Interim Report of KONE Corporation for January-March 2020

KONE Corporation, stock exchange release, April 22, 2020 at 12.30 p.m. EEST

Interim Report of KONE Corporation for January-March 2020

January-March 2020: Resilient sales and orders in an exceptional operating environment

• Orders received grew by 0.7% to EUR 2,109.3 (1-3/2019: 2,094.1) million. At comparable exchange rates, orders grew by 0.3%.
• Sales were stable at EUR 2,198.3 (2,198.8) million. At comparable exchange rates, sales declined by 0.5%.
• Operating income (EBIT) was EUR 197.2 (215.4) million or 9.0% (9.8%) of sales. The adjusted EBIT was EUR 205.6 (228.4) million or 9.4% (10.4%) of sales.*
• Cash flow from operations (before financing items and taxes) was EUR 346.9 (377.6) million.

Business outlook for 2020 (unchanged)

KONE estimates that in 2020, its sales will decline or be stable at best at comparable exchange rates as compared to 2019. The rate of decline in sales will depend on the duration and severity of the COVID-19 related government measures and the pace of recovery.

• Stable sales would require a relatively brisk recovery in the second half of 2020 and sustained positive progress in KONE's largest market China.
• KONE's sales are expected to decline by less than 5% in case the restrictive measures would impact KONE's business mainly in the first half of 2020 and there would be a gradual recovery in the second half.
• Should the broad and strict government measures continue to impact KONE's operations well into the second half of 2020, KONE's sales are expected to decline by 5-10%.

The adjusted EBIT margin is expected to decline somewhat or to be stable at best.

Profitability is expected to be burdened by weaker fixed cost absorption due to lower sales, 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. Excluding the COVID-19 related factors, KONE's profitability outlook has been positive.

KEY FIGURES		1-3/2020	1-3/2019	Change	1-12/2019
Orders received	MEUR	2,109.3	2,094.1	0.7%	8,399.8
Order book	MEUR	8,386.4	8,454.7	-0.8%	8,051.5
Sales	MEUR	2,198.3	2,198.8	0.0%	9,981.8
Operating income (EBIT)	MEUR	197.2	215.4	-8.4%	1,192.5
Operating income margin (EBIT margin)	%	9.0	9.8		11.9
Adjusted EBIT*	MEUR	205.6	228.4	-10.0%	1,237.4
Adjusted EBIT margin*	%	9.4	10.4		12.4
Income before tax	MEUR	197.2	220.4	-10.5%	1,217.5
Net income	MEUR	152.8	169.8	-10.0%	938.6
Basic earnings per share	EUR	0.29	0.33	-9.4%	1.80
Cash flow from operations (before financing items and taxes)	MEUR	346.9	377.6		1,549.6
Interest-bearing net debt	MEUR	-970.2	-837.3		-1,552.9
Equity ratio	%	39.4	39.4		46.5
Return on equity	%	21.6	24.8		30.1
Net working capital (including financing items and taxes)	MEUR	-964.3	-938.5		-856.0
Gearing	%	-39.2	-34.7		-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:

"During the first quarter, we faced challenges that were unimaginable at the beginning of the year.While the first outbreaks of COVID-19 took place in January, the scale of the global impact could not be seen until March. At KONE, we have been able to successfully overcome significant challenges brought to us by the pandemic. Our robust supply chain has continued to deliver to customer needs with minimal interruptions across the world and our maintenance operations have continued to ensure that people can move safely in buildings. All this with safe working practices. This has been possible because of the phenomenal commitment of our people and the collaboration within KONE and with our customers, suppliers and partners. I am immensely proud of the entire KONE team. I would also like to thank our suppliers and partners who have also incredibly well risen to the challenge.

KONE's first quarter results were clearly impacted by the COVID-19 crisis.The biggest impacts came from China, India and South Europe as a result of wide-ranging restrictions. Our performance in Central and North Europe and the Americas was very strong on all fronts in Q1. I consider the overall outcome a good achievement in this environment. Our sales and orders received were stable at comparable exchange rates. I am pleased that service sales continued to grow at a good rate. New equipment sales declined by 5% as a result of the February lockdown in China that halted KONE's new equipment business in the country. Orders received grew in Americas and Asia-Pacific driven by China and declined slightly in EMEA. Adjusted EBIT margin declined by 1 percentage point as a result of COVID-19 related extra costs and weaker fixed cost absorption. Looking ahead, it is clear that in terms of results development, the worst is still ahead of us in most parts of the world. The impacts of COVID-19 will be significant in the coming months on our business in Europe, Americas and many parts of Asia-Pacific. On a positive note, our China business has recovered rapidly, and the current level of customer deliveries is very high. 

We have taken decisive actions to mitigate the impacts of the current crisis and to find new opportunities.Our priorities are very clear. First, we ensure the health and wellbeing of our employees. Second, we support our customers; and third, find opportunities to become an even stronger company. Simultaneously to working on business continuity plans we have continued active development of our offering and the roll-out of our new solutions such as the DX Class Elevators. While taking many actions to contain our costs, we have accelerated some of our investments in new services and solutions and in training and developing our employees. Our clear objective is to emerge as an even stronger company following this crisis. The strength and motivation of our team, our strong balance sheet and market positions put us in a strong position in this difficult time."

Operating environment in January-March 2020

In the first quarter of 2020, also the global elevator and escalator market was impacted by the COVID-19 outbreak. 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, where the outbreak began in January, whereas in other countries around the world the impact started to be more visible towards the end of the quarter.

Despite the COVID-19 outbreak, demand in the new equipment market was still fairly resilient in many parts of the world. However, there started to be signs of increasing uncertainty towards the end of the quarter. In Asia-Pacific, the new equipment volumes declined significantly. In China, the new equipment market declined significantly in units as a result of the COVID-19 outbreak but started to recover in March. Also in the rest of Asia-Pacific, the new equipment markets declined significantly. In the EMEA region, the new equipment market was rather stable. The new equipment market in Central and North Europe grew slightly from a high level, where as in South Europe, the market declined slightly. In the Middle East, the market was stable. In North America, the new equipment market was stable on a high level.

Global service marketscontinued to develop positively, but uncertainty increased towards the end of the quarter especially in modernization. 

Pricing environmentremained relatively stable in January-March. However, there were signs of some pricing pressure towards the end of the quarter.

Market outlook 2020 (updated)

The new equipment market is expected to decline across regions as a result of the increased uncertainty related to the COVID-19 outbreak. The Chinese market started to recover in March.

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 (unchanged)

KONE estimates that in 2020, its sales will decline or be stable at best at comparable exchange rates as compared to 2019. The rate of decline in sales will depend on the duration and severity of the COVID-19 related government measures and the pace of recovery.

• Stable sales would require a relatively brisk recovery in the second half of 2020 and sustained positive progress in KONE's largest market China.
• KONE's sales are expected to decline by less than 5% in case the restrictive measures would impact KONE's business mainly in the first half of 2020 and there would be a gradual recovery in the second half.
• Should the broad and strict government measures continue to impact KONE's operations well into the second half of 2020, KONE's sales are expected to decline by 5-10%.

The adjusted EBIT margin is expected to decline somewhat or to be stable at best.

Profitability is expected to be burdened by weaker fixed cost absorption due to lower sales, 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. Excluding the COVID-19 related factors, KONE's profitability outlook has been positive.

KONE has a solid order book and maintenance base for 2020. 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 cost containment actions. Increasing subcontracting costs as well as the investment in building our capability to sell and deliver digital services and solutions are the main headwinds for the adjusted EBIT in 2020 in addition to the COVID-19 related items. KONE is also 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.

Press and analyst meetings

A Microsoft Teams call for the press, conducted in English, will be held on Wednesday, April 22, 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.

An audiocast 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 audiocast will be available on www.kone.com later the same day. The event can also be joined via a telephone conference.

U.S.: +1 929-477-0630
UK: +44 (0)330 336 9104
Finland: +358 (0)9 7479 0360
Participant code: 746643

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 Q1 2020 Interim Report