Half-year Financial Report of KONE Corporation for January-June 2020

KONE Corporation, stock exchange release, July 17, 2020 at 12.30 p.m. EEST

Half-year Financial Report of KONE Corporation for January-June 2020

Earnings growth in an exceptional operating environment

April-June 2020

• Orders received declined by 10.2% to EUR 2,075.4 (4-6/2019: 2,310.1) million. At comparable exchange rates, orders declined by 9.4%.
• Sales declined by 0.3% to EUR 2,532.1 (2,540.8) million. At comparable exchange rates, sales declined by 0.1%.
• Operating income (EBIT) was EUR 315.5 (306.5) million or 12.5% (12.1%) of sales. The adjusted EBIT was EUR 324.6 (319.6) million or 12.8% (12.6%) of sales.*
• Cash flow from operations (before financing items and taxes) was EUR 592.3 (323.5) million.

January-June 2020

• Orders received declined by 5.0% to EUR 4,184.7 (1-6/2019: 4,404.1) million. At comparable exchange rates, orders declined by 4.8%.
• Sales declined by 0.2% to EUR 4,730.3 (4,739.6) million. At comparable exchange rates, sales declined by 0.3%.
• Operating income (EBIT) was EUR 512.7 (521.8) million or 10.8% (11.0%) of sales. The adjusted EBIT was EUR 530.2 (548.0) million or 11.2% (11.6%) of sales.*
• Cash flow from operations (before financing items and taxes) was EUR 939.2 (701.1) million.

Business outlook for 2020 (specified)

In 2020, KONE's sales growth is estimated to be in the range of -4% to 0% at comparable exchange rates as compared to 2019. The adjusted EBIT margin is expected to decline slightly or to be stable at best.

KONE previously estimated its sales growth to be in the range of -10% to 0% at comparable exchange rates depending on the duration and severity of the COVID-19 related government measures and the pace of recovery. The adjusted EBIT margin was expected to decline somewhat or to be stable at best.

KEY FIGURES		4-6/ 2020	4-6/ 2019	Change	1-6/ 2020	1-6/ 2019	Change	1-12/ 2019
Orders received	MEUR	2,075.4	2,310.1	-10.2%	4,184.7	4,404.1	-5.0%	8,399.8
Order book	MEUR				8,307.3	8,407.1	-1.2%	8,051.5
Sales	MEUR	2,532.1	2,540.8	-0.3%	4,730.3	4,739.6	-0.2%	9,981.8
Operating income (EBIT)	MEUR	315.5	306.5	2.9%	512.7	521.8	-1.8%	1,192.5
Operating income margin (EBIT margin)	%	12.5	12.1		10.8	11.0		11.9
Adjusted EBIT*	MEUR	324.6	319.6	1.6%	530.2	548.0	-3.3%	1,237.4
Adjusted EBIT margin*	%	12.8	12.6		11.2	11.6		12.4
Income before tax	MEUR	315.3	310.2	1.7%	512.6	530.6	-3.4%	1,217.5
Net income	MEUR	244.4	238.8	2.3%	397.2	408.6	-2.8%	938.6
Basic earnings per share	EUR	0.47	0.46	2.3%	0.76	0.78	-2.5%	1.80
Cash flow from operations (before financing items and taxes)	MEUR	592.3	323.5		939.2	701.1		1,549.6
Interest-bearing net debt	MEUR				-1,330.2	-973.3		-1,552.9
Equity ratio	%				40.8	42.2		46.5
Return on equity	%				27.0	28.6		30.1
Net working capital (including financing items and taxes)	MEUR				-1,057.7	-805.4		-856.0
Gearing	%				-49.4	-36.6		-48.6

* KONE presents adjusted EBIT as an alternative performance measure 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 strong performance in a very challenging environment. I am immensely proud of how the entire KONE team has worked during this crisis. I am equally thankful for the trust our customers have shown us. From early on, we set ourselves a clear objective to come out of this crisis as an even stronger company. While the results will be seen in the coming years, it is clear to me that we have already made good progress. I believe that the KONE culture combined with our decentralized leadership model have been the key enablers for our good performance in these unusual circumstances.

The highlights in our second quarter results were the improvement in our adjusted EBIT and the strong cash flow. The challenging market environment was seen in our orders received, which declined 9.4% in comparable currencies. Orders received continued to develop very positively in China and in some European countries, while orders received in the rest of the world declined significantly. Our sales remained robust and were stable. As an essential service, maintenance has continued with limited disruptions. Installation activity has continued well considering the circumstances, and in China the recovery was very strong in the quarter. Going into this year we had an overall positive outlook for our margins. Even in the current situation, profitability improved slightly in the quarter. This was a result of good execution as well as selective cost containment partly offsetting the negative impacts of the COVID-19 crisis. Our policy throughout this crisis has been one of responsibility, by not taking actions that could boost short term profits at the cost of our longer-term competitiveness.

I was particularly pleased with the results of our employee engagement survey. The survey was carried out in the midst of the crisis and results were very positive. KONE employees wanted to be heard; 92% of our people responded to the survey. Our employee engagement score improved significantly from an already good level. The belief in our strategy as well as the direction of our innovation got exceptionally strong scores.

Our solid performance in the first half has given us the confidence to specify our business outlook. We now expect sales growth to be in the range of -4 to 0% at comparable exchange rates and the adjusted EBIT margin to be slightly down or stable at best. The COVID-19 pandemic is far from over and the level of uncertainty continues to be high. However, we have a solid order book to deliver upon and a stable and resilient maintenance business. In times like this, it's also more important than ever to be able to differentiate in the eyes of our customers. I believe that we have strengthened the foundation for this during the current strategy phase. Our skilled and motivated team, competitiveness, and robust balance sheet puts us in a strong position to face a continued uncertain business environment."

Operating environment in April-June 2020

In the second quarter of 2020, the global elevator and escalator market continued to be impacted by the COVID-19 pandemic. Governments across the world were taking significant measures to contain the outbreak by restricting the movement of people. In many places, this resulted in actions such as closing down construction sites and limiting manufacturing operations. In most countries, maintenance has been deemed an essential service which was allowed with some limitations. During the second quarter, COVID-19 had the biggest impacts in Europe, North America and several countries in Asia-Pacific, whereas China rebounded strongly from a challenging first quarter.

Due to the COVID-19 outbreak, demand in the new equipment market decreased in many parts of the world. In Asia-Pacific, the new equipment volumes grew clearly as a result of high level of activity in China. In the rest of Asia-Pacific, the new equipment markets declined significantly. In the EMEA region, the new equipment market declined clearly. The new equipment market in Central and North Europe declined slightly and in South Europe, the market declined significantly. In the Middle East, the market declined clearly. In North America, the market declined significantly.

Global maintenance market was relatively resilient, whereas increased uncertainty had a significant impact on the modernization markets.

Intensifying competition affected the pricing environment adversely in April-June.

Operating environment in January-June 2020

In the first half of 2020, the global elevator and escalator market was impacted by the COVID-19 pandemic. Governments across the world were taking significant measures to contain the outbreak by restricting the movement of people. In many places, this resulted in actions such as closing down construction sites and limiting manufacturing operations. In most countries, maintenance has been deemed an essential service which was allowed with some limitations. During the first quarter, COVID-19 had the biggest impact in China, whereas in other countries around the world the impact was more visible in the second quarter while the Chinese market recovered strongly.

In the new equipment market, demand decreased across the regions. In Asia-Pacific, the new equipment volumes declined slightly. In China, the new equipment market grew slightly with significant decline in the first quarter and significant growth in the second quarter. In the rest of Asia-Pacific, the new equipment markets declined significantly. In the EMEA region, the new equipment market declined slightly. The new equipment market in Central and North Europe was stable, whereas in South Europe, the market declined clearly. In the Middle East, the market declined slightly. In North America, the new equipment market declined clearly as the stable development in the first quarter turned to significant decline in the second quarter.

Global maintenance market was relatively resilient, whereas increased uncertainty had an impact on the modernization markets especially in the second quarter.

Intensifying competition affected pricing environment adversely in January-June.

Market outlook 2020 (updated)

The new equipment market is expected to be relatively stable in China and to decline in other regions as a result of the increased uncertainty related to the COVID-19 pandemic.

The maintenance markets are expected to be resilient, excluding the direct impacts of the lockdown measures.

In the modernization markets, the fundamental growth drivers are intact, but uncertainty could delay decision-making in modernization projects.

Business outlook 2020 (specified)

In 2020, KONE's sales growth is estimated to be in the range of -4% to 0% at comparable exchange rates as compared to 2019. The adjusted EBIT margin is expected to decline slightly or to be stable at best.

KONE has a solid order book and maintenance base for 2020. Excluding the COVID-19 related factors, KONE's profitability outlook has been positive. Targeted pricing and productivity actions, which have impacted the margin of orders received positively, are expected to support profitability together with around EUR 50 million of savings from the Accelerate program and other selective cost containments.

Profitability is expected to be burdened by weaker fixed cost absorption in many countries, the costs related to the measures to ensure the safety and wellbeing of KONE's employees, suppliers and customers and the costs related to the actions in the supply operations to ensure solid delivery capability among other things. Increasing subcontracting costs as well as the investment in building our capability to sell and deliver digital services and solutions are also headwinds for the adjusted EBIT in 2020 in addition to the COVID-19 related items. Foreign exchange rates are estimated to impact the EBIT negatively by around EUR 20 million.

KONE is expecting to have around EUR 40 million of restructuring costs related to the Accelerate program in the final year of the program. These costs are excluded from the adjusted EBIT.

KONE previously estimated its sales growth to be in the range of -10% to 0%at comparable exchange rates depending on the duration and severity of the COVID-19 related government measures and the pace of recovery. The adjusted EBIT margin was expected to decline somewhat or to be stable at best.

Press and analyst meetings

A Microsoft Teams call for the press, conducted in English, will be held on Friday, July 17, 2020 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.: +1 646-828-8143
UK: +44 (0)330 336 9105
Finland: +358 (0)9 7479 0361
Participant code: 4227853

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 2019, KONE had annual sales of EUR 10 billion, and at the end of the year approximately 60,000 employees. KONE class B shares are listed on the Nasdaq Helsinki Ltd. in Finland.
www.kone.com

KONE H1 2020 Half-year Financial Report