Good afternoon and welcome to KONE's Q2 result presentation. My name is Sanna Kaje and I'm the Head of KONE's Investor Relations. As always, I have here with me today our President and CEO, Henrik Ehrnrooth, and CFO, Ilkka Hara. Henrik will first present the Q2 highlights and tell you a bit about what happened in the market. Ilkka will then take a closer look at the numbers, Henrik will conclude with the outlook statements. After that, we will have time for your questions. Henrik, please.
Thank you, Sanna, also warm welcome to our Q2 results announcement. It's my pleasure to announce or to review our results today because we have many good news to share today in this presentation. I want to start with the highlights. In the second quarter, we had very solid growth of orders received, what's really the highlight was that our margins of our orders received improved. We continued our strong momentum in modernization. Sales growth continued to be very strong, which it has actually been now already for several quarters. I'm also pleased that our adjusted EBIT is back on a solid growth path, the development in the first half and the second quarter is very much in line with our full year targets and what we had expected. I think that that was a good performance as well.
As usual, let's start with the key figures for the second quarter. As I mentioned already, the highlights were really our orders received also that our adjusted EBIT is back on a solid growth path. Our orders received was EUR 2.3 billion, a growth of 8.1% in comparable currencies. That is a good growth rate in this environment. We have a very solid order book, EUR 8.4 billion, has grown at 5.9% year-over-year. Good growth in sales. Sales was about EUR 2.5 billion growth of 7.9% in comparable currencies. Our operating income grew from EUR 280 million to EUR 306 million, our adjusted EBIT, which is a key performance metric that we follow in profitability, was EUR 320 million compared to EUR 300 million last year, growth of 6.4%.
Our adjusted EBIT margin continued to decline slightly, although we can see that the pressure on margin is lower than in prior quarters, I think we're going into a better direction here. Cash flow was at a solid level of EUR 324 million, not as strong as the very strong level we had a year ago. EPS grew at about 6% to EUR 0.46. As we have always said is that one quarter is a very short period of time and always better to have a longer perspective of the performance. Now we have half year behind us. I would say the story for the first half year is very much the same as for the second quarter. In particular, very strong orders received for the first half. Orders received of EUR 4.4 billion, 8% growth year-over-year. Good growth of sales.
Sales about EUR 4.7 billion and 7.7% growth in comparable currencies. Operating income grew from EUR 492 million to EUR 522 million, and our adjusted EBIT from EUR 519 million to EUR 548 million. Here we can also still see slight pressure on our adjusted EBIT margin. For the first half year, we had a very strong cash flow of EUR 701 million and also earnings per share EUR 0.78 compared to EUR 0.77 a year ago. We all know that our whole industry has faced a lot of headwinds over the past years. We've taken a lot of actions in response to those headwinds, and we can see that we are going very much in a better direction. We can see that from our orders received. All of this is, again, down to the great and hard work done by all of KONE's employees.
Once again, I'd like to thank them for the great work that they have done in driving KONE forward and improving the company as we are. Let's go into some of the highlights for the second quarter. As many of you probably remember, in the past quarters, I've talked a lot about how we differentiate through our new services and solutions. We can see that our competitiveness is strong, and that is really the background to our strong growth in orders received and also to the fact that we've been able to improve the margins of orders received. To drive overall competitiveness, it's clear that you need strong services and solutions. We talked a lot about those, how we continue to develop and drive differentiation here. To be competitive, it is not enough just to have great services and solutions.
It is also very much about execution, how we deliver on our promises to our customers. We can see that this is definitely one of the very strong ways how we differentiate and one of the reasons of how we have grown so well over the past, both in 2019, but also 2018. Why is that? We've put a lot of emphasis, which is, I would say, very much down to KONE's culture in how we constantly meet and exceed the promises that we have to our customers. We have taken further action in improving this, in making sure this continues to be even a stronger competitive edge. We have developed a lot further how we manage our installation resources, how we drive project management, and also processes and tools to help all of our employees out in the field. We are making progress here.
I believe this is a strength of KONE. It's really who we are. All this, how we execute towards our customers, our service and solutions, that is, of course, what forms the KONE brand, which I believe is very strong and helps us grow very well in our markets. That's a little bit to how we developed KONE and give a little bit different perspective than in prior quarters. We also had some other changes during the quarter. A few weeks ago, we announced some changes in our executive board. This came as a result of the fact that Heikki Leppänen, who has been leading our new equipment business since 2005, decided to retire. Heikki has very successfully managed and driven KONE's new equipment business since 2005, from a clear challenger in the market to a clear market leader now where we are in new equipment.
During Heikki's period as leader, KONE has taken a fantastic leap. A huge thank you to him for all his contributions. I'm also very happy to have Tomio Pihkala taking over Heikki's role as the new head of our new equipment business. Tomio has a very broad and strong leadership experience from within KONE. He has had many roles. Of course, the latest three and a half years, he's been our Chief Technology Officer. He has also broader experience within research and development. In addition to that, he has been leading our product strategy and marketing in China. He has been leading our service business in China. He has also been leading our installation quality functions globally, and now this. I think he has a very broad and very strong experience to take over.
I'm very happy to have Tomio taking over our new equipment business. I'm also very happy to have Maciej Kranz join KONE. He joins us from Cisco, where he has had a very long and successful career. The reason we decided to go external and hire someone else, someone from outside of KONE as our new Chief Technology Officer, was that we can see that the way the world is developing, we wanted to augment the capabilities we have within KONE. We can see that ecosystems are becoming much more important. To differentiate, we need to develop much more in our ecosystems together with our customers, and we can see that to differentiate, you need both good products and how you combine those with digital services that helps your customers succeed in their business. This is where Maciej has a very strong and successful background.
I'm very happy to have him on board, taking the role of KONE's Chief Technology Officer as of July 1, when Tomio took his role as our Executive Vice President for our new equipment business. Those are some changes within KONE and how we are developing KONE overall. As usual, let me next touch on the external market environment. Starting with new equipment business, I would say overall, the new equipment business has developed slightly better than we would have expected earlier in the year. North America, Europe, Middle East, and Africa has developed very much as we would have expected. Markets overall stable, although variation within those markets. Asia Pacific has grown slightly, and perhaps what has developed better than we would expected is China, where we had expected market to be probably pretty stable, and now it's grown slightly in units.
Also, Southeast Asia and India has grown. Slight growth overall in the markets. Services markets have developed very much as we would have expected. Maintenance growing everywhere. Of course, the strongest growth in Asia Pacific, with slight growth in Europe and North America. Modernization, European or Europe, Middle East and Africa has returned to slight growth, perhaps slightly better in Middle East than previously. North America continues to grow slightly, and then strong growth in Asia Pacific overall. As usual, let me touch a little bit on the Chinese property market. We know that it's a very important and large market to us. As I mentioned already, the market has developed slightly better than we would have expected early in the year. If we look at in number of units order, the market has grown slightly year-over-year. Also, pricing has been fairly stable.
Now looking at the property market overall, we can see that there has been a lot of balancing from a government perspective of restrictions and maybe some stimulus. We can see that the construction activity has remained high. To put it in perspective, we can still see that it is much more restrictions in the market than what there's been stimulus. I would say that there's been some restrictions selectively eased in some places, immediately we've seen growth come through. As I talked about the construction activity, real estate investment continued to grow at 10% year-over-year. Although sales volume of real estate is slightly down, prices are up, we can see that there is strong demand.
It's because of this now, again, clearly increasing prices that we have seen a, again, clear view from the government that they want to control housing prices to avoid any speculation to occur. Also, one of the other important trends that we talked a lot about is the consolidation amongst the top property developers. The top 100 property developers in China, they now represent, if you look at just number of square meters built, more than 50% of the market. That is a more than doubling of their market share in the past three years. This consolidation has many implications. For us, we could say it has been positive because we have a strong position with the top developers. That is one of the reasons why we have grown so strongly in China. Clearly, competition is tougher amongst these.
Also, they are demanding, and they do appreciate very strong field execution, strong services in combination with good products. We can see that our competitiveness is good in that field, and that's why we have grown so nicely in that area. There is a bit perspective also on the external markets. Let me next hand over to Ilkka, to talk a little bit more about our financial performance and what is behind it.
Thank you, Henrik, also warm welcome on my behalf to this second quarter results announcement webcast. I'll go through our financials in more detail and start with orders received development. Orders received in the second quarter reached EUR 2.3 billion in the quarter, representing a 9% reported growth, on a comparable basis, 8.1% growth in our orders received. This development was driven by China as well as Americas. If I look at the orders that are received development in China, we saw significant growth in our orders received, both in units as well as in monetary value. When comparing year-on-year, we saw like for like prices having a slight positive impact, as well as mix having a slight positive impact to the monetary value.
As highlighted by Henrik already earlier, we saw in the second quarter the margin of orders received having improved slightly, and this development was driven by an improvement in our prices. It's clearly something which we've worked quite some time hard, and it's good to see now the prices having a positive impact to our orders received margin. Looking at sales. In the quarter, we saw sales at EUR 2,541 million, which represents a 9% reported growth. On a comparable basis, that's 7.9%. If you look at the growth, what is good that it's broad based. We look at the business lines, modernization having the strongest growth at 13.7%. Also, new equipment contributing at 8.1%, as well as maintenance growing at 5%. From a geographical point of view, we saw the strongest growth in Asia Pacific at 9.6%, which was driven by strong new equipment deliveries in China.
In China, we saw our sales growing more than 10% in the quarter. Also Europe, Middle East, Africa grew 6.8%, as well as Americas at 6.6% in the quarter. Overall, good broad-based growth in our sales. Our adjusted EBIT grew to EUR 320 million, which a year ago it's a 6.4% growth. As highlighted by Henrik, our EBIT margin was at 12.6%, so slightly down from last year, but clearly closer to last year's level than we've seen in the past quarters. Our adjusted EBIT development was driven by growth driving an improvement in adjusted EBIT. At the same time, profitability had a slight negative impact. As indicated already earlier, the cost headwinds are more pronounced in the first half of the year impacting our profitability. Currencies had a positive EUR 3 million impact, as well as IFRS 16 having a EUR 2 million positive impact to our results.
In the quarter, the cost from our Accelerate program were EUR 13 million impacting our EBIT in the quarter. Lastly, cash flow. We saw continued strong cash flow in the first half of 2019. Our cash flow reached EUR 701 million. Our net working capital contributed positively, driven by strong advances received, as well as progress payments from our customers. When you look at the comparison, it's good to note that IFRS 16 had a positive impact of EUR 58 million to our operating cash flow in the first half of 2019. With that, I'll hand it over back to Henrik to go through market and business outlook for 2019.
Thanks, Ilkka. Just going to wrap up with our outlook for the rest of the year. Starting with the market outlook overall, here we have slightly changed our new equipment outlook. We now expect the new equipment market to grow slightly to be stable for the full year. The background to this change is that now in China, we previously expected the market to be stable. We now expect it to be stable or grow slightly units ordered, and that's really because of the better development in the first half and rest of Asia Pacific to grow slightly as well. North America, Europe, Middle East, and Africa, rather stable. In maintenance markets, nothing new. Continue to see growth, with the strongest growth in Asia Pacific. In modernization also slight growth in Europe, Middle East and Africa, North America, and strong growth in Asia Pacific.
Very much the same trends as we saw there in the second quarter. KONE's business outlook, we have specified that. We now have six months behind us. We clearly can now narrow the ranges a bit, which we have done. Sales, we expect that to be in the range of 4%-7% at comparable currencies. Previously, we expected that to be 3%-7%. Our adjusted EBIT, we now expect it to be in the range of EUR 1.17 billion-EUR 1.25 billion. Previous expected to be in range of EUR 1.16 billion-EUR 1.26 billion. What's also changed is that in connection with Q1 results, we expect that currencies would contribute EUR +30 million . Now that's slightly less positive, it's about EUR 20 million.
If you look net-net at our adjusted EBIT range, if we keep currencies out of the picture, we're actually taken slightly up only the bottom end of the range, but not really. I would say it's a tightening and specification of it. We continue to have many areas that are driving up performance, a solid order book where now margins are starting to improve. Our service business, how that's developing and growing, and a continued performance improvements that we are driving. Accelerate savings, as we have talked earlier, about EUR 50 million for the full year, slightly more, impacting second half than first half. There are also areas burdening our result, raw material prices and trade tariffs, close to EUR 50 million, and also then labor and subcontracting costs increases, which have been higher than we would have expected earlier, particularly in Europe, are also burdening the result overall.
I would say first half very much on track for this outlook. I would say just to wrap up before we go to question, we can see that our broad-based competitiveness is helping us driving a good growth in orders received, and now also margins improving. That's very good. The results that we had for the first half sets us up very well to be on track for the full-year targets that we set. With that, very happy now to go to your questions.
Thank you, Henrik. Now is the time for questions. Operator, you can start taking the questions from the telephone line. Thank you.
Thank you. If you would like to ask a question, please press star followed by the digit one. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, star one to ask a question, we'll pause for just a moment. We'll take our first question from Lucie Carrier with Morgan Stanley.
Oh, hi. Good afternoon. Thanks for taking my question. I have three question, actually. I would go one at a time. The first one was actually around the margin, I was just trying to think about that a bit more conceptually. You now have, I would say China kind of strongly back on track after a couple of years where the market was with high price pressure, relatively low orders. The drop-through, however, if we kind of exclude FX, raw material, and so on, is still quite low in the quarter. This is still below 10%. What should we reasonably think as a normalized drop-through for the business, I would say, if we consider the China market to be in the current condition that it is now?
I think it's probably a bit surprising for most people to see how your margin is continuing to drag, despite the recovery in China. That's my first question.
I'll let Ilkka comment a little bit more in detail on this. I would say, of course, you always have fluctuations from quarter to quarter in margin. When we look at it, yes, we were still slightly down year-over-year, if you also look at it, the drag that we had was now slightly lower. If you look at our outlook, I think we have a good potential to have a better performance second half of the year. I don't know, Ilkka, if you want to go deeper into that question.
Well, what I would add to that is that always quarter by quarter, there are some fluctuations. For example, in this quarter, overall, we had a bit more larger projects as well as modernization, which both of them have a slightly less lower profitability impacting overall the margins. At the same time, I think what we indicated earlier was that the cost headwinds, especially the raw materials, are more pronounced in the first half, and that's also impacting the margins in this quarter.
Understood. I appreciate the variation quarter by quarter, but when we think about a normalized drop-through for the business, not on a specific quarter, but if we kind of look at it more on an annualized basis, considering all of the efforts you've also made with Accelerate, and so on, what should we think in terms of normalized drop-through for the business in a normal condition?
I can't comment exactly on the drop-through rate. We don't necessarily look at it exactly that way, but I understand your question perfectly well. I would say our margin in China is higher than that. Of course, you have said you have fluctuation in other businesses, and as Ilkka mentioned, more modernization now and larger projects. The comparative number that you quoted, drop-through, should be and is higher.
Thank you. My second question was around the China market, and thanks for all of the details you've provided. You are, of course, quite close to the property market, the developers, and so on. If I look at your guidance, especially on the top line, and some of the comments you made, I just was curious if this is a short-term concern for you, that maybe we could go back to tightening considering the increase of prices we've seen since the beginning of the year in the property market. Is that something that concerns you and maybe one of the reasons why you're maybe not increasing a little bit more the guidance on the top line, considering the first half we've seen, which was very strong, of course?
Yeah. As you also know that the actions by the government, which I think overall they've steered it quite successfully, the market. It has a clear impact. What is also in the second half, what we don't really know exactly what the outcome will be. China is celebrating the 70th anniversary now in October. We may see a little bit longer national holidays for that. There are a few uncertainties like this that we are not quite clear how much they will impact. I think if you look at our outlook range, if things go really well, we can see similar development as first half, but also if you have more tightening and more impacts of these Golden Week holidays, then we could have some impact. I don't think that we're talking about massive differences H2 compared to H1, but let's see.
Thank you. Just my last question, I think you were on the press call earlier, and you said that before that you would be happy to take part into industry consolidation. Just on that kind of wording and what that means precisely, would you see from your standpoint when you think about consolidation, does that necessarily mean being a majority owner in another company or in a combined business, or actually, could you see consolidation also happening via what I would call more innovative structure, maybe consolidating certain functions or part of the elevator business?
I would repeat what we have consistently said that our industry continues to be quite fragmented overall, and therefore we continue to see that there will be benefits of consolidation that could clearly happen in many different ways. You have some bigger players, but also you have mid-size players, many of them in Japan or Germany or Spain. I think our comment is that we would be interested in participating in this. Clearly, when you think about consolidation, then clearly you more think about taking control of another company, whichever it may be. Of course, one could always think about more innovative structures, but I think that is what we have said, and that is how we conceptually think about the situation.
Thank you very much.
Thank you.
Next we move to James Moore with Redburn.
Good afternoon, everyone, and thanks. I too have three. I'll go one at a time as well, please. Firstly, remarkably strong double-digit order volume growth in China. Thanks for your commentary on the property market. One of the things you perhaps didn't mention is that China land sales, from the data I see, seem to be down 40% year to date. I don't know if that's a data point that you follow, whether you think it is a lead indicator, and whether you see a softer pipe coming in from land sales through the developers or not.
If you look over the past years, land sales, of course, is if you look over a longer period of time, something that developers need to have land banks to develop. That's clear. We understand that they have quite ample land banks to develop at the moment, and that can fluctuate that land sale number quite a lot month to month or quarter to quarter. I think that's something worthwhile to follow on a longer-term basis, and that's then. If you look at the development over a longer period, you can see as a leading indicator, but not a short term, but a quite longer-term leading indicator. That's at least the experience that we would have of it.
Very helpful, thanks. Secondly, on your U.S. modernization business, seems to be going very fast. I just wondered whether there's something specific, individual project, et cetera, driving that or whether it's more a function of a sustainable market environment that you think can continue. Basically, what's your U.S. modernization outlook after this quarter?
As we say, the market is growing slightly. Clearly, we have had a good development in the first half there. Yes, there were some larger projects, but as you know, sometimes you have them, sometimes not. If you have them, you're probably going to have even a little bit more growth. The point is that it's not only one individual project or projects, it's more broad-based than that. The team there has done a great job.
Thanks. Lastly, I think last time I caught up with it, your digital service offerings were progressing well. I think 24/7 was less than 5% of maintenance sales, KONE Care a bit over 5% of maintenance sales, with KONE Care being 10% penetrated in Europe. I wondered if you could update us with how that's progressing or in terms of rates of growth. I think you'd got to a point of break even previously. Are you now starting to see some EBIT contribution yet?
I would say new KONE Care, of course, we have had in the market more broadly for a longer period of time, that is how we operate in Europe today, we have also started in many Asian countries to introduce it now. I would say that that is something that is there. What we sell, particularly on the residential, I would say standard volume side, that is what we sell today. So that's developing very nicely, and we continue to see the benefits we've seen before. 24/7 Connected Services, yes, momentum is good. Clearly, it's taken time to introduce them to the market, get both our own organization, our customers used to it to start seeing the benefits. Many customers start smaller, testing it. When they see the benefit, they take it more broadly.
As you know, we have taken a very clear view that these are not services that we just give to our customers. These are value-added services that helps our customers run their buildings or facilities much better. Therefore, we sell them as a commercial offering. When you introduce with this way of working, it takes a while, but we're constantly building momentum, and we can see that customer take-up is very good. The countries where we started earlier, there, again, momentum is stronger. We can also see that it takes time to really penetrate every market. I'm actually quite pleased how we see progress going now.
We haven't said that we're probably at the level where we're covering our costs and maybe a little bit more of that, but I think that's pretty good for a totally new service that didn't exist a couple of years back.
In terms of growth rates, is there something you can share? Are we growing at 50%, 110%? I have no idea what sort of speed this is.
Actually, the growth rates are very strong. Of course, we're starting from a pretty low level. Therefore, I actually don't have the exact growth rates, but they are very strong. I think in the beginning, when you start from a low level, you need to just see all the time how you're building momentum and how many absolute units you have, because in the beginning, you would, by definition, have very high growth rates.
Thanks, Henrik.
Thank you.
Next we'll move on to Andre Kukhnin with Credit Suisse.
Good afternoon. Thanks so much for taking my question, so I'll go on as time as well. Can I start with China competitive environment, and ask you whether you noticed any changes in that as you kind of progressed through the quarter and towards the end? I've realized the comment that you've put out is very similar to before, competitive in large projects, but overall on a positive trend. Just wanted to check if that changed at all in terms of kind of month-to-month cadence.
I don't think it has changed month-to-month. We know that competition continues to be very tough there. There are a lot of large and also mid-sized players. Of course, everyone is working very hard to win more of the business of the large developers. There, competition is tough. I wouldn't say that it would have changed, and frankly, not expecting it to change very much from where it's now. Overall, I'm actually quite pleased how we've done in this environment.
Indeed. Just to follow up on this, in terms of the kind of smaller local players' behavior, just to double-check that you haven't noticed changing either?
No, it's clear that many of the smaller players, this environment is very tough for them. There's no question about that.
Right. Okay, great. Thank you. Just while on China, I was just going through your disclosure on percentage of sales from the country and trying to compare the quarter year-on-year, it sounds like after a very strong growth in Q1, Q2 is more sort of small down, if I got the numbers right. Could you just give a bit more color on the sort of revenue development in China in H1?
China overall grew faster in our group revenues. The share of China has, both in Q1 and Q2, slightly increased.
We had a very strong sales growth in China in first quarter. Now we did grow also in second quarter, now more than 10% our revenue in China. As such, its share of the revenue is increasing.
Got it. Thank you. I'll double-check that. Just a much broader one on China and slightly following up on the question of profitability before. Could you give us some idea on where is China profitability now versus the peak? We got some numbers that suggest that the peaks were somewhere in sort of high teens, and we're now in low teens. Is that kind of right ballpark, that we're 5, 6, 7 points off from the peak levels in terms of China profitability?
Well, instead of going to specific numbers, it's clear that China peak profitability was probably back in about 2015 or 2016. It's clear that we've come down a fair bit from that. Having said that, our China profitability continues to be good, but it's clear it was at an excellent level back then. Still, it is good. It is many percentage points that it has come down in that time, and that's of course, the main reason for the headwind on our margin. As we said, again, I think we are now in a more stable situation, and we're starting to go in the better direction overall.
Do you see any structural reasons to not get back to the previous peak or kind of at least halfway there?
Clearly, that's what we're working on all the time. The way one can do it is that we need to make sure that we can constantly differentiate more. We can command a premium because of very good service we provide to our customers and all of those things. Clearly, it's a super competitive market, and I don't think that that's going to change. We just got to continue to work super hard to build our brand and continue to develop our business there. That's what we're doing day in, day out.
Got it. Thank you. If I just may, very final one, on a large consolidation kind of opportunities, I guess the question that we've been getting more is along the lines of, is there an absolute backstop for you, even in a position of being an entity that is capable of generating most synergies? Is there a numerical backstop for you at which you'll stop and say, "Okay, this is not for us," and walk away? Or in this sort of very strategic deals environment, you'd be happy to push all the way?
I'm not going to comment on any specific things, of course. We can see, again, from this quarter and how we are now growing orders received and improving margins, and our competitiveness is in a good shape. We can continue as we are. At the same time, if there are interesting consolidation opportunities, clearly we are going to be interested in those. Of course, at the same time, as always, you need to be comfortable with what you buy.
Got it. Thank you. Thanks for your time.
Next we'll move to Daniela Costa with Goldman Sachs.
Hi, good morning or good afternoon. Wanted to ask two things, basically. Wanted to follow up back on margins, and actually sort of some of the comments on the prior question. It's clearly your margins have come down in China. Can we attribute all the margin drop that we have seen in the group just to China? Or if you looked at individual components on other regions and products categories, is there any other place where you have seen a more structural margin pressure? One small question, just looking at raw materials and how they've been developing lately. Would you see a tailwind, even perhaps towards the end of the year or the beginning of next year? Because your guidance stays the same, but obviously raw materials have moved quite a lot since 1Q. Thank you.
Thank you. First, to give a little bit perspective on the margin comment, I would say that there are a few different things at play here. First, we know that when the China market started to decline, particularly in value, but also in units, we could see a tougher competitive environment, both in China but also globally. Clearly, the whole global markets were smaller. Everyone was fighting for that share. I would say, clearly, if we look at the individual market where the price pressure was the toughest historically, that was clearly China. At the same time, we had several years of raw material costs coming up, and that, of course, impacted the business globally. Now, as you see, it takes a while, but now we are improving those margins over the orders received. We're starting to get up prices. It's been hard work and we're getting there.
I would say it's a combination of cost headwinds and then what we saw back in, I would say 2015, 2016, 2017, particularly pricing in China.
Maybe if I add, then the question-
Yeah.
The second part was the raw material question that you had. Overall, our comment is the same. We still see raw materials combined with the tariffs having a little bit less than EUR 50 million impact to 2019. I would say that raw materials actually have been relatively volatile lately, but we have a pretty good visibility to the remainder of the year. In that sense, let's see how the exact deliveries and which project get completed. That has some impact still, but relatively good visibility to 2019 on the prices.
Next I move to Omid Vaziri with Jefferies International.
Yes, thank you for taking my questions, I had two in fact. First of all, I wanted to touch base on the recent trends of more increasingly orders being made up of very large infrastructure orders. I was wondering if you tracked and have available to provide to us what portion of orders today sits in very large infrastructure projects. From your view, could this make your earnings profile lumpier? Could this make cash flow profile lumpier going forward? My second question is in relation to the modernization market and in China in particular. What's the size of the modernization market there? Do you have the figure at hand available? How do you see it specifically growing within China?
Let me start, and Ilkka, you can then fill in to my answers. The infrastructure market is not one of the larger segments in our industry overall. Maybe because when you get orders, they are not that many of them, and they're usually the size that we announced, and therefore, it may seem that it's a high share. Actually, when you have a number, but it's not the very high share of our orders received overall, and that hasn't changed meaningfully. Probably a little bit up, but it's not a meaningful change there.
I think from a revenue perspective, given that we are in a percentage of completion, I see less lumpiness there. Also from a cash flow perspective, there's probably a bit tougher commercial terms on those, but it's not a major driver for going forward on volatility in my mind.
Yeah. Then the-
Okay, thank you. Is that a function of the size, but also the timing of delivery that, in your view, makes it less lumpy than other projects?
No, what I was saying is that we have a percentage of completion, as these projects, they also have ongoing work and they're taking a longer time, but we constantly recognize the revenue. Similar to other contracts as we progress, and we also get payments from the customer. In that sense, I don't see that big of a volatility coming out from them.
Your other question was related to the Chinese modernization market. Overall, it's quite a small share of China. Still today, for us, it's only some percentage points of our sales. However, it is growing very rapidly. Again, that was one of the drivers of modernization growth that we have very fast growth in China in that business. As I said, it's still coming from quite a low level.
Okay, thank you. Would you agree that the very large infrastructure projects can still make your order development lumpy?
If you have some of the really large infrastructure projects, they are going to have some little bigger impact on your orders received. That's one reason for orders received can fluctuate a little bit quarter to quarter. If I look at the Q2, in fact, it was actually modernization, our volume business that was growing more than the new equipment major projects. Clearly, if you get some of the really large ones, it can have a little bit of impact, but it's still, I wouldn't call it very meaningful.
That's very interesting. Great. Thanks very much for that.
Thank you.
Next I move to Lars Brorson with Barclays.
Thanks. Hi, Henrik, Ilkka, Sanna. Three questions from me. Henrik, if I can start with your backlog margins or orders received margins. Encouraging to see those point upwards now for the first time in five years. Well done for that. I was curious as to, A, the order of magnitude of that, tens of basis points, or what are we talking about? Any color will be helpful, but also if you could break down the key components of that. Is this purely a function of price cost, or are you seeing a more meaningful impact from modularity and other improvements around your cost of goods sold?
First of all, if it will be only some basis points, that's still flat because you will have fluctuation always quarter-over-quarter. Clearly when we comment this, then we see a change, and it will have an impact rather than comment exactly how big it is, because you always see fluctuation quarter-over-quarter. Clearly we are seeing now improving margins of our orders received. You always have a combination of price and cost. I would say in this environment where we are, the majority, the biggest part of this is clearly pricing improvements. That again talks about strength of our brand and our competitiveness.
Understood. Thank you. Secondly, if I can ask to your European modernization market, curious as to the raised outlook. I know, again, the rate of change is small. We're going from stable to slight growth. Directionally, I was a little bit surprised. I see some of your core northern European markets perhaps getting a bit weaker in terms of the indicators I look at, Scandinavia, U.K. I'm assuming that what you're seeing in that market is perhaps more driven by Middle East, Southern Europe. Can you help me a little bit with what's driving that raised outlook?
I would say exactly as you mentioned, Middle East is somewhat better. Some South European markets also have a little bit of life in them. Yes, this is not a big change, I would say. Magnitude-wise, we're not talking about a big change from being stable to slight growth, but perhaps Middle East is the biggest area where we're seeing some better development.
That's helpful, Henrik. Maybe finally, just on China, on the market outlook there, I don't think great surprise to see a raised outlook, but I wonder how sustainable you think it is. I get the top-down picture, house price inflation running suddenly in the double digits, government tightening probably more to come second half this year. I wonder what you're seeing from a bottom-up standpoint in terms of the sustainability of that improving outlook. We've heard some of your developer customers asking for very fast delivery times with lead times down to weeks, I think, in some cases. What do you read into that, what do you see from a bottom-up standpoint in terms of the sustainability of a slightly better market in the first half?
When I think about the market overall, I would think from a top-down perspective, there the comments that we had are very much relevant. Let's not speculate about next year, but I would still see that we have still a lot of restrictions in the market. You can see that immediately if they even slightly loosen these restrictions, we see growth coming through. That indicates that there is demand underlying that. Of course, government's very focused on making sure they avoid speculation. As to developer, why are they looking for short lead times? I think they are looking for speed, they are looking for efficiency all the time, the faster they can be, of course, they are going to preserve cash flow, and that's good for their business to be quick.
Again, if you can deliver to their very fast lead times, that is a competitive advantage, that is a strength that we have, that we have very short lead time from order to be able to deliver to their site and start the installation.
Understood. Thanks.
Next we'll move to Guillermo Peigneux with UBS.
Hi, good afternoon. Guillermo Peigneux from UBS. Just a few questions as well. First, I wanted to ask about the U.S.A. Strongly surprising growth outlook in order intake. I guess, I wanted to get more granular idea as to whether you're seeing the same trends across the different segments, i.e. multifamily, commercial, and office, also infrastructure. Then I ask the other two questions afterwards. Thank you.
If you look at our North American order intake, clearly now modernization was the strongest. Also in volume business, we're doing quite well in major projects in new equipment business, perhaps that's less than it was a year ago. Perhaps that means that more standard buildings rather than very large ones. I would say on the housing side, pretty stable markets overall. Clearly, there is a lot of difference in different geographies in the U.S. and Canada. U.S. particularly, very large country with many different situations. Again, one is to make sure that you are active and driving where you're seeing growth at the moment. I would say what has had an impact on why we haven't grown now our new equipment orders in North America strongly has been smaller number of large projects. As the volume business has been doing quite well.
Thank you. Then out of curiosity, I was wondering about the period between 2017 and 2018 in which price competition was in China, in particularly the name of the game. I was wondering who led price decreases. Was it the local players? Was it the Western players?
I think it's not worthwhile speculating who was leading competition. Everyone who is in a market, who is selling at those prices are part of that competition. There's no question about that. I wouldn't start pointing fingers towards anyone. It was just that a lot of players looking for market share in a declining market, of course, created a very competitive environment. Many could see that probably that went a little bit too far, and now therefore we're seeing a stabilization overall.
Yeah, no, I agree. In the end, Chinese OE makers, elevator manufacturers' margins were significantly lower than Western players. I was wondering whether, it will not be very clever for them to, or rational for them to actually start pricing competition. Maybe, we've seen Chinese not behaving rationally in markets at times. That's fine. I guess, my last question is on consolidation, and it goes again into China. Would you include Chinese maintenance/service as part of a consolidating argument that you suggested before?
Clearly, both the new equipment and the services market in China are very fragmented, particularly the services market. I think there some consolidation would clearly be helpful over time.
Thank you so much. Very helpful.
We'll move to Wasi Rizvi with RBC Capital Markets. It looks like we'll move to Guillermo Peigneux with UBS.
I already asked my questions.
Andre, did you have another question?
Yes, I did. I didn't hear the announcement. Am I on?
You're on. We can hear you, Andre.
Yes, you are.
Oh, thank you. Thank you for the opportunity to ask follow-ups. A couple of things to check first. On North America pricing comment, where you now highlight that it's become a bit more intense. I just wanted to get a bit more color on degree of severity and do you think this is the beginning of a trend, or is this kind of response to the start wobbling early in the year and just showing that it's procyclical? Would just love to hear a bit more color on that.
I don't think it's been dramatic in any way. I would say the change from what we said before, perhaps it was more a favorable pricing environment there than the other parts of the world. Prices were increasing, but of course, costs were also increasing there. Now we see that costs are increasing because of partly raw materials and tariffs and things like that. Also we're seeing that as the market is now more stable, perhaps competition has been a little bit tougher. The environment has in that perspective changed, but I wouldn't call it dramatic that change.
Great. Thank you. Another one on China modernization. It is something we try to keep a close eye on, and wanted to ask whether, in your view, China modernization profitability is likely to follow the global profitability trend, i.e., from my understanding that modernization work is not that profitable, but obviously secures multi-year service. Do you think the chance that China modernization market actually follows the trend of China OE or new equipment, and proves to be above average versus other modernization markets globally?
I would say today, again, we have to remember that the market is still quite small, and I would say in its infancy, but growing very nicely. Today, we are somewhere in between those, so perhaps slightly better than globally, but not quite at the level of new equipment there.
Very clear. Thank you. Finally on digital, you mentioned breakeven or slightly above. I'm thinking that you're spending somewhere between EUR 15 million-EUR 17 million. I think that was the cost ramp-up that you indicated a couple of years ago, or I guess more like three years ago now. Am I right to think about your level of sales from 24/7 being in that sort of order of magnitude of up to EUR 100 million from that?
No, we are not at that. I think when we say breakeven, we say that the costs of developing today and the cost of running those services and then, of course, you need to look at the investments you've done more from an amortization perspective.
Got it. Can you give us any idea on maybe what the percentage of new service contracts that you sign that also get 24/7 monitoring attached?
That varies a fair bit in markets, but there, when we look at conversions, the hit rates are higher than for existing buildings. The majority is still without them, but I would say that the hit rates are actually increasing pretty good in new installations. That's where we see actually a big part of the ramp-up happening there. I think we have a lot of potential that way as well.
Is it over a half in the markets where 24/7, as you described, has been tried and tested by the customers, and it's something that has been around maybe for a year or 18 months now. In those kind of markets, would you say you're now over a half of newly signed service contracts that get 24/7 attached, too?
Not quite yet, but I would say some of the very early markets look quite promising here, but we're not quite at those levels yet.
Great. Thank you very much for your time.
Thank you.
We'll move on to Daniel Gleim with MainFirst.
Yes, hello. Thank you very much for taking my questions. Actually, also I have two of them. The first one would be on prepayment trends. Maybe, Ilkka, could you please comment on whether higher pricing in China comes alongside potentially also better prepayment terms, or have they been unchanged? Maybe on the bigger picture scheme, where do you see net working capital develop as a percentage of sales, maybe 12 months out? Is this going to be unchanged or do you also expect a slight improvement on that front?
First, if I comment on the China. From a payment terms perspective, commercial terms perspective, we haven't seen a change. Obviously, it is true that liquidity in the market for our customers has been tight, and that's something that we've been successful continuing with good commercial terms that we've had. That's also then visible in our cash flow. Going forward, from a net working capital perspective, I think we have good commercial terms when it comes to our customers, and maybe it's less likely to see an improvement there. They're already in a good level. At the same time, I think where the opportunities for us are in working capital are maybe more on the receivable side as well as on a payable side. There we continue to work on improving on those. I don't see a dramatic change as such.
It's more about just continuing to see a good development there.
Thank you very much. I was disconnected on your raw material answer, but just to double-check, when you speak about raw materials in your report and also during this call, you would assume the same trends then in your component input prices, or would you expect a material difference on that front?
When we comment the raw materials, what we're trying to give a more transparency on is that what is the impact that we see from raw materials on the component purchases that we make. We don't actually buy that much raw materials. It's the components. We want to try to estimate the impact of the raw material changes in that component prices. That's what we comment on.
Very clear. Thank you very much.
Thank you.
Next we'll move to Wasi Rizvi with RBC Capital Markets.
Hi, thanks for the question. Just one left from my side. The insight into China market was helpful, but I'd like to dig into that a bit more. Have you seen any difference in the growth rates between the Tier 1 cities and the lower tier cities? I guess I'd expect the government to be reluctant to stimulate the market in Tier 1 cities, so I'm wondering whether the lower tier they're growing faster. Then following on from that, could you just remind us how you're positioned in the lower tier cities and whether there's any difference in the competitive and pricing dynamics there?
Actually, even though you're correct that the restrictions are stronger in the higher tier cities, we can see that the bigger cities are drawing people to them and the satellites around them. You can really see these satellites forming around the big cities and the big cities themselves. That is where you have actually most of the growth, because that's where you have better jobs, usually better education, better healthcare, and that's drawing people, even though they have stronger restrictions than the lower tier cities. Our market share across China is pretty strong. Competition is tight in both of them. Actually, this doesn't have a huge impact on us.
Okay. Helpful. Thank you.
Thank you.
Next we'll hear from James Moore with Redburn.
Oh, yeah. Thanks for taking the follow-up. I wondered if I could ask about the China maintenance growth rate in the second quarter and its percentage of China revenues.
Yeah. Sales growth continues to be in the double digits. Also strong growth in the maintenance base. I would say very much the same trends we've seen before. Ilkka remind me, total services share of China revenues.
About 15%.
About 15%.
Thank you. On China earlier, you were commenting on the overall margin of the business and how we moved up from the peak and we've come back down. I think we all understand that. I think back in 2011 or 2012, I forget exactly when, you talked about a margin being broadly in line with the group, which was about 14% at that point. I was wondering if you might be able to help us a little bit more with the absolute level today and whether we're back at that sort of 14% level, or we're somewhere above or somewhere below that.
We're probably, I would say ball park-wise, not too far away from group average.
Thank you. Raw materials, I didn't catch your answer earlier either, I wonder whether the question was about 2019 or 2020, but my question's about next year. If we stay, I understand there's been some volatility in raw material spot markets, if we stay broadly at recent raw material price levels, do you envisage a headwind or a tailwind or a neutral environment for the raw material cost impact in 2020?
There's still many moving parts if you look at 2020. In that sense, it's a comment that is hard to make at this stage. Still orders to come and exact understanding on which ones we will deliver in 2020. If I broadly look at it, at these levels, the raw materials will be less of a headwind next year than they are this year. A slight headwind still.
Very helpful. Thank you.
Thank you.
At this time, I would like to turn the call back over to the speakers for any additional or closing remarks.
Many thanks for all the good questions again. We look forward to continuing these discussions with you after a couple of weeks of holiday. Thank you.
Thank you.
Thank you.