3 Contents 1 Review 2006 KONE in Brief 4 Year in Brief 6 For Our Shareholders 8 CEO s Review 9 Business Review 11 Personnel 22 Environment 25 Corporate Governance 27 Board of Directors 32 Executive Board 34 Shares and Shareholders 36 Global References 42 2 Financial Statements Board of Directors Report 50 IFRS Financial Statements Consolidated Statement of Income 55 Consolidated Balance Sheet 56 Consolidated Statement of Changes in Equity 58 Consolidated Statement of Cash Flow 59 Notes on the Consolidated Financial Statements 60 Calculation of Key Figures 86 Summary in Figures 87 Board of Directors Dividend Proposal 88 Auditors Report 89 3 pro FORMA COMPARABLE DATA In order to facilitate the evaluation of the financial performance and status of the company, pro forma comparable data for 2005 have been included. Review 2006 with Pro Forma Comparison Figures 90 Consolidated Statement of Income with Pro Forma Comparison Figures 93 Consolidated Balance Sheet with Pro Forma Comparison Figures 94 Consolidated Statement of Cash Flow with Pro Forma Comparison Figures 95 Quarterly Key Figures 96 Summary in Figures investor INFORMATION KONE as an Investment 98 Information for Shareholders 100
4 2 review 2006
6 4 KONE in Brief KONE is one of the world s leading elevator and escalator companies. It provides its customers with industry-leading elevators and escalators and innovative solutions for their maintenance and modernization. KONE also provides maintenance of automatic building doors. In 2006, KONE had annual net sales of EUR 3.6 billion and about 29,000 employees. Its class B shares are listed on the Helsinki Stock Exchange in Finland. Strategy KONE gives a performance edge to its customers with innovative services and solutions. Simultaneously, KONE s products and services are cost-competitive and its processes characterized by globally aligned operational excellence. In 2006, KONE continued to successfully implement its strategy, which was revised early The key development programs in the implementation of the strategy are; increasing the customer focus, broadening and improving the product and service portfolio, improving business processes and productivity, utilizing sourcing power, and strengthening KONE s position in the Asian market. In 2006, sales growth, healthy sales margins, extended product portfolios and improved productivity contributed to strengthening KONE s market position and positive progress in profitability. Customers KONE s most important customer groups are building owners, constructors, and facility management companies. Architects, elevator consultants, development companies, and designers are key parties in the decision-making process regarding elevators and escalators. KONE has approximately 250,000 customers globally, of which the majority are maintenance customers. Customer segments and maintenance contracts vary from one-elevator residential buildings with yearly contracts to large international accounts with long-term performance-based maintenance agreements. Sales, % Sales by market, % New equipment Service Europe, Middle East, Africa (EMEA) Americas Asia-Pacific
7 5 Hyvinkää Head Office, Helsinki Keighley Hattingen Ústí nad Labem Pero Moline, IL McKinney, Texas Torreón Kunshan Chennai KONE is present Head Office Global R&D centers Production units Market Size and KONE s Position The annual size of the market for elevator installation, maintenance, repair and modernization is estimated to exceed EUR 30 billion. The corresponding escalator market is nearly EUR 3 billion, and the market for door service amounts to roughly EUR 5 billion annually. As one of the leading elevator and escalator companies, KONE has production in all major continents. It has operations in all key markets through some 800 service centers worldwide. In Europe, sales correspond to approximately 65 percent of total net sales. The North American sales correspond to approximately 22 percent and the Asia-Pacific sales to 13 percent. However, the importance of Asia-Pacific is continuously increasing. In mature markets such as Europe and North America the modernization market is increasingly becoming more important. The main driver behind this development is safety (regulatory) and the need for upgrading. In emerging markets, the new equipment market is mainly driven by urbanization and economic growth. KONE s share of the global market is approximately 10 percent.
8 6 year In Brief Key Releases A yearly summary of all KONE s releases in 2006 is available on the Internet at 11 May 31 January KONE booked an order to provide all elevators for the old London Stock Exchange Building. The value of the order was approximately EUR 9 million. 28 February KONE and Hewlett-Packard signed a global IT infrastructure agreement. KONE won a major service contract for the London Underground. The value of the contract over the 12-year period will be approximately EUR 195 million. 13 June KONE won a major order for the Vienna International Airport February KONE secured major orders in Italy and Qatar with a combined value of approximately EUR 27 million. 19 April KONE won three orders from the Madrid Metro. The combined value of the contracts was approximately EUR 22 million. 26 April KONE won two orders to deliver all elevators for Beijing s National Stadium, which will host the 2008 Olympic Games. Net Sales and Profit Increased (Pro Forma) KONE s net sales progressed well. Net sales grew by 11 percent, amounting to EUR 3,601 million. Net sales increased in the EMEA region by approximately 8 percent. The corresponding increases in the Americas and Asia-Pacific were 16 percent and 20 percent respectively. Orders increased by 18 percent in 2006 and the order book stood at a record high level of EUR 2,762 million at the end of Operating income was EUR 360 million, or 10 percent of net sales. This is the best result in the company s history KONE distributed a dividend of EUR 0.99 per class A share and 1.00 per class B share from the profit for 2005, and the Board of Directors proposes to the Annual General Meeting that EUR 1.00 per class B share be distributed as a dividend for the year KONE s market capitalization* ) increased from EUR 4,261 million to EUR 5,382 million during Strengthened Management and Continued Progress in Development Programs Changes took place in key managerial posts relating to business process development and IT systems and development of the quality of KONE s solutions and operations from the customer s perspective. Top management and the whole group continued to focus on the development programs, which started to contribute to the strengthening of KONE s market position and positive profitability performance. Acquisition of Mainly Small Service Companies KONE continued its active acquisition policy during the year and strengthened its market position in all key markets. A total of over 20, mainly service companies were acquired. * ) Market capitalization is calculated based on both the unlisted class A and the listed class B shares.
9 7 21 July KONE acquired Evin SAS, an elevator company located in Lille, France. 26 October KONE introduced the world s flattest technology for autowalks. The first KONE InnoTrack TM units will be installed at Amsterdam Airport Schiphol. 18 December Antti Herlin s title was changed into Chairman of the Board of KONE Corporation, and Matti Alahuhta s title to President & CEO of KONE Corporation. 9 October It was announced that KONE s new factory in Mexico would deliver all elevators for the North American markets. 3 November KONE and Marimekko entered into cooperation on elevator car interiors August KONE won a contract to design, supply and install all the elevators on Celebrity Cruises three new cruise ships. 15 September KONE signed a contract with Aker Yards for the design, supply and installation of all the elevators on a mega-cruise ship. The new ship type has been developed under the project name Genesis for Royal Caribbean International (RCL). 28 November KONE Corporation and KMZ Karacharovo Mechanical Factory agreed to withdraw from their plans to set up a joint venture elevator company in Russia. Key Figures pro forma 2005 Change % Sales MEUR 3,601 3, Orders received MEUR 3,116 2, Order book as of 31 December MEUR 2,762 2, Operating income MEUR ) 32 Income before taxes MEUR Net income MEUR Total assets MEUR 2,292 2,145 Basic earnings per share 2) EUR Equity/share 2) EUR Return on equity 2) % Return on capital employed 2) % Total equity/total assets 2) % Gearing 2) % Number of employees as of 31 December 29,321 27,238 1) Excluding MEUR 89,2 provision for the development and restructuring program. 2) The principles of calculating key figures can be found on page 86.
10 8 For our shareholders The year 2006 was a successful one for KONE and its shareholders. KONE s change was systematically carried forward during the year. The stock markets also showed confidence in the company s revised strategy. The performance of KONE s share price reflects the confidence that shareholders have in the company s sharpened strategy and in the progress of the development programs created to fulfil it. During the last year and a half i.e. from the demerger until the present day KONE s market capitalization increased from approximately EUR 2.8 billion to EUR 5.4 billion, and KONE is counted among the most highly valued companies on the Helsinki Stock Exchange. The number of shareholders has increased steadily, and KONE now has almost 14,000 owners. I want to thank the shareholders for their trust. I am very proud of the fact that, during the past year, we made excellent progress in winning orders and especially in increasing our profit in very competitive markets. Our strong order book and earnings ability create a solid platform from which to further develop KONE towards the targets laid out in the strategy. I want to express my heartfelt thanks to the personnel whose work has been integral in changing the company, and to the President & CEO who has successfully piloted it to its present success. Late in the year, a change was made in the titles of our corporate executives, as a result of which the title of CEO, previously used by me, was transferred to the President, Matti Alahuhta. The new practice reflects the nature of our collaboration and the division of tasks that is already in place. Simultaneously, it conveys my own confidence in the future of KONE. January 2007 Antti Herlin Chairman of the Board
11 CEO s Review 9 Two years ago we revised our strategy and initiated significant development programs. We also set our business targets at a clearly higher level. Our achievements in 2006 show that we are on the right track. Our business growth, in terms of both sales and especially orders, outperformed the market growth. Our profitability improvement in the past year surpassed even our own forecasts to some extent. Also our cash flow developed positively. In parallel with these results, we succeeded in making our company more customer-driven and sharper and more effective in terms of product competitiveness. During the year, we strengthened our sales network and sales management, while applying new tools in support of our customer activities. One of our major projects has been the introduction of a globally common customer relationship management system, which we will complete in the spring of We also made rapid progress in the application of e-business solutions. We continued to develop our product and service portfolio. We not only improved the cost competitiveness of our products, but also increased their flexibility, which allowed us to better respond to local market requirements. We also undertook a major redevelopment of our product design, an area in which we accomplished the first results last year. The strengthening of the product portfolio positively influenced our order intake, especially in the Asia-Pacific region and North America, but also in Europe. As well as making new product launches on the equipment markets, we increasingly began to develop new products for Europe s rapidly growing modernization markets. We also made good progress in industrializing the delivery and installation functions within modernization. KONE is known for its innovation. Last year we presented a completely new kind of autowalk solution, the KONE InnoTrack TM. The new technology benefits the customer by making the installation of autowalks easier and more flexible, and more economical in terms of building costs. We demonstrated once again that radical technological innovations are possible even in a rather mature business area. Our logistics development projects also progressed well, and in the future we will be able to better respond to variations in demand. In the service business, we began to streamline our ways of working. In addition, the introduction of a new modular based maintenance method will increase both customer satisfaction and our own productivity.
12 10 CEO s Review In purchasing, the development of our new component category based sourcing method advanced according to plan. We also expanded the responsibilities of our global purchasing team to cover local purchasing in different countries. By developing and centralizing purchasing in this way, we have been able to build successful supplier co-operation - and strengthen our purchasing power. The contribution of the Asia-Pacific region to our order backlog has grown quickly, and will gradually be reflected in the sales figures. I am especially pleased with the strengthening of our position in China and India. Our market position is now substantially better than still two years ago in Asia s fast growing and large markets. As a result of the above-mentioned development programs, KONE is changing in many ways. We apply common global processes whenever this offers economies of scale or better promotes the achievement of quality in our operations. On the other hand, we are striving to deepen our knowledge of the requirements of local markets and to solve the related challenges through a more flexible product offering. I am happy that our employees have enthusiastically taken up these challenges. A well-motivated, committed and competent personnel is our greatest strength! In 2007, our objective is to continue growing faster than the market, while also further improving the profitability of our operations. Our long-term goal is to systematically develop a KONE that will be as strong as possible in terms of both market position and profitability. January 2007 Matti Alahuhta President & CEO
13 business review 11 In 2006, KONE continued to implement the change that was necessitated by the revised strategy. Systematic implementation of development programs started to produce concrete results. KONE continued to strengthen its customer focus and improve its product and service offering, which took significant steps forward in all market areas. Extensive measures to raise productivity continued. Among others, the industrialization of modernization, the renewal of a module-based maintenance method and efficient route capacity planning for field operations started to show first results. KONE also continued to optimize its logistics network and centralize its sourcing. Elevator and Escalator Markets Growing in China The global elevator and escalator market has changed significantly in the 21st century due to strong growth in China. Over half of the world s elevators and escalators are currently located in Europe, nearly 20 percent in the U.S. and the rest in Asia and elsewhere in the world. However, it is Asia where new equipment sales are heavily concentrated, with more than 25 percent of new elevators and half of new escalators being installed in China. On the other hand, the growth potential for repairs and modernizations is concentrated in Europe and North America. Urbanization and economic growth are continuing to increase the demand for new elevators and escalators and the related service in Asia, while economic growth and the need to modernize equipment and cater for aging populations is driving demand along with economic growth in Europe and North America. The industry is also affected by trends towards more efficient space and energy utilization, the use of new technologies, the requirement for better, more versatile services and the tightening of safety norms and regulations. Residential Construction and Modernization were Drivers of Demand in the EMEA Region In Europe, the Middle East and Africa (EMEA), the business environment continued to be favorable. KONE was successful despite the tough competition. In Europe, the residential market was the main driver of Europe s new equipment business. Although commercial construction still progressed at a fairly lively rate in the U.K., it was residential construction that was the dominating factor in most European countries. In the Southern European market, demand slowed down towards the end of the year. The Middle East market continued to be buoyant due to energetic construction growth in most segments. The tourism industry is fuelling growth in demand for hotel and entertainment building projects, while infrastructure is being improved through projects such as airport extensions and the construction of a light train system in Dubai. As in Dubai s case, Qatar, Saudi Arabia and Abu Dhabi were also enjoying strong construction activity in most segments in 2006.
14 12 Increased Focus on Design Options To better fulfill customer needs, KONE introduced a new product concept in Europe. The key idea is to provide customers with a wider range of alternatives in choosing their elevator car interiors and performance features. The preferred offerings consist of a broad set of harmonized packages of different options. By predefining the product packages, KONE aims to provide the customer with greater flexibility and a shorter response time. The preferred packages have been applied to the new release of the machine-room-less elevator, KONE MonoSpace. Improved customization is also offered by the KONE Deco solution, which makes it possible to decorate elevator car interiors with different patterns. As part of this solution, the designs of the Finnish design company, Marimekko, were added to the decoration portfolio in 2006.
15 business review 13 Russia also exhibited healthy market growth. While construction activity continued to accelerate in all construction segments, it was the retail market that was the main driver of demand. There was harsh price competition in the market for new elevators and escalators in all market areas. In addition, increasing escalator imports from China continued to press down the market prices of standard equipment in the EMEA region. The maintenance market progressed well, although tough price competition continued. It is estimated that around two-thirds of the elevators in service in Europe are over 20 years old, which increases the need for both maintenance and modernization. The European Safety Norms for Existing Lifts (SNEL) continued to create a favorable environment for the modernization business. Modernization orders continued to increase particularly in countries that have adopted SNEL in their legislation. The rapidly growing modernization business is increasingly attracting the attention of both global and local players. For KONE, the modernization business was active especially in France, the U.K., Germany and the Nordic countries. In 2006, KONE won several major contracts from the public transportation segment. The most significant orders concerned a modernization of the escalators and walkways in the Roman metro system, several major projects for the Madrid Metro, an order for the Vienna International Airport and a service contract for the London Underground. KONE also signed a contract to supply all elevators for the old London Stock Exchange Building and won a major order in the retail sector from Tesco PLC to supply ramps and elevators for stores across the U.K. KONE also won a major contract to design, supply and install all the elevators on Celebrity Cruises three new cruise ships, and signed a contract with Aker Yards for the design, supply and installation of all the elevators on a mega-cruise ship. In the Middle East, KONE products were delivered to the 300-meter-high Doha Sports City Tower, which was the symbolic landmark of the 2006 Asian Games. Good Order Intake Growth Continued in the New Equipment Business in North America In North America, the new equipment and modernization markets continued to be strong. The market for hotel and leisure building solutions was especially active, whereas growth in the U.S. residential segment slowed down towards the end of the year. The development efforts initiated by KONE in 2005 showed concrete results by boosting sales of new equipment. The success of the KONE extended machine-room-less (MRL) elevators and the encouraging escalator demand in the public transportation segment resulted in good order intake growth. The product offering for the North American machineroom-less market has been systematically expanded, and KONE s MRL solutions now cover most hydraulic elevator segments. The modernization business advanced well as a result of the additional solutions developed and released. In particular, the public transportation and high-rise building sectors showed increasing interest in KONE s new modernization solutions.
16 14 business review Further information on KONE s financial performance: Financial Statements, page 50 Pro Forma Comparable Data, page 90 KONE s Position Continued to Strengthen in the Asia-Pacific Region The Asia-Pacific region continued to develop well, with most markets maintaining a high level of activity. The market for new equipment continued to be good, especially in China, India and Australia. The Southeastern Asian markets of Malaysia, Singapore and Vietnam also showed positive progress. Rapid urbanization and economic growth were the main factors affecting the new equipment and modernization markets in the region. The Chinese market was characterized by increased investment in urban real estate. The demand for new equipment was strong, especially in the residential sector which constitutes approximately two-thirds of the construction segment. KONE was able to further strengthen its market position in the residential segment due to its new elevator offering customized for Chinese residential buildings. The central government made several consecutive controlling actions particularly to guide residential construction towards more affordable housing for people moving into cities, which temporarily slowed down growth somewhat. The Indian market developed well. Although the residential building sector remained the engine of growth, all segments performed well. KONE continued to enjoy good order intake growth in India. Despite the fact that the service business is still young in the growing Asian markets, demand is expanding rapidly in line with new equipment installation. The Australian market progressed steadily. As a result of the active demand for modernizations, KONE succeeded in winning several significant modernization contracts. Market activity was also high for new equipment in the office and commercial segments and, contrary to expectations, did not slow down significantly in the residential segment. In 2006, KONE won the order for all elevators for the National Stadium in Beijing, which will host the 2008 Olympic Games. The order follows KONE s previous successes in China, including equipment deliveries for the new terminal at the Beijing Capital Airport, the Capital Museum and the National Grand Theater. A Year of Innovations During 2006, several product improvement initiatives were turned into concrete solutions. KONE s order intake was boosted by the positive reception given to its renewed offering for the Chinese market, the success of its extended machineroom-less range in the U.S. and the improved product portfolio in Europe. KONE also made several gains as a result of the increased focus on design in all business areas. KONE has continuously improved its service business offerings in order to provide the best possible service to its customers throughout the life cycle of the equipment. In 2006, KONE continued to implement new service concepts and started the rollout of a renewed global maintenance method. In 2006, KONE also introduced new internet-based tools to support its business operations.
17 15 Demand for Energy-efficient Solutions Growing in China In 2006, KONE won an order to deliver new KONE MonoSpace and MiniSpace elevators to the Water Front, the largest residential community in Qin Huangdao. The coastal city with over 2.6 million residents is located about 300 kilometers east of Beijing. The buildings in the area are designed to save 50 percent energy and incorporate the latest housing features and technology. KONE s solutions offered energy efficiency and the most environmentally-friendly design in line with the project s themes of energy saving, safety, efficiency, accessibility and sustainability. This was an especially important aspect now that the State Construction Commission of China has issued a Construction Energy-saving Management Rule, which requires real estate developers to disclose their residential energy-savings index in all future projects. KONE will continue to scan local product and service requirements to create improved solutions for local needs. In China, the demand for energy efficiency is growing alongside the requirement for space efficiency.
18 16 New Revolutionary Autowalk: KONE InnoTrack TM The development of KONE s new autowalk solution originated from interviews of some of KONE s leading customers regarding people flows in the future. After evaluating the customer views, KONE started to develop a revolutionary new autowalk solution together with one of its public transportation customers, Amsterdam Airport Schiphol. One of the key requirements set for the product was adjustability to a changing environment. In September 2006, KONE released the new KONE InnoTrack autowalk, whose name derives from its key features. Inno stands for innovation, the key element and driver of the new autowalk, while track stands for the new modular design of the truss, which differs from the traditional one-piece rigid format. The key features of the new product culminate in its modular structure, with no need for a pit, which enables its easy installation, relocation and modification.
19 business review 17 New Flat Autowalk Technology Introduced in Europe The most significant innovation in 2006 was new autowalk technology which sets a totally new standard for escalator solutions. The KONE InnoTrack technology makes it considerably easier to design locations for and install autowalks. Due to the innovative pallet return mechanism and a new kind of motor solution, the KONE InnoTrack autowalk can be installed on a finished floor without any need for a pit. Sale of the new solution will commence in In the European new equipment market, KONE released a range of preferred offerings, which apply to the new release of the KONE MonoSpace elevators. These predefined product packages offer customers added value by providing more flexibility, improved performance features (e.g. a destination control system) and shorter delivery times. They include a broad range of visual options for elevator car interiors, ranging from wall decoration to lighting. A roll out of an elevator car decoration solution KONE Deco started in Europe in The solutions range from predefined solutions to fully customized solutions and can be applied to both new and existing elevators. The KONE Deco solution comes with full service, from decoration planning to material installation and replacement. Following the KONE Deco release, KONE and the Finnish design company, Marimekko, signed an agreement to start cooperation under license, concerning the decoration of elevator car interiors. Marimekko s designs are now part of the KONE Deco solution, offering high-quality design alternatives to supplement other KONE Deco designs. New legislation requirements based on the European Safety Norms for Existing Lifts (SNEL) continued to create lot of demand for modernizations in Europe. During 2006, KONE developed and released several modernization solutions, including the new innovative KONE ReGenerate modernization package. This solution covers the hoisting, electrification and signalization of elevators, and is optimally suited to old residential buildings. The sale of KONE MaxiSpace elevators was extended to most European countries. This modernization solution, which in many cases enables elevator cabins that are as much as one-third larger than traditional cabins to be installed in the same hoistway space, strengthens KONE s portfolio of full replacement solutions. Machine-room-less Offering Expanded in North America In North America, KONE extended its machine-room-less KONE MonoSpace product family (known as KONE EcoSpace in the U.S.) to offer more space efficiency and energy savings. In 2006, further performance improvements, such as the capability for bigger loads, were released. KONE s MRL product offering for the North American market now covers most hydraulic elevator segments. KONE also developed elevator and escalator modernization solutions tailored for the North American market.
20 18 business review Space-efficient Elevator Solution a Success in Asia In the Asian market, KONE continued to increase the flexibility of its product offerings and the coverage of visual options. The new KONE MiniSpace elevator, which is customized for the Chinese market, was well-received especially in the residential segment. The new elevator is based on the KONE MonoSpace machine-room-less technology platform, but it has a small machine room. Due to the space-efficient features, the KONE MiniSpace elevator is especially wellsuited to high-rise office and residential buildings. Both the new KONE Mini- Space elevator and a new MonoSpace elevator released for the Chinese market in 2006 offer a broader range of visual alternatives, space efficiency and flexibility. In 2006, the first escalator product from KONE s subsidiary KONE TELC Industries Co., Ltd was released to most Asian markets, including India, and to the South African and European markets. The new escalator, called KONE TravelMaster, is targeted at commercial use in shopping and entertainment centers and in other commercial buildings. KONE also introduced another escalator product, which was released for sale in all market areas. The KONE TransitMaster escalator is based on KONE s proven heavy-duty escalator technology, which has been developed to further optimize engineering, manufacturing, installation and maintenance processes. Customer Focus Supported by New Service Improvements The service concepts, KONE Proximity and KONE Care for Life, were further developed in KONE Proximity is a real-time service concept, which supports customer focus by improving the access to and amount of real-time customer information and communication. The KONE Care for Life concept focuses on long-term, customer-specific needs covering the whole life cycle of the equipment. KONE aims to be the preferred partner of its customers, fulfilling their needs throughout the equipment s entire life cycle. In 2006, KONE Proximity was supported by the rollout of a renewed preventive maintenance method based on eight maintenance modules which have been harmonized in KONE s maintenance operations globally. The new maintenance method was developed to improve end user safety, and also to ensure that maintenance methods are similar in all market areas. The new maintenance method has been implemented in most KONE countries globally. Following a pilot project in 2005, a customer extranet service, KONE eoptimum, was introduced globally to provide real-time information relating to callout and equipment status, as well as reports related to performance, maintenance, repairs and invoicing. The new web-based solution offers customers easy access to a centralized source of customer-specific information and improves customer communication. KONE continued to implement the global KONE Care for Life concept to help customers identify accessibility, safety, aesthetics and performance opportunities. The tools of the KONE Care for Life concept make it possible to analyze equipment with respect to potential safety risks, usability problems, technological obsolescence and quality of appearance.
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