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CEO's review

Q3 Interim Report | October 25, 2018

President and CEO Panu Routila comments:

Progress towards our targets continued according to our plans in the third quarter.

First, we continued to track slightly ahead of our synergy savings plan, with EUR 98 million run-rate savings reached in Q3. Following our good progress, we now expect the run-rate savings to reach EUR 105-110 million by the year-end, which is at the higher end of our previous target range.

Second, Q3 was a solid quarter for Business Area Service. Net sales grew 8.2 percent from the year-ago quarter, on the back of the increased order backlog year-to-date. While orders in Q3 grew at a slightly lower rate compared to Q2, this was due to slower modernization activity in the quarter. That said, field services and parts continued to record solid growth. On a comparable currency basis, order intake in Service increased by 4.8 percent and the value of the agreement base by 3.2 percent to EUR 242 million. Compared to the year-end 2017, the annualized growth of the agreement base value was approximately 6 percent.

Third, Business Area Industrial Equipment recorded solid constant currency growth of 5.5 percent in external orders in Q3, compared to the year-ago period. The growth was strongest for components and continued to accelerate from the first half of the year. In addition, order intake for standard cranes grew for the first time during the current economic upcycle; by solid double-digit percentage in the Americas and continuing the growth in EMEA, which began in Q2. Being late-cyclical, the improved performance in Q3 puts Industrial Equipment in a good position when entering the last quarter of the year.

While order intake in Ports Solutions was still relatively weak in Q3, this was largely due to the timing of projects. After the end of the reporting period, we announced an order for 54 Automated Rail Mounted Gantry cranes by Abu Dhabi Terminals for the expansion of its container terminal in Khalifa Port. The order is the second largest ever received by Konecranes and a testimony to our proven technology, delivery expertise and service support. The order is booked in Q4.

Overall, the demand environment for container handling products and services continues at a good level. Despite the slow order intake in the first nine months of the year, we expect the full year order intake in Ports Solutions to be around the same level or even slightly higher than in 2017.

On a comparable currency basis, Group sales increased by 7.8 percent from the year-ago period, with all Business Areas recording solid sales growth. Higher net sales, along with the EUR 14 million of P&L level cost synergies delivered in the quarter, helped to improve the Group’s adjusted EBITA margin to 9.3 percent in Q3. In Port Solutions, profitability continued to benefit from good project execution and favorable project mix. We expect the margin performance in Port Solutions to be somewhat lower in the coming quarters, given our current orderbook and project pipeline.

Activity in the world’s manufacturing sector continued to expand in Q3. However, the growth came at a slowing pace, reflecting the reduced predictability in the global economy, as worries about trade wars and tariffs continued. We, too, have seen certain cases where customers’ decision-making is taking slightly longer. So far, however, the cases have been isolated and have had only a limited impact on us. Changes in trade policies also require us to adjust our own operations. With a global supply chain and manufacturing network, we are in a good position to do so, when needed.

Despite the increased uncertainty in the world economy, our own demand environment within the industrial customer segments continues to improve in EMEA and the Americas. That said, signs of stabilization have become visible. The two cornerstones of our medium-term strategy; growth in Service and capturing MHPS acquisition related cost synergies, are progressing well and according to our plans. Our confidence in reaching our target of EUR 140 million run-rate cost synergies by the end of 2019 continues to be strong, and we have reiterated our financial guidance for full year 2018.