KONE Oyj

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

As always, I have here with me today our President and CEO, Henrik Ehrnrooth; and CFO, Ilkka Hara. Henrik will first go through the Q3 highlights, Ilkka will give a bit more color on the numbers, and Henrik will then discuss how we see the outlook.

After that, we will have time for your questions. Henrik, the floor is yours.

Thank you, Sanna and warm welcome on my behalf to our Q3 webcast and I’m very pleased to present a good result to you today. We have some good news to share here.

If I start with the highlights for the third quarter, I would say the highlights are really that we continue to grow faster on markets on a broad basis and the margins of our orders received continued to improve. Also, we had a solid growth in our service business, our adjusted EBIT margin improved and we had a very strong cash flow.

So overall a very solid quarter and that I'm very happy about. But if as usual start with key figures.

As I mentioned already, it's all about solid growth, improving margins and cash flow. Orders received at €2 billion, good growth 6.8% growth in comparable currencies.

That is a very strong achievement in the market environment that we have at the moment. We have a strong order book at €8.4 billion and it's growing at 4.2% in comparable currencies over last year.

Sales $2.55 billion and growth of 9.4% again very, very strong. Our EBIT operating income improved at €258 million to €314 million and the adjusted EBIT which excludes the cost from the accelerate program increase to €274 million to €322 million and the margin improve from 12% to 12.6%, also good growth and good profitable growth in the quarter.

Cash flow at an all-time high of €463 billion that is very strong and also earnings per share improved to $0.42 to $0.48. But as we always say one quarter is a short period of time and now, we have three quarters behind us, so we get a bit longer perspective of our performance and also if you look at the first nine months, we can see a very similar trend, solid growth in all business and strong cash conversion.

Orders received for the first nine months of the year €6.4 billion and growth of 7.6% in comparable currencies, again that I'm very pleased with. Sales also growing strongly €7.3 billion of sales and 8.3% growth in comparable currencies.

Also operating income grew from €750 to €836 million and the adjusted EBIT from €792 million to €870 million. Our adjusted EBIT margin is still just slightly down year-on-year because of decline beginning of the year, but now we had a solid improvement in Q3, a clear objective from here is to be on improving that.

Cash conversion very strong for the first nine months at €1.16 billion compared to €818 million last year and EPS grew from €1.19 to €1.26. As usual, I'd like to express my thanks to all of Kone Oyj employees for a fantastic job done in the third quarter.

We know that the activity and development activity level of Kone is very high. We are executing our strategy.

We are bringing new service and solutions to our customers. We are driving accelerated program.

But despite obvious, our people have kept their focus on our customers being out there proactively helping our customers resolve their pressing problems and that we can see from the growth that we are driving and from a fact that we are continues now have been growing faster in our markets. That is a good achievements and I’m very happy about and very thankful for the great job our employees are doing.

Some more highlights of the Q3 are, first of all, the continued faster market growth in all businesses. It's been broad-based growth and if we look at the orders received, we have now two quarters in a row been able to slightly improve our margins in our orders received.

All of this tells us that our competitiveness is strong and it's broad-based. We're growing in our businesses.

We have been growing in our geographic areas that I think speaks volumes. Also in the summer, we had again -- we did again our customer loyalty survey.

Results from that continue to be good. Our net promoter score was now stable but on a good level.

What our customers saying about us, they continue to say that Kone is a reliable and good partner; they appreciate our service mindset, our products and our services. However, as always, we have a number of areas where we can improve, such as customer communication, such as proactiveness, so we still have a lot that can be done and those are things that we continue to work on.

So we can continuously improve. In Q3, our execution overall was very solid.

We had very strong deliveries to customers in all businesses, and that I'm very happy about, particularly if we think about the resource shortages that these whole industries is facing at the moment. In that environment, we've been able to keep our promises, deliver to our customers and delivery to our customers in a good way.

Also strong cash conversion, tell us about how are we running the business, always very important metric to us. We can see that the actions we have taken to improve our profitability are starting to show results.

Those, of course have to do with pricing with efficiency and productivity. One of the actions we have been taking apart from just executing our strategy has been the accelerate program.

We can start to see visible benefits from it and just to recap why we started this program. We have three objectives.

Improve customer centricity, speed, and efficiency. Customer centricity is a big word.

So, what does it in practice mean for us? What we want to do is that we want to help our frontline organizations, the ones who are constantly in customer contacts, in focusing more on customer interactions and spending more time there to serve our customers even better.

Therefore, we want to take away tasks from them, to help them focus on this and also drive the transformation that we need to drive as Kone. We also want to be faster and bringing new services and solutions to our markets and clearly want to improve our efficiency.

And we have a good momentum currently in the accelerate program. If I just take a few examples in customer solutions engineering, we have brought new processes, new ways of working on new tools as well.

This is helping our frontline organizations to serve our customers faster, better, and be more productive with better tools. We also shortening the lead times of our deliveries to many of our customers in many markets, that is important and we have shortened those a lots that we have actually gained a lot of speed in the business.

So, we can see tangible benefits of what we're doing here. Our HR organization, which was one of the first ones we transformed, we have now built an organization where we can much better meet the needs that we have in the coming years.

For example, I believe that every company has a big need in the coming years to retrain a lot of people, to reskill a lot of people. We are doing that actively and we have now built up an organization that can support such retraining even better that we've done in the past.

I think as everyone remembered, we have every year, increase the amount we invest in developing our people, and now we have a better platform how to do it. We have also been able to improve how we recruit and bring people on board to Kone.

We are faster in recruitment with better quality. Our sourcing in our front lines, which is the local part, we have also improved that, so many things have improved.

For example, in customer service and admin and finance, we still have a lot to be done. But that was always the plan that we don't do everything at the same time.

We do things sequentially. So, we are going in the right direction and that I'm happy about.

So those are few highlights of Q3 and bring a bit more insight in the accelerate program, what we're really doing there. The next, let's talk about what's happening in our markets.

The global new equipment markets were stable in the third quarter, North America stable on a high level. Europe, Middle East and Africa.

Clear variance in the region, Central North Europe pretty stable, South Europe growing and Middle East declining. So clearly a mixed situation overall.

Asia Pacific overall stable; in China, market grew. I'll come, as usual little bit closer to China soon.

But rest of Asia Pacific is declining due to decline in many Southeast Asian markets. Some decline in Australia and also decline in India.

What is happening in India? We've been always talking about that as a very promising growth market.

Situation in India development is that liquidity is very constrained and we can see that's causing a lot of issues for many of the large developers. Again, as many of the other big reforms in India, we think there's going to take a few months, probably six months or so for this to work itself through the system.

And because we can still see that the underlying demand from consumers is continues to be strong. But at the moment that the market is also declining.

Service market continued positive development, not much new. Maintenance all markets are growing at least slightly.

Good growth in Asia Pacific. Modernization market, actually now, pretty good growth in Europe, Middle East and Africa and good growth in Asia Pacific, and also North America growing slightly.

So overall solid and good growth opportunities in services. But as usual, let's dive a little bit deeper into what is happening in China.

Overall, we can say that the main theme in China is that the government is balancing between supporting the economy, but at the same time restricting the residential market. If you look at our market overall, we can see that the market grew slightly if in metro units and pricing was pretty stable as it's been throughout this year.

The government when I talked about the support the economic activity, where we can see that mainly is through the infrastructure market. We can see high activity in building metro lines, railway lines, airports, and so forth.

So there we can see high activity and stimulus activity. On the other hand, when we look at the residential market, we still see restrictions in the top 100 cities and it's interesting that when they have even slightly eased those restrictions, we immediately see a very strong growth.

So when people ask me that, how much do I see stimulus in China, I would say, let's keep in mind that we still have principally restrictions in place, and those have it in some cases slightly bit eased, but not significantly. But overall construction activities on high level.

If you look at some of the key indicators, you can see the real estate investments have grown at about 10% year-to-date. Also residential sales volume, a new starts are growing and new home prices in top 70 cities have also increased quite nicely year-over-year.

It is of course against this backdrop why we continue to see many of the restrictions. If you don't think about our customer base, the developers, so we can continue to see a consolidation amongst the top developers.

At today, the top 100 developers already represent over 50% of the market. Clearly, that has many implications.

For Kone, we have created an opportunity out of that, how we able to serve the market position we have with the top developers. But it's clear at the same time that they have a strong purchasing power.

But also, they usually have slightly higher conversion rates to service as they have a branded product. So we think overall, we have created an opportunity out of that and continue to see opportunities there.

So that is about the market and a little bit about our development. Now I'm happy to hand over to Ilkka to talk about our financial development.

Thank you, Henrik and also welcome on my behalf to this third quarter results announcement webcast. Let's start going through our financials a bit more in detail.

And I'll start with orders received. Orders received reached over €2 billion in the third quarter and that represents a 9.6% growth on a reported basis and we saw growth in all regions and on a comparable basis that 6.8% growth.

As Henrik already highlighted, our margin of orders received improved slightly now also in third quarter. And if we look at the large Chinese market, we actually saw good growth in orders received and both monetary value as well as in unit, we saw over 10% growth in our orders received.

Mix had a slight negative impact in China, while pricing was relatively stable. Then to sales, we continue to see a good growth in all businesses in sales, and our sales rates €2,558 million.

On a reported basis, that's 11.7% growth compared to last year, and on a comparable basis that's 9.4%. If we look at where the strongest growth was from a geographical perspective then Asia Pacific was 11.5% growth and there especially the strong deliveries, we saw in China were driving the growth overall.

At the same time, Europe, Middle East, Africa grew 8.1%, as well as Americas contributing at 7.6% growth rate. Also, if we look at from a business line perspective, both new equipment as well as modernization grew over 10%, so new equipment growing at 10.2% and modernization at 10.9%.

At the same time, the number that I would highlight from this is actually our maintenance growth, which is 7.4% and that's quite a good growth rate for the business in this quarter. Then moving to adjusted EBIT development and our adjusted EBIT grew to €322 million in the quarter, representing a 17.6% growth compared to last year.

We also saw our adjusted EBIT margin growing from 12% to 12.6% in the quarter. If you look at what's driving that adjusted EBIT development then growth had positive impact, also we saw profitability so the actions that taken on both pricing, but also improving our efficiency coming through in the results.

Currencies had an €8 million positive impact to the results and IFRS16 €2 million. At the same time, accelerate program costs were €8 million in the quarter, our benefits from the program were more than €10 million in this quarter.

Lastly to cash flow, so we had a strong cash flow quarter and our cash conversion continued to be strong. Cash flow at €463 million in the quarter is obviously one quarter is a short time to measure cash flow, but also the first nine months with over €1,164 million is very strong cash flow.

We continue to see networking capital contributing positively driven by both strong development in our advances received, as well as progress payment from our customers. It's also good to note that IFRS16 has a positive impact our cash flow of €87 million for the first nine months of the year.

But regardless of that the cash flow has been strong. With that, I'll actually hand over back to Henrik to talk about market and business outlook for us.

Thank you, Ilkka. Let's then wrap up with the outlook for our business and our markets.

For 2019, we expect the new equipment markets will be relatively stable or grow slightly. In China, we expect markets to grow slightly in units ordered as it's done so far this year, so the same trend to continue.

While in rest of Asia Pacific market expected to be pretty stable year-over-year. So we have growth beginning of the year now slight decline.

North America, Europe, Middle East and Africa expect to be a rather stable. Maintenance markets, no changes there so growth in all geographic regions; slight growth in Europe and North America and good growth in Asia Pacific and pretty much say the modernization that's good growth opportunities Asia Pacific the fastest, but also some growth in Europe, Middle East and Africa and North America.

Then our business outlook for 2019. We now have nine months behind us.

So we have slightly specified our outlook. Sales we expect to grow between 5% to 8%.

When we previously expected the growth is between 4% and 7% in comparable currencies. And EBIT we expect to be in a range from €1,190 million to €1,250 million, while previous expected range to be €1,170 million to €1,250 million.

And we expect that there's some tailwind from the foreign exchange to tune of about €20 million, so pretty same as previous quarter, slightly adjust slight specification of the outlook compared to a specific Q2. What's driving our performance?

It's clearly a solid order book we have. The growing service business and how we are driving improvements throughout the Kone including accelerate.

What is burning the result? Raw material prices and trade tariffs.

And then as we mentioned, what has been an increasing trend is the labor and subcontracting cost increases as a result of labor and resource shortages. We also thought at this stage as we usually do, it's good to give a little bit of a view into 2020.

What are we seeing now? What we are seeing that there are a number of things that are positive for us.

They're definitely driving up performance. They include a strong order book and also that we have been able to slightly improve our margins of orders received.

That's clearly a positive. The solid growth we have in our service business.

The constant compounding we have had there, of course, sets us up for a good situation, and also accelerate savings and performance improvements in general is positive. But as always, there are also some negative headwinds for us.

Labor and subcontracting cost increases due to the resource shortages that we had talked about. But also, I think it's clear to everyone what we can see is that the overall world economy is weakening.

So that we think are a headwind and also the geopolitical uncertainties. When I look at Kone's overall situation, I think we look with quite some confidence into 2020.

We have a strong order book. We have a growing service business.

We are executing. So we think that also in that environment we can perform and, of course, objective continues to be to grow fast on the market, even if the market environment itself is more challenging.

That is what we have been doing and that's what we intend to continue to do. So to summarize, we had a broad base good development across our business in the third quarter.

And we believe that we will enter year 2020 in a strong position. With that, we are happy to turn over to your questions.

Yes, plenty of time for questions now. And I think we're ready to start from the line.

So, operator, please.

Yes. Hi, Henrik and Ilkka.

I have three questions, please. First on the cash flow for you, Ilkka, obviously, a strong growth for you in China for quite some time now.

But now we see a further delta on cash. Is that also the collection terms improving in China?

The share of prepayments going up and quicker cash collection was interested in the next year within China. I will start there.

Overall, so -- if you look at the cash flow, so it's not only China contributing positively, but overall cash flow been strong across the businesses and across the geographies. But from advances point of view, China is a big market than a large part of the -- advances are coming from there, so that's contributing positively.

And from a collection point of view, there hasn't been that big of a change in that one. It's been rather stable.

Maybe this quarter was a bit better, but not the meaningful driver for the input cash flow as such in China.

All right, thank you. And then my second one for you, Henrik, and I need to ask you on two things and your ambition here.

We'll try and see if we can answer some questions in this forum. First on the antitrust.

There are some regions in Europe where you will face issues, but you say that these can be solved. And I get that, at the same time news agencies are reporting of you delivering some of the lowest bids and it might be because of these issues that the net effect of the synergies might below pose remedies for example, on service density, or are we missing something on the synergies.

I know you will say it's a dream team and I can see that. But if you could drill down a bit more on the synergy potential post potential remedies, you talked about digitalization being at the center of a potential deal.

Henrik could you help us perhaps on the standard opportunity on the cross selling as well with this group? Thank you.

Well, first of all, I'm not going to comment on any specifics and I'm sorry, I'm not going to go into to any of the synergies. I think I would repeat what we said before.

As you're already alluded to that we think that this is the ideal combination. If you look at the geographic complementarity of the two businesses, if you look at the potential you can have from synergies and combining and if you can, the potential you can have from even faster and more actively build out new services brought it to your customers.

I think those are all fundamental positive things. We've said that we think it's inherently doable.

What it will mean I can -- I don't know exactly and therefore not going to go into that. I think we just have to be patient here and wait for whatever process they are running to play out.

And we will continue to see a lot of rumors. There are lots of rumors around this process.

I would just urge everyone to be quite critical of what we see and what we read because not everything is true and even close to true. So I just leave it there.

Okay, thank you, Henrik. I had to ask.

And my final one pricing. We keep hearing from some of your peers that while price cost is improving in China, is getting weaker in North America and pricing is obviously flat now in China.

It will be coming from a tough comp. In North America, we've seen multiyear recovery and non res activities a bit weaker now.

China look, I mean, it's good, but looks pretty toppy. So how should we square this with your cost comment, Henrik that cost increases on subcontracting would likely to continue into next year?

Should be more cautious on price costs going forward. If you could just comment on price and cost base?

Well, as you know, we don't comment on pricing going forward. That's always individual negotiations between us and our customers.

And, of course, what we want to do is provide a good of outcomes as possible to our customers and that's way great win-win and improved pricing. But if you look at the trends we see in North America.

If remember, we have been multiyear, we had actually quite a favorable situation where pricing improved. It's clear now the markets are stabilizing.

We are seeing a more competitive environment. And of course, we don't need to take action and make sure that we can compensate that with productivity and work even harder with our customers.

In, Europe, perhaps we have seen better pricing environment now slightly. And that's why we been able to improve pricing, but of course, there is been a very high need for it, but its resource shortage that's really a principally a Europe and Asia problem.

So we have been able to increase prices. Clearly, prices going up more than margins because costs have also gone up.

So I think that we are in a pretty good situation, but we have to see where the market is next year. And, of course, we're going to continue to be out there work with our customers want to add value to them and that will in the end determine how successful we are here.

Yes. And just a quick follow-up on cost for you.

Ilkka. Shall we see another €20 million - €30 million delta from subcontracting in 2020?

I think that is what you guided for in 2019. Are you ready to make such a comment for 2020?

Well, 2020 it’s a bit early to still comment, but if I look at the situation so we do say that especial in Europe and there is a pickup in prices more than normally, let's say maybe some tens of millions would be at this stage my guidance.

Pick up in cost you mean.

Pick up in cost, yes.

Yes. I also remember what you said there is always you can look at just what labor costs increases are, that's one aspect, but when you have a situation where you have resource shortages.

That means that of course, subcontracting becomes more expensive. There is more competition for those resources.

But as well what it means is that you will have much more over time. You've much more juggling between projects and of course those are always things that are, they are not good from a productivity perspective.

But we're working, we are making some good progress and being even better in how we plan our work, how we work with our customers to do it, but there is a clear headwind in Europe and yes there are just I think the whole construction sector at the moment is suffering from shortages for skilled labor and of course skilled labor that we work with.

Good afternoon, gentleman and good afternoon, Sanna. Thanks for taking my question.

I have three. I will go one at a time.

I would hoping maybe could follow up on some of the comment on pricing from class earlier and specifically on China, the fact that you, that the price increase cannot stop, is that on the back of the raw material situation? Is that because the market maybe starting to slow, other type of pressure?

And I was opening you could comment on the negative China mix that you also mentioned in the quarter. That’s the first question.

So I’m not sure if raw material is the big -- that's the competitive environment. We can also say that clearly big developers are getting stronger, but as I said that is been still a net positive for us.

Overall, pricing environment has been pretty stable. I wouldn’t say if I look at the China market today and if we look a couple of quarters forward.

I actually don't expect to see major changes in activity. And now we had a slightly growing market.

So that's where the overall situation is and competitive situation. I think we are in a pretty good spot overall at the moments.

Sorry and on the next step.

Yes. Sorry to lose it, first on the pricing.

So maybe after the comment that if you look at quarter-on-quarter this year relatively stable pricing action in China, but year- on-year improving and now the comp for Q3 was a bit tougher. So that's may be more so than a big change in the pricing environment as such.

And maybe I will continue with the mix. So, yes, the mix had a slightly negative impact, but wouldn't be too much of a trend that such.

Our GK brand was a bit better performing this quarter and that's driving the mix.

Thank you very much. My second question was around the sales guidance.

And so if I kind of back out the fourth quarter based on what you've done so far, and it kind of imply quite a broad range between, I would say, flat to about 7% organic growth in the fourth quarter. So I was just curious if you could give us some color.

Why do you see such a broad range? I mean we are two months away from the end of the year.

And at the same time, we have -- I've also noticed that it seems the execution or turnaround of the backlog seems to be a bit faster than expected. So is there a risk that we have maybe front loaded a little bit the third quarter versus the fourth quarter here?

I don't think. Our deliveries happen when our customers need those deliveries.

So I wouldn't think about front loading. I would, Ilkka, if you want you can comment more specifically on this, but I would just observe that.

I think, overall, we give quite specific guidance. And yes okay maybe for one quarter that may appear broad, but I think for the full year, we give pretty specific guidance.

And clearly that could be various outcomes. I think one of the trends we've seen over the past year is a clearly in China the order book is rotating somewhat faster.

And that is just something we see in over the past years. Other than that no big differences in other markets.

And why have we had a good growth this year is because order received have been strong in China and that has been also delivered quite broadly to customers.

Yes. I don't think I have much more to add than.

The biggest moving part is obviously what are the customer projects that are going forward in the coming months. And how are we able to then deliver our production and complete installations for those products, both in new equipment as well as the modernization, which is the more -- where we still have not perfect visibility and maintenance is more stable.

So not more to add there.

Thank you. And just my last question.

I was hoping you could give us maybe if we look at the order trends year-to-date, can you maybe give us a bit of a split between growth in new equipment, modernization and maintenance kind of year-to-date, and how you're tracking?

The good thing is we have had good growth in all of those, but do you want to open I mean, of course, in order to see this mainly about new equipment and modernization, so, Ilkka, do you want to open more.

Well, if we look at overall, the trend what has been going well from an order perspective then new equipment has been strong especially in China from oldest perspective. And then if we look at modernization, so that's been slightly better in terms of growth for the first nine months of the year, but slightly better modernization overall, but not that big of a difference.

Thank you.

And I think to Lucie's question. Again, I think the most important thing, if we look at our growth this year, it's actually -- it's not some individual things here or there.

It's actually been broad based and quite consistent. And I think that is the ideal situation to have in a business.

Hi, good afternoon. Thanks for taking my questions.

I'll go one at a time. Firstly, could we talk about the service growth in the quarter specifically maintenance, accelerating to that 7.4% from about 5% to 5.5% run rate.

Is that just kind of timing of things in the quarter and a bit of an easier comp or was there any underlying pick up there? And if there was, could you share with us what's behind it?

I would say nothing, nothing specific there. I would say we have had a continued good growth in our service base.

That's been growing at about 6%. Then our new services are adding slightly to it, not much, but just slightly and that's positive.

And then repair activity has also been high. So all of these together have contributed to it.

So historically this is a very, very, very good performance. We have to remember that if we look at earlier this year, we had a little bit of headwind in the growth because we have had an automatic doors business in North America that we had sold little bit over a year ago, and now that didn't impact anymore.

It wasn't a big impact previously, but that is slightly in and now at least that didn't drag anymore.

Great, thank you. And new services adding kind of sub 1% or is --can now aging over 1%?

I think if I look at all of them together, we start to probably at 1% additional growth from them. Yes, about there.

Great. Thank you.

And then if we move on to labor inflation topic, can we just break it up between kind of labor inflation and service contracts and then installation. In service contract, our labor inflation for maintenance, do you expect that to be at a higher pace in 2020 versus 2019 or kind of similar lower level of installation?

We have to see things haven't quite played out. If you think about where is the largest service business by revenue, it's clear it's Europe and almost all labor costs there are based on some general bargaining agreements.

And I don't think there are answers in many of them yet. We just know that demands are much higher than in the past.

So it would be an incremental headwind. And I think if you look at Asia, that's a pretty constant, quite high increase.

But that's something we've seen year-over-year and managed. So I think Europe is probably the main one here where's the difference.

If you add to that, to answer that the way to think about it is that there's always some inflation in labor costs, but now in Europe recently, we've seen increase in that. So that's clearly the incremental that we're talking about here.

Right, so that -- is that acceleration in one year that is the issue, right? Because you price up in Europe, at least on service contracts, they get generally kind of priced up on indices in the following year based on kind of indices performance in the prior year, is that still kind of the right rule of thumb?

Well, I think quite a few of those have a general and the ones that have a formula tends to be more CPI or general inflation that we know is actually quite low. So it's not helping that much.

It's helping, if they increase, we can price some of that more, but I think overall, it is a slight or it's not, it is to clear headwind. But we need to just work all the time and our pricing and our productivity to counteract that.

Got it, thank you. And installation costs kind of across the portfolio is about 20% of new equipment revenues, is that still come to the right full some?

If I take at an average probably little bit more, maybe more, but not yes, of course, much higher in North America and in lower in Asia, but yes.

Right. And you're seeing high single digits inflation there is a kind of what you pointing to?

Again, one aspect is just what you see labor cost increases, just straight out labor cost increases and that's one aspect. The other aspect is, again, subcontracting, and clear when there's tightness in the market and subcontracting, they have more pricing leverage.

But also when you have this tightness, you, as I mentioned, you get more overtime and more, juggling between different sites to make sure you meet your customer requirements and all that. So it's all of that is a negative driver for productivities.

Therefore you can adjust calculate straight from what a labor cost increase would be. But we're working on it.

We think we'll get there but at the moment, it's a little bit more of a headwind and then in the past and what we had expected.

Great, thank you. And just very final one on digital investment side.

You've been running, I think relatively stable I think pace of around €50 million to €60 million for last two, three years. Is there any reason for us to expect that to change for 2020?

Yes. So what you can see externally is we report R&D number and as part of digitalizing in their part of digitalizing IT costs and other costs.

But I would say that I think the activity level will keep it high, simply because we can see that the services, we have brought out have a clear benefit customers appreciating those, they're paying for those and I think we have a good leadership position here. Really how we do it, how we do it broadly.

So we will continue to invest practically as an absolute number next year is probably going to be somewhat higher, is going to be much higher as percent of sales that we have to see, but I would -- overall say that we keep higher activity level here and exactly how much we spend next year, we are still, let's see, we haven't quite decided that.

Thank you. I want to ask you two things.

First of all, on margin and on your comments on sort of margin year-over-year now turn back to growing year-on-year after a while. And you mentioned you want to sort of the trajectory, can you comment on whether that -- is that trajectory linear from here or should we be aware of sort of -- are there any particular seasonality or any considerations given what you have still in the backlog that we should think about it?

Some any path that is different from sort of a linear progression. And then related to that you were doing much higher margin sort of pre 2017.

Is there -- has anything fundamentally changed in the industry that you think would prevent you? I'm not asking when but at some point, to go back to those levels.

We've also seen margins coming down for some of your other peers, so interested in whether there have been any structural shifts in the industry which makes going back to those prior peaks and feasible to assume? Thank you.

So, if I start with the latter question. It's clear that you the whole industry and we have seen some headwinds on margins over the past years, what is the biggest impact from us is clearly that if we go back to 2016 and 2015.

We had very strong margins in China. We still have good margins in China, but that's where the biggest delta comes from.

But if you look at our business, how we developing it, yes, we do believe that we can recover without giving a timetable, recover and get back to those margins. That is definitely our ambition.

Exactly when that will happen. I'm not going to comment on but we still think it is possible.

When you asked what margin trajectory from here, we don't guide beyond this year. But I think it's clear that our ambition is to improve our margins.

Also next year, is it going to happen and how is going to happen per quarter I can't say, but that's the ambition. That's what I can say.

Good afternoon, gentlemen. And thanks for taking my question.

And starting off, I have three questions and I'll take one at a time. Starting off with the -- let's say broader environment, global environment and new equipment.

Judging from your last three quarterly results reports looks like the new equipment market has seen somewhat of a slight slowdown. Now I was wondering whether you confirm my impression firstly.

And secondly, can you talk a little bit about what you've seen recently in the market with regards to recent tender activities and major projects in the pipeline and what you think the expected implications are for market growth in the various regions?

I think we can, I think your perception is probably rights one that we coming from a situation where we actually had a very long recovery in North America, where Europe, driven by Central North Europe had been quite strong and actually Middle East also doing pretty well. To all those being flat or little bit weaker.

So, yes, market growth, there is somewhat weaker. China now was this year and last year has been growing slightly so that's clear recovery from a couple of years back.

But overall, we are in a pretty stable environment now from having been a slight growth environment. It's not the massive difference.

But I think it's a slight difference.

Okay. With regards to recent tender activities in major projects, can you make some comments on those two issues, please?

I don't think we have seen a massive difference here. Yes, of course, you can make a difference region-by-region.

But not a big difference overall.

Perfect, thanks. Then just coming back to China, if I may.

I heard your comment at the beginning of your presentation, Henrik, with regards to the ongoing tightening mode in real estate policies. Just wondering where you see the momentum going on.

Is it more in terms of easing or is it more in terms of tightening? So quite being such a huge country, it's quite difficult to really follow the main trends.

I was wondering whether you could elaborate on that a little bit and provide some clarity? Where you see the real estate policies going?

Is it more towards easing, more towards tightening?

I think one of the key things to keep in mind is what the government and the President repeat quite frequently that houses are for living and not for speculation. I think that tells quite a lot their mindset overall.

And that is why we have continuously on the residential side we will continue to see restrictions on how we can finance them, how many apartments can buy, prices, and so forth. And probably not going to see big differences there.

We've seen in a couple of cities where they eased these restrictions a bit and really growth has taken off, and they put them back those restrictions just to avoid bubbles to occur. So I mean I can't predict exactly where they're going to be.

But I think this overall guidance I think is quite clear from what they think. And then when we see in stimulus, David, then talk more about infrastructure, as you know, what they are attempting to build out our these key hubs where you have then major cities with hubs with high speed railway connections to them.

That is, that's why they are focusing on infrastructure at the moment. If I look at the next couple of quarters, which is probably the visibility we can have.

I don't see a big change happening but I can of course not predict what government actions made maybe. And we know that those are important.

And then my final question. I just wanted to go back to the issue of raw material prices and how you see those developing.

We're now almost one month into the fourth quarter. And I remember there was a discussion in the second quarter call also with regards to your expectations going into 2020.

And I was just wondering whether you can provide us with an update on that? Where you see raw material prices going for Q4 and going into 2020?

So if we look at first 2019, so we've been quite consistent now that and have actually good visibility to do the outcome already with the pricing that we have with our suppliers. So raw materials including the tariffs have a bit less than €50 million impact to 2019.

So that's been quite stable and there's less moving parts for this year. Next year, they're still continues to be moving parts in terms of orders coming in.

But also exact timing of projects, how they go forward. And obviously, raw materials can still fluctuate going into next year, but if I just look at where we are today, so then raw materials are more neutral impact for 2020 than anything else.

Hello, I'm sorry. Can you hear me?

Yes, apologies, the phone was on mute. If I could follow up on two of Andre's topics earlier and back to the strong 7.5% maintenance growth.

I understand your repair and disposal point. But could you scale the growth regionally for maintenance, important part of your business in China versus the Americas versus Europe?

Well, we had good growth, actually a good growth in each of those regions, clearly fastest in Asia Pacific, where we had double digit growth. Europe, we had high single digits and North America slightly lower.

And that seems above your comment for the full year, right. And is that just because of the repairs part of the business or is there potential for similarly high fourth quarter?

I think, let's see where we end up. I think you know what our ambition is.

So let's see.

Okay. And on your wages and subcontracting point.

I have got some nice say; you thought that wage inflation was 3% and subcontracting zero in 2018. But that lifted to something like 4% as inflation for both of those buckets in 2019.

I'm wondering as we look into 2020, what percentage rate of inflation you think that the €2.8 billion the wages of a €600 billion of subcontracting will face. This is another 4% year or might get moderate against that or even increase against that 4%?

I think subcontracting must be more than 4%. But I actually don't --

I don't think we've said exact numbers on this one. And it's actually varies market-by-market on the general labor agreements that one makes and then subcontracting definitely is much more volatile than the underlying labor agreement.

But I think that our message is it's probably an incremental headwind for next year.

Sure. Another headwind but the pace of inflation, whatever that is all in for wages and subcontracting in 2019.

Do you think it's a similar degree of percentage inflation?

Based on what we said earlier, probably on own labor, we don't quite know yet. But good assume that some was higher.

Okay, thank you. And just turn into currency, if I could.

I was running at current rate. So I thought you might see a small negative impact in 2020 at current rates but nothing major.

Is that something you think fair?

Yes, that's correct. So no, minor impact.

Minor probably slightly negative impact.

Okay, thank you. And just last if I could, the potential for regulation change in China on the maintenance side and the number of visits.

Is that a city-by-city conversation or one nation conversation? And can you update us to what a possible timetable could look like?

Yes. So it starts with national regulation where they set the policies.

And then it gets usually implemented province-by-province, city-by-city. There's clearly -- there have been some trials in some cities on how you can do this.

So there's a lot of activity, a lot of thinking going in there. We don't have exact clarity of if and when something will happen.

If it happens, then usually it starts from a government level, policy, how you do it, and then it's going to take quite a while to implement it throughout the country. So we think that's a longer-term thing that we expect would likely to happen, but let's see, but it's not going to impact us on a short term basis.

And in the instance that you do get a reduction in number of visits, do you think you can continue to offer a value selling proposition on the digital side of your major contracts? That means you don't have to pass it all on and you could capture some of the value there?

That's of course, the ambition we would have. And this is what they said, it's not just a simple the thinking is that it's not just a simple reduction number of visits that you would need to then have them connected and monitored and remotely and have information on them.

And of course, the objective would be that you could show your customers, you're serving them better. And that's why created added value and not price everything away.

Thank you. This is Antti from Danske.

Three questions, please. First of all, what kept your margin back so to say, you had strong increase in sales and you said it throughout 2018 that your order intake margin was stable year-over-year.

What one could have expected I think a little bit more margin improvement?

Well, I would say that we had some good drop through and always there are positives and negatives that happen in business and some fluctuations. So I don't have a more specific answer to that.

Yes. There's always fluctuations quarter-by-quarter but overall no more details to be shared here on that one.

Okay, then, next your China outlook in the sense that we can see from the numbers, Chinese numbers that right the US land sales have been cut back quite notably. Is this any concern to construction starts next year and then potentially also to elevate the demand next year in China?

Well, firstly, I would say that we think that quite many of the big developers have ample land bank, but of course over long term, that's an important number. Now we see a little bit better land sales again.

So it doesn't, it's quite a long-term forward looking indicated to us and if you look in history, you need to look at longer term trends to see what the impacts are. So of course, if that would be a long-term down drop, of course, that would have an impact because it's a strong indication of developers.

How much they are, because they are investing in the future by buying land. At the moment, I wouldn't be too overly concerned yet, but of course, we need to continue to follow it.

How long do you think it takes before this impact becomes visible on the consumer company side, sorry your construction company side?

If you think about, that has to be before construction activity and we had --if we think about the past couple of years that we had for quite a long period of time. And, first of all, I don't have an exact answer for you.

But we had a quite a long period of time when new starts were increasing and you guys were asking why can't we see it in your industry, why can we see in the industry and now this year we have started to see it coming through. So it can be quite a delay because we come with more at the tail end of the projects.

But of course I don't have a specific answer to your question how long that time will be.

All right, and then finally just what is driving modernization up 11%? Is this -- I assume this must be market share or--?

I think first of all, markets are growing slightly, but we believe that we have grown faster in the markets and it's a good productive activity from Kone with a good competitive message. That's the only way you grow.

You have to be out there. Working with your customers, showing that you help them resolve their problems and do good job for them, that's what it's all about.

Where is the Kone's market share in any modernization at the moment?

It's -- I would say it's, I don't have a specific number because there's -- the date on the modernization market is not that exact. What we know is that it is higher than our market sharing maintenance executives, any market share maintenance, we are probably, and we have 1.3 million little bit more units in serving out of our total markets about 15 million.

It's not very visible. Modernization market, it's not very easy to evaluate and have a good view on that one.

Yes, good afternoon. Thank you very much for taking all of our questions.

And my first one would be on your remark that you saw an improvement in the relative margin of orders. Could you can point for us which region you saw this relative improvement?

I would say the biggest impact we did see in Europe and some Asian countries.

And what is your estimate for the lead period of that improvement to come through and say it is mid 2020 too early or stood roughly the right number. How do you think about that?

Probably around that year.

And the relative improvement in the third quarter compared to the second one, was there acceleration or is it roughly the same ballpark?

That is different. So, if we comment orders, we see margin, so it is one way, or there's many moving parts, if you think about first that you have different type of projects, and also you have different type of countries and we tried to neutralize for those when we comment.

So at the end of the day, it's not exact one number. But it's not that different the improvement between the quarters.

Okay, thank you for that. And my second question circles around China.

How much of your China growth in the order intake was market share gains of your own versus market share that your customer gained? Do we have a ballpark estimate for us?

How should we think about the split here?

I don't really know what the difference is. So I think we work with a very broad set of customers.

So sorry, I don't really understand the question.

I mean question here is how long can this strong order intake growth last? And one of the meaningful drivers has been the consolidation of large developers.

Now, if you think about your own growth, partially driven by your customers gaining share, and it's partially driven by you gaining share. Those other bigger OEMs that might have the same exposure to the same developers.

My question really is how can this abnormal growth last that stems from the big developer consolidation? The limitation for that we will see this going to 70% in the future and that is the way I think about that question now.

Well, I would say that, look; we serve a very broad base of customers in China. Our aim is to really find always where there are growth opportunities.

So we don't really think about it that way. We said it's been helpful for us that we have a strong position there, but of course we constantly building relationships and market shares beyond that as well.

So I think the fundamental way how you build market share stems from your activity, your competitiveness, and how much you add value to your customers. That is I think the fundamental and most important question that we're focusing on.

I can't say where we will be next year, we don't guide and we don't give you indications of that. I think our objective is clear that our objective is to grow faster in markets overall.

And then we have to see next year where we get to.

And maybe from these large customers and definitely we see opportunity to continue gaining share with them as well. So it's not something where we only grow with them and definitely, let's stay in.

Have you historically seen any other market maturing whether was a developer or consultation? And where you can give us a ballpark number with a consultation has stopped?

So we can think about where this might be heading to China?

I think we should keep in perspective, again, that just a scale and the size as the China market and the size of these developers just, it's very different than any other markets. So I don't think we have any direct precedents or comparisons.

The China market is unique in its size, breadth and else is based on development.

Hi, thanks for taking my questions. I have two questions, please.

The first question is on China in the infrastructure business. So like previously you have mentioned it's around 10% to 15% of the sales in China.

Now given the strong growth we have seen here over the last three quarters like is there any change in that shares or the way around are you gaining market share in that segment versus some of your more established peers in that segment?

I think we have performed reasonably well in that segment. I can't say exactly but maybe it's today; I think what we said 10% to 15% we said of the total market.

I'm not sure if we commented how much it's of our business. So I think we commented that's how much of the markets probably now more in the 15% of the market size.

And we have performed quite well there, but it's not the only reason I think we perform very well in the residential market and the commercial market and high res market. Without being broad based, competitive and broad based strong performance we wouldn't have had the order receive growth we have had.

Okay, got it. And my next question was like on new services.

Could you give some more flair--and which has seen more traction in terms of adoption? Is it more like in the Asia Pacific, China or is it more in Europe like where you see more acceptance given it's like 1% growth you have seen adding to the service growth this quarter?

So just wondered to get a perspective like where you have seen more traction on this by geography?

Okay. We see more traction in countries where we started early.

So we didn't start in all countries at the same time. So it was kind of a gradual roll out.

But I think this is strongest traction we see in the countries in Europe where we started the earliest. So we have very good momentum in some and we're building in others.

But then you also have specific markets in some markets in Asia, we can see that the adoption of the new digital services is quite high, but it varies mark-to-market. So I would still say that we are early on and we see that it doesn't take off day one, you really have to build up your own capabilities, get your customer acceptance but once you get there then you start to build up a momentum and it's where we started earlier where we have the best momentum.

Hello, again, thanks so much for taking a follow up. I'll just go quickly through them.

On the tariffs for 2020, I think you quantify that around €10 million or €15 million. Could you please remind us on that?

I think I've commented 2019 with saying that it's more than €10 million impact to 2019. And if -- obviously, it's something which moves continuously, so let's follow it through but it has less of an impact in some millions in 2020.

Additional incremental

Yes, incremental, yes.

I think that's what the situation and see what happens.

Of course, yes. Okay, great.

And I just want to talk about this China potential regulation change that you discussed earlier. So you see that it needs to happen at the national level first.

But there are no way individual cities or provinces can start converting the South more broadly replacement of physical visits with remote monitoring?

That's what we do expect that the first will get, and that's where we have seen the work happening is on a national level, then we know that there's been some trials in some cities. But to get a broad base changed, change, we would we think we would need to see first a change in national regulation and then cascaded down gradually from there.

Right. And in terms of that work, I mean those pilots have been ongoing for a while now.

I think two years we've been kind of tracking the city names, if not longer, is a kind of a major hurdle that the government struggles to overcome at that national level, or is it just a lengthy process that is progressing and should arrive kind of to an outcome?

I would say it's more the latter.

Okay. And would you venture a kind of an estimate on when you think the government could be ready to change that?

I'm not going to make any estimates on that. I think we just have to follow it and be assured when we have news, someone there's clarity we'll share that with you.

Great, great, thank you. And just a couple more on China.

We got some data points on or a data point, I guess on office vacancies rising. I think CBRE were reporting that about I think 17 major cities.

And just where are you picking on one thing and then running with it wondered if you have got or if you track any more comprehensive data sets specifically on commercial and office, specifically in terms of vacancies and where do you see that -- the state of that kind of industry that segment at this point?

I think that's pretty consistent. We said about the market that commercial was slightly weaker.

So I haven't seen the CBRE report. But I think what we've seen more stronger has been residential and infrastructure markets.

I still believe in this in the city hubs that we're looking at. There are still opportunities but overall, yes, they've been a slight slowdown in that market.

Got it. Thank you.

And finally, in China on digital, are you being able to kind of sell it as an add-on service there with the same sort of progress or same needs as same traction as you getting in Europe? Or is it generally kind of a tough to sell enough where you kind of need to balance maybe providing it at more attractive terms because it improves stickiness or other benefits that come with it?

I am asking that because we see some evidence of local players that tend to treat digital as a kind of free add-on to existing service?

As you know that our clear policy is that these additional services, they are a commercial service that we sell to our customers. Why do we do that?

Because we think that there's a clear improvement for them. And we see a clear value to them in these new services.

And that same policy we have had in China. I would say depends segment-to-segment maybe commercial segments are, it works better, some residential, perhaps more challenging but still this is the policy we have and we are growing that business and we haven't seen a reason to deviate from that.

I think it's very early days local players, we start to see some early initial services but I think they are not that many players who can say, who can demonstrate the consistency and actually the concrete outcomes and positive outcomes that we can do.

Got it. And would you say your attachment rate of digital to newly signed service contract is similar in China to the developed world?

Not quite, not quite it depends on segment-to-segment.

But it's not widely different?

It's not why but slightly lower. Yes.

Many thanks for all the good questions and we are of course happy to help if any further questions arise. We like to wish you all a nice rest of the week.

Thank you.

Thank you.

Thank you.