Kone Oyj Q4 2024 Earnings Call For Analysts Transcript

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

Question: Daniela Costa - Goldman Sachs Group, Inc. - Analyst : I have one question and then sort of just a follow-up on the clarification on your accounting. But my question relates to the margin guidance for it to be up. And can you help us understand the various moving parts in terms of how do you still model in that China OE positive next year? How much of the improvement is a mechanical mix impact versus tailwinds from the actions that you're implementing and which ones are the critical ones? And then just on the R&D write-off that you did, what have you discontinued? Sort of can you elaborate basically exactly what that was and how we should think about maybe as you restructure the business, further actions like that? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Yes. Maybe on the China part, and Philippe, you can also talk about what we are aiming to do there. So we, in the fourth quarter, in China, focused our business in line with the market and the new strategy moving to Service- and Modernization-focused business. And as a result, we saw the restructuring costs hitting our fourth quarter as the measures were being taken then. And we do expect those to contribute positively. But as already said, so we also do see the NBS business continuing to decline in the fourth quarter. So it's more towards aligning our business to the market reality we see as a result. I'll come back to the second question, if you want to comment on China?

Question: Daniela Costa - Goldman Sachs Group, Inc. - Analyst : Just on the first question on the answer, just to make sure I understood. You're saying that China OE is still profitable or just at a cash level? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region No. It is profitable, both in P&L, as you saw in the cash flow, also China contributed positive to a very good development in the fourth quarter.

Question: Andre Kukhnin - UBS. - Analyst : I'll just go one at a time and maybe follow up on the margin drivers for 2025. Firstly, on the restructuring. Could you give us an idea of what amount of savings can we expect on that EUR 50 million of restructuring? Is it kind of more of a traditional one-to-one? And related to that, are there any other measures to kind, if you try to bucket this in terms of what's being done on footprint, on sales and procurement? Could you give us some idea of the sizes of those initiatives and what they can contribute in 2025? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region So mainly, if I look at the restructuring, so China was about restructuring to the market's reality. As said, we expect China margins still in '25 to be somewhat under pressure given the difficult market, but we're realigning the teams to the market reality as such. And then in the rest of the world, we are taking measures to align the teams to the new strategy. And then on top of that, as we talked about, we have performance improvement initiatives, especially related to procurement as well as then sales and operational excellence, so how are we organized on the lowest level of Koneto be able to deliver the best possible delivery organization towards our customers. And what I said earlier is still valid. So we expect the performance initiatives to have more impact towards the end of the year, but still continuing to ramp up all throughout towards our midterm targets with an increasing speed towards the end of the period. And with the measures that we took now in the fourth quarter, we've included those to our guidance, and we expect in China, as I said to Daniela already that there continues to be a margin pressure in China, but these are measures to counter that. And there is some benefits for the cost, but some benefits for the global teams that are visible in the '25 as well.

Question: Andre Kukhnin - UBS. - Analyst : Very helpful. If I may, just one on cadence of first half, second half. Would you expect the margin to show further improvement in the first half already or should we think about second half primarily? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region So if you think about what I said about the whole period all the way to the midterm targets, we are continuing to accelerate our margin improvement.

Question: Andre Kukhnin - UBS. - Analyst : Right. And is the Service margin itself improving as well in 2025 as a stand-alone? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region So I guess we have not guided that closely each of the dimensions more given the total number, but as we said in the CMD, so the measures we're taking on digitalizing the Service business are actually something where we see good opportunities to drive margin improvement going forward. Clearly, number one is that customers actually visibly, it will differentiate us. But then secondly, we also are driving with digital productivity improvements. And actually, as we are now ramping up country by country the digital offering, we see that materializing. But it will take some time to see that in the P&L as first, you need to implement, then you need to learn the new way of working and then you start to be able to reap up the benefits from profitability and productivity point of view.

Question: John Kim - Deutsche Bank. - Analyst : Could we unpack the slight margin decline in the Q4 order intake? It'd be helpful to understand whether this is still the weight of Chinese MBS or whether you're seeing any sort of evolution on margins in the Modernization, again, looking at China? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 30, 2025 / 8:30AM, KNEBV.HE - Q4 2024 Kone Oyj Earnings Call For Analysts Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region So in China, the Modernization margins, as I've said earlier, that is the highest margin business for us. It's still a smaller part of the business and the fastest-growing business. And we actually see good development, good opportunities going forward in the Modernization, especially the partial modernization part of it is a very compelling part of it. But let's see. Right now, it looks quite good.

Question: Vladimir Sergievskiy - Barclays Bank - Analyst : Two questions. I'll start on the adjustment to EBIT and apologies for laboring the point. On my numbers, it looks like this was the highest quarterly adjustments Kone has ever had. In particular, I'm interested on this EUR 18 million development cost adjustment. Can you explain what those exactly are and how the accounting worked on those EUR 18 million? And have you done similar development cost adjustments before? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Can you just summarize again, the line is bad. So on your actual question, it was losing 1 out of the 3 words on this end.

Question: Vladimir Sergievskiy - Barclays Bank - Analyst : That's very clear. Last question. Would you expect any additional adjustments for 2025 or restructuring costs at this point or not? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Of course, we continue to evaluate both the market as well as how we deliver our strategy. But I do not expect right now any restructuring costs that are meaningful in the '25.

Question: Klas Bergelind - Citigroup Inc. - Analyst : Philippe and Ilkka, it's Klas at Citi. First, on the composition of Service growth. It seems like organic units grew mid-single digits still and then the ISPs again added another 1.5%, and that leaves 4% price mix, which is higher than I thought, especially as you probably have a negative geographical mix there out of China still. Can we try and break that down a little bit? What I'm trying to gauge really is if digital and 24/7 contributed more this time to the organic growth in Services? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Well, I see, you've seen on the penetration. So we continue to penetrate quite nicely with our connectivity. But I think this time, I would call out more of the overall services contributing to the value. So yes, 24/7 and the added value is there. But I think we saw broad-based services, positive development and especially the Western market standing out, both Europe as well as more broadly. And those have been standing out in terms of growth in the fourth quarter. It doesn't mean that 24/7 didn't, but I wouldn't call that out as a main driver for that.

Question: Klas Bergelind - Citigroup Inc. - Analyst : Makes sense. My second one is on the margin development. First, the Modernization, Philippe. You improved its margin from COVID levels by 4 percentage points, that was the message at the Capital Markets Day. What about the quarter? Let's see if you're going to answer this, but roughly year-over-year in the quarter, you have to get a feeling for the magnitude. And also, if I can just confirm that you said that you intend to improve the Modern margin further in '25, but with the Service margin likely to be stable and for that to come further out. And I'm obviously talking beyond the restructuring in China. I'm talking about the sort of ex China business, if you like. Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Maybe I'll clarify first on what I've said. So, so far, I have not said on Service margins going forward anything, I commented '24. But then looking forward with digitalization and so forth, of course, we expect the margins to improve in the longer term. And on the supporting performance, I was more highlighting the fact that as long as we continue to grow Service and Modernization as fast as we are doing, of course, that provides us a positive contribution to profitability. And in Modernization, all I would say that I continue to be very happy with the steady growth of the profitability of the business as we are scaling it up. And let's see, it is a function, of course, the speed we can scale up, but it is also one where how we deliver to our customers is critical in terms, how we can differentiate and command a pricing premium and impacting then the margins. But I have to say that the Modernization team has done a good job.

Question: Klas Bergelind - Citigroup Inc. - Analyst : Just final thing. I mean the reason I'm asking is I get the mix shift, Ilkka. The reason why I'm asking is that you improved the Modernization margin this quarter, again. Again, I think for some people, there was a feeling that all of the self-help would be quite back-end loaded. And that is why I'm asking whether there is a chance to improve the Modern margin in absolute terms? I get the mix shift also in '25. Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Is there a possibility? Definitely, there's a possibility. You've gone very far.

Question: Miguel Borrega - BNP Paribas. - Analyst : I've got 2 questions. The first one on maintenance grew 9.5% in '24. I believe you said previously that you would expect a similar development in '25. So wondering if you could shed some light on the moving parts regarding portfolio growth, scope, pricing and mix. Correct me if I'm wrong, but I think in '24, you said 5% portfolio growth, 2% scope, 3% price offset by 1% mix. So with inflation coming down, you think you can maintain that level of pricing? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 30, 2025 / 8:30AM, KNEBV.HE - Q4 2024 Kone Oyj Earnings Call For Analysts Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Well, I guess what we've said about Services is that we aim to grow that over cycle towards our midterm targets closer to 10%. And I'll stick to that target and hopefully that is consistently then also our target and ambition for every year. And we continue to see good opportunities in growing units. Of course, with NBS market now being more difficult in the last years, we've been seeing Modernization contributing positively to the units. And so far, we've been growing quite nicely units as well. And then market for acquisitions, the small maintenance companies continues to be very active. We have a good pipeline. So the aim is to be able to continue to add also from there. But of course, it's a smaller part of the growth.

Question: Miguel Borrega - BNP Paribas. - Analyst : That's very clear. And then just a follow-up on the Service margin. As you mentioned, in '24 was stable despite the 10% growth. Usually, labor is offset by price. And you mentioned productivity and value-added services. So in other words, what's prevented your margins from growing in '24 and why should it be any different in '25? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Well, many of the things we're aiming to deliver to our customers with digital will actually be the key way to improve the profitability. And of course, we do have right now a mix negative shift with still fast growth in China contributing negatively to the profitability. So that's one negative on that side. But it is something where the scaling and getting the profitability up, not only growing but improving profitability is at the heart of the strategy. So we expect that to be better going forward.

Question: Miguel Borrega - BNP Paribas. - Analyst : Okay, good.

Question: Benjamin Heelan - Bank of America. - Analyst : I just wanted to have a quick follow-up on some of the margin commentary for '25. So you talked about the backlog margins being down slightly in 2024. Do you have a view on where that will end up in 2025? Are you going to be able to offset cost inflation, et cetera, in 2025 to kind of order margin? How can we think about that progressing over the next 12 months? And then just a quick one on the market outlook. You've talked about a more positive outlook in North America. I think one of your competitors last night said something similar. So can you talk a little bit about what you're actually seeing on the ground? Are you starting to see the orders improve? Is it more just kind of qualified leads? Just help us understand a little bit what you're actually seeing on the kind of day-to-day in the North American business? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region I'll start and then maybe you comment to market. But I would say that we still have double-digit growth in orders in Americas, so it's quite a good market and has been for the full year. But on the order margins, so trying to be clear and concise on your question. So I comment orders booked in the fourth quarter and the margins, we expect those to have when we deliver them going forward. So in China, our margins are down for those orders. And the margins were booking for China are below the ones we are delivering. So there's clearly a margin pressure in China. In rest of the world, the margins are more stable. And there's a slight positive. So the orders we're booking are slightly positive towards the ones we are delivering, so a slight tailwind there. So that's on the orders margin. And we do expect with that comment to continue to drive actually very good product cost reductions. And in '24, we had historically high product cost reductions, especially in China. But of course, the pricing environment has been quite tough there as well. And the goal for '25, we continue to see good opportunities to drive overall the product cost down with the actions we're taking as such. But maybe on Americas, do you want to comment?

Question: Panu Laitinmaki - Danske Bank A/S - Analyst : I have a question on the sales mix in China. So how much roughly was new equipment out of sales in '24 and then Modernization and Services? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region So 2/3 new equipment and 1/3 Modernization and Services. And the same rule applies there, 2/3 Services, 1/3 Modernization. So that's the mix. And like Philippe said, we expect that to continue to move in favor of Modernization and Services where we see good growth opportunities going forward.

Question: Tomi Railo - DNB Markets - Analyst : It's Tomi from DNB. Can you just comment a little bit on the lowered outlook for China Service from the third quarter, clear growth to fourth quarter slight growth? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Well, we are seeing the impact of the slower NBS market in earlier quarters and years impacting the growth in Services. So less units being added to the Service base. And therefore, the growth we expect for the market to be now a slight growth rather than a clear growth. So no big drama there and as such.

Question: Mikael Doepel - Nordea Markets - Analyst : Just a question on China, really. So if you look back at 2024, we saw quite significant volume pressure in the new equipment business there and we also saw quite significant pricing pressures. Well, if I remember correctly, being down double digits. I'm wondering what kind of a delta you expect on the pricing side for new equipment in 2025 in China? And also, if you expect to see any mix change in your business there, please? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Well, first, our outlook for the market was significantly down in units. We seldomly or I don't see that you can comment forward-looking pricing. But let's put the competitive nature of the market is expected to continue in China. And we continue to see our business mix from this 2/3, 1/3 to continue to be moving towards closer to the market and the market value for China is 50-50 roughly in terms of new equipment versus Modernization and Services. So the mix shift towards Service and Modernization continues in our businesses also looking forward.

Question: Mikael Doepel - Nordea Markets - Analyst : Okay. That's very clear. If I just squeeze in a final one on the margins, which I mean you've managed to improve your group margins by 30 bps last year and you expect to continue to improve this year. We talked a bit about the, let's call it, puts and takes for the year and how things are going to develop. But would you say that this is a good ballpark in terms of what to expect in terms of the improvement for this year given what you have previously said that it's going to be a bit more back-end loaded to get to your targets? Ilkka Hara - Kone Oyj - Chief Financial Officer, Member of the Executive Board, Interim leader for the South Europe and Mediterranean region Well, I will leave some work for you guys as well. As I said, we aim to continue the improvement of our margins going forward, and that's the goal.