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Interim Report of KONE Corporation for January-September 2017

Stock Exchange Release Published 26/10/2017

KONE Corporation, stock exchange release, October 26, 2017 at 12.30 p.m. EEST

Interim Report of KONE Corporation for January-September 2017

January-September 2017: Orders back to growth, profitability continued to be under pressure

July-September 2017

  • Orders received declined by 1.8% to EUR 1,739 (7-9/2016: 1,772) million. At comparable exchange rates, orders grew by 2.1%.
  • Net sales grew by 0.9% to EUR 2,191 (2,170) million. At comparable exchange rates, the growth was 4.4%.
  • Operating income (EBIT) was EUR 307.3 (331.1) million or 14.0% (15.3%) of net sales. The adjusted EBIT was EUR 310.6 million or 14.2% of net sales.*
  • Cash flow from operations (before financing items and taxes) was EUR 302.7 (400.6) million.

January-September 2017

  • Orders received declined by 1.3% to EUR 5,708 (1-9/2016: 5,782) million. At comparable exchange rates, orders grew by 0.6%. The order book stood at EUR 8,703 million at the end of September 2017 (September 30, 2016: 8,699).
  • Net sales grew by 1.5% to EUR 6,286 (6,191) million. At comparable exchange rates the growth was 3.1%.
  • Operating income (EBIT) was EUR 851.4 (901.1) million or 13.5% (14.6%) of net sales. The adjusted EBIT was EUR 854.7 million or 13.6% of net sales.*
  • Cash flow from operations (before financing items and taxes) was EUR 928.4 (1,100) million.

Business outlook for 2017 (unchanged)

KONE's net sales is estimated to grow by 1% to 3% at comparable exchange rates as compared to 2016. The adjusted EBIT is expected to be in the range of EUR 1,200-1,250 million, assuming that translation exchange rates would remain at approximately the end of September 2017 level for the remainder of the year.

Key figures 7-9/20177-9/2016 Change1-9/20171-9/2016Change1-12/2016
Orders receivedMEUR 1,739.0 1,771.7-1.8 % 5,708.2 5,781.8-1.3 % 7,621.0
Order bookMEUR 8,703.0 8,699.00.0 % 8,703.0 8,699.00.0 % 8,591.9
SalesMEUR 2,190.8 2,170.20.9 % 6,285.5 6,191.11.5 % 8,784.3
Operating income (EBIT)MEUR 307.3 331.1-7.2 % 851.4 901.1-5.5 % 1,293.3
Operating income (EBIT) margin% 14.0 15.3 13.514.6 14.7
Adjusted EBITMEUR 310.6 331.1-6.2 %854.7901.1-5.2 %1,293.3
Adjusted EBIT margin% 14.2 15.3 13.614.6 14.7
Income before taxMEUR 319.6 337.5-5.3 %900.4941.0-4.3 %1,330.3
Net incomeMEUR 246.1 259.9-5.3 %693.3724.6-4.3 %1,022.6
Basic earnings per shareEUR 0.48 0.52-7.4 %1.341.42-5.4 %2.00
Cash flow from operations

(before financing items and taxes)
MEUR 302.7 400.6   928.4 1,099.6  1,509.5
Interest-bearing net debtMEUR -1,464.9 -1,368.7   -1,464.9 -1,368.7  -1,687.6
Total equity/total assets% 46.2 44.0   46.2 44.0  46.8
Return on equity% 34.2 38.6   34.2 38.6  38.1
Net working capital

(including financial items and taxes)
MEUR -933.3 -1,052.8   -933.3 -1,052.8  -1,054.8
Gearing% -56.0 -56.2   -56.0 -56.2  -60.4
                   

* 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 saw positive development on many fronts in the third quarter although we continued to also face several headwinds. I'm happy that in China, our orders received returned to growth and that good growth in orders continued in Americas and EMEA. Sales growth was also at a healthy level driven by continued solid development in Services. Higher raw material prices, price pressure witnessed in our Chinese new equipment business and increased R&D and IT spend continued to burden our operating income in the third quarter. The solid development in EMEA and Americas contributed positively to the EBIT. We cannot be satisfied with the recent EBIT development, and we continue to take firm action to compensate for these pressures. We are already seeing positive impact from the focused pricing actions in China and the continuous work to improve productivity.

What I'm especially happy about, is the good progress we've made in executing our new strategy. Roll-out of the new services we introduced earlier this year has gained momentum, and the recently launched Residential Flow solution has raised a great amount of interest. Our customer-centric thinking is uncovering new ways to add value to our customers and to generate profitable growth for us, and we expect to bring many new services and solutions to the market in the coming years. I am happy to see that our employees have strongly embraced an even more customer-centric mindset and are constantly striving to better understand our customers' needs.

To capture the full potential of our innovation pipeline in a fast moving environment, we need new competences and ways of working, and we also need to be faster. In the third quarter, we launched an Accelerate Winning with Customers program to enable our people in the frontlines to focus on customers by giving the area and global functions a bigger role in supporting the countries. This is how we create a faster-moving, customer-centric organization that leverages our scale more efficiently.

The near-term market outlook remains mixed. We expect the Chinese new equipment market to be relatively stable for the full year 2017 in units ordered. However, we continue to see risk that the government restrictions in the Chinese residential market will have a negative impact on new equipment demand still during the final months of 2017 and the early part of 2018. At the same time the outlook remains positive for services and many other new equipment markets. KONE is in a good position to capture the opportunities in the markets and we will continue the work to improve our competitiveness further."

Operating environment in July-September 2017

The global new equipment market was stable in units ordered compared to the third quarter of 2016. In Asia-Pacific, the new equipment volumes declined slightly. In China, the new equipment market was rather stable in units but declined slightly in monetary value. Both the residential and commercial segments were relatively stable, while the infrastructure segment continued to grow clearly driven by government stimulus measures. 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 continued to decline driven by the Indian market in particular. The Indian market continued to be impacted by the implementation of reforms in the market. 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 driven by the United States.

Global service markets developed positively in most regions. The modernization market continued to grow slightly in North America and significantly in Asia-Pacific, whereas the market declined in Central and North Europe due to a decline in Great Britain. In South Europe, the modernization market grew slightly. The maintenance market continued to see growth across regions, with the strongest rate of growth seen in the Asia-Pacific region and a more stable development in Europe and North America.

Pricing trends remained varied during the third quarter. In China, competition remained intense in new equipment, and pricing was rather stable compared to the previous quarter. In services, the pricing environment continued to be characterized by strong competition in the EMEA region, particularly in South Europe and also in some of the Central and North European markets. In North America, pricing remained rather intense in maintenance but continued to develop positively in modernization.

Operating environment in January-September 2017

The global new equipment market was stable compared to January-September 2016. The new equipment market volumes in Asia-Pacific declined slightly. In China, the market was stable in units, but declined slightly year-on-year in monetary value. In the rest of Asia-Pacific the market declined driven by India in particular. In the EMEA region, market volumes were stable in Central and North Europe compared to the comparison period. The new equipment market developed positively in South Europe and the Middle East. In North America, the new equipment market continued to grow from a high level.

Global service markets continued to develop positively. The large European modernization market declined slightly in Central and North Europe and grew slightly in South Europe. In North America, the modernization market continued to see slight growth, and also the smaller Asia-Pacific market continued to grow. The maintenance markets continued to see growth globally, with the fastest rate of growth seen in the developing Asia-Pacific markets.

The pricing environment was varied and remained challenging in many markets.

Market outlook 2017

In new equipment, the market in China is expected to be relatively stable in units ordered and the intense competition is expected to continue. In the rest of Asia-Pacific, the market is expected to decline slightly in 2017, but to return to growth towards the end of the year. The market in North America and Europe, Middle East and Africa region is expected to grow slightly.

The modernization market is expected to grow slightly in Europe and in North America and to develop strongly in Asia-Pacific.

Maintenance markets are expected to see the strongest growth rate in Asia-Pacific and to grow slightly also in other regions.

Business outlook 2017 (unchanged)

KONE's net sales is estimated to grow by 1% to 3% at comparable exchange rates as compared to 2016.

The adjusted EBIT is expected to be in the range of EUR 1,200-1,250 million, assuming that translation exchange rates would remain at approximately the end of September 2017 level for the remainder of the year.

The sales outlook is based on KONE's maintenance base and order book as well as the market outlook. KONE's operating income outlook is based on the current sales forecast combined with factors impacting profitability. In 2017, profitability is expected to be impacted by factors such as improved quality and productivity, pricing and business mix, a slight decrease in the margin of orders received in 2016 as well as cost pressures resulting from increased material costs and R&D and IT spend.

Press and analyst meetings

A meeting for the press, conducted in Finnish, will be held on Thursday, October 26, 2017 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. An on-demand version of the webcast will be available on www.kone.com later the same day. The meeting can also be joined via a telephone conference.

U.S.: +1 719 325 2213
UK: +44 (0)330 336 9105
Finland: +358 (0)9 7479 0361
Participant code: KONE

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 2016, KONE had annual net sales of EUR 8.8 billion, and at the end of the year over 52,000 employees. KONE class B shares are listed on the Nasdaq Helsinki Ltd. in Finland.

www.kone.com

KONE Q3 2017 Interim Report


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