Kone Oyj Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Andre Kukhnin - UBS Investment Bank - Analyst : Maybe I'll start with a follow-up. Just on the backlog margin evolution, you commented that it's down slightly year-on-year. Could you comment on how it's developed sequentially in Q3? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Can you repeat the beginning, you're talking about orders margin? Or what did you ask?

Question: Andre Kukhnin - UBS Investment Bank - Analyst : And if I may, just briefly a question on your comments on the pickup in activity in Americas, could you elaborate on that in terms of whether this is US or Canada? I guess South America is not relevant for you. And where are you seeing that and whether that is indicative of a trend or just a quarterly phenomenon? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Yes. So it's good to -- so first, we are commenting the markets where we are active. So it's a comment about Canada, US, and Mexico. And given the size, it's a lot of -- the comment is really mainly about US. And second, which is good to remember that the volumes in US are quite low, although the value per unit is quite high. So the swings in the market when we comment the market activity in units can be fluctuating. And in the third quarter, we did see positive development in the market. Also, part of the impact was coming from a few larger major projects where there are quite a few units being ordered. So overall, market continues to be stabilizing, and this quarter was very good. But for the full year, our outlook was on the market to be stable. I consider that to be a start and then let's see how it develops, where there are many moving parts still.

Question: Daniela Costa - Goldman Sachs Group, Inc. - Analyst : I have two questions. I'll ask them one at a time. The first one is sort of like related to China, basically. And can you comment on if China is still profitable? And given the pricing trends that you and your peers have been flagging in China and the situation, do you see a possible outcome that maybe next year, China will not be profitable? Or do you have actions that you can take immediately now to prevent that?

Question: Daniela Costa - Goldman Sachs Group, Inc. - Analyst : My second question maybe related to some of the things that Ilkka was also talking about. But just going back to the CMD where you had the bridge to get to the 13% to 14% margin and also tying that up with the 2025 commentary that you just gave. The bridge had three parts basically, had the ones related to like product costs and what digitization and modularity in the individual business units, had the business mix, which you just gave a comment on that, that will take time. Does it's time to shift? And then have the big bar that was 100 basis points of performance initiatives. Can you give us a little bit more color exactly on what those performance initiatives are and whether they're more back-end loaded, they're more linear through the period? Just trying to tie up how you get to the 2027 given the commentary on '25? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Yes. And I actually gave a bigger expectation than that. I think it was 150 basis points for the performance initiatives. And then, of course, we have a choice then to reinvest some of the benefits back to the business if we so decide. So that's then the net 100 that you're referring to. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 24, 2024 / 7:30AM, KNEBV.HE - Q3 2024 Kone Oyj Earnings Call But on the initiatives, Philippe talked about them. I'm sure he's going to comment next. He is quite passionate about them. They will take some time to have impact. So we expect to start to see the impacts towards the end of '25 and then throughout the period to '27. The strategy, if you think about the performance initiatives, they will continue to deliver positively as well as then some other things like the mix change, digitalization, providing improvement in profitability for services and so forth, they continue to ramp up towards -- with accelerating speed towards the end of the '27. That was my main message on that one. But I think, Philippe, if you want to comment a bit about the performance initiatives.

Question: Vladimir Sergievskiy - Barclays Corporate & Investment Bank - Analyst : I'll start with free cash flow, if I may. Equity free cash flow conversion below 100% this quarter, which leaves room for improvement on the historical standards, I would say. Do you think you will be able to make progress to improve cash conversion in Q4 2025 to 100% or maybe above where it's historically been for KONE before 2021? So that's the first question. Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Simplify the question, can we improve? And are we aiming to do? Definitely so. And on cash flow, we don't guide quarters. And I think actually, on a quarterly level, there's always fluctuations. But definitely, that is focus, as Philippe was referring in context of China, but also outside of China. So definitely, that's the goal.

Question: Vladimir Sergievskiy - Barclays Corporate & Investment Bank - Analyst : Excellent. And if I can follow up -- another follow-up. The second question will be on Modernization. Would you be able to comment what -- on Modernization. Would you be able to comment what volume and pricing development separately, are you seeing in China Modernization market? And whether do you think Modernization will continue to be your most profitable business in China over the medium term, maybe long term? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Maybe I'll take in the reverse order the questions because I think Philippe will want to comment on the Modernization opportunity, which was the first part. So Modernization continues to be the most profitable business we have in China and more stable business in terms of profitability, while it is growing. And then from a unit and price perspective, something that I very seldomly comment when it comes to Modernization because there's so many things in Modernization. So starting from partial modernization to more full replacement of elevators. So it makes less sense. On a pricing environment, of course, China continues to be quite competitive overall. But in Modernization, I would say that the pricing environment has been more stable definitely than in NBS lately. But maybe you want to comment on the Modernization. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 24, 2024 / 7:30AM, KNEBV.HE - Q3 2024 Kone Oyj Earnings Call

Question: Miguel Borrega - BNP Paribas Exane - Analyst : The first one just around China. I remember you having a very strong order book in Q4 of last year. When would you expect that to flow through the P&L since China sales over Q2 and Q3 are still down 20%. So would you expect that to come through over the next coming quarters and to boost growth in China or not really? And then I can ask the second question. On the full year guidance, you mentioned the reason for the cut was an increasingly difficult China market. But the reality is the cut is the same as the bad debt provision in Q3. So in other words, have you changed your expectations for Q4? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region That's a good question. So I'll start with China orders development in last year and what we see in deliveries. And I will -- so China market is very dynamic. And what we see is that order book rotation is slowing down, and that's been consistently happening now for some time. But equally, we are selective and prudent focusing on cash. So as customers place orders, we do continue to make checks during the time of getting to the delivery to manage credit risk. And in some cases, more cash basis, but in most cases you need to make prepayments before we deliver. And as liquidity is constrained, then of course, that slows down further or makes us more selective in which orders we're delivering. So there's maybe less correlation than the past on this order rotation as such.

Question: Rizk Maidi - Jefferies International Ltd. - Analyst : I'll have two and then take them one at a time. So maybe just on -- just again on China. I know it's a smaller part of the business, but sorry to come back to this. Price mix drop in excess of 10% in a quarter where you've actually underperformed the market when it comes to volumes. I rarely see sort of this sort of situation. I think this downturn compared to the previous ones, I think you always said that you competitors have actually less levers to be more aggressive on pricing just because they're not making as much margin as they've done before. Can you just maybe talk about this overall sort of pricing dynamics? And just maybe to link this with the previous question. We've seen it in other markets when new equipment becomes weak for an extended period of time, we see price deceleration spreading into other segments, maintenance and modernization. What makes you think this is not going to happen this time? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Well, if I start and then maybe you continue from there. So I would -- and I've said this before, that on orders particularly, single quarters can fluctuate. And if you look at the nine months of the year, the picture in terms of us and the market is much more stable as a result. So in single quarters, we can be above or below the market development in terms of volume. But your comment in terms of price pressure in the market and also mix contributing negatively. So it depends what's being constructed and now it's more the low end. So it is true. So it is very competitive and challenging market right now, and that's visible in our orders received for in the quarter. Then on the pricing pressure, in China, it's been always the most competitive market when it comes to pricing across all businesses. Of course, in the past, the NBS business has been the larger part of our commentary because of its size. But now increasingly, we see the impact of Services and Modernization as they're growing fast to be part of the commentary. And both businesses have always been competitive in pricing. But I think from a pricing pressure perspective, we've seen more stability in those two businesses so far.

Question: Rizk Maidi - Jefferies International Ltd. - Analyst : This is very helpful. The second one, and again, thank you for giving us a little bit of an early comment on 2025 because that's really the main debate, I guess, for us this morning. Just maybe if I could ask you on some of the items in the EBIT that you actually know from today. I know you don't have a crystal ball on a lot of things and a lot of things can change between now and then. But can you assess or give us an assessment of roughly how much savings when you think about those performance initiatives that you talked about you're estimating to achieve basically next year? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region So first, I think we've been now working with a new strategy, what three, four weeks -- .

Question: Klas Bergelind - Citigroup Global Markets Ltd - Analyst : I was a bit late on the call, so maybe you covered some of this already. First, on the Modernization business in China, it's the best margin in China at the moment. But we're hearing of incremental price pressure also in Mod. You've obviously done a great job in improving the Mod margin since 2020 for the group and you want to improve it further. It would require sort of a pretty good step up in China is obviously with that EUR1 billion of growth ambition that you have, Philippe, if this margin will be under pressure? Or do you think you can keep the margin there at the current level in China Mod despite a very competitive market? That's my first one. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 24, 2024 / 7:30AM, KNEBV.HE - Q3 2024 Kone Oyj Earnings Call

Question: Klas Bergelind - Citigroup Global Markets Ltd - Analyst : Yes. And this is a good -- this is a good bridge into my second question on Modernization and the offering. We have a very good impression at the Capital Markets Day that you or at least I felt that you're relatively unique in terms of the increased standardization, partial modernization, all these kits. There are some peers though that are reporting very strong growth. It's very similar to you this quarter, and are talking about that they have introduced the standardized kits also into the market. So could you just remind us again and you were leading in the whole sort of standardization on equipment 20, 25 years ago. I think you have a strong position. But I'm still curious to hear your sort of USP versus some of the competition out there on the Mod business.

Question: Nick Housden - RBC Capital Markets - Analyst : I have both on the Service business. Firstly, how much did M&A contribute to the 9.6% Service growth in Q3? And then secondly, can you just comment on whether you're seeing any pricing pressure on Services in China and maybe just quantify that for us? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region So in Services growth, out of close to 10% growth, our unit growth was roughly 7%, including M&A. M&A had a positive impact, but still the organic growth was the main driver for the growth. And then to China. So of course, the market continues to be challenging from a pricing perspective, as I said earlier, but I think from our perspective, the service prices have been definitely more stable than we've seen in, for example, in NBS business. So yes, there is pressure because the economy is weak, but we can also have been able to sustain quite well the margins.