KONE Oyj

Sanna Kaje - Vice President, Investor Relations Henrik Ehrnrooth - President and Chief Executive Officer Ilkka Hara - Chief Financial Officer

Andre Kukhnin - Credit Suisse Guillermo Peigneux - UBS James Moore - Redburn Antti Suttelin - Danske Markets Equities Glen Liddy - J.P. Morgan Cazenove Daniela Costa - Goldman Sachs Lucie Carrier - Morgan Stanley Rizk Maidi - Berenberg Tom Skogman - Carnegie Investment Bank AB Mustafa Okur - Bloomberg Intelligence

Good afternoon, ladies and gentlemen, and welcome to KONE's Q3 result 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. They will together present to you the Q3 highlights and how we see the market and business outlook.

Henrik, please.

Okay. Thank you, Sanna.

And also, warm welcome on my behalf to everyone that is online to have a discussion with us today again about our performance and how we are developing KONE. If I straight go to the highlights of our Q3 performance, we can say that our Q3 was a mixed quarter where a number of areas have continued to develop very well.

Those were, in particular, the fact that our orders received grew in all geographic areas, and grew at a good rate. Also, the sales grew in all regions and all businesses.

What I'm less happy about is, clearly, our EBIT margin, how it developed and the fact that it's continuously burdened by a number of headwinds. On the other hand, what I also see is the strategy continues to improve our differentiation.

This, we can see very concretely from the growth that we're having and also improving pricing. So, I feel very good about how we’re continuing to develop the differentiation of KONE.

I will talk more about that as well during this presentation. To start with, as usual, let's go to the highlight numbers.

And here we can see, as I mentioned already, that our orders received, we had a good growth of 7.3%. Orders received were a little bit over €1.8 billion.

In an environment where our markets, particularly new equipment side, are more as flat, a continued good growth is a good achievement. Order book continues to be solid, growth of 5.5% over last year.

And also, our sales grew at a pretty good rate of 5.6%, almost close to €2.3 billion. Our EBIT was €258 million.

Or adjusted EBIT, €273.7 million. And we can see that our EBIT margin declined from 14.5% to 12%.

It's clear that 12% does not meet our objectives and this is a margin that we clearly want to improve and will improve. Cash flow, €273 million; and earnings per share of €0.42 compared to €0.49 a year ago.

So, if I look at an overall assessment of Q3, as I mentioned previously, orders received, the broad-based growth, the fact that we’ve been able to improve pricing slightly, and broad sales growth, those are the good things. However, EBIT margin and EBIT does not quite meet our objectives.

While one quarter is a short period of time, so if we look at the first nine months, we can see similar trends, also that orders received for the first nine months have grown to €5.8 million, a little bit more, and it's a 6.8% growth in comparable currencies. As I mentioned already, in this environment, that's a good growth rate.

Sales has grown to 6.2% in the first nine months, up to €6.6 million. And our EBIT, €750 million.

Or adjusted EBIT, if we exclude the cost from the Accelerate program, a little bit over €792 million. And also, here the margin was 12% compared to 13.9% the year before.

Cash conversion has been pretty good, €818 million from an EBIT of €750 million. And earnings per share of €1.19 compared to €1.41 a year ago.

If we look at the overall environment, we know that our whole industry has gone through a more challenging period. And we continue to develop KONE very actively.

That is good. When I look at how we're driving that internally, I'm very pleased with how our people continue to do it very proactively.

Their engagement and motivation to continue to positively develop Kone. A big thanks to them.

And I must say I'm very pleased when I look at the development on this side. In order to drive growth and profitability, the key to that is really differentiation.

And when I look at the external environment, we can see that there are plenty of good opportunities to differentiate because we can see that the environment is changing more rapidly than it's ever changed before and we can see that that creates new needs and also challenges for our customers. For example, the changing use of buildings that we have talked a lot about, that the way people live and the way people work is changing fundamentally and quite rapidly.

We can also see that people are expecting much more convenience, much more experiences and want to have services that meets their individual expectations. That's about ease and convenience.

Speed is becoming more and more an important factor also for our customers on the new equipment side, in particular, because we can see that, particularly in city centers, land costs are increasing all the time. We can also see that there continues to be shortages of employees in many parts of the construction trade.

So, more we can help our customers speed up their construction, the more we can help them succeed. And we can see that our solutions on this side have taken us very much forward.

If I look at how we are differentiating and capturing opportunities out of these needs, that is really all about our new services and solutions. Those, you have heard a lot about in the past, but I want to talk about them again because they are so central to how we continue to drive KONE forward.

For example, new KONE Care, in the countries where we have KONE Care new KONE Care nowadays, that is the way we sell service contracts to our customers. And I continue to see very good development here.

When we look at the countries where we have introduced KONE Care already a year or two ago, I see that that is the contracts we sell and we compare them to the old way. We can see that hit rates are better with customers, customers are happier with this because they can buy something that suits their needs, and also pricing is better.

So, we can see that it does bring differentiation. Then, of course, our digital services, KONE 24/7 Connected Services, very important in helping our customers run their buildings more efficiently, but also get more insight in how buildings operate and make them more efficient.

Residential flow is something we started to sell in a pilot mode earlier this year. We now have the first installations and we can see very good development here.

I must say I can see a very good improvement in the momentum, how we're selling it, and we are taking it to more and more countries now. And then, finally, our people for planning and consulting services are an essential service that we provide to our customers to help their buildings improve, to make flows better in their buildings, make sure the buildings just simply operate better.

All of these are bringing clear differentiation. And we continue to develop these services, we continue to drive them out, and I must say that what I'm most pleased about, when we look at the feedback from early adopters, it is very broadly positive.

So with that encouragement, we continue to drive these services forward and believe that that's central to our differentiation, not only in services, but also in our new equipment business. So, that is about our development and how we continue to develop KONE going forward.

If you then next turn to the market development, how the external environment is developing, if you look at new equipment markets, they have grown slightly, if we look at number of units in Q3. And North America markets continues to be robust at the high level, growing slightly.

Where we've seen a small change has been in Europe, Middle East and Africa where the markets were now more stable. It's clear that we've seen a slight weakening of the markets in northern parts of Europe and UK, and also it's clear that the Middle Eastern markets have declined now.

South Europe, we continue to see some growth opportunities there where market is growing there. Asia-Pacific, the Chinese market actually grew slightly better than we had expected in Q3, so that grew slightly.

That was good. And we also have growing markets in rest of Asia-Pacific, in particular, driven by India.

So, if you look at the service markets on the maintenance side, no changes in trends there. Continued growth in both Europe and North America and good growth in Asia-Pacific.

Modernization, no changes in North America. We continue to see slight growth from a good level and good growth in Asia-Pacific.

In Europe, Middle East and Africa, we have, however, seen now a stabilization of the modernization markets after a long period of growth. And that's particularly Middle East and a few European markets where we see more stable development, although I would say that modernization continues to have good growth opportunities, but perhaps we see a little bit pause in the markets at the moment.

But if we go more in detail to the Chinese market, as I mentioned, developed slightly better than we had expected, we can continue to see very much the same trends we had seen earlier. What is very good with the Chinese market is that it's becoming healthier all the time and that we can see through the improving situation of inventories of unsold apartments.

Both in absolute and relative terms, they continue to improve. And actually, most big cities, they're at quite healthy level at the moment.

On the other hand, we can see that the government continues to have a lot of restrictions in place in more than 100 cities in order to cool down the housing market. And we have seen the impact, particularly in the higher-tier cities where markets have declined, albeit stable now; and also lower-tier cities, we have seen an impact there and, therefore, overall more stable markets on this side.

But what is still happening, if we look at development side, is that the large developers continue to take significant market share. So, there are overall markets not growing so much, but with the right positioning, there are clearly growth opportunities in the market that we have seen that we have been able to capture quite well now this year, and particularly this quarter.

The overall construction markets are pretty stable, even though we can see good growth in real estate investments, but that is mainly due to increasing land costs. And as I mentioned, our markets grew slightly.

[indiscernible 0:11:19.4] about our development and the external markets, and with that I'm again – as usual, we'll hand it over to Ilkka Hara to review our financial performance in Q3.

Thank you, Henrik. And also, welcome on my behalf for this third quarter results announcement conference call.

And as normal, I'll start going through our financials in more detail with orders received. In the third quarter, orders received was €1.8 billion, and that's a 5.3% growth on a reported basis and 7.3% growth on a comparable basis.

And not only did we have a strong growth in the quarter, but also we saw a broad-based growth. All regions, as well as all businesses, contributing to our orders received development.

If we look at more in detail the large Chinese market for our orders received, in units, we saw our orders received growing clearly; and in monetary value, significantly. Mix had a slight negative impact, but like-for-like prices had positive impact, both quarter-on-quarter as well as year-on-year.

And if we look at the overall margin development for our orders received, that continued to be stable year-on-year. So, the pricing actions that we've taken continue to be there to stabilize our margins compared to increasing raw material prices.

Then, looking at sales development, we continue to see broad-based growth in our sales. And our sales reached €2.289 billion, and that's 3.6% growth on a reported basis.

At the comparable currencies, that's 5.6%. If we look at what are the contributions from a regional perspective to that growth, then the strongest growth was in Asia-Pacific, China at 8.2%, Americas at 6.7% and Europe, Middle East, Africa grew 2.4%.

From a business line perspective, we saw the strongest growth in modernization at 8.1%, new equipment at 5.4% and our maintenance business grew 4.9% in the quarter. Then, looking at our EBIT, our adjusted EBIT was €274 million in the quarter and our adjusted EBIT margin was 12%.

And as said already by Henrik, this is clearly not satisfactory development. While we continue to see growth contributing positively to our operating profit, we are seeing the headwinds being stronger than our productivity actions that we've taken.

And the pricing that we have seen in orders received earlier, especially in China, is having a negative impact to our profitability as well as increasing input costs, both the raw materials as well as cost on the labor side. Also, currencies had a €11 million negative impact to our operating profit.

For the adjusted EBIT in this quarter, the Accelerate program costs were €15.7 million. Then lastly, a few words about cash flow.

So, our cash flow in the quarter was €273 million and our cash conversions continues to be on a healthy level in the quarter. If we look at the key drivers for this operating cash flow, then the decrease in our operating income was the main driver for the decrease compared to the comparison period a year ago.

Our net working capital increased slightly, but continued to be on a good level. With that, I'll hand over back to Henrik to talk about market and business outlook for 2008 (sic) [2018].

Thank you, Ilkka. If we look at our market outlook for the full year, we have made a couple of changes.

First of all, we have slightly upgraded our view of the Chinese market for the full year, simply because we are three quarters behind us and we've seen now a slight growth. Also Europe, Middle East and Africa, we have actually taken slightly down and we expect it to be stable now.

And the same thing in modernization for Europe, Middle East and Africa. So, in new equipment, we expect the Chinese market to be stable or grow slightly in units this year, although competition will continue to be very intense.

And rest of Asia-Pacific will continue to grow, driven by India. Europe, Middle East and Africa, as I mentioned, to be stable this year and North America to continue to be very robust and grow slightly from a good level.

Maintenance markets, again no changes here. Slight growth in Europe and North America and good growth in Asia-Pacific.

And in modernization, stable Europe, continued robust and good markets in North America and strong growth in Asia-Pacific. If we then go to our business outlook, we expect now our sales to grow between 4% and 7% in comparable currencies.

Previously, we expected to be between 3% and 7%. So, we're simply now nine months through the year, so we have narrowed the range.

We expect our adjusted EBIT now to be in the range of €1.100 billion to €1.150 billion, and that assumes that exchange rates will stay at the level where they were at the end of September. And if they stay at this level, they will impact our result by approximately €45 million negative for the full year.

When we look at our EBIT margin, we expect that the pressure we have seen so far in the year, which had been expected, that that will start to ease towards the end of the year in the fourth quarter. In fact, if we look at this outlook range, we can see that, with this, we expect our EBIT margin to be approximately at last year's level or even slightly better.

Previously, we had our EBIT range to be €1.100 billion to €1.200 billion and then we expected exchange rates to impact €35 million negative, so €10 million more than previously. And I think it's familiar to everyone that we have a number of good things that are driving our performance, but also a number of factors that burden our results.

Well, of course, we continue to develop KONE proactively going forward to build on the positive performance in order to, of course, offset all the headwinds that we are facing. So, if I summarize, what I'm very happy about is the continued good growth in our orders received with improved pricing.

It shows that we have a strong competitiveness and we are differentiating and driving differentiation in many markets. This is very good.

We can see that our differentiation is improving. And it's really the key lever to drive improved performance.

That is why we continue to rollout and invest in our new services, solutions and products. And we see good outlook for those.

So, that is really what we're very focused on. It's clear that the EBIT margin trend has not been favorable this year so far, but we expect the trend to improve now in the final quarter and we can see margins to be at last year's level or slightly better.

So, with that, we will now have good time for your questions.

Yes. And I believe, we can go straight to the lines.

So, operator, please, you can take questions now. Thank you.

Yes. Good afternoon.

Thanks very much for taking my questions. I'll just go one at a time.

Just firstly on that margin evolution from Q3 to Q4 with the over 100 basis points step up in the guidance, how much kind of visibility do you have on that? I presume you do see it in the order book and you have a very good idea on what kind of orders will be rolling into Q4 revenue and at what prices with what input costs, but just wanted to kind of really check how much you can really underwrite that from the visibility you have in the company?

Well, as you know, we have an order book and we have our service base. So, it's clear that we have a pretty good visibility at this point of the year for the last quarter.

So, we can see what we have, but as always, in business, there will be always some fluctuations through that. But, yes, we have a pretty good visibility for the final quarter of the year.

Right. And if I think about – so, your message now is that the backlog margin is stabilized.

I just wanted to check what level should we be referring to for that stabilization. Is this on the last quarter or last four quarters’ average as it has been stabilizing through this year?

So, if I first would answer it in a slightly different way, but I'll then answer your specific question that – so, as we have communicated now for a year that we have stabilized our margins, that means that we have been able to slightly improve our pricing constantly. And at the same time, we know that input cost versus raw material, now also labor cost, has increased.

So, with that estimate, we believe that, year-over-year, it's pretty stable. So, we can say that what we have been taking in as orders now compared to where we had been delivering that there is not a big difference between those.

So, clearly, if you look at where we – historic highs, we are clearly below, but now we have stabilized and prices are going in the right direction. And that is, to me, important that the trend there has improved.

Got it. So, essentially, would I be right that this kind of implies that, at the current level of raw material prices, your price versus raw material equation is neutral compared to the current profitability, so that in a year’s time or nine months’ time, when you come to deliver these orders, and I appreciate there could be variability on what exactly comes at what time, et cetera, but kind as a whole, then you will have the efficiency improvement and Accelerate program savings coming on top of that and being incremental as long as, obviously, we don't have further inflation from raw materials?

Of course, there are many inputs. But if you simplify it, you can say that that will be the situation on more the new equipment side of the business.

Great. Thank you.

And just last one, on labor inflation, as that has become more of a topic for elevator world, our kind of historic thinking was always that labor inflation is almost a net positive for elevator companies because of the price escalators built into the service contracts and kind of usually allows you to do more on price when there is labor inflation rather than when there isn't. How do you view the current levels of labor inflation and the trends there when maybe looking 12 months forward?

Is that likely to be a headwind or a net headwind for you or not?

So, as we mentioned, particularly in Europe, KONE service contracts will have some kind of inflation or cost index in them. But, of course, comes with a delay.

So, on the service side, I think that, over time, is an okay thing to have some – overall inflation in the market that helps you with your pricing there as well. But I think where you probably have got more comments, and also we'll be commenting, there's more perhaps on the installation side where there is quite a lot also subcontracting used.

And there we can just see a shortage of skilled labor, not only in our industry, but I would say a lot of skilled labor for construction trade as a whole. You start to see that particularly subcontracting costs go up.

Got it. Thank you, Henrik.

Appreciate it.

Hi. It's Guillermo Peigneux from UBS.

I actually have a question regarding your headcount and inflation probably into next year. I was wondering, you do have some round about €3 billion internal wage and other expenses.

But if I net basically direct labor with your overall headcount levels, I would say that your labor bill is at around €2.15 billion, €2.20 billion. And that continues to inflate into next year unless you are able to contain inflation, wage inflation here.

Given that LC is relatively equal at this point in time, that means extra €80 million, roughly speaking, of cost pressures. And I wonder whether your pricing initiatives, both actually on the equipment side and especially on the market side, are enough actually to offset that inflation alone?

Well, first perspective here, it’s clear that, particularly in Asia, we've seen quite high increase in labor costs over the past years constantly. And so, there is not a big change there.

If anything, perhaps in China, that's percentage-wise, a little bit lower than it's been in the past years. I think that where we'll start to see an increase in pressure is perhaps Europe and some other Asian countries.

So, this is not necessarily a new phenomenon. But, of course, we constantly need to get productivity out of what we do that.

And that happens by having better processes, better quality, better ways of doing, and that is how you offset. And then also pricing is another lever for that.

So, when we talk about stabilization in margins, that means that we have been able to increase prices to compensate for increasing material costs and the labor costs. But in order to get the margin improve further, we would need to do more.

And that's, of course, a clear objective.

Okay, thank you. And then, second question is, obviously, you've given a clear message as to how predictable Q4 is, but I'm surprised a bit on how unpredictable Q3 was.

And to some extent I wanted to understand what happened during the quarter that made the quarter look so weak from a margin standpoint. What was unforeseen that happened during the quarter from a margin perspective?

Thank you.

Well, first, I think we've been quite explicit with the fact that we had expected Q3 margins to continue to be under pressure. That is very clear.

I would say there's – as always, in business, you have variation and fluctuation in businesses. So, it's the headwinds we've been talking about that impacted us as well as pricing from prior years and prior quarters that are now being delivered.

And as Ilkka said, given the particularly increasing costs on the installation side that we would have to get more productivity to offset that. So, I wouldn't say that there is anything out of the ordinary.

As always, you have fluctuation in business, and we have always been guiding the full year only, not quarter by quarter.

Thank you. And last question, regarding aftermarket in Southern Europe or services in Southern Europe – or maybe extend that into Europe – could you comment a little bit on the competition environment there and how margins are developing from a maintenance point of view in Europe, EMEA alone?

Thank you.

As we have been talking, it's, if you look at northern parts of Europe, clearly better. Their demand and pricing situation has been better.

South Europe, as you know, has been challenging for many years because new equipment volumes have been low and many of those markets are quite fragmented. So, you have quite a lot of competition.

So, competition has continued to be quite intense. And, therefore, I would say, more stable those markets, whereas our development in some of the Central and Northern European markets from a growth perspective has been better.

Thank you.

Thank you.

Hey, good afternoon, everyone. Hi, Henrik, Ilkka.

I wondered if I could ask a little bit about China. And you seem, in the last year, to have done really well compared to your peers on the volume versus price equation.

And I'm sure you have the ambition to sustain that. But was there any kind of product launch or innovation lever that helped you do that that could become a tougher comparative next year or not?

So, if we look at our adjusted product perspective in China, I’d say we have had a continuous improvement, how we have improved our product portfolio, but we haven't had any step changes. I would say, if I look at why we have done well, it's the large developers that are clearly taking market share.

And we have a good market share there. And the way you achieve a good market share with customers such as this that are very demanding is to be very reliable in your installations, to be a very good partner, to have reliable and good products and provide them with value-added services, which we are doing.

So, it's our overall approach. And in our industry, I think, it's very seldom just down to product.

There are a lot of good products out there. I think we have excellent products out there.

But you need to have the whole operation. You need to be a very reliable partner in installation.

You need to make sure that you have a very broad and good and strong service base. That's how you create trust with these customers and build a good business with them.

And I think that's what we've been very focused on, in not only China, but rest of the world. And we can see it's yielding results.

Congratulations. But we also do hear that large developers are tougher on price.

So, if that’s become a bigger and bigger part of the mix of the markets and you're taking share in that, one might have thought that that might have led to greater price pressure. You're saying that others get the price pressure, but because of your service offering, you think you can basically not suffer as much as others in the large developer price pressure?

To be clear, the whole China market is a very competitive market. There's no question about that.

It's quite a fragmented market with a lot of players. Everyone knows it's the world's largest market.

Everyone wants to be a big player there. So, competition is tough.

But you need to constantly, if you can add value to our customers, then you can everywhere do good business. It's clear that the competition is very, very tough there and very demanding customers, but that's okay.

That's how – puts positive pressure on you to perform better all the time. And even in that environment, we have been able to slightly improve pricing and it only happens if you can add value.

Thanks, Henrik.

Thank you.

Yes, thank you. If I compare you with some of the peers that have reported, Otis and Schindler, I think one can say that Otis EBIT margin dropped by about as much as KONE's, while Schindler's didn't.

It was flat this year-over-year. Would you say that the simple reason why some drop and some don't is China?

Those who are big in China see a fall in EBIT margin. Can one say that?

I cannot comment on any of our competitors. I can comment on our business.

I can comment on our performance. We've been very clear that what has impacted our margins has been the price pressures we've seen in China.

We continue to have good margins in China, but they used to be even clearly higher. So, that is the, clearly, biggest impact on us.

And I can't comment on the rest.

Yeah. And after all this, let's say, pressures that we have seen over the past years, is it really so that you are still having a higher margin in China than in the world outside China?

We have very good margins in China. That's a good business for us.

Well, it's a good market. It's an important market.

So, I think we're performing well there.

So, higher than elsewhere

Not everywhere, but most of it. The business there is higher than average, yes, particularly the new equipment side.

Okay, thank you.

Thank you.

Hi there. Just coming back to your input costs and raw materials, are you getting any impact from tariffs for things like steel purchases in the US?

And also, on your sort of raw materials, if we start at the beginning of the year at 100, and raw materials have gone up by X, how much of that X have you recovered just in pricing so far? Not productivity because you seem to be able to improve that on a continuous basis.

Just on a pure pricing basis, how much of your raw material hit have you now recovered?

Well, twofold. First, if you look at the raw materials, we've been consistent throughout the year that we were estimating the raw material impact to be around €100 million for the year and we continue to be there.

And, I guess, your second part was about the tariff impact. So, that includes the impact of the tariffs for us.

Then, at the same time, when we’ve...

But have you…?

Sorry?

But have you recovered that? I appreciate you've not changed that €100 million, but have your price increases for your new business today recovered half of it, three-quarters of it rather than just looking at the margin being similar you have for incoming orders and where you are at the moment because that includes productivity improvements as well, presumably?

Yes. So, I was trying to get there, so bear with me.

So, if we look at what we've commented on on our pricing development, so when we look at our margin of our orders received, we've been consistently saying that it’s stable for this year, for the first three quarters. And that means that we've been able to stabilize, compared to the previous year, our margin.

Okay. But is that just raw material price rises and your price rises equaling each other out?

Well, it's the net of everything because we do also include our productivity actions for new equipment manufacturing and installation there.

Yeah, okay. Okay, thank you.

Thank you.

Hi. This is Daniela actually here from Goldman.

Good afternoon, everyone. I wanted to ask three quick things.

One, can you update us sort of on Accelerate? I know, prior to this, you have said not much impact in 2018, but you started it in September 2017.

And I think you are 50% through the action. Shall we expect the largest chunk of the first impact of that to come in the first half of 2019?

Is there any sort of seasonality how that comes to 2019? The second thing I wanted to ask you about is China payment terms.

Some of your competitors have talked about, in their calls, about that getting tougher. You've already commented extensively on pricing, but I was wondering, with large developers taking share, what's happening on payment terms.

And the third thing is just on US market share. You had a few years of very successful market share wins in the US.

Has that continued? What's the situation there in your view?

Thank you.

Why don't Ilkka start with at least the two first ones, with Accelerate and China?

So, first, let's start with Accelerate. So, we've said that it has a minor impact into 2018.

Some impact, but that's included in our guidance as such. And we continue to see the programs working through in 2019.

So, some of them will continue. We will develop them during that period as well.

So, the impact for P&L continues to be then increasing throughout the year, but, at this stage, I wouldn't comment half or on a quarterly level yet. We'll come back to that at a later stage when we guide 2019 more detail in January.

Then, on the payment terms for China, so, as Henrik was talking about earlier, larger developers are taking share. We are also growing with them.

And, yes, they are demanding customers and price is one component, but also our commercial terms, including payment terms, are also there. And we've been able to, overall, have stable payment terms, good payment terms in China as well.

So there continues to be pressure, but we've been able to also then push back on that one. So, that's the status on payment terms in China.

And I think your final question was related to US market share. As you know, we don't disclose market share throughout the years because it can fluctuate quarter to quarter.

Overall, I would say that we have been able to grow our orders received in North America, and US, particularly this year, continue to have good performance there. So, overall, I'm quite pleased with how we are doing there.

Now, this quarter, growth was slightly slower, but, as we all know, they fluctuate quarter-to-quarter. And, overall, yeah, we're doing quite well.

Thank you.

Thank you.

Great. Thanks very much for taking my follow-up.

It was just more a broader question on China and the evolution there of construction market statistics. We've seen this sort of continuous ramp up in starts now for two-and-a-half years and, at the same time, completions are completely diverging from that.

So, just wanted to get your opinion on what's driving that, how long this can continue, for which way you think it eventually plays out, what we should be kind of looking out for when we're tracking that? Thank you.

I think an important number to track all the time is total real estate investment. That tells usually quite a lot about the activity.

And we have to remember that we don't come really the earliest in the cycle, particularly on standard projects. So, there is a divergence between these two.

What we see current activity, when we look at total construction activity and volumes, they are pretty stable in most places. So, that is what we continue to focus on.

And I don't have a clear crystal ball as to how this will play out over the coming year or so.

Got it. And can I just ask a follow-up?

Looking at your China business for next year or next kind of 6 to 12 months, you've now had four, if not five, quarters in a row of orders in China printing into – in kind of a mid-single digit or even towards high single-digit positive in value terms. When we think about these orders rolling out into revenues over the next 12 months, should this drive actually growth of your revenue in China or are these more kind of longer lead orders with – i.e., is that order book not the usual sort of 9 to 12-month lead time and maybe that growth is not actually – an order does not translate in growth in revenues?

I don't think – is there any big difference in the...

We haven't seen any big changes in order book growth pace. And so, as such, the 9 to 12 months is a pretty good proxy.

Yeah. In China, of course, we have large projects, but the vast majority of the market is the standard, more volume business, and we haven't seen a relationship between the two that there would be a significant difference.

Got it. Thank you.

So, if you print Q4 similar to, say, Q3 in terms of orders in China in value terms, and I know it's – kind of say it's my assumption, then when we come to modeling 2019, we shouldn't do anything different to what we were doing a year ago, i.e. take that and mostly apply that for the new equipment part of your Chinese revenues.

[indiscernible] next year.

We don't give outlook on our orders. What I would say is that we had a very good quarter with, as Ilkka mentioned, value terms where it was in the double digits.

So, that's very, very good in the current market. And, yes, what we are getting in as orders now is something that, I think, the volume business by and large will be delivered next year.

Great. Thank you very much to both of you.

Appreciate the time.

Hi. Good afternoon, gentlemen and Sanna.

Thanks for taking my question. The first one, I was wondering if you could maybe comment on your services business and the digital offering, which is – from what I understand, you're saying you are trying to raise the prices in your maintenance service contracts to kind of counteract inflation.

And I was wondering that, with all of your new offering, are you seeing maybe a faster renewal or upgrade of your maintenance contract at the moment because of all these new offerings? And are you able, as a result, maybe to step up prices a little bit faster than what would have been previously in the past?

So, that's question number one. And then, secondly is a follow-up on the many questions on China.

So, I think I understand with order up in China in 2018, we should see China revenues up in 2019 with normal conversion. But those orders being up above the market, have you gained market share also possibly versus some of the smaller players?

And with the challenges that the industry has shown over the last years, do you think that maybe the number of the smaller players is finally starting to reduce?

Ilkka, if you take the second one. I take the first one.

Can you just repeat the first question? Sorry.

I can take the first question. You take the – well, there was something about maintenance and if you can take the China, small players versus us.

Yeah.

So, if I look at our new services that we have now been rolling out over the past roughly year or so, the first countries where we were in with many of these services were many countries in Europe. And in those countries, yes, we have started to see a slightly improved growth.

It's clear that we are very much at the beginning. And, clearly, that is an objective that we have additional new values we can sell to our customers.

We can help their buildings function better. We can help them manage their buildings in a better way.

And we believe that that's an area where we can help them perform better. And that, we believe, will generate extra revenues.

We're early on, as I mentioned from the early adopters. News is positive.

And when we also look at our new KONE Care in the countries where we're early on with this, we are seeing a slightly better growth rate there. But, again, we have to remember that the renewal of contracts in our industry is quite slow which is a good thing, but when they're renewed, then we can see the improvement from this.

The long answer is – the summary of it is that, yes, over time.

Then to the second question, on China market share. So, our focus in China has been more the value than the volume.

Clearly, in a market situation where it's been – there's been price pressure, raw materials have been a headwind to us. We've been really focused on gaining share in more the value than on the volume side.

And if we look at our execution so far, so it seems that we've been successful making some share gains. But, obviously, we look at it in the context of a year, not on a quarter-by-quarter basis, but that's how it seems to be.

And I think you also asked about what happens to smaller players. We can see that many smaller players have lost market share, but we haven't seen a big change there.

Some midsize players that have actually done pretty well. But, overall, I think it's many of the large players have taken market share from the really smallest ones.

Thank you.

Thank you.

Hi. Just have a couple of questions.

Number one, we're hearing that some of the real estate developers holding back on floor space completions as there is an expectation in the market that China will stimulate the property market. Is this something you're hearing from your customers?

There can be different approaches province to province, but we haven't seen that that would be something that is happening on a larger scale.

Okay. And maybe on the Accelerate program, you talked about a minor impact in 2018.

Can you just help us on the phasing there between Q4 and what you had in Q3, please?

Well, on the raw mats, we've said that the €100 million is pretty evenly split between the quarters throughout the year. So, there's no big differences quarter by quarter.

I was thinking about – mentioned the Accelerate program.

Sorry. Can you repeat the question?

Just the Accelerate program and the minor impact in 2018, what is the impact in Q4 versus Q3?

We haven't been so particular on that one. It's a small impact, but it's within the guidance, so it's not that material yet.

Yeah. We're not talking about a huge amount.

We're talking about – as always, you have some – I would put that – it's a little bit more than continuous improvement that we tend to have a little bit more, but it's not the major numbers here this year.

Okay. And then, perhaps as we're getting closer to the year-end, can you just give us – just some early indication of how you feel about the Chinese market next year, at least in the first half of it?

I think we have to still see exactly what's going to happen next year. Much will depend on the government policy on restrictions and also financing availability.

So, let's see how that develops because a very big impact on the market is the fact that there are restrictions in more than 100 of the large cities and also the very tight liquidity situation for developers. So, let's see how those develop, and that will tell a lot about the market next year.

Thank you.

Thank you.

Thanks for the follow-up. I've got two.

Maybe one for Henrik, maybe one for Ilkka as a guess. But thinking of your comments from your US friends, is Korea an important region for you?

And if so, can you size the percentage? And, basically, are you seeing any weakness there?

And the second question is, you've already said, back at the Capital Markets Day, that you see a negative FX and raw material impact in 2019. Is there any chance you could say any more about the impact relative to what you're going to see this year, given current rates, or is it too early for that?

I'll take the liberty of taking the very simple one, Korea. We see nothing because it's 0% of our sales.

Okay.

But maybe I'll then get to take the second part of the question on raw materials and FX impact for 2019. So, this has many parts still moving when it comes to getting into 2019.

But, first, from a raw material perspective, we continue to be where we are right now. We are seeing that the raw materials will continue to be a headwind in 2019, but less of a headwind than we've seen in 2018.

And also currencies, there is a slight headwind that there will be for next year if we continue to be on this level on the exchange rates.

And do you think wage inflation is a bigger percentage next year versus what you've seen this year? Is that an important topic?

Another player believes it is. I don't know if that's the same for you, though.

I guess we've been now saying also that the labor cost inflation is picking up, and that's especially, I would say, Europe, some parts of Asia where it's picking up compared to where it has been. And that's something that we need to take into account.

Thanks very much, guys.

Thank you.

A small follow-up from me. Thank you very much for taking my question.

You mentioned service business as means of going to the market for acquisitions. Maybe two, if I may.

One is the size of deals. I guess you've changed a little bit your tone from the market will benefit from consolidation to we're looking into every single segment for consolidation among the large players.

And then, now the focus narrowing to the service businesses. I was wondering whether the scope of acquisitions is getting smaller for you, in your bidding.

And then, second, in terms of services business, which regions are you most interested in acquiring services business, and is China part of that opportunity? Thank you.

I don't think we have changed our focus on acquisitions. We continue to do them.

Just this year, perhaps we've seen less attractive opportunities than in the past years. So, that's definitely something we continue to do, buying smaller service companies.

And if you think about what we have been acquiring over the past many years, it's been principally company on the service side or a few of our distributors in markets such as Israel and a few other markets. GiantKONE was, of course, a bit different case.

But the focus continues to be very much the same and we continue to think that consolidation in the industry makes sense. Whereas the highest activity being – usually has been in Europe, partly North America.

China, we still see such good organic growth in the service business that we have not yet started actively looking for acquisitions there. But let's see in the future.

But at the moment, it's not a high focus area for us.

Thank you.

Thank you.

This is Tom from Carnegie. I was wondering about the potential to do cost-cutting in China when the margin, obviously, is down.

Like, is it there on the equipment side? Do you see any significant things you could change in the setup to get down the cost of a [indiscernible]?

You have such a fair amount [ph] of taxes compared to peers.

I would say – Tom, your line was a bit breaking, so it was difficult to hear your whole question.

Yes. I was wondering about potential for cost cutting in China, given the margin pressure.

The Accelerate program is rather about developing KONE than really improving the efficiency.

So, if I look at – we have a lot of people in China, but if I look at our efficiency there, it is at a pretty good level. But, of course, there is always room to improve.

And, of course, we look all the time at how we run the operation the most efficient way. But if I look at our China operation, I think it's actually quite efficient.

It's quite lean and efficient.

And maybe to add to that, if we look at productivity gains in China, so one of the reasons why we have such a good print in business from a profitability perspective in China. We've been consistently able to make good gains in productivity starting from manufacturing, but all the way to installation side.

So, that's been something that we've done throughout the time.

Then my second question is about the maintenance margin in European countries that have enjoyed good equipment demand now over the last five years. So, what is happening to the underlying maintenance margin in these countries?

Those are usually at a pretty good level.

You said a couple of years ago that it's improved – the maintenance margin is improving in the US some years after the equipment markets start to improve. And now, we have had quite a few years with good demand in equipment in Europe.

So, I just wondered if you see similar trends.

Clearly, from a growth perspective, what drives growth for the market is clearly historical new equipment deliveries. That's what grows the service market.

And, therefore, we're seeing – in many European markets, we're seeing better growth than usually. Then there's also more space for everyone to grow with better pricing.

So, yes, we can see improvement in many areas there.

Okay, fine.

In the fast-growing markets.

Hi, Henrik, Ilkka. Thank you for taking my questions.

Just two, please. First one on the new services.

Would you say that your margin would be even lower without offering these new services, like 24/7 or KONE Care, i.e. did they materially contribute to your margin in the quarter?

And the second question, please. Your order intake in China jumped from about 5% in the first half to 10% in Q3.

Did something specific happen there? Did your maybe price increases start taking hold or did you receive a large order?

Thank you.

So, first of all, as I mentioned, new services, yes, they have a good margin, although we are very much at the beginning. So, they don't have a material impact on KONE overall.

So, I would say, still, the impact from them on our bottom line is very small. So, that didn't have an impact really either way.

In China, it's usually not about single orders because it's so much driven by the large standard volume business there. Just that we had a good performance.

We have been very focused on serving our customers well and we continue to do that than outwardly focused. That's what we're doing.

And there's nothing out of the ordinary, I would say, here.

Sounds good. So, you wouldn't say that perhaps the price element wasn't more prominent in this quarter versus the first half.

It was on a similar trajectory, shall we say?

Yeah, about similar. So, you had a slight positive impact to the growth number.

But also, we have to remember that growth rates, they do fluctuate quarter-to-quarter. So, one quarter is quite a short period of time to look at.

But if I look at the first nine months of the year, overall, we have performed well in China this year.

I agree. Thank you.

Thank you.

Hi. Thanks very much for taking my follow-up.

Just one question on the service business in China. I know it's still quite small versus new installation.

And, historically, the margin as well was maybe being impacted by a bit of what I would call lack of scale or lack of density. As we are seeing these business services, both maintenance and modernization, continuing to grow, are you seeing improving momentum also on your profitability in this business in China?

Profitability on that business is quite good. It's similar to new equipment there.

I would say density has not been the major issue there because you tend to have quite a lot of buildings together, so you can actually get a pretty high service density early on. But, clearly, as we expand the business, we are looking to get all the time better efficiency there, adding more value to our customers and, that way, improve the margins.

So, that is where we focused mainly, but density is perhaps not the biggest driver in that market, not as much as it's in a market such as Europe or North America.

Thank you.

Thank you.

Many thanks again for all the good questions. We look forward to continuing the discussion over the coming months.

And with this, we wish you a good rest of the week. Thank you.

Thank you.

Thank you.