2018-10-25 Interim Report of KONE Corporation for January-September 2018 (2)

KONE Corporation, stock exchange release, October 25, 2018 at 12.30 p.m. EEST

Interim Report of KONE Corporation for January-September 2018

Orders received and sales grew in all regions, increasing costs burdened profitability

July-September 2018

Orders received grew by 5.3% to EUR 1,832 (7-9/2017: 1,739) million. At comparable exchange rates, orders grew by 7.3%.
Sales grew by 3.6% to EUR 2,289 (2,210) million. At comparable exchange rates, sales grew by 5.6%.
Operating income (EBIT) was EUR 258.0 (317.9) million or 11.3% (14.4%) of sales. The adjusted EBIT was EUR 273.7 (321.3) million or 12.0% (14.5%) of sales.*
Cash flow from operations (before financing items and taxes) was EUR 273.3 (302.7) million.

January-September 2018

Orders received grew by 2.6% to EUR 5,859 (1-9/2017: 5,708) million. At comparable exchange rates, orders grew by 6.8%.
Sales grew by 2.1% to EUR 6,627 (6,490) million. At comparable exchange rates, sales grew by 6.2%.
Operating income (EBIT) was EUR 750.0 (899.5) million or 11.3% (13.9%) of sales. The adjusted EBIT was EUR 792.5 (902.9) million or 12.0% (13.9%) of sales.*
Cash flow from operations (before financing items and taxes) was EUR 818.5 (928.4) million.

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

Business outlook for 2018 (specified)

In 2018, KONE's sales is estimated to grow by 4-7% (previously 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 1,100-1,150 (previously 1,100-1,200) million, assuming that foreign exchange rates would remain at the end of September 2018 level for the remainder of the year. Foreign exchange rates are estimated to impact EBIT negatively by approximately EUR 45 (previously 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		7-9/2018	7-9/2017	Change	1-9/ 2018	1-9/ 2017	Change	1-12 /2017
Orders received	MEUR	1,831.9	1,739.0	5.3%	5,859.1	5,708.2	2.6%	7,554.0
Order book	MEUR	7,791.6	7,473.5	4.3%	7,791.6	7,473.5	4.3%	7,357.8
Sales	MEUR	2,288.7	2,209.7	3.6%	6,627.3	6,490.3	2.1%	8,796.7
Operating income (EBIT)	MEUR	258.0	317.9	-18.9%	750.0	899.5	-16.6%	1,192.3
Operating income margin (EBIT margin)	%	11.3	14.4		11.3	13.9		13.6
Adjusted EBIT*	MEUR	273.7	321.3	-14.8%	792.5	902.9	-12.2%	1,205.5
Adjusted EBIT margin*	%	12.0	14.5		12.0	13.9		13.7
Income before tax	MEUR	271.9	330.2	-17.7%	786.0	948.5	-17.1%	1,250.4
Net income	MEUR	217.2	253.6	-14.4%	613.1	728.4	-15.8%	960.2
Basic earnings per share	EUR	0.42	0.49	-14.7%	1.19	1.41	-16.0%	1.86
Cash flow from operations (before financing items and taxes)	MEUR	273.3	302.7		818.5	928.4		1,263.3
Interest-bearing net debt	MEUR	-1,425.5	-1,464.9		-1,425.5	-1,464.9		-1,690.2
Equity ratio	%	47.8	47.7		47.8	47.7		50.0
Return on equity	%	28.0	33.9		28.0	33.9		32.1
Net working capital (including financing items and taxes)	MEUR	-719.0	-782.2		-719.0	-782.2		-772.6
Gearing	%	-50.8	-52.5		-50.8	-52.5		-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:

"Our performance was mixed in the third quarter. I am very pleased with the continued brisk growth in our orders received with stabilized margins. Also, our service business continued its consistent good growth path. However, the development of our adjusted EBIT margin was clearly unsatisfactory. As we had expected, our profitability continued to be burdened by several factors, such as the intense price competition over the past years and increased costs. Recent geopolitical tensions also had a negative impact on our result.

We are seeing good momentum for our new services and solutions. The key to improving growth and profitability is further differentiation. Our digital services and solutions are central to driving differentiation in both our services as well as our new equipment business. We are seeing strong customer interest for these and feedback from early adopters is very positive.

The Accelerate program will help compensate for the headwinds in our markets. The Accelerate program that was launched to speed-up the execution of our strategy is also progressing and we expect to start seeing clear benefits from it in 2019. The benefits include further improvement in customer service capability, faster introduction of new services and solutions for our customers globally as well as improved cost efficiency.

We have specified our outlook in connection to the Q3 results. We now expect sales to grow by 4-7% at comparable exchange rates and the adjusted EBIT to be in the range of EUR 1,100 to 1,150 million. After seeing clear decline in our adjusted EBIT margin for the first three quarters, in the final quarter we expect the margin to be close to the level of the comparison period or slightly higher, as implied by our business outlook. Despite the increased uncertainty in many markets, we continue to see good opportunities for growth both in new equipment and in services also in the coming years. I'm confident that differentiation will help us capture the opportunities, and that the actions we are taking will improve our profitability."

Operating environment in July-September 2018

The global new equipment market grew slightly in units compared to the third quarter of 2017. In Asia-Pacific, the new equipment market grew slightly. In China, the new equipment market grew slightly with residential and infrastructure segments developing better than the commercial segment. Government restrictions across city tiers continued to have a cooling effect on the overall markets. In the rest of Asia-Pacific, the new equipment markets grew slightly with clear variation between countries. In the EMEA region, the new equipment market was rather stable. 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 declined due to increased market uncertainty across 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 July-September. Across the regions, cost increases, both for material and labor, were more pronounced driving a need to further increase prices. 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. In North America, the overall positive development in pricing continued despite increased competition in some segments.

Operating environment in January-September 2018

The global new equipment market grew slightly in units compared to January-September 2017. In Asia-Pacific, the new equipment market grew slightly. In China, the new equipment market grew slightly. 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 in the first half of the year, but declined in the third quarter due to increased uncertainty across the region. In North America, the new equipment market continued to grow slightly from a high level.

Pricing trends remained varied during January-September. 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 grow slightly in units ordered and competition to remain intense. In the rest of Asia-Pacific, the market is expected to grow. The market in North America is expected to grow slightly. In the Europe, Middle East and Africa region, the market is expected to be stable.

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 be stable in the Europe, Middle East and Africa region, to grow slightly in North America, and to develop strongly in Asia-Pacific.

Business outlook 2018 (specified)

In 2018, KONE's sales is estimated to grow by 4-7% (previously 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 1,100-1,150 (previously 1,100-1,200) million, assuming that foreign exchange rates would remain at the end of September 2018 level for the remainder of the year. Foreign exchange rates are estimated to impact EBIT negatively by approximately EUR 45 (previously 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.

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 higher labor and material costs. Higher raw material prices are estimated to impact KONE's 2018 EBIT negatively by approximately EUR 100 million. Also, the increased geopolitical uncertainty is expected to have a negative impact. 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.

Press and analyst meetings

A meeting for the press, conducted in Finnish, will be held on Thursday, October 25, 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: 9763612

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 Q3 2018 Interim Report