Konecranes Plc (KNCRF) CEO Richard Smith on Q2 2021 Results - Earnings Call Transcript

Konecranes Plc (OTCPK:KNCRF) Q2 2021 Earnings Conference Call July 28, 2021 3:30 AM ET

Company Participants

Kiira Froberg - VP, IR

Richard Smith - President & CEO

Teo Ottola - CFO & Deputy CEO

Conference Call Participants

Artem Tokarenko - Crédit Suisse

Magnus Kruber - UBS

Antti Suttelin - Danske Bank

Aurelio Tejedor - Morgan Stanley

Daniela Costa - Goldman Sachs Group

Antti Kansanen - SEB

Sebastian Growe - Commerzbank

Kiira Froberg

Good morning, and welcome to Konecranes Q2 earnings conference. My name is Kiira Froberg, and I'm the Head of Investor Relations at Konecranes. Here with me today, I have our President and CEO, Rob Smith; and our CFO, Teo Ottola.

Before we start, I would kindly remind you about our practice. This conference is to discuss Konecranes Q2 earnings. Securities laws in the United States and in some other jurisdictions restrict us from discussing or disclosing information on the contemplated merger with Cargotec. Information regarding the merger can be found at www.sustainablematerialflow.com.

Until the completion of the merger, Konecranes and Cargotec will operate as separate and independent companies. Here's our today's agenda. Rob will start by reviewing our group level performance, after which they will continue with a more detailed walk-through on our three businesses. The presentation is followed by Q&A, as always. Please, Rob, the stage is yours.

Richard Smith

Thank you very much, Kiira. Ladies and gentlemen, thank you for coming, and welcome to our second quarter earnings conference. One point is a point and 2 points make a line. Three points define a trend. And the fourth point confirms the trend.

And it's actually the same thing in quarters. This morning, Konacranes reported our fourth consecutive quarter of record profitability, confirming our exciting trend. Solid sales growth and high performance across the whole company delivered that second quarter result and did so against the challenging backdrop of COVID-19 and ongoing component shortages and logistics challenges.

Strong first half orders, especially in our short-cycle products, our record high order book and continued traction from our strategic initiatives gives us very good momentum and confidence in the second half of this year. Although COVID-19 market volatility is certainly not over, our record high overall market sentiment continued to improve in Q2 compared to previous quarters.

Activity remained high in the port sector and continued to improve with our industrial customers. Group order intake grew 41% year-on-year in comparable currencies as last year's Q2 was the peak of the lockdown period in COVID-19.

Component shortages and other supply chain constraints did affect our Q2 sales, with negative quarterly sales impact of approximately negative €35 million.

Sales, however, still grew 10% year-on-year in comparable currencies, as the Konecranes team focused on our customers and overcame these COVID-19 challenges. COVID-19 and component shortages are not the only events recently impacting our operations.

Two weeks ago, our factory in Wetter, Germany, was affected by flooding. None of our employees were injured. There was physical damage on site, and we expect to recover the lost production during this third quarter. We have many employees living in the region, and our thoughts and our sentiments are with our employees and their families and their communities.

Today, we updated our demand outlook for Q3. And we also reiterated our full year guidance for 2021, where both net sales and expected EBITA margin profitability will improve in 2020 versus -- in 2021 versus 2020.

And finally, our announced merger with Cargotec is progressing well, with merger control filings and integration planning teams making good headway. This month, the European Commission and the CMA in the U.K. announced a Phase II investigation, which is a common practice in large global transactions.

We are confident the merger will be successfully completed by the end of the first half of next year. The merger is fully aligned with Konacranes strategy and our growth ambitions. And together with Cargotec, we will create a global leader in sustainable material flow.

Turning now to further key group figures. Free cash flow for the quarter was around €15 million. This is lower than the second quarter of 2020, mainly due to changes in net working capital, as was the case in the first quarter of this year.

Net debt at the end of the second quarter was approximately €624 million. This is lower than last year due to the strong operating cash flow and working capital development in 2020. Sequentially, we are above the first quarter levels. As during the second quarter, we paid a dividend to our shareholders of €0.88 per share.

Moving to the market environment for our Service and Industrial Equipment business. In both the Eurozone and the U.S., the manufacturing PMIs were at record highs at the end of the second quarter. And the manufacturing industrial capacity utilization rate exceeded pre-COVID levels in the second quarter.

In the BRIC countries, China and Brazil's manufacturing sector PMI continued in the expansion zone in the second quarter. And in India and Russia, the manufacturing PMI dropped below 50 in June.

And the market environment for our Port Solutions business. The global container throughput index continued to increase in the second quarter and finished at an all-time high. And at the end of May, it was 24% higher than it was at this point in time last year.

While we expect market volatility to continue due to the pandemic, we have updated our demand outlook for the third quarter to reflect the current market sentiment. The worldwide demand picture remains subject to volatility due to the COVID-19 pandemic.

In Europe, the current demand environment within the industrial customer segments has reached pre-COVID-19 levels. In North America, the demand environment is still behind the pre-COVID-19 levels. And this is the same case in Asia Pacific outside of China.

Outside of China, the pre-COVID levels have not yet been reached either in the demand environment. The global container throughput continues to be at record high and long-term prospects to the global container handling remain good overall.

This morning, we reiterate our full year financial guidance. Despite the supply chain challenges, which impacted our net sales in the first quarter and continue to impact our operations in the third quarter, we expect to overcome these challenges, and we expect our net sales for the full year 2021 to be higher than they were in 2020. And we expect our full year 2021 adjusted EBITA margin profitability also to improve in '21 versus 2020.

Our order intake in the second quarter increased to €807 million. It increased in all three businesses, and it increased in all three regions. We had good order growth again in our short cycle time products. The quarterly impact from component shortages and logistics constraints was about €35 million of less sales.

Our sales increased in Port Solutions and Service and remained at previous year levels in our Industrial Equipment business, all in comparable currencies. In line with our first half -- in line with our full year expectations, our first half sales exceeded the first half of last year in comparable currencies and was within 0.7% of last year's levels at reported rates.

Our rolling 12-month sales by business and by region is very similar to the results we had in the first quarter of last year, where each of our businesses has approximately 1/3 of total sales. And EMEA and the Americas are our largest regions, followed by APAC with 16% of our overall sales.

Our end of June order book was at a record high and is approaching €2 billion. Year-on-year, this is up by 4.8% in comparable currencies, and is sequentially up over €100 million versus the first quarter of this year. The order book increased in Service, it increased in Port Solutions and was slightly down in Industrial Equipment.

And as in previous quarters, we confirm we have not had any significant order cancellations due to COVID-19. Our group adjusted EBITA increased to €65 million in the second quarter versus €57.5 million last year. And our EBITA profitability was 8.6%, another record, our fourth in a row in confirming our exciting trend of profitability improvement.

I'd like to express my strong thanks and my sincere appreciation to our employees all over the world for their dedication and hard work and to our customers and our business partners, our suppliers for the close collaboration we've had and we enjoyed together.

These together give us very good momentum and very strong confidence for the second half of this year. I'd like now to turn it over to Teo to take us through the individual business results. Thank you. Teo?

Teo Ottola

Thank you. Thank you, Rob. And as usual, let's start with the Service business. So Service order intake was €257 million. That is up 23% or actually 26% with comparable currencies.

Now of course, the second quarter of last year, second quarter of 2020, was heavily impacted by the COVID pandemic, as a result of which our orders actually increased in all of the regions and they also increased both in field service as well as parts business.

In these circumstances, it is maybe even more important than normally if we take a look at the sequential changes to understand where the demand is growing. We had growth sequentially in our order intake, even though not very much. And when we take a look at that by regions, we can note that regarding the EMEA, the order intake actually rose sequentially there and the order intake within service in EMEA has actually reached and exceeded pre-COVID levels. Whereas then in the Americas, the order intake sequentially slightly declined.

And in the Americas, we are, let's say, at pre-COVID level or slightly below, when we take a look at the business activity regarding service. Of course, also regarding Americas, the first quarter of '21 was very good. So this partially explains the sequential slight decline that we experienced in the second quarter.

When we then take a look at the agreement base. Agreement base was €283 million. There is a slight improvement in an year-on-year comparison. It's very much on the same level as in the first quarter of '21 so sequentially, not much change.

The customers continue to be quite cautious in making longer-term commitments in this volatile demand environments that we are living through. And as a result of that, the agreement-based growth is maybe a little bit more sluggish than what we have been used to.

Then when we take a look at the Service sales and the order book sales was actually €299 million. And as in the order intake as well, so we had growth in all of the regions. We also had growth both in field service and parts.

And here, we are also seeing a good growth sequentially despite some of the delivery challenges that Rob was already talking about. When we then take a look at the Service order book, €273 million at the end of the second quarter, 9% increase, and the sequential improvement or increase in the order book, which is approximately €20 million, actually coincides pretty well with the delivery delays that we have been experiencing through the supply chain challenges in the second quarter.

Then the profitability regarding Service. The adjusted EBITA was €50.3 million, that is a margin of 16.8%. So we are higher than a year ago in euros, but the margin declined slightly. And the decline in the margin is mainly due to two reasons. The first one of them is the weaker mix. So now the delivery challenges that we have been experiencing have been mostly been in product or, let's say, service offering that is material content rich. And that offering typically has a higher margin than the labor part.

And therefore, now the mix has been a little bit weaker from the margin point of view than in the situation a year ago or actually in the first quarter of '21. The other reason is then that the comparison period included temporary factors with an impact on our indirect personnel costs and now as a result of not having those ones like government subsidies or short workweek type of activities, our indirect salaries are slightly higher than what they were a year ago.

This obviously concerns also other BAs not only Service, but it is maybe more visible in the Service numbers. And then the gross margin declined in a year-on-year basis, and that is, of course, as a result of the mix and it actually declined in a sequential comparison as well due to the same reason.

Then moving on to the Industrial Equipment and Industrial Equipment order intake and sales. Order intake, €331 million, that is 40% higher than a year ago, a very high growth. Actually with -- when we take a look at the external orders with comparable currencies, we are taking a look at the growth of 48%. And as in the Service business, so also in the Industrial Equipment in an year-on-year comparison, orders increased basically across the offering.

So in standard cranes, process cranes and components of the regions, there was growth in the Americas and EMEA, but a decrease in Asia Pacific. And again, when we take a look at the situation sequentially, so there is significant growth also sequentially. The -- in a sequential comparison, the standard cranes did pretty well or actually very well. Process cranes did well. The component order intake declined slightly in a sequential comparison; however, it stayed on a very high level in historical perspective also during the second quarter of '21.

Then when we take a look at the sales, the sales number was €261 million. There is a slight decline year-on-year, 3.4%. However, when we take a look at the external sales with comparable currencies, we are looking at a small growth of 1.8%. Sales increased in the Component business, but declined in standard cranes and process cranes in a year-on-year comparison. And this obviously means and meant that the sales mix from the margin point of view was better than a year ago.

Sales decreased in the Americas, but increased in EMEA and APAC in a year-on-year comparison. And then when we take a look at the profitability, adjusted EBITA, €5.4 million, 2.1%. We have an improvement both in euros as well as margin in a year-on-year comparison despite very small sales change. The improvement in the margin is due to -- here also due to two reasons. The first one is the sales mix, a favorable one as a result of higher share of components than a year ago.

And then the continuous progress on the strategic initiatives and particularly the process crane business improvements that we have been able to do, and this is creating a positive delta in comparison to the second quarter of 2020.

And gross margin improved on a year-on-year basis as a result of both those factors mentioned. Order book, there is not actually a major difference in comparison to the situation a year ago. But obviously, as we can see from the end of last year, the order book has been increasing very nicely.

And then Port Solutions. Port Solutions orders received, €272 million. That is as much as 48% higher than a year ago. Orders increased in all the regions, again, Americas, EMEA and Asia Pacific. If we take a look at the business units within Ports, we can note that Lift Trucks did very well in an year-on-year comparison. Also Port Service did very well in a year-on-year comparison and maybe in the sequential comparison and the numbers sequentially are pretty much on the same level, but it's worth noting that the Lift Truck business continued to do very well also in the second quarter, and they did, let's say, very favorably also in the sequential comparison.

Port Solutions sales were €243 million. That is 17% higher than a year ago. Actually, the deliveries in the ports business did very well or we did very well regarding the deliveries in the Ports business towards the end of the second quarter.

Then the adjusted EBITA for Ports, €17.3 million, 7.1%. And there is an improvement here as well, both in euros as well as percentage. The improvement is due to, of course, higher sales, but also good project management execution. Mix was probably a little bit weaker than what it was a year ago. And as a result of that, gross margin also declined in a year-on-year basis.

The sequential decline in the EBITA margin from Q1 to Q2 is as a result of the, let's say, €5 million provision change that we made in the first quarter. So we actually had an extraordinary gain of -- in the amount of €5 million in the first quarter. So that explains the sequential decline in the EBITA margin from Q1 to Q2.

And then when we take a look at the order book, so €983 million, increase of 6% with comparable currencies in an year-on-year comparison. And then still a couple of comments on the cash flow and balance sheet. And we have typically, of course, been starting with the net working capital situation. Net working capital is higher than what it was at the end of Q1, exactly like Rob mentioned, €392 million. That is 12.4% of the rolling 12-month sales.

So the increase in the net working capital is primarily as a result of the inventories, which is then again primarily as a result of sales going up in a way so that higher sales, also project timing. And then, of course, also the delivery challenges that we have been having is in practice, meaning that much of the undelivered goods are still in the inventory increasing that value to some extent as well.

Again, in a historical perspective, we are still clearly -- or we are still quite okay in comparison to our midterm target to be below 15% in net working capital/rolling 12-month sales.

Free cash flow lower than a year ago, like Rob mentioned, this is basically -- all of it is coming from the net working capital changes. Net working capital change was very favorable in the first half of '20, now it was not. And this is obviously impacting the free cash flow.

Cumulatively, or let's say, on a rolling 12 months basis, free cash flow is still a very handsome number as a result of an extremely good end of 2020 from the cash flow point of view.

And then gearing and return on capital employed. Net debt, €624 million, like I already mentioned, almost exactly 50% gearing at the end of the second quarter. And then finally, before going into the Q&A, return on capital employed or an adjusted return on capital employed, 13.0% has been trending upwards as a result of the profitability improvement and also the capital employed has been trending down a little bit, helping, obviously, the return on capital employed development.

And now after these comments, I believe that we are ready to go to the Q&A.

Question-and-Answer Session

A - Kiira Froberg

Thank you, Teo. And before we actually start the Q&A, a kind reminder, due to the securities laws in the United States and some other jurisdictions, we won't be taking any merger-related questions. Let's now open the line for questions. Operator, please go ahead.

Operator

[Operator Instructions]. We will now take our first question.

Artem Tokarenko

I have a couple, please. My first question is about Service margins. Could you maybe give us some color about the EBIT breach for Q2 and maybe how we should think about the margin levels towards the year-end?

Teo Ottola

Yes. Well, if we take -- let's take a look at the Service, but also maybe let's start with the group level analysis. And we have been, of course, over the quarters, we have been discussing the temporary and permanent cost reduction and the amount of those.

So now when we take a look at the second quarter on a group level and compare that to the second quarter of 2020, so actually, the indirect salary change that is due to the temporary cost savings that we made in the second quarter of 2020 is about €10 million.

And we are expecting that, that €10 million will be a similar comparison topic in the third quarter as well. And then as we have been explaining also earlier, so when we take a look at the indirect salaries, we have been on a relatively stable path since the fourth quarter of '20. So fourth quarter of '20, first quarter of '21 and second quarter of '21 are, in a way, on par with each other -- or comparable with each other, whereas these temporary activity, short workweek, government subsidies were mostly impacting Q2 and Q3.

So this is maybe a building block for an EBITA breach for the whole group. This -- actually, this €10 million is divided to four different topics. So it's all of the three businesses and the unallocated group costs. So it's visible on all of those. So it doesn't make a significant difference to Service, for instance.

And at least, as important topic in Service Q2 EBITA breach is the mix. And as we have been saying, now the delivery challenges that we have been having. So in Service, those have mostly impacted material content-related offering, and this material content-related offering carries a higher margin than labor content.

And now that the mix has been weaker, gross margin has been declining, and as a result of that one, then the margin in the Service breach -- in the Service Q2 '21 is a little bit lower than what it was 1 year ago. So it's these 2 things: product mix and the indirect salaries coupled with a little bit other, let's say, other SG&A type of fixed costs.

Overall, on a group level, when we talk about the indirect personnel costs, so we can say that in the fixed costs, the other SG&A type of costs, so they are on the same level as they were a year ago. So there is no change in -- from that point of view, the change is mostly in the personnel costs.

Richard Smith

I'd add two more points. As Teo described, the second and third quarters had some temporary effects in them. Over the course of last year, we adjusted our cost base on a permanent basis to be appropriate with the demand levels in the market and that will become visible again in the fourth quarter when the periods become again comparable.

I think another important element to understand is nothing has fundamentally changed in our Service business logic or the Service business dynamics. Service is a very important growth engine for Konecranes.

In the second quarter, customers have been a bit sluggish on renewing orders or placing new orders based on the volatility in the market. But we see this as a temporary thing, and we expect to overcome the supply chain challenges over time as well.

So we're very committed to our ongoing profitability increase in Service and our ongoing sales increase in Service.

Artem Tokarenko

Okay. I guess just to double check that €10 million is this per quarter? And also in terms of the mix, thinking sequentially for H2 versus maybe Q2, shall we expect similar mix or worse?

Teo Ottola

I missed the first part of the question. So maybe later on, you can repeat that. But if I start with the mix, so the mix topic will normalize in a way, so that there is nothing -- like Rob mentioned, there is nothing structurally that would have changed in the Service business.

So the fact that we have a weaker mix now in the second quarter, so that thing will go away as things will normalize from the delivery capability point of view and, let's say, the material shortage situation gets to a more normal level.

Whether that will exactly happen in the third quarter or somewhat later is obviously a good question. And of course, if I knew, I would tell, but obviously, there is no way for us to know that for sure. But over time, we are not expecting any permanent mix change in the service business.

Then you had an additional question on the €10 million, would you mind reporting -- repeating that?

Artem Tokarenko

Yes. My question was whether that's still quarter or months?

Richard Smith

Yes, it's for the quarter...

Teo Ottola

Yes. It's for the quarter. It is €10 million for the second quarter, and we are expecting a similar delta in the third quarter because the temporary activities, short work weeks, furloughs and those kind of things that we did last year, so they were impacting both Q2 and Q3. So it will be €10 million for -- it was €10 million for Q2, and we are expecting it to be €10 million for Q3 in a year-on-year comparison.

And now it is important to remember that this is not a sequential thing because the Q1 of '21, we were basically on the same, in a way, parameter when it comes to the indirect salaries as we have been now. So it's only a year-on-year topic.

Artem Tokarenko

Understood. And my last question is about the demand environment in Services. If we look quarter-over-quarter, there has been only moderate improvement sequentially in terms of sales and orders. But I guess thinking about the exit run rate for the quarter, have you seen any sequential improvement throughout the quarter or not really?

Richard Smith

Well, let's go to that demand environment again. Teo pointed it out that it was clearly in the Industrial segment affected our Service business. In Europe, the demand environment has reached pre-COVID levels. In North America and in Asia Pacific outside of China, the demand environment remains behind pre-COVID levels. We think that's an important element to understand when we're looking at the industrial demand environment. What we should understand with the Service business and the sales, you know what customers have been a bit sluggish in making new order renewals and placing orders in this demand environment.

We expect that will ameliorate as well over time. And I would point out to you the service agreement base and the service orders and the service sales have been very resilient during this pandemic and demonstrate the importance and the robustness of our Service business and our overall Konacranes business.

Artem Tokarenko

Okay. But I guess just to follow up on this question, I mean throughout the quarter, how have you seen the dynamics in terms of the different months of the quarter?

Teo Ottola

There hasn't actually been a significant shift one way or the other within the second quarter. There has been, obviously, when we take a little bit, let's say, a longer period. So -- and I explained how the Q1 in the Americas was actually quite strong from the order intake point of view, Q2 was sequentially a little bit lower.

It's a good question why Q1 was very good regarding the Americas? Maybe there was pent-up demand from the 2020 as a result of COVID. That can be one of the sort of reasons. But apart from that one, there haven't been any major changes. And the development in the EMEA has been quite consistent and going in the right direction.

Operator

We will now take our next question.

Magnus Kruber

Magnus here with UBS. Just a couple of questions from me. And first a clarification from Artem's question on the margin breach in Service first. Did I read you correctly that the year-over-year headwinds were larger from mix than from the temporary costs?

Teo Ottola

Yes. I think you heard exactly what I said. So I said that the mix impact was at least as much as the fixed cost or the indirect salary topic, yes.

Magnus Kruber

Perfect. Perfect. That's great. And then related to the supply chain challenges, obviously, you had a €35 million headwind in the quarter. And -- but I think in Q1, you were at €25 million. How are they allocated this quarter in terms of proportions between Industrial Equipments and Industrial Service?

Richard Smith

So let's dive into that for a minute. We reported the €20 million to €25 million of delayed backlog or missed sales in the first quarter due to supply chain and logistics challenges, primarily material shortages and logistics challenges. An additional €35 million impact was in our second quarter, delayed backlog, an incremental €35 million of missed sales in the second quarter. So that's two elements. So if you want to break down now the €35 million in the second quarter, Teo described €20 million of delayed backlog in Service, and there was €15 million approximately in our Industrial Equipment business.

Magnus Kruber

Perfect. And then just finally, on the €25 million you had in Q1, were they delivered now in Q2? So the extra delta you had in Q2 was another €10 million buildup then? Is that how I should think about it?

Teo Ottola

Yes. The majority of that one obviously has been delivered. So I mean the €35 million is, of course, a different set of deliveries than €20 million to €25 million that we had at the end of Q1. So these are, in a way, different projects, but we are trying to describe the impact to the quarter. And of course, I am not 100% sure if there is something that hasn't really been delivered out of the €20 million to €25 million, but clearly, the majority of that obviously has been delivered.

Operator

We will now take our next question.

Antti Suttelin

This is Antti from Danske. I would be interested on the Industrial Equipment business because there, the margin remains persistently on a low level. Could you talk a little bit about that? How is the breakdown now, i.e., what proportion is components, how much is standard, how much is processed these days?

And how are these three segments within Industrial Equipment doing? Where is the problem? And how are you addressing that problem? And then finally, where do you expect to get this margin for Industrial Equipment, when everything has been taken care of finally?

Richard Smith

Why don't you do the first half, and I'll do the second half, Teo?

Teo Ottola

Okay. Okay. So when we take a look at the structure of the business. So now we were referring to the mix having been a little bit better than what it was, for example, 1 year ago, which means that the share of components of the output of the sales is higher than what it was 1 year ago.

It doesn't change the big picture of the overall business split, so which is that about half of the Industrial Equipment business is standard cranes and then the share of components is somewhere typically between 25% and 30%. And then, of course, the process cranes is the remainder of that one. So the standard cranes continue to be, by far, the biggest part of it.

But the margin differences due to the product structures are big enough to have an impact even if you do not have a significant change in the headline numbers. The -- like I said, the share of components now in the second quarter was higher of the sales than what it was a year ago, and it has a positive impact.

Then when -- going a little bit to your basic question, what is the challenge in a way? So here, of course, we need to remember that within the industrial equipment business, we have the production machinery a little bit different than, for example, in our Port Solutions business. So it means that we have more supply capacity to ourselves, manufacturing capacity to ourselves as a result of which the Industrial Equipment business is very sensitive to volume.

And now when we take a look at the numbers, for example, in the second quarter, and we compare the numbers to the situation a year ago, so in the second quarter of 2020, the sales was pretty much the same. The external sales rose a little bit. The reported sales actually went down in a year-on-year comparison.

And this, of course, puts a little bit pressure to the margin as well because the fixed cost infrastructure that we have requires volume for it to be covered so that the operating leverage can be decent. And of course, the -- before I let Rob continue, so the obviously, the pain point has been and continues to be the process crane business. From the profitability point of view, we have been doing progress, but there is a long way still ahead of us to improve the margin of that business to the level where we want it to be.

Richard Smith

So let's pick up on the process crane business, and then let's talk about our expected profitability in Industrial Equipment. We're making good progress on the process -- we continue to make good progress on the process crane business. We described that we made a positive result in the fourth quarter of last year, and we expect to make a positive full year result next year in the process crane business.

The increased margin thresholds are in place. The improved project management is in place, the supply chain, procurement, and lean activities are making a good effect. And there's a very good year-on-year impact visible in the process crane business. So that continues on a good way, and we expect full year profitability in 2022.

Our overall expectations remain as we've described them for our Industrial Equipment business, where we expect high single-digit margins in our Industrial Equipment business over the medium term.

Operator

We will now take our next question.

Aurelio Tejedor

It's Aurelio, Morgan Stanley. I've got a couple of questions, please. The first one is on pricing and especially raw materials. So what are you seeing in terms of steel prices? And what are your hedging policies and your pricing policies, especially, let's say, as we've seen steel prices and copper prices go up strongly in the first half?

Richard Smith

I described that we are working in an inflationary environment. Teo can -- you can tackle the first half of that, and I'll talk a little bit about that as well.

Teo Ottola

Yes. When we take a look at the -- what we are seeing in the marketplace, so it is obviously the same as everybody is seeing so that the raw material prices, steel prices as well as others have been going up, and it is clearly visible.

However, when we take a look at our business, so there, we have a little bit of a structural benefit from the point of view that actually these inflationary impact, so they come to us a little bit later due to the thing that the supply chains are typically very long.

We do buy mostly prefabricated components and products, which means that there is -- there are a couple of suppliers there in between and the time lag from the raw material price increase to the -- when we see it. So that time lag is quite long. This helps in a way that we have time to react when it comes to the customer prices.

And now, for example, if we take a look at the second quarter. So from the net of inflation pricing point of view, we have not really gained, but we have not really lost either. So that the net of inflation pricing is more or less unchanged when you compare it to the situation a year ago.

Then regarding the hedging practices, a bit more technical part of that. So when we take a look at really big projects where the delivery times are long and where the procured steel, for example, is very, very big part of the total, we typically hedge it at the time when we sell it. So we hedge it or we agree the price with the steel supplier so that we have a fixed price.

Or then alternatively, we have a price escalation clause in the customer agreement, which means that we would be covered. When we talk about the smaller projects, so there, we handle it with the sales configurator where we actually update the raw material prices along the way as they develop, and then we will be able to manage the customer pricing with the help of that one.

There are obviously in inflatory environments, always risky points, and they are the kind of projects where your delivery time is very far in the future, and you cannot get a price escalation clause into the customer contract.

And these are obviously something that we are managing very carefully in these kind of inflatory environment. Maybe as a final comment regarding the inflation. So now that we have been seeing the inflation in our own input costs, so we are actually expecting that we will be seeing higher inflation in the second half of this year, which is quite natural, I think.

But we are also expecting that we will be able to compensate that with price increases and then also with our own efficiency improvement activities that we are doing internally.

Richard Smith

Maybe just to expand on that, as Teo said, we're working very hard on the inflation on both ends of our business. In terms of our procurement and supply chain teams, are working within the overall material spend to balance any increases with productivity in other parts. And as a part of our business process, there's very close and very timely communication on the supply side and on our commercial side.

So current prices are reflected in our current quotations. And as Teo said, we passed the pricing inflation in those sales quotations into the market as is appropriate.

Aurelio Tejedor

Okay. That's very helpful. And my second question is around Services. And especially if you look at the development of Services within Port Solutions, it was quite good also sequentially. So my question is, is there anything fundamentally different between the Industrial Services business and the Port Service business? I would be curious to know if you are seeing more kind of site access impact in the industrial side done on the Port side?

Richard Smith

I think that you pretty much answered the question in your question. We described a different demand environment in the industrial segment than we described in the Port segment. The Port segment all-time high container throughput index, real strong operations in all the port container terminals worldwide, quite a significant demand environment there.

And the long-term prospects are good there. In the industrial sector, it's a bit mixed, where we've reached pre-COVID levels in Europe. We've not yet reached pre-COVID levels in North America and Asia outside of China, primarily Southeast Asia, where the COVID impact is very strong. So as you rightly say, there are some access bottlenecks, et cetera. The answer is as you described it.

Teo Ottola

Yes. And I think that maybe if we touch briefly on the structural differences, and I don't know what this is worth regarding your question, but let's answer anyway. So that in the Port Service business, so we are much more linked to our own equipment base than in the Industrial Service where we are maintaining all mix of cranes than the majority -- actually all mix or other mix of cranes than our own ones.

In Port Services, we are doing much more -- let's say, we are much more focused on following our own equipment fleet. The other difference that we have is that the material content, so the share of spare parts, for example, is higher in the Port Service than what it is in the Industrial Service for the -- partially for the same reason.

These may not be explaining in a way any of your underlying question, but there are structural differences that we have between these two service businesses.

Aurelio Tejedor

Okay. Yes, that's very helpful. If I may squeeze 1 last question in very brief one. Have you seen any impact from restocking made in your components business or nothing really to highlight there?

Richard Smith

No, that's a good question as well, and thank you for that. Our first 2 quarters this year, there was very strong in the Ports business as well as in the Industrial business, real good demand against our short-cycle time products. And in the Industrial business, the short-cycle time products are our Components business.

And we think that the first 2 quarters might have had some pent-up demand elements in it. So overall, we don't expect the demand environment to sequentially improve on a go-forward basis at this point in time.

Operator

We will now take our next question from Daniela Costa from Goldman Sachs.

Daniela Costa

I would like to ask three things, if possible. So the first one regarding margin, and you had a very strong order intake, particularly on the Industrial Equipment side. What are you seeing in terms of like margins in the order book?

Do you already see like better indications? Has the volumes are improving there? The second question regarding free cash flow and thinking about how the rest of the recovery will pan out. The first half was weaker because of the working capital situation. Do you see sort of like a sequential improvement there? Or do you still need to invest into working capital for the recovery?

And then a longer-term question. Just interested in your views on like the expansion on the whole wind offshore industry and the support that Ports will need to give to that? Do you see much of an opportunity in there for you in terms of like course rental fees? Or that is still way far out?

Richard Smith

Do you want to touch the first two, Teo?

Teo Ottola

Yes. Well, if we take a look at the margin discussion first. And the margin in the order book, I guess, was the core of the question. And the margin in the order book when we compare it to the situation that we had -- have had in the previous quarters. So there is not a significant like-for-like difference.

And the reason for this one is that, as mentioned earlier, so the net of inflation pricing impact that we have been having in the second quarter, so that actually is similarly visible in the sales so that we have not really -- well, in the sales, we haven't really seen a major difference, but we are not seeing a major difference in the order book either.

And as I said earlier, we believe that we will be able to compensate for the exceeding or accelerating inflation, if you allow, with price increases and our own activities, which also means that part of that future deliveries, of course, already is in the order book.

No significant like-for-like change. Then when we take a look at specific product areas like process cranes, so there, obviously, we have been talking about the turnaround project that we have had and we have talked about the progress that we have done so far on the sales level.

And there, obviously, we are expecting that to continue. And there, one can see a difference in the order book margins as well. But this is when we take a look at the whole group, so this obviously is a relatively small part of the total group order book.

Then your question regarding free cash flow. So the net working capital to 12 months rolling sales where we are now at 12.4% or so, so that is actually still slightly on the better side of our recent year's average, which has maybe been somewhere between 13% and 14%.

Based on that one, you could then say that maybe it can deteriorate further, but not necessarily significantly if we were to go to a more normal situation in the coming quarters.

So historically, we are okay -- on okay levels at this point of time, which means that there can be a small deterioration going forward, provided that the sales will grow and the other topics that are usually impacting net working capital behave as normal, so to say.

Richard Smith

And picking up on your question, tangentially on sustainability and the growth in the wind offshore market, Konecranes has good product in that market, and we do expect to benefit from the long-term growth in the wind offshore industry.

Operator

We will now take our next question from Antti Kansanen from SEB.

Antti Kansanen

Antti from SEB. I have two. First is a follow-up on the input cost inflation question. So how are you seeing the competitive pricing environment and pricing discipline within your industries? Are your competitors as prudent as you are, whether in terms of pricing to the future steel price increases and so forth? And also, did I understand correctly that you kind of need additional price hikes and operational improvements to maintain kind of a neutral impact going forward?

Richard Smith

Right. Let's talk about the first one. The -- we monitor very carefully in our pipeline orders won and bids won and bids lost, and there continues to be both of those, bids won and bids lost that do include our pricing into the market. And so I'd like to speak to our practice, and I don't want to talk about other practices. So our practice is, as I described, to work to manage the inflation on the procurement and supply chain side as well as in the real-time communication of material costs into our pricing quotations. And so we're doing that, and we're passing the pricing as appropriate in a systematic fashion into the market.

Antti Kansanen

Okay. And regarding...

Richard Smith

Maybe you had the second question. Hit me with the second question again, please, Antti.

Antti Kansanen

Yes. The second part of the question was regarding kind of the price hike that you are doing and also the operational improvements. Would that kind of lead to neutral impact or kind of a positive net impact going forward?

Richard Smith

No. Neither Teo or I talked about price hikes, Antti. We talked about appropriate pricing into the market on an inflationary basis and on an ongoing business basis. And continuous -- so continuous monitoring on the commercial side of appropriate pricing and inflationary mechanisms as part of our business practice and continuous improvement on the operational and supply chain is very much a part of our strategic initiatives as well.

So that's ongoing business, that's the ongoing practice and our commitment. As we described, in the earnings release this morning, was that we expect our sales to be higher this year than they were last year. We expect to increase our profitability this year than last year. And four quarters in a row of profitability increase is a very exciting trend, and we are working very hard to keep that going.

Antti Kansanen

All right. That's clear. And then also on kind of the one-off costs that you have for the quarter, which were kind of roughly €10 million on the transaction and integration cost. So could you open up that a little bit what that kind of includes? And how should we think about the second half or the one-off expenses?

Teo Ottola

We have actually now in this report also we have given an update on the merger costs, so to say. So basically transaction costs that are needed to make the merger happen. And in the prospectus that number was €50 million, and that is of course, a combined number so it's the -- for both parties. Now we have updated that number to €70 million.

And this change, obviously, is mostly in relation to the prolongation of the period and the -- or let's say, competition authority dealings as in there. Now the transaction and integration costs, what we are describing in the adjustment, so it includes this part what I just now mentioned and it also includes, to some extent, integration planning costs that are not in a way necessary to get the deal done, but will help us in doing the integration.

And -- but this is a clearly smaller part of the whole. So much, much smaller than the actual transaction costs that are needed this €70 million for the combination of the parties to get this done.

And now as you -- I guess, as you read from the report, so the vast majority of our adjustments that we have now, for example, in the second quarter is this transaction and integration planning costs. And the restructuring costs are this time actually quite small.

Operator

We will now take our next question.

Sebastian Growe

It's Sebastian from Commerzbank. Quickly and going back to the demand side. I think you mentioned the restocking and prebuying impact and the more short-cycle part at Industrial Equipment. I would be more interested in Port Solutions after we have seen pretty strong order intake quarters in that segment.

So eventually also certain prebuying element in the very segment? Or would that go way too far? Or put differently, can you talk about the order funnels and be what you're currently seeing? And then the other question I would have is also more on Port Solutions. As you have walked us through the measures or process cranes, my question would rather be then for Port Solutions. How should we think about the project management excellence initiative that you're also referring to in the report that you also addressed in the call, but where do you simply stand on that journey in bringing this one to 100% level? That would be my two questions.

Richard Smith

I appreciate those questions. Thank you very much. So the prebuying we talked about are actually more of a pent-up demand, was primarily around components in the Industrial segment.

There is -- the Ports segment and the demand outlook there is very, very healthy in the context of the global container throughput index and it's continued to climb in the second quarter. It's at an all-time high now. And the outlook in that industry remains very good.

The pipeline -- as you requested, the pipeline is very healthy. Trying to second guess the exact timing of customers placing order decisions is something that we don't do. And therefore, by making specific projections on the order intake over -- on a quarterly basis, we don't do.

But I confirm. We've got a very good pipeline in Port Solutions. It doesn't -- you asked if there's prebuying there? No. I don't see prebuying in the Port Solutions business. Our customers are operating on 5 and even longer year large capital equipment cycles.

And that business remains with a very healthy pipeline, and we expect good sales coming from Port Solutions in the periods of time in the future based on that demand environment that we're describing.

You asked about project management in Port Solutions. So obviously, that's also a continuous journey, and we want to get better and better at each period. On a year-on-year basis, we already see a marked improvement in project management. And we see that in the financial performance in our Port Solutions business.

So that's on a good way. And we've taken good steps. We've taken some professional project management activities systematically in our business. That's being led by the leader of our Port Solution to business personally. Going on a very good way. And we still have a good ways ahead of us to go.

Kiira Froberg

We are running out of time, unfortunately. So it's time to conclude our today's conference. Thank you all for the active participation and questions. And as a reminder, Konecranes will issue Q3 report on October 28, and then we will host a service update to the investors and analysts on August 30, together with our Service Head, Fabio Fiorino. And you can find more information on that event on our investor website. I would like to wish you all a great day and summer. Thank you.

Richard Smith

Thanks very much.

Teo Ottola

Thank you very much.