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 very pleased to be joined here today by our President and CEO, Henrik Ehrnrooth, and our CFO, Ilkka Hara. As usual, Henrik will begin by talking you through the key developments in the quarter, both in terms of our financial and business performance, but also what we're seeing in the markets. Ilkka will then deep dive a bit into the financials and, Henrik will wrap up with our market outlook and our guidance for the year before we then move into the Q&A session. During the Q&A session, I would ask you to limit yourselves to one question and one follow-up so that we make sure as many people as possible have the time to go through their questions.
With that, Henrik, please.
Thank you, Natalia, and good to have you all online. Our second quarter was clearly a mixed quarter. It ranged everywhere from significant impacts from COVID lockdowns in China to an excellent performance in our Services business. Many different situations in the quarter. If we start with the highlights of Q2 2022. Clearly, the lockdowns in China had a significant impact on our deliveries. Although our development in China was robust, which is clearly a positive. We again had an excellent quarter in our Services business. What is positive here is that the good growth in Services overall was driven by both pricing as well as volume growth. We're making good progress here again. Our actions to improve our profitability are progressing well and clearly remain a top priority.
Ilkka will talk a little bit more about how we are progressing here. Some of the key figures for Q2 is that our orders received were just slightly up year-over-year in comparable currencies at just over EUR 2.6 billion. I think in the environment, I think it's actually quite a good number. Our order book is clearly at an all-time high at exactly EUR 10 billion, and that's up 12.2% year-over-year in comparable currencies. Clearly, that's very strong and gives us good situation going forward from here. Sales at EUR 2.55 billion, now down 15%. Clearly here, as we had announced already, impact from China was quite significant.
Given the impact of the COVID lockdowns, our operating income declined 48.5% to EUR 189 million, and our adjusted EBIT declined 44% to EUR 209 million, giving us a margin of 8.2% compared to 13.3%. It is clear that this type of margin is not okay to us, and it's clear that we want to improve it quite significantly. Our cash flow, EUR 166.6 million, down from the exceptionally strong level of over EUR 500 million last year. As we always say, one quarter is a short period of time, and now we have six months behind us, which gives us a little bit more perspective.
From orders received perspective in this type of environment, we grew now at comparable rate at 5.2% to just over EUR 5 billion. I think it's actually quite a good number. Sales close to EUR 5 billion as well, although down 8.5%, and clearly was the impact from Q2. We can see here the significant impact on our EBIT and adjusted EBIT of what happened in Q2. EBIT at EUR 360 million, adjusted EBIT from EUR 624 million down to EUR 406 million. Here, 8.1% margin is clearly not enough for us. Cash flow at EUR 385 million, Q2 was a solid cash flow, now slightly lower.
Ilkka will talk about more down from the really exceptionally high level of over EUR 900 million last year. Earnings per share also down from EUR 0.92 to EUR 0.51 per share. It is clear that a lot of things have happened in the quarter and the first half of the year. Everything from COVID lockdowns in China, the war in Ukraine, disrupted supply chains, but at the same time, good opportunities in Services and North America and many other markets. It's been a, you know, very changing environment, and that, of course, takes a lot from the teams. I must say that I think the KONE teams have done an outstanding job again in navigating this environment, finding opportunities, continue to drive improvement, as we'll talk more about today.
A huge thank you to everyone at KONE for that. We can see that employees at KONE are doing a great job, and also they remain highly engaged. In the quarter, we all again conducted our annual employee engagement survey, and we can see that our employee engagement stayed at a good level. It was slightly down year -over -year, but it's clearly above where it was pre-pandemic level, clearly above outside benchmarks. Overall, you know, in this type of environment, with a lot of uncertainty in the world overall, we can see that engagement of our employees is high. When we look at the overall survey, feedback was actually pretty good. That I'm incredibly happy about. We can also see the great work our employees are doing in the development of our Net Promoter Score.
In the quarter, we did our annual Net Promoter survey, where we surveyed broadly our customers globally. I'm happy to say that we had another good year of improvement. What I'm particularly pleased about here is that we know that supply chains have been disrupted this year and there's been a lot of uncertainty. At the same time, our customers are giving us constantly better feedback on how we are delivering to them. We had a broad-based improvement, both in the Services business, in the New Equipment business, and through most geographic regions. Really a strong result here.
What is the feedback we're getting from our customers is that they very much appreciate the quality of our products, overall our products, the quality of our services, how we serve in a relationship with KONE, and clearly we have areas we can improve, for example, in customer communications and how we interact with them. Many things are moving forward, and we can see this trend over many years has been quite positive. I think these are two very, very fundamental topics, and of course, these are first two strategic targets are about making KONE a great place to work and have the most loyal customers. Therefore, these are really important and fundamental metrics to us. That's something I'm definitely happy about. That's a little bit of highlights of what's been going on at KONE in Q1. What about the markets?
When I look at the New Equipment markets, we again have two very different stories here. New Equipment markets outside of China have actually been good. Clear growth in North America, growth also in Europe, Middle East, and Africa, particularly in South Europe, and then good growth in the Middle East, although we can see some impact of the war in Ukraine on demand in Central and North Europe and perhaps the energy crisis having a little bit more of an impact there. Overall, growing markets. Also in Asia Pacific, outside of China, significant growth in Asia Pacific outside of China, and here really call out, for example, India, which we all know is a very important market for KONE, a great development in that market.
It's clear that China, it was significantly impacted by COVID-19 lockdowns, and continued liquidity constraints on developers. That means the market did decline significantly, but I'll come back to that a little bit more in detail soon. Service markets continued to develop very nicely, so this is really continuing to be a good story. Maintenance, some growth in all of the mature markets and clear and good growth in Asia Pacific. Perhaps the most positive market overall is the modernization market right now with significant growth in both North America and Asia Pacific and also clear growth in Europe, Middle East, and Africa. We've been putting a lot of efforts here, and I must say that the development, also modernization from a KONE perspective has been excellent, so a lot of great opportunities there.
When we look at the fundamentals for the Service business, this chart you've seen now throughout the pandemic from us. This is again the monthly average number of starts per elevator, from a very broad base of connected units. What is positive is we can see that number of starts per elevator is more or less at pre-pandemic levels, so people are moving out and about. Yes, it differs a little bit by country and by segment, but by and large, back there. Why do we follow this? Because this really tells about the longer term need for maintaining and upgrading elevators, and we definitely see that the need is there. This is a great development, a good picture for us as well. Then a little bit more about China.
If you look at the property markets, first of all, as I mentioned, the big impacts have been liquidity constraints for developers and, of course, COVID-19 lockdowns. The overall markets declined by more than 20% in Q2, and the pricing environment was very intense. There's no question about that. The lockdowns had a negative impact on many markets and of course, created uncertainty. That I think is clear to everyone. However, we have started to see some easing measures, particularly from local governments to stimulate a little bit the demand side from consumers. Actually, well, I'm not sure we call it stimulus, but they have reduced restrictions for buyers. Some also improvement in liquidity, but not significant yet. What is situation for KONE?
In April, there was several weeks when the City of Kunshan was in total lockdown, so it was impossible to keep the factory open. When we went to May, we had for a while so-called closed loop production, so it was still limited production. Although in June, we were back to full capacity in our supply chains, both in Kunshan and Nanxun, both ourselves and our suppliers. We did recover pretty well from there. Maintenance has been resilient. Of course, modernization has been impacted by same issues in the supply chain. That was clearly the big impact, and our sales declined in China as a result of this in total about 40% in this quarter. What I already mentioned is a positive thing is that there's been solid demand for KONE's solutions.
If you look at the statistics for the real estate market, we can see that there are clearly challenges with real estate investments down, also residential sales volume and new starts. What is positive is that prices in 70 largest cities have been very stable. It is also clear that we are starting to see improvement in all of these numbers, and therefore we're expecting a somewhat better second half than first half from this perspective. That is about KONE's development and markets. Now I'll hand over to Ilkka to talk more about our financial development.
Thank you, Henrik. Also, welcome on my behalf to this webcast for second quarter results this year. I'll go through our financials in more detail and start with orders received development. Orders received for the quarter were EUR 2,609 million. On a reported basis, a growth of 8.2%, and on a comparable basis, 0.6% growth in the quarter. I would say that this is robust considering the environment where we operate. We saw strong growth in Americas as well as in Europe, Middle East, Africa. Also, Asia -Pacific, excluding China, grew strongly in the quarter. Naturally, China's impact then drew APAC as a whole to a decline. Second, our actions around pricing, product cost aimed at our margins are progressing well.
I'll come back to them a little bit later in my presentation in more detail. As a result, we continue to see sequentially our orders received margin improving again. Starting from fourth quarter last year, we've now seen three quarters of improvement in the margins. At the same time, we're still slightly down compared to last year's equivalent quarter in the margin. To sales. Sales for the quarter were EUR 2.555 billion, down on a reported basis 9.1% and on a comparable basis 15.2%. Americas grew its sales by 2%. Europe, Middle East, Africa came down slightly at 1.4%. APAC overall declined by 31.5%, driven by the development in China, where our sales declined close to 40%.
In the rest of the Asia -Pacific, we actually saw growth in our sales. In business line-wise, New Equipment was impacted by China and declined 30.1%. We continued to see very strong development in our Services business led by maintenance growing 7.6%. Very good development there. Also modernization were stable compared to last year at 0.5% down. To adjusted EBIT, which for the quarter was EUR 209 million and the margin was 8.2%. While we did see the good development in Services contributing positively to our growth of our adjusted EBIT, the decline in sales in China naturally had a negative impact overall. From a profitability perspective, we continue to see improved quality as well as productivity contributing positively.
At the same time, in second quarter, the impact of increasing input costs was EUR 70 million, covering the material component and logistics costs. Naturally from a profitability perspective, having less sales, we had a lower fixed cost absorption as a result. As already said by Henrik, this is not naturally a level where we are happy with. As a result, we have very clear actions on how to improve our financial performance. We're driving pricing across all regions and businesses and also implementing more dynamic contract models which are better suited for this highly volatile cost environment. In pricing, we see a very good progress in maintenance as well as in modernization, where we've been able to almost fully transfer the prices to increased costs.
At the same time, in New Equipment, our pricing develops positively when we look at Americas, Asia Pacific, as well as in Europe. While we still have more work to be done to be able to fully offset the increase in costs, we progress well. In China, the pricing is clearly, it is more a challenging market from that perspective. The second action is around product cost. Actions in sourcing and are offering developments to decrease the product cost. There we continue to make good progress, and we are seeing two to three times higher product cost reductions than we normally see. While the pricing environment in China is more challenging, there we've been seeing then a better development from a product cost perspective, leading clearly globally the effort there.
Also in other factories, we see good development from a product cost perspective. These are the actions that are really about the orders that are coming in the new business. We also have an existing order book, and we're focused on improving margins there. Clearly, driving productivity across the business is important. We've seen now for the first half of the year good development in productivity, actually better than we've seen in the past. That's helping us then to counter some of the headwind that we have for the existing orders going forward. Last, clearly we need to, and we are accelerating the services business growth. For the first half, we've seen very good growth in the Services business and maintenance especially, and that's clearly one of the key actions to drive the improved financial performance going forward. Lastly, to cash flow.
Cash flow for the quarter was EUR 167 million. That's down from what I would call exceptionally high level in previous year in second quarter. Operating income contributing to a decrease in cash flow. Also last year we had a very positive development from working capital point of view. Now we actually see working capital coming, going up slightly. The key drivers for that are accounts payable. There we had exceptionally high level, I would say, on payables. Now it's more normalized. We have increased inventories, given the environment where we are operating from a supply chain perspective. Then lastly, particularly now in the second quarter, we announced the divestment and suspension of our deliveries in our operations in Russia, having also a negative impact to working capital as we're ramping down the equipment business there.
With that, I'll hand over back to Henrik to cover market and business outlook for the rest of the year.
Thank you, Ilkka. To wrap up, New Equipment markets for the full year this year, again, two different stories. Chinese new equipment market, we expect to decline significantly this year due to the tight liquidity situation and for developers and of course COVID-19. What this means is we think the market is gonna be down about 15% for the full year, year-on-year. In the rest of the world, we expect that the activity will increase, so good markets overall in rest of the world. Also modernization markets, we expect that they will continue to grow and be very solid. That's been definitely a positive in this industry. Maintenance markets, really, returning to pre-pandemic growth trajectory, which means slight growth in mature markets and good growth in Asia-Pacific.
Really what we've been seeing for a longer period of time. Our business outlook, which we announced already last week, we now expect our sales to be in the range from -1% to +3% in comparable currencies compared to last year. We expect our adjusted EBIT to be in the range of EUR 1.130 billion-EUR 1.210 billion, and that assumes that foreign exchange rates stay about at the level where they are now. Now, as usual, there are a number of things that are positive, driving our performance, the great outlook for our Services business and the performance there, and our very solid and large order book.
We also expect that the profit improvement actions that Ilkka talked about, such as productivity pricing, cost and so forth, will start to have a positive impact towards the latter part of the year. As we know, there are a bunch of things burdening our result, about EUR 200 million headwind from materials, components, logistics and so forth. What I would say here is that while headwind continues to be very significant, that we're starting to see the first signs, I wouldn't say anything concrete, but first signs of improvement in global supply chains overall, logistics and, perhaps component availability and so forth. Still tight, but at least first signs of improvement. Clearly, also COVID-19 lockdowns have an impact and also the competitive dynamics and pricing in the China market are very challenging.
To wrap up, great continued development in our Services business, that I'm very, very pleased about. It's clear that we have a very strong focus right now on delivery execution so that we can deliver on our large order book, which we're confident we can do, and, secure a continued progress in our actions to improve our profitability. We have good momentum there, and that we want to continue. Perhaps the most positive is that we have a high employee engagement that is absolutely fundamental in an environment like this. We have an improving customer loyalty. I think these are absolutely great positives in capturing, opportunities going forward. With that, we are definitely ready for your questions.
Of course. Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue, you may press star two. As a reminder, we ask that you only ask one question and one follow-up question. You may re-enter the queue for any additional questions. Again, it is star one if you would like to ask a question. We'll go ahead and take our first question from Daniela Costa with Goldman Sachs. Please go ahead.
Hi. Good afternoon. Thank you so much for taking my questions. I'll stick to one, and then I will ask a follow-up afterwards. But I mean, looking at your slide on China, it sounds like despite the market drop, you're still gaining market share there, or at least I wanted to ask you to how do you read the fact that you're saying your units are only down 10%, the market's down more than 20%. Is it a market share gain from who or is it just where you're distributed in the country or any sort of mixed impact, but how do you sort of phrase that difference?
Thank you, Daniela. I would say that, yes, we clearly had a very robust performance compared to the market. Again, I would highlight, as we said so many times, that this is one quarter and quarter -to -quarter there can be fluctuations. It's clear that, relative to the China market, I think we're performing well. I don't think we are performing well. You know, we know many of the smaller players are challenged in this type of environment. I cannot say really who we're taking market share from. Clearly we have that. I'm not sure the most relevant point. Yes, we are performing well. We are doing well. Again, let's remember it's one quarter. Also if you look at the first half year, performance has been pretty solid from that perspective.
Then my follow-up relates to Europe and U.S. equipment margins, given what you have said in past calls regarding your profitability on service not being too different from where one of your peers that discloses it is and what you've said in the past regarding China. I don't know if this is still true, but China not being below group margin at the moment. I'm not sure if this was true, but that looks like your Europe and U.S. equipment margins must be very, very low or even breakeven. Can you talk about sort of. I know you don't comment on levels, but compared to history, where we are there and how much a potential raw material tailwind going into 2023 helps you normalize that to historical levels?
Yeah. Maybe, Ilkka, you start with that.
Yeah, I would say that clearly second quarter from an equipment business perspective was heavily impacted by first the COVID-related measures in China and volumes were lower than normally. Also, the cost levels have increased considerably, as we've said about the input costs, and that's mainly then impacting our New Equipment business as such. Your question around then New Equipment business outside of China, the profitability there, clearly it is something where the input costs have impacted the profitability negatively and we're on an annualized basis profitable in New Equipment, but short term in Q2 that is impacted by these headwinds.
We'll go ahead and move on to our next question from Jeff Sprague with Vertical Research. Please go ahead.
Good morning. Good day, everyone. Thanks for the question. I'm just wondering if on China, you could unpack that a little bit further. Obviously, with your revenues down 40% and your New Equipment units down 10%, the implication, as you noted, is, you know, price is quite weak. But can you kind of provide a little bit of color on how you would bridge between those two items, price versus maybe mix? Is there mix erosion going on in China also? Thank you.
I can take it.
You can take it, yeah.
Yeah. In China, in the quarter, both mix as well as price contributed slightly negatively to our orders. It's not a big change. Sorry, mix is more driven by somewhat lower floors, and as a result, slight negative mix impact.
When you mentioned first the 40% that we're, that's revenues, that's deliveries.
That's right.
10% is orders. Two different numbers. That, of course, is just want to highlight.
Great. Thanks for that. Just as a follow-up, just on the guidance, obviously you indicated that some of the actions might be a bit more back-end loaded, you know, the productivity and other actions. Can you give us some sense of how you see the remaining trajectory of the year playing out? How much improvement you do expect in Q3? Or is this really very Q4 weighted to reach your guidance? Thank you.
Well, I guess we are not guiding on a quarterly basis, but if you think about the nature of the actions, clearly we've seen now prices and margins for orders received starting to improve latter part of last year. Some of those start to be in delivery at the latter part of the year, so gradually contributing positively. Also, the product cost actions that we've talked about, they will gradually start to then impact also our manufacturing and be then impacting P&L. Gradually, I expect that the margins will then recover towards the latter part of the year. We will start to see some of that slowly impacting then also Q3.
Of course, the big difference in Q2 is that we're not expecting this type of lockdowns that we had, that we can have a, you know, good deliveries. We have a great order book, we have a good service business, so all of those, things are in place for us.
Yeah.
We'll go ahead and move on to our next question from Andre Kukhnin with Credit Suisse. Please go ahead.
Good afternoon, and thanks so much for taking my question and follow-up. My question is on China impact. If you could help us quantify the EBIT impact from that 40% decline and maybe around that the 40%, I guess, is a combination of what would be the underlying decline that already started from orders to revenue in Q1. Is there any chance to also get a gauge on how much the lockdowns added on top of that, if that's at all possible?
Mm-hmm.
I'll have a follow-up.
Well, normally there's a sequential increase in revenues from Q1 to Q2 related to normal seasonality. In Q2, as you said, we saw our revenue from last year decrease by 40%. We're talking about, in order of magnitude, EUR 400 million-EUR 500 million impact into our revenue. As a result, over EUR 100 million cost or EBIT impact. There's both the drop through, but also in this environment, naturally operating is more expensive as well. There's not one of course, but costs related to operating in this environment.
Right. Thank you. Is there an element of catch-up of this baked into your guidance for the full year? Could you give us some idea of maybe how much of that catch-up you expect, maybe at the midpoint of the guidance range, please?
There is some catch-up expected there. I don't think we're gonna define it more in detail, but there's some catch-up clearly.
I think here you can see, Andre, that we have a very big order book. At least we have plenty to deliver, which is very positive.
We'll go ahead and move on to our next question from Miguel Borrega with BNP Paribas, please.
Hello, everyone. Thanks for taking my questions. On the margin of orders being down year-on-year but sequentially up, can you just be a little bit more clear on what that really means? Because if you were aiming for a margin of, let's say, for the sake of the argument, 5% last year when you were doing 4%, it's quite different from now that you're maybe targeting 4% but doing 1%. Is that the right way to think about this? Or can you give us a better picture of what sequentially better margins mean?
We're slightly improving sequentially. I don't think we're gonna quantify that much more. Clearly, our ambition is to be able to improve and return to the levels of margins that we've seen in the past. Those actions are ongoing and this is just a way to report the progress compared to last year and previous quarter.
Okay. On your order intake, how are things changing in the sense of offsetting cost inflation? Can you give us a sense of how many of these dynamic contract models have been already implemented out of Q2 orders? Will we see kind of the new way of working going forward or still quite limited to certain regions and clients?
I would say it varies. I would say Ilkka mentioned his presentation, perhaps when it comes to pricing and offsetting costs, best in the Services business, both maintenance and modernization. Actually, modernization doing very well there. New Equipment business, still some way to go, but the momentum is right here, perhaps best in North America than both Europe and Asia-Pacific. Perhaps Asia-Pacific has had the best momentum right now, so outside of China. You know, many good developments there. When we think about these more dynamic contract models, of course they have existed in some parts of the business, but that hasn't been a very high percentage and that of course then helps a bit. It's clear we started to implement that now through tenders before those are then in orders and deliveries.
Of course it's not gonna turn very quickly, but it's a longer-term initiative that we think it's important to get a closer correlation between costs and order book. I would say that momentum in getting started to implement that in the business I think actually is going pretty well.
We'll move on to our next question from Klas Bergelind with Citi. Please go ahead.
Thank you. Hi, Henrik, Ilkka. Klas at Citi. First one is on your freight costs. I don't think you pass these on automatically as part of your contract. When these costs start to go down and you allude to, Henrik, that you're starting to see the first signs of an improvement to supply chains, this should obviously be positive. I also remember correctly that I think that you renegotiate the contractual part at mid-year, which is right now. I'm trying to gauge the timing, but also how much you buy on spot versus contract. I'll start there.
Maybe I'll start and then you can comment. Not sure I heard you correctly. You're talking about logistics, I guess.
Yeah.
In the beginning. We ongoingly contract with our logistics suppliers as with other suppliers as well. I would say that from a input cost, logistics cost perspective, we have a pretty good visibility for the year 2022 already. We're committed and also start to have quite a clear picture on the mix, which countries and so forth. There overall the cost headwind now is the EUR 200 million and there's less variability there. In logistics, I think what has been in the past the challenge is that you have a base price, but then you need to add capacity with spot purchases on logistics. Those spot purchases have been very expensive.
I think here we're now starting to see not only the availability be there, but also then having to use less of these spot purchases and overall logistics costs, especially sea freight, starts to come down, but I don't think we're gonna see much of that as a impact anymore this year. The separate story is that in road transportation, naturally, that is then the next challenge. There the prices continue to be on a quite high level and also capacity quite tight.
I'm trying to gauge the impact for 2023. I appreciate 2022 is too early to see it. Anything there on contract versus spot, if you have that split, I don't have it right now or if you-
No, I think the spot normally has not been used during the last years. It is something where we've had to supplement then the capacity where there hasn't been enough. I think normally I don't expect that we would start to use more of that spot purchases for logistics in larger scale.
That's why, you know, many of the trade lanes have been overfull. You know, you have had no flexibility. If you have delivered a little bit less at some point, then it's not that you've been able to move that capacity later, which is usually the possibility. I think it's just a more stable and more environment you can plan better right now.
Yeah. No, that makes sense. My follow-up is from the steel side. We're seeing some quite big drops here. Sometimes, you give us an indication, Ilkka, what you think the impact will be beyond this here at current spot. I don't know if you are willing to do that, but I'll give it a try.
Sorry, can you repeat the question? I didn't hear the.
It was a bad line here.
Oh, sorry. On the steel side, we're seeing some quite big drops. Sometimes, Ilkka, you are helpful with the impact beyond this here at current spot. But I don't know if you're willing to go that far, if you could hear me. Sorry.
Yes, now we hear. Thanks. Sorry for that. Let's see. Steel in China has come down and whereas I would say that outside of China it continued to be on a quite high level. Let's see when we get a bit closer to 2023. If the development would be similar to what we've seen now, that would start meaning that there could be some positive, but it's too early to comment that yet.
I think the only thing we know is that the volatility is likely to be high going forward, which direction that we would then see.
We'll go ahead and take our next question from Alexander Virgo with Bank of America. Please go ahead.
Thanks very much. Good afternoon, gentlemen, and thanks for taking my question. The first question I wanted to just touch on was the dynamics that you saw in Q1 with respect to your decisions around to whom you were delivering in China and the liquidity concerns, the quality of the customer base. I guess it's pretty difficult to disaggregate that in Q2 because of the lockdowns. It doesn't. I don't get the impression that has improved an awful lot. I'm just trying to get a sense of why you feel there can be a reasonable amount of recovery in the second half. That's the first question, just a little bit of a conversation around the quality of that customer base. The follow-up would be related to that.
I guess you've seen quite a big build in working capital, partly as a function of decisions you're making yourself and also, the problems of lockdown. I'm just wondering how you would expect to see that working capital unwind, through the back half of the year so we can get a sense of cash generation. Thank you.
Well, if I start first on the quality of customers. I would say that in Q2, clearly the bigger challenge was the capability to deliver. Yes, we continue to be managing our payment terms and customer risk quite tightly as we talked about in conjunction with Q1 results. Clearly in Q2, the impact was larger due to the lockdown measures. Going forward, naturally we will continue managing that risk quite tightly. From a cash flow perspective, I think it's good to remember that when we talk about working capital change. Last year, Q2, we had a very good improvement in working capital. Now, it was an opposite direction about the same change around EUR 85 million.
Out of that EUR 85 million, roughly EUR 50 million actually was related to the decision we made on our business in Russia, where we're unwinding the business. I would not overemphasize the working capital change because at the end of the day, if you look at the big picture, it hasn't changed much. Naturally, when we grow, it helps us when it comes to advances, especially in the equipment business and vice versa. If we see a decrease in orders, then that would have a opposite impact.
We'll go ahead and move on to our next question from Andrew Wilson with JPMorgan. Please go ahead.
Hi. Good afternoon. Thanks for taking my question. I think it's a bit of a follow-on from Alex's question previously, actually. I'm just trying to get a sense of. I think when we've talked before about the expectations on the second half.
I guess the market conditions to improve and obviously I guess I'm interested in updating how you're thinking about that. Now, clearly it's gonna improve on a Q2, which is very heavily impacted by lockdowns. When you think about what the government has or hasn't done with regards to policy and how that's impacting activity on the ground, can you just give us a sense of sort of if what you've seen from a policy perspective and I guess from the customer indications perspective that you're as confident around that recovery as you were previously? I appreciate that's quite a general question, but just really trying to get a sense on your confidence around that improving at least order number I think probably for China.
I would put it this way that, you know, we are not expecting any massive changes in the environment and government actions. We expect, you know, the market will continue to be as it is, right? Which is challenged, but they still have a big order book to deliver to the developers, and they will, they need to deliver that. The liquidity will continue to be quite tight. We're not counting on anything very significant that would happen in the market. If something significant would happen to the positive side, it would then more probably impact orders rather than deliveries. But at the same time, we're also not expecting any significant lockdowns that we saw in Q2 that, of course, there are smaller lockdowns here or there, but I think they are quite manageable.
Thank you. Just as a follow-up, I appreciate it's a slightly different area, but maybe just looking for a little bit of help on some of the margin drivers. Kind of talked a couple of times around the lowering product costs and some of the actions around productivity. I don't know if you could help us try and quantify some of the potential benefits. I appreciate it's often difficult to isolate these, but just to, I guess, give us a bit more confidence in terms of the help on the margin for the second half versus. I guess into 2023 as well, please.
Well, I guess on the product cost side, normally when we look at product cost actions that we take, we've seen maybe 2%-3% decrease on annual basis on product cost. As I said, now we've been able to see 2x-3x that. Maybe that's one way to think about the magnitude of those actions. I think the actions that we have now in place and expect to be in place for the second half are quite clearly. We have a good line of sight to those actions, and then normally it always takes a bit of time to then implement that to the new production and then start to see those elevators produced with a lower product cost then being delivered and then recognized on the P&L.
That's more the timing difference than towards the latter part of the year.
The next question comes from Guillermo Peigneux with UBS. Please go ahead.
Thank you. I guess that was me, Guillermo Peigneux from UBS. Maybe, you know, a follow-up question from previous questions on steel prices, especially when you look at steel prices in China, we've seen spot prices basically going down, in some instances by a third. Rather than asking the magnitude, can we ask when would you start to see it in your P&L, i.e. basically, when would you start to filter through these lower cost levels in your Chinese new installations, if I may? I have a follow-up.
Well, if the prices were as you said, then we would start to see the benefit in first half of next year. There's always a timing difference, as you saw in 2021 when the prices were going up. We were mostly not impacted in the first half, started to really then impact in third quarter and fourth quarter. There's a three to six months lag normally. This year we already have quite a good visibility. Our prices are locked with our suppliers and also with the inventory rotation. I would not expect a big change anymore into this year's results, but sometime then early next year.
Thank you. My follow-up is, I worry a bit about pricing now that obviously the China recovery will be very intense activity, and then a stabilization will be peaked afterwards. As you said, the fundamentals aren't great. And with raw mats going down, what do you think pricing will do next year? I know it's a bit early to ask, but would you say that if there is a chance that actually we resume pricing pressures to the magnitude that people would like to gain market share, in a flat market or in a potentially, you know, weak market? Thank you.
I think we need to put it in perspective as well that, you know, there's still way to do to catch up with prices have gone up, and I think that everyone in the industry are feeling it. Clearly, then when you look at China where costs are then coming more down, you know, you have not seen price increases there. From that perspective, I would not be so worried about that. I trust that everyone understands that, hey, there is a need to improve margins throughout the industry and therefore driving a better margin, and that's what we are very focused on right now. We also have to see.
It's also a big difference if you look at Europe, here actually steel prices and others continue to be at the very high level. U.S. perhaps slightly down, but also the high level. I guess in Europe it has a lot to do with the energy crisis that we are facing here right now.
We'll go ahead and move on to our next question from Martin Flueckiger with Kepler. Please go ahead.
Yeah, afternoon, gentlemen. Thanks for taking my question. Again, on China, I'm afraid. We've been reading about these revolts by apartment or housing buyers in China and quite, you know, literally the images and the videos that we were able to see were a bit frightening too about what's going to happen here. Now I've seen what the regulators are suggesting to the banks, but I was just wondering what the kind of feedback was that you've got, that you received from your team in China, how they view the situation and what they make out of this going forward, you know, whether the downward spiral will be broken or whether there's further downside risks from here. I have a follow-up after that.
Okay. Clearly that has been a lot in the press over the past days. Of course, you know, if consumers have made a down payment and are paying mortgage already and not getting delivery of their apartment, clearly that's a concern. We are seeing that government is taking action to make sure that the developers are speeding up so that they can deliver this. That should have a somewhat positive impact for us if deliveries are actually sped up because of this, so we can complete the installations and hopefully slightly better liquidity for them. Clearly this is a topic they need to take seriously, and I think they are taking seriously. We have to see how it develops.
As I said, it seems that the government is stepping in here quite clearly to protect the consumers.
Okay. Then my follow-up is just a clarification question really, to Ilkka. Did I understand you correctly that the China impact on adjusted EBIT in Q2 was EUR 100 million? Because you mentioned two numbers, and I wasn't sure which one was which.
Yes. I said over EUR 100 million in Q2 results.
We'll go ahead and move on to our next question from Hans Olsson with please.
Yes. Hi, Henrik and Ilkka. I have two questions. First, I wonder about the margin on orders received now, if you compare that to Q3 last year, are we still down year-over-year? I mean, that was when you had the big drop, or are we now on par with the level in Q3 last year?
We are up from last year's Q3, so up in Q4, Q2, Q1, and now in the Q2 as well. That is up.
Okay. Then you have always said that, you know, this industry doesn't really have any peak capacity or the industry does not tie up a lot of costs. Still we have seen this kind of big, you know, margin collapse, you know, throughout the industry almost it seems. It's kind of hard to believe that, you know, companies would not really know what's going on with costs and pricing. I mean, many other industries are doing very well with their margins. From a, like, more philosophical kind of point of view, what do you think is kind of the problem? Is it only the China exposure, but it seems to have problems with margin liquidity, whole thing in other Western markets in a different fashion than we see in other industries.
That's kind of, it's just kind of hard to understand why it would be more difficult in this industry than in many other engineering industries at the moment.
I would put it in two different buckets. If you look at the Services business, actually there you know prices are up so to cover costs and in some cases even more than that. Of course, it takes a little bit of time for modernization to come through the order book, but it's much faster moving. In New Equipment, it's a business that is very much driven by tenders, very competitive there. Then of course, the challenge is that you know you have a long order book, so before you have tender prices up, orders are there, it takes a good time for it to come through. Clearly there price development has been slower than for example in the Services business. It's just that the commercial dynamics are different.
It's kind of two very different stories if you look at Services and New Equipment. I would say New Equipment, you know, we are clearly up in prices outside of China so far this year, so we're definitely going in the right direction. I think in, you know, most markets we'll get there. I'm very confident with that. It just takes a little bit of time.
Our next question comes from Daniela Costa with Goldman Sachs. Please go ahead.
Thank you for taking my follow-up. I just wanted to ask back on China, obviously, on the backlog, which I guess is a sizable portion of your overall backlog. We're seeing a lot of uncertainty, I guess, around what happens in the local market. Can you remind us, like, how long do you keep things in the backlog until you have to maybe write them off? I think you did this in the prior crisis. I know we're not there yet, but just to have an idea on how should we think about length of the backlog and delivery. Thank you.
Well, I guess overall, our fastest circulating order book in the New Equipment business is in China, approximately nine months in terms of circulation and so that's the overall picture. We assess the quality of the order book continuously every quarter and as a result then cancel orders in case they are not likely to be delivered. Amount of cancellations have remained to be low and I think in this quarter particularly, we actually canceled on ourselves the Russia related orders which took that up a bit. In China it has continued to be on a low level. To be honest, if we look at the past, still the cancellations, I mean there were some in the 2016, 2017 when the prices came down quite dramatically.
Otherwise, it's been more stable and the cancellations from customers have been actually quite a low level.
The rotation at the moment is still within those nine months. It hasn't extended from order to delivery?
The order circulation has then as a result, I mean, we didn't deliver as many orders as we expected, so it is slightly up as a result. I would say that still the nine months is a good way to think about it.
Okay. Thank you very much.
Thank you.
We'll go ahead and take our last question from Andre Kukhnin with Credit Suisse. Please go ahead.
Oh, hi again. Thanks so much for taking the further follow-up questions. I wanted to come back first to those mitigating measures and just to get confirmation of sizes. I think at your Capital Markets Day you said that together pricing and cost out measures should mitigate about half of the cumulative raw materials and the logistics headwind, which are adding up to EUR 400 million now across 2021 and 2022. Is it right to think that you've got that kind of EUR 200 million annualized tailwind coming in and gradually from Q3 this year into Q4 and then building up to the full run rate by end of first half of 2023? Would that be the right cadence and right magnitude?
Well, I guess what we said, it was a status check where we are and now with actions continuing to progress positively, we're a bit better than that. The comment was especially about the New Equipment business. In the maintenance and modernization, as we said, we are actually progressing much faster than that and almost there when it comes to countering the cost headwind when it comes to the modernization business, and that's naturally then a bit faster circulating. On the New Equipment side, it will take some time for those orders that we've continuously booked now with the improving margins then to come to delivery. In China, as I said, the order book rotation is around nine months.
If you look at Europe being over a year and North America, then clearly over a year. Clearly that's then how it will be visible in the P&L when it comes to the pricing part. On the product cost side, we'll gradually start to see more and more of that coming through in latter part of this year and probably during the first half then in full extent. As always, we're not stopping to improve our product cost, so hopefully see then continuous good progress there in next year as well.
I think, Andre, that I think your math is sounds clear, but it's perhaps not quite that straightforward because the EUR 200 million this year, that includes already some of the benefits from the improvement actions. Yes, of course, our target is to come back to the levels we were a while ago. We still have some way to go there, but it's not quite that you can say EUR 200 million immediately improvement in a short -term because some of that improvement is already baked into that EUR 200 million. But of course, a lot of actions continue, and I must say I'm quite positive how our pricing outside of China is developing right now. Momentum is definitely there.
What I've got. Okay. EUR 200 million this year would have been high if you hadn't taken some of these measures, so we shouldn't double count.
Indeed.
On the ambition. Thank you. On the ambition of getting that order intake or order backlog margin up to where it was historically, the 2020 levels, how far below are we at the moment? Is there any way to tell?
Well, I think first what we've commented is the orders that we book those margins. In order book there's always a mix impacts when it comes to businesses and geographies. It's not as good proxy of the future. Clearly our ambition that we've commented was on the orders booked.
Yeah. If you think if you book orders, you know, for example, last quarter this year, not necessarily, it's not gonna necessarily show up in the following year. Some will, but not all. It's gonna be a gradual improvement. I think the important thing is that pricing is definitely taking us in the right direction, and from Services we're seeing the faster impact than from New Equipment.
Right. Sorry, very quick last one. I know we're an hour. Just looking at Q2 performance, and what you said about China being down 40%, that still implies down a couple of percent for kind of the rest, to get to the 15.2%-
Yep.
... overall. In the rest, we've got service up. I just wanted to check if in New Equipment there was softness elsewhere, in the second quarter that we should be aware of and then find out whether that's run rate or any one-off effects.
Well, I guess, sales in Europe, Middle East, Africa were down in the quarter. There we are seeing that some of the customers, especially in the New Equipment side, are having difficulties in taking their project forward as they planned. It's about having the supply chain, access to labor and so on that are impacting the project. Slight delays from that respect, impacting the revenue in the quarter. North America as well, some impact of especially labor, I guess, there being tight. As said, we saw growth in the sales in U.S., so slightly less. Well, the mix is less new equipment heavy, so less impact from there. In essence, we do see some slowness in the construction side.
With that does conclude our question and answer session for today. I would now like to hand the call back over to Natalia for any additional or closing remarks.
Thank you. Thank you Henrik and Ilkka for the presentation today. Thanks to everyone online for joining in and for the active questions. If you do have any follow-ups, please do feel free to reach out to me and the team. If not, I would like to wish you all a very happy summer.
Thank you.
Thank you, everyone.