Konecranes Abp

OMXH:KCR

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, good morning, and welcome to the First Quarter 2018 analyst and press conference of Konecranes. My name is Eero Tuulos, and I'm the Head of Investor Relations at Konecranes. I'm joined here by Panu Routila, the President and CEO of Konecranes, who will present to you the group financial highlights in the first quarter. Panu's presentation will be followed by our Chief Financial Officer, Teo Ottola, who will then go deeper into the business area level financials. And at the end we'll have time for Q&A. But now, with no further ado, Panu, the floor is yours.

[Panu Routila]

Thank you, Eero. The first quarter of 2018 was a good start in several ways. To begin with, our group adjusted EBITDA margin improved 1 percentage point to 5.5% year-on-year, reflecting the good progress we have made with the integration. The integration progresses according to our plan, which gives us additional confidence that we will reach our planned EBITDA-level run rate synergies of EUR 140 million by the end of 2019. At the end of the first quarter 2018, approximately EUR 63 million of targeted run rate savings has already been implemented.U.S. dollar has depreciated close to 15% against euro compared to the year-ago period and as a result, foreign exchange fluctuation had an adverse impact on our reported volumes in the period. With that as a context, our underlying financial performance turned out in-line with our expectations on a comparable currency basis. Group sales grew 3.9%, sales increasing in all business areas and regions. The sales growth was mainly attributable to Business Area Port Solutions, which benefited from a strong order backlog. While external orders fell on a comparable currency basis in both Business Area Industrial Equipment and Business Area Port Solutions, I am particularly happy with the comparable currency order growth in Business Area service which was 4.5 percent points. Also, our service agreement base value increased clearly in Q1, demonstrating the progress we have made with the execution of our service growth strategy. In Business Area Industrial Equipment, component orders grew sequentially, continuing the positive trend from Q4 last year. This is actually an encouraging signal also for industrial cranes when looking further into the year. We have updated our demand outlook to reflect improved conditions in the North American manufacturing industry, and stabilizing prospects relating to container handling overall, and we are confident about the quarters ahead. Thus, we have today restated our guidance for the full year. Let's then look at our key figures in more detail. Orders received in January–March totaled EUR 683.1 million, representing a decrease of 7%. On a comparable currency basis, orders decreased 2.6%. The value of the order book at the end of March totaled approximately EUR 1.58 billion, which is 2.7% higher than in the previous year on a comparable currency basis. Group sales in January-March totaled EUR 672.8 million, representing a decrease of 1.7%. But on a comparable currency basis, sales increased 3.9%. The consolidated adjusted EBITDA increased by EUR 6.1 million to EUR 37.2 million. The adjusted EBITDA margin improved to 5.5% of sales. The consolidated operating profit in January-March totaled EUR 23.8 million. Free cash flow in the period was slightly negative and the development is in line with our expectations following the high level or advance payment we received last year. The activity in the world's manufacturing sector continued to expand in January-March 2018. While the average rate of expansion in the first quarter remained unchanged from the prior quarter, the growth in the global manufacturing sector begun to ease towards the end of the period. In the U.S., the PMI indicated strong growth and the overall improvement in operating conditions across the manufacturing sector, and the PMI advanced to its 3 year high at the end of the period. Meanwhile in Eurozone, after a long period of rapid growth and economic activity, short-term capacity constraints begun to limit rate of expansion in the first quarter 2018. The European Union manufacturing capacity utilization rate continued to improve slightly in the beginning of the year, reaching a new high since the financial crises. Also the U.S. total industrial capacity utilization rate showed an uptick in the first quarter after only marginal improvement in 2017. PMIs also rose in the BRIC countries, but rate of expansion remained more modest than in Europe and in the U.S.A. While manufacturing conditions in China and Russia improved only marginally, and the pace of improvement in India slowed clearly, activity in Brazilian manufacturing sector recorded strong improvement in January-March. Following a strong recovery in the world's containerized trade in 2017, the global container throughput continues to expand at a robust pace. Year-on-year, the index increased by approximately 8%, reaching a new all-time high. As I mentioned earlier, we have updated our demand outlook to reflect improved conditions in the North American manufacturing industry and stabilizing prospects related to container handling overall. That said, Europe has started to show signs of slowing growth as capacity constraints have begun to hinder general economic activity. Our updated demand outlook is as follows: Demand situation in Europe, is stable, with industrial customer segments. Business activity in the North American manufacturing industry is starting to improve. Demand in Asia Pacific region continues to show signs of improvement. Global container throughput growth continues at a high level and the prospect for the small and medium-sized orders related to container handling remain stable. We are confident about the year, thus we are restating our financial guidance for 2018. Our sales 2018, to be approximately on the same level or higher than in 2017, and our adjusted EBITDA margin to improve in 2018. As additional information for 2018, we continue to expect a negative impact of approximately 3% odd sales from foreign currency exchange rate fluctuations, based on the current FX rates. Furthermore, we continue to expect EUR 40 million to EUR 50 million incremental P&L level synergy savings in 2018. In addition to EUR 12 million, net interest rate savings related to our debt refinancing activities last year. And finally, we are still planning to boost our R&D and IT investment by approximately EUR 50 million this year.As mentioned, the integration of MHPS progresses well and according to our plan. Our guidance for the integration programs remains intact and we continue to target EUR 140 million of total cumulative run rate synergies by the end of 2019.Our estimate for the restructuring costs to total EUR 130 million, and the integration-related CapEx at EUR 60 million remain as well unchanged.Operationally, our integration and restructuring activities progress on many fronts. We have rolled out our first industrial equipment products with harmonized componentry including light rail systems and wire rope hoist. The closing of Solon factory in the U.S. progresses and our Springfield factory now supplies Demag wire rope hoist to our U.S. customers.In addition, our Shanghai factory remains on track to be closed by the end of Q3 this year, and we have also announced the closure of our crane manufacturing plant in Banbury, U.K. Moreover, we have launched new Demag DBR hoist to Asian markets, and implemented the reorganization of our Port Solutions operations, in Germany.And finally, the consolidation of legal entities progresses on track. We have already so far consolidated 20 entities, and our plan is to reduce another 15 to 20 entities in the coming quarters.Our run rate synergies reached EUR 63 million at the end of Q1, meaning that we have achieved EUR 7 million of additional run rate savings in this quarter. In the full year 2018, our synergy expectations remain intact. We continue to expect full cumulative run rate impact at year-end to be EUR 100 million to EUR 110 million. The corresponding cumulative P&L impact of these actions is estimated to be approximately EUR 60 million to EUR 70 million in 2018. EUR 34 million of this was delivered already in the first quarter. As said, our target of EUR 140 million annual EBIT level synergies by the end of 2019 remains intact.Next, a few words on the EUR 50 million investments in R&D and IT, which we explained last quarter. I am very pleased with the progress we have made recently on R&D. Our pipeline includes several products that will significantly advance our technological leadership. Speeding up some of these projects in addition to investment in selective key IT initiatives is the reason why we are investing more in these areas in 2018. While I cannot discuss all our projects in detail at this stage, I want to highlight here some of the areas where we have increased our resources and spending. One of these areas is artificial intelligence. To give an example, we are developing new applications that utilize AI to predict the renewal of service agreements. Another example of our recent R&D achievements is Work Zone, a suite of location-based services for Lift Trucks that uses GPS technology-based geofencing to create virtual fences around real-world areas for improved safety. Regarding the additional spending on IT, the projects include a new product lifecycle management tool, new HR system, updated eCommerce platform, as well as investments needed to meet the requirements of the European Union’s new general data protection regulation. We are making these investments to improve efficiency and to secure our competitiveness and long-term success. We have some truly exciting R&D projects in the pipeline, and I look forward to informing you more on these in the course of coming next 12 months period. Continuing then with a few more words on the group's financial performance without repeating too much of what I have already been saying until -- we'll then further on discuss the numbers in more detail on the business area level.While external orders fell on a comparable currency basis in both Business Area Industrial Equipment and Business Area Port Solutions, Business Area Service recorded solid growth in order intake of 4.5% on a comparable currency basis. In BusinessArea Port Solutions the decrease was largely due to the timing of the projects in this quarter. Orders received decreased in Americas and the EMEA but increased in APAC. Our reported sales decreased 1.7% year-on-year primarily due to an adverse FX impact. On a comparable currency basis, sales increased 3.9%. The comparable currency sales growth was mainly attributable to Business Area Port Solutions, which benefited from a strong order backlog.The value of the order book at the end of March totaled approximately EUR $1,058,000,000 million, which was 1.8% lower compared to the year-ago period. On a comparable currency basis, the orderBook increased 2.7%. The order book increased in Port Solutions but decreased in Service and Industrial Equipment. And the order book decline in Service was primarily due to an adverse FX impact. Group adjusted EBITA increased to EUR 37 million and EBITA margin to 5.5% of sales. The improvement in the group adjusted EBITDA margin was mainly attributable to the synergy cost savings measures implemented in 2017, which were enough to offset low volumes, as well as the adverse FX impact.Material and salary inflation were absorbed by our customer price increases. On a year-on-year basis fixed costs were lower in Business Area Industrial Equipment and Business Area Port Solutions. And gross margin improvement -- improved in Business Area Service and Business Area Industrial Equipment. On comparable rolling 12-month basis, the split of the group sales between the Business Areas and the 3 geographical regions has remained unchanged from the previous quarter. Each Business Area contributes approximately 1/3 of the group sales with approximately half of the sales coming from EMEA and APAC being clearly smallest of the regions to us. With that said, I hand over to Teo, who will now give a more detailed walk through the different business areas. Teo, please.

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

Thank you, Panu. And then let's start with Service and Service order intake and sales. So service orders received were EUR 239 million that was a decline of roughly 3% with reported currencies. Panu already referred to the FX impact and the FX headwind was particularly strong in service, and with comparable currencies we have a growth of 4.5%.When we take a look at the regions and the order intake growth, so actually, Americas did well, both in year-on-year comparison as well as in sequential comparison. And also in an year-on-year comparison, Asia Pacific order intake increased whereas the orders declined in EMEA. And we had good order intake in the modernizations. Then let me take a look at the sales. So sales were EUR 266 million that is also a decline of almost 7%. Again with comparable currencies we are taking a look at the small increase of 0.7%. Sales fell in the Americas and EMEA, the reported sales, but increased in the Asia Pacific. And then when we take a look at the business units within service, so regarding the first quarter sales, parts outperformed slightly field service, which has a small positive product mix impact. The service adjusted EBITA was EUR 33.8 million, and the margin 12.7%. So there is 1 percentage point improvement in the margin, which is, in a way, in line with the way that we have been doing lately, however, the currency translation impact basically consumes quite a big portion of the improvement in euros, and therefore the euro numbers are actually quite close to each other between these 2 years. The gross margin continued to improve in service and of course, then, the overall product improvement was attributable to the cost saving measures implemented, but also the productivity improvement as well as the slightly more favorable sales mix. Then the service order book and agreement base. So order book is also showing with reported numbers a decline, but when we take a look at the comparable currency, order book actually was higher than a year ago, and then particularly delightful the agreement base is showing a sequential growth both also in reported currencies of EUR 2 million and then with comparable currencies even more, and of course, we want to continue stressing the importance of the agreement base for us as it creates the potential for future sales growth. Then to the Industrial Equipment, and regarding the Industrial Equipment, so we have actually a reporting change which impacts our orders as well as sales compared to the situation in 2017. So we have, let's say an impact of EUR 14 million on order intake, and EUR 11 million on sales, as a result of reporting change, this does not impact external numbers as it is the transactions between service and Industrial Equipment, but in a way it inflates the order intake number for Industrial Equipment for example. The total orders received were EUR 272 million and now that if we exclude both the currency impact as well as the reporting change impact, so actually our order intake is quite flat, it is slightly below the last year's level. And as the external orders fell year-on-year so when we take a look at that with the business unit basis again, so component order intake actually continued to be on a good level. We are seeing clear sequential growth. In an year-on-year comparison, the component orders declined slightly because the first quarter of 2017 was quite strong, and then, in the process crane, in particular, we continue to have a lowest order intake now in the first quarter of 2018.Again, regionally when we take a look at the order intake. So Americas did well here as well whereas the order intake in EMEA and APAC declined. Sales were EUR 249 million, and again excluding the impact of both currencies as well as the reporting change. So we are taking a look at the small like-for-like underlying growth in our sales.Adjusted EBITA, for Industrial Equipment was EUR 6.6 million or 2.7%. We continue to show a good improvement year-on-year, this is due to gross margin improvement, and lower fixed costs, and of course, as these also are as a result of the cost saving activities that we have implemented during 2017, and of course, also earlier than that.From the order book point of view, so there we have a decrease of 8.3% again with reported currencies, whereas then with comparable currencies we do have a decline, but only in the amount of 1.3%. Then to the Port Solutions. Port Solutions order intake was EUR 226 million that is a decrease of 8.5%. The currency headwind is smaller in the Ports, and with reported currencies the orders received decreased by approximately 7%. Orders fell in EMEA and Americas but increased in the APAC, and then again when we take a look at the businesses separately within the Port Solutions, actually Port Service did well from the order intake point of view. Also Lift Truck business continued to be on a good level, and also RTG orders where on a decent level in the first quarter of 2018. So the mix of incoming orders was actually quite okay. Sales of about EUR 200 million, again -- or an increase with comparable currencies of 13% with reported ones at 10.6%, so this is, of course, as a result of the very good order book that we had at the beginning of this year or at the end of 2017.Then the adjusted EBITA, EUR 6.2 million, 3.1%, also here a good improvement both in euros and in percentages. Of course, in Port Solutions this is mostly because of the higher volume, but we also are having a lower fixed cost level than what we had a year ago. And then finally regarding Port Solutions. The order book EUR 836 million, and this is 4.6% higher than a year ago with comparable currencies, and we continue to have a higher order book for deliveries for 2018, in comparison to the situation a year ago for deliveries in 2017. And then a couple of comments on the net working capital and free cash flow. So our net working capital at the end of the first quarter was EUR 355 million, that is 11.4% of rolling 12-month sales. This is a deterioration of 1 percentage point compared to both the end of 2017, as well as Q1 2017. This is mostly due to the timing of different Port Solutions projects. There are also some technical things in relation to taxes et cetera, but of course, the trend -- or it's a level as such still is fairly good in our historical perspective.Free cash flow was slightly negative, mostly of course, as a result of the additional tied up capital in net working capital, and as we can see, on the right-hand side of the slide, so the beginning of the year has traditionally been a bit challenging for us from the cash flow point of view. The exception being of course, 2017 when group Q1 already was very good there. The balance sheet from the gearing and net debt point of view continues to be on a good level. So we have basically unchanged net debt from the end of 2017, naturally as a result of the cash flow being close to 0, the gearing is 44% at the end of the first quarter. And then, finally, on the capital employed and return on capital employed. So on the right-hand side, 10.7% is the adjusted return in capital employed and is now actually is the first quarter when we have both the beginning of the balance sheet and the end of the balance sheet during the 12 month period so that it includes the MHPS balance sheet as well. So from that on the trend for return on capital employed obviously it is easier to follow than what it has been so far because these are step changes as we are seeing from Q4 to Q1, for example, are as a result of these comparison period challenges that we have as a result of the acquisition in the beginning of 2017. That was the last slide of the presentation as such and now I suggest that we go into the Q&A.

[Eero Tuulos, Vice President of Investor Relations]

Yes. So thank you, Teo. Thank you, Panu. Let's start from the audience here. [Foreign Language] So do we have any questions here?

[Tomas Skogman, Head of Research of Finland]

Yes. This is Tomas Skogman from Carnegie. I have 3 questions. First of all, can you please confirm that this EUR 50 million additional kind of expense for R&D and IT, that's just temporary, that we can take that away as a cost item next year, and is this the explanation for the large costs on the internal level, that the large part of these costs come on not on a divisional basis but on the internal kind of.

[Panu Routila]

That is correct. That is only this year.

[Tomas Skogman, Head of Research of Finland]

And they will -- how large will the internal cost be on the same level as in Q1 throughout this year then?

[Panu Routila]

The -- actually the -- now you're probably referring to the unallocated cost which is significantly higher than what we had at the -- for Q1. So this one actually is not as a result of the investment in R&D and IT. This is a technical thing and the reason for that one is that in Q1 2017 we actually -- regarding the MHPS entities we overallocated so-called central cost to the units. And we dismantled that for the second quarter of 2017, so actually the level went from EUR 4 million to EUR 8 million in Q1 -- from Q 1 '17 to Q 2 '17. So this was -- this is about, let's say, EUR 2.5 million to EUR 3 million impact. And then on top of that what we have done from the beginning of 2018, so we have actually moved certain resources, unrelated resources to these, what you were asking for, from businesses to unallocated. These are including, for example, let's say, HR resources, internal audit resources, strategy team, and those kind of things. And these, all together, when you calculate those together so the impact in comparison to the Q1 '17 is probably EUR 3.5 million to EUR 4 million, so the level where we are now is a good approximation for the future because these changes, of course, prevail, but the change is not directly explained or even indirectly explained by IT or R&D development activities. Those are allocated to the businesses.

[Tomas Skogman, Head of Research of Finland]

And then about demand, can you give a bit more color on certain industries by geographies, and also comment if some customers within the Port segment, in particular, brought up increased uncertainty from the fear of customs and trade wars et cetera and whether they are kind of saying that let's postpone these investment 1 or 2 years until we get more clarity.

[Panu Routila]

First regarding the demand situation. I think we can clearly say that North America situation has improved, we also said before that the component business order intake was growing. We said in the Q4 that it was growing double-digit in Americas and Europe, and now the Component Business continues to increase sequentially, so that is a very good sign. Also, we see increased demand in Asia, Europe being a little bit more stable as such.Regarding the customers hesitation related to the trade wars, what you were referring to, I haven't seen that really, I haven't seen that comment really yet coming from the customer side. Of course, there is an overall maybe economic climate discussion going on about that, but in our market that has not impacted the demand as such. And I want to repeat again that in the short term CQAs, in our so-called American content is actually quite good, meaning that probably in the short termwe can even have here -- if something happen, we can have positive effect. But on the other hand, overall, in the long-term trade was never -- are good for the business.

[Tomas Skogman, Head of Research of Finland]

And can you perhaps give just some more color on different industries? Last quarter, you said that the resource industries starts to look a bit better in the U.S. Is this still the main kind of industry that we see improved demand? Or do you see other industries as well?

[Panu Routila]

No. Automotive is doing also very good.

[Tomas Skogman, Head of Research of Finland]

Okay. And then about steel price impact that is kind of quite volatile at the moment. I mean, how safe do you feel with hedging this? And do you have big open positions on pricing compared to cost escalations?

[Panu Routila]

In the bigger projects, we typically actually buy the steel content for the projects in the beginning of the projects and are not naturally hedged in that way. Otherwise, so far, we have been, quite successful in having our price increases absorb the inflation, cost inflation.

[Tomas Skogman, Head of Research of Finland]

Okay. And then finally on taxes. How should we think about these large EU items? These here in the context of taxes and the tax rate. So will -- are kind of all that EU items kind of tax deductible, so we can use a 30% tax rate on the pretax profit after restructuring charges?

[Panu Routila]

Okay. So you mean after -- you mean the restructuring charges tax deductibility in general?

[Tomas Skogman, Head of Research of Finland]

Basically, what is the -- I mean, should the -- both rates should be used on the kind of the reported pretax profit in the quarters ahead?

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

Yes. The reported tax rate now at -- for the Q1 is 28%. And this is at the same time, according to the system, this is basically also the estimate for the full year. So based on what we know today, our estimate is that we would be at 28%. So that would be the percentage to be used. Regarding then the tax deductibility of different topics that we have in the P&L, so these intangible asset amortizations that are in relation to the transaction or the acquisition. So they are not, by nature, tax deductible. But we have a tax liability book on that one. So also that is neutral from the tax rate point of view. So it would be okay to use the tax rate that we are showing in the latest report.

[Erkki Vesola, Analyst]

It's Eric Vesola from Inderes. A couple of questions from me as well. First, you said there were some timing issues regarding Port Solutions orders. How big an issue was this? And will it reverse in the coming quarters?

[Panu Routila]

I'm very confident that this was just temporary. And this, let's say, in the Port business even in the medium-sized order intake are affected by, let's say, lumpiness of these business. And meaning that there is -- some quarter, there are more projects coming in as orders, and then next quarter can be some quarters more and some quarters less. So that's has not affected the overall judgment of the market as such at all.

[Erkki Vesola, Analyst]

Okay. And then about this guidance and the synergies. How large a share of the EUR 40 million to EUR 50 million additional P&L impact in synergies do you absolutely need to reach in order to meet this year's guidance?

[Panu Routila]

Do you want to take that, Teo?

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

Well, it is a good question, but the answer on the front -- I'm afraid is not as good. So I mean, we are happy by, let's say, providing the range of EUR 40 million to EUR 50 million for the year-on-year impact for 2018 and not being more [ reactive ] on that one.

[Eero Tuulos, Vice President of Investor Relations]

Thank you. Any more questions through here? If not, so then we can take questions from the phone line, please.

[Operator]

[Operator Instructions] We can take our first question from Magnus Kruber from UBS.

[Magnus Kruber, Associate Director and Research Analyst]

Magnus here from UBS. A few question from my side. First, I think a comment on the guidance. On the fourth page, you started -- you mentioned that the Europe has started to show signs of slowing growth as capacity trends has begun in their general economic activity that it reads a bit negative, but that must surely be good for you. How should I read this in the context of demand for cranes?

[Panu Routila]

I had a little bit difficulties really capturing that full question...

[Eero Tuulos, Vice President of Investor Relations]

It was a question about the general economic environment in Europe and -- when we say that the -- we have started to see in the -- a kind of capacity constraints to limit the growth of expansion. So is -- that should be good for us, right? And that was the question.

[Panu Routila]

Especially in -- let's say, as we said, North American situation is clearly now improving and European situation, it's more -- how -- what -- stable. We are quite nicely situated with a component business. And I think our funnel looks also quite good in the standard crane business as such. In the process crane business the -- we have actually also even voluntarily let go some projects due to the unprofitability. And now the component and standard business -- standard crane business is actually advancing quite nicely and gives confidence for the remaining part of the year.

[Magnus Kruber, Associate Director and Research Analyst]

Okay. Got it. What's then -- what's the reason for the weakening profitability on the process cranes?

[Panu Routila]

That is probably on the side of certain business areas, and we are looking into that.

[Magnus Kruber, Associate Director and Research Analyst]

Okay. Got it. And next -- I mean, I saw a quite sharp divergence in the organic growth rates between orders and sales in service. Can you comment on that?

[Panu Routila]

I'm very happy for the growth that we can see with several measures, actually. The first one being the order intake for our service business, 4.5% growth on that. That is a very good sign. The second is with the agreement base, which did grow now. And also the fact that how many new assets, how many new cranes of Demag install base were able to be converted to our agreement base. So this number is also very convincing and gives us confidence that the plan we have for capturing and taking these Demag install base in our agreement base is actually coming in [ life ] .

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

Maybe as a continuation to that one. So the -- now as we are commenting that the big portion of the order -- order intake increase actually come from modernization. So modernizations obviously do not convert to sales immediately when we get the order unlike for spare parts where the reaction, of course, to sales is also quite imminent.

[Panu Routila]

And we have to remember that the increase in the agreement base is actually not brought through the order intake.

[Magnus Kruber, Associate Director and Research Analyst]

Got it. And actually on that point, on the service base, I can see that the equipment base rose 15% in units. But I see 2 different numbers on the value. I see a 2% like-for-like decline mentioned on the -- in the report. But then I see an increase in value in like-for-like [ currencies ] on other places in the documents that were -- how should I read this? Is it up or is it down? And then there is also mentioning something about the harmonization of the reporting there. Or just from the image, [indiscernible] could you just comment a little bit on that?

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

Well, we have consciously -- now when we have been commenting this. So in the slide deck, for example, we have commented the sequence of development. So from the fourth quarter to the first quarter. And the reason is, is that as we are writing in the report. So that we had a little bit, let's say, challenges in reporting the agreement base correct regarding the acquired businesses in the first quarter of 2017. So maybe the advice would be to rather take a look at the development from the end of 2017 than particularly comparing year-on-year. We had to reorganize the reporting regarding agreement base a little bit in the first half of 2017. As our understanding of the actual contract [ rose ] during the beginning of 2017.

[Magnus Kruber, Associate Director and Research Analyst]

Okay. So if we sort of adjust to that harmonization, do you -- you would say that you were up year-over-year as well on a constant currency basis?

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

No. It's -- when I -- I mean that the Q1 2017 units and euros as well. So one has to take a look at those with certain caution. So a better comparison is to the end of 2017.

[Panu Routila]

Quarter-on-quarter.

[Magnus Kruber, Associate Director and Research Analyst]

Okay. Got it. Yes?

[Eero Tuulos, Vice President of Investor Relations]

Let's limit the questions at this stage to 2 questions. And then at the end if we have time, of course, then we can take more questions. But just to ensure that everybody has a chance to ask, so we'll come back to this. So -- but let's continue now to the next one.

[Operator]

We can now take our next question from Manu Rimpelä from Nordea.

[Manu M. Rimpelä]

First issue would be just clarifying the comments that you made around on the central costs. So is it something we should assume that the Q1 run rate was around EUR 10 million is now the kind of normalized run rate, then EUR 40 million is kind of a normal run rate of these internal costs for the group going forward?

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

The Q1 number was at now EUR 9.5 million or whatever. That is the, let's say, valid run rate going forward. And it is actually not far away from the level that we had during Q2, 3 and 4 in 2017, especially when you add the, let's say, change that we have made regarding moving some resources from the businesses to the unallocated.

[Manu M. Rimpelä]

And then following up on the EUR 15 million (sic) [ EUR 50 million ] then. That EUR 50 million of extra R&D [indiscernible] the investments. So did you have already booked those in -- some of that in Q1? And can you give us an understanding of how much?

[Panu Routila]

Some of that was already in the Q1, but I don't think we are actually going to define how much.

[Manu M. Rimpelä]

Okay. And then on this growth rate between the services orders and sales. So how much of the services and sales in the quarter goes through the order intake? Or how much is transactional? So which is really the kind of more important leading indicator of the future growth potential in the underlying end market activity, the order intake or sales?

[Panu Routila]

The order intake in the terms of the growth is important than the agreement base growth is important. Those are most relevant numbers regarding the growth coming to the -- next quarters. And they give confidence to us that what we said actually in the Capital Markets Day regarding our growth rate in service business is actually real and doable.

[Operator]

We can now take our next question from Leo Carrington from Crédit Suisse.

[Leo Carrington, Research Analyst]

I wonder would you say that Konecranes is having to wait longer than expected for life cycle growth to come through, especially in industrial equipment. Your message on component orders is very promising, but I wonder how long do we need to wait in order to see broader growth from the heavier cranes?

[Panu Routila]

We have typically needed 6 to 12 months period to wait from the component growth. And that component growth started actually on the fourth quarter last year in that respect. So there is still some time to wait. Our funnel actually looks quite good at the moment and that gives us confidence for the future. And that funnel now needs to be converted to orders.

[Leo Carrington, Research Analyst]

Okay. And moving a little bit to the synergies. Your commentary is very constructive in terms of achieving the EUR 140 million total amounts. So the amount of run rate synergies implemented in Q1 implies there's a bit more to do later in the year. Will synergies be back weighted this year a bit, if I'm correct?

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

The synergies for this year will be clearly back weighted. And the first quarter run rate improvement actually was quite good. So the expectation is that, that run rate actually will now slow down a little bit during Q2 and Q3. And then it will pick up again towards the end of 2018. So for this year, unlike for last year so -- or in a difference to last year. So they will be more back-end weighted.

[Operator]

We can now take our next question from Johan Eliason from Kepler Cheuvreux.

[Johan Eliason, Analyst]

On the IT costs, you didn't want to quantify it -- how much was in this quarter. But I understood from your comments that it's mainly impacting services in the industrial cranes margin. And if you look at services you had 100 basis points improvement in Q1 year-over-year on the margin despite this impact. Is that sort of the improvement rate we should expect a quarter going forward? Or is there anything particular in this quarter impacting the improvement rate? And secondly then, if the IT costs had a significant impact on this margin in the quarter, you should see -- expect an ever further uplift on the margin on the services next year. What sort of margins do you think the services business is currently capable of achieving considering all the activities and the IT costs gone, et cetera?

[Panu Routila]

Our service business actually continues the improvement also in that margin wise. I am not going to give a guidance on the exact numbers for the end of the year neither for next year and neither for 2020 while our Capital Markets Day explanation was clear on where we are going to be actually targeting for the service business. We are on the trajectory. The growth naturally takes a little bit on the margin but doesn't affect too much on the situation. So the margin improvement continues with the same speed as we had last year, and this year continues.

[Johan Eliason, Analyst]

Good. And then a second question just on the currency. You talked a lot about it on the top line here, but I think you have some transactional exposure as well. You've given some sensitivity on that previously. Could you tell us where you expect the transactional impact to be for the full year at current -- currency rates?

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

Well, we can, of course, take a look at the situation in the first quarter first. And now if we use that formula that we have given so that the impact on EBITDA is roughly with the same percent as we have an impact on sales. So we are talking about the translation impact of -- in the ballpark of EUR 2 million negative now in Q1 year-over-year. The transaction impact, which is obviously much more complex for us to calculate as well is higher number than that. So it is probably between EUR 2 million and EUR 3 million. So we are, let's say, taking a look at the EUR 4 million to EUR 5 million negative impact as a result of the translation in transaction in the first quarter. Then when we go forward, so it is, of course, so that the -- the translation impact will be whatever at the -- the conversion rates will give to us and then maybe it's worth repeating the guidance that you were referring to as well so that, that 10% euro-dollar change would be approximately EUR 9 million for us on transaction in P&L. And then of course, there is the hedging delay so that -- that we will be having that a little bit later than what the actual rate change in the market happens.

[Johan Eliason, Analyst]

But is that half a year or what sort of delay are we talking about?

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

That is about half a year. Yes. Correct. Correct. In some businesses, it can be shorter; in some businesses, it can be a little bit longer. But the average is half a year. So 2 quarters is our ballpark hedging time frame for flow hedging.

[Operator]

We can now take our next question from Magnus Kruber from UBS.

[Magnus Kruber, Associate Director and Research Analyst]

Magnus here again. Just on the footprint consolidation. I think you've announced the closures of 10 plants to date. But how many were actually finalized in '17? And what do you expect for -- to finalize in 2018?

[Panu Routila]

We have not given an exact number of what has been fully finalized. Quite many of those have already been finalized. And actually, the work progress is extremely well. So I'm very happy on what we have been able to achieve there in good cooperation throughout the whole company. We have announced the site names already, which are going to be closed and consolidated. But the exact timing is not published.

[Magnus Kruber, Associate Director and Research Analyst]

Got it. And then finally on the bookkeeping tax rates beyond 2018, should we think about 28% [indiscernible] ?

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

Sorry, now I missed the end of the question. What was the...

[Magnus Kruber, Associate Director and Research Analyst]

Yes. Should we expect the tax rate of over 28% beyond 2018 as well?

[Panu Routila]

Well, we -- I think that, that is a fair assumption. Of course, it depends on our -- completely on our, let's say, business profile and what are the countries where we are making profits compared to the situation in 2018. So of course, now we can only -- let's say, the longer in the future we go, the more uncertain that, of course, would be. But 28% is a good number for 2018 at least.

[Operator]

We can now take our follow-on question from Leo Carrington from Crédit Suisse.

[Leo Carrington, Research Analyst]

I was wondering if you could talk a bit more about the outlook in Port Solutions. I think we understand the sort of large greenfield projects aren't really on the cards at the moment. But would you say the market is currently mostly maintenance CapEx at healthy levels? Or do you actually see any significant increases to capacity at the port operators?

[Panu Routila]

I clearly think that it is not only maintenance CapEx investments that our customer base is doing. I think we can clearly see that there are capacity additions and efficiency improvements as well by our customers. So this actually gives good confidence also now for the future.

[Leo Carrington, Research Analyst]

And of those 2 effects, which you think is contributing more to growth? Is it efficiency or is it capacity in terms of building cranes that work for larger ships, that kind of thing?

[Panu Routila]

I think it is clearly both. We have already been saying before as well that there are nicely -- these greenfield atomization projects, which are continuing, and we have a good market position and good product palate for those that is continuing as well.

[Operator]

We can now take a follow-up question from Johan Eliason from Kepler Cheuvreux.

[Johan Eliason, Analyst]

Jeff, coming back to the tax issue again. I think you have previously mentioned that we should do -- expect a falling tax rate and I was bouncing in 28% by 2020 basically. The reason you indicated previously was that in several geographies, you were loss making but were not allowed to add the tax assets. Are you now in all of these geographies where you were loss making before sort of profitable and at least allowed by the accountants to account for tax assets? Or is there more to come on that side?

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

Yes. Well, let's say, of course, the background of the question is good. And we have been discussing several times that in certain countries, we have been having difficulties with the profitability due to the reason that we have been too small, so that we have not had a critical mass that we would be able to make our businesses sort of big enough and feasible from the profitability point of view regarding that one. Of course, we are doing that and improving on that all the time when we do the integration. But then when we take a look at the situation for 2018, for example, so we have not really included significantly those kind of improvements in the tax rate so they -- if and when they come. So they will be coming in the coming years.

[Johan Eliason, Analyst]

So that implies that we could potentially even see lower tax rates than the 28% you were talking this year.

[Panu Routila]

We would be very happy to see a lower tax rates going forward, that is correct.

[Operator]

[Operator Instructions] We can now take our next question from Manu Rimpelä from Nordea.

[Manu M. Rimpelä]

The follow-up would be on the services margin. Can you comment on -- if you get more of these modernization orders and services. So that would have a diluted impact on the margin.

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

It doesn't have structurally, a diluted impact as such. And we have sometimes in the past, I don't now recall, that's how many years ago it was but some may remember that we have had also modernization programs that have been, let's say, difficult from the profitability point of view that have been, let's say, complex. And we have not always done those exactly according to the plan. But lately, we have been more diligent of that one and the margins that we have been able to have in the modernizations have been quite decent and in line with the rest of the business. So pure spare part business, of course, from the margin point of view is very good. But the modernizations of such are a very okay business as we see today.

[Panu Routila]

More than okay.

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

More than okay.

[Manu M. Rimpelä]

Okay. And can you then comment that -- just help me explain this difference or increase in the internal sales and internal [ orders ] . So what was really the change in -- was it accounting change [ added to it ] ?

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

It is not an accounting change as such. It is how we are organized internally and the -- in practical terms, this is a difference -- or this is a change regarding one of our big supply units in Germany. Coming from the MHPS hardware, we have now moved into a model where actually the industrial equipment is selling the products that are being manufactured in the factory to service. And this is creating internal orders and this is creating internal sales. And last year, the way that we did it, we used a shortcut and we just calculated the margin and moved the margin. So this is not impacting group orders or group sales, and it is not changing the profitability split between the BAs. So it's a technical change with which we have now made our structure so that it is aligned also in Germany in comparison to the -- to other supply units.

[Manu M. Rimpelä]

And would you suggest that the Q1 are now in a kind of normal type of level for that business or what type of the annual of percentages of sales?

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

Yes. That business is relatively stable from that point of view. But then when you take a look at the internal orders be -- particularly in the industrial equipment, so one has to remember that there is also a significant internal order and sales flow to Port Solutions and that is much more volatile than regarding service. So in a way, the internal eliminations as we are showing it in our reports and also regarding this one, so they fluctuate mostly based on the demand from ports to industrial equipment.

[Manu M. Rimpelä]

Okay. But basically, I assume a higher number than in 2017 for both lines.

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

Yes. The -- if we take a look at the volumes now. So of course, the volumes that we are having in Q1 are maybe more representative than the volumes that we had a year ago.

[Manu M. Rimpelä]

Okay. And then just another technical question on the financial items. So there was obviously a very big -- was it a change -- rate differences. So do you expect that we kind of seen the big currency moves and now you're kind of mark-to-market? And unless the spot rates move a lot from here, we will kind of see that line normalizing in the coming quarters or becoming closer to 0?

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

Yes. I think that this is as a result of the fluctuations that we have been having, and we have been doing those flow hedgings that we just discussed for a period. And these hedges that we do on flow hedgings, so they typically do not qualify for hedge accounting. So therefore, they are not in the comprehensive P&L, but they are in the P&L -- in the normal P&L, so to say. And typically, it is so that the bigger are the fluctuations in the currency, so the bigger is this item as well either plus or a minus. And this of course, over time, this will normalize. So I mean, when the transactions actually take place so whatever difference there is, will be moving to the business units and business areas P&Ls. So it will -- over time, it will normalize, but the problem is that forecasting that flow is virtually impossible.

[Eero Tuulos, Vice President of Investor Relations]

That concludes our conference this quarter. So thank you for everybody for coming over, joining the phone lines and asking good questions. And see you all again at the next quarter. Thank you.

[Panu Routila]

Thank you.

[Teo Ottola, CFO, Deputy CEO & Member of Executive Board]

Thank you.