Konecranes Abp

OMXH:KCR

Earnings Call Transcript 2020-Q1

[Eero Tuulos, Vice President of Investor Relations]

Good morning. And welcome to Konecrane's First Quarter 2020 Conference Call. I'm Eero Tuulos, Head of Investor Relations at Konecranes. Rob Smith, President and CEO of Konecranes; and Teo Ottola, CFO of Konecranes are here in Espoo with me today. Rob will start by reviewing our group level performance, and Teo will then continue with a more detailed walk through of the business areas. And as always, there will be an opportunity to ask questions after today's presentation. With that, Rob, over to you.

[Richard Robinson Smith, President, CEO & Member of Group Executive Board]

Good morning, everyone. The world has changed dramatically since the last time we spoke in early February as more countries around the world have been increasingly impacted by the corona crisis. I'm very clear, however, that today is not day 120 of the corona crisis, but it's day 20 of our new reality. And I didn't say new normal because this is not normal, but it's our new reality. And we are very focused on the safety of our employees and on supporting the essential mission-critical operations of our customers worldwide. I'm confident that this focus will bring us through this unprecedented period in great safety and in excellent health. Our order intake and our sales were impacted by the corona in the first quarter. Group order intake declined 13% year-on-year with comparable FX rates. Our sales increased by 1.2% on comparable FX rates. And although corona impacted our bottom line result, our EBITA result, to some extent, the major effects on our EBITA result came from 2 costs related to project execution. We spoke about the EUR 18 million at our port crane project in the United States at the end of March. We also incurred further costs in closing the process crane project that affected our profitability in the fourth quarter. With the drop in demand, we have measures underway, actions underway all across our business to adjust in real-time the demand and supply levels to our -- and our cost levels to the new demands that we're having. And we're doing that in real time. You can imagine beyond the second quarter, fixing this process crane business is one of my very top priorities. I will come to those at the back end of this conversation. Sticking on the first quarter and the view of the second quarter. In the second quarter, we expect this demand situation to continue to drive a drop in sequential order intake in sales for the -- in the second quarter versus the first quarter. The cost adjustment actions and the real-time demand balancing, however, will already be impacting our result on a positive way in the second quarter. And sequentially, between the first quarter and the second quarter, we expect to have an improved adjusted EBITA margin. You'll recall we withdrew our financial guidance in 2020 -- for 2020 on the 26th of March due to the coronavirus situation and we consider it is still too early to be giving recent guidance, and our financial guidance for the full year remains withdrawn. In our results, as we published them this morning, we do make some assessments of the second quarter, and we'll be sharing that together today. Let's go to the key figures in the first quarter. Orders received were EUR 737 million, as I said, down 13.4% on a comparable currency basis. Sales at EUR 770 million were up 1.2%. Our adjusted EBITA margin -- EBITA was EUR 21 million, which is a margin of 2.7% compared to the 6.4% last year. We had strong free cash flow at EUR 54 million. And we finished with a net debt at the end of the first quarter at EUR 771 million. You'll recall we closed the MHE -- the strategic acquisition of the MHE-Demag business in Southeast Asia in the first week of January. Excluding the debt taken on board with this, debt would have decreased by EUR 26 million on a year-on-year basis. Moving into the demand environment and describing what we were facing in the first quarter. Activities in the world's manufacturing sector dropped dramatically in the first quarter. In the eurozone and in the U.S., the manufacturing PMI ended very significantly down. As a matter of fact, in the eurozone, it was at its lowest level since 2012. And in both the eurozone and the U.S. markets, the manufacturing industry capacity utilization rate dropped in both markets as well. China dropped -- the bottom of the market in China was in February, and it picked up a bit in March and is on a way back from the trough. The rest of the markets in the BRIC countries, however, ended the first quarter in contraction, ended down. Our Port Solutions business was working in the following environment in the first quarter. The global container throughput index dropped very significantly in February. As a matter of fact, the largest monthly drop ever observed for this index. This was primarily driven by the Chinese ports, and the throughput is expected to decline even further in March as the effects of the virus going around the world are seen in the March statistics. The index finished 8.4% lower in the end of February than it did in February of the year before. And as I say, we do expect to see this drop further in the March statistic, and that's what we're experiencing at the end of the first quarter. As I look forward now into the second quarter, let's talk about the demand outlook there. The worldwide demand picture remains subject to significant volatility. And due to the corona pandemic, the demand environment is very similar to what I described in the first quarter, what we see in North America and Europe. Europe and North America are down in the second quarter versus the first quarter. And although China is picking back up, the rest of Asia markets -- the Asia Pacific markets are weak. I described the global container throughput index as some of its lowest levels ever. We do see long-term prospects are very good in the global container-handling market. And although many of our port customers or large port customers are considering postponing decision-making, we don't see cancellations, and that's a very important element of our future expectations for that business. We withdrew our guidance on the 26th of March due to corona, and we consider it is still too early to be making reasonable estimates. What we can expect in the first -- in the second quarter, though, is, as I said, orders for all 3 of our businesses and sales for all 3 of our businesses will be down versus the first quarter. And the cost adjustments actions that we're very actively doing worldwide are going to impact our second quarter in a positive fashion. And obviously, going forward from there, we expect in the second quarter to have an improved EBITA profitability versus the first quarter. In this crisis, it's very clear that the safety DNA in Konecranes is making a very positive impact on the safety of our employees, and it's making a very positive impact for our customers as well. Our focus on the safety of our employees, our focus on the mission criticalness of our customers' business operations and the continuity of those is paying dividends for us. We've been able to go through the crisis. We've had 15 cases. 10 of those are closed. 6 of our employees are still home recovering, and we have no employees in the hospital. This is a very impressive result coming from the DNA of our business focused on the safety of our employees. Lockdown does not mean closed for business. Although many countries locked down operations, many regions locked down operations, that extensive physical restriction to customer sites did impact our ability for service teams to get on site, did impact our ability to deliver cranes and close projects. However, as I say, lockdown doesn't mean closed for business. Many customers that would shut a factory very quickly thereafter brought in our service teams to do mission-critical repairs and mission-critical service operations. As we talk about interruptions, I think it's important to say that our factories that were closed during the first quarter at different times. We had a factory in China, Italy, France, South Africa, Malaysia, Philippines and India, we're closed at different times during the first quarter. That was not due to material availability. That was due to the region or the state or the country being locked down. And at the end of April now, we've reopened several factories, most recently just reopening our factory in Italy this week. And so we remained closed in India, Malaysia, Philippines and South Africa as a result of the lockdowns. The overall impact on our operations, though, we expect to be limited because our European component factories have been able to continue to run without interruptions during this period of time. Our cost mitigation actions are very intensively underway all over the world across our business, and we expect that's going to bring us some benefit in the second quarter. As you know, I started with Konecranes on the 1st of February, and we've been working very hard and I'm very clear that we will be creating significant value in Konecranes going forward. Let me share with you my first 3 areas of focus. Number one is on our strong Service business. We have a strong track record in Service of increasing the profitability over the last several years, year-on-year profitability increase. And a real key element in the first quarter was year-on-year, our service agreement base grew 8% on a year-on-year basis. So intensive focus on the continued performance and growth of our Service business is a very important element of our go-forward plan. We've been struggling for over 10 years in our process crane business, and I intend to fix that. It's very important to turn that business around, and that's a very important element of driving the increased profitability in our Industrial Equipment business. Secondary, a very key focus for me. And further, with the project management costs or the execution costs in the first quarter, you can imagine that getting project management right on a go-forward basis is a very clear element of our commercial and operations excellence focus I want to bring to our company. I expect that drives consistency in our ability to deliver projects, and I expect that brings consistency in our ability to do that profitably. And beyond that, I see significant potential in our manufacturing efficiency and in driving procurement savings, both the direct materials that we buy and the indirect spend that we have as well. These seem like basics, I consider these fundamentals of making an industrial business, a successful industrial business on a sustainable basis. That's what we're focused on doing, and I very much expect we should be doing that in the months and years to come. I'd like to turn over to Teo now to take us through the results of our business on a business-by-business basis. And then we'll have Q&A after that. Thank you.

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

Thank you, Rob, and let's move to the Service business right away. So our service order intake in the first quarter was EUR 266 million, that is an increase of 3.4% on a comparable currency basis. Now we started consolidating the MHE-Demag during the first quarter of this year now and organically. So excluding MHE-Demag, the order intake in Service decreased by roughly 3%. When we take a look at the order intake by geographical areas, so order intake increased in Asia Pacific, remained quite flat in EMEA but decreased in the Americas. And then when we take a look at the business units within Service business, so actually, this time, field service order intake grew whereas there was a decline in the parts order, meaning a little bit weaker product mix from the margin point of view. Agreement-based value reached EUR 282 million. This is an increase of 13%. Approximately half of that growth comes from the MHE-Demag agreement base, so excluding that when we had a nice growth of 6.5% in a year-on-year comparison, and actually, the agreement base grew also sequentially organically, so excluding MHE-Demag from Q4 to Q1. So a decent -- a good quarter actually from the agreement-based growth point of view. Then when we take a look at the sales, EUR 304 million. This is an increase of 1.6% with comparable currencies. But again, organically, there was a decrease of 3% or so in sales. Again, geographically, sales rose in APAC, but declined in EMEA and Americas. And then similarly to the order intake, so sales increased in field service, but there was a decline in the parts volume. Then when we take a look at the order book, so the order book, EUR 257 million. Again, organically, a small decrease of roughly 2% from the situation a year ago. Then when taking a look at the adjusted EBITA, so that was EUR 42 million or 13.8%. There is a decline both in euros as well as margin. The decrease mostly comes from lower underlying sales, so the organic sales were lower than a year ago, and then also partially due to the weaker mix, so the lower share of spare parts of the total sales value even if the gross margin stayed approximately flat. The MHE-Demag result for Service in Q1 was on the positive side, but the margin from the MHE as a stand-alone company was a little bit lower than that of the underlying legacy Konecranes Service business. Then moving on to the Industrial Equipment. And Industrial Equipment, order intake was EUR 278 million. This is a decrease of more than 13% and again, organically, excluding MHE-Demag, about 19% decrease year-on-year. When taking a look at the business units, again, within this business area, so order intake decreased in process cranes as well as in components. There was an increase in standard cranes. This is as a result of the MHE numbers. But even if you exclude the MHE numbers, so the standard crane order intake was flattish, slightly down, but by and large, flattish in a year-on-year comparison. So from the standard crane order intake point of view, the quarter was taking into consideration the circumstances quite okay and quite good. Then when we take a look at the sales numbers, so EUR 267 million there, this is a decrease of 3%. And again, organically, the decrease is close to 5% year-on-year. The sales actually grew now in process cranes in year-on-year comparison. So as a result of the order book that we have had, but there was a decline both in standard cranes as well as components. And this, obviously, for Industrial Equipment, as well similarly to the Service business, means that the mix was weaker now in Q1 '20 than what it was a year ago. Industrial Equipment profitability was weak, so minus EUR 10.6 million adjusted EBITA, a margin of minus 4%. The decrease is due to several reasons. There is, of course, the lower sales, particularly the underlying lower sales -- organic lower sales. The sales mix was weaker. The MHE-Demag adjusted reported number was on the negative side. And in addition to that, there was also an elimination and a technical thing as a result of this company being consolidated now in Q1 for the first time. But probably the single biggest individual item was the further costs incurred in closing the process crane project. That affected our profitability already in the fourth quarter, the same that Rob as well already mentioned. And of course, as a result of primarily that -- those costs, so also the gross margin declined on a year-on-year basis. The order book for Industrial Equipment, EUR 755 million. So this is -- there's a nice increase. However, much of that comes from the MHE-Demag. And excluding that one, the order book increased, but only a little, by 1.5% in a year-on-year comparison. And then Port Solutions. Port Solutions order intake, EUR 243 million. This is a decrease of more than 25% in a year-on-year comparison. Of course, the comparables are tough this time because Q1 '19 included a very big single order. The Hadarom order was booked in Q1 '19. But nevertheless, also, when we take a look at the situation sequentially, so the order intake came down from the fourth quarter of '19 as well. So when we take a look at the business units within Port Solutions, so mobile and harbor cranes did well, port service did pretty okay, but most of the other business units then saw a decline in order intake from the comparison period of last year. Sales were EUR 252 million. This is actually a good achievement. On a comparable currency basis, there is an increase of 4.7%. And again, particularly mobile harbor crane business unit had good deliveries towards the end of the first quarter. And therefore, the sales is higher than a year ago. The MHE-Demag acquisition doesn't impact the Port Solutions number, so these are comparable as such to the previous year. Then the adjusted EBITA for Port Solutions, so it's a 0 result from the adjusted EBITA point of view, and the decrease in comparison to the situation a year ago obviously comes from the estimated cost overrun of this one big project in the U.S., the number being EUR 18 million. And then we were able to compensate partly -- part of that decline with higher sales and the gross margin as a result of that and also some of the synergy savings that we were still able to have. But obviously, it was not, it was not enough to compensate for the full EUR 18 million. And of course, in this business as well, gross margin declined on a year-on-year basis. Then the order book on a comparable currency basis, there is a decrease of 5% year-on-year and sequentially, we are down by about EUR 10 million in the order book. Then finally before the Q&A, a couple of comments on cash flow and balance sheet. The first stage here in this section, net working capital and cash flow. So our net working capital was EUR 458 million at the end of Q1. This is now including also, of course, the MHE numbers, this is about EUR 50 million, the net working capital for MHE. So excluding that one, we would have seen a nice decline in the net working capital, primarily thanks to the accounts receivables, so customers have continued to pay well during the Q1. And also then, of course, as this is rolling 12-month sales, so obviously, now the MHE sales is consolidated only for Q1 '20. So the percentage, 13.7, maybe looks a little bit worse than what it will then look on a long-term perspective when we get more quarters in where the MHE numbers have been consolidated. So this will be, of course, correcting itself over the coming quarters. Free cash flow, EUR 54 million. This is a good number. It is higher than what we had in Q1 '19. And as said, quite a lot of that is thanks to the receivables and also advanced payments, but thanks to the receivables. Good development in Q1 '20. Gearing and net debt. So net debt was EUR 771 million, like Rob already mentioned, up as a result of the MHE acquisition. That took place in the beginning of January. Gearing, now 61.7% at the end of the first quarter. And then obviously, capital employed, going up for basically 2 reasons. One of them obviously being the MHE acquisition, the other one being that we have a high cash level. Currently, we are keeping more cash in the -- at hand than what we would be doing in so-called normal conditions. So this is impacting the capital employed as well. And then, of course, also on a rolling basis, the Q1 result, obviously, is lowering the return on capital employed for the end of Q1 situation as well. This is the last slide in the presentation as such, and then we can go into the Q&A.

[Eero Tuulos, Vice President of Investor Relations]

Yes. So let's open the lines for questions, please.

[Operator]

[Operator Instructions] We'll now move to our first question over the phone.

[Magnus Kruber, Associate Director and Research Analyst]

Rob, Teo, Magnus here with UBS. A couple of questions from me. So first, could you help us with some comments on how demand developed on orders and service in the back end of March? And what decline rates did you see there?

[Richard Robinson Smith, President, CEO & Member of Group Executive Board]

Let's talk about the overall Q1 result being the fact that the Service business increased, what we measure carefully, which is its agreement base. Year-on-year, that agreement base, which locks in a certain level of service activity, has our service personnel in the factories of our customers. And while in the factories, identifying other opportunities to improve the customers' operations with them. That order base or that agreement base in services grew by 8% during the course of the -- during the year on a year-on-year basis in the first quarter. What we see in the Service business also, we've had quite a few customers that have shut down their operations but have been calling us in to do mission-critical work for them during their shutdown period. And in some cases, it's not a cancellation of a project or a piece of work with the customer, it'd be a postponement if the site was closed and did not give access to our personnel. So we see that as a postponement into the second quarter when those cases have happened. I wouldn't give you a specific decline in that last 2 weeks of March because that was a very intense period of time where a lot of things were going on and measuring that exactly for you for a number, I wouldn't give you at this point.

[Magnus Kruber, Associate Director and Research Analyst]

And on savings, could you help us quantify what you expect to realize in the short-term in temporary cost savings in Q2? And do you expect to replace these savings with some more permanent cost adjustments beyond what you already announced in -- come Q3?

[Richard Robinson Smith, President, CEO & Member of Group Executive Board]

Maybe Teo and I tag team on that. What I described is our ongoing activity of balancing in basically real-time the demand we're facing with our supply. And when I talk about supply, I'm talking about the supply of our service personnel going on-site. They only go on-site when it's confirmed that they're expected and when the safety measures are in place to do that. I also talked about supply in terms of our factory production and in terms of our cost base, which we're adjusting variable cost, we're adjusting fixed cost, and we're working to address that in real-time in line with the demand activities. So we talked about flexing and we're flexing directly in line with the variations that we're seeing.

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

Yes, exactly like what you said, Rob.

[Magnus Kruber, Associate Director and Research Analyst]

Can you give us some sort of a run rate savings you expect to see?

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

Sorry, could you repeat that one, please?

[Magnus Kruber, Associate Director and Research Analyst]

Sorry, could you give us a sort of a run rate savings you expected in Q1 from the furloughing in Finland, for example?

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

No. We haven't given the exact numbers, and I guess that maybe what Rob said, summarizes it very well. So we are currently in a situation that we are looking for basically the maximum potential flexibility in all of the locations where we're operating. So we are agreeing with the unions to be able to make adjustments as needed now that the situation is evolving all the time. And these are primarily temporary measures that we have taken so far. And in some legislations, of course, the things are different, and there you go into the permanent situation immediately. But for the most part, these are temporary ones. And then obviously, we will need to see that where the demand goes from here and what that then requires from our cost base point of view. So we will be taking a look at that all the time, like Rob said. So we are measuring the situation constantly.

[Richard Robinson Smith, President, CEO & Member of Group Executive Board]

And I'd also say that we very quickly got on, we're on this. As the crisis was intensifying second half of March, we were already on this, adjusting our cost base. And with very good relations with our workforce around the world, we're able to very quickly get to the agreements that we need to, to make the temporary adjustments as well as making the permanent adjustments we've been making.

[Operator]

[Operator Instructions] We'll now move on to our next question over the phone.

[Artem Tokarenko, Research Analyst]

That's Artem from Crédit Suisse. My first one is around process cranes, and Rob, you mentioned it will be one of your major focuses. Could you maybe talk a little bit about what you see as the main reasons why the business has underperformed, whether that was external pricing or maybe some internal efficiencies? And what are the primary changes you're aiming to make and in particular, whether you will be changing any incentive structures and management team in that business?

[Richard Robinson Smith, President, CEO & Member of Group Executive Board]

Well, sure. Let me be real clear. My Industrial Equipment business has several elements to it. We've got a very strong components business. We have an industrial crane business that makes configure-to-order cranes as well as engineered-to-order cranes. And when we talk about our process cranes, we're primarily talking about these engineered-to-order cranes that are in many -- basically, they're unique, and that's why they're engineered for that specific project. I see this as an element of project management capability. I see this as an element of projects being costed in the first place on a correct basis, costed and quoted on a correct basis as well as some projects, the delivery and the execution of the project going off track would cause us problems. So I think the important thing to recognize in the process crane business is we do this worldwide. We -- when we talk about process cranes, these are integral parts of our customers' major operations. You can imagine a major crane pouring hot metal in a steel plant. You can imagine the major impact or the major function that a process crane has in a paper mill. You can imagine the centricity of that technology in our customers' operations. And I'm very confident that, that centricity in their operations needs to mean and does mean value for Konecranes. In this portfolio of process crane projects, by engineered-to-order projects, I have some examples, some very good business. And I also have some examples of some very poor business that must be fixed. And so we're working every single element you can imagine on a project -- on a business turnaround to make sure that we get that business to a profitable basis. It's been a drag on us. We've been losing, we've been negative in terms of profitability in that business for the last 10 years or so. So there is an intense effort to get it right going forward. And the best way to get it right going forward is to make sure the population of projects in that in order entry or on the good side or on the positive margin side and are very, very -- they're quoted right and they're executed right. And that's the focus that we'll be taking. We need to adjust projects that are in process. We need to adjust projects in the order book. And going forward, we need to make sure that each one that comes in has been well quoted, well costed and will be well executed.

[Artem Tokarenko, Research Analyst]

I guess asking more specifically, do you think that the incentives for sales force are not properly aligned in that business? And have you implemented any management changes in that specific business line?

[Richard Robinson Smith, President, CEO & Member of Group Executive Board]

You know that from the beginning of this year, from actually the first of March, we have a new leader in our Industrial Equipment business, who I think very positively came from the Demag part of our business, that part we acquired 3 years ago, and is the first member of our leadership team that has come from the Demag side. She's got excellent experience for many, many years in the original equipment as well as the Service business. Part of creating value for Industrial Equipment will be the very intense teamwork between our Service team and our Industrial Equipment team. So with good experience on both sides of the net there, I think she's bringing the right background. And she and her team are extremely focused on getting this process business turned around for us. So yes, we have had a change. And I think it's a great leader in our business. It's going to be taking that business forward with me, making it profitable.

[Artem Tokarenko, Research Analyst]

Okay. And my second question is around the EBIT bridge for this year. So could you maybe help us to quantify the negative mix impact in the order backlog and also how to quantify the costs related to process -- to finalizing those process crane projects in Q1, please?

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

So if we start with the product mix. So now the -- for the Q1, the mix was negative for Service. It was also negative for Industrial Equipment. It was maybe more or less neutral when it comes to the Port Solutions business. And now, of course, guessing what the Service business mix will be going forward is a little bit tough because there is so much in and out order intake sales during the year. But for Industrial Equipment, we can -- we almost -- we certainly know that the mix will be negative this year. And then for Port business, it will probably be slightly negative. So it will be clearly negative for Industrial Equipment and it will be slightly negative for Port Solutions. Then typically, when you take a look at this negative or positive product mix changes, so they have not typically been more than a percentage point of the sales in -- as an EBITA margin impact. So I would say that regarding the Industrial Equipment also this year probably would be something like that from the effect point of view. And for Ports, it would be less, and then like I said for Service, it is maybe unnecessary to try to guess this one. Then regarding the bridge that we have for the first quarter of this year, so '21 versus '19, so the Industrial Equipment process crane challenge that we had in Q1 is this particular project, this one particular project. So it is between EUR 4 million and EUR 5 million. That is the impact in the first quarter.

[Artem Tokarenko, Research Analyst]

Okay. Thank you. And that project is finalized?

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

That project is not handed over to the customer. It is at the very late stage of its life cycle, but it has not been handed over. So it will be handed over in May.

[Operator]

We'll now move on to our next question.

[Antti Suttelin, Head of Research of Finland]

This is Antti Suttelin from Danske Bank. Two questions. How much were the closure costs incurred in Q1, please, in France?

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

That is a very, very low number because the French costs were basically already reserved by the end of last year. And there is no production anymore in France or there hasn't been any production in France anymore. So the number is low. It is not -- it wouldn't be visible in the EBITA bridge. So it is so low.

[Antti Suttelin, Head of Research of Finland]

So the loss of EUR 11 million was basically due to mix and a weak top line. And then you said something about a bad project, EUR 4 million to EUR 5 million as well.

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

That is correct. So there are maybe 2 main negative reasons. One of them, obviously, is the project that we just mentioned, EUR 4 million to EUR 5 million. The other one is then the volume, which is down, particularly when you take a look at the underlying legacy Konecranes volume. And on top of that, we have a mix impact, which is a couple of billions as well. And also the volume impact is more, but the mix is a couple of millions. Then as a third one or fourth one, I mentioned the MHE consolidation, which is now -- the MHE result for Industrial Equipment was negative. It was positive for Service, but for Industrial Equipment, it is negative. And then on top of that, there is the internal margin elimination, which comes as a onetime impact now for Q1 as we've now started to consolidate. So these all together are roughly EUR 3 million. So they have something between EUR 2.5 million and EUR 3 million. So this obviously brings a very big negative number. And on the other hand then, we have there the savings that we have been able to get from the restructuring programs that we have been having, partially the impact from the integration activities and also the ones that we have been doing then otherwise during the second half of last year.

[Antti Suttelin, Head of Research of Finland]

Okay. And then secondly, you have previously said in your Q4 presentation that you target EUR 34 million savings for 2020 and EUR 14 million for '21. Are these numbers still valid to assume?

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

These numbers are valid. And actually, the Q1 number that we have in the numbers is, let's say, EUR 11 million to EUR 12 million. So it is part of that already. But the EUR 34 million that you mentioned is still valid as well as the number for '21.

[Operator]

We'll now move on to our next question.

[Manu M. Rimpelä]

This is Manu Rimpelä from Nordea. My first question would be on these cost savings measures and the plan to tackle the last 10 years issues with the profitability in the Industrial Equipment and more likely in the process crane business. So do you have anything more concrete that you would help us with in terms of understanding of how do you plan to tackle the issue? Obviously, cost overruns is one, obvious thing to take care of. But still, even without the cost overruns, we have a clear profitability issue in that business.

[Richard Robinson Smith, President, CEO & Member of Group Executive Board]

Sure. So as I talked about in my process crane portfolio there, I have projects that are making good money, and I have projects that are not. And in assessing how and why they're making good money and how and why they're not making good money, you come across some fundamentals and root causes. One of the root causes is inaccuracy in the quotations in the first place. When you do that all over the world with teams that don't do that every day, that becomes -- there's some variation in the quotation accuracy. There's variation on the cost basis as assumed. And there's an opportunity for -- there's an opportunity for making mistakes doing that. Our process crane team wants to consolidate the way we approach and quote and cost our project crane business on a go-forward basis. In addition, you put in place quotation thresholds where the profitability needs to be such before it comes in the pipeline. And then when you're looking at the orders in the process crane order book, you do an assessment of to what extent those projects have started and to what extent they're profitable. And you make some real hard decisions on giving some projects back or on renegotiating some projects, and in every one of the projects, some very intense focus on getting the execution right and getting rid of the variability. In addition, you look at where is it manufactured and how is it manufactured. And is it manufactured in a way that doesn't have the rework costs that we had associated with the crane project that we've been discussing so intensely this morning, and very, very intensely in our company in the last months. Getting things right the first time and not having rework cost is a fundamental piece of getting those project costs in the right way, especially when you're talking about very big cranes that then get delivered to same continent and other continents. And so those are some of the elements that I'm ready to talk to today. And I think the rest of it is going to be -- we can say what we want to say today but it's going to be over the next quarters that you see the improvement in the business profitability.

[Manu M. Rimpelä]

Okay. That was very helpful. If I may just follow-up on that. So did I understand it correctly that you see that it's mainly a risk management and the quotation execution issue rather than if you talk about the bigger Industrial Equipment, the profitability issues you had in the past, that you don't see so much potential to cut costs from the manufacturing footprint itself still further beyond the synergy and other cost savings that you already have in place?

[Richard Robinson Smith, President, CEO & Member of Group Executive Board]

No, don't misinterpret. I was very clear that driving cost reductions in terms of manufacturing efficiency all over the company is a very important part of my focus. So that will include our process crane business. What I'm saying about specific to the process crane business, the engineered-to-order projects are classic project management business. And you have to get every single element of that, right, throughout the life of the project, including upfront the commercial project assessment, the important terms and conditions, the material costs going into a quotation, the timing and the manufacturing plans and assumptions. And then turning it into the detailed plan and executing it. So risk management is an element of overall excellence in project management. And we must be very good at that to get that business in a very good fashion going forward. The short-term measures of making adjustments on projects in the order entry pipeline in terms of either givebacks or renegotiations or intensification on getting it right first time without the rework costs or part of getting the order entry right. Going forward, we need to be able to bring projects in, in the first place that are in good shape that we can then execute well. And as I say, that's a fundamental part of those customers' business. It's the heart of the steel mill. It's the heart of the paper mill. It's the heart of many of the customers that are bringing those process cranes into their business. And I think on a value-for-value basis, that must mean positive value for Konecranes. And I expect that we will achieve that.

[Manu M. Rimpelä]

Okay. Excellent. That's very clear. My second question would be on these existing projects. We've seen now almost EUR 30 million worth of write-downs both in the Industrial Equipment and the Ports business in the last couple of quarters. And obviously, there wasn't really probably expectations of having further write-downs in this Q1. So what confidence would you say that you have gone through the existing backlog? And especially given your comments about the kind of increased focus on risk assessment going forward in projects that you will not be able to kind of price yourself into this tough competitive environment, that you will end up losing market share?

[Richard Robinson Smith, President, CEO & Member of Group Executive Board]

I've explicitly given the team directions to bring onboard profitable projects. And that's the kind of project I want in that business. And in the short term, I'm willing to trade some revenue levels to ensure that I have profitable business in my pipeline. And then as we get very good at executing that and I expect that we grow that business top line and bottom line over the medium and longer term. But in the short term, if I need to reduce my top line to get the profitability there, I shall do so.

[Manu M. Rimpelä]

Okay. And what about the existing backlog? Have you gone through that?

[Richard Robinson Smith, President, CEO & Member of Group Executive Board]

Yes, yes. We're interrogating at existing backlog on a very intense basis. It applies to my comments.

[Eero Tuulos, Vice President of Investor Relations]

All right. Thank you. So we can then move to the next question please.

[Operator]

We'll now move on to our next question.

[Antti Kansanen, Analyst]

It's Antti Kansanen from SEB. The first question would be on Services. And if you look at your client base, now gradually maybe moving away from the restrictions and gradually ramping up their production. How do you think the demand for Services will develop going forward? Do you think that they will pull forward some maintenance work as they are operating with lower capacity utilization? Or do you expect them to kind of push forward and save on OpEx as they are doing this ramp-up phase, mostly related to Q2, Q3?

[Richard Robinson Smith, President, CEO & Member of Group Executive Board]

Good question, Antti. I mean the exciting thing about the Service business is it's had -- our customers have been having our Service teams into their operations while those have been shut down. The customers that have been fully shut down and not able to give access to our service personnel. I think the positive thing in the today environment is during March, so intensively in the first half of April, everything -- we all saw, countries all over the world fully shutting down their operations and going into lockdown statuses to one degree or another, then increasingly so over that period of time. And as we're sitting here this morning, we all have been observing that countries and states and communities are working to, at different spaces and levels of success, reopen operations. And I think that, that will have a positive impact for all of my business on a go-forward basis. I think that the question about exactly how each customer evaluates their plans for service intervals, so I think the service intervals that they were not able to execute in Q2 will certainly be executed in Q3. Pardon me, the ones that were postponed from Q1 to Q2, I expect to be executed in Q2. And each customer is making its decisions on his own basis or her own basis. But it's very clear that we play a very important role in keeping their overall business running. We've seen that intensively during the crisis. How many customers are saying, you are a very important part of our central operations and we need you there. And so I expect that, that continues. And I expect as people restart and start up their operations, they'll need some service assistance as well. So I think that potentially going forward, this whole reopening is going to be a good thing for our business here.

[Antti Kansanen, Analyst]

All right. Very clear. Then the second question is a bit coming back to the process crane discussion that we have had. But overall, generally, if you look at kind of the economic conditions in Europe and U.S. going a couple of years forward, and if I read correctly, you are targeting to be a bit more selective on the process train project side, how should we -- and how do you look at your production footprint? What kind of a scale is the Industrial Equipment production designed at and the fragmentation of the production footprint if we think about the volume outlook for the next couple of years?

[Richard Robinson Smith, President, CEO & Member of Group Executive Board]

Well, you can certainly imagine that with a worldwide footprint in factories on a worldwide basis and demand level is now lower than we've had them in the past and some uncertainty going forward on how long the recovery is going to take, we're looking at our footprint very, very carefully. And that's all I'd like to say at this point in time.

[Antti Kansanen, Analyst]

But if you think about the profitability levers, do you think kind of optimizing the footprint or improving kind of the quotations on the risk management levels in the process crane is a key priority right now? Or how should we think about those 2 issues?

[Richard Robinson Smith, President, CEO & Member of Group Executive Board]

Well, those are certainly a part of my considerations going forward.

[Operator]

We'll now move on to our next question.

[Unknown Analyst]

Congrats. [ Kevin Saks ] from Goldman Sachs. I have 2 follow-up questions. The first one is, could you please confirm how much work is still required on the projects on which you incurred costs? Should we expect additional costing there in the second quarter? And my second one, could you please confirm that the time line on the France factory and the German one is unchanged when it comes to the restructuring and respective exposure?

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

Yes. If we take a look at the projects that we have been talking about now here, so the Industrial Equipment process crane project, that cost is EUR 4 million to EUR 5 million hit in the first quarter. So like I said, so that will be finalized now in the month of May. The port crane project though, the one in the U.S., is a very long project, so it will be taking several quarters from now to be finalized. And therefore, this EUR 18 million that we have there is an estimate. Like is, of course, regarding the process crane situation as well. But the estimate period is significantly shorter in the process crane than in the port crane project. So both of these are estimates but particularly regarding the port crane project, it is an estimate far into the future. Then having said that, so then obviously, we should not be expecting costs in the second quarter because we have tried to make our best estimate on the efforts and work needed to finalize both of these projects. And then there is a normal potential variation as a result of not necessarily being able to forecast exactly right. So it can be a plus or a minus, but this is obviously our best understanding.

[Richard Robinson Smith, President, CEO & Member of Group Executive Board]

I think it's also appropriate to say that the project we're discussing in the U.S. is a multiple crane project where those cranes are delivered over a period of time. And the cost estimate that was the basis for the 18 million was based on the experience we made in the first several of those cranes. And so it's no longer a projection. It's based on the hard facts of the first several elements. And projecting forward for the rest of the project, expecting that to make those mistakes again. And having addressed the change in our supply concept will affect the rest, and we've made those calculations based on the experience on the first part of that delivery. Giving us some confidence in the projections for the rest of that project there.

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

Okay. Sorry, there was the other part of the question. Sorry, I forgot about the timing of the factory restructuring. So the timing of the Vernouillet factory has been like we have been discussing so that there is no production coming anymore from the Vernouillet factory as of beginning of this year. So that, from the production point of view, the production shifts and moves have been completed. There is a small number of people, team members doing, let's say, maintenance and cleaning work at the site, but no production. Then regarding the Wetter factory, so there, the situation is that the time line that we have been discussing now previously the end of Q3, so that time line is valid, and we believe that we will be able to get the required layout changes completed by that time.

[Operator]

Now we'll move on to our next question.

[Tomi Markus Railo, Analyst]

Yes. This is Tomi from DNB. A question on the components business development in the first quarter, if you can comment sequentially and year-on-year. And then maybe just overall in terms of various end-customer segments in the Services and the Industrial Equipment business. Where do you see sort of further weakening, possibly stabilization or even signs of improvement, automotive, energy, pulp and paper, et cetera, et cetera?

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

If I take the component business development question first and regarding the development year-on-year and sequentially, so it is down both year-on-year and sequentially, and it is more down year-on-year than sequentially, which is probably not a surprise to you, but that is the way it is. But it is also sequentially -- it is sequentially down more than marginally, so that there is a decline clearly in the sequential development as well. And this is, of course, one of the reasons why we are also commenting that the product mix for the full year will most likely be weaker than the mix was for the previous year.

[Richard Robinson Smith, President, CEO & Member of Group Executive Board]

And talking about the customer base. I think that it's probably more appropriate to be looking at that geographically as opposed to industry-wise. Why? Because the lockdown restrictions are on a geographic basis. I would point out, you asked about -- and we talked about where we saw that in Q1, and we talked about the regions and the expectations for the different markets for Q2 in previous comments. I would highlight too, you asked about one industry, a very widely and intensively documented in business journals and magazines and newspapers and news all the time. In quite a few elements of the automotive business during the times when the factories were shut down, those were the factories, those were among the customers that we're bringing our teams in to do critical overhauls or repairs during the shutdown. And many have asked us to be on-hand and on standby to help them restart their operations. So as operations restart geographically, I expect that has a bigger impact in business than any one particular segment. And happily, we're not -- we don't have any cranes in the service -- in the service and hotel industries, in the airline industries these days. So -- and in terms of flight operations, in terms of hotel operations. So our underlying industrial base customers in port cranes and in industries all over the world have factories with lifting equipment in it, to the port terminals that have lifting equipment in it that need ongoing original equipment and service support. And I think it's a good customer base for us, especially in these corona times and coming out of these corona times.

[Eero Tuulos, Vice President of Investor Relations]

Thank you, Rob. That was the final question today. And before we close, a short practical and a slightly personal announcement, so I will be on paternity leave now starting from late May until mid-August. And [ Kira Ferber ], who most of you and many of you know well, will be rejoining IR now temporarily as the acting Head of IR, and she will also then be hosting our Q2 conference -- earnings conference. But that concludes now the conference today. And regardless of the times we live in right now, so I wish you all a very, very good and sunny summer. Thank you.

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

Thank you.

[Richard Robinson Smith, President, CEO & Member of Group Executive Board]

Thank you very much.