• While demand for maintenance services improved during 2014, the market environment remained difficult in the new equipment business, particularly within process industries and, geographically, in most of the emerging markets.
• The three strategic initiatives – Industrial Internet, Segment-based Offering and oneKONECRANES – were at the core of Konecranes’ development work in 2014.
• The BOXHUNTER RTG crane, launched in April, was the first product to be launched under the Segment-based Offering initiative. The CXT UNO overhead crane was launched in September.
• At the end of 2014, the equipment base covered by Konecranes’ remote monitoring services had grown to 8,000 units. We enhanced the user experience with a user-friendly, harmonized communication interface.
“We are, of course, always dependent on general economic and geopolitical development, but I am confident that those matters that we can affect are developing in the right direction.”
2014 was characterized by uneven economic development across the world. We benefited from the strong development in North America, owing to our good market position in the region. This was unfortunately not enough to compensate the weakness in several other parts of the world, and consequently we targeted profit improvement despite slightly lower overall volumes. Price competition remained intense, but we managed to retain our market position through active sales management and new product launches. Price increases were possible in certain value-adding products and services. We can be reasonably satisfied with the fact that our operating profit before restructuring costs improved in spite of net sales dropping by EUR 88 million, to EUR 2,011 million. The operating margin, before restructuring costs, improved from 5.5 percent in 2013 to 5.9 percent, which is a good achievement in a volume decline, though still below our target of 10 percent.
Our Service business continued on their steady path, and its operating margin climbed to 10.0 percent (2013: 9.1 percent). Systematic restructuring of non-performing units, introduction of new services, and focus on sales management were the main contributors to this result, marking the third consecutive year of operating margin improvement. Weak topline growth was an issue, but the promising order intake in the second half of the year, combined with strong contract base development, bodes well for growth and profitability prospects in 2015.
While the Equipment business was able to lower costs and improve project execution to mitigate the effects of the lower volume, we obviously cannot be satisfied with the 3.8 percent operating margin excluding restructuring costs. There were, however, big performance differences between the different product lines and geographical market areas. I want to highlight the excellent performance of our lift truck business that posted good growth and strong results. The new management of the Equipment business launched a comprehensive turnaround plan in the second half of 2014, which will simplify our operational model and reduce our cost base by a further EUR 30 million by the end of 2016’s first quarter.
Cash flow was strong, which helped to lower our gearing to 33.3 percent and improve return on capital employed to 17.0 percent from 11.6 percent the year before. Earnings per share grew to EUR 1.28 from EUR 0.85 in 2013.
There are many uncertainties in the world economy. However, even in low-growth environments there are interesting megatrends that create opportunities.
Digitalization has the potential to radically change how the world’s industries operate. Smart connected machines enable increased safety, completely new business models, and sometimes even disruptive asset productivity leaps. We intend to be in the forefront of this development and have therefore defined the Industrial Internet as one of our three key strategic initiatives. We have 8,000 machines already connected online, and that’s just the beginning.
Baby boomers are retiring, and the shrinking workforce in industrialized countries will necessitate more productive ways of working, increasing the demand for technology that drives up productivity, as well as outsourced professional services. At the same time, scarcity of resources will create major opportunities as old lifting equipment is replaced with safer and more environmentally efficient modern solutions.
Our second strategic initiative, Segment-based Offering, reflects the fact that customers’ needs for advanced and standard solutions does not follow the division between established and emerging markets. The new product family for standard customer needs will be relevant throughout the world, as is the case with our products that satisfy those customers with advanced needs. 2014 saw the launch of the first products in the standard segment: the BOXHUNTER container crane, UNO standard industrial crane, UNITON heavy-duty industrial crane, and Morris S5 wire rope hoist.
Our third strategic initiative, oneKONECRANES, sees us streamlining our processes and modernizing our information systems to improve customer service and productivity. As a result, our sales funnel management is now globally implemented, covering almost all of our business. Our new ERP for finance and material handling now covers about one third of our sales and the new systems for field service management are implemented or in the process in six countries, with approximately a fifth of our global business covered.
I am cautiously optimistic about 2015. We started the year with an order backlog that was 9.6 percent higher than a year ago. The weakening euro is increasing the competitiveness of our European manufacturing units, our newly launched products are providing growth opportunities, and cost efficiency programs are proceeding. We are, of course, always dependent on general economic and geopolitical development, but I am confident that those matters that we can affect are developing in the right direction.
A sincere thank you to our shareholders, customers, partners, and, most importantly, to all our employees for their dedication and hard work.
President and CEO
“I give credit to our decision at the turn of the decade to build a company which can act with a high degree of agility in all situations. Today that decision pays dividends.”
In my letter one year ago I lamented the difficult world economy and the hard fight our company was facing in order to win contracts in a world unwilling to invest. I also pointed out some pockets of good progress, in particular the American market and our operations there.
Now, one year later, the same applies.
I went on to describe our strong internal actions, intended to position ourselves for a better economy in the future: our R&D efforts, our systems development and our venture into the Industrial Internet.
Once more, this year I am compelled to repeat myself on most of my previous points.
The world economy has not improved. On the contrary, we have seen a development to the worse. The Arabic spring with its uprisings, war in Syria and the actions related to ISIS have sent profound shockwaves through the whole world.
The Russian seizure of Crimea and the war that followed in Ukraine’s Donbass region have an impact worldwide also, particularly in the EU and the US.
Sanctions against Russia in trade, in the financial sector, and in technology have had profound effects not only in Russia but also elsewhere.
The big drop in oil prices, a consequence of both low demand and the arrival of a new actor in that market, the American shale gas, have further wounded the Russian economy.
To save space, I will not indulge here in the state of the European economy and all its problems. I trust that my educated reader is well aware of how things are here.
It is obvious that our customers have become very cautious. They carefully examine every CAPEX project, and they postpone all orders, save for those that are absolutely vital for their survival.
Against this extreme backdrop, our company has nevertheless performed well.
Not only have we maintained our topline sales, we have also been able to defend our market shares and improve our margins and profitability.
Our balance sheet has remained strong. Our return on capital has improved, our net debt is low and our dividend capacity is intact.
Our Equipment business has gained, through a number of painful but necessary adjustments, an increasingly competitive edge. As is usual in activities like ours, with long lead times between order and shipment, we have not seen the full profit impact yet. Orders are already improving, and we started 2015 with a strong and growing order backlog.
In our Service business, results come through much faster. Through the year, we have seen stronger margins, and during Q4 this business already posted impressive margins. Profitable work for hire is a large part of our service activity, yielding sustainable and good customer relationships. Our parts sales is increasing, but companies whose entire service sales comprises of parts naturally post even higher margins.
We are understandably proud of our previous strategic choices: our R&D investments, our decision to invest in systems improvements in a down market, and the fact that we positioned ourselves at the forefront in Industrial Internet applications.
Most of all, I give credit to our decision at the turn of the decade to build a company which can act with a high degree of agility in all situations. Today that decision pays dividends.
In the midst of all the doom and gloom, however, we do see a number of positive elements.
The factory in Zaporizhia, Ukraine, has been able to continue production. When the war broke out, we reduced the amount of orders to that factory and increased production in other locations. However, although the situation in Eastern Ukraine remains highly uncertain – the war appears to be escalating – the factory has been able to reach semi-normal activity levels, which in today’s situation is an outstanding achievement.
I am writing this letter in late January, 2015. The most recent news carries messages on ECB, the European Central Bank, moving into massive quantitative easing, similar to the US Fed’s actions earlier. I hope the consequences will be a wave of new confidence in the EU economy, a confidence that will hopefully translate into increasing investments and growth.
The euro has also weakened substantially as of late. This movement will not affect our profitability until later this year (our future cash flows are hedged for surety reasons), but we are already better equipped to meet non-European competition.
Let me also comment on our internal development. I can confirm my forward-looking statements from last year’s letter.
Our new product range of competitively priced mid-market products is launching and orders are coming in.
Our new administrative systems have been deployed in a majority of our units, and our people are enthusiastic about these new tools, which enhance our efficiency and management precision tremendously.
We continue spearheading the march into the era of Industrial Internet. Perhaps the markets do not yet fully appreciate the potential of this technology, but few companies dare to ignore the future, and most of our customers specify internet capabilities in their new equipment orders.
Dear fellow shareholders, we have put a turbulent year behind us. No one can promise an end to the turbulence. However, your Board and management remain as determined as ever to steer our company successfully through the storm. We have a winning concept, capable management and superb people.
I want to thank all of our employees for their diligent work throughout a difficult year. Together we have forged a better and stronger company.
Finally, following an old tradition, I would like to thank our loyal shareholders, and extend a warm welcome to all the new members of our ownership.
Chairman of the Board