Good afternoon. Welcome to KONE's Q2 results presentation. My name is Sanna Kaje and I'm the head of investor relations. I have here with me today, as usual, our President and CEO, Henrik Ehrnrooth, and CFO, Ilkka Hara. Henrik will first go through the Q2 highlights. Ilkka will then talk a bit in more detail about the financials, Henrik will then conclude with a couple of comments on the outlook. After the presentation, we have plenty of time for your questions. Henrik, please.
Thanks, Sanna, also a warm welcome on my behalf to our results webcast. Today, I have a lot of good news to share with you. Although what you also have seen is that what we can't be fully happy with is our results development. I will also talk about how we are addressing that going forward. The highlights for the second quarter of this year, clearly that we had a good growth in our orders received, they grew in all regions, in all businesses, with now stable margins. That's good. Our service business continued to grow well. Here we can clearly see that the differentiation we've been driving in the business over the past years is bringing results. It's clear that we are not happy with the development. Our EBIT margin is continuously burdened by a number of headwinds.
We'll address that a little bit later more. I'm also happy to share some good news on results from our annual customer employee surveys. Let's go straight into the highlights of the numbers for the second quarter. As I mentioned already, the highlight is really the growth in our orders received that were about EUR 2.1 billion and growth of 6.4% in comparable currencies. In a market that is pretty stable in monetary value, particularly new equipment, I think this is quite a good achievement. That's I'm happy about. Our order book continued to be strong at close to EUR 8 billion, our sales now about EUR 2.3 billion, a growth of 3.2%. Our EBIT, EUR 280.5 million. If you look at our adjusted EBIT, where we exclude the cost from the Accelerate program, that was EUR 300.4 million compared to EUR 335.8 million a year ago.
We can see that our EBIT margin declined from 14.4% to 12.9%. It's clear that this is the part that I'm not happy about in the result. What's good in the quarter, though, was our cash conversion and cash flow at EUR 366.2 million. Earnings per share EUR 0.43 compared to EUR 0.52 a year ago. As we always said, one quarter is a very short period of time, it's always better to look at it at slightly longer period of time. Now we have, of course, half a year behind us. Here I would say the message for the six months is very much the same as it was for the second quarter. Good growth in orders received at 6.6% in comparable currencies, in sales 6.5%, which is quite a good growth number in this environment.
EBIT EUR 492 or adjusted EBIT EUR 519 compared to EUR 582 a year before, a margin of 12% in the first six months compared to 13.6% a year ago. Cash flow EUR 545, but still a positive cash conversion, however, lower than last year due to a slightly lower cash flow in Q1. Clearly, a good recovery now in Q2. EUR 0.77 per share EPS compared to EUR 0.92 a year ago. As I think most of you know, the way we measure our success is through our five strategic targets. On two of them, we have some good updates and some good news. Those relate to our first two targets, having the most loyal customers and KONE being a great place to work.
When I think about these targets, they are to me the most important leading indicators of the health of the business, particularly in a very rapidly changing environment and an environment where also we have a lot of change at KONE. Very important to have loyal customers and motivated and engaged employees. If I go a little bit more in detail into this, if I look at our customer loyalty measure through Net Promoter Score, that improved again. We have had a many-year improvement, and we can see that the actions we have taken are bringing results here. What are customers saying about KONE? The most frequently occurring comments in our survey that covers roughly 30,000 customers, so it is meaningful, is that KONE, we have great products, high-quality products. Also, they talk a lot about KONE's employees, service-minded and want to provide good outcomes for our customers.
Also very frequently comes up, these are the three most frequent ones, the third one is that when KONE promises something, then we deliver. These are very important basic fundamentals that are strong in KONE and very important fundamentals when we're driving positive change in the company. That I'm very happy about. Also in a period of significant change in the markets, very rapidly changing markets, customer needs, it is important to have strong engagement and motivation amongst employees. We just conducted our annual employee engagement survey, and it has some very good results. 91% of our more than 55,000 people answered the survey, which shows that it's meaningful and that it matters. Also, employee engagement is on a strong level. What I'm particularly happy about are some very positive results from questions that relate to our direction, our strategy, and our change.
That is very important in environment where things are changing, that the employees understand where we're going, because that is really the fundamental driver behind successfully executing our strategy. I think we have many of the fundamental aspects there. These two I'm very happy about. In our Accelerate program that we announced last year in September, we have a lot of good development. We started or initiated number of organizational changes in many of our functions, such as our finance function, marketing communication, in our customer solutions engineering, and in our local sourcing organizations. All of which are designed to enable our frontlines to spend even more time at the customer interface, driving positive change and bringing our vision to our customers.
At the same time, being much more efficient and harmonized in all our back office functions to speed up the ability to deliver new solutions to our customers in a more efficient way. Also, we are progressing with this program, as we have planned, and that's good. I would at this stage like to, again, express my thanks to all KONE's employees for their drive, engagement, and motivation in driving forward positive change at KONE. This I'm very thankful for, and I think we have seen good development here again. That's about highlight numbers and a little bit more broadly on our progress. If I then go to market development and start with the new equipment markets. If I look at the new equipment markets, not much has changed relative to what we talked in Q2. North America, Europe, and East Africa growing slightly.
In North America, growth from a good level. Europe and East Africa, continued recovery in South Europe and growth in the Middle East despite overall turbulence in the region. Central North Europe, stable at a pretty good level. In Asia Pacific, slight growth, and it's really India and a few Southeast Asian markets are driving the growth. China pretty stable now in the quarter. If I look at the service markets, very much also the same we've seen before. Maintenance, slight growth in North America and Europe, strong growth in Asia Pacific, and exactly the same picture in modernization. Very much the same as we've seen before, and overall growth. What I'm happy about is Asia Pacific markets continue to grow well, given our strong positions in those markets. Let's go a little deeper again into what's happening in China.
First, I would say when we look at China, demand for housing in particular continues to be high. That has resulted in a situation where housing inventory levels have improved over the past couple of years quite significantly. We can see that overall are at a pretty healthy level. Why is our market not growing more? Why are then house sales stable in lower tier cities or actually declining in higher tier cities? There are many reasons for that. First, it's clearly the restrictions that are in place in over 100 cities today on property purchases. It's also the very tight liquidity situation, which has a very significant impact on our developer customers in their ability to finance new projects and particularly buying land at very high land costs. We can also see this in the output.
If we look at the total construction volumes in China, they have been pretty stable now in the first half of the year. Actually, if you look at the number of completed buildings, those have been slightly down. Then you can ask, why are total real estate investments growing so nicely at 9%? Well, the main driver behind that is increases in land prices and impacting this number. With all of this, we have seen a pretty stable market for elevators and escalators, and that situation we expect to continue. That's about our markets and our overall development, a little bit more in depth on China. With that, I'll hand over to Ilkka to review our financial performance a bit more.
Thank you, Henrik, and also welcome on my behalf to our second quarter results call. As normal, I'll go through the financials a bit more in detail and start with orders received. Orders received in the second quarter were EUR 2.1 billion, which is 3% growth on a reported basis and 6.4% growth on a comparable basis. I'm happy to see the development that started in fourth quarter last year, now with a stronger growth in orders continuing in this quarter. We saw broad-based growth. All regions as well as all businesses contributed to this growth. The margins of our orders were stable compared to the comparison period last year. In an increasing input material environment, that has meant that we have increased our prices to cover that increase in the input materials.
If we look at China in more detail, then our orders measured in units grew there slightly. When measured in monetary value, we saw a clear growth there. Pricing like-for-like basis contributed positively, and the mix was stable compared to comparison period a year ago. Moving on to sales. Sales were EUR 2.3 billion in the quarter. On a reported basis, slight decline, but on a comparable basis, 3.2% growth. As we said already in the first quarter result announcement that we saw exceptionally strong growth in first quarter due to the number of starts, and now we're seeing a more stable first half with 6.5% growth on the first half basis. If you look at the key drivers for the growth then Europe, Middle East, and Africa contributing 6.6%, Americas at 6.1%, and Asia Pacific having a slight decline at 1.3%.
From a business line perspective, maintenance had a strong 6.3% growth. We look at overall the maintenance growth, we always say that if we're able to grow at 6% or better, then we're really happy, and I'm happy to see that we were able to now grow at this rate. Modernization contributed positively 3.2%, and as well as new equipment, 1.4%. Looking at our EBIT development. Adjusted EBIT was EUR 300 million in the quarter, which is down from last year, and the margin was 12.9%. We're clearly seeing that our profitability is burdened by both higher raw material costs, as well as the price pressure that we've seen earlier in our orders, especially in China. At the same time, growth contributed positively, and currencies had a negative EUR 11 million impact to our result.
While I'm not happy about the results, what I'm happy about is that we now have been taking action to counter this development. Clearly, we're seeing those actions having an impact, and having an impact to improve this outcome. Finally, cash flow. Our cash generation was strong in the quarter, landing the cash flow at EUR 366 million. The cash conversion clearly improved from where we were in the first quarter. As we look at the first half as a whole, the main driver compared to last year's comparison period is the results. The EBIT down contributing negatively to our cash flow. At the same time, we see that the working capital continued to improve and contribute positively to our cash flow. Good to see that we were now continually positively developing the cash conversion for KONE.
I'm asking Henrik to come back and talk a bit more about the market and our business outlook for the remaining of the year and the full year.
Thank you, Ilkka. Let me wrap up with our market outlook and our KONE business outlook. First, I would say, effectively the same that we had in first quarter. New equipment, we expect that the market in China is effectively stable or declined slightly in number of units. The rest of Asia Pacific, slight growth, particularly driven by India. Europe, Middle East, and Africa, slight growth. The same in North America. Also maintenance markets, we expect them to continue to develop very much as we've seen so far. Strongest growth rate in Asia Pacific and slightly in other regions. Modernization also, same goes for modernization. A slight growth in North America and in Europe, and a strong growth in Asia Pacific.
For our business outlook, here we expect our sales to grow between 3%-7% in comparable currencies, and we continually expect our EBIT to be in the range of EUR 1.1 billion-EUR 1.2 billion, assuming that translation exchange rates stay at the level where they were at the end of June. If this is the case, the headwind from currency is going to be about EUR 35 million. Because of the actions we have taken, we expect that the pressure on the adjusted EBIT margin is expected to start to ease towards the end of 2018, which in practice means Q4. Of course, we continue the actions, but we can see that we're making progress on them. There are a number of things that are driving good performance.
Our solid order book, our continued solid and good growth in our services business, and the continued performance improvements that we have had. However, we have still matters that are burdening our results, and they are unfortunately more significant still at the moment. The price pressures we earlier seen in orders received in China. Raw material cost headwind of about EUR 100 million, and the translation exchange rate of about EUR 35 million. That is about our outlook. Before we go to questions, to summarize, I'm very happy about the clearly improved growth momentum we have in orders received. That actually started already in Q4 last year with pretty good growth then and good growth now in Q1 and Q2. That's good. We continue to take actions to improve our margins. That's pricing, it's productivity, it's costs, and we're progressing on all fronts.
We can see that the continuous good growth we have in our services business is as a result of the differentiation. We can see a clear link with the progress of our service transformation programs and growth in services. We can see that we are definitely going in the right direction. Also what is important in an environment like this is to have happy and loyal customers and motivated employees. As I talked earlier, we can see that we increasingly have that. With that, I think we have plenty of time to go to questions.
Exactly. Now we can go to the questions, and as we have no audience here today, we can go straight to the telephone lines. Operator, please. Please ask one question at a time. Thank you.
Thank you. To ask a question, please press star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach the equipment. Again, that is star one. We'll go first to Andre Kukhnin at Credit Suisse.
Good afternoon. Thanks so much for taking my question. Can I ask about raw materials? Firstly, is EUR 100 million for this year completely fixed? If it's not, what are the sensitivities there, given that we have seen continued inflation, especially in the U.S.? Secondly, just looking at 2019 and from what you're seeing in terms of your component pricing, inflation or maybe lack of, we're hearing some interesting messages from China on that. Is there any ballpark figure you could provide on what kind of level we should worry about for 2019? Maybe it's just a quick follow-up on digital to previous discussions. Could you update us on how you're getting paid in digital and on the investment that you have been putting in and what we should look for in your reporting to see that? Is this the growth in services? Is it profitability?
That would be great. Thank you.
If I give first Ilkka about raw material, then I'll ask the second question after that.
Very good. Thank you.
Great.
First, raw materials. Your question was, I'll just summarize it. There's multiple questions at the same time. First on the question that how much flexibility there is still within 2018 on the raw material prices. As we said earlier that we lock our raw materials or actually component prices anything between three to six months forward, depending a bit about the component. Clearly for this second half of 2018, there's still some fluctuation that we expect in the fourth quarter. We haven't locked everything down, but we expect this EUR 100 million to be the best estimate for us. You're asking us what is the impact to 2019 with where we are with raw materials. It's too early to really say. It depends a bit about the product mix and how the remaining of the year goes.
As we see it now, then the best estimate would be that there's a slight headwind from raw materials still expected to 2019, but not at the scale we see it here in this year.
Got it.
Your question, how we get paid on digital. Well, we have many different types of digital services. Perhaps we start with the 24/7 Connected Services. That's clearly a service that we sell. Over time, as we ramp that up and that's going to be shown in our service sales in the maintenance business. However, we have also things that we sell in connection with new equipment. It's going to be a multitude of revenues coming from different sources in the future.
Maybe just a quick update on how that's progressed now that we're nearing two years of investment in this, and you've been rolling out 24/7 across the countries.
We said, what I'm very happy about is the feedback we get from our customers. I think what we hear in the market is that the solution we have, the right solution, is really differentiating us and customers are happy with it, and therefore pricing on that is quite good. It's always when you come with something totally new, it's something totally new to our customers and also our organization. What we are spending a lot of time is to speed up how quickly we sell and the volumes that we sell of this. I would say pricing and feedback is very good. I'm actually quite happy where we are. We have to remember that we are still at very early phase.
Got it. Thank you very much for your time both.
Thank you.
We'll go next to Antti Suttelin at Danske Bank.
Yes. Hi. On Chinese indicators, it's interesting to see the indicators you follow. I think aren't you missing one important indicator, namely starts? When I look at starts, the picture is completely different than the graphs you are showing. This is the third year of quite sharply improving starts. Don't you think that's a relevant indicator for elevator demand in China?
I think over the longer term, it's clearly a relevant indicator. How it comes through is one has to see, still we have to see that the total, if you look at floor area in progress, has stayed quite stable. It's clear that we don't come, our industry immediately when it starts, we come a little bit later in the cycle. I think why our sector has been stable is that still if we look at the total amount that is being constructed is pretty stable. Over the long term, yes, there's going to be a correlation to starts. We had to remember there was quite a sharp fall in starts for a couple of years, and now it's been recovering. You'll probably see a little bit smoother curve. I don't have an exact explanation how it's going to flow over to our industry.
Do you see a risk that all of a sudden elevator demand clearly takes off? One night, you wake up and it's full speed on elevator demand.
It'll be great.
Do you think that could happen?
I'm not going to speculate what's going to happen. I think what we see at the moment for this year, we see a quite a stable market because we still have to see that, as I mentioned, what are the important things in the market? It's clear that there is strong focus from the government on the quality of housing and how people live. We can also see very strong restrictions on purchases and also liquidity for developers is tight. That's what we see in the market, and I think that's why we expect the market to be stable or slightly down this year.
Yeah. Okay. Thank you.
Thanks.
We'll move next to Lucie Carrier at Morgan Stanley.
Oh, hi. Good afternoon, thanks for taking the question. The first one I had was actually around tariffs that have been so far announced and also the tariff which are being assessed at the moment as well. Additional one between China and the U.S. I was just wondering if you could give us some color in terms of how we could potentially impact your procurement into the U.S. and also if you are kind of concerned about some shortages in terms of your supply, your issue in terms of your supply chain. That's question number one, and then I'll ask the others.
I'll first say that we have to remember that the majority of our business in the U.S. in particular is maintenance or installation activities. It's clear that there will be some impacts on us and there is some impact from tariffs. We don't expect that to be material, but some impact. I don't know, Ilkka, if you want to comment on that in more detail.
It's not going to be still that impactful this year. Let's say EUR 10-ish million it would be my estimate in the impact. It's included in the EUR 100 million raw material that headwind that we've talked about.
Of course, we follow the situation very carefully all the time and make sure that we have the supplies that we need. I think it's still a reasonably fluid situation.
Understood. My second question was around the drop-through in the quarter. It seems that the drop-through this quarter was not as strong as what you had in the first quarter. Is there any color you can give us on that, whether this is coming from mix or a product or things you couldn't take into account this quarter that maybe are reported to the next quarter? It seems the drop-through was particularly low.
I don't think that there was a big difference when I look at. Margin impact was pretty similar Q1 and Q2. We had a stronger growth in Q1. Ilkka, do you have any other comment on that?
On a quarterly basis, there's so many fluctuation both country mix playing a part there and also business mix. It's hard to comment on a quarterly basis. We don't see a big change there.
Okay, thank you. The last question I would have, I was just hoping you could give us an update on the progress you made on your Accelerate program. If you could remind us what you're expecting in terms of the phasings, in terms of phasing for your savings. How much in 2018 and then 2019 and so on, please?
Yeah. As I mentioned earlier in the presentation, we are progressing with the Accelerate program exactly as we had planned. Quite small, very small impact this year. We're going to start to see the benefits as of next year.
We have the same estimate that we have had for the year. We're targeting having EUR 50 million of run-rate savings by the end of 2018. At the same time, we don't see a large impact in 2018 yet. We have to execute the actions that we're taking. We see that impact in 2019. A reminder, we still have work to be done to have the details available for 2019, 2020. Depends how the Accelerate programs are developing in the coming months and quarters.
Okay. Just to be clear, you are expecting in terms of savings to have at least EUR 50 million to benefit your EBIT but in 2019. Is that correct? Considering you're talking about annualized savings of
That's correct.
Okay. Yeah. At least EUR 50 million to benefit your EBIT in 2019.
Yes.
Yes.
Okay. Thank you very much.
We'll go next to Glen Liddy at JP Morgan.
Good afternoon. In your revenue growth, you're showing particularly strong growth in the maintenance market. Are there any particular issues that are driving such lively growth?
As Ilkka mentioned in the presentation, I think we have had a very stable growth in this. It's been varying between 5% and 6%, a little bit 6% plus. As we said, that 5% that's a pretty good growth in this business. If we get to 6%, that's a good growth in a stable maintenance business that we have. I think we're just executing very nicely on our business here, and we can see that the programs we have initiated over the past years is having a positive impact on growth. There's nothing special there. Good growth in Asia Pacific, but actually many European countries we're growing quite nicely as well.
Are you suffering much from rising wage costs, particularly in Europe and the U.S.?
Clearly, that is an impact, and one needs to constantly get more productivity. Clearly, wage cost growth has been higher this year than in past years, quite clearly higher. With that, you need to constantly drive productivity and pricing, and that we have done.
In China, there seems to be sort of ongoing consolidation of property developers. Is this resulting in them being tougher at negotiating, whether it be on price or terms and conditions at all yet?
It's clear that the top 100 developers are constantly taking market share in China. They have better access to financing in a very tight financing market. It's clear that the bigger developers have more professional, for example, sourcing organizations. On the other hand, we have very good position with them. They really understand the added value that you have, and we see it as an opportunity to work closer with these bigger developers. Clearly they are good and professional companies and act in that way. We see it as an okay thing, and we are growing nicely with them.
Are they significantly more likely to sign up to longer-term service agreements?
On average, yes. Yeah, they are more prone to also want to have service because they all have an important brand to also look after, and therefore they need good services and good functioning properties that they develop.
Okay. Finally, you said the margin in the order backlog is stabilizing. Is it still running below the margin that you're operating on for sales?
We are at pretty similar levels now.
Okay. Thank you very much.
We'll take our next question from Zexi Wu at Bank of America Merrill Lynch.
Hello. This is Zexi from Merrill Lynch. Just two quick question, please. First, you've seen the market share in China since the beginning of the year. Just wondering whether you could please tell us what's driving that. Is it because of the real estate developer consolidation, or you become more aggressive on pricing? That's question number one. I will ask question number two after that. Thank you.
Our market share will always fluctuate in markets quarter-to-quarter. First six months of this year, we have had a higher growth than the market overall in China. Yes, we have a good situation with the large developers that has probably helped. Overall, our objective in China in the past year or past years has been to primarily focus on market share in monetary value terms as the market has been stable or declining in a very competitive market. Again, we saw in the quarter that our performance, if you look at monetary value, was better than it was in units. In that sense, from that perspective, we are going in the right direction, but we have to remember that market share will always fluctuate quarter-to-quarter.
Okay. Thank you. That's very helpful. Second question, just need some clarification over the cost saving. I think you just said you're still guiding for EUR 50 million cost saving run rate at the end of this year, I think. Is that still the case, or?
That is still the case. Run rate savings by end of the year of EUR 50 million.
By the end of the year. EUR 100 million by 2020, I think.
By 2020, yes.
Okay. Thank you. Maybe one quick follow-up is, I think you have a plan in Mexico, if I remember correctly. How do you think the situation over there, given current trade war scenario?
Currently, that is operating fine, and we have to see how the situation develops. Yeah, we have a component factory in Mexico. As I mentioned earlier, I wouldn't speculate on what's going to happen and what the development's going to be. Of course, we're looking at the situation and following the situation very closely.
Got it. Thank you so much.
Thank you.
We'll move next to Dirk Schwende at Berenberg.
Yes. Good afternoon. Maybe just start with France. We're hearing housing starts and house permits are actually down year-to-date. I'm just wondering if you could remind us of what your French exposure is and if you've seen any of this into your new equipment orders.
So far, I've seen actually a recovery in the French market. Housing starts and permits will always fluctuate. We have a very strong position in France. It's a significant important market for us, one of our top five markets. Still, as we know that we don't have individual country exposures that are very big apart from China and U.S. So far, we've actually seen a positive development in the market. I think housing starts usually fluctuate a bit more than actual activity. Sorry, the permits fluctuate a bit more than actual activity.
Okay. Thank you. Maybe just to go back to the first question on this call. I think you tried to explain basically the disconnect between construction activity in China and elevated demand in China. Henrik, do you think that the elevator intensity is actually the main explanation for this? Is elevator intensity coming down in China?
I don't think elevator intensity is going down. It's actually come up a lot over the past years. It's probably more stable now. I think if you look at just total construction in progress, that is stable. If you look at total number of apartments that have been completed, that's actually down. That mirrors our industry quite well.
Okay. Finally, just a housekeeping kind of question. You usually comment on the China service exposure and the growth rates there. I think last time you said it's slightly above 10%. Is that still the case? If you can just give us just the growth rates there, please.
It's continued to grow in double digits, it's a similar development we've seen before, good growth rates. If you look at number of units, they continue to grow much stronger than that.
Thank you very much.
We'll take a follow-up from Andre at Credit Suisse.
Yes. Thanks very much for taking the follow-up questions. Can I talk about China a little bit? Firstly, on the pricing side, are you not a little bit disappointed that there's not been more of a follow-through on the price increases from more mid-tier players and maybe from the Japanese peers of yours? Not to comment on any specific competitors, I know you don't do that, but generally, everyone seems to be in the same boat. Everyone has got margins down because of raw materials and the kind of pricing legacy. It just seems strange that there is a bunch of European companies or Western companies pushing for it and there's no follow-through from the rest of the market.
We can see it is a very competitive market. As you say, everyone clearly is suffering from increased input costs. We can see that number of the midsize and smaller players are under quite a lot of pressure financially as a result. It's always a competitive market. We can't comment, we can't say what other people do or should do. What we can control is what we do ourselves, and I think our direction has been pretty clear.
Do you see the competitive landscape changing at all in terms of the rate of exiting versus joining the industry? We obviously follow the large players, but on the smaller tail?
Yeah. Many of the smaller players, I don't think it really matters if there are a few exiting or entering. We expect that the China market will continue to be clearly the world's largest market. We are very happy to be the market leader there. It's going to be the world's largest service market in the coming years, both in units and in value. I think we have a great position here. It's clear that a lot of other people see the attractiveness of Chinese market the same way, that's why it is a very competitive market, there's no reason to believe competition will decrease there. That's why we continue to drive and improve our business.
Got it. On the non-residential part of the market, particularly on the infrastructure side where we don't have as much data, what are you seeing in terms of the market development for elevator orders? I think last year was a very good year, there's a bit of risk of the sort of boom starting to run out of steam whether you agree with that or not. Also connected to that, I think you launched a new offering on escalators specifically in China, if I'm not mistaken. Is that yielding results for you already or is that too early to say?
First I would say that if you look at the overall infrastructure expenditure in China, it was a lot of focus on that in the past years. We're probably seeing that that's declining overall a bit. We're probably going to start seeing that in our market. We have to remember that it is not a huge segment for our industry. It is an important segment, but by far not the largest. Yes, I think we have strength in our position. The infrastructure offering is not only for China. We have a lot of infrastructure opportunities in the coming years in rest of Asia, actually, lots of them there in Europe, in Middle East. Infrastructure is going to be important, I think we are strengthening our position there as we speak, as we can see already.
Okay. Just to calibrate, infrastructure is about sort of 10%-15% of the market by value and towards the low end of that in units. Would that be right ballpark?
Yeah. About. Roughly.
Great. Last question, just staying on your business in China specifically, where we obviously have idea on the number of units over 100,000 and in maintenance base of, I think now surpassing quarter of a million. If you have an opportunity to add something that is kind of a third of the size of your business there, do you think that would be immediately synergetic or is it really too much of an integration exercise given how spread out the country is and how quickly everyone is growing there with various kind of structures? If we could talk about that.
If I look at China, as you know, that our focus in China specifically has been organic growth. The reason we have focused so much on organic growth in China is that there's plenty of it there, particularly on the services side. We want to keep Razor focused on that. I think if we look at our position in China, there's been some of the smaller mid-size brands possibilities to acquire them, but that hasn't been interesting to us given the position we have with KONE and GiantKONE. I think we cover the market very nicely. I think we have a good position here. Would the bigger service portfolio be interesting to us? Yes, if it would be a harmonized and good portfolio. At the moment, we, in China specifically, focusing very much on organic growth.
Got it. Thank you very much for your time.
Thanks.
We'll go next to Lucie Carrier at Morgan Stanley.
Hi. Hello again. Thanks for taking my follow-up. The first one I had was around your price initiative in China. It seems indeed that you are increasing the prices more than what we see at some of your competitors. However, we've also seen that you've been outgrowing. In terms of your pricing strategy at the moment, are you still pushing for further price increase because you think you have sufficient leverage to do so? You think that considering what you have achieved already and have balanced a price and performance at the moment, you're probably going to slow on the price initiative? That's question number one.
As always, we don't comment on our commercial strategies going forward. I think the only thing I would say that it's clear that in the China market, for everyone, us included, that price increases are important. How we're going to drive our company commercially going forward is not something we comment on.
My second question was a follow-up actually on the question you had earlier on the start. The start which have been actually quite strong since the second half of 2016. First of all, you explained very well that there is some delay for you in terms of the elevator when it comes into the building. Do you think as well that maybe we hadn't seen momentum in the elevator market because the inventory in the building channel were quite high and could the strength in the start give you some leeway even into momentum in 2019, considering that you mentioned the inventories in the building channel are now much healthier. The start could proceed considering the inventories are low.
No. I think we have to see. It's too early to comment on 2019. Clearly, the demand for elevators and escalators is totally linked to overall construction activity. I think we need to follow how construction activity develops, how well these starts translate into higher activity there. That is what's going to drive. I don't have a perfect answer or visibility into how the starts are following through. We also have to see that things that are holding back growth, as said, are the restrictions on property purchases, as well as a very tight liquidity situation for developers. We don't see that changing anytime soon.
Thank you.
We'll go next to James Moore at Redburn.
Good afternoon, everyone. Thanks for taking the questions. Apologies, I joined a little late. I apologize if there's any repetition, China, I wonder if I could start with order pricing. I think you commented that quarter-on-quarter sequential pricing's stable, year-on-year order pricing is up slightly, which is sort of up 2%-5%, which is quite a big band. I wondered if you might be able to help us a little more on that. If you could give us a number, whether 1%, 2%, 3%, it'd be great. If not, can you possibly say if the year-on-year percentage number in Q2 was the same, better, or worse than the year-on-year number you saw in Q1 in Chinese order pricing?
Not that different. We're talking about a few percentage points. It's not zero, it's not five, somewhere in between. You also remember that there are so many different products, there are so many different variations. You have to look at the total situation. I think what we've seen is that we've been able to slightly improve our pricing and on a year-over-year basis, as Ilkka mentioned already, that has helped us stabilize our margins. Clearly we have some way to go to get back to margins where we were some years ago.
Thanks.
Clearly it's something where the momentum and the direction is more important than the exact number because like-for-like pricing is difficult with the product mix as well as then within the products even different number of floors and so on. I think the direction is the more important part there.
I appreciate that. Thank you. Maybe I could switch topics. With the recent events at your German peer, given you've been very open in the last few years about your interest in a possible combination, I wonder if I could ask a conceptual question about synergies that could be possible in a potential combination of large elevator manufacturers, beyond the normal SG&A fixed cost savings, which every merging entity would talk about. Again, this is a conceptual question. Where would be a good area to find synergies in that sort of combination? Are we talking service technicians or somewhere else?
Well, first, as you know, that we don't comment on rumors and we haven't speculated on any potential synergies in any potential combinations. I think what we have said consistently is that we think consolidation in our industry makes sense
There are a number of different opportunities for that. To take a little bit of a background is that about half of Europe's service base is served by small and mid-size players. A lot of potential there. We have a lot of Japanese players, Chinese players, mid-size German, Spanish and all of that. A lot of different opportunities for further consolidation, what we're driving with a lot of small acquisitions every year. In these small acquisitions, it's density of maintenance base that drives opportunities.
Thank you very much. Again, switching topics. On raw materials, you've maintained your view for this year, but at latest commodity prices, I know it's early, but could you give us an idea as to what the spillover could be at current commodity prices into next year? Is it a similar magnitude to this or is that changing?
Well, it's very early to comment 2019. We still have 2018 to finish first and country product mix and obviously raw material prices will change by the time we get there. As we see the world now, if you look at the raw materials where they are, it's reasonable to assume that there's a slight headwind in 2019, but not at the magnitude that we're seeing this year.
Thank you. Lastly, if I may, the Chinese housing sales or transaction growth rate is running quite a bit below starts year to date. Recently, house purchase restrictions have tightened a fair bit. Some others in different construction-based industries, maybe locks, have talked about some new weakness in Chinese demand. You're obviously not seeing that in the current quarter, but are you seeing any new weakness in conversations, tendering activity out in the market, or is it steady as she goes on that front?
I think our outlook for the full year of the market is what we see stable or it could be slightly down. Pretty much as we've seen for the first half of the year.
Thanks, Henrik.
We'll move next to Xing Liu at UBS.
Hi, it's actually Guillermo Pena from UBS. Same as James, I joined a little bit late, so I apologize if this has been asked before. Of all the questions that have been asked, I have actually two more. One is related to the renminbi. Is your current guidance on EBIT on the currency reflecting June end renminbi or an average for June? Second, whether you could give a sensitivity to renminbi fluctuation and your operating profits. I have a follow-up as well.
It's in our guidance as of June end what we know.
Any big difference to where we are today?
No big differences there.
Perhaps slightly weaker, but it's not in the big scheme of things.
Is it fair to assume that a 10% depreciation on renminbi from here would impact your operating profits by 5%, roughly speaking?
I don't think we've given a sensitivity exactly there. It's clear that China is a profitable market for us, so therefore a weaker renminbi has some impact on our profitability. Overall, as you've seen over the years, it hasn't had a major impact on our profits. It's been similar on top line and bottom line, perhaps a little bit more in China on bottom line and top line.
Okay. Last but not least, could you comment a little bit on the current situation in after market in Southern Europe? In the past, I know that you commented on the competition levels as being high, but I wonder whether that situation is increasing in terms of competition or it's stabilizing a bit now.
Not big differences on development of the market, pretty similar to what we've seen.
Okay. Thank you very much for your time.
Thank you.
Answers.
We'll go next to Mattias Holmberg at DNB.
Hi. Thank you. It's kind of a detailed question here. You now guide for FX to have a negative impact of EUR 35 million on EBIT in 2018, which is EUR 5 million less than the previous guidance. My question is simply, given that you have left the EBIT guidance for the group unchanged at EUR 1.1 billion-EUR 1.2 billion, does this imply that you have now assumed there is slightly weaker underlying profitability, i.e., excluding FX, or is this EUR 5 million adjustment on the FX guidance sort of within the margin of error on the group EBIT guidance? Thank you.
I think it's the latter, margin of error.
Thank you very much.
We'll go next to Omed Wasseri at Jefferies.
Yes, good afternoon. Thanks very much for taking my questions. Are you able to update us on the latest conversion rates you're achieving in China with respect to the service maintenance? If you are taking share, is it on tier 1 and tier 2 players installed base or is it on the local?
Well, first our conversion rates have slightly improved, not material, but slightly improved, particularly with the KONE brand. That's good. We can see that our customers are more and more wanting to have a good and high-quality service, which we do provide. Let's remember that when we take share here, when we increase our conversion rates, it's on KONE equipment. Actually the dynamics in China are slightly different than many other markets. Remember that in Europe and North America and many other Asian markets, a big part of our portfolio is other brands than KONE elevators. In China, virtually everything is KONE elevators. The competition there are the small and mid-size players. We don't necessarily compete with the big other OEMs on the service base. It's with the small independents that we compete there.
Thank you. Are you able to provide perhaps an updated range of conversion rates being achieved of late, or is that not available?
Yeah, I would say the KONE brand is more than 60%.
Lovely. Thanks very much. That's all from me.
Sure.
That does conclude the question and answer session. At this time, I'll turn the conference back over to management for any closing remarks.
Thank you. Thanks for all the questions and the discussion. I think just to summarize where we're going, I would say there are many good things in our development with the growth, both in orders received, our maintenance business, how that's growing. I would say that the actions we're taking to improve our margins are taking us in the right direction, although it's clear that we're not happy where we are on margins. I think many of the fundamentals to improve are there, and also some of the longer-term fundamentals like loyal customers and increasingly motivated employees are also there. With that, I would like to thank you all for participating and speak to you next quarter again. Thank you.