Konecranes Abp

OMXH:KCR

Earnings Call Transcript 2022-Q4

[Kiira Froberg, Vice President of Investor Relations]

Good morning, everyone, and welcome to Konecranes' Q4 Earnings Conference. My name is Kiira Froberg, and I'm the Head of Investor Relations at Konecranes. Here with me today, I have our President and CEO, Anders Svensson; and our CFO, Teo Ottola. This time around, we have slightly renewed our presentation. I hope you like it.

Before we start, I would kindly remind, that our presentation contains forward-looking statements. Next, Anders and Teo will walk you through our Q4 results. Anders will start by presenting the group numbers, after which Teo will focus on our business segments. The presentation is followed by Q&A as always. Anders, please go ahead.

[Anders Svensson, President and Chief Executive Officer]

Thank you very much, Kiira, and a warm welcome from my side as well to the Konecranes Q4 2022 webcast. I will start with some highlights of the quarter. We had a solid closing to the 2022 year and the demand sentiment remained solid throughout the quarter, despite market uncertainty that continued and macroeconomic indicators that were signaling weakening market conditions. Our order intake continued good. We delivered €879 million, which was 1% less than the comparison period in the previous year.

Our delivery capability improved in the quarter. We had more component availability. And in several material categories, it improved. It's not over, however, the component availability challenges, especially within electronic components continues. And our supply chains remained fragile in the quarter, but held up well. So we managed to deliver above €1 billion, at €1.21 billion for net sales. That was 8% up versus the comparison period in the previous year. And that made us close the year with an order book of €2.9 billion and that's 42% up on the previous year.

We delivered €118 million of adjusted EBITA versus the previous year of €113 million. That was down from 11.9 percentage points of adjusted EBITA to 11.6. And I think this is a good achievement given the circumstances in the world with the Ukraine war, with the inflation, with material availability issues and with the COVID situation that continued. And the Board proposal for dividend for 2022 is €1.25 per share.

I'll move into the market environment. So we follow a couple of macro indicators and we will start with the capacity utilization rate in Europe. And it declined during the quarter and declined both sequentially, but also year-on-year with 1 percentage point. And if we move into the U.S. capacity utilization rate, it ended the previous quarter at 80% and now we ended at 77.5%. And that's the manufacturing utilization rate then. So it declined both sequentially, but also year-on-year with 1.2 percentage points.

If we move into the manufacturing PMIs, it's not on the slide, but [measuring] the European one as well. It reached a low point in October and then increased during the quarter, but ended the year still below 50%. And that's the six months in a row then with below 50%, meaning market contraction. The same for U.S., but ended the third quarter at 52% signaling market expansion, but had a steep decline during the quarter and ended the quarter at 46.2%, so also signaling market contraction.

If we go into Brazil, India and China, China remained solid below 50% throughout the quarter, while Brazil started being far above the 50% mark, but had a steep decline and ended below 45% at the end of the quarter. India remained strong and were above 55% at the end of the quarter.

And moving to the demand driver then for Port Solutions. And here, we measure and follow the seasonally adjusted container throughput index. The index declined in the beginning of the quarter and that was driven by lower activity then in Europe, but had a strong ending at the quarter and that was driven by China, but also recovery within Europe.

I will now go a bit into the Group financials, and I will then leave to our CFO, Teo Ottola, to continue more with the segments and the balance sheet. So as I previously said, we managed to deliver €879 million. We couldn't follow-up the three quarters above €1 billion, but we think that €879 million for the quarter was a solid performance. And that's a 1.5% negative versus the previous year and 4.5% negative then in comparable rates versus the previous year.

We had a decrease in Service order intake and an increase in Industrial Equipment and Port Solutions. The decrease in Service was related to a strong comparable in the previous year. And there we had an order intake of a nuclear modernization order of US$59 million. So if you strip that out of the comparison, actually, we had a growth also in order intake for Service on both reported and comparable rates, but also for the Group on both reported and comparable rates.

Moving into net sales. So we managed to deliver €1,021 million for the quarter, good to be above €1 billion mark. And here, we were at 7.6% above previous year and 4.4% then above in comparable rates. The increase was in Service and Industrial Equipment, while we had a decrease in Port Solutions, and that was expected due to the delivery schedule within Port Solutions.

If we look into the markets, so when it comes to the order intake side, we had a decrease in the Americas, and that was then related to the nuclear modernization order. Otherwise, that was an increase. It was flat in EMEA, and it was a decrease in APAC. And on the net sales side, we had an increase in EMEA, that was actually a strong increase in EMEA, but the decrease in Americas and APAC. And to say here, maybe it should be stated as well that we had had some challenges in APAC in the quarter, mostly related then to COVID effects, affecting both people working on site, being off on sick leave, but also the suppliers and we also had a close down for suppliers, et cetera and also for ourselves. So it's been difficult in APAC in the quarter.

I'll move forward then to the Group order book. We ended the year on a €2.9 billion order book. And here, you can see represented by different colors, the relative size of the different businesses. So Service is the red one and Industrial Equipment is the gray one and the blue, green one represents Port Solutions. The €2.9 billion was up 42.2% on reported rates versus previous year, while it was up 41.1% in comparable rates. And we had an increase in all three segments, and it was driven then by the largest increase in Port Solutions, as you can see also on the slide. It was somewhat lower, about €150 million versus the Q3 period. So it's positive that we start to deliver on our order backlog.

I'll move in to our adjusted EBITA. So we delivered €118 million for the quarter. That was €5 million up versus the previous quarter of €113 million. The margin, however, declined from 11.9% in the previous year to 11.6% in this year. So that was a decline of 35 basis points. The profitability increased in Service, we had a slight decrease in Industrial Equipment and a more solid decrease in Port Solutions. That was primarily related then to lower underlying sales volume.

And when I mean – when I talk about lower underlying sales volume, I mean that we had a growth for the Group of 4.4% in comparable rates, but our pricing components is larger than that. So the actual volume growth was negative compared to the comparison period. We also had a slight decrease in our gross margin and that was driven by Industrial Equipment, not fully compensated for the inflation with increased prices. We have taken the measures. They are in the order book, but they haven't filtered through to invoicing yet fully.

We have updated our first quarter 2023 demand outlook. The world demand picture remains subject to volatility and uncertainty. Within the Industrial Customer segment, we say, despite the weakened global macro indicators, our overall demand environment within Industrial Customer segment has remained good and continues on a healthy level. That said, we have started to see some signs of weakening within all three regions. Within ports customers, we say, global container throughput continues high and long-term prospects related to global container handling remains good overall.

So the financial guidance for full-year 2023. Net sales is expected to increase in full-year 2023 compared to 2022 and the adjusted EBITA margin is expected to improve in full-year 2023 from 2022.

And with that, I will then leave over to our CFO, Teo Ottola, to continue with the presentation. Go ahead, Teo.

[Teo Ottola, Chief Financial Officer]

Thank you. Thank you, Anders. Welcome also on my behalf. And as usual, let's take a look at the performance by business segments. Before that, however, we have added one new slide in the presentation, and we could start this section with that slide actually. So it's an adjusted EBITA bridge between the fourth quarter of 2022 and then the fourth quarter of 2021, where we actually dividing or splitting the different change factors, different deltas into various categories. So like Anders already explained, the adjusted EBITA in the fourth quarter of 2021 was €113 million, and in the fourth quarter of 2022, €118 million.

There are four different categories that where we are splitting the delta. The first one of them is volume pricing and mix combined, so we have combined all of these in one bucket. The other one is variable cost, which is of course excluding volume impact because that's already in the first category. This is basically inflation and so-called performance in comparison to the previous years corresponding period. The third one is fixed cost, which is basically the cost level below the gross margin. And then we have translation impact as a result of the FX changes.

And if we then take a little bit deeper look on these different buckets, so the volume pricing mix altogether, €103 million positive. So our, let's say, understanding and our view on the pricing in an year-on-year comparison is that that our prices were around 10% higher than they were a year-ago. And that is of course, with the sales that we have roughly a €100 million difference by itself.

The volume impact in the fourth quarter of 2022 in comparison to a situation a year-ago is a negative one. Exactly like Anders already explained. Our pricing is 10%, having a 10% impact and sales grew by 4.4% with comparable currencies. So the volume impact to the EBITA from that point of view is negative. However, our product mix was actually positive also, both within the business segments as well as between the business segments and this product mix, positive impact almost compensated for the volume difference that we had in comparison to the situation a year-ago.

When we take a look at the variable costs, so like I said, this is inflation, and then of course, so-called performance in a year-on-year comparison, inflation obviously is creating a negative variation. We are compensating that by price increases like this picture also explains the so-called performance component was a little bit negative in an year-on-year comparison due to project execution, due to inefficiencies caused by component shortages and other supply chain issues. The fourth quarter of 2021 actually was a very clean quarter from those that point of view like was the third quarter of 2022 also, but a small negative deviation in a way in an year-on-year comparison from the performance part.

Fixed cost minus €8 million tells that our fixed costs are that much higher than what they were in the fourth quarter of 2021. And this in this context basically mostly comes from inflation. So actually the underlying growth within the fixed expenses of fixed cost is very, very modest, but the inflation is impacting this one as well. And then the translation impact relatively big number, this time €6 million as a result of the currency changes, of course, euro dollar impacting quite a bit here as well. So this is in a way a summary of the bridge that we have now put into the presentation.

Then if we take a look at the segment performance and start with the service, as usually order intake €283 million that is a decline both in reported as well as comparable currencies for the reason that Anders also already explained a very big modernization order one year-ago. Excluding that one, we would have seen growth in the service order intake. There was actually growth both in field service and parts in an year-on-year comparison. We had a decrease in the Americas from the regional point of view then we were approximately flat in EMEA and APAC in an year-on-year comparison.

If you take a look at it sequentially, the order intake declined there as well. So Americas and APAC were declining, whereas EMEA was more or less on the same level as in the third quarter. Agreement base, the number – of the value of the agreement base €307 million, roughly at the end of the year, 3.4% growth with comparable currencies could remember that the Russian business agreement base is not included in this number and adjusting for that, we would've seen maybe a percentage point higher growth for the agreement base in a year-on-year comparison.

Sales were €376 million, that is up 7.7% with comparable currencies. There was increase both in field service as well as in parts and also in all of the regions. Adjusted EBITA is on a very good level. The euro number is €79 million and 21.1%. There is actually an increase in an year-on-year comparison of very small increase, but an increase anyways, which is driven by higher sales. Higher sales obviously driven by pricing as already discussed during this call. And the gross margin also slightly increased within the service business, so a very solid performance from the service business.

Industrial Equipment and order intake €306 million, this is 7.8% higher than the corresponding period a year-ago. And then the – maybe the most meaningful number from the order intake point of view, external orders year-on-year with comparable currencies plus 2.9%, we had in a year-on-year in comparison increase in standard cranes and components. The process crane order intake declined in an year-on-year comparison from the regional point of view, increase in Americas and EMEA whereas APAC decreased.

Then, if we take a look at sequentially, so sequentially order intake declined from the third quarter. The explanations are very similar to what they are in an year-on-year comparison. So actually standard crane orders even increased in a sequential comparison, process crane orders declined and component orders, this short cycle product category was more or less flat in Q3, Q4 comparison. Sales €377 million, that is an increase of 9.2%, year-on-year, also external sales with comparable currencies, 9.2% and increase in all major business units as well as in all regions. Order book, of course, on a good level, on a high level as was already visible in Anders presentation as well.

Adjusted EBITA €22 million, that is 6%. There is a slight decline in the margin. The volume development has been quite good, but then as Anders explained, so the cost inflation is still impacting the price increases that we have done during the first half of last year are impacting, but maybe not to the full extent yet during the fourth quarter, and we still have a little bit of the, let's say, negative delta as a result of price inflation relationship in the fourth quarter of 2022.

Port Solutions order intake was €356 million that is almost exactly on the same level as it was a year-ago from regional perspective in an year-on-year comparison, there was an increase in Asia-Pacific, there was a decrease in Americas and EMEA. If we take a look at it by business units within the Port's business so actually Lift Trucks and automation parts did very well in an year-on-year comparison.

Sequentially, the order intake declined from the very good level that we have been having in the third quarter and again, if we take a look at the short cycle product categories within Ports business, so lift truck orders declined in a sequential comparison, whereas Port Service was more or less on the same level both in Q3 and Q4.

Net sales declined 2.6% with comparable currencies. This was primarily as a result of timing of the deliveries. So project timings impacted that way. It of course then also means that the order book continues to be on a very good level, €1.6 billion, 60% – more than 60% up year-on-year. Adjusted EBITA, €21 million, 6.5%, so there is a decline both in euros as well as in margin. The main reason clearly for the decline is volume, so the underlying volume is quite a bit lower than what it was a year-ago. But then also a little bit performance topics from the project execution point of view. Like I said, the comparison period was very clean from that point of view, as was the third quarter.

Now we had a little bit more of that, nothing dramatic an indication of which is that, that we are here stating that the gross margin actually increased within the Port Solution. So the issues within the execution by no means are massive, but a little bit let's say to the negative in comparison to the situation a year-ago.

Then finally before going into the Q&A, a couple of comments on the net working capital and cash flow. Net working capital was at the end of the year, €581 million, that is 17.3% of rolling 12 months sales. The net working capital has been increasing during the year as we can see from the slide. There was a very small increase from the third quarter to the fourth quarter as well. But as we can see, so the rotation in a way improves the relation between – through the rolling 12-month sales improved. Inventories declined during the fourth quarter. And of course, then the – in a way, the same deliveries then moved into the AR at the end of the year.

Cash flow in the fourth quarter was positive €91 million, of course, as a result of the relatively good result, and that was barely enough to make the cash flow, free cash flow positive for the full-year as well, so €25 million on a cumulative basis at the end of 2022. Of course, the main reason for the low cash flow still continues to be the networking capital accumulation.

Gearing and net debt, so net debt decreased from the third quarter level slightly to €688 million, that corresponds to gearing of 48%, which also of course came down from the previous quarters level. And then finally, the return on capital employed on an adjusted basis. It's a very stable on the level of 13.4%. And I guess that with these comments, we can then move into the Q&A.

[Kiira Froberg, Vice President of Investor Relations]

Thank you, Teo. Thank you, Anders. Before we turn the line on, we have a couple of questions through the chat. So maybe we could start by them. First one is regarding Industrial Equipment. So this is not now my words, but Industrial Equipment is the black sheep of the company. What we can expect on that area?

[Anders Svensson, President and Chief Executive Officer]

I think in Industrial Equipment, we have had a difficult time since the inflation started to really compensate for the – with the prices for the increased inflation. We have now taken all the right measures, and looking forward, we are compensating for that. So we are recovering. And we are also with easing of our supply chain issues, getting up the productivity within Industrial Equipment. And we shouldn't forget, without Industrial Equipment, our service wouldn't have the kind of growth that we have had. We are sort of populating the market with our equipment and then we are servicing our equipment. We're also servicing third-party equipment, of course, but our own equipment is critical as well in this. So if you look at it integrated, it's actually a very nice business.

[Kiira Froberg, Vice President of Investor Relations]

Teo?

[Teo Ottola, Chief Financial Officer]

Maybe worth adding to this one is that when we have been talking about the efficiency improvement activities within the industrial segment or industrial business area, consisting of two segments, Service and Industrial Equipment. So we have been talking about an efficiency improvement targets of €30 million to €35 million within the next three years. And of course, this is combined for the Service Industrial Equipment business area, but a clear majority, a very big deal of this expected efficiency improvements would be taking place within the Industrial Equipment sector. And the actions that we have been discussing regarding those ones are in relation to product platform changes and go-to-market changes, among other things, but those are maybe some of the most relevant ones here.

[Kiira Froberg, Vice President of Investor Relations]

Thank you. Then we have another question, which is related to the Russian write-offs. And this question actually came in while you were, Teo, discussing the EBITA bridge. So what impact did the Russian write-off accumulated to? And there, I think we need to now remember that all Russian-related write-offs, so they have been adjusted for, so they are not included in the bridge. But perhaps, you can share with...

[Teo Ottola, Chief Financial Officer]

That is correct, like Kiira said. So these corrections that we have done, so they have been adjusted from these numbers. However, if we take a look at the brief summary of that one, so at the end of the year, the adjustments in relation to the Russia-Ukraine crisis and Russian business are altogether in the ballpark of €38 million. There is also a sales impact because we have in a way canceled POC sales that were already in the books. And the sales impact is slightly smaller amount. It's about €30 million, €32 million or so, but the P&L impact is €38 million within the adjustments. So that is basically impairment of the assets in Ukraine or impairment of the majority of the assets in Ukraine and then the impact of the canceled projects that we are not delivering to and in Russia.

In addition to that one, of course, the overall decision of withdrawing from the Russian business or not taking new orders and sales is, of course, having its own impact to these numbers as well in the way that the business does not exist anymore. We have not been giving the actual profitability numbers. We have been referring to the Russian business having been around 2% of our total Group turnover.

And then maybe as we have been discussing also earlier, so the – we cannot utilize the Ukrainian manufacturing facility, obviously, in the way that we earlier planned. And this has created a need to manufacture crane structures elsewhere. And this has created a cost of approximately €1 million per quarter, which is also visible in these numbers that we can see in this slide. So that has not been adjusted for.

[Kiira Froberg, Vice President of Investor Relations]

Yes. Thank you. Okay. I think that we could now open the line for questions, please.

[Operator]

[Operator Instructions] The next question comes from Antti Kansanen from SEB. Please go ahead.

[Antti Kansanen, SEB]

Hi, guys. It’s Antti from SEB. A couple of questions regarding Industrial Equipment. I mean, on the outlook comments, you are flagging some signs of weakness on the demand, but then if we look at what's happening, kind of the short cycle business components and standard cranes are doing better than the process cranes. So what does this tell you kind of where we are in the cycle and how do you kind of – where are you actually seeing the signs of weakness?

[Anders Svensson, President and Chief Executive Officer]

Yes. Thanks, Antti. I think, if you start with a macro indicators that are showing sort of decline in utilization in both Europe and in U.S. and we have our true connect where we can follow utilization equipment. So we also see in our connected equipments that are utilized to a somewhat lower level than previously. Then we have our sales funnel within Industrial Equipment, in the Industrial segment where we can see that we have slightly fewer cases in the funnel. And also the value of the funnel is slightly less than previously. We have also seen that decision making is somewhat longer than previously, so it hasn't hit us in any way so far, but we see signs of weakening in the different regions.

[Teo Ottola, Chief Financial Officer]

Then back to your question about the, what can you conclude about the process cranes being in a way or weaker than the standard cranes or the componentry. Of course, you are absolutely right, so that it's not according to the model. But I would say that it is rather a coincidence than other than anything else. So I wouldn't really conclude anything on the position where we are regarding the cycle based on that one. And the key thing is still just to take a look at the development within the components within lift trucks, standard cranes to some extent and try to conclude it there. As we discussed through the components were more or less flat in a sequential comparison. Lift trucks came down, service number is visible as we can, as we can see it. So there are signs of weaker demand, which have not really massively, at least been in a way materializing in the order intake.

[Antti Kansanen, SEB]

All right. That's very clear. And then the second question is on the sales guidance for this year. Could you little bit talk about how do you say that divisionally and also price versus volume, and I'm quite interested on the Port side, how much of that big backlog you are kind of scheduling to deliver during 2023?

[Anders Svensson, President and Chief Executive Officer]

I think we are not really giving any more details on how we see that. But what we can say is that we go into the year with an order book as you can see which is very strong at €2.9 billion and a large part of that to be delivered in 2023. If you compare, we have 500 million more going into 2023 being delivered in the year than we had going into 2022. So I think we are fairly confident that we go in with a strong backlog and we have done the pricing changes, et cetera, needed to keep a profitability going forward. We already did that earlier in 2022, and that are reflecting into the later half of 2022, but also now more into 2023, but we are not giving any guidance on specific sales development per segment, et cetera going forward.

[Antti Kansanen, SEB]

Okay. And then perhaps on the EBITA guidance, it's a very nice bridge chart that you provide for Q4. So could you conceptually talk about 2023 profitability improvement in the same terms?

[Anders Svensson, President and Chief Executive Officer]

I think, if you look here at the different businesses, I mean it was mentioned by Teo as well. In the service, we have improved our profitability from 21.0 to 21.1. And we have seen sort of an underlying performance improvement, also driven by pricing as Teo mentioned, and not by volume, but service is a volume business. So the more we can get our componentry business in line, of course, there's an opportunity to drive additional productivity. Also, the productivity and service is driven when we don't have supply chain constraints hindering us from doing the right sort of planning of our service technicians, et cetera. So there is potential going forward. There's nothing that doesn't say that we could keep the development that we have had within that area. When it comes to the port side, we have been challenged by lower volumes in the year, as mentioned and that impacts our profitability and we now see we go in with a very strong order book and improved delivery capabilities.

So even though we also had some project related performance challenges with imports that is not something which will follow us into 2023, what we believe. And in the Industrial Equipment, we have already talked about the compensation of pricing versus inflation. And also here we have had, like Teo mentioned, impact from the war with a million per quarter related to not being able to operate our [indiscernible] plant. We have also seen here COVID effects of lack of availability impacting our business and our ability to plan in our different production facilities also closing due to COVID in Asia. So there's an underlying – we are going confident with that in our pockets.

[Teo Ottola, Chief Financial Officer]

Yes. Maybe regarding the product mix comment that we have been discussing earlier as well a little bit regarding the future, so there maybe, one can conclude that if we take a look at the current situation, for example, in the fourth quarter, and it applies for the full-year, so the mix impact has been positive, so it most likely will not be that positive in 2023. The mix between the segments will probably change to the worst and it is maybe even so that also, at least within ports, the mix most likely will change to the worst. So I guess this is something that one can in a way conclude from the order book that we have at this point of time. Then I think that the overall margin development very much boils down to what Anders was saying about the order book being much higher than a year ago, and then that what is the delivery schedule of that one and how are we constrained by component availabilities or other topics within this year.

[Antti Kansanen, SEB]

All right. That's very clear. Thank you.

[Operator]

The next question comes from Massimiliano Severi from Credit Suisse. Please go ahead.

[Massimiliano Severi, Credit Suisse]

Yes. Hi, good morning. Thanks for taking my questions. My first one would be on Port Solutions and execution challenges that you mentioned. I was wondering, first of all, if these projects are already ongoing or have they been finished and so if I should think about, how should I think about these execution challenges potentially affecting also 2023 and maybe which measures have been taken to avoid these execution challenges in the future?

[Teo Ottola, Chief Financial Officer]

When we take a look at the challenges as we have been talking about them, so like already said, so there is no reason to exaggerate the impact of those because the gross margin is basically up year-on-year even with these challenges. These are primarily projects that are at the very, let's say towards the end of the period of those projects. So they are not – I cannot say that they would be completed, but they are to be completed. We feel that adequate measures have been taken and we are not expecting any kind of, let's say trend wise weakening of the performance as a result of project execution.

I would rather maybe say even so that this is kind of normal fluctuation and volatility. Like already said, Q4 2021 was very clean from project execution point of view. Q3 2022 was also very clean. We even had within the Ports a small positive one-off there in the third quarter. And this now in comparison to those two, this is maybe weaker performance in a way, but it doesn't mean that that we would be having any massive issues in this respect.

[Massimiliano Severi, Credit Suisse]

So just to clarify, it's not really related to maybe cost inflation hitting the margins on your backlog, this is more of a one-off, and you do not generally see any larger than usual issue on cost inflation on your backlog in projects?

[Teo Ottola, Chief Financial Officer]

This particular challenge that we are talking about here now is not pricing related. So this is more like project timing execution-related topic. When we talk about the order book margins, so as already discussed, so I think that it applies to all of the businesses. And of course, the order book is picking, Industrial Equipment and Port, in particular in those. So we are quite comfortable with the margin levels that we have within the order book.

[Massimiliano Severi, Credit Suisse]

Okay. Thank you. And my second question is going back to the topic of process cranes and the turnaround. I was wondering if you can give us an update on whether process cranes were profitable in 2022? And if they're not profitable, how would you think about 2023 and process cranes turnaround continuing to be somewhat of a tailwind for Industrial Equipment going forward?

[Anders Svensson, President and Chief Executive Officer]

So I think Teo mentioned it a bit in his part of the presentation, but process cranes are unfortunately still in the red for us. We have a lot of initiatives ongoing. And we have communicated around these as well, what we do in terms of our different platforms and go-to-market models, et cetera. And we also communicated that, that will in 2025 then contribute with an EBITA improvement of €30 million to €35 million and it will come at a cost of €30 million to €35 million. And we are executing on that plan and proceeding according to our own plan. And most of that related cost will then be taken within the first 12 months of announcement, which was basically one quarter ago.

[Teo Ottola, Chief Financial Officer]

Taking a look at the 2023 and from the process crane point of view, in particular. So I think that it would be fair to say that the war impact that we were now discussing in connection to the 2022, so this €1 million per quarter, so unfortunately, it will not completely go away. We were not intending to update on the number every quarter, because of course, the impact has been there on 2022 as well. But I mean, it will not be vanishing just like that. So I think that it will continue to burden the process crane profitability. And hence, it's not at all guaranteed that it would be with black numbers in 2023. Obviously, we are working the best we can to make it happen. But of course, these extra costs may impact that plan to some extent. Of course, we can probably comment the process crane profitability then on a quarterly basis going forward as well, maybe not with the number, but whether we are on the black or on the red.

[Anders Svensson, President and Chief Executive Officer]

And we have – you could probably add as well that the lead time to filter through from the price increases has also been longer in ETO cranes and process cranes than in the short-cycle products. And that would then help us a bit during 2023 as well.

[Massimiliano Severi, Credit Suisse]

Yes. Clear. Thank you. My very last question would be, again, on the order book of Port Solutions, if you could maybe comment. I would expect it right now to be more tilted maybe towards mobile equipment than it has been historically because of supply chain issues. I was wondering whether it is the case? If you can help us provide more or less the split between short-cycle equipment and then large cranes. And more or less, in terms of the mix of 2023, how much do you expect to be able to sell in terms of revenue generation capacity? And I don't know if you can provide any color at all about how much could be large cranes versus mobile equipment?

[Teo Ottola, Chief Financial Officer]

We would maybe rather not talk about the numbers exactly, but I think that your underlying question is that is the order book tilted more towards the shorter-cycle product offering within the port. So I would not necessarily draw that conclusion. And the reason is that we have definitely longer delivery times when it comes to the mobile equipment than what we have been having previously. But the same applies to many other product categories. And of course, the order book in a way, is basically quite long when it – longer than usual regarding most of the product groups that we have.

The key question then from the mix point of view, which I think that you are after, is then that what is the delivery capability regarding all of those business units, in particular product groups. And that is what we'll be decisive then from the P&L point of view in 2023. We are a bit cautious on commenting that in any more detail because the future is an uncertain thing after all.

[Massimiliano Severi, Credit Suisse]

Okay. Thank you.

[Operator]

The next question comes from Tomi Markus Railo from DNB. Please go ahead.

[Tomi Railo, DNB]

Hi, Anders, Teo and Kiira. It's Tomi from DNB. A couple of questions. Firstly, I respect you have the outlook, but can you say anything how the year has started, especially for the short-cycle business? Are these fourth quarter levels a good proxy where we start the year with the comment that demand is overall healthy in terms of components and services as well?

[Anders Svensson, President and Chief Executive Officer]

Yes. Basically, we don't go in and comment within existing quarters. But if you read and listen to what we say in our outlook, it continues on a healthy level. And we haven't seen anything that would deviate from continuing, as we said, that flat or increasing quarter-on-quarter or year-on-year, as Teo mentioned previously, on the short-cycle products. And if something would have changed in the last weeks, we would have mentioned that.

[Tomi Railo, DNB]

Okay. Thank you. And then have you seen any order cancellations or signs of that?

[Anders Svensson, President and Chief Executive Officer]

There are always order cancellations to some extent, but we haven't seen more order cancellations than we do in – have done historically in previous quarters. So no sort of escalation in any cancellations and not within any projects such as specific projects that we couldn't sell to others more as we normally have within price list products that we then can sell to another customer. But nothing that's indicating any sort of increased cancellations.

[Tomi Railo, DNB]

And then maybe on the currency or ForEx impact. Do you think or do you believe, expect any negative currency impact on EBIT this year due to the strengthened euro compared to U.S. dollar?

[Anders Svensson, President and Chief Executive Officer]

I don't think it's our job to speculate on currency development going forward. So I think what we normally say is that changes between U.S. and euro of 10% has an effect of roughly €10 million on our adjusted EBITA, and that's about what we can say regarding that.

[Teo Ottola, Chief Financial Officer]

Which obviously comes with a delay because there is a hedging process in place.

[Tomi Railo, DNB]

Okay. And finally, just checking what Anders you said on booking of the efficiency improvement costs. Can you please repeat that?

[Anders Svensson, President and Chief Executive Officer]

No, it's what we announced in – already in the third quarter report that we are making initiatives to improve the profitability of the Industrial Equipment segment. And we have a project that will reward us with €30 million to €35 million EBITA improvement in 2025, but it will come at the cost, a one-time cost of €30 million to €35 million. And most of those costs will be booked within the first 12 months from when we announced.

[Kiira Froberg, Vice President of Investor Relations]

So we already booked costs related to that program now in Q4.

[Anders Svensson, President and Chief Executive Officer]

Yes.

[Tomi Railo, DNB]

Okay. Perfect. Thanks.

[Operator]

[Operator Instructions] Please go ahead.

[Unidentified Analyst]

Thanks. I was just wondering if you had any plans for refinancing the debt maturing in 2023?

[Teo Ottola, Chief Financial Officer]

We have actually refinanced the debt maturing 2023. There will be refinancing needs for the year 2024, which at this point of time has not been refinanced, but will be planned during 2023.

[Unidentified Analyst]

Thank you. And can I just ask a follow-up on what we should consider the right level of inventory for the business in the medium term?

[Teo Ottola, Chief Financial Officer]

The level of inventory, as a normalized case, is that it's a very, very challenging question because it is so much depending on the product mix that we have and we cannot really give a very good guideline and what is the correct number because the work in progress in long projects, of course, starts to accumulate in a very early phase. And then on the other hand, you can have an inventory of spare parts. And it is a lot, let's say, depending on the mix. I would maybe concentrate and focus on the indicator that we are also showing ourselves, which is the net working capital as a whole in relation to rolling 12-month sales. So this has proven to be, let's say, the one of the best indicators for net working capital efficiency, including inventories.

[Anders Svensson, President and Chief Executive Officer]

And to add to that, maybe that we target to be clearly below the 15% mark and we are currently at 17.3%. So we will work on that during 2023.

[Unidentified Analyst]

Thank you.

[Operator]

The next question comes from Antti Kansanen from SEB. Please go ahead.

[Antti Kansanen, SEB]

Yes. Hi. Thanks for the follow-up. It was on something that, Anders, you said about Industrial Equipment and Services and it's obviously an enabler of Services. So could you elaborate a bit how do you look at those two businesses? Is there more kind of a collaboration to be done? How do you look at kind of an equipment profitability versus lifetime profitability, including the Services? And maybe talk a little bit about around that theme.

[Anders Svensson, President and Chief Executive Officer]

No, we are working on our strategy update now for the CMD on 10th of May where we will more in detail talk about our strategy going forward. But clearly, there is an opportunity to – as we have combined these two segments into one business area to look more on end-to-end profitability, to really understand our profitability in the different legs that we have of the business.

[Kiira Froberg, Vice President of Investor Relations]

And to kind of increase collaboration and cooperation. That was one of the reasons for the new, let's say, structure.

[Anders Svensson, President and Chief Executive Officer]

Yes. It won't mean that we will start reporting only together or so. We will keep reporting separate as we do today.

[Antti Kansanen, SEB]

Yes. But I was thinking kind of if you look at the process cranes and there's been a couple of questions regarding the margin weakness over there. If you look at the service opportunity in process cranes and kind of the lifetime profitability, including the Services, how does that stack up against the component and standard crane business today?

[Anders Svensson, President and Chief Executive Officer]

Yes. Versus the component business, of course, it's not the same because you're not comparing apples with apples. Components is basically a part of the service on the cranes, the process cranes. So I think it's difficult to compare. But I think for us, it's important to understand the lifecycle margin, and we haven't been working in that way previously. So that is something we more will look into to really understand where we should not water the plant and where we should water the plant.

[Antti Kansanen, SEB]

All right. Thanks.

[Operator]

[Operator Instructions]

[Kiira Froberg, Vice President of Investor Relations]

We have some questions in the chat function. A couple of questions related to the inflation. So I think that we could take them here in between. So what should we think of raw material inflation developments in 2023? Could that become a tailwind to Group margin in the course of the year? If this inflation occurs, should we see a downside risk to the pricing? That would be one question.

[Teo Ottola, Chief Financial Officer]

So I think that when we take a look at the inflation picture as a whole, so of course, it's extremely difficult to say that where the inflation would be going. That depends on the overall economic environment and the Central Bank's rate increases and all of that. But of course, it would be realistic to think that the material inflation would be declining because we have been seeing raw material prices going down as a result of the – how the economies have been doing.

So it is quite possible that the material inflation would be lower in 2023 than what it has been in 2022. It's not certain, but it's possible. If that happens, it has typically been a piece of good news for us. So a, let's say, declining raw material prices are maybe an easier environment for us even though raw materials technically are a pass-through item. So there is maybe a potential to, in a way, benefit a little bit from the margin point of view.

I would not, however, exaggerate the impact of this one, because by definition, we are passing it on to the customers. But the environment where raw material prices are going down is definitely easier for us to manage than the other way around. So from that point of view, maybe it would be, to some extent, a positive thing. Then again, it may be that the labor inflation is somewhat higher even in 2023 than what it has been in 2022. That's at least a possibility given the current sort of status where we are.

[Kiira Froberg, Vice President of Investor Relations]

Okay. Thank you. I think we could now take still at least one question from the line, please.

[Operator]

The next question comes from Erkki Vesola from Inderes. Please go ahead.

[Erkki Vesola, Inderes]

Hi, Anders, Teo and Kiira. Just regarding what Tier 2 capital labor inflation. What was the labor inflation last year? And what kind of inflation do you expect in 2023?

[Teo Ottola, Chief Financial Officer]

The labor inflation has been somewhere between 4 and 5, maybe 4.5 to 5 or so. Whether it will accelerate or not is an excellent question. It might, but that's not in a way, of course, certain. But let's say, between 4 and 5 for the full of 2022, and of course, higher towards the end of the year than in the beginning of the year.

[Erkki Vesola, Inderes]

And then I'm not sure if you're going to answer this, but regarding your ongoing or planned price increases you're tendering currently or in 2023 in total. Are you still raising prices altogether in 2023 as we speak?

[Anders Svensson, President and Chief Executive Officer]

We are raising prices basically on a quarterly level when it comes to the Service side and have been doing so. We will probably not do it on a quarterly level going forward if the inflation sort of starts reducing. But we are taking all the measures needed and we learned our lesson being late a bit in the industrial side during the early days of this cycle. So we have learned and we are quick and we are taking all the measures that's needed. But as Teo mentioned, now we have raw material prices at the end of 2022 was lower than at the beginning of 2022. So what we are mainly battling now going forward is then labor inflation.

[Erkki Vesola, Inderes]

Okay. Thanks. And then a final one to Teo, just a housekeeping question regarding corporate tax rate, a ballpark figure for 2023?

[Teo Ottola, Chief Financial Officer]

It was a little bit more than 27%, 27.4% or 27.5% now in 2022. I would use roughly the same. So no major change to be expected.

[Erkki Vesola, Inderes]

Okay. Thanks so much.

[Kiira Froberg, Vice President of Investor Relations]

Okay. I think that we start to run out of time here. So it's time to conclude our today's conference. I thank you all for participation. And just as a reminder, Q1 interim report will be then reported on April 28. So we'll meet then again. Thank you.

[Anders Svensson, President and Chief Executive Officer]

Thank you very much.

[Teo Ottola, Chief Financial Officer]

Thank you very much.