2017-07-19 KONE Corporation: Half-year Financial Report 2017 (2)

KONE Corporation, stock exchange release, July 19, 2017 at 12.30 p.m. EEST

KONE Corporation: Half-year Financial Report 2017

KONE's January-June 2017 review: Solid execution helped weather the headwinds

April-June 2017

Orders received declined by 0.6% to EUR 2,056 (4-6/2016: 2,068) million. At comparable exchange rates, orders grew by 1.1%.
Net sales grew by 0.5% to EUR 2,284 (2,273) million. At comparable exchange rates, the growth was 1.7%.
Operating income (EBIT) was EUR 326.4 (348.6) million or 14.3% (15.3%) of net sales.
Cash flow from operations (before financing items and taxes) was EUR 320.4 (393.3) million.

January-June 2017

Orders received totaled EUR 3,969 (1-6/2016: 4,010) million. Orders received declined by 1.0% at historical exchange rates and were stable at comparable exchange rates. The order book stood at EUR 8,905 (June 30,2016: 8,764) at the end of June 2017.
Net sales grew by 1.8% to EUR 4,095 (4,021) million. At comparable exchange rates the growth was 2.4%.
Operating income (EBIT) was EUR 544.1 (570.0) million or 13.3% (14.2%) of net sales.
Cash flow from operations (before financing items and taxes) was EUR 625.7 (699.0) million.

Business outlook for 2017 (specified)

KONE's net sales is estimated to grow by 1-3% at comparable exchange rates as compared to 2016. The operating income (EBIT) is expected to be in the range of EUR 1,200-1,280 million, assuming that translation exchange rates would remain at approximately the average level of January-June 2017.

KONE previously estimated its net sales to grow by 0-3% at comparable exchange rates as compared to 2016. The operating income (EBIT) was expected to be in the range of EUR 1,200-1,290 million, assuming that translation exchange rates would have remained at approximately the average level of January-March 2017.

Key figures		4-6/ 2017	4-6/ 2016	Change	1-6/ 2017	1-6/ 2016	Change	1-12/ 2016
Orders received	MEUR	2,056.2	2,067.8	-0.6%	3,969.2	4,010.1	-1.0%	7,621.0
Order book	MEUR	8,905.1	8,763.6	1.6%	8,905.1	8,763.6	1.6%	8,591.9
Sales	MEUR	2,284.4	2,272.6	0.5%	4,094.7	4,020.9	1.8%	8,784.3
Operating income (EBIT)	MEUR	326.4	348.6	-6.4%	544.1	570.0	-4.5%	1,293.3
Operating income (EBIT) margin	%	14.3	15.3		13.3	14.2		14.7
Income before tax	MEUR	337.1	360.8	-6.6%	580.8	603.5	-3.8%	1,330.3
Net income	MEUR	259.5	276.6	-6.2%	447.2	464.7	-3.8%	1,022.6
Basic earnings per share	EUR	0.50	0.54	-6.1%	0.86	0.90	-4.2%	2.00
Cash flow from operations (before financing items and taxes)	MEUR	320.4	393.3		625.7	699.0		1,509.5
Interest-bearing net debt	MEUR	-1,302.1	-1,145.4		-1,302.1	-1,145.4		-1,687.6
Total equity/total assets	%	42.8	40.2		42.8	40.2		46.8
Return on equity	%	34.5	39.0		34.5	39.0		38.1
Net working capital (including financial items and taxes)	MEUR	-1,015.1	-1,033.4		-1,015.1	-1,033.4		-1,054.8
Gearing	%	-54.5	-52.4		-54.5	-52.4		-60.4

Henrik Ehrnrooth, President and CEO:

"I am pleased that our orders received returned to growth at comparable exchange rates during the second quarter. This was a result of a solid development in EMEA and the Americas and a stabilization of our orders received in China. Sales growth was again driven by EMEA and the Americas, and the rate of decline eased in Asia-Pacific. The service business continued to develop positively, although the sales growth was somewhat below trend in the second quarter. New equipment sales was stable year-on-year at comparable exchange rates. As expected, higher raw material prices, price pressure witnessed in our Chinese new equipment business and increased R&D and IT spend burdened our operating income in the second quarter. However, we were able to partly compensate for the intensified headwinds with the growth in our service business, focused pricing actions as well as productivity improvements. I'm also pleased that our strong execution and healthy business fundamentals have resulted in solid cash flow again this year. I would like to thank all KONE employees for their good work and commitment to drive continuous improvement in the current challenging environment.

During the second quarter, we conducted our annual customer loyalty survey, which showed good improvement in all businesses. The results show that the strategic actions we have taken are driving us in the right direction. Based on the feedback, customers appreciate the competence and service mindset of our personnel as well as the quality of our products and services in particular. This feedback also reflects the results of the employee survey which indicated continued high level of engagement. Achieving our long term strategic targets would not be possible without satisfied customers and engaged employees. The results from both surveys show that we are developing in the right direction.

We have again specified our business outlook for 2017. We now expect sales to grow by 1-3% at comparable rates, and the operating income to be in the range of EUR 1,200-1,280 million, assuming that translation exchange rates would remain at the average level of January-June 2017. We will continue to work hard to compensate for the profitability headwinds we are facing this year, and keep our orders received growing."

Operating environment in April-June 2017

The global new equipment market declined slightly in units compared to the second quarter of 2016. In Asia-Pacific, the new equipment volumes declined slightly. In China, the new equipment market declined slightly in units, and continued to decline year-on-year also in monetary value. The impacts of the government housing restriction measures were visible in the residential segment, while the commercial segment was rather stable. The infrastructure segment continued to grow driven by stimulus measures. The market declined in the higher-tier cities due to the housing restriction measures, while the development in the lower-tier cities was more stable. In the rest of Asia-Pacific, the new equipment markets continued to decline. The decline was driven in particular by the Indian market, which declined due to reforms being implemented in the market. In the EMEA region, the new equipment market grew slightly. New equipment market in Central and North Europe was 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 market uncertainty. In North America, the continued new equipment market growth was 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 slightly in Central and North Europe from a strong comparison point. In South Europe, the modernization market was relatively stable. 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 second quarter. In China, competition remained intense in new equipment and pricing was 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-June 2017

The global new equipment market was rather stable compared to the first half of 2016. The new equipment market volumes in Asia-Pacific were rather stable. In China, the market was rather stable in units, but declined year-on-year in monetary value. Also in the rest of Asia- Pacific the market declined driven by India in particular. In the EMEA region, market volumes grew slightly in Central and North Europe compared to the previous year. 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 was rather stable 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 grow 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 decline by 0-5% in units ordered and also the competition to continue intense. In the rest of Asia-Pacific, the market is expected to grow slightly. 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 (specified)

KONE's net sales is estimated to grow by 1-3% at comparable exchange rates as compared to 2016.
The operating income (EBIT) is expected to be in the range of EUR 1,200-1,280 million, assuming that translation exchange rates would remain at approximately the average level of January-June 2017.

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. The operating income outlook includes around EUR 10 million negative impact from translation exchange rates compared to 2016.

Previous business outlook

KONE's net sales was estimated to grow by 0-3% at comparable exchange rates as compared to 2016.

The operating income (EBIT) was expected to be in the range of EUR 1,200-1,290 million, assuming that translation exchange rates would have remained at approximately the average level of January-March 2017.

The previous operating income outlook included around EUR 10 million positive impact from translation exchange rates.

Press and analyst meetings

A meeting for the press, conducted in Finnish, will be held on Wednesday, July 19, 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.

US: +1 719 325 4759
UK: +44 (0)330 336 9411
Finland: +358 (0)9 7479 0404
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 H1 2017 Half-year Financial Report