Good afternoon, and welcome to KONE's Q3 Result Presentation. My name is Sanna Kajem, and I'm the Head of Investor Relations. As always, I have here with me our President and CEO, Henrik Anruth and CFO, Ilkka Hara. Henrik will first go through the Q3 highlights. Ilkka will give a bit more color on the numbers, and Henrik will then discuss how we see the outlook.
After the presentation, we have time for your questions. Henrik, the floor is yours.
Thank you, Sanna, and warm welcome on my behalf to our Q3 webcast. And I'm very pleased to present a good result to you today. We have some good news to share here. If I start with the highlights for the Q3, I would say the highlights are really that we continue to grow faster in our markets on a broad basis and the margins of our orders received continued to improve. Also, we had a solid growth in our services business.
Our adjusted EBIT margin improved and we had a very strong cash flow. So overall, a very solid quarter and that I'm very happy about. But if we, as usual, start with our key figures. As I mentioned already, it's all about solid growth, improving margins and cash flow. Orders received at €2,000,000,000 good growth, 6.8 percent growth in comparable currencies.
That is a very strong achievement in the market environment that we have at the moment. We have a strong order book at €8,400,000,000 and it's grown at 4.2% in comparable currencies over last year. Sales, SEK 2,550,000,000 and growth of 9.4%, again, very, very strong. Our EBIT operating income improved from €258,000,000 to €340,000,000 And the adjusted EBIT, which excludes the cost from the Accelerate program, increased from €274,000,000 to 322,000,000 and the margin improved from 12% to 12.6%, so also good growth and good profitable growth in the quarter. Cash flow at an all time high of €463,000,000,000 That is very strong.
And also our earnings per share improved from €0.42 to €0.48 But as we always say, 1 quarter is a short period of time. And now we have 3 quarters behind us, so we get a little bit of a longer perspective of our performance. And also, if we look at the 1st 9 months, we can see a very similar trend, solid growth in all businesses and strong cash conversion. Orders received for the 1st 9 months of the year, €6,400,000,000 and growth of 7.6% in comparable currencies, again, that I'm very pleased with. Sales also growing strongly, €7,300,000,000 of sales and 8.3% growth in comparable currencies.
Also, operating income grew from €750,000,000 to €836,000,000 and the adjusted EBIT from €792,000,000 to €870,000,000 Our adjusted EBIT margin is still just slightly down year on year because of decline beginning of the year, but now we had a solid improvement in Q3. And clearly, objective from here is to be on an improving path. Cash conversion, very strong for the 1st 9 months at €1,160,000,000 compared to €880,000,000 last year. EPS grew from €119,000,000 to €126,000,000 As usual, I'd like to express my thanks to all of KONE's employees for a fantastic job done in the Q3. We know that the activity and development activity level of Oconee is very high.
We are executing our strategy. We're bringing new service and solutions to our customers. We are driving accelerate program. But despite all of this, our people have kept their focus on our customers being out there proactively helping our customers resolve their pressing problems and that we can see from the growth that we are driving and from the fact that we are continuously now have been growing faster than our markets. That is a good achievement and I'm very happy about and very thankful for the great job our employees are doing.
Some more highlights of the Q3 is, first of all, the continued faster market growth in all businesses. It's been broad based growth. And if we look at our orders received, we have now 2 quarters in a row been able to slightly improve our margins from our orders received. All of this tells us that our competitiveness is strong and it's broad based. We are growing in all businesses.
We have been growing in all geographic areas. That, I think, speaks volumes. Also, in the summer, we had again we did again our customer loyalty survey. The results from that continue to be good. Our Net Promoter Score was now stable, but on a good level.
What are customers saying about us? They continue to say that KONE is a reliable and good partner. They appreciate our service mindset, our products and our services. However, as always, we have a number of areas where we can improve, such as customer communications, such as proactiveness. So we still have a lot that can be done, and those are things that we continue to work on so that we can continuously improve.
In Q3, our execution overall was very solid. We had very strong deliveries to our customers in all businesses. And then I'm very happy about, particularly if we think about the resource shortages that this whole industry is facing at the moment. In that environment, we have been able to keep our promises, deliver to our customers and deliver to our customers in a good way. Also strong cash conversion tells a lot about how we've been running the business, always very important metric to us.
We can see that the actions we have taken to improve our profitability are starting to show results. Those, of course, have to do with pricing, with efficiency and productivity. One of the actions we've been taking apart from just executing on our strategy has been the Accelerate program. We can start to see visible benefits from it. And just to recap, why did we start this program?
We have 3 objectives: improve customer centricity, speed and efficiency. Customer centricity is a big word, so what does it in practice mean for us? What we want to do is that we want to help our frontline organizations, the ones who are even better. Therefore, we want to take away tasks from them to help them focus on this and also drive the transformation that we need to drive as KONE. We also want to be faster in bringing new services and solutions to our markets and clearly, we want to improve our efficiency.
And we have a good momentum currently in the Accelerate program. If I just take a few examples, in customer solutions engineering, we have brought new processes, new ways of working and new tools as well. This is helping our frontline organizations to serve our customers faster, better and being more proactive with better tools. We're also shortening the lead times of our deliveries to many of our customers. In many markets, that is important and we have shortened those a lot, so we have actually gained a lot of speed in the business.
So we can see tangible benefits of what we're doing here. Our HR organization, which was one of the first ones we transformed, we have now built an organization where we can much better meet the needs that we have in the coming years. For example, I believe that every company has a big need in the coming years to retrain a lot of people, to reskill a lot of people. We are doing that actively, and we have now built up an organization that can support such retraining even better than we've done in the past. I think as everyone remembered, we have every year increased the amount we invest in developing our people and now we have been a better platform how to do it.
We have also been able to improve how we recruit and bring people on board to Kore. We are faster in recruitment with better quality. Our sourcing in our front lines, which is the local part, we have also improved that. So many things have improved, But for example, in customer service and admin and finance, we still have a lot to be done, but that was also planned that we don't do everything at the same time and do things sequentially. We are going in the right direction and that I'm happy about.
So those are a few highlights of Q3 and bring a little bit more insight in the Accelerate program, what we are really doing there. And next, let's talk about what's happening in our markets. The global new equipment markets were stable in the Q3. North America, stable on a high level Europe, Middle East and Africa, clear variance in the region Central and North Europe, pretty stable South Europe growing and Middle East declining. So clearly, a mixed situation overall.
Asia Pacific overall stable. In China, market grew slightly. I'll come, as usual, a little bit closer to China soon. But rest of Asia Pacific is declining due to decline in many Southeast Asian markets, some decline in Australia and also decline in India. What is happening in India?
We'll be always talking about that as a very promising growth market. Situation in India at the moment is that liquidity is very constrained, and we can see that that's causing a lot of issues for many of the large developers. Again, as many of the other big reforms in India, we think it's going to take a few months, probably 6 months or so, for this to work itself through the system and because we can still see that the underlying demand from consumers is continues to be strong. But at the moment, that market is also declining. Service market continued positive development, not much new.
Maintenance oil markets are growing at least slightly, good growth in Asia Pacific. Modernization market actually now pretty good growth in Europe, Middle East and Africa and good growth in Asia Pacific and also North America growing slightly. So overall, solid and good growth opportunities in Services. But as usual, let's dive a little bit deeper into what is happening in China. Overall, we can say that the main theme in China is that the government is balancing between supporting the economy, but at the same time, restricting the residential market.
If we look at our market overall, we can see that the market grew slightly if you measure units, and pricing was pretty stable as it's been throughout this year. The government, when I talked about the supporting economic activity, where we can see that mainly is through the infrastructure market. We can see high activity in building metro lines, railway lines, airports and so forth. So there, we can see high activity and stimulus activity. On the other hand, when we look at the residential market, we still see restrictions in the top 100 cities.
And it's interesting that when they have even slightly eased those restrictions, we immediately see a very strong growth. So when people ask me that how much do I see stimulus in China, I would say, let's keep in mind that we still have principally restrictions in place and those have, in some cases, slightly been eased, but not significantly. But overall, construction activity is on a high level. If we look at some of the key indicators, consider real estate investments have grown at about 10% year to date. Also, residential sales volume and new starts are growing And new home price in top 70 cities have also increased quite nicely year over year.
And it's, of course, against this backdrop why continue to see many of the restrictions. If you then think about our customer base, the developers, so we can continue to see a consolidation amongst the top developers. Today, the top 100 developers already represent over 50% of the market. Clearly, that has many implications. For KONE, we have created an opportunity out of that, how we're able to serve the market position we have with the top developers.
But it's clear at the same time that they have a strong purchasing power, but also they usually have slightly higher conversion rates to service as they have a brand to protect. So we think overall, we have created an opportunity out of that and continue to see opportunities there. So that is about the market and a little bit about our development. Now I'm happy to hand over to Ilkka to talk about our financial development.
Thank you, Henrik, and also welcome on my behalf to this Q3 results announcement webcast. Let's start going through our financials a bit more in detail, and I'll start with orders received. Our orders received reached over SEK 2,000,000,000 in the 3rd quarter, and that represents a 9.6% growth on a reported basis. And we saw growth in all regions. And on a comparable basis, that's 6.8% growth.
As Henrik already highlighted, our margin of orders received improved slightly now also in 3rd quarter. And if we look at the large Chinese market, we actually saw good growth in our orders received. And both monetary value as well as in units, we saw over 10% growth in our orders received. Mix had a slight negative impact in China, while pricing was relatively stable. Then to sales.
We continue to see a good growth in all businesses in sales, and our sales reached €2,558,000,000 On a reported basis, that's 11.7% growth compared to last year and on a comparable basis, that's 9.4%.
If we look
at where the strongest growth was from a geographical perspective, then Asia Pacific was 11.5% growth and there especially the strong deliveries we saw in China were driving the growth overall. At the same time Europe, Middle East, Africa grew 8.1% as well as Americas contributing at 7.6% growth rate. Also, if we look at from a business line perspective, both new equipment as well as modernization grew over 10%. So new equipment growing at 10.2% and modernization at 10.9%. At the same time, the number that I would highlight from this is actually our maintenance growth, which is 7.4% and that's quite a good growth rate for the business in this quarter.
Then moving to adjusted EBIT development. Our adjusted EBIT grew to DKK322 1,000,000 in the quarter, representing a 17.6% growth compared to last year. We also saw our adjusted EBIT margin growing from 12% to 12.6% in the quarter. And if we look at what's driving our adjusted EBIT development, then growth had positive impact. Also we saw profitability, so the actions that we've taken on both pricing, but also improving our efficiency coming through in the results.
Currencies had an €8,000,000 positive impact to the results and IFRS 16, €2,000,000 At the same time, Accelerate program costs were €8,000,000 in the quarter and our benefits from the program were more than €10,000,000 in this quarter. Lastly, to cash flow. So we had a strong cash flow quarter and our cash conversion continued to be strong. Cash flow at 4 63,000,000 in the quarter is obviously 1 quarter is a short time to measure cash flow, but also the 1st 9 months with over EUR 1,000,000,000,000, EUR 1,164,000,000 is very strong cash flow. We continue to see net working capital contributing positively, driven by both strong development in our advances received as well as progress payments from our customers.
It's also good to note that IFRS 16 has a positive impact to our cash flow of €87,000,000 for the 1st 9 months of the year, but regardless of that, the cash flow has been strong. With that, I'll actually hand over back to Henrik to talk about market and business outlook for
us.
Thank you, Ilkka. Let's then wrap up with the outlook for our business and our markets. For 2019, we expect the new equipment markets will be relatively stable or grow slightly. In China, we expect markets to grow slightly in units ordered as it's done so far this year, so the same trend to continue. While in rest of Asia Pacific, market is expected to be pretty stable year over year.
So we have some growth beginning of the year, now slight decline. North America, Europe, Middle East and Africa, expect to be rather stable. Maintenance markets, no changes there. So growth in all geographic regions, slight growth in Europe and North America and good growth in Asia Pacific and pretty much saving modernization. That's good growth opportunities, Asia Pacific the fastest, but also some growth in Europe, Middle East and Africa and North America.
Then our business outlook for 2019. We now have 9 months behind us, so we have slightly specified our outlook. Sales, we expect to grow between 5% to 8%, where we previously expected that the growth is between 4% 7% in comparable currencies. And EBIT, we expect to be in a range from €1,190,000,000 to €1,250,000,000 We previously expected a range to be €1,170,000,000 to SEK 1,250,000,000. And we expect that there's some tailwind from foreign exchange to the tune of about €20,000,000 It's pretty same as the previous quarter.
But it's just a slight specification of the outlook compared to what we said in Q2. What's driving our performance? It's clearly solid order book we have, the growing service business and how we are driving improvements throughout Kona, including Accelerate. What is burning the result? Raw material prices and trade tariffs.
And then as we mentioned, what has been an increasing trend is the labor and subcontracting cost increases as a result of labor and resource shortages. We also thought at this stage, as we usually do, it's good to give a little bit of a view into 2020. What are we seeing now? Well, we're seeing that there are a number of things that are positive for us. They are definitely driving our performance.
They include our strong order book and also that we have been able to slightly improve our margins of orders received. That's clearly a positive. The solid growth we have in our service business, the constant compounding we have had there, of course, sets us up for a good situation. And also, accelerate savings and performance improvements in general are positive. But as always, there are also some negative headwinds for us, labor and subcontracting, cost increases due to the resource shortages that we had talked about.
But also, I think it's clear to everyone what we can see is that the overall world economy is weakening. So that we think is a headwind and also the geopolitical uncertainties. But when I look at KONE's overall situation, I think we look with quite some confidence into 2020. We have a strong order book. We have a growing service business.
We are executing. So we think that also in that environment, we can perform. And of course, our objective continues to be to grow fast on the market even if the market environment itself is more challenging. That is what we have been doing and that's what we intend to continue to do. So to summarize, we had a broad based good development across our business in the Q3, and we believe that we will enter year 2020 in a strong position.
With that, we are happy to turn over to your questions.
Yes, plenty of time for questions now, and I think we're ready to start from the line. So operator, please.
Thank We will now take our first question from Klas Berling of Citi.
Henrik and Ilkka, it's Klas from Citi. I've got 3 questions, please. First, on the cash flow for you, Ilkka. Obviously, strong growth for you in China for quite some time now, but now we see a further delta on cash. Is that also the collection terms improving in China?
The share of prepayments going up and quicker cash collection, just interested in the mix there within China? I will start there.
Overall, so in if you look at the cash flow, so it's not only China contributing positively, but overall cash flow being strong across the businesses and across the geographies. But from an advances point of view, China is a big market and a large part of the advances are coming from there. So that's contributing positively. And from a collection point of view, there hasn't been that big of a change in that one. It's been rather stable.
Maybe this quarter was a bit better, but not a meaningful driver for the input cash flow as such in China.
All right. Thank you. And then my second one is for you Henrik. And I need to ask you on Thyssenkrupp and your ambition here. I will try and see if you can answer some questions in this forum.
First on anti trials, there are some regions in Europe where you will face issues, but you say that these can be solved and I get that. At the same time, news agencies are reporting of you delivering some of the lowest bids and it might be because of these issues that the net effect of the synergies might be low post remedies, for example, on service density. Or are we missing something on the synergies? I know you will say it's a dream team and I can see that. But if you could drill down a bit more on the synergy potential post potential remedies, You talked about digitalization being at the center of a potential deal.
Henry, could you help us perhaps understand the opportunity on the cross selling as well with Thyssenkrupp?
Well, first of all, I'm not going to comment on any specifics, and I'm sorry, I'm not going to go into any of the synergies. I think I would repeat what we said before. As you already alluded to that, we think that this is the ideal combination. If you look at the geographic complementarity of the 2 businesses, If you look at the potential you can have from synergies combining and if you can the potential you can have from even faster and more actively build out new services broadly to your customers. I think those are all fundamental positive things.
We've said that we think it's inherently doable. What it will mean, I can't I don't know exactly and therefore not going to go into that. I think we just have to be patient here and wait for whatever process they are running to play out. And we will continue to see a lot of rumors. There are a lot of rumors around this process.
I would just urge everyone to be quite critical of what we see and what we read because not everything is true or even close to true. So I'll just leave it there.
Okay. Okay. Thank you, Henrik. I had to ask. My final one on pricing.
We keep hearing from some of your peers that while price cost is improving in China, it's getting weaker in North America and pricing is obviously flat now in China. We'll be coming from a tough comp. In North America, we've seen a multi recovery and non res activity is a bit weak in our China looks I mean, it's good, but it looks pretty toppy. So how should we square this with your cost comment, Henrik, that cost increases on subcontracting will likely continue into next year? Should we be more cautious on price cost going forward?
If you could just comment on price and cost, please.
Well, as you know, we don't comment on pricing going forward. That's always individual negotiations between us and our customers. And of course, what we want to do is provide as good of outcomes as possible to our customers and that way create win wins and improve pricing. But if you look the trends we see in North America, if you remember, we have been multiyear, we had actually quite a favorable situation where pricing improved. It's clear now the markets are stabilizing.
We are seeing a more competitive environment. And of course, we then need to take action and make sure that we can compensate that with productivity and work even harder with our customers. In Europe, perhaps we have seen better pricing environment now slightly and that's what we've been able to improve pricing, but of course, there's been a very high need for it with this resource shortage that's really a principally a Europe and Asia problem. So we have been able to increase prices. Clearly, prices have gone up more than margins because costs have also gone up.
So I think that we are in a pretty good situation, but we have to see where the market is next year. And of course, we're going to continue to be out there working with our customers, want to add value to them and that will, in the end, determine how successful we are here.
Yes. Just a quick follow-up on cost for you, Ilkka. Shall we see another SEK 20,000,000 SEK 30,000,000 delta from subcontracting in 2020? I think that, that was what you guided for in 2019. Are you ready to make such a comment for 2020 yet?
Well, 2020, it's a bit early to still comment. But if I look at the situation, so we do see that especially in Europe, there is a pickup in the prices more than normally. Let's say, maybe some tens of 1,000,000 would be at this stage my guidance.
Pickup in cost, you mean?
Pickup in cost, yes.
Yes. Yes. We also remember, what is the there's always you can look at just what labor cost increases are. That's one aspect. But when you have a situation where you have resource shortages, that means that, of course, subcontracting becomes more expensive.
There's more competition for those resources. But as well, what it means is that you will have much more overtime. You have much more juggling between projects. And of course, those are always things that are not they are not good from a productivity perspective. But we're working, we are making some good progress in being even better in how we plan our work, how we work with our customers to do it.
But there's a clear headwind in Europe. And yes, there are just I think the whole construction sector at the moment is suffering from shortages for skilled labor and of course skilled labor that we work with.
We will now take our next question from Lucy Carrier of Morgan Stanley. Please go ahead.
Hi. Good afternoon, gentlemen, and good afternoon, Zana. Thanks for taking my question. I have 3. I will go one at a time.
I was hoping maybe I could follow-up on some of the comment on pricing from Claus earlier and specifically on China. The fact that you that the price increase has kind of stopped, is that on the back of the raw material situation? Is that because the market may be starting to slow other type of pressure? And I was hoping you could comment on the negative China mix that you also mentioned in the quarter? That's the first question.
So I'm not sure if raw materials is the big just that's the competitive environment. We can also see that clearly, big developers are getting stronger, but I said that has been still a net positive for us. Overall, pricing environment has been pretty stable. I wouldn't say if I look at the China market today and if we look a couple of quarters forward, I actually don't expect to see major changes in activity. And now we have had a slightly growing market.
So that's where the overall situation is and competitive situation. I think we are in a pretty good spot overall at the moment.
Maybe to add to your comment here.
Sorry, on the mix.
Yes, sorry.
Yes, sorry. Lucie, first on the pricing. So maybe add to the comment that if you look at quarter on quarter this year, we've had relatively stable pricing actually in China, but year on year improving and now the comp for Q3 was a bit tougher. So that's maybe more so than a big change in the pricing environment as such. And maybe I'll continue with the mix.
So yes, the mix had a slightly negative impact, but wouldn't be too much of a trend as such. Our GK brand was a bit better performing this quarter, and that's driving the mix. Thank
you very much. My second question was around the sales guidance. And so if I kind of back out the Q4 based on what you've done so far, it kind of implies quite a broad range between, I would say, flat to about 7% organic growth in the Q4. So I was just curious if you could give us some color, why do you see such a broad range? I mean, we are 2 months away from the end of the year.
And at the same time, we've also I've also noticed that it seems the execution or
turnaround of the backlog seems to
be a bit faster than expected.
So is there a risk that we have maybe from a little bit the Q3 versus the Q4 here?
I don't think our deliveries happen when our customers need those deliveries. I wouldn't think about front loading. I would Ilkka, if you want, you can comment more specifically on this. But I would just observe that I think overall, we give quite specific guidance. And yes, okay, maybe for 1 quarter, that may appear broad, but I think for the full year, we give pretty specific guidance.
And clearly, there could be various outcomes. I think one of the trends we've seen over the past years is that clearly in China, the order book is rotating somewhat faster, and that is just something we've seen over the past years. Other than that, no big differences in other markets. And why have we had a good growth this year is because orders have been strong in China and that has been also delivered quite broadly to customers.
Yes. I don't think I have much more to add. And the biggest moving part is obviously what other customer projects that are going forward in the coming months and how are we able to then deliver our products and complete installations for those products, both in new equipment as well as in modernization, which is the more where we still have not perfect visibility. And our maintenance is more stable, so not more to add there.
Thank you. And just my last question. I was hoping if you could give us maybe if we look at the order trends year to date, can you maybe give us a bit of a split between growth in new equipment, modernization and maintenance kind of year to date how we are tracking?
The good thing is we have had good growth in all of those, but do you want to open I mean, of course, in order to see this mainly about new equipment and modernization, so Yirka, do you want to open more?
Well, if we look at overall the trend what has been going well from an orders perspective, then new equipment has been strong, especially in China from better monetization overall, but not that big of a difference.
But I think to Luz's question again, I think the most important thing, if we look at our growth this year, it's actually it's not some individual things here or there. It's actually been broad based and quite consistent. And I think that is the ideal situation to have in a business.
We will now take our next question from Andre Guggenheim of Credit Suisse. Please go ahead.
Good afternoon. Thanks for taking my questions. I'll go one at a time. Firstly, could we talk about the service growth in the quarter, specifically maintenance accelerating to that 7.4% from about 5%, 5.5% run rate? Is that just kind of timing of things in the quarter and a bit of an easier comp?
Or was there any underlying pickup there? And if there was, could you share with us what's behind it?
I would say it was nothing specific there. I would say we have had a continued good growth in our service base that's been growing at about 6%. Then our new services are adding slightly to it, not much, but just slightly, and that's positive. And then repair activity has also been high. So all of these together have contributed to it.
So historically, this is a very, very, very good performance. But remember that if we look at earlier this year, we had a little bit of headwind in the growth because we have had a automatic doors business in North America that we had sold a little bit over a year ago and now that didn't impact anymore. It wasn't a big impact previously, but had a slight impact and now at least that didn't drag anymore.
Great. And new services adding kind of sub-one percent or is kind of now edging over 1%?
I think if I look at all of them together, we start to probably be at 1% additional growth from them, yes, about there.
Great. And then if we move on to the labor inflation topic, can we just break it up between labor inflation in service contracts and then installation? In service contract or labor inflation for maintenance, do you expect that to be at a higher pace in 2020 versus 2019 or kind of similar or lower level of inflation?
We had to see things haven't quite played out. If you think about where is the largest service business by revenue, it's clearly it's Europe. And almost all labor costs there are based on some general bargaining agreements. And I don't think there are answers in many of them yet. We just know that demands are much higher than in the past.
So it would be an incremental headwind. And I think if you look at Asia, that's a pretty constant, quite high increase, but that's something we've seen year over year and managed. So I think Europe is probably the main one here, where is the difference.
Yes. If you add to that, to answer that the way to think about it is that there's always some inflation in labor cost. But now in Europe, recently, we've seen increase in that. So that's clearly the incremental that we're talking about here.
Right. So that it's that acceleration in 1 year that is the issue, right? Because you price up, in Europe at least, on service contracts, they get generally kind of priced up on indices in the following year based on kind of indices performance in the prior year. Is that still kind of the right rule of thumb?
Well, I think quite a few of those have a general the ones that have a formula tends to be more CPI or general inflation that we know is actually quite low. So it's not helping that much. It's helping if the increase is, we can price some of that more, but I think overall, it is a slight or it's not it is a clear headwind. But we need to just work all the time in our pricing and our productivity to counteract that.
Yes. Got it. And installation costs kind of across the portfolio is about 20% of new equipment revenue. Is that still kind of the right full sum?
If I take as an average, probably a little bit more. A little bit more. A little bit more, yes. But not yes, of course, much higher in North America and then lower in Asia, but yes.
Right. And you're seeing high single digit inflation there. Is that kind of what you're pointing to?
Again, one aspect is just what you see labor cost increases, just straight out labor cost increases, and that's one aspect. The other aspect is, again, subcontracting. And clearly, when there is tightness in the market, subcontracting, they have more pricing leverage. But also when you have this tightness, you as I mentioned, you get more over time and more juggling between different sites to make sure you meet your customer requirements and all of that. So it's all of that is a negative driver for productivities.
Therefore, you cannot just calculate straight from what a labor cost increase would be. But we're working on it. We think we'll get there, but at the moment, it's a little bit more of a headwind than in the past and what we had expected.
Great. And just a very final one. On the digital investment side, you've been running, I think, at a relatively stable, I think, pace of around €50,000,000 €60,000,000 for the last 2, 3 years. Is there any reason for us to expect that to change for 2020?
Yes. So what you can see externally is we report R and D number, and that's where part of digital is in there, part of digital is in our IT costs and other costs. But I would say that I think the activity level will keep it high simply because we can see that the services we have brought out have a clear benefit. Customers appreciating those. They are paying for those, and I think we have a good leadership position here really to how we do it broadly.
So we will continue to invest proactively. As an absolute number, next year, it's probably going to be somewhat higher. Is it going to be much higher as presented sales that we have to see, but I would overall say that we keep a high activity level here and exactly how much we spend next year, we still let's see, we haven't quite decided that.
Great. Thank you very much to both
of you.
Thank you.
We will now take our next question from Daniela Costa of Goldman Sachs. Please go ahead.
Thank you. I wanted to ask you 2 things. First on margin and on your comment on sort of margin year on year now turned back to sort of growing year on year after a while. And you mentioned you want to sort of that's the trajectory. Can you comment on whether that is that trajectory linear from here?
Or should we be aware of sort of are there any particular seasonality or any considerations given what you have still in the backlog that we should think about it, some any path that is different from sort of a linear progression? And then related to that, you were doing much higher margin sort of pre-twenty 17. Has anything fundamentally changed in the that you think would present you, I'm not asking when, but at some point to go back to those levels. We've also seen margins coming down for some of your other peers. So interested in whether there has been any structural shifts in the industry, which makes going back to those prior peaks unfeasible to assume?
So if I start with the latter question. It's clear that the whole industry and we have seen some headwinds on margins over the past years. What is the biggest impact from us is clearly that if we go back to 2016, 2015, we had very strong margins in China. We still have good margins in China, but that's where the biggest delta comes from. But if we look at our business, how we're developing it, yes, we do believe that we can recover.
We're not giving a timetable, we'll recover and get back to those margins. That is definitely our ambition. Exactly when that will happen, I'm not going to comment on, but we still think it is possible. When you ask about margin trajectory from here, as you know, we don't guide beyond this year, but I think it's clear that our ambition is to improve our margins also next year. Is it going to happen and how it's going to happen per quarter, I can't say, but that's the ambition, that's what I can say.
We will now take our next question from Martin Flukiger of Kepler Cheuvreux. Please go ahead.
Good afternoon, gentlemen and Sona. Thanks for taking my question. Starting off, I have 3 questions and I'll take 1 at a time. Starting off with the, let's say, broader environment, global environment in new equipment. Judging from your last 3 quarterly results reports, it looks like the new equipment market has seen somewhat of a slight slowdown.
I was wondering whether you would confirm my impression firstly. And secondly, can you talk a little bit about what you have seen recently in the market with regards to recent tender activities and major projects in the pipeline and what you think the expected implications are for market growth in the various regions?
I think we can I think your perception is probably the right one that we're coming from a situation where we actually had a very long recovery in North America, where Europe, driven by Central and North Europe, had been quite strong and actually many and Middle East also doing pretty well to all those being flat or a bit weaker? So yes, market growth there is somewhat weaker. China, now both this year and last year, has been growing slightly, so it's clearly a recovery from a couple of years back. But overall, we are in a pretty stable environment now from having been in a slight growth environment. It's not a massive difference, but I think it's a slight difference.
Okay. And with regards to the recent tender activities in major projects, Can you make some comments on those two issues, please?
I don't think we have seen a massive difference here. It's, of we're going to be a difference region by region, but not a big difference overall.
Perfect. Then just coming back to China, if I may. I heard your comment at the beginning of your presentation, Henrik, with regards to the ongoing tightening mode in real estate policies. I was just wondering where you see the momentum going on. Is it more in terms of easing?
Or is it more in terms of tightening? It's quite being such a huge country, it's quite difficult to really follow the main trends. I was wondering whether you could elaborate on that a little bit and provide some clarity where you see the real estate policies going? Is it more towards easing, more towards tightening?
I think one of the key things to keep in mind is what the government and the President repeat quite frequently that houses are for living in, not for speculation. I think that tells quite a lot their mindset overall. And that is why we have continued to see on the residential side, we have continued to see restrictions on how you can finance them, how many apartments can buy, prices and so forth. And probably not going to see big differences there. We've seen in a couple of cities where they eased these restrictions a bit and immediately growth have taken off and they put them back those restrictions just to avoid bubbles to occur.
So I mean, I can't predict exactly where they're going to be, but I think this overall guidance, I think, is quite clear from what they think. And then when we see in stimulus, David then talked more about infrastructure. As you know, what they are attempting to build out are these key hubs where you have then major cities with hubs with high speed railway connections to them. That is that's why they are focusing on infrastructure at the moment. If I look at the next couple of quarters, which is probably the visibility we can have, I don't see a big change happening, but I can, of course, not predict what government actions may be, and we know that those are important.
Perfect. And then my final question, just wanted to go back to the issue of raw material prices and how you see those developing. We're now almost 1 month into the Q4. And I remember there was a discussion on the call in the second quarter call also with regards to your expectations going into 2020. And I was just wondering whether you could provide us with an update on that, where you see raw material prices going for Q4 and going into 2020?
So if we look at first 2019, so we've been quite consistent now that and have actually good visibility to the outcome already with the pricing that we have with our suppliers. So raw materials, including the tariffs, have a bit less than €50,000,000 impact to 2019. So that's been quite stable and there's less moving parts for this year. Next year, there still continues to be moving parts in terms of orders coming in, but also exact timing of projects, how they go forward. And obviously, raw materials can still fluctuate going into next year.
But if I just look at where we are today, so then raw materials are more neutral impact for 2020 than anything else.
Thank you very much.
Thank you. Thank you.
We will now take our next question from James Moore of Redburn Partners. Please go ahead.
Hello. I'm sorry. Can you hear me? Yes. Apologies.
The phone was on mute. If I could follow-up on 2 of Andre's topics earlier and back to the strong 7.5% maintenance growth. I understand your repair and disposal point, but could you scale the growth regionally for maintenance, such an important part of your business in China versus the Americas versus Europe?
Well, we had good growth actually good growth in each of those regions, clearly fastest in Asia Pacific, where we had double digit growth. Europe, we had high single digits.
Yes.
And North America, slightly lower.
Yes. And that seems above your comment for the full year rate. And is that just because of the repairs part of the business? Or is there potential for a similarly high Q4?
I think let's see where we end up. I think you know what our ambition is. So let's see.
Okay. And on your wages and subcontracting point, I've got some notes that say you thought that wage inflation was 3% and subcontracting 0% in 2018, but that lifted to something like 4% as an inflation for both of those buckets in 2019. I'm wondering as we look into 2020, what percentage rate of inflation do you think the €2,800,000,000 of wages and the €600,000,000 of subcontracting will face? Is it another 4% year? Or might it moderate against that or even increase against that 4%?
I think subcontracting must be more than 4%, but I actually don't
I don't think we've said exact numbers on this one. And it actually varies market by market on the general labor agreements that one makes. And then subcontracting definitely is much more volatile than the underlying labor agreements.
But I think that our message is that it's probably an incremental headwind for next year.
Sure. Another headwind, but the pace of inflation, whatever that is all in for wages and subcontracting in 2019, do you think it's a similar degree of percentage inflation?
Based on what we said earlier, probably on own labor, we don't quite know yet, but could assume that it's somewhat higher.
Okay. Thank you. And just turning to currency, if I could. I was running at current rates, and I thought you might see a small negative impact in 2020 at current rates, but nothing major. Is that something you think is fair?
Yes, that's correct. So no minor impact.
Probably slightly negative impact.
Okay. And just lastly, if I could. The potential for regulation change in China on the maintenance side and the number of visits, Is that a city by city conversation or a 1 nation conversation? And can you update us to what a possible timetable could look like?
Yes. So it starts with national regulation where they set the policies, and then it gets usually implemented province by province, city by city. There's clearly there's been some trials in some cities on how you can do this. So there's a lot of activity and a lot of thinking going in there. We don't have exact clarity of if and when something will happen.
If it happens, then usually it starts from a government level policy, how you do it, and then it's going to take quite a while to implement it throughout the country. So we think that's a longer term thing that we expect with likelihood to happen, but let's see. But it's not going to impact us on a short term basis.
And in the instance that you do get a reduction in number of visits, do you think you can continue to offer a value selling proposition on the digital side of your maintenance contracts? That means you don't have to pass it all on, you could capture some of the value there?
That's, of course, the ambition we would have. And this what they said, it's not just a simple the thinking is that it's not just a simple reduction number of visits that you would need to then have them connected and monitored and have information on them. And of course, the objective would be that you could show your customers your service even better, and that's why it creates added value and not price everything away.
We will now take our next question from Antti Suttelin of Bank. Please go ahead.
Thank you. This is Antti from Danske. Three questions, please.
First of
all, what kept your margin back, so to say? You had strong increase in sales and you said it throughout 2018 that your order intake margin was stable year over year. What one could have expected, I think, a little bit more margin improvement. Well, I
would say that we had some good drop through. And obviously, there are positives and negatives that happen in the business and some fluctuations. I don't have a more specific answer to that, Yves.
No, there's always fluctuations quarter by quarter, but overall, no more details to be shared here on that one.
Okay. Then next year, China outlook in the sense that we can see from the numbers, Chinese numbers, that right to use land sales have been cut back quite notably. Is this any concern to construction starts next year and then potentially also to elevate their demand next year in China?
Well, firstly, I would say that we think that quite many of the big developers have ample land bank. But of course, over the long term, that's an important number. Now we've seen a little bit better land sales again. So it doesn't it's quite a long term forward looking indicator to us. And if you look in the history, you need to look at longer term trends to see what the impacts are.
So of course, if that would be a long term downdraft, of course, that would have an impact because it's a strong indication of developers, how much they are, you can say, investing in the future by buying land. At the moment, I wouldn't be too overly concerned yet, but of course, we need to continue to follow it.
How long do you think it takes before this impact becomes visible on the consumer company side sorry, construction company side?
If you think about that has to be before construction activity. And we had if you think about the past couple of years that we had for quite a long period of time first of all, I don't have an exact answer for you, but we had quite a long period of time when new starts were increasing and you guys were asking, why can't we see it in your industry? Why can't we see it in your industry? And now this year, we have started to see it come through. So there can be quite a delay because we come a little bit more at the tail end of the projects.
But unfortunately, I don't have a specific answer to your question, how long that time will be.
All right. All right. And then finally, just what is driving modernization up 11%? Is this I assume this must be market share or
I think, first of all, markets are growing slightly, but we believe that we have grown faster than the markets. And it's a good proactive activity from KONE with a good competitiveness. That's the only way you grow. You have to be out there working with your customers, showing that you help them resolve their problems and do a good job for them. That's what it's all about.
Where is Kone's market share in modernization at the moment?
It's I would say it's I don't have a specific number because there is the data on the modernization market is not that exact. What we know is that it is higher than our market share in maintenance. If that gives any market share in maintenance, we are probably we have 1 point 3,000,000, a little bit more units in serving our total market is about 15,000,000.
It's not very visible. Modernization market is not very easy to evaluate and have a good view on that one.
Yes. Okay. But thanks for the answers. Thank you.
We will now take our next question from Daniel Gleim of MainFirst. Please go ahead.
Yes. Good afternoon. Thank you very much for taking all of our questions. My first one would be on your remark that you saw an improvement in the relative margin of orders. Could you pinpoint for us which region you saw this relative improvement?
I would say the biggest impact we did see in Europe and some Asian countries.
And what is your estimate for the lead period of that improvement to come through in sales? Is mid-twenty 20 too early? Or is that roughly the right number? How do you think about that?
Probably around that, yes.
And the relative improvement in the 3rd quarter compared to second one, was there an acceleration? Or is it roughly the same ballpark?
Not that different. So if we comment the orders received margin, so it is one where there's many moving parts. If you think about, 1st, that you have different type of projects and also you have different type of countries, and we try to neutralize for those when we comment. So at the end of the day, it's not exact one number, but it's not that different, the improvement between the quarters.
Okay.
And my second question circles around China. How much of your China growth in the order intake was market share gains of your own versus market shares that your customers gained. Do you have a ballpark estimate for us? How should we think about the split here?
I don't really know what the difference is. I mean, I think we work with a very broad set of customers. So sorry, I don't really understand the question.
I mean,
the question here is how long can this strong order intake growth last. And one of the meaningful drivers has been the consolidation of larger developers. Now if you think about your own growth, partially, it is driven by your customers gaining share, and it's partially driven by you gaining share versus other big OEMs that might have the same exposure to the same developers. So my question really is how can this abnormal growth last that stems from the big developer consolidation? The limitation for that, you see this going to 70% in the future?
That is the way I think about that question.
Well, I would say that, look, we serve a very broad base of customers in China. Our aim is to really find always where there are growth opportunities. So we don't really think about it that way. We said it's been helpful for us that we have a strong position there, but of course, we're constantly building relationships and market shares beyond that as well. So I think the fundamental way how you build market share stems from your activity, your competitiveness and how much you add value to your customers.
That is, I think, the fundamental and most important question that we're focusing on. I can't say where we will be next year. We don't guide and we don't give indications of that. I think our objective is clear that our objective is to grow faster than markets overall and then we have to see next year where we get to.
And maybe from these large customers and definitely we see opportunity to continue gaining share with them as well. So it's not something where we only grow with them and definitely that's the aim.
Have you historically seen any other market maturing where there was a developer consolidation and where you can give us a ballpark number where the consolidation has stopped so we can think about where this might be heading in China?
I think we should keep in perspective again that just the scale and the size of this China market and the size of these developers, it just it's very different than any other market. So I don't think we have any direct precedence or comparisons. The China market is unique in its size, breadth and also space of development.
All right. I'll leave it at that. Thank you very much.
Thank you.
We will now take our next question from the Basis Chand of Societe Generale.
I have two questions, please. The first is on China in the infrastructure business. So like previously, you have mentioned it's around 10% to 15% of your sales in China. Now given the strong growth we have seen here over the last 3 quarters, like is there any change in that share or the way around are you gaining market share in that segment versus some of your more established peers in that segment?
I think we have performed reasonably well in that segment. I can't say exactly where we but maybe it's today. I think what we've said, 10% to 15%, we've said of the total market. I'm not sure if we commented how much is of our business, Sanar. 15%.
Yes. So I think we commented that that's how much of the market is probably now more in the 15% of the market size. And we have performed quite well there, but it's not the only reason, I think, we performed very well in the residential market, in the commercial market and high rise market. Without being broad based competitive and broad based strong performance, we wouldn't have had the orders received growth we have had.
Okay, got it. And my next question was like on new services. Could you give some more color? And which region are seeing more traction in terms of adoption? Is it more like in the Asia Pacific, China?
Or is it more in Europe, like where you're seeing more acceptance, given the it's like 1% growth you have seen adding to that service growth this quarter. So just wanted to get a perspective like where you're seeing more traction on this by geography?
Clearly, we see more traction in the countries where we started early. So we didn't start in all countries at the same time. So it was kind of a gradual rollout, but I think this is strongest we see in the countries in Europe where we started the earliest. So we have very good momentum in some and we are building in others. But then you also have specific markets.
In some markets in Asia, we can see that the adoption of new digital services is quite high, but it varies market to market. So I would still say that we are early on and we see that it doesn't take off day 1. You really have to build up your own capabilities, get your customer acceptance. But once you get there, then you start to build up a momentum and it's where we started earlier where we have the best momentum.
We will now take our next question from Andre Kukhnin of Credit Suisse.
I'll just go quickly through them. On tariffs for 2020, I think you quantified it at around CHF10 1,000,000 or CHF15 1,000,000 Could you please remind us on that?
I think I've commented 2019 with saying that it's more than €10,000,000 impact to 2019. And if well, obviously, it's something which moves continuously, so let's follow it through. But it has less of an impact in some 1,000,000 in 2020 additional
Incremental. Yes, incremental, yes. I think I saw the situation and see what happens.
Of course, yes. Okay, great. And I just want to talk about this China potential regulation change that you discussed earlier. So you see that it needs to happen at the national level first, that there's no way individual cities or provinces can start kind of rolling this out more broadly, replacement of physical visits with remote monitoring?
That's what we would expect that you first will get and that's where we have seen the work happening is on a national level. Then we know that there's been some trials in some cities. But to get a broad based change, we would we think we would need to see first a national regulation and then cascade it down gradually from there.
Right. And in terms of that work, I mean those pilots have been ongoing for a while now. I think 2 years, we've been kind of tracking some of the city names, if not longer. Is there kind of a major hurdle there that the government kind of struggled to overcome at that national level? Or is it just a lengthy process that is progressing and should arrive kind of to an outcome?
Subsequent? I would say it's more the latter.
Okay. And would you venture an estimate on when you think the government could be ready to change that?
I'm not going to make any estimates on that. I think we just had to follow it. Be assured when we have news, someone there is clarity, we'll share that with you.
Great. And just a couple more on China. We got some data points on or a data point, I guess, on office vacancies rising. I think CBRE were reporting that about, I think, 17 major cities. And just weary of picking kind of one thing and running with it, wondered if you have got or if you track any more comprehensive data sets specifically on kind of commercial and office specifically in terms of vacancies?
And where do you see that the state of that kind of industry, that segment at this point?
I think that's pretty consistent what we said about the market that commercial was slightly weaker. So I haven't seen the CBRE report, but I think what we've seen more stronger has been residential and infrastructure markets. I still believe in this in the city hubs that we're looking at, there are still opportunities. But overall, yes, there have been a slight slowdown in that market.
Got it. And finally, in China on digital, are you being able to kind of sell it as an add on service there with the same sort of progress or same ease as same traction as you're getting in Europe? Or is it generally kind of a tougher sell and that's where you kind of need to balance maybe providing it at more attractive terms because it improves stickiness or other benefits that come with it? I'm asking that because we see some evidence of local players that tend to treat digital as a kind of free add on to existing service.
Well, as you know that our clear policy is that these additional services, they are a commercial service that we sell to our customers. Why do we do that? Because we think that there's a clear improvement for them and we see a clear value to them in these new services. And that same policy we have had in China, I would say, depends segment to segment, maybe commercial segments are it works better. Some residential, perhaps more challenging, but still this is the policy we have and we are growing that business and we haven't seen a reason to deviate from that.
I think it's very early days. Local players, we start to see some early initial services, but I think there are not that many players who can say who can demonstrate the consistency and actually the concrete outcomes and positive outcomes that we can do.
Got it. And would you say your attachment rate of digital to newly signed service contracts is similar in China to developed world?
Not quite, not quite. Depends on segment to segment.
But it's not widely different?
It's not wider, but slightly lower, yes.
Got it. Thank you very much.
Okay. Thank you.
This concludes today's question and answer session. At this time, I will now turn it back to your host for any additional or closing remarks.
Many thanks for all the good questions, and we are, of course, happy to help if any further questions arise. I'd like to wish you all a nice rest of the week. Thank you.
Thank you. Thank you.