Afternoon, and welcome to KONE's Q2 Results Presentation. My name is Sandra Carre, and I'm the Head of Investor Relations. I have here with me today, as usual, our President and CEO, Henrik Anhut and CFO, YOKAARA. Henrik will first go through the Q2 highlights. Ilkka will then talk a bit in more detail about the financials, and 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, and 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. Highlights for the Q2 of this year, clearly, that we had a good growth in our orders received, and they grew in all regions, in all businesses and with now stable margins. That's good.
Also, 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. However, 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 bit later more.
I'm also happy to share some good news on results from our annual customer and employee surveys. Let's go straight into the highlights of the numbers for the Q2. As I mentioned already, the highlight is really the growth in our orders received that were about €2,100,000,000 and growth of 6.4% in comparable currencies. In a market that is pretty stable in monetary value, particularly in new equipment, I think this is quite a good achievement. So that's, I'm happy about.
Our order book continues to be strong at close to €8,000,000,000 and our sales now about €2,300,000,000 or growth of 3.2%. Our EBIT, SEK 280,500,000. And if we look at our adjusted EBIT, where we exclude the costs from the Accelerate program, and that was $300,400,000 compared to $335,800,000 a year ago. We can see that our EBIT margin declined from 14.4% to 12.9%. And it's clear that this is the part that I'm not happy about in the result.
What was good in the quarter, though, was our cash conversion and cash flow at EUR 366,200,000 Earnings per share, dollars 0.43 compared to EUR 0.52 a year ago. But as we always said, 1 quarter is a very short period of time, and it's always better to look at it at slightly longer period of time. And now we have, of course, half a year behind us. And here, I would say the message for 6 months is very much the same as it was for the Q2. Good growth in orders received at 6.6 percent in comparable currencies and in sales 6.5%, which is quite a good growth number in this environment.
EBIT, dollars 4.92 or adjusted EBIT, dollars 5.19 compared to $582 a year before, a margin of 12% in the 1st 6 months compared to 13.6% a year ago. And cash flow, dollars 5.45 is 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 and $0.77 per share EPS compared to $0.92 a year ago. But as I think most of you know, the way we measure our success is through our 5 strategic targets. And on 2 of them, we have some good updates and some good news. And those relates to our first two targets, having the most loyal customers and Kona being a great place to work.
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 Kore. Very important to have loyal customers and motivated and engaged employees. If I go a bit more in detail into this, if I look at our loyalty that we 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, it is meaningful, It's that KONE, we have great products, high quality products. Also, they talk a lot about KONE's employees, service minded and want to do a good want to provide good outcomes for our customers. And also very frequently comes up, well, these are 3 most frequent ones, and the third one is that when KONE promises something, then we deliver. And these are very, very important basic fundamentals that are strong in KONE and very important fundamentals when we're driving positive change in the company. So that's, 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. It shows that it's meaningful and that it matters. Also, employee engagement is on a strong level.
And what I'm particularly happy about are some very positive results from questions that relate to our direction, our strategy and our change. And that is very, very important in an 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. So I think we have many of the fundamental aspects there. So these 2, 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 front lines to spend even more time at the customer interface, driving positive change and bringing our vision to our customers and 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. So also, we are progressing with this program as we have planned, and that's good. So 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. So 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 Latin Africa growing slightly. The North America growth from a good level. Europe, Middle East and Africa continued recovery in South Europe and growth in the Middle East despite overall turbulence in the region.
Central and North Europe stable at a pretty good level. In Asia Pacific, slight growth, and it's really India and a few Southeast Asia 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 yes, overall growth.
And what I'm happy about is Asia Pacific markets continue to grow well given our strong positions in those markets. So 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. And that has resulted in a situation where housing inventory levels have improved over the past couple of years quite significantly. So we can see that, overall, are at the pretty healthy level.
So why is our market not growing more? Why are then house sales stable in lower tier cities? Are they declining in higher tier cities? Well, there are many reasons for that. First, it's clearly the restrictions that are in place in over 100 cities today on property purchases.
And 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. And we can also see this in the output. So if we look at the total construction volumes in China, they have been pretty stable now in the first half of the year. And actually, if you look at the number of completed buildings, those have been slightly down. And then you can ask, so why are total real estate investments growing so nicely at 9%.
Where the main driver behind that is increases in land prices and impacting this number. And with all of this, we have seen a pretty stable market for elevators and escalators, and that situation we expect to continue. So that's about our markets and our overall development, a little bit more in-depth on China. And 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 2nd quarter results call. And as normal, I'll go through the financials a bit more in detail and start with orders received. Orders received in 2nd quarter were SEK 2,100,000,000, which is 3.3% growth on a reported basis and 6.4% growth on a comparable basis. And I'm happy to see the development that started in Q4 last year, now with a strong growth in orders continuing in this quarter. Also, we saw broad based growth, so 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. So in an increasing input material environment, that has meant that we have increased our prices to cover that increase in the input materials. And if we look at China in more detail, then our orders measured in units grew there slightly. But when measured in monetary value, we saw a clear growth there. Pricing like for like base fees contributed positively, and the mix was stable compared to comparison period a year ago.
And moving on to sales. So sales were SEK 2,300,000,000 in the quarter. On a reported basis, slight decline, but on a comparable basis, 3.2% growth. And as we said already in the Q1 result announcement that we saw exceptionally strong growth in Q1 due to the number of starts and now are seeing a more stable first half with 6.5% growth
on a first half basis.
If 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 of 1.3%. From a business line perspective, maintenance had a strong 6.3% growth. If you 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. Also, modernization contributed positively, 3.2% and as well as new equipment, 1.4%. Then looking at our EBIT development.
So adjusted EBIT was SEK 300,000,000 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 11% CHF 11,000,000 impact to our results. 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. And clearly, we're seeing those actions having an impact and having an impact to improve this outcome.
Then finally, cash flow. So our cash generation was strong in the quarter, landing the cash flow at SEK 366,000,000. So the cash conversion clearly improved from where we were in the first quarter. And as we look at the first half as a whole, the main driver compared to last year's comparison period is the results. So the EBITDA contributing negatively to our cash flow.
At the same time, we see that the working capital continues to improve and contribute positively to our cash flow. So good to see that we were now continually positively developing the cash conversion for KONE. Now 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, Oscar. So let me wrap up with our market outlook and our KONE business outlook. First, I would say effectively the same that we had in Q1. New equipment, we expect that the market in China is effectively stable or declined slightly in number of units and 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 strong growth in Asia Pacific. And for our business outlook, here, we expect our sales to be between to grow between 3% to 7% in comparable currencies, and we continue to expect our EBIT to be in the range of CHF 1,100,000,000 to CHF 1,200,000,000 assuming that translation exchange rates stay at the level where they were at the end of June. If this is the case, then the headwind from currency is going to be about €35,000,000 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. And of course, we continue the actions, but we can see that we're making progress on that.
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 burning our results, and they are unfortunately more significant still at the moment. Price pressures we've already seen in orders received in China. Raw material cost headwind of about $100,000,000 and then the translation exchange rate of about €35,000,000 So that is about our outlook.
But then before we go to questions, to summarize, I'm very happy about the clearly improved growth momentum we have in order to see it. 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, that's productivity, that's cost, and we're progressing on all fronts.
We can see that the continuous good growth we have in our Services business is a result of the differentiation. We can see a clear link with the progress of our service transformation programs and growth in services, so we can see that we are definitely going in the right direction. And also what is important in an environment like this is to have happy and loyal customers and motivated employees. And 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. So now we can go to the questions. And as we have no audience here today, we can go straight to the telephone line. So operator, please. And please ask one question at a time.
Thank you.
Thank you. We'll go first to Andre Kukhn at Credit Suisse.
Good afternoon. Thanks so much for taking my question. Can I ask about raw materials? Firstly, is EUR 100,000,000 for this year completely fixed? And if not, what the sensitivity is there given that we have seen continued inflation, especially in the U.
S? And 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 we should what kind of level we should worry about for 2019? And 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.
If I give first Ilkka about raw material, and then I'll ask the second question after that.
Very good. Thanks. So first, raw materials. Your question was I'll just summarize it. There's multiple questions at the same time.
So first on the question that, hey, how much flexibility there is still within 2018 on the raw material prices. So as we said earlier that we lock our raw materials or actually component prices anything between 3 to 6 months forward, depending a bit about the component. And so clearly, for this second half of twenty eighteen, there's still some fluctuation that we expect in the Q4. We haven't locked everything down, but we expect this SEK 100,000,000 to be the best estimate for us. Then you're asking us what is the impact to 2019 with where we are with raw materials.
So it's too early to really say. It depends a bit about the product mix and how the remaining of the year goes. But 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.
And then your question, how do we get paid on digital? Well, we have many different types of digital services. Perhaps we start with the 20 fourseven connected services. That's clearly a service that we sell. And over time, as we ramp that up, 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. So it's going to be a multitude of revenues coming from different sources in the future.
And maybe just a quick update on how that's progressed now that we're nearing 2 years of investment in Nissan you've been rolling out 20 fourseven across the countries?
As 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, or the 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 the how quickly we sell and the volumes that we sell of this.
But I would say pricing and feedback is very good. So I'm actually quite happy of where we are. But we have to remember that we are still at very early phase.
Got it. Thank you very much for your time, guys.
We'll go next to Andy Suttelin at Danske Bank.
Yes. Hi. On Chinese indicators, it's interesting to see the indicators you follow. But 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.
It's really this is the 3rd 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 I mean, still, we have to see that the number the total, if you look at floor area in progress has stayed quite stable. And it's clear that we don't come our industry immediately when it starts. We come a little bit later in this cycle. So I think why our sector has been stable is that the total still, if you look at the total amount that is being constructed, it's pretty stable.
Then over the long term, yes, there's going to be a correlation to starts. But 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. But I don't have an exact explanation how it's going to flow over to our industry.
But do you see a risk that all of a sudden elevator demand clearly takes off? 1 night, you wake up and
it fits full speed on elevator demand.
Will 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 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. So 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.
We'll move next to Lucie Carrier at Morgan Stanley.
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 tariffs which are being assessed at the moment as well, so 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 of in terms of your supply your issue in terms of your supply chain? So that's question number 1, 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 if you want to comment on that in more detail.
It's not going to be still that impact for this year. Let's say, euros 10,000,000, it would be my estimate in the impact. And it's included in the $100,000,000 raw material that headwind that we've talked about.
But of course, we follow the situation very carefully all the time and make sure that we have the supplies that we need. So 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 Q1. Is there anything any color you can give us on that whether this is coming from mix or product or things you couldn't take into account this quarter that maybe are reported to the next quarter? But it seems the drop through was particularly low.
I don't think that there was a big difference when I look at I mean, margin impact was pretty similar Q1 than Q2. We had stronger growth in Q1. But Arun, Craig, 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. So it's hard to comment on a quarterly basis. We don't see a big change there.
Okay. And then 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. And 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?
Yes. So as I mentioned earlier in the presentation, we are progressing with the program exactly as we planned, quite small very small impact this year. We're going to start to see the benefits as of next year.
And we have the same estimates that we have had for the year. So we're targeting having EUR 50,000,000 of run rate savings by the end of 2018. At the same time, we don't see a large impact in 2018 yet. It's really we have to execute the actions that we're taking, and then we see that impact in 2019. And then a reminder, we still have work to be done to have the details available for 2019 2020, depends on how the programs are developing in the coming months and quarters.
Okay. So just to be clear, you are expecting in terms of savings to have at least EUR 50,000,000 to benefit your EBIT in 2019, is that correct? Considering you're talking about annualized savings of okay, yes. So at least EUR 50,000,000 to benefit your EBIT in 2019?
Yes.
Okay. Thank you very much.
We'll go next to Glenn Liddy at JPMorgan.
Good afternoon. In your revenue growth, you're showing particularly strong growth in the maintenance market. Are there any issues that are driving such lively growth?
As Yuka 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. And as we said, that 5% is a 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.
And do you suffering much from rising wage costs, particularly in Europe and the U. S?
Clearly, that is an impact, and one is to constantly get more productivity. Clearly, wage cost growth has been higher this year than in past years, quite clearly higher. So with that, you need to constantly drive productivity and pricing, and that we have done.
And 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 big top 100 developers are constantly taking market share in China. And it's they have better access to financing in a very tight financing market. And it's clear that the bigger developers have more professional, for example, sourcing organizations. On the other hand, we have a 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, but 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. But yes, 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.
Thank you. And finally, I mean, 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. Thanks very much.
We'll take our next question from Dexter Wu of Bank of America Merrill
Lynch. Hello. This is Shi from Merrill Lynch. Just two quick questions, 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? So that's question number 1. I will ask question number 2 after that. Thank you.
Our market share will always fluctuate in markets quarter to quarter. 1st 6 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, very competitive market.
And again, we saw in the quarter that our performance, if you look at monetary value, was better than it was in units. So in that sense, we are going 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. That's very helpful. Then second question, just need some clarification over the cost saving. Think you just said you're still guiding for JPY 50,000,000 cost saving run rate at the end of this year, I think. But so is that still the case?
Or
That is still the case. So run rate savings by end of the year of €50,000,000
By the end of the year and €100,000,000 by 2020, I think?
By 2020, yes.
Okay. Thank you. Maybe one quick follow-up. So 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 develop. Yes, we have a component factory in Mexico. As I mentioned earlier, I think it's I wouldn't speculate on what's going to happen and what the development is going to be. Of course, we're looking at the situation and following the situation very closely.
Got it. Thank you so much.
We'll move next to Eric Spandy 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, it's 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 5 markets. But still, as we know, that we don't have individual country exposures that are very big apart from China and U. S. But 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 then fluctuate a bit more than actual activity.
Okay. And then 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 elevator demand in China. But 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 and that is stable. If you look at total number of apartments that have been completed, that's actually down.
And that mirrors our industry quite well.
Okay. And then 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? And if
you can just give us just the growth rates there, please? It's continued
to grow in double digits. So it's a similar development we've seen before, so good growth rates. And if you look at number of units, they continue to grow much stronger than that.
And we'll take a follow-up from Andre at Credit Suisse.
Yes, thanks so 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 kind of 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?
I mean, we can see it's a it is a very competitive market. And as you say that everyone clearly is suffering from increased input costs. So we can see that number of the midsized and small 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.
And do you see the competitive landscape changing at all in terms of kind of the rate of exiting versus joining the industry? I mean, we also followed it large players but on a smaller tail.
Yes. So many of the smaller players, I don't think it really matters if there are a few exiting or entering. I mean 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 coming years, both in units and in value.
So 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, and that's why it is a very competitive market, and there's no reason to believe competition will decrease there. And that's why we continue to drive and improve our
business. Got it. And on the nonresidential part of the market and particularly on the infrastructure side where we don't have as much data, what are you seeing in terms of the market development for Elevate orders? I think last year was a very good year, so there's a bit of risk of the sort of boom starting to run out of steam, whether you agree with that or not. And 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 we 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. But we have to remember that it is not a huge segment for our industry. It is an important segment, but not by far not the largest.
Yes, I think we have strength in our position. I think we are and 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. So infrastructure is going to be important, and I think we are strengthening our position there as we speak and that we can see already.
Okay. And just to calibrate, infrastructure is about 10%, 15% of the market by value and towards low end of that in units. Would that be right ballpark?
Yes, about, roughly.
Great. And last question, just staying on your business in China specifically, where we obviously have idea on the number of units, around 100,000 and maintenance base of, I think, now surpassing 0.25 1,000,000. 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. And 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, and we want to keep razor focused on that. And if we look at our position in China, there's been some of the smallormidsized brands possibilities to acquire them, but that hasn't been interesting to us given the position we have with KONE and Giant KONE. I think we cover the market very nicely. I think we have a good position here.
Would a bigger service portfolio be interesting to us? Yes, if it would be a harmonized and good portfolio. By the moment, we in China specifically focusing very much on organic growth.
Got it. Thank you very much for your time.
Thanks.
We'll move next to the security of Morgan Stanley.
Hi, hello. 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.
Are you going to I mean, 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? Or you think that considering what you have achieved already and have balanced price and raw mats at the moment, you're probably going to slow on the price initiatives. So that's question number 1.
I mean, 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. But how we're going to drive our company commercially going forward is not something we comment on.
Okay. And my second question was a follow-up actually on the question you had earlier on the start and the start which have been actually quite strong since the second half of twenty sixteen. Do you think that well, 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. But do you think as well that maybe we hadn't seen momentum in the elevator market because the inventory in the channel in the building channel were quite high. And could actually 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.
And so the starts could proceed considering the inventories are low.
So 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. So 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. So I don't have a perfect answer visibility into how this is going to the starts are falling through. But 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.
And we don't see that changing anytime soon.
We'll go next to James Moore at Redburn.
Yes, good afternoon, everyone. Thanks for taking the questions. Apologies, I joined a little late, so I apologize if there's any repetition. But China, I wonder if I could start with order pricing. I think you commented that quarter on quarter sequential pricing is stable, but year on year order pricing is up slightly, which is sort of up 0% to 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 would be great. But if not, can you possibly say if the year on year percentage number in the second quarter was the same, better or worse than the year on year number you saw in the Q1 in Chinese order pricing?
Not that different. I mean, we're talking about a few percentage points. It's not 0, it's not 5, somewhere in between. So you also remember that there are so many different products. There are so many different variations, so 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, that has helped us stabilize our margins. But clearly, we have some way to go to get back to we want to get back to margins where we were some years ago.
And clearly, it's something where the momentum and the direction is more important than the exact number because it is like for like pricing is difficult with the product mix as well as within the parks even different number of floors and so on. So it's I think the direction is the more important part there.
I appreciate that. And maybe I could switch topics. With the recent events at your German peer and given you've been very, very open in the last few years about your interest in the 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. But beyond the normal SG and A fixed cost savings, which every merging entity would talk about, and 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, we don't comment on rumors, and we haven't speculated any potential synergies in any potential combinations. I mean, I think what we have said consistently is that we think consultation in our industry makes sense. And there are a number of different opportunities for that. Let me take a little bit of a background is that about half of Europe's service base is served by small and midsized players, a lot of potential there. We have a lot of Japanese players, Chinese players, midsized German, Spanish and all of that.
So a lot of different opportunities for further consolidation, what we're driving with a lot of small acquisitions every year. And in these small acquisitions, it's density or maintenance base that drives opportunities.
Thank you very much. And again, switching topics. On raw materials, you've maintained your view for this year. But at latest commodity prices, and 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. But 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 that the magnitude that we're seeing this year.
Thank you. And lastly, if I may, the Chinese housing sales or transaction growth rate is running quite a bit below starts year to date. And 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 obviously not seen 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, but pretty much as we've seen for the first half of the year.
We'll move next to Xing Liu at UBS.
Hi, it's actually Guillermo Peigne from UBS. Same as James, I joined a little bit late, so I apologize if this has been asked before. But for all the questions that I have been asked, I have actually 2 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?
And second, whether you could give a sensitivity to renminbi fluctuation and your operating profits? And I have a follow-up as well.
So we it's in our guidance as of June end what we know.
And any big difference to where we are today? No big differences there. So slightly weaker, but it's not in the big scheme of things.
And is it fair to assume that a 10% depreciation on NIMBY 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. But overall, as you've seen over the years, it hasn't had a major impact on our profit. So it's been similar on top line and bottom line, perhaps a little bit more in China on bottom line and top line.
Okay. And last but not least, could you comment a little bit on the current situation in aftermarket 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 is stabilizing a bit now?
Not big differences on what's been on development of the market. So pretty similar to what we've seen.
Okay. Thank you very much for your time. Thank you. No
answers. We'll go next to Matthijs Holmberg at DNB.
Hi, thank you. So it's kind of a detailed question here, but you now guide for FX to have a negative guidance. And my question is simply given that you have left the EBIT guidance for the group unchanged at EUR 1,100,000,000 to EUR 1,200,000,000, Does this imply that you have now assumed a slightly weaker underlying profitability, I. E, excluding FX? Or is this EUR 5 1,000,000 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.
And we'll go next to Omid Vazari 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? And if you are taking share, is it on Tier 1 and Tier 2 players installed base? Or is it on the locals?
Well, first, our conversion rates have slightly improved, not material but slightly improved particularly with the KONE brand. So 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, in Europe and North America and many other Asian markets, a big part of our portfolio is other brands than KONE elevators. But in China, virtually everything is KONE elevators. So the competition there are the small- and midsized players. We don't necessarily compete with the big other OEMs on the service base. So it's with the small independents that we compete there.
And are you able to provide perhaps an updated range of conversion rates being achieved of late? Or is that not available?
Yes, I was at the corner. Brian, it's more than 60%.
Lovely. Thanks very much. That's all
from me.
Sure. And 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, and 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. And I'd 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. But 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. So with that, I would like to thank you all for participating and speak to you next quarter again.
Thank you.