiency improvement actions that we have done have meant that the gross margin has continued to improve. Product mix for the fourth quarter actually is slightly weaker than what we had a year ago, but in net terms, the gross margin improvement is helping our EBIT in the fourth quarter.
Again, then on a long-term perspective, rolling 12-month sales, so there we can note, as in the service side as well, that the sales are slightly down, whereas now in the EBIT we have a very nice-looking trend from the beginning of 2016 onwards, where we have been able to improve the profitability quite nicely. Obviously, the absolute level, somewhat more than 4% EBIT margin, is not satisfactory, but the direction definitely is the right one. Then again, on the order book, so order book EUR 865 million, roughly, pretty much on par with the situation one year ago. The timing of the order book is different now, so more of the order book is beyond 2017 deliveries than what the situation was a year ago. And then still a couple of comments on the balance sheet and cash flow situation.
Our net working capital at the end of the year was EUR 304 million. That is 14.4% of rolling 12-month sales. This is in our target, so our target is to be below 15%, and as we can note from the graph, so the situation always has been better towards the end of the year, and that is the case now as well, but we are about half a percentage point better than what we were at the end of 2015, so the development has been in the right direction. That good development in the net working capital obviously is visible also in the cash flow. Our cash flow, or free cash flow, was EUR 84 million, a good level, especially in comparison to 2015 when it was basically zero.
Then the proceeds of the disposal of the shares in Kito then mean that our cash flow before financing was then approximately EUR 48 million higher than the free cash flow for 2016. The cash flow, of course, is then feeding into the net debt and gearing numbers. Our net debt at the end of 2016 was approximately EUR 130 million. That is a decline of roughly EUR 70 million from the situation a year ago, and our gearing is at 29.1% at the end of the year. Then still before going into the Q&A, so the slide on return on capital employed, our 12-month rolling ROCE, so at the end of 2016, was 10%. Then when we exclude the adjustments, we are on the level of roughly 19% in return on capital employed for 2016, a slight improvement in comparison to the situation at the end of 2015.
Now we can go into the Q&A session.
Thank you, Panu and Teo. Let's go to the Q&A, and first I expect more questions to be coming from the phone line. Operator, would you please inform the participants that they can present their questions?
Yes, of course. Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one to ask a question, and we will now pause for just one moment to allow everyone to signal. We can now take our first question from Antti Kansanen from Danske Bank. Please go ahead.
Thank you. This is Antti. Order intake Q4. What happened? Because if I take off the EUR 300 million order, it looks like the underlying was really quite bad. So what happened there?
Thank you, Antti, for the question. Firstly, why do you want to take it off? Because I want to keep it, and you can't take it off from us. It's a good order still, so we have to keep it. And it gives a very good base load. It is true that if you don't count that on the port side, the order intake was somewhat lower, but I think on the other hand, we concentrated really on getting this big order because it's an important one for our near-term and even short, let's say, longer-term future. So it gives a very good base load for the next couple of years.
I estimate that in the near term, let's say, the port side order intake will concentrate more on the smaller size of orders, and that we will probably going to see in the near future here as well. But this big one is an important one. Do you have, Teo, maybe something for the numbers as well there?
Maybe an additional comment on the order intake as such. So now in the fourth quarter, we also had a relatively high cancellation. The amount of cancellations in euro terms was quite high, so we had about EUR 18 million cancellations. Majority of that came from one order only, but this cancellation obviously is then taken away from the order intake, so it impacts that number as well.
Okay. And based on what you told about the leading indicators, when would you expect to potentially see some improvement in underlying demand?
Well, as we have said, we don't give really a guidance at the moment. We can though state that traditionally we have been a kind of late cyclical in our businesses, and that would mean that there should be the visibility seen maybe sometimes during the second quarter or so.
Okay. And then finally on Terex MHPS, I understand that you may not even yourself know yet the 2016 performance, but what we know is that the business is usually very second half weighted. Is there any indication that you could share how the second half was last year?
No way, Antti.
All right. Thank you.
Thank you.
And we can now take our next question from Tom Skogman from Carnegie. Please go ahead.
Yes, thank you. I've got questions on synergies that are not included in these EUR 140 million. You mentioned today again about these service top-line synergies, and of course you can speculate about improved pricing in equipment. So have you already started to adjust some prices on equipment, and what kind of service top-line synergies do you see in just short term? What are you really doing concretely to make that happen short term?
Well, short term now we are concentrating on the cost synergies. We have a vast number of activities that we are doing. There's about 3,000 different activities that we are doing internally in the company. We have now today one organization in place, and we are working to get the target organization in place, so there's a lot of work to be done there. At the same time, we have to still keep very active in the marketplace, working with our customers, factories working with the delivery, so we should not turn introvert and we have to keep ourselves extroverted at the marketplace to ensure that our, let's say, even short-term order intake grows there.
So these are now, let's say, the activities that we are mainly doing. Later on, then we will go to the other activities, and we have already told that there is untapped potential in the service business. We also told earlier that it will take some more years to come for us to get it, so that we rather lay the middle to long-term perspective on that one. We'll be coming to that later on.
But if you think about just equipment pricing, do you think you need new products to adjust prices, or can you just use your much stronger market position in pricing somehow?
I would prefer not to comment that question. Just smile.
Okay. Thank you.
Once again, if you would like to ask a question, please press star one. If you find your question has already been answered, you can remove yourself from the queue by pressing star two. We can now take our next question from Philippe Salaberry from HSBC. Please go ahead.
Yeah, no, thank you very much. Maybe could you provide a detail on the Virginia port order split? So the EUR 217 million, I assume they all came in in Q4, and I think the previous communication was in 2017, 2018. We should roughly see EUR 60 million coming from this order, right? Is that still correct?
Do you remember, Teo, the numbers exactly how much was for 2017?
2017 estimated sales are, let's say, between EUR 40 million - EUR 60 million. So that would be the amount.
Yeah. And that's because of the percentage of completion method. The deliveries will actually start in 2018, correct?
Correct. No deliveries in 2017 yet. That is correct.
Okay. And in terms of the remaining order book, what is the length of it? Is it in terms of delivery schedule? Is it mostly to be delivered in 2017, or what is the split in terms of delivery in 2017 and 2018?
Well, probably the best way to take a look at that is to view that what is the difference between the order book now and a year ago when it comes to the deliveries for the next year. And now, like I already mentioned, so now at the end of 2016, the order book is, let's say, the order book in relation to the order book size, it is lower for 2017 than what the situation was a year ago. And that difference of the equipment order book is in the ballpark of 10%. Comparable order book, it's in the ballpark of 10%.
And then you did quite well in terms of cost saving and also exceeded the target of EUR 30 million. However, it seems quite a lot is also eaten up then by restructuring costs and extra costs, especially now in Q4. Could you elaborate a bit on those?
Well, I'm very proud that
what to expect in 2017.
I'm very proud that we could actually reach these EUR 30 million savings. Had we said in the beginning of the year that we are going to reduce 900 people, it would have made a huge fuss everywhere. At the end, reducing 900 people and getting a EUR 30 million efficiency is a very good achievement, I have to say. And combined together with the same time organization making the MHPS acquisition, all the legal work, all the operative work to be ready with the integration, I mean, that's a fantastic job actually what the organization has done.
But can you provide, let's say, some more picture on the restructuring costs or why below the adjustments then the adjusted operating profit then?
Teo can say a few words about the numbers, but we already said here earlier that there is EUR 10 million-EUR 15 million coming in addition for 2017 profitability improvement from these restructuring activities that already have been carried out and implemented.
Yeah. If we take a look at the restructuring cost as such, so in 2016, the restructuring cost was EUR 15 million-EUR 16 million, if I remember correct, excluding the impairments. So with the impairments, it was a little bit higher, and in 2015, the cost was roughly the same for restructuring or, let's say, one-time restructuring costs. There, of course, one can calculate the payout, which has been decent.
Yeah. The report contains a breakdown of these transaction costs and restructuring costs. Now in the fourth quarter, the restructuring costs themselves were quite in line with the previous guidance, and basically the full year figure was bang in line with the figure we estimated already in the beginning of the year for the full year. So really, I think the figure that you are now wondering is mainly coming from the transaction costs, and the main explaining factor is the divestment of STAHL CraneS ystems that was signed during the quarter.
Okay. And then in terms of the declining order intake in the EMEA region, the last time you flagged some, let's say, some difficulties in some core European markets like Germany or Scandinavia, is the decline now in Q4 also related to these core regions, or is it coming from other EMEA countries?
Well, actually, if we take a look at the EMEA and take a look at service first, so it is correct that the service sales came down slightly in EMEA. However, if we take a look at the order intake, so that was actually up in the service EMEA. If we take a look at the country split, and we are writing also in the report that the market environment is a bit mixed within Europe. Generally, 2016 service has been quite strong, and strong countries are, for example, U.K., Spain, maybe the Benelux countries, Austria, Nordic countries, not as strong, but maybe on that side as well.
Then there are also some, let's say, weaker countries. Again, while service has been strong, maybe standard cranes have been relatively strong. Process cranes, on the other hand, in the EMEA area throughout 2016 have been very weak. The same applies to the components that have also been relatively weak. The market environment overall is mixed, like we are writing in the report as well when it comes to EMEA.
And especially on the component side, I mean, after all, they need to be delivered, I guess. I mean, there's a replacement cycle, or is it rather a method of losing market shares, or should those, especially the components, now come in 2017 then instead, or?
It's not that much of a replacement market at the moment as such. I don't see a big negative trend, though, there, so I remain somewhat optimistic now on this side.
Component order intake typically has been one of the first ones to recover if the economic environment overall improves. And if we take a look at now our component order intake in the fourth quarter specifically, so in a sequential comparison, in comparison to the third quarter, the situation actually looks better. So that, especially in Asia-Pacific, the component order intake has recovered. But it is like we have been pointing out many times, so it is extremely difficult and maybe even dangerous to draw conclusions based on one quarter only. So we would always need a little bit longer period to take a look at that. But in the Americas area, the component order intake has stabilized, and now in the fourth quarter in APAC, it was actually higher than a year ago.
Thank you very much.
Thank you.
And we can now take our next question from Manu Rimpelä from Nordea. Please go ahead. Good morning. My first question would be on the service business.
So do you see that you have now completed all these restructuring efforts, and you have right aligned the size of the order base as well, so that we should start expecting kind of see a more normal trend in terms of the orders and sales development in 2017 for the service business?
Now, we wanted last year to kind of make sure that we are well equipped for the integration activities, and that's why we did quite a lot of work on that side in the service business as well, specifically in some countries. And now we are actually well aligned to get the new MHPS service business integrated in our service business and return to the, I would say, more traditional situation there.
Okay. So from a kind of standalone Konecranes point of view, we should think about the demand growth should normalize to in line with GDP or growth in the installed base? Yes. Okay. And the second question is just on the services margin. Do you see that there are still these cost savings, EUR 10 million-EUR 15 million you have for 2017? So is that mainly on the equipment side, or is that also going to come on the service business?
There has been, of course, quite a lot done in the equipment side, but also in the general overhead, so that will also affect by increasing the service profitability somewhat while they have been allocated to both of the businesses.
Okay. And then just two housekeeping questions. So where do you see the non-recurring or the restructuring cost? Do you have an estimate of those for the 2017 and also the net financial items? I mean, given that you have all these transaction costs, then where do you see those two landing in the ballpark for 2017?
We have the numbers, but we are not giving them out yet as we don't give the guidance, so we are not giving any portion of it neither.
Okay. Thank you.
Thank you.
It appears there are no further questions over the audio at this time.
Okay. Thank you. Thank you, Operator. How about the audience here in meeting room in Espoo, Finland? Do you have any questions? Or everything's rather clear, and we wish you a good continuation of the day, and see you next time at the shareholders meeting, perhaps.