Konecranes Abp

OMXH:KCR

Earnings Call Transcript 2022-Q3

[Kiira Froberg, executive]

Good morning, everyone, and welcome to Konecranes Q3 Earnings Conference. My name is Kiira Froberg, and I'm the Head of Investor Relations at Konecranes. Here with me today, I have our new President and CEO, Anders Svensson; and our CFO, Teo Ottola.

Before we start, a kind reminder, this presentation contains forward-looking statements. Next, Teo will present to you our Q3 earnings. And in the end of the presentation, Anders will say a couple of words. The presentation is followed by Q&A, as usual. Please, Teo, the stage is yours.

[Teo Ottola, executive]

Thank you, Kiira. And as you already saw, the agenda for today's call looks very familiar. We have a group highlights first, and then we will talk about the business segments in a little bit more in detail.

And let's start with the Q3 highlights on a group perspective. So it was actually a solid third quarter overall. Our order intake continued high and our delivery capability improved from the previous quarters. As a result of the improved delivery capability as well as from better sales mix in comparison to the previous year, our adjusted EBITA margin improved to 10.8% from 10.0% a year ago. Profitability improved in Service as well as in Port Solutions but declined in Industrial Equipment.

The overall market sentiment remained good, even though geopolitical tensions and growing macroeconomic concerns have increased uncertainty. Our order intake grew by more than 34% year-on-year in comparable currencies and we were again above EUR 1 billion in order intake, just like we were in Q1 and Q2 as well. Sales grew by 8.8%, again, in comparable currencies year-on-year. And when we take a look at this sales growth, so actually and compare that to the pricing impact that we have been having in comparison to the previous year, so pricing impact is somewhere between 8% and 9%. So actually, the underlying volumes did not really significantly grow from the situation a year ago. But anyway, it was enough to give a positive impact to the EBITA margin. So actually, component availability issues and other supply chain constraints continued to impact our performance in the third quarter as well. Now as a result of the very good order intake and as a result of these delivery challenges, our order book broke again a new record, and we're about EUR 3 billion order book at the end of the third quarter.

We have updated our Q4 demand outlook and we are reiterating our '22 financial guidance. We're also planning to take care of our long-term competitiveness in the marketplace. And regarding industrial service and equipment operations, we have -- we are optimizing those globally. And we have now also given a little bit financial targets for that program. So the topics that we are talking about here regarding the optimization are very familiar. We are talking about go-to-market strategies, we are talking about product platform harmonizations, et cetera. We are estimating that these activities that we are now planning to do would be having a positive EBITA impact between EUR 30 million and EUR 35 million by the year 2025, so a relatively long period from now onwards. And at the same time, we would be booking EUR 30 million to EUR 35 million onetime restructuring costs as a result of these activities or this program.

Then on next slide, we have the key figures. I think that we covered many of them already, maybe focus on the free cash flow. We actually had a negative free cash flow now in the third quarter as we had in the second quarter as well. The negative cash flow mainly comes from higher net working capital level. And that, again, mainly comes from inventories and particularly work in progress. Consequently, our net debt has increased to the level of EUR 750 million now at the end of September.

This is then the market environment slides, very familiar ones, these as well. If we start with the utilization rates in Europe, so actually, the manufacturing utilization rates in Europe have been declining during the third quarter. They are, however, still a little bit above the so-called pre-COVID levels but trending downwards. Whereas then in the U.S.A., the utilization rates actually continued to improve also during the third quarter. And a similar kind of separation between EU and U.S.A., we can also see in the PMIs, where in Europe, the PMIs are below 50 mark signaling actually contraction in the economy, whereas in the U.S.A., we are still above 50 signaling expansion in the economy. When we then take a look at Brazil, India and China, so PMIs in China are declining or are below 50 actually, whereas in Brazil and India, they are still above 50%.

Looking at the demand driver for Port Solutions' container handling volumes. So they have actually trended quite positively during the whole year of '22. There has been a little bit fluctuation along the way. But at the end of August, we are some 4% higher in container traffic in comparison to the situation a year ago.

Here, we can see our take on the demand outlook and the worldwide demand picture remains subject to volatility, of course, due to the war in Ukraine, COVID having increased inflation. Consequently, interest rates have also been increased, and we continue to have material availability concerns. Having said that, within industrial customer segments in North America, the demand environment remains active, whereas in Europe, the level of uncertainty is higher in comparison to the America and the demand environment has started to show signs of weakening. In Asia Pacific, demand environment is stable. And then when we take a look at the global container throughput, that continues on a high level and the long-term prospects related to container -- global container handling remain good overall.

Financial guidance unchanged from what it was. So net sales expected to remain on the same level or to increase in '22 in comparison to '21. And the adjusted EBITA margin expected to remain on the same level or to decrease in full year '22 in comparison to '21. These financial numbers, we can take a closer look in connection to the business segments, but maybe a couple of comments here. When you take a look at the order intake columns, one can see that the previous 4 quarters actually have been very good from the order intake point of view, excellent level, 3 previous quarters above EUR 1 billion. When you take a look at the sales picture on the right-hand side, so there one can see that the sales have been increasing from the second quarter, whereas then last year, so in year '21, actually Q2 and Q3 were quite flattish, which then means that maybe the comparables are a little bit easier now in the third quarter than they were, for example, in the second quarter reporting.

The pie charts have not changed significantly. Service continues to be our biggest segment. And when we take a look at the geographical split, so the share of EMEA has decreased a little bit in a year-on-year comparison if we take a look at the same pie chart a year ago, for instance. However, of course, part of that is in relation to currency rates having changed quite a bit.

Group order book, like I discussed, on a very high level, more than EUR 3 billion. There is an increase of EUR 1 billion in a year-on-year comparison and almost 45% with comparable currencies, growth in order book in all of the business segments. And then the group adjusted EBITA, also like I already mentioned, 10.8%, EUR 95 million roughly. The increase or improvement in the adjusted EBITA margin is mainly attributable to sales growth. The sales growth is primarily driven by pricing, as already mentioned, and then also the sales mix being better than what it was a year ago. On a group level, when we take a look at the gross margin, which talks about, for example, the success of pricing, so that has remained approximately on the same level as we had a year ago.

Then we can actually move into the business segment reviews. And as usual, let's start with the Service business. Service order intake was EUR 298 million. And of course, the growth there is more than 15%. However, currencies, like already discussed, give a lot of tailwind in this quarter, and that's why it's maybe easier or wiser to take a look at the changes in comparable currencies. And in comparable currencies, orders received increased by 6.8% within the Service business.

Both field service orders as well as spare part orders increased and order intake actually, in a year-on-year comparison, increased in all of the regions, Americas, EMEA and APAC, but most in the Americas. If we take a look at the order intake sequentially and the numbers are, of course, very close to each other between Q2 and Q3. So we had sequential growth in Americas and APAC, whereas the order intake in EMEA declined in a sequential comparison.

Then the agreement base, EUR 315 million, that is growth of 1.8% with comparable currencies in a year-on-year comparison. Sequentially, actually, the agreement base came down a little bit with comparable currencies. That is primarily due to the agreement base in Russia not being in the numbers anymore at the end of the third quarter.

Then when we take a look at the Service sales and order book sales, EUR 347 million, again, with comparable currencies, 8.8% increase. Sales increased in all of the regions and the story is the same as for orders, most in the Americas. Order book as high as EUR 490 million. That is more than 50% increase in comparison to the previous year corresponding time period. Good to remember that there are quite many modernization deals that we have been getting over the quarters, and quite a big part of that is modernizations in the Service order book.

Then the Service adjusted EBITA, EUR 68 million, roughly, a margin of 19.6%. This is a very good -- very high and good adjusted EBITA margin. The increase here also, like on a group level, was attributable to higher sales, but as said, mainly driven by pricing. Gross margin remained approximately on the same level as 1 year ago.

Then Industrial Equipment and Industrial Equipment order intake and sales. So orders for IE were EUR 334 million. And there, we have typically also wanted to take a look at external order intake and that with comparable currencies. And there, the growth number is basically only 1.1%, so external order intake with comparable currencies. When we take a look at the order intake in general as a whole, so the order intake increased in a year-on-year comparison in standard cranes as well as in process cranes, but there was a decline in the components business. Orders increased in the Americas and EMEA, but declined in Asia Pacific. And then when we take a look at the sequential comparison, again, where the order intake has been declining. So there is actually a decline in all of the major sort of business units, standard cranes, components and process cranes, even though process cranes were actually quite good in the third quarter. But if you combine that with the nuclear cranes, so there was a decline in a sequential comparison in that one as well.

And then Industrial Equipment sales, EUR 311 million. That is a growth of 16% and here, a very good thing, when we take a look at our delivery capability. So our sales -- external sales with comparable currencies, up 13.5%. Sales increased in Americas and APAC, but actually decreased in EMEA. The adjusted EBITA in Industrial Equipment, so roughly on the same level as a year ago in euros, but the margin is lower, so 4% versus 4.4%.

The decrease in adjusted EBITA margin is due to the same reason as we had for the second quarter as well, so it's cost inflation. We actually have been a little bit late in price increases regarding certain product categories. And as a result of that, the gross margin, particularly in those product categories, is lower than what it was a year ago, and it is then reflected in the adjusted EBITA margin as well.

So gross margin for the whole of Industrial Equipment was lower than a year ago. We are, however, seeing an improvement in gross margin sequentially. So we are going in the right direction, and we are going in the direction that we have been talking about also earlier, but have not reached the previous year's level at the end of Q3. Order book, very high, almost EUR 1 billion also for Industrial Equipment.

Then Port Solutions and Port Solutions order intake and sales. Orders on a very high level, EUR 454 million, more than 100% growth with comparable or reported currencies. We had order intake increase in Americas, EMEA and APAC, so basically all of the regions and also very importantly, across a quite large number of business units within the Port Solutions business. So actually, RTGs had an excellent order intake quarter now during the third quarter of this year. When we take a look at the sequential change in comparison to the second quarter, the RTG good order intake is driving, of course, that sequential difference as well. Maybe worth noting that when we have, every now and then, been talking about the short-cycle products, lift trucks being one in the Port Solutions, so lift trucks orders are down sequentially, but still up in a year-on-year comparison.

Then sales, EUR 273 million. This is higher than what we had a year ago, 5.6% growth with comparable currencies. Port Solutions adjusted EBITA, EUR 21 million and 7.7%. So there is an improvement both in euros and margin increase is due to higher sales and positive sales mix. We also have, let's say, EUR 1 million to EUR 2 million positive kind of onetimers included in the Q3 numbers, which will not be repeating themselves in the quarters coming. Gross margin, however, improved on a year-on-year basis and, of course, positive sales mix and pricing having driven that. Order book on a very high level, almost EUR 1.6 billion and the order book increased 64% in a year-on-year comparison.

And then maybe a couple of comments on the cash flow as well as balance sheet. We have typically taken a look at the net working capital first. And as we can see from the slides, so net working capital has increased quite significantly from the second quarter. Like I already mentioned, this is as a result of the inventories and work in progress in particular. So it is project-related inventory that we have within the inventory and, of course, partially driven by the delivery challenges that we have still continued to have during the third quarter as well. We actually had an inventory increase also in Q1 and Q2, but there was a balancing factor from the point of view that advanced payments increased quite a lot in Q1 and Q2, whereas now in the third quarter, due to the timing reasons, advanced payments did not increase in comparison to the second quarter. We have not changed anything in the commercial terms. So this advanced payment topic is more like a timing question. But all in all, of course, the net working capital being clearly more than 15% of rolling 12-month sales at 17.6% is not in line with our target setting.

Free cash flow, like I already mentioned, negative and also now the, let's say, rolling 12 months free cash flow is basically at 0 level at the end of September. Cash flow is reflecting naturally to the gearing as well. So the net debt increased, as mentioned. However, then when we take a look at the gearing, so that actually has stayed quite much on the same level as it was at the end of the second quarter as well. Like also actually, the capital employed -- the return on capital employed has remained, let's say, on a very sort of stable level at 13% or slightly above also now at the end of the third quarter.

And now actually, before we go into the Q&A, I'd like to welcome our new President and CEO, Anders Svensson to the stage. Anders has been in the company for already a week. And Anders would like to give some comments before we go into the Q&A. So please, Anders.

[Anders Svensson, executive]

Thank you, Teo, and good morning, everyone. I'm really excited to be here with you today, finally, you can add. So like you said, I started with the company one week ago, actually exactly today. So everything is still very new to me, of course. And I'm really excited. Konecranes is a great company with a strong history and also excellent products and services for our customers and fantastic people in the organization. So I really look forward to the coming weeks and months to get to know the company, understand the business, understand our customers, understand our operations and meet our people. And that would be my sort of key focus for the fourth quarter. I didn't have any major induction before I actually started a week ago as I was fully committed to my previous employer up until last week, actually.

In Q1 or quarter 1 in this year, we announced or Konecranes and Cargotec announced that the merger plans are canceled. And after that, in the second quarter, Konecranes initiated a strategy review process, and we are in the middle of that currently. And from now on, I will take a lead in this process going forward. And together with the Konecranes leadership team, I'm happy to welcome everyone to the hosted Capital Markets Day that we will have in Helsinki on May 10 next year, where we will present the outcome of our strategic review and our updated strategic direction and also updated targets. But before that, we have a lot to do. We have just presented a solid third quarter, and we will work continuously going forward with continuous improvements to ensure that we can deliver a strong performance in all areas going forward.

And with that, I think it's time for the Q&A section. So Kiira, welcome back on the stage. And thank you, everyone.

[Kiira Froberg, executive]

Thank you, Anders. So next, we have the Q&A. And before we start that, I can already tell you that we have received some questions through the chat function. So please keep them coming. We will also take those. And when we open the line for the questions, so I'd kindly ask you to limit the questions to maximum 2 now in the beginning so we ensure that everyone gets to ask their questions. So please, operator, let's open the line now. Thank you.

[Operator]

[Operator Instructions] The next question comes from Magnus Kruber from UBS.

[Magnus Kruber, analyst]

Magnus Kruber with UBS. Congratulations first, solid quarters and welcome, Anders, onboard. Great to have you. First, on industrial service, of course, very solid performance again. So how should we think about seasonality into Q4? And should we expect sort of the unusual margin weakness we had in Q4 -- Q2, sorry, to be fully behind us? Or is there something we could -- that could return in coming quarters?

[Teo Ottola, executive]

Yes. If we take a look at the industrial service performance, so you are quite right, so that we had a little bit of a dip in the second quarter in the margin. And the explanation for that dip was that because of the supply chain disturbances, because of the missing materials, componentry, et cetera, we have been having a little bit difficulties in, let's say, planning, for example, our service technician visits to the customers in the most efficient way. So there has been, in a way, a little bit this kind of a hassle cost as a result of that one. And when we take a look at the third quarter now, so these problems were not over, so they continued to some extent, but not in the same way as in the second quarter. And even though I would like to say that we do not have that kind of a risk for hassle cost in the fourth quarter, I'm afraid that, that would not be completely correct. So the risk, of course, is there as well because we have been saying that the supply constraints can continue and planning will probably be a little bit of a challenge as well.

Having said that, we are not aware of any specific those kind of hassles now, but the risk for those actually is within the environment where we are living as of today as well. So we cannot really guarantee that there wouldn't be those, but we are doing, of course, our utmost to make sure that the delivery will be as smooth as possible in the fourth quarter. Generally, we can say that, and not necessarily referring to Service only but for the overall group performance, that the so-called normal seasonality pattern should be visible in this year as well, so that the fourth quarter is expected to be good in comparison to the other quarters.

[Magnus Kruber, analyst]

Perfect. That's super helpful. And just on the follow-up there, could you potentially quantify the hassle cost in Q3, if that's possible? And on the supply chain constraints, you mentioned in Q2 that you expect it to improve through the second half of the year. Has it followed sort of the path that you expected? And is there any further comments you can make on what you're seeing now?

[Teo Ottola, executive]

Yes. Maybe that is a good question, of course. And I think that in the third quarter, when we take a look at the so-called hassle cost, so that was not in any way significant. And one would probably not see that in the gross margin. Like I said, gross margin is on the level that it was a year ago, which is probably quite a lot in line with how it should be, we would have expected it to be, et cetera. The key, of course, is that we have been able to deliver and push out more deliveries to our customers. So that is the key. And that will be the key regarding the fourth quarter as well. So we will need to be able to secure seamless delivery, be it in Service offering and products or equipment products.

The overall material shortages and supply chain constrained situation has improved roughly in line with how we have been thinking about it. So it hasn't gone away. The risks are still there. But when we take a look at these escalation matters that we will need to handle within the group, so they are maybe fewer of those than there used to be. So from that point of view, I think that we are going in the right direction, we are going there relatively slowly. So one would, of course, hope that the things would be clearing out earlier. And then unfortunately, there continues to be, every now and then, these kind of unanticipated surprises regarding component availability or regarding transportation capacity, which we have been discussing earlier as well. So we are not out of the woods in any way, and we are actually saying that we are expecting these challenges to continue into next year. However, of course, the idea is that there would be a little less of those than what we have been having in the beginning of this year.

[Operator]

The next question comes from participant from Goldman Sachs.

[Daniela Costa, analyst]

It's Daniela from Goldman. Can you hear me?

[Kiira Froberg, executive]

Yes, we can hear you well.

[Daniela Costa, analyst]

Perfect. Welcome, Anders. I have 2 questions. The first one, I wanted to follow up in terms of this seasonality, but on cash. Obviously, you had a very strong P&L, but the cash conversion was weak. Normally, Q4, I guess, is seasonally higher. Should we expect like a normalization of cash conversion this year in Q4? Or is it going to be sort of more moved into 2023? And then the second question relates to obviously the -- everyone is very worried about the downturn and you do flag some weakening signs in your own commentary. Can you help us sort of just remind us of, in prior downturns, what percentage of your order book normally gets delayed or canceled? If you could give 1 or 2 reference points from prior downturns, that would be very helpful. And in case you see sort of something different this time around if we do have a downturn, I would also appreciate that type of commentary.

[Teo Ottola, executive]

Okay. So if we start with the cash conversion and the fourth quarter, so again, as much as I would like to say that the net working capital development will be better in the fourth quarter, so I think that's not, let's say, necessarily guaranteed either. The thing is that we are a little bit struggling with the deliveries still. We will probably carry a high inventory going forward. And the more we will be able to deliver and produce and send to the customers, so of course, the inventory will then be moving into the accounts receivable. So I think that we may face a period going forward where the net working capital is on a, let's say, not satisfactory level from our point of view, which is the 15% mark there. And again, we will do everything we can to try to lower the level of the net working capital. But in the current circumstances, it's not necessarily particularly easy. So I'm a little bit cautious in promising a quick recovery from that one.

The downturn question then and the cancellation, so first of all, we do not have any indications that things would be significantly different this time than what it has been previously, maybe apart from one exception that I can soon tell. But then if we first discuss that how it has been going previously, so when we take a look at those product groups where we have advanced payments, so typically, the cancellations have been very few. Customers tend to cancel basically only if they need to. So if they run out of cash, for instance, which is, of course, that if there are bankruptcy waves or something like that in any given downturn, that would be impacting us as well. But when we take a look at the previous downturns, cancellations have not really been an issue. There have been cancellations in product areas where the products are very standard and where the advanced payments as a result of that have not been very high. In those product categories, of course, a cancellation from our point of view would not necessarily be an issue either.

And then when we -- if we take a look at the current situation, so we have changed the pricing mechanisms with customers in certain product categories where we are actually doing so that we are confirming the price to the customer only at the situation where we take the equipment into the systems or material resource planning, that is. And this is a new feature. It's more like, let's say, secure from our and customers' point of view, but it may obviously increase cancellations to some extent, if the downturn is very bad. We don't know because it's a new thing, but there is this kind of a potential. But these are standard products. So cancellation in those ones would not be an issue. Now what we have been seeing is some cancellations, for example, in the lift trucks, but the order intake overall has continued quite well. In the other product categories, there are quite few cancellations.

Then I'm not sure if you actually were referring to the order book and how it is now in comparison to previously if we assume that the downturn is coming. So of course, our order book now is on a record high level. And typically, we have been in a situation that the order book is maybe 6 months plus a little bit of sales by size. And now, of course, we have a EUR 3 billion order book and the company sales in '21 were EUR 3.2 billion. So we have a very, very high order book in comparison to the historical perspective. And about, let's say, how, let's say, recession-proof we are, so of course, the Service business is much less volatile than the Equipment business order intake and Equipment business order intakes have been declining significantly in previous downturns, whereas the Service sales has remained on a much more stable level.

[Operator]

The next question comes from Massimiliano Severi from Credit Suisse.

[Massimiliano Severi, analyst]

It's Massimiliano from Credit Suisse. My first one would be, if I look at Port Solutions now, the order backlog is close to EUR 1.6 billion. And I was wondering if you were able to comment on how much is it possible to deliver in 2023 out of this, if supply chains ease?

[Teo Ottola, executive]

Yes, we are not actually disclosing that one, even though we are, of course, following that internally. We have decided not to disclose that timing so exactly because the challenge in the current circumstances is that we will need to play a little bit with the component availability and subcontractor capacity as well.

But maybe just to give an overall flavor and particularly when we take a look at the Port Solutions so that as we get more orders, so the delivery times tend to get longer because we are in a business model where quite a bit of the actual manufacturing work regarding steel structures, for example, happens with the subcontractors.

And this then means that the subcontractor capacity is not in a way -- we cannot expand it significantly in a very short period of time, which means that it tends to be so that the delivery times that we are now offering to the customers and what we have been offering to the customers so they are, let's say, significantly longer than they would be in so-called normal market situation without actually, unfortunately, giving any monetary guidance on how much is secured for next year and how much is then for '24 and beyond.

[Massimiliano Severi, analyst]

Yes, makes sense. And my second question would be maybe on the topic of hedging for cost inflation on the projects businesses, so mainly large parts orders and process cranes. And I was wondering, in the contractual structure that you have, apart from the raw materials, which I think that are fully hedged, do you have escalation clauses for things like employees cost inflation and other component inflation? Or do you hedge mainly just the steel? What I'm trying to get is, do you think that there is a risk of margin deterioration on the backlog of large projects in case inflation continues to go up?

[Teo Ottola, executive]

Yes, it is a very valid question, of course. And I think that your comment regarding the raw materials is correct. So that is -- that we try to, in a way, hedge with a so-called natural hedge at the time when we get the deal. If you take a look at the other cost items, so there is probably not one single rule on how it is done. But one typical way of doing it would be to choose an index and then tie the -- in a way, the price into the cost index. And there, we are then talking about the question that, is the index that we are using in the agreement, is it a suitable one? Does it take the actual cost inflation fully into sort of consideration? What does it do if the raw material costs or whatever cost will start to go down, et cetera? So it is this kind of a discussion that we then have typically with the customers.

Having said all that, so we are quite comfortable with the, let's say, sales margins or gross margins that we have within the order book, but we cannot exclude the possibility of a margin erosion in individual projects if something goes wrong or has gone wrong, for example, in setting the index.

[Operator]

The next question comes from Antti Kansanen from SEB.

[Antti Kansanen, analyst]

It's Antti from SEB. Two questions for me. First one would be on your suppliers and you already mentioned steel structures and so forth. So what are you seeing within your European suppliers? How are they managing kind of the increasing energy costs and kind of being able to commit the prices that you have set regarding certain suppliers that you are purchasing from them and also your own operations in Germany?

[Teo Ottola, executive]

It is a wide question, and it varies. So there is a very large number of suppliers that we are using. And I would maybe say so that some are doing very well when it comes to managing their own input costs. Some have maybe more issues. And we have been having discussions with many of our suppliers on, let's say, whether we would be okay to change kind of the already agreed terms and conditions, including, but not limited to, price. And those have probably been partially the reason that the suppliers have been in financial challenges or then also only for the reason that their own margins are going down significantly. So we are not seeing any kind of a collapse in the supplier base from the point of view that people would be in very big difficulties as a result of cost inflation. But the discussion about, let's say, adjustments does take place all the time, and our procurement organization is very, very busy in trying to secure the best possible deals for us going forward, but only in discussing the current ones.

[Antti Kansanen, analyst]

Yes. What I'm just kind of trying to get at is that if there's some sort of escalations or over the other risks going into winter, would it be, for you, kind of a margin risk or availability, which would lead to kind of delivery delays? Or how do you see kind of the risk assessment in that [ theme ]?

[Teo Ottola, executive]

There are both, in a way, so that, of course, we have suppliers on which we are dependent on short-term basis. So -- and I'm not saying that there would be a significant number of single-source suppliers, even though they exist also. But there are also suppliers that are supplying such a big part of a certain critical component. So at the worst case, it can become a, let's say, availability topic as we have seen, for example, in terms of COVID lockdowns in China. So if there is no component availability or, let's say, no transportation from Shanghai area, so it can create issues to us. And these are, of course, these, let's say, criticalities and, let's say, dependencies, what we are now actually going through one by one and trying to figure out that how do we make it so that we do not end up in issues and we do not have a dependency that cannot be rectified in a relatively short period of time.

Then this question about the, let's say, gas availability in Germany, for example. So that is, of course, a wide question. And if there is no gas availability in Germany, so I think that quite many suppliers and many companies will be in difficulties. So that would then obviously be a bad thing for the whole industry, not only us.

[Antti Kansanen, analyst]

Okay. And then the second question, also perhaps a quite wide topic. But if you kind of look at the short cyclical businesses, the components, perhaps standard cranes also the lift trucks, and you are seeing some sequential slowness there and perhaps even some cancellations. So how would do you kind of -- kind of what is the magnitude? Is this a start of a normal downturn patterns? Or is it still very minor? How do you assess kind of the trends there?

[Teo Ottola, executive]

So it's maybe -- maybe if you take a look at -- particularly if you take a look at the sequential change, so one cannot really say that it would be minor as a change. So I think that the changes actually in percentage is quite big. But the levels in Q1 and Q2 in both of those short-cycle product groups were so good that we were on an exceptionally high level. So that even if the delta from that very high level is quite big, so still the volume, what we are seeing in the third quarter from the order intake point of view is actually, in a historical perspective, quite okay. And even so that if we take a look at this lift truck, so there year-on-year, we are seeing an increase in the order intake. In components, we are not. So that is going down sequentially and year-on-year.

Then your underlying question that whether this is the beginning of a downturn or something else, so time will show. But if this is a beginning of a downturn, this would not be the first time that the market behaves the way that it seems to be doing now.

[Antti Kansanen, analyst]

Do you think that the high levels in kind of previous quarters are kind of a demand stolen from next year, given kind of the extended lead times? Or is it just pent-up from before? Or how should we think about the comps?

[Teo Ottola, executive]

There is a possibility regarding Q1 and Q2 order intake that people, customers, in this case, have wanted to secure availability to some extent. We have typically been saying that you do not -- you cannot have a lot of inventory in our business. But if you take a look at the short cycle product groups, of course, you can, to some extent. So there is a possibility that people have been concerned about the inflation and availability and those kind of things and have been kind of pre-buying. But it's very difficult to prove one way or the other. But I'm, let's say, more cautious than previously to -- in a way, to deny that it wouldn't be this kind of pre-buying. It can be, to some extent, can have been, to some extent, there in Q1 and Q2 because the levels have been -- they were really, really high, for example, in the component business.

[Operator]

The next question comes from Panu Laitinmaki from Danske Bank.

[Panu Laitinmaki, analyst]

It's Panu Laitinmaki from Danske Bank. I have 2 questions. Firstly, continuing on the topic that Antti already asked. So can you talk about your own energy cost, especially in Germany? What are you seeing there? And did kind of Q3 already reflect what's happening in the spot prices? Or is this something that will come with a lag? And then the second question is on the guidance. You kept the revenue guidance unchanged, but if I kind of do the math and assume that full year sales will be flat, then Q4 would be down more than 10%, and that's kind of excluding the FX. So just wondering what is the -- why is the range of outcomes so wide in Q4 guidance?

[Teo Ottola, executive]

Okay. And then starting with the energy costs. So we have been discussing about the, let's say, annual energy costs on a group level being around EUR 15 million. And we have not actually seen an increase as of now, so as of Q3, at least in any significant way because of the hedging systems that we have been having with the energy costs. Maybe not specifying any individual country, Germany, Finland or any other country, for that matter, either, but when we take a look at next year, so the energy costs will be higher than this EUR 15 million. And we are not going to be in a situation that it would be doubling, but, let's say that somewhere between 50% and 100% increase in this EUR 15 million is something to be expected from the energy cost point of view. And there is a caveat, which is that as you -- as we all probably know, I mean, the hedging that you can do in the electricity market or how the gas price setting goes, so of course, if those hedges do not hold for one or another reason, then the situation can be different. But if the agreements that we have in place today, so that's roughly the ballpark.

Then talking about the guidance. So yes, the sales guidance is on the same level or higher and the margin guidance is on the same level or lower. And of course, there are things that are -- and these are with reported currencies basically. So it's not with fixed currencies, which makes it a little bit more challenging. That's why it is quite wide. And from that point of view, and like I said, about the fourth quarter, in particular, so we are expecting the normal seasonality to be valid also this year in 2022.

[Kiira Froberg, executive]

Okay. Let's now take a couple of questions from the chat function next. We still have some 10 minutes time. So we have questions on raw material pricing. Has the headwind from raw material prices, for example, steel eased? Can you say that the worst is behind you?

[Teo Ottola, executive]

Many raw material prices have, of course, turned or the price trend has turned and they -- at least, they have not been increasing anymore. They are maybe on a lower level than what they used to be. However, the thing what we have always been talking about is that the lead times from these kind of direct raw material prices to our sort of P&L impact is quite long because we are using a lot of processed materials that comes through a chain of suppliers. But of course, I mean, to answer the question, it is better that raw materials have started to go down from our, let's say, business management point of view because it's always, of course, more difficult to run after something that is going up than the other way around. So it is a cautiously positive thing that it has turned that way.

[Kiira Froberg, executive]

Then we have a couple of questions on timing for revenue recognition. So how significantly did the timing of some deliveries affect sales and profitability in the quarter? And I think this other question is linked to this one. So there was some sales lag in Q2 and could you shed some light on this sales tailwind in 3Q?

[Teo Ottola, executive]

Yes. And actually, yes, that's a good question, and I forgot to mention that in terms of the order book. So what I was intending to say was that even though the sales delivery capability has improved during the third quarter, so still our so-called late backlog actually increased during the third quarter. Even though it's very difficult to measure it accurately because we are changing the delivery times as we agree with the customers, but one can say that it actually -- the late backlog still increased. So we did not really have this kind of a significant tailwind from the second quarter. And we did have some slippage of deliveries from the third quarter to the fourth quarter, like, for example, in the ports business, a couple of projects. But maybe from that point of view, things -- and as the sales number also tells, maybe less issues than what we had in the second quarter.

What was the other part of the question?

[Kiira Froberg, executive]

The other part was that there was some, let's say, lag in Q2. So how much was this tailwind now...

[Teo Ottola, executive]

Yes, exactly. And I think that in net terms, there was no tailwind from that -- in that sense because unfortunately, the late backlog continued to go up, not clearly as much as in the second quarter, but went up anyways.

[Kiira Froberg, executive]

Yes. And then we have a question on the story of the merger with Cargotec. Is it over?

So yes, the merger was canceled in late March this year. And now we have the new CEO, Anders, here with us.

I think we can then move back to the questions from line. So please, operator, let's continue.

[Operator]

The next question comes from Erkki Vesola from Inderes.

[Erkki Vesola, analyst]

Welcome onboard, Anders. Regarding the optimization program, some parts of that sounded familiar, talk about platforms and modernization, et cetera. And I was wondering, what are the main action points there on the agenda that you have not yet addressed in the company history? And secondly, I would like to ask, is it too early to model in anything regarding the costs and savings and their timing?

[Teo Ottola, executive]

Yes. The time line that we have given for these savings is obviously, let's say, quite long. So -- and we cannot really specify it in more detail at this point of time because these are plans and all the relevant discussions and negotiations are still ongoing and pending. You are quite right in saying that the themes sound familiar.

However, one would maybe say so that if you take a look at the go-to-market strategy, which we have that we are selling componentry to OEM crane builders and distributors and then we are selling, let's say, complete cranes to end customers, so that has, in practice, not been as clear as it would be on paper so that we have a little bit, let's say, complexities inbuilt in that one. Certain brands are being used both as customer brands and distributor brands. We still have a very large number of platforms in both standard lifting as well as in heavy lifting.

And I think that this is -- you are probably quite right so that this is not something that would be completely new, but it is actually a logical continuum to what we have been doing when it comes to the integration activities regarding MHPS, for instance. So yes, the wheel has not been reinvented. These are topics that are, in a way, continuing on the same path where we have been or, let's say, these plans, one has to say.

[Erkki Vesola, analyst]

Okay. And then I have to ask you directly. Is it so that you're going to disclose more information regarding this [ program ] on the CMD so it would probably be a little bit too early to model in anything regarding the numbers and the impact?

[Teo Ottola, executive]

We will most likely communicate more in connection to the CMD.

[Kiira Froberg, executive]

But some restructuring costs might come already earlier. That's correct to say.

[Operator]

The next question comes from Magnus Kruber from UBS.

[Magnus Kruber, analyst]

You are approaching year-end now and 2023. Could you comment a little bit on how you see the EBIT bridge developing into '23 from this year? Which are the key moving parts you see contributing positively or negatively through the year?

[Teo Ottola, executive]

Well, we haven't really started talking about '23 too much. We do not have, let's say, any financial guidance or anything like that out for the next year. But of course, if one takes a look at it on general terms and takes a look at the key challenges that we have been having now, which have been in connection to the material availability, to some extent labor scarcity or quite a bit labor scarcity as well and then inflation, which has been, let's say, discussed in this call as well quite many times. So those will probably continue to be themes for next year as well. And then it is all the improvement activities that we are planning to do and want to do, example of which being the optimization topic that we have now briefly been discussing in connection with this report. Maybe we will need to leave it at that at this point of time and come back a little bit later.

[Magnus Kruber, analyst]

For sure, I can at least try. And then actually following up on what you said on labor shortages, could you explain a little bit sort of to what degree that has actually impacted your capacity to deliver? I'm thinking particularly on the Service side? Are we talking about notable headwinds to growth there or not so much?

[Teo Ottola, executive]

Yes. There are certain market areas where we are clearly lacking service technicians. And I guess that part of the reason is the overall labor market being quite hot and the overall attrition that we have been having, even if it's not on alarming levels, but it is higher than what it used to be. So we need to hire more people, train more people, et cetera. So this is, of course, creating a challenge of its own. And then, of course, the COVID situation still and people -- if people are ill, so they will need to stay out of job for quite some time, even if the symptoms may have gone away already a bit earlier. We are lacking, let's say, if you take a look at the service technicians, if the situation were optimal, we could probably use 150 to 200 more service technicians at this point of time.

[Operator]

The next question comes from Tomi Railo from DNB.

[Tomi Railo, analyst]

This is Tomi from DNB. Question related to the optimization improvement actions. Anything related to possible preparation for downturn or lower demand, what you might be seeing next year?

[Teo Ottola, executive]

Not the -- let's say, not the optimization program as such. I mean, that is to improve our long-term competitiveness and to make us more agile in general and more, let's say, straightforward simplified from that point of view. Of course, it will be -- it would be helping to be more streamlined in a downturn scenario as well. But if you take a look at the overall preparedness for the downturn, so that is, of course, inbuilt into the business system. And when we are doing our own plans for next year and beyond, so we are, of course, taking a look at different scenarios when it comes to the economic environment as well. And, okay, downturns and upturns have been there before, and I think that we roughly know what are the activities that we should be doing. It is, of course, also good to remember that currently, our primary concern is not -- that we cannot deliver everything to the customer.

[Kiira Froberg, executive]

Thank you. I think that we are running out of time here. We still had one question in the chat function regarding the one-off restructuring costs expected for 4Q [ 2020 ].

So we haven't usually given any this kind of guidance. And what was mentioned was that we expect that part of the restructuring costs related to the optimization program would be booked already before the CMD. There was this question whether we will reveal more only at the CMD.

I thank everyone for the active participation and the questions. It's always a pleasure to host these quarterly earnings calls. And as a kind reminder, we will report our 2022 financial statement release on February 2, next year. Thank you.

[Teo Ottola, executive]

Thank you.

[Anders Svensson, executive]

Thank you.