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Interim Report of KONE Corporation for January–September 2022

Stock Exchange Release Published 27/10/2022

KONE Corporation, stock exchange release, October 27, 2022 at 12.30 p.m. EEST

Interim Report of KONE Corporation for January-September 2022

Strong development in Services, New Equipment business burdened by China 

July-September 2022

  • Orders received declined by 2.5% to EUR 2,155.5 (7-9/2021: 2,211.1) million. At comparable exchange rates, orders declined by 10.0%.
  • Sales grew by 14.9% to EUR 2,998.2 (2,610.0) million. At comparable exchange rates, sales grew by 6.5%.
  • Operating income (EBIT) was EUR 303.9 (326.5) million or 10.1% (12.5%) of sales. The adjusted EBIT was EUR 305.8 (326.5) million or 10.2% (12.5%) of sales.* 
  • Cash flow from operations (before financing items and taxes) was EUR 336.1 (365.1) million.

January-September 2022

  • Orders received grew by 7.3% to EUR 7,187.1 (1-9/2021: 6,697.7) million. At comparable exchange rates, orders grew by 0.1%.
  • Sales grew by 3.2% to EUR 7,995.2 (7,747.3) million. At comparable exchange rates, sales declined by 3.4%.
  • Operating income (EBIT) was EUR 664.0 (943.4) million or 8.3% (12.2%) of sales. The adjusted EBIT was EUR 711.6 (950.4) million or 8.9% (12.3%) of sales.*
  • Cash flow from operations (before financing items and taxes) was EUR 721.4 (1,303.7) million.

Business outlook for 2022 (revised)

KONE estimates its sales in 2022 to decline by -1 to -4% at comparable exchange rates as compared to 2021. The adjusted EBIT is expected to be in the range of EUR 1,010-1,090 million, assuming that foreign exchange rates would remain at the October 2022 level. Foreign exchange rates are estimated to impact EBIT positively by around EUR 80 million. This guidance assumes that KONE's delivery capability is not impeded by extended or more severe COVID-19 restrictions in China during the fourth quarter.

KONE previously estimated its sales growth would be in the range of -1% to +3% at comparable exchange rates as compared to 2021. The adjusted EBIT was expected to be in the range of EUR 1,130-1,210 million, assuming that foreign exchange rates would remain at the July 2022 level. Foreign exchange rates were estimated to impact EBIT positively by around EUR 80 million.

KEY FIGURES7-9/20227-9/2021Change1-9/20221-9/2021Change1-12/2021
Orders receivedMEUR2,155.52,211.1-2.5%7,187.16,697.77.3%8,852.8
Order bookMEUR9,890.58,436.917.2%8,564.0
SalesMEUR2,998.22,610.014.9%7,995.27,747.33.2%10,514.1
Operating incomeMEUR303.9326.5-6.9%664.0943.4-29.6%1,295.3
Operating income margin%10.112.58.312.212.3
Adjusted EBIT*MEUR305.8326.5-6.3%711.6950.4-25.1%1,309.8
Adjusted EBIT margin*%10.212.58.912.312.5
Income before taxMEUR313.4336.4-6.8%664.3960.7-30.8%1,320.8
Net incomeMEUR238.0260.7-8.7%508.2744.5-31.7%1,022.7
Basic earnings per shareEUR0.460.50-8.5%0.971.43-32.0%1.96
Cash flow from operations (before financing items and taxes)MEUR336.1365.1721.41,303.71,828.7
Interest-bearing net debtMEUR-1,552.8-1,820.0-2,164.1
Equity ratio%37.340.741.2
Return on equity%22.632.432.0
Net working capital (including financing items and taxes)MEUR-1,318.9-1,356.9-1,468.2
Gearing%-55.7-62.2-67.6

* KONE presents adjusted EBIT as an alternative performance measure to enhance comparability of business performance between reporting periods. In January-September 2022, items affecting comparability amounted to EUR 47.6 million including a charge for the impairment of assets and recognition of provisions for commitments in Russia and Ukraine, as well as costs for restructuring measures. In the comparison periods, items affecting comparability consisted of restructuring costs.

Henrik Ehrnrooth, President and CEO:

"Although the impact of the deterioration of the Chinese new equipment market was larger than expected, the third quarter was also characterized by many positives. I am particularly pleased with the continued strong performance of our services business, which was supported by robust activity in both the maintenance and modernization markets, as well as by the year-on-year improvement in the margin of new orders thanks to successful price increases. Compared to the previous quarter, pricing improved in all areas, and I would like to sincerely thank the whole KONE team for their dedication and commitment to prioritizing margin improvement. These positive developments were, however, overshadowed by the weak market environment in China, which has clearly impacted our deliveries and new orders. Liquidity constraints continued to be the key challenge, adversely affecting both new projects and progress at construction sites. COVID-19 restrictions, while less severe than in the previous quarter, added to uncertainty.

Our Services business contributed strongly to KONE's overall sales growth with support from both volume and pricing. The demand for digital services also developed well, as customers increasingly seek to benefit from the improved safety, transparency, and uptime offered by our 24/7 Connected Services. Today close to 20% of KONE elevators in our maintenance base are connected to this service, and we are also actively installing it on non-KONE brands. For us, higher adoption of 24/7 has driven increased conversion and retention rates. We are seeing further improvements with KONE Care DX, an evolution of our flagship KONE Care and 24/7 Connected Services offerings specifically designed for our DX Class elevators. In the New Equipment business, on the other hand, sales were lower than anticipated largely due to liquidity challenges in China as well as some impact from component shortages. While the availability of components is expected to improve in the fourth quarter and commodity cost headwinds are reversing in Asia, progress at construction sites is likely to remain sluggish in several regions and cost inflation is a burden to this year's results. As a result, we have lowered our sales and adjusted EBIT outlook for 2022. 

Looking ahead, I expect our Services business to maintain its strong momentum and profitability to benefit from our actions to restore margins as of the fourth quarter. To further improve our financial performance and secure progress toward our targets, we are planning to simplify our operating model, speed up our ability to respond to changes in the external environment, and bring solutions to our customers faster. We expect these changes to have a clear impact on our operating leverage and cost structure. I am convinced that this, together with our focus on differentiation and accelerating service growth is central to strengthening our resilience and continuing to deliver superior value to our customers."

Operating environment in July-September 2022

The market environment was mixed in the third quarter with continued strong activity in services and a slight slowdown in new equipment demand. Sentiment was affected by continued supply chain disruptions and labor availability constraints, as well as by rising interest rates and expectations for slowing economic growth. 

In the new equipment market, continued liquidity constraints caused construction activity to decline significantly in China and COVID-19 restrictions, although less severe than in the previous quarter, increased uncertainty. In the rest of Asia-Pacific, activity grew clearly, largely due to strong recovery in India. In the EMEA region, activity levels were varied.The war in Ukraine impacted demand in Central and North Europe. Market activity also declined slightly in South Europe and grew slightly in the Middle East. In North America, the market declined slightly in units but grew significantly in monetary value.

The service market developed positively with broad based growth inboth maintenance and modernization. 

Although the pricing environmentremained adversely affected by intense competition, market prices continued to improve outside China as a response to wide-spread cost inflation.  
 

Operating environment inJanuary-September 2022

Although the demand environment was favorable in many areas during the reporting period, overall market activity was adversely impacted by the weak market conditions in China. The disruptions to global supply chains, which were amplified by the war in Ukraine, rising interest rates and expectations for slower economic growth have also affected sentiment.

In the new equipment market in China, COVID-19 lockdowns were a considerable disruption in the second quarter. Though less severe, restrictions continued to create uncertainty during the third quarter. This, together with continued liquidity constraints, caused a significant slowdown in demand. In the rest of Asia-Pacific, the market grew clearly. In the EMEA region, increased uncertainty due to the war in Ukraine resulted in slightly declining activity in Central and North Europe. Activity in South Europe and in the Middle East grew slightly. In North America, the market grew clearly, thanks to strong activity in the residential and infrastructure segments in the first half of the year.

The service market developed positively with broad-based growth in both maintenance and modernization. Utilization rates have recovered to pre-pandemic levels in almost all customer segments and modernization market activity was driven by stimulus measures, infrastructure investments and office refurbishments.

Although the pricing environment remained adversely affected by intense competition, market prices improved outside China throughout the reporting period as a response to wide-spread cost inflation.  

Market outlook 2022 (updated)

The Chinese new equipment market is expected to decline by over 20% due to the tightened liquidity situation in the property markets and the impact of COVID-19 related restrictions. In the rest of the world, activity is expected to be stable in the EMEA region and grow clearly in both North America and Asia-Pacific, excluding China.

Modernization markets are expected to grow across regions supported by an aging equipment base, stimulus measures, and the emphasis on the adaptability of buildings.

Maintenance activity is expected to return to pre-pandemic growth trajectory with slight growth in the more mature markets and clear growth in Asia-Pacific.

Supply chain constraints and rising interest rates may limit growth in construction activity, which could impact demand in the new equipment and modernization markets. COVID-19 related lockdown measures in China and the war in Ukraine are adding to global supply chain disruptions and increasing uncertainty in the demand environment.

Business outlook 2022 (revised)

KONE estimates its sales in 2022 to decline by -1 to -4% at comparable exchange rates as compared to 2021. The adjusted EBIT is expected to be in the range of EUR 1,010-1,090 million, assuming that foreign exchange rates would remain at the October 2022 level. Foreign exchange rates are estimated to impact EBIT positively by around EUR 80 million. This guidance assumes that KONE's delivery capability is not impeded by extended or more severe COVID-19 restrictions in China during the fourth quarter.

KONE has a positive outlook for services and a solid order book. Furthermore, the effect of product cost, productivity and pricing actions are expected to support the results towards the latter part of the year.

Headwinds for the 2022 results include increased material, component and logistics costs, as well as constraints in global supply chains. Other key headwinds are the deterioration of the market environment in China and the impact of COVID-19 restrictions.

Press and analyst meetings

A Microsoft Teams call for the press, conducted in English, will be held on Thursday, October 27, 2022 at 2:15 p.m. EEST. Journalists are kindly asked to sign up to media@kone.com, and they will receive a link to the call upon registration.

A webcast for analysts, conducted in English, will begin at 3:45 p.m. EEST and will be available on www.kone.com/investors. An on-demand version of the webcast will be available on www.kone.com later the same day. The event can also be joined via a telephone conference.

U.S.: +1 786-697-3501
UK: +44 (0) 33 0551 0200
Finland: +358 (0) 9 2319 5437
Participant code: 018269

For further information, please contact:

Natalia Valtasaari, Head of Investor Relations, KONE Corporation, 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 2021, KONE had annual sales of EUR 10.5 billion, and at the end of the year over 60,000 employees. KONE class B shares are listed on the Nasdaq Helsinki Ltd. in Finland.

www.kone.com

KONE Q3 2022 Interim Report


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