2018-01-25 Financial Statement Bulletin of KONE Corporation for January-December 2017 (2)

KONE Corporation, stock exchange release, January 25, 2018 at 12.30 p.m. EET

Financial Statement Bulletin of KONE Corporation for January-December 2017

January-December 2017: Orders back to growth, EBIT margin declined

October-December 2017

In October-December 2017, orders received grew by 0.4% to EUR 1,846 (10-12/2016: 1,839) million. At comparable exchange rates, orders grew by 5.3%.
Net sales grew by 2.5% to EUR 2,657 (2,593) million. At comparable exchange rates, the growth was 6.8%.
Operating income (EBIT) was EUR 365.7 (392.2) million or 13.8% (15.1%) of net sales. The adjusted EBIT was EUR 375.6 million or 14.1% of net sales.*
Cash flow from operations (before financing items and taxes) was EUR 335.0 (409.8) million.

January-December 2017

In January-December 2017, orders received declined by 0.9% to EUR 7,554 (1-12/2016: 7,621) million. At comparable exchange rates, orders grew by 1.7%. The order book stood at EUR 8,240 million at the end of December 2017 (December 31, 2016: 8,592).
Net sales grew by 1.8% to EUR 8,942 (8,784) million. At comparable exchange rates the growth was 4.2%.
Operating income (EBIT) was EUR 1,217 (1,293) million or 13.6% (14.7%) of net sales. The adjusted EBIT was EUR 1,230 million or 13.8% of net sales.*
Cash flow from operations (before financing items and taxes) was EUR 1,263 (1,509) million.
The Board proposes a dividend of EUR 1.65 per class B share for the year 2017.

Business outlook for 2018

In 2018, KONE's sales is estimated to grow at around a similar rate as in 2017 at comparable exchange rates. The adjusted EBIT margin is expected to continue to decline in 2018 as witnessed in 2017. However, the margin pressure is expected to start to ease towards the end of 2018 as a result of pricing and productivity actions that have been taken.

Key figures		10-12/ 2017	10-12/ 2016	Change	1-12/ 2017	1-12/ 2016	Change
Orders received	MEUR	1,845.8	1,839.2	0.4%	7,554.0	7,621.0	-0.9%
Order book	MEUR	8,240.2	8,591.9	-4.1%	8,240.2	8,591.9	-4.1%
Sales	MEUR	2,656.9	2,593.2	2.5%	8,942.4	8,784.3	1.8%
Operating income (EBIT)	MEUR	365.7	392.2	-6.8%	1,217.1	1,293.3	-5.9%
Operating income margin (EBIT margin)	%	13.8	15.1		13.6	14.7
Adjusted EBIT*	MEUR	375.6	392.2	-4.2%	1,230.3	1,293.3	-4.9%
Adjusted EBIT margin	%	14.1	15.1		13.8	14.7
Income before tax	MEUR	374.8	389.3	-3.7%	1,275.2	1,330.3	-4.1%
Net income	MEUR	281.8	298.1	-5.5%	975.1	1,022.6	-4.6%
Basic earnings per share	EUR	0.55	0.58	-6.1%	1.89	2.00	-5.6%
Cash flow from operations (before financing items and taxes)	MEUR	335.0	409.8		1,263.3	1,509.5
Interest-bearing net debt	MEUR	-1,690.2	-1,687.6		-1,690.2	-1,687.6
Equity ratio	%	49.0	46.8		49.0	46.8
Return on equity	%	34.2	38.1		34.2	38.1
Net working capital (including financing items and taxes)	MEUR	-875.6	-1,054.8		-875.6	-1,054.8
Gearing	%	-58.1	-60.4		-58.1	-60.4

* In September 2017, KONE introduced a new alternative performance measure, adjusted EBIT, to enhance comparability of the business performance between reporting periods during the Accelerate program. Restructuring costs related to the Accelerate program are excluded from the calculation of the adjusted EBIT.

Henrik Ehrnrooth, President and CEO:

"We ended the year 2017 with positive development on many fronts. Our orders received grew in all regions during the fourth quarter. I was especially pleased that the margin of orders received stabilized after being under pressure for several consecutive quarters. In Asia-Pacific, our orders received grew with positive contribution from pricing actions in China. We were also able to benefit from the opportunities in the growing markets of EMEA and North America with continued good growth in orders received. The final quarter was strong also in terms of sales. Service sales saw healthy growth of 6.5% at comparable exchange rates, and strong deliveries at the end of the year lifted the new equipment sales growth to 7.1%. However, higher raw material prices, price pressure we have seen earlier in our Chinese new equipment orders and increased R&D and IT spend continued to burden our operating income in the fourth quarter. The full year 2017 operating income declined, and our adjusted EBIT margin was 13.8% against 14.7% in 2016. We are taking determined actions to counter the headwinds and we can already see positive results from these.

The execution of our Winning with Customers strategy has started well during 2017. We have good momentum in rolling out our new services which were launched in 2017. Looking ahead to 2018, we plan to expand these groundbreaking services and speed up their roll-out globally. In new equipment, we have also introduced several new solutions for smart buildings and will continue to develop our offering further. The customer feedback on our latest solutions and services has been encouraging and demonstrates that we are clearly able to add value for our customers in new ways. I am confident that we are on the right path to further strengthen our competitiveness with improved differentiation. I would like to thank all of our employees for their commitment and actions to bring our new strategy alive.

In 2018, we expect the market to continue to provide growth opportunities for KONE. We expect the new equipment market in China to decline slightly or to be stable in terms of units ordered, with competition remaining intense. The new equipment markets outside China and the service markets are expected to continue to grow. The good momentum we have in services and the solid order book in new equipment are expected to support healthy sales growth in 2018. The margin pressure which we saw in our orders received earlier and the higher raw material prices are expected to continue to burden our profitability in 2018. However, we expect the margin pressure to start to ease towards the end of the year.

I'm looking ahead with confidence and excitement. The rapidly changing operating environment provides us opportunities to add value to our customers in new ways. I believe we are in a strong position to tap on these opportunities to continue developing towards our targets."

Operating environment in October-December 2017

The global new equipment market grew slightly in units ordered compared to the fourth quarter of 2016. In Asia-Pacific, the new equipment market was rather stable with the Chinese market stable both in units and in monetary value. In China, the residential segment was relatively stable despite the housing restriction measures impacting the market across city tiers. The commercial segment saw a slight decline and the infrastructure segment continued to grow driven by government investments. In the rest of Asia-Pacific, the new equipment markets showed positive signs after a continued period of decline. The Indian market started to recover in the fourth quarter after being impacted by the implementation of several reforms during the previous quarters. In the EMEA region, the new equipment market in Central and North Europe was rather stable on a high level. In South Europe, the market continued to see slight growth from a low level. In the Middle East, the market grew slightly despite uncertainty in the region. In North America, the new equipment market continued to grow slightly driven by the United States.

Global service markets continued to develop positively. Both the maintenance and the modernization markets continued to see growth across the regions, with the strongest rate of growth seen in China and a more moderate development in Europe and North America.

Pricing trends remained varied during the fourth quarter. In China, competition remained intense in new equipment, but pricing stabilized. In the EMEA region, the pricing environment continued to be characterized by intense competition in maintenance, particularly in South Europe. In North America, the pricing environment remained favorable in new equipment and modernization, while the maintenance market continued to be competitive.

Operating environment in January-December 2017

In 2017, the global new equipment market was relatively stable in units ordered. In Asia-Pacific, the new equipment market was rather stable with the large Chinese market stable in units and slightly down in monetary value. In China, the residential segment was relatively stable despite the housing restriction measures impacting the market across city tiers. The commercial segment saw a slight decline and the infrastructure segment continued to grow driven by government investments. In the rest of Asia-Pacific, the new equipment markets declined slightly. The Indian market was impacted by the implementation of several reforms. However, the market stabilized towards the end of the year. The new equipment
market in the EMEA region saw slight growth, with relatively stable development in Central and North Europe and slight growth in South Europe and Middle East. In North America, the new equipment market continued to grow slightly driven by the United States.

In 2017, the pricing trends remained varied. In China, competition was intense in the new equipment market, but prices started to stabilize during the year. Higher raw material costs burdened the industry's profitability. In the EMEA region, the pricing environment continued to be characterized by intense competition in maintenance, particularly in South Europe. In North America, the pricing environment remained favorable in new equipment and modernization, while the maintenance market continued to be competitive.

Market outlook 2018

In new equipment, the market in China is expected to decline slightly or to be stable in units ordered and competition to remain intense. In the rest of Asia-Pacific, the market is expected to grow. The markets in both North America as well as in the Europe, Middle East and Africa region are expected to grow slightly.

Maintenance markets are expected to see the strongest growth rate in Asia-Pacific, and to grow slightly in other regions.

The modernization market is expected to grow slightly in the Europe, Middle East and Africa region and in North America, and to develop strongly in Asia-Pacific.

Business outlook 2018

The outlook is based on KONE's maintenance base and order book as well as the market outlook. The main factors continuing to pressure the adjusted EBIT margin in 2018 are the decrease in the margin of orders received witnessed in 2017, in China in particular, and the increased raw material prices. The margin pressure is expected to start to ease towards the end of 2018 as a result of pricing actions taken and general productivity improvements as well as the first savings from the Accelerate program. New equipment business outside China and the service business are expected to continue to develop positively. Foreign exchange rates are estimated to have an approximately EUR 40 million negative impact on KONE's EBIT in 2018 assuming that translation exchange rates would remain at the end of December 2017 level.

As a result of the adoption of new IFRS 15 accounting principles effective from January 1, 2018, KONE's sales recognition will change in 2018. The IFRS 15 restated figures for 2017 will be published in March 2018. Given this change, KONE will provide a more precise business outlook for 2018 in connection to the Q1 2018 report that will be published on April 25, 2018. The change in accounting principles is not expected to have a material impact on annual sales and operating income.

The Board's proposal for the distribution of profit

The parent company's non-restricted equity on December 31, 2017 was EUR 2,195,493,551.80 of which the net profit for the financial year is EUR 1,054,610,239.57.

The Board of Directors proposes to the Annual General Meeting that a dividend of EUR 1.6475 be paid on the outstanding 76,208,712 class A shares and EUR 1.65 on the outstanding 438,568,899 class B shares, resulting in a total amount of proposed dividends of EUR 849,192,536.37.

The Board of Directors further proposes that the remaining non-restricted equity, EUR 1,346,301,015.43 be retained and carried forward.

The Board proposes that the dividends be payable on March 7, 2018. All the shares existing on the dividend record date are entitled to dividend for the year 2017 except for the own shares held by the parent company.

Press and analyst meetings

A meeting for the press, conducted in Finnish, will be held on Thursday, January 25, 2018 at 2:15 p.m. EET.

A meeting for analysts, conducted in English, will begin at 3:45 p.m. EET and will be available as a live webcast on www.kone.com. An on-demand version of the webcast will be available on www.kone.com later the same day. The meeting can also be joined via a telephone conference.

US callers: +1 323-794-2551
UK callers: +44 (0)330 336 9105
Finnish callers: +358 (0)9 7479 0361
Participant code: KONE

Both meetings will take place in KONE Building, located at Keilasatama 3, Espoo, Finland.

For further information, please contact:
Sanna Kaje, Vice President, Investor Relations, tel. +358 204 75 4705

Sender:

KONE Corporation

Henrik Ehrnrooth
President and CEO

Ilkka Hara
CFO

About KONE

At KONE, our mission is to improve the flow of urban life. As a global leader in the elevator and escalator industry, KONE provides elevators, escalators and automatic building doors, as well as solutions for maintenance and modernization to add value to buildings throughout their life cycle. Through more effective People Flow®, we make people's journeys safe, convenient and reliable, in taller, smarter buildings. In 2017, KONE had annual net sales of EUR 8.9 billion, and at the end of the year over 55,000 employees. KONE class B shares are listed on the Nasdaq Helsinki Ltd. in Finland.

www.kone.com

KONE Financial Statement Bulletin 2017