Interim Report of KONE Corporation for January-March 2018

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

Interim Report of KONE Corporation for January-March 2018

January-March 2018: Orders received grew in all regions, EBIT margin continued to be burdened

• Orders received declined by 0.2% to EUR 1,909 (1-3/2017: 1,913) million. At comparable exchange rates, orders grew by 6.8%.
• Sales grew by 3.3% to EUR 2,008 (1,943) million. At comparable exchange rates, sales grew by 10.6%.
• Operating income (EBIT) was EUR 211.5 (245.8) million or 10.5% (12.6%) of sales. The adjusted EBIT was EUR 218.3 million or 10.9% of sales.*
• Cash flow from operations (before financing items and taxes) was EUR 179.0 (305.3) million.

KONE published on March 19, 2018 restated 2017 financials as a result of adoption of new IFRS 15 and IFRS 9. In this Interim Report all 2017 financials are restated applying IFRS 15 and IFRS 9 retrospectively. The earlier published restated information on 2017 financials has been slightly corrected. The corrections are not considered material and do not impact consolidated statement of income or cash flow.

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 March 2018 level for the remainder of the year. Foreign exchange rates are estimated to impact EBIT negatively by approximately EUR 40 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.

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

* 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 started the year with good growth in both orders received and sales, while profitability continued to be burdened by several headwinds. Our orders received and sales grew in all regions and all businesses at comparable exchange rates. In the new equipment business, our orders received saw the strongest growth in EMEA, but activity also picked up in the Asia-Pacific region. New equipment sales growth was exceptionally strong due to a very high number of project starts during the quarter. Our good momentum continued in services with solid progress in both maintenance and modernization. As anticipated, our profitability was burdened by the price pressure seen earlier in China, combined with higher raw material prices and the adverse effects of foreign exchange rates. However, the margin of the orders received continued to stabilize.

We can clearly see that our Winning with Customers strategy is taking us in the right direction. When we put a stronger emphasis on creating value for our customers, it creates exciting opportunities. We are strengthening our differentiation by introducing services and solutions which meet the individual needs of our customers. For example, we are seeing strong interest in our new KONE Care and KONE 24/7 Connected Services. They are now available in over 15 countries and the roll-out continues. During the quarter, we expanded 24/7 Connected Services to also include escalators. In addition, to speed-up our ability to serve our customers in constantly better ways, we have made continued progress with our Accelerate program, which was launched last year.

With the strong momentum in our services business and good growth in orders received in the past few quarters, we are seeing healthy sales growth in 2018. We expect that due to the healthy sales growth outlook combined with our pricing and productivity actions, the margin pressure will ease towards the end of the year. I'm confident that this development together with the good momentum in our strategy execution is taking us towards our strategic targets."

Operating environment in January-March 2018

The global new equipment market grew slightly in units compared to the first quarter of 2017. In Asia-Pacific, the new equipment volumes grew slightly. In China, the new equip­ment market was rather stable in units with both the resi­dential and commercial segments relatively stable, while the infrastructure segment grew slightly. The market decline in the higher-tier cities continued due to the government housing restriction measures. The market in the lower-tier cities grew slightly. In the rest of Asia-Pacific, the new equipment mar­kets returned to slight growth 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.

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 first quarter. In China, competition remained intense but pricing was rather stable in new equipment. In the EMEA region, the pricing envi­ronment continued to be characterized by strong competi­tion, particularly in South Europe and the Middle East while the 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 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

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 March 2018 level for the remainder of the year. Foreign exchange rates are estimated to impact EBIT negatively by approximately EUR 40 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 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 Wednesday, April 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.: +1 323-794-2093
UK: +44 (0)330 336 9105
Finland: +358 (0)9 7479 0361
Participant code: 1335887

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

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 Q1 2018 Interim Report