Good afternoon, and welcome to KONE's Q1 Results Presentation. My name is Sanna Kalle, and I'm the Head of Investor Relations. I have here with me today our President and CEO, Henrik Anhult and CFO, Ilkka Hara. Henrik will first go through the Q1 highlights. Ilkka will then 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?
Luc, please? Thanks, Sander, 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 Q1 results, we also have updates on 2 of our strategic targets, namely whether we have grown faster than the market last year and how we develop its sustainability.
I'll share update on those, talk about the markets. As Sanne says, Ilkka will dive a little bit deeper into our financial performance, and I'll wrap up by looking at our outlook for the year. I'd like to start with highlights of the Q1. 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. It shows good development of our business. And also, adjusted EBIT grew. And we can also see that the strategic targets to which we have updates that they developed well. Now let's start with the key figures.
As I mentioned, highlights here were orders received and cash flow and orders received at about €2,100,000,000 grew at 8% in comparable currencies. In this environment, this is a good achievement. We have a good and solid order book at about €8,500,000,000 which has grown about 4.6% year over year. Also in sales, we had a good start, almost EUR 2,200,000,000 for the Q1, a growth of 7.6%, which is a good growth rate. Our operating income, EUR 215,000,000 compared to EUR 211,000,000 last year.
If you look at our adjusted EBIT, which is the main way how we measure, our financial performance was €228,000,000 compared to €218,000,000 a year ago. The growth in 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 Q1.
As I mentioned, cash flow very strong at €378,000,000 compared to €179,000,000 last year. And then finally, our earnings per share at about last year's level of €0.33 If we just take a few of the highlights of the Q1. 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. And if I just take a few examples of this, what we have done to strengthen our differentiation, for example, in the 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. And at the same time, we have strengthened our offering with our new infrastructure offering over the past roughly a year. And 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, but 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 are 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.
So 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, is 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'll 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. 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, and 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, and 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. So many things are progressing there.
We still have a lot to be done, though, in Accelerate, but it is progressing according to our plans. And as I mentioned, in connection with Q1 results, we also look at 2 of our strategic targets. As you know, we have 5 strategic targets through which we measure our longer term success. Now we have an update of 2 of them. It's whether we have grown faster than the market and how we're doing towards being leader in sustainability.
So let's start with how we have developed compared to the market. And 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 we look in monetary value. When we look at the total of 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 it to previous year's numbers. We have reassessed it because we have gained additional official data, particularly from China, which has shown us the market is a little bit larger than we have previously assessed. But 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 market. Our market share in the countries that we operate was about 20%, up about 1 percentage point from prior year.
We clearly grew faster than 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. So if we look at new equipment markets, yes, we did grow faster in 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, and we expect that the total installed base of elevators and escalators is about 16,000,000 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 particularly, by far, the largest market in measuring monetary value. If you look at the fastest growing market, it is clearly it's 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 3 market position globally. But 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.
So both in maintenance and in new equipment business, we grew faster than the market in 2018. And if you look at our overall market positions, we can see that in the really key Asian markets, China and 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. But 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 4 both in new equipment and maintenance.
However, if I look at over the past 5, 6, 7 years, we had a continuous good and strong development. And in new equipment, we particularly have a very strong position in the most important segment that is growing the fastest, which is the machine roomless 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. So 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, and we have decided that we want to be good overall, but then we want to be really a leader when it comes to energy and resource efficiency. That we have we measure 2 ways. We measure, 1st 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.
That we have done consistently. Last year, we improved it by 4% if you look at overall operations. And 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, we have every year we have improved by more than our target.
And that means that we're actually continuously improving our operations. So 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, and we know that we are the market leader here.
We have 3 escalator models that have the best in class energy efficiency rating. So we also help and ensure that our customers can have efficient energy efficient and sustainable buildings. We have also continued to receive a lot of external use and also awards for the work we do in sustainability. If you look at the CDP, there we have an A- rating for the 6th 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 actually also one of the world's best employers that is important in sustainability, and we are part of the 34 good index. You can read much more about this in our sustainability report, which was published today. So that is about the highlights for Q1 and a little bit more about our strategic targets that measures our performance on a longer term basis. Then 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, particularly in Europe that they many European markets where it's growing, whereas Middle East continues to be challenging. Asia Pacific, slight growth in China, good growth in India and Southeast Asia and then Australia declining, with that a slight growth overall. So this is perhaps a slightly better development, I think, in the Asia Pacific markets than what we had expected for the Q1 of the year. Service markets, not much new here.
Maintenance continued to grow everywhere, slightly in North America, Europe, Middle East and Africa and good growth in Asia Pacific and 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. So what was driving that? Well, let's start from the market overall.
So 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? Well, 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.
But we even then clearly outperformed this slightly higher activity. So if you look at the markets, we can see that housing inventories have slightly increased, and that's particularly due to the cooling measures, but it has slightly increased in lower tier cities. Higher tier cities, it's at a pretty good level, but that's something, of course, we need to continue to watch inventories in lower tier cities. Housing sales, as I mentioned, slight growth, but perhaps most important is that prices have increased. And if you look at total real estate investments, they are 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. And this increase in construction activity is clearly driven by demand for housing, but also a slightly better liquidity situation for developers that helps them drive projects going forward. And 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.
And because of that, we expect that for the full year, markets are pretty stable. That is a slight improvement to what we believed 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. And with that, I'll hand it over to Ilkka to dive a little bit deeper into our financial performance.
Thank you, Henrik, and welcome also on my behalf to this result announcement webcast for the Q1 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 €2,094,000,000 for the quarter, which reports which on a reported basis represents 9.7% growth and on comparable basis, 8% growth. So clearly, good start from an orders receipt point of view. And we saw growth in all businesses and particularly from an area perspective, driven by China and Europe, Middle East, Africa from a growth perspective.
We look at the important Chinese markets and the development for orders received there. We saw in unit clear growth for orders in China. Also price like for like price as well as mix contributed slightly positively. And 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 continue to be stable as we saw last year and since end of 2,007.
So overall, good growth in orders received for the quarter. Then looking at sales at $2,199,000,000 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 on a comparable basis, maintenance at 5.4 percent and modernization at 8.3 percent. 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%.
And 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 in Q1 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. Then looking at adjusted EBIT.
So we continued to grow our adjusted EBIT as we did in Q4 of last year, and it reached EUR 228,000,000, which represents 4.6% growth for our adjusted EBIT. At the same time, if we 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 13,000,000 and the savings from Accelerate program in the quarter were a bit less than €10,000,000 Currencies had a positive impact of €5,000,000 dollars and also I'll go a bit more in detail, but the impact of IFRS 16 for the quarter was positive 2,000,000 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 $378,000,000 it's clearly a strong cash flow for the quarter. And 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 net working capital developing positively, especially in our advances received as well as in progress payments for the quarter. Also here, IFRS 16 had a positive impact of $28,000,000 to our cash flow. So 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.
But from a balance sheet perspective, we saw a EUR 358,000,000 increase in our opening interest bearing debt. We saw a $5,000,000 increase in our capital expenditure due to the lease agreements been there. From an income statement perspective, there was a $2,000,000 positive impact on Q1 EBIT. And correspondingly, in the financing expenses, we saw $3,000,000 increase in the expenses. And then from a cash flow statement perspective, on cash flow from operations, there's a $28,000,000 positive impact.
At the
same time, there's a $2,000,000 negative impact on cash flow from financing items taxes and then $26,000,000 negative impact on cash flow from financing activities. So overall, the net impact naturally for cash flow is 0, but 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. So that's the history, start of the year. Let me then 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 in 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, a bit driven by India and many Southeast Asian countries.
New equipment in North America, 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. And modernization, pretty stable in Europe, slight growth in North America and good growth in Asia Pacific, so 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% 7%, where we previously expected to be 2% to 7%, and of course, it's at comparable exchange rate.
We expect the adjusted EBIT to be in the range of $1,160,000,000 to $1,260,000,000 We previously expected to be $1,120,000,000 to $1,240,000,000 Now this assumes that exchange rates stay at the level that they were about in April. Now if they stay at the above the April level, then we expect to see about the €30,000,000 positive impact from currencies, whereas the same number was about €10,000,000 previously. So 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 results and that's probably higher beginning of the year than end of the year, raw material prices and trade tariffs slightly less than €50,000,000 and then a clear increase in labor and subcontracting costs. But just to wrap up with the Q1 results, we are fully on track to meet our full year targets, such as a good start to the year. All metrics, we were either on track for what we had expected or actually a little bit ahead. And we can see that our strategy, how we're driving differentiation works. We can see it from our growth, and that is positive.
So that is what we'll continue executing on in the same way we had. So I think that this start of 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, Henrik. As said, I guess we're ready for the questions. Operator, you can start taking them from the line. Thank you.
Thank We will now take our first question from Andre Kujes from Credit Suisse. Please go ahead.
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 into the rest of the year? And at some point, do we need to think about your performance kind normalizing towards the market or not?
Well, 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, but clearly, always our ambition and our target is to grow faster than market. But 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, and 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 a place you want to be. But then let's see how we perform for the rest of the year.
And just on the China end 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. So 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.
What I think we can we, of course, have to see what happens. But 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. Now what we can see is that the government very much emphasizes that houses are for living in, not speculation. That means 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. So that is probably not unreasonable to expect.
And then we have to see in 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. And my last one, just on that combination of 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? Or as you say, you expect performance to improve, just for us to have a better idea of the moving parts and the sensitivities?
Yes. Well, Ilkka can answer that a little bit for you in detail. I would say, well, first of all, we said that we expect performance to improve as we go through the year or in this coming quarter, but particularly the further we go in the year. We have to also remember, of course, there are always some specific things. But at the end, you also have quarter to quarter, you have some fluctuation that may impact your margin.
Clearly, there are always some of those things. But Ilkka, maybe you want to take that a little bit more
in-depth. Yes. So 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.
So 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.
And then so 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 because what you start to see on raw material cost towards the end of last year, it's not we don't see it yet because it was caused with delay to us, but that clearly then will be less pronounced, therefore, as we go through the year.
Got it. Thanks very much. Thanks very much for your time. Thank you.
Sorry, Andre. So just to repeat your question, was there anything particular? No, there's nothing particular for the quarter from that perspective.
We
will now take our next question from James Ward from Redburn. Please go ahead.
Hi, everyone. Henrik, I've got 3 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 wondered if you could just be a bit more precise and say whether you're talking 11% or 14%.
And within that, there's obviously a very good pricemix 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.
Do you want to take that? Yes. So both price and mix had a slight positive impact in the quarter. They are not that different compared to the impact that they have. And as I said earlier,
I mean, we do a good job trying to
estimate the impact, but it's not exact science either. So both had a positive impact
there. And sorry, on the
nominal growth, are we talking
What level was it? So units, we were kind of mid single digit growth in number of units and then more than 10% in value, but less than 15%.
Percent. And then on your savings ambition, I think you previously raised the ambition from 100% to above 100%. And 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 100,000,000 or EUR 150,000,000 to give us some idea of quantity?
Closer to EUR 100,000,000. That's right.
Kind of it. And just finally, so returning to this margin point. The margin is down 50 bps year on year. I think you did a good job coming into the quarter explaining that there will be some challenges here. And I understand the point on the installation subcontracting costs, but we have had 6 quarters of stable equipment order margin and we see this decline in the reported margin.
And I understand that you have to make some assumptions on costs. And then that can then deviate in the outturn. 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. So could you just help us with that?
Well, of course, always in execution, you have pluses 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 subcontracting costs per se will improve towards as we go, perhaps more when we talk about material costs not being such a headwind as it's been last year and still beginning of this year. So that is perhaps one of the other factors. And then the variation will come from how well we execute.
And overall, we are pretty much on track for what we're expecting at the beginning of the year.
Thank you very much, Henrik. That's helpful.
We will now take our next question from Lucy Carrier from Morgan Stanley. Please go ahead.
Hi, good afternoon gentlemen and good afternoon Zana. Thanks for taking my question. I will have 3 actually and 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. And if you are looking at the margin, it's taken another leg down versus the Q1 2018, which was already down significantly. And I remember in the past that the China business was quite accretive to the group mix. So 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.
Do you want to? Well, I'll start. Thanks for the question. So if I look at it in a context of, 1st, the China margin. So 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 than it used to be given the price pressure that we've seen. And while we said our prices have enabled us to have stable margin, it doesn't meant that we've been able to increase the margins yet. So that's the one part. And yes, it does have a slight positive impact to our mix. But 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. But if you I mean, the question I have maybe a bit more directly, but 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. But 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 you're more concentrated in the beginning of the year.
But I mean, how much headwind then 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 number of things that fluctuate. So which project get delivered? And if you look at the profitability, so that's the hard part that there's so many moving parts underlying it. And then if we look at the raw material impact as a whole, so what we said that it's a bit less than $50,000,000 including the tariffs for the year and that it's more pronounced in the 1st part of the year, 1st quarters of the year than at the latter part year on year comparison there. So we haven't given guidance on a quarterly impact of that, but 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. So this was more or less as we had actually, 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. And then we had slower growth in some markets and higher in others. And I think those kind of then take out each other. So 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.
My second question was on North America. Just I know you're guiding the market to be relatively stable. It seems that you are starting the year otherwise kind of on a slightly negative foot. 1 of your competitors also reported strongly negative order in the Q1 already. So 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. So that means that it can be more lumpy than other markets. And I think the way we look at it is we can see the activity of tendering of new opportunities and so forth. And we see that, that's we expect that to be pretty stable. So if we look at it just basic volume business, that is more stable, but then perhaps a bit less of larger projects.
And those just fluctuates from quarter to quarter. And our performance in the quarter was nothing more than the difference in how many large projects you had year over year. So visibility is reasonably good and looks pretty stable.
And then just my last question, if you could remind us the impact or the benefits you expect on EBIT from IFRS 16 for 2019, it was EUR 2,000,000, I think, in the quarter. How do you see for the full year?
Yes. So the full year impact on EBIT is about EUR 10,000,000. That's what we expect for the full year.
EUR 10,000,000. Okay. Thank you.
We will now take our next question from Badriu Ropelos of Dordea.
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 2 to 3 years and especially for one of the main competitors a lot longer. So 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? So could you just run through a bit what the kind of pricing environment is looking at? And do you see that it has changed in the last kind of 6 to 12 months?
Yes. 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, and we can see that through how our average value per unit or so in all markets are developing positively.
So that's clearly but I think that, that's more through what we are doing. Markets continue to be competitive, a lot of small and mid sized players. So there is a tough fight every day in the service business. But 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 4, 5 years, it's a combination of a lot of players want to increase their market share and same time markets declining. That's, of course, a it gives a tough environment. So we can see that it's more stabilizing. And I would think that one of the main reasons for that is not everyone earns money in China anymore. We continue to have a good profitability.
It's clearly come down a fair bit, but it continues to be at a good level. But there are we expect that there are lots of players who are not making money at these levels and that you only get to a certain floor, particularly in the very standard of business.
And if you specifically think about the new equipment business, I mean, 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 Q1. But 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.
So why haven't we kind
of 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, but 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 cost and so competition. It drives market pricing. But I think a lot of 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, but at the same time, once we need to do that because of headwinds in many areas. So I think that pricing in many markets have come up a bit, but clearly, it will continue to be done. Okay.
And final question on the cost and pricing differential. So I mean, given the labor cost still look to be increasing in most regions and the pricing environment looks tough. So do you think that you will be able to kind of 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. So we have to see then how it develops. I think the ambition we have shouldn't be unclear, but 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 Dalia Kapusta from 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 KonaCare and 20 fourseven Connected Services on where the penetration stands? And when do you expect that to start to show some margin accretion?
And then the second thing I wanted to ask is about sort of one of the initiatives that we have seen one of your competitors doing recently. I guess Schindler announced BuildingMinds as a platform to connect many people in the building. What do you think sort of of that? Do you have something parallel to that? Does that change the dynamics potentially on the aftermarket?
Sort of how shall we read that?
When it comes to New Connect Care and 20 fourseven Connected Services, New Connect Care, of course, we've been longer in the market. There in Europe, where we started, probably at a 10 ish percent penetration. And yes, we can see it in pricing. Yes, we can see it in growth. It has a positive impact on both.
And 20 fourseven 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. And 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. So I would say both of these are developing well.
Are we do we want to get speed into both of them? Of course. But I think we are we can see that the business case and the benefits are there, and that's why we continue to drive them forward. Then 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 that's where we are good, where we have an edge and where we have a lot of knowledge within the company. So that is what we are so 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.
And it's good that various companies test various things, but this is our direction and what we want to do.
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're 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, but we also expanded it to commercial contracts.
That's where we started in Europe because that is a big market, and Europe is the largest service market. We continue to roll it out. And 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 customers' individual needs, and that is why it's so good.
We will now take our next question from Claus Virgenlicht from Citi. Please go ahead.
Yes. Henrik and Ilkka, it's Claus from Citi. A couple of questions from me, please. Firstly, on pricing there in China. Out of the 6%, 7% pricemix, it seems like pricing was slightly higher year over year and stable versus the Q4.
Did you push through any price increases during the quarter, which is yet to impact order pricing further out, I. Further out? Have you announced any list price increases? We're hearing that you might have made a push during the quarter. So I will start there.
In this market, in 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 to drive it. It's clear.
It's a strong focus. You always need to have the right balance between your pricing and your volumes, and 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.
Maybe a follow-up, Henrik, about 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, market competition. And clearly, input price may have some impact, but I don't think that there's a direct impact to that. So 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 and 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. And clearly, the fact that the market is consolidating towards the bigger developers also has its own dynamic. And we have shown that with that dynamic, we can do quite well.
Yes. Good. Good. My third one is on a follow-up on digital. Seems like sales now is on 2% of group revenues this after 2, 3 years since the launch.
Contract renewals, 2 to 3 years on average within KONE Care. Obviously, it takes some time to get the uptake. But 20 fourseven Connected should be quicker adoption, not dependent on renewals, but still lagging Konecure. Can you help me, Henrik, a little bit understand why 20 fourseven Connected is not catching up faster?
First of all, it is catching up. And I think that if we look at I think we are definitely leading the way in our industry and selling it commercially out in the markets broadly to our customers. You have to remember that this is something totally new to our customers as well, and 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. And that's usually the sales force is a bit longer than a normal service contract, but we can see that the customers are taking into use that there are clear and tangible benefits.
That's actually very positive because we can see it's getting there, perhaps not quite at a speed that we had hoped originally, but that's quite normal. But we can see the direction is the right one, and we can see the momentum is picking up. So 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, and customers are getting benefits from it. So we are growing, and I think momentum is picking up. Would we like to grow faster?
As always, of
course. Yes. Good, good. My quick final one is on infrastructure by region. You're talking about this initiative of more hubs toward the infrastructure.
You're typically a little bit less exposed versus peers in infra in China, but you're pushing now to expand outside. I mean, you're 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, would be very helpful.
I don't have it exactly by region. It's not the largest segment, but it's some 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. And where are the big growth areas? Throughout Asia. And 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. So we can see both the United States, there are several projects.
So 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, many years to come. And that's why I just highlighted 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.
We will now take our next question from Guillermo Peigneux from UBS. Please go ahead.
Hi, good afternoon. It's Guillermo Peigneau from UBS. Just really a follow-up on pricing and China in particular. I guess we've seen some consolidation moves with Hitachi and Juntai kind of together. And 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 the pricing going forward in order to for you to hike prices is going to be more difficult under the current scenario?
Or 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.
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, if that's going to have a huge impact on it. So we think that, 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. But then we continue to improve our operations and stay at the forefront there.
We will now take our next question from Amdi Sluytian from Deutsche Bank. Please go ahead.
Yes, 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? Or is it down from a year ago?
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. And they're relatively stable, we said, year on year. And given the order book rotation, which in China is about 9 months on average, So that's how you can do the math. So it's relatively stable, I would say.
Yes. 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. But despite a strong sales increase in Q1, the group margin came down. So I'm just struggling to understand whether it could be that China had some bad tails still in Q1, which pulled 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, Q1, as I said, went as we had expected, in many aspects, actually better than we had expected. So I don't there is always some fluctuation in 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 are 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. But we have to mention that our backlog margin in China is pretty stable overall year over year. And if we get some benefit on less headwind on material costs towards the end of the year, maybe we can see some improvement there. But let's see.
We don't guide specifically area to area margins, how they develop.
Actually, 3 and 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. Well, overall, because there are so many different markets, so many different specific products and so forth, I think in many markets, we are improving. And in some markets, we're improving more than what the cost headwinds are, others more or less in line with that. So I can't really you have to go very much in detail with that question. I think in the services business, I would say more broad based improvement.
And in new equipment, there is, but overall, actually okay ish, I would say.
Okay. But just to give me a feel for it, this 8% increase that you've had, is that 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 what are 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 don't, sometimes not, perhaps China where the volume mix is the biggest impact always.
Yes. And as Hendrik said, China represents the biggest market at 63% of the total world market. So that's why we specifically called that out. But for us, the orders, we had a clear growth in our orders in unit. And 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, and the value then grew significantly, so 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 implemented similar price increases?
All right. And like I 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. And 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.
So there is no general statement to be made. But at the same time, it's in general, I think we did a good job in working with pricing in the quarter across the globe in many markets.
Okay. Thanks. Got it. And then my second question would be on your investments into KONE Care 20 fourseven connected services and other strategic initiatives. Have you stepped up these investments without going into specifics, but have investments here accelerated recently?
And is that a key element in your EBIT bridge going forward?
So we have grown them year over year, but I would say more or less in line with sales. So if we think about why over the past years have investments in research and development and IT increased, this historical world, it 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. But year over year, as a percent of sales, it was pretty stable.
It was pretty stable. So in that sense, not more of a ramp up than what we are growing.
Okay. That's very helpful. And then my final question, I saw that you had some minor acquisition related cash outflows of around 8,000,000 euros Is it fair to say that the sales and orders received impact was of a similar magnitude in Q1? No. So
if you think about the acquisitions, talk about maybe last year or last year's, So we do anything between 20 to 30 small maintenance acquisitions. And individually, none of them have a big impact to our orders or sales. And the timing of the cash outflows depends a bit when we close and when we have certain milestones being met. So nothing particular there. We made few acquisitions in the quarter, but nothing particular that would impact either orders or sales as such.
Okay. Would the impact be more than 0.5%?
No, nothing material in the quarter. I mean,
there were some little bit bigger acquisitions. Now we haven't found those. It could have it had probably an impact of 1 percentage point or so to our sales growth in maintenance. Now it's probably clearly less than 0.5 percentage point, if even that. And in the quarter, we didn't do anything which would impact it materially.
So 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 midsize acquisitions, but sometimes they are available and sometimes not.
We will now take our next question from Daniel Glynn from Needham Press. Please go ahead.
Yes. Thank you very much for taking my questions. The first one would be when we think about the $50,000,000 savings from the Accelerate program, you mentioned less than $10,000,000 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, €20,000,000 H1, €30,000,000 in the second half?
Or is it more geared towards the latter part, let's say, a bit more than €10,000,000 in the first half and less than €40,000,000 in the second? If you could provide a little bit more color on you see that evolve in 2019?
So from Accelerate program, what I said was that in the first quarter, we had a bit less than SEK 10,000,000 savings. So if you start to do a little approximation how you get to SEK 50,000,000, then I think that's a good way to approach it. So it's a bit more heavier on the second half than first half, but already we are seeing the savings in the P and L.
And the second question, and apologies to belabor the point. But if we think about the roughly EUR 50,000,000 raw mats and tariffs and we think about a rough calculation between H1 and H2 again, I assume the comparison base in the second half is much, much softer than the first half. So would it right to be assumed to see like EUR 40,000,000 in the first half and EUR 10,000,000 in the second? Just to get a better understanding how much this is tilted towards the first half.
Of course, Edwin. Well, I guess we haven't given a specific number on quarterly level, and part of that is that it's we're trying to estimate the cost impact of raw materials, but we don't really buy raw materials but components. So there's always a bit of an estimation there as well. And 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 on then on the second half.
And as I said, impacting 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 €50,000,000 the impact raw materials plus the tariffs. Now what we have seen so far is that the tariff impact on from especially the List 3, which was supposed to be going up to 25, has been postponed, so it's now 10%. So there's a few million improvement coming from there. And then from raw material sorry, raw materials, some millions of improvement. And that's why we're saying that it's a bit less than SEK 50,000,000.
So compared to what we expected at the beginning of the year, there's some improvement but not that material compared to total.
Well, we can expect there hasn't been a big change to what we saw at the beginning of the year. I think what we can expect is quite a lot of volatility based on all the uncertainties we have in the world. So 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. So I think volatility is quite high, and that makes perhaps the predictions a little bit more difficult to make.
Very clear. Maybe one last question on the pilot project you were running in China, remote maintenance. Can you provide us an update on that already? Or is it still too early to make an assessment?
You referred to this one where we had some pilots with some of the local authorities?
Yes, correct.
Yes. I think that is a they will always run certain pilots and tests and then usually assess and evaluate. So 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, but there's no update and no big change overall in the regulation in the market.
What do you think the time line could be? Is this more a multiyear exercise? Or could this be more imminent? Just to get a sense on how relevant this could become for 2019 2020.
I think these are usually multiyear 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, but then they have to be implemented in Europe in all countries. So if you look at in China, all provinces separately, so that's why they usually are multiyear projects, but it shows the direction usually where regulators want to go and how they want to develop the market. So they see the benefit that there are technologies that can improve, and they want to test on what they are. So 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.
We will now take our next question from Wazir Razi from RBC Capital Markets. Please go ahead.
Hi, thanks for taking my question. I just wanted to focus on mix in China actually. It's 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 will be something like customer preferences changing or whether that's just where we're on the cycle for various types of investment.
I think one of the 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 of if there are more infrastructure, then mix will be a little bit heavier. But also, if you sell more units to higher tier cities, they tend to be a little bit higher specification, mix can be higher. So I don't think there's anything fundamental behind it, and there will always be a shift in mix quarter to quarter. So yes, not much more to it, frankly.
We will now take a follow-up and our last question from Andre Kuuket of Credit Suisse. Please go ahead.
Yes. Thanks very much for taking the follow-up. I just wanted to take the opportunity to ask about those market size estimates. And 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?
No, just Chinese authorities have now more specific data available than in the past. And there are so many players, there hasn't been exact data available, and we just took into account what additional information we had and slightly reassessed based on that. That's kind of the that's the background here.
Okay. That's the 20000, 30000. Okay. And on modernization, and I probably have to apologize in advance for this question, but 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 onethree and then Asia Pac over 15%.
But that still is quite far away from 100%. And I presume LatAm is the obvious one that's missing there, but looks like quite substantial for a modernization market in Latin America for what is about 3% of global deliveries in installed base. So I just wanted to check what's that kind of missing pocket of modernization that is not there on that Slide 12.
We also I think then we wouldn't have Japan, South Korea, South America. So places where we don't operate.
Got it. And 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?
So the largest market, single market is Europe, Middle East and Africa, but North America is very big. So that's North U. S. A. As a market is probably the biggest market overall, but then European markets are big.
The global market overall, including all countries, is probably something €8,000,000,000 €9,000,000,000 €9,000,000,000 maybe.
€9,000,000,000 Great. Thank you very much, Henrik.
Appreciate it. Okay.
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