Earnings Call: Q2 2021

Jul 20, 2021

Good afternoon, and welcome to KONE's second quarter earnings call. My name is Natalia Valtasaari, and I'm Head of Investor Relations here at KONE. I'm joined today by our President and CEO, Henrik Ehrnrooth, and our CFO, Ilkka Hara. Henrik will start by talking to you about the second quarter highlights, both financial and business, after which Ilkka will go into a bit more detail on the financials. Then Henrik will end by going into the guidance and business outlook as usual before we take your questions. With that, Henrik, please. Thank you, Natalia. A warm welcome also on my behalf. I would say, again, a pleasure to present our results to you because we have some very good news to share with you today. We had a very good second quarter at KONE. We start with some highlights. Our financial performance was very strong and strong across the board. Ilkka will talk about that more, but was really both in orders and sales across businesses and regions, very good. We could also see that the market recovery solidified and a really good recovery in many parts of the world. There is a small drawback, though, of this recovering economy overall, our recovering markets, and that's clearly what we can see the impact on input costs and on logistics and so forth, but we'll deal with that later. The good news is that we have been able to start to improve our pricing to compensate for this. We are definitely going in the right direction here. Of the business highlights, we like to always talk about our strategic targets, and we have updates on 2 of them related to our employee engagement and customer loyalty. We had results for both of our annual surveys there in the quarter, and the results were again very good for both. I'll talk more about those as well. Overall, I must say I'm very pleased with our second quarter performance and overall how we operated throughout the period. If you go into the numbers, I talked about growth and also we had margin expansion. Orders received grew 17.2% and reached EUR 2.4 billion. Very strong orders received growth really, as I said, across businesses, across regions. Very happy about that. Very solid order book at €8.3 billion. Our sales grew by 12.7%. Here, very broad-based good growth, €2.8 billion. Perhaps the highlight in our sales growth was the very strong growth in our maintenance business. As you remember, it was very resilient throughout last year. Now it grew well because we grew both our maintenance base, we grew repairs very well, and also value-added services performed very well. How we were compared to 2019 here was also very strong. Overall, very good there. Operating income, EUR 367 million compared to EUR 315 million, so good growth there. Our adjusted EBIT grew from EUR 325 million to EUR 374 million, and adjusted EBIT improved by half a percentage point to 13.3%. Also cash flow, which last year was really exceptional, this EUR 592 million. I would say the EUR 513 million we had now was outstanding. 513 million of cash flow from operations compared to an EBIT of EUR 374 is just a very good number. Of course, earnings per share as well, 17.6% growth to EUR 0.55. Overall, I would say great numbers across the board on Q2. As we always say, 1 quarter is a very short period of time. Now we have also half a year to look at, and we look at the first half year as a totality, very robust. Orders received almost EUR 4.5 billion, growth of 9.3%. Also, sales growth at EUR 5.1 billion, 11% growth, also here, very good. Operating income from EUR 530 million to EUR 616 million, it's a 20% improvement, and adjusted EBIT from EUR 530 million to EUR 624 million, and a 0.9% improvement in adjusted EBIT margin. Cash flow at the extremely good level of last year of EUR 939 million. Very good, and earnings per share, EUR 0.92. I would say that the strong performance we have had in what I would say is a very changing and challenging environment has been good. The way KONE's teams, all of our employees, have dealt with a very changing situation, dealing with challenges as they come has just been exemplary. I could not be more proud of the team. Everyone has done just a phenomenal job, and of course, a huge thanks to everyone for that. That is the environment to live in today, but I think we are dealing with the environment quite well, or actually very well. In terms of business highlights, as I mentioned, our first strategic target is for KONE to be a great place to work. We did our annual employee engagement survey in the months of May and June this year. Results were very strong. Employee engagement clearly above Circle of High Performance benchmark norms. We came slightly down from last year, but last year we had a real big jump, and then slightly down, but engagement at a very good level. The commitment to stay at KONE and commitment to go the extra mile, all of those numbers were very good. We have a good situation here. We also did our annual customer loyalty survey in the beginning of summer. Good improvement in all businesses. Strongest improvement, our new equipment business. We had broad-based improvement here as well. What is it that customers are saying? They very much appreciate our products, our product quality, KONE as a partner, our reliability. All of those were definitely strong points. Clearly, we have areas to improve. We look at this very much in detail in a very self-critical mode. It's clear we can communicate better with our customers and improve our productivity that way. Results, again, took us in the right direction. That is KONE's development. Next, I'll go to overall market development, how the external markets developed. Let me start with the same chart we have had now for a number of quarters, where we look at elevator usage in a few markets. As I mentioned before, we look at this because this is a good indicator of maintenance activity. Remember, we started to look at this data beginning of the pandemic. We looked at it since. We can see, of course, that activity has increased and usage increased a lot in most markets since the beginning of the year. Except for some markets in Southeast Asia, like Singapore, with new lockdowns slightly down after having recovered quite well. In Europe, North America, strong recovery. We don't have China here, but of course, that's really at a very normalized level. What is also interesting when we look at this in more detail on a segmental basis is that we know the residential has been strong throughout. Also what has been very strong recovery has been in hotel, leisure, in also shopping centers, so retail. We can see that people are traveling domestically. More domestic tourism rather than maybe cross-border tourism, and also back to shopping centers, so forth. Office is still lagging, but perhaps in North America, Europe, we expect that to start coming back probably sometime in September. This tells us a lot, and we can also see, as you saw from our and what you will hear from Ilkka, that our maintenance business very much at normalized level. This is something we do track, and we have roughly 100,000 connected units behind this data, so I think it's quite meaningful. About new equipment markets. As I mentioned, good recovery, and actually better recovery than we would have expected beginning of the year. North America, clear growth. Actually, North America market about that same level for the first half as the year before, and strong recovery in Q2. Of course, United States came quite a lot down in Q2 last year, but now recovered nicely. Europe, Middle East, and Africa, slight recovery. We have to remember that Central and North Europe actually had a very small impact last year. Strong growth in Asia-Pacific. China from an already good level last year, when markets recovered strongly, and rest of Asia-Pacific, strong market recovery from, of course, a low level last year. What is interesting to follow is that, for example, India, where the COVID situation continues to be very challenging, markets are recovering strongly. My read of this is that most markets, economies are learning how to live with this pandemic, and we can see the strong underlying demand being in the markets, and therefore also recovering. Service markets, overall maintenance markets recovering. As I mentioned, they were really starting to normalize. Not all segments, but overall, the good level. Modernization markets recovered strongly. Strong growth in North America. Clear growth also in Europe, Middle East, and Africa, and continued strong growth in Asia-Pacific. Overall, good markets there. If you look a little bit more in detail at the important China market, in number of units ordered, market continued to grow significantly year-over-year. As you remember, market already last year was good, recovered strongly, and continued to grow from that. Competition in China is intense. There is no question about that. However, given the cost pressures that we have seen throughout the year, we are starting to see that prices are starting to improve, and the direction is clear and is the right one. They are improving. Overall macro momentum in China as we know is solid, although perhaps moderating. In the real estate business, investments and sales remain strong. Perhaps the biggest challenge for developers is the overall financing environment. If you look at the KPIs we've shown here, real estate investment up well year-over-year, and clearly up CAGR over 2019, and same thing with sales volumes, and prices also improving. Overall, a good situation there. That's why we expect Chinese markets to remain very solid also rest of the year. Now, as I mentioned that this good recovery we've seen in the world economy, good recovery seen in our markets, that the drawback it has had is that material prices, steel, copper, and the like, are at high levels. They have now stabilized, but at high level. Of course, as everyone knows that every industrial company involved in global businesses, and particularly deploying advanced electronic components have had challenges with component availability and component prices, and also sea freight costs have increased, I would say dramatically. Electronic component availability will continue to be an issue throughout this year and probably next year. For KONE, the situation is improving clearly towards the end of the year as the result of actions we are taking ourselves. Broadening our supply base there through design changes. We are working on that, and that's going definitely in a good direction. We also expect that should start easing beginning of next year. Sea freight probably sometimes beginning of next year should start easing. They are probably more temporary. The good news as well is that the pricing environment has started to improve overall and of course, that's something that we are looking to capitalize on. Perhaps the most important factor though, is that we have constantly been able to deliver and delivering on our customer promises, and that's of course the focus we have that costs have been higher, but for us focus is to fulfill our promises, which we have been doing. With that, I will hand over to Ilkka to dive a little bit deeper into our financial performance. Thank you, Henrik, also warm welcome on my behalf to this Second Quarter results webcast. As you already saw, I had some good news to share when it comes to our performance in Second Quarter. I'll start with orders received. Our orders received for the quarter were EUR 2,411 million, which is a strong growth of 16.2% on a reported basis and on a comparable basis, 17.2%. Very good performance there. What I'm pleased about is the fact that we saw strong performance in all businesses as well as in all geographies behind these numbers. If we look at particular China, the large market there, and our orders received development, we saw both in volume as well as in monetary value, our orders received growing significantly. Pricing contributed slightly positively while mix was slightly negative in orders received in China, but overall significant growth continued there. Henrik talked already about pricing, which started to improve during the second quarter. Despite that, the margin of our orders received declined slightly due to the increase in costs that we've seen, especially driven by the electronic components and raw materials here. To sales. Our sales grew 11%, reaching EUR 2.8 billion. Again, in sales, what I'm pleased about is the broad-based development on a positive direction. From a business line perspective, we saw the highest growth in the modernization business growing 18.8%. Also, our new equipment grew 12%. Maybe one of the highlights for this quarter's results is the maintenance growth at 11.7%. We saw higher than normal growth in the contract revenue, the basic fee we get and also the discretionary part grew strongly. The recovery is happening also visible in the data that Henrik shared earlier about the usage. On top of that, we continue to see an increasing impact from our value-added services, especially the 24/7, that continues to gain momentum as we go forward. Geographically, we saw growth in Americas 6.7%. EMEA grew 12.9% and APAC grew 14.9%, driven by the very strong performance that we continue to see in China in our deliveries. Moving to adjusted EBIT, which for the quarter was EUR 374 million, growing 15.2%, also our profitability improved from 12.8% to 13.3%. We saw positive impact from the improved pricing that we've had in our orders received earlier, now being delivered and impacting our adjusted EBIT. Due to the strong performance on sales, fixed cost absorption was very good. Due to the environment, we also continue to see somewhat lower than normal discretionary spend at KONE. With those, we were then able to counter the impact of rising costs that we saw in Q2 as highlighted already earlier. To cash flow, which continued to be on a very strong level, reaching EUR 513 million in the quarter. There, improved operating income contributed positively, also networking capital continued to be developing positively in the quarter. Overall, very good performance on cash flow for the whole business. With that, I'll hand over back to Henrik to talk about market and business outlook for the remainder of the year. Thank you, Ilkka. Let me wrap up with our outlook. Starting with market outlook and for new equipment, here we continue to see a good recovery. China new equipment market expected to grow clearly compared to 2020. We have to remember that 2020 was already a good year, given the very strong recovery we saw in Q2, Q3, and Q4 last year. Rest of the world markets also expected to grow significantly outside China and Asia Pacific. North America, also a good recovery, and then some recovery also in Middle East, European, East, and Africa. We have to remember, for example, Central and North Europe was pretty good throughout last year. Maintenance activity is normalizing. As Ilkka was talking about, we can see it also in our business, but overall the markets are expected to grow clearly in Asia Pacific and continuous slight growth in other regions. Good recovery of modernization markets across all areas. Of course, strongest growth in Asia Pacific. Overall, a good market outlook situation for the second half. Our outlook, we have now 6 months behind us, we specified our outlook a bit. Expect now sales to be in the range of 4%-6%, was previous 2%-6% in comparable currencies. Adjusted EBIT margin, we expect that now to be 12.4%-13%, compared to 12.4%-13.2% previously. Of course, assumes that exchange rates stay at this level. If exchange rates stay at this level, there will be minimal impact from currencies compared to previous year. We have a number of good things that are driving our performance, as we could see in Q2. Our competitiveness is in good shape. We have a solid order book, a maintenance base as a result. We have had a continuous good improvement in our quality and productivity. With that, we've been able to already offset a bunch of the headwinds that we have seen. What is impacting our result? We can see that the global supply situation I was talking about is having an impact. We expect that the increased component logistics cost of various raw material and other component costs are going up. Full year impact about EUR 175 million. As Ilkka mentioned, clearly higher than what we had expected before. As I mentioned, we expect that the electronic components, given the actions we're taking, should start easing towards the end of this year and logistics start easing next year. They are more perhaps temporary in nature. Despite this, we continue to invest strongly in our capability to sell and deliver digital service and solutions because we see good growth here. I think we are really leading the market here, and we want to continue to do that when we're bringing new service and solutions onto the market. Again, as Ilkka mentioned, the growth we had in the quarter in our KONE 24/7 Connected Services was excellent. Continue to build momentum there. In summary, very strong financial performance across the board. I would say that we are addressing the increasing costs from a position of strength. That is the environment, but we are dealing with it. The momentum in our value-added services continues to improve, and we had very good sales growth and very good performance there. Overall, I must say that I'm very pleased with the performance of the second quarter and how our team overall have been dealing with the changing environment that we see in the market. With that, we are ready to go over to questions. Operator, you can take questions from the lines now. Our first question comes from Jeff Sprague. Up for Yes. Thank you. Good day, everyone. Jeff here. Two questions from me. First, just on China. You mentioned some of the- Jeff, can I interrupt you? Sorry. Jeff, can you hear us? We can hear you very faintly. Yes. Technicians here, we could hear the others also very faintly. Can we try to see if we can fix the line? Is that any better? This is perfect. Now it's much better. That's better? Yeah. Okay, great. Yes, thank you for interrupting then. Two questions. First, on China, right? We're seeing a number of mixed signals. We saw developers are being required to disclose their commercial paper balance, which would suggest there's some restrictions. Then on the flip side, the reserve ratio requirements are going down, which suggests stimulus, right? It seems like there's really a number of mixed signals from the government about what it wants to happen or what it sees happening economically. I just wonder if you could elaborate a little bit more on really the current state of affairs on the ground in China as a 1st question. Then the 2nd question is just on modernization in general and perhaps some of the discretionary maintenance. I would imagine there's a fair amount of pent-up activity, given what happened last year. Is there any way you could size or put in perspective that pent-up activity, how long it might take to meet that demand, and what your visibility is there? Thank you very much. Ilkka, why don't you take the financing situation in China? I'll take the other part, yeah maintenance part. Well, I guess, if I look at the overall China market and look at the context where we are there, we've seen, from an overall perspective, the liquidity situation to be tightening towards the developer customers. The overall market has then been a bit separate, I think for these developers, clearly, one of the targets for the government has been that they want to control the market and continue to see healthy development there. We've also seen regulation there, such as the pilot program with three red lines policy, aiming to improve the credit worthiness of the developer base. We've then lately, also talked about how and what to disclose on the balance sheet. I think from our perspective, that has not changed. It's been tight for quite some time. Naturally, we talk about pricing as a negotiation point, but also then also the payment terms are a negotiation point always. We've seen actually, and so far been able to see quite a good development in our payment terms, and they remained roughly stable throughout the last quarter. I think that's the situation from the overall market and our perspective. If I go to this modernization discretionary activity, clearly there's probably some pent-up demand in some markets that there were a lot of, for example, the residential side in Europe, a lot of modernizations that didn't happen as housing associations didn't have their meetings to approve the budget, or people didn't want jobs to be done in their houses while they were living there and working there as well. There's probably some pent-up demand. However, if we look at the fundamental demand in the market, it was growing well before the pandemic hit, then it was muted, and now we're coming back. Probably some pent-up demand, but also fundamental growth is what we believe that there is. We believe that when companies start to bring people back to offices, the need for good offices is just very important. That's how you attract people back, and at least our surveys and studies indicate that that's what companies want to do. We believe there will be good activity there to make sure the offices are attractive, and our residential-side usage has been high. All that may be some pent-up demand, but I would say still good growth is expected going forward. Thank you very much. Thanks, Jeff. Our next question comes from Andre Kukhnin of Credit Suisse. Good afternoon. Thank you very much for taking my questions. I hope you can hear me okay. Yep. Great. Can I start with one kind of going back to basics kind of question and talk a bit about your relationship of the order backlog versus revenues? In the last couple of years, we've had this situation where we didn't really see much backlog growth, but it didn't stop your revenues from growing and the new equipment, specifically within that. Just wanted to get a sense on how you view the backlog rolling out and whether anything has changed in the last couple of years that maybe made conversion faster so there are more orders that are delivered as you go so that they don't make it into the backlog. Could we start with that, please? Well, maybe I'll start- Yeah We've seen somewhat increasing rotation in our order backlog due to China market being faster and faster in the last, I would say, few years. Obviously from last year's perspective, also the market environment impacted the order book rotation somewhat. We saw book to bill being a little bit less than 1 during the 2nd half of last year due to the strong deliveries. Now for the last couple of quarters, the order book actually quarter on quarter has been growing. I wouldn't say that there's been a big change, but those are the dynamics behind it. Perhaps if you think about in China, one of the ways the developers are improving their financial situation is improving their lead times, how long they have things in work in progress. That has really played into our favor because we are very quick from order to delivery, and that's a important competitive driver in China today. That has had maybe one of the drivers, but perhaps slightly faster, but no, as Ilkka mentioned, no dramatic changes. Got it. Thank you. That's helpful. Could I ask a question on pricing? You mentioned it quite a few times on the call. It sounds like it's new equipment oriented and quite China focused, but could you tell us whether that is the case or is it broader than that geographically or by sort of categories? Could you give us any idea on the size? We've got a whole bunch of other kind of construction space companies talking about 2%-3% price increases. Is that a reasonable ballpark? I think we mentioned that the pricing environment has improved, and we have slightly been able to improve our prices. We haven't talked about any specific numbers on that. It's not only China. It's also Europe and North America. Clearly, it's impacting all businesses. Of course, the objective is both, for example, modernization, new equipment and spare parts and things like that. Of course, the objective is in all areas. The improvement is slight, but our message is clear that we believe the direction is now clear here. Got it. Thank you. If I may, last one on raw materials. I know it's early to think about 2022, but could you give any indication, assuming obviously no change in spots from here, on what that headwind would amount to from a raw materials perspective, given that you've just moved the estimates for 2021? First of all, on raw materials, I would say raw materials, as we talked about the electronic components as well as logistics, all of that is included in the updated EUR 175 million headwind that we see for this year. That's clearly up from the, in a conjunction of our Q1 results, we said EUR 100 million, most of that increase actually is coming from the electronic components and logistics. Those two components we expect, as Henrik talked about, to be more temporary in nature. Just looking at the raw material part of it, given how the comparison works, we do expect to have a headwind to 2022, especially in the beginning, Q1, Q2, where we saw less of that impact. Got it. Thank you very much for your time. Thank you. Our next question comes from Guillermo Peigneux of UBS. Hi. Good afternoon. It's Guillermo Peigneux from UBS. I want to labor, actually, on a follow-up on the last 2 questions. First, I think on your outlook, you say China significantly up during the first half and then clearly up for the second half. Could that mean that in the end there's no growth in China for your second half or for the outlook over years? This is when you say clearly up. I just wonder about the second half growth outlook for the China market in your view. Let me take that. The second one. Guille, we take that first. Yeah We take that. Yeah, sure. We can go to the second question. You have to remember how the China market developed last year. First quarter was clearly impacted by pandemic. Second quarter started to recover, very strong recovery and actually strong growth year-over-year in Q3 and Q4. The comparison point second half is clearly different than it was for the first half in China. I think our message is that we expect markets to be really solid in China for the rest of this year. Thank you. Because it changes from significant to clearly for the final year, I was wondering whether that means that growth will be a lot more difficult in the second half. Well, probably growth rate. Yeah will be lower in the second half, but the comparison point is also much higher. Thank you. That was the clarification. Okay I was looking for. Second is when it comes to your margin commentary about what's coming into the backlog at the moment, I wonder, again, on the previous question, whether you could kind of pinpoint here with the backlog in hand that you do have for delivery next year, whether we could see already that that level is below current level. I'll take it. Yeah. As we said already, now in Q1 and Q2, it is slightly lower, the orders that we booked there. When you look at the total order book, mix plays a important role there. It's not that good of a proxy to look at comparison point there. Clearly now in Q2, we start to see prices improving, countering some of the increased headwinds from the cost. That's clearly the right direction. Thank you. Thank you. Our next question comes from Klas Bergelind of Citi. Yes. Hi, Henrik and Ilkka. Klas at Citi. I want to come back to cost again. Obviously material increase, but driven by temporary factors. Thinking about 2022, I think you, Ilkka, gave sort of an indication at the last conference call of what it could be for next year, some EUR 30 million-EUR 35 million for the first half. Now we've had steel costs going up sharply in the second quarter. Steel in Europe is continuing to trend higher, and given the hedging, will that be a bigger number for 2022? I will start there. I'm not sure I gave an exact number on the last call for 2022. I said that there's a headwind there. It is somewhat bigger now due to the development and mostly impacting then first half next year due to comparison point. If I ask it like this instead, the EUR 175, it feels like raw materials for this year is a small part of that EUR 25 million, EUR 30 million I heard when I spoke with Natalia before. How will that grow, do you think? Is it EUR 35, EUR 50? Is there anything you can say at the current levels and giving your hedges, or are we just going to get it will be a bigger headwind? Just so we have some sort of quantification. Well, naturally, I mean, it's also reality is that at this point of the year, there's still many moving parts before we get to 2022. Orders to come in and also then where and how we deliver those next year. If I think about the 175 now. The biggest change from 100 to 175 during the quarter was due to the electronic components as well as the logistics. Raw materials continued to be on a high level. On the raw materials, the impact is more towards the first half, but I wouldn't go into too much detail yet. We'll update as we get closer to 2022 on that one. I think it's also important to think about the context that all of these that we're talking about, that if you look at all the costs, volatility has been very high. Situations have changed very rapidly. I think now, of course, we have new contractual rates for sea freight and things like that for Q3 and partly Q4. What it's going to be next year, I think that's still open and still raw materials. It's just too early to say, and only thing we know is that all these situations have changed rapidly. Direction, of course, is something we don't know and if it will continue doing that. That is just the context of the environment. The context of the environment we all have to live in business, and as I said, I think we've done a really good job in dealing with those rapidly changing situations. Very good. My final one is on services. Is there any way, Henrik, you can try and back out, I know this is difficult, but how much was pent-up demand as we open up versus more acceptance of the digital offering, whether that offering saw even more acceptance this quarter? The levels we see quarter-on-quarter, particularly on the maintenance side, was quite a big surprise, I think, for everyone. Is it definitely more than just pent-up? I think Ilkka talked about it already, that it was actually a combination. If we look at discretionary activity was clearly above 2019 levels as well. Maybe there was some pent-up, but the main thing is that we had a more normalized activity. We had all of the parts in maintenance grew, so good growth in a maintenance base overall. Very good growth in our digital services, and pricing continued to be very good there as well, which is important. We continue to sell very well our digital services at good prices. Then also good repair activity. In repairs, maybe there was some pent-up demand, but it really shows that market is coming back here. You have to remember that last year, we still had, despite the environment, we had a couple of percent growth in our maintenance business. It wasn't a slump. It was just a little bit lower, very resilient, and now we kind of clawed back much of that. Thank you. Thank you. Our next question comes from Rizk Maidi of Jefferies. Yes. Hi. Thank you for taking my questions. I'm just going to go back to the cost again. Can you please just help us split out that EUR 175 million between what is pure raw materials versus the other components, logistics, et cetera? Well, I would say most of the increase from EUR 100-EUR 175 is coming from logistics and electronic components, which is roughly, I would split that maybe to half. Then a little bit more than EUR 100 million is then the raw material impact out of that. That's roughly the split. As I always say that we don't really buy raw materials. What we purchase is components for our equipment. Those components naturally have a tight connection to raw materials. We try to give you a picture of the impact of those changes. It's also a bit of an estimate just to provide transparency. Okay, thanks. Just the number seems to be way higher than what we've had during the last inflation environment of 2017, 2018. Is there anything that has changed in your relationship with your component suppliers? I understand that most of the direct material cost is through components, or is it essentially those logistics, electronics, et cetera, that is driving the bill higher this time around? I think our supply chain is fundamentally similar to what is back then. The difference is that I don't think we've seen for decades a situation where all costs in a synchronized way would go up so much. That then it was more certain materials that were going up, and now we're seeing it across the board. That's perhaps the difference between now and going back a few years. Okay, thank you. The second one is just a clarification, really. What we're hearing from some of your competitors is three red lines policy has so far not had any big impact on the market demand, at least. Some of your competitors are seeing tougher pricing but also different payment terms. I think Ilkka touched on this a bit earlier. Can you just elaborate on whether you've seen something similar at all? I always say that when we talk about negotiations with customers, pricing is one component. You have the commercial terms, including payment terms there as well. We've seen that our developer customers have faced liquidity challenges for now a number of quarters. Obviously it's even tighter negotiation on the payment terms. As I said, so far we've been able to maintain good payment terms and they haven't changed overall. I think that's positive development from our perspective, but the pressure continues to be tightening there. Thank you. Our next question comes from Lucie Carrier of Morgan Stanley. Good afternoon, everyone. Thanks for taking my question. Apologies maybe to come back on the guidance for 2021. I know it's a bit more short-term focused. I wanted to understand a little bit more your assumption around the second half of the year, because you are at 11% organic growth in the first half. Virtually you're kind of guiding for about 0 in the second half. Appreciate maybe the second half comp base in China is a bit more demanding. It's not that difficult necessarily in the other regions. I was just wondering if the orders you have taken over the last 9-12 months or maybe longer dated, or why you are kind of assuming so little growth in the second half. If I start the guidance for second half, naturally, as you said that the comparison point is tougher when it comes to the second half, and especially in China, where we saw very good recovery throughout last year since second quarter. You have to also remember that even though we did have increasing impact of pandemic in number of markets in the second half, actually our performance was better. As we said then, we learned to live with the pandemic more and more there. That's the background for the guidance. We continue to see that the business develops positively, but the growth is less than we saw in the first half. Okay. Secondly, around the guidance for the margin on that front. You have an incremental cost of about EUR 75 million from the headwind from components and logistics. I was just curious to understand whether you are seeing a higher potential in terms of your savings benefits, because I think you had initially guided for a relatively modest amount of savings for 2021. If you were expecting quite a lot of benefit on the mix, maybe more skewed to modernization and maintenance in the second half. If I look at the leverage you've had so far this year, and kind of extrapolate that, it looks like the high end of the margin target, let's put it this way, is quite challenging. Well, I think overall, given the increase in costs, we've been able to counter that with good productivity quality improvements, as Henrik already highlighted, and that's been helping us to be able to perform quite well. The guidance has been less impacted than the headwinds we've seen. I think it's just a mix. If you look at it from a first half perspective versus second half, we are expecting more of that impact from the 175 to be impacting Q3 and Q4 than we saw in the first half. Okay. Thank you very much. Thank you. Our next question comes from Andrew Wilson of JP Morgan. Hi, good afternoon. Thanks for taking my questions. I just have two. On the modernization side, I'm interested in a couple of comments you made, I think, to the very first question. Just are you seeing a change in terms of the types of inquiries that you're having on the modernization side? With it being that customers obviously thinking about repurposing buildings or potentially seeing an acceleration in some of these areas which we kind of expected to maybe be modernized a bit more quickly than they ultimately have been. Just interested to see if you're seeing a sort of change in some of the incoming requests and inquiries from customers there? I think it depends a bit on market, but what is interesting to see is that I think in North America, we're experiencing what we saw also after the financial crisis, that actually modernization came up first because if you had an old building that didn't have tenants to make it competitive, you had to modernize it. Of course, it's not only about the elevators, it's general modernization to make sure that you have something that can attract employees. I still believe that that is going to be for offices really critical to bring people back is to make sure that you have offices that are fit for purpose, that are attractive and are good places to work, so people can really feel the benefit of coming there. That's a lot of discussion that we can hear, but also in people's homes. Probably going to be a much more mixed mode work and people are going to be more home and expect more out of them. On top of that, you have the EU requirements, which you can see of the Recovery and Resilience Facility. Much of that money is going to modernizing, upgrading buildings to make them more energy efficient and smarter. We think all of these things will drive and create a good growth environment for modernization over the coming years. We could see that already before the pandemic, perhaps slightly different drivers. That's why we are positive about the longer-term outlook for that business. Maybe in the short term, there was some pent-up demand, we still expect to see good growth going forward. Maybe just a quick one. It's probably for Ilkka, and apologies if I missed this, but have you or can you provide us with a split of the EUR 175 cost headwind between the first half and the second half? I'm just interested in terms of how that fares us through the year, obviously to help us a little bit with our models for the second half. Well, I would say that on a rough terms, maybe first half, one third of that impact in first half, and then the rest more towards Q3 and Q4, quite equally impacted there. That's very helpful. Thanks for the time. Our next question comes from Martin Flueckiger of Kepler Cheuvreux. Yeah, thanks for taking my question. Good afternoon, gentlemen. Just on your efficiency gains and productivity improvements that you've mentioned. I appreciate you talking about your headwinds from higher input costs in quantitative terms, but could you possibly also elaborate a little bit, in terms of numbers what you're expecting for cost improvements from these efficiency and productivity gains that you're targeting? That would be my first question. I don't think we have a specific number, because this is really across the board. Of course, we have targets for many different ones, because you have to remember, this comes in so many different forms. It comes through maintenance productivity, it comes through installation productivity, it comes through general quality, it comes from supply chain, and it comes from also our product cost competitiveness. Actually, we've seen good improvement in each of these to offset some of the costs. Each of them, it's a few percentage point, but if you normally do two or three, and then you can do instead of three to four or something like that, it starts to have an impact. That's kind of the magnitudes we're talking about. Okay, thanks. The second one, I seem to remember that you've been doing quite a number of smaller acquisitions, particularly on the services side in the past. I was just wondering whether you could talk about whether there have been, again, numerous acquisitions in Q2, and what regions you made those, and what the actual impact was on your sales growth at comparable exchange rates. Maybe I'll start. You begin. As said, our strategy there, looking for nice smaller maintenance companies that we can acquire and add to our maintenance base hasn't really changed. It continues to be the same. We're very interested to look for those. At the same time, if you look at over time, the challenge is more finding willing sellers than our appetite there. Now, I don't think there's been a big change, but there are a few that we've been able to now close lately that are positively impacting. As said, focus is more Europe and especially South Europe and I guess now North America is also one where time to time we find opportunities there. It brings some growth but obviously it varies a lot between quarters. It's not a big number. As I said, the driver for the maintenance growth clearly was other things than acquisitions. Okay, it's fair to say that the impact at the group level is less than half a percentage point? Yeah. Yes. Probably. Okay, thanks. Okay, thank you. Our next question comes from Joel Spungin of Berenberg. Hi good afternoon. I've got 2. Maybe just to start, could you maybe talk a little bit about your sort of thinking around the long-term potential for the market in China, particularly as we look into 2022. Obviously, we've come off the back of 2 good years. This year's probably been better than expected. Do you think that momentum can continue much longer, or are we inevitably going to see some sort of normalization in market growth rates? We haven't given estimates yet for China into 2022. We expect the markets to finish on a good note this year, probably then I would expect them to start on a good note next year. Probably not growth rates that we see now, but solid markets is what we expect. Growth rates, we have to see what those are. It's too early to say now. Fundamentally, when we look longer term, we expect new equipment markets to be solid, perhaps then more of the growth going forward is going to come from services, why we're putting so much effort into that now, and that's where we see lot of opportunities. Overall, we continue to see that there are good growth opportunities in the China market overall. Okay. Thanks, that's helpful. Maybe just some clarification, just in terms of your order intake number, the 17% that you reported for the second quarter. Obviously you said within that, obviously China grew significantly, the EMEA was up slightly. What I'm curious about is Americas, which is obviously the sort of smallest probably contributor of the three regions. It must have grown at an extremely fast rate to sort of reconcile to that 17% order intake growth overall. Can you maybe just give it a more clarification on what happened there? Yes. You have to remember that the comparison point for Americas last year, Q2 clearly was impacted strongly by the COVID in Americas, and we did see significant growth in Americas orders in the quarter. Let me be a bit more bullish. We had actually extremely strong growth in orders received in North America in Q2. That's right. Particularly United States. We had a phenomenal performance there. Right. Okay. Thank you. Maybe just a very quick one. Just in terms of your comments on pricing, and you obviously mentioned that the pricing environment improved in the quarter. I'm just curious to understand maybe a little bit more about what maybe lies behind that. What explains the improvement in the pricing environment in the recent months? I think, everyone in the market is seeing the same pressure, of course. Our customers are seeing the pressure from many different perspectives, of course, therefore it's clear they want to push back. I think there is a recognition that costs have gone up significantly. We have compensated much of that. Not everything has been put through directly to customers. We can see that there start to be a better acceptance and more companies, not everyone, but more companies have started to look at price increases and we have been very focused on that and we're starting to see some of that coming through. Of course, it has to do with your competitiveness as well, that if you are competitive, I think you can do it. I think it's the right thing to do in a high cost increase environment that we are in now. It doesn't happen overnight. It's hard work behind it and consistent work. I think our message very clearly that, yes, it's slight improvement now, but when we look at our data, the direction is clear. Okay. Thank you very much for that. Thank you. Our next question comes from Nick Housden of RBC Capital Markets. Yes. Hi, everyone. Thank you for taking my questions. My first one, it's a bit of a broader question about the Chinese market again. In the past, you've spoken about consolidation among Chinese property developers being a catalyst for KONE and indeed for other established OEMs to gain market share. Can you just give us an update on how this process is moving and whether it's accelerated or stalled in the past 18 months or so, and just what the situation is there? Thanks. We have seen a continued consolidation. If you look at the top 50 or top 100 developers in China, we've seen a continuous consolidation, perhaps not as fast as it was before. As we talked before, there's a strong focus to improve the balance sheets of many of the big developers. Still, many of the big developers have stronger balance sheets, they've been able to then participate in land purchases and that way grow. They have been growing, and that consolidation has continued, perhaps, as I said, not as fast as before. Likely to continue the same trend as we've seen so far. Thanks. Very helpful. Just one more quick one. You mentioned earlier in the call about KONE having a very quick order to delivery time again in China. I'm just wondering how that compares with other OEMs. Is it a big differentiator between KONE and other major OEMs, or is it more an advantage that all of the major companies have versus some of the smaller, more local players? I can't talk about all of our big competitors, but my understanding is that we have the shortest order to delivery turnaround times in China for the big customers. Clearly everyone is working on that. That's been a source of competitive advantage and doing that consistently in a good way. Very helpful. Thank you. Thank you. Our next question comes from Tomi Railo of DNB. Hello, this is Tomi from DNB. Can you perhaps comment the growth rate in terms of Chinese maintenance and modernization in the second quarter for you? Joonas, comment on that. We continue to see similar good growth in maintenance in China that we've seen before. Maintenance revenue growing double-digit and also our maintenance base growing slightly higher than the revenue there. On the modernization, we've continued to see good growth there. Have to remember that the base still continues to be small, but over the last year, 30-plus% growth has been the base there. No change there. Okay. Thank you. Our next question comes from Maddy Singh of Bank of America. Yes, hi. Thanks for taking my question. Just a couple of them. First is a quick follow-up on the pricing comment. When you talk about price increases, are you talking about year-on-year increase or a sequential increase in prices? It's my understanding that so far price increases have not been enough to offset the cost increases until now. Obviously, you'd hope that it does that in future. The second question is on your order backlog as it stands now. Can you confirm whether the margins of the overall order backlog is lower than current reported margin levels during the quarter below 13% level, basically. Yeah. I'll start with the pricing question. On the pricing, normally when we comment, comparison period is year-over-year. There's slight seasonality impact in that commentary, but as we now talk about improvement in overall pricing environment, I think it's true both year-over-year and quarter-over-quarter on a high level. On the order book margins, and what we book to order book. As I said already earlier, it is not a very easy comparison point to give or not very good one as you have in the order book a higher number of major projects, for example, and also the rotation in order book is different between the regions. We haven't commented that much on order book margins versus what we book. Can you also confirm whether the price increases so far have been enough to offset the underlying cost increases? Sorry. You would need a lot more price increases? No, I actually already commented that we start to see prices going up, but not enough to counter the cost increases. Okay, great. Thank you. Our next question comes from Lars Brorson of Barclays. Oh, hi Henrik, Ilkka, and Natalia. Thanks for that. I can follow up on that pricing question, Ilkka, and maybe just start by saying you give by far the best commentary and visibility on pricing in the industry. Thank you for that. Let me just press you maybe a bit on new equipment pricing in China in particular. I think what I pick up from your competitors is that price increases have been far easier in Western markets than it have been in China at least recently. I wonder whether you can give a bit of color around the new equipment pricing trend in China. Like for like prices slightly higher, are we talking 100 basis point, and can you give some color around market pricing? Can you also give perhaps, Henrik or Ilkka, a little bit of color around what you see in your base business versus larger projects business? I'm still assuming that the latter is far more price competitive. I'll start there. Thank you. Many questions. I'll try to take all of them. Your question on where do we see pricing developing between areas? I think what first I comment particularly China due to the size of that and also it's easier to take the mix out there. We've seen now prices improving in China slightly in Q2. They were flat or more stable in Q1. That's one thing, and the clearly overall market despite being competitive, there's a strong growth there. That's an environment where you normally also see better pricing environment. Now we've also seen during the second quarter that we start to see signs of improving prices in Europe and in North America as well. I don't know, Henrik, if you have more to add. I don't really add no. I think that clearly markets are very competitive. There's no question about that. At the same time, everyone is facing the same environment in the market. That's also important to remember. Okay. It asked certainly is that easier to put through price increases in your base business than in your large project business? It was a little bit garbled, but I think it was kind of volume business versus major project business. Sorry, line was a little disturbed there. Clearly the bigger impact is always the volume business. Major projects also there, we've seen a good development. Both are extremely competitive, no question. I think we've similar trends, I would say. Thank you, Henrik. It sounds like you can't hear me particularly well, but maybe I can ask if you can hear me? Now we can hear you again. Okay, thank you. Around key customers in China. Not sure whether you can give us a percentage as group sales from Evergrande or China sales. Maybe more broadly, have you quantified sort of the customer group that may be at risk? If so, can you give us a little bit of color around that risk assessment? Well, I don't think we've commented individual customers as such. Obviously China now has bigger customers than in other markets. It's also good to remember that still compared to group total, we're talking about maybe percentage point or two on the big customer. It's not that the business is very concentrated as such. Clearly we are managing risks all the time and so far fared quite well or very well, maybe. Yes. If I can, just an understood on your repairs business, the last 3 quarters you had a handy little heat map chart for your order trends by region and segment, which you've taken out. I just wondered, I mean, I was late on the call, so apologies if you've already covered it, but your repairs business, is that tracking your elevator usage? Are we back in growth year-over-year? Are you able to give a bit of color on that, please? Well, glad to get the feedback that it was useful and sorry for dropping it for this quarter as we saw more green everywhere there. I think that's the answer. It didn't give much of a difference between the different areas anymore. And maybe you missed it during the presentation, we went through the maintenance business, which grew very nicely. We saw across the board very nice growth. The basic maintenance business with the contractual revenue grew more than normally. Also, the value-added services contribute to the growth, we continue to see good momentum for services like 24/7 Connected Services. The highlight was the discretionary part, that grew much faster than the maintenance business in general. That's, I think, a comment across the globe. Thank you both. Thank you. Our next question comes from Debashis Chand of Societe Generale. Thanks for taking my questions. My first question was on one of your key competitors investing on ramping of connectivity in its installed base. Do you see that could potentially change the competitive environment for the digital services? To put it other way, do you see it could push KONE to adopt a similar strategy in the future? I would say that I think everyone is investing in various different digital services. We feel good about the competitiveness of ours. I think the fact that we're able to achieve a premium pricing for them talks a lot about the value of these services and the value we can deliver to our customers for them. Clearly, we are coming out with different types of service all the time. Some perhaps more basic, some more advanced. I think this market will continue to develop, but we see that our approach is working. We are selling these as commercial services because they really add good value to our customers, and we put in a lot of money into the development of them. That seems to work. Clearly, competition is going to do different things, and that's what a competitive market is all about. I think it just verifies that there is a need for such services, and I'm very pleased with the value we can provide. Maybe to add to that, it's not that we only invest to the development part. We continuously invest also to the go-to-market. Yeah Effort. That's been something that we've continued to do for quite some time. I think in that sense, we are, from our perspective, in a good position. I think what Ilkka mentioned is just worth highlighting. That going to selling different types of service customers always takes different commercial skills that we have really built up over the past years, and I think that this is really an important competitive advantage. If you don't do that, then I think you're going to be behind in the future. That's a conscious choice we've made. That's what we believe in. Thank you. One clarification on the growth guidance, and is looking at the flattish growth outlook for the second half now. Are you looking for low growth in China in second half, or now you see China declining in the second half? We don't guide specific markets. I think we have a solid order book, and orders have come in at different times, and this is what we expect now from second half overall. Thank you. Thank you. Now we can go to Andre Kukhnin of Credit Suisse. Thanks very much for taking the follow-ups. I wondered if you could tell us your maintenance base growth in H1 so far in units. A bit over 5. Probably something in around that. Yeah. Normal good growth. Great. Thank you. That's just to help calibrating against all of that and catch up what's come back to trend, et cetera. You have to remember, Andre. The China business mix. Sorry to interrupt, the maintenance base last year was, of course, very little impact. Yeah during the pandemic. There were some, but very little. It was really the discretionary activity that was impacted more last year. Exactly. Yes. That's what I was thinking, is that you were, I think, 4% something, and the growth should've been a couple points higher given price, given digital, et cetera. I guess we're catching up this now. Yeah to the trend. On China business mix, is maintenance and modernization still circa 16%, or have we moved past that point towards 20%? Modernization, you said it's a very small base, but is it nearing the 5% of your China business or still far off it? It's a bit more than 15%, but not quite 20% in total right now. The modernization business, it's closer to 5%. Yeah. It's probably slightly below. Yeah. Yeah. Good. Perfect. Thank you. Is there an update on China regulation change? We know they keep piloting and trialing the replacement of mandatory visits to on-demand visits plus 24/7 monitoring. Has there been any movement on that front? Those pilots have continued. My understanding is that the results are good for them, but no real update on that regulatory front yet. Very clear. Thank you very much for your time again. Thank you. Thank you. Ladies and gentlemen, that concludes all the time we have for questions today. I'd like to hand the call back to speakers for any additional or closing remarks. Yes. Well, thank you, Henrik, thank you, Ilkka, for the presentation. Thank you to everyone who's participated, everyone who's asked questions. It's been a very lively discussion this time around, which is great. If you do have any follow-ups, please do feel free to reach out to either me or the rest of the IR team. Yeah, with that, I'm wishing you a great rest of the summer. Thank you, everyone. Thank you.