2018-07-19 Half-year Financial Report of KONE Corporation for January-June 2018 (2)

KONE Corporation, stock exchange release, July 19, 2018 at 12.30 p.m. EEST

Half-year Financial Report of KONE Corporation for January-June 2018

Good growth in all regions, EBIT margin continued to be burdened

April-June 2018

Orders received grew by 3.0% to EUR 2,119 (4-6/2017: 2,056) million. At comparable exchange rates, orders grew by 6.4%.
Sales declined by 0.3% to EUR 2,331 (2,337) million. At comparable exchange rates, sales grew by 3.2%.
Operating income (EBIT) was EUR 280.5 (335.8) million or 12.0% (14.4%) of sales. The adjusted EBIT was EUR 300.4 million or 12.9% of sales.*
Cash flow from operations (before financing items and taxes) was EUR 366.2 (320.4) million.

January-June 2018

Orders received grew by 1.5% to EUR 4,027 (1-6/2017: 3,969) million. At comparable exchange rates, orders grew by 6.6%.
Sales grew by 1.4% to EUR 4,339 (4,281) million. At comparable exchange rates, sales grew by 6.5%.
Operating income (EBIT) was EUR 492.0 (581.6) million or 11.3% (13.6%) of sales. The adjusted EBIT was EUR 518.7 million or 12.0% of sales.*
Cash flow from operations (before financing items and taxes) was EUR 545.2 (625.7) million.

KONE has adopted the new IFRS 15 and IFRS 9 effective January 1, 2018. In this Half-year Financial Report all 2017 financials are restated applying the standards retrospectively.

Business outlook

In 2018, KONE's sales is estimated to grow by 3-7% at comparable exchange rates as compared to the restated 2017 sales. The adjusted EBIT is expected to be in the range of EUR 1,100-1,200 million, assuming that foreign exchange rates would remain at the end of June 2018 level for the remainder of the year. Foreign exchange rates are estimated to impact EBIT negatively by approximately EUR 35 million. The pressure on the adjusted EBIT margin 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		4-6/2018	4-6/2017	Change	1-6/ 2018	1-6/ 2017	Change	1-12 /2017
Orders received	MEUR	2,118.6	2,056.2	3.0%	4,027.2	3,969.2	1.5%	7,554.0
Order book	MEUR	7,915.3	7,749.2	2.1%	7,915.3	7,749.2	2.1%	7,357.8
Sales	MEUR	2,330.6	2,337.2	-0.3%	4,338.6	4,280.6	1.4%	8,796.7
Operating income (EBIT)	MEUR	280.5	335.8	-16.5%	492.0	581.6	-15.4%	1,192.3
Operating income margin (EBIT margin)	%	12.0	14.4		11.3	13.6		13.6
Adjusted EBIT*	MEUR	300.4	335.8	-10.5%	518.7	581.6	-10.8%	1,205.5
Adjusted EBIT margin*	%	12.9	14.4		12.0	13.6		13.7
Income before tax	MEUR	290.5	346.5	-16.2%	514.1	618.3	-16.8%	1,250.4
Net income	MEUR	223.7	266.1	-15.9%	395.9	474.8	-16.6%	960.2
Basic earnings per share	EUR	0.43	0.52	-16.0%	0.77	0.92	-16.7%	1.86
Cash flow from operations (before financing items and taxes)	MEUR	366.2	320.4		545.2	625.7		1,263.3
Interest-bearing net debt	MEUR	-1,254.8	-1,302.1		-1,254.8	-1,302.1		-1,690.2
Equity ratio	%	45.5	44.5		45.5	44.5		50.0
Return on equity	%	28.0	34.5		28.0	34.5		32.1
Net working capital (including financing items and taxes)	MEUR	-725.7	-861.7		-725.7	-861.7		-772.6
Gearing	%	-47.7	-50.8		-47.7	-50.8		-55.8

* 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:

"In the second quarter, we again achieved a good level of growth in orders received, although profitability continued to be burdened by several headwinds. I'm happy that our orders received grew well in all regions and in both new equipment and in services. We have been able to find good opportunities in varying market conditions by proactively serving our customers. As anticipated, our adjusted EBIT margin continued to be burdened by the price pressure seen earlier in China combined with higher raw material prices. However, we have been able to stabilize the margin of orders received and as a result expect the pressure on the adjusted EBIT margin to ease towards the end of the year. I'm also pleased that the cash conversion was strong in the quarter.

Our improved differentiation in services has resulted in continued good growth. We have consistently developed our services business to find new ways of adding value to our customers. In the quarter, we have continued to roll out and expand our new services and solutions. New KONE Care was introduced in additional countries, we are further investing in technology and capabilities of our 24/7 Connected Services, and the first Residential Flow solutions were delivered to customers. We also expanded our People Flow Planning and Consulting. I continue to be very encouraged by how positively these services and solutions have been received by our customers.

The Accelerate program is speeding up the execution of our strategy. We started our Accelerate Winning with Customers program last year. The program will enable an even better focus in customer-facing activities while leveraging our scale efficiently in back-end functions. Further harmonization in our roles and ways of working will also help us to bring new services and solutions faster to the market. In the second quarter, we initiated several organizational changes as part of the program. The program is proceeding according to plan and we expect to see clear benefits from next year onwards.

Loyal customers and motivated employees are keys to KONE's long-term profitable growth. We recently conducted our annual surveys for both customers and employees. The results were once again very positive. Customer loyalty (NPS) improved further. Employee engagement also remained on a high level reflecting the strong commitment of KONE's people to execute our strategy. I would like to thank all our employees for their hard work during this time of active transformation within KONE."

Operating environment in April-June 2018

The global new equipment market grew slightly in units compared to the second quarter of 2017. In Asia-Pacific, the new equipment volumes grew slightly. In China, the new equipment market was rather stable in units with residential and infrastructure segments developing better than the commercial segment. The market decline in the higher-tier cities continued due to government housing restriction measures. The market in the lower-tier cities grew slightly. In the rest of Asia-Pacific, the new equipment markets continued to grow driven by South-East Asia and the recovering Indian market. In the EMEA region, the new equipment market grew slightly. The new equipment market in Central and North Europe was rather stable at a high level, while in South Europe, the market continued to see slight growth from a low level. In the Middle East, the market grew despite uncertainty in the region. In North America, the new equipment market continued to grow slightly from a high level.

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 Asia-Pacific and a more moderate development in Europe and North America.

Pricing trends remained varied during the second quarter. In China, competition remained intense but pricing was rather stable in the new equipment market. In the EMEA region, the pricing environment continued to be characterized by strong competition, particularly in South Europe and the Middle East while maintenance pricing improved slightly in Central and North Europe. In North America, pricing environment continued to be more favorable than in the other regions.

Operating environment in January-June 2018

The global new equipment market grew slightly in units compared to the first half of 2017. In Asia-Pacific, the new equipment volumes grew slightly. In China, the new equipment market was rather stable in units. In the rest of Asia-Pacific, the new equipment markets grew slightly driven by the Indian market in particular. In the EMEA region, the new equipment market grew slightly. New equipment market in Central and North Europe was rather stable at a high level, while in South Europe, the market continued to see slight growth from a low level. In the Middle East, the market grew despite uncertainty in the region. In North America, the new equipment market continued to grow slightly from a high level.

Pricing trends remained varied during the first half of the year. In China, competition remained intense but pricing was rather stable in the new equipment market. In the EMEA region, the pricing environment continued to be characterized by strong competition, particularly in South Europe and the Middle East while maintenance pricing improved slightly in Central and North Europe. In North America, pricing environment continued to be more favorable than in the other regions.

Market outlook 2018

In new equipment, the market in China is expected to be stable or to decline slightly 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 higher raw material prices. Higher raw material prices are estimated to impact KONE's 2018 EBIT negatively by approximately EUR 100 million. 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.

Press and analyst meetings

A meeting for the press, conducted in Finnish, will be held on Thursday, July 19, 2018 at 2:15 p.m. EEST.

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

U.S.: +1 323-701-0225
UK: +44 (0)330 336 9105
Finland: +358 (0)9 7479 0361
Participant code: 9388620

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 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 H1 2018 Half-year Financial Report