U.S. Markets closed

Edited Transcript of KNEBV.HE earnings conference call or presentation 23-Oct-19 12:45pm GMT

Q3 2019 Kone Oyj Earnings Call

Espoo Oct 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Kone Oyj earnings conference call or presentation Wednesday, October 23, 2019 at 12:45:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Henrik Ehrnrooth

KONE Oyj - CEO, President & Member of the Executive Board

* Ilkka Hara

KONE Oyj - CFO & Member of Executive Board

* Sanna Kaje

KONE Oyj - VP of IR

================================================================================

Conference Call Participants

================================================================================

* Andre Kukhnin

Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst

* Antti Suttelin

Danske Bank Markets Equity Research - Head of Research of Finland

* Daniel Gleim

MainFirst Bank AG, Research Division - Director

* Daniela C. R. de Carvalho e Costa

Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team

* Debashis Chand

Societe Generale Cross Asset Research - Equity Analyst

* James Moore

Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research

* Klas Henrik Bergelind

Citigroup Inc, Research Division - Director

* Lucie Anne Lise Carrier

Morgan Stanley, Research Division - Executive Director

* Martin Flueckiger

Kepler Cheuvreux, Research Division - Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Sanna Kaje, KONE Oyj - VP of IR [1]

--------------------------------------------------------------------------------

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 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 the presentation, we have time for your questions. Henrik, the floor is yours.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [2]

--------------------------------------------------------------------------------

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 continued to grow faster than market on a broad basis, and the margins of our orders received continued to improve. Also, we had a solid growth in our services 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 our key figures. As I mentioned already, it's all about solid growth, improving margins and cash flow. Orders received at EUR 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 EUR 8.4 billion, and it's grown at 4.2% in comparable currencies over last year. Sales, EUR 2.55 billion and growth of 9.4%, again very, very strong.

Our EBIT, operating income improved from EUR 258 million to EUR 314 million. And the adjusted EBIT, which excludes the costs from the Accelerate program, increased from EUR 274 million to EUR 322 million. And the margin improved from 12% to 12.6%, so also good growth and good profitable growth in the quarter. Cash flow, at an all-time high of EUR 463 billion, (sic) [EUR 463 million,] that is very strong. And also, our earnings per share improved from EUR 0.42 to EUR 0.48.

But as we always say, 1 quarter is a short period of time. And now we have 3 quarters behind us, so we get a little bit longer perspective of our performance. And also, if you look at the first 9 months, we can see a very similar trend, solid growth in all businesses and strong cash conversion.

Orders received for the first 9 months of the year, EUR 6.4 billion and growth of 7.6% in comparable currencies, again, that I'm very pleased with. Sales also growing strongly, EUR 7.3 billion of sales and 8.3% growth in comparable currencies. Also, our operating income grew from EUR 750 million to EUR 836 million and the adjusted EBIT from EUR 792 million to EUR 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 an improving path. Cash conversion, very strong for the first 9 months at EUR 1.16 billion compared to EUR 818 million last year, and our EPS grew from EUR 1.19 to EUR 1.26.

As usual, I'd like to express my thanks to all of KONE's 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 on our strategy. We're bringing new services and solutions to our customers. We are driving Accelerate program. But despite all of this, 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 the fact that we are continuously now have been growing faster than our markets. That is a good achievement, and I'm very happy about and very thankful for the great job our employees are doing.

Some more highlights of the Q3 is, first of all, the continued faster market growth in all businesses. It's been broad-based, the growth. And if we look at our orders received, we have now, 2 quarters in a row, been able to slightly improve our margins from our orders received. All of this tells us that our competitiveness is strong, and it's broad-based. We are growing in all businesses. We have been growing in all geographic areas. That, I think, speaks volumes.

Also, in the summer, we had again -- we did again our customer loyalty survey. The results from that continued to be good. Our Net Promoter Score was now stable but on a good level. What are 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 communications, such as proactiveness. So we still have a lot that can be done, and those are things that we continue to work on so that we can continuously improve.

In Q3, our execution overall was very solid. We had very strong deliveries to our customers in all businesses, and that I'm very happy about, particularly if we think about the resource shortages that this whole industry is facing at the moment. In that environment, we have been able to keep our promises, deliver to our customers and deliver to our customers in a good way. Also, a strong cash conversion tells a lot about how we've been running the business, always a 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've been taking, apart from just executing on our strategy, has been the Accelerate program. We can start to see visible benefits from it. And just to recap, why did we start this program? We had 3 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 in 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 in bringing new services and solutions to our markets. And clearly, we 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 and new tools as well. This is helping our frontline organizations to serve our customers faster, better and being more proactive with better tools. We are 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 lot. So 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 than we've done in the past. I think as everyone remembered, we have every year increased the amount we invest in developing our people. And now we have even 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. But for example, in customer service, in 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, and do things sequentially. So we are going in the right direction and that I'm happy about. So those are a few highlights of Q3 and bring a little bit more insight in the Accelerate program, what we are really doing there.

And 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 and 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 slightly. I'll come, as usual, a 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 a decline in India.

What is happening in India, we've been always talking about that as a very promising growth market. The situation in India at the moment is that liquidity is very constrained, and we can see that 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 this is going to take a few months, probably 6 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 big 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 you measure in units, and pricing was pretty stable as it's been throughout this year. The government, where I talked about this supporting 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, in some cases, slightly been eased but not significantly. But overall, construction activity is on a high level.

But if you look at some of the key indicators, you can see that real estate investments have grown at about 10% year-to-date. Also, residential sales volume and new starts are growing. And new home price in top 70 cities have also increased quite nicely year-over-year. And it's, of course, against this backdrop why we continue to see many of the restrictions.

If you then think about our customer base, the developers. So we can -- continue to see a consolidation amongst the top developers that 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 are 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 brand to protect. 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.

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [3]

--------------------------------------------------------------------------------

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. Our orders received reached over EUR 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's 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 our orders received. And both monetary value as well as in units, 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 continued to see a good growth in all businesses in sales, and our sales reached EUR 2.558 billion. 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 EUR 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. And if we look at what's driving the -- our adjusted EBIT development, then growth had positive impact. Also, we saw profitability. So the actions that we had taken on both pricing but also improving our efficiency coming through in the results. Currencies had an EUR 8 million positive impact to the results. And IFRS 16, EUR 2 million. At the same time, Accelerate program costs were EUR 8 million in the quarter, and our benefits from the program were more than EUR 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 EUR 463 million in the quarter is -- obviously, one quarter is a short time to measure cash flow. But also, the first 9 months with over EUR 1 billion, EUR 1.164 billion is very strong cash flow. We continued to see net working capital contributing positively driven by both strong development in our advances received as well as progress payments from our customers.

It's also good to note that IFRS 16 has a positive impact to our cash flow of EUR 87 million for the first 9 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 the market and business outlook for us.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [4]

--------------------------------------------------------------------------------

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, the market is expected to be pretty stable year-over-year. So we had some growth beginning of the year and now a slight decline.

North America, Europe, Middle East and Africa, expected to be 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 the same in 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 9 months behind us, so we have slightly specified our outlook. Sales, we expect to grow between 5% to 8% where we previously expected the growth is between 4% and 7% in comparable currencies. And EBIT, we expect to be in the range from EUR 1.190 billion to EUR 1.250 billion. We've previously expected a range to be EUR 1.170 billion to EUR 1.250 billion. And we expect that there is some tailwind from foreign exchange to the tune of about EUR 20 million, so pretty same as previous quarter but adjusted slight specification on the outlook compared to what we said in Q2.

What's driving our performance? It's clearly the solid order book we have, the growing service business and how we are driving improvements throughout KONE, including Accelerate. What is burdening the results? Raw materials -- 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.

But 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? Well we're seeing that there are a number of things that are positive for us. They are [definitely] driving our performance. They include our strong order book and also that we have been able to slightly improve our margins from our 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 are 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, is a headwind and also the geopolitical uncertainties.

But 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 also in that environment, we can perform. And of course, our objective continues to be to grow faster than 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-based 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.

--------------------------------------------------------------------------------

Sanna Kaje, KONE Oyj - VP of IR [5]

--------------------------------------------------------------------------------

Yes. Plenty of time for questions now, and I think we're ready to start from the lines. So operator, please?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

We will now take our first question from Klas Bergelind of Citi.

--------------------------------------------------------------------------------

Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [2]

--------------------------------------------------------------------------------

Klas from Citi. I've got 3 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? Just interested in the mix there within China. I will start there.

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [3]

--------------------------------------------------------------------------------

Overall, so in -- if you look at the cash flow, so it's not only China contributing positively, but overall cash flow being strong across the businesses and across the geographies. But from an advances point of view, China is a big market and 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 a meaningful driver for the improved cash flow as such in China.

--------------------------------------------------------------------------------

Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [4]

--------------------------------------------------------------------------------

And then my second one is for you, Henrik. And I need to ask you on thyssenkrupp and your ambition here. I will try and see if you can answer some questions in this forum. First on 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 be low post 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 understand the opportunity on the cross-selling as well with thyssenkrupp?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [5]

--------------------------------------------------------------------------------

Well, first of all, I'm not going to comment on any specifics. And I'm sorry, I'm not going to go into -- through any of the synergies. I think I would repeat what we said before, as you already alluded to, that we think that this is the ideal combination. If you look at the geographic complementarity of the 2 businesses, if you look at the potential you can have from synergies combining, and if you can -- the potential you can have from even faster and more actively build out new services broadly to your customers, I think those are all fundamentally -- fundamental positive things. We've said that we think it's inherently doable. What it will mean, I can't -- 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 a lot 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 or even close to true. So I'll just leave it there.

--------------------------------------------------------------------------------

Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [6]

--------------------------------------------------------------------------------

I had to ask. My final one, on pricing. We keep hearing from some of your peers that while price cost is improving in China, it's getting weaker in North America. And pricing is obviously flat now in China. It will be coming from a tough comp. But in North America, we've seen a multiyear recovery and non-res activity is a bit weaker now. China looks -- I mean, it's good, but it looks pretty choppy. So how should we square this with your cost comment, Henrik, that cost increases on subcontracting will likely continue to -- into next year? Should we be more cautious on price cost going forward? If you could just comment on price and cost, please.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [7]

--------------------------------------------------------------------------------

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 as good of outcomes as possible to our customers and that way create win-wins and improve pricing. But if you look at the trends we've seen in North America, if you 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 then 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 -- we've been able to improve pricing. But of course, there's been a very high need for it with this resource shortage. That's really a -- principally a Europe and Asia problem. So we have been able to increase prices. Clearly, prices are 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 working with our customers. We want to add value to them. And that will, in the end, determine how successful we are here.

--------------------------------------------------------------------------------

Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [8]

--------------------------------------------------------------------------------

Yes. Just a quick follow-up on costs for you, Ilkka. Shall we see another EUR 20 million, EUR 30 million delta from subcontracting in 2020? I think that, that was what you guided for in '19. Are you ready to make such a comment for 2020 yet?

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [9]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [10]

--------------------------------------------------------------------------------

Pickup in costs, you mean?

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [11]

--------------------------------------------------------------------------------

Pickup in cost, yes.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [12]

--------------------------------------------------------------------------------

Also remember, what is the -- there's 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's more competition for those resources. But as well, what it means is that you will have much more overtime. You have much more juggling between projects. And of course, those are always things that are not -- they are not good from a productivity perspective. But we're working. We are making some good progress in being even better in how we plan our work, how we work with our customers to do it. But there's 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.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

We will now take our next question from Lucie Carrier of Morgan Stanley.

--------------------------------------------------------------------------------

Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [14]

--------------------------------------------------------------------------------

I have 3. I will go one at a time. I was hoping maybe I could follow up on some of the comment on pricing from Klas earlier. And specifically, on China, the fact that you -- that the price increase has kind of stopped. Is that on the back of the raw material situation? Is that because the market may be starting to slow, other type of pressure? And I was hoping you could comment on the negative China mix that you also mentioned in the quarter. That's the first question.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [15]

--------------------------------------------------------------------------------

So I'm not sure if raw materials is the big -- just that's the competitive environment. We can also see that clearly, the big developers are getting stronger, but I said that has 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 have 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 moment.

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [16]

--------------------------------------------------------------------------------

Maybe to add to your comment, Henrik...

--------------------------------------------------------------------------------

Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [17]

--------------------------------------------------------------------------------

Sorry, and on the mix that...

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [18]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [19]

--------------------------------------------------------------------------------

Yes. Sorry, Lucie. First, on the pricing, so maybe add to the comment that if you look at quarter-on-quarter this year with the relatively stable pricing actually in China, but year-on-year, improving, and now the comp for Q3 was a bit tougher. So that's maybe more so than a big change in the pricing environment as such.

And maybe I'll continue with the mix. So yes, the mix had a slightly negative impact but wouldn't be too much of a trend as such. Our GK brand was a bit better performing this quarter, and that's driving the mix.

--------------------------------------------------------------------------------

Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [20]

--------------------------------------------------------------------------------

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, it kind of implies 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 2 months away from the end of the year. And at the same time, we've also -- 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?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [21]

--------------------------------------------------------------------------------

I don't think -- our deliveries happen when our customers need those deliveries. So I wouldn't think about front-loading. I would -- okay, 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 1 quarter, it may appear broad. But I think for the full year, we give pretty specific guidance. And clearly, there could be various outcomes. I think one of the trends we've seen over the past years is that clearly in China, the order book is rotating somewhat faster. And that is just something we've seen over the past years. Other than that, no big differences in other markets. And why have we had good growth this year is because orders received have been strong in China, and that has been also then delivered quite broadly to customers.

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [22]

--------------------------------------------------------------------------------

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 products and complete the installations for those products both in new equipment as well as in modernization, which is the more -- where we still have not perfect visibility. And maintenance is more stable, so not more to add there.

--------------------------------------------------------------------------------

Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [23]

--------------------------------------------------------------------------------

And just my last question. I was hoping if 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, how we are tracking?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [24]

--------------------------------------------------------------------------------

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 could you want to open more?

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [25]

--------------------------------------------------------------------------------

Well, if we look at overall the trend, what has been going well from an orders' perspective, then new equipment has been strong, especially in China for -- from a orders' perspective. And then if we look at modernization, so that's been slightly better in terms of growth for the first 9 months of the year but slightly better modernization overall, but not that big of a difference.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [26]

--------------------------------------------------------------------------------

Well, I think to Lucie's question again, I think the most important thing if you 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.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

We will now take our next question from Andre Kukhnin of Crédit Suisse.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [28]

--------------------------------------------------------------------------------

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%, 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 pickup there? And if there was, could you share with us what's behind it?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [29]

--------------------------------------------------------------------------------

I would say it was 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 good performance. You have to remember that if we look at earlier this year, we had little bit of headwind in the growth because we have had a automatic doors business in North America that we had sold a little bit over a year ago. And now that didn't impact anymore. It wasn't a big impact previously, but it had a slight impact. And now at least, that didn't drag anymore.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [30]

--------------------------------------------------------------------------------

Great. And new services adding kind of sub-1%? Or is it kind of now edging over 1%?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [31]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [32]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [33]

--------------------------------------------------------------------------------

We have to see. Things haven't quite played out. If you think about where is the largest service business by revenue, it's clearly 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 is the difference.

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [34]

--------------------------------------------------------------------------------

Yes. 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.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [35]

--------------------------------------------------------------------------------

Right. So that -- it's that acceleration in 1 year, that is the issue, right? Because you've priced 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?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [36]

--------------------------------------------------------------------------------

Well, I think quite a few of those have a general -- 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 the increase is -- we can price some of that more. But I think overall, it is a slight -- or it's not -- it is a clear headwind. But we need to just work all the time on our pricing and our productivity to counteract that.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [37]

--------------------------------------------------------------------------------

Got it. And installation costs kind of across the portfolio is about 20% of new equipment revenue. Is that still kind of the right rule of thumb?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [38]

--------------------------------------------------------------------------------

If I take as an average, probably a little bit more...

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [39]

--------------------------------------------------------------------------------

A little bit more.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [40]

--------------------------------------------------------------------------------

A little bit more, yes. But not -- yes, of course, much higher in North America and then lower in Asia, but yes.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [41]

--------------------------------------------------------------------------------

Right. And you're seeing high-single digits inflation there. Is that kind of what you're pointing to?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [42]

--------------------------------------------------------------------------------

Again, one aspect is just what you see labor cost increases, just straight up labor cost increases. And that's one aspect. The other aspect is, again, subcontracting. And clearly, when there is tightness in the market, 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 sides to make sure you meet your customer requirements and all that. So all of that is a negative driver for productivity. Therefore, you cannot just 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 than in the past and what we had expected.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [43]

--------------------------------------------------------------------------------

Great. And just a very final. On digital investment side, you've been running, I think, a relatively stable, I think, pace of around EUR 50 million, EUR 60 million for last 2 or 3 years. Is there any reason for us to expect that to change for 2020?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [44]

--------------------------------------------------------------------------------

Yes. So what you can see externally is we report R&D number and that's the part of the digital is in there, parts of the digital is in our IT costs and other costs. But I would say that, I think the activity level we'll keep it high, simply because we can see that the services we have brought out have a clear benefit. Customers appreciating those. They are 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 proactively. As an absolute number, next year, it's probably going to be somewhat higher. Is it going to be much higher as a percent of sales? That we have to see. But I would, overall, say that we keep a high activity level here and exactly how much we'll spend next year. We still -- let's see, we haven't quite decided that.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

We will now take our next question from Daniela Costa of Goldman Sachs.

--------------------------------------------------------------------------------

Daniela C. R. de Carvalho e Costa, Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team [46]

--------------------------------------------------------------------------------

I wanted to ask you 2 things. First on margin and on your comments on sort of margin year-on-year, now turn back to sort of growing year-on-year after a while. And you mentioned you want to sort of -- that's 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 margins sort of pre-2017. 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's been any structural shifts in the industry, which makes going back to those prior peaks unfeasible to assume?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [47]

--------------------------------------------------------------------------------

So if I start with the latter question, it's clear that 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, 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 we look at our business, how we're developing it, yes, we do believe that we can recover. We're not giving a time [till our] 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 ask about margin trajectory from here, as you know, 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 it's going to happen per quarter? I can't say, but that's the ambition. That's what I can say.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

We will now take our next question from Martin Flueckiger of Kepler Cheuvreux.

--------------------------------------------------------------------------------

Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [49]

--------------------------------------------------------------------------------

Starting off, I'll ask 3 questions and I'll take one at a time. Starting off with the, let's say, broader environment, global environment in new equipment. Judging from your last 3 quarterly results reports, looks like the new equipment market is -- seen somewhat of a slight slowdown. Now I was wondering whether you would confirm my impression, firstly. And secondly, can you talk a little bit about what you have seen recently in the market with regards to recent tender activities and major projects in the pipeline? What do you think the expected implications are for market growth in the various regions?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [50]

--------------------------------------------------------------------------------

I think we can -- I think your perception is probably the right one that we're coming from a situation where we actually had a very long recovery in North America, where Europe, driven by Central and North Europe, had been quite strong and actually many -- and Middle East also doing pretty well. [To all] those being flat or a bit weaker. So yes, market growth there is somewhat weaker. China, now both this year and last year has been growing slightly. 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 a massive difference, but I think it's a slight difference.

--------------------------------------------------------------------------------

Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [51]

--------------------------------------------------------------------------------

Okay. And with regards to the recent tender activities and major projects, can you make some comments on those 2 issues, please?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [52]

--------------------------------------------------------------------------------

I don't think we have seen a massive difference here. There's of course, is going to be a difference region-by-region, but not a big difference overall.

--------------------------------------------------------------------------------

Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [53]

--------------------------------------------------------------------------------

Perfect. 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. I was just wondering where you see the momentum going on. Is it more in terms of easing? Or is it more in terms of tightening? It's quite -- being it's 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 policy is going? Is it more towards easing, more towards tightening?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [54]

--------------------------------------------------------------------------------

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 in, not for speculation. I think that tells quite a lot their mindset overall. And that is why we have continued to see on the residential side. We've continued to see restrictions on how you can finance them, how many apartments you 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 immediately growth have 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 what we see in stimulus, they [even] talk more about the infrastructure. As you know, what they are attempting to build out are 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 may be and we know that those are important.

--------------------------------------------------------------------------------

Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [55]

--------------------------------------------------------------------------------

Perfect. And then my final question. Just wanted to go back to the issue of raw material prices and how you see those developing. We're now almost 1 month into the fourth quarter. And I remember there was a discussion on the -- in the second quarter call also with regards to your expectations going into 2020. And I was just wondering whether you could provide us with an update on that, where you see raw material prices going for Q4 and going into 2020.

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [56]

--------------------------------------------------------------------------------

So if we look at first, 2019, so we've been quite consistent now that -- and have actually good visibility to the outcome already with the pricing that we have with our suppliers. So raw materials, including the tariffs, have a bit less than EUR 50 million impact to 2019. So that's been quite stable. And there's less moving parts for this year. Next year, there 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.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

We will now take our next question from James Moore of Redburn Partners.

--------------------------------------------------------------------------------

James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [58]

--------------------------------------------------------------------------------

As a follow-up on the (technical difficulty).

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [59]

--------------------------------------------------------------------------------

James, we can't really...

--------------------------------------------------------------------------------

James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [60]

--------------------------------------------------------------------------------

Hello? I'm sorry, can you hear me?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [61]

--------------------------------------------------------------------------------

Now we can hear you. Yes.

--------------------------------------------------------------------------------

James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [62]

--------------------------------------------------------------------------------

If I could follow-up on 2 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, such an important part of your business in China versus the Americas versus Europe?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [63]

--------------------------------------------------------------------------------

Well, we had good growth -- actually 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.

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [64]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [65]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [66]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [67]

--------------------------------------------------------------------------------

Okay. And on your wages and subcontracting point, I have got some notes that say, you thought that wage inflation was 3% and subcontracting 0% in 2018, but that lifted to something like 4% as an inflation for both of those buckets in 2019. I'm wondering as we look into 2020, what percentage rate of inflation do you think that the EUR 2.8 billion of wages and the EUR 600 million of subcontracting will face? Is it another 4% a year or might it moderate against that or even increase against that 4%?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [68]

--------------------------------------------------------------------------------

I think subcontracting must be more than 4%, but I actually don't...

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [69]

--------------------------------------------------------------------------------

I don't think we've said exact numbers on this one, and it 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 agreements.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [70]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [71]

--------------------------------------------------------------------------------

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?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [72]

--------------------------------------------------------------------------------

Based on what we said earlier, probably on own labor. We don't quite know yet, but you could assume that it's somewhat higher.

--------------------------------------------------------------------------------

James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [73]

--------------------------------------------------------------------------------

Okay. And just turning to currency, if I could. I was running at current rates. And I thought you might see a small negative impact in 2020 at current rates, but nothing major. Is that something that you think is fair?

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [74]

--------------------------------------------------------------------------------

Yes, that's correct. So minor impact.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [75]

--------------------------------------------------------------------------------

Probably slightly negative impact.

--------------------------------------------------------------------------------

James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [76]

--------------------------------------------------------------------------------

Okay. And just lastly, 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 a one-nation conversation? And can you update us to what a possible timetable could look like?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [77]

--------------------------------------------------------------------------------

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's been some trials in some cities on how you can do this. So there's a lot of activity and a lot of thinking going in there. We don't have exact clarity on if and when something will happen. If it happens, then usually it starts from a government level policy, for 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 with likelihood to happen, but let's see. But it's not going to impact us on a short-term basis.

--------------------------------------------------------------------------------

James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [78]

--------------------------------------------------------------------------------

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 maintenance contracts, that means you don't have to pass it all on, you could capture some of the value there?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [79]

--------------------------------------------------------------------------------

That's, of course, the ambition we would have. And this is what they said, it's not just as simple. The thinking is it's not just a simple reduction in number of visits that you would need to then have them connected and monitored remotely and have information on them. And of course, the objective would be that you could show your customers, you serve even better and that's what creates added value and not price everything away.

--------------------------------------------------------------------------------

Operator [80]

--------------------------------------------------------------------------------

We will now take our next question from Antti Suttelin of Danske Bank.

--------------------------------------------------------------------------------

Antti Suttelin, Danske Bank Markets Equity Research - Head of Research of Finland [81]

--------------------------------------------------------------------------------

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 then you said it throughout 2018 that your order intake margin was stable year-over-year. One could have expected, I think, a little bit more margin improvement.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [82]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [83]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Antti Suttelin, Danske Bank Markets Equity Research - Head of Research of Finland [84]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [85]

--------------------------------------------------------------------------------

Well, firstly, I would say that we think that quite a many of the big developers have ample land bank. But of course, over the long term, that's an important number. Now we're seeing a little bit better land sales again. So it doesn't -- it's quite a long-term forward-looking indicator to us. And if you look in the 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 downdraft, of course, that would have an impact because it's a strong indication of developers, how much they are, you can say, 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.

--------------------------------------------------------------------------------

Antti Suttelin, Danske Bank Markets Equity Research - Head of Research of Finland [86]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [87]

--------------------------------------------------------------------------------

If you think about -- that has to be before construction activity. And we had -- if you think about the past couple of years that we had for quite a long period of time, 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't we see it in industry?" And now this year, we have started to see it come through. So there can be quite a delay because we come a little bit more at the tail end of the projects. But unfortunately, I don't have a specific answer to your question, how long that time will be.

--------------------------------------------------------------------------------

Antti Suttelin, Danske Bank Markets Equity Research - Head of Research of Finland [88]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [89]

--------------------------------------------------------------------------------

I think, first of all, markets are growing slightly, but we believe that we have grown faster than the markets. And it's a good proactive activity from KONE with a good competitiveness. 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 a good job for them. That's what it's all about.

--------------------------------------------------------------------------------

Antti Suttelin, Danske Bank Markets Equity Research - Head of Research of Finland [90]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [91]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [92]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Operator [93]

--------------------------------------------------------------------------------

We will now take our next question from Daniel Gleim of MainFirst.

--------------------------------------------------------------------------------

Daniel Gleim, MainFirst Bank AG, Research Division - Director [94]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [95]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Daniel Gleim, MainFirst Bank AG, Research Division - Director [96]

--------------------------------------------------------------------------------

And what is your estimate for the lead period of that improvement to come through in [sales?] Is mid-2020 too early? Or is that roughly the right number? How do you think about that?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [97]

--------------------------------------------------------------------------------

Probably around that, yes.

--------------------------------------------------------------------------------

Daniel Gleim, MainFirst Bank AG, Research Division - Director [98]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [99]

--------------------------------------------------------------------------------

They're different. So if we comment the orders received margins, so it is one where -- 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 try 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.

--------------------------------------------------------------------------------

Daniel Gleim, MainFirst Bank AG, Research Division - Director [100]

--------------------------------------------------------------------------------

Okay. 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 shares that your customers gained? Do you have a ballpark estimate for us? How should we think about the split here?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [101]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Daniel Gleim, MainFirst Bank AG, Research Division - Director [102]

--------------------------------------------------------------------------------

The question here is, how long can this strong order intake growth last? And one of the meaningful drivers has been the consolidation of larger developers. Now if you think about your own growth partially, it's driven by your customers gaining share and it's partially driven by you gaining share versus other big OEMs that might have the same exposure to the same developers. So my question really is, how can this abnormal growth last that stems from the big developer consolidation? The limitation for that, do you see this going to [70%] in the future. That is the way I think about that question.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [103]

--------------------------------------------------------------------------------

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're 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 indications of that. I think our objective is clear, that our objective is to grow faster than markets overall. And then we have to see next year where we get to.

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [104]

--------------------------------------------------------------------------------

And maybe from a -- 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 that's the aim.

--------------------------------------------------------------------------------

Daniel Gleim, MainFirst Bank AG, Research Division - Director [105]

--------------------------------------------------------------------------------

Have you historically seen any other market maturing, where there was a developer consolidation and where you can give us a ballpark number where the consolidation has stopped, so we can think about where this might be heading in China?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [106]

--------------------------------------------------------------------------------

I think we should keep in perspective, again, that just the scale and the -- this China market and the size of these developers is just -- it's very different than any other market. So I don't think we have any direct precedent or comparisons. The China market is unique in its size, breadths and also its pace of development.

--------------------------------------------------------------------------------

Operator [107]

--------------------------------------------------------------------------------

We will now take our next question from Debashis Chand of Societe Generale.

--------------------------------------------------------------------------------

Debashis Chand, Societe Generale Cross Asset Research - Equity Analyst [108]

--------------------------------------------------------------------------------

I have 2 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 your sales in China. Now given the strong growth we have seen here over the last 3 quarters, like is there any change in that share? Or other way around, are you gaining market share in that segment versus some of your more established peers in that segment?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [109]

--------------------------------------------------------------------------------

I think we have performed reasonably well in that segment. I can't say exactly, but maybe it's today -- I think what we've said 10% to 15%, we've said of the total market. I'm not sure if we commented how much it's of our business, it's on our -- I think we commented that, that's how much of the market. It's 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 performed very well in the residential market, in the commercial market and high-rise market. Without being broad-based, competitive and broad-based strong performance, we wouldn't have had the orders received growth we have had.

--------------------------------------------------------------------------------

Debashis Chand, Societe Generale Cross Asset Research - Equity Analyst [110]

--------------------------------------------------------------------------------

Okay, got it. And my next question was, like, on new services, could you give some more color in which region are you seeing more traction in terms of adoption? Is it more like in the Asia Pacific, China? Or is it more in Europe? Like, where you're seeing more acceptance given that it's like 1% growth you have seen adding to the service growth this quarter? So just wanted to get a perspective like where you're seeing more traction on this by geography.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [111]

--------------------------------------------------------------------------------

Okay. We see more traction in the countries where we started early. So we didn't start in all countries at the same time. So it was kind of a gradual rollout. 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 new digital services is quite high, but it varies market to market. So I would still say that we are early on, and we see that it doesn't take off day 1. 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.

--------------------------------------------------------------------------------

Operator [112]

--------------------------------------------------------------------------------

We will now take our next question from Andre Kukhnin of Crédit Suisse.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [113]

--------------------------------------------------------------------------------

I'll just go quickly through them. On tariffs for 2020, I think you quantified it at around EUR 10 million or EUR 15 million. Could you please remind us on that?

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [114]

--------------------------------------------------------------------------------

I think I've commented 2019 with saying that it's more than EUR 10 million impact to 2019. And if -- well, -- 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.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [115]

--------------------------------------------------------------------------------

Incremental.

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [116]

--------------------------------------------------------------------------------

Yes, incremental, yes.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [117]

--------------------------------------------------------------------------------

I think let's follow the situation and see what happens.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [118]

--------------------------------------------------------------------------------

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, that there's no way individual cities or provinces can start [kind of rolling] this out more broadly replacement of physical visits with remote monitoring.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [119]

--------------------------------------------------------------------------------

That's what we'd expect that you first will get and that -- 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-based change, we would -- we think we would need to see first a change in national regulation and then cascading down gradually from there.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [120]

--------------------------------------------------------------------------------

Right. And in terms of that work, I mean, those pilots have been ongoing for a while now. I think 2 years, we've been kind of tracking some of the city names, if not longer. Is there kind of a major hurdle there that the government kind of struggled to overcome at that national level? Or is it just a lengthy process that is progressing and should arrive kind of to an outcome?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [121]

--------------------------------------------------------------------------------

I think it's -- I would say, it's more the latter.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [122]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [123]

--------------------------------------------------------------------------------

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 and when there's clarity, we'll share that with you.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [124]

--------------------------------------------------------------------------------

Great, great. And just a couple more on China. We've 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 wary of picking kind of one thing and running with it. Wondered if you have got -- or if you track any more comprehensive data sets, specifically on kind of 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?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [125]

--------------------------------------------------------------------------------

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, there have been a slight slowdown in that market.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [126]

--------------------------------------------------------------------------------

Got it. 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 ease as the same traction that you're getting in Europe? Or is it generally kind of a tougher sell and that's where you kind of need to balance maybe providing it at, I don't know, more attractive terms? because it improves stickiness or other benefits that come with it? 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.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [127]

--------------------------------------------------------------------------------

As you know that our clear policies 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 there 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.

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [128]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [129]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [130]

--------------------------------------------------------------------------------

But it's not widely different?

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [131]

--------------------------------------------------------------------------------

It's not wide, but slightly lower, yes.

--------------------------------------------------------------------------------

Operator [132]

--------------------------------------------------------------------------------

This concludes today's question-and-answer session. At this time, I will now turn it back to your host for any additional or closing remarks.

--------------------------------------------------------------------------------

Sanna Kaje, KONE Oyj - VP of IR [133]

--------------------------------------------------------------------------------

Many thanks for all the good questions. And we are, of course, happy to help if any further questions arise. I'd like to wish you all a nice rest of the week. Thank you.

--------------------------------------------------------------------------------

Henrik Ehrnrooth, KONE Oyj - CEO, President & Member of the Executive Board [134]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Ilkka Hara, KONE Oyj - CFO & Member of Executive Board [135]

--------------------------------------------------------------------------------

Thank you.