2019-10-23 Interim Report of KONE Corporation for January-September 2019

KONE Corporation, stock exchange release, October 23, 2019 at 12.30 p.m. EEST

Interim Report of KONE Corporation for January-September 2019

Continued good growth in orders received and sales, adjusted EBIT improving

July-September 2019

- Orders received grew by 9.6% to EUR 2,007 (7-9/2018: 1,832) million. At comparable exchange rates, orders grew by 6.8%.

- Sales grew by 11.7% to EUR 2,558 (2,289) million. At comparable exchange rates, sales grew by 9.4%.

- Operating income (EBIT) was EUR 314.2 (258.0) million or 12.3% (11.3%) of sales. The adjusted EBIT was EUR 321.9 (273.7) million or 12.6% (12.0%) of sales.* IFRS 16 had a positive impact of EUR 2 million to the operating income.

- Cash flow from operations (before financing items and taxes) was EUR 462.9 (273.3) million. IFRS 16 had a positive impact of EUR 30 million to the cash flow from operations (before financing items and taxes).

January-September 2019

- Orders received grew by 9.4% to EUR 6,411 (1-9/2018: 5,859) million. At comparable exchange rates, orders grew by 7.6%.

- Sales grew by 10.1% to EUR 7,297 (6,627) million. At comparable exchange rates, sales grew by 8.3%.

- Operating income (EBIT) was EUR 836.1 (750.0) million or 11.5% (11.3%) of sales. The adjusted EBIT was EUR 869.9 (792.5) million or 11.9% (12.0%) of sales.* IFRS 16 had a positive impact of EUR 6 million to the operating income.

- Cash flow from operations (before financing items and taxes) was EUR 1,164 (818.5) million. IFRS 16 had a positive impact of EUR 87 million to the cash flow from operations (before financing items and taxes).

KONE has adopted the new IFRS 16 and IFRIC 23 effective January 1, 2019 using the modified retrospective approach and the comparative figures have not been restated.

Business outlook (specified)

In 2019, KONE sales is estimated to grow by 5-8% at comparable exchange rates as compared to 2018. The adjusted EBIT is expected to be in the range of EUR 1,190-1,250 million, assuming that foreign exchange rates would remain at the October 2019 level. Foreign exchange rates are estimated to impact EBIT positively by around EUR 20 million.

KONE previously estimated its sales to grow by 4-7% at comparable exchange rates compared to 2018. The adjusted EBIT was expected to be in the range of EUR 1,170-1,250 million, assuming that foreign exchange rates would have remained at the July 2019 level. Foreign exchange rates were estimated to impact EBIT positively by EUR 20 million.

Key figures

Key figures		7-9/2019	7-9/2018	Change	1-9/ 2019	1-9/ 2018	Change	1-12 /2018
Orders received	MEUR	2,007.3	1,831.9	9.6%	6,411.5	5,859.1	9.4%	7,797.0
Order book	MEUR	8,399.8	7,791.6	7.8%	8,399.8	7,791.6	7.8%	7,950.7
Sales	MEUR	2,557.6	2,288.7	11.7%	7,297.2	6,627.3	10.1%	9,070.7
Operating income (EBIT)	MEUR	314.2	258.0	21.8%	836.1	750.0	11.5%	1,042.4
Operating income margin (EBIT margin)	%	12.3	11.3		11.5	11.3		11.5
Adjusted EBIT*	MEUR	321.9	273.7	17.6%	869.9	792.5	9.8%	1,112.1
Adjusted EBIT margin*	%	12.6	12.0		11.9	12.0		12.3
Income before tax	MEUR	320.9	271.9	18.0%	851.5	786.0	8.3%	1,087.2
Net income	MEUR	247.1	217.2	13.8%	655.7	613.1	6.9%	845.2
Basic earnings per share	EUR	0.48	0.42	13.8%	1.26	1.19	6.4%	1.63
Cash flow from operations(before financing items and taxes)	MEUR	462.9	273.3		1,163.9	818.5		1,150.1
Interest-bearing net debt	MEUR	-1,276.9	-1,425.5		-1,276.9	-1,425.5		-1,704.0
Equity ratio	%	44.1	47.8		44.1	47.8		49.9
Return on equity	%	29.1	28.0		29.1	28.0		27.7
Net working capital (including financing items and taxes)	MEUR	-871.5	-719.0		-871.5	-719.0		-757.8
Gearing	%	-43.3	-50.8		-43.3	-50.8		-55.3

* 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:

"I am in many ways pleased with our development in the third quarter. Orders received continued to grow at a good rate across regions, and the margin of orders received improved for a second quarter in a row. Sales growth was strong with solid deliveries of new installations and accelerating growth in services. Most importantly, the adjusted EBIT margin improved as a result of improved pricing and efficiency. Cash flow was record high in the third quarter and overall strong year-to-date.

We have made good progress with the Accelerate program, and are starting to see benefits. The new Customer Solutions Engineering function is fully up and running enabling us to serve our customer better and more efficiently. We have also seen encouraging impacts from the changes in Customer Service and Administration as well as Sourcing. I am pleased with the results we have seen so far and I am confident that they are taking us in the right direction. In the latest customer loyalty survey conducted in the summer, our net promoter score was stable at a good level. Our customers continue to appreciate KONE as a good and reliable partner as well as the quality of our products and our customer service. We can still improve our responsiveness and communication with our customers.

Our transformation continues to improve our differentiation. Our new services have been well received by our customers, and are generating new revenue streams that did not previously exist in our industry. This gives us confidence to continue to invest in this area. Overall, I feel that our competitiveness has strengthened further during the Winning with Customers strategy period.

Overall, we have had good development so far this year. Therefore, we now expect our sales to grow by 5-8% at comparable exchange rates in 2019. We have also narrowed our adjusted EBIT range to EUR 1,190-1,250 million. When we look forward, we can see an increasingly uncertain economic environment. However, I feel confident about the coming year, given our strong and improving competitiveness, solid order book and growing service business."

Operating environment in July-September 2019

The global new equipment market was stable in units compared to the third quarter of 2018. In Asia-Pacific, the new equipment market was stable. In China, infrastructure segment developed positively and residential segment grew slightly, while non-residential segment declined. Government continued to support the economic activity through infrastructure investments while maintaining restrictions in the residential market. Overall, the Chinese new equipment market grew slightly in units. In the rest of Asia-Pacific, the new equipment markets declined slightly. The market in India and in some Southeast Asian countries declined after a growth period. In the EMEA region, the new equipment market grew slightly. The new equipment market in Central and North Europe grew slightly from a high level. In South Europe, the market grew slightly with growth in most of the countries in the area. In the Middle East, the market declined due to increased uncertainty in the area. In North America, the new equipment market was stable on a high level.

Global service markets continued to develop positively. Both the maintenance and the modernization markets saw growth across the regions, with the strongest rate of growth seen in Asia-Pacific. Also in the EMEA region the modernization market grew clearly driven by Central and North Europe and the Middle East.

Pricing trends remained varied during July-September. In China, competition remained intense but pricing was rather stable in the new equipment market. In the EMEA region, the pricing environment was mixed. In South Europe, there were signs of improving pricing environment while in Central and North Europe pricing was more stable. In the Middle East region, intense competition continued. In North America, competition intensified somewhat.

Operating environment in January-September 2019

The global new equipment market grew slightly in units compared to January-September 2018. In Asia-Pacific, the new equipment market grew slightly. In China, infrastructure segment developed positively and residential segment grew slightly, while non-residential segment declined. Government continued to balance between supporting the economic activity and restricting the residential market. Overall, the Chinese new equipment market grew slightly in units. In the rest of Asia-Pacific, the new equipment markets were stable with growth in the first half and slight decline in the third quarter. In the EMEA region, the new equipment market grew slightly. The new equipment market in Central and North Europe grew slightly from a high level. In South Europe, the market grew slightly. In the Middle East, the market continued to decline. In North America, the new equipment market was stable on a high level.

Global service markets continued to develop positively. Both the maintenance and the modernization markets saw 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 January-September. In China, competition remained intense but pricing was rather stable in the new equipment market. In the EMEA region, the pricing environment was mixed. The Middle East region continued to be characterized by intense competition, while there were some signs of improving pricing environment in parts of Europe. In North America, competition intensified somewhat.

Market outlook 2019

The new equipment market is expected to be relatively stable or to grow slightly. In China the market is expected to grow slightly in units ordered, while in the rest of the Asia-Pacific, the market is expected to be stable. The new equipment markets in North America and the Europe, Middle East and Africa region are expected to be rather 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 grow slightly in North America and in the Europe, Middle East and Africa region and to develop strongly in Asia-Pacific.

Business outlook 2019 (specified)

In 2019, KONE's sales is estimated to grow by 5-8% at comparable exchange rates as compared to 2018. The adjusted EBIT is expected to be in the range of EUR 1,190-1,250 million, assuming that foreign exchange rates would remain at the October 2019 level. Foreign exchange rates are estimated to impact EBIT positively by around EUR 20 million.

The outlook is based on KONE's maintenance base and order book as well as the market outlook. KONE has a solid order book for 2019 in the new equipment business and the service business is expected to continue to grow. Targeted pricing and productivity improvement actions are expected to support profitability together with the savings from the Accelerate program. High component and labor costs together with trade tariffs are the main headwinds for the adjusted EBIT in 2019. The impact of high raw material prices and trade tariffs is estimated to be less than EUR 50 million.

KONE previously estimated its sales to grow by 4-7% at comparable exchange rates as compared to 2018. The adjusted EBIT was expected to be in the range of EUR 1,170-1,250 million, assuming that foreign exchange rates would have remained at the July 2019 level. Foreign exchange rates were estimated to impact EBIT positively by around EUR 20 million.

Press and analyst meetings

A meeting for the press, conducted in Finnish, will be held on Wednesday, October 23, 2019 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.: +1 323-794-2551
UK: +44 (0)330 336 9105
Finland: +358 (0)9 7479 0361
Participant code: 7053455

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 2018, KONE had annual sales of EUR 9.1 billion, and at the end of the year over 57,000 employees. KONE class B shares are listed on the Nasdaq Helsinki Ltd. in Finland.

www.kone.com

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