Good afternoon, and welcome to KONE's Q3 result presentation. My name is Sanna Kaje, and I am the Head of Investor Relations. As usual, I have here with me today our President and CEO, Henrik Ehrnrooth, and CFO, Ilkka Hara. Henrik will first talk through the Q3 highlights. Ilkka will then dig a bit deeper into the numbers, and Henrik will then talk about the outlook for our markets and our business. In the end, we have time for your questions.
Thank you, Sanna, and also welcome on my behalf. It is my pleasure again to share our development in Q3 and how we have continued to develop KONE in a very positive direction during this quarter. We have many positive developments how we are driving KONE forward in what is quite a challenging environment, particularly in the new equipment markets. Highlights for the Q3 is that our orders received returned to growth in China, and in particular, that our focused pricing actions had now a positive contribution to our orders received growth. That is very important, and we are definitely showing the way in the Chinese market with this. Our new services that we launched in February, they are gaining great momentum, and we can see that they are taking us definitely in the right direction and providing very good differentiation for us.
What we are not so happy about, though, is that our profitability continues to be burdened by a number of headwinds, and therefore our EBIT declined in the quarter. That is something we need to continue, and are continuing, to work on. Those are the highlights, and let us go straight into some of the key figures. Highlights and key figures. Orders received and sales grew. Orders received a little bit over EUR 1.7 billion, and in comparable currencies, they grew by 2.1%. We can see that currencies have quite a significant impact now this quarter because the reported currencies declined by 1.8%. Our order book continues to be very strong at EUR 8.7 billion, some growth from last year. Sales at about EUR 2.2 billion, 4.4% growth. Here, in particular, it is our services business that continues to grow at a good rate.
Also, if we look at geographically, Europe, Middle East, and Africa growing strongly in the quarter and continued good growth from North America. Our EBIT, EUR 307 million in the quarter compared to EUR 331 million a year ago. So margin 14% compared to 15.3% a year ago. Here, clearly, we want to achieve more, and we are taking action to improve it. In the quarter, we also introduced adjusted EBIT. That is to reflect the costs that we have from the Accelerate program. They are excluded from the adjusted EBIT, although there was not a big difference between EBIT and adjusted EBIT this quarter. Cash flow about at the level of our EBIT, EUR 303 million, down from a very high level of EUR 400 million last year. But as we know, one quarter is a short period of time. Always important to look at it from a slightly longer term perspective.
Of course, we have our first nine months to look at. If you look at our nine months, we can see also that our orders received now year to date turned to slight growth, 0.6% and EUR 5.7 billion in total. Our sales at about EUR 6.3 billion, growth of 3.1% in comparable currencies, and EBIT now EUR 851 million compared to EUR 901 million a year ago. Similar things as to Q3, there are a number of things that are positive in our EBIT, such as our service business growth to Europe, Middle East, and Africa, North America. We have a number of things that are burdening the result, such as margins in China, raw materials, currencies, and so forth. Margin now 13.5% compared to 14.6% a year ago. Our cash flow for the first nine months, a solid EUR 928 million.
A good conversion from EBIT to cash flow. Slightly lower than the very strong EUR 1.1 billion last year. If we look at the cash flow for the first nine months, our working capital was more or less stable. What I'm happy about is that, particularly in the challenging Chinese market, we continued to have a strong cash flow. That was a great achievement. Earnings per share, EUR 0.34 compared to EUR 0.42 a year ago. When we look at the environment we are going through, we know that particularly the global new equipment markets continue to be challenging and highly competed. What I'm very happy about is that our people continue to develop KONE in a very consistent and positive way forward. Looking forward, understanding what customers' needs are, and therefore delivering solutions based on that.
I must say the momentum how we are driving KONE forward in this respect is very positive. There, again, our employees deserve a big thank you for that. Those are the highlight numbers. If we go to our sales split for the first nine months, not big differences from a year ago. Maintenance increasing share slightly. Geographically, it's clear that North America continues to increase the share of revenues as well as Europe, Middle East, and Africa. I think that's overall good. The geographic mix is getting a bit more balanced, particularly with the higher share of North America, and that's a good thing. The business highlights for Q3. We have a number of positives, and particularly how we're developing our business overall. Starts with orders received and sales continue on growth path. That is very good.
Our focus pricing actions, particularly in the highly competitive Chinese market, are definitely bringing results, and also productivity improvements in many areas. Our new services are gaining very good momentum. We launched in February our new KONE Care and our KONE 24/7 Connected Services, and we can see that they are differently differentiating us in the market. We are very much showing the way in the market with our KONE 24/7 Connected Services, and we haven't seen anyone else with something compared to our KONE Care. That is something our customers are telling us is differentiating us, and it's actually very positive from their perspective. This is good. We also, a few weeks ago, launched our KONE Residential Flow solution, and I must say that this has received a lot of interest from our customers.
Shows that the way we develop our solutions, the way we co-create together with customers, brings results, all of these are great examples of that. That's why I feel great about our direction overall. We are continuing to face a number of headwinds. Particularly, what I'm not happy about is that our profitability has declined, and it continues to be burdened by a number of headwinds. Ilkka will talk about this a little bit more in detail, it's clear we need to continue to take action to compensate for this. We can also see that competition remains intense in most markets, particularly the largest markets. If I look at, again, the environment and try to give a picture a little bit more broadly how we have developed. We know that the Chinese market is by far the largest new equipment market in the world.
We also know that it's highly competed. Our focus during more than a year has been to ensure that we can turn the pricing in the market. We know that pricing has been a lot under pressure in China. We've taken significant action, the great thing is we can see positive results. We have been able to turn the pricing to slight positive now. I definitely believe that we are showing the way in the Chinese market with this. It's important to note that in a highly competed market such as China, in order to be able to increase prices, you need to have a number of things in place. It starts with having a great overall competitiveness, a good portfolio, a good competitiveness of the organization. Also requires a very strong accountability locally throughout the organization to drive this.
It also requires courage in strong competition to drive it forward. We are showing the way. We have been able to slightly improve our pricing in China in a very competed market. I think this, again, speaks volumes about the strength of our China team and what we can achieve when we put our mind to it. The other thing I want to highlight overall from development is that when I look at our new services, our new solutions, they are definitely taking us in the right direction. Our customers are very positive about these new services and showing us that they're differentiating us in a very clear way. Because of this, we want to now accelerate this development, that's why we launched our Accelerate Winning with Customers program earlier this quarter. I've been asked by many people that, why did you launch this program now?
Also, what is it all about? Why now? To give you a little perspective, when we look over the coming years, we can see an increasing pace of new services and solutions launches. We can also see the demands of our customers are increasing. General speed is just increasing in the market. With the change that we are driving through this program, we want to empower and strengthen our front lines even more than today, to spend even more of their time with customers, to be able to bring new service and solutions and value add to our customers faster, and that way, gain a benefit. In order to do that, we are taking a number of non-customer facing functions that still we do in our front lines in our country organizations and bringing the accountability of these up to an area level.
That means that our front lines can then spend even more time on really adding value to customers and driving that accountability going forward. What will remain important for KONE is that our accountability is very far down in our organization. That's why we're very responsible how we deliver value to our customers. That's why we started it now. We have three clear objectives with the program. The first one is to build better customer-centric capabilities. That's again about strengthening customer interface that I just talked about. When we enable our frontline organizations to spend even more time serving our customers, we will be faster in bringing new services and solutions to the market. That's the increasing speed. When we combine some non-customer facing functions to an area level, we will also gain efficiencies.
When I think about this whole program from a profitable growth perspective, it's clear it's the two first parts, customer-centric capabilities and increasing speed, that have the most significant impact on our profitable growth. It's clear that efficiency is also incredibly important in a very competitive market. The better we serve our customers, the faster we bring services and solutions to them, the more we will achieve growth And better pricing. That is the biggest impact on our business. Then on top of that, efficiencies. That's why we have done it, and that's the idea of this program. It's all about our strategy and how we speed up our strategy execution. That is about KONE's development overall in the third quarter. Let me then next go to the markets.
If I start with the new equipment markets, we can see that overall volumes in new equipment markets were rather stable in the third quarter. However, in monetary value, markets continued to decline slightly. Europe, Middle East, and Africa, overall slight growth. Growth in particular in many Southern European countries and in the Middle East. Central and North Europe is more stable at a high level. North America continues to grow. Asia-Pacific, now the Chinese market was rather stable in number of units. However, pricing continues to be under pressure. I would say pricing probably now stable quarter-on-quarter, and we are clearly performing better than the market in that respect. Rest of Asia-Pacific markets are now declining, and they're declining mainly because of the decline in the Indian market. The Indian market has faced three significant reforms over the past 12 months.
While each of these reforms, we believe are good for the long term, they have created quite a lot of uncertainty in the market in the short term. That's why we believe that we're probably going to see a better development towards the end of this year. Overall, rest of Asia-Pacific markets are declining. If we then look a little bit more closely again at the Chinese property markets, what's happening there? As you know, we have been talking for a long time about the improvement in housing inventories, that the fundamentals of the market have become more healthy. Now, in this quarter, we saw a slight uptick in housing inventories. The reason for that is lower sales volumes of apartments in the quarter.
The reason for lower sales volumes are clearly the restrictions that the government has imposed on more than 50 large cities in China. We can see that these restrictions are having an impact. If we try to look at the Chinese market, my judgment would here be that overall, the market has become healthier from a fundamental perspective because the inventory situation has improved. We can see good continued underlying demand. On the other hand, government restrictions are having a significant impact on the market. When we think about the market towards the end of this year and perhaps the beginning of next year, it's clear that government restrictions will have a significant impact on the development. The overall elevator escalator market has now been rather stable.
We can see continued growth in total real estate investments, although a large part of that growth in real estate investments is due to land purchases and higher land purchase prices. That in summary, our thoughts on the Chinese market. If I turn to the service markets, here trend is very much the same that we have talked about previously and also in our capital markets day. Europe, Middle East, and Africa, North America continue to grow slightly. Southern Europe, highly competitive, but some growth everywhere. Asia-Pacific, continued growth in the market. That's a strong growth. That's positive. Modernization markets, slight growth overall. Europe, Middle East, and Africa, more stable. Slight growth in North America and good growth in Asia-Pacific. Pretty much the same trends we have talked about earlier. With that's the market.
Let me turn over to Ilkka Hara for our Q3 financials.
Thank you, Henrik. Welcome also from my part to the third quarter call. I'll walk you through in more detail our financial performance in this quarter, and I'll start with orders received. Our orders received reached EUR 1.7 billion in the quarter, which represents 2.1% growth on a comparable basis. I think the key highlight from the quarter is that our orders received returned to growth in China. We also continued to grow in Europe, Middle East, and Africa, as well as in Americas. In Asia-Pacific, however, our orders declined overall. I'll talk a bit more in detail in the other slides as well about currencies, but clearly they have a negative impact to our performance in this quarter overall. The relative margin of our orders declined slightly but remained at a good level overall. Let's look at sales in more detail.
We reached close to EUR 2.2 billion in sales in this quarter, really the driver for the sales growth being services, as Henrik highlighted earlier. Sales growing at 4.4% on a comparable basis in this quarter. If you look at the drivers and driving the performance on sales from a business perspective. Modernization growing at 9.5% being the highlight, but also maintenance contributing at 5.1% and new equipment at 2.7% to our sales growth. From a geographical point of view, Europe, Middle East, Africa contributed over 10%, so 10.4%. America is growing also at 7.5%, and Asia Pacific declining at 2.4%, where you can see now the orders received development that we saw in China in earlier quarters now coming into sales and impacting that. Lastly about EBIT.
As Henrik highlighted already in the beginning, that we can't be fully satisfied with the performance we have in EBIT from an EBIT perspective. We continue to see our EBIT margin still being burdened by several headwinds and reaching now on an adjusted basis EUR 311 million, which represents decrease of 6.2%. However, if we look at the details behind that, I would highlight first that the currencies have a negative impact of EUR 13 million out of the EUR 21 million difference compared to last year. Also, our increased investments to R&D and IT represent close to EUR 10 million out of that. In summary, our services growth, as well as the productivity improvements that we've done across the businesses, are pretty much equaling the raw material pressure as well as the margin pressure that we've witnessed in China in the previous quarters.
There is some headwinds, but also some tailwinds which are represented in our EBIT development in the quarter. With that, I'll ask Henrik to come back and talk a bit more about the market and business outlook for the remaining of 2017.
Thank you, Ilkka. Turning to the outlook for the markets for this year, we now have only one quarter to go, so we have slightly specified and adjusted our outlook for Asia Pacific. We now expect the Chinese market to be relatively stable in units for the full year, and we expect the very fierce competition to continue. Rest of Asia Pacific, we expect the market to decline slightly 2017, but probably towards the end of the year, see some growth. Europe, Middle East and Africa, North America, both markets are expected to grow slightly. Same as previously. Maintenance markets, we expect them to continue developing very much the way they have developed so far, same as modernization markets overall. If we look at our business outlook, that is unchanged.
We expect our sales to grow between 1% and 3% at comparable currencies, and we expect our adjusted EBIT to be in the range of EUR 1.2 billion-EUR 1.25 billion. That assumes that translation exchange rates remain approximately at the end of September level for the remainder of the year. That is unchanged outlook. If I then summarize. What is important is that orders back on a growth track. We can see that the actions we have taken and are taking to offset the headwinds we are facing, that they are working and we are continuing with them. Strategy execution is progressing well, definitely feel that we are on the right track, and we can concretely see that. That is why we want to speed up our development.
To end on a little bit lighter note, here in the picture you see a very important building that was inaugurated during 2017. It is the Elbphilharmonie in Hamburg, an absolutely spectacular building. It is a very unique building that has got a lot of accolades. Also an important part of that building is that the architect could not have achieved his vision without some very special and unique escalators that we delivered there. It is one of the main attractions of the building is to see those escalators. Perhaps worth a visit to go and see them. With that, I am happy to turn over to questions.
We will take our first question.
Yes, we now have some time again for your questions, we can go straight to the telephone lines. I would like to remind you to ask one question at a time, please.
We will take our first question from Lucie Carrier from Morgan Stanley. Please go ahead.
Hi. Good afternoon, gentlemen, and good afternoon, Sanna. Just the first question I will have actually is on China, but maybe as different than normal on services. We are hearing more encouraging comments in terms of service demands of China from some of your competitors, but also from some of the component suppliers into elevator in China. I was wondering if that was due to kind of new regulation that have been put in place, and whether you could comment on that service momentum also from a profitability standpoint for you. That's question number one. I'll have a few other after that.
Okay. There hasn't been any concrete China-wide regulation. There are certain specific regulations rolled out by certain cities to test what connectivity means and how you can change your service based on that. It's nothing significant on the regulatory side. I would say that the main change is that customers are starting to appreciate more and more good services. That is something we of course like because we have a very strong service organization in China with a very broad reach, how we train, bring on new service technicians to continue to serve our customers there as well. That is all a positive. Overall, we have good development in our service business in China. It's again, also a highly competed part of the business. Again, I would say that it's the increasing expectations from customers, which is just a positive thing.
Thank you. The second question I had as well is around the China mix. I was wondering, considering you've seen a rebound in the quarter of your orders in China in value, whether you could give us a bit more visibility on which part contributed a little bit better to the mix and to your point about your price increase. How do you see this impacting the rest of the market? We also heard some of your competitor mentioning some pockets of better pricing here and there. How do you see that environment overall, as we continue into the year and into next year?
Perhaps the most important thing is that we believe that it's important to turn the pricing trend in China. We can see, and we have seen increasing costs on the input side, and we have of course seen now a few years of clear price declines. We want to just show the direction there. There are always many aspects to achieve that. Clearly there are always some pockets that are better, some that are weaker. We have to remember, China is a very big market, and we operate in all parts of those. You need to get a broad-based good improvement. I wouldn't single out any pockets specifically, or segments. Perhaps it's important when we talk about this pricing, we talk about in the volume business.
It's not that we would have had more larger projects or things like that, but this is our volume business, and we can see that the actions we have taken are bearing fruit. We are not talking about a significant change, but at least we have turned a corner. With that, I believe we're definitely showing the way in the market. Again, you can only do that with a strong competitiveness and very strong organization. Again, I'm very happy about what our China team has achieved here.
Thank you. Just last question, just to double-check on the guidance. It seems, I think you're suggesting that you should be around more the low end of your guidance on raw mats for this year. I just wanted to double-check whether that was correct and whether, from an R&D and IT standpoint, considering you've had already three big launches this year, how we should think about the magnitude from here, in terms of this investment.
I'll first answer the latter one. Ilkka can answer a bit more specifically, but we have to remember that when you look at R&D and IT expenditure, what you see are certain launches, but of course, there's a constant pipeline of that. The fact that you've seen a few launches, that's not the biggest impact on what the costs are. It's how you develop your pipeline and portfolio overall. Ilkka, could you comment on the raw material and overall cost for IT and R&D?
Yes, certainly. Thanks for the question. Let's start with the raw materials. We started the year with a guidance that we see EUR 50 million to EUR 100 million impact from raw materials to our results. Now from our perspective, we are estimating that to be slightly above EUR 50 million for the year. We have one quarter to go, but at the same time, this is not an exact science. We do not buy raw materials, we buy components, and therefore trying to give you a sense of the magnitude of the impact from them to our results. That would be kind of more details on that one. Secondly, on R&D and IT. We guided for this year that we are expecting a 40 basis points increase to our R&D and IT spend.
So far in this quarter, we are at 40 basis points and year to date as well. We expect that to continue for the remaining of the year as an investment level.
You do not expect a step up now from here considering you are at the run rate of 40 basis points?
Sorry. We had a step up of 40 basis points this year. On an absolute basis, we continue to probably invest on that magnitude going forward. We do not see a decrease, let's put it that way, on an absolute spend.
Okay. All right. Clear. Thank you very much, gentlemen.
Thank you.
Our next question comes from Andre Kukhnin from Credit Suisse. Please go ahead.
Yes. Good afternoon, everybody. Thanks so much for taking my questions. I'll have to go on China as well, so apologies in advance. On pricing, a couple of things to check. Could you confirm that you're putting these price actions through on both brands, KONE and GiantKONE? Are we right to think that the volume part of the business is somewhere around 80% across the whole China business for you? Just to check the kind of indications of price increases we've heard are around 5%. Is that kind of the right ballpark for you? Just to finish off on this, if I may.
In terms of that realizing, how much room is there for that kind of list price increase not to materialize on that particular kind of like for like part of the business, i.e., is there a dealer discount or some sales incentives that can be utilized? This is kind of taking the large project business completely aside from it and looking at the volume purely. Thank you.
Okay. We have quite a few questions. Let's try to take them one by one. Yes, definitely both brands. It's something we've taken action in both of our brands to increase the pricing. The majority of the business in China is a volume business. Large projects, infrastructure, may be 10% of the market overall, and then other major projects may be similar size, but as we know that those come not in the same stream, that they can vary quite a lot quarter-to-quarter. The majority of the business continues to be, and is the volume business both for residential and certain commercial projects. I can't comment really on price increases. There are certain targets. Of course, you can put the list price up, but then depends on what kind of discounts and how you manage that.
I would say that like for like, we're talking about a slight increase that we have achieved. Of course, it's more important to see what you have achieved rather than what may be talked about. I think that comes over time.
Great. Thank you, Henrik. I appreciate it. Can I just follow up on the modernization question before and the regulation part of it? I think you answered it in relation to the connectivity. Can I ask it about with relation to new safety norm, the EN 81-20/50? I think we've heard some suggestions that that may accelerate the demand for modernization of installed base in China because there may be some series of inspections being kicked off across the country as of New Year 2018 on the back of that. Could you clarify on that, please?
There's no nationwide significant regulation that we're seeing now come into place. There are certain cities that are taking stronger action. There are certain regulations that will come into the Chinese market, but it's not as of next year yet. Those will then bring Chinese code again closer to the European code.
Thank you.
Thank you. We will now take our next question from Manu Rimpelä, Nordea. Please go ahead.
Thank you. My first question would be on the drive pricing situation still in China. Could you comment on how are you seeing the net pricing? Obviously prices are going up, are you able to actually offset the cost inflation because I think you mentioned that the order intake margins are still down.
Today we talk about price to customers. That's the main price we talk about. You're right in that way, in that raw materials, particularly if they stay at the current level, that's another significant headwind and that requires further price increases to compensate for that.
At the moment you are not able to fully compensate the raw material with the price increases if I understood you correctly.
That's why, yes, we've said that we have seen a slight decline in the margins of orders received. I think that the most important point here is that I think we've turned the momentum in China and you're really showing now the market direction as the market leader in China. I think that's an important thing that we do that.
Okay. The second question would be, can you confirm that you still have the Chinese margins which are above the group average?
We have a good business in China, yes. Our margin in China is above group average, yes.
Okay, thank you. Finally on the service pricing across the group. Can you comment about how do you see the situation? Are you able to raise services prices or maintenance prices and especially, for instance, in the U.S. where you had strong volumes there for quite some time? Comment how you have this new program that you have or this new service concept impacting pricing and are we seeing anything of that already in your figures?
Service pricing varies a lot market to market, and it's usually a very direct correlation of the strength of the new equipment market. That tells how many new units are coming to the market. Some Central North European markets are clearly better than Southern European markets and some parts of the U.S. is then better than other parts of the U.S. It's quite local. Overall, I would say we have done better in that area this year than, for example, last year. Our new services, we can see that they are positive from three perspectives. First, our customers are clearly giving us very good feedback about them, that we are differentiating and that we now provide them with services that they want to have. This is very important.
That means our hit rates are better for those and our pricing is also slightly better there. We have to remember that to roll out this over entire service portfolio takes time. We are now in about eight countries and we are increasing number of countries all the time. Momentum is good and we can see that definitely this is the right direction for a service business.
If I may follow up on the service question. If you look at the group as a whole, can you say that this service pricing contributing positively to your margins or are you still lacking cost inflation, wage inflation there?
In most places it would be a slight positive contribution. Again, it varies quite a lot market to market which markets are growing, mix may be slightly different. Overall, I would say that we have done better this year on that front than last year.
Any more further questions?
Our next question comes from Guillermo Peigneux-Lojo from UBS. Please go ahead.
Thank you. Good afternoon, everyone. I was wondering about the situation in the market as you see it stable in China, but also at the same time, we're starting to see other leading indicators now starting to erode, not only in tier 1 cities, but also in lower tiers, including tier 2 and a slowdown in tier 3, on the national level as well. I was wondering whether, is it fair to assume that the stable market can be just lagging the weakness we saw in some past statistics on whether a recovery should be expected in the market, before we see the deterioration again in 2018?
Clearly we have had now many things that have gone in the right direction over a period of time with, if you look at apartment sales and starts and so forth. We know that our sector comes a little bit with a delay to this. It's too early to comment on how we expect our market to develop next year, because it will depend upon how the government restrictions are kept in place or how they deal with those. Let's see towards the end of next year, but currently we see a pretty stable market overall.
My second question regards actually the aftermarket in China as well. I guess normally, you mentioned in the past a 60% conversion rate. Is that improving as kind of a first question regarding the Chinese market, but also at the same time, it takes longer time to service the market than in Europe. I think it's just one year longer period before you actually enter into a revenue stream. If we think about this and the fact that the order intake has been weak for a year, is it fair to assume that aftermarket will slow down at some point over the next year or so?
I didn't quite understand. If I just first clarify, what do you mean it takes a year longer to get the revenues in China than the rest of the world?
Yeah. Sorry, normally what you have is time to service in Europe tends to be anything between, well, roundabout speaking, 12 months between the installation and first service point. In China it takes two years normally to service. In the past I read these statistics, hence actually there's one extra year, so to say, when it comes to basically from installation to the first revenue stream.
Okay. I understand your question because the point is that you will in both Europe and in China, immediately start servicing when the elevator is handed over to the customer or escalator, you will start generating service revenues. In the first year in Europe, for example, that's the first service revenue, but that's something we accrue out of the new equipment sale. We will generate service revenues also during the first year. In China, that first service period may be up to three years. We are generating service revenues during that period of time. They just were sold as part of a new equipment contract. In both countries, you start generating service revenues immediately.
Okay.
If I address it slightly different way. Our conversions in China, first of all, are improving slightly, and the number of units we're converting are growing. That's great. Our service base is actually growing strongly in China. If we look at our overall first service revenues, they are only growing slightly. That's of course a little bit then blurring the overall growth rate of services. If you look at how many contracts we're signing up and our service base, that continues to grow at a strong rate, over 20%.
Is it fair to assume then, order intake slowing down will mean that the service growth at some point will be slower or do you will continue to grind higher at this pace?
There are of course two factors that impact service growth. One is how big the underlying service base is, which for us is rather large. Then how many new units you come. It's clear that if you have a slowdown in new equipment and the bigger your service base gets, then of course the percentage growth will get lower, but you continue to grow and continue to add to that base. That's the important point.
Thank you so much. Very helpful.
If you find that your question has been asked today, you can remove yourself from the queue by pressing star two. We will now take our next question from Matthew Spurr from RBC. Please go ahead.
Hi there. I might switch from China. Can I ask about the Europe growth in the quarter, please, Henrik? 10.4%, I think at constant currency, that is pretty good. If I look back at the order trends in the new equipment or in the modernization, they've been good, but I don't think they've been sort of double plus in your little diagram. Could you give us a little bit of color on what's going on in Europe, please?
Right. It's also, you have to remember quarter to quarter may fluctuate. Our revenue growth in Europe wasn't so strong first two quarters, now it was stronger. It's also a bit seasonal. We have had a very strong order intake in both our new equipment and our modernization business over the past couple of years. Now we can start to see that in our revenues. It's nothing more to that. Just that now this quarter we had a little bit more revenues coming through.
Okay. I had one again on China. Just on the whole pricing strategy. It was early last year when you had a little bit of a change in pricing strategy and ended up having to give away a little bit of market share. Is the difference now just that the market isn't declining, that you can be more successful leading pricing but not giving up market share? Is that the main difference from early 2016?
I don't think we've given up market share to start with. I think we've more or less held our market share and continue to be clearly the largest player in the important Chinese market. Always when you have a large, highly competed market like the Chinese one, even if it's stable, again, I would repeat that in order to be able to improve prices, you need to have a strong overall competitiveness with a good portfolio of solutions and products. You need to have a strong organization that takes the accountability and responsibility for driving this and really understands how you add value to your customers. Without adding value to customers, you don't increase prices. As I said, it takes courage as well.
When you can see a very highly competed market around you need to then understand how you drive forward and believe that by adding value to customers, you can do it. That's what we've done. We started to take then very determined action. A large organization takes a while to roll this out, but I believe that we are very much on the right path here.
Okay, thanks.
Our next question comes from James Moore from Redburn. Please go ahead.
Yeah, good afternoon, Henri, Ilkka, everyone. Thanks. On China pricing, I just wanted to be clear that the slight sequential Q-on-Q price uplift in China in orders in RMB that you talk about, was that less than the sequential Q-on-Q Chinese raw material cost uplift?
Yes, you can see it therefore that our margins slightly still declined even though we're able to improve pricing somewhat. That's why I said earlier that even when we look at raw material prices are now. We know that they're highly volatile. Where they're going to be next year, I don't know, but they have just recently spiked up a fair bit again, that actually this trend that we are driving is needed.
Yes. What sort of price rises do we need for the current spike up to be broadly flat net?
Net, you need a few percentage points.
Yeah. On raw materials, I'm modeling 40 next year versus 60 this, your Swiss friends are talking about 2018 pressure being the same as 2017 pressure. Do you think we ought to think about next year's pressure being similar to this year on raw materials?
Let's see. I'm not going to make a prediction where it's going to be next year. Only thing we can see is that the volatility is high. Where they are at the moment, they are quite a high level, and that would indicate quite a significant headwind, and that's why we're determined to everywhere continue to drive better pricing by adding value to our customers. Let's see where we are next year. I think it's too early to comment at this point.
Okay, thanks. You mentioned earlier the service pricing is getting better this year versus last, which is encouraging. Is that European maintenance pricing pressure easing or is it better U.S. maintenance pricing?
It depends. In many countries, if you do slightly better on your pricing and renewals of contracts, that's how we get it from a broad portfolio. Clearly, it usually comes more from the countries where new equipment markets have been stronger for the past year. Overall, the situation is slightly better than last year.
Great. Thank you very much, Henri.
Thank you.
Our next question comes from Glen Liddy from JP Morgan. Please go ahead.
Hi there. It's just a few different things. Your pricing's improved in China, are you changing any of the other contract terms, either extending service periods in that initial sale or payment terms or anything else?
This is all when we comment like for like. Payment terms, we continue to have good payment terms. Sometimes you may have a longer first service period, that's included in a new equipment price. When we comment on this, we very much comment like for like.
Okay. The margin in the backlog, you've been quite clear, is down slightly. Is the decline greater now than it was at the beginning of the year?
Clear. Now we'll be able to improve pricing. It was more beginning of the year than it's now.
Okay. Finally, on raw materials, you were hoping to enter into some longer contracts with your suppliers. Have you reached the limit of how long your contracts might be now on average, or is this lock in prices further?
Locking in prices, that's something we've done successfully over the past years. Remember that you then roll over something and get a slightly smoother effect. When the market is volatile you can lock some prices, but also the terms at what supplier is willing to do it may not be the most favorable. You have to always look in the market what makes sense at any given time, but perhaps we have slightly less locked in prices now than we would have had last year at this time.
Okay. Thank you very much.
Thank you.
Our next question comes from [Aneri Sutlond] from Deutsche Bank.
Hi, this is [Antti]. The Chinese held their meeting, the big meeting, and I wonder whether that made you any more optimistic or pessimistic as regards to the development in China construction and elevators.
I don't think there was anything that surprising coming out of that meeting. I would say they are emphasizing a more sustainable growth, both from economic and environment perspective, which is, I believe, good for long-term growth. Urbanization will continue, and we have to see what detailed policies comes out of this for who goes and so forth. I don't think that there was a big change how we would view the market. We can see that a lot of people continue to move into the cities. We continue to see that consumers are getting wealthier, want to upgrade, and all that has a good impact on our market. No, I wouldn't say a big change out of that.
Okay. I can note that you and also Schindler became a little bit more positive in China for this year. I wonder whether this has any significance for next year in your view. By the way, what is your next year view on China?
Let's come to that in January. As I said earlier, there are a couple of important things. One, I believe that the market is fundamentally more healthy because inventories for our department has continued to improve over the past year, so underlying health has improved. That's a good thing. The other part of the equation are government restrictions that are having a significant impact on the market. Let's see how they develop. That will impact the market next year.
Okay. Thank you.
Thank you.
As a gentle reminder, if you would like to ask a question, it is star one on your telephone keypad. We will take our next question from Andre Kukhnin from Credit Suisse. Please go ahead.
Yes. Thanks so much for taking the follow-ups. I try to follow Sanna's rule. Can I just double-check on the pricing versus raw materials? Apologies for laboring this, but if you talk about slight price increase in your Chinese new equipment business and taking, say, couple of percent as an example, that yields about EUR 35 million. If you take 2% on 85% of your Chinese sales and then 80% of that to the volume business. We are talking about raw material impact across the group of above EUR 50 million, and then we can scale it down by Chinese business. Is this kind of the right way to think about the delta? Are we talking about EUR 50 million plus this year and then the headwind for 2018 and setting that against the price increase in China and as a result saying that the orders margin is declining?
Okay. First of all, clearly, when you look at pricing, yes, you can count it over the total business that we have there. There are of course many puts and takes. You have raw material price increases, but then you have a lot of actions that we have taken to mitigate that. As Ilkka Hara talks about with EUR 50 million, we showed that we have been able to mitigate a lot because if everything would come straight through, we would have a much higher increase. There is always many puts and takes. It is also part of the mix of the business that you have. We have to remember that now we are more or less at last year's level, but before that, we had seen a significant decline. What are we delivering from the order book is of course comes with a delay.
When you take all of these factors into play, you can still see a slight decline in the order book, but clearly we are going in the right direction now.
Great. Thank you. I appreciate that. Just on something else completely. In terms of the cash performance and working capital within that, what drove that, I think it was a sort of EUR 33 million outflow, was that FX or anything underlying? Could you please comment on that?
Comment on that.
Yes. On the working capital, in total we did have a significant impact from currencies in the change. If you look at the underlying commercial terms that we have, we continue to work on advanced payments in all regions across the globe, no changes there in underlying terms for the business.
Great. Thank you very much. Just a last one follow-up for me. Thank you for clarifying the dynamics between the first maintenance and paid maintenance contract in China. Are those paid maintenance contracts, are they any kind of fundamentally different to elsewhere in the world in terms of what you kind of sign up to provide there or anything in the pricing structure? Obviously, the labor rates are different and therefore the levels are different, but is there any kind of fundamental difference in terms of how these contracts are structured for you in China versus elsewhere?
From contract perspective, no significant differences. There are clear differences between the regulation between different markets, how you perform your service and what the requirements, how often you perform it and how you do it and so forth. That's where the differences are between markets. Fundamentally structuring contracts, no big differences.
Great. Thank you very much.
Thank you.
Our next question comes from Lars Brorson from Barclays. Please go ahead.
Yeah. Hi, Henrik. I just had a couple of quick follow-ups. I know we are really sort of running around talking about China pricing and backlog margins quite a lot here, but it is important because it's obviously forward-looking. I'm not quite sure I understand correctly, but maybe I could just be clear. You're saying you're fully offsetting raw materials inflation in China in your equipment this quarter to the earlier question earlier. Can I just ask why is backlog margins down then?
I don't think that I said that. I said that we have improved pricing slightly, but where raw material prices are right now, we would need to improve them even slightly further to compensate for that fully.
Okay. Again, I mean, backlog margin is down now less than it was early in the years, perhaps less surprising. This is the fifth consecutive quarter of decline. It's obviously annualizing now. It's quite an easier comparison. I wonder whether you could give us some sense for how the backlog margin is progressing relative to the raw material headwinds. Should we expect this now to be sort of the last quarter, if you like, of backlog margins down given the measures you're taking on pricing?
As you know, we don't comment on pricing going forward. That's something always individual deals between us and our customers, so we don't comment on pricing going forward. I don't know where raw material costs will be in three months' time, for example. We have to see. I think our objective and our direction that I've communicated should be pretty clear.
It's obviously positive to see you lead the market on pricing. I would expect that. I wonder how much of that is a reflection of your slightly smaller exposure to the larger project and infrastructure business. You're obviously trying to give an indication of what you're doing on a like-for-like basis. It's also true to say perhaps, at least from what we heard from your peers, there's much greater pricing competition on some of the larger projects. Would you say that that's fair? If so, how much is this better pricing relative to market a reflection of that?
As I said earlier, this is like for like, it's when we talk about our volume business. What mix you have between larger projects and smaller projects, that's out of this equation. This is like for like for the volume business that we are talking about. Okay, the mix in the volume business may have improved somewhat. We've taken large projects out of the equation here. I would say that we have a very strong market position also in large projects, both infrastructure and others. Again, we are a clear market leader in China, and we have a good exposure to most of the markets, and that's really the strength we have there.
All right. Okay, thanks.
Thank you.
Our next question comes from Lucie Carrier from Morgan Stanley. Please go ahead.
Hi. Hello again. As we have a bit of time, I just had another question, actually. On the mix of new equipment, it seems that you've had very good momentum coming from North America in terms of new equipment orders. I'm just wondering also in terms of overall mix for that new equipment business, whether that could be a bit of a help as well.
Yes, we have clearly have had a very good momentum and development of our North American new equipment business. So have we done also in many European countries. Yes, perhaps we know that the Chinese new equipment business is more profitable, still, we have good businesses in these areas and are developing them nicely. Perhaps it may be a slight mix headwind, still, the most important thing is that those are all developing in a good direction both growth and profitability wise.
Just to follow up, when you think about the new equipment business typically in North America, how does that compare maybe with EMEA in terms of a margin profile?
It's not that significant of a difference.
Okay.
Thank you.
As a final reminder, ladies and gentlemen, if you'd like to ask a question, please press star one. We pause for just one last moment. We will take a question from Andre Kukhnin from Credit Suisse. Please go ahead, sir.
Hi, yes. Hi again. Just last follow-up from me on the China retrofit opportunity. It's something that's come up in discussions and quite surprising that the numbers that are being suggested on potential number of lifts that can go into the existing buildings to retrofit buildings of seven to nine-story high that do not have elevators at the moment. Is this something that you see as relevant in kind of a near term on sort of a one or two-year view? Or is that just kind of something that would be nice to materialize at some point in the next 10 years? Thank you.
I don't know exactly when it will materialize. You talked about the earlier regulation in China. There's a lot of talk, a lot of discussions and constructive and positive discussions about various regulations in China. The exact timing of those when they were rolled out is unclear. When you talk about now the retrofitting of elevators into buildings seven to nine stories, also a lot of discussions ongoing on that. I believe at some point it will be a significant opportunity to improve the usability of these buildings. Still, exact timing when there may be some regulations is unclear. What we can start to see already is that some customers are asking for it. I think that it's the same discussion as in Europe that
How do you split the cost between the different floors of the building and all that? All of that discussion is ongoing and what it will mean and when this will come through, we will have to see.
Thank you. Are you ready for it in terms of product offering, the channel to market capacity?
I think we have shown quite many years in a row that when a good opportunity comes up, we are pretty quick.
Great. Thank you very much for all your time.
Thank you.
Our next question comes from Daniel Gleim from MainFirst. Please go ahead.
Yes. Thank you very much for taking my question. Can you hear me?
Yes.
Thank you. The first one I have is on the maintenance acquisition opportunity in China. We heard from some competitors that they're now starting to eye on potential. Is this something that you're also eyeing on or is this to be excluded for the time being?
Our principal focus is clearly organic growth because we have very good organic growth and a good pipeline there. We deliver new equipment with good margins and then convert into service. That's clearly the best business we can do. If there are good opportunities that come up, clearly that's something that is interesting to us. At the moment, if you look in the past years, main focus has clearly been on organic growth.
Thank you. Very clear. Maybe Ilkka, when you say the absolute investments next year are not going to go down, they're going to be stable. Are you referring to the euro amount or are you referring to the percentage number in terms of sales?
More referring to the percentage of net sales in my comment. This year, we clearly wanted to highlight the fact that that went up, and we see more stability than going forward, at least at this stage. We continue to monitor the opportunities for investments and then decide based on those.
Very clear. Thank you very much.
Thank you.
As there are no further questions, I'd like to turn the call back for any closing comments or remarks.
Thank you, Henrik. Thank you, Ilkka, and thanks for all the good questions from the lines. I would still like to remind everyone about the IFRS 15 call that we will have on November 16. If you have any questions regarding that, please join. Otherwise, with that, I would like to wish everyone a great remainder of the week. Thank you.
Thank you.
Thank you.
This concludes today's call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.