Afternoon, and welcome to Ponex Q1 2018 Results
Webcast.
My name is Esili Ponex, and I'm from the Investor Relations team. I have here with me our President and CEO, Henrik Anruth our CFO, Jorgka Hara and Head of Industrial Relations, Sam Nakaye. We will start with Henrik presenting the Q1 highlights and also the development in the market environment. After that, Ilkka will take us through the numbers. We will finish with Henrik presenting the market outlook and the business outlook.
After the presentation, we will have time for your questions. I'd kindly ask you to limit your questions to one question at a time. Let's get started. Henrik, please.
Thank you, Richard, and welcome also on my behalf to our Q1 results webcast. It's again my pleasure to present to you our progress during the Q1 of this year, and we have a lot of interesting news to share. And if we straight go into the highlights of how we developed during the Q1 of this year, I'd like to start with the fact that we had a solid and good growth in our orders received on a broad basis with stabilizing margins. This is really good news. Our profitability continues to be burdened by a number of headwinds.
That's, of course, something we are not happy about. We'll go into that in more detail as well. We are seeing good progress in how we are driving our differentiation from our competition to add better value to our customers, and we will talk about that as well during this webcast. But to dive straight into the highlights of the numbers. Here, clearly, the highlight is the strong orders received that we had in Q1.
Our orders received were just over €1,900,000,000 In comparable currencies, they grew by 6.8%. We can see though that the strengthening of the euro has a very significant impact on our reported numbers. On a reported basis, they actually declined 0.2%. We continue to have a strong order book, about EUR 7,800,000,000 and in comparable currencies, that's also grown slightly year over year. Our sales, I would say, call it exceptionally strong growth in Q1, just over €2,000,000,000 and 10.6% growth in comparable currencies.
Our EBIT was now DKK211,500,000 or the adjusted EBIT DKK218,300,000 compared to $245,800,000 the year before. It is clear that we are not satisfied with the level of our EBIT and also the fact that our EBIT margin declined from 12.6% to 10.9%. It's something we are continuing to take action to improve this, and we continue to see now good progress in that. Also, our cash flow declined and was €179,000,000 compared to a strong €305,000,000 last year. Ilkka will talk more about this.
EPS, €0.33 compared to €0.40 a year ago. As we all know, our markets are changing, customer expectations are changing. What I'm very happy about is the continued energy and positive forward looking drive I can see throughout Kone in developing Kone going forward. And that's I'm very pleased about, and I think a big thanks goes to all of our employees for the great job they continue to do to develop KONE into even better direction and drive our differentiation. If I then look at the Q1 business highlights.
Orders received growth, I talked about that, how it grew in all regions and all businesses. What I'm very happy about is that the growth was broad based, quite even strongest was in Asia Pacific outside of China, where we had very strong growth. And also the fact that 2nd quarter in a row now, we started to see a stabilization of our margins in our orders received. We can see that the actions we are taking on improving our pricing are bearing fruit. We also had, again, a very solid development in our maintenance and modernization business.
We continued good growth in both businesses. Perhaps the highlight here is that when we look at Europe and particularly Central North Europe, we can see that the good development in new equipment business now for a few years is starting to also be reflected in the maintenance business. And we can see an improvement in maintenance prices, particularly in Central and Northern Europe. I think we have done quite well in many of the countries here. We also see in the service side that our Connect Care and 20 fourseven Connected Services continue to build momentum.
We can see that both of these are differentiating us. We can see continued good development, for example, Connect Care, how it's improving our pricing, how it's improving our hit rates and how the comments from customers are very clear that, hey, now you're selling something that suits my needs, and that's why I like this. Also 20 fourseven Connected Services, good momentum here, and we can see very strong overall progress in rolling out these services. KONE Care and 20 fourseven Connected Services are now available in more than 15 countries. Also in the quarter, we continued to strengthen our product competitiveness.
In Asia, we had some very important product launches, particularly in India, where we launched a totally new mid range sorry, mid rise offering for the specifically designed for the Indian market. I think the timing of this is actually very good. We're starting to see the Indian market recovering now, and I would claim that we have the most complete offering for the Indian market now and are very well positioned to capture the good growth we're seeing coming through in that market now. And we also strengthen and broaden our offering in China to make sure that we are strong in all of the key segments throughout the market and that we have done. As you know, we started our Accelerate Winning with Customers program in September.
Here, we continue to drive that forward. We have good progress in the execution of this program. The whole idea here is to ensure that we can have more customer facing time with new service and solutions and therefore bring our new service solutions faster to our customers with higher efficiency. And a lot of things that are going in the right direction here, and we continue to execute on that program. Also, what we did in the quarter is that we launched a new offering structure.
And this is to ensure that our offering structure, overall, what we sell to our customers, fully reflects our current strategy. And the whole idea here is to ensure that KONE is as easy for the company as possible for our customers to deal with. We can see that our customers' needs are changing very significantly. The way people work is changing, and we can therefore see that that's putting new demands on office buildings. We also see new demands on residential buildings, And we want our new offering to better reflect the needs of our customers and reflect our strategy where we call that we want to have customer centric solution and services that fits their needs.
And therefore, we launched an operating structure that looks like we have on the screen now. At the basis of it, we have our basic core business, equipment for new buildings, elevators and escalators for new constructions to provide great people flow in these buildings and the maintenance and modernization business for existing buildings to ensure people flow remains good and the equipment is kept in good condition and modernized. This remains the same and, of course, a very core part of our business. At the next level, we have our advanced people for solutions. Those are our solutions for smart buildings.
Part of these offerings have been available already for many years, and that's, of course, an area we continue to strengthen and broaden to make sure that we have the best solutions for increasingly smarter buildings, everything from destination to access control, but also information, monitoring and how we can understand best what's happening in these buildings. Then we have added a new layer that we call advanced people flow planning people for planning and consulting. This service is specifically designed for our customers to meet their facing, necessary to meet their changing needs. Here, we are using all the insights and analytics we have from buildings when we connect the elevators and escalators, but also all the other data we have gathered over the years on these buildings. The idea here is to ensure that we can help our customers make their buildings the best buildings to work in or live in by having the best people flow in them.
We're seeing a lot of good demand for our services in providing the analytics design and planning for our customers as their needs are changing. So with this whole offering structure, we want, again, KONE to be constantly an easier company to deal with and very much structured in the way our customers want to face us and want to buy from us. So that's the idea of this new offering structure. So that's a little bit about how we're developing KONE and how we'll also be developing towards our strategy of winning with customers. Market development.
What have you seen in the markets? We start with new equipment market overall. We can see that the new equipment markets grew slightly in the Q1. And actually, we saw a slight growth in all geographic areas. North America, the market grew already from a high and good level.
Europe, Middle East and Africa, also a slight growth, particularly in South Europe and the Middle East. Central and North Europe pretty stable on a good level. In Asia Pacific, we saw the Chinese market was now quite stable in units, and rest of Asia Pacific grew. And it was particularly India that returned to growth, and because of that, we saw the whole rest of Asia Pacific growing. So overall, I would say development of the new equipment markets were very much in line with what we had expected at the beginning of the year.
If I then look at the service markets, here also we see growth across markets and across businesses. Across America, both maintenance and modernization markets are growing slightly. And I would say modernization, we can see also that given the good growth and momentum that market has had for a good while already, definitely seeing that pricing has improved in the market. Europe, Middle East and Africa, maintenance markets are growing slightly. As I mentioned already, we're seeing a slight improvement in pricing overall in Europe.
And clearly, the reason for this is that there are more units coming into service now from the better new equipment markets over the past years and also better economic environment. And it particularly can be seen in Central and North Europe. Also, modernization markets are growing slightly. Asia Pacific, good growth in maintenance and strong growth in modernization overall, not much new there. If I look a little bit closer at the Chinese market, as I mentioned, was flat in the Q1.
Here, if you look at the fundamentals of the market and start with housing inventories. We can see that in the higher tier cities, the relative inventory has a little bit edged up, whereas the development, if you look longer term, has improved in lower tier cities. Actually, if we dive a little bit deeper into these numbers, we can see that the absolute number of apartments available for sale has actually declined. But if you look at the higher tier cities, we have also seen a decline in transaction volumes, therefore, we see a little bit blip up here in relative measure of the inventories. But overall, the gas sales remained at a relatively healthy level.
Housing sales and prices. Here, as I mentioned, the higher tier cities, we've seen that transaction volumes have declined a bit and prices are pretty flat, whereas the development in the lower tier cities is good. We can see that the government restrictions that have been in place now already for a good while, they are really having an impact. There are now some 100 cities where we see restrictions on apartment purchases and mortgages. And if, of course, the idea of the Chinese government here is to cool down the markets, and we can see it is having a significant impact overall on the property market.
If I look at the property construction markets overall, we can say that real estate investments actually grew very nicely beginning of the year. They grew at about 10%. The main driver behind this are the increasing land transactions and increasing prices of land. The overall elevator escalator market was now pretty stable in the Q1. Now in connection with the Q1 results, we also dive deeper into other markets and how market shares developed in the prior year.
In the Q1, we always do a deep dive into market sizing and market shares. And as usual, we then present that in connection with our Q1 results. And if I look at the global new equipment markets overall in 2017, as we discussed earlier, the markets remained stable overall at approximately 825,000 units of elevators and escalators. China has remained by far the biggest market at 63%. Chinese market was now quite stable after 2 years of decline in units and also pretty stable in monetary value, and that had declined for already some 3 years.
So we saw stabilization on that market. The growing markets were clearly Europe, Middle East and Africa and North America, whereas rest of Asia Pacific declined slightly. Fonex market share in 2017 was stable at approximately 19% if you measure it in number of units. As I think all of you know, our principal objective last year was to gain market share measured in value. In a stable market or even in some of the declining markets, most important way to gain in those markets is to gain by value and look at your pricing very carefully.
And as you know, that has been very much our approach. And if I look at our market share measured in value, it actually grew slightly. So I believe that, that was very much in line with our approach last year. The service markets continue to grow. The global installed base grew to almost 15,000,000 units last year.
Markets grew at close to about 6% in number of units last year. Clearly, the Chinese market is the fastest growing given the number of new installations we see every year there. Monetization markets also grew in all regions. We consider ourselves clearly a challenger in the maintenance markets. However, if I look at our major competitors, we clearly have the fastest growth rate.
So we are catching up on the bigger competitors, and we can see it now that we have improved over the past years' position, and we are now number 3 in number 3 position if you measure it by global service base, how many units we have in service. So we continue to grow faster than our main competitors. And last year, our service base was more than 1,200,000 units under service contracts at the end of last year. If you then look at our market positions in the various businesses and various markets, no big changes here. Europe, Middle East and Africa, we continue to be number 2 in the new equipment market.
And in maintenance, we are number 3, but we have gained share here. In North America, in new equipment, we continue to be number 4. However, if I look at particularly the American market, the U. S. A, we can see that the difference between the second, third and the fourth player actually is quite small.
So we have constantly strengthened our position there, particularly given the very strong position we have in the machine room less segment there. In maintenance, we are a clear challenger with the number 4 position. In China, we continue to be a clear leader in the new equipment market and also a leader in the maintenance market. Rest of Asia Pacific, we remain a leader in new equipment and number 2 in maintenance. So the strong positions we have in new equipment clearly continues to fuel a good development in our maintenance base and that we have seen consistently over the past years.
So with this introduction of our highlights, markets, market shares, I'm happy to hand over to Ilkka to review our financial performance a little bit deeper during Q1.
Thank you, Henrik, and also welcome on my behalf to this result announcement call. And as normal, I'll go through our financials a bit more in detail, and I'll start with orders received development in the quarter. Our orders received grew and reached SEK 1,900,000,000 in the quarter. We saw growth in all regions and in all businesses on a comparable basis. Comparable basis, our growth was 6.8% in the quarter.
And more importantly, we saw the development that started already at the end of 2017 in our margins. It continued to stabilize in the quarter. If we look at China in more detail. In China, we saw in both volume as well as in value growth in our orders. Our volumes grew about 5%, and value grew slightly less than that.
Price contributed positively year on year to that development, but mix had a slight negative impact to our in the quarter in China. Then moving onwards to sales. So our sales reached SEK 2,800,000,000 in the quarter, which is on a reported basis 3.3% growth. And as said earlier by Henrik, so the growth was very strong at 10.6% on a comparable basis. And high level of project starts really drove this strong growth development in the quarter, especially in the new equipment but also in the modernization business.
But overall, sales grew in all regions and in all businesses. And if I look at it in more detail, so new equipment business grew at 14.6%, modernization at 10.3% and maintenance contributed at 5.4% in this quarter to the growth. From a geographical perspective, the strongest growth was in Europe, Middle East, Africa, 19.8 percent Americas contributed at 3.5% and Asia Pacific at 4.1% in this quarter in sales. Then looking at EBIT development more in detail. So our EBIT reached EUR 218,000,000 and down in EBIT margin as we saw the headwinds continuing to burden our results, both higher raw material costs as well as the price pressure that we've seen earlier in our orders in China contributing to this development.
And our adjusted EBIT reached 10.9% in the quarter, down from 12.6% in the previous year's Q1. It's good to note that, yes, we did have headwinds, but growth continues to positively contribute to our profit as well as the significant impact that FX and currencies play in our results. So we had a EUR 21,000,000 impact from currencies in our results. Restructuring costs related to Accelerate program were EUR 6,900,000 in this quarter. Into cash flow.
Cash flow is always difficult to measure cash flow in 1 quarter. You need to look at it in a larger context. But our cash flow in this quarter declined against a strong comparison period and reached SEK 179,000,000 in this quarter. If you look at the key drivers for this development, first, change in our EBITDA was a negative contributor at 34,000,000 Also from a working capital perspective, in the previous year, we saw a positive €31,000,000 contribution from working capital, whereas this year, we saw the working capital contributing negatively €62,000,000
If I look at
the business fundamentals, they continue to be intact. Our customer payment terms as well as payment behavior continues to be the same. And I'm convinced that in the coming quarters, we see the cash conversion recovering for the business. Now handing it over back to Henrik to talk about market and business outlook for the remaining of the year.
Thank you, Luca. Let me start with the market outlook, what do we expect for the full year 2018. Firstly, it is unchanged from what we said in connection with the full year result. We expect the new equipment market in Asia Pacific, that this market in China expected to decline slightly or to be stable in units and that the competition there will continue. Rest of Asia Pacific market is expected to grow.
Also Europe, Middle East and Africa, North America, slight growth as well there. Maintenance, very much the same trends we've seen so far with growth across markets, of course, strongest growth in Asia Pacific. And amortization, slight growth in Europe, Middle East and Africa, North America and strong growth in Asia Pacific. If I then turn over to our business outlook. As we had promised, we have now specified in connection with Q1 results our business outlook.
We expect our sales to grow between 3% 7% in comparable currencies, and we expect our EBIT to be in the range of $1,100,000,000 to $1,200,000,000 And this assumes that foreign exchange rates remain at the level where they were at the end of March of this year. With this level, there would be about a €40,000,000 negative impact from exchange rates on the EBIT. There are a number of things that are driving us in a positive direction. It's a solid order book that we have. It's a solid and continuous good development in our services business as well as the continued performance improvements that we have been able to drive.
What is, however, burning our result? It's clearly the price pressures we have been experiencing in China over the past years, and now we are clearly delivering orders that were booked last year with a lower margin that we can clearly see. Also, that in combination with higher raw material costs, we expect to burden our result by about EUR 100,000,000 this year. Those are clearly weighing on the results. And then if I look at translation exchange rates, the impact on our sales, if they stay at the level where they are now, will be about €300,000,000 and on our EBIT about €40,000,000 So then to summarize.
I'm very pleased with the good start we had for the year in orders received, given it was broad based and given that we also stabilized our margins. Captures we are taking to improve our profitability and margins are working. You can see the focus even pricing is delivering results, and of course, we need to do more there. But also, the overall performance improvements are driving us forward. And I'm very pleased that our services that we have launched over the past year, they are differentiating us, which are really a sign how we want to work, how we want to show our customers that we help them succeed in their business, they're very much gaining momentum.
Therefore, we also see good progress in our strategy execution, continuously driving us forward and finding a lot of great opportunities from the changing markets market environments that we are seeing. Also like to highlight that we have today published our sustainability report for last year. I hope you all read it. There's a lot of interesting information in it, how we continue to make KONE a more sustainable company and how we are developing towards our target of being the leader in sustainability in our industry. So with this, I'm happy to open up for your questions.
Jussi Koskin, a couple of questions. First about this new offering. How about this actual product for elevator portfolio? Haven't you heard for a while about that? Any development directions in that area?
You are talking much about new services, but how about actual elevator portfolio?
If you look at new product introductions, actually, we have continuously upgraded our and launched new improvements and broadening of our offering. For the past years, there's been a lot of work in North America, and we can see that has delivered a lot of results. Now we had launched a new mid rise offering for the India market. And as I said, very well timed to capture the growth opportunity we see there. And also in China, we launched new broadening of our range to capture more of the market.
So we have continuously had new offerings and new launches for strengthening our product competitiveness. Last year also, we had a lot on the high rise side, how we strengthened and brought new values to our customers there.
Then second question about this value market share. Could you elaborate, is it contributed by some specific market area or draft area? Or in what area we were successful?
I think it was clearly everywhere. But I think in the market where we had perhaps the biggest difference between in China, our market share remained stable at about 20%. So we are a clear market leader there. But there, we saw that we actually gained some market share measure in value. They're pretty stable in units but gained in value, and that was through our the pricing focus that we had.
We will now take the first question from Guillermo Pignot from UBS. Your line is open. Please go ahead.
Good afternoon. It's Guillermo Peigneux from UBS. Thank you very much for taking my question. I have two questions on China actually. First on pricing, could you comment on how prices compare quarter on quarter?
So I think you increased by 7%, if I recall correctly, your pricing for China in Q4. Did your prices increase sequentially on Q1? That's the first question. And the second question is kind of similar. Thinking about the margin of orders that you commented in your press release and the presentation, Can you comment on how those margins compare Q4 and Q1?
You already mentioned that margins were stabilizing in Q4. I just wonder whether the stabilization means that your order margins are improving at this point. Okay.
So as you remember, in Q4, we had a very good pricing development in China. And the 7% you mentioned, that was a combination of price and mix, and most of that was price. Now year on year, we were able to improve our prices a bit. Now for Q1, quarter on quarter, they were pretty stable. So we actually had good growth now in volume, and we're able to maintain the good price increases we were able to get in Q4.
So I would say Q4 from that perspective was a very strong quarter. That was okay. They were able to keep it. But that's clearly continued to have good momentum there and high focus in this area. Then when it comes to margins, when we look at the margin, there are clearly 2 things that impact your margins.
One is the price and the other one is the general cost level or your cost level. So prices, as we have said, we have been able to improve slightly, But at the same time, we have seen significant pressure from increasing raw material costs. So what we're saying is that for us to improve our margin, we need to increase prices even more. But we are going in the right direction, but it's clear that the headwinds are quite strong from the raw materials.
So is that can I read that as your margins are stabilizing but are still suffering here in Q1 versus Q4?
It is stable Q1 versus Q4, yes.
Okay. Thank you.
We will now take our next question from Klas Bergelind of Citi. Your line is open. Please go ahead.
Yes. Hi, Hendrik and Ilke. It's Klas from Citi. So I have a couple of questions. First on EMEA, very solid growth this quarter, both on equipment and also when we look at maintenance sales versus my forecast.
On equipment, is this just mix looking at the different countries in Europe or market share gains? Or did you land a lot of projects? I know project starts drove higher sales and it's linked to IFRS 15, but I'm interested in the orders. And also on the maintenance side, where we're now seeing pricing accelerating, is this just because of higher cost inflation? Or are you taking market share on the back of Kona Care 20 fourseven, etcetera?
If I start, if I address the orders you see, in Europe, Middle East and Africa, we actually had a good performance on a broad basis. And as you know, there are growth opportunities. Europe, we had South Europe is growing. Germany is growing, and we can also see in Middle East. So I would say just good broad based performance.
It was nothing it was not that there was one market that was driving it all, but I would say good broad based performance. That's the message. On maintenance, yes, we had good growth, particularly in Central and North Europe in maintenance, and that is a combination of continued good conversions and good pricing performance. And one of the factors driving our pricing performance is our new Connect Care and our new services. So it's a combination of everything, and it shows that we are going in the right direction.
Yes. Because you're a bit late to just talk about positive pricing compared to your peers. So we should basically say that now the reception around the digital offering is sort of biting more?
It's Dave, when you bring new offerings like this that are totally new for the market, we have them broadly available. It's now a lot of work with our customers and showing them how it adds value. But I think we're gaining good momentum here. And in every market where you have it and you people are trained to do it, you're constantly gaining momentum. So yes, we're going in a very good direction here.
Okay. Then I want to come back on price and mix in China. So pricing is up a bit, mix down a bit. It seems like pricing is stable quarter on quarter. Could you talk about why you didn't increase prices further quarter on quarter?
Is it because you felt that the cost inflation is now under control? You didn't move on the €100,000,000 in raw mats? Or did the competitive pressures get worse this quarter? We're hearing that the consolidation among developers means that you and your competitors need to increasingly compete more on price. So I would be interested to hear why you didn't increase pricing further versus the Q4.
When it comes to prices, of course, our ambition is very clear. In some quarters, you have a better performance and some quarters, it was more stable now. So Q4 was really good. I would say this was quite okay, not quite as good as Q4 from a pricing perspective. Pricing, of course, there's a decision you make that you want to increase prices.
But you have to remember that all of these are individual negotiations between us and our customers in a competitive environment. I would say perhaps what is impacting as you said, it's a consolidation amongst developers, and we have a very good position with the biggest developers in China. So that's okay. And also the fact that more of the growth now came from lower tier cities, where perhaps buildings are slightly lower. So average value, therefore, probably a little bit lower than in higher tier cities.
That was actually my final one, Henrik, on the mix there. So it was not just a project with a tough comp or this is purely down to sales to less high rise in lower tier cities, which then means that it should continue throughout the year? Just to understand the mix as the year progresses, please.
Clearly, mix, if it's more in the lower tier cities, there is some impact on the mix. And then you need to see what is the combination of price and mix. And overall, I think we did quite well in this in Q1. Thank you. Thank you.
We will take our next question from Manu Rimpela of Nordea. Your line is open. Please go ahead.
Good afternoon. It's Manu Rimpela from Nordea. The first question would be on just the sales recognition and this IFRS 16 accounting change. So obviously, we had a very strong Q1 in terms of sales recognition and you're guiding for 3% to 7% organic sales growth. So can you just help us to understand that this is are we kind of having these very strong starts impacting the new equipment part of the business in Q1 and that will kind of fade off towards end of the year?
Or how do you think about your organic sales guidance compared to what you did now in Q1 already? And how should we think about the progression through the year?
If I hand that question to you. Yes. So we did see
a very strong growth in our sales in Q1, and that is, like you said, driven by the number of starts and the installation starts at site. And we're clearly expecting less growth in then second quarter, and the first half as such would then even itself out. And like you said, so now that we are in the IFRS fifteen world, we start to recognize the revenue immediately once we deliver the material on to the site. So in that sense, it is different, but it's more driven by the way the work was timed for this point.
Okay. And then obviously, the follow-up on the profitability of the business. So we saw pretty big fall in the margin, But that probably then also probably is impacted by the fact that you had a lot more revenue recognition in the project business. So should we also see an equal IFRS 15 related reversal of the or improvement of the profitability in the coming quarters when you have less of the project revenue getting recognized? Or how should we think about just to understand how this new system works between the quarters?
Some impact, if I look at how where we saw the growth, so Europe, Middle East clearly growing faster than the rest of the business. And yes, some timing impacts in profitability. But like I said, if you look at our guidance and how we talked about it, so we more see that there's the pressure on the margins will ease off at the very end of the year, right towards the Q4. So that's where we really where we see the development maybe turning compared to what it is today.
Okay. Another question. On the pricing improvements on maintenance in Europe, you're talking about. So have you seen that already flow through to your P and L and improving the profitability? Because it doesn't seem so on the back of at least the kind of Q1 margin.
I mean, if I look at Europe and the maintenance business, it's clearly, course, a good thing among the increased prices. Clearly, that has an impact on your bottom line. So the answer to that is yes. But at the same time, we also see much higher labor cost increases in Europe this year than in past years, and I think that's a general phenomenon in Europe at the moment. But clearly, it's a positive and good thing, the price increases that we have achieved.
If I may follow-up on that. Is the net price increases something we are seeing? Or is it just the prices are going up on the back of inflation as is the case in China as well?
No, I think it is a net improvement.
Thank you.
Thank you. We will take our next question from Lucy Carrier of Morgan Stanley. Your line is open. Please go ahead.
Hi, thank you very much. Thanks for taking my question. Actually, as a starter, I had a follow-up on one of your previous question regarding the outlook for the rest of the year. So it's clear you've mentioned that you expect in new equipment growth to kind of decelerate, of course, from what we've seen in the Q1. But do you have I mean, what's the visibility you have really on your service business?
Because maybe to the point of my colleague earlier, how should we think about the margin mix for you in the next few quarters considering that possibly it looks like you will have less new equipment than what you had in this quarter and maybe a higher share of service. So I wanted to come back to that please. Because the comment around the Q4 kind of margin pressure easing, that's something you had mentioned before. But now considering the mix we had in the Q1 and how you're guiding, I would like to have your view on the margin mix based on that.
I would say that if you look at our maintenance business there, our growth has been very longer term. Modernization, we have a good order book, so that should also grow. Yes, there's going to be a slight mix difference, but I would say, as I have considered, if you look at the first half, the whole thing is probably going to be pretty normalized, both from a geographic and a business perspective. There are probably a little bit more services than new equipment in Q2 than in Q1, and then second half of the year, probably more normalized.
Okay. Thank you very much. The second question was around the price increase in China. And you've mentioned
that the fact that
you had a bit more lower tier CT activity on average maybe was not reflecting so well on the overall price increase. Can you maybe tell us whether you've increased prices in China across the board or whether you focused on a specific segment? And also, of course, without naming anyone, but what are you seeing in terms of your competitor behavior in terms of pricing in China? Because one of your competitor yesterday was not maybe not as positive as you seem to be today.
Price increases maybe in years gone by, you were able to say that, okay, I increased prices with a flat number across the board. Pricing is understanding your competitiveness, understanding your market and understanding how you differentiate in each and every single situation, they're all individual cases. And therefore, it is something that requires courage, knowledge and insight. And that's how you drive that. If you're going to say that, okay, I'm going to cross the board, we're going to do something that definitely isn't going to work.
So that is what it's all about, and that is what we continue to develop our capabilities, develop our skills out in the field and understanding where we have the best opportunities to drive it. And that's what it's all about. And I wouldn't start naming any competitors. What we can see is that competition is tight. China is by far the largest market.
Yes, it's been more challenging over the past years, but it's still the largest market in the world. And clearly, a lot of companies have ambitions there, as do we.
But do you I remember you had taken the lead in terms of price increase in the Q3. You had said that. Do you feel that you're still kind of leading in that effort in China?
I believe so, yes.
Okay. And then just one last question. It was just on are you I mean, what can you comment at the moment around potential impact from tariffs in terms of your sourcing in the U. S, but also in China where I know you source locally?
I think we have to see how this plays out, but so far impact not significant. But it's clear that we see many steel prices, different grades of steel in the United States have gone up a lot. And we also see an impact on certain materials in China going up a lot. I would say that the situation, that perspective, has been volatile. And I think it's still unclear.
So far, not a major impact that Jirka would like to clarify if you've seen something more specific there.
Yes. We haven't seen major impacts and are not expecting with what we know today to 2018. But naturally, it's hard to estimate what the carry on impact is across the globe for any possible actions that will be taken as a countermeasures. And we follow that, and all that we know is included in our guidance when it comes to the raw material impact for the year.
Thank you very much.
We will take our next question from Omid Vaziri from Jefferies International. Please go ahead.
Yes, thank you very much. I've got 2 questions. My first question is on the modernization market. When we look at North America and given the age of the installed base there, why are we not seeing stronger growth more than the slight growth that you're reporting in Q1, let's say, and we had some of the picture in previous quarters? And we're seeing Asia Pacific market for modernization grow with significant growth.
So it's just a bit surprising.
I would say the North American market has been very active already for a few years. So actually, it's growing from a good level. North America is absolutely one of the largest modernization markets. So I would say it's growing from a good level already, and therefore, I think the activity level is high there. Asia, on the other hand, is growing from a low level because the equipment base is quite young.
So it's only monetization market is only emerging there at the moment, and that's where we see good growth. So perhaps that's the difference between the 2.
And just to clarify, when you guide for slight growth in modernization for this year, you're basically saying you're not expecting an acceleration in modernization growth in North America?
So as I mentioned, the activity level is at a good level there already, and we're expecting a slight increase from there. So we're not expecting any sort of big jump, no.
Okay. That's clear. And my second question is around the maintenance market in China. You're clearly well positioned, and it looks like you have taken some share in the maintenance market there. Going forward, can we just again hear your thoughts, latest thoughts on how whether Kona can take market share from the local service providers given how competitive this market has become regionally?
And also how with what sort of support what would help Kona to do that?
I'd say in all markets, the way to gain share, clearly, the key way to grow in the service business is through conversions when you have installed your new equipment to convert that to service. And that's clearly the best way to grow and the way we continue to grow in all markets. But at the same time, we're, of course, active in the market. And what is shown time after time again is that with great customer service, with good service quality and being able to provide services that fits your customers' needs more specifically, that's how you gain share and how you can win from the market overall. Still in Europe, there are more competition from small independent players, still a lot of those in North America as well.
So there's a broad competitive market, and of course, we want to compete against all of that with good services, good performance and providing good value to our customers.
Thank you. And is it possible to just hear from maybe two examples of what a good service in China for winning service for achieving high conversion rates in China is?
When you have large customers in China, I would say there are 2 impacts. If I take a little bit broader your question, so the two impacts of the market consolidating. So the biggest strategic customers who are taking more and more share, the top developers, they also service is more important to them because they have, of course, brand and reputation to make sure it stays intact because they often own these buildings and then want to have the service as well. And there, they are very good at understanding what your service performance is, what is the uptime of the elevators, what condition are you keeping them in, How well are you responding? How well are you keeping them informed?
What's happening? What is the transparency? And what is your overall customer service? And we can see customer service also has a very big impact on the satisfaction of customers in this industry. So it starts from the basics.
And then when you really understand what your customer is looking for, what type of buildings they have, what type of tenants they have and what the specific needs are, you can then cater to those specifically. And that is what we're doing and why we're performing well in that market.
Okay. And we've clearly seen margin pressures on the maintenance business. Is this mainly because of lower pricing, more competitive environment? Or is it more and more of a servicing costs rising in the region?
And which market you talk about now?
The Chinese maintenance market.
The Chinese maintenance market, actually, we have a good profitability there. There are big differences, and you need to make sure that you write segments, and there you can have good profitability. If you go to the most affordable segments there, it may be more challenging. So it really depends on what you cater to. But I believe that if you develop in a good way, your customers will understand and appreciate the service, in particular, as we can see an overall aging of the installed base there.
Okay. Thank you very much.
We'll now take our next question from James Moore from Redburn. Please go ahead.
Good afternoon, everyone. Thanks for taking my question. Could I I have 3, so I'm thinking which one to choose. Raw material, your EUR 100,000,000 guidance, you get to unchanged, but you mentioned steel prices are rising. You say you've got as much of the available information in the full year 2018 guidance as possible.
Could you help me with how much of that EUR 100,000,000 or how much of the year is locked in, if you like? And whether we should think about the current raw material prices affecting the 2019 headwind and not 2018? And if so, do you have an early read on whether that could be another €100,000,000 given what's going on in steel prices?
Thanks and thanks for the question, James. So if I look at the total and just to summarize, so we said that we expect about €100,000,000 impact from raw materials to 2018. And we are about we normally lock our prices between 3 to 9 months depending a bit on the components and what we're talking about. We're roughly, I would say, halfway through locked for the year in our price season. And like you said, there's been a lot of volatility in the market, but at least in the beginning of the year, we were able to push some of the impacts to latter part of the year.
Okay. Thanks a lot. I'll get back in the queue.
We will take our next question from Martin Flueckiger of Kepler Cheuvreux. Go ahead.
Good afternoon, gentlemen. Martin Flueckiger from Kepler Cheuvreux. Just Just coming back to that raw materials question, if I understood you correctly, you were talking about 2018 only. But what about the impact for 2019? I realize it's still early days, but given the pretty steep increases in hot steel prices, it looks like it's going to be delayed into next year.
Is that the case? Is that how we should think about it?
So first, like I said, we have kept what we said earlier, same, and it's partly about us being able to work with our suppliers and partly about the market development. If I look at forwards to 2019, so obviously, the impact of product mix as well as the geographical mix plays a big role there. And but if all things being equal and trying to estimate what it would be for 2019, then we do expect that at current levels, we have a slight headwind for 2019 if the prices remain at this level.
Okay, thanks.
Next question is from Glenn Liddy, JP Morgan.
Good afternoon. Just coming back to margins and costs again for the backlog. For Q1, the margin in the backlog is down again, I believe. How long will it be before all that negative margin has washed through to revenue?
Let me understand your question a bit. So we've said now for 2 quarters that the margin of our orders received has stabilized. It's clear that we are now delivering orders that we booked first half midyear last year. So those are coming through. And if I look at the margin that we're delivering and booking now, it's probably not a huge difference between the 2.
Right. So if we look to next year, if nothing changes on your raw material or your costs, you would expect your margins to rise?
Clearly, if you grow, then also you get leverage from your costs. And it's too early to talk about 2019, but I think our the ambition of what we are driving for is pretty obvious.
We'll take our next question from Matthias Holmberg from DNB Markets. Please go ahead.
Hi, thank you for taking my question. Sorry to sort of nag on the raw material here again. But I was just wondering if you could give some clarity on how much of the EUR 100,000,000 headwind on EBIT that has impacted already now in Q1? And also, if there's any of the remaining 3 quarters of the year that you see sort of will be taking a larger or bigger share of this EUR 100,000,000 headwind, please?
Thank you. So thanks for the question, Matthias, and no worries. For the SEK 100,000,000, it's roughly evenly split out between the quarters. So that's how it plays out. Thanks.
I'll step back in line.
We'll take our next question from Antti Suttelin from Danske Bank. Please go ahead.
Thank you. This is a big picture question on China where I'm really struggling to understand. When I look at Chinese floor space starts, I can see that they increased 8% in 20 16, then they increased again by 7% in 2017, and now they increased again year over year in the Q1. But elevators don't follow for some reason indicating that intensity is going down. Can you talk a little bit about what's going on?
Why is Chinese elevator intensity going down?
I don't think elevator intensity is going down. I think all of these there can be quite big differences in the timing. If you remember for how long the floor space starts went down and our markets were still growing. So I think it's difficult to draw direct conclusions out of these 2, but I don't think there's an indication that the intensity of elevators, escalators would go down in buildings. I don't have an exact answer to that.
Perhaps where you've seen better correlation is if you look at total real estate investments because that's the real money going in the buildings that you are constructing and buying materials and labor for them.
Yes. But if the intensity doesn't go down, then it has to mean that at some point, elevator should start to follow the increase, which is now, I mean, over the past few years, we are talking about 15%, 16% or even more of growth in starts. When would you expect this turn in elevator demand to start becoming visible?
I think you have to look at really a start is a start, but you don't need to see the physical actually things happening on the site. And therefore, I would more follow the real estate investment because it tells more how these sites and the starts are progressing and how much extra money is being used to build them further. So I don't have a perfect answer to your question, and we've just seen that where we see better linkages to our sector compared to other leading indicators.
The next question is a follow-up question from James Moore from Redburn. Please go ahead.
Yes. Thanks for taking the follow-up. So I've got 2, if that's all right, at this point. On the cash flow, could you break out the inventory receivable payable and other working capital movements? I'm just trying to understand the EUR 93,000,000 worse result than last year.
Thanks, James. So if I look at the big picture for the working capital development. So first, we did see an improvement in working capital in the previous year, and now it turned out to be the other way around. For example, unveiled revenue increased in this quarter. We saw a lot of start and a lot of installations.
And you have as the projects continue and progress, then you build them, but no one item that is developing as such negatively. And for example, receivables are developing quite okay. They contributed positively, but not as positively as the previous year.
Fair positive, what's the other $100,000,000 Is it inventory or payable or other?
Well, also currencies play a role. So if you look at year on year comparisons from a working capital perspective, it's about €70,000,000 impact that the currencies have year on year.
Okay. And the other question was a bigger picture question on your savings plan. Could you just remind us of the timing of when the savings will land? Are you still basically on the same path as before? And could you help us or remind us what proportion of those savings come from headcount related actions versus sourcing and efficiency?
I ask because I noticed your employees are up 6% year on year, which I wasn't expecting given your saving actions.
Well, do you want to
Francois, I'll address first the employee and you can say anything. Why where is actually employees growing? And we have had this question before. It's a good question. It's really because the service business in China and rest of Asia is growing quite fast.
And remember, last year, again, we hired about 2,000 new service technicians in China. So when it's a service business that is growing faster, that is much more labor intensive, and that's our own labor. On the new equipment side, on the installation side, it's principally subcontracted labor. So that's where you see it. I would say the majority of this increase is in service technicians.
Good answer. And just on the timing of the savings, maybe ELCO, are you still happy with the balance of most of it being in 2019? Is the mix still the same?
Well, I think maybe I got your question wrong, but I'll answer what I think I heard. So first was question about how the savings are developing. And we've said that we have a number of initiatives ongoing to really look at how we can work smarter across the company and therefore, decrease the cost base. And we're aiming for, at the end of this year, to be in a position where we get are having a $50,000,000 run rate savings achieved. Out of those savings, we don't expect much of an impact this year yet as we are we need to still execute those projects.
And then the total target for the program is SEK 100,000,000 before end of 2020. So the remaining EUR 50,000,000 then will be split between those years. But as I said, it's still fairly early days. We're working hard, and we'll keep you updated on how that splits as we get through this 2018 first.
Thank you very
much. So we are progressing according to what we discussed in connection with the Capital Markets Day back in September.
Thanks, Henrik.
Our next question is a follow-up question from Martin Flueckiger of Kepler Please go ahead.
Yes, thanks for taking my follow ups. Actually also 2 very quick ones. Firstly on EMEA, it looks like Korea is getting market share, particularly in EMEA, also a little bit in China. Can you highlight the main reasons why you think that is? What you've been doing there and why you think you're being so successful?
And in that respect, are we supposed to assume that the strong sales growth in the EMEA is more or less sustainable throughout 2018? That will be my first question.
Let me address the market share question, and then I hand over to Ilkka to talk about the sales growth in EMEA. While I'm very happy about our orders received growth in Q1, and it shows we had a very good performance, after good performance in Q4, Let's remember, 1 quarter in all numbers is a short period of time. What I'm happy about is that performance was good, broad based. I think when you look at market share, you want to look at it over a longer period of time. And then we could see EMEA overall, we gained some share last year.
But this is 1 quarter, and we don't measure our market share in just 1 quarter. But overall, we said the performance was good. And then just on the revenue growth in EMEA for the year.
Yes. Well, overall so first, I just wanted to clarify as we started the discussion first in the quarter. So we look at the EMEA sales growth, which was 19.8% in the quarter, It's clearly one which is now impacted about the number of starts that we saw very strongly coming into the Q1. And we are expecting that to even itself out during the first half. So clearly, then seeing a lower growth in second quarter as we get through the project and it normalizes more.
And overall, for the year, so we are expecting a good growth in sales, but it's good to remember that maintenance business contributes more in EMEA. So that's much more stable than new equipment business overall. Our
next question comes from Ryan Gregory of Liberum Capital. Please go ahead.
Hi, thanks for taking my question. I just had a follow-up on the working capital question from earlier. How do you see working capital progressing through the rest of this year given the FX headwinds you're still seeing?
So overall, cash conversion, we're expecting that to recover in the coming quarters. And that's bit worse development in working capital compared to previous year, expecting that to then recover in the coming quarters.
Okay. Thanks.
Our final question comes from Guillermo Pignot of UBS. Please go ahead.
Thank you for taking my follow-up. Just regarding restructuring, are you happy with the current initiatives? Or at what point do you would basically study or try to analyze whether you need further restructuring to deal with the current cost pricing environment? Thank you.
We are happy with our current initiatives. We have to remember that this Accelerate program, the principal reason for that program is how we can speed up our ability to bring new service and solutions to the market. I mentioned we are in an environment where markets are moving and shifting quite fast. And you know what? This shift and movement in markets, that creates great opportunities.
So these changes bring opportunities, and we just want to be faster in capturing them. That's why we are working on providing better resources for our frontline organizations to spend even more time at the customer facing end. And therefore, we take a number of these functions that are not customer facing and bringing some of those centralized. And I think those are very important and good actions. And what we will get from that is both ability to serve our customers better, be faster in bringing new services to the market, but at the same time gain efficiencies.
And we want to look at each three of these because then we really tie them to our strategy and how we develop Bonnett going forward. And I must say, I'm quite happy with the initiatives we have at the moment and think that they will have a good impact.
Thank you. And my last follow-up is regarding China margins. I think in the past, you mentioned that the China margins for equipment were significantly higher or higher than the group average. I just wonder whether this kind of gap has been diminishing over the last 2 years.
Clearly, it's been diminishing that gap that was way much higher. They're still very good margins in China, not quite as good as they were some years ago.
We will now take a question from Daniel Gleim of MainFirst. Please go ahead.
Thank you very much. I have 2 clarification questions. The first one is on Ilkka's remark with regards to the recovery of the net working capital. Were you referring to the absolute net working capital number or the cash flow contribution from net working capital?
I was more
referring first to the cash conversion level overall in our cash flow.
So net working capital will become again a positive contributor to free cash flow. Is that the right read?
So, Duifold, so we said that we have quite a good business terms when it comes to overall working with our customers and getting paid with those. We do see opportunities when it comes to working capital on managing our receivables better. As long as you have receivables, you can always do it better. And then obviously, we need to work closely with our suppliers as well. So I see opportunities, but from an advanced lease payment perspective, I don't expect that the rate will improve much going forward.
And the second question would be on the lead periods for the stabilizing order quality that you're seeing at the moment. I think Hendrik was referring to you being converting orders to sales at the moment that were taken in as orders at the mid of last year, I. E, less than a yearly period. Is this the right reading? Or what's simply misunderstanding?
I think I said first half to mid last year. But yes, I think that it varies. I think most markets, lead times are pretty stable. Clearly, with the new revenue recognition, we start recognizing the revenue earlier than the question when it's completed. Actually, we also see in some markets where actually lead times are getting shorter, like China.
But we can see that when our customers, when liquidity situation is tight, they want to order as late as possible and then get quick deliveries. And that's we're seeing. That's why we have had also good deliveries and good delivery growth from China. So that is also a competitive advantage in that market in being able to deliver fast, And that's what many customers are starting to ask for there. So overall, not a big change.
Very clear. Thank you very much.
Our next question comes from Tommy Reilho of SEB. Please go ahead.
Hello. This is Tommy from SEB. Can you give a comment on the Chinese maintenance growth in the Q1?
Yes. So our sales growth continued to be good double digit growth in China. Our number of units under contract increased again by over 20%. And you asked what is the gap between the 2. So our service revenues from contracted revenue is increasing at a good rate.
But then what is quite stable is the revenue from the so called first service contracts, which is what is part of the new equipment sale, but we then record as service revenue as they get for the 1st period. So that part of the revenue is quite stable, whereas the contracted revenue is then growing at a good rate. Thank you.
Our final question is a follow-up question from Martin Flueckiger of Kepler Cheuvreux. Please go ahead.
Yes. Thanks gentlemen for your patience. Just a follow-up. Just trying to get this a little bit more structured in my head. Your sales growth performance in Q1 for both EMEA and the group, what would it have been at constant exchange rates without the adoption of IFRS 15?
Literally, there is no number that I can tell you without IFRS 15 because we changed the systems to reflect the new revenue recognition. It's clear that the number of starts was stronger than normally. And if I look at past, we start to recognize the revenue as we completed the work. So it would have had negative impact, but it's I don't have the number to tell you, unfortunately.
It probably would have been somewhat lower, but we don't know how much lower. Yes.