Kone Oyj B

Good morning and welcome to KONE's second quarter results call. My name is Natalia Valtasari. I'm head of investor relations here at KONE and I'm very pleased to be joined here today by Philippe Delorme, our president and CEO, and by Ilkka Hara, our CFO. As usual, Philippe will start by talking through the highlights of the quarter in terms of financials, but especially our strategy execution. Ilkka will then follow up with some more details on markets and financials, and then Philippe will wrap up before we head into the Q&A session. And just as a reminder already at this point, please, in the Q&A, try to limit yourselves to one question, one follow-up, and, of course, you can rejoin the queue if you have anything further to ask. But with that, Philippe, please.

Thank you, Natalia, and good morning, everyone. I'm very pleased to be here today to discuss our second quarter results, which reflect continued progress across our business and good momentum in our strategic priorities. Looking at the number, all the growth stands out. I was especially encouraged by the acceleration in modernization, which grew by well over 15%. This shows our success in capturing the opportunities created by aging building stock around the world. We also delivered further margin expansion and strong cash generation, highlighting the quality of our business mix and the benefits of disciplined execution. Beyond the financials, We continue to advance our strategy. An excellent example is the increasing connectivity of our maintenance portfolio, now at 44%, strengthening both customer value and our service capabilities. And finally, there is a good momentum in the plan combination with TKE. I'll provide a more detailed update on this later in the presentation, but first, let's take a closer look at our financial performance. Let's start with orders. Orders grew by almost 11% in a quarter. What I find particularly encouraging is both the breadth and the quality of that growth. Three of our four regions delivered double-digit growth, while modernization grew strongly across all regions. Turning to sales, we grew 3.4% in comparable currencies, putting year-to-date sales growth at a respectable 5%. Our adjusted EBIT margin expanded by 40 basis points thanks to a richer sales mix and improved operating leverage. Cash generation was also very robust, resulting in healthy cash conversion and further strengthening our financial position. So overall, this was a good quarter for KONE with growth across all our key financial metrics and performance very much in line with our expectations. Let me share a few practical examples of the progress we are making in executing our RISE strategy. In digital first, we continue to make good progress both in connecting more maintenance equipment and rolling out productivity tools for our field technicians. Together, we make an even more reliable, responsive and efficient service partner for our customers. In modernization, our modular approach significantly reduces downtime, one of the biggest concerns for customers undertaking upgrade projects. I'm confident that this is a key factor behind the consistently strong modernization growth we've delivered since the launch of RISE. I also believe it is behind the improvement in our modernization customer satisfaction scores we've seen during the year. In residential new buildings, our focus on affordability without compromising quality has strengthened our competitiveness in this important segment. Our offering developments are supporting growth in new equipment today while also creating a valuable install base for future service business. Turning to cut carbon, 75% of our equipment deliveries are now equipped with regenerative drives, helping customers reduce energy consumption and meet increasingly demanding sustainability requirements. And finally, our core processes and culture. Our ambition is to be the number one choice for both customers and employees. We track our progress through annual customer loyalty and employee engagement surveys. Customer loyalty has developed positively in three of our four areas, but feedback also highlights opportunities for further improvement. And at the same time, employee engagements remained above the global benchmark, reflecting the strength of our culture and the commitment of our people. I'm proud of what the KONE team has accomplished, and I'm also happy to see our strategy translating into tangible value for our customers. And let me share a few examples from the quarter. Starting in China, we have a great example from the hotel industry where minimizing downtime is absolutely critical. Our fast-track delivery capabilities not only helped secure a modernization contract, but also regained the customer maintenance business. This clearly demonstrates the value of combining speed, reliability, and strong customer relationships. Next. An excellent example of how digitization creates value for customers. The Mecca clock tower is an iconic landmark and a customer with whom we've built a long-lasting relationship. Last year, we connected the equipment to our 24-7 connected service platform. The true proof of our predictive maintenance capabilities came during the Hatch Pilgrimage in May, when more than 5 million people traveled through Mecca. We completed the season with record high customer satisfaction underlining the reliability of our solution. And then moving closer to home, we recently secured an order to deliver monospace for elevators to rapidly growing residential area in Prague. This is a great example of how our effort to improve competitiveness of our residential offering are translating into commercial success in an important market segment. Let's move on to sustainability. One of the key sustainability milestones this quarter was the validation of our updated near-term science-based targets. These reaffirms our commitment to reducing our environmental impact and supports our long-term ambitions. We now target a 46% reduction in scope 1 and 2 emissions and a 40% reduction in scope 3 emissions from our 2022 baseline by 2030 and we are committed to achieving net zero emissions by 2050. We were also again included on CDP's Supplier Engagement Assessment Leaderboard with an A scoring. A great achievement for the team, showing consistent engagement on an important topic. Turning finally to our plan combination with TKE. We've discussed the strategic rationale extensively over the past few months. So let me simply reiterate how excited we are about this opportunity. By bringing together the strengths of both companies, we can accelerate innovation, improve responsiveness, and create even greater value for our customers and stakeholders. With regards to required approval, we reached an important milestone at the Extraordinary General Meeting in June. Shareholder support was remarkably strong, with nearly 100% of votes cast in favour of our proposals. The regulatory review process is also progressive as planned, with filing submitted or underway across all key jurisdictions. At the same time, we've begun integration planning so that we are well prepared to move quickly once all necessary approvals are in place. The collaborations between our team has been open, constructive and highly productive, which reinforced my confidence in our targeted 700 million cost synergies. As a reminder, this target reflects our expectation after any divestment that may be required as part of the regulatory approval process. Now, let me hand over to Ilkka, who will take you through the market developments and our financial performance in more detail.

Thank you, Philippe, and a warm welcome also on my behalf to this second quarter result webcast. Let's start by taking a look at market activity over the past few months. Overall, the demand picture remains very similar to what we've seen over the last few quarters. Growth continues to be led by service and modernization, but demand for new building solutions has also been active across most markets, while China remains the clear exception. In the Americas, unit growth was affected by last year's comparison point, which was strongly impacted by tariff-related demand recovery. In value, the market is growing clearly. What stands out in particular is the Middle East. Despite a challenging backdrop, demand stayed strong and helped drive growth in the broader Asia-Pacific, Middle East and Africa region. It is really a remarkable demonstration of the market's resilience. Let's next look at our financial performance, starting as usual with orders received. Orders grew by 10.9% at a comparable FX, reflecting our ability to capture market opportunities across business and regions. Growth was broad-based geographically, with double-digit increases in three of our four areas. This is true also for modernization as order acceleration accelerated in all areas. It was particularly encouraging to see this driven primarily by the volume business, although major projects also contributed positively. New building solutions performed well too, which is important as it supports the future expansion of our service space. Our orders margins declined slightly year on year as a result of the inflatory pressure we've seen. That said, we have taken clear actions to address this. These actions include pricing measures already implemented across the portfolio combined with a disciplined cost management. Then turning to sales, which increased by 3.4% at the comparable rates in the quarter. Growth in service and modernization compensated for the slight decline in new building solutions, increasing by 5.6 and 6.7 respectively. Service growth was impacted by high comparison point in China, as highlighted already earlier. In addition, less contribution from M&A resulted in slower maintenance-based growth in Europe. Even so, year-to-date sales growth of 5% for the group means that we continue to be well on track against our full-year guidance. Moving then to adjusted EBIT and profitability. Margin expansion in the quarter was 40 basis points year-on-year. This took adjusted EBIT to 370 million euros. The adjusted EBIT excludes items affecting comparability, which amounted to roughly 50 million in the quarter. Around 25 million of this was related to the planned TKE transaction. And we currently estimate additional 40 million or so one-time costs in the second half, mainly transaction related. From profitability perspective, business mix remained favorable and we benefited again from a good leverage on fixed cost. These factors more than offset margin pressure in China and inflation-related cost increases elsewhere. Overall, it's encouraging to see yet another quarter of profitability improvement, and we have actions in place to support continued progress going forward. Turning finally to cash flow. Good progress to report also on this front, as year-to-date cash flow rose to 937 million. Working capital was the main driver of the improvement. Order growth resulted in higher advances, and timing of payables also contributed positively. Let's next look at how we're thinking about 26. Starting with market environment. Our outlook for the year is unchanged and consistent with what we have seen so far this year. In new billing solutions, we expect the market in China to decline around 10%. Elsewhere, we expect growth slight in Europe and North America and stronger growth in Asia-Pacific, the Middle East and Africa. Both modernization and service markets are expected to remain active across all regions, offering excellent growth opportunities. Naturally, geopolitical developments remain a risk, but so far our markets have demonstrated solid resilience. Then to our business outlook, which we have left unchanged. This means we continue to expect comparable sales growth of 3-6% and improvement in adjusted EBIT margin to the range of 12.3-13%. Looking at the factors affecting the performance, challenging market conditions in China and the wage inflation continue to create headwinds. We also see inflationary pressure linked to geopolitical tensions, including elevated logistics costs. On the positive side, growth in service and modernization supports the favorable business mix, and our performance initiatives continue to contribute to margin improvement. With that, I will hand back to Philippe for some closing remarks before we move to Q&A.