Good afternoon, and welcome to KONE's Q1 result presentation. My name is Sanna Kaje and I'm the Head of Investor Relations. I have here with me today our President and CEO, Henrik Ehrnrooth, and CFO, Ilkka Hara. Henrik will first go through the Q1 highlights. Ilkka will take a closer look at the numbers, and Henrik will conclude with the market and business outlook. In the end, we will again have time for your questions. Henrik, please.
Thanks, Sanna, and welcome also on my behalf to our Q1 results webcast. Today, we have a lot of good news to share that I'm happy about. I'll start with talking about the highlights of the quarter, our key numbers, but also as usual, in connection with our first quarter results, we also have updates on two of our strategic targets. Namely, whether we have grown faster than the market last year and how we developed in sustainability. I'll share an update on those, talk about the markets. As Sanna said, Ilkka will dive a little bit deeper into our financial performance, and I'll wrap up by looking at our outlook for the year. To start with highlights of the first quarter. We had a good start to the year. Orders received grew strongly in all businesses. That is great.
Also, I'm very pleased about our performance in our maintenance business. That developed good on a very broad basis and in all geographic areas. That was a really good start and good consistent development that we have had for a good while. Our cash flow was very strong. That's great. Shows good development of our business and also our adjusted EBIT grew. We can also see that the strategic targets to which we have updates, that they developed well. Let's start with the key figures. As I mentioned, highlights here were orders received and cash flow. Orders received at about EUR 2.1 billion grew at 8% in comparable currencies. In this environment, this is a good achievement. We have a good, solid order book at about EUR 8.5 billion, which has grown about 4.6% year-over-year. Also, in sales, we had a good start.
Almost EUR 2.2 billion for the first quarter, a growth of 7.6%, which is a good growth rate. Our operating income EUR 215 compared to EUR 211 last year. If you look at our adjusted EBIT, which is the main way how we measure our financial performance, was EUR 228 million compared to EUR 218 million a year ago. So growth in our adjusted EBIT. However, we continue to see a number of things that burden our margin, therefore margin was slightly lower at 10.4% compared to 10.9%. This was very much as we had expected for the first quarter. As I mentioned, cash flow very strong at EUR 378 million compared to EUR 179 million last year. Finally, our earnings per share at about last year's level of EUR 0.33. If we just take a few of the highlights of the first quarter.
We have now grown many quarters in a row faster than the market, very consistently, and on a very broad basis. It shows that our differentiation has strengthened. If I just take a few examples of this. What we have done to strengthen our differentiation, for example, in infrastructure market, which we see that will be very active over the coming years and has been very active. We have improved our differentiation and competitiveness by setting up competence hubs in our key areas to do this. What we have done is that we have structured the teams in a totally different way. Instead of having people dispersed in different places, we put them together in competence hubs to be able to serve our customers in a better way and to be more competitive here.
At the same time, we have strengthened our offering with our new infrastructure offering over the past roughly a year. We can see that this has clearly improved our positioning in the growing infrastructure segment. If I look at our new services, which we have talked a lot about, what is important here is that they are not only strengthening our competitiveness in our services business, where we can see clear and good improvement, but they're in fact also improving our competitiveness in the new equipment business. Because we are talking about services that support our customers in much better way, it gives us an even better opportunity to have a life cycle discussion with them to make sure that our products and services and solutions gets more specified, and therefore stronger customer relationships.
We can see that also being stronger in services helps us on new equipment side and for orders received, we can see that this is the case. Our Accelerate program, which is important to us in speeding up our ability to bring new services and solutions to our customers, improve our customer centricity, and also improve our efficiency, is developing well. Here, I just take a couple of highlights of what's happening. We have totally restructured our customer solutions engineering organization. In fact, it's a new organization we have set up. How we restructured our engineering organization to support our customers even better and also support our sales organizations better.
That organization is now ramping up in a restructured and more efficient way. We can see that that is helping our frontline units in serving our customers better, freeing up time to serve customers in a better way. We have also further harmonized our ways of working across business units, particularly on a geographic basis. We can see that this is definitely bringing efficiency into our business, and that is where we are starting to see savings materialize as we speak. Many things are progressing there. We still have a lot to be done though in Accelerate, but it is progressing according to our plans. As I mentioned, in connection with first quarter results, we also look at two of our strategic targets. As you know, we have five strategic targets through which we measure our longer-term success. Now we have an update, two of them.
It's whether we have grown faster than the market and how we're doing towards being a leader in sustainability. Let's start with how we have developed compared to the market. Now we have again, a more deep dive into market sizing and market shares for 2018. In 2018, the new equipment market grew slightly in number of units, but it grew a little bit more if you look in monetary value. When we look at the total new equipment markets in 2018, we expect that they were about 900,000 units globally. Now, we have slightly reassessed the total market size. We cannot completely compare to previous year's numbers. We have reassessed it because we have gained additional official data, particularly from China, which has shown that the market is a little bit larger than we have previously assessed.
Still, we have a comparison now year-over-year that is consistent. When we look at our development last year, we grew clearly faster than the market. Our market share in the countries that we operate was about 20%, up about one percentage point from prior year. We clearly grew faster than the market. Our market share gains were driven, in particular, by China and Europe, but we had many other areas that also continued to develop well. If we look at new equipment markets, yes, we need to grow faster than our market and had a good development overall in 2018. Service markets also continue to grow. Here also we have based on the same data, we have slightly reassessed the total installed base globally. We expect that the total installed base of elevators and escalators is about 16 million units.
Market continued to grow slightly, and we could see the fastest growth was in China as expected. Europe, Middle East, and Africa continues to be the largest market, and in particular, by far the largest market if you measure in monetary value. If you look at the fastest-growing market, it is clearly China, which starts to be a significant share of the world market. In maintenance, we continue to grow faster than our key peers, and we have year after year, slightly improved our market position, although we continue to be a challenger with about number three market position globally. It's our strong position or very strong position in many of the key markets around the world in new equipment that gives us the ability to continue to grow our service business in a very attractive way and at market leading growth rates.
Both in maintenance and in new equipment business, we grew faster than the market in 2018. If you look at our overall market positions, we can see that in the really key Asian markets, China, rest of Asia-Pacific, which are the largest markets in the world, where urbanization is the strongest, we have a very good position. Number one position overall in these markets. Europe, Middle East, and Africa, our market position varies but has strengthened. In many markets, we continue to be a challenger, and of course, that gives us good impetus to drive further growth. North America, we continue to be number four, both in new equipment and maintenance. However, if I look at over the past five, six, seven years, we have a continuous good and strong development.
In new equipment, we particularly have a very strong position in the most important segment that is growing the fastest, which is the machine room-less segment. There's a very large hydraulic segment still in North America, but there we are not present, but we focus on modern energy-efficient equipment that we think are the best solutions for our customers and also the fastest-growing market. Overall, our market positions, of course, give us a good basis to continue to develop KONE going forward. The other strategic target where we have an update is we have a target of being the leader in sustainability in our industry. We know that sustainability is a very broad subject, we have decided that we want to be good overall, but we want to be really a leader when it comes to energy and resource efficiency.
We measure two ways. We measure, first of all, the carbon footprint from our own operations. Here we have a target of reducing our carbon footprint relative to sales by 3% per annum. We have done consistently. Last year, we improved it by 4% if you look at overall operations. It may not sound a lot. 2017 was slightly less improvement than the other years, but if I go back 10, 15 years in history, every year we have improved by more than our target. That means that we actually continuously improving our operations. We are meeting our targets here. The other aspect for us is that we want to have the most energy-efficient elevators and escalators and solutions for our customers.
We have 14 elevator models that have the highest energy efficiency rating based on new ISO standards. This is more than any of our competitors, we know that we are the market leader here. We have three escalator models that have the best-in-class energy efficiency rating. We also help and ensure that our customers can have energy-efficient and sustainable buildings. We have also continued to receive a lot of external views and awards for the work we do in sustainability. If you looked at the CDP, there we have an A-minus rating for the sixth consecutive year. That is clearly best in class in our industry. Also, Forbes has ranked us as one of the world's 100 most innovative companies very consistently over the past years, and lastly, also one of the world's best employers. That is important in sustainability. We are part of FTSE4Good Index.
You can read much more about this in our sustainability report, which was published today. That is about the highlights for the first quarter and a little bit more about our strategic targets that measures our performance on a longer term basis. Let's briefly look at market development for the start of the year. Here you can see that markets in new equipment grew slightly year-over-year. In North America, they stayed pretty stable at the high level. Europe, Middle East, and Africa, they actually now grew a bit, and they were pretty stable in Q4. It's particularly in Europe that many European markets were growing, whereas the Middle East continues to be challenging. Asia Pacific, slight growth in China, good growth in India and Southeast Asia, and Australia declining. With that, a slight growth overall.
This is perhaps a slightly better development, particularly in the Asia Pacific markets, than what we had expected for the first quarter of the year. Service markets, not much new here. Maintenance continues to grow everywhere. Slightly in North America and Europe, Middle East, and Africa, and good growth in Asia Pacific. Modernization, also slight growth in the developed market and strong growth, particularly in China. As always, let's look a little bit closer into what's happening in the Chinese market. We know it's very important to us, very important to our industry, and we can see that our performance was strong there. What was driving that? Let's start from the market overall. While there continues to be uncertainty in the Chinese property market, the start of the year was somewhat better than we had expected. Why was this?
We could see last year when Chinese economy was cooling down, we could see that some restrictions that we have seen in the property market were slightly eased, and that immediately grew up the activity and particularly prices in the property market. That clearly gave an incentive for developers to speed up projects, and we could see that both in our deliveries and in our orders received. We even then clearly outperformed this slightly higher activity. If you look at the markets, we can see that housing inventories have slightly increased, and that's particularly due to the cooling measures. It's a slight increase in lower-tier cities. Higher-tier cities, it's at a pretty good level. That's something, of course, we need to continue to watch: inventories in lower-tier cities. Housing sales, as I mentioned, slight growth. Perhaps most important is that prices have increased.
If you look at total real estate investments, they're actually growing at about 12%. Last year, when we were talking about growth in real estate investments, that was mainly driven by increase in land prices and land sales. Now actually it's construction activity. This increase in construction activity clearly driven by the demand for housing, but also a slightly better liquidity situation for developers that helps them drive projects going forward. We saw then slight growth in our market.
When we look at the situation going forward, what we can see is that if we have now a clear uptick in the market, particularly in prices, and we can see that PMI also in China is improving, I think it can be likely that we see again that many of the restrictions get put back in place to make sure that property markets don't get too hot, because it's clear that that is something the government seems to be very focused on. Because of that, we expect that for the full year, markets are pretty stable. That is a slight improvement to what we believed at the beginning of the year when we said that we expect the Chinese markets to perhaps slightly decline or be stable. Now we expect them to be stable overall.
That's a little bit more of our views and thoughts on the Chinese market overall. With that, I'll hand it over to Ilkka to dive a little bit deeper into our financial performance.
Thank you, Henrik. Welcome also on my behalf to this result announcement webcast for the first quarter 2019. As usual, I'll go through a bit more in detail our financials, and I'll start with orders received. We saw orders received at EUR 2,094 million for the quarter, which on a reported basis represents 9.7% growth. On a comparable basis, 8% growth. Clearly a good start from an orders received point of view. We saw growth in all businesses. Particularly from an area perspective, driven by China and Europe, Middle East, Africa from a growth perspective. We look at the important Chinese market and the development for orders received there. We saw in units, clear growth for orders in China. Also, like-for-like price as well as mix contributed slightly positively. From a monetary value perspective, we saw significant growth in our orders received in China.
At the same time, when we look at the margin for orders received in the quarter, they continued to be stable as we saw last year and since end of 2007. Overall, good growth in orders received for the quarter. Looking at sales at EUR 2,199 million. Growth of 9.5% on a reported basis and 7.6% on a comparable basis. Good growth in all businesses with new equipment contributing at 9% growth in a comparable basis, maintenance at 5.4%, and modernization at 8.3%. From geographical perspective, we saw Europe, Middle East, Africa growing at 1.7% growth, and have to remember that there's a strong comparison point last year for the sales in Europe, Middle East, Africa. Americas at 4.6% and Asia Pacific at 17.4%. There, the growth was driven by strong deliveries in China. Henrik was talking about the strong activity in the construction sector.
That's also visible here in deliveries for us in China, where we saw our sales growing first quarter, about 20% for the quarter. It's good to note that we don't expect similar growth to continue from a sales perspective, but more stable development for the rest of the year in China. Looking at adjusted EBIT. We continued to grow our adjusted EBIT as we did in fourth quarter of last year, and it reached EUR 228 million, which represents 4.6% growth for our adjusted EBIT. At the same time, if you look at the margin, so it came down from 10.9% to 10.4% as expected for the quarter. As we said, we are seeing the cost headwinds more pronounced at the beginning of the year, and at the same time, see better development towards the latter part of the year for our margin.
Restructuring costs for the Accelerate program were EUR 13 million. The savings from Accelerate program in the quarter were a bit less than EUR 10 million. Currencies had a positive impact of EUR 5 million. I'll go a bit more in detail, the impact of IFRS 16 for the quarter was positive EUR 2 million. I'll come back to that at the end of my presentation just to summarize the impact of that change in our accounting standards. Lastly, about cash flow. At EUR 378 million, it's clearly a strong cash flow for the quarter. It's good to note that cash flow on a quarterly basis does fluctuate, but clearly we saw a good start for the year from a cash flow perspective. Driven by networking capital developing positively, especially in our advances received, as well as in progress payment for the quarter.
Here, IFRS 16 had a positive impact of EUR 28 million to our cash flow. Lastly, just to summarize the impact of IFRS 16, the new lease accounting method in our results. Very much aligned with what we already explained earlier. From a balance sheet perspective, we saw a EUR 368 million increase in our opening interest there in debt. We saw a EUR 5 million increase in our capital expenditure due to the lease agreements being there. From an income statement perspective, there was a EUR 2 million positive impact on Q1 EBIT. Correspondingly in the financing expenses, we saw a EUR 3 million increase in the expenses. From a cash flow statement perspective, on a cash flow from operations, there's a EUR 28 million positive impact.
At the same time, there's a EUR 2 million negative impact on cash flow from financing items and taxes. Then EUR 26 million negative impact on cash flow from financing activities. Overall, the net impact naturally for cash flow is zero. Line by line, there are some changes. With that, I'll hand over back to Henrik to go through market and business outlook for 2019.
Thank you. That's the history start to the year. Let me review what we expect from markets for the rest of the year and also from our performance for the rest of the year. If you look at the outlook for 2019, we expect the new equipment, the market to be relatively stable overall. China, as I mentioned, we expect now to be relatively stable in units ordered, while rest of Asia Pacific is expected to grow slightly. It is driven by India and many Southeast Asian countries. New equipment in North America and Europe, Middle East, and Africa expect to be rather stable. Maintenance, very much the same trends as we've seen for a long time already. Slight growth in Europe and North America and good growth in Asia Pacific. Modernization, pretty stable in Europe, slight growth in North America, and good growth in Asia Pacific.
Pretty much in line with what we've seen so far. Then our business outlook for 2019, which we have slightly specified. We expect our sales to grow between 3% and 7%, where we previously expected it to be 2% to 7%. Of course, it's at comparable exchange rates. We expect adjusted EBIT to be in the range of EUR 1,160 million to EUR 1,260 million. We previously expect it to be EUR 1,120 million to EUR 1,240 million. This assumes that exchange rates stay at the level that they were about in April. If they stay at about the April level, we expect to see about a EUR 30 million positive impact from currencies, whereas the same number was about EUR 10 million previously. This difference is one of the reasons we have slightly specified our guidance, but also particularly at the lower end.
We can see the good start to the year, which means that we are fully on track with the targets that we have for the year, that we could also slightly improve it from that end more than currency. If I look at our performance, we can see what is boosting our performance. The solid order book we have, the continuous good development of our services business, performance improvements we are driving, and Accelerate savings. There's still things burdening our result, and that's probably higher beginning of the year than end of the year, raw material prices and trade tariffs, slightly less than EUR 50 million, and then a clear increase in labor and subcontracting costs. Just to wrap up with the Q1 results, we are fully on track to meet our full year targets, such a good start to the year.
All metrics we were either on track for what we had expected or actually a little bit ahead. We can see that our strategy, how we're driving differentiation works. We can see it from our growth, and that is positive. That is what we'll continue executing on in the same way we had. I think that this start to the year sets us up for a clear improvement potential and a commitment to clearly improve our EBIT this year compared to last year. With that, we are ready for your questions.
Thank you.
Thank you, Henrik. As said, I guess we're ready for the questions. Operator, you can start taking them from the line. Thank you.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will now take our first question from Andre Kukhnin of Credit Suisse. Please go ahead.
Good afternoon. Thanks very much for taking my questions. I'll start with one on China and your relative performance there. You've now for a few quarters taken share there in units while also outperforming the market on price. Could you just talk us through how you're doing that and how should we think about that in the rest of the year? At some point, do we need to think about your performance kind of normalizing towards the market or not?
I would first say that we have had a good performance in China. It shows the competitiveness we have in the market overall. We have a very broad reach in the market, which means that we have been, again, able to be very good at finding the growth opportunities in a more uncertain market, a market that varies a lot from region to region. Also, we have good competitiveness if you look at services, our products and solutions. That is good. Now, when we look at the rest of the year, as you know Andre, we don't guide orders to see it for the rest of the year, clearly always our ambition and our target is to grow faster than market. At the same time, we want to be very clear that we also need to make sure that our pricing stays at a good level.
We are at the level where we have been able to slightly improve pricing year-over-year, and at the same time grow volume, and that is clearly the place you want to be. Let's see how we perform for the rest of the year.
Thank you. Just on the China and market outlook itself, that you expect stable after a small up in Q1 and what looks like kind of an okay Q2 shaping up. I know you didn't say that, but there's no tightening happening kind of right now. There's just talks about it. It just seems to imply that you do expect things to turn down at least a bit in the second half to end up flat or is that just kind of normal conservatism? Just wanted to check if you're expecting tightening already within your flat guidance or not.
We, of course, have to see what happens. We know that government policy has had a very significant impact on developing the market and the restrictions that we've seen in place and also liquidity. What we can see is that the government very much emphasizes that houses are for living in, not speculation. That we read in a way that if we start to see a significant increase in housing prices, there is a likelihood, probably quite a high likelihood, that we see more restrictions coming back. That is probably not unreasonable to expect. We have to see liquidity, how that will shape up. We are seeing a slightly better PMI and economy picking up in many places, and perhaps that means that likelihood of more restrictions later in the year or even quite soon is probably there.
Got it. Thank you. My last one, just on that combinational factors that impacted the margin in Q1 and the higher costs. Could you just give us a bit more detail on what were those costs that ramped up a bit more in Q1 and that you expect to normalize in the next few quarters in the year, as you say, you expect performance to improve. Just for us to have a better idea of the moving parts and the sensitivities.
Sure. Ilkka can answer that little bit more in detail. I would say, first of all is that we expect performance to improve as we go through the year, already in this coming quarter, but particularly the further we go in the year. We ought to also remember, of course, there are always some specific things, but at the end, you also have a quarter-to-quarter, you have some fluctuation that may impact your margin. Clearly, there are always some of those things. Ilkka, maybe you want to take that little bit more in depth.
Yes. If I look at the development of the margin, so what we talked about the potential and headwinds for cost. Clearly, we talked about the impact of raw material prices from a component cost perspective. We also talked about the cost for labor as well as subcontracting. We look at how that develops. We've seen those headwinds to be more pronounced in the beginning of the year, and that's very much in line with what we expected as a development.
Then, sorry, if I may just follow up. Why would you expect labor inflation to be less prominent later in the year? Or was there any particular kind of spend in Q1?
I think what we said, what is less prominent later in the year is the material cost.
Right.
What you start to see on raw material costs towards the end of last year, we don't see it yet because it always comes with delay to us, but that clearly will then be less pronounced, therefore, as we go through the year.
Got it. Thanks very much to both of you for your time. Thank you.
Sorry, Andre. Just to repeat your question, was there anything particular? No, there's nothing particular for the quarter from that perspective.
Got it. Thank you. I appreciate your time.
Okay. Thank you.
We will now take our next question from James Moore from Redburn. Please go ahead.
Yeah. Hi, everyone, Henrik, Ilkka, Sanna. I've got three questions, if I may, and I'll go one at a time if I can. Firstly, on China, can you help us understand the comparable order growth development in the quarter a little bit more? You're relatively clear with nominal and unit growth, and you talk about nominal growth being above 10%. I wonder if you could just be a bit more precise and say whether you're talking 11% or 14? Within that, there's obviously a very good price mix dynamic that we can see is continuing. Could you help us understand a little bit which is bigger, price or mix? That's the first question.
You want to take that?
Yes. Both price and mix had a slight positive impact in the quarter. They're not that different compared to the impact that they have. I said earlier, we do a good job trying to estimate the impact, but it's not exact science either. Both had a positive impact there.
Sorry, on the nominal growth, are we talking?
What level was it? Units, we were kind of mid-single-digit growth in number of units, and then more than 10% in value, but less than 15%.
Thanks. On your savings ambition, I think you previously raised the ambition from 100 to above 100. Again, I'm trying to nail down the range here, and I know that's difficult, but can you say if that is closer to EUR 100 million or EUR 150 million to give us some idea of quantity?
Closer to EUR 100 million.
That's very kind of you. Thanks. Just finally, returning to this margin point. The margin's down 50 basis points year-over-year. I think you did a good job coming into the quarter explaining that there would be some challenges here. I understand the point on the installation subcontracting costs. We have had six quarters of stable equipment order margin, and we see this decline in the reported margin. I understand that you have to make some assumptions on costs, and then that can then deviate in the out turn, and it feels like that subcontracting costs have ended up being more than you had anticipated that they might be. I wasn't clear as to why it is that you think those are going to improve as the year progresses. Could you just help us with that? Thanks.
Of course, always in execution, you have plusses and minuses, and some are external costs, some is your own performance. I would say our own performance was pretty much as we had expected. I don't think we said that the subcontracting cost per se will improve as we go. Perhaps more, we talk about material costs not being such a headwind as it's been last year and still beginning of this year. That is perhaps one of the other factors. Then the variation will come from how well we execute. Overall, we are pretty much on track for what we were expecting at beginning of the year.
Thank you very much, Henrik. That's helpful.
We will now take our next question from Lucie Carrier for Morgan Stanley. Please go ahead.
Hi. Good afternoon, gentlemen, and good afternoon, Sanna. Thanks for taking my question. I will have three actually, I will go also one at a time. A follow-up maybe on the margin question. I think if I understood well during the call, you were mentioning that China sales were approaching growth of something like 20%. I mean, this is significantly higher than the group. If we are looking at the margin, it's taken another leg down versus the first quarter 2018, which was already down significantly. I remember in the past that the China business was quite accretive to the group mix.
I'm just trying to understand why we are not seeing this quarter any benefit from the strong momentum you've had in China on the sales side, and whether this is something that has changed meaningfully around your China margin or whether this is in another part of the business. That's my first question.
Well, I'll start. Thanks for the question. If I look at it in a context of first the China margin. What we've said is that our new equipment business in China is above group average and it continues to be so, but it is not as much above the group average as it used to be given the price pressure that we've seen and why we've said that our prices have enabled us to have stable margin. It hasn't meant that we've been able to increase the margins yet. That's the one part. Yes, it does have a slight positive impact to our mix. Overall, if we look at the margin development, so the key driver negatively impacting our margins for the quarter was as expected, the more pronounced cost headwinds that we talked about already.
Apologies to push a little bit on this just for understanding, the question I have maybe a bit more directly, if you are growing 20% or strong double digit, let's say in China and the margin is not able to lift up, I mean, the headwind must be quite significant, when you are talking about the headwind also from a raw material standpoint, it actually seems that you're expecting less for this year. I understand they are more concentrated in the beginning of the year. How much headwind are we really? Can you quantify that for us to be able to kind of back out a little bit what's going on the margin bridge here between what you see in terms of very strong momentum in China, which you haven't seen in a while sales wise and the margin which is coming down.
Well, first, if I think about it on quarterly level, there's always a number of things that fluctuate. Which project get delivered and if you look at the profitability, that's the hard part that there's so many moving parts underlying it. If we look at the raw material impact as a whole, what we've said that it's a bit less than EUR 50 million, including the tariffs for the year and that it's more pronounced in the first part of the year, first quarters of the year than at the latter part year-on-year comparison there. We haven't given guidance on a quarterly impact of that, it's more pronounced in the beginning of the year. That's what I would say.
Also, we have some seasonal fluctuation in our business. We know that Q1 is the smallest quarter in most markets. This was more or less as we had. This was very much as we had expected, and with this result, we are on track for what we were expecting for the year. I don't think there was anything special. We know that there are some things that are burning a result. Some things are helping it. We had slower growth in some markets and higher in others. I think those kind of then take out each other. I can't see anything that special in this result. Clearly, our desire and our target is to improve the margin, and we think we can do so as we go forward this year.
Thank you. My second question was on North America. I know you're guiding the market to be relatively stable. It seems that you are starting the year order-wise kind of on a slightly negative foot. One of your competitor has also reported strongly negative order in the first quarter already. What is your visibility to kind of assume that the market is actually going to improve during the year to kind of offset that negative start to the year from an order standpoint?
I would say North America you have a higher proportion of larger projects. That means that it can be more lumpy than other markets. I think the way we look at it is we can see the activity of tendering of new opportunities and so forth. We see that we expect that to be pretty stable. If we look at it just basic volume business that is more stable, perhaps a little bit less of larger projects and those just fluctuate from quarter to quarter. Our performance in the quarter was nothing more than the difference in how many large projects you had year-over-year. Visibility is reasonably good and looks pretty stable.
Thank you. Just my last question, if you could remind us the impact or the benefit you expect on EBIT from IFRS 16 for 2019. It was EUR 2 million, I think, in the quarter. How do you see for the full year?
Yes. The full year impact on EBIT is about EUR 10 million. That's what we expect for the full year.
10 million. Okay. Thank you.
We will now take our next question from Berje Räpylä from Nordea. Please go ahead.
Good afternoon. My first question would be on the general pricing environment in the industry. I mean, we're seeing that the whole industry margins have come down for the last two to three years, and especially for one of the main competitors a lot longer. Are you seeing any kind of changes in the way pricing is behaving, that you are talking about this maintenance pricing initiatives you have and also your competitors. Could you just run through a bit what the current pricing environment is looking at, and do you see that it has changed in the last 6-12 months?
Yeah. Of course, it varies a lot. It varies by business and by geography and so forth. I would say we have now been developing very systematically our services business with new ways of working, with new offerings and new types of services. Therefore, we can see that on the maintenance business, we are improving our pricing. We can see that through how our average value per unit or so in all markets are developing positively. I think that's more through what we are doing. Markets continue to be competitive. A lot of small and mid-size players. There is a tough fight every day in the service business. I think what we've done, we can see that that's helping us improve. What you always want to do is make sure that you differentiate, and therefore you can drive your pricing.
I would say that if we look at China, which has been perhaps where pricing has been the toughest over the past four or five years, it's a combination of a lot of players want to increase their market share, at the same time market's declining. That, of course, gives a tough environment. We can see that it's more stabilizing, and I would think that one of the main reasons for that is that not everyone earns money in China anymore. We continue to have a good profitability. Clearly, it's come down a fair bit, but it continues to be at a good level. We expect that there are a lot of players who are not making money at these levels and that usually gives you a certain floor, particularly in the very standard volume business.
If you specifically think about the new equipment business, for instance, looking at your orders, you've been able to grow orders like 6%-7% organically last year and now very strong in the first quarter. It still doesn't feel as the new equipment pricing is improving and your growth has been, even if you exclude China, the growth has been strong. Why haven't we started to see any type of improvement in the new equipment pricing, for instance, outside of China, even though volumes seem to be accelerating?
I would say that in many markets we've seen a slight improvement in pricing, that has been needed because we can see that both the labor costs and other costs have gone up. I don't think that there's that much of a link between direct costs and competition, it drives market pricing. I think we have strong focus at pricing. It's a high focus area to be able to improve our margins, and we can see development in some areas at the same time. One, we need to do that because of headwinds in many areas. I think that pricing in many markets has come up a bit. Clearly, work continues to be done.
Okay. Final question on the cost and pricing differential. Given that labor costs seem to be increasing in most regions and the pricing environment looks tough. Do you think that you will be able to get this year into a situation where you're actually able to get the margins on new orders up, or are we more looking like it's still going to be challenging to do this year?
We don't predict what our pricing and margins for orders will be going forward. We continue to execute on whatever commercial strategy we have, and that's of course something that we hold close to our chest. We have to see then how it develops. I think the ambition we have shouldn't be unclear, we don't give guidance or predictions for where we think it's going to be.
Thank you.
We will now take our next question from Daniela Costa for Goldman Sachs. Please go ahead.
Hi. Good afternoon. Thanks for taking my questions. I have two things I wanted to ask about. First, can you give us maybe a little bit of an update on KONE Care and 24/7 Connected Services on where the penetration stands, and when do you expect that to start to show some margin accretion? Then the second thing I wanted to ask is about one of the initiatives that we have seen one of your competitors doing recently. I guess Schindler announced BuildingMinds has a platform to connect many people in the building. What do you think of that? Do you have something parallel to that? Does that change the dynamics potentially on the aftermarket? How shall we read that? Thank you.
When it comes to new KONE Care and 24/7 Connected Services, new KONE Care, of course, we've been longer in the market. There in Europe where we started, probably at a 10-ish% penetration. Yes, we can see it in pricing. Yes, we can see it in growth. It has a positive impact on both. 24/7 Connected Services penetration is still less than 5%. Momentum is constantly building, actually at quite a good rate. We can see that the pricing for that continues to be good because we can see that the benefit to our customers is very tangible and real. That is why we have decided this is a commercial service that we sell because of the benefits that our customers get, how it improves them running their business. I would say both of these are developing well.
Do we want to get speed into both of them? Of course. I think we can see that the business case and the benefits are there, and that's why we continue to drive them forward. As to other services-As you know, we don't comment specifically on what other competitors are doing. I would say what we are focused on is we say some people flow. How can we help people move safer, more smoothly, and more conveniently in and between buildings? Those are the solutions and systems that we focus on. We think that's where we are good, where we have an edge, and where we have a lot of knowledge within the company. That is what we are solely focused on, is on helping people move in efficient, good ways, and that way making buildings and also their surroundings more efficient.
That is where we're putting our money, where we're investing. It's good that various companies test various things, but this is our direction of what we want to do.
Thank you. Very quickly on KONE Care, have you now rolled it out to 100% of your locations? I remember the number was something around 85% you mentioned a couple of quarters ago that you had rolled it out. Is it now 100%?
It's not 100%. There's still a number of large countries where we are not. It covers a very large part of our service base. As I said, we started in Europe. This is where it makes most sense. It has absolutely the biggest value in smaller residential contracts. We have also expanded it to commercial contracts. That's why we started in Europe because that is a big market and Europe is the largest service market. We continue to roll it out, what is great that every country we roll it out, we see the same benefits. We see higher hit rates, we see higher customer satisfaction, and we see an improvement in pricing because we're delivering an outcome that meets the customer's individual needs. That is why it's so good.
Thank you.
We will now take our next question from Klas Bergelind from Citi. Please go ahead.
Yes. Hi, Henrik and Ilkka. It's Klas from Citi. A couple of questions from me, please. Firstly, on pricing there in China. Out of the six, seven% price mix, it seems like pricing was slightly higher year-over-year and stable versus the fourth quarter. Did you push through any price increases during the quarter, which is yet to impact order pricing further out? Have you announced any list price increases? We're hearing that you might have made a push during the quarter. I will start there.
This world where you say that you increase your list prices and expect that things improve, I don't think we're quite in that world. We have a tough market competition. We set clear targets for our people, and it's really how we can show our customers that we are actually adding value to their business. That is how you drive it. It's clear. It's a strong focus. You always need to have the right balance between your pricing and your volumes. That is what we're constantly trying to balance. Where prices were coming a lot down, we focused much more on pricing, on value, and it's always about finding the right mix. Where we're going to be in the coming quarters, we have to see that. I'm not going to comment on that anymore.
In the end, it's an individual agreement between us and our customers.
Sure. Maybe a follow-up, though, Henrik, to that. Given the slightly better demand backdrop there in China with real estate volumes now improving, not only driven by land prices, do you feel that might be a bit easier to hike prices now, or is competition still tough, means that you still have to largely depend on the cost inflation when you negotiate prices?
I think the most important thing what drives prices is market competition.
Yeah
Input price may have some impact, but I don't think that there's a direct impact to that. It's really, if you want to improve pricing, you need to be able to tangibly show to your customers that it's better to work with you than with the closest alternative.
Yeah
That you add value to them. That is what you got to focus on every day. When you do that, you add value, and you can improve pricing. Clearly, the strong competition in the market has an impact. Clearly, the fact that the market is consolidating towards the bigger developers also has its own dynamic. We have shown that with that dynamic, we can do quite well.
Yeah. Good. My third one is on a follow-up on digital. Seems like [safe] now is on 2% of group revenues. This after two, three years since the launch. Contract renewals, two to three years on average within KONE Care. Obviously, it takes some time to get the uptake. KONE 24/7 Connected should be quicker adoption, not dependent on renewals. Still lagging KONE Care. Can you help me, Henrik, a little bit to understand why 24/7 Connected is not catching up faster?
First of all, it is catching up, and I think we are definitely leading the way in our industry and selling it commercially out to the markets broadly to our customers. We have to remember that this is something totally new to our customers as well.
It's something new that we're selling. It's something that we have to prove to our customers that their business is better off with them having this service than without it. That's usually the sales process is a bit longer than a normal service contract, but we can see that the customers who take it into use, that there are clear and tangible benefits. I'm actually very positive because we can see it's getting there, perhaps not quite at the speed that we had hoped originally, but that's quite normal. We can see the direction is the right one, and we can see the momentum is picking up. I think we are in a pretty good spot here, and particularly because of the fact that we have something that is tangible, it's real, it's working, customers are getting benefits from it.
We are growing, and I think momentum is picking up. Would we like to grow faster? As always, of course.
Yeah. Good. My quick final one is on infrastructure by region. You are talking about this initiative of more hubs toward infrastructure. You are typically a little bit less exposed versus peers in infra in China, but you are pushing now to expand outside. You are talking about infra hubs. Could you help us, Henrik, how much is infra of your orders today, roughly by region, if you have that number? It would be very helpful.
I don't have it exactly by region. It's not the largest segment, but it's one segment that we expect that even if markets can fluctuate on residential and commercial, this is something that there is such a strong trend and such big pressure on improving, particularly public transport, that we continue to see a lot of growth. Where are the big growth areas? Throughout Asia. I'm not so sure that we have a lower exposure in China than many of our competitors. We actually have a pretty good share there. Rest of Asia, we see a lot of activity because, again, the need for public transport. We can see France has a massive program. Middle East, there are many different markets where it's happening. We can see both the United States, there are several projects.
You can see whatever market there is, it tends to be a big challenge on having enough capacity in public transport that we see there's going to be a growth trend for many years to come. That's why just to highlight it as an example of what we do when we see a growth. How do we strengthen our competitiveness to capture our fair share of that growth?
Thank you.
We will now take our next question from Guillermo Peigneux-Lojo from UBS. Please go ahead.
Hi, good afternoon. It's Guillermo Peigneux-Lojo from UBS. Just really a follow-up on pricing and China in particular. I guess we've seen some consolidation moves with Hitachi and Yungtay tying up together. I just wonder, within the commentary that you just said during the conference call and in your press release with lower raw materials especially, is it fair to assume that pricing going forward in order for you to hike prices is going to be more difficult under the current scenario? Would you see that now the industry, as it's becoming more consolidated, is a bit more disciplined on pricing? Just leave it at that. Thank you.
As I said, we don't comment on pricing going forward. We think if I just look at competition, there are so many competitors in China. If there is some consolidation, I'm not sure, frankly, that's going to have a huge impact on it. We think that is the world's largest market. It is probably the most competitive market in the world. We are in a good shape there. We are okay to compete in that one. I don't see any reason why it would not continue to be as competitive as it is. We continuously improve our operations and stay at the forefront there.
Thank you.
We will now take our next question from Antti Suttelin from Danske Bank. Please go ahead.
Yeah. Thank you. This is Antti. I have two questions on China. First of all, since you are an order book company, you have a strong order book. Can you comment where in that order book is China margin for equipment? Is it up from a year ago? Is it stable from a year ago? Is it down from a year ago?
Juha.
From an order book margin perspective, I don't have the exact number here in my head, but the way I think about it is actually through the orders that we take in. They're relatively stable, as we said, year on year. Given the order book rotation, which in China is about nine months on average. That's how you can do the math. It's relatively stable, I would say.
Yeah. I've just also been surprised by your comments where you have been saying for a long time that the order intake margin has been stable. Despite a strong sales increase in Q1, the group margin came down. I'm just struggling to understand whether it could be that China had some bad tails still in Q1, which pulled the China margin down, or was it really so that it wasn't China, it was the world outside China that pulled the margin down from a year ago?
Any specific reason? I think it's generally just higher input costs that had an impact on our total margin. I would say overall, first quarter has went as we had expected, in many aspects, actually better than we had expected. There's always some fluctuation margin quarter-to-quarter. I don't think there's frankly much more to it.
Okay. Let me do my final try to get more clarity into this. You are guiding group EBIT margin up for this year. In that guidance, what is the China margin that you're using? Or let's say, that China margin compared to last year.
As you know, Antti, that we actually, I think we give quite a specific guidance on our sales and our EBIT. We don't give guidance specifically for each margin and each area. Ilkka mentioned that our backlog margin in China is pretty stable overall year-over-year. If we get some benefit on less headwind on material cost towards the end of the year, maybe we can see some improvement there. Let's see. We don't guide specifically area-to-area margins, how they develop.
Yeah. Okay. Thank you.
Sure.
We will now take our next question from Bartek Blugajzer from Pekao. Please go ahead.
Gentlemen, thanks for taking my question. Actually three. I'll go one at a time. I realize you're not talking about pricing ex-ante, but looking back over Q1, could you indicate the overall, not for each business, but the overall level of price increase across the group that you have achieved? That would be my first question.
I think it's difficult to say what the overall, because there are so many different markets, so many different specific products and so forth. I think in many markets we are improving. In some markets we're improving more than what the cost headwinds are, others more or less in line with that. I can't really. We have to go very much in detail that question. I think in the services business, I would say more broad-based improvement and new equipment varies. Overall, actually okay-ish, I would say.
Okay, thanks. Just to give me a feel for it, this 8% increase that you've had, does that feel more like more than half is volume mix, or can you say something like that just to give a very broad idea?
I think Ilkka mentioned on China, why don't you just repeat the volume mix, which of course is the biggest one. The rest, we had a few larger projects in the quarter which impacted, but you have sometimes doing, sometimes not. Perhaps China, where the volume mix is the biggest impact always.
Yes. As Henrik said, China represents the biggest market at 63% of the total world market. That's why we specifically call that out. For us, the orders, we had a clear growth in our orders in units. Then we saw from like-for-like prices as well as mix, a slight improvement, approximately similar improvement from each contributing to our orders value. The value then grew significantly, more than 10%.
Okay. The prices were raised the strongest in China, right? Compared to the rest of the world, or were there other key markets where you had implemented similar price increases?
As Henrik said, we don't implement price increases. Pricing, at the end of the day, is an agreement between us and the customer, and we can't choose to increase prices. It's something that we really need to be able to provide value to our customers. Like Henrik said as well, that if you would say, it's hard to say a general statement about pricing across the globe because there's a mix on products, mix on countries, mix on the businesses. There is no general statement to be made. At the same time, in general, I think we did do a good job in working with pricing in the quarter across the globe in many markets.
Okay, thanks. Got it. My second question would be on your investments into KONE Care 24/7 Connected Services and other strategic initiatives. Have you stepped up these investments without going into specifics, but have investments here accelerated recently? Is that a key element in your EBIT bridge going forward?
We have grown them year-over-year, but I would say more or less in line with sales. If we think about why over the past years have investments in research and development and IT increased is, historical world, there was more emphasis always on the, I would say, mechanical and product side. Now we have the whole digital side, so that is an additional aspect, but also gives us the new revenues. Year-over-year as a % of sales, it was pretty stable. In that sense, not more of a ramp-up than what we are growing.
Okay, that's very helpful. Thanks. My final question, I saw that you had some minor acquisition-related cash outflows of around EUR 8 million. Is it fair to say that the sales and orders received impact was of a similar magnitude in Q1?
No. If you think about the acquisitions, talk about maybe last year or last years. We do anything between 20 to 30 small maintenance acquisitions, individually none of them have a big impact to our orders or sales. The timing of the cash outflows depends a bit when we close and when we have certain milestones being met. Nothing particular there. We've made a few acquisitions in the quarter, nothing particular that would impact either orders or sales as such.
Okay. Would the impact be more than half a percent?
No, nothing material in the quarter.
Perfect. Thank you so much.
Historically, when there were some little bit bigger acquisitions. We haven't found any of those. It had probably impacts of a percentage point or so to our sales growth in maintenance. It's probably clear less than half a percentage point, if even that
In the quarter we didn't do anything which would impact materially.
Very small impact on our top line, but there's always some we can find attractive. We would like to find more of those small mid-size acquisitions, but sometimes they are available and sometimes not.
Perfect. Thanks.
We will now take our next question from Daniel Glynn from Baird. Please go ahead.
Yes. Thank you very much for taking my questions. First one would be, when we think about the EUR 50 million savings from the Accelerate program, you mentioned less than EUR 10 million in the first quarter. How do you see the split between the first and the second half? Is it more evenly split, let's say EUR 20 million H1, EUR 30 million in the second half? Or is it more geared towards the latter part with, let's say, a bit more than EUR 10 million in the first half and less than EUR 40 million in the second? If you could provide a little bit more color on how you see that evolve in 2019.
From Accelerate program, what I said was that in the first quarter we had a bit less than EUR 10 million savings. If you start to do a bit of approximation, how do you get to EUR 50 million then? I think that's a good way to approach it. It's a bit more heavier on the second half than first half, but already we are seeing the savings in the P&L.
Thank you. The second question, apologies to belabor the point, but if we think about the roughly EUR 50 million raw materials and tariffs, we think about a rough calculation between H1 and H2 again, I assume the comparison base in the second half is much more softer than in the first half. Would it right to be assumed to see like EUR 40 million in the first half and EUR 10 million in the second? Just to get a better understanding, how much this is tilted towards the first half.
Cost headwinds.
Well, I guess we haven't given a specific number on a quarterly level. Part of that is that we're trying to estimate the cost impact of raw materials, but we don't really buy raw materials but components. There's always a bit of an estimation there as well. On a quarterly level, obviously it gets a bit more difficult to give a number, but it is weighted more towards the first half of the year and a little bit less than on the second half. As I said, impact in being the biggest in first and second quarter.
How do you see the current prices evolve? Is there further softening or is there stabilization when we think about the supplier contracts going forward?
Well, I guess it's fair to say that in the beginning of the year, we were saying it's approximately EUR 50 million, the impact raw materials plus the tariffs. What we have seen so far is that the tariff impact on from especially the list three, which was supposed to be going up to 25%, has been postponed, so it's now 10%. There's a few million EUR improvements coming from there. Then from raw materials, some millions of EUR improvement, and that's why we're saying that it's a bit less than EUR 50 million. Compared to what we expected at the beginning of the year, there's some improvement, but not that material compared to total.
We can expect, Ilkka, there hasn't been a big change to what we saw beginning of the year. I think we can expect is quite a lot of volatility based on all the uncertainties we have in the world. We can see it in many different directions. We've seen oil now sharply increase from having come down quite a lot at the beginning of the year. I think volatility is quite high, and that makes perhaps the predictions a little bit more difficult to make.
Very clear. Thank you. Maybe one last question on the pilot project you were running in China on remote maintenance. Can you provide us an update on that already, or is it still too early to make an assessment?
You refer to this one where we had some pilots with some of the local authorities?
Yes, correct.
Yeah, I think that is, they will always run certain pilots and tests and then usually assess them, evaluate. There's no update on that. I think there's a willingness from the authorities to test various alternatives and see how they work, and we have worked closely with them on finding other opportunities. There's no update and no big change overall in the regulation in the market.
What do you think a timeline could be? Is this more a multi-year exercise or could this be more imminent? Just to get a sense on how relevant this could become for 2019 and 2020.
I think these are usually multi-year exercise because what you're looking at is that you have always a state level regulation, like you have also in Europe, you have codes on a European level. Then they have to be implemented in Europe, in all countries, or if you look at in China, all provinces separately. That's why they usually are multi-year projects. It shows the direction usually where regulators want to go and how they want to develop the market. They see the benefit that there are technologies that can improve, and they want to test them, what they are. I think we have to wait and see and then usually it then takes a while also then to roll it out throughout the country because we know the country is big.
Very clear. Thank you very much.
Thank you.
We will now take your next question from Wajid Reza of RBC Capital Markets. Please go ahead.
Hi. Thanks for taking my question. I just wanted to focus on mix in China actually. I found interesting that you and your competitor earlier this week called out mix in China as positive in this quarter. Now, is that just a coincidence, or is there an underlying market trend which means the mix is improving and something we can expect to be generally positive over the next few quarters? I don't know whether that would be something like customer preferences changing or whether that's just where we are in the cycle for various types of investment.
I don't think that there's anything fundamental behind it. It really depends on which parts of the country that is growing, what types. If they're more infrastructure, then mix will be a little bit heavier. Also, if you sell more units to higher tier cities, they tend to be a little bit higher specification, mix can be higher. I don't think there's anything fundamental behind it, and there will always be shifts in mix quarter to quarter. Yeah, not much more to it, frankly.
Okay, thanks.
We will now take a follow-up and our last question from Andre Kukhnin, Credit Suisse. Please go ahead.
Thanks very much for taking the follow-up. I just wanted to take the opportunity to ask about those market size estimates. You said that you increased the China market size estimate because of some latest data. Could you share with us what drove that? Is that anything to do with the retrofit market maybe?
Just Chinese authorities have now more specific data available than in the past. There are so many players, there hasn't been exact data available. We just took into account what additional information we had and slightly reassessed based on that. That's the background here.
Okay, that's the 20,000, 30,000. Okay. On modernization, I probably have to apologize in advance for this question, we were just looking at the dynamics when you talk about development in Q1 and for the modernization side of the market. You stated North America being over 25% and EMEA over a third, Asia Pac over 15%, that still is quite far away from 100%. I presume LATAM is the obvious one that's missing there, looks like quite substantial for a modernization market in Latin America for what is about 3% of global deliveries and installed base. Just wanted to check what's that kind of missing pocket of modernization that is not there on that slide 12?
I think then we wouldn't have Japan, South Korea, South America. Places where we don't operate.
Got it. Could you specify the size of the modernization market, either in units or value, either globally or any of these regions that you operate in?
The largest single market, is Europe, Middle East and Africa, North America is very big. USA as a market is probably the biggest market overall, European markets are big. The global market overall, including all countries, is probably something, EUR 8 billion, EUR 9 billion maybe.
9 billion EUR. Great. Thank you very much, Henrik. Appreciate it.
Great. Thank you.
This concludes today's question and answer session. I would now like to turn the conference back to the speakers for any additional or closing remarks.
Many thanks again for all the questions and for being so active. I hope you have a nice and sunny rest of the week like we're expecting here in Finland. Thank you.
Thank you all.
Thank you.