Good afternoon, welcome to KONE's second quarter earnings call. My name is Natalia Valtasaari. I'm KONE's Head of Investors, and I'm very pleased to be joined here today by our CEO, Henrik Ehrnrooth, and our CFO, Ilkka Hara. As usual, Henrik will take you through the business and financial highlights to start with. Ilkka will then go through the financials in a bit more detail, and Henrik will end the presentation by running through the guidance both from a business perspective and a market perspective.
We'll move to Q&A then, and I would ask you all to please limit yourselves to one question, one follow-up during the Q&A session to ensure that as many people as possible have the opportunity to ask their questions. With that, Henrik, please.
Thank you, Natalia, very warm welcome to everyone. Great to have you here today. I'm also very happy that we have a lot of good news to share with you today. If I start with the highlight, really, one of the key highlights for the quarter was the very broad-based growth we had in sales. We grew our sales strongly in all businesses and all geographic regions. That was really great, also we had a strong profitability improvement. That I'm very happy about.
We had another quarter, yet again, of excellent performance in services, both maintenance and modernization. Both of them had really, I would say, phenomenally strong sales growth in this quarter, and that is something I'm really, really happy about.
New equipment orders, clearly, they are lower now as a result of challenging markets in both Europe, North America, as well as in China, although also some very positive opportunities in Asia. During the quarter, we implemented our new operating model. I am very happy of the strong performance that we had during time of organizational change. We are now really set up for better competitiveness, speed, through a better, even better local accountability in our organization.
The objectives that we set for ourselves there of competitiveness, improving speed and decision-making closer to customers, as well as profitability through cost savings, we are on track to achieve all of those. Those are the highlights. Let's start then with the key figures of second quarter.
As I mentioned already, really highlight was about very strong sales growth and a great improvement in our profitability. Our orders received a bit shy of EUR 2.3 billion, a decline of 8.1% in comparable currencies. It's clear that our new equipment business did decline. At the same time, we had a continued good development in modernization, and also, I would highlight the great development we had in Asia Pacific outside of China.
What is great is that our order book continues to be at a very solid level, over EUR 9 billion. A year ago, it hit an all-time high of EUR 10 billion. We are now, in comparable currencies, EUR 2.9 billion below that. A good level. Actually, we have had a positive book-to-bill if we look at the last 12 months.
Sales is EUR 2.8 billion, 11% up, 16% up in comparable currencies. As I mentioned here, really the highlights were the phenomenally strong growth in modernization of almost 25% and 9.8% in our maintenance business, which is really, really strong. Operating income improved by about 50% to EUR 283 million. Our Adjusted EBIT improved by 59% to EUR 332 million, a margin from 8.2% to 11.7%. We are really on track with our objective of improving our margins, that is, of course, positive. Now cash flow is EUR 306 million, compared to EUR 167 million a year ago. As we always say, six months is a short per...
Sorry, three months is a short period of time. Now we have full six months behind us, so we have a little bit more perspective of our performance. If you look at the first six months of the year, very much similar trends to what we saw for the second quarter. Orders received EUR 4.5 billion, down 6.6%. Sales, strong growth to almost EUR 5.4 billion, which is 11% growth, and also Adjusted EBIT grown from EUR 406 to 574 million. Adjusted EBIT margin up from 8.1 to 10.6, so 2.5 percentage points, so very good margin improvement.
If you look at a six-month basis, cash flow, a good EUR 762 million, so really good cash conversion also for the first six months. Earnings per share from EUR 0.51 to 0.79. I would say our numbers, I think, are strong for the first six months of the year. As I mentioned already, we have, in the past six months, implemented what we call our new operating model. That has required a fair bit of organizational and position changes. I'm very happy that during that change, we have had a strong performance that really talks volumes about the motivation, the spirit, and the forward-looking nature of KONE's employees.
A huge thanks to everyone for a very, very good job done. In the quarter, we performed our annual customer loyalty survey, this year we had a slight negative development. Here, what impacted was really lockdown-related challenges in China, as well as supply chain challenges overall last year.
What I'm very happy about, though, is that our Net Promoter Score in our services, especially modernization, continued the positive development that we have had over many years. In fact, actually, if I look at most of our countries, we had a positive development overall. We are now back at the level we were in 2021, which was clearly a good level.
When I look at the background and the reasons for the slight decline now, I am confident that we can re-recover based on the feedback we have got and what we are seeing with our, in our customer work right now. Key feedback, again, was really about KONE reliable partner as a company, the great quality of our products and our services, and the responsiveness we have as a company.
All of those are positive, but it's clear that we're not happy that it came down somewhat this year, and now clear focus on improving our customer loyalty again. Those are some of the highlights of KONE's second quarter. Let's talk about markets, where we clearly see two different situations.
New equipment markets are clearly impacting by economic environment in China as well as Europe and North America. We have seen a weakening of the new equipment markets in the second quarter. North America markets in second quarter declined significantly from, I would say, a high base.
What is positive with North America, though, is if you look at the Architecture Billings Index, which is an important leading indicator, we can see that it is at 51. 50 indicates stable markets, and of course, then above that means there's positive, more billing and so forth. We are seeing actually slightly positive development in that area, which is good. Europe, Middle East and Africa, also significant decline.
Very much the trends that we talked about in connection with our first quarter result, which is the further we go in Northern Europe, the Nordic countries are perhaps where, and we have see the most significant weakness, as well as Germany. Whereas a little bit further south, such as France and perhaps also UK, we see a somewhat better situation. Middle East and Africa overall declined, although if I look at the Gulf countries, there we continue to see good demand. China markets declined clearly as a result of weak consumer sentiment.
This is clearly a bit weaker than what we expected in connection with first quarter results, but I'll come back to China and talk about that a little bit more in detail. Rest of Asia Pacific, particularly India and Southeast Asia, we have very strong markets where demand is also growing.
Southeast Asia has been growing and developing very positively, as has India. That's where the best growth opportunities are right now in new equipment business. Now, what we have to remember is that more than 50% of our business today are in growing markets. That means our services markets, which continue to develop positively across the board in all countries.
Modernization business is modernization markets overall are at a good level, and they continue to grow slightly, both in North America and Europe, Middle East and Africa. China modernization markets are back to a good growth trend after slightly weaker markets last year. Clearly, we had a COVID impact, but they are clearly back to a good growth trend as are markets in rest of Asia-Pacific.
In maintenance, we have continued to see similar trends as before in measure of units, slight growth in North America, Europe, Middle East and Africa, and clear growth in rest of Asia-Pacific and in China. I would say that if you look at the service markets in monetary value, we actually have more growth than we have seen in the past years because of better pricing in the markets overall.
Again, I believe that we are in an excellent industry because in this economic environment as well, more than 50% of the markets where we operate are clearly growing. Let's talk a little bit more in detail about China. I know that interest is of course, for us also very important, so we focus a lot on it. If I give you a little perspective, how we've seen China develop during this year.
Beginning of the year, and in connection with the first quarter result, we said that we expected the market to start recovering towards the end of the first half of the year. That situation seemed to be very much intact when in first quarter because of good development we had seen in February, in March, continuing into April.
However, then when May came, we saw that growth really petered out overall in the economy, and that also impacted property markets and consumer sentiments. We've seen that savings rates in China have continued to go up. It's really a question of consumer sentiment at the moment why markets have been somewhat weaker than we had expected.
What has held true, what we expected beginning of the year, was that there would be a strong focus on completions, and completions, in fact, would be at a good level, and this has clearly happened. When we look at the new equipment markets for the rest of the year, it is clear that policy actions are very important to how the markets develop end of the year.
If you look at China, what we also have had as a very high focus in China, is to drive growth in services, both maintenance and modernization. We've seen those markets develop well, and we've seen good growth for us as well. We had extremely strong growth in our modernization sales now in the quarter. Again, that is where the growth is in China, and we're putting a lot of emphasis on this.
We can clearly see the challenging markets if we look at the statistics, real estate investments, particularly new starts. At the same time, we can see a positive situation in completions, and we believe this completion story will continue going forward as well. That perhaps, hopefully gives a little bit more context and views on how we think about China. Now I'll ask Ilkka to again dive a bit deeper into our financial performance for second quarter.
Thank you, Henrik, and also warm welcome on my behalf to this second quarter result announcement webcast. As Henrik already said, we have some good developments and performance in the second quarter, so let's dig deeper into the numbers. First, orders received. For the second quarter, they were EUR 2,275 million, and on a resulted basis, that's a decline of 12.8%, and on a comparable basis, a decline of 8.1%.
We saw orders received growing in Europe, Middle East, Africa, whereas Americas and APAC declined, especially driven by the market backdrop in China, that Henrik already covered. When we look at the pricing, we saw positive development in pricing outside of China. In China, the market continues to be competitive, and both price as well as mix contributed slightly negatively in our orders received.
At the same time in China, component costs continue to come down, which is then mitigating the impact to margins. Overall, therefore, we continue to see our margin of orders received improve year-on-year, and continue on a stable level compared to the good level that we were in first quarter.
As highlighted already by Henrik, especially good development in orders received was in the modernization that continues to grow very well in this environment. To sales, which was EUR 2.836 billion for the quarter. On a reported basis, 11% growth, and a comparable basis, see over 16% growth, so very strong development in sales.
What I'm especially pleased about is how all areas, as well as all businesses, contributed to this positive growth in our sales. In new equipment, the growth was 18.5%. As Henrik already highlighted, maintenance grew very strongly at 9.8%. Maybe again, the highlight of the quarter, as was the case also in the first quarter, is a very strong sales development in modernization, growing at 24.8%.
We see both in the new equipment as well as in modernization, that after a more difficult period from a supply chain perspective, now both customers and ourselves, we are able to also get a positive order book development and get back to a more normal level, which is supporting the sales in those businesses.
From an area perspective, we saw EMEA growing at 13%, Americas at 12.6%, and in APAC, strong growth at 21.6%. As already noted, APAC, of course, the comparison point for China due to COVID lockdowns, is part of the explanation, but we did see strong performance also in Asia Pacific, especially in India and Southeast Asia from this perspective. To our adjusted EBIT and profitability. For the quarter, EUR 332 million at 11.7%, we are now seeing the profitability improving.
That's been one of the focus areas for us. I'm very happy to see that now materializing continuously in this quarter. We also saw a strong broad-based contribution from all of the businesses contributing to this outcome.
If I look at the key drivers for this growth, of course, contributes positively with the sales growth we had, but profitability also is a key part of the development. Pricing of the orders continues to improve, so the orders that we booked previously, where the pricing is improving, is now materializing in deliveries. We still see lower material costs contributing positively this, in this quarter, and continue to see a better environment from that perspective.
With a strong growth, we get and had a strong fixed cost absorption, but I will also highlight that I'm very pleased about our fixed cost control, which has contributed also to this profitability improvement. At the same time, it's good to note that inflation continues to be on a high level, and that's something that is negatively then impacting our profitability in the quarter. Very good development from a profitability perspective.
To cash flow, which for the first half, it was EUR 762 million, clear improvement from last year, and particularly, we continued to have a first quarter was very strong and a good development also in the second quarter. Our Net working capital for the first half improved from EUR 904 to 949.
Always, seasonality plays a role, so the maintenance invoicing cycle is contributing positively. As already noted, in the year, we had a timing of our accounts payable contributing negatively. In the second quarter, it was more stable. Overall, a good first half from a cash flow perspective. With that, I'll hand over back to Henrik to talk about market and business outlook for the rest of the year.
Thank you, Ilkka. Let's wrap up with the market outlook. New equipment markets, we now expect China to decline by approximately 10% to 15% this year. Previously, we expected it with slightly under 10%. It's clear that policy actions by the central government will be very important to the market recovery. Rest of Asia Pacific continues to grow. We see a good situation there. Again, India, Southeast Asia, very good demand there. We expect Europe, Middle East, and Africa to decline clearly, and North America to decline significantly from a good level, or actually a high level.
What is positive, and again, where more than 50% of our business is, that both modernization and maintenance markets are growing. Modernization, we expect to continue to grow in all regions with clear growth in throughout Asia Pacific, including China.
Maintenance markets continue to develop positively in number of units, actually, as we've seen, trend growth in monitor value is a little bit higher than what it's been in the prior years. The biggest growth opportunities are in Asia Pacific, China and outside, where we have good positions overall. That's where definitely we have good opportunities. Our business outlook, we have now specified our outlook as we have six months behind us. We now expect our sales to grow between 3% and 6% in comparable currencies.
As you probably remember, we said previously that it would grow somewhat above the previous year. This is really a specification of that somewhat, very much in line, but now just a clear tighter range. The same thing we've done with Adjusted EBIT.
We're giving now a specific range. We expect the margin to be in the range of 11% to 12%, which means that we will continue to see a recovery throughout this year. Previously said it will start to recover. As I'm sure all of you have noticed, is that the renminbi and the dollar has weakened compared to the euro. From a translation perspective, we will have about EUR 50 million negative impact from foreign exchange for the full year.
For the first six months, we had only about EUR 6 million, so most of the impact will come in the second half. We have a bunch of things that are supporting our good performance, such as the continued positive outlook in services, both maintenance and modernization.
As you've seen, we've, you know, markets are positive. We have had a really good performance here. We have a very solid order book, and we have continuously improving margins in our order book. That is also providing good support for our profitability. We see easing commodity headwinds, which are clearly impacting, in particular in China.
The more challenging situation is, of course, the declining market for new equipment in China, and also softer markets for new equipment in Europe and North America, as well as wage inflation. Overall, I would say that given the backdrop we have, we have a good situation that continues to improve our margins.
In summary, I would say great development in sales and in profitability, really on track with the objectives we set us, and actually in sales, even better. The new operating model that we have implemented strengthens our customer focus and competitiveness, decision-making closer to the customer, provides us speed. As you can see, we are very well positioned to capture growth in services markets everywhere, and also selected new equipment markets that provides good opportunities going forward. With that, happy to take all of your questions.
First question comes from Daniela Costa, from Goldman Sachs. Please go ahead.
Thank you. Good afternoon. Thanks for taking my questions. I have three, please. First one, just wanted to check what scenario do we need to see in the second half so that you have enough of an order book to support growth in original equipment in 2024? Or do you already think you have that? Would be interesting to hear your thoughts.
Second thing, if you can update us regarding how much in terms of raw material tailwinds do we still have yet to come in the second half and beyond that? Thirdly, just given you've weakened the market outlook in Europe and North America as well, do you see some risk of backlog cancellations there? Or are you seeing any evidence of like, product project delays? If you can talk a little bit about what led you it was quite a large change. Thank you.
Okay.
Maybe I'll start.
Yeah.
I guess, first of all, of course, at this point of the year, we're not guiding yet for 2024. From an order book point of view, we actually have, I guess you asked for new equipment business, but overall order book is on a very good level. It's over EUR 9 billion, which is just shy of our all-time high overall. In new in modernization, our order book coverage actually is very good, but of course, that is a part of the order book that rotates faster. I would say that overall book-to-bill continues to be on a very good level, clearly over one on that one.
In new equipment, we naturally, at this point of the year, still need to book orders for supporting our expectations for next year. I would say that we are in a spot where we continue to follow how the markets develop. As I said, we've now seen a few quarters of decline in our orders received in new equipment business. Let's see how the market develops there. To raw materials, which was another question.
Overall, we expect raw materials for this year to be a tailwind, raw materials or input costs, as I like to say it, of a tailwind of about a bit of more than EUR 100 million. It's clearly up from what we said earlier. We've seen more positive development than we expected.
I would say that a bit more than half of that is still yet to be expected in second half. Clearly something that if we're on this level, there would be still some tailwind left for 2024, of course, assuming all things being similar in that equation. I think the last question was on cancellations. We have not seen cancellations being different than in the past, very much similar.
Even though the markets have been more challenging to many of the developers, I think they've been taking the projects that have been Where the orders have been booked forward. As I said earlier on the revenue part, actually, in some cases, we're now seeing, those projects going forward, faster than we've seen, in 2023, 2022.
Thanks. I would just one further context provide to this Daniela, because as you know, we have put a lot of emphasis on growing our services business, both maintenance and modernization, and that has worked very well. I'm actually very proud of the 9.8% in maintenance business. I know all of you have followed our business for a long time and know that this is an incredibly strong number for a maintenance business and modernization now.
A good order received growth, first half of the year in double digits, and now very, very strong sales growth. What we said is that in new equipment business, we have focused a lot on pricing. The growth we can really drive from our highest margin businesses, and that's working very, very well.
New equipment, we have said that there, our focus was a lot to improve margins, we have a great situation there because the orders that we're booking today are clearly at the higher margin than what we are delivering. you know, we are in a good situation in that over 50% of the markets we operate are growing, that's where we're driving growth. In new equipment so far, we have focused a lot on improving margins, that provides further tailwind going forward. I think that approach has worked, that's the approach we have had so far.
We will move now to our next question from Klas Bergelind from Citi. Please go ahead.
Thank you. Hi, Henrik and Ilka, Klas at Citi. My first one is on the second half margin implied by your guide. It looks like 100 BPS improvement year-over-year at the midpoint. That's good, I had expected a little bit more considering how price cost is moving. Sales will come down a bit in the second half, it seems like, you know, say Ilka, EUR 100 million on the cost side, guided and growth in services is still strong. That's mixed positive. We knew that equipment would slow quite a lot in the second half, it implies quite a negative mix impact in my model.
Here's my question really: How much of this is driven by China coming out of the backlog relative to also Americas and EMEA coming down, as you had very strong backlog conversion there also at the start of the year? Thank you.
I guess, first, there's still quite a few different outcomes for the second half, if you think about the range of the sales, guidance and then, the margin range. That's number one. We've also said that one of the key priorities for us is to improve margins, and we continue to, with the guidance, say that we are improving margins, also in second half. That's good.
We saw our margin development being quite good in second quarter, if you look at the especially fixed cost absorption with a strong growth in orders. As on strong growth in sales contributing positively. Of course, like you said, there are a number of things that are, positively, as positive tailwinds, for second half as well.
For example, inflation now, labor cost inflation, for example, we see more impacting second quarter, we see more of that impact in second half than we saw in first half, just given the cycle, how salary increases are going. Maybe those are a few of the moving parts. Business mix, yes, it plays a role, and we did get a very good good mix development, but of course, the order book rotation, which was fast in the first half, is also then negatively impacting the profitability, where the profitability is lower.
Can you see a higher cost inflation on the wage side now compared to when we spoke last time, Ilkka, for the full year, and therefore for the second half, obviously?
Not that different than what we talked about in conjunction the first quarter results. Normally it always takes a bit of time to negotiate the agreements, and also merit rounds and so forth. You see part of that impact in second quarter, then it's more fully impacting second half. I would say that that cycle is more normal annual cycle. This is not that different year.
Thank you. My second one is on the new order margin. It's up year-over-year, but it's flat quarter-on-quarter. Was that in line with your expectation, or had you expected to increase the margin more versus the first quarter? The reason why I ask this, it seems, Henrik, you have taken the commercial decision again, not to participate in China as much as the market. You're down 20%, market down 10%, pricing is still weak. Would you say that the margin backdrop in China has worsened a bit from here?
If we look at our margins of orders received, it's right that China pricing has been very tough in the market overall. We have focused on keeping that reasonably stable, but, yeah, margins are slightly down in China, whereas rest of the world, they are up. Very good development still outside of China. Overall, it's about stable quarter-over-quarter. It's still year-over-year positive. As I said, also, that the margins that we are booking on an overall basis today are clearly higher than what we are delivering, so that gives a further good upside going forward.
Yeah. Maybe to add to Henrik's comment, is that in the rest of the world, I think the pricing developed quite well. At the same time, also, as you saw, in the numbers as well, I think we had a, from a volume perspective, also a good development. I think we got both volume and price in outside of China.
Yeah. Very quick, final one on the new equipment guide in America. As I thought, this was going to come a bit later, given the commercial resi backlog and that you have quite solid exposure to multifamily there, which is, yeah, pretty stable. Just curious, Henrik, why you saw this shift, if you can talk a little bit more in the second quarter in new equipment in North America?
We also have to remember that backdrop last year, the market was very strong, and both the markets were strong, and we had very strong growth. Now, actually, if you look at the Architecture Billings Index, it's actually multifamily that is down, many other segments are up. It is clear that, as we have seen in many other cases, that particularly US market does react quite quickly to economic cycles.
There are many different situations in the countries. We can see the West Coast, which is very tech related. There, we can see that declining significantly, whereas there continues to be opportunities in many of the southern states where a lot of people and companies are moving right now. It varies, but United States has usually been a market that goes quickly down, quickly recovers, a little bit faster movements than we've usually see in Europe.
Thank you.
I would say, you know, just, how I think about it is that I would say almost everywhere we have a situation, particularly on residential side in Europe, where there is a lot of demand. We all know that Nordic countries, Germany, France, UK, all of these countries have a shortage of apartments. However, consumer confidence and consumers' ability to pay is lower, and I think consumers are still worried about high interest rates and can they go even higher.
Given that the demand is there in many countries, once we get to a cycle where people see that at least interest rates have peaked or could even come slightly down, I would think that we can see a recovery in the market. Of course, we are not quite there, particularly in Europe, and it's something we have to see. You know, as been widely publicized, for example, Germany, there's a huge shortage of apartments, but currently, the confidence of consumers to pay and, take loans is too low to get the market going.
Thank you.
Ladies and gentlemen, as a reminder, kindly limit the question to one question and one follow-up in order to allow other participants to contribute in today's event. Our next question is from Jeffrey Sprague from Vertical Research. Please go ahead.
Good day, everyone. Thanks for taking my question. I was wondering if we could just delve a little bit more into modernization and maintenance. The nature of my question is really around service attachment, what's going on with Connected Services and the like. I wonder if you could just kind of unpack a little bit to what degree the strength is, you know, rising attachment or recapture versus maybe rising revenue per unit on contract because of additional services. Any way you could unpack that, either in aggregate or, you know, by some key geographies, would be very interesting.
Sure, sure. On maintenance, as usual, in maintenance, there's not a silver bullet, but you need to get many things to work, right. If you look at the revenue side, why have we achieved now in second quarter a 9.8% growth and a, you know, 9.5% for the first half, which is, you know, we haven't seen growth numbers in normal times like that before. It really comes from many different aspects. First of all, our service base, the number of units, is growing a bit faster than usual. We hit, you know, 1.6 million units in the second quarter, which was great. It's number of units is growing faster.
That means that we have had a good development in retention rates in many countries, that is really helping, and conversions have continued to be good. That is providing the unit growth, which of course, the first very important aspect. Clearly on pricing, we have done very well, so a significant part of the growth also comes from pricing. That is also an important contributor.
Connected services have continued to develop well, and as you know, we have quite a different strategy on connected services from most of our competitors, is that we sell this as a commercial service, so it does contribute to our top line and to our profitability, which is important. Then also we can see a good development in repairs.
Repairs, as you know, depends on market, 25% to a third of the revenue is in maintenance. If I look at that, you can say, "Okay, are we gonna continue to have as good repairs?" Repairs is very much pricing driven, not necessarily unit driven. That we think, therefore, can continue.
Again, it's more or less, you know, all of the cylinders that need to work in maintenance have been contributing towards that, and that's how a maintenance business need to be. You seldom have a, you know, silver bullet that moves quickly. It's a huge base you work with, and therefore, you know, many things need to work right. We've worked for many, many years on our offering.
You know, it's really 2016 that we started to really introduce differentiated offerings and constantly renewed that and updated. That's worked very well. Put a lot of focus here in how we serve our customers, what kind of digital services, and it's really paying off. I would again say it's a business that, you know, does not turn on a dime that requires long-term, consistent development. Hopefully that helps with a long answer.
Maybe to add color, Henrik was talking about the cylinders firing, so all of them were aligned and contributing to the same direction. Also the interlinks. For example, when we have 24/7 Connected units, we are able to do a better job, better outcomes for our customers, better availability, and then the retention for those is actually higher. All of this is also something where when you are executing well with all of the items, then actually also boost one another. That's been very positive to see, actually.
I must say that in this business, I'm, I think our teams have been doing a really stellar job.
Can you give, just as a quick follow-up, some indication of, you know, kind of the growth and, you know, average revenue per service contract or however you measure it? You know, what kind of revenue per user uptick you're seeing with connected services, maybe versus a baseline at, you know, a year or two ago?
I think first of all, Ilka can answer that. He probably has a better grasp on it. I would say, first of all, you know, I think what we talked about many times, and it was actually 2018 was a watershed year for us, because up until 2018, the average revenue per contract, and that's, of course, not all of the revenues in maintenance, but had been going down slightly year-over-year.
That clearly happened because we were growing fast in Asia, where average contract revenue is lower than in Europe and North America. Now, in 2018, we turned that because of our offering, because of pricing, because of value-added services, and now we've been able to improve it year-over-year.
You know, because you have a mix effect, when you have more Asia, it takes it down, but then with good actions, 24/7 pricing, retention, all of that, we've been able to get the whole portfolio value up, and we talk about, you know, a couple of percentage per unit per year, or now actually even a little bit more, but that already helps and just as a backdrop to this.
Today, if I look at what we sell, it's a combination of the digital and physical service as a combination. That's what we offer to our customers. Your question, how much is the uptick on price is maybe not a straightforward answer.
But on approximately, aim is to get 20% to 30% uptick on revenue per customer when we connect them to digital services, and, of course, market by market, there's some variance on that one. Clearly, it is more something where we want to get additional revenue, see that as an opportunity and something that is adding value to our customers, and that's why we're also commencing a fee for it.
Thank you very much.
Thank you.
Calderon from Morgan Stanley. Please go ahead.
Hi, good afternoon, Henrik, Ilkka. Thanks very much for taking my questions. My first question is actually a follow-up to, on the previous question, and it's trying to understand that very strong 9.8% growth in maintenance. You talk about pricing. I just want to make sure that have you taken pricing on top of the normal wage inflation clauses that you will have in some European contracts? I'm just trying to understand how the margin dynamic is evolving in those maintenance contracts.
You know, in Europe, you have in a pretty large part, but not all contracts, you usually have some kind of price escalation mechanism that's linked to a CPI or inflation or something like that. In many cases, we've been able to do even slightly more than that, but still in majority of cases, these are commercial discussions. Yes, we've been able to increase prices that exceed a bit what labor costs have increased.
Yeah, if I think about it, from a numbers perspective, out of the 9.8%, a bit more than 5% is units, and the rest is price and value. Value to me is, for example, 24/7 Connected service. Give you an idea, as Henrik said, there's a mix of contracts that you cannot escalate, some you can. That's just to give you an overall figures, and of course, the inflation is not everywhere in the world. That's the type of development and drivers for the growth out of the 9.8.
Okay, thanks very much. That's very helpful. My last question is actually a follow-up on Klas' previous question on China. I think it's been well flagged that you've been growing less than the market or you've been declining more than the market. Is that a conscious decision to make sure that you get good projects, or has there been any underlying market share shift, probably more towards locals? Or you've not seen anything, it's just a conscious decision to take orders at good margins and good payment terms?
I would say, of course, margin and payment terms, absolutely critical in China. We've been working on those. If you look probably a little bit to a perspective, that if you remember last year, our focus everywhere was twofold, very much that growing our services business was we wanted a growth. In new equipment, it was about margin, the same thing in China. We really focused on margin over market share, and we can see, I think, that that's delivering results right now.
Now, we can see the impact of that in China as well. Perhaps our development compared to the market, we wouldn't have wanted to be quite as what it is. Even if we have been slightly below market, wouldn't have been an issue. Now we're a little bit too much.
Clearly, it is something we are focusing on. you know, when I look forward, I'm confident that we can keep our market position in China. These are quarterly impacts, and we have to remember, if you look at the first half of the year, last year, we actually had very strong order intake in China, so we have a very high comp. It is what it is. If I look at the full year, I'm still confident of, you know, retaining our strong market position in China.
That's great. Thank you.
We have a question from Andrew Wilson, from JP Morgan. Please go ahead.
Hi, good afternoon, everyone. Thanks for taking my question. I wanted to ask you around the comment that you make, Henrik, around policy being obviously important for the second half, which is clear, I guess. I wonder if you could just help with being a bit more specific in terms of exactly what you think is important there.
Is it policy from a broader stimulus perspective, which would seem to help the consumer confidence problem, or is it more specific to the property market? I ask because we're seeing a lot of news flow around property-specific stimulus, or easing, or removal of restrictions. Sort of as you allude to, as yet, we haven't really seen that make enough of a difference. I don't know if you can just help us sort of think about what we need to be looking for and thinking about.
Yeah, very good question. I think it's, you know, a bit of both. Yes, we've seen certain cities lose restrictions. I still think we need to see developers having better access to financing. That they have somewhat better, but that is still an important thing, because they will not start projects and, you know, people need to be confident that they are on a solid financial footing, which I think is improving. I still think very important is the whole consumer confidence.
We can see that savings rates are going up in China. We know that there is underlying demand. I think that's gonna be critical overall consumer confidence, and I can see for the whole economy, and that will go for the property sector as well. What those specific measures will be, I don't have a specific view on that, but it's really about the confidence overall.
Maybe to add to Henrik's comment on this liquidity, which has been targeted to the developers to complete projects.
Mm.
That we do see happening... [crosstalk]
Yeah.
I f you look at the completion numbers. The new starts and new projects is a both financing as well as confidence, which is maybe the next focus.
Thank you. Maybe a follow-up, I guess it's a follow-up to a couple of the margin questions and some of the observations that Klaus made with regard to the second half. I guess looking further forward, appreciating that you're not gonna comment too much on this, if you could help us at least frame the debate a little bit.
It would seem to me that with the margins in the orders you're taking at the moment, being ahead of the margins in the income statement, with the mix potentially shifting, given maintenance and modernization strength, given the operational improvements that you're making and the savings you've guided to on that.
Plus a little bit more tailwind from raw mats, it would seem to me that even with the current, obviously, relatively challenged new equipment market, the 2024 margin has decent potential to be decently ahead of the 2023 number. Even if you're not gonna say yes or no to that, can you at least help me with anything that I'm missing in terms of thinking about that margin bridge?
Well, maybe I'll start then. Yes, you're right. There's a number of things which are a tailwinds for us. Of course, I already talked about that there's also some headwinds, for example, inflation and so forth. We've already said earlier that one of the key priorities for us is to drive our profitability up and improve profitability, and I don't see that that goal is changing for 2024. We continue to be focused. I'm very happy to see that we continue to have, for example, orders, margins on a good level supporting that.
Yeah. Thank you very much.
Our next question is from Miguel Borrega, from BNP Paribas. Please go ahead.
Hi, hello, everyone. My first question is on the pricing of new equipment, which you said was up in the US and also in Europe, but not in China. At the same time, you have a negative outlook for Europe and the US. To what extent can you keep raising your prices? Would you see price increases now effectively plateauing? That's my first question.
Sure. We have talked about the margins of our orders received, which have gone up, but because of good pricing. When we look forward, we probably have a better outlook now for component costs, raw materials, and all of that. That's of course, also helping. You know, even if we cannot increase prices from here, we still have a good situation in that the cost side of the equation should be better.
It's clear that when markets are weakening, competition are likely to be tougher. I would say that in this market, the way we have achieved what we have achieved in our prices, I think is a great achievement, so we're starting from a really good position. We always have, you know, margins, always a combination of price and cost. Now price has gone very well. Outlook for cost is perhaps a bit better.
Maybe to give a more color on the cost side of equation, which is very much aligned with what Henrik already said. Majority of the EUR 100 million improvement is coming in from China, but we are also starting to see that there is a slight tailwind in Europe and North America as well. At the same time, I think, looking forward, a focus on product cost improvements, which is a part of the priorities in the R&D, are actually yielding quite good results. I think that's also supporting the margins going forward. And that's been progressing quite well.
That's very good. Thank you very much. My, my second question, on the price increases that are already locked in in the backlog, can you give us a sense what percentage of the backlog includes the higher margin? Or in other words, how much is left to wash out from the legacy lower margin orders?
I think the way I would say it, because order book margins is a complex topic, it also you need to look at when you deliver which orders, and sometimes it's, quite often it's actually related to customers as well, in the new equipment business. If you look at our commentary on how we've been able to improve our orders received margins over the last quarters, then you start to look at the order book rotation. In China, it's probably less than nine years, nine months right now, and in Europe, a bit more than one year, and in North America, clearly more than one year, so closer to two years.
You start to get an idea, how much tailwind are we getting from the order book. I definitely personally don't think about bad margin orders. We just have orders, if they have some work to be done to improve the margins, that's a challenge we need to take. I don't differentiate between the two.
We have a question from Rizk Maidi from Jefferies. Please go ahead. We have another question from James Moore from Redburn. Please go ahead.
Yeah. Hi, everyone. I hope you can hear me. Good afternoon. My first question is on order pricing. Hi, Henrik. I wonder if you could quantify what year-on-year order price or price mix for China new equipment is in the second quarter? It's obviously down, but are we talking, I don't know, 1% to 3% or 4% to 6%? I'm just trying to scale it. That's the first question, really.
I guess I've said the same thing earlier, that we haven't been giving more detailed commentary around the magnitude of the margin changes, and they're quite nuanced. That's pricing and mix clearly were negative, so I, but margins don't move around as much as the pricing and mix move. Also there's a product cost and as well as overall raw material environment that then mitigates part of the impact.
The question was on the pricing for orders, not the margin... [crosstalk]
Sorry! I don't... [crosstalk]
No problem.
I misheard you. I said, already earlier, so, both pricing as well as mix contributed slightly negatively, so it's a low single digit number.
Okay, that's great. Just a bigger picture question, if I could. I mean, if you take the China new equipment margin over the last 15 years, when did it peak? I'm just trying to get a scale for the trough that I guess you saw recently, and kind of some idea as to how much above that we are now. I think you said recently that the China new equipment margin's above the group average, I'm just trying to understand what the shape was.
I think... [crosstalk]
We are today.
I think we've been pretty clear that the margins, they peaked about in 2015, 2016.
Yeah.
W hen they were at a excellent level. From that, then they came down 2017, 2018, 2019, started a bit to recover to 2020, 2021, now they've come down from there again. So, it's been a little bit of a wave effect, but it's clear that they were, yeah, for us in particular, in 2015, 2016, they were significantly above the level where they are today. We still have good margins in China, but not the more than excellent that we used to have in those times. Compared to... [crosstalk]
I've commented in the previous quarters on this one. If I look at exclude the normal seasonality, China's margins overall are quite stable now, but we've seen improvement in other areas. As a result, China is slightly negatively contributing compared to the group average. It's because of the improvement in profitability in the other areas, rather than the decrease in profitability in China.
Yeah, that makes a lot of sense to me. Just the last one, if I could. How does that compare to, say, new equipment margins in the US and Europe? Is it still at a significant premium? What I'm thinking about here is the Chinese elevator market remains a very competitive market, and I wondered if, given that it seems to me we're in a really tough Chinese property market for some time, there's still a degree of long-term risk of going down from a low double-digit number to a mid-single digit number.
I would, you know, first of all, yes, new equipment margins in China are better than, for example, North America, for at least us, and somewhat better than Europe as well. There are some other Asian countries where the margins are higher. You know, if you look at the players, and I've said this before as well, and perhaps it's come down, but if you look at the various players in China, they are not that many that actually make decent margins today.
There are many that are break even or even below. You know, from that market perspective, yes, it's very competitive, but I, you know, we continue to command a higher margin than the market on average, or we're clearly in the highest group of margins in China.
That's just an important perspective to put. If I look at it, is that while margins are good, for example, maintenance in China, they are not quite as good as the rest of the world. We usually see a correlation that where you have really high service margins, you tend to have a little bit lower new equipment margins. Some places like the Nordic region, you then have more, you know, there's not huge difference between the two. It varies, and therefore, if you look at the overall margin of China, it is not today that it would be so much higher than others. I think that's what's different from perhaps the past.
Hey, maybe, James, just to make sure that I didn't mishear you. When you asked about the impact of price, I said slightly negative impact on price and mix. That's a change of price and mix, not the margin. If that. Maybe we can follow up it separately, but I, you might have drawn the wrong conclusion.
No, I think I thought it was a low single digit year or near down for price and a low single digit year or near down for mix in the orders for China.
Yes.
If that's okay?
Yes, exactly.
Great. Thanks. Thanks for your help.
Thank you.
Our next question is from John Kim, from DB. Please go ahead.
Hi, everyone. I was wondering if you could speak a little bit about the competitive intensity in China. Can you give us a sense of how it's progressing through the quarter? A slightly different question for question... sorry, let's execute on that. Please go ahead.
Competition has been intense, as it's been for a long period of time in China, and, you know, always some players are doing better, some are not doing as well, because there are a lot of players. What we can see is that the market is consolidating towards the bigger players, and there are increasing number of the really small players that are going out of business.
So that's helping a bit. You know, if you look at the market, where the biggest demand is a more affordable end of the spectrum, more affordable housing, and that is, you know, related to Ilkka's comment about mix. You know, is competition tougher now than it was before? I don't know. It's always been very tough in China. You know, that's why it's important to be competitive in China. We continue to be very competitive there. That's important for global competitiveness as well. I don't know if that answers your question.
Fair enough. As a quick follow-up, one of the things I'm curious about is whether you see any kind of policy or financing for the developers. I think, a while back, when we spoke about this, the market may have been expecting consolidation or policies towards the actual developer base rather than the consumer. Any color, any context on that?
Of course, the big thing was last November, when they came out with a 16-point plan, which was to help developers restructure their balance sheets and make the market more healthy. That, as Ilkka said, I think very clearly and well, is that it has been now really targeted towards completing projects, not so much for new orders yet.
I still think that the main thing holding back the market is consumer confidence, and as that it can be seen almost across the Chinese economy if you look at consumption and other sectors as well. You can see that savings rates continue to be very high and actually go up. Probably the biggest help, getting back to earlier question as well, to Andrew's question, about what it's gonna take. It's more developer financing. Yes, we need a bit of that, but also, we need improvement in consumer confidence. Exactly what actions would be required; I'm not an expert in answering that.
Okay, thank you.
Our next question is from Ben Heelan from Bank of America. Please go ahead.
Yes, good afternoon. Thank you for squeezing me in. I had two. Firstly, I wanted to ask about your views around visibility into third quarter. You've obviously made some fairly large changes in terms of your views around the new equipment market in the second quarter. How confident are you have visibility that though that's what the conditions are in EMEA and North America into third quarter? I'm just thinking, what is the risk that that gets incrementally worse?
Secondly, coming back to the 2024 margin and volume pressure. I know you're not gonna comment on 2024 specifically, but you have kind of talked about quite negative trends in terms of the new equipment market. From a cost perspective, can you talk about your ability to manage volume pressure, if that is what you start to see? Thank you.
I think I'll ask Ilkka to answer both because he has been leading our South European Mediterranean Business as his other job for the past six months.
I guess your question was that, well, how do we see market developing and what gives us confidence on the market outlook? Of course, we talk a lot to our customers, and part of the equation is about analytics, but also it's about getting the latest input from our customers. I think what is particularly was visible in our South European business, but I think it's the case in Europe as well, is we continue to see opportunities being created in our CRM.
We see salespeople following, being active on discussing those. The question is that: How do you get the decisions? That means that when do you take the project forward? It comes back to Henrik's comment earlier, that when the price requested is too high, then you don't get the cost and the price meeting, and that's where then the decisions will be made when there's less volatility in the variables.
For example, interest rates being more stable. I think we have a relatively good understanding based on the customers when we comment the market outlook. It's been also a few years where there's been a lot of volatility, of course, in the market. That's the comment on the outlook on the market. Second question was on margin development in this environment, and I think particularly for the new equipment business, if there's less volume.
First, I think we talked a lot about the positive side, pricing developing, orders margin developing, a backlog, which is, we're still delivering orders at the lower margin than we're booking them. There's a positive backdrop in that environment for the margins. From a volume perspective, we need to manage against what we plan to deliver.
The good thing for us is that we are manufacturing many of the components that make an elevator together with our suppliers, so we have quite a flexible manufacturing footprint and has been, if you look at the past, how we've been able to deal with that. Similarly, our installation capacity is quite flexible.
Okay, very clear. Thank you.
Our next question is from Guillermo from UBS. Please go ahead.
Hi, Guillermo from UBS. I wanted to ask a question regarding, you know, the slides that you put on the China activity levels, with you comparing versus the market. If I go back in time, in 2022, the first half of 2022, you managed to grow 5% versus the market. Actually in third quarter, you collapsed v ersus the market, your demand actually falls by 30%. Ever since, you know, the decline in rates have been, you know, closer to 25%, 20%. I wonder whether going into third quarter 2023, into third quarter 2023, we're gonna face significantly easier comms for you when it comes to order intake.
Therefore, potentially, you know, you could even, if you were to, you know, achieve some market share gains or large orders, whether, you know, growth is possible from that, you know, Y-o-Y comparison, so from a year ago. Thank you.
[crosstalk]... Maybe I'll take the comparison point. You can comment.
Yeah, yeah.
Yes, you're right. If you think about what happened last year, in second quarter, due to the COVID situation, we had to. We took good orders in, but then, of course, we could not have our factory open for the full quarter, or two months out of the quarter, which then impacted our capability to deliver and capability to also attract orders in third quarter. Yes, the comparison point is impacted by that development, and that you do need to take into account, as we said, for second quarter, also from a sales perspective. Maybe you want to comment on your outlook for the rest of the year.
Outlook for the rest of the year, you know, as you know, Guillaume, we don't, you know, give any outlook for orders received. What I said earlier is that based on what I see, I'm confident that we can keep our strong market position in China for the full year. Let's see. We still have almost six months to go, and clearly a lot to be done in that market.
Maybe I can follow up a little bit on that one. If you were to look at units at the moment, orders in terms of units in China in second quarter, if you compare that to third quarter last year, would you now be higher than third quarter last year in unit terms?
Maybe we can follow up on the... if you think about how markets have decreased over the last four quarters, you need to take that into account.
It's probably not... [crosstalk]
Yeah.
That, you know, I don't. Yeah, let's see. We come to that. You know, if you look at our orders historically, we have usually been quite, first half heavy, in orders in China.
Understood. Okay, thank you.
Our next question is from Rizk Maidi from Jefferies. Please go ahead.
Yes, hello, can you hear me?
Yep.
Yeah.
Yeah, perfect. Yeah, I just have, basically one on, is on the China outlook. Henrik, you guided for a 10% to 15% drop for the full year. I know this is not exact science, but it's just your best estimate. That's roughly the decline that we've had in first half.
And I'm just wondering, how do you square this with your sort of earlier comment in previous quarters that the completions should actually boost the new elevated demand, and there is roughly sort of one year worth of elevated demand in those sorts of completions that continue to grow? Just perhaps, how do we square both, basically? The fact that you're not seeing an improvement sequentially in the second half in the Chinese market versus the completion still up 20% year to date.
I think the completion is clearly much of that, not all, much of that has been in the backlog already. That's why we see it a little bit speed up or the rotation of the order book, which is a positive thing. We delivered more in the order book. There's some to be ordered. How much is that? I think it will still flow into next year. I don't know how much, Ilkka, the more you could.
Yeah, I guess what has changed, really, we were talking about how to see the recovery in the markets towards the end of first half. That is maybe the one which is delayed by the consumer confidence, and therefore, we are seeing a slightly lower estimate for the overall market. I think that's the key change. The completions actually continue to develop as we expected.
Okay, understood. The second one that I had is one of your main suppliers, especially on the cars and doors, is facing financial distress. I'm just wondering whether you've seen any sort of disruption from this in your supply chain. Secondly, obviously, we had the whole supply chain constraints during COVID, and now this impact on one of your supplier. Is this prompting you to consider more of insourcing a part of your value chain, or you're still happy with the outsourcing model?
I actually said already in the presentation that we've actually seen our supply chains normalizing, and that's been able to actually supported our order book rotation quite nicely. I don't comment individual suppliers, but I think it's a comment that covers all of them. Positive development from that perspective.
Secondly, yes, of course, in this environment, we've also had to reconsider our supply chain footprint. Think about both geopolitics and as well as resilience in this environment a bit differently. If you look at, for example, CapEx, it's a bit higher because of the investments we're making to support resilient supply chain as we see fit for our business.
It's clear that that's been a huge focus for us, is to make the supply chain more resilient, as Jukka said. The outlook we have now, of course, we follow all of our big suppliers very closely, have close dialog with them. You know, we think we have a good situation, continue to have good deliveries for this year.
Perfect. Thank you.
Thanks.
There are no further questions. I'll hand you back to Ms. Natalia to conclude today's conference.
Thank you. Thank you everyone for listening in. Thank you for the very active dialogue. Lots of very different questions, which is always nice. If you do have any follow-ups, please reach out to me or the team. We're always here for you. I guess with that, I'd like to wish you all a great rest of the summer.
Thank you, all.
Thank you.