KONE CMD 2015 An attractive business model with a high return … · High share of outsourcing to...

KONE CMD 2015 An attractive business model with a high return on capital Eriikka Söderström, CFO September 25, 2015

Global position in a life cycle business

Agenda

Strong order book combined with recurring revenues

Flexible cost structure

Good cash flow generation

High return on capital

September 25, 2015 Eriikka Söderström | Capital Markets Day 2015 | © KONE Corporation 2

We have strengthened our position globally and grown profitably


KONE sales by business 2009-H1/2015

MEUR

H1/2015

3,901

33%

11%

56%

2014

7,334

32%

13%

55%

2013

6,933

2012

6,277

2011

5,225

2010

4,987

2009

4,744

34%

19%

47%

Maintenance Modernization New equipment

KONE sales by area 2009-H1/2015

7,334

41%

15%

44%

2013

6,933

2012

6,277

2011

5,225

2010

4,987

2009 H1/2015

3,901

44%

16%

40%

2014

4,744

17%

21%

62%

Asia-Pacific

EMEA Americas

MEUR

Our regions are seeing different development phases and opportunities in the market


North America

>30%

<70%

Asia-Pacific ex-China

~50%

~50%

China

>90%

<10%

Middle East

~75%

~25%

Europe

~30%

~70%

Share of new equipment Share of services

SPLIT OF KONE’S NEW EQUIPMENT AND SERVICE SALES PER AREA

Europe and North America: We focus on further improving our field productivity and delivery capability


New equipment and

modernization

Maintenance

Decrease cost with installation productivity

Further improve sales management and product competitiveness

Invest into the delivery capability of our strong order book in North America

Improve productivity of field

operations with new technology

Continue building pricing capabilities

Asia-Pacific and the Middle East: We continue to invest in our delivery capabilities and processes


New equipment

Service

Ensure high quality

execution of strong order book

Continue expanding our service footprint and capabilities

Implement global best practices

Further improve product

competitiveness and installation productivity

China

Rest of Asia-Pacific & Middle East

Our order book is at a record-high level following solid growth in orders received


The order book consists of new equipment and modernization orders received

A strong order book

gives us longer term visibility

10,000

0

8,000

4,000

6,000

2,000

H1/2015

8,627

2014 2013 2012 2011 2010 2009

3,309

MEUR

Order book at historical exchange rates

ORDER BOOK 2009-H1/2015

The share of major projects and North America within the order book has increased

Eriikka Söderström | Capital Markets Day 2015 | © KONE Corporation 9

Indicative breakdown of KONE’s order book

September 25, 2015

Order book rotation (new equipment)

Major projects

Globally Up to 5 years

Volume business

Europe ~1‒1.5 years

North America ~1.5‒2 years

Asia-Pacific ex China ~1.5‒2.5 years

China < 1 year

H1/2015

Volume projects Major projects

H1/2015

North America Asia-Pacific

EMEA

Estimated lag from new equipment order to completion

Maintenance provides a solid foundation for the business with recurring revenues


Retention rates for

existing maintenance contracts 90-95% globally

Growth in the business is scalable and requires little capital investment

Maintenance revenues form a stable foundation for the business through economic cycles

2,400

2,000

400

1,600

1,200

800

0 H1/2015

1,294

2014

2,338

2013 2012 2011 2010 2009

1,625

MEUR

MAINTENANCE SALES 2009-H1/2015

Our cost structure is flexible and scalable


Sourcing and manufacturing High share of outsourcing to component

suppliers

September 25, 2015

Installation Subcontracting used in installation

Service Expansion of footprint requires little

investment

Flexible cost base, with a low share of

fixed costs

Sourcing cost Favorable raw material price

development in key component materials

Labor cost inflation In mature markets low single digit

Higher but manageable in emerging

markets, trend slowing


Cost environment

Pricing is a headwind in many markets; cost environment on a favorable trend

New equipment Price competition continues intense in

many markets Services Modernization pricing environment

improving in growing markets

Regional variation in maintenance pricing

There are both headwinds and tailwinds in the cost environment

Pricing environment

We have several ways to address the challenges and opportunities in pricing and sourcing


Pricing actions

Strengthen sales management and further improve sales data

analytics

September 25, 2015

Sourcing actions

Product cost development

actions

Numerous ways to improve product cost competitiveness:

- Optimized use of components - Simplicity in manufacturing, easier installation process

Ensure competitive prices from economies of scale

Ensure benefits from favorable raw material prices

We are addressing the pressures and also looking for opportunities

Our foreign exchange exposure is mostly limited to translation risk


Transactional Balance between sales and costs provides

good natural hedging

Translational Changes in translation rates have an impact on

sales and EBIT

Full-year EBIT guidance includes a positive impact of 100-120 MEUR, assuming that translation exchange rates would remain at the average level of January-June 2015

Economic No major implications on competitiveness

Sales by currency H1/2015 Foreign exchange impacts

Others

2015

EUR

RMB

USD/CAD

Our working capital has remained at a very good level, supporting the strong cash flow


1,500

1,250

1,000

750

500

250

0 Q2

1,378

2014 2013 2012 2011 2010 Q2 09

MEUR

12m rolling quarterly cash flow from operations (before financing items and taxes)

12M rolling quarterly cash flow

2009 2010 2011 2012 2013 2014

1.00

1.50

0.00

1.25

0.25

0.50

0.75

1.25 1.21 1.18 1.17

1.04 1.13

Cash conversion rate 2009-2014

Note: Cash conversion rate calculated as cash flow from operations before financing items and taxes / EBITDA

We are focused on maintaining a good level of working capital


Negative working capital WC rotation relative to sales

20

30

10

100

50

40

110

0

70

80

90

60

Q2 09

2010 2011 2012 2013 2014

Inventory rotation Accounts receivable & other non-IB assets rotation Accounts payable & other non-IB liabilities rotation

1,500

-2,000

-500

0

500

1,000

-1,500

-1,000

-2,500 2011 2010 Q2

09 2013 2012 Q2 2014

Net working capital Advance payments

Inventories Net inventory

Figures include new equipment and modernization

1,428

-574

-2,002

-940

Our capital expenditure needs remain low


49 50 50

5358 62

36

14222033

161313

29

74

119

524447

88

0

20

40

60

80

100

120

66 64 62

49

84 79

86

MEUR

2009

2010

2011

2012

2013

2014

H1/ 2015

Amortization of acquisition related intangible assets Depreciation Capital expenditure excluding acquisitions

CAPITAL EXPENDITURE AND DEPRECIATION EXCLUDING ACQUISITIONS

Activity continues with acquisitions and we aim to further accelerate this


37

6783

169185

46

167

0

40

80

120

160

200

H1/2015 2014 2013 2012 2011 2010 2009

(Nr of acquisitions) 21 21 23 21 38 17

We mainly acquire small local

maintenance companies to strengthen the density of our maintenance portfolio

In addition, we have acquired our distributors from time to time to expand to new markets

We make acquisitions within our business scope of providing the best People FlowTM experience 13

MEUR

ACQUISITION SPEND 2009-H1/2015

KONE’s financial performance has enabled increasing dividend payments to shareholders

Eriikka Söderström | Capital Markets Day 2015 | © KONE Corporation 21 September 25, 2015

0.2

0.5

1.1

0.3 0.4

0.1 0.0

0.9

0.7

1.2

1.0

0.8

0.6

0.01

1986

1993

1991

0.02 1994

1988 1987

1989 1990

0.02

1984 1985

1992

CAGR +15%

2014

1.20

2013

1.00

2012

0.88

0.70

2011 2010

0.45

2009 2008 2007

0.33

2006 2005 2004 2003

0.25

2002

0.19

2001

0.09

2000

0.06

1999

0.04

1998 1997 1996 1995

1983 1982 1981 1980

0.01

Note: Includes the basic dividend. Adjusted for share splits in 1999 (1:3), 2002 (1:3), 2005 (1:2), 2008 (1:2) and 2013 (1:2). 1 EUR= 5.9 FIM; not adjusted to constant exchange rate. Additional extraordinary dividends: for 2009, a double dividend was paid; for 2011, an extraordinary dividend of EUR 0.75 was paid and for 2012 an extraordinary dividend of EUR 0.65 was paid.

EUR

SPLIT-ADJUSTED DIVIDEND PER CLASS B SHARE, 1980-2014

Our return on capital is very high


%

0

10

20

30

40

50

37.7 36.3

29.4

34.3 34.8 34.0

2012 2011 2014 2009 2010

37.1

2013 H1/2015

RETURN ON CAPITAL EMPLOYED 2009-H1/2015

We have grown profitably over the past 10 years and improved our EBIT margin at the same time The margin improvement over the last decade has been supported by:


Improvement in profitability

even with the share of new equipment increasing

Operational efficiency

Scale and rationalization in sourcing

Fixed cost leverage

0%

4%

8%

12%

16%

2006 Q2/2015

Note: Excluding one-time items. For 2012, intangible asset amortizations burden the margin.

12M QUARTERLY ROLLING EBIT MARGIN, Q4/2005-Q2/2015

Our long term targets remain intact


Growth

Profitability

Cash flow

September 25, 2015

Faster than market

EBIT margin of 16%

Improved working capital rotation

We maintain the 16% long-term margin target WE HAVE FOUR KEY FOCUS AREAS GOING FORWARD


Productivity

Maintenance

Installation

Fixed cost management and leverage

Quality of field operations

New product quality

Accelerating service business growth

Faster than market growth in new equipment business

Smart growth investments

Granular market understanding

Right balance between growth and profitability

Processes and tools

Growth Pricing Quality

Global position in a lifecycle business





KONE CMD 2015 An attractive business model with a high return … · High share of outsourcing to...

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