Good afternoon, and welcome to KONE's Q2 Result Presentation. My name is Sandra Kae, and I'm the Head of KONE's Investor Relations. As always, I have here with me today our President and CEO, Henrik Anruth 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, and Henrik will conclude with the outlook statements.
After that, we will have time for your questions. Henrik, please.
Thank you, Sanna, and also a 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'll just start with the highlights. In the second quarter, we had very solid growth of orders received and what's really the highlight was that our margins of our orders received improved. Also, we continued a strong momentum in modernization.
Sales growth continued to be very strong, which has actually been now already for several quarters. And I'm also pleased that our adjusted EBIT is back on a solid growth path and 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. So I think that that was a good performance as well. But as usual, let's start with the key figures for the Q2. As I mentioned already, the highlights were really our orders received and also that our adjusted EBIT is back on a solid growth path.
Our orders received was €2,300,000,000 a growth of 8.1 percent in comparable currencies. That is a good growth rate in this environment. Also, we have a very solid order book, €8,400,000,000 has grown at 5.9% year over year. Also good growth in sales. Sales was about €2,500,000,000 and growth of 7.9% in comparable currencies.
Our operating income grew from €280,000,000 to €306,000,000 or adjusted EBIT, which is a key performance metric that we follow in profitability, was €320,000,000 compared to €300,000,000 last year, so growth of 6.4%. However, our adjusted EBIT margin continued to decline slightly, although we can see that the pressure on margin is lower than in prior quarters and I think we're going into a better direction here. Cash flow was at a solid level of €324,000,000 not as strong as a very strong level we had a year ago. And also EPS grew at about 6% to €0.46 As we have always said is that 1 quarter is a very short period of time and always better to have a longer perspective on the performance and 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 Q2.
In particular, very strong orders received for the first half, orders received of SEK 4,400,000,000, 8% growth year over year. Also good growth of sales, sales about 4,700,000,000 and 7.7 percent growth in comparable currencies. Operating income growing from SEK492,000,000 to SEK 5.22 and adjusted EBIT from €519,000,000 to €548,000,000 And 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 €701,000,000 and also earnings per share of 0.78 dollars compared to €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. And all of this is again down to the great and hard work done by all of KONE's employees. So 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. Well, let's go into some of the highlights for the Q2.
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. Now to drive overall competitiveness, it's clear that you need strong service and solutions. We talked a lot about those, how we continue to develop and drive differentiation here. But 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. And 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? Well, we 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. And 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. And we are making progress here. I believe this is a strength of KONE. It's really who we are. And all of 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.
So let's do a bit of 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 Lepponen, who has been leading our new equipment business since 2,005 decided to retire. Heikki has very successfully managed and driven KONE's new equipment business since 2,005 from a clear challenger in the market to a clear market leader now where we are in new equipment.
So during Heikki's period as leader, Kone has taken a fantastic leap. So a huge thank you to him for all his contributions. But I'm also very happy to have Tomio Pichkala 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. But 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.
So I think he has a very broad and very strong experience to take over. So I'm very happy to have Tomio taking over our new equipment business. I'm also very happy to have Maciek 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 Maciek has a very strong and successful background. So I'm very happy to have him on the 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.
So 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'd have expected markets overall stable although variation within those markets. Asia Pacific has grown slightly and perhaps what has developed better than we would have expected is China where we had expected market to be pretty stable and now it's grown slightly in units.
Also, Southeast Asia and India has grown. So slight growth overall in the market. Services markets have developed very much as we would have expected. Maintenance growing everywhere, and 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. And 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. And as I mentioned already, the market has developed slightly better than we would have expected earlier in the year. And 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. And we can see that the construction activity has remained high. But 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 and immediately we've seen then growth come through.
But as I talked about the construction activity, real estate investment continued to grow at 10% year over year. And although sales volume of real estate is slightly down, but prices are up. So we can see that there is strong demand. And 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 in 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 3 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. But clearly, competition is tougher amongst these, but also they are demanding and they do appreciate very strong field execution, strong services in combination with good products.
And we can see that our competitiveness is good in that field and that's why we have grown so nicely in that area. So a little bit perspective also then on the external markets. Let me next hand over to Ilkka then to talk a little bit more about our financial performance and what is behind it.
Thank you, Henrik, and also a warm welcome on my behalf to this Q2 results announcement webcast. I'll go through our financials in more detail and start with orders received development. Orders received in the 2nd quarter reached NOK 2,300,000,000 in the quarter, representing a 9% reported growth and on a comparable basis 8.1% growth in our orders received. This development was driven by a positive driven by China as well as Americas. And if I look at the orders that received development in China, we saw significant growth in our orders received both in units as well as in monetary value.
And 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. Also as highlighted by Henrik already earlier, we saw in the Q2, 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. Then looking at sales. So in the quarter, we saw sales at €2,541,000,000 which represents a 9% reported growth and on a comparable basis that's 7.9%.
And 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.
But also Europe, Middle East, Africa grew 6.8% as well as Americas at 6.6% in the quarter. So overall, good broad based growth in our sales. Our adjusted EBIT grew to €320,000,000 which a year ago is a 6.4% growth. And 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. And as indicated already earlier, the cost headwinds are more pronounced in the first half of the year impacting our profitability. Currencies had a positive €3,000,000 impact as well as IFRS 16 having a €2,000,000 positive impact to our results. In the quarter, the cost from our Accelerate program were €13,000,000 impacting our EBIT in the quarter. Then lastly, cash flow.
We saw continued strong cash flow in the first half of twenty nineteen and our cash flow reached €701,000,000 Our net working capital contributed positively driven by strong advances received as well as progress payments from our customers. And when you look at the comparison, it's good to note that IFRS 16 has had a positive impact of €58,000,000 to our operating cash flow in the first half of twenty nineteen. With that, I'll hand it over back to Henrik to go through market and business outlook for 2019.
Thanks, Jokka. I'll just then wrap up with our outlook for the rest of the year. To start 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 Restoration Pacific to grow slightly as well. North America, Europe, Middle East and Africa rather stable. In maintenance markets, nothing new, continued to see growth with the strongest growth in Asia Pacific. And in modernization also slight growth in Europe, Middle East and Africa, North America and strong growth in Asia Pacific. So very much the same trends as we saw there in the 2nd quarter.
Corniche business outlook, we have specified that. We now have 6 months behind us. So we clearly have can now narrow the ranges a bit, which we have done. Sales, we expect that to be in the range of 4% to 7% at comparable currencies. Previously, we expect that to be 3% to 7%.
Our adjusted EBIT, we now expect it to be in the range of 1,170,000,000 to 1,250,000,000 previously expected to be in range of 1,160,000,000 to 1,260,000,000. What's also changed is that in connection with Q1 results, we expect that currencies would contribute €30,000,000 positive. Now that's slightly less positive, so it's about €20,000,000 So if you look net net at our adjusted EBIT range, if we keep currencies out of the picture, we actually taken slightly up on 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 our 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 €50,000,000 for the full year, slightly more impacting second half than first half. But there are also areas burning our result, raw material prices and trade tariffs close to €50,000,000 and also then labor and subcontracting costs increases, which have been higher than we would have expected earlier, particularly in Europe, are also burning the result overall. But I would say first half very much on track for this outlook. So I would say just to wrap up before with the 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. So operator, you can start taking the questions from the telephone line. Thank you.
Thank And we'll take our first question from Lucy Carrier with Morgan Stanley.
Hi, good afternoon. Thanks for taking my question. I have 3 questions actually. I would go one at a time. The first one was actually around the margin.
And I was just trying to think about that a bit more conceptually. So 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. I mean, 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?
Because 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. So that's my first question.
Okay. So I'll ask let Ilkka then 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. But if you also look at it, the drag that we had was now slightly lower.
If you look at our outlook, then we I think we have a good potential to have a better performance second half of the year. But I don't know 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. And for example, in this quarter, overall, we had a bit more larger projects as well as modernization, which both of them have a slightly lower profitability impacting overall the margins. And 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. And 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 like 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, But of course, you have as I said, you have fluctuation in other businesses. And as Ilkka mentioned, more modernization now on larger projects. But clearly, compared to the 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 you 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 may be 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.
Yes. As you also know that the actions by the government, which I think overall they steered it quite successful, the market, has a clear impact. What is also in the second half? Well, 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. So there are a few uncertainties like this that we are not quite unclear 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 impact of these Golden Week holidays, then we could have some impact. So but I don't think that we talk about massive differences H2 compared to H1, but let's see.
Thank you. And just my last question, I think you were on the press call earlier and you were saying and you said that before that you were 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 would be benefits of consolidation that could clearly happen in many different ways. You have some bigger players, but also you have midsized players, many of them in Japan or Germany or Spain. So 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 being 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.
And next we'll move to James Moore with Redburn.
Yes, good afternoon, everyone, and thanks. I too have 3. I'll go one at a time as well, please. Firstly, remarkably strong double digit order volume growth in China. And 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?
Yes. What 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. So I think that's something worthwhile to follow on a longer term basis.
And that's been quite a 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 a longer term leading indicator. That's at least the experience that we would have of it.
Very helpful. Thanks. And secondly, on your U. S. Modernization business, it seems to be going very fast.
I just wondered whether there's something specific, individual project, etcetera, driving that or whether it's more a function of a sustainable market environment that you think can continue. So basically, what sees your U. S. Modernization outlook after this quarter?
Well, 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. And if you have them, you're probably going to have even a little bit more growth. But the point is that it's not only one individual project or projects.
It's more broad based than that. And the team there has done a great job.
Thanks. And then lastly, I think last time I caught up with it, your digital service offerings were progressing well. I think 20 fourseven was less than 5% of maintenance sales, CODA care a bit over 5% of maintenance sales, with CODA Care being 10% penetrated in Europe. I wondered if you could update us with how that's progressing in terms of rates of growth. And I think you've got to a point of breakeven previously.
Are you now starting to see some EBIT contribution yet?
I would say, Nukemic Care, of course, we have had in the market for more broadly for a longer period of time. And that is how we operate in Europe today, and we have also then started in many Asian countries to introduce it now. So 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.
20 fourseven 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, then they take it more broadly. And 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, and therefore, we sell them as a commercial offering.
And 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. So in the countries where we started earlier, there, again, momentum is stronger, but we can also see that it takes time to really penetrate every market. But I'm actually quite pleased how we see progress going now. And 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.
And in terms of growth rates, are they is there anything you can share? I mean, growing at 50%, 100%, 10%, I have no idea what sort of speed this is.
I've actually heard the growth rates are very strong. But of course, we're starting from a pretty low level. So therefore, I actually don't now have the exact growth rates, but they are very strong. But I think in the beginning, when you have 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, very high growth rates.
Thanks, Hendrik.
Thank you.
And next we'll move on to Andre Kukhnin with Credit Suisse.
Good afternoon. Thanks so much for taking my questions. So I'll go one at a 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 realized the comment that you 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. And of course, everyone is working very hard to win more business of large developers. So their 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. But overall, I'm actually quite pleased how we've done in this environment.
Indeed. And just to follow-up on this. In terms of the
kind of
smaller local players' behavior, just to double check that you have noticed changing either?
No. But 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. And 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. And 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 revenue our group revenues. So the share of China has both in Q1 and Q2 slightly increased.
So we had a very strong sales growth in China in first quarter. Now we did grow also in 2nd quarter now more than 10% our revenue in China. So as such, its share of the revenue is increasing.
Got it. I'll double check that. And just a much broader one on China and following up on the question on profitability before. Could you give us some idea on where is the China profitability now versus the peak? I mean, we've 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. And 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, but still it is good. And 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.
But as we said, again, I think we are now in a more stable situation and we're starting to go in a better direction overall.
And then 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 are that's what we're working on all the time. And 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. But clearly, it's a super continue to work super hard to build our brand and continue to develop our business there. But that's what we're doing day in, day out.
Got it. Thank you. And 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 the long 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 kind of 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 deal environment, you'd be happy to push all the way?
I'm not going to comment on any specific things, but of course, there is a 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. So we are we can continue as we are. But at the same time, if there are interesting consolidation opportunities, clearly, we are going to be interested in those. But 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.
And next we'll move to Daniela Costa with Goldman Sachs.
Hi, good morning or good afternoon. I wanted to ask 2 things basically. I 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 you can we attribute all the margin drop that we have seen in the group just to China?
Or if you look at individual components on other regions and products categories, is there any other place where you have seen a more structural margin pressure? And then 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? How because your guidance stays the same, but obviously, raw materials have moved quite a lot since 1Q? Thank you.
Thank you. First, you give a little bit of perspective on your 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. But I would say, clearly, if we look at individual market where the price pressure was the toughest historically, that was clearly China. But 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 that it's been hard work, and we're getting there.
So 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 the second part was the raw material question that you had. So overall, our comment is the same. So we see raw materials combined with the tariffs having a little bit less than €50,000,000 impact to 2019. And 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. So in that sense, let's see how the exact deliveries and which project gets completed.
That has some impact still, but relatively good visibility to 2019 on the prices.
And next, we'll move to Amit Bazziri with Jefferies International.
Yes. Thank you for taking my questions. I had 2 in fact. First of all, I wanted to touch base on the recent trend of more increasingly orders have been 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 that's in very large infrastructure projects?
And 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?
And how do you see it specifically growing within China?
So 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. So maybe because when you get orders, they are not that many of them and they're usually the size that we announce and therefore, it may seem that it's a high share, but actually, I don't know if you had a number, but it's not a 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.
And I think from a revenue perspective, given that we are in a percentage of completion, so it's I see less lumpiness there. And 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.
And then the Okay.
Thank you. So is that a function of the size, but also the timing of delivery that in your view makes it less lumpy than other revenue other projects?
No. What I was saying is that we have a percentage of completion. So as these projects they also have ongoing work and they're taking a longer time, but we constantly recognize the revenue. And similar to other contracts, as we progress and we also get payments from the customers. So in that sense, I don't see that big of a volatility coming out of from them.
And the 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. And again, that was one of the drivers of modernization growth that we have very fast growth in China in that business.
But as I said, it's still coming from quite a low level.
Okay. Thank you. But would you agree that it would the very large infrastructure projects can still make your order development lumpy?
If you have some of the really large infrastructure projects, they may they are going to have some little bit bigger impact on your orders received, and that's one reason why orders received can fluctuate a little bit quarter to quarter. But if I look at the Q2, in fact, it was actually modernization of volume business that was growing more than the new equipment major projects. But 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.
And next we'll move to Lars Bronson 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 5 years. So 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? Are you seeing a more meaningful impact from modularity and other improvements around your cost of goods sold?
So first of all, if it will be only some basis points, that's still flat because it will have fluctuation always quarter to quarter. Clearly, we are 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 to quarter. But 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.
And 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.
But 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. So 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?
Well, I would say exactly as you mentioned, it's Middle East is somewhat better. Some South European markets also have a little bit of life in them. So yes, this is not a big change, I would say. Magnitude wise, we're not talking about the 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. And then maybe finally just on China on the market outlook. I don't think great surprise to see a raised outlook. But I wonder how sustainable you think it is. I mean, 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. I mean, 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. How what do you read into that? And what do you see from a bottom up standpoint terms of the sustainability of a slightly better market in the first half?
I would think when I think about the market overall, I would think from a top down perspective. And there, the comments that we had are very much relevant. And let's not speculate about next year, but I would still see that we have still a lot of restrictions in the market. And you can see that immediately, if they even slightly loosen these restrictions, we see growth coming through. So that indicates that there is demand underlying that.
But of course, government is very focused on making sure they avoid speculation. Now then as to developer, why are they looking for shorter lead times, I think they are looking for speed. They are looking for efficiency all the time. And the faster they can be, of course, they are going to preserve cash flow and that's good for their business to be quick. And again, if you can deliver to their very fast lead times, that is a competitive advantage and 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.
And next we'll move to Gurlamaz Premix with UBS.
Hi, good afternoon. It's Guillermo Peigneux from UBS. Just three questions as well. First, I wanted to ask about the U. S.
A. Strongly surprising growth outlook in order intake. But I guess, I wanted to get more granularity as to whether you're seeing the same trends across the different segments, I. E, multifamily, commercial and office, also infrastructure. And then I ask the other two questions afterwards.
Thank you.
If I look at our North American order intake, clearly now modernization was the strongest. But also in volume business, we're doing quite well in major projects in the equipment business, perhaps slightly that's less than it was a year ago. And perhaps that means that more standard buildings, larger than very large ones. And then I would say on the housing side, pretty stable markets overall. Clearly, there's a lot of difference in different geographies in the United States and Canada.
United States, particularly, very large country with many different situations. And again, one is to make sure that you are active and driving where you're seeing growth at the moment. But I would say what has had an impact on our why we haven't grown now, our new equipment orders in North America strongly has been a small number of large projects. So the volume business has been doing quite well.
Thank you. And then out of curiosity, I was wondering about the periods between 2017 2018 in which price competition was in China, particularly the name of the game. I was wondering who led price decreases? Was it the local players? Was it the Western players?
I don't think I think it's not worthwhile speculating who is leading competition. Everyone who is in the market who is selling at those prices are part of that competition. There's no question about that. So 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, very competitive environment.
And then many could see that probably that went a little bit too far. And now, therefore, we're seeing a stabilization overall.
Yes. No, I agree. But in the end, Chinese OE makers' elevator and the Elevator Manufacturers' margins were significantly lower than Western players. And I was wondering whether it will not be very clever for them to or rational for them to actually start pricing competition. But maybe we've seen Chinese not behaving rationally in markets at times, so that's fine.
I guess my last question is on consolidation and it goes again into China. Would you include Chinese maintenanceservice as part of the consolidating argument that you suggested before?
Clearly, both the new equipment and the services market in China are very fragmented, particularly the services market. So I think there some consolidation would clearly be helpful over time.
Thank you so much. Very helpful.
And we'll move to Wazee Rizvi with RBC Capital Markets. It looks like we'll move to Guillermo Pemex 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.
Thank you. And thank you for the opportunity to ask some 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 kind of degree of severity. And do you think this is the beginning of a trend?
Or is it kind of in response to the start wobbling early in the year and just showing that it's procyclical? We'd 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 in other parts of the world. So it was prices were increasing, but of course, costs were also increasing there. Now we start we see that costs are increasing because of partly raw materials and tariffs and things like that. But also we've seen that as the market is now more stable, perhaps competition has been a little bit tougher.
So the environment has in that perspective changed, but I wouldn't call it dramatic that change.
Great. Thank you. And another one on China modernization. It is something we kind of try to keep close eye on. And I wanted to ask whether China in your view, China modernization profitability is likely to follow kind of the global profitability trend, I.
E, from my understanding that modernization work is not that profitable, but obviously secures multiyear service? Or 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. And finally, on digital, you mentioned breakeven or slightly above. And I'm thinking that you're spending somewhere between €15,000,000 €70,000,000 I think that was the kind of the cost ramp up that you indicated a couple of years ago or I guess more like 3 years ago now. Am I right to think about your level of sales from 20 fourseven being in that sort of order of magnitude of up to EUR 100,000,000 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 amortization perspective.
Got it. Got it. And can you give us any idea on maybe what percentage of new service contracts that you sign that also get 20 fourseven monitoring attached?
That varies a fair bit between markets, but there when we look at conversions there, the hit rates are higher than for existing buildings. So we still we are not that the majority is still without them, but I would say that increasing and the hit rates are actually increasing are pretty good in new installations. So that's where we see actually a big part of the ramp up happening there. So I think that's we have a lot of potential that way as well.
And is it over a half in the markets where 20 fourseven kind of as you described has been kind of 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 20 fourseven attached to?
Not quite yet, but I would say some of the very early markets are clearly they look quite promising here, but we're not quite at those levels yet.
Great. Thank you very much for your time.
Thank you.
And we'll move on to Daniel Glynn with MainFirst.
Yes, hello. Thank you very much for taking my questions. Actually, I also have 2 of them. The first one would be on prepayment trends. So maybe, Elka, could you please comment on whether higher pricing in China comes alongside potentially also better prepayment terms?
Or have they been unchanged? And maybe on the bigger picture scheme, where do you see networking capital develop as a percentage of sales maybe 12 months out? Is this going be unchanged? Or do you also expect a slight improvement on that front?
So first, if I comment on the China. So 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 tightened and that's something that we've been successful continuing with good commercial terms that we've had and that's also then visible in our cash flow. And 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. But 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 the payable side. And there we continue to work on improving on those. But 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?
So when we comment raw materials, so 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, but we want to try to estimate the impact of the raw material changes in that component prices. And that's what we comment on.
Very clear. Thank you very much.
Thank you.
And next we'll move to Wazee Rizvi with RBC Capital Markets. Hi.
Could 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? And I guess I'd expect the government to be reluctant to stimulate the market in Tier 1 cities. So I'm wondering whether the other with the lower tiers are growing faster. And 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?
In fact, actually, even though you're correct that the restrictions are stronger in the higher tier cities, but we can see that the bigger cities are drawing people to them and the satellites around them. So 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 health care, and that's drawing people even though they have stronger restrictions on the lower tier cities. Our market share across China is pretty strong. So competition is tight in both of them.
So actually this doesn't have a huge impact on us.
Okay. Helpful. Thank you.
Thank you.
And next, we'll hear from James Moore with Redburn.
Yes. Thanks for taking the follow-up. So I wondered if I could ask about the China maintenance growth rate in the Q2 and its percentage of China revenues.
Yes. 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. And if you can remind me, total services share of China revenues About 15%. About 15%.
So, but remember now Thank
you, Ed. On China earlier and on China, 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. And I think back in 2011 or 2012, I forget exactly when, you talked about a margin being broadly in line with the group, which is about 14% at that point. And 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, ballpark wise, not too far away from group average.
Thank you. And raw materials, I didn't catch your answer earlier either. I wonder whether the question was about 2019 or 2020, but my question is about next year, if we stay and I understand there's been some volatility in raw material spot markets, but 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? Well, there's still many moving parts if you look at 2020. So 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. But 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, but a slight headwind still.
Very helpful. Thank you.
Thank you.
And 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.