KONE Oyj

Henrik Ehrnrooth – President and Chief Executive Officer Eriikka Söderström – Chief Financial Officer

Elina Riutta – Evli Bank Andre Kukhnin – Credit Suisse Manu Rimpela – Nordea Jonathan Hanks – GS Michael Hagmann – HSBC Guillermo Peigneux – UBS Max Lewis – JP Morgan Jiahuan Wang – Exane Glen Liddy – JP Morgan Phil Wilson – Redburn Martin Flueckiger – Kepler Cheuvreux Norbert Kretlow – Commerzbank

Okay. Thank you, Katri.

As also my great pleasure to welcome you to our Q2 webcast, because we have good news to share with you. I must say that I’m very happy about the strong performance that we had in the second quarter that again shows the good execution and the breadth of our performance that we are able to achieve at the moment.

I will as usual start with our key figures, I’m going to be more in detail into orders received, sales and EBIT after that I’ll talk about our businesses and the markets and then how we have strengthened our competitiveness and finish up with our market and our guidance for the year. But starting with Q2 and our key numbers, as the heading also says, we had a very strong performance on a broad basis.

This we can see from starting with our orders received, our orders received were EUR2.2 billion, a growth of 21.7% compared to last year, or 6.3% in comparable currencies. Our order book reached an all time high EUR8.6 billion, a growth of 32%, or 15% in comparable currencies.

Our sales grew also, was EUR2.2 billion, a growth of 15%, or 6.8% in comparable currencies. What is important with our growth is that if continued to be profitable.

And that we can see from development of our operating income, which was now EUR325 million in the quarter, a growth of 23.5% compared to last year. The profitable growth can also be seen from our operating income margin, which now improved from 14.2% to 14.7%.

We also had a very strong cash flow, we can say it was exceptionally strong for quarter two was now EUR426 million. And our earnings per share grew a little bit over 30% compared to last year was now EUR0.51, so a very strong overall and broad-based performance in quarter two.

But also if we would take a little bit longer perspective and look at the first half of the year, we can also see a similar performance. Good growth in our orders received which were EUR4.2 billion, a growth of 20.3%, or 5.9% in comparable currencies.

Also, solid sales growth in the first half total sales of EUR3.9 billion, growth of 18.6%, or 6.9% in comparable currencies. And we also see that our growth was profitable if you look at it over a six-month period with an EBIT of EUR537 million, a growth of a little bit over 21% and improvement in our operating income margin from 13.5% to 13.8%.

Our cash flow from operations, a very solid and strong EUR638 million for the first six months. I'm very pleased now that we had a very good performance in quarter two, of course we can see now on a six months basis, we had a solid cash flow.

We had a slightly slower – casual start to the year in terms of cash flow, but I think we can see if we look on the six months perspective that’s even in a challenging market environment, we have been able to maintain good and healthy business practices, which can been seen from our cash flow. Earnings per share EUR0.80 compared to EUR0.67 in the comparison period.

Again, what has been the key enabler of dispute development that we have had, I would say it’s the very good engagement we have amongst out 48,000 people and all our employees’ commitment to continue to achieve good result and profitable growth, so, of course, a very big thank you to all of our employees for the great work done in the first half of the year. So if you look a little bit more closer at the numbers and I start with orders received, which grew at 21.7% or 6.3% in comparable currencies.

Here we had growth in orders received in all geographic areas and in both new equipment and organization business. I think the highlight on our orders received is that we had a solid growth in our volume new equipment business with a good growth in both Europe and North America.

The growth in Asia Pacific was now somewhat slower due to also very high comparison point particularly major projects last year. In the important China markets, we continue to grow faster in the market.

We grew at close to 5% in volume terms when the market declined slightly, so a continued strong out performance as well in China. So I would say, overall, I'm very pleased with our performance on orders received, how broad-based it was, and how well we were able to continue a stronger growth in North America and accelerate our growth in Europe.

If you then look at pricing and the overall market environment, what we can see is that the fight for market share has continued to be very intense and we can see that that has had some impacts on pricing. But what I would say here is that in an environment we fight for market share and the impact on pricing has been tough, we have been able to, for example, in China grow continuously faster than market without sacrificing our margins.

And this – I think shows the strength of our performance. In an environment where market prices have come down slightly, but we’ve been able to maintain a solid level of the margins of our orders received.

And this has been achieved through a continuous improvement in our overall competitiveness and through a very good performance of our teams overall. So I would say overall broad-based and good performance.

If you then look at sales, here what’s the good news is that we had growth in all geographic regions and all of our businesses. If we start geographically, the fastest growth was in North America where our growth was about 14% in comparable currencies.

Our growth in Asia-Pacific continues to be a solid 7%; and in Europe, Middle East and Africa we grew at 4%. If you look at our businesses, what I'm pleased about is that our growth in our services business accelerated slightly.

Our growth in services overall was 7.1%, maintenance was 6.4%, and in our modernization business 8.8%. So clear acceleration of growth in our modernization business.

Also new equipment business continue to grow and was 6.6% overall. So here you can see the solid broad-based growth that we achieved also in sales.

And then finally, turning to operating income. And the main reason behind the broad-based positive development was really – will be achieved in sales on many fronts.

So we were able to have a good development in both our services business as well as new equipment business and in each of our geographic regions, so I am very happy about the underlying performance that we had. Translation exchange rates also had a significant positive impact on our operating income and they now contributed a little bit more than EUR40 million to our operating income, but even taking out that, we can see that the underlying growth was solid.

We continued to increase our investment in areas that support our future growth such as our investments in R&D, process development and IT and expanding our footprint in key growth markets in Asia Pacific. Also we continue to strengthen our resourcing in North America to cater the strong growth that we are experiencing in that market, so again also in operating income, a very broad-based and positive development.

And then finally on our numbers looking at our business mix and if we start business mix by various business lines, we can see that the trends that we have seen already for a while which is that our new equipment business continue to increase its share of our sales that’s continued and new equipment was now already 56% of total sales. Here the main reason for the increase in the share of new equipment was translation exchange rates because we have – in new equipment business we have more sales in other currencies and euro than we would have in for example maintenance and modernization.

So the change in mix was mainly a foreign exchange driven mix change, same very much comes to when we look at by market here Asia Pacific was now 44% of total sales, Europe, Middle East and Africa 40%. But if you look at Americas, it increased from 14% to 16% that is of course both due to the strong underlying gross in Americas in comparable currencies as well as of course translation exchange rates.

So that’s about our numbers, let me next go into our various business lines. And we start with new equipment business and first about our performance.

As I mentioned I think the most important point is that our orders received in volume business grew clearly. In the major project business – now slight growth as a result of a very significant comparison period last year.

And the growth as I mentioned was strong in North America and also accelerated in Europe, Middle East, and Africa. In Asia Pacific, we’re able to grow in China, in Australia, and in India.

Percentage wise, the growth was the fastest in Australia and India, but as I mentioned in China we grew as close to 5% in a market that decline slightly, so very strong performance overall. If you then look at the various markets and we start with the Europe, Middle East and Africa region.

First of all, markets in Central and North Europe, we were rather stable, but the positive thing is that we saw these stabilization now of the markets in South Europe. Here a continued recovery although from a low level in Spain, but also we saw markets such as France to start to stabilize and that’s of course positive.

So if you look at Europe overall, I would say that we’re seeing a slightly more positive overall sentiment than in previous quarter, so not significant but at least slightly in the right direction. And also what have developed slightly better than we expected is the overall market in the Middle East that grew from a good level last year.

In North America, markets continue to grow, say previous trends continued there and Asia Pacific, their market volumes weakened marginally because of the slight decline in new equipment market in China. Markets continue to grow in Australia and the recovery continued in India, so those were both positive.

Now, let me address China again a little bit more in detail because I know there is lot of questions relating to that, so I can try to address some of them upfront. The first message related to china is that we had a good performance.

We continued to outperform markets and grew faster than the market at close to 5% when the market declined slightly. If you look at the markets overall, one of the important points to remember is that the market is not one homogeneous market.

The market actually has many different environments within it. If you look at the Tier 1 cities, the market development continues to be positive.

There is growth in the market. The overall real estate markets are quite strong.

And our customers in those markets are developing well and growing. If you on the other hand look at some of the lower tier cities, we see a fairly more challenging situation and we can see that our customers have challenges in getting financing and also inventory levels are at a quite a high level in some of the cities.

If you look at the overall markets, we can also see that the area where we see most growth is infrastructure and that is of course driven by stimulus measures, other than that we don’t see a significant impact from stimulus as of yet, but are return to that. If you look at the overall pricing environment in China, as I mentioned earlier that the competition for market share specifically in China is very intense.

But particularly in China I would say that we have been able to grow in a declining market without sacrificing our margin and that’s we have been able to achieve as a result of a very good development in our overall product competitiveness, the strength of our team on the ground and our good and broad distribution in the market. I would say if you look at the overall pricing trends, we're continue to be challenging and we can expect also that situation continues, but of course our objective is to continue to improve our competitiveness as we have very successfully done in the past as well.

Now going forward, we expect the market for this full year this year to be stable or slightly down. If you look at the impact of government stimulus in the market that is not significant and we can't receive as of yet other than in the infrastructure segment.

So the market remains uncertain and in some places very challenging. But I think, also we've received that there are some good news also coming off to the markets.

In the second quarter, for example, real estate transactions increased quite solidly throughout the market and we could start to see in the past few months that pricing improved in the top 100 cities now on a sequential basis. So, I think that this positive development gives us again confidence in our longer-term view in the Chinese markets of the continued strong urbanization on the improving quality of urbanization.

So we can say despite the challenging markets, we can see that if competitiveness is strong then it’s a big market with a lot of – opportunities, it’s also possible to – as we have shown to perform strongly in that market environment. So let’s again a little bit more in detail about the Chinese market and our performance there.

Let me then go to our services business and start with maintenance. As all of you know, one of our most important strategic objectives is to accelerate the growth in our maintenance business.

And I am happy to say that our maintenance sales developed positively in all geographic regions on earlier good trend, in fact, a slight acceleration even. And our sales growth in Asia Pacific continue to be strong, so good overall performance in the maintenance business.

If you look at the markets, we can say first of all that Europe and North America, markets continue to grow although as before it continues to be differences in the market environment overall. And competition – in competitive environment, it continues to be tough in many markets.

Asia Pacific, here we continue to see very good trends in the market, the markets continue to grow and that’s of course a good thing for us given the very strong market position we have in Asia/Pacific overall and that we can see how we are able to turn that into a strong sales growth in that region. Then if you look at our modernization business, here our orders received grew slightly.

Also our objective here is to accelerate the growth, so this is an area, where I think we can do better. Modernization sales grew strongly in North America, here we are doing quite well, but within Europe, Middle East and Africa, I believe we have good potential to improve our growth rates.

If you look at the markets overall, North America markets continue to grow somewhat and also markets in Central and North Europe grew, but in South Europe, they remained at the weak level. In South Europe, I would like to highlight one positive market, which is Spain, and here we can see again from Spain that when the overall market economic environment improves, then we can also see a clear correlation to the modernization market.

So as we know the Spanish economy is recovering and we can see that clearly in the modernization market. But overall I said many of the South European market still remain challenging.

So that about our businesses and our market developments. Let me then go to our development programs, as you know, we have always three-year cycles in our development programs – as you know we have always three-year cycles in our development programs and we’re now halfway through them.

I would say first of all that I think we have had solid development in them overall and we can see that we have strengthened our competitiveness in many areas. Today, we always highlighted one of the areas.

I wanted to highlight what we’ve done and what we call our program the Most Competitive People Flow Solutions where objective is to have the most competitive elevator and escalator offering and develop solutions for smart buildings. So first of all, here the focus is again on how we can strengthen our competitiveness in the key growth markets.

And that we have done again during the half – first half of the year. In the first quarter, we launched the KONE I MonoSpace elevator that is specifically designed for the Indian residential market.

It brings all of KONE’s strength to in this product with right comfort with energy efficiency and what is new, what we are bringing to the Indian residential market is a much more attractive visual design and options in that side. So I think that the attractiveness of the elevators would bring into the residential market in India, we’re clearly taking to a new level with this product.

And I must say that I’m very pleased how this has been received by our customers since it has been launched. Another important growth market development is the overall infrastructure and public transport market for this we have launched a new version of our infrastructure escalator, KONE TravelMaster 140, to again make sure we have a stronger competitiveness in this key growth segment.

And also when we look at the smart buildings, we have strengthened our offering in North America with our People Flow Intelligence solutions and related to that we have also launched our turnstile 100 product in that market. So again, you can see many different improvements in our competitiveness in key growth markets of the world.

And then finally, our market outlook which we have slightly specified, starting with new equipment markets. First of all, Asia-Pacific, the market is expected to be rather stable in 2015.

And the Chinese markets, as I mentioned already we expect that to remain stable or decline slightly this year. In Europe, Middle East and Africa, we expect the markets to grow slightly.

In Central and North Europe market expect to be stable or grow slightly and in South Europe, we expect to start to see a recovery although from a low level, but at least we can start to see a recovery and this we can see through the recovery we seeing already in Spain and the stabilization of the market in France. In the Middle East, we are now expect the market to grow slightly this year.

In North America, we expect the good trend to continue, their markets continue to grow. Their maintenance markets here the overall outlook is the market environment will remain very much similar to what it’s been so far so the market to grow overall, but with variations from market-to-market and we expect that the development in Asia-Pacific will continue to be positive.

Modernization markets rather stable in Europe, but continue to grow in North America and Asia-Pacific and given the weight of Europe we expect the market overall to be rather stable or grow slightly. So I would say, perhaps the most important – on the positive side, most important changes or that we are seeing a slightly better environment in Europe.

And then finally, KONE’s business outlook, we have now six months of the year behind us. So we have specified our outlook and on sales we have now narrowed our range little bit, so we expect sales to be between 6% and 8% in comparable currencies, previously we expected to between 6% and 9%.

In the first half of the year, we’ve grown at about 7% so I think this range is very much inline with that. And if we look at our operating income, here we now expected to be EUR1.190 million to EUR1.250 million and here we assume that translation exchange rate now remain at the average level of January to June 2015.

Previously, we expect that the range to be from EUR1.140 million to EUR1.230 million assuming exchange rate the level of January to March. So previously, we expect that translation exchange rates would bring about EUR100 million positive to our result.

Now we saying we expect with this translation exchange rates, it will be positive of about EUR100 million to EUR120 million. So we look at the specification of our range, we can see that actually most of it is because of good underlying performance, but also because of improvement in translation exchange rates.

So I would say, if you look at this outlook, we look at the strong order book we have and the broad-based strong execution we have, I think we have quite a good confidence for our performance for rest of the year. So with that, I think we have now good time again for questions.

Hello, Elina Riutta from Evli Bank. On the strong modernization sales now in Q2, it was negative in Q1, is it kind of lumpy?

Or is the underlying sales growth better now?

So if you look at our performance over the past quarters, so we’ve had better performance in orders received than in sales. So now, we’ve just had more of the sales coming through from the order book.

There is some seasonality of it, but it’s particularly the good performance in North America where our order book is stronger and we’ve grown our orders received for the past couple of years quite strongly where they start to come more through around.

Okay. And then on the Middle East, you are expecting some growth now versus stable with Q1.

Could you talk a bit about what’s happened in the market? Why it’s more positive now?

So we actually – in Middle East it's increasing, we see quite a broad-based good markets in many different countries in the Middle East and in many different sectors. So there is a quite a lot of infrastructure happening, but also the residential market is quite good, so it’s not one specific market, it’s actually quite broad-based.

Thank you.

Okay. And we are now ready to take questions from the line.

So handing over to the operator. Please.

Yes, good afternoon. Thanks for taking my questions.

So can I start with just a couple of questions on China, could you tell us or could you confirm that in a backlog, the margins that you're booking right now that they're comparable to the current backlog or to the sales level, given what you've said on the pricing environment and your ability to compete in the following market without sacrificing profitability?

Yes. So as I mentioned a strong competition in the market, but I think if you look at how we’ve been able to strengthen our competitiveness in this market environment.

We have been able to compensate the pressure in the market overall. So yes, you’re right so that the margins we’re booking are consistent with the margins in our backlog.

Got it, thank you. And could you tell us, in terms of your two brands in China, KONE and Giant Kone how are they performing against each other and against the market.

Are both growing at the similar space, one outgrowing the other this is the market?

First of all, we look at our China market one whole and it’s important to have the two different brands we got. When the market environment is different at some point one grows more than the other in this current specific environment given that the performance is stronger in the higher tier cities with larger customers then we see a better development overall for the KONE brand given the overall market.

So here in this, we can also see a slight difference between the two but this situation varies between the two. So I think it really that’s the strength we have is that we can really see the difference in the market and cater to different market environments.

Got it. And just on Europe, it’s nice to the improvement and sentiment but could you help us, just thinking about the gearing of that impact on KONE.

Should we think about it as a sort of a turning point, but in terms of actual meaningful for tangible improvement or impact on your bottom line, it will be somewhat later on once that starts translating into high additions to installed base and therefore may be pricing pressure easing on service or would you anticipate actually any early impact from this already from the new equipment piece, just sort of being aware of very low profitability of that segment. How should we think about the impact from Europe getting better on your bottom line?

Well. I would say, first of all, let’s put it in perspective as I said slightly and the Europe is going in the right direction.

If you look at Europe, Middle East and Africa plus 40% of our overall sales, of course it’s important. And I think what’s important here is that now that we had a Asia market that was slightly slower, somewhat slower than we’ve seen in the past years.

We were able to actually grow well because we were able to accelerate our growth in Europe and continue to have a strong growth in North America. So, of course it has some impact when we start delivering these orders.

I think you have to remember that our revenue streams come from a broad set of countries project and different businesses you’ve seen those countries. So it usually not one single market that is driving profitability, but as we saw again, it was broad based.

So I don’t know how I would – I don’t think that there was much more in detail into that. But of course always a growing market is more favorable to profitability developments overall.

Great, thank you, Henrik. I appreciate it.

Thank you.

Okay, good afternoon. Two questions from me.

Firstly, accounting on the China. So you mentioned that you’ve been outperforming the market and we know that you’ve been doing that for quite some time already and you say that improved distribution and improved competitiveness are the main reasons for that and also why you are able to keep prices higher.

I was just wondering if you would be able to kind of give some more concrete examples of what this exactly means. And then secondly, on the outlook you gave for the group, and especially for areas outside of China, so you sound cautiously optimistic on Europe and fairly upbeat on U.S.

And then if I look at the order intake on organic basis excluding China, I think it was up 8% in Q2 compared to last year. So I think that’s a pretty strong number.

So should we read into that that 8% is a cautious growth number you think or how should we think about that 8% in the context of your comments?

Okay. Can I ask then – going on that we take one question at a time because I must say that your second question was so long that I most – I’m not sure I quiet understood your second question.

So if you could – I’ll start with the first one, where do you see, if I can give something specific on China. I think the point is, that it’s a very broad market.

We have a broad and I would say very strong team in China. It’s a very broad customer base.

So in a market where you have both strong and weaker situations, its all about who has the best team on the ground with a strong product competitiveness and good distribution, who finds these opportunities. So I don’t think I can’t give you anymore specifics behind it.

It’s about even a challenging environment they are lot of a good opportunities in market. How do you find them, how do you make sure that you have a product that is competitive against it, and the sales force that knows where the opportunities are and how you price them?

That’s what it’s all about. Its not about individual situations, it’s about having a broad based structure to be able to deliver that.

And I must say – sorry, one of your second question, I did not understand.

I’ll repeat that one. So, I think your outlook is – if you look at the orders in Q2 on an organic basis, I'll take out China.

So I get number something like 8% growth in organic order intake outside of China and you sound still fairly cautious on the kind of European recovery and okay upbeat on the U.S. We are just trying to understand that, how should I think about the cautious comments, still on the kind of outlook, but then pretty strong organic growth outside of China.

So should we see that if Europe started picking up then that number should be a little up higher going forward or just help how should I think about that?

Well, first of all, as you know we don’t guide our orders received. So we don’t given outlook on that.

And as you know orders received can fluctuates, we have to remember this is one quarter, they can fluctuate quarter-to-quarter. Outside that – our message is that we are slightly and I would underline we are slightly more optimistic on Europe when we see the trends in there, and we continue to see a good market in North America.

So overall, if you have a growing market, and if you have your competitive is in shape then you can of course find good growth opportunities. I don’t know how more I would comment on that.

Okay, thank you.

Thank you.

Hi there and just one on China again. Sorry about that.

And just on payments specifically we just have a numbers of pays coming and we're seeing payment terms in China, specifically. Just wondering if you’ve seen any impact there at all.

Thanks.

Thanks, well. Eriikka, do you want to – do you want to address that?

Yes. So I can comment about the payment terms in China.

So yes, it has been slightly tougher situation due to the competition. But we have been able to hold on to our good payment terms.

So nothing dramatic there, so good cash flow from China.

And I think the overall…

Okay, thank you very much.

I think the key point as you can see our continued strong cash flow. I think that shows how we’ve been able to run our business.

Thanks, very clear.

Good afternoon, several questions if I may. The first one; if we now look at the fact that you have 45% of your orders from China 40% of sales.

If you look at it from a risk controlling perspective. So I was wondering.

Have you been increasing your controls or change the way that you manage the cash how you get the cash out of the country just in order to make sure that if we see a precipitous decline in demand in China the company is safe guarded. In second question and would be what is the risk that we are now seeing orders.

Michael, let’s take one question at a time.

Okay, sure.

That would be appreciated. First of all, where was been a certain market gets more challenging or a specific area in a market is more challenging, clearly it take more deeper look at that with focus and controls in place to make sure you strengthen your resourcing in areas to make sure that you collect your money and you maintain your payment terms and also, as you know, we are been able to repatriate our cash from China, so from that perspective, we're pretty good situation.

Okay. And then if you now look at the order trends, obviously you've been saying that the market is not done in the second quarter.

We've seen, as you know very weak housing starts and obviously also weak completions. I see that we are seeing a sequential improvement in pricing.

Nevertheless, there is this over build that we have particularly in the lower-tier cities. So how big do you think is the risk that we actually see a meaningful decline in the market for the rest of the year and in 2016?

Well, as always the outlook that we give for the market that is our best and transparent outlook for the market. So we don’t believe that we will see a situation that you are describing.

We expect the market said to slightly decline or be stable year-over-year, because we continue to see, as again you have to remember that the market is not one homogeneous market, have many different situations and there are lot of higher-tier cities that are actually in pretty good shape where inventory levels are improving and are nothing higher than where they've been on average over the past several years and we continue to see good urbanization in lot of cities. Then you have others where the situation is more challenging.

So I think when we look at this net-net that’s how we come to our outlook and we – and based on current of customer activity and the activity on the ground that we see. That’s our best and most transparent outlook of the – for the market.

Would you dare to look into 2016?

As you know Michael, we don’t at this stage of the year given outlook for 2016. I think what's important as I mentioned that we still are confident that urbanization will continue to be strong in China and the quality of urbanization will continue to improve and that is driving the density of elevators and escalators into market, driving higher standards of living, all of which are positive.

So, I think what I mentioned is that when we start to see now again transaction volumes improving quite strongly in Q2 that gives us confidence of longer-term market has good opportunities even though we see the clear uncertainty at the moment.

Thank you, can I also ask about net working capital trends? Obviously we had not quite a regular pattern if you look at the second half of last year, Q1 this year and Q2 this year.

Can you give us your expectation for net working capital development in the second half? Thank you.

You want to take that Eriikka?

Yes. So first of all, we don’t give guidance to our balance sheet items and cash flow either, but yes we have seen fluctuation, but that is like mostly related to payables.

But I would say that the net working capital is negative EUR950 million. So we are very pleased with that level.

Thank you very much.

Hi, there congratulations on the very good, very solid results for the second quarter.

Thank you.

One thing I want to further understand is your EBIT margin in the second quarter actually advanced a lot. So could you help me to understand what kind of – like the major reason that drives the EBIT margin growth?

Well, I would say that there are two main reasons behind it. One is the overall solid performance we had on a broad basis.

So that brought us good profitable growth and good profitability. Also, when we have a favorable translation exchange rates at this level that little bit also helps our margin, because just if we look at cost such as research and development and process development those are more euro weighted.

So therefore a shift in exchange rates little bit helps our margin, as well. But I would say it’s a combination of – it’s not one specific area, I would say it’s the broad based solid execution plus then little bit of exchange rates.

Thank you. Is the low material cost and also power supply also helped to that?

That has helped a little bit. Eriikka our raw material impact for the quarter was …

About EUR5 million.

About EUR500 million. We have to remember that one of the areas we said and we have strengthen in the competitiveness of our offering.

We have slightly benefited if not much on raw material, but has been design, change and sourcing impact and so forth. So there are many different areas that contributed to that and that’s the reason we’ve been able to maintain a good and healthy level of our orders received.

Could you help me to understand the cost structure of your new equipment production?

In which way?

Like, how much is from raw materials and parts, how is from labors, things like that?

So first of all, raw material is not that significant of a part. We have to remember that we don’t buy really raw material directly, it’s embedded in components that we acquire.

So lot of the standard or most of the standard component elevator we buy from are suppliers, we then assemble some of the parts ourselves so I would say, most of the cost come from buying components from our suppliers. And of course, they have all of the components in…

So in cost structure, what’s the breakdown of the component supply outsourced from party?

That’s a very significant part of our cost base on new equipment is what we buy from suppliers. So I think – yes.

Do we see like price decline from those component suppliers?

They always – you have to look at – the answer is yes, and you have to look at where does it come from, it comes from of course working with suppliers on improving designs. We have to remember that with very significant volumes we have, we have a good benefit in the market of getting benefits from that volume.

So it comes from many different sources.

I see. I see.

The other thing I want to understand is you just confirmed that there margin for the backlog is pretty much consistent from previous year. If you look at the new order intake from China, would you say on apple-to-apple basis, the ASP also maintain as like pretty much the same level or ASP probably also slightly declined a little bit, which kind of like offset by the cost decline.

How would you comment on that?

So as I mentioned because of the fight for market share there has been price pressure in the market and prices had been declining slightly. So, yes, prices have declined slightly, but we’ve been able to compensate that with improvement in our competitiveness and as a result, we’ve been able to defend good margins in our business.

Thank you, if I use your full year guidance on the EBIT and a back out to the second half EBIT which is comparable to the second half of last year.

I would say if you look at our outlook, and I think the point is that we expect a continued solid performance.

Yes, it’s quite solid because second half of last years EBIT margin was if it’s not historically high it should be close to historical high. So I’m not sure if my calculation is right, if I just used your EBIT, put your EBIT margin – EBIT guidance and then back out the second half EBIT margin for this year, which is quite comparable to last year.

We don’t guide our margin, we give a range for sales – in comparable currencies. And we give a range for operating income for that you can see that we expect to continue to have a good and solid development in the second quarter.

That’s the point.

Okay. Thank you very much.

Thank you.

Yes, it’s Guillermo I’ve been here from UBS. Two questions if I may.

Could you comment a bit on how the price declines in China actually compared to the price declines that you saw in Q1? And is it fair to assume that as order declines for the market, not so much for you that the price competition is probably going to increase going forward?

I would say that the overall trend, I don’t think has changed that much from quarter one, so in that sense is not a big surprise. And let’s see, I think we continue to expect a very competitive environment, but also we expect that we can continue to perform strongly if we look over a period of time in that market as we have done so far.

So, I wouldn’t expect any significant change to that overall equation.

And the second question is regarding a comment you mentioned earlier about density of elevators. I’m just puzzled a little bit because if total floor space under construction at the moment is roughly flat just quite a bit.

But actually on your statement you say that order intake, orders for elevators are actually going down. That would imply it actually – it is declining where we are increasing.

How can you read that density comment from yours? Thank you.

Well, I think if you look over – I think when you look at density, you have to look at it over a fewer period because when you look at orders and you look at floor space they don’t go exactly and sync. So you don’t – you can’t compare them exactly.

But if you look at it over a some period of years then you can see a continued improvement in the density, what the improvement is exactly right now that’s why its difficult to say because you kind of have to average over a number of years because the two statistics – the data points you can’t they’re not quite apples for apples.

That is interesting because I was doing that theoretically, I can agree with you on the density comment when you compare elevator installations on new starts then I can see that this is an increasing amount of elevators spare a total 1 billion square meters have it. But then, if I compare the total elevator installations to the total for a space under construction is actually a very, very, let's say, one to one relationship almost 90% correlated.

So I just I'm partial because new starts is a very early indicator. It takes three years to build in China two to three years.

So I just wonder whether this is actually density increases at all over the last five years for the Chinese market.

We would expect that it has been. I don't have the exact numbers here with me, but that’s based on our understanding that definitely has been a continued improvement in density when you look at what types of buildings and how many elevators they have and what regulation requires.

Okay. Thank you.

Hello. Thanks for taking my question.

I want to ask a little bit more about what you’re doing with suppliers and with lower your cost base and moving forward. If you tell more about that, more about the fire policy not only in here but also in China, that would be interesting.

Staying on the topic suppliers, one of your key suppliers when they recently announced they were starting production of elevator, elevator component in South America in order to serve this not any in the South American but also in North American market. What kind of opportunity do you see there and did you view that as an opportunity secure more components from one of your large supplier slightly lower rate you mapping historically?

Well, first of all, I think on the first question you had – I can't give you an exact answer because if then will be one specific area where you could get a very significant improvement that would mean that you haven’t done a good job in the past. So this comes from many different streams.

It’s really a combination of continued development of your offering, of your product, of the materials and components you use them, how you apply them, how you can reduce number of components and of course, there is some also action on the sourcing side, how we can benefit from increasing volumes you have and standardization and so forth. It's just such a broad plethora of areas you need to look at, when you talk about the overall strengthening of your competitiveness.

And South America supplying to the U.S., we have many suppliers. I don't know exactly what maybe it could give us some opportunities as you know, we are not in South America, maybe it could help our suppliers in North America, I don’t know.

We have eight good – we have good suppliers there. There is good competitive situation.

So I think that, I don’t think that’s such a big individual factor for us.

Okay, thank you very much.

Hi, thank you for taking my question. It’s Jiahuan Wang from Exane.

I have a question regarding the service business in China. And could you give us an update on the conversion rate in China in Q2, please.

And maybe the sales split between service and new equipment and the growth rate in service? Thank you.

So we continue – first, we start from a growth perspective, we start continued strong growth in our service business in China. We said that it's been compounding, recently that's about 25% and it continues to do that good level.

So that’s positive. It continues still to be less than 10% of our sales, but not much use on that front and an overall still conversion rates not the big change.

So for the KONE brand, we continue to operate at around 60% and then if we include Giant KONE for the whole KONE it's bit lower.

That's okay, thanks. And I have a follow-up.

You have increased your workforce in China last year by about 20%. I guess, many of them therefore your investment in the service team and how is the headcount development in China for this year – for now or you have a general target for the end of the year?

Well, we haven't set a specific target, but we continue to increase our headcount in China particularly as you said on the service side that's a more, I would say, labor intensive part of the business. And I think there when you grow one of the important areas as we continue to get more skilled technicians into your workforce to make sure that you can have a good service delivery.

So we have very active training programs ongoing in China and we will continue to expand our service workforce in the market. That’s – I guess how specific we can be there.

Okay, thank you and may be one last question about your American business. We see the order accelerated this quarter.

It seems the biggest driver is volume product maybe I am wrong because I was just reconciled your comments with volume product growth. And so can you give a little bit more color on this, are you getting more market share in the U.S.

or its general online market is rebounding more faster?

We believe that we would have grown in the first half of the year, clearly fast than the market in the United States. I think we have a good competitiveness there.

The market is growing, but I believe that we are growing faster than the market.

And the key driver behind this, do you have any reasons?

Again we have…

Which segments are growing faster?

I think it’s – the segments are growing are both commercial and residential. And if you look at the trends in the North American markets, they are favorable for us, because the machine room-less segment overall continue to take market share from the hydraulic segment and we are very strong player in the machine room-less market.

So we have a good overall competitiveness in the market. We have strengthened our team.

So I think in that sense we have – you have to remember, it’s not only product, it's the team you have on the ground, it’s a combination of that then and I think we have been able to improve on both sides.

Okay, very clear. Thank you very much.

Thank you.

Good afternoon. In terms of the margins for region equipment, I think in the past you suggested that China is around the group average, but in developed markets it's below the group average.

Is that still the case?

Our best new equipment margins are in China. That's correct.

So going forward, if we’ve got no growth in China and strong growth in the rest of the world, do you think you can keep the order – the margin in the order backlog at the current level?

I wouldn’t start speculating on that. I think, Glen, our objective is to continue to grow profitably, if we can continue to improve our competitiveness, we can also our profitability in each of the markets, that’s how we look at it.

The most important point is that when we grow, we grow profitably. They are slightly differentiation in the profitability, but that’s the most important point and that’s the way we continue to generate good cash flow returns in this business.

And for China, are you seeing any cancellations of orders.

The very – no, not really. I mean our cancellations overall have continued to be at very low level has to have been in the past, so the answer that is no.

And in terms of the delivery profile, I know you don’t give us an average delivery time, but the order backlog today particularly for China stretching over the next 12 months. Is it the same percentage of the backlog that will be delivered over the next 12 months, as you had over the last 12 months or it’s the time getting longer?

Eriikka, do you want to comment on our delivery backlog profile.

Yes. I would say that the rotation has remained approximately in the same level that in the – as in the previous years.

Okay. Then thank you very much.

Thank you.

Hi, can I ask anyone, I have got two questions please. Firstly on your price impacts the comments on China.

Can you give some commentary on what price developed you've seen and quite in terms you seen in Europe and North America. I know there's a commentary in the press release perhaps some quantification towards pricing trends you’re seeing there?

Thanks.

First of all, if we start from the most positive area, so in North America our pricing is improving, so that – that’s good. In Europe overall no significant change, we have to remember many of our European markets are still quite weak, even though we see that slight positiveness and positive development we have.

And I think in China as we’ve said that pricing is slightly down even the strong competition for market share there.

I think in the past have been, your Chinese market price slightly down 2% to 5%. Can you scale way European pricing is [indiscernible] and where North America pricing is [indiscernible].

We don’t usually open up so that you had remembered Europe are so many different markets as well and little different development there. But I think overall I said positive trends in the U.S., Europe more mix, but more stable and China I think we discussed already.

Okay, thank you. And just coming back on Chinese maintenance.

Great growth, growing 25%. I think due to the conversion rates haven't really changed much.

I'm just curious as why you are not seeing that conversion rates move up either joint kind of – kind of brand given the investment of going in and maintenance that works for – currently why conversion rate [indiscernible].

But as you know the overall market structure is such there are a lot of independent players that they also continue to grow there. I think, what's important is that we continue to grow at a very good rate in China.

We have a good performance. I think, it's clear that over the coming years are objective these to increase the conversion rate, but given the market structure is not something you change overnight, but I think our clear objective over the coming years is to improved that.

Because the conversion rates have been rising there from 2007, 2011 when they compared to more than a 7.5 years. If you think it's fair that we've get come to the level at which that property price much further?

I don't think so, I think, as the market develops, I think the focus on quality of service and productivity of service will become more important and I think then we'll have a good position. So I'm confident that – over time that will be a favorable development, but it's not something that will change overnight.

I would say, the good thing is that particularly with KONE brand our performance continues to be solid and we are very significant presence in the market.

And how these -- share it from competitive install base in China or you still very much focus on the road install base for now?

China base is predominantly KONE equipment and Giant Kone.

Okay. Thank you very much.

Thank you.

Good afternoon. This is Martin Flueckiger from Kepler Cheuvreux.

Two questions if I may. And just going back to your outlook on new equipments and market growth in China.

Looking at the recent statistics coming from the National Bureau of Statistics of China by the way as I'm aware of the statements you made on the heterogeneity of the market, but just looking at those as statistics, particularly looking at land purchases and looking at new construction area, and looking at inventory levels overall looks the outlook of a stable to only slightly declining market, particularly given the fact that's Q2 was only slightly declining and seems to be somewhat overly optimistic and how would you respond to such a claim. That’s my first question and then secondly coming back to…

Let’s take again one question at a time.

Sure.

I think it provides more clarity, that’s why. I would say, you have to remember that we have a very – I think first of all we have very good team on the ground in China.

We have a very broad team on the ground in China. So we followed that market very closely there, of course have close relationships with our customers.

Based on everything we see in development in the market in China this is what we believe at the moment and also when we look at overall real estate investments in the market. This is our best and most transparent view and what we of course are committed to stick to.

Okay, thank you very much. And then second question I’m coming back to the EMEA particularly Europe, if I remember correctly, the statement in the Q1 sorry, Q2 report was that Europe overall was flattish to slightly up and if I remember also correctly the statement on your own order intake growth in Europe was looking for clearly growing in Europe.

I think that those were the words. So if there’s a discrepancy you gaining market share, and if yes from whom?

I would say that we had overall a good performance, and did we grow faster than market? We probably did, whoever taking market share, I mean I don’t know from probably that – I can't exactly say, but I would say overall, I would say that, I think, the key message and the current takeaways from the quarter is that our performance was very strong on a broad basis including Europe..

And I think that's important and that’s where I'm very happy about how strong the execution we have a strong execution we had on a broad basis.

Okay. Thank you very much.

Thank you.

Good afternoon, ladies and gentlemen. One follow-up on China if I may.

Could you share your view with us on effect of the stock market drop it looks like in particular private investors has been hurt and could there been any spill-over effect to developers offering and lower return for their properties [indiscernible].

I think they are better experts to access the impact of the stock market volatility we've seen in China. I think the best understanding we have is that if they can keep it more stable at these levels or if the market keeps, stays more stable at these levels the wealth effect should be limited, and in the end, the number of private individuals active in the stock market is not that high.

So at least based on the intelligence and understanding we have so far it has not had a significant impacts on either investments in real estate, in fact investments in real estate’s are going up at the moment and also consumption seems to be pretty solid.

So you are hearing no complaints in the developers?

We have not seen any significant impacts in our developer customers on this.

Good to know. Thanks.

Thank you.

Thank you. We are then ready to conclude the call for today.

So thank you everybody for your participation and we would like to wish you a very nice rest of the day. Thank you.

Thank you.