ANNUAL REVIEW - Kone

ANNUAL REVIEW

KONE 2018

Contents

KONE in brief

1

4. Acquisitions and

KONE's strategy

capital expenditure

47

4

4.1 Acquisitions

48

4.2 Goodwill

49

Board of Directors' report 6

4.3 Intangible assets 4.4 Property, plant and equipment

50 51

Shares and shareholders

22

5. Capital structure

53

Key figures and financial development

25

5.1 Capital management

54

Calculation of key figures

26

5.2 Shareholders' equity

55

5.3 Financial risks and instruments

57

5.4 Shares and other

Consolidated

non-current financial assets

60

financial statements

27

5.5 Deposits and loans receivable

61

5.6 Associated companies

61

Consolidated statement of income

27

5.7 Employee benefits

62

Consolidated statement of financial position 28

5.8 Finance lease liabilities

64

Consolidated statement of changes in equity 29

5.9 Commitments

64

Consolidated statement of cash flows

30

6. Others

65

Notes to the consolidated

6.1 Management remuneration

65

financial statements

31

6.2 Share-based payments

66

1. Basis of preparation

6.3 Restated information related

31

to the new standards

69

2. Financial performance

34

Parent company

2.1 Sales

35

financial statements

71

2.2 Costs and expenses

36

2.3 Depreciation and amortization

36

Subsidiaries

81

2.4 Foreign exchange sensitivity 2.5 Financing income and expenses 2.6 Income taxes

37 38 39

Board of Directors' dividend proposal and signatures

84

2.7 Earnings per share

39

2.8 Other comprehensive income

40

Auditors' report

85

3. Net working capital

41

3.1 Inventories

3.2 Accounts receivable and

contract assets and liabilities

42

Corporate governance

42

statement

90

3.3 Deferred assets

44

3.4 Accruals

44

Corporate governance principles

90

3.5 Provisions

45

Board of Directors

94

3.6 Deferred tax assets and liabilities

46

Executive Board

95

KONE in brief

At KONE, our mission is to improve the flow of urban life. As a global leader in the elevator and escalator industry, KONE provides elevators, escalators and automatic building doors, as well as solutions for maintenance and modernization, which add value to the life cycle of any building.

Through more effective People Flow?, we make people's journeys safe, convenient and reliable, in taller, smarter buildings. Together with our partners and customers around the world, we help cities to become better places to live in.

Coal Valley Allen

Torre?n

R&D center Production site Head office KONE is present

Tytyri Hyvink??

Motala

Helsinki

Veenendaal Cadrezzate

Essen ?sti nad labem

Pero

Chennai

Kunshan Nanxun

9,071 Sales MEUR in 2018

>57,000 employees

We move over

1 billion

people every day

>450,000

~1,300,000

equipment in KONE's

customers

maintenance base

Operations in over

60 countries

Authorized distributors and agents in close to 100 countries

Key figures

Key figures

Key figures

Orders received Order book Sales Operating income (EBIT) Operating income margin (EBIT margin) Adjusted EBIT* Adjusted EBIT margin* Income before tax Net income Basic earnings per share Cash flow from operations (before financing items and taxes) Interest-bearing net debt Equity ratio Return on equity Net working capital (including financing items and taxes) Gearing

MEUR MEUR MEUR MEUR

% MEUR

% MEUR MEUR

EUR

MEUR MEUR

% %

MEUR %

1?12/2018 7,797.0 7,950.7 9,070.7 1,042.4 11.5 1,112.1 12.3 1,087.2 845.2 1.63

1,150.1 -1,704.0

49.9 27.7

-757.8 -55.3

1?12/2017 7,554.0 7,357.8 8,796.7 1,192.3 13.6 1,205.5 13.7 1,250.4 960.2 1.86

1,263.3 -1,690.2

50.0 32.1

-772.6 -55.8

Change 3.2% 8.1% 3.1%

-12.6%

Comparable change 6.6% 8.0% 6.3%

-7.8%

-13.1% -12.0% -12.3%

* In September 2017, KONE introduced a new alternative performance measure, adjusted EBIT, to enhance comparability of the business performance between reporting periods during the Accelerate program. Restructuring costs related to the Accelerate program are excluded from the calculation of the adjusted EBIT.

Orders received*, MEUR

Sales, MEUR

Adjusted EBIT, MEUR and adjusted EBIT margin, %

10,000 8,000 7,621

7,554

6,000

4,000

2,000

0

2016

2017

*) Orders received do not include maintenance contracts

7,797

2018

10,000 8,000

8,784

8,797

6,000

4,000

2,000

0

2016*

2017

*) 2016 not restated with IFRS 15 and IFRS 9 changes

9,071

2018

1,500 1,293

1,250

1,000 14.7%

750

500

250

0

2016*

1,206 13.7%

2017

24.0

1,112 20.0 16.0

12.3% 12.0 8.0

4.0

0

2018

*) 2016 not restated with IFRS 15 and IFRS 9 changes

Adjusted EBIT Adjusted EBIT margin

2

KONE ANNUAL REVIEW 2018

Key figures

Sales by region

Sales by business

EMEA 42% (41%) Americas 20% (20%) Asia-Pacific 38% (39%)

1?12/2018 (1?12/2017)

New equipment 53% (53%) Maintenance 33% (33%) Modernization 14% (14%)

1?12/2018 (1?12/2017)

Cash flow*, MEUR

1,750 1,500

1,509

1,250

1,000

750

500

250

0

2016

1,263

2017

1,150

2018

*) Cash flow from operations before financing items and taxes

Earnings per share, EUR

2.10 2.00 1.80 1.50 1.20 0.90 0.60 0.30

0

2016*

1.86

2017

*) 2016 not restated with IFRS 15 and IFRS 9 changes

1.63

2018

Dividend per class B share, EUR

2.10

1.80 1.50

1.55

1.20

0.90

0.60

0.30

0

2016

*) Board's proposal

1.65

2017

1.65

2018*

KONE ANNUAL REVIEW 2018

3

Strategy

KONE's strategy: "Winning with Customers"

At KONE, our vision is to deliver the best People Flow? experience by providing ease, effectiveness and experiences to equipment users and customers over the full life-cycle of the buildings. Our job is to make the best of the world's cities, buildings and public spaces, because we believe that cities are part of the solution for a better future. Our mission is to improve the flow of urban life.

Our cities will undergo enormous change, with the UN predicting that 6.7 billion people will be living in cities by 2050. Around 200,000 people move into cities across the globe each and every day. It is by understanding urbanization and focusing on improvements for people that we can create better buildings, better low-carbon cities and a better world.

Rapid technological advancements in connectivity, mobility, and computing power are changing many aspects of our lives. Technological disruption drives change and means a faster pace of business and new expectations for ways of working. New technologies give us a great opportunity to serve our customers in smarter and more exciting ways.

Everything starts with the customer

KONE's strategic phase for 2017?2020 is called "Winning with Customers". The objective is to drive differentiation further by putting the needs of customers and users at the center of all development.

Every one of our customers is different. We want to deliver better value and meet their individual needs. To do this, we are investing more than ever in new technologies, connectivity and new solutions. With new ways of working, partnering and co-creation, we help our customers improve their businesses.

Our Accelerate Winning with Customers program was launched in September 2017 to speed up the execution of our strategy and to support profitable growth. The objective of the program is to create a faster-moving, customer-centric organization that leverages scale efficiently in a rapidly changing environment. The program includes both organizational adjustments, as well as the development and further harmonization of roles, processes and tools.

Four ways to win

To bring the strategy to life, we have introduced four Ways to Win with our customers. Each of the Ways to Win has a number of development programs within them, which will be the practical way to make progress in our daily work. Our four Ways to Win are:

4

KONE ANNUAL REVIEW 2018

URBANIZATION

MEGATRENDS

TECHNOLOGICAL DISRUPTION

OUR MISSION IS TO IMPROVE THE FLOW OF

URBAN LIFE

Strategy

1 Collaborative innovation and new competencies To be able to bring new solutions and services to our customers more quickly, we collaborate much more with our partners and customers. Our people drive our success in this change, which requires us to develop new competencies and innovate in new ways.

2 Customer-centric solutions and services Customers choose partners who best understand their changing needs and help them succeed. We understand these needs, and offer flexible solutions and services which benefit customers and users in the best way.

3 Fast and smart execution Customers want their partners in construction projects and building services to be professional, fast and reliable. They choose partners that continuously improve and focus on what is essential. We increase speed and work smarter to focus on what is valuable to the customer.

4 True service mindset Customers value partners who strive to understand and take action to exceed expectations. We can make a difference by serving our customers better than anybody else.

Strategic targets

Our strategic targets are how we measure our success. We aim to have the most loyal customers, be a great place to work, grow faster than the market, have the best financial development in our industry and be a leader in sustainability.

Our culture

We are passionate about safety, quality, and our values, which together form a strong foundation for our company culture. Our culture builds on our values of delighting the customer, energy for renewal, passion for performance, and winning together.

WAYS TO WIN

VISION

KONE DELIVERS THE BEST PEOPLE FLOW? EXPERIENCE

STRATEGIC TARGETS

Most loyal Great place customers to work

Faster than

Best financial Leader in

market growth development sustainability

WINNING WITH CUSTOMERS

Collaborative innovation and new competencies

Customer-centric solutions and services

True service mindset

KONE WAY

Fast and smart

execution

CULTURE

SAFETY

Delighting the customer

Energy for renewal

VALUES

QUALITY

Passion for performance

Winning together

KONE ANNUAL REVIEW 2018

5

MAINTENANCE

MODERNIZATIO

Board of Directors' report | KONE's Business model

Board of Directors' report

KONE's Business model

KONE provides value for the customers during the entire lifespan of the building. In the new equipment business, we offer innovative and sustainable elevators, escalators, automatic building doors and integrated access control solutions to deliver the best people flow experience. In maintenance, we ensure the safety and availability of the equipment in operation, and in modernization we offer solutions for aging equipment ranging from the replacement of components to full replacements.

CREATING VALUE BY IMPROVING THE FLOW OF URBAN LIFE

INPUTS

PEOPLE AND LEADERSHIP

? >57,000 employees in >60 countries, ca. half of them in the field

? Personnel voluntary turnover rate 8.5%

? Wide training opportunities on all organizational levels around the world ? 39 training centers ? 4,700 courses in 30 different languages

? Management systems and certificates (e.g. ISO 14001, ISO 9001, OHSAS 18001)

? Governance structures and Code of Conduct

INNOVATIONS, PROCESSES AND SYSTEMS

? >3,000 patents ? R&D spend 1.8% of sales, 9 global

R&D units ? >1,000 technology professionals

in R&D ? Global KONE Way processes and

systems ? Safe and efficient maintenance

and installation methods

BRAND AND REPUTATION

? One of the leading brands in the elevator and escalator industry

PARTNERING

? Co-creation with customers ? Partnering to develop new

technologies ? Collaboration with >300 universities

and educational institutions ? Distributors and agents important

part of go-to-market

MANUFACTURING AND DELIVERY CHAIN

? 13 manufacturing units in 9 countries

? ~2,000 component suppliers ? thousands of installation suppliers ? Logistics network

FINANCIAL

? Equity EUR 3.1 billion ? Interest-bearing net debt

EUR -1.7 billion ? Net working capital EUR -0.8 billion ? Capital expenditure

1.2% of sales

NATURAL RESOURCES*

? Materials used 737,200 tonnes ? Heating and vehicle fleet fuels

424,600 MWh ? Electricity and district heat

82,000 MWh ? Water consumption 403,000 m3

BUSINESS MODEL

WINNING WITH CUSTOMERS

NEW EQUIPMENT

Share of sales

53%

Creating value for customers through the whole lifecycle of

the building

N 14%

33%

*2017 figures. 2018 figures will be published in the 2018 Sustainability Report in Q22019.

6

KONE ANNUAL REVIEW 2018

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