Good afternoon, and welcome to KONE's Q1 2018 Results Webcast. My name is Essi Lipponen, and I am from the Investor Relations team. I have here with me our President and CEO, Henrik Ehrnrooth, our CFO, Ilkka Hara, and Head of Investor Relations, Sanna Kaje. 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 would kindly ask you to limit your questions to one question at a time. Let's get started. Henrik, please.
Thank you, Essi, and welcome also on my behalf to our Q1 Results Webcast. It is again my pleasure to present to you our progress during the first quarter of this year. We have a lot of interesting news to share. If we straight go into the highlights of how we developed during the first quarter of this year, I would 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 continued to be burdened by a number of headwinds. That is, of course, something we are not happy about. We will go into that in more detail as well. Now seeing good progress in how we are driving our differentiation from our competition to add better value to our customers.
We will talk about that as well during this webcast. To dive straight into the highlight of the numbers. Here, clearly the highlight is the strong orders received that we had in Q1. Our orders received were just over EUR 1.9 billion. 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 7.8 billion, and in comparable currencies, that has also grown slightly year-over-year. Our sales, I would say, call it exceptionally strong growth in Q1, just over EUR 2 billion and 10.6% growth in comparable currencies. Our EBIT was now EUR 211.5 million, or the adjusted EBIT EUR 218.3 million compared to EUR 245.8 million 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 is 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 EUR 179 million compared to a strong EUR 305 million last year. Ilkka will talk more about this. EPS, EUR 0.33 compared to EUR 0.40 a year ago. As we all know, our markets are changing, customer expectations are changing. What I am very happy about is the continued energy and positive forward-looking drive I can see throughout KONE in developing KONE going forward.
That I am very pleased about. 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. I look at the Q1 business highlights. Orders received growth, I talked about that, how it grew in all regions and all businesses. What I am 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. The fact that second 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 a highlight here is that when we look at Europe, 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. 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 are also seeing on the service side that our KONE Care and KONE 24/7 Connected Services continue to build momentum. We can see that both of these are differentiating us. We can see continued good development, for example, KONE Care, how it is improving our pricing, how it is improving our hit rates, and how the comments from customers are very clearly that, hey, now you are selling something that suits my needs, and that is why I like this.
KONE 24/7 Connected Services, good momentum here. We can see very strong overall progress in rolling out these services. KONE Care and KONE 24/7 Connected Services are now available in more than 15 countries. 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-rise offering specifically designed for the India market. I think the timing of this is actually very good. We are starting to see the India market recovering now, and I would claim that we have the most complete offering for the India market now and are very well positioned to capture the good growth we are seeing coming through in that market now.
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 services and solutions, and therefore bring new service solutions faster to our customers with higher efficiency. There are a lot of things that are going in the right direction here, and we continue to execute on that program. What we did in the quarter is that we launched a new offering structure.
This is to ensure that our offering structure overall, what we sell to our customers, fully reflects our current strategy. The whole idea here is to ensure that KONE is as easy of a 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, we can therefore see that that's putting new demands on office buildings. We also see new demands on residential buildings. We want our new offering to better reflect the needs of our customers and reflect our strategy, what we call that we want to have customer-centric solution and services that fits their needs. Therefore, we launched an offering 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. 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 flow solutions. Those are our solutions for smart buildings. Parts of these offerings have been available already for many years, 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 and consulting.
This service is specifically designed for our customers 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 from 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. 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.
That's the idea of this new offering structure. That's a little bit about how we're developing KONE and how also we're developing towards our strategy of Winning with Customers. Market development. What have we seen in the markets? We start with new equipment market overall. We can see that the new equipment markets grew slightly in the first quarter. 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 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, rest of Asia-Pacific grew. It was particularly India that returned to growth, because of that, we saw the whole rest of Asia-Pacific growing.
Overall, I would say development of the new equipment markets looked very much in line with what we had expected at the beginning of the year. Here also we see growth across markets and across businesses. North America, both maintenance and modernization markets are growing slightly. I would say modernization, we can see also that given the good growth and momentum that market has had for a good while already, that we're seeing that pricing has improved in the market. In 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. 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.
This 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. The Chinese market, as I mentioned, was flat in the first quarter. 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. 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.
If you look at the higher tier cities, we have also seen a decline in transaction volumes, and therefore we see a little bit blip up here in the relative measure of the inventories. Overall, we can say it's remained at a relatively healthy level. Housing sales and prices. As I mentioned, the higher tier cities we've seen that transaction volumes have declined a bit and prices are pretty flat. 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.
The idea of the Chinese government here is to cool down the market, and we can see it is having a significant impact overall on the property market. 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 first quarter. In connection with the Q1 results, we also dive deeper into other markets and how market shares developed in the prior year. In the first quarter, we always do a deep dive into market sizing and market shares. We then present that in connection with our Q1 results.
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 remained by far the biggest market at 63%. Chinese market was now quite stable after two years of decline in units and also pretty stable in monetary value, and that had declined for already some three years. We saw a stabilization of that market. The growing markets are clearly Europe, Middle East and Africa and North America, whereas rest of Asia Pacific declined slightly. KONE's market share in 2017 was stable at approximately 19%, if you measure it in number of units. 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 declining markets, most important way to gain in those markets is to gain by value and look at your pricing very carefully. As you know, that has been very much our approach. If I look at our market share measured in value, it actually grew slightly. I believe 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 million 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. We are catching up on the bigger competitors, and we can see it now that we have improved over the past years our position, and we are now in number 3 position if you measure it by global service base, how many units we have in service. We continue to grow faster than our main competitors, and last year our service base was more than 1.2 million units under service contracts at the end of last year. If you 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 markets. In maintenance we are number 3, but we have gained share here.
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 fourth player actually is quite small. 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 a 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. The strong positions we have in new equipment clearly continues to fuel a good development in our maintenance base. That we have seen consistently over the past years.
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, also welcome on my behalf to this result announcement call. As normal, I'll go through our financials a bit more in detail. I'll start with orders received development in the quarter. Our orders received grew and reached EUR 1.9 billion 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. More importantly, we saw the development that started already at the end of 2017 in our margins. It continued to stabilize in the quarter. 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, mix had a slight negative impact in the quarter in China.
Moving onwards to sales. Our sales reached EUR 2.008 billion in the quarter, which is on a reported basis, 3.3% growth. As said earlier by Henrik, the growth was very strong at 10.6% on a comparable basis. High level of project starts really drove this strong growth development in the quarter, especially in the new equipment, also in the modernization business. Overall, sales grew in all regions and in all businesses. If I look at it more detail, 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%. Americas contributed at 3.5% and Asia Pacific at 4.1% in this quarter in sales. Looking at EBIT development more in detail.
Our EBIT reached EUR 218 million 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. Our adjusted EBIT reached 10.9% in the quarter, down from 12.6% in the previous year's first quarter. It's good to note that, yes, we did have headwinds, growth continued to positively contribute to our profit, as well as the significant impact that the FX and currencies play in our results. We had a EUR 21 million impact from currencies in our results. Restructuring costs related to Accelerate program were EUR 6.9 million in this quarter. Into cash flow. Cash flow is always difficult to measure cash flow in one quarter. You need to look at it in a larger context.
Our cash flow in this quarter declined against a strong comparison period and reached EUR 179 million in this quarter. We look at the key drivers for this development. First, change in our EBITDA was a negative contribute at EUR 34 million. Also from a working capital perspective, in the previous year, we saw a positive EUR 31 million contribution from working capital, where this year we saw the working capital contributing negatively EUR 62 million. 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. I'm convinced that in the coming quarters, we see the cash conversion recovering for the business. Handing it over back to Henrik to talk about market and business outlook for the remaining of the year.
Thank you, Ilkka. If we 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 the market in China expected to decline slightly or to be stable in units, and that the tough 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, the strongest growth in Asia Pacific. In modernization, slight growth in Europe, Middle East, and Africa, North America, and strong growth in Asia Pacific. I 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, we expect our EBIT to be in the range of EUR 1.1 billion-EUR 1.2 billion. 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 will be about a EUR 40 million 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 burdening our result, it's clearly the price pressures we have been experiencing in China over the past years, we are clear delivering orders that were booked last year with a lower margin, as we can clearly see. Also that in combination with higher raw material costs, that we expect to burden our results by about EUR 100 million this year. Those are clearly weighing on the results. 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 EUR 300 million, and on our EBIT about EUR 40 million. To summarize, I'm very pleased with the good start we had to the year in orders received, given it was broad-based and given that we also stabilized our margins.
The actions we are taking to improve our profitability and margins are working. You can see the focus we have on pricing is delivering results. Of course, we need to do more there. Also the overall performance improvements are driving us forward. I'm very pleased that our services that we have launched over the past year 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. We also see good progress in our strategy execution continuously driving us forward and finding a lot of great opportunities from the changing market environments that we are seeing. I 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. With this, I'm happy to open up for your questions.
Jussi Koskinen. A couple of questions. First about this new offering. How about this actual elevator portfolio? Haven't heard for a while about that. Any development directions in that area? You are talking much about new services, how about actual elevator portfolio?
If you look at new product introductions, actually we have continuously upgraded and launched new improvements and broadening of our offering. For the past years, there's been a lot of work in North America, we can see that has delivered a lot of results. Now we had launched a new mid-rise offering for the Indian market, as I said, very well timed to capture the growth opportunity we see there. Also in China, we launched a new broadening of our range to capture more of the market. 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.
Second question about this value market share. Could you a little bit elaborate, is it contributed by some specific market area or product 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. In China, our market share remained stable at about 20%, we are a clear market leader there. There we saw that we actually gained some market share measuring in value. Pretty stable in units, but gained in value, and that was through the pricing focus that we had.
Thank you.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. We will now take the first question from Guillermo Peigneux from UBS. Your line is open. Please go ahead.
Good afternoon. This is Guillermo Peigneux from UBS. Thank you 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? 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. The second question is kind of similar. Thinking about the margin of orders that you commented in your press release on 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. Thank you.
Okay. As you remember, in Q4, we had a very good pricing development in China on the 7% you mentioned. That was a combination of price and mix, and most of that was price. Year-on-year, we were able to improve our prices a bit. For Q1, quarter-on-quarter, they were pretty stable. 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. I would say Q4 from that perspective was a very strong quarter. It's okay. They were able to keep it. That's clearly continued to have good momentum there and high focus in this area. When it comes to margins. When you look at the margin, there are clearly two things that impact your margins.
One is the price, and the other one is the general cost level or your cost level. 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. What we're saying is that for us to improve our margin, we need to increase prices even more. We are going in the right direction, but it's clear that the headwinds are quite strong from the raw materials.
Can I read that as your margins are stabilizing, but are still suffering here in Q1 versus Q4?
Pretty 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, Henrik and Ilkka. It's Klas from Citi. 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. 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 KONE Care 24/7, et cetera?
If I address the orders you see. In Europe, Middle East, and Africa, we actually had a good performance on a broad basis. As you know, there are growth opportunities in Europe. We have South Europe is growing, Germany is growing, and we can also see in Middle East. I would say just good broad-based performance. It was not that there was one market that was driving it all. 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. One of the factors driving our pricing performance is our new KONE Care and our new services. It's a combination of everything, and it shows that we are going in the right direction.
Because you're a bit late to talk about positive pricing compared to your peers. We should basically say that now the reception around the digital offering is sort of biting more.
It's clear 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. I think we're gaining good momentum here. In every market where you have it and people are trained to do it, you're constantly gaining momentum. Yes, we're going in a very good direction here.
Okay. I want to come back on price and mix in China. Pricing is up a bit, mix down a bit. 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 EUR 100 million 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. I would be interested to hear why you didn't increase pricing further versus the fourth quarter.
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. 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. We 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 is, as you said, that it's a consolidation amongst developers. We have a very good position with the biggest developers in China. That's okay. 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. It was not just the project with the 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, the mix, if it's more in the lower-tier cities, there is some impact on the mix. Then you need to see what is the combination of price and mix. Overall, I think we did quite well in this in Q1.
Thank you.
Thank you.
We will take our next question from Manu Rimpelä of Nordea. Your line is open. Please go ahead.
Good afternoon. It's Manu Rimpelä from Nordea. The first question would be on just the sales recognition and the IFRS 15 accounting change. Obviously we had a very strong Q1 in terms of sales recognition, and you're guiding for 3%-7% organic sales growth. Can you just help us to understand 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 the 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?
Ilkka, if I hand that question to you.
Yes. We did see a very strong growth in our sales in first quarter, and that is, like you said, driven by the number of starts and the installation starts at site. We're clearly expecting less growth in second quarter, and the first half as such would even itself out. Like you said, now that we are in the IFRS 15 world, we start to recognize the revenue immediately once we deliver the material on to the site. In that sense, it is different, but it's more driven by the way the work was timed for this quarter.
Okay. Obviously the follow-up on the profitability of the business that we saw pretty big fall in the margin, but that partly then also probably is impacted by the fact that you had a lot more revenue recognition in the project business. Should we also see an equal IFRS 15-related reversal of the improvement of the profitability in the coming quarters when you have less of the project revenue getting recognized? How should we think about it, just to understand how this new system works between the quarters?
Thanks. Ilkka.
Some impact if I look at where we saw the growth. Europe Middle East clearly growing faster than the rest of the business. Yes, some timing impacts in profitability, like I said, look at our guidance and how we've talked about it. We more see that the pressure on the margins will ease off at the very end of the year towards the fourth quarter. That's where we see the development maybe turning compared to what it is today.
Okay. Final question. On the pricing for improvements on maintenance in Europe you're talking about. Have you seen that already flow through to your P&L and improving the profitability? Because it doesn't seem so on the back of at least the kind of Q1 margin.
Clearly, if I look at Europe and the maintenance business it's clearly, of course, a good thing. When you increase prices, yes, clearly that has a impact on your bottom line. The answer to that is yes. At the same time, we also see much higher labor cost increases in Europe this year than in past years. I think that's a general phenomenon in Europe at the moment. Clearly it's a positive, a 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. As a reminder, please limit yourselves to one question. We will take our next question from Lucie Carrier of Morgan Stanley. Your line is open. Please go ahead.
Hi, thank you very much. Thanks for taking my question. Actually, as a start, I had a follow-up on one of your previous question regarding the outlook for the rest of the year. 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 first quarter. What's the visibility you have really on your service business? 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. I wanted to come back to that, please.
The comment around the fourth quarter kind of margin pressure easing, that's something you had mentioned before, but now considering the mix we had in the first quarter 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 consistent in that business if we look for the past two years. I think that's what you can expect of the longer term. Modernization, we have a good order book, that should also grow. There's going to be a slight mix difference, but I would say, as Ilkka said, that 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. 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, you've mentioned that the fact that you had a bit lower tier city 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? One of your competitor yesterday was 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, therefore, it is something that requires courage, knowledge, and insight. That's how you drive them. If you're going to say that, okay, across the board, we're going to do something that definitely ain't going to work. That is what it's all about. 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. That's what it's all about. I wouldn't start naming any competitors. What we can see is that competition is tight there. China is by far the largest market.
It's been more challenging over the past years, it's still the largest market in the world. Clearly, a lot of companies have ambitions there, as do we.
I remember you had taken the lead in terms of price increase in the third quarter, you had said that. Do you feel that you're still kind of leading in that effort in China?
I believe so, yes.
Okay. Just one last question. It was just on, 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, so far, impact not significant. It's clear that we see many steel prices, different grades of steel in the United States have gone up a lot. We've also seen impact on certain materials in China going up a lot. I would say that the situation from that perspective has been volatile. I think it's still unclear. So far, not a major impact, but Ilkka would like to clarify if you're seeing something more specific there.
Yes. We haven't seen major impact and are not expecting with what we know today to 2018. Naturally, it's hard to estimate what the carry-on impact is across the globe for any possible actions that will be taken as countermeasures. 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 two 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 similar picture in previous quarters. We're seeing Asia Pacific market for modernization grow with significant growth. Just a bit surprising.
I would say the North American market has been very active already for a few years. Actually, it's growing from a good level. North America is absolutely one of the largest modernization markets. I would say it's growing from a good level already. 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. The modernization market's only emerging there at the moment, and that's why we see good growth. Perhaps that's the difference between the two.
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.
As I mentioned, the activity level is at a good level there already, and we're expecting a slight increase from there. We're not expecting any sort of big jump, no.
Okay. That's clear. My second question is around the maintenance market in China. You're clearly well positioned there and it looks like you have taken some share in the maintenance market there. Going forward, can we just again hear your latest thoughts on whether KONE 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 KONE 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. That's clearly the best way to grow and the way we continue to grow in all markets. At the same time, 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 customer's 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.
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. 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 two impacts. If I take a little bit broader, your question. There are two impacts of the market consolidating. The bigger strategic customers who are taking more and more share, the top developers, 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. 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 your transparency and what is your overall customer service?
We can see customer service also has a very big impact on the satisfaction of customers in this industry. It starts from the basics, when you really understand what your customer's looking for, what type of buildings they have, what type of tenants they have, what the specific needs are, you can then cater to those specifically. That is what we're doing and why we're performing well in that market.
Okay, thank you. We've clearly seen margin pressures on the maintenance business. Is this mainly because of lower pricing, more competitive environment? Or is it more of a servicing costs rising in the regions?
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 right segments and there you can have good profitability. If you go to the most affordable segments there, it may be more challenging. It really depends on what you cater to. 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.
Once again, as a reminder, please limit yourselves to one question. We'll now take our next question from James Moore from Redburn. Please go ahead.
Good afternoon, everyone. Thanks for taking my question. I have three, so I'm thinking which one to choose. Raw material. Your EUR 100 million guidance, you kept it 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, but could you help me with how much of that EUR 100 million or how much of the year is locked in, if you like? Whether we should think about the current raw material prices affecting the 2019 headwind and not 2018? If so, do you have an early read on whether that could be another EUR 100 million given what's going on in steel prices?
Thanks for the question, James. If I look at the total and just to summarize, we said that we expect about EUR 100 million impact from raw materials to 2018. We normally lock our price between three to nine 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. 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.
Okay, good afternoon, gentlemen. Martin Flueckiger from Kepler Cheuvreux. Just coming back to that raw material question. If I understood you correctly, you were talking about 2018 only. 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?
First, like I said, we have kept what we said earlier same, 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, obviously, the impact of product mix as well as the geographical mix plays a big role there. If all things being equal and trying to estimate what it would be for 2019, 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 from Glen 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. We've said now for 2 quarters that the margin on orders received has stabilized. It's clear that we are now delivering orders that we booked first half mid-year last year. Those are coming through. If I look at the margin that we're delivering and booking now, it's probably not a huge difference between the two.
Right. 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, also you get leverage from your costs. It's too early to talk about 2019, but I think the ambition and what we are driving for is pretty obvious.
Okay. Thank you.
Thank you.
We take our next question from Mattias 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, I was just wondering if you could give some clarity on how much of the EUR 100 million headwind on EBIT that has impacted already now in Q1, if there's any of the remaining three quarters of the year that you see sort of will be taking a larger or bigger share of this EUR 100 million headwind, please. Thank you.
Thanks for the question, Mattias. No worries. The EUR 100 million, it's roughly evenly split out between the quarters. That's how it plays out.
Thanks. I'll step back in line.
We'll take our next question from Antti Sutelin 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 2016, they increased again by 7% in 2017, and now they increased again year-over-year in the first quarter. 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 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. I think it's difficult to draw direct conclusions out of these two. I don't think there's any indication that the intensity of elevators and escalators would go down in buildings. I don't have an exact answer to that. Perhaps where you're seeing 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.
Yeah, if the intensity doesn't go down, then it has to mean that at some point, elevators 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, you then need to see physical actually things happening on the site. Therefore I would more follow the real estate investment because it tells more how these sites and the starts are progressing. How much extra money is being used to build them further. I don't have a perfect answer to your question, and we're just seeing that where we see better linkages to our sector compared to other leading indicators.
Yeah. Okay. Let's keep following the situation. Thank you.
Once again, if you would like to ask a question, please press star one. We'll take the next question as a follow-up question from James Moore from Redburn. Please go ahead.
Thanks for taking the follow-up. I've got two, 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 million worse result than last year.
Thanks, James. If I look at the big picture for the working capital development. 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, unbilled revenue increased in this quarter as we saw a lot of starts and a lot of installations, and as the projects continue and progress, then you bill them. No one item that is developing as such negatively. For example, receivables are developing quite okay. They contributed positively, but not as positively as the previous year.
They're positive. What's the other EUR 100 million? Is it inventory or payable or other?
Also currencies play a role. If you look at year-on-year comparisons from a working capital perspective, it's about EUR 70 million impact that the currencies have year-on-year.
Okay, thanks. 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? 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
Ilkka, I address first the employee and you can the saving. Where is actually employees growing? We have had this question before, and it's a good question. It's really because the service business in China and rest of Asia is growing quite fast. Remember in last year, again, we hired about 2,000 new service technicians in China. 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. That's why you see, I would say the majority of this increase is in service technicians.
Good answer. Thanks. Just on the timing of the savings, maybe Ilkka, 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. first was question about how the savings are developing. we've said that we have number of initiatives ongoing to really look at how we can work smarter across the company and therefore decrease the cost base. we're aiming for, at the end of this year, to be in a position where we are having a EUR 50 million run rate savings achieved. Out of those savings, we don't expect much of a impact this year yet as we need to still execute those projects. the total target for the program is EUR 100 million before end of 2020. the remaining EUR 50 then will be split between those years. as 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.
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 Cheuvreux. Please go ahead.
Yeah, thanks for taking my follow-ups. Actually, also two very quick ones. Firstly, on EMEA, looks like KONE is gaining 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? In that respect, are we supposed to assume that the strong sales growth in EMEA is more or less sustainable throughout 2018? That would 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 a good performance in Q4, let's remember one 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. We could see EMEA overall, we gained some share last year. This is one quarter and we don't measure our market share in just one quarter. Overall, I would say the performance was good. Ilkka on the revenue growth in EMEA for the year.
Yes. Well, first I just wanted to clarify as we started the discussion in the quarter. If we look at the EMEA sales growth, which was 19.8% in the quarter, it is clearly one which is now impacted about the number of starts that we saw very strongly coming into the first quarter. We are expecting that to even itself out during the first half. Clearly seeing a lower growth in second quarter as we get through the project and it normalizes more. Overall for the year or so, we are expecting a good growth in sales, but it is good to remember that maintenance business contributes more in EMEA, so that is much more stable than new equipment business overall.
Thanks.
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 are still seeing?
Overall cash conversion, we are expecting that to recover in the coming quarters and that is a similar comment on working capital. Now we saw a bit worse development in working capital compared to the previous year, expecting that to recover in coming quarters.
Okay, thanks.
Our final question comes from Guillermo Peigneux 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 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 services and solutions to the market. I mentioned we are in an environment where markets are moving and shifting quite fast. You know what? This shift and move in markets, that creates great opportunities. 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. Therefore, we take a number of these functions that are not customer-facing and bringing some of those centralized. I think those are very important and good actions.
What we will get from that is both ability to serve our customers better, be faster in bringing new services to the market, at the same time gain efficiencies. We want to look at each three of these, because then we really tie them to our strategy and how we develop KONE going forward. 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. 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 two years. Thank you.
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.
Thank you.
Thank you.
We will now take a question from Daniel Gleim of MainFirst. Please go ahead.
Thank you very much. I have two 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.
Net working capital will become again a positive contributor to free cash flow. Is that the right read?
Well, default, we've said that we have quite 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. Obviously, we need to work closely with our suppliers as well. I see opportunities, but from an advances payment perspective, I don't expect that the rate will improve much going forward.
The second question would be on the lead periods for the stabilizing order quality that you're seeing at the moment. I think Henrik was referring to your 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 year lead period. Is this the right reading, or was it simply misunderstanding?
I think I said first half to mid last year. 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. It's a question when it's completed. Actually, we also see in some markets where actually lead time's getting shorter, like China. 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. That we're seeing, and that's why we have had also good deliveries and good delivery growth from China. That is also a competitive advantage in that market, in being able to deliver fast. That's what many customers are starting to ask for there. Overall, not a big change.
Very clear. Thank you very much.
Our next question comes from Tomi Railo of SEB. Please go ahead.
Hello, this is Tomi from SEB. Can you give a comment on the Chinese maintenance growth in the first quarter?
Yeah. Our sales growth continued to be good double-digit growth in China. Our number of units under contract increased again by over 20%. You ask what is the gap between the two. Our service revenues from contracted revenue is increasing at a good rate. What is quite stable is the revenue from the so-called first service contract, which is part of the new equipment sale, but we then record as service revenue as they get for the first period. 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.
Yeah, thanks gentlemen, for your patience. Just to 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 have been at constant exchange rates without the adoption of IFRS 15?
Literally, there's 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 the past, we start to recognize the revenue as we completed the work. It would have had a negative impact, but I don't have the number to tell you, unfortunately.
It probably would've been somewhat lower, but we don't know how much lower.
Yeah.
Okay, thanks.