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Half-year Financial Report of KONE Corporation for January-June 2019

Stock Exchange Release Published 18/07/2019

KONE Corporation, stock exchange release, July 18, 2019 at 12.30 p.m. EEST

Half-year Financial Report of KONE Corporation for January-June 2019

Continued strong orders received, well on track to meet full-year targets

April-June 2019

-       Orders received grew by 9.0% to EUR 2,310 (4-6/2018: 2,119) million. At comparable exchange rates, orders grew by 8.1%.

-       Sales grew by 9.0% to EUR 2,541 (2,331) million. At comparable exchange rates, sales grew by 7.9%.

-       Operating income (EBIT) was EUR 306.5 (280.5) million or 12.1% (12.0%) of sales. The adjusted EBIT was EUR 319.6 (300.4) million or 12.6% (12.9%) 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 323.5 (366.2) million. IFRS 16 had a positive impact of EUR 29 million to the cash flow from operations.

January-June 2019

-       Orders received grew by 9.4% to EUR 4,404 (1-6/2018: 4,027) million. At comparable exchange rates, orders grew by 8.0%.

-       Sales grew by 9.2% to EUR 4,740 (4,339) million. At comparable exchange rates, sales grew by 7.7%.

-       Operating income (EBIT) was EUR 521.8 (492.0) million or 11.0% (11.3%) of sales. The adjusted EBIT was EUR 548.0 (518.7) million or 11.6% (12.0%) of sales.* IFRS 16 had a positive impact of EUR 4 million to the operating income.

-       Cash flow from operations (before financing items and taxes) was EUR 701.1 (545.2) million. IFRS 16 had a positive impact of EUR 58 million to the cash flow from operations.

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's sales is estimated to grow by 4-7% at comparable exchange rates as compared to 2018. The adjusted EBIT is expected to be in the range of EUR 1,170-1,250 million, assuming that foreign exchange rates would remain at the July 2019 level. Foreign exchange rates are estimated to impact EBIT positively by around EUR 20 million.

KONE previously estimated its sales to grow by 3-7% at comparable exchange rates as compared to 2018. The adjusted EBIT was expected to be in the range of EUR 1,160-1,260 million, assuming that foreign exchange rates would have remained at the April 2019 level. Foreign exchange rates were estimated to impact EBIT positively by around EUR 30 million.

Key figures

Key figures 4-6/20194-6/2018Change1-6/
2019
1-6/
2018
Change1-12
/2018
Orders receivedMEUR2,310.12,118.69.0%4,404.14,027.29.4%7,797.0
Order bookMEUR8,407.17,915.36.2%8,407.17,915.36.2%7,950.7
SalesMEUR2,540.82,330.69.0%4,739.64,338.69.2%9,070.7
Operating income (EBIT)MEUR306.5280.59.3%521.8492.06.1%1,042.4
Operating income margin (EBIT margin)%12.112.011.011.311.5
Adjusted EBIT*MEUR319.6300.46.4%548.0518.75.6%1,112.1
Adjusted EBIT margin*%12.612.911.612.012.3
Income before taxMEUR310.2290.56.8%530.6514.13.2%1,087.2
Net incomeMEUR238.8223.76.8%408.6395.93.2%845.2
Basic earnings per shareEUR0.460.435.8%0.780.772.3%1.63
Cash flow from operations(before financing items and taxes)MEUR323.5366.2701.1545.21,150.1
Interest-bearing net debtMEUR-973.3-1,254.8-973.3-1,254.8-1,704.0
Equity ratio%42.245.542.245.549.9
Return on equity%28.628.028.628.027.7
Net working capital (including financing items and taxes)MEUR-805.4-725.7-805.4-725.7-757.8
Gearing%-36.6-47.7-36.6-47.7-55.3

* 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:

"In the second quarter, we had a good performance on many fronts. I'm especially pleased that our orders received continued to grow at a very good rate and that the margin of orders is now improving. Sales growth was balanced with all businesses and regions contributing to the positive development. We have returned to a solid growth path in adjusted EBIT this year and the actions we have taken to improve our margins are starting to produce results. While our adjusted EBIT margin was still slightly below that of last year, we are going in the right direction. Overall, our results were in line with our expectations and consistent with our full-year targets.

The solid growth in orders received, combined with the improving margin of orders received, is a demonstration of our overall competitiveness. We have continued to make good progress in driving improved differentiation with our solutions and services. In addition to our strong offering, one of our competitive edges continues to be consistent project execution as well as the service mindset of our people. We have continued to build on these capabilities with the objective to be the preferred partner for our customers. This year, we have focused among other things on further improving the quality of our field operations. We have developed our installation resource and project management, processes and tools to ensure that we can consistently do what we promise for our customers with improved quality and productivity. We have also continued to strengthen our network of training facilities, so that our employees have the necessary competences to deliver increasingly complex projects. I want to thank all KONE employees, for their hard work and accountability in strengthening these competitive advantages.

We have now half a year behind us with strong development in both orders received and sales. As a result, we can specify our full year guidance. We expect sales to grow by 4-7% at comparable exchange rates and the adjusted EBIT to be in the range of EUR 1,170-1,250 million in 2019. Our industry has faced several headwinds over past years. Our industry has faced several headwinds over past years. I'm pleased that the actions that we have taken and our strategic direction have strengthened us in this environment, and our result is again improving."

Operating environment in April-June 2019

The global new equipment market grew slightly in units compared to the second quarter of 2018. In Asia-Pacific, the new equipment market grew slightly. In China, infrastructure segment developed positively while residential segment was rather stable and nonresidential segment declined. Government continued to balance between supporting the economic activity and curbing speculation in 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 some Southeast Asian countries and in India and a decline in Australia. In the EMEA region, the new equipment market was stable. The new equipment market in Central and North Europe grew slightly from a high level. In South Europe, the market declined slightly with varying development among the countries. In the Middle East, the market declined driven by Turkey, in particular. 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 April-June. 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 Europe. In North America, competition intensified somewhat.

Operating environment in January-June 2019

The global new equipment market grew slightly in units compared to the first half of 2018. In Asia-Pacific, the new equipment market grew slightly. In China, infrastructure segment developed positively while residential segment was rather stable and non-residential segment declined. Government continued to balance between supporting the economic activity and curbing speculation in 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 some Southeast Asian countries and in India and a decline in Australia. In the EMEA region, the new equipment market was stable. The new equipment market in Central and North Europe grew slightly from a high level. In South Europe, the market was stable. 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-June. 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 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 be relatively stable or to grow slightly in units ordered, while in the rest of the Asia-Pacific, the market is expected to grow slightly. 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 4-7% at comparable exchange rates as compared to 2018. The adjusted EBIT is expected to be in the range of EUR 1,170-1,250 million, assuming that foreign exchange rates would remain at the July 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 3-7% at comparable exchange rates as compared to 2018. The adjusted EBIT was expected to be in the range of EUR 1,160-1,260 million, assuming that foreign exchange rates would have remained at the April 2019 level. Foreign exchange rates were estimated to impact EBIT positively by around EUR 30 million.

Press and analyst meetings

A meeting for the press, conducted in Finnish, will be held on Thursday, July 18, 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: 9926738

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

KONE H1 2019 Half-year Financial Report


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