KONE Oyj

Sanna Kaje – Head, Investor Relations Henrik Ehrnrooth – President & Chief Executive Officer Ilkka Hara – Chief Financial Officer

Ben Maslen – Morgan Stanley Klas Bergelind – Citigroup Andre Kukhnin – Credit Suisse James Moore – Redburn Partners Lars Brorson – Barclays Manu Rimpela – Nordea Martin Flueckiger – Kepler Cheuvreux Michael Kaloghiros – Bank of America Glen Liddy – JPMorgan Tomi Railo – SEB

Good afternoon and welcome to KONE's Q3 Results Presentation. My name is Sanna Kaje and I'm the Head of Investor Relations.

I have here with me today our President and CEO, Henrik Ehrnrooth; and CFO Ilkka Hara. As usual, we will start with a presentation by Henrik on the highlights of the quarter.

Okay, thank you, Sanna, and also welcome, everyone in the room and everyone following the webcast. It's again a great pleasure to report to you the results we have achieved in the third quarter.

We had a good performance again and I'm particularly pleased that we continued the performance strongly in an environment that we all know that has been challenging already for a while. So I think we have -- again, clear demonstrated but also in a more challenging environment that we can continue our good performance and find good opportunities out in the markets by working with our customers.

The usual, I'm start with our key figures, go a little bit deeper into some of them, and also about some of the areas that we have developed Kone, and some developments in our programs and after that, to talk about markets and then wrap up with our outlook for the markets as well as Kone's outlook. Let's start with the key figures for the third quarter of this year.

As you can see on the heading, we had a solid development on a broad basis. Our orders received were €1.77 billion, growth of 0.4%, but if we look in comparable currencies, growth was now 3.3% - this I'm pleased about.

Our order book remains very strong at €8.7 billion. Also it has grown at 5.6% in comparable currencies from last year.

This I'm sure gives us a good situation for the coming years. Our sales, €2.17 billion, it declined slightly if we measured in reported currencies, however in comparable currencies, we continue to grow and we grew at 1.9%.

What is most important with this is that we continue to grow profitably. Our EBIT of €331 million and we can see improvement in our EBIT margin from 14.9% to 15.3%.

This was a strong performance. We also continue to have strong cash generation.

We continued very positive cash generations over €400 million of cash flow in the quarter and also our EPS grew. Now, as we've always said, one quarter is a very short period of time to look at our performance and so it's better to look at slightly longer period of time and now at this stage of the year, we actually have nine months to look at.

We can see how we've done on a slightly longer term. For the first nine months, we can say that it's been a continued good operating performance.

Our orders received at just shy of €5.8 billion, they declined at 3.8% or 1.2% in comparable currencies. Sales have continued to grow at €6.2 billion, 1.7% growth, but again in comparable currencies in this type of environment, what I believe is a very solid number, 4%.

But again here, perhaps if we look at the first nine months, the highlights are our EBIT are more than €900 million for the first nine months, improvement on margin from 14.2% to 14.6% and what I'm very pleased about is the very strong cash flow we have continued to drive at Kone. €1.1 billion of cash flow for the first nine months is a very strong achievement and I'm very happy about that.

Our EPS has also improved from 130 to 142 for the first nine months. I think it's clear to everyone that performing strongly in an environment like this requires a committed, motivated, dedicated team and this, I believe we definitely have at Kone.

Everyone at Kone has continued to really look to find opportunities how we can improve in this environment and this again, my heartfelt thanks to all Kone employees for the great work that they have done during the first nine months or ongoing, what they do for us as company to drive us forward. So those are the key numbers.

Let's go a little bit deeper into orders received, sales and EBIT. Orders received growth of 3.3% in comparable currencies and here, what I'm very pleased about is that we had a very broad-based strong performance and that compensated the challenge situation we are facing in the large Chinese market.

Here in Europe, at least in Africa, we continue to grow in double digits at very strong performance. Also in North America, we continued a solid growth from a good level and also the rest of Asia Pacific grew in a good way.

So we can see that the objective we have had during the past years is to find broader-based growth to compensate, but what we have already known for a while, Chinese markets getting more difficult, this we are definitely delivering on. If you look by business, continued double-digit growth in our modernization business, which I'm very pleased about is also here.

The efforts we have put in over the past few years to strengthen amortization business that drive growth, it's happening. We also had a basic [ph] month now of good growth in our major projects business.

If we now look at China, I know that there's always a lot of questions about that and of course it's an important and big market for us. In China now this quarter, we did outperform the markets.

Our orders received grew at close to 5%. If we look at our orders received in monetary value, they declined in high single digits.

But we can see that the markets continues to be price-competitive and we can continue to see a shift that our customers prefer to lower specification product. If you look at this combination in fact for us continues to be roughly 5% in price and roughly 5% impact from mixed to lower specification product.

If we look at the margins for our orders received, the most important point is that the margin of our order book remains healthy. However, given the price pressure that we have seen in China, the margins for our orders received in the Chinese market declined slightly now in the third quarter.

But overall, if you look at the orders received, I am very pleased about the broad based strong performance that we have had. If I then turn to sales, the growth to 1.9% in comparable currencies and here the highlight is really the services business.

Our services business we have been delivering good growth in that now for quite some time and as we continue. Modernization business continues solid double digit growth at 13.4% and our maintenance business also is very solid 6.1% growth.

These then compensated the slight decline we had in our new equipment business. Also if you look at this by recent growth in Europe, Middle East and Africa and get merit growing at good rate than compensate before a decline in the specifics.

So here a specific outside of China continues to record good growth whereas our sales in China now decline at around 10%. And is of course a natural consequence of the fact that our orders received started to decline earlier this year and order to delivery lead times are about 6 to 9 months so I think this is totally logical.

But overall, we're very pleased about the growth in our service business where actually we have been growing at a good rate in all geographic regions. And in turn to our operating income our EBIT, here you will be very pleased that we have continued our profitable growth and improved our margins from 14.9% to 15.32% and the driver of the good improvement in our margin was the supposed development we have had in our services business both in maintenance and in modernization.

We were both growing at good rates and be able to improve our margins through the work that we have done. It's clear that profitability in the new equipment declined slightly but remained at a good level because sales declined in new equipment.

We also continue to have other areas that burden our EBIT development such as continued increase in investments in Research & Development and in IT and also foreign exchange continues to be a clear head wind. For the quarter head wind from foreign exchange is about $30 million for the first nine months so far, the head wind from currencies is about $30 million.

And overall good development and actions we have taken we have been able to continue our good profitable growth. If I then turn to our sales split.

As an actual consequence of the fact that our services business has been growing faster than our new equipment business the share of sales also increased. And particularly in modernization, that is a good slightly more balance overall sales mix.

Even by area North America is increasing its share as it is the fastest growing area in terms of sales for the moment. China represented about 30% of our total sales in the quarter, a little bit over 30% of the sales in this quarter.

Turning now to our financials, and you can see that renewed performance and I am pleased about the achievement. Let me then next go to how we developed our business, bring again some highlights from our development program after which we will go into more detail into our markets as well as our outlook.

Starting with our development programs; as I believe it's familiar to all of you we are now in the third year of the current set of development programs and these are coming to the end of this year. We have had lot of good achievements and we continue naturally to drive them with good momentum towards the end.

I have few highlights here. In Q3 as usual we have completed our annual customer loyalty survey where we got feedback from more than 30,000 customers from around the world.

The results remained at the high level and perhaps the most important development is that we had a good development in our services business and that's thanks to the structured approach. We have had to drive actions based on feedback from customers, any form of customer communications.

These are very important in services business and we are very encouraged at what we do and we can see the result and that's why we are continue to drive forward those actions. The other highlight I wanted to bring up here is our most competitive people process solutions development program.

Here I am very pleased to say that we have a very good momentum in the adoption of our key high-rise technologies. The technologies where we deliver very unique value to our customers and where we have very strong differentiation.

Our UltraRope Hoisting Technology has good momentum, it has been ordered to some very prestigious buildings around the world and we have a very good vendor pipeline for it. Our jump lift construction time elevator has great momentum.

This is really a unique solution that's going to provide how we help our customers speed up construction work, make it safer and better. We have a number of great customer testimonials and usually when customers are using this they realize that the productivity they get out of their construction for high rise buildings is very strong and we can see that great development for product solution.

And also, I would say virtually all of the commercial buildings where we are delivering the solutions to our customers they also have people code intelligence to make people flow in the building smoother, better with a better experience for the users and better monitoring for the building owners. So overall good momentum in each of this.

And also a very nice accolade we had during the quarter is the Forbes magazine every year released their 100 most innovative companies in the world. We were sixth year running on this list as the only company in our industry and we were ranked number 56.

It is of course a nice encouragement and recognition for all the work we have done. Naturally the way we measure the success of our innovation is how our customers view it and get option and the added value we can provide to them.

It is of course a nice encouragement to all of our teams for the work they have done. So this is about our development programs.

If I then turn to markets, so -- so far it's all been about how we developed but now let's talk about market in more detail. And let's start about new equipment markets and I will pick them in the size order of the markets and start with Asia Pacific.

Now in the quarter we did see that new equipment markets in Asia Pacific stabilized. And the reason for that is the decline in the China market moderated in the quarter.

So it declined only slightly in the quarter. Although price competition did remain intense in the Chinese markets.

Rest of Asia Pacific and because particularly growth in India, then southeast Asia as a market pretty stable but mixed and Australia slightly declined from a high level as I know Australia has been developed very positively already for many years so it remained strong but came slightly down from a high level. I will come at the end of this again with more details.

Europe, Middle East and Africa we saw some growth in South Europe that's positive. As predicted the market is recovering not fast but it's going in the right direction.

However, Central and North Europe now in the quarter was a slight decline. We continue to see a good momentum of potential in the market.

However, if we compare to the quarter of last year there was quite a lot of activity in the third quarter last year and then on top of that Brexit also had an impact on the market. So we saw slight decline although we think that many markets that's good momentum.

Particularly Germany is developing nicely as are many other Nordic countries. Middle East rather stable despite the uncertainty in many parts of the region.

North America as you know we are under 7 gross year of the market so it's at a good level and it continues to grow slightly from there. Also this has made pricing in the market continued to improve slightly.

Overall, we can see a mixed environment on new equipment. But let me again -- let me pause here and talk slightly more detail about China.

As I mentioned already in Q3, the markets declined now slightly. So it declined moderate as somewhat compared to the first half of the year.

Year-to-date, our estimates is the markets has declined at about 5%. However, if we look at the monetary value with the markets, that has declined significantly more -- both as a result of price competition and also what I mentioned customer preferences going more to value to affordable products.

Therefore, we can see a clear impact from this. Price competition has continued to be intense.

I would say trend pretty much the same as we have seen earlier in the year. As I already talked, what I'm pleased about is that in this quarter, both if we look at units and its monetary value, we did outperform the market, but the unit where Kone was up at close to 5% than in monetary value, our decline was high single digits.

Now, what is happening in the Chinese markets? We of course all see that the market for real estates, I think residential real estate has been very active and prices have gone up a lot.

And there used to be particular in a limited set of the higher Tier cities, where momentum for our property market perspective is very strong. However, as we know, lower tier cities, it continues to be an excess supply which is good in a limit on development there.

But if we look at total real estate investments they are growing only slightly and one can question that why is the market not growing faster given the very positive momentum and a strong market for residential apartments in particular? We have two situations here.

I think we all understand why lower tier cities are not developing better, because the inventory is there -- although they're coming down, they remain at the level where there's still room to be worked on and therefore of course developers are cautious in starting much view in these areas. If we then look at the higher tier cities, what is restricting developers from accelerating the development and meeting more of this demand are very high land prices, but that is putting a limit on the development potential in the higher key cities.

So we have these two areas that are impacting and we can also see that in particular Tier-1 cities, we have seen a lot of restrictions imposed by the government to cool down the markets overall in these cities and we're seeing that growth has spread more to Tier-2 and Tier-3 cities in the vicinity on Tier-1. So market continues to be challenging, particularly the residential side which is a segment that is declining.

As you know, our approach continues to be that we are not maximizing market share, what we want to do is to find a good balance between pricing, volume, our good development and I think that we've shown, we've done so far this year. If we look at the markets, what you see from our outlook is that we have slightly changed the outlook for the Chinese market for this year.

Earlier, we expected the markets will decline between 5% and 10%, now we expect that the market will decline at about 5% for the full year. And this is because this moderation or decline started perhaps a bit earlier than we had expected and also the year-to-date decline is about 5%, so we expect similar level for the full year.

You'll notice again a little bit more in detail on China as going back to our markets and go back to our service markets and I'll start with maintenance. Start with largest market; Europe, Middle East and Africa; here markets continue to grow although clear difference market-to-market and price competition continues to be intense.

Similar situation in North America, some growth and price competition rather intense personal [ph], not as intense in Europe. In Asia Pacific, here, development continues to be positive throughout the region because of high and new equipment deliveries over the past years.

In modernization, markets grew somewhat in Central North Europe and South Europe, here also we have positive views and that we are starting to see early signs of recovery in many of South European markets. That's good after many years of decline.

That is definitely positive news. And both North America and Asia Pacific markets are in good level and growing slightly.

With this, let's wrap up with our outlook. New equipment markets here in Asia-Pacific, as I mentioned, China is expected to decline at approximately 5% in units order, however, competition is expected to continue intense.

Our rest of Asia-Pacific, some growth. Europe, Middle East and Africa grow slightly in Europe as stable in Middle East and North America, continue the same development we're seeing so far since slight growth from a good level.

Our maintenance, very much the same trends we're seeing so far over growth, but differs country-to-country with the best growth of course in Asia-Pacific. Any modernization also pretty much the same trend we're seeing so far grow slightly in Europe and continue to growth in both North America and Asia Pacific.

In this environment, what do we expect from Kone? Here we can say that our outlook, we have specified it.

We have now nine months behind us so we can make a little bit tight arrange and we expect our sales to be in between 3% to 5% growth in comparable currencies. Probably we expected that between 2% and 6% so we can see we just narrowed the range.

In EBIT, we expect our EBIT to be in the range of €1.260 billion, to €1.320 billion assuming the translation, exchange rates remain at the level of January to September. If they remain on that average level, then the headwind from currencies for this year is about €45 million.

So a little bit more headwind than we have our guidance in Q2 and if previously we had €1.250 billion to €1.330 billion was our previous. So also here, despite the fact that we have a little bit more currency headwind, we have tightened the range a bit.

And then just to wrap up highlights of this quarter, I'm very pleased about the orders achieved growth because of the good development we have had on a broad basis. Also, strong development in EBIT, during by the positive development we have had in our service business and we can see that even in difficult environment, we are able to find good opportunities to develop Kone going forward.

With that, I think we have a good time for questions.

Thank you, Henrik. Now it's time for your questions and please let's take one question at a time.

Do we have any from the audience? I guess most of the people are following us over the telephone lines.

So operator, I'll hand over to you.

Yes, thank you. Good afternoon, Henrik.

A couple for me. Please firstly just on China, you've notched up your guidance for this year, but I think the capital markets, they gave a preliminary view on '17 that the market will be down, but down less than this year.

I just wonder whether that view on '17 changed at all, given your treat to the '16 guidance, firstly? Thank you.

In the capital markets, we said this that when approach, going into 2017, we expect that the decline will moderate and as we've seen now already. We haven't given an outlook for all of 2017, it was only as we go into the year and that's a trend we are seeing now -- perhaps start a bit earlier than we have expected, but nothing new to report on view for next year.

Thank you. And secondly, you mentioned that you need to step up your investment in R&D or in IT going forward.

I just wonder whether you'd already started increasing that spending, or we would see that headwind more coming through next year?

If you look at our report, you can see that R&D expenditure is up, compared to sales, 0.2% point for the third quarter now compared -- actually today compared to last year. It's gradual, it's something we're going to have a step change and it's particularly in the services side perhaps where investments are increasing more.

Got it. Thank you.

And then just looking at the dynamics in China. Pricing sounds tough, just looking at your commentary.

It looks like price mix was weaker in Q3 than it was in Q2 and you talk about slightly weaker pricing in the backlog, particularly as this is coming from China. Given steels going up in China, wages going up, how confident are you that you can maintain the levels of margin there and I guess that the only way you can do that is with productivity, how much can you keep squeezing out productivity and offsetting what is a tougher market.

Thank you.

You can get perspective on this. In the past couple of years we have had a positive development in our overall competitiveness, productivity and cost competitiveness in overall in China elsewhere as well but particularly in China.

And with that we have been probably a little bit ahead of the curve of how the prices have declined and of course one and only one of the areas that has been declining is raw material prices. So clearly we have conceded with the actions, we believe there is continued work we can do but raw materials display that they aren't currently for their mark increasing so that as we now look, it's likely to be a head win.

So we have to be able to see how we are able to continue this but so far this year we have had a good momentum and perhaps the raw materials have changed in trend that we are looking next year.

I will drop back in the queue. Thanks, Henrik.

Thank you.

Yes hi Henrik, it's Klas from Citi. I was late on the call, apologies if you have already provided answers for my questions.

Also want to get back to the price mix. The price mix [ph] was minus 10; we're just wondering if it's similar in the quarter and then back -- then you said pricing minus five and -- minus five posted a similar relationship this time?

I would say very much similar trends yes. I mean of course these are rough numbers, we are not talking about the exact but yes direction both are similar to what we saw in Q2.

Okay. Then we got some conflicting messages from your peers yesterday with Schindler saying that pricing worsening and could land at 10% negative towards the end of the year while better pricing is now more stable, this obviously depends on each company's previous price levels, the comparative and all, the exposures [indiscernible].

As we focus on your mix, can we talk a little bit about what you think about price going into the second half?

Right, as always we do not comment on pricing going forward. Each pricing decision is a negotiation between us and our customers.

We can look at what history has been, what we can see is that the competition in the market remains intense and we have this -- the cranes we were talking about which continue but in the pricing, that we have to see how that evolves into that something we can't comment one something outcome. But again, that's something we have with our customers, negotiation with each one separately.

Yes, absolutely. Then back to Nick, you said lower ASP go down.

Can you help us understand you see customers trading down, this is the result of lower demand in Q3, weighing on the ASPs or you also see customers trading down in Tier 1 and Tier 2?

I would say because of highland prices now they are also increasing developers they are looking at all options to find savings there as well and also there lot of good products in the lower categories. It's now that they are worst elevators or escalators but breaking the elevator side, we're talking about a more standardized products when it now comes to speeds and sizes and interiors and so forth so it's just that you are going through more standardized range and therefore it's more affordable.

That is what we would say.

Thank you.

Yes good afternoon, thanks so much for taking my questions. Just a couple, firstly in terms of your profitability on those low end products, would you say it's different to high end?

Mark we have discussed this before. A good thing situation we have is that our core competitiveness is good on a broad basis but it is clear to say we sell a more value product even if you have a good percentage margin of that monitor value of your profit is going to be less.

That's just a mathematical difference but yes we have a good profitability on more affordable products.

Great yes sort that was exactly about the margins rather than the absolute size in profits. And then quite interesting to see your top line in China already declining at 10%.

We thought lead times are just a little bit longer than you seek in Q4 beginning of 2017. The balance of volume versus price mix within that 10% decline, is it comparable to what you are booking right now to what you have been booking say in the last six months i.e.

you expect it to change substantially and the reason I am asking is that I think the message has been quite consistent that the prices were reduced at the beginning of the year by everyone and that is sort of seeing trend. But when we try to run some sort of average selling price calculations or change in value of your orders in China it seems to have quite a clear trend of first worst volumes both methods ASP and now lower volumes ASP and just trying to understand if that's something that we should be actually focusing on or what you are seeing in your cells right now represents what you will in 6 months' time.

Yes I would say this mix shift has probably something that started more Q2, Q3 this year so perhaps that mix is still coming through with ASP on sales going forward. There is of course a gradual shift is not going to happen overnight.

We can see, in this environment continue to have solid deliveries and I think it's natural when the orders have declined in the year we will now start to see these effects.

Right and just the very last one if I may. Beginning of the year was clear message on China that looking at the bigger player now you are not going to participate in price wars, you are not maximizing market share and will look for the mix of profitability and growth but you said in this presentation as well.

Is this message kind of absolutely firm right here right now as it was nine months ago?

You are probably referring to the fact that now we grew faster to the market. You know we have to remember that one quarter is a very short period of time to measure.

You are going to have fluctuations from quarter-to-quarter. If you will look at year-to-date our development is probably roughly in line with the market so I think the message is definitely still intact.

Good, thank you very much.

Thank you.

Yes hi everyone. I have got some question on China.

I wonder if you could help us a little bit more on this price mix. I think you said units down five to you and the value.

Sorry, the units not five and the value down high single-digit. Does that mean that we are talking about a price mix that is sort of 12%, 13%or 14% above what you saw last quarter and I wonder if you could help us by splitting that into price mix of half-half or has there been a shift around?

So, volume growth was at close to 5% and probably a bit less than that and then pricing would be and so looking at roughly 5 and 5. And again as we discussed in the previously quarter it's not detected.

But that's roughly what we talking about and as remained pretty much the same as it was in Q2.

Thanks and the service margin you talked about being up today and driving the better group margin can you say if the equipment margin is flat year-on-year or up year-on-year or down year-on-year on a global basis?

The margin in new equipment grew but when the volumes are down. Also, there absolute profits are down so their main improvement in profitability clearly came from services and we have to remember that the new equipment China was the one where the decline is coming from and that's as we know where we have higher margin and other parts of new equipment business.

So, is the percentage margin down in equipment globally?

As a result of that on a global basis would be slightly down, yes.

Right, okay and finally. I wonder if you could help us a little bit with the Chinese equipment margin today.

I know you don't give it and the numbers you peers have and I think in 2014 you talked about it being broadly in line with the group and I think you hopefully said in '15 that it has gone up from that. I guess the revenues are still rising or about to turn, but still rising this year in China.

Is it fair to say that the Chinese margin has gone up again? And might we dare to think of this as the highest 20% yet?

I'm thinking about a starting point to try and model the challenges that may come.

Okay. Revenues for China in the third quarter were down, in total about close to 10%, but our margins are good.

If we look over the past years, up until 2015, we grew that margin significantly this year. But that is of course important driver for our profitability.

I think we have good margins in China. Now, sales in the quarter in China did decline.

And can you help us at all with the starting point versus the group? Or is that difficult?

It is about the group, yes.

Okay, thank you very much.

Thank you.

Hi, Henrik. Just two questions for me, please.

Just on the outlook for China and the slightly better than earlier expected, can you say by segment where that is coming? Is infrastructure proving to be stronger than you previously expected?

You obviously announced a very large order yesterday in China -- one of the biggest ever for you in that market. Or are you seeing something different in residential or commercial that's proving a little bit better?

And as you're looking to '17, I wonder whether you can give us a sense for whether you see some risk particularly on Tier-1 and Tier-2 cities on the back of the cooling measures we see coming through now?

Actually, no. The residential markets is clearly the largest market.

Infrastructure is important, but that segment is more partly over our market. So that has continued to develop well because of stimulus measures, also commercial, more or less stable.

I guess it is always the residential market where that drives quite a lot of the bigger movements. Perhaps they're a slightly better impact and you're right, they have an active cooling measures on some of the higher tier cities.

I'm glad to see how much that spreads and what the impacts are. But if you look at the transaction volumes and the prices, of course it's very strong.

If you look over longer period of time, it help to think to cool down the situation a bit.

Thanks and just secondly, a minor question perhaps on your minorities line. They're in a loss.

Is there a special chance coming through, or is giant corner in an underlying? Last one, is there anything else or in your minority line that I missed?

Ilkka, do you want to take that?

Yes, sure. Thank you.

That's actually correct. The major driver of that is the closure of our acquisition of Chinese corner and the said.

Once that is done actually within, less volatility going forward.

Sorry. Just to be clear.

So that's a charge, is it? Or is there an underlying loss in China corner?

No. It's an adjustment as we close transaction on what we had for the year.

So nothing material there.

Just want to continue with a good profitability.

That's what I thought. Thanks.

Good. Thanks.

Okay. Good afternoon.

Can you firstly help me to understand the margin in the third quarter? It was very good and you said in the second quarter that I think you used the word like 'all stars were aligned' or it was a very strong performance.

I'm just wondering, would that continued in the Q3 as well? I mean are you being able to run the whole engine of a lot better base now compared to previously, or is that the kind of more that we're starting to see that service growth picking up and that's driving the margin improvement more than what you're losing in the equipment at the moment?

I would say that each year, we have been able to improve our productivity and that continues. What I'm happy about -- and that doesn't always happen, but both in Q2 and now in Q3, this performance was broad-based from many different businesses and regions.

We have good execution of broad-bases and good execution means that you constantly in this environment, constantly to improve your productivity and you need to improve the value, provide to your customers, to develop your pricing and so forth. All that has continued.

Okay. And then one question on China from me as well.

You're commenting about the weaker margins and the order in place. So just trying to understand what has changed because you didn't have that comment in Q2.

So what has changed between Q2 and Q3 to mean that the margins have become weaker?

Just remember that the margins, you've booked at an estimated margin, you have what to deliver when you finish the project. And because of this very good momentum we have had in our competitiveness and cost that we have driving in China, we have been able to be a little bit ahead of the curve, you can say, of price declines.

Now perhaps as we start to see some headwinds in raw materials and others, it's easy to be as ahead of the curve and this is probably where the change is coming. We see them continue, see a lot of opportunities and we think we can improve our competitiveness, but then there are some things that are being external -- tailwinds are now turning to the bit headwind.

Okay and then final question in terms of pricing outside of China. Are we starting to see prices versus the North American services improving?

I think you mentioned that the pricing has improved in North America both related to the equipment, or more services, or both?

In new equipment, we have been able to improve our pricing in North America. Services continues to be very competitive there.

Perhaps not quite as competitive as European market, but I think we're on new equipment where the improvements have been seen. Europe, in the stronger markets, we've been able to improve particularly when it relates to compensate for costs of new codes and so forth.

Okay and would you classify it as in global excluding China about the pricing environment that was in the equipment and services that we're starting to interface where we would actually be able to gain some pricing power again after years of not having so much?

That all depends on how well we can deliver value to our customers because if we look at the world economy as a whole, we all know that it's quite fragile. I don't think that the external environment will provide a lot of help to that.

So it all depends on how we can drive forward and provide better value to our customers.

Okay, thank you.

Yes, good afternoon, gentlemen. Martin Flueckiger from Kepler Cheuvreux.

Thanks for taking my questions. Actually, a few of them have already been answered, so let me just stick to the ones that remain.

Going back to your statement on the markets, the new equipment market in China, I just wanted to clarify. When you talk about markets generally, not just to China, but for all regions, do you talk about the relevant market for Kone, or do you talk about the entire market?

That will be my first question.

Actually, we are not present in for example South Korea and Japan. We don't talk about those, we talk about the markets where we are present.

That's where we have an insight to understand what's happening in them.

Thanks. I understand that, but just within China, because the reason or where I'm coming from is also some conflicting statements made, but some of your competitors recently compared to the ones that you've made in your Q3 report today.

I'm just wondering where the difference in assessment between the various tiers comes from, whether it's the geographic positioning, whether it's the market segment positioning. Again, is that the entire market as opposed in China that you're looking at when you talk about market declines or increases?

Or is it just the market relevant to you?

I don't think anyone has broad of a footprint and broad presence in China as we do. Yes, we look at the whole market.

There's always going to be some differences between what we say and someone else's. We have to remember this, that market growth figures, that's an often absolute science.

It's based on what we see on our judgment. I don't think there are massive differences, but our approach in China is to understand the whole market because that's where we think that that's the market that we want to cover.

Okay, thanks. And then my second question would be on -- I'm not sure whether James had a question previously whether that was asked -- I'd refer to the same item.

I was looking at your minority interest which is negative this quarter, what was the impact there sorry?

Again, confirming what I said earlier so, it's an adjustment due to acquisition of the remaining state in defined corner, so it's not to do with the profitability of KONE as such.

Understood, thank you very much.

Yes, good afternoon. Thanks for taking my question.

Just one on cash flow; in the quarter your EBIT was up 2%, the operating cash flow is down 7% and we saw similar development in Q2 so I was just wondering, could you provide a bit more color on your working capital? Actually the cash flow from working capital this quarter is $40 million which is about half what you have had historically in your third quarters.

Is that just a function of trying to order the clients you seen given the favorable time set or is there something else going on? Thanks.

Yes, certainly. So I think overall we are happy with the cash flow so $1.1 billion in the 9 months this year is a good achievement as such.

And naturally there's many components that we were going -- so we have a, I will try to but China included as well, a good balance between advanced payments and inventories. In this difficult environment I am quite happy how we performed on that one.

And then thirdly, I think also the highlight that our receivable collection is progressing well and we have seen progress across the globe but especially in Southern Europe and in Europe in general in that respect so all in all I think a good progress there given the circumstances.

Okay. But you see a negative impact from China in terms of advance payments?

We haven't seen a change in payment terms as such so this is part of our negotiations with our customers and obviously any change in sales in China will have an impact there. But overall it hasn't had a major change with the overall situation.

Okay, great thank you.

Okay. Brian, perhaps the only addition I would have to add, we said we continue to improve our work and capital.

Remember our work capital is negative $200 billion so continuous to have working capital and have better cash conversion done and EBIT, I think it is a very strong achievement.

Yes sure.

Yes, thanks so much for taking this follow-up. So I just wanted ask a broader question about surface looking 2017, we kind of go across geographies and across maintenance versus modernization and should we think of any reason why growth should slow down in the markets?

I mean when we try to adopt kind of installed base additions and try to run kind of service models, it looks like if anything we should be accelerating and on modernization it's harder to track but you seem to be very firm on that market and some of your peers are very bullish. Any kind of broader thoughts on that looking 2017 without publishing an official outlook, we would much appreciate it.

If you look at, I am just going to comment more in general rather next year so our service, we are now being compounded at around 6% for the past 2 years and for services like this I would consider a very strong number. And of course what's helped there has been good growth in deliveries in Asia Pacific.

And we have lot of new units coming into service. I believe that we have ambition to drive continuous good growth there.

Nothing has changed on that side. Remember that the bigger the base gets we need to have even bigger growth the following year to get to the same percentage number and that is just simple math.

But the key point is ambition level continues to be high and compounded at a good rate.

Okay, got it. Thank you and just to double check on the increase level of investment that you highlighted at the capital markets day.

The 20 plus 20 basis points. Of which base is that given that you are already ramping it up as you highlighted as there is already 20 bits improve and increase in R&D for sales and year-to-date 2016?

Right. Probably if you look at some of our rolling basis from now on -- it is not benefactor that each quarter that much or that's kind of the trend, and it can fluctuate from quarter-to-quarter but we can see that this year this increased quite a lot.

We are going to see increase next year as well so if you look at rolling basis from now on for the next year or so.

Got it, thank you very much.

Thank you.

Hi, good afternoon. Just want to put your comment on lower gross margin into context.

I think in the past you were referring on your pricing pressure. You were able to offset by your customer competitiveness basically and supplier and raw material, each of them maybe one third.

Going forward I guess raw materials, I mean raw materials probably disappears. Do you think the pressure you can put on your suppliers where raw materials are, are you still able to do that?

As you have seen how we have developed in the Chinese market successfully together with the suppliers of course is to work with them on making sure that we can have sustainable business with them and therefore develop the solution and how we do things and what materials and design views and so forth. That would definitely continue.

However, as I said earlier, an added benefit to that and the main improvement has to been through the updates we have taken and that would really continue. But the added benefit to that has been that raw materials that had been declining now for few years and provided a good tail wind.

Now if you look at steel prices they are actually quite significantly and therefore that has been turning from tail wind to a head wind and the work with our suppliers continues but this is something that external factors more difficult to do it, to impact.

Okay so basically if we assume price is going down maybe 5%, maybe there's couple of percent of this that you can't pass-through and that is basically the difference in gross margin in your orders at the moment?

You know I will say that when we talk order about order safe margin that you have remembered, that is the estimate what we have today. And the real margin is what we deliver eventually to our customers.

When everything is delivered and we have done everything and so we have to see but it looks at the moment we are slightly down. I won't quantify it now.

Okay, thank you. And maybe just a follow up and taking a bit of a longer turn, perspective on long pricing in China.

I guess you had other countries which when through that phase of being very immature and the right margin on the OE and but sure aren't getting a bigger services base with the OE margin probably going down a little bit. How should we think about pricing in China medium-term and not just talking about the next few quarters?

But is it the market that basically is going to see another 5% or so pricing pressure for the next 10 to 15 years or should we think a little bit differently?

Again, I can't make comments on pricing going forward. What is good is that the services business has continued to grow at a good rate and if you look a few years forward and if you look at your share of the pie of profitability for the industry as a whole and I believe for us as well, I believe will come from services than it's today.

So clearly, you have a gradual shift but how that will happen, we have to see.

And last one Henrik on the investment in R&D and IT, we get 20 bps increase for those, then how should we think on absolute level as you roll our another kind of initiative that are supported by those investment? Are those investments going on?

I mean you needed to do more investments as you go into more countries or is it kind of like one-off investments? You do these, you go back to previous level of filing the IT or it stayed stable?

How should we think of beyond 2017 or 2018?

Good. There's a lot of new technology happening in the market and all these helps us to serve our customers even better and provide better value to them.

I think that this is a training that when technology is moving fast and shifting quite a lot, I think we are in a certain period of time. We are now in a structurally higher investment environment.

However, as I mentioned also in the capital markets day, the results we have from suddenly increased investments we've done -- for example the services side -- are very encouraging, so we believe that there is a payback, but of course investments comes first and then the payback comes later. But I believe that as technology continues to move, there are probably structurally higher level we need to see over the coming years, but again, we are very excited on what that can provide us in terms of providing value to our customers and also improving productivity in our business.

I think everyone will agree in saying that your capital allocation is very good. So being the way you think about these extra investment at the moment is basically this will allow you to remain a good 5% for maintenance and services goods for many years, kind of like in the super cycle in China.

Basically just how you'd thought about that?

Clearly, we are making these investments and continue our good growth, whatever that growth rate is. But yes -- why are we doing this?

It's to differentiate from the market overall. We want to provide the best value to our customers and we do that, we see great growth opportunities in this industries.

We see a lot of good growth opportunities in services. Remember, it's a very fragmented market with good organic growth in particularly, the Asian part of the world.

That's where we're investing because we see good opportunities there.

Understood. Thanks very much.

Thank you.

Good afternoon. If you looked at the revenue for Europe or the U.S.

in terms of an OE [ph] cost relative to the aftermarket value over a period of 10 years, how does that compare in Euro U.S. in China?

In U.S. products, our products are more expensive in Europe because we have a higher labor cost there and that tend to be larger and bigger equipment, but also service prices are higher.

So I kind of look at what is the relative new equipment to service price. I don't think that there's probably going to be a massive differences between the regions.

In China, yes, equipment are cheaper, partly because labor cost, partly because volumes and so forth, but also services are cheaper than the rest of the world. So is the ratio different?

I don't think there's going to be a huge difference.

Is the Chinese aftermarket profitability improving yet, or you're still investing a lot so it's not improving in its profitability?

What I would say about that Chinese service business is it has a good profitability.

Okay. And regulatory change in China.

If you got a view on when that might happen to trigger a big wave of aftermarket opportunity?

We've had some regulations over the past years mainly related to installation and mainly related to bigger repairs. They have significantly changed the market.

Now you have in some areas, you have some specific service regulations. We have to see how that changes, but if you look over the years, we can see that OEMs has taken all that on little bit bigger share of the service market.

It's not a huge shift, but it's going. Remember, Bill Johnson showed that in his capital markets day presentation, I believe that that trend will continue and the more demands, there are service as equipment will start aging.

Also the larger OEMs can show the value from utilizing new technology. I believe that you will start to see a gradual consultation of the industry.

And finally on China, direct sales rather than via a third-party, is that resulting in different pricing environment? Are you in more control of your prices if you're doing it direct rather than through a third-party?

Yes, a little bit different model. You have different models in China, but there is not a significant difference.

Okay. Thanks very much.

Thank you.

Hi. Hello, can you hear me?

Now we can hear you.

Okay, good. I apologize.

Tomi from SEB. Can you just -- also on China -- give a comment on the maintenance growth for the third quarter?

We continue to grow as a good rate year-to-date. We are close 25% in the third quarter.

We're about 20% growth in China. So continue to compounded a good rate in China.

Thank you.

Yes, thank you. Just a couple of follow-ups, please.

Henrik, just obviously a little focused in the line and the report that says the relative margin of all is slightly lower. We've not seen that before, really, so I just wanted you to remember that.

Do you mean that the margin is lower on a kind of like-for-like basis for this similar equipment? Or is it lower because the mix is different?

Maybe there's more equipment in U.S., in Europe, less in China? Or is it a mix backwards?

As you say, people are trading down in China. I'm just trying to understand, is it a commentary around on a like-for-like basis, or is it a mix effect that's making the margin come down?

Thank you.

This margin is particularly related to China there on a like-for-like basis. Margins are slightly lower and as you know, that's the highest margin new equipment business so that is what has the impact.

Got it. Thank you.

And then just I want to have one on China. Can you give it's a sense maybe of what the book to bill ratio is on new equipment on China or how your backlog is looking?

If revenues in China are down 10% already, how much more the decline will we have to kind of process as we go into 2017? Any help with that would be appreciated.

Thank you.

We could have our book-to-bill, but it was proxy [ph] for China now.

Approximately in third quarter, if I believe correctly, it was 0.9%. That's what I remember.

It's around that. You have to remember then also that the third quarter is seasonally something where you have more delivers and less orders.

I think that's most as unusual.

Yes, okay. Got it.

But then looking into next year, you would still see even if orders flatten out from here which gives us what your guidance is implying for the market? There's still a sales declined process?

Orders received decline beginning of the year and for first half of the year. Now also in monetary value, they decline and you know lead time is six to nine months really.

That can draw your conclusion for.

Thank you. And then just going back to your point on raw material cost and how they can change going forward.

Your margin is an estimate of what you deliver now. It may change.

If you were to take and elevate your order in China now, how much do the component cost is fixed at the point of order and how much is variable that you will lock in at a point closer to delivery? Thank you.

Because the volumes are so high, you don't do it individually, quite a bit [indiscernible]. But as you know, what we try to do is that we try to lock in our prices on a periodic basis to smooth out any development this year.

We have been successfully locking in our prices at favorable levels and we have to see when there is rollover, what the impacts are, but you wouldn't do it individually because you have so many equipment in the order book, so you do it more rolling. Probably know that with looking in prices and hedging, you can -- due to for certain period of time, but of course after a while it does -- if underlying comes through it.

Okay, thank you. Thanks.

Oh, yes, thanks. Henrik, I just have a couple of follow-ups.

Really the non-Chinese business service pricing or maintenance pricing, I wondered if you could comment on pricing there in the U.S. and Europe and how that's changing?

I wouldn't say any significant changes. As you know, what we have talked about for a while is that the South European markets in particular, that's where the most significant price competition has been seen.

And given the fact that new equipment volumes have been low for many years there, that means that there's that much new equipment volume in the market and that has made them quite competitive. Not a big difference there.

North American markets continue to be price-competitive, but perhaps not quite as significant as we saw about a year back or so.

That's helpful. Thanks.

And just on the U.S. market.

I wonder if I could ask about the volume demand development. You had a good run for the last few years and I'm just thinking about the MRL share of the market, which has gone up a lot from 4% to 60%, 70% at that time.

I think if we ask a couple of markets then, but could you might as well think that and how fast it gets going up? Does it stay here or do we get a 95%?

Is it going to take a long time, or could it keep running at the same sort of pace? And embedded in that question is also, I see that starts for multi-family buildings, which I guess is what you have left, have come down quite a lot and your orders keep going up.

I wonder whether you see some volume crowds on the horizon because of those multifamily starts?

Let's start with this question about machine room less elevator versus hydraulic. It's continuous to shift more towards machine room less.

At what base? I can't say, but that's definitely their trend because also if you look at buildings in the U.S., they're probably starting to gradually get a little bit higher and we can see that the average floors have went up a little bit over the past years.

So hydraulic elevator usually is used in very low-raised buildings. We think that this trend is going in our favor and a machine room less elevator elevated just provides better value over the life cycle for the all the owners and users.

Now, we haven't given guidance for next year, but you have to remember that North America, U.S. market in particular, there's quite a big commercial component.

So it's not that residential-driven as Europe. Residential has been one of the growing segments and so far we're seeing pretty good momentum there over that as well, but maybe you have had some slowdown in some areas.

But as I said, continued good momentum overall in the market that we addressed with machine room less.

That's very helpful. Just probably for a rough mix of commercial versus resi, U.S.?

What could it be? There's not an exact number, but commercial probably seem to be more than half of the market, whereas in Europe, clearly residential is clearly the largest.

That's really helpful. Thank you very much.

Thank you.

Yes. Thanks for taking my follow-up question.

Just looking at your comparable base for Q4 in 2015, I saw some pretty strong growth if I remember correctly. I think close to 11%.

That looks like it does come back and forward. I'm a little bit surprised that you're still looking or considering 5% is doable as you put it in your revenue guidance going forward.

Is there anything that we should be aware of? Particularly with regards to top-line growth going into Q4?

How should we think about the dynamics going into the final three months of the year? Thank you very much.

Nothing specific there. I would say if I say it little bit light-heartedly that we have a tough comp every quarter because we have now been growing our profits for 20 years in a row.

I don't think we have had a quarter where we would have an easy comparison point, so I don't think that there's anything new for us. Nothing specific in Q4, and we expect to have a good development towards the end of this year.

Okay, thanks.

Thank you.

I guess it's now time to close the event. Thank you, Henrik.

Thank you, Ilkka.

Thank you.

And thank you all for your good questions. I wish you all good rest of the week.

Thanks.

Thank you.