Good afternoon, and welcome to KONE's first quarter earnings call. My name is Natalia Valtasaari. I'm the Head of Investor Relations at KONE. I'm joined here today by our President and CEO, Henrik Ehrnrooth, and our CFO, Ilkka Hara. As usual, Henrik will start by going through the highlights of the quarter both in terms of financials business performance and market development. Ilkka will then follow up with a bit of a deep dive into the financials. Henrik will end the presentation with the business and market outlook before we move into your questions. When we do go to the Q&A session, please try to limit yourself to two questions, and then you can rejoin the queue. That's to make sure that as many as possible have the opportunity to ask questions.
With that, I will hand over to Henrik.
Thank you. Welcome to this call. To start with, it's clear it's been a very eventful quarter. A lot of good things, a lot of good developments. Also, we know that there are a number of challenges in the market. If we start with the highlights for Q1. Really the key highlights were that we had very good growth in our orders received and I would say an excellent start to our services business the year there. Really a great continuation to what we did last year in services. At the same time, it is clear that I wish I could present this in a more positive environment. We have some significant concerns around us. Of course, the war in Ukraine is creating a lot of concerns.
Of course, there, what we're doing a lot is to make sure that all of our people everywhere are safe. For example, in Ukraine, we do check in with our employees there every day and we were able to do so again yesterday. Of course, also the COVID-19 restrictions in China are causing a lot of challenges overall. We know that supply chain disruptions have intensified as a result of this. However, what is also positive though is that we have progressed very well in our actions to offset the impact from costs in the supply chain. We'll talk about that more. It's clear that that remains a top priority for us. Clearly momentum there is very positive. If I start with the highlighted numbers for first quarter.
As I mentioned already it was really about growth in orders received. However, our operating income was clearly burdened which is a concern of ours. Orders received at EUR 2.4 billion grew at 10.6% in comparable currencies, really broad-based and good growth. As a result of that, our order book hit again an all-time high at EUR 9.3 billion and growth of 7.3% compared to last year. Sales was more or less flat in comparable currencies at EUR 2.4 billion. Our operating income was down from EUR 250 million- EUR 171 million. That's clearly a concern of ours. Adjusted EBIT from EUR 250 million- EUR 196.5 million. Adjusted EBIT margin from 10.7%- 8%.
It's clear that top priority for us is to restore our margins. Our cash flow was an okay level of EUR 218 million compared to EUR 425 million last year. EUR 425 million was clearly an exceptionally good number. EPS of EUR 0.25 compared to EUR 0.37 . As I mentioned at the beginning, it's been an eventful quarter and we all know that a lot of things have changed and a lot of developments. What I'm very pleased about is again the resilience of our people at KONE of our whole organization about the motivation. You know, when I look at people being locked down in China how they continue to do great work with good motivation. You know, all around the world, how KONE's employees are performing in this environment is just excellent.
That I'm very, very happy about. Big thanks to all of them. Now, let's start with a few highlights of our business, and let's start with some innovations that we launched in March this year. In March this year, we had the first KONE Experience event, a very big event for our customers and partners. There we launched three types of solutions that I think reflect extremely well the needs of our customers just in this current environment. We strengthened our offering for smart and sustainable buildings. We're really showing the way here, key part of our strategy.
We launched solutions that help our customers compress their schedules improve their productivity on construction sites and also, broadened our offering of our connected solutions to enable better adaptability by launch of DX Class elevators now also in the United States and Canada. If a little bit closer to this, what have we done on solutions to accelerate construction productivity for our customers? It's all about our construction time use solutions that we brought digital services to improve insight and uptime for those units that are in very heavy use during construction. Now, the point here is really that now we brought again a broader offering, so we can bring elevator services into buildings at a much earlier stage that really significantly improves the productivity for our customers when they can start bringing workers much more efficiently in the buildings.
An example of this is that we launched a standardized version of KONE JumpLift for machine room less elevators, and it is really available for all building heights. Already a long time ago, we brought a clear revolution to the industry by bringing jump lifts that goes up as the building goes up. Now we can bring that also to lower rise buildings and really customers who have used this so far have seen really clear improvements in their productivity. I think very well suited to a highly inflationary environment where productivity is at top of everyone's agenda. Today we have also launched our fourteenth sustainability report. Fourteenth year in a row we've done that. Some of the highlights from it you can find it naturally on our website.
As you know, we are committed to science-based targets to a 1.5-degree pathway. We have the most ambitious targets in this respect in our industry, both for our emissions from Scope one and Scope two, but also life cycle Scope three. Now, for so-called Scope one and Scope two, emissions from our own operations, their target is a 50% reduction by 2030. We now reduced in absolute terms from the baseline in 2018 by 15%. Today, already 80% of the electricity that we use is renewable. Target is 100%, so we clearly are ahead of schedule. Now, we also have a target to reduce the emissions relative to product orders, Scope three, so the life cycle emissions for our products and solutions.
Now, here you can see +0.4%, going the wrong direction. Well, what's going on here is that actually the energy efficiency of our products has clearly improved again since 2018, the baseline. However, when we are selling more into countries that use more fossil fuels, therefore that is increasing the life cycle emissions. Fundamental improvement, but clearly here we are speeding up our actions as well. We also have a clear target for diversity, equity, and inclusion. One of those targets is to have 35% of our director level positions held by women. Last year, we increased that from 19% to 21%. We made some progress there so we're on the path of getting to our 35% target.
In safety, we continued our good performance with an industrial injury frequency rate globally of 1.6% which was an improvement compared to pre-pandemic levels. It's clear that we're on the path. We have a lot to do, and at the same time we are progressing. An important event during the quarter, we announced that Karla Lindahl has been appointed Executive Vice President, responsible for South Europe and the Mediterranean region, and a member of the executive board on April 1. Karla has an 18-year career at KONE. She's held many leadership positions within the company, latest as the Managing Director for Finland and the Baltics. Very happy to welcome Karla into my direct team. Those are some highlights. First, innovations, sustainability, and some appointments also in the quarter.
Now I think many of you remember in connection with the first quarter results, we dived a little bit deeper into the prior year development of markets and market share. Now we have that data ready and what I'm happy to say is that we had good development last year as well. Just to give you context first. Global new equipment markets were a bit over 1 million units last year and the markets grew at about 7%. At KONE, we sold last year 196,000 elevators and escalators and we grew overall 9%, so slightly faster than the market. The maintenance market was close to 20 million units, growing at 5%. We grew 5% in units and 7.5% in value.
In value, we again all the big players were clearly the fastest growing again last year. Now, best performance in new equipment we had in the Americas and in Asia Pacific outside of China. In maintenance, we progressed in most places. I think one highlight there in maintenance was that in the large India market, we became the market leader last year with a very fast growth and great trajectory. That was one of those nice milestones to take a number one position. In many parts of Europe, we are also improving our position. Overall, slight improvement in many places. Now, what about the markets in Q1? As I mentioned at the beginning, the positive thing is that we have a very positive market backdrop. New equipment markets are growing.
Particularly strong growth in North America. Europe also growing then more stable in Middle East. Asia Pacific outside of China recovering strongly. Although the China market we saw some liquidity constraints was down 5%-10% so therefore we had somewhat decline in Asia Pacific. But a lot of good growth opportunities still around the world as we could see that we were able to capitalize on. The services markets also developed nicely. Maintenance markets, I would say very much trend growth, slight growth in the mature markets and good growth in Asia Pacific. Perhaps the highlight was a very positive market backdrop in modernization. Very strong growth in Europe, Middle East, and Africa, Asia Pacific, and also good growth in North America. As you saw, we were very well able to capitalize on this.
Modernization is really a highlight of great growth in the markets right now. A little bit more on China. We all know that the Chinese market has been more uncertain. If we think about the market overall, we can see that liquidity restrictions continue to have an impact on the market. The markets declined as I said, about 5%-10% and very tough pricing environment. We started to see the first easing measures introduced in Q1 to support housing demand. When we have restrictions we know both on demand and the supply side. It's really the demand side we start to see the local authorities are starting to ease restrictions. Now, in the past weeks, those have accelerated. Let's see how that will impact the market.
Of course as everyone knows, the really big thing now are the COVID-19 restrictions which have increased uncertainty and have had a big impact throughout the market. Today more than 50 of the 100 largest cities in some form of lockdowns, 90 or 100 large cities have some form of restrictions. Really a big impact. Really where this has impacted the most is on logistics and ability for anyone really to operate businesses and to deliver to their customers, irrespective of what business you are in. This uncertainty is expected to impact second quarter market activity and particularly of course deliveries because of a very disrupted logistics environment in the country overall. If I look at our operations, we could see a solid demand for KONE's solutions.
Q1 deliveries were only somewhat impacted you know, towards the end of March, because of site closures and logistics, although maintenance remained resilient. Our factories in Kunshan and Nanxun were closed for about three weeks in April. Now, those are gradually opening up. Like for anyone, you know, getting supplies and logistics continues to be challenging in the market because of the restrictions that are in place quite broadly. That is about markets overall. With that backdrop, I'll hand it over to Ilkka to talk more about our financial performance.
Thank you, Henrik. Also warm welcome on my behalf to this first quarter results announcement webcast. I'll start going through our financials with orders received development. Overall, we saw strong growth in our orders received in the first quarter. Orders received was at EUR 2.4 billion on a reported basis, growth of 16.7%, and also on a comparable basis 10.6% growth is a very strong performance for the start of the year. Strongest growth in our orders received was in Americas followed by Europe, Middle East, Africa, and in Asia Pacific, we also grew. If I look at particularly China within the Asia Pacific market, then in China we grew slightly in units and were stable in monetary value as both mix and pricing contributed negatively.
That is a good performance against the market, which as Henrik highlighted was down 5%-10% in the first quarter. If I look at our orders received development from a margin perspective. Although we did continue to see a slight decline in our orders received margin year-on-year. We did continue to see an increase in margins sequentially. From Q3 to Q4 we were able to increase slightly our margins and now that continues in Q1 as well. Our actions on a product cost as well as on a pricing front continue to yield results and the momentum is good.
From a new equipment perspective if I look at the total picture in terms of increased costs over the last year as well as then what we've done in terms of product cost and pricing actions we are now roughly 50% there in countering the headwinds we've seen in our new equipment business globally. In the modernization business, we actually are doing better and we are close to being able to mitigate these cost increases on a cost level that we now see for the orders that we booked in the first quarter. Although it's not impacting orders I think still from a pricing perspective where we've seen best opportunities to increase prices in this environment is in the maintenance business, and that contributes positively to the overall business as a whole. Good progress there.
Although we continue to see our costs increasing and the raw material headwind that we highlighted earlier to be EUR 100 million-EUR 150 million in this year now is EUR 150 million-EUR 200 million for 2022. To sales. Our sales grew on a reported basis 5% and were EUR 2,442 million. From a geographical perspective strongest growth in Europe, Middle East, Africa, where we grew 7%. In Americas our sales grew slightly at 0.4%. In Asia Pacific, our sales declined 7.7%. There, that development was largely driven by China, where our developer customers their tight liquidity impacted our deliveries. We wanted to continue to be very focused on our payment terms and that had an impact to our deliveries.
As Henrik said, towards last week of March, also slight impact from the restrictions that we've seen in China due to COVID-19. From a business perspective, China impacted our new equipment deliveries and we saw a decline of 9.4% in the revenue. As Henrik already highlighted very good performance in our services business. Modernization growing 11.5%, and also our maintenance growing very strongly at 8.7%. Good performance there. Both units contributing to this but also as I highlighted pricing having an impact as well as our 24/7 connected service and other value-added services. To Adjusted EBIT and profitability. Our Adjusted EBIT for the quarter was EUR 196 million, and the adjusted EBIT margin was 8%. We can't be happy with the development here.
While we had positive contribution from the good development in services, at the same time from a growth perspective the profits were impacted by the new equipment sales decrease in China. At the same time we continue to see profitability positively being impacted by quality which continues to then help us to drive good productivity in our operations. At the same time the headwind for this quarter from the increased material component logistics cost is around EUR 80 million, then impacting our Adjusted EBIT development as the biggest item. Cash flow was for the quarter EUR 218 million. Against last year's exceptionally high cash flow, this is a more normal development. We saw in the quarter, net working capital having a slight negative impact.
If I compare to last year, our cash flow was down due to our operating income being down EUR 79 million as well as then from a working capital perspective although maintenance business growth and invoicing in first quarter had a positive impact we did have higher than average inventories due to the supply chain disruptions. We see that that's a good thing we can deliver to our customers while having slightly higher inventories. As highlighted also in the fourth quarter results, we did have payables that from the fourth quarter slipped over to the first quarter and had a negative impact to our working capital than in the first quarter.
All in all, as I always said, cash flow on a quarterly basis does fluctuate, and you need to look at it in a longer term. With that, I'll stop the financials review and hand over back to Henrik to talk about market and business outlook for the year.
Thanks Ilkka. Ilkka said let me wrap up with outlook. If we start about overall market outlook for 2022 in new equipment we expect that the Chinese market will decline significantly. That means in practice 10%-15%, of course due to the liquidity restrictions and COVID-19 restrictions. In the rest of the world we expect the new equipment markets to be positive and improve. Modernization markets continue to be growth markets across all regions. That is positive. Maintenance is expected to return to pre-pandemic growth trajectory. Slight growth in mature markets and clear growth in Asia Pacific. That is market outlook. Most places quite positive. We look at our business outlook for 2022 is specified.
We now expect our sales to be growing 2%-5% in comparable currencies, compared to 2%-7% previously. We expect our Adjusted EBIT to be in the range of EUR 1,180 million-EUR 1,280 million. Of course, assuming that foreign exchange rates remain about the current level they will give us a tailwind about EUR 70 million. What is important is that this outlook is dependent on COVID-19 restrictions in China being lifted during the second quarter and that we can see a rapid recovery thereafter. That is of course something that the level of restrictions will impact our deliveries, particularly in China.
Now we have a number of things that are supporting our performance particularly the positive outlook and great performance we have had in services as well as our solid order book. We expect that the effects of our product cost actions productivity actions and pricing will start having a positive impact towards the latter part of the year. As you have mentioned, we have had good momentum in these areas now in the quarter. What's burdening our results? It's clearly further headwinds from material components and logistics. We expect that to be further EUR 150million-EUR200 million this year. It was about EUR 200 million last year so another EUR 150millon-EUR 200 million this year. Clearly COVID-19 restrictions in China are having an impact on deliveries. Also the competitive dynamics and liquidity constraints in the Chinese property market.
That's our outlook. If I wrap up, the good thing is that while there's been a lot of uncertainty in the world we have good growth opportunities and we can see good market activity in our industry. We can also see that the actions we have taken to address our headwinds from supply chain costs and others are actually going very well. Pricing is improving, productivity is improving our product cost actions are actually quite good at the moment. We continue to drive differentiation through adaptability, productivity, and sustainability. Those are at the core of our ambitions. With that, we start taking questions.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, we ask that you please limit yourselves to two questions each to allow everyone an opportunity to ask their questions. We will now take our first question from Andrew Wilson of JP Morgan. Please go ahead.
Hi, good afternoon everyone. Thanks for taking my question. If I can start with the first one, you mentioned around the easing actions in China having picked up in recent weeks and having started in the Q1. What sort of typical lag do you see in terms of easing actions before we actually see that coming through in terms of improved market conditions? Sort of I think I've heard previously sort of six to nine months in terms of a thought process but very interested in terms of I guess, your experience in terms of when you would expect to see that come through in the market.
Thanks. Yes. The easing what we were talking about is really on the demand side. For property buyers to be able to finance and buy apartments better it's clear that that is a little bit further out because first you need to get demand there. That clearly then gives more confidence to builders to start again buying land and starting new projects. Usually the lead time is not too long maybe a couple of quarters or so that they should have a positive impact still this year.
Thank you. Please second question. I guess it's a bit of a kind of philosophical question in terms of running the business in this period. It seems to me if I look at the, obviously the strong market share performance in 2021 the very strong orders you've reported for the Q1 it doesn't seem to me that the business is losing a great deal in terms of I guess, that proactivity towards growth and that focus on growth. I'm just wondering sort of how you're balancing the longer term prospects which seems to be going very well versus obviously these short-term challenges and kind of if any of the actions that you're taking at the moment you think are gonna be kind of sticky actions which help over the longer term.
I guess linked to that is. Do you think you're dealing with this downturn in a different way to some of your competitors? I appreciate that's quite a broad question. Just interested in terms of how you're thinking about it.
Sure. Well, clearly, you know, the impact we're seeing from supply chain disruptions and things like that is something we have not experienced for a very long time and something of course we hadn't expected. It's clear that when you have a tough situation like this you take a lot of actions you learn to do things in a new way. I think every business around the world had to learn to live in a totally different environment. We have to remember that we come from a 15-year period of I would call it extreme price stability in the market if you think from inflation or material costs or so. Clearly fluctuated but still longer term quite stable.
That was of course for every industry, every business given a certain backdrop of how you need to operate that you've been able to make longer term commitments and been able to do it in a stable way. I think now business is changing. I think everyone will have to have more indexation in contracts. We'll need to reflect that inflation and product cost changes in a more dynamic way than in the past. It's clear that, you know, we all have to change a little bit the way we operate and that will definitely be for the better longer term.
You know, when I see, you know, usually, I would say, you know, when you benchmark across industries, you know, on a product cost basis fundamentally most companies are getting let's say 3%-4% fundamental product cost improvement year-over-year. Now, you know, when you really put an enormous focus on it you can see you can get much much more. How do you know, continue driving that? There are a bunch of things you know improving how you operate your business.
I think this way that how you operate in a totally different environment where we don't have this extreme price and cost stability that the world got used to over a long period of time means that we all have to operate in a slightly different way or actually quite much in a different way in many places.
That's very helpful, Henrik. Thank you.
Thank you.
We'll take our next question from Klas Bergelind of Citi. Please go ahead.
Thank you. Hi, Henrik and Ilkka. Klas at Citi. The first question I have is on the revenue recognition out of the backlog and it's a pretty big growth step up that is required for the rest of the year at the midpoint of the guide. I obviously appreciate that the backlog is up 7% organically, but you started the year weak with sales weak both in Asia-Pac and Americas. I mean, obviously maintenance growth is solid but what gives you the confidence you can convert that backlog as we have this bottom that you say that China it's depending on China but is that really enough? I will start there. Thank you.
I'll maybe start. First, I would say that we have a very good backlog as you highlighted. Our order book gives us a good visibility and opportunity to deliver against that guidance. As you've seen also in our maintenance business, we've seen very good growth now for a few quarters now, starting from last year and now continuing to the first quarter. All of those contribute positively.
As said, one of the assumptions we are having in our guidance is that we do expect and assume that the markets and the restrictions in China are lifted and we can operate more normally during the second quarter and therefore be able to catch up during the second half of the year from a revenue perspective in China. Those are the assumptions and at this point of the year we still are booking orders for especially modernization business that we will deliver during the year. Yes. We do continue to also expect new orders in second and maybe beginning of the third quarter that will still be recognized as revenue during 2022.
I guess the conversion is quite quick in China when that opens up. My second one is on the margin performance. Listening to you now, Henrik, it still feels like the second quarter can be pretty tough considering the China lockdowns. That feels more like a second half opportunity than being lifted. The liquidity constraints impacting deliveries in the second quarter and that pricing is yet to feed through from the longer backlogs outside China. When I then consider your EBIT guidance with a still tough margin for the second quarter there's quite a big margin uplift in the second half sequentially. What gives you the confidence on pricing in India and Americas gradually kicking in?
Is that really what should drive it then from a margin point of view if the second quarter is maybe 10% +?
Well, I'm not gonna go into each quarter how they are sequentially going to go. We have our overall guidance as you mentioned. Clearly, second quarter will be quite a lot influenced by the lockdowns in China. It's clear that for everyone deliveries in April are low level. I think orders are probably at a better level but that clearly has an impact on revenues and therefore margins. We have to see how it recovers from thereafter. We have given our assumption the way we see it. But as you know, that always, seasonally for us Q1 always has a lower margin and then we have better margins in the other quarters.
As we have said also that we expect that the actions we take in our pricing and productivity and product costs and so forth will start to impact us towards the latter part of the year. In the pricing improvement that we're doing now, it's clear that that you know is something that impacts more particularly new equipment impacts more 2023 whereas in the services business we are seeing a faster drop-through of that.
I would maybe add to that also that the product cost actions that we're making they will take some time to get to then production and then to deliveries and that's yeah, impacting more the latter part of this year. Those actions we have quite a bit visibility on.
Yeah. No, I appreciate that. It was just. I know that the margin will be better in the second half but it just looks like a flattish margin implied if you're reporting a weak, like 10-ish second quarter. Yeah, I'll get the moving parts. Thanks.
We'll take our next question from Jeff Sprague of Vertical Research. Please go ahead.
Thank you. Good day, everyone. Just hoping we could clarify if you don't mind the price cost side of the equation. Specifically my first question is you'd noted that price is covering about 50% of the inflation on the new equipment side. Could you clarify was that an order comment related to Q1 or is that what you're expecting for the full year?
I'll take that. So my comment was related to both our actions in pricing as well as in product cost. Those are the mitigating actions. It was related to our orders received orders that we're booking in first quarter how much in those we've been able to counter the cost inflation that we've now seen. It is in new equipment about 50%. In modernization, it is clearly higher than that. It's close to being able to mitigate the cost increases we've seen. That was my comment, and it's about the orders.
Great. Just taking that a step further, the comment that the cost headwind is EUR 150million-EUR200 million for the year. Could you give us the context on expected price realization against that headwind?
Well, I guess, we don't have a habit of commenting pricing in a forward-looking manner. The reason is that you have to customer by customer, order by order at the end negotiate the deal, and as an outcome you get the pricing level. We comment what we've been able to achieve, but not in a forward-looking manner.
Understood. Thank you.
Um.
We'll take our next question from Andre Kukhnin of Credit Suisse. Please go ahead.
Hi. Good afternoon. Thanks for taking my questions. Can I ask about China orders to sales conversion phasing? It's interesting to see that you haven't had a quarter I think, with orders down in units yet and yet I think you're seeing a revenue downturn. I just wanted to check if that has changed structurally or was a kind of early impact from lockdowns in Q1 already? How would you expect that kind of orders to sales phasing to play out in China over 2022?
Yeah, I'll take it.
You can go. Yeah.
Yeah. I'll start with the smaller part then and just to your question on the COVID-19 restrictions impact in the first quarter. It really impacted the last week or so in the quarter. That was not impacting the conversion for the quarter that much. We did see that the order book rotation in the first quarter as expected was slower. The main reason for that was that we've been quite focused on making sure that we have a good control of our credit risk and also payment terms. That impacts our capability to deliver. We expect to be able to control both. Therefore, the order book rotation was slower than we've seen in the past.
We do expect as we talked about earlier that the market would return and that would mean that the order book rotation then is more normal or more similar to what we've seen in the past.
Thank you. If I come back to one angle on the pricing. We've heard from a peer of yours mentioning going back to existing orders, and I think existing responses to request proposals and looking to adjust prices there for the latest inflation in raw materials and input costs. Is that something that you were alluding to when you were answering the question on maybe doing things differently? Is there scope for that? If there's any scope for that could you give us some idea how much of a backlog could be subject to those practices?
I think my comment was more when we think about booking new orders that probably you know, having fixed prices for a very long period of time on any side is probably unlikely going forward. There probably needs to be more indexation and reflections of what we of course are at that point in time. That we can see that our customers builders are doing as well. I think that this is a general trend that we see in the market. Clearly you also need to take action on how do you improve margins of existing orders. Of course, you have your contractual commitments that, you know, we are a company that if we made a commitment with a customer we will hold to that.
In some of those cases there are some indexations not in a very high proportion of contracts. There you have an opportunity. Of course you have an opportunity, you know, if you can provide more value add, you can sell more during the period and things like that. You can improve your productivity. There are a lot of things you can do on that side as well, and it's clear that that's part of the toolbox. That's very clear.
If I may just follow up on that. Is there as much of that practice baked into your guidance for the second half? Because I assume going to existing contracts and enforcing escalation clauses or proactively increasing value added, as you've just described, should have a fairly immediate effect, should not be subject to that 12-month lead time. Is there much of that baked into your second half guide?
There are things you can improve a bit but it's not gonna frankly change the big picture though.
Got it. Thank you very much for your time.
We'll take our next question from Lars Brorson of Barclays. Please go ahead. Please go ahead, your line is open.
I apologize. I was on mute. Hi, Henrik, Ilkka. Maybe first on the China market outlook, Henrik. I just wanna clarify. The rapid recovery expected in H2 that's your business outlook. Deliveries installations it's not your market outlook orders. You're still guiding of course down over 10% that will be on a par with what we saw I guess, in the market in Q1. Not much of a second half recovery which I think you expected in your early assumption. Just wanted to check that is sort of what you see right now that there isn't any evidence of any stabilization. Secondly, maybe on China just to like-for-like pricing. It declined slightly now in Q1. Felt like we were tracking a bit better in the fourth quarter.
We started talking about price hikes in Q2 last year. Takes a bit of time for that to filter through but I felt sequentially things were improving somewhat. Can you talk a little bit about the broader market pricing trend in China in new equipment and what is sort of driving that step down sequentially that it appears to be the case for your new equipment business? Thank you.
Okay. Should I start with the market outlook?
I'll get into pricing then.
Yep. That's right that in our outlook we expect the markets to be somewhat softer now, second half driven by continued, challenging property markets and the impacts of the restrictions that we're seeing now. We have to see how these easing measures, and if they're further easing measures, how they impact. That is our current outlook and estimate. From a pricing perspective I just wanted to clarify first. Yes. In the first quarter, we did see pricing having slight negative impact on our orders received and competitiveness in the market continued to be on a high level. It was very tough pricing environment in the market. But at the same time, I think what is always combination of pricing and product cost actions.
From our perspective, even though the pricing has been more difficult, actually where we've seen very good progress, and I would say best progress within the different regions, is on the product cost side in China. There, we've been really able to find savings more than elsewhere, and pricing overall, I mean, has been more stable you're referring to last year, so throughout most of last year for us. I wouldn't read too much into it, I would say it this way.
Thank you, Ilkka. Secondly, can I ask you just on the raw material guidance, the EUR 150 million-EUR 200 million, we had negative EUR 80 million in the first quarter. How to think about the cadence through 2022? Is it another EUR 80 million in Q2 and a stabilization? I appreciate it's a very volatile environment. I'm just trying to understand what you're baking in in terms of the recent moves you've seen in some of your key input exposures particularly steel of course and what you're baking in as far as that cadence is concerned. Please.
Yes. I guess the benchmark from last year was that in the first and second quarter we saw less of the impact of the increase in raw materials and then it was mostly impacting Q3, Q4. From a comparison point of view, it is more in the first half where we see the increase year-on-year and then gradually easing towards the latter part of the year. That's the way I would think about it.
Okay. Sorry, can I finally just ask to maintenance pricing? It's a clear contribution from pricing. I wonder whether you could help us quantify the maintenance pricing. Are we talking about like-for-like maintenance pricing of, say, 150 basis points? And how much of that if any at all is associated with, as you said, ARPU uplift as you transition from legacy to digital? I presume that will be on top of what you refer to as like-for-like improvement in maintenance pricing, please.
Well, we've seen in a number of markets quite a good possibilities to increase prices. I would say high single digits% and even above in some cases. Overall, it contributes to our revenue some percentage points on top of the unit growth. Then from a 24/7 Connected Services, we get a bit more than that a bit more on top of that. That's the level I would talk about it in an overall level. Naturally, it is something that has continued to be a good source of growth over the last few years, and we continue to see opportunities going forward.
Understood. Thank you.
We'll take our next question from Guillermo Peigneux of UBS. Please go ahead.
Good afternoon, gentlemen, and thank you for taking my question. I wanted to ask a little bit about the divergence between service and equipment modernization margins as we stand. I know that you don't provide the margins between the different segments, but I was interested in understanding a little bit the dynamics as we stand and with potentially what you see here on the backlog as we speak. Could you, in a way, give us a little bit of granularity around the level of margins for equipment North America and Europe as we stand today? Where do you expect the margins to trough? Maybe just a similar comment on China equipment margins, if I may. Thank you.
Well, as you know, we're not gonna disclose our margins per business line. What I would characterize is that from a pricing perspective, which was the original part of the question, we are seeing that modernization projects are maybe more unique. They are really about that single unit, that single building. In that environment, we've been able to find better ways to drive pricing upwards and counter the cost headwinds. There we also are closer to customer and that has contributed positively. The competitive nature of the new equipment market maybe is a bit different, and therefore it is, the pricing has not progressed as well as in the modernization side. Where do we see the biggest opportunities geographically?
I would say overall our pricing has developed in the equipment businesses in North America quite well and then followed by Europe. As we said already last year that Asia-Pacific has been a bit slower but I think now is making also good progress.
If I follow up maybe a little bit on the China equipment margins, may I ask, obviously these margins peaked in the past very close if not basically 20%. We've been gradually going down with some volatility up and down, but gradually going down throughout 2021. I was wondering whether you could give us basically now some in a way guidelines as to think about now single digit margins for 2022, 2023, or is it too abrupt what I just said? Thank you.
Well, we are again on this part not disclosing margins neither by business or on an annual basis. I think if I look at China it continues to contribute positively to our margins. It's slightly uplift because I said already earlier.
Mm-hmm.
Yeah. If you think about it, the environment right now and the pricing that of course, China is facing a lot of headwinds from this perspective. At the same time we're making a lot of progress there in improving as well. Clearly, new equipment is the toughest business from margin perspective at the moment, and China is of course really, really big there.
Mm-hmm.
That goes without saying. At the same time, we are making good progress there right now.
All right. Thank you very much.
Thank you.
We'll now take our next question from Miguel Borrega of BNP Paribas Exane. Please go ahead.
Hello, everyone. Just, two questions from me. Just on your expectations for China. You know, we've seen inventory levels going up. The situation with developers is not really improving. I understand your expectations for the market to return to 2019 levels. You've now downgraded your expectations to between 10% and 15%. Was this mostly because of a weaker first half or does that imply also the market to be down in the second half? Because I remember you saying your expectations for a flattish market in the second part of the year. Then are you expecting the market to kind of stabilize in 2023, or to keep going down further in units and monetary value in 2023?
I think it's too early to comment on 2023. Clearly as you said that the situation is quite challenging for many developers, and that is reflective because of liquidity constraints. That's reflecting now in the second half or rest of this year. If we think the market is gonna be down 10%-15% for the full year, and it was down 5%-10% now, then clearly we're gonna see a decline probably throughout this year with this outlook. Then what is 2023 gonna be? That's gonna depend a lot on the policies in the market, and we are now starting to see some easing. Let's see, because we know there are many strong markets around China.
You know, if we look at the mega city hubs and all the satellite cities around, those continue to be very active. The secondary hubs, those are active. There are of course lower tier cities where the situation is more challenging. We still expect to have a good and solid market in China this year, of course, down as we have expected. You know, what our strategy is in China is to transition all the time to go more and more into services, and that's why we're growing our service business so fast there right now. That's kind of how we think about it overall.
Thank you. My second question on your orders, just trying to understand the moving parts between margins down year-on-year but sequentially up, being the second consecutive quarter you are seeing margins on orders up sequentially, even with prices down in China. I suppose just wanted some clarification here. When you talk about prices down in China is that year-on-year and also sequentially or sequentially is more flattish? Then when would you expect margin in new equipment to stabilize? Do you think pricing and cost actions will be enough to stop margin pressure in 2023? Thank you.
First on the pricing front. Prices were down in China both sequentially as well as year-on-year slightly. That was a comment on the pricing. When I talk about margins, it's good to remember that it's not only about pricing, it's also the product cost and cost for the development for the product cost. While pricing has been more challenging in China as I already said, product costs have actually we've been able to drive savings there in the best way in our China operations. That's then been contributing positively towards the margins also in China.
Thank you. If I could squeeze in just one last question on M&A and the situation with Toshiba Elevator. Do you know if that asset is still up for sale? Can you update us if you've had conversations with them since the last quarter? Are they more open to talk or is this no longer happening? Thank you.
Of course, as you know, we don't comment on any rumors or speculations around that. I think, if you look at what Toshiba has said, it's not right for us to comment on anyone's behalf or speculate what they may do. They have made their own announcements. I think that's as much as we can say.
We'll take our next question from Martin Flueckiger of Kepler Cheuvreux. Please go ahead.
Yeah, thanks. Thank you for my question. Martin Flueckiger from Kepler Cheuvreux . My first one is on I think yesterday's or today's news regarding Russia stopping natural gas exports to Poland and Bulgaria. Now, you know, I realize or I seem to think that Poland and Bulgaria are not significant markets for KONE. But let's just assume that these natural gas export halts are expanded across other more important markets, you know, like Germany for instance, or France or who knows? Maybe even Finland, yeah, the way the geopolitical things are going. I was just wondering what do you make out of this with regards to the potential impact on your industry overall and particularly with respect to your own company? That's my first question, and I'll follow up with a second one.
I think it's pretty clear. You know, I'm not gonna speculate what's going to happen. You know, as a company directly we are not so dependent on natural gas as many other industries will be. It's clearly if something like this happen it's gonna have impact on all through what its impact gonna be in economy and ability to use energy and energy savings required. I don't think it's worthwhile to speculate but I think as an industry we are not one of the ones that are gonna be impacted the most, probably at the lower end. Yeah.
Our energy consumption is quite low, so we're talking about maybe EUR 10 million or so in a year. The gas is close to nonexistent, to my knowledge.
Okay, thanks. The second one is on your targeted productivity and efficiency gains. Just wondering you know, trying to do an EBIT bridge here. I was just wondering how much do you think that's gonna contribute to EBIT as a tailwind for this year?
Well, I think there's two things. We talked a lot today about the product costs. To me that's really about manufacturing efficiency and productivity in the manufacturing and there we progressed well in this year. On the productivity of our field there we continue to make good progress. In this environment where costs are inflating when it comes to labor costs, subcontracting to install elevators to maintain them really the clear goal is to be able to take also productivity up to counter most of that inflation. So far we've actually done quite a good job there.
Okay. No specific quantitative guidance. I take it.
No.
I was looking for actually.
No, no, not a specific number that I would highlight here.
Okay, thanks.
We'll take our next question from Joel Spungin of Berenberg. Please go ahead.
Yeah, good afternoon. Actually, I think I've just got one outstanding, which is maybe Ilkka, if I can just come back to I think you made the comment a couple of times about the order book rotation in China and being disciplined about credit and getting paid there. Could you maybe just elaborate sort of what that means in practice? Are you actually now insisting that you're paid up front before you will deliver to customers in China? I'm just kind of wondering what the implications are in terms of your sort of debts outstanding in the Chinese market and is there any risk that orders are canceled?
Well, we continue to manage our credit risk customer by customer, project by project basis very diligently. I would say that our team actually in China has been doing a very good job there. In an environment where there's increasing liquidity concerns with the developers that's naturally very, very important. Yes. With some customers where we see the risk being on a very high level then it means that we're dealing on a cash basis with them but it doesn't mean that we would be dealing with all customers on that front. It is really about judgment and understanding the risks that we're taking. In the first quarter, clearly we could have delivered more if we would have been relaxing the rules for that.
Okay, thank you. Maybe just a quick follow-up. If you look at the development versus Q4 in China, has the credit situation with any of your customers deteriorated or have you had to make any adjustments to any outstanding provision or anything like that?
Well from a bad debt provision perspective, we've increased somewhat but more normally, I think where the biggest impact is that from in the first quarter. The liquidity was very tight. We had to scrutinize more and more of our deliveries and that had more of an impact to our volumes than anything else.
Okay. Thank you very much.
We'll take our next question from Christian Hinderaker of Liberum. Please go ahead.
Yes. Good afternoon. Thank you for taking my questions. Both of them are on inventories. Firstly, just be interested if you could provide an indication even if it's just a broad ranking, as to how much of the inventory build was the result of say, strategic choice to increase your buffer stocks versus cyclical factors be they component shortages or some of the bottlenecks related to COVID-19 lockdowns. Secondly, interested in the intentions for inventory management as we move through the year appreciating obviously that inflationary effects may mean that the value goes up, but interested in volumes in particular if I can put it like that. Thank you.
Well, overall our inventories are quite low. Yes. We did make some choices to increase inventories for certain components that are difficult to get access to. I would say that still, most of this is really related to the complexity of operating. In a number of markets we see our customers being impacted by shortage of also material for them to build their construction sites. Therefore it is more complex to see which projects are going forward. The inventory is really tied up to these deliveries where we have distribution centers having a bit more content than normally. We're relatively still talking about tens of millions rather than bigger numbers.
In the big scheme of things it's still we have relatively low inventory levels.
Sorry, the forward planning for the year ahead?
Forward planning year ahead. I think it's more just in case but I don't see right now that it would have a more dramatic effect or impact to our inventory levels. Clearly we need to think about it differently. So far I have to say that the combination of our manufacturing as well as our sourcing has done a very good job being able to deliver in this environment to our customers when they need the products and solutions. I think it's a bit more just in case but I wouldn't say that it's a dramatic change. I don't know, Henrik, if you have anything to add to that.
No, I think that's, yeah. No, that's good.
Great. Thank you.
We'll take our next question from Alexander Virgo of Bank of America. Please go ahead.
Thanks very much, Henrik, Ilkka. Quick couple of clarifications, please. I'm still not quite sure I understand why revenues were down in Q1 in China and orders were flat. I was expecting it to be somewhat the other way around. If I understood you correctly. The revenues were down partly because of your own actions around concerns around customer health. I guess where I'm going with this is that I'm not sure that gets an awful lot better in the very near term next couple of quarters. I'm wondering why that improves. That's the first question. Then the second question, if I could, just follow up on impact of lockdown.
Could you help us understand, I guess it's probably non-China Asia, but how much of your China production supplies non-China Asia or rest of world KONE? Just so we understand the broader implications of the logistics difficulties that are gonna be exacerbated by the lockdowns we're living through at the moment. Thank you.
I think Ilkka can probably give a more accurate answer to this. You also have to remember that first half of last year, particularly first quarter, there was actually a very rapid rotation of the order book in China. It actually increased a lot in the first half of last year. What developers did is that they speeded up projects to be able to sell them to improve the liquidity. It started to slow down. We also have a comp that was actually a very rapid rotation. I wouldn't make a big point out of this that we have, you know, as Ilkka said, that on payment terms, what we've done is that we've ensured that we kept our payment terms that we haven't eased them. We know the credit situation can be challenging.
You know, we can see that actually things are at the moment progressing there. I would put this in perspective that the challenge I think for the second quarter and going forward is now the restrictions and lockdowns because of the lockdowns. Logistics is really very challenging in China at the moment because the restrictions where drivers can go to. The Shanghai port is, as we all know, clogged up. Those are really the bigger challenges right now. My understanding is that the message from customers is that they want as soon as they can proceed they proceed. Now, if you look at the rest of Asia, yes. We supply a lot from China. Of course we have factory in India as well. Also there you have to put it in perspective.
I would claim that almost every building that goes up in Southeast Asia, Australia, or these countries.
are built very much with Chinese components. Be it maybe not the basic building materials, but facade elements or, you know, plumbing and HVAC and everything. All of these constructions will be delayed. You know, at the stage we come in I don't think we are the bottleneck. At the moment, we've been able to find alternative logistics ways to actually continue to deliver. How it impacts our restoration business will depend on how long the lockdowns are continuing. As I said, I think you know, you're gonna see a big impact on the whole construction trade just because of all the materials, how they are supplied to these building sites.
Great. Thank you.
Still, to add to Henrik's answer, that relatively speaking, we are still quite local in terms of manufacturing. If you look at the global footprint, North America, Europe, India, China. It is still an industry where distance does matter.
Okay. Thank you very much.
Well, thanks to everyone for listening in. Henrik, did you have anything that you wanted to say now?
I could just say a couple of.
Mm-hmm
Further comments. Thank you first of all, everyone, for your activity. You know, as I started this event today it's been an eventful quarter once again. Easily we can think about all the disruptors that we're seeing. At the same time, there are many actually good things going on there. With market growth, you know, we've been able to capture that growth very nicely. I would really highlight our service business. I don't think we can see anyone performing or growing it as fast. Really the strategy we have had on our service business with how we're building it up how we're growing it and the digital aspect of it is really coming through very nicely. That is something where we're definitely pushing the accelerator as much as we can. The Chinese property market is challenging.
At the same time, orders keep coming in. You know, there is still belief there, and it's definitely belief there. We have to see how long these lockdowns go on how that's gonna impact deliveries. That's clearly a question that we don't have all answers for. At the same time, I can see the motivation our team is that once we can get going, they are very eager again to get going full speed. If we remember how quickly we at KONE came out of the COVID lockdown in 2020, I think we have some good abilities there. Of course, a huge focus for us is to improve pricing improve productivity and product costs. Momentum is good. Yes. We are not where we need to be.
We need to make further progress, but I think the momentum is really good at the moment. There also we are pushing as much as we can going forward. With that, happy to Natalia, any final comments from you?
Yes. Just one reminder to everyone. We just actually sent out our CMD invitations yesterday. It would be great to have you all attending. You can find more information on the events on the IR pages, and the registration information as well. Hope to see you in Helsinki in June. Otherwise, thank you for the questions. Thank you for dialing in. If there are any follow-ups, please feel free to reach out to me. With that, have a great rest of the day.
Thank you.
Thank you, everyone.