KONE Oyj

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00:04 Good afternoon, and welcome to KONE’s Fourth Quarter Earnings Call. I hope everybody is been keeping safe and wealth.

My name is Natalia Valtasaari. I am Head of Investor Relations here at KONE.

And I am joined here today by our President and CEO, Henrik Ehrnrooth and our CFO, Ilkka Hara. As usual Henrik will start by going through the key developments from the quarter, business, financials and markets.

Ilkka will then dive a bit more deeply into the financials. And Henrik will finalize by going through the business outlook and the market outlook before we go into your questions-and-answers.

00:35 So Henrik, I guess with that please.

00:40 Thank you and welcome everyone. Pleased to see you all of you.

I'm very happy to present the results for 2021 and Q4. We all know that 2021 was quite an unusual year.

With that context, I'm actually very pleased with our performance last year. How we were able to perform and what was actually quite a challenging environment.

01:02 Some of the highlights for Q4. Orders received now reached again the high level of last year, which were actually very strong.

So we had a good comparison point and got to that level again, so that was good. We had an excellent development in our services business, that's something I'm very pleased about.

I will talk also more about today. 01:26 We all know that the supply chain environment remains very challenging.

We are making good progress in offsetting actions, and I talk more about them today as well. Also highlight this that our Board of Directors have today proposed to the AGM, a dividend of EUR1.75 plus an extra dividend of EUR0.35 to EUR2.10 in total, so another strong payout.

01:57 As usual, let's start with our key figures for Q4. We had a very solid development in the quarter.

As I mentioned, orders received in comparable currencies got through a good level of last year at closer EUR2.2 billion. Our order book is at an all-time high, at over EUR8.5 billion and grown 3.8% year-over-year.

02:19 Our sales was now just shy of EUR2.8 billion, 1.8% growth in comparable currencies and our operating income declined by 4.5 – 4.1% to EUR352 million. Our key performance indicator adjusted EBIT declined by 5.6% to $359 million and the margin from 14.5% to 13%, so we can really see now that the impact as we discussed of the supply chain environment is having impact.

02:55 Real highlight was our extremely strong cash flow once again, at EUR525 million super strong. It really shows that we continue to run the business with very good discipline, so that's something I'm very happy about.

EPS at EUR0.53 compared to EUR0.55. Now, as we all know one quarter is very short period of time and now, we have a full year behind us so we have a little bit longer perspective.

Overall very good year. 03:24 Orders received grew at a good rate of 7.4% and reached over EUR8.8 billion.

Our sales, we had a new important milestone. Our sales exceeded EUR10 billion for the first time and was now at EUR10,514 million and grew 5.3%, which I think it's good growth in this environment.

03:49 Our EBIT operating income grew EUR1,295 (ph) million and our adjusted EBIT grew by just under 5% to EUR1,310 million and we could see that the margin we had clear positive development, beginning of the year and then the supply chain environment had an impact second half, so margin down 0.1 percentage points for the year. 04:15 Full year cash flow close to last the prior year’s exceptional level.

I would say, EUR1.8 billion is extremely high. So very pleased about that and earnings per share of EUR1.96, so 8% growth in EPS.

04:32 Now, as I mentioned already, 2021 was an unusual year because of the supply chain challenges because of increase in material cost, and so forth. What I'm very pleased with is that we were constantly able to deliver on our customer promises that's of course, critical.

Our teams throughout the organization have done a phenomenal job being able to find solutions to headwinds that we faced or just be doing an extraordinary job. So I could not be happy with the team's performance, so I am and huge thanks to everyone there.

05:15 Now, that's our summary of our performance and then our dividend, as I mentioned, in total EUR2.10, EUR1.75 plus EUR0.35 gives a good yield overall 2.8% based on a share price at the end of the year and the ordinary and total dividend 3.3, so continuous strong payout this is almost EUR1.1 billion in total. So I think that is a very good dividend again.

05:49 Now, the way we measure our performance on a longer term basis is through our five strategic targets that is how we measure whether we make progress in our strategy. We can see many good areas here.

Great place to work, continue high employee engagement, clearly about high-performance benchmarks. Most of our customers target very nice again improvement in our Net Promoter Score, so we have a multi-year improvements here.

06:22 Faster market growth in our services business. We had market-leading growth again, particularly maintenance business, we have the market leading growth in the maintenance business and I'll talk about that more today.

In new equipment, we grew a number of units about 9% which I would say is probably slightly higher than the market, but we are still looking more in detail into that. Perhaps, where we had the best performance in market share was North America, some parts of Europe and in countries like India.

06:52 Financial performance, our fourth target it’s clear that we are not happy with the development of our EBIT margin. We had a target of improving that.

It's clear that there -- it is big burden and so that's something we are taking very strong action, very high focus for us. At the same time, exceptionally strong cash flow, second year in a row.

I think that is important something to put really focus on. 07:21 Leader in sustainability, this is not a new thing to us.

We have had this target for well over a decade. And that's why we have good development here.

We continue to improve our carbon footprint and we had also improvement in diversity and inclusion last year. So we continue to get a lot of external recognition for our performance and sustainability.

This is not something that is a short term matching for us as that we have been developing this for decades already and now doubling down on our focus here. 07:52 So that's about our longer-term performance, what we thought that we have put a lot of effort into innovation in our services business over the past year's and we can see that it's paying off.

We have innovated a lot when it comes to service offerings, technology, ways of working and business models and we can see that, that is paying off. That's why we have particularly maintenance the market leading growth.

That's very clear. 08:24 What is of course always important to maintenance business to have a strong new equipment business to feed the base.

Last year, we sold 196,000 elevators and escalators up about 9% year-over-year, so good improvement again. Our service base continue to grow about 5% and was just shy of 1.5 million units.

So when we look at our revenue as maintenance it was clearly higher than this because of pricing actions, because of value-added services. There, we don't see others really doing it, that's why we evaluated service actually driving growth for us.

It's a commercial thing. So both of those are doing well and very good development modernization, again.

09:10 China clearly a focus area, we know that's where the highest growth area is and we continue to grow faster market there as well. 24/7 connected services and now we talk about penetration, we not only talk about connected units that's much, much higher number, but these are number of units again where we have commercial contracts and customers are paying for this service.

And this, I don't think anyone is close to having this many commercial contract and it really shows the value that we're providing. 09:41 One of the ways, we have been driving our growth in our maintenance business have been through our KONE Care offering.

I think many of you remember when we launched it back in 2016 start to rolled out in 2017. How we provide much more adaptability to our customers.

It's really been important for growth and for pricing. So that really show you the direction then in terms of offering.

10:04 Now, end of last year, we launched a next stage of this, we call it, KONE Care Dx. It is for our DX Class elevators, differed markets first, carbon-neutral maintenance and of course, fully connected service and through AI improving the experience of our customers and service outcomes.

So again taking the next step here. So it’s just a highlight of how innovation has been driving constant improvement in services both maintenance and modernization and that's of course something we continue and focusing a lot on right now.

10:42 So that's about KONE's development. Let's talk a bit about markets, of course what’s important to market is how people are moving around, how innovate that's being used?

Here you can see the same data we now been showing for almost two years during the pandemic. We can see that elevator usage has recovered throughout this year.

And that's something we expect to continue. Of course, there is always a little bit seasonality in this.

11:12 What is actually interesting, when you look on the right hand side by segment. First of all, people are moving a lot in and out of their homes, that's usual.

However, lot of people have declared that brick-and-mortar retail is dead. Our data shows something different.

Look at this picture, it actually, we are at or above pre-pandemic level in number of elevator starts i.e. usage of elevators in retail establishments.

So we can see that people are back and I think this is very positive also for our customers in these segments. So this gives us confidence for services both maintenance and modernization again for the coming year.

11:57 So then what did happen through the markets in Q4? New equipment markets developed positively most parts of the world, strongest development in North America and Asia-Pacific outside of China.

So good growth in North America, slight growth throughout Europe, Middle East and Africa. The Chinese market was now stable, which I think is a good level.

Given the uncertainty in the market and we'll talk of course about outlook soon as well. And Rest of Asia-Pacific was very strong so good recovery throughout, Southeast Asia and India.

12:34 Service markets, they are very positive. Maintenance markets are continuing to grow as they have done many years, so the slight growth indeed mature markets and continued good growth in Asia-Pacific.

If you look at modernization, a lot of growth again in Q4 there in all parts of the world, particularly North America and Asia Pacific. And we have captured this growth in a very nice way.

13:01 So what about China? As I mentioned, the market was stable year-on-year, and pricing environment continues to be very intense, very strong competition in the market.

Ilkka will talk more about pricing, but I think it was important and good market was stable. If you look at the total property markets, we can see that macro momentum is slowing overall in the economy.

And the financing environment remains extremely tight. So the liquidity restrictions are clearly having a big impact on property developers.

13:40 At the same time, we can see that towards the end of the year and beginning of the year, that’s already start to take a more balanced approach to tightening and actually do some easing measures and we think that that's probably going to, we're going to start seeing that later this year. What we did see in Q4, of course, the real estate investments, sales volumes and new starts did decline, so that's going to have an impact in the first half of the year, we think second half is going to be stronger.

And I'll talk about that more in detail in outlook. But if you compare where we are compared to pre-pandemic levels, I think we actually are still markets are at a good level overall.

14:21 So that's about our development as a market and now I’ll hand over to Ilkka for talk little more about our financial development.

14:32 Thank you, Henrik and also warm welcome on my behalf to this fourth quarter and full year one result announcement webcast. I’ll go through our results in more details from a financial perspective and I have a good news to share.

We've made continued progress in many fronts in the business. 14:53 First, I think with orders received.

Orders received for the fourth quarter were EUR2,155 million on a reported basis growth of 4.2% on a comparable basis growth 0.4%. It's good to note, when comparing our performance that we did book last year in the fourth quarter a very large order in the modernization business in North America, which is impacting the comparable period.

15:23And if I look at our performance, underlying performance, we saw very good performance in Asia-Pacific, North America as well overall in orders growth in Europe, Middle East, Africa and also more stable development and overall orders in China. When we look at the new equipment, particularly and especially the important China market, we saw our orders in both units as well as in monetary value declining slightly and there, we did see mix contribute negatively at the same time pricing was stable for us, which in the competitive market landscape is actually a good result from my perspective.

16:11 If you look at the pricing overall, which has been the focus for us now in this increasing cost environment in -- with an increasing inflation around us. Pricing continues to develop positive.

I would call out particularly our business in North America as well as in Europe, where we are seeing good continued progress in improving pricing, as well as Asia Pacific where we start to now see improvement on the pricing front as well. 16:40 Then, as a result, when we look at our orders received margins, well they declined slightly year-on-year.

We now see as a result of the pricing actions, the product cost actions as well as productivity that it's actually improving sequentially. So our orders received margin from third quarter to fourth quarter is improving.

And to me that's important, that’s a leading indicator the progress we're making on encountering the cost inflation that we've seen. 17:13 Then, looking at sales.

Sales for the quarter was EUR2.7 billion, growth of 5.6% on a reported basis and on a comparable basis 1.8% growth. Geographically, we saw 1.1% decline in Americas in sales, in both Europe, Middle East, Africa, we saw growth as well as in APAC, growth of 1.3% for Europe and for Asia growth of 3.6%.

17:49 Then from a business perspective, new equipment declined 1.1% against previous year's fourth quarter. Inflation (ph) was more stable, but to me, one of the highlights of the results this quarter again, is the best performance we see in maintenance.

Henrik talked about the units growing close to 5% but in grow sales, we grew 7.7%, it’s very good performance. And there we see contribution also from our new service and solutions such as 24/7 connected service contributing positively as well as pricing, which I would say that the best opportunities we've seen pricing actually in the maintenance business also now visible in our revenue growth.

18:37 Then, to adjusted EBIT development. For the quarter, our adjusted EBIT was EUR359 million and our adjusted EBIT margin was 13% down from 14.5%.

While we e actually saw very good improvement in productivity. Good development in services contributing positively to our profits and profitability.

In the fourth quarter, as highlighted earlier, we saw also our increased component and logistics costs impacting more. So for the quarter, the impact was EUR75 million.

Clearly, we were successful in delaying the impact of increasing costs in the first half of ’21, now in the second half and particularly fourth quarter more visible in our results as well. 19:30 Few words about that.

So first, when we look at our supply chain, what I’m very pleased, we've been able to deliver to customer needs very well throughout the year, despite the constraints especially in logistics and the semiconductor in certain and also on the components side. And to me, that's important.

That’s something that, we will see the value of in the coming years, as well with a good response to our customers delivering to their needs throughout the year. 20:05 But if I look at the three components.

We've seen overall a cost impact of EUR200 million now in ‘21 as expected and we expect that headwind to continue also in ‘22 of approximately EUR100 million to EUR150 million. Material prices continue to be on an elevated level, although slightly down from the peak levels but as we've talked about there is -- when prices are going up, we can delay the impact.

Now we continue to see that especially in the first half of the year as a comparison point is a lower one. 20:46 Increases in semiconductors continue to be an issue, both the costs have increased, but also the availability continues to be tight.

And we expect 2020 also that to continue for most of the year, as well as the logistics cost to be on the higher level. But what are we doing about it at KONE?

We've actually seen good progress in our product cost actions and our actions to improve productivity, part of that's already visible in fourth quarter, when expect that to continue and we see those actions have been good traction. 21:23 Also pricing, I've already talked about.

We are moving to right direction. We just need to do more to counter the inflation and we are on good track on that.

But how are we able to do it? It's all about differentiation.

So our new service and solutions are one way for us to differentiate, but so also for example our DX Class elevators, the DX maintenance and so on are the new service and solutions that enable us to differentiate and have a capability to do improve our prices. Actually from my perspective, we are progressing well here.

21:58 Then, lastly, to cash flow. And frankly to me, this is the highlight of the results for last year, EUR1.8 billion (ph), EUR525 million is a very good number.

Working capital continued to develop positively and what I would highlight throughout the year in particular now at the end of the year, the good work we've done on collections contributing positively onto our working capital, so very pleased to see this development for the full year. 22:30 But with that, I'll actually then hand over to Henrik to talk about market and business outlook.

22:41 Thanks, Ilkka. So outlook for overall market for 2022 and let's start with new equipment markets and with China.

So in China, we expect the markets in 2022 remain at a solid level although, below that of the 2021, because of the tighter liquidity and the situation we all are aware of. What does that mean in practice?

It means that we are going to be down mid to high-single digits. And in practice means that the market would be at an equivalent level in number of units to where it was in 2019.

2019 was -- for me, it's not a bad year, it was actually good year. So therefore we expect markets to be solid and at a good level.

As we all know they recovered very strongly grown actually very strongly post-pandemic there. 23:33 Rest of the world, we continue to expect markets to continue recovering, which is positive, so good opportunities there.

Strongest growth continues to be in the modernization markets, where we expect to see a growth in all regions. Our maintenance markets, those we expect to return to a pre-pandemic growth trajectory, with slight growth in the mature markets and good growth in Asia-Pacific so same good opportunities as we see in there for many, many years.

So overall I would say that the market backdrop for this year is a positive one. 24:14 Business outlook, we expect that our sales this year will grow at the good rate between 2% and 7% in comparable currencies.

Our EBIT, we expect that to be in the range of EUR1,180 million to EUR1,330 million that of course again assumes that foreign exchange rates stay about the level where they've been in January and then we're going to have a slight tailwind from currencies, but this is a range that we see for this year. 24:47 We have a number of positives that continue to drive a very good performance, very solid order book.

As you know, is at all-time high level and we expect a continued good outlook for services and strong performance there. Ilkka talks about the actions we are taking on product cost productivity and pricing and we're starting to see good -- good development here.

So we expect these to start to have an impact in a positive way towards the latter part of the year on our profits. 25:22 As we know there are also a number of things are burdening our result, headwind from material, component, logistics and so far, we will continue to be high.

Last year was roughly EUR200 million. We see another EUR100 million to EUR150 million this year.

As you remember that, in the first half, last year, we didn't have much of these headwinds, most of them in the second half now therefore we're going to see, beginning of the year, quite a lot of headwind from this. And clearly, also the competitive dynamics and liquidity constraints in China have an impact on our outlook and results.

Overall, the good thing is that there is a growth outlook and then KONE has achieved a lot of things. So that's a positive thing.

26:06 So to summarize, continued positive outlook and services, growth markets and our own business. We expect that markets are growing in new equipment in all markets except for China and also China to be at a solid level, although somewhat down.

We are making progress in our actions to offset the supply chain constraints, all the additional costs that we have. We need to continue, but at least we can see that we are on the right path and sequentially, we're able to improve the margins while orders received.

26:43 And what is of course important to us is we continue to innovate, drive long-term growth and differentiation through value-added services and solutions, very active innovation agenda. We actually have a very interesting year ahead of us from that perspective.

So continue to invest heavily in how we add value to our customers, how we approve our business and that's something I'm very happy about. We talk more about the impact we've had in our service business, so we can see clear results of the actions we've taken over the past years.

27:17 With that, we are ready to move over to your questions.

27:57 Thank you. Hi, Henrik and Ilkka, hats off.

(ph) So first -- first, a quick one for you, Ilkka. I'm trying to understand the exit margin embedded.

From the balance sheet, it looks like it was a provision release in the fourth quarter. How much was that exactly and impact of the margin year-over-year?

And what does it relate to and I'm trying to understand if this was -- an FX effect or if that is a key number, which seems to be EUR12 million? So I'll stop there.

28:23 I don’t think we had anything out of the ordinary in the fourth quarter from a provision release point of view. So that's really not a big drive for our margins in the fourth quarter.

There was normal ups and downs in terms of provisions, but nothing particularly that I would highlight.

28:43 Okay. Then on to my real question.

So the second one is on price cost out of the backlog and it’s good to see that price cost is improving on the orders, but I'm still a bit curious to understand what have been out of the backlog. You're guiding 150 -- EUR100 million to EUR150 million of cost inflation before which was roughly what I had, but then the margin at the midpoint is below me and that was pretty cautious ahead of numbers.

So that's, the pricing was much weaker out of the backlog considering that you're guiding costs not far from me. We know that the China pricing that was flattish in orders.

You gave us that, so that must mean that pricing in Europe and Americas was pretty weak a bit surprising to me, so can you elaborate on pricing, Henrik on the orders you took throughout ’21?

29:36 Yeah. I’ll provide some context, Ilkka can provide some more details on this.

Remember for example, I remember that in Q3, we did say that the margins of our orders received declined and that's of course what we are -- then delivering in the first half of the year. So then now in Q4 the impact was positive, which will then have impact on the latter part of next year, so that's I think consistent with the timing that we have been talking about.

30:06 Maybe to add to Henrik’s comments so, it's good to note that if you look at the orders development before third quarter, clearly, especially in the second quarter, we didn't foresee all the cost increases. So they start to more and more increased throughout the year.

So if I look at our orders received for the full year ’21, the margins are down for those. So that's something where the assumptions that we had, we are more positive at the time when we comment those, that's influenced as personally the first beginning of the year in ‘22 and easing off towards latter part of ’22.

30:50 Yeah. I know you're thinking, given that the cost guide in the P&L.

It's not far from me and it seems like the underlying drop through them is considerably weaker particularly for the for the first half, but okay. And then on the -- my third and final one is on the China guide.

Henrik, I note that you said somewhat lower, but when I spoke with Natalia this morning, I sensed mid-single digit to high-single digit down for China unit terms and I know from one of your peers they said down 5% to 10%. Just want to clarify that and maybe following up on pricing as well flattish when the market was pretty solid.

When the market falls it feels like pricing could be down somewhat? What do you think there, Henrik?

31:37 So first of all, I think I was -- Ilkka also said mid to high-single digit is what we expect the market to decline and if that happens, we're going to be at an equivalent level to where we were in 2019. So that's about where we see Chinese market and particularly more challenging first half and then slightly better second half is our outlook at the moment.

I’m sorry, pricing in China. Yes.

32:07 Pricing in China, it's -- we all know the Chinese market has been very, very competitive, both domestic players and also the international players. I think that the fact that we're able to keep stable pricing and with the cash flow that we had was a good achievement.

As you know we don't comment on pricing going forward. We know that the intensity of competition will continue.

So we just have to see what the development is then going forward. I think there are -- targets are pretty clear.

32:46 Very, very quick final one. In the China guide made to high-single digit down, do you assume any incremental stimulus from -- in China in that number?

32:58 I would say perhaps that restrictions will be quite despite this day, they have been up until now.

33:09 Thank you.

33:21 Hi. Good afternoon.

Thank you so much for taking my questions. Can I start just with the kind of broader question on your new equipment profitability, business profitability.

Just looking at the kind of up to EUR300 million off raw materials and logistics inflation that you're incurring and most of that is a new equipment suggest around 400 basis points plus impact which together with initially sort of starting point being around mid-single digit in mature economies presumes that takes you new equipment margin profitability down towards zero and takes China down meaningfully as well. 33:58 So just wondered if you could comment on whether you view that as a structural situation going forward given that the industry saw a raw materials and substantial inflation and spot prices didn't respond to straight away with own pricing.

Now there is a response, but not as much traction in China. So I just wanted to check if you see that as structure going forward.

Do you see scope for new equipment profitability to recover back to kind of mid-single digit level in material world going forward?

34:30 We haven't given views on what profitability’s our new equipment business. It continues to be a good business even these levels, but not quite as good as this was before.

So clearly, margins are down, there is no question about that. We take a lot of actions to offset this.

So we don't think this structural. At the same time, we haven't quite increased prices and what the productivity and cost to the level that would offset but we are making progress in that direction, and that's clearly a very high focus area for us in the coming year.

We don't think it's structural, but we have to see how the markets develop and I think we'd be shown many times that when we put our mind to something we can usually it make some impact that's what we're trying to do here as well.

35:19 Thank you. And if I may a couple of just smaller questions.

In terms of pricing components for 2022, if we put the service side aside and look at new equipment only, you've clearly communicated on China being stable, would maybe negative mix but on Europe and North America and Asia-Pac, ex-China, what kind of price increases have you been able to achieve in those geographies, kind of rough ballpark numbers?

35:52 Do you got to comment on that?

35:54 Yeah. First, I just wanted to clarify your question.

So when I comment pricing or we comment pricing, we talk about history, the orders that we booked, not forward-looking, but naturally, I guess you're asking then what the impact is then to deliveries. But from pricing perspective, for the orders now, particularly in the fourth quarter, so we see good low-single digit improvements in the prices, especially in Europe and North America.

So that's some percentages up in terms of prices and I said, and now we're starting to see that also in Asia-Pacific, China has been more stable throughout the year. So clearly there, I think that's been something where both pricing as well as payment terms have been the focus and especially in the payment terms, I think we've done very good job on top of the pricing that has been stable.

So that’s the way, I’d think about the pricing development. So progress, but not yet enough going to come to the headwinds from a cost perspective.

36:56 And Andre, you said that you focused mainly on new equipment business, but of course pricing focus of course in all businesses, perhaps in this environment where we are, we have been able to improve our pricing as you've seen in our maintenance business over the past many years. This year, we actually see even better scope for that.

So clearly, there is focus on pricing not only new equipment, but in all of our businesses.

37:23 Got it. Thank you.

Appreciate it. And just last one on productivity.

It's something that we talked about quite a bit in the past and you talked about single digit percentage off or the total cost base or kind of materials plus contracting cost base and that does imply quite a substantial number on the bridge, it implies easily over EUR100 million, but obviously, as we go through on a couple of the history and the fully your guide, for this year with all components just doesn't add up with that sort of level of productivity being achieved and EBIT to be still down EUR50 million year-on-year at the midpoint with plus 50 from FX. 38:08 So I just wanted to check on productivity for 2022, is that somewhat being held back and is somewhat related to the measures you've undertaken.

And therefore, maybe we should think about our single-digit for second half revenue as the new orders have been delivered or kind of what is the nuance into productivity on the profit bridge for this year?

38:30 I would say that we would look at productivity of course in our type of industry, it's very much -- now we talk about major field productivity installation and service that’s you get a few percentage points every year, usually you don't get big jumps. We have had a good development there in particularly because our quality has developed very positively.

I must say that our quality performance has been really, really good over the past last year, and that’s of course, it was fundamental thing that drives productivity. We expect to continue with a steady and good development in productivity.

It's always say, it's a force low-single -- low to mid-single digits what you can achieve, and now of course, you need, you need to get several percent of productivity just to offset costs. Labor costs are what -- of course, they go up every year particularly in Asia and other markets, but also in Europe, North America, they are going up every year.

Now, they go up a little bit more not dramatically more but little bit more than in the past. So, of course, you need to have a bit more productivity to get there, but I must say particularly on installing new elevators productivity has been good done and I can see a lot of potential in the service business as well.

39:46 All right. Thank you very much for your time.

39:47 Sure.

39:58 Hi. Good afternoon, gentlemen.

Thanks for taking my question. Apologies to go back to the adjusted EBIT guidance for 2022, but maybe if I can break it down.

At the midpoint, you are looking roughly for 4% compression or about EUR50 million reduction in your adjusted EBIT versus 2021. You are guiding for net inflation plus FX headwind of about EUR75 million and that compares to EUR118, 2021 and you're still guiding for what I would call a comfortable organic growth in 2022 which is fairly equivalent to the one in 2021.

If we kind of look organically, so effectively you kind of with the FX, positive FX you're guiding for about EUR700 million extra sales in 2022, but you expect 50 million less suggested EBIT, so I appreciate the EUR75 million headwind you're guiding on between the inflation and the FX, but it still seemed quite a lot of compression, so does that mean you're not really expecting and your providing leverage in ‘22 or is it more mix related because of the weakness of China or is it something else, but just trying to make sense of those numbers because so much incremental sales and that level of EBIT contraction is a bit difficult to follow I think.

41:21 Maybe I'll start and then if you have something to add. So the way, I would maybe think about it is that from a growth perspective, that is contributing to our profits positively.

But then, if you look at inflation that you always have in our labor cost and field cost overall that is slightly higher than normal. And also then clearly, we have a headwind coming from this increasing raw materials of EUR100 million to EUR150 million on top of that.

Then productivity is able to help us to net some of that inflation. But clearly, in this environment productivity, even though it's a bit higher than we've seen in the past is not enough to count to that.

Then, the pricing that we talked about as a slight positive impact more towards a latter part of ‘22 as those orders that we've now booked start to be in deliveries, so in that sense those are the moving parts in the bridge in the broad scale. So cost inflation is impacting especially the first half of the year as a comparison point much lower in ’21.

42:32 Okay. So if I understand well, you cannot pretty down essentially to inflation rather than potentially any mix impact?

If I'm understanding correctly?

42:43 Yes. So the cost inflation, particularly in in the raw materials which just continues to be a headwind in ‘22 as well.

42:53 Okay. Thank you very much.

The second question was around your comment around China and just maybe if you can help us with some units number for that market, because I think Otis was kind of guiding mid to high-single digit down for the whole of APAC, so we expect as a result China to be done more. And if we look back to 2019 level unless I mean correct.

I think it was about 570,000 units installed and it look about 650,000 this year. So it looks again that double-digit percentage contraction if you go back to 2019 level.

43:33 So first of all, I wanted to check that with you around kind of your guidance, which is more mid to high-single digit negative rather than low-double digit? And then if I think about that number, how do you expect this to reflect in your numbers, is that going to be more reflected on the orders, on the sales, which is actually do you sales guidance is quite constructive in this case for the other regions in that context, considering China is about 30% of your sales?

44:02 So, it's clear that, what is -- what we are delivering in China, of course, a big part. We have the order book, okay.

A big part in China, we need to continue to orders. So, of course, the order book is important, and that's a very solid, we have a very good order book, both in China and rest of the world.

So then market of course more impact on orders, but in orders we have to see, how we saw our market share going to develop? What is the market going to be?

The numbers of growth, you don't have to be exactly at hand, when we looked at them. China market probably closer to 610,000 units also next year.

When we looked at our estimate of units during last year, we don't have exactly the final numbers, but then going back to 2019 would be somewhere a mid to high-single-digit decline depends a little bit what numbers you have, we may have slightly different one for each -- each of the year, so maybe that's something that Natalia can follow up and her team can follow up with you.

45:03 Yeah. That would be great.

Thank you. And just maybe my last question on that.

So I guess or the follow-up maybe was, so you expect the impacts that you gave on China guidance more on the orders rather than sales, if I understand well?

45:17 Well, I guess, our guidance is not about orders, we talk about market and then we have a sales guidance, but we do take into account the development on how we see the orders and when we gave the sales guidance.

45:31 And with the rotation in China, of course, a lot of what we deliver -- this year, we also need to order this year, but clearly in a relative sense order has a bigger impact in orders, but we still see, I mean I think the key message is, though, which is important is that market at similar level to 2019. 2019 was not the bad year, it was actually a pretty good year, if you remember how we performed then.

And I think that -- a lot of new elevator is going to be and this can be sold in that environment.

46:07 Thank you very much. And just the last question was more around capital allocation.

The ordinary dividend is stable. I appreciate your doing special dividend, but this is obviously a little bit lower than what you have done last year.

And kind of, if I look at the overall return, we're looking at 2.10 and for this year, it was 2.25, I think for last year, even though your net cash position has -- has kind of gone up and is now nearly 2.2 billion, so how should we understand that kind of capital allocation of that single year where the overall return is actually down year-on-year?

46:45 Well, I would say that the way I know of course our Board has been deliberating on this, but this is a good payout almost EUR1.1 billion. So I think we're paying out quite a lot and paying out an extra again.

Now the point is, yes, we continue to have a very strong balance sheet also after that. Again signals that we are very ready for opportunities.

I want to capture opportunities if and when they come in to market. It hasn't been such big opportunity in the past years, but in environment like this, I think things can happen, then we want to be ready.

47:27 Understood. Thank you very much.

47:29 Thank you.

47:36 Hi. Good afternoon, everyone.

I've got a couple of questions. The first one, again, coming back to your guidance for 2022.

Can you help us understand the trajectory throughout the next year? Your guidance implies basically around the 100 basis points of margin contraction, let's call it at the midpoint.

So if I look at margins in 2021 in the second half, there were also basically down 100 basis points. So are you assuming a bigger contraction in the first half of 2022 and maybe because the whole off the cost inflation headwinds of EUR100 million to EUR150 million will fall in Q1 and then you have broadly flat margins in the second half of next year?

Just wanted to understand the difference between Q1, which is usually lower and then the rest of the quarters?

48:34 Yes and thanks for the question, Miguel. From our perspective, so clearly, what I talked about in terms of cost headwinds as well as how the pricing has been evolving more towards latter part of ’21.

Then the impact to profitability would be clearly more than -- more in the first half of the year and towards the latter part of 22 then see recover in the margins. So that's the way I would think about it, and that's embedded in the guidance.

49:07 Okay. And then my second question is on your free cash flow.

You had quite a positive working capital inflow in Q4, which traditionally is an outflow. Can you give us some color here, you mentioned timing of payments?

Is this related to any specific region or order and can we expect this to reverse next year or are you assuming that working capital will be sustainable at these levels?

49:36 Well, first, I would say that, if I look at for the last couple of years, we've actually had very good cash flow and positive development from a net working capital perspective. And underlying that there are many actions across the whole globe and businesses that are contributing.

So for example, our collection efforts are actually been developing quite positively. There is -- I guess, the only thing I would call out when it comes to our networking capital is that, yes, it's true that there were some large payments where the timing is now in the first quarter of ‘22 rather than fourth quarter that impacted positively, but there are always also items that kind of a quarterly basis fluctuate.

So some impact, but clearly, I think overall, all the good work is now visible in the cash flow for the last couple of years. So that's very positive.

50:32 Then structurally I think we have very good payment terms with our customers already. So I don't expect those to improve, I think just been able to keep them and as we talked about in case of China, we've been quite successful there and in the rest of the world.

And with suppliers as well, I think we have a pretty good terms. So it's really something that we can maintain a good net working capital from that perspective.

50:58 I think, we know we are cash flow, there is always timing differences and cash flow can fluctuate from quarter-to-quarter, what is very clear that we wouldn't have had a cash flow even close to what we have unless there would have been fundamentally phenomenal work by our teams and Ilkka’s team. So it was just on any measure was very, very strong.

And again, it shows the focus and discipline that we've been driving in our business at the same time, we know cash flow fluctuates from quarter-to-quarter and now two years in a row, very strong I think tells a lot.

51:38 Thank you very much.

52:02 No. We're not able to hear you?

Are you on mute?

52:04 Yes. Hi.

Can you hear me now?

52:06 Yes.

52:10 Yes, sorry. Yes.

So, thanks for taking the questions. I have two.

Number one is, can you give us an indication of your China backlog growth at the end of last year. How much of that is, should we think about the conversion of that and the phasing of its into revenues this year?

And what are you assuming for revenue growth in China this year within the sort of plus 2 to plus 7. That said, that's the first one.

I'll take the other one later.

52:36 Well, overall, if we look at our development of our order book, it is developing positively more than 3% growth at the all-time high and I think that's all of the areas contributing to that we did not see result some growth in order book in China towards the latter part of the year. Last year, and that's giving us a good basis them to deliver the revenue growth for ’22.

We don't guide particular market by market order book development for the coming year, but it is something which is a good thing to happen. And in the case of China, the order book rotation is actually the fastest so also we need more orders then for ’22 to get ourselves guidance.

53:28 Okay. Thank you.

The second one is, historically, you've been kind enough to give us the China business mix between OE maintenance and modernization. Can you perhaps give us an update there, sort of where you were at the end of last year?

And more importantly, I think historically, you've told us that the China OE margin, which came down for drastically since its 2014, 2015 levels is still ahead of the group. Can you just confirm that is still the case, please?

Thanks.

53:55 The product mix or business mix in China, so it's a bit more than 80% this new equipment and then maybe 15% is maintenance and the rest is modernization. So that is, we see the best growth opportunities in China in one modernization.

So, it's growing from a small base and we continue to see a good double-digit growth in the maintenance business contributing to it. So that's the split.

Now I forgot your second part of your question.

54:25 China margins compared to group margins.

54:29 So China margins are contributing positively to our gross margins. But as you said, clearly, they are at earlier, especially if you look at years before we are more positive than they are today.

54:46 Okay. Thank you very much.

54:57 Yes. Hi.

Thank you for taking my questions. I have two.

The first one is, I'm just looking at Slide 26 of the presentation. It looks like you underperformed the market in China, in terms of new equipment growth.

I'm just contrasting that to one of your peers, who reported earlier this week. You said that they were gaining market share.

Specifically, thanks to large investments in their sales coverage. So I'm just wondering it from your side, you're noticing a higher level of competition in that market.

55:34 As we said that the competition in China has always been very, very tough. In an environment like this, we focused a lot on having a very disciplined business in China with payment terms and cash flow, which you can really see coming through.

Overall, I think last year in China, we developed more or less in line with the market, It is always going to be quarter fluctuation for someone who is as large as we are in China. So overall, I think we are developing well there.

Yes. Competition is very, very tight.

56:08 If I look at markets last year, I say that with our about 9% growth in new equipment business both in value and in volume as probably slightly ahead of market where we gain most market share. I would think that was in North America, several European countries.

We gained nice market share and then many Asia markets like India. Also in China, we're probably then more or less for the full year in line with the markets.

56:36 Understood. Thanks.

And just my second question also on China. In terms of the contribution from infrastructure, my sense is that towards the middle of Q4, the government open the taps on infrastructure spending a bit more.

Was that your experience and was that helping to offset weaker residential investments?

57:01 Infrastructures continued to be quite active, but perhaps the segment, quite as both (ph) the activity has been residential. So that's absolutely critical in China.

There is some infrastructure, but I don't think it was peak now, it was -- continue to be at a good level but it's been higher.

57:20 And clearly, if you look at the segment, by far the largest segment is the residential segments I would say maybe 65% to 70% of the market and infrastructure have been clearly smaller talking about maybe 10% or so. Clearly, a smaller part of the market.

57:43 Understood. Thank you very much.

57:44 Thank you.

57:54 Thanks very much. Good afternoon to you, both.

Thanks for taking the time to answer the question. I wondered if you could talk a little bit about the broader implications for what we're seeing develop today over the last month and a couple of months in last year.

And now given where we are seeing significant declines in developer sales in land sales and housing starts, et cetera. 58:22 Surely, the bigger question is really around next year 2023 and the longer term implications for the China residential market.

I appreciate you don't -- shouldn't provide guidance for 2023 I don't imagine you want to, but I appreciate your thoughts from a slightly broader perspective. Yeah.

Are we looking at a structurally lower market 2019? You're right, with a reasonable year, but I wonder whether that is a strong as it can be in the round from where we are today, given the government's stated focus I suppose on shifting the economy away from reliance quite so much on construction and residential markets in particular?

59:08 Sure. Well, thanks for the question.

Of course, that's an important question. What we see is that still the fundamental demand particularly among -- around the big clusters in China continues to be high.

People continue to move in their upgrade. They start to be a lot of quite big share of the volumes in China of new constructions actually demolishing and rebuilding and that those volumes continue to be high.

So therefore, we expect the markets to continue to be active also in the coming years. Exactly at what level?

I think that's too early to say, but structurally, we think that there is a plenty of demand. 59:49 If you think from a growth perspective in the coming years, I mean I think it's pretty obvious why we are doubling down on services growth, that that's where the biggest growth opportunities are.

And why can we grow, so well in services, it's of course, because of our very strong position in new equipment. So that's how we think about it.

Solid market of course, it's going to fluctuate which direction 2023, it's way too early to say. I can't say that.

But fundamentally, we believe that there is plenty of demand and then really drive good gross constantly through both maintenance and modernization.

60:29 Okay. Thank you.

And then just as a follow-up, is there a risk that the competition that you are seeing as being intense on the OE side given the dynamics that we're seeing in the market over the next 12 months to 18 months as everybody adjusts to perhaps something of a new normal. Do you see the competitive dynamics intensifying and getting even more difficult on the service side in the modernization and maintenance side of things?

Appreciate your coming from a smaller base, but I’m just thinking about how that competitive dynamic really, really might change actually and get even more intense on arguably what is meant to be the replacement business in service and maintenance?

61:14 I wish Alex here that, to put it in context, of course, I think I don't think we're the only ones who have focused on driving growth here, only thing I know is we have very good position here. If you think that we are the leader in maintenance in China and we still have a single-digit market share or mid-single-digit market share little above, if market is hugely fragmented so there continues to be opportunities, a really good job.

Also modernization market is really at its infancy and we can see very strong growth on that in the coming year. So I'm still quite fragmented.

So I think there are opportunities and yes, as always gross markets and competitive markets some companies will make it others not. We are hesitant to make it here as well.

62:08 And also if you think about the modernization opportunity for us at KONE, we were relatively late comer to China market have been ramping up and growing faster than the rapidly growing market. So that opportunity for us to modernize KONE elaborate there should have been installed in the last 15 years.

It is something an exciting growth opportunity in the coming years for us. Clearly something we're – we no one unlike to modernize our own equipment at that stage.

62:46 Understood. Thanks very much, gentlemen.

62:49 Thank you.

62:56 Yeah. Hi, everyone.

Good afternoon. Thanks for the time, like, Klas, Lucie, Andre many others on the call I really struggle to reconcile your EBIT guidance.

And I've heard everything you've said so far, but could we focus on some of the unknowns that you haven't spoken out. Maybe we could start with labor cost and field cost inflation.

What was the percentage year-on-year inflationary increase in 2021, please and what do you expect in ’22?

63:27 I think overall, there is always as Henrik was talking about earlier, there's always a labor cost inflation in the more rapidly growing emerging markets that inflation is higher. And then what we've seen is a lower number in the more mature markets in the past.

And as long as that stable, so it is something that you built on and both productivity and pricing perspective, you can counter that as we've said in the past. Now I have to say that we do expect slightly higher labor cost inflation in the coming year due to an environment where we operate.

But it is on top of what we normally see. Let's say a percentage point or so higher than normally.

So that's the way I would think about it. We haven't been very specific then on what it is on a normal year.

64:24 Well, I think in previous years, okay, you've called out a 2 or 3 or 4 and 5 in the last seven years. so what's normal -- are talking about 4 compared to normal of 3?

64:36 Maybe in the middle there.

64:38 Not, too far away the 3 probably.

64:42 Okay. That's great.

Thanks. So if we're 3.5 you're talking about EUR100 million, maybe just a bit more of labor.

We've got to EUR100, EUR150 of material. We've got your plus 50 of FX, basically you are assuming roughly EUR100 million to EUR150 million of positive volume, price and productivity.

Could you confirm that that's correct and give us a rough flavor for how that breaks down, I have to say I don't understand why it's so little because you're going to grow revenues to700, a normal 20% drop through, you would expect to be all of that just from volume alone and you have been talking about positive pricing in Europe and U.S. equipment and in service and you talk about generally getting productivity and I just don't understand why you are so low on those three items.

65:26 Well, I think you're estimates on the cost increases side are rounding up towards the smaller numbers. So I was talking about from a material and semiconductor logistics increased EUR100 and EUR150, and then on the labor cost inflation side, it's a bit more than that.

Growth is contributing positively and prices start to contribute positively next year. But as I said, we've seen pricing actions being more visible now in the latter part of ‘21.

So we deliver those in -- the orders that we deliver in ‘22 start to be in the latter part or for those orders where the pricing improvements are visible. So those are the moving parts and the rest, I think there is not that big items that I would call out other than those.

66:21 Okay. That's helpful.

The smallest price and the productivity is that also quite small and it is smaller than previous years?

66:28 No. Productivity is actually improving compared to a normal run rate that we said so clearly that's something where in this environment, we've actually seen a good progress through counter (ph), but some of that you always need to be able to counter the inflation normally.

Now the inflation is higher than normally and although productivity is better, it's not yet enough to the increases in cost in total.

66:57 Well, I have to say I still don't get it. But maybe I can come back offline.

Thank you very much.

67:02 Thank you.

67:03 Thank you.

67:12 Hi and good afternoon. Sorry to get back to China again.

You talked about the pricing environment being stable, if I understood you correctly in Q4. And then I guess we have a pretty significant inflation.

So that doesn't sound to me like you are able to pass on the price or the cost inflation in China at the moment and why do you think that would be getting any easier if we start seeing volumes additionally in the equipment market falling more during the first half of the year? I'm just struggling -- trying to understand that, why do you think that they will be able to pass on pricing in the following market in China?

67:50 I'll start. So I was talking about how prices have developed, so they've been stable and, yes, you're right.

So costs have increased. So that means that it is something where we've not been able to pass through that cost increase to our customers in China so far.

And for the coming, or this year ’22, I said already, we're not guiding our prices going forward. So it is something where we need to deal by deal, win the deals.

And then at the end, we can see what the pricing development was, so we've talked about it historically. Clearly, our goal is to be able to counter the cost headwinds with pricing productivity and product cost factors, but good in China, that's not the case yet.

68:40 I don't think we've made any comments about pricing going forward, that's something -- I've said, we don't comment on that and we have to just see how that's going to develop.

68:52 Maybe then just to better understand the stable pricing in China. So I would imagine that the cost inflation has been pretty significant through the year.

So, when you said that they’re only comparing your pricing. So if you can say the value, being more or less aggressive than competition.

Are you seeing competition trying to gain volumes through pricing, just sounds to me a bit different difficult to understand that why prices couldn't have gone up in the fourth quarter in this, in this [indiscernible] environment?

69:24 Well, I guess, overall pricing competition has continued to be quite tough throughout the recent history in China and it's a balancing act where those that can differentiate can have better pricing and maybe other way around. We focus on what we do and I always emphasize I think case of China, it's really a combination of pricing as well as payment terms.

You have to be able to balance between those two. And I think we've done a good work in the fourth quarter, given the competitive nature of the market.

70:01 Okay. Perfect.

Then, my second question would be on the cash flow. And if we see lower volumes in China.

So I guess, your payment terms are there pretty favorable. So when we think about the kind of networking capital or advances received going into ‘22.

So do you see that that could turn into a headwind and I think we've seen a couple of years when you had a negative kind of working capital development. So, but the -- and the Chinese market was kind of a stable during those years, so any comment on that please?

70:38 Well, growth in orders with advances does help our working capital, but if you look at over the years a bit longer cycle. I think we've done pretty good job continuing to see net working capital developing positively.

So let's see, we don't particularly guide that but I think the growth does impact net working capital.

71:02 Perfect. Thank you.

71:16 Hi, Henrik, Ilkka, and Natalia. It's Tomi from DNB.

Also a question on China, you mentioned that the authorities using measures would start to help under achieve some impact later in the year. Can you just briefly mention what concrete signs are you seeing in China in order to put some stimulus to the marketplace?

And also maybe to clarify that you are expecting some help in the latter part of the year from these measures for Chinese market to recover somewhat in the second half?

71:53 So let me clarify Tomi first that, we have never talked about stimulus. We've said about perhaps easing some of the restrictions.

We have to remember they’re restricting a lot and perhaps, we expect that the restrictions won't be quite as significant as they are now. And you can see some of that already happening on the liquidity side, that's what we've been talking about.

72:21 Yeah. I understand that.

To the second part of the question, are you assuming that these easing of restrictions start to help the market and that you would in a way, see some help from that in the second part of that? Yeah.

72:40 That is correct. That's what we expect.

We aren’t expecting significant but some.

72:45 Thank you.

72:46 Yeah.

73:02 Good. Thank you all for active participation today again.

So I thought I could, but probably just said, so a couple of words here to the end, we had many questions, good questions and thank you for those. If I just summarize what we are talking today.

We know that 2021 was an unusual year. We actually performed very strongly in that environment and we had a solid finish to the year.

So that's something I'm very happy about. 73:31 And what I'm also happy about is that we -- our making progress in the actions to offset the headwinds, Ilkka talked about them, how we're doing on pricing, productivity and product cost that's actually sequentially, we're now going in the right direction.

So that's always what I focus a lot on what is your direction, our direction is right. We need to do more, but we're going, going there.

And what I'm actually incredibly pleased with is that we can see that the -- great work that our service team has been doing on innovation from many risk aspects is really paying off, and that's why our service business over the past few years has really been improving its performance and really growing at a great rate and really market leading growth rate there. So that's something we are a lot focus a lot on and of course, how we can constantly also differentiate more and more a new equipment business also to help us.

74:27 So I think we have -- from that perspective a good backdrop. We're seeing the impacts and we are very focused on finding all the ways we can to offset some of these headwinds.

As said, I feel good about where we're going.

74:46 Great. Thank you, Henrik.

Thank you, Ilkka and thanks to everyone, who listened in. Lots of -- lots of questions, lots of dialog and if there was anything that was left unanswered or if you have any follow-ups, as always please free -- feel free to contact me or someone in the IR team.

We're happy to help. So with that, I guess, I wish you a great rest of today.

75:06 Thank you, all.

75:07 Thank you.