Konecranes Abp

OMXH:KCR

Earnings Call Transcript 2022-Q2

[Kiira Froberg, Head of Investor Relations]

Good morning, everyone, and welcome to Konecranes' Q2 Earnings Conference. My name is Kiira Froberg, and I'm the Head of Investor Relations at Konecranes. Here with me, I have our Interim CEO and CFO, Teo Ottola.

Before we start, I would kindly remind you that our presentation includes forward-looking statements. Soon, Teo will present you our Q2 results. The presentation is followed by Q&A as always. Please, Teo, the stage is yours.

[Teo Ottola, Interim CEO and CFO]

Thank you, Kiira, and welcome on my behalf as well. The structure of the presentation is very similar to what it usually has been. So we will start with the Q2 group highlights and then we will discuss a little bit more in detail the business segments, and then, a couple of comments on balance sheet before we go into the Q&A.

And let's start with the Q2 highlights. Actually, the second quarter of '22 was quite similar to the first quarter, both from the operating environment point of view, as well as from the performance point of view. We continued to have very good, very high order intake in the second quarter, but at the same time, our profitability declined year-on-year.

Our adjusted EBITA margin declined to 7.7% from 8.6% one year ago. This was mainly due to lower sales volumes, which was again caused by component and material availability issues, as well as COVID-related challenges. Profitability declined in all segments. When we take a look at the overall market environment, it actually remained good in Q2, despite the war, despite the pandemic, macroeconomic concerns, including inflation. Our order intake grew by almost 20% in comparable currencies year-on-year and surpassed 1 billion level again now for the second consecutive quarter. We were very close to the record levels of the first quarter in the second quarter order intake. Also, the so-called short cycle products, notably components in Industrial equipment and lift trucks in imports continued to do very well, and actually also now in the second quarter slightly better than what we expected ourselves.

From the sales point of view, like already said, we were suffering as a result of the component and material shortages and other supply chain constraints, and our sales in a year-on-year comparison decreased slightly in comparable currencies. And then when you take into consideration the price increases that we have done in on year-on-year comparison in a way as a result of the inflation. So actually our underlying volumes are quite a bit lower than what they were one year ago. And this is, of course, also creating the profitability challenge and the decline that we are seeing in the numbers.

When we take a look at the order book, so, of course, the continued very high order intake, as well as some of the delivery challenges that we have been having meant that the order book had another record at the end of Q2, more than EUR2.8 billion at the end of June. We are expecting the market volatility caused by the ongoing war, the pandemic and other macroeconomic concerns to continue. The demand environment has remained good. However, uncertainty has increased, and we have updated our demand outlook for the third quarter to be in line with the current understanding of the market sentiment.

Also, as we do not expect the situation with the supply chain constraints to normalize in near-term, we have lowered our full year guidance ahead of the half-year financial report a couple of weeks ago. And even if we do not -- even if the material issues and constraints are by no means over, they will continue -- the situation will continue to be tight. However, we feel that in the second half of the year we expect our delivery capability to improve in comparison to the first half, and also some of the price increases that we have earlier done are starting to impact our profitability positively during the second half of the year.

Looking ahead, we will continue to drive efficiency improvements throughout the company. Since the beginning of June, our Service and Industrial Equipment businesses or segments have been focused under one leadership, and following this change, we have started to identify opportunities for efficiency improvements and simplification of our Industrial business model.

In June, we announced that Anders Svensson has been appointed as Konecranes' new President and CEO. He will assume his role on October 19. And as he will be starting in his new role as late as in October, so we have also decided to postpone our planned Capital Market's Day to the first half of next year, instead of the second half of this year as we were discussing earlier. And of course, on behalf of the Konecranes leadership team and employees, I want to wish Anders very warmly welcome to Konecranes and I look forward to our future co-operation.

Then when we take a look at this slide. So, here, we have actually more of the numbers. I think that we went quite many of them through already. Maybe worth noting is the cash flow from this slide. Our free cash flow was negative by approximately EUR31 million. This is primarily driven by the net working capital development as a result of the inventories being on a higher level than at the end of Q1. At the same time, maybe a comment regarding the net debt. It rose to EUR700 million at the end of Q1, it was about EUR545 million. The increase is, of course, as a result of the cash flow, but also as a result of the dividends that were bait during the second quarter.

Then a couple of words on the macro environment -- market environment. First, starting with industrial businesses and familiar pictures here, utilization rate for EU, if we start with that one. Actually, the manufacturing capacity utilization has been quite steady during the first half of 2022 and it is slightly above the pre-pandemic levels when it comes to the EU. If we take a look at the picture in the middle. So there is the utilization rate for US, it has actually continued to improve during the first half of '22. And despite, there is a small dip at the very end of the second quarter. So, still, we actually are on a higher level than the recent peaks in the middle of 2018.

When we -- if we take a look at the PMIs for these same markets, EU and USA. So they are suggesting expansion. We are above 50 points limit. However, maybe a little bit slower pace of growth than what we have been having previously. And then taking a look at the emerging markets, Brazil, India and China, so there, the PMIs also are above 50.

Demand environment for Port Solutions, we can see it here. Actually the container throughput has been quite stable during the '22 -- first-half of '22. There has been some fluctuation, but overall, quite steady and at the end of May, we are approximately at the same level as we were one year ago, which level is actually very high in historical comparison. This is our take, then from the macro data to the demand outlook, of course, it goes without saying that the demand picture remains subject to volatility due to the topics that we have discussed.

When we take a look at our industrial customer segments and Europe and North America, we are seeing that the demand environment is on a healthy level, even though there are some early signs of weaker demand. In Asia Pacific, the demand environment has started to slow -- to show signs of improvement. And, of course, this is COVID-related to the extent that COVID restrictions where they're quite strong still in the beginning of the second quarter and now things look a little bit better from that point of view. When we take a look at the container throughput, that continues on a high level and long-term prospects related to the global container handling remain good overall.

Financial guidance, which we actually, as mentioned, issued already ahead of the actual report. We are expecting net sales to remain on the same level or to increase in full year in comparison to '21. And then regarding adjusted EBITDA margin, we are expecting it to remain on the same level or to decrease in full-year '22 in comparison to '21.

Then a couple of group level numbers very briefly, 20% order intake -- almost 20% order intake increase with comparable currencies like discussed. We had growth in all regions. We had growth in all reporting segments. When we take a look at sales, EUR787 million with comparable currencies almost exactly the same number as a year ago, we had increase in Industrial Equipment and Service, but then we had a decrease in a year-on-year comparison in Port Solutions in the second quarter.

Pie-chart by businesses and by regions. There are no major changes here. Obviously, the Port Solutions share has maybe from the sales point of view declined slightly. However, now that when we take a look at the order intake which has been very good for Port Solutions, so of course, there will be catch-up coming a little bit later. From the regional point of view, EMEA continues to be, by far, the biggest. It has been around 50%, a little bit lower or higher now 49% at the end of the second quarter. Order book has been increasing quite a lot dramatically, actually at the -- both at the end of Q1 and Q2 in a sequential comparison. Now we have in a sequential comparison more than EUR300 million -- clearly, more than EUR340 million increase in the order book and in a year-on-year comparison, actually more than EUR800 million improvement in the order book. And as we can see from the percentages there, so it's actually increasing in all of the businesses.

Then, the adjusted EBITA that was EUR60.9 million, 7.7% as discussed. And as already mentioned, the decline, which is both in euros as well as percentage was as a result of the lower sales volumes caused by -- primarily by component and material shortages and other supply chain issues, labor availability to some extent and then cost inflation in certain places like in Industrial Equipment where we still had a gross margin decrease in a year-on-year comparison as a result of cost inflation. On group level, however, gross margin remained on the same level as it was one year ago. So on group level there was no gross margin deterioration really in on year-on-year comparison.

Then, let's move into the reporting segments and start with Service, as we usually do. Service order intake EUR297 million, that is growth of more than 15% actually with reported currencies. Now, of course, the currency impact is quite big, particularly in Service. So with comparable currencies the growth was almost 9%. We had growth in both field service as well as spare parts and we had order intake increase in all of the regions, but particularly, in Americas, in a year-on-year comparison. And then when we take a look at the Q-on-Q comparison, so there, Asia Pacific was particularly strong like already indicated in the demand outlook as well.

Then, when we take a look at the service agreement base, EUR310 million, a little bit less than 10% growth with reported currencies, a bit more than 3% growth with comparable currencies and there is also sequential growth in the agreement base in the second quarter in comparison to the first quarter. Sales and order book. Sales was EUR319 million with good growth of 6.8% with reported currencies. However, with comparable currencies only 0.8%, suggesting that also in Service the underlying volume actually was lower than what it was a year ago, because we have price increases included in Service business as well. Sales increased in Americas, but decreased in EMEA and APAC. And Service order book, of course, on a very high level, EUR457 million. This is including some of the big modernization deals that we have been getting earlier, but nevertheless, in a historical perspective, a very high order book for service business.

And then to the adjusted EBITA. So, EUR49.6 million or 15.5%, there is a decrease, both in euros and in margin in EBITA for Service. This decrease is basically as a result of two or three actually different reasons. One of them, of course, is the underlying volume that was already discussed. So, we are effectively lower than a year ago, which was in a way, as a result of the component shortages and labor availability.

At the same time, our productivity was a bit lower than usually and this is also kind of driven by material shortages. So when the spare parts, for example, or other material is not at the right place at the right time, so planning service jobs becomes very difficult and it creates a little bit inefficiency in the system. And this is something that we can see in Service in Q2. Maybe as a third item, the product mix maybe from the field service parts point of view was slightly weaker now than in the Q2 last year or in Q1 this year for that matter. I guess the productivity topic in a way is the decisive one here. So that is something that has been affecting maybe most of these items and gross margin decreased as a result of the productivity, like already discussed.

Then, moving on to the Industrial Equipment and Industrial Equipment order intake, EUR385 million, 16% growth, basically. However, when we take a look at the external orders with comparable currencies, growth is about 6%. We had order intake increase in all major business units, standard cranes, process cranes and components. However, if we take a look at the same with comparable currencies year-on-year, so actually, components is the only one that -- clearly crew in an year-on-year comparison where a standard cranes and process cranes were quite a bit on the same level. Regionally, order -- orders received increased in all of the regions.

Sales, EUR275 million, again, 7% growth, but when taking a look at the sales increase, external sales with comparable currency is 1.3% only and there sales increase in standard cranes and components, but there was a decrease in process cranes. From the profitability point of view, adjusted EBITA was EUR2.7 million, margin of 1%. The decrease in the adjusted EBITA margin was, of course, as a result of the low volume. The underlying volume was lower than a year ago here as well, but then also, at least partially in relation or definitely partially related to the pricing topic. So we have not been covering inflation in all of the business units fully. And as you may remember, we communicated that we have increased prices already earlier, but that it takes a little bit time before that will be visible in our P&L, and it was not really visible that much in the second quarter yet. So gross margin decrease on a year-on-year basis.

Order book looks good here as well. So it has been increasing in Q1 and Q2. Sequentially, both of those quite a bit, reaching EUR962 million at the end of Q2. Then Port Solutions and order intake, very good order intake, EUR403 million, that's a growth of 47% with comparable currencies. When we take a look at the situation year-on-year by business unit, so basically, it was a strong quarter across the board. Also, when we take a look at the sequential comparison where the actual order intake came down, but still particularly this shorter cycle product looks like lift trucks and -- port service and lift trucks in particular continued to do very well from the order intake point of view in the second quarter as well. Orders increased in Americas and EMEA, but decreased in Asia Pacific.

Sales, EUR237 million, that is a lower number than a year ago by 2% on a comparable currency basis. There was not necessarily major amount of, let's say, delivery issues from the project business point of view. So this is partially at least an order book timing topic. However, then when we take a look at some of the other businesses like the lift truck that was already mentioned, so there, of course, the China lockdowns that we had in April and May impacted our factory as well. So there is, of course, this kind of a pandemic impact in the Port Solutions sales to some extent as well visible in the second quarter.

Adjusted EBITA, EUR16 million, 6.7%. Again, lower, both in euros as well as margin and lower sales due to timing of customer deliveries is the main reason. But here, gross margin actually improved in on year-on-year comparison in comparison to the second quarter of last year. Order book, this picture looks very similar to the Industrial Equipment order book improvement, Q1 and Q2, have been increasing quite a lot in a sequential comparison, EUR1.4 billion or more than EUR1.4 billion being the order book at the end of June.

Then still a couple of comments on cash flow and balance sheet before we go into the Q&A. Net working capital and free cash flow. We can see that here, net working capital was EUR474 million, that is 14.9% of rolling 12-month sales. There is an increase like mentioned already mostly as a result of inventories or work in progress actually. In this case, advanced payments have continued to come in pretty nicely, but it hasn't been enough to compensate for the increase in inventories. We have been communicating that we basically should be under 15% threshold for us to be in a way satisfied with this one. We are very close to that level now. But of course, this is quite a lot driven by the late backlog and the delivery challenges that we have across, actually, the businesses that we have. Free cash flow, EUR31 million negative, as already discussed, driven by the same topic as just mentioned.

From the balance sheet point of view, equity and net debt. Equity, of course, shows the impact of the dividend payment as does net debt, partially -- as well EUR700 million net debt at the end of Q2 and gearing 55%, a good level. As such, no issue there. Adjusted return on capital employed 13% at the end of Q2.

And I think that this concludes the presentation and then we can go into the Q&A.

[Kiira Froberg, Head of Investor Relations]

Thank you, Teo. Before we open the line for the questions, we already have at least one questions in the chat. So we could start with that one. You flagged a softening of macroeconomic indicators from high levels, is this just contextual and to show awareness of changing macro environment? Or are you already seeing reductions or delays in customers tender activity within your pipeline in Q3?

[Teo Ottola, Interim CEO and CFO]

The overall sales pipeline. So, when we take a look at sales funnels including offers and hot offers and the whole categorization that we have there. So they continue to be strong. So there is not that kind of reduction in the sales funnel number as such. However, in addition to general macro cautiousness, this comment is driven by the discussions that we have been having with the customers. And I think that this uncertainty that we have been referring is reflected in the customers' comments. So customers are clearly requiring more decision making time, particularly if the case is a relatively large project. So it takes more time to make a decision. Some of the customers have also come in and said that they do not want to proceed with the plans that we already have in the offer base in a way, not necessarily a cancellation of an order, even though some small ones may have been there as well, but very small ones, it's mostly a funnel question. And these kind of, let's say, hesitation is taking place more than what the situation was before.

Now, of course, the demand level with what we have been having has been excellent. So more than EUR1 billion orders for Q1 and Q2. So a small deterioration would not be a big thing. As such, but this is in a way, the comment conveys some of the considerations that customers are having. So there is maybe a little bit nervousness on the inflation, on the rate hikes, on the raw material prices going down, and these kind of things that people are thinking, and they are reflected to some extent at least in our discussions with our customers. This is of course mostly now regarding the Industrial side. When we take a look at the port side, so maybe this kind of a discussion has been maybe less there. And the funnel is as strong there as it has been.

[Kiira Froberg, Head of Investor Relations]

Thank you. I think we can now open the line for questions. Please, operator, go ahead.

[Operator]

Thank you [Operator Instructions] And our first question comes from the line of Magnus Kruber at UBS. Please go ahead, your line is open.

[Magnus Kruber, UBS]

Hello, Kiira. I'm Magnus Kruber at UBS. So a couple of questions from me. I’d say this is probably the first quarter in a long time where margins has come in a bit below expectations on the service side and you already called out the lower volumes as being the main reason behind that, but you also talked about potentially improving situation for deliveries into the second half. Should we -- assuming that the volumes remain low or slightly down year-over-year as in this quarter, should we expect the same margin drag to carry over into the second half? That's my first question.

[Teo Ottola, Interim CEO and CFO]

Of course, the margin development is to a large extent, volume driven. So there is no doubt about that. And I think that the situation what we have now is that, when we take a look at the underlying service volume. So it is below the level that we had previous year and based on the demand that we have in the marketplace and the order book that we have that shouldn't be the case. So this is primarily a delivery issue, we will need to be able to deliver more.

And now, the productivity issue that I flagged and mentioned. So this is mostly in relation to the component availability. But from the point of view that when it is uncertain or let's say, the supply chain works in a way that it's very difficult to forecast, when we have certain parts at which time -- at which place, for example. So this creates in a way an inefficiency in the overall business. So provided that we can eliminate that one, gross margin as such should still be developing in the right direction. If volume is very low in comparison to previous year, for example, so then, of course, eventually, it will create a fixed cost issue, which is in a way below gross margin. But we do not see a systematic issue in the margin development of Service. So provided that we can deliver and we can plan our own activities efficiently, we should be able to be on the track where we were before.

[Magnus Kruber, UBS]

Okay. So now -- okay, and then secondly, your comment related to the supply chain again, is there any way you can help quantify or add some color around improved capacity delivery into the second half. Ideally per business areas if it’s possible.

[Teo Ottola, Interim CEO and CFO]

Yes. Quantification is of course difficult, but maybe I can try to describe a little bit of what is -- how we see the situation. So, now, when we take a look at the second quarter and particularly after the lockdowns have been removed in China, so we have seen fewer and fewer categories of material that has been in short supply. So that the number of escalations that we have from the material availability has become smaller, so it in a way sign that the material availability will be improving gradually. And why I say gradually is that, we cannot unfortunately say that we would be out of the woods as of now. And the reason is that, that there can still be surprises and then, many of the components that we need are actually configured, so a subcontractor has raw material to which he, in a way, fabricated according to dimensions that we require and then we utilize that. And for this to improve from the actual improvement of the component availability, it can still take time. So we are saying that things are going in the right direction. We will not be out of the woods in near-term, by the end of the third quarter. So this will still continue to be challenging, but we are going in the right direction.

And then, of course, I understand that quantifying in euros would be nice, but we would prefer not to do that, because there is still the risk for additional surprises. And let's say, escalations that we are not maybe aware of today regarding various components. This is, of course, not only a material topic. It's also our internal processes and, of course, it's labor availability. And then labor availability has largely been driven and impacted by, of course, our capability of hiring new service technicians, for example, but also sickness leaves as a result of the COVID pandemic and guessing how that will be going in various parts of the world is also, to some extent, challenging.

[Magnus Kruber, UBS]

Absolutely. I appreciate it. Thank you. And just a final one, with respect to the revenue seasonality into the third quarter, following on to my second question, should we expect that to be relatively normal?

[Teo Ottola, Interim CEO and CFO]

Seasonality model definitely would be there this year as well. So that is definitely our expectation. So the second half from that point of view, obviously, would need to be better than the first half. Maybe, if you take a look at it from the so called -- from the financial guidance point of view, we are now saying that the -- that net sales would be on the same level or higher than what they were in previous year for the full year. And then when we take a look at the first half of this year, so we are actually slightly behind. We are not much behind in reported currencies, but we are slightly behind. So this maybe gives you some kind of a view also as to how the guidance has been constructed.

[Magnus Kruber, UBS]

Perfect, thank you so much.

[Operator]

Thank you. And just as a note, if we can try to limit yourselves to two questions per person. Just in the interest of time and fairness so we get to everyone. The next question comes from the line of Antti Kansanen of SEB. Please go ahead. Your line is open.

[Antti Kansanen, SEB]

Yes, hi. Good day, Teo, and thanks for taking my question. First question on the backlog. If you look at the product groups that you are kind of seeing, the longest lead times or extension of lead times and kind of the biggest backlog build because of the supply chain issues, what would you kind of highlight there? And how much of kind of a price is impacting to the discrepancy between your backlog and order growth and the modest sales growth? I mean, how much more kind of a price increases do you have in the orders compared to what you are delivering today? That would be the first one.

[Teo Ottola, Interim CEO and CFO]

Yeah. And maybe we can start with the latter part of the question. And the -- how much we have in a way price increases now in the second quarter numbers in comparison to the situation one year ago? So it's maybe something like 7% or so. So if we take a look at the inflatory impact of price increases into Q2 numbers. So it's maybe 7% in comparison to the previous year. We cannot, of course, calculate that exactly scientifically, but that's the ballpark. It is lower in ports, because of the longer lead time and somewhat higher in Service, but this is roughly the Group level number.

When we take a look at the order intake now. So there are product categories where the -- of course, where the prices that we are quoting now are significantly of higher price than what we are having these less than 10%. And it's because if there is a very high steel content for instance. So that has been impacting a lot. So there are 10s of percentages of difference in some product categories and in some others, it may be that it is around 10 or so. So on average from there is very, very difficult to say. And the order book is, of course, then somewhere there in between. So the inflation as it has been accelerating, so the sales is -- sales inflation in where you saw on a lower level than order book, which is on a lower level than the order intake that we get today.

So, this is also good to remember when evaluating the order intake. So that there is underlying price increases that are impacting. Now I answered with such a long answer to your questions, but I have forgotten the first part of the question, would you mind, Antti, repeating?

[Antti Kansanen, SEB]

Yeah, sure. So, I mean just backlog build and kind of the expansion of lead times, which are kind of in ports and industrial equipment which are kind of the product groups that it is the most substantial issue.

[Teo Ottola, Interim CEO and CFO]

We actually can maybe note so that we have basically in all of the product categories the delivery times are longer now than what they normally would be. And that goes for service, as well as for component business in industrial equipment and cranes as well and then particularly in some product categories in the Port Solutions business, we have a very high -- very big sort of prolongation in the delivery time. Maybe I do not want to go into the product groups like that, but there are delivery times or can be 50% or more longer than what they normally -- 50% to 100% longer than what they normally would be in so-called normal circumstances.

[Antti Kansanen, SEB]

Okay. And the last question from me would be kind of you already mentioned that the demand for the short-cycle businesses, components and lift trucks surprised you positively on the second quarter. And do you have any color on what's actually driving this demand, because I would imagine that your lead times are quite long. So the kind of the deliveries for your customers are longer than normal and then you are seeing this kind of increased macro uncertainties, especially in Europe. So, I was a bit surprised that the customers are still willing to order or place so much orders that you saw on Q2. So do you have kind of any indication what is kind of driving. Is there a pricing impact or something that you could put your finger on?

[Teo Ottola, Interim CEO and CFO]

That is a very good question and I think that this is probably then, at the end of the day, it's, of course, a game between the delivery time and the price for the customer. But I think that the underlying reason to some extent at least maybe behind the strength of the component business and lift trucks, for example, is that there is a relatively big replacement demand in built into these product categories. Unlike, if you take a look at the standard cranes or process cranes for that matter, which are basically for new capacity expansion, so maybe these kind of smaller ticket items that are for replacement for instance. So they are easier decisions for customers to make even in an uncertain situation than the bigger ones. And like I think I already said, that when we take a look at the uncertainty that we are now hearing from the customers. So it is quite a lot, so that the bigger the project is that the customer is -- on an industrial side, the bigger the project is, the more hesitation and discussion, and decision-making time there is required, which would be in a way suggesting that people are maybe a little bit more cautious making long-term CapEx type of things. Whereas then components or lift trucks can be replacement items. This is more of a guess than a fact. But I think that it would make sense from that behavior point of view.

[Antti Kansanen, SEB]

Okay, sounds reasonable. Thanks.

[Operator]

Thank you. And the next question comes from the line of Massimiliano Severi of Credit Suisse. Please go ahead. Your line is open.

[Massimiliano Severi, Credit Suisse]

Yes, hi, thanks for taking my question. So my first question would be, maybe on the impact of China lockdowns. And if you could maybe help us quantify how much of sales were impacted by this in both for Port Solutions and I think also in components, given that you have a customer in China also for components as well.

[Teo Ottola, Interim CEO and CFO]

Yes, good question. We would rather not, let's say, quantify the impact in euros, but what, of course, we can conclude is that, we have basically three factories in China. One of them is to lift truck factory that we already discussed. The other one is in Xinjiang, which is a component/assembly factory and the third one then towards the northern part of the country. But I think that if we take a look at the lift truck factory, for instance, it is a smaller factory than what we have in Sweden. But it was more or less closed in April and May. So it definitely had an impact when we take a look at the Xinjiang. So I think that we were not closed for such a long time, maybe a little bit for a while.

[Kiira Froberg, Head of Investor Relations]

And not because of the lockdowns.

[Teo Ottola, Interim CEO and CFO]

And not because of the lockdowns, but then the material availability, of course, was an issue as a result of the overall environment during the lockdowns being difficult, so that the material flow was in a way impacted negatively by that one and it created slowness into that one. And then, of course, I mean, the Service business naturally in a way suffers from lockdowns because you cannot visit customers. So there are all of these impacts. But throwing a euro number per BA, it probably wouldn't serve the purpose.

[Massimiliano Severi, Credit Suisse]

Clear. Thanks very much. [Multiple Speakers] Yes, thank you. And the second question would be maybe on industrial equipment side. And if you could maybe help us getting a sense of what is in the backlog in terms of industrial cranes, process cranes and components? And maybe if you do have cancellation fees on clearly process cranes are projects so you cannot cancel them. But do you have cancellation fees for orders on industrial cranes and components within Industrial equipment?

[Teo Ottola, Interim CEO and CFO]

The split of the businesses within Industrial Equipment is roughly so that generally about 50% of the business is standard cranes, about 25% to 30% is components. And then the remainder, say, 20% or so is process cranes. I don't think that the order backlog significantly differentiates from that split. However, so, that, of course, the component order intake has been quite good now. So there is maybe a little bit higher relative share of the component order book than what it normally would be. And, of course, the component order book would be in a way shorter as well than for the other businesses.

Actually, both process cranes and standard cranes are projects. Standard cranes are projects, but they're are much smaller projects. And the idea is to get advanced payments also in those ones. And at least in a historical perspective, we have not really -- in crisis situations, we have not really seen cancellations in either of those. We haven't really seen them quite many in component business either. And when we take a look at this situation, so overall, one could maybe say so that there is -- there are no big cancellations or a wave of cancellations or anything like that. There have been individual single cancellations from the order book, but they are not in any way meaningful. And I think that a good guidance can that we get from the previous crisis, even though, of course, every situation is different, but even in financial crisis or then subsequent crisis, we have had a very limited number of cancellations, overall, in our business.

[Massimiliano Severi, Credit Suisse]

Clear. Thanks very much.

[Operator]

Thank you. And our next question --

[Kiira Froberg, Head of Investor Relations]

Sorry. We still have people waiting for questions. So now you need to shorten your answers. We have enough time --

[Teo Ottola, Interim CEO and CFO]

I'm sorry.

[Kiira Froberg, Head of Investor Relations]

To take all the questions.

[Teo Ottola, Interim CEO and CFO]

Yes, I'm sorry.

[Kiira Froberg, Head of Investor Relations]

Please, operator.

[Operator]

Thank you. The next question comes from the line of Panu Laitinmaki of Danske Bank. Please go ahead.

[Panu Laitinmaki, Danske Markets]

Thank you. I just wanted to ask about FX. So, if I look at your annual report, you keep the sensitivity to US dollar change, so that every 10% weakening against euro should improve your EBIT by about EUR37 million on an annual basis, which is a quite sizable number. So the question is that, is this a rule of thumb that we could use for kind of -- from here forward and then did you have much of the EBIT impact from FX already in the first half of this year?

[Teo Ottola, Interim CEO and CFO]

Now that you asked me to answer shortly. So there comes a very difficult question, which is very difficult to answer shortly, but I'll try. I would be very glad to be able to say that we would be able to use that as a rule of thumb, but unfortunately we cannot. And that is in a way a theoretical number and it's including also the project business. And in reality, the project business is something that is always agreed separately with customer, the currency changes that are happening are taken into consideration, and then the projects are typically hedged.

The rule of thumb that you can use though is the transaction exposure, which is 10%, EUR10 million. So this is something that comes from the flow business, which is then depending on how quickly or -- how long a period we hedge at the flow business and we typically hedge one to two quarters. We haven't seen much of an impact in Q2. We will probably see some in Q3. And I think that if the euro-dollar stays like this, the full impact will be there somewhere between Q4 and Q1.

[Panu Laitinmaki, Danske Markets]

All right. Thank you.

[Operator]

Thank you. And our next question comes from the line of Tomi Railo of DNB. Please go ahead.

[Tomi Railo, DNB]

Hi, Teo, Kiira. This is Tomi from DNB. Just wondering if you have had any large orders in Industrial Equipment or Port Solutions during the quarter which you haven't yet published. What I'm thinking of this, of course, the underlying levels and EUR1 billion orders. You are changing a little bit the market outlook, but what kind of visibility and guidance would you have for the third quarter demand levels?

[Teo Ottola, Interim CEO and CFO]

There have been big deals within the Port Solutions order intake also in the second quarter and now I will turn to Kiira to ask whether there are something that have not been announced.

[Kiira Froberg, Head of Investor Relations]

We haven't really announced that many deals this quarter because, of course, always, when we announce a deal, so it needs to be accepted by the customer. And that process sometimes takes quite a long time. But the bigger deals have not been as big as there -- as the one deal was in Q1, which was I think the second largest or so, but there have been bigger deals. Yes.

[Teo Ottola, Interim CEO and CFO]

Sizable differences, yes.

[Kiira Froberg, Head of Investor Relations]

And in industrial equipment, there was also, I think, a couple of bigger deals, but not as sizable as the Q1 nuclear project from the US.

[Teo Ottola, Interim CEO and CFO]

And we would have to like to repeat what we said already, basically at the end of Q1 that we are not really expecting another record high quarter from the order intake point of view. Okay, Q2 was very close to Q1. So in retrospect, we were may be too pessimistic at that time, but then again, like discussed, these sizable deals, so they happen in a quarter where the customer is willing to make the decision and the exact estimation of the timing is, of course, challenging.

[Tomi Railo, DNB]

Second question, but also maybe a follow-up to the previous. So any comments on the third quarter level. But really, the second question was, the profitability development in the second half, now given your guidance, of course, what we know for the first half was likely not up, but best case flat or most likely down. Where do you think the, let's say, easing is coming from a business line point of view? You mentioned that you will have better delivery capabilities and also the price increases start to impact profitability positively in the second half. But where is your assumption most sort of based on?

[Teo Ottola, Interim CEO and CFO]

And I think that I will have to say that this challenge that we have been having. So it's actually with all of the businesses and if we take a look at the component availability for instance, and some of our internal process topics as well, so it's impacting service and industrial equipment as well, because the same factories are being used and the same subcontractors are being used at least partially. Of course, services impacted by labor availability may be more than anybody else, but regardless.

And I think that also even though parts has maybe a little bit different set of suppliers, of course, we are using similar -- same componentry as well but also different. So I think that the situation should be looking better also from the ports point of view. Even though, of course, now we already said that in the second quarter, project deliveries were not actually causing a massive issue from the availability point of view, this was more like a timing topic.

[Tomi Railo, DNB]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Tom Skogman of Carnegie. Please go ahead. Your line is open.

[Tom Skogman, Carnegie]

Yes, hi. This is Tom from Carnegie. I wonder whether there are some kind of disruptions regarding customers going for nearshoring and about the competitive position in, especially, stacking yards and Port Solutions after Kalmar walking out of this business. Will that be like a big change for you?

[Teo Ottola, Interim CEO and CFO]

Well, if we take a look at the, let's say, nearshoring as a whole, I'm not 100% sure what you are specifically referring to, but I think that the overall supply chain constraints that have -- that everybody has now seen is maybe causing discussions within companies that maybe is not good to have all the eggs in the same basket, but having nearshoring as a concept would probably make sense. And these kind of changes and discussions, we are of course having those discussions within our company as well, and they are definitely interesting from our point of view because they can, of course, create additional demand for our cranes, because cranes are typically not moved, even if the production is moved from one place to another one. And then, of course, the competitive dynamics within the ports business, we will then -- we will then see how it will form itself over time.

[Tom Skogman, Carnegie]

Okay. But you have not seen any kind of real discussions with customers starting nearshoring products or so, it's more kind of a speculative kind of levels at the moment.

[Teo Ottola, Interim CEO and CFO]

Well, I think it's maybe speculative from the point of view, but I think that quite many companies are discussing these topics internally. So there are plans and contingency plans and those kinds of things being done on where your supply network would need to be going forward. So these kind of discussions are ongoing. Where it will then lead in practice is probably more speculative.

[Tom Skogman, Carnegie]

Okay. And then given the price situation in Germany with gas, I wondered, how large share of industrial cranes sale come from Germany?

[Teo Ottola, Interim CEO and CFO]

The [better] (ph) facility that we have is a significant part of the supply chain and it's the core of Demag production platform, obviously. So it has an impact or it is a significant site for us. We do have -- we are using gas, of course, for heating. We are using gas also for certain production processes. And I think that if we have time to manage we can probably manage the production processes in another way as well. But in case something happens very suddenly. So, of course, it will be causing disruptions to our production as well.

So a lot of spare parts and Demag componentry in general is coming from Germany. And, of course, if there is a massive issue with gas in Germany, I think there is also the topic that what is then the sub suppliers capability of supplying so that is maybe another topic, a very important one as well.

[Kiira Froberg, Head of Investor Relations]

So we have five production facilities. Sorry, Tom. We have five production facilities in Germany and three of them use natural gas in a way or another. So mainly for heating, but then also for some production parts.

[Tom Skogman, Carnegie]

But out of sales then how large is Germany out of industrial crane sales, if people just turn cautious in Germany, just overall.

[Teo Ottola, Interim CEO and CFO]

Okay. Germany, we haven't given the actual sales per country, but Germany is a very important country. It is -- US is bigger, but Germany is basically the second biggest country for us in the industrial area. So it is of course important. I think that when we started about the macro environment, and obviously, we have been studying this internally. So that are the customers more pessimistic in Germany than what they would be elsewhere in Europe, say, Nordic countries or South European. So maybe there is more of this kind of uncertainty discussion with the German customers, which may come partially from the reason that you are asking it as well. So the gas topic, et cetera, is on top of the people's minds.

[Tom Skogman, Carnegie]

Okay, thank you.

[Operator]

Thank you. And our next question comes from the line of Erkki Vesola of Inderes. Please go ahead, your line is open.

[Erkki Vesola, Inderes]

Hi Kiira, and [indiscernible]. About component availability impact on deliveries and sales in Q2, could you give us any kind of ballpark figure, how big that was? Tens of millions maybe?

[Teo Ottola, Interim CEO and CFO]

Okay. So, you mean the late backlog increase in the Q2. We didn't write that in the report. The reason, of course, is that now that we have had these supply issues. So we are, of course, changing the delivery times towards the customers. And as we do that, so in a way, it doesn't -- it's not any more visible in the overall late backlog, but yes, it is 10's of millions that the additional impact has been during the second quarter, probably something between EUR40 million and EUR50 million and it brings the cumulative late backlog number somewhere EUR160 million, EUR180 million or something like that.

This is not in a way again factually completely 100% correct, because there are these transitions. But it gives you an indication on how it has been developing during the second quarter in comparison to the previous quarters.

[Erkki Vesola, Inderes]

Okay. Thank you. And then second is, personnel costs. How big cost increases should we model for '22? And regarding personnel availability, do you have to recruit by just offering higher wages or how do you solve this problem?

[Teo Ottola, Interim CEO and CFO]

We need to pay competitive wages, of course, as everybody else. But, of course, at the same time, we try to make sure that we would be able to attract people also with other means, training and carrier opportunities also for the service technicians. So these are the kind of things. We are seeing the inflation currently somewhere between 4% and 5% for wages.

[Erkki Vesola, Inderes]

Okay. Thank you so much.

[Kiira Froberg, Head of Investor Relations]

Thank you. I think that we start to run out of time here. So it's time to conclude the conference. Thank you, everyone for the participation and good questions. And as a reminder, we will issue our Q3 interim report on October 26 this year. I wish you all a greater day and a great summer. Thank you.

[Teo Ottola, Interim CEO and CFO]

Thank you very much.