Good afternoon, and welcome to KONE's Q4 and 2018 results presentation. My name is Sanna Kaje, and I'm the Head of Investor Relations. As usual, I have here with me our President and CEO, Henrik Ehrnrooth, and CFO, Ilkka Hara. Henrik will first go through the Q4 and 2018 highlights, a bit how the market has developed. Ilkka will then go deeper into the numbers, and Henrik will finish with how we see the market outlook. Henrik, please.
Thank you, Sanna, and also a warm welcome on my behalf. I'm very happy to say that we have a lot of good news to share with you today. We know that this year or the last year overall, had many challenges for us, particularly when we look at our results, we were able to turn that trend clearly in the last quarter, and that's something I'm happy about. If I look at the highlights for last year, particularly last quarter, is that orders received and sales grew again in all regions and all businesses. That is something we did consistently last year and a clear difference to year 2016 and 2017, how we turned our orders received, in particular, in all parts of the world back to growth. Also, in last quarter, our adjusted EBIT returned to clear growth. That I'm happy about.
We are now halfway through our Winning with Customers strategy phase. I will go a little bit deeper into what we have achieved during this strategy phase. We can see if it is leading to clear and strengthened differentiation. Finally, our Board of Directors made a proposal to our Annual General Meeting that we would pay dividend of EUR 1.65 per B class share, the continued strong dividend. If I then go to the highlights for the Q4, I talked already about growth in orders received and our EBIT return to growth. Orders received grew at 5.9% in comparable currencies and was a little bit over EUR 1.9 billion. It's a good number. Given the good growth we have had in orders received last year, our order book is at a very solid level of close to EUR 8 billion, and it grew at 8% last year.
Our sales also continued to grow in all businesses, was EUR 2.4 billion and grew at 6.5%. Operating income, EUR 292.5 million. When we look at our adjusted EBIT, which is our operating income, and then exclude the restructuring costs from the Accelerate program, it was EUR 319.6 million compared to EUR 302.6 million previous year. Clear growth of about 6%. Adjusted EBIT margin now stabilized and was 13.1%. Overall, I'm pleased that we returned to the improvement path in our operating or adjusted EBIT. Cash flow, we continued to have a solid cash conversion at EUR 331.6 million, and EPS was EUR 0.45. One quarter is always a very short period of time, looking at the full year always gives, of course, a broader picture. Here, highlight is perhaps our orders received at close to EUR 7.8 billion for the year, a growth of 6.6%.
Throughout the year, we grew at a very consistent rate. We grew consistently in all geographic areas, in all businesses. What I'm happy about here in the orders received is that it was very broad-based. It wasn't only one or two regions that drove the growth. It was actually something that happened everywhere. That shows good consistency and breadth to the growth. That I'm happy about. Our sales exceeded EUR 9 billion for the first time, an important milestone, 6.3% growth. Operating income, EUR 1,042 million and adjusted EBIT, EUR 1,112 million compared to EUR 1,205 million the previous year. We know that our adjusted EBIT margin declined clearly from 13.7% to 12.3%. It is clear that the 12.3% does not meet our objectives, and our ambitions are clearly to improve that going forward.
Cash flow, EUR 1,150 million, more solid now towards the end of the year, slightly lower in the Q1. An EPS of EUR 1.63. If I look at some of the business highlights for the full year 2018, I would start with the record high orders we had in our new equipment business. Last year, our total orders received on new equipment business was 166,000 units of elevators and escalators, up from about 158,000 the year before, which means it's a growth of about 5%. We think it's clearly faster than overall market growth, which means that we grew faster than market and took some market share last year. The actions we have taken to offset headwinds, particularly in our new equipment business, are starting to show positive results, clearly through pricing but also productivity. Our service business continued to develop very solidly.
Been very consistent, the growth in our service business. It grew in all parts of the world and strong growth throughout Asia Pacific. Our total maintenance base grew by 6% and was 1.3 million units at the end of the year. What I'm particularly happy about is that our new services are having a clear impact on pricing and conversions. We can see that particularly in the countries where we have rolled out these services early. We can see a concrete impact from our new KONE Care in Europe, the impact it's having on pricing and conversions and 24/7 Connected Services on both pricing and conversions in all parts of the world. It is definitely taking us forward. We can see that we are on the right path here, although we are still at quite an early stage.
As I mentioned, our dividend proposal from our board of directors is EUR 1.65 per B class share, same level as in the prior year. If you look at a little bit longer perspective, we see that our dividends have grown solidly year after year, and now it's stayed at the same level. A very good level. This means dividends of about EUR 850 million. That's a little bit over 100% payout ratio and gives a dividend yield of 4%. I would say overall, a strong and attractive dividend is how I would describe it. Those are some highlights for 2018. As I mentioned, we are halfway through our Winning with Customers strategy period. It's always good to look back what we have achieved in these two years.
The way we measure our success, which I think is familiar to most of you, is through our five strategic targets. If we look at how we developed against these, we can see broad-based good development towards most of them, not all of them. Our objectives are most loyal customers. And we have seen continued improvement in our Net Promoter Score again in 2018 on a very broad basis. We can see what we're doing is taking us further towards that target. We want KONE to be a great place to work. Our employee engagement continues to be at a very strong level. We are compared to external benchmarks in a high-performance category, and we can see we have engaged and motivated employees. That I'm very happy about, and that's clearly fundamental to developing a company going forward.
Last year, we had a strong development, both in new equipment and in services, looking at our orders received and our growth in our service base. We believe that we did grow faster than the market in both of these businesses. Good development also there. However, where we're not satisfied with our development, clearly, is when we look at the best financial development target. We know that our profitability in the past two years have clearly been burdened by several headwinds. And we need to continue to take determined action to improve our margins. It's clear that the level we are at the moment, does not meet our objectives and is not satisfactory to us. The ambition is higher. Our final target is to be a leader in sustainability.
This can clearly be defined very broadly. We want to be the leader in eco-efficiency. We can see that we have the most energy efficient products in the market. We have continued to reduce our carbon, the CO2 relative to sales, so we're becoming a more carbon efficient company. We've also, in the past couple of days, had very exciting news and some exciting and, I would say, very rewarding external recognitions for our work in sustainability. We were ranked as the 43rd most sustainable company in the world by Corporate Knights and i n CDP, which measures carbon dioxide efficiency, we had a rating of A minus, which is benchmark in our industry. Again, very important and exciting external recognitions in this area.
When I look at our strategic targets, we can see broad-based development, clearly one area where we want to improve. The way we're improving it is through developing KONE through our strategy. The way we develop KONE is through our ways to win. That is what guides our development activity in each of our businesses. And what we decided already two years ago is that the way we develop our innovation, the way we innovate, has to become much more open. We have to do it much more with partners than with customers to bring all the best knowledge, to bring the best solutions to our customers. I'm very pleased to say that today, co-creation with customers and partners, that is how we operate. That is how we drive our innovation projects further and forward. We have seen faster and better results from here.
To do that, we also need new competencies for our people to succeed in the current environment. We need a lot of new capabilities in a changing, more and more digitalized world. We have developed a lot our employees. And we can see through our people strategy the way we are building up specific competence hubs around the world to support our business to succeed and our people to succeed and the way we are developing them through very innovative and new learning methods. We can see a very broad base of our employees participating in this. This is, I think, very, very exciting. When we develop KONE this way, we can come up with customer-centric solutions and services. These are solutions and services that meet the changing and more and more individualized needs of our customers.
We talked a lot about our 24/7 Connected Services. These are showing the way for our whole industry. We can see that we are really leading the way in our industry with this. What I'm particularly excited about these services is that here we are generating revenues that have not existed in this business before. These services now cover countries that represent 85% of our maintenance base. They're very broadly available. We're building momentum on many bases. Our new KONE Care maintenance offering is driving clear differentiation. We can see that it is having an impact, not only on prices but also on conversion. In many countries in Europe, we have been able to turn the trend where price has been under pressure for many years. We've now been able to turn it back to the improvement path.
We can see it does differentiate us. And we can also see that the continuous improvements we're driving in our core product offering is bearing fruit. We can see how that helped us grow faster in the market last year. Our faster, smart execution way to win. That is how we constantly need to be able to work smarter to help our customers succeed in construction sites or serve them better in existing buildings. Much of this is about freeing up time from our frontline people to spend more time with customers to add value to them. We've been able to reduce a lot of administrative work to release time for customers. Hugely important. We can see some very concrete benefits of this. We have also very broadly improved how we can use advanced analytics to help us make smarter decisions and work smarter.
Some of the very specific success cases here relate to how we are much better using advanced analytics for pricing and for retaining our customers better, know how to serve them better, particularly in the maintenance business. Then final program, true service mindset. We know we are in the service business. We constantly need to meet and exceed our customers' expectations. To do that, we have spent a lot of time in understanding what really matters to our customers and then excel in these areas. Here also, we can see from our customer loyalty surveys that we have made some good progress. This is how we have developed KONE, how we could continue to drive KONE forward, our philosophy of developing the company.
To speed up this strategy execution, towards the end of 2017, we launched our Accelerate program with the idea of improving our customer-centric capabilities. That is helping our customers succeed in their changing businesses and by understanding their businesses even better. By introducing speed, how we can bring our new services and solutions faster to the market, and constantly in an ever more competitive market, be constantly more efficient. Those were the objectives. The first program within Accelerate was a renewal of our entire HR function. That was already completed over a year ago in Q4 2017. We're seeing some clear benefits from this. How we are making better decisions, how we are more efficient in HR, how we are much faster and better in recruiting new people and training people and so forth.
Encouraged by this, we have started also transforming many other functions to be able to be more efficient in many of the support functions that are critical to running KONE in order to release time for our customers to serve them even better. When we looked at the Accelerate program, we had originally a target of about EUR 100 million run rate savings by the end of 2020, and that the program would cost us about EUR 100 million. As we have now been developing for about a little bit over a year, we expect that the total savings will be somewhat over EUR 100 million by the end of 2020, and we also expect the costs to be somewhat over EUR 100 million by the 2020. No big difference here, it is just something as we have gone further, we have more specific plans now and know more about the program.
This is progressing as planned. That is about how we're developing KONE and what happened in 2018. If I then turn next to market development, how we see the external markets developing and starting with the new equipment market. We can see that overall, the new equipment market in the last quarter, last year, grew slightly in units ordered. North America continued to grow from already a strong level, slightly. Europe and Middle East and Africa, pretty stable, with stable markets in Central and North Europe, slight growth in South Europe, but a decline in the Middle East. Asia-Pacific, slight growth, with growing Chinese market, but also growth in rest of Asia-Pacific with growth in Southeast Asia and in India. If I then look at the service markets, the maintenance, really nothing new.
Some growth in both North America, Europe, Middle East, and Africa, and good growth in Asia-Pacific. Modernization. North America continues to grow from a good level. Europe and Eastern Africa now declined slightly, giving some regulatory changes in some markets and some markets coming down. And Asia-Pacific continues to grow at a good rate. As usual, let us look in a little bit more detail what happens in the very important and large Chinese new equipment market. Here we saw last year a slight growth overall in the market. I would say perhaps one of the most important factors driving the market have been government policies towards the whole housing and property market, and the restrictions have been in place. I'll talk a little bit more about those. If we start with looking at housing inventories, what is the underlying market health of it?
We can see that the inventories continue to be at a pretty healthy level. These figures here are from end of November. Our understanding is that December situation improved a bit. But we can see some places slightly increasing, our understanding is that the absolute number of apartments for sale have gone down a bit. But also we can see a cooling down in housing sales and housing prices in all city tiers, particularly in higher tier cities. Clearly, this is where government's restrictive measures are having a clear cooling down effect on the overall market. We have restricted measures in over 100 of the larger cities. The overall elevator escalator market grew slightly. We also saw some growth, actually, some pretty good growth in total real estate investments, but that was mainly driven by increases in land prices.
The overall, I would say that we can see continuous demand for apartments. On the other hand, the restrictive measures from the government is keeping, clearly, markets at a more stable level. That is about KONE, how we developed and our markets, and now hand over to Ilkka to dive a little bit deeper into our financial development.
Thank you, Henrik, and also welcome on my behalf for this results announcement webcast. I'll go through our financials a bit more detail, also at the end, we'll give you a heads-up on IFRS 16 and accounting standard change that will apply to 2019. First, let's start with orders received development in our last quarter of 2018. Our orders received reached over EUR 1.9 billion, and we saw growth in all regions as well as in all businesses. In a reported basis, the growth was 5%, and on a comparable basis, we saw 5.9% growth in our orders received. We look at in more detail, especially the important Chinese market and the development for orders received there. We saw clear growth in both units order as well as in monetary value in the quarter. Year-on-year prices contributed positively, while the mix was slightly negative contributor.
We look at quarter-on-quarter, prices were relatively stable. And overall, our margin for orders received was stable, again, in the Q4 year-on-year. The continued development that we've seen throughout 2018 continued also in the final quarter. Moving on to sales. We saw good growth in both new equipment as well as in services in our Q4. And our sales reached EUR 2.443 billion, and on a reported basis, that represents a 5.9% growth. On a comparable basis, 6.5% growth overall. We look at the key drivers for that development. First, new equipment growing at 7.3%, modernization over 7%, and our maintenance business growing at 5% in the quarter. And from geographical perspective, Americas had the strongest growth at 7.9%. Asia Pacific had the strongest growth at 9%, Americas at 7.9%, and Europe, Middle East, Africa growing at 3.8% in the quarter.
Then adjusted EBIT. We can be pleased about the fact that we returned to growth with our adjusted EBIT in the Q4, reaching EUR 320 million, up from EUR 303 million in the previous year. That's 5.9% growth year-on-year. Our margin was stable, as highlighted by Henrik, at 13.1% for adjusted EBIT margin. Key driver for this development was growth contributing positively. Profitability was relatively flat as already said, and currencies had relatively little impact into the quarter. Overall, the cost for our Accelerate program in Q4 was EUR 27 million. As it is at year-end, it's good to also step back a bit and look at the 2018 EBIT development as a whole. Clearly, we can't be happy about the fact that our adjusted EBIT was down compared to 2017. The key drivers for this development, first, growth in all businesses contributed positively.
Currency is having a negative EUR 40 million impact to our results, approximately, with the biggest impact coming from EUR strengthening against CNY as well as USD. Increasing raw material prices had a negative, roughly EUR 100 million impact to our adjusted EBIT. Then at the same time, we did see positive impact coming from our productivity improvements as well as from our Accelerate program. Also, at the latter part of the year, the focused pricing actions that we've taken earlier had a positive impact. At the same time, especially in the beginning of the year, the price pressure that we've seen earlier in our orders received in China was having a negative impact to our profits. And then lastly, we are now starting to see increasing labor and subcontracting costs having a negative impact to our operating income and adjusted EBIT.
Overall, as seen in the Q4, we're now seeing that the actions that we're taking are having an impact. It's visible in the results, which now start to improve in the Q4 of the year. Cash flow. Cash conversion was at a healthy level in Q4 and overall in 2018. Main driver for decrease in cash flow for the year was the decrease in our operating income. Net working capital was relatively stable compared to end of 2017, and our commercial terms with our customers continued to be on a good, healthy level. That's the main points from our financials. Then to close, a few words about IFRS 16, which introduces a new on-balance sheet lease accounting model, which will be effective as of 1st of January in our opening balance sheet. We'll come back with more details in conjunction of our Q1 results.
But few highlights for you already at this stage. First, we will apply a modified retrospective approach, i.e., we will not publish restated figures, at the same time, we will give more color throughout the year of the impact. There is a comparability there. The key impacts that we're now estimating for our financials. First, from a balance sheet perspective, we will see an increase in our net debt of approximately EUR 330 million-EUR 380 million. On income statement, we'll see an increase in operating income of approximately a bit more than EUR 10 million and the corresponding increase in financing expenses then. On cash flow statement, as we will have increased depreciation and amortization, our cash flow from operating activities will increase approximately a bit more than EUR 100 million. Correspondingly, our cash flow from financing activities will decrease with that same amount.
But overall, this has no impact to our cash flow, just between these two items. As said, we'll come back with more details in conjunction of the Q1 results. With that, I'll give it back to Henrik with the market and business outlook for 2019.
Thanks, Ilkka. If we then wrap up with that's all what we discussed is history. Now we look forward into this year. When I first look at the markets, it is clear that the global economic outlook at the moment, given the uncertainty we see, means that the visibility is perhaps somewhat less than what we saw a year ago. We expect overall that our new equipment markets will be pretty stable this year. In China, we expect markets to decline slightly or be stable in units order. Rest of Asia-Pacific, we expect markets to grow slightly, particularly driven by India and some Southeast Asian countries. Pretty stable development, although at a good and high level, both in North America and Europe, Middle East, and Africa. Particularly North America and Central North Europe are at a high level.
Some growth in South Europe and Middle East, perhaps more challenging. Maintenance markets continue to grow. Good growth opportunities there, particularly in Asia, but also growth in Europe, Middle East, and Africa, and in North America. Modernization markets pretty stable in Europe, Middle East, and Africa. Slight growth in North America and good growth in Asia-Pacific. If we look at the situation for KONE, what we expect for our business this year, we expect that our sales will grow between 2% and 7% in comparable currencies. Of course, a result of a good order book we have and solid growing service business. And we expect an improvement in our adjusted EBIT this year. We expect it to be in the range of EUR 1,120 million to EUR 1,240 million, and that assumes that translation exchange rates stay approximately at level where they've been in January.
If they stay at that level, it's actually this year would be quite a minor impact from currencies, so less than EUR 10 million. There are a number of things that continue to boost our performance, our solid order book, our solid growing service business, our performance improvements, and about EUR 50 million of savings from the Accelerate program. But there are a number of headwinds that we continue to face. Raw materials and tariffs together, some roughly EUR 50 million. And you can also see a clear increase in labor and subcontracting cost in many countries. The change is particularly visible in Europe, where we can see a clear shortage of skilled employees in many parts of the region. This creates some headwinds to us. But overall, we expect adjusted EBIT to improve in 2019. In summary, good growth in orders received throughout the year, and the service business as well.
That gives us a solid outlook for 2019. Our adjusted EBIT in Q4 and for 2019 returning to growth. A fundamental driver for that is that we can see a clearly improved differentiation from our Winning with Customers strategy. With this, we are happy to open up for questions.
Thank you, Henrik. Now we have plenty of time for your questions. Operator, please, you can start taking those from the telephone lines.
If you would like to ask a question, please signal by pressing star one on your telephone keypad. We'll take our first question from Hamid Jafari with Jefferies.
Thanks. Good afternoon. Thanks so much for taking our questions. Despite the large net cash position you hold on the balance sheet, you haven't paid an extraordinary dividend since 2012. Is this because you're concerned about a 2019 performance, or that you're gearing up to make larger acquisitions? What's the reason for this? I see that the net cash position is more or less unchanged year-over-year.
Yeah, it's clear that we have a strong balance sheet, and that's something we are very happy about. As we've been very consistent over the past years, is that we think it makes sense for us to maintain a healthy and strong balance sheet. We've always said that if there are opportunities from growth through good acquisitions, that's something that interests us and we therefore think it makes sense to maintain a strong balance sheet. So I think that we'll be very consistent with, and that continues to be the view that we have taken.
Yes, thank you. If we look at the track record of paying extraordinary dividends, 2011, 2012, and I think, in 2008 or 2009, you had another. Clearly it was more frequent back then, and now it's been a number of years, several years, when you haven't paid it. Clearly, a change in strategy there, it seems.
I don't think an extraordinary dividend is ever a strategy. I think if you look at our actual ordinary dividend over the past years, that has grown quite significantly. So we have had more of a growth in our ordinary dividend. I don't think this has been a change in approach. I think, we know it's important to many of our shareholders, and we also think it's important to pay attractive dividends, and we feel that this is another attractive dividend.
Yes. Thank you. Thanks for that explanation. If I could just move the conversation to China new equipment market. So we understand from your reporting that competition remained intense, but pricing was stable in the new equipment market there. Now, given the material and labor cost inflation in Q4 continuing, can you confirm that China new equipment market margins declined year-over-year on that basis, and how is KONE's performance different in that market?
We don't have full visibility into our competitors, but we will expect, the reason we start to see a stabilizing pricing or even improved pricing in some places, is clearly that there are a lot of players who are suffering quite a lot with this price level and the costs that we are seeing. Clearly, it's a very competitive market. We constantly need to improve the value we provide to our customers and how we improve our efficiency. So last year, what we've said is that we've been able to stabilize the margins of our orders received. However, what we have delivered is clearly an order book where margins have come down, therefore, year-over-year, the delivered margins both on sales in China were lower, but the orders received, we have now seen a more stable situation for a year.
Yes, thank you confirm that pricing for the market as a whole, you're saying was stable, so KONE achieved higher prices year-over-year in that market?
That's our rough expectation, yes.
Okay, yeah, thank you very much. My final question is to do with this new alternative performance measure, the adjusted EBIT you introduced in 2017. You introduced it to help comparability of the business performance between reporting periods during the Accelerate program. As a result, the restructuring costs related to the Accelerate program are being excluded from your calculation of the adjusted EBIT, which is what you use to guide on as a metric. A lot of the analysts are following this.
Now that we are halfway through this multi-year program, wouldn't it make sense to refocus on EBIT, including restructuring costs for better year-over-year comparability, also the fact that such spending in part, is becoming part of the norm, day-to-day spending to, in the new world order of the elevators meaning to win, take market share, to retain maintenance share, to improve customer loyalty and so on. Isn't it becoming more of the norm expenditure to operate in this environment? Why continue to treat it as a one-off?
I would say, this year probably you can compare what we expect, slightly lower cost on the Accelerate program. I still think it's only the Accelerate program we adjust away, nothing else. To be very clear on that. Everything else that we develop, I would say, is part of the constant development, how we invest in our business. That, yes, has increased somewhat over past years, but there we don't adjust away anything. It's only this Accelerate program that we see it now. When that program is over, we'll no longer have this alternative performance measure as it looks now. Ilkka, any further comments there?
I would actually add two things. First, if we look at not only 2018 but the previous years, we called it out also there, that from an R&D perspective, we actually have invested both R&D and IT more. It is stable now in 2018, but that's the investment we make for the normal business. Then when it comes to Accelerate program, it's really the transformational nature of the program, which is then making us calling it out and making sure that's then clearly visible there. In 2018, we spent roughly EUR 70 million for our Accelerate program, and we are expecting then in 2019, less spend than that going forward.
Yes. No, thanks very much. That's very clear. Isn't it the case that the very nature of areas you're investing in as part of this Accelerate program, it's what's needed in today's elevator escalating market globally to achieve the kind of growth rates, the kind of margin developments that you're hoping to achieve and the kind of order development that you are delivering, which is quite good. The kind of pricing increases that you are able to report in places like China. It looks like it's better than the market. Isn't that what's really required to deliver those things? That's the bread and butter of your business and what's required on a day-to-day operational basis. So, why continue to treat it-
Sorry to interrupt. Nothing of standard normal development is in there. It is only what we do as part of transformation and restructuring for these specific programs.
Okay.
Nothing else is included there. I don't think we see it at all in a different way. Okay, let's go to the next question.
I will take our next question from Klas Bergelind with Citi.
Yes. Hi, Henrik and Ilkka. It's Klas from Citi. A couple of questions from me. First on the cost inflation from wages, both from normal wage inflation and from the contractors. What was the impact in 2018 when you looked through the numbers? Was that perhaps EUR 80 million from wages, EUR 20 million from contracting? I would assume that this number in absolute terms could be bigger in 2019, but by how much? This will help us understand the drop-through better here in 2019. It would be great if we could get some color at least. Maybe a question for you, Ilkka.
Thanks. I guess the way to think about it is that, why are we calling it out? It is the fact that wages are increasing in a number of places in the world, and that's been the case especially, quite consistently, in Asia-Pacific, for example. What we are seeing now, especially in latter part of 2018 and more towards 2019, is that these costs, in Europe are actually now increasing faster than normally. And that's really what we're calling out. And when we think about what the impact could be for 2019 from wage and labor cost, and this increasing subcontracting costs, we're talking about some tens of millions EUR. That's the way to think about the magnitude of it.
That is obviously incremental, but the total absolute has to be somewhere around the EUR 80 to EUR 100. That will go up by EUR 10 million to EUR 20 million, is that how to think about it then?
Well, you can look at our labor and related cost. That's about EUR 2.8 billion in 2018. That's something that increases consistently, partly because of the growth of the business, but also there's a inflation impact there. In order of magnitude, you're not that far off from the total.
Okay. Okay, good. My second one is a clarification on what you said, Henrik, on the margin versus backlog. You still say it's relatively stable. Is that the same thing as saying that the margin on new orders are on par with those leaving the backlog for delivery? I just want to confirm that. If that is the case, do you feel that you need to hike prices once again from the current levels to compensate for the increased wage inflation, et cetera? Can you handle that increased cost through productivity improvements?
Sure, I think that very roughly you can say probably orders received and delivered margins are pretty at a similar level. I would say our objective is always, and that never changes, is always to find ways of adding more value to our customers to help them improve their businesses. When we do that, we can increase prices. That is not changing in any environment, and that is constantly our objective. It's clear that we have tough competition doing that, and that's okay. I would say that to your first question, more or less, yes.
I just am thinking obviously if raw materials are starting to fade, obviously that could change a little bit the pricing power. Yeah, I appreciate the ambition.
Just to that, when we talk about the margin in our orders received, that of course is a certain assumption on the cost the cost we assume there is about where our product costs are today.
Fair enough. My last one is on the ranges in your guidance on the lower end, 2% growth and a 12% implied margin. That's quite a big slowdown, the margin is still pretty healthy there, only 30 bps lower than the midpoint. I guess this is more a reflection of your view of what can happen to demand in the different regions or the conversion of the backlog rather than pricing. Could you just walk through the rough assumption behind the lower end of the guide, please, and how you think about the China backdrop at the lower end?
You know, as always, there's a range of outcomes, both downside and upside, throughout the year. We don't have full visibility to the full year. We, of course, have order book. But it's particularly, we have to see what happens in China, but also in other markets, how the economy develops and what the confidence are of developers. Clearly, if we would be at the lower end, that would mean that we would see a slowdown in new equipment and deliveries. If we're at the higher end, we would actually see more strong orders or the beginning of the year that could be still delivered during the same year. We have a fair bit of what we need to deliver now.
We have already an order book, clearly we need to see still, in a percentage of completion world, quite a lot of new orders beginning of the year that we deliver still in 2019.
The reason why I ask is that one of your competitors said that they expect actually the conversion from orders to revenues to improve in 2019 on the back of better liquidity environment in China. As in that light, I just felt that the range between two and seven was quite big. If you could comment a little bit what you see in China from that perspective, it would be very helpful.
If you want to comment on liquidity in China.
Yes. so, if we look at the overall liquidity situation in China at the latter part of the year, overall in China, I think liquidity actually improved. It's important to note that, especially for our customers and the bigger developers that are quite levered overall, that's not where the liquidity was targeted. It was elsewhere in the market. And from that perspective, I think there is a fair bit of pressure with our customers. I don't see that changing in that part of the year. If I look at the order book rotation overall, we haven't seen a big change there, globally or in China either.
Okay, thank you so much.
Thank you.
And we'll take our next question from Andre Kukhnin with Credit Suisse.
Yes, good afternoon. Thanks very much for taking my questions. I'll go on the time as well. Can we just come back to this notion of the order intake margin being stable at the current material prices? Would an interpretation of that as net price being neutral be right? I.e., at the current material prices with the prices that you're achieving for your product is a wash.
We can see that during last year, material prices continued to be a headwind, as you know, about EUR 100 million for the full year. That meant that during last year, we were able to increase prices roughly to the tune of what material prices increased, in some places, a little bit more perhaps, but by and large. If anything more to add to that?
No, I think the only thing to highlight is that, as we've spoken already earlier, is that when we talk about 2019, we're seeing, as Henrik highlighted, about EUR 50 million headwind from raw materials. That's because there's always a bit of a lag for us. First, there's raw material prices changing, and I guess there we've seen a bit of a direction change now lately. But our component prices are much more stable than that. At least for the first part of the year where we have better visibility for our component prices, we do see that there is a headwind coming from there, plus the tariffs.
If you think about it sequentially, tariffs, fair enough, and that's EUR 10 million you've quantified, and see what happens from March. Just the raw materials, if you think about sequentially from Q4, the levels that you achieved for your prices versus the levels that raw materials and component prices have landed at. Do you expect raw material prices to go up from that level in H1 2019?
For H1 2019, we actually have a pretty good visibility already to our component price. That's the basis also for the EUR 40 million that we call out. There's less variance. As we've said, locking our prices for most components between three to nine months forward. That's why we have pretty good visibility. What happens in H2 of 2019, we both have moving parts also in the orders that we will receive, where and what type of orders, but also then we'll need to see where the prices are for raw materials and what the final prices for our components are for that part of the year.
Right. And your product prices in Q4, where you closed out the year, are they higher than beginning of the year? I'm just trying to figure out what is the annualization of the changes that took place during 2018 versus what the incremental moves will need to be during 2019.
Clearly, we have had increasing costs and margin is stable, then yes, prices have increased somewhat during 2018.
Right. So, really, sorry to labor it, but just to close this. If I look at your profit bridge on slide 18 and imagine it for 2019, then that rising raw material piece becomes EUR 50. Within other factors impacting EBIT, the price element should be plus EUR 50, or am I getting that wrong?
I don't know how to.
No, I think the way to think about it is that there is a EUR 50 million raw material headwind coming year-on-year. The prices against the raw individual quarters are quite neutral as we've said. The raw materials are on a higher level than they were in 2018 when we were commenting those quarters.
Right. Okay. It'll depend on future price increase. Great. Thank you. Can I just check something. On R&D and IT investments, when you started this journey just over two years ago, you talked about this ramping up by about EUR 50 million per annum for two years. I think there was general expectation that they start coming off. What should we expect now that we've kind of traveled these two years?
As you remember, in the first years, we did see a ramp-up, and now as a percentage of sales, they've been pretty stable. We think that with the growth we're seeing, we probably can see a pretty stable percentage as a percentage of sales. That of course, in future years, we have to see, but at least what the visibility we have at the moment.
Got it. And finally on China, very clear on the outlook. Just wondered if you could elaborate a little bit what your expectation set is within that in terms of resi and non-resi segments and whether you expect the city tier by tier performance to differ in 2019 versus what we saw in 2018. Just in conjunction with that, in your outlook, do you incorporate any assumption on whether the government measures will change one way or the other?
Think about what we've seen a pickup in activity recently has been again in infrastructure. Perhaps that is going to be a little bit more of the active segments, but of course it's not the biggest one. The most important is residential. Much will depend on government policies. We are not making any predictions as to what may happen to these. What we can see at the moment and what we understand from our customers is reflected in our outlook. Perhaps a somewhat better situation now in higher tier cities. That's where we see more activity and those are usually cities where there are more opportunities for people for work and education and so forth. They are drawing more people into them. Perhaps higher tier cities a little bit better than lower tier cities now.
That slightly down part of the outlook is hence based on resi potentially being down as a carryover effect of completions slowing down during 2018. If you're not assuming government measures to change much, you think in absence of those then resi goes down?
That would probably be the situation if the central parts of our forecast is that market slightly cools. Clearly resi is the largest, so then we would see some cooling down in the residential sector overall.
Right. Great. Thank you very much, both of you.
Thank you.
We'll take our next question from Lars Brorson with Barclays.
Hi. Thank you. Hi Henrik, Ilkka, Sanna. I have three questions. I could start maybe with the EBIT bridge, Ilkka. I know we're all sort of circling around some of the key components of the EBIT bridge for 2019. The one component I'm starting to think is perhaps a greater negative than I think we have in our numbers now is mix. I wonder whether you could help me put a number around how you see mix impacting your EBIT bridge in 2019. For starters, you've had solid new equipment order growth in 2018, including parts of the sort of the shorter cycle markets that get invoiced in 2019. You also have a quite a sort of slow turning order book in North America, which I assume is also quite a headwind for you in 2019.
So, were you able to put some quantification around how you see mix impacting the EBIT bridge in 2019, please?
Well, default, if you look at the overall situation for the business, mix hasn't changed that dramatically. But at the same time, there's still a lot of things which are moving parts for 2019. There's orders that we need to still receive that we will deliver in 2019, and that's impacting it. It's really hard to be very clear on the mix, but I wouldn't say that it's something that I would call out yet at this stage of the year as a big factor there.
Tens of millions of EUR negative?
I'll go back to my answer already that I wouldn't call that as a negative. It's still a lot of moving parts for 2019 if you think about orders especially on the volume side that we will during the first part of the year that get delivered in the year. It's not something I would call out at this point.
Thanks.
I would say-
Henrik?
We don't see that. I wouldn't put a lot of focus on that because that's not one of the big drivers, really.
Thanks. Actually, Henrik, if I can just ask to European service pricing this year. I was a little bit surprised to hear Otis's comments yesterday on pricing in European services in 2019. I appreciate there's some quite meaningful differences in your regional exposures here compared to them, could you help me a little bit with how you see the general pricing environment in European services this year, and also specifically your own pricing trends? Obviously, you should see quite a positive impact from the rollout of some of your new service offerings.
Clearly, it differs from country to country, Europe, and as always, the countries where trends are better is where the economy is stronger. There, central North Europe is better than South Europe. That's pretty evident. But we can also see that if we compare to previous years and we look at just the value of how the service base is developing, we can see a clear improvement in the year 2018 compared to prior years. We can see we're making progress, and much of it is through the actions we've done ourselves. Again, also there is South European markets probably slightly more challenging, with central North European markets a bit better.
Are you able to put some numbers around that, what that means in terms of pricing for the market? Is it flat, slightly up, and you up more than that, or what does that actually mean?
We know that we are perhaps slightly up, or we are slightly up. Market, South Europe is difficult to say. What I can say at least is that we are slightly up.
That's helpful. Thirdly, if I just could finally on the non-China Asia Pacific market outlook for 2019. You're nudging it down slightly from growth to slight growth. You do talk about India earlier, still seeing good growth, and obviously by far the largest new equipment market in Asia Pacific ex-China. Can you give a little bit of color around the sort of slowdown in growth trends in non-China APAC, what's driving that? Or is this more sort of caution around specifically India in 2019 with elections and other factors that could drive some volatility in that market?
Okay, first of all, not in unit terms, but in value terms, Australia is a very significant part of that market. It's a big market and very important for us, and that market is clearly cooling down, so that has some impact. In units, we expect India to continue to grow. Yes, you have elections, but so do many other countries. Perhaps we see a little bit more differing. Some Southeast Asian countries are developing very nicely. Some have a little bit more turbulence. Perhaps that's the big difference. I would say Australia is declining. Southeast Asia is a mixed picture. We see growth in India.
Thank you.
And we'll take our next question from Lucie Carrier with Morgan Stanley.
Hi, thanks for taking my question. I actually only have two follow-up. One was on the evolution of your Chinese margin. I understand in 2018 it was down versus 2017. When I look actually into 2019, I have to say, I struggle to see how it shouldn't benefit actually your EBIT mix in 2019, considering that you look quite up in terms of orders in 2018 in China, and typically China is higher margin than the rest of your group. That's something I wasn't sure to understand in terms of how you set up the guidance for the EBIT. That's my first question.
Do you want to answer?
Yeah, First question or statement, that, what was the impact from 2017 to 2018? You're right. The pricing for the orders earlier was down as we called it, and it had an impact to our orders margin and also overall profitability of the company. And for 2019, now we've seen stabilization in our order margins, and slightly a comment also in China, as we've spoken earlier. So therefore, we are expecting a positive impact then in 2019 from China to our operating profit.
Despite expecting that positive mix, you're kind of guiding only, I would say, for 30 basis points at the midpoint of the guidance, 30 basis point margin expansion year-over-year?
Well, there's a number of different outcomes, and it's early in the year if you think about the revenue range versus the adjusted EBIT range. There's still a number of outcomes there.
Okay. Understood. Just maybe my last question. Actually, this is on the conversion rate in China. One of your competitors has spoken a bit more positively about that. I was wondering, you were mentioning yourself, I think, that a lot of new products were helping to improve the conversion overall. I was wondering if you could give us a couple of pointers in terms of your conversion rate on a global basis, which historically have been high, but more specifically in China.
Yeah. In China, our conversion rate has improved somewhat last year. We can see a good development there. With KONE, I think we have a good conversion rate that we can see that that is improving. That helped, and that's why we had good conversions overall last year.
Any number you can maybe give us?
As you know, for the KONE brand, we have been converting slightly over 60%. When we measure 60%, we look at all deliveries that we have through all channels. 100% for deliveries and what is the conversion against that. I think it's important to understand how one calculates these numbers. If you're trying KONE, it's lower, then the average would be, as we said, a bit over 50%.
And just maybe the last question to follow on one question that was asked earlier. Around the top-line guidance, you are exiting 2018 with an order backlog up roughly 8% organically. You're guiding 2% to 7%. I think it's maybe, I guess, a little bit surprising or a bit difficult for us to do the math on how cautious you are here, because it looks like, in terms of size, your order backlog typically takes between six to 12 months to convert. Is that a specific concern for you towards the end of 2019, that kind of drive where you're kind of guiding at the midpoint?
First of all, it does take longer than six months to convert an order backlog. It is probably closer to a year and depends very much market to market.
For today, in this case, if it takes a year, you are up about 8% at the end of this year.
Of course, always in an order book, you have different mix. One of the growth drivers for us at the end of the year this year was good success in many large projects. Good growth in North America where the conversion is longer. I would say this is how we see this order book playing out over the coming years and that is the outlook that we see. I do not think that there is anything more surprising to that.
Okay. Thank you.
Thank you.
We'll take our next question from James Moore with Redburn.
Yeah, afternoon everyone. Henrik, Ilkka, I've got a few bridge style questions, if we could run through those. If 2019 EUR 50 million, what was Accelerate in 2018, please? I'm guessing EUR 22 million, but some precision would be helpful.
Probably less than that, yeah.
If we look at, we've said that it's not that significant driver yet in 2018 for our results. In 2018, roughly speaking, about EUR 10 million impact from a cost-saving perspective or the P&L.
We still have maybe EUR 50 plus to go in 2020, given your above EUR 100 comment earlier.
If you think about how these savings happen. For EUR 50 million, we're saying that's the P&L impact and it will always take some time to execute these programs. There's some waiting there within the year. Also some work that we still need to do to make those happen. So it will likely leave us with a run rate which is higher than EUR 50 at the end of the year. Let's see. We still have work to be done there.
Okay.
I think, James, we said that, yes, that should give us a few benefits again in the following year.
Yeah.
Okay. On wage inflation, can I clarify your answer a little? I didn't really understand it. Are you saying that the 2019 EUR million increase is expected to be bigger or smaller than the 2018 increase for wage inflation?
What I was saying is that the wage inflation or increase in wage cost is increasing its pace as there's more scarcity of resources and therefore it is bigger than we've seen previously.
Are you talking something that's a meaningful change to whatever the number is? If it's EUR 80 million or EUR 100 million, are we talking sort of 1.5x, 2x or not as big an increase as that?
No, I'm talking about some tens of EUR millions as an impact.
The change in the rate of it. Okay, thanks. If you could, on productivity, you sometimes commented in the past away from Accelerate, your sort of normal ongoing productivity. Could you help us a little bit with what benefit you thought you saw last year and how that compares to what you're thinking in 2019 to see if there's any change to the impact there?
We see constant year-over-year improvement in productivity, in maintenance, how you do it better. Also in installation performance and there are many drivers to that. I think it's been pretty steady and even development there. No huge changes to past years.
Is that still around 1% of sales a year or have I got my order of magnitude wrong now?
Well, we don't look at it as percentage of sales, but we look at it at how productivity usually measure against your costs and you get a few percentage point per year is a target what you need to get.
Thanks. Just lastly, you mentioned that your volume business was down globally, but project helped. Was that a China project or a project in another region that you were referring to?
These major projects, they come and go, but it was not in China. China was actually the volume business that developed quite nicely. We had a few larger projects in the quarter. Sometimes we have more of them, sometimes less. Nothing out of the ordinary.
Thank you very much. Thanks, Henrik.
Thank you.
We'll take our next question from Antti Siltanen with Inderes .
Yes. Hi, this is Antti from Inderes. A question on your China margin. You have said in this call that your equipment margin in China fell in 2018. Where are we now? Where are we in China compared to rest of the world in terms of equipment margin?
If you just look at new equipment business, it's clear that China has good margins compared to the rest of the world. Not as much higher as they used to be.
Yeah. Would you still say that the difference is significant, maybe twice as high or something like that?
It depends on market to market. China margins, I would say just the new equipment continue to be good.
Why wouldn't the margin fall to a level outside of China over time?
I would say that not everyone has the margins in China that we do. You can see a lot of players really struggling in that market, and that's why we're starting to see consolidation happening amongst some of the weaker players in that market. So that means to me that we have a pretty good situation there compared to many others.
Yes. Would you expect this margin to continue to go down in 2019?
That is clearly not our objective. Our objective is clearly something else.
Yeah. You don't see a new wave of order price pressure in 2019?
I would say the market is very competitive. It's clear it's the largest new equipment market in the world. There are clearly more players there than the other markets. It's highly competitive. We have a good value proposition that we need to continue to improve, to show our customers it really makes sense to work with KONE, that helps them in their business. And I think we can continue to develop well.
Yeah. Okay. Thank you.
And we'll take our next question from Glenn Liddy with JP Morgan.
Good afternoon. There's a lot of focus, obviously, this afternoon on wage costs. Are you suffering from any shortage of employees in some of the developed markets?
I would say that's something you need to constantly develop very actively to have enough employees, because I think it's not only our business. I would say it's the whole construction trade for skilled employees is suffering from shortages in big parts of Europe at the moment.
Does that mean that you're running with overtime bills that are larger than normal?
Partly, that's
All right. In the U.S., the government shutdown. Is that having any impact on the business at all in terms of getting paid in a timely manner if you have any government related business?
We haven't seen any significant impact at least so far. I can't say what the impact would be if it is prolonged, but so far it hasn't had any meaningful impact on us.
Is that because the U.S. government isn't a material customer or it's just too early to know?
I would say you have to remember our business is so broadly spread amongst many customers, that individual customers are seldom a large portion of the revenues.
Okay. Finally on wage costs, have you had to enter into any multi-year pay rise commitments anywhere?
If you first look at Europe, the vast majority of your operative employees would be part of some general bargaining agreement. Some of those are multi-year. That's something we cannot impact. Those are usually more centrally negotiated. And some of them are multi-year, and that's what we're saying in some countries, we saw towards the end of last year, larger increases than the larger increases that we've seen in the prior years.
Right. You're not able to pass these on in full to customers yet then?
Well, that's of course if we're able to pricing. There are some indices in some contracts. Usually they're more related to a CPI or general inflation or something like that. So partly not, and it's of course up to our skill or ability to do that.
Thank you.
Naturally, if you think about when we talk about pricing, it is our aim over time to be able to get a good price for our services and solutions and products. So that's one part of it, and what do we need to do.
Sure. Finally, the new service products that you've launched, I appreciate they've only been launched relatively recently, but in the markets that they were launched first, is it yet a material percentage of the service income?
It's increasing all the time. I think what you have to remember in our type of business, if we talk about the new KONE Care contracts. Those we use when there are renewals or renegotiations or conversions. And the service portfolio does not change that fast. I think that's one of the good things with our business. So if I look at the new KONE Care contract types in the countries that we have been operating this for over a year, what we sell today by way of renegotiations, renewals or conversions, this is what we sell.
Okay. That's great. Thank you.
Thank you.
We'll take our next question from Andre Kukhnin with Credit Suisse.
Great. Thanks very much for taking my follow-ups. I just wanted to first come back to pricing and thinking about that as a kind of item on the bridge of 2019. Looking at the components, you had positive pricing in China on new equipment. You said a few % or slightly said you've raised Europe service, you said Europe slightly. I'm adding up to about EUR 100 million in a very sort of just calculating way of taking China sales, multiplying by three, taking Europe service sales, multiplying by one. Am I far off? What's on the other end that I should bear in mind that can make the numbers more or smaller or neutral?
I'm not sure I'm fully following your bridge calculations, but bridgings are good, but we have to remember that the world doesn't work like a bridge because there are so many more variables that drive something that, yes, pricing has increased a bit with the new equipment business. At the same time, costs have gone up. What is the net-net of these two? It's pretty neutral so far. If you continue the same pace of price increases and now costs increase at a lower level, clearly that would drop through more.
Right. Absolutely. I was just trying to separate the price. I know you've got tens of thousands of contracts with different times of deliveries, but just thinking about you having four quarters plus of positive price element in China, if that kind of altogether is 3%, then on just sub EUR 3 billion of sales, based on your order disclosure, that should be adding up to, like, EUR 70 million to EUR 80 million positive. If these price increases change or the pricing they're securing in orders change as we deliver them? Just trying to understand what components on the bridge are going to be different in 2019 versus 2018.
First of all, I think it's important to say that I think we've made good progress. I think our pricing has been better than market overall. And you know, there are some players that have developed better, others less good, I think we are probably in that better category. I think the net-net of what we have communicated is that the margin of our orders received have been pretty stable.
Right. Okay. We will work with that. Just on connected devices, we are also keen to find out any details, any kind of numbers, and appreciate there is kind of different ways of connecting lifts and calling a connected device. Maybe I could try it from perspective of how much that helped growth in 2018, i.e., how much of the growth that you generated in your service business was thanks to that connected devices premium, the bigger packages that you secured or better conversion rates?
Better conversion rates, that is difficult to say. There was a slight positive impact on pricing from this. We have to remember that, again, prices for our new services, the 24/7 Connected Services, we have a clear objective. We sell them as a commercial service because we can see that it really helps our customers improve their business and there are clear benefits to our customers. We are doing it in a way that we are selling them as a commercial service, and as we have said that prices are quite good for them. However, we have to remember that we are still early days, so the absolute numbers, even though we sell them broadly, are still not meaningful. But last year it had a slight positive impact to our overall growth rate in the maintenance business.
Right. I have picked up a couple of points that suggest that as kind of an add-on service, it generates something like a quarter of your worth of your usual service maintenance revenue for the KONE Care. Running some numbers suggests that it added anywhere between 0.5% to 1% of growth to your service business. Can you comment if that is kind of right ballpark or still far off?
Probably not too far off the truth.
Okay. Great. Thanks very much for your help.
There are no further questions at this time.
Okay. Then, I would like to thank everyone for participating, again, for your active participation and questions, and I think we are then ready to close here. Thank you.