Earnings Call: Q2 2021

Jul 27, 2021

Good morning, and welcome to Konecranes Q2 Earnings Conference. My name is Kira Froebari, and I'm the Head of Investor Relations at Konecranes. Here with me today, I have our President and CEO, Rob Smith and our CFO, Teo Ottola. Before we start, I would kindly remind you about our practice. This conference is to discuss Konecranes Q2 earnings. Securities laws in the United States and in some other jurisdictions restrict us from discussing or disclosing Information on the contemplated merger with Carcotech. Information regarding the merger can be found at www. Sustainablematerialflow.com. Until the completion of the merger, Konecranes and Carcotech will operate as separate and independent companies. Here's our today's agenda. Rob will start by reviewing our group level performance, after which Theo will continue with a more detailed walkthrough on our 3 businesses. The presentation is followed by Q and A, as always. Please, Rob, the stage is yours. Thank you very much, Kiran. Ladies and gentlemen, thank you for coming, and welcome to our 2nd quarter earnings conference. One point is a point, and 2 points make a line. 3 points define a trend, And the 4th point confirms the trend. And it's actually the same thing in quarters. This morning, Kona Cranes reported our 4th consecutive quarter of record profitability, confirming our exciting trend. Solid sales growth and high performance across the whole company delivered that 2nd quarter result And did so against the challenging backdrop of COVID-nineteen and ongoing component shortages and logistics challenges. Strong first half orders, especially in our short cycle products, our record high order book And continued traction from our strategic initiatives gives us very good momentum and confidence in the second half of this year. Although COVID-nineteen market volatility is certainly not over, our record high overall market sentiment Continued to improve in Q2 compared to previous quarters. Activity remained high in the port sector And continue to improve with our industrial customers. Group order intake grew 41% year on year in comparable currencies, As last year's Q2 was the peak of the lockdown period in COVID-nineteen. Component shortages and other supply chain constraints Did affect our Q2 sales, with negative quarterly sales impact of approximately negative €35,000,000 Sales however still grew 10% year on year in comparable currencies as the Konecranes team focused on our customers And overcame these COVID-nineteen challenges. COVID-nineteen and component shortages are not the only events Recently impacting our operations. 2 weeks ago, our factory in Wetter, Germany was affected by flooding. None of our employees were injured. There was physical damage on-site, and we expect to recover the lost production during this Q3. We have many employees living in the region, and our thoughts and our sentiments are with our employees and their families and their communities. Today, we updated our demand outlook for Q3, and we also reiterated our full year guidance for 2021, Where both net sales and expected EBITA margin profitability will improve in 2020 versus 2021 versus 2020. And finally, our announced merger with Cargo Tech is progressing well with merger control filings and integration planning teams making good headway. This month, the European Commission and the CMA in the UK announced a Phase 2 investigation, which is a common practice In Large Global Transactions, we are confident the merger will be successfully completed by the end of the first half of next year. The merger is fully aligned with Kona Crane's strategy and our growth ambitions. And together with Cargo Tech, We will create a global leader in sustainable material flow. Turning now to further key group figures. Free cash flow for the quarter was around €15,000,000 This is lower than the Q2 of 2020, mainly due to changes in net working capital, as was the case in the Q1 of this year. Net debt at the end of the second quarter was approximately $624,000,000 This is lower than last year Due to the strong operating cash flow and working capital development in 2020. Sequentially, we are above the 1st quarter levels, As during the Q2, we paid a dividend to our shareholders of €0.88 per share. Moving to the market environment for our Service and Industrial Equipment business. In both the Eurozone and the U. S, The manufacturing PMIs were at record highs at the end of the second quarter. And the manufacturing industrial Capacity utilization rate exceeded pre COVID levels in the Q2. In the BRIC countries, China and Brazil's manufacturing sector PMI continued in the expansion zone in the Q2. And in India and Russia, the manufacturing PMI dropped To below 50 in June. And the market environment for our Port Solutions business, The global container throughput index continued to increase in the Q2 and finished at an all time high. And at the end of May, it was 24% higher than it was at this point in time last year. While we expect market volatility to continue due to the pandemic, we have updated our demand outlook for the 3rd quarter To reflect the current market sentiment, the worldwide demand picture remains subject to volatility due to the COVID-nineteen pandemic. In Europe, the current demand environment within the industrial customer segments has reached pre COVID-nineteen levels. In North America, the demand environment is still behind the pre COVID-nineteen levels. And this is the same case in Asia Pacific outside of China. Outside of China, the pre COVID levels have not yet been reached either in the demand environment. The global container throughput continues to be at record high and long term prospects to the global container handling remain good overall. This morning, we reiterate our full year financial guidance. Despite the supply chain challenges which impacted our net sales in the Q1 and continue to impact our operations in the Q3, We expect to overcome these challenges, and we expect our net sales for the full year 2021 to be higher than they were in 2020. And we expect our full year 2021 adjusted EBITA margin profitability also to improve in 'twenty one versus 2020. Our order intake in the 2nd quarter increased to €807,000,000 It increased in all three businesses and it increased in all three regions. We had good order growth again in our short cycle time products. The quarterly impact from component shortages and logistics constraints was about €35,000,000 of less sales. Our sales increased in Port Solutions and Service and remained at previous year levels in our Industrial Equipment business, all in comparable currencies. In line with our first half in line with our full year expectations, our first half sales exceeded the first half of last year in comparable currencies It was within 0.7% of last year's levels at reported rates. Our rolling 12 month sales by business and by region is very similar to the results we had in the Q1 of last year, Where each of our businesses has approximately 1 third of total sales. And EMEA and AM in the Americas are our largest regions Followed by APAC with 16% of our overall sales. Our end of June order book was at a record high and is approaching €2,000,000,000 Year on year, this is up by 4.8% In comparable currencies and is sequentially up over a 100,000,000 versus the Q1 of this year. The order book increased in service, it increased in Port Solutions, and was slightly down in Industrial Equipment. And as in previous quarters, we confirm we have not had any significant order cancellations due to COVID-nineteen. Our group adjusted EBITA increased to $65,000,000 in the 2nd quarter Versus 57.5% last year. And our EBITA profitability was 8.6%, Another record. Our 4th in a row in confirming our exciting trend of profitability improvement. I'd like to express my strong thanks and my sincere appreciation to our employees all over the world for their dedication and hard work And to our customers and our business partners, our suppliers for the close collaboration we've had and we enjoy together. These together give us very good momentum and very strong confidence for the second half of this year. I'd like to now to turn it over to Teo To take us through the individual business results. Thank you. Teo? Thank you. Thank you, Rob. And as usual, let's start with the Service business. So service order intake was €257,000,000 That is up 23% Or actually 26% with comparable currencies. Now of course, the Q2 of last year, Q2 of 2020 Was heavily impacted by the COVID pandemic. As a result of which, our orders actually increased in all of the regions, And they also increased both in field service as well as parts business. In these circumstances, It is maybe even more important than normally to take a look at the sequential changes to understand where the demand is growing. We had growth sequentially in our order intake, even though not very much. And when we take a look at that By regions, we can note that regarding the EMEA, the order intake actually rose sequentially there and the order intake within service In EMEA has actually reached and exceeded pre COVID levels, whereas then in the Americas, the order intake sequentially slightly declined. And in the Americas, we are, let's say, at pre COVID level or slightly below when we take a look at the business activity Regarding Service. Of course, also regarding Americas, the Q1 of 2021 was very good. So this partially explains the sequential slight decline that we experienced in the second quarter. When we then take a look at the agreement base, agreement base was €283,000,000 There is a slight improvement in a year on year comparison. It's very much on the same level as in the Q1 of 2021. So sequentially, not much change. The customers continue to be quite cautious in making longer term commitments in these volatile demand environments that we are living through. And as a result of that, the agreement based growth is maybe a little bit more sluggish than what we have been used to. Then when we take a look at the service sales and the order book, sales was actually €299,000,000 And as in the order intake as well, so we had growth in all of the regions. We also had growth both in field service and parts. And here we are also seeing a good growth sequentially despite some of the delivery challenges that Rob was already Talking about. When we then take a look at the service order book, euros 273,000,000 at the end of the second quarter, 9% increase And the sequential improvement or increase in the order book, which is approximately SEK 20,000,000 actually coincides pretty well With the delivery delays that we have been experiencing through the supply chain challenges in the second quarter. Then the profitability regarding Service. The adjusted EBITA was €50,300,000 That is a margin of 16.8%. So we are higher than a year ago in euros, but the margin declined slightly. And the decline in the margin is mainly due to two reasons. The first one of them is the weaker mix. So now the delivery challenges that we have been Experiencing have been mostly been in product or let's say service offering that is material content rich. And that offering typically has a higher margin than the labor part. And therefore, now the mix has been a little bit weaker from the margin point of view Than in the situation a year ago or actually in the Q1 of 2021. The other reason is then that the Comparison period included temporary factors with an impact on our indirect personnel costs. And now as a result of not having those ones, Like government subsidies or short work week type of activities, our indirect salaries are slightly higher than what they were a year ago. This obviously concerns also other BAs, not only service, but it is maybe more visible in the service numbers. And then the gross margin declined in a year on year basis and that is, of course, as a result of the mix. And it actually declined in a sequential comparison as well Due to the same reason. Then moving on to the Industrial Equipment And Industrial Equipment order intake and sales. Order intake, €331,000,000 that is 40% higher than a year ago, A very high growth. Actually with when we take a look at the external orders with comparable currencies, we are taking a look at the growth of 48%. And as in the Service Business, so also in the Industrial Equipment, in an year on year comparison, orders increased basically across the offering, so So in Standard Cranes, Process Cranes and Components of the regions, there was growth in the Americas and EMEA, but a decrease in Asia Pacific. And again, when we take a look at this situation sequentially, so there is significant growth also sequentially. And the in a sequential comparison, The standard cranes did pretty well or actually very well. Process cranes did well. The component order intake declined slightly In a sequential comparison, however, it stayed on a very high level in historical perspective also during the Q2 of 'twenty one. Then when we take a look at the sales, the sales number was €261,000,000 There is a slight decline year on year, 3.4%. However, when we take a look at the external sales with comparable currencies, we are looking at Small growth of 1.8%. Sales increased in the component business, but declined In standard cranes and process cranes in a year on year comparison, and this obviously means and meant that the sales mix from the margin point of view was better than a year ago. Sales decreased in the Americas, but increased in EMEA and APAC in a year on year comparison. And then when we take a look at the profitability, adjusted EBITA, EUR 5,400,000, 2.1%. We have an improvement both in euros as well as margin in a year on year comparison despite very small sales change. The improvement in the margin is due to here also due to two reasons. The first one is the sales mix, A favorable one as a result of higher share of components than a year ago. And then the continuous progress On the strategic initiatives and particularly the Process Grain Business Improvements that we have been able to do and this is creating a positive delta in comparison to the Q2 of 2020. And gross margin improved on a year on year basis as a result of both those factors mentioned. Order book, there is not actually major difference in comparison to the situation a year ago. But obviously, as we can see from the end of last year, The order book has been increasing very nicely. And then Port Solutions. Port Solutions orders received, euros 272,000,000 that is as much as 48% higher Then a year ago, orders increased in all the regions again, Americas, EMEA and Asia Pacific. If we take a look at the business units within ports, we can note that lift trucks did very well in a year on year comparison, also port service Did very well in a year on year comparison. And maybe in the sequential comparison and the numbers sequentially are pretty much on the same level, But it's worth noting that the lift truck business continued to do very well also in the 2nd quarter and did, Let's say very favorably also in the sequential comparison. Port Solutions sales were €243,000,000 That is 17% higher than a year ago. Actually, the deliveries in the ports business did very well or we did very well regarding the deliveries in Ports Business towards the end of the second quarter. Then The adjusted EBITDA for EUR 17,300,000, 7.1%. There is an improvement Here as well both in euros as well as percentage. The improvement is due to, of course, higher sales, But also good project management execution. Mix was probably a little bit weaker than what it was a year ago. And as a result of that, gross margin also declined in a year on year basis. The sequential decline In the EBITA margin from Q1 to Q2 is as a result of the, let's say, SEK 5,000,000 provision Change that we made in the Q1, so we actually had an extraordinary gain of in the amount of NOK 5,000,000 in the Q1. So that Explains the sequential decline in the EBITA margin from Q1 to Q2. And then when we take a look at the order book, so €983,000,000 increase of 6% With comparable currencies in a year on year comparison. And then still a couple of comments on the cash flow and balance sheet. And we have typically, of course, been starting with the networking capital situation. Networking capital is higher than what it was at the end of Q1, exactly like Rob mentioned, euros 392,000,000 that is 12.4% of the rolling 12 month sales. So the increase in the net working capital is primarily as a result of the inventories, which is then again primarily as a result of Sales going up in a way so that higher sales, also project timing. And then, of course, also the delivery challenges that We have been having is in practice, meaning that much of the undelivered goods are still in the inventory, increasing that value to some extent as well. Again, in a historical perspective, we are still clearly or we are still quite okay in comparison to our midterm target To be below 15% in net working capitalrolling 12 month sales. Free cash flow Lower than a year ago, like Rob mentioned, this is basically all of it is coming from the net working capital changes. Net working capital change was very favorable in the first half of twenty twenty. Now it was not. And this is obviously impacting the free cash flow. Cumulatively or let's say on a rolling 12 month basis, free cash flow is still a very handsome number As a result of an extremely good end of 2020 from the cash flow point of view. And then gearing and return on capital employed. Net debt, €624,000,000 like already mentioned, almost exactly 50% Gearing at the end of the second quarter. And then finally, before going into the Q and A, return capital employed or an adjusted Return on capital employed, 13.8 percent has been trending upwards as a result of the profitability improvement and also the Capital employed has been trending down a little bit, helping obviously the return on capital employed development. And now after these comments, I believe that we are ready to go to the Q and A. Thank you, Teo. And before we actually start the Q and A, a kind reminder, due to the securities laws in the United States and some other jurisdictions, we won't be taking any merger related questions. Let's now open the line for questions. Operator, please go ahead. Thank you. We will now take our first question. I have a couple, please. My first question is about service margins. Could you maybe give us some color about The EBIT bridge for Q2 and maybe how we should think about the margin levels towards the year end? Yes. Well, if we take a let's take a look at the service, but also maybe let's start With the group level analysis and we have been of course over the quarters, we have been discussing The temporary and permanent cost reduction and the amount of those. So now when we take a look at the 2nd quarter On a group level and compare that to the Q2 of 2020. So actually the indirect salary Change that is due to the temporary cost savings that we made in the Q2 of 2020 is about SEK 10,000,000. And we are expecting that, that SEK 10,000,000 will be a similar comparison topic in the 3rd quarter as well. And then as we have been explaining also earlier, so when we take a look at the indirect salaries, we have been on a relatively stable path since the Q4 of 2020. So Q4 of 2020, Q1 of 2021 and Q2 of 2021 Are in a way on par with each other or comparable with each other, whereas these temporary activity, short work week, Government subsidies were mostly impacting Q2 and Q3. So this is maybe a building block for an EBITA bridge for the whole group. This actually, this SEK 10,000,000 is divided to 4 different topics. So it's all of the 3 businesses and the unallocated group costs. So it's visible on all of those. So it doesn't make a significant difference to service, for instance. And at least as important topic in Service Q2 EBITA bridge is the mix. And as we have been saying, now the delivery challenges that we have been having, so in Service, Those have mostly impacted material content related offering. And this material content related offering Kari is a higher margin than labor content. And now that the mix has been weaker, gross margin has been declining. And as a result of that one, then the margin in the Service Bridge in the Service Q2 'twenty one It's a little bit lower than what it was 1 year ago. So it's these two things, product mix and The indirect salaries coupled with a little bit other, let's say, other SG and A type of fixed costs. Overall, on a group level, when we talk about the indirect personnel costs, so we can say that in the fixed costs, The other SG and A type of costs, so they are on the same level as they were a year ago. So there is no Change from that point of view, the change is mostly in the personnel costs. I'd add 2 more points. As Thio described, the 2nd and third quarters Had some temporary effects in them. Over the course of last year, we adjusted our cost base on a permanent basis To be appropriate with the demand levels in the market, and that will become visible again in the Q4 when the periods become again comparable. I think another important element to understand is nothing is fundamentally changed in our service business logic or the service business dynamics. Service is a very important growth engine for Kona Cranes. In the Q2 customers have been a bit sluggish on renewing orders or placing new orders Based on the volatility in the market. But we see this as a temporary thing and we expect to overcome the supply chain challenges Over time as well. So we're very committed to our ongoing profitability increase in service and our ongoing sales increase in service. Okay. Thank you. I guess just to double check those NOK 10,000,000, is this per quarter? And also in terms of the mix, So thinking sequentially for H2 versus maybe Q2, shall we expect similar mix or worse? I missed the first part of the question, so maybe later on you can repeat that. But if I start with the mix. So the mix topic will normalize in a way. So that There is nothing like Rolf mentioned, there is nothing structurally that would have changed in the Service business. So The fact that we have a weaker mix now in the second quarter, so that will that thing will go away as things will normalize from the delivery Capability point of view and let's say the material shortage situation gets to a more normal level. Whether that will exactly happen in the Q3 or somewhat later is obviously a good question. And of course, if I knew, I would tell, but There is no way for us to know that for sure. But over time, we are not expecting any permanent mix change in the Service business. Then you had an additional question on the SEK 10,000,000. Would you mind reporting repeating that? Yes. My question was whether that's per quarter or per month. Or it's for the quarter now? Yes. It is for the quarter. It is SEK 10,000,000 for the 2nd quarter, and we are expecting a similar delta in the 3rd quarter because the temporary activities, Short work weeks, furloughs and those kind of things that we did last year, so they were impacting both Q2 and Q3. So it will be SEK10 1,000,000 for it was SEK10 1,000,000 for Q2 and we are expecting it to be SEK10 1,000,000 for Q3 in an year on year comparison. And now it is important to remember that this is not a sequential thing because the Q1 of 2021, we were basically on the same, In a way, parameter when it comes to the indirect salaries as we have been now. So it's only on year on year topic. Understood. And my last question is about the Demand environment and services. If we look quarter over quarter, there has been only moderate improvement Sequentially in terms of sales and orders. But I guess thinking about the exit run rate for the quarter, have you seen any sequential improvement throughout the quarter? Or Not really. Well, let's go to that demand environment again. Theo pointed it out. It was It's clearly in the industrial segment affected our service business. In Europe, the demand environment has reached pre COVID levels. In North America and in Asia Pacific outside of China, the demand environment remains behind pre COVID levels. We think it's an important element to understand when we're looking at the industrial demand environment. What we should understand With the service business and the sales, you know what customers have been a bit sluggish in making new order renewals In placing orders in this demand environment, we expect that will ameliorate as well over time. And I would point out to you the service agreement base and the service orders and the service sales have been very resilient during the crisis, during this pandemic And demonstrate the importance and the robustness of our service business and our overall Konecranes business. Okay. But I guess just to follow-up on this question. I mean throughout the quarter, How have you seen the dynamics in terms of the different months of the quarter? There hasn't actually been a significant Shift one way or the other within the Q2. There has been obviously when we take a Look, a little bit, let's say, longer period. So and I explained how the Q1 in the Americas That was actually quite strong from the order intake point of view. Q2 was sequentially a little bit lower. The It's a good question why Q1 was very good regarding the Americas. Maybe there was pent up demand from the 2020 as a result of COVID. That can be one of the sort of reasons. But apart from that one, there haven't been Any major changes and the development in the EMEA has been quite consistent and going in the right direction. We will now take our next question. Caller, your line is open. Please go ahead. Rob Thio, Kiran. My name is Sigve with UBS. Just a couple of questions for me. And first, a clarification from Artem's So a question on the margin bridge in Service first. Did I read you correctly that the year over year headwinds were larger from mix So Dan from the temporary costs. I think you heard exactly what I said. So I said that the mix impact Was at least as much as the fixed cost or the indirect salary topic, yes. Perfect, perfect. That's great. And then related to the supply chain challenges, obviously, you had a €35,000,000 headwind in the Quarter. And but I think in Q1, you were at 25%. How are they allocated this quarter in terms of Proportions between Industrial Equipment and Industrial Service? So let's dive into that for a minute. We reported $25,000,000 of delayed backlog or missed sales in the Q1 due to supply chain and logistics challenges, Primarily material shortages and logistics challenges. An additional $35,000,000 impact was in our 2nd quarter, Delayed backlog, an incremental €35,000,000 of missed sales in the 2nd quarter. So that's two elements. If you want to break down now the $35,000,000 in the second quarter, Teo described €20,000,000 of delayed backlog in Service, and there was €15,000,000 approximately in our Industrial Equipment business. Perfect. Thank you very much. And then just finally, on the 25 you had in Q1, were they delivered now in Q2? So the extra delta you had Q2 was another €10,000,000 build up then? Is that how I should think about it? Yes. The majority of that one obviously Has been delivered. So I mean the SEK 35,000,000 is, of course, a different set of deliveries than the SEK 20,000,000 to SEK 25,000,000 that we had The end of Q1. So these are, in a way, different projects, but we are trying to describe The impact to the quarter. And of course, I am not 100% sure if there is something that hasn't really been delivered out of the 20% to 25 But clearly the majority of that obviously has been delivered. Yes, brilliant. Got it. Thank you so much. I'll get back in line. We will now take our next question. Caller, your line is open. Please go ahead. Thank you. This is Antti from Damske. I would be interested on the Industrial Equipment business because there the margin remains Persistently on a low level. Could you talk a little bit about that? How is the breakdown now, I. E. What proportion is Components, how much is standard? How much is process these days? And how are these 3 segments within Industrial Equipment doing? Where is the problem and how are you addressing that problem? And then finally, where do you expect to get this margin for Industrial Well, everything has been taken care of finally. Thank you. Why don't you do the first half and I'll do the second half too? Okay. Okay. So when we take a look at the structure of the business, so now we were referring to the mix having been a little bit better than what it was, For example, 1 year ago, which means that the share of components of the output of the sales is higher than what it was 1 year ago. It doesn't change the big picture of the overall business split, so which is that about half of the Industrial Equipment business is standard cranes. And then the share of components is somewhere typically between 25% 30%. And then, of course, the process cranes Is the remainder of that one. So the standard cranes continue to be by far the biggest part of it. But the margin differences Due to the product structures are big enough to have an impact even if you do not have a significant change in the headline numbers. The like I said, the share of components now in the Q2 was higher of the sales than what it was a year ago, and it has a positive impact. Then when going a little bit to your basic question, what is the Challenging away. So here, of course, we need to remember that within the Industrial Equipment business, We have the production machinery a little bit different than, for example, in our Port Solutions business. So it means that we have more Supply capacity to ourselves, manufacturing capacity to ourselves, as a result of which the Industrial Equipment business is very sensitive to volume. And now when we take a look at the numbers, for example, in the Q2 and we compare The numbers to the situation a year ago. So in the Q2 of 2020, the sales was pretty much the same. The external sales rose a little bit. The reported sales actually went down in a year on year comparison. And this, of course, puts a little bit pressure to the margin as well because the fixed cost Infrastructure that we have requires volume for it to be covered so that the operating leverage Can be decent. And of course, the before I let Rob continue, so the obviously the pain point Has been and continues to be the Process Crane Business from the profitability point of view. We have been doing progress, But there is a long way still ahead of us to improve the margin of that business to the level where we want it to be. So let's pick up on the Process Crane Business and then let's talk about our expected profitability in Industrial Equipment. We're making good progress on the price. We continue to make good progress on the process crane business. We described that we made a positive result in the Q4 of last Cheer. And we expect to make a positive full year result next year in the Process Crane business. The increased margin thresholds are in place, The improved project management is in place. The supply chain procurement and lean activities are making a good effect and There's a very good year on year impact visible in the process crane business. So that continues on a good way and we expect full year profitability in 2022. Our overall expectations remain as we've described them for our Industrial Equipment business, where we expect high single digit margins in our Industrial Equipment business Over the medium term. All right. That's good. Thank you. We will now take our next question. Hi, good morning, Rob there. It's Aurelio, Morgan Stanley. I've got a couple of questions, please. The first one is on pricing and especially raw materials. So What are you seeing in terms of steel prices? And what are your hedging policies and your pricing policies, especially as it As we've seen steel prices and copper prices go up strongly in the first half. I described that we are working in an inflationary environment. Teo can tackle the first half of that, and I'll talk a little bit about that as well. Yes. When we take a look at the What we are seeing in the marketplace, so it is obviously the same as everybody is seeing, so that the raw material prices and steel prices as well as others Have been going up and it is clearly visible. However, when we take a look at our business, So there we have a little bit of a structural benefit from the point of view that actually these inflationary impacts, so they come to us A little bit later. Due to the thing that the supply chains are typically very long, we do buy mostly prefabricated components and products, Which means that there is there are a couple of suppliers there in between and the time lag from the raw material price increase To the when we see it, so that time lag is quite long. This helps in a way that we have time to react When it comes to the customer prices and now for example, if we take a look at the Q2, so From the net of inflation pricing point of view, we have not really gained, but we have not really lost either. So that the net of inflation pricing It's more or less unchanged when you compare it to the situation a year ago. Then regarding the hedging practices, A bit more technical part of that. So when we take a look at really big projects Where the delivery times are long and where the procured steel, for example, is very, very big Part of the total. We typically hedge it at the time when we sell it. So we hedge it or we agree the price With the steel supplier, so that we have a fixed price. Or then alternatively, we have a price escalation clause Into customer agreement, which means that we would be covered. When we talk about the smaller projects, So there we handle it with the sales configurator, where we actually update the raw material prices along the way as they develop. And then we will be able to manage the customer pricing with the help of that one. There are obviously in inventory environments always risky points, And they are the kind of projects where your delivery time is very far in the future and you cannot get a price escalation clause into the customer contract. And these are obviously something that we are managing very carefully in these kind of inventory environments. Maybe as a final comment Regarding the inflation, so now that we have been seeing the inflation in our own input costs, so we are actually expecting That we will be seeing higher inflation in the second half of this year, which is quite natural, I think. But we are also expecting that We will be able to compensate that with price increases and Then also with our own efficiency improvement activities that we are doing internally. Maybe just to expand on that. As Thijo said, we're working very hard on the inflation on both ends of our business. In terms of our procurement and supply chain teams are working within the overall material spend to balance any increases with productivity in other parts. And as a part of our business process, there's very close and very timely communication on the supply side and on our commercial side. So current prices are reflected in our current quotations. And as Teo said, we passed the pricing inflation in those Sales quotations into the market as is appropriate. Okay. That's very helpful. Thank you. And my second question is around services. And especially if you look at the development of services within Board Solutions, It was quite good also sequentially. So my question is, is there anything fundamentally different between the Industrial Services business and the Ports Services, Nez. I would be curious to know if you are seeing more kind of site access impacts in industrial side done on the port side. You know, I think that you pretty much answered the question in your question. We described a different demand environment In the industrial segment than we described in the port segment. The port segment all time high container throughput index, Real strong operations in all the port container terminals worldwide. Quite a significant demand environment there. And the long term prospects are good there. In the industrial sector, it's a bit mixed. We're we've reached Pre COVID levels in Europe, we've not yet reached pre COVID levels in North America and Asia outside of China, primarily Southeast Asia where The COVID impact is very strong. So as you rightly say there are some some excess bottlenecks, etcetera. The answer is as you described it. Yes. And I think that maybe if we touch briefly on the structural differences, and I don't know what It's worth regarding your question, but let's answer anyway. So that in the port service business, so we are much more linked To our own equipment base than in the Industrial Service, where we are maintaining all makes of cranes and the majority Actually all makes or other makes of cranes than our own ones. In Port Services, we are doing much more let's say, we are much more focused on following our Own equipment fleet. The other difference that we have is that the material content, so the share of spare parts, For example, it's higher in the port service than what it is in the industrial service for this partially for the same reason. These may not be explaining in a way any of your underlying question, but they are structural differences that we have between these 2 service businesses. Okay. Yes, that's very helpful. If I may squeeze just one last question in, a Very brief one. Have you seen any impact from restocking made in your components business? Or nothing really to highlight there? No, that's a good question as well and thank you for that. Our first two quarters this year, there was very strong In the ports business as well as in the industrial business, real good demand against our short cycle time products. And in the industrial business, the short cycle time products are our components business. And we think that the 1st two quarters might have had some pent up demand elements in it. So overall, we don't expect the demand environment to sequentially improve on a go forward basis at this point in time. Thank you very much. We will now take our next RANES. We have taken from Daniela Costa from Goldman Sachs. Please go ahead. Hi, good morning. Thanks for taking my questions. I would like to ask 3 things, if possible. So the first one regarding margin and you had a very strong order intake, particularly on the Industrial Equipment side. What are you seeing in terms of like margins in the order book? Do you already feel like better indications? Has the volumes are improving there? The second question regarding free cash flow and thinking about how the rest of the recovery will pan out. The first half was weaker because of the working capital situation. Do you see sort of like a sequential improvement there? Or do you still need to invest Into working capital for the recovery. And then a longer term question, just interested in your views on Like the extension on the whole wind offshore industry and the support that ports will need to give to that, do you see much of an opportunity in there Or for you in terms of like course retrofits or that is still way far out? Thank you. Do you want to touch the first two, Teo? Yes. Well, if we take a look at the margin discussion First, and the margin in the order book, I guess, was the core of the question. And The margin in the order book, when we compare it to the situation that we had have had in the previous quarter, so there is not A significant like for like difference. And the reason for this one is that, as mentioned earlier, so The net of inflation pricing impact that we have been having in the second quarter, So that actually is similarly visible in the sales, so that we have not really Well, in the sales, we haven't really seen a major difference, but we are not seeing a major difference in the order book either. And as I said earlier, we believe that we will be Able to compensate for the exceeding or Accelerating inflation, if you allow, with price increases and our own activities, which also means that part of that Future deliveries, of course, already is in the order book. No significant like for like change. Then when we take a look at Specific product areas like Process Cranes. So there, obviously, we have been talking about the turnaround A project that we have had and we have talked about the progress that we have done so far on the sales level. And there, obviously, we are expecting that to continue. And there, one can see a difference in the order book Margins as well. But this is when we take a look at the whole group, so this obviously is relatively small part of the total group order book. Then your question regarding free cash flow. So the net working capital to 12 months rolling sales where we are now at 12.4% or so. So that is actually still slightly on the better side of Our recent year's average, which has maybe been somewhere between 13% 14%, based on that one, You could then say that maybe it can deteriorate further, but not necessarily significantly, If we were to go to a more normal situation in the coming quarters. So historically, We are okay on okay levels at this point of time, which means that there can be a small deterioration going forward, Provided that the sales will grow and the other topics that are usually impacting net working capital behave as Normally, so to say. And picking up on your question tangentially on sustainability and the growth in the wind offshore market, Konecranes has good product in that market and we do expect to benefit from the long term growth in the wind offshore industry. Thank you. Thank you. We will now take our next question from Antti Kassan from SEB. Please go ahead. Yeah. Hi, it's Antti from SEB. Thanks for taking my questions. And I have 2. 1st is a follow-up on the input cost inflation question. So how are you seeing the competitive pricing environment and pricing discipline Within your industries, are your competitors as prudent as you are, whether in terms of pricing to the future, Steel price increases and so forth. And also, did I understand correctly that you kind of need additional price hikes and Operational improvements to maintain kind of a neutral impact going forward? Thanks. Well, let's talk about the first one. We monitor very carefully in our pipeline orders won and bids won and bids lost. And there continues to be both of those bids won and bids lost that do include our pricing into the market. And so I'd like to speak to our practice, and I don't want to talk about other practices. Our practice is, as I described, To work to manage the inflation on the procurement and supply chain side as well as in the real time communication of material costs Into our pricing quotations. And so we're doing that and we're passing the pricing as appropriate In a systematic fashion into the market. Okay. Maybe, Andy, you had the second question. Hit me with the second question again, please, Andy. Yeah. The second part of the question was regarding kind of the price hikes that you are doing and also the operational Improvements. Would that kind of lead to neutral impact or kind of a positive net impact going forward? No, neither Teo or I talked about price hikes, Santi, we talked about appropriate pricing into the market on an inflationary basis and on a ongoing business basis. And continuous improvement so continuous monitoring on the commercial side of appropriate pricing and inflationary mechanisms is part of our business practice And continuous improvement on the operational and supply chain is very much a part of our strategic initiatives as well. So that's ongoing business, that's ongoing practice and Our commitment as we described in the earnings release this morning was that we expect our sales to be higher this year than they were last year. We Back to increase our profitability this year than last year and 4 quarters in a row of profitability increase is a very exciting trend and we We're working very hard to keep that going. All right. That's clear. And then also on kind of the one off costs That you have for the quarter, which were kind of roughly SEK 10,000,000 of the transaction and integration costs. So could you open up that a little bit, What that kind of includes and how should we think about the second half or the one off expenses? We have actually now in this report also, we have given And an update on the merger costs, so to say, so basically transaction costs that are needed To make the merger happen. And in the prospectus, that number was €50,000,000 and that is, of course, a combined number. So it's the for both parties. Now we have updated that number to €70,000,000 And this change obviously is mostly in relation to the prolongation of the period And the, let's say, competition authority dealings as in there. Now the transaction and integration costs, what we are describing in the adjustment, so it includes This part, what I just now mentioned, and it also includes, to some extent, integration planning Costs that are not in a way necessary to get the deal done, but will help us in doing the integration. And but this is a Clearly smaller part of the whole, so much, much smaller than the actual Transaction costs that are needed, this SEK 70,000,000 for the combination of the parties to get this Done. And now as you I guess, as you read from the report, so the vast majority of our adjustments that we have now, for example, In the Q2 is this transaction and integration planning costs and the restructuring costs are this time actually quite small. We will now take our next question. Caller, your line is open. Please go ahead. Good morning. It's Sebastian here from Konecranes Bank. Quickly and going back to the demand side, I think you mentioned the restocking and prebuying impact and the more short cycle part at Industrial Equipment. I would be more interested in Port Solutions after we have seen 3 pretty strong order intake orders in that segment. And so eventually also certain pre buying element in this very segment or would that go way too far? Put differently, can you talk about the order funnels Thank you, what you're currently seeing. And then the other question I would have is also more on Port Solutions. As you have walked us through the measures For Process Crane, my question would rather be then Support Solutions, how should we think about the project management excellence initiative That you're also referring to on the report and that you also addressed in the call, the way do you simply stand on that journey in bringing this one to 100% total FID rate level, that will be my 2 questions. I appreciate those questions. Thank you very much. So the pre buying we talked about are actually more of Pent up demand was primarily around components in the industrial segment. There is the ports segment and the demand outlook there is very, very healthy in the context of The global container throughput index is continued to climb in the 2nd quarter. It's in an all time high now. And the Look, in that industry remains very good. The pipeline, as you requested, the pipeline is very healthy. Trying to second guess the exact timing of customers placing order decisions is something that we don't do. And therefore, Making specific projections on the order intake over on a quarterly basis, we don't do. But I confirm, We've got a very good pipeline in Port Solutions. It doesn't you ask if there's pre buying there. No, I don't see pre buying in the Port Solutions business. Our customers are operating on 5 and even longer year large capital equipment cycles and that business remains with a very healthy pipeline and We expect good sales coming from Port Solutions in the periods of time in the future based on that demand environment we were describing. You asked about project management in Port Solutions. Obviously, that's also a continuous journey, and we want to get better and better at each period. On a year on year basis, we already see a market improvement in project management. And we see that in the financial performance In our Port Solutions business. So that's on a good way and we've taken good steps. We've taken some Professional project management activities systematically in our business that's being led by the leader of our Port Solution business personally, Going on a very good way. And we still have a good ways ahead of us to go. We are running out of time, unfortunately, so it's time to conclude our today's conference. Thank you all for the active participation and questions. And as a reminder, Konecranes will issue Q3 report on October 28, and then we will host a service update to the investors and analysts on August 30, together with our Service Head, Fabio Fiorino. And you can find more information on that event on our investor website. I would like to wish you all a great day and summer. Thank you. Thanks very much. Thank you very much.