Kone Oyj B

Good morning and welcome to Kone's second quarter results call. My name is Natalia Valdesari. I'm head of investor relations here at Kone and very pleased to be joined today by our president and CEO, Filip Delor and our CFO, Ilkka Hara. So as usual, Filip will start by talking us through the highlights of the quarter, where we are in terms of our strategy execution. Ilkka will then go through the market situation, the financials in a bit more depth, and then Filip will summarize before we move into Q&A. during the q a please remember to limit yourselves to one question one follow-up and then you can absolutely feel free to rejoin the queue if you have anything on your mind With that.

Thank you, Natalia. And good morning, everyone. I'm very pleased to be presenting our second quarter results today. We have good news again to share this quarter with positive development in both financial and strategic metrics. And I'm proud of the KONE team and what we have accomplished, especially when considering the global environment, which, as you know, it's quite complex at the moment. For me, a highlight was a continued strength in service and modernization, where our focus on customer value and field execution has paid off. I see this as a clear proof of the resilience of our model. And as you know, we are dedicated to delivering profitable growth. With this in mind, our 12th consecutive quarter of margin expansion is a great achievement and we have good levels also going forward. And last but not least, we are seeing the results of our dedicated focus on strategy execution. I'll spend more time speaking about this in a moment, but let's first start by looking more closely at our financial development in the quarter. So overall, it was great to see broad-based growth in the quarter. Order received increased by 3% and high single digit outside China. The main contributor was Asia Pacific, Middle East, and Africa, but we had some quite sizable new building solution order wins also in Americas. In China, construction market conditions remain very difficult, and we continue to see the effects in our business. Our sales increased by 4.9% at comparable currencies. And as mentioned, we had another outstanding quarter in modernization with nearly 20% sales growth. Service also developed very well, especially outside China. And from a margin perspective, this resulted in a favorable business mix visible in the 25 basis point improvement in adjusted EBIT margin for Q2. And finally, we had good cash generation in a quarter with operating cash flow increasing by approximately 50 million euros year over year. So as usual, let me share a few exciting customer references from the quarter. Starting with a recently completed modernization in Europe, actually one of the largest we've had in the region. This was part of a complete refurbishment of a residential complex in Switzerland. A successful project with downtime pushed down to only four weeks per elevator in a country where we see scope for market share expansion. Then, a great win in service where we have entered a new contract with Hong Kong Metro to provide maintenance both for Kone and non-Kone elevators and escalators. This is a long-term and digitally savvy customer, so we are very happy to see them choosing us as a partner again. And finally, in new building solution, we are excited about our first ultra rope project in Indonesia. So this super light hoisting technology is part of our next generation high rise offering. Always good to see our innovation gaining foothold in new markets. We have actually seen traction for ultra rope acceleration very nicely in the high end high rise segment. So let's talk about strategy. We're now six months into the first full year of our RISE strategy. And I want to share a more detailed picture of our progress. And here, momentum is very good. Let's start with digital. We have successfully accelerated both the pace at which we are connecting our maintenance based and the deployment of field productivity tool. This is very important to me as I'm a firm believer in the value of data and transparency as a driver of customer experience. Feedback from our annual customer loyalty survey really confirms this. Second point, in modernization, we are delivering high double-digit growth in line with our target. We are also putting more focus on innovation on this business, specifically in relation to partial modernization. It's easy to see why partial modernization is so appealing. It is quicker and easier to install. It drives energy efficiency gains and enables customers to tap into the benefits of connectivity. Approximately 30% growth in order for KONE Monospace Upgrade year-to-date shows that this value proposition is resonating. Number three, innovation is also an important success driver in wind residential. And here, our recent offering enhancements such as the cost competitiveness Monospace 100 are key to making sure that the positive trend in NBS market share continues. Number four, With regard to cut carbon, 60% of our equipment deliveries are now equipped with our regenerative drive. This is a key enabler for Scope 3 emission reduction, which reinforces my confidence that we will continue to make good progress towards our long-term commitment. Turning finally to our core processes and culture, while there is more work to be done, we've gotten off to a good start, especially in our sales and operational excellence and pricing-related initiatives. Some first results are already visible in our numbers, and we expect more meaningful contributions starting next year. We also continue to perform well against the global benchmark in employee engagement, which is a key measure of the strengths of our culture. Now let's move on to sustainability. And let me start by sharing that we are tracking very well against this year's sustainability index target. While there is good development in all index components, the strong increase in regenerative drive sales really stands out. And we received on top of that several great recognitions for our sustainability work during the quarter. And here I'm especially proud that we ranked 15 in Corporate Night inaugural lists of the most sustainable companies in Europe. Last but not least, some people related news to share. So last month we announced the appointment of Michel Houen as our EVP of procurement, a new position in the Executive Board. So Michelle has a strong track record in the field of procurement, mainly coming from the auto industry. Most recently, she was the head of procurement and supply chain at Stellantis. I'm certain that she will bring a lot of learnings as we double down on driving procurement efficiency. Now, let me hand over to Ilka, who will go through the market development and financials in more detail. Ilka, the floor is yours.

Thank you, Philip, and also warm welcome on my behalf to this second quarter result webcast. Let me start by talking about how we see the markets developing in the different regions over the past three months. Generally, I would say that the trends were broadly similar to what we saw also in quarter one. In terms of new billing solutions, the market conditions continue to be difficult in China, and activity in Europe came down a bit in the quarter. Demand in North America saw a strong rebound in the quarter, with customer decisions making ramp up towards the end of the quarter. Demand for new billing solutions was strong in Asia Pacific, Middle East and Africa. Service and modernization markets also continued to develop well with growth in all areas. Let's next go through our financials and development there in more detail. Starting with our orders receipt, which increased by a solid 3% at the comparable currencies in the quarter. Order margins in total were stable. Pricing continues to be under pressure in China, but in other regions, order margins were more stable. Looking at the development by business, we saw orders in new billing solutions slightly up in the quarter. This was mainly due to good development in major projects, while the volume business was more stable. Modernization orders grew low single digit from a high comparison point. There are excellent opportunities in all regions, and I'm confident in our ability to drive double digit growth in this business going forward. In terms of sales, we grew by 4.9% of the comparable currencies in the quarter. It was great to see, again, a strong development in services and modernization. Interestingly, this year services has become our largest business. In new building solutions, continued low delivery volumes in China was the main reason for the 5.2% sales decline. In modernization, we delivered one of the highest sales quarters ever, increasing by nearly 19.9%. Growth was broad-based, all regions increased double digit. Services grew by 8.6% overall. A very good outcome. This quarter, the key growth driver was actually the value component. So pricing, digital and repair sales. Our maintenance sales base increased by 3%. Here we see effects of our focus on margin and cash flow over volume in China. Outside of China, we continue to deliver very good performance in services with over 10% growth. In line with our right strategy, Q2 shows that we're transitioning towards becoming a service and modernization driven business. Nearly 65% of our sales today come from these businesses, thanks especially the strength outside of China. This increases our resilience and is great foundation for continued profitable growth going forward. Then moving to adjusted EBIT and profitability. Margin expansion in the quarter was 25 basis points year on year. This took adjusted EBIT to 347 million euros. Looking at the profitability more closely, the margin decline in China was again the biggest challenge, but we also invested more into R&D, which is visible in the numbers. More than offsetting was the positive development in sales mix. I was also pleased to see services margin improving in the quarter. So overall, a very good delivery, yet another quarter of profitability improvement. And as mentioned by Filip, we continue to be moving forward with our performance initiatives. Some results of this are visible this year, and we expect more meaningful contribution starting year 26. Let me take this opportunity to provide an update view on the tariffs. First of all, just a reminder that our business is highly local in nature, which limits the potential impacts. Of course, our US team has had to deal with increased business complexity. Tariffs have impacted costs for imported goods and components. For us, the imports to US amount to less than 10% of our US sales. From results perspective, there was no impact yet in Q2, and we are very much committed to recovering most of the gross impact currently forecasted for the year. And we have a variety of mitigation actions already in place to ensure that we do so. Then turning to my favorite topic, cash flow. We had steady progress in the second quarter. Cash flow increased to 364 million, bringing the year-to-date cash flow to 851 million. Working capital improved moderately from the beginning of the year, despite a roughly 70 million negative impact from FX. The service invoicing cycle contributed positively, and more importantly, our focus on collections continues to pay off. Then let's look at how we think about the year 25. We have slightly updated our market outlook. We now expect the new billing solutions market in North America to be stable following the strong activity rebound in Q2. Our view in other areas is unchanged. China continues to be the main challenge. In Europe, we continue to expect some growth. And in Asia Pacific, the Middle East and Africa, we expect clear growth. Our outlook for service and modernization markets continue to be positive in all areas. Then to our business outlook. With six months behind us, we have specified our sales guidance and now expect growth of 2-5% at the comparable currencies. Our guidance for adjusted EBIT margin range is unchanged at 11.8-12.4%. FX is expected to be a headwind, and if the rates remain at July levels, we estimate a roughly 50 million negative impact to our EBIT. China continues to be burdening on both volumes and margin. That said, performance will be supported by service and modernization also in the coming quarters, as well as by the ramp up of our performance initiatives. With that, let me now hand back over to Philippe to close the presentation before going into Q&A.