Afternoon, everyone, and welcome to KONE's Q1 Results Presentation. My name is Sanna Kaje, and I'm the Head of Investor Relations. I have here with me today our President and CEO, Henrik Anruth and CFO, Ilkka Hara. Henrik will first go through the business highlights, Ilkka will then dig a bit deeper into the numbers, and Henrik will then conclude with the outlook. Henrik, please.
Thank you, Sanna, and also a warm welcome on my behalf to our Q1 results announcement. It's again my pleasure to share some interesting news with you and share with you how we have performed in the Q1 of the year. In Q1, we had a solid start to the year with continued sales growth and a very strong cash flow. However, we did have a number of areas that burdened our result. And therefore, despite good progress, our results declined slightly.
What is also important in the quarter is that we launched some new very groundbreaking services that we can see already now that has great traction with our customers. But during this presentation, I'll start with going through highlights of our performance, talk about a little bit broader how our markets and our market share developed last year. I will talk also about our market development. And after that, I will hand over to Ilkka Hara to review our numbers a little bit more in detail, and then I'll wrap up with the outlook for the coming year. But if you go straight into the key highlights and the key figures for 2017, you can see that our orders received, they were a little bit over €1,900,000,000 and they declined slightly at 1.2% in comparable currencies.
Order book continues to be strong. It is over €9,000,000,000 and has grown at about 5% over prior year. Our sales continued its growth. It was over €1,800,000,000 And in this environment, I would say a good 3.3% growth. We'll come a little bit more in detail into what is behind this good development.
Our operating income declined slightly from $221,000,000 to $218,000,000 And here, despite good performance in many areas, we did have areas that burdened the result and therefore also the margin declined slightly from 12.7% to 12%. It's clear that we are not happy with the fact that our results declined slightly, and we continue to take action to find areas where we can improve compared to the headwinds that we are facing. What I'm happy about is that our cash flow was very strong, again at €305,000,000 So we can see that cash conversion was very good again in the Q1. EPS, €0.36 compared to €0.37 last year. In an environment that we're going through where we can see the environment is very mixed, we have some good markets, some very challenging market, and I would say quite an uncertain overall environment, what is important is that a company has a very clear direction.
Employees understand where to focus, where the opportunities can be found. And there, I think our employees have been, again, done a great job. So big thank you to them in understanding of how we drive performance also in a more challenging environment. If you look at how our business mix is developing, we can see that the trends that we started to see during the second half of last year continues, which is that the services business is clearly our strongest growth driver at the moment and where we have good growth. So share of maintenance and share of modernization continues to increase.
If you look again on a geographic basis, we can see that it's North America, the share is clearly growing and it was already 22% in the Q1 of our revenues. And I think particularly the geographic share, it's good that we get a more balanced market share of our business as we know that our markets do develop in different rhythm globally. But if you look at some of the highlights of our businesses and our business review in Q1, we can see that on the positive side, a continued good growth in our services and good growth in both maintenance and modernization sales in all geographic areas. So what I'm very happy about is that the active development we put into our services business over the past 2 years is really continuing to deliver strong results. We also had a solid development in orders received in many markets, which is supported by some of the very successful product launches that we had during last year where we continued to strengthen our product competitiveness.
It's clear that we also had some areas that burdened the orders received, but overall, many good performances. Ilkka will come back in more detail into this. Also during the quarter, we launched our new strategy, have been actively rolling it out throughout KONE and discussing it very broadly with our customers. And what I'm very happy about is building great momentum and has been very positively received. Also, we opened our renewed high rise test laboratory in Tuturi in Finland, which is a totally unique high rise testing laboratory where we can bring, again, a lot of great solutions to add value to our customers.
From a market perspective, I would say that the positive thing that occurred during the quarter was that we start to see a stabilization in the large Chinese market. If we look at volumes in the Chinese market, they were now stable year over year. And as you all remember, the trend last year was that we clearly saw a clear price decline in China throughout 2016. But now during the quarter, we saw that our prices started to stabilize. So I would say some of the first positive signs that we're going in the right direction, and that's also very positive.
In the Q1, we were also facing some clear headwinds, something that we had expected and something we already talked about during last year and beginning of this year. And what is burning our profitability is a combination of the price pressures we saw in the Chinese market last year and also clearly higher raw material costs. We're also seeing, particularly I would say in larger project, an intense and perhaps intensifying price competition. So these are the highlights of how of our business from the Q1. Another important highlight is that we really showed how we bring our strategy alive.
We had a very important launch on the 8th February, where we launched some truly groundbreaking services. What is perhaps most important with these new services that we launched is that these are not only a promise. These are services that we have been delivering to our customers in pilot mode or actually some countries a little bit broader already during the year. So we can see that the results have been very positive and that we are definitely on the right path. So what we launched on the 8th February were 2 things.
1st, our 20 fourseven Connected Services. These are some of the first truly customer value creating IoT services. We hear a lot about technology and technique when it comes to IoT and that we have really the best partners, I believe, in the world to develop this. But perhaps the most important thing is how we have packaged this to something that truly adds value to our customers and something we've been able to show with customers and they really appreciate it and it's developing well. They get clear value in seeing improved safety, much better transparency in understanding how the building works, how people are moving there and how the equipment overall are performing as well as being able to predict before problems occur.
The other thing we launched was our new KONE Care maintenance services. These are truly differentiated markets, And we can see, as I mentioned, we have been selling this for over a year. We already have thousands of customers who are benefiting from the value that we deliver through these services. And what is new in this? The new thing here is that as our industry, most places, most companies have 3 different offers what they want to sell to the customer.
Here we turn it on the head. We instead go to our customers, truly want to understand what type of buildings, what type of tenants, what type of needs do they have. And based on that, based on certain modules that we have, we tailor an individual offer that meets their exact needs. And we can see that our customers are very much appreciating this, and it adds value to them. And the reason we can see it is we can see from the customer feedback, but also from the fact that our hit rates are up and our prices are better when we work in this way.
So we can see that we are clearly bringing differentiation also to the services business in this industry. So that is about Kone's performance and our development during the Q1. If then go to market development. New equipment markets in the Q1, globally, they were rather stable. Europe, Middle East and Africa grew slightly, particularly in Central and North Europe.
South Europe continued to recover from a low level. Middle East, more mixed and challenging. North America, I believe the United States continued to market continued to grow. We're already coming into 8th year of growth, but the market is very solid across segments. And in Asia Pacific, if I start with markets outside of China, we saw now a more challenging environment in the market.
India market declined slightly because of demonetization that happened in the Q4 last year. And also Australia is slightly declining from a high level. And Southeast Asia, I would say more mixed environment, some growth markets, some more uncertain where more political uncertainty is at the moment. China, as I mentioned already, markets overall stable. And during the quarter, we started to see that prices were stabilizing.
So I would say, 1st, very positive news from that market. If we then go into a little bit of what is behind the stabilization of the Chinese market year over year in volumes and now during the quarter in prices as well. Of course, behind it is the Chinese property market. If you look at the market overall and start with inventories in the market, we can say that we can see that in the higher tier cities, inventories are at a healthy level, where they continue to be for about a year. So they continue to be quite good.
In the lower tier cities, inventories have clearly come down over the past years and continue to come down, but are still elevated in many cities. So we still have some way to go, but it's clear that the market is becoming healthier all the time. If you then look at housing sales and prices. As you all know, prices in the property market came up quite significantly, particularly in the larger cities last year. And as a result of that, the government started to introduce restrictions for mortgages and number of apartments one can own.
And we started to see that, that is starting to have an impact, particularly in the higher tier cities. We already have about 32 large cities with the restrictions, which represents close to half of the overall market. So it's starting to have an impact. And because of these restrictions, we start to see that growth is now shifting more into Tier 3 and Tier 4 cities overall. Because of this, we can see also more confidence amongst developers and because of that, also total real estate investments is growing, up 9.1% year over year.
And all this, as I mentioned, has created a more stable market for us now. When we look forward during the year, we still expect that the market is stable to minus 5%. You can see there are positive things happening in the property market, but on the other hand, we also have the restrictions being imposed by the government and those we believe will start to have a bigger impact towards the end of the year. So that is the new equipment markets, a little bit more detail on China. If I then turn to the services market.
Maintenance development continued very much in line with last year. Slight growth in the market in Europe, Middle East and Africa and North America and strong growth in the Asia Pacific market. Modernization, where the markets have been growing well for a couple of years now, we continue to see slight growth in both Europe and Asia and Africa and in North America and strong growth in Asia Pacific, although that's a slightly smaller market, but continues to develop very well. So that was development in the Q1. And as we are now in connection with the Q1 result, we have also had now as a habit for many years to also look at our market share development in more detail for the last year and the market development in more detail for the prior year.
So when we look at the new equipment markets globally for the year 2016, we can see that the global new equipment market shrank by about 2% measured in number of units from about 840,000 units to about 825,000 units. In monetary value, the market declined last year by about 8%. If you look at the market development in the various markets, as we discussed already beginning of the year, the important China market that declined by about 5% and was last year around 515,000 units overall. In monetary value, the Chinese market declined last year in the mid teens. We then had growth in Europe, Middle East and Africa, growth in Rest of Asia Pacific as well as in North America.
KONE's market share last year was stable at 19%. If we look at where it has come from, in China, our market share stayed stable at about 20 percent. And as you know, our objective last year wasn't even to maximize market share in China. In a declining market, as a clear market leader, we focused more on a solid development there, which we had. Market share wise, the best development last year was in Europe, Middle East and Africa, where we clearly improved our market share.
If you look at North America, our market share improved, in particular if you look at in monetary value. So those were the markets where we had the best overall development. If we then look at the services market, the services market globally increased again last year. Installed base of elevators and escalators was more than 14 1,000,000 units globally. And it's clear that it's China that already represents 31% of the market is the key growth driver globally.
KONE, we clearly improved our market position in maintenance last year. And we can see that given the growth and the good improvement that we have had, we are already now on a shared number 3 position. In maintenance as well as in modernization, we clearly have a market leading growth rate, and that's why we are clearly catching up with our larger competitors in services. Also modernization, market continued to grow. It was a single digit growth number for the market overall, and we grew at about 15%.
So again, here we improved our market position also quite significantly. So overall, stable market share in new equipment, but clearly improved market positions in services. If you then look at what are our market positions at the end of last year, we can see new equipment. We have very strong market positions, particularly in the largest markets. Even though they have been more challenging now, China and rest of Asia Pacific, we know that those are the key markets for the future and here we continue to be market leader in both.
Europe, Middle East and Africa, we are the 2nd largest player. And in North America, we are number 4. However, it's interesting to look at this number 4 position in North America. If I only go 3 years back, there was a very significant difference between our market share and that of our bigger competitors. Today, when I look at it and we see the number 2, number 3 and number 4 players, they are within a couple of percentage points of market share.
So here we can also see that we have clearly caught up with our larger competitors in that market. And that shows that in new equipment, we have very strong market positions throughout the world. In maintenance, as we know, we continue to be the challenger. And that is a position we are taking very seriously, and that's why our objective is to grow faster than our key competitors and that we are doing. Market positions continue to strengthen.
And what I'm very happy about is that in the what is going to be in the future, the largest service market and the fastest growing market, the Chinese service market, we are market leader and also in Rest of Asia Pacific, we have very strong positions. In other parts of the world, we are also strengthening our positions. So good overall development, I would say. So that is, in summary, our performance, what we have done within KONE, markets and our market share for last year. I will now hand over to Ilkka to review our financial performance and some other matters in a bit more detail.
Thank you, Henrik. It's my pleasure today to go through more in detail our financials for the Q1 2017 as well as then look at as a heads up item more in detail the changes we have ahead of us in terms of our accounting standards. But let's first start with our financial performance and orders received development in the Q1. So although we saw very good development in a number of areas, overall, we did see a decline in our orders received by 1.5% on a historical basis, and our orders received reached over 1 point €9,000,000,000 in the quarter. If we look at the key drivers for this development.
So first of all, I would highlight a good performance in our modernization business where we continue to see positive contribution to our orders received growth. At the same time, I would also highlight new equipment in both Europe, Middle East and Africa as well as in Americas contributing positively towards our orders received growth. At the same time, new equipment in Asia Pacific negatively contributed to our growth in orders received. And there, China playing a major role. So we saw in China for orders received a decline of about 10%.
And as said, we were aligned with the market overall from a volume perspective, but prices, given the performance, although it stabilized in the quarter, we still saw year on year decline by about 10%. Then if we look at the relative margins of our orders received in the quarter, so they declined slightly but remained at a healthy level. And contributing to this development, we saw both the development in pricing, especially in China, contributing there, but also the increasing raw material pricing having a negative impact there. FX played a minor role this time, negative impact of SEK 7,000,000 to our orders received. Moving forward and then to sales.
So for sales, we saw solid development and really driven by services. We saw growth of 3.5%, reaching over slightly over SEK 1,800,000,000 in the quarter. And if we then look at the key drivers on the right hand side for this, what came out to be a 3.3% growth in a comparable basis. Then first, from a business perspective, so both maintenance as well as modernization contributed positively. And there, modernization at 9.5% as well as maintenance at 7.1% clearly were highlights for growth in the quarter.
At the same time, new equipment was down 1.3%, really driven by the development in orders received that we saw in 2016 for that. And then geographically, looking at the development, so Europe, Middle East, Africa contributing at 5%, really good performance there as well as Americas really as a highlight of the quarter at 19.6% growth there. Asia Pacific declining 5.8 percent and there China playing a major role where our revenue in China, driven by the orders received development that we saw in 2016, declining over 10%. Then moving forward and looking at the operating income, where although we saw continued strong execution in a number of fronts, despite that, several headwinds burdened our profitability. And we did see a decline of 1.7% on our operating income, reaching DKK218,000,000.
And clearly, that's not something we can really be happy with, and we clearly need to accelerate the actions we have to improve our profitability going forward. If we look at the key drivers on the right hand side for operating income, So services growth contributing positively to our operating income as well as the overall good execution in a number of fronts in terms of driving profitability as well as product competitiveness forward. At the same time, we did see our accelerated investments to R and D and IT short term negatively impacting our operating income, although we continue to see, as witnessed by the new launches that Henrik talked about, good potential going forward in these investments. Then as discussed, so the raw materials in the quarter are a headwind already. And then also the margin pressure that we witnessed in latter part of 2016 now is coming through in our P and L to operating income as well.
Now shifting gears and really looking forward a bit as a heads up item on the upcoming changes when it comes to how we recognize our sales from 2018 onwards. While we're adopting the new IFRS 15 principle in our accounting. It impacts about half of our sales, so the volume new equipment sales as well as modernization business. If you look at on the right hand side at the top graph, you can see how we're accounting for our sales today. So from the time when we start to manufacture the order all the way to installing it, we are recording that as a work in progress in our balance sheet.
And once we actually hand over the project to our customers, we then record the responding revenue, the costs and the relevant profit in our P and L. That's
how we
are doing the accounting for the volume business as well as the modernization business as of today. Going forward, starting from 2018, we will move to a gradual recognition of our sales. If you look at the right hand side lower picture, you can see the difference in terms of how we are going to approach it. So from a manufacturing all the way to deliveries of the first materials to a customer side is record as a work in progress. And from there onwards, we're going to record revenue as we are progressing throughout the project lifetime, all the way to hand over to customer where we are at the same point actually cumulatively as we are today.
This change will not impact our major project unit as we're already recognizing gradually the sales there. And we will provide you with comparison data prior to release of our results for Q1 2018. And if we then look at the first estimates in terms of the impact of these changes to our financials, so here are a few key items that we wanted to highlight. So first of all, part of our profits from an ongoing project at the time of the cutover will be booked straight to equity. So this will mean that there's an impact to our order book and that decrease is roughly about SEK 1,000,000,000 is our estimate as of today.
And then also inventories will decrease by over 50% as we're starting to recognize the sales earlier than today. And the corresponding equity will increase as we book these ongoing projects there directly at the time of a change. This will also impact our working capital items. So advanced payments will decrease by roughly 30%. Receivables will increase somewhat.
And there are also minor changes to how deferred taxes and tax liabilities are recorded due to the fact that we're changing the recognition. And as a whole, there will be over 10% less of negative working capital as a consequence. There are also other changes that will be coming here. So as we're starting to recognize the sales more as a function of the time and work being put into the projects, we are seeing less seasonality in both sales as well as in our profit recognition going forward. It will also impact how our lead time to from order to sales will develop, and it will become shorter going forward.
And as said, so as our equity increases also then our equity ratio will increase as well as impact our return on equity negatively. But more importantly, from a cash flow point of view, there will be no change going forward. So this is as a heads up, and we'll continue providing you more information on the details during the year. And we'll release comparable data before the first time of releasing our results with IFRS 15 standard. But with that, I'll hand over back to Henrik on our market and business outlook for the remaining of the year.
Thanks, Jokka. Then if I just wrap up with what we expect from our markets towards the end of this year and also our outlook. In new equipment, we expect that in China, the market will be flat or down minus 5%, somewhere in that range, in units ordered. And we also expect that the intense competition will continue in that market. Restoration Pacific, we expect to grow.
Europe, Middle East and Africa and North America in new equipment, we continue to expect slight growth over prior year. Maintenance, Here, we expect the trends that we've seen so far this year and during last year to continue, the slight growth in Europe, Middle East, Africa and North America and continued good growth in the Asia Pacific market. In modernization, overall market, we expect to continue to grow with slight growth in Europe and North America and strong growth continued in Asia Pacific. And then if we look at our outlook, KONE's outlook for the full year, which we have specified slightly, we now expect that our net sales will be between 0% and 3% growth, whereas we previously said, between minus 1% to plus 3%. So because of the good start we had to the year, we have slightly improved it and taking 1 percentage point from the bottom end of the range.
Operating income, here we have also slightly specified our outlook. We now expect our EBIT to be in the range of €1,200,000,000 to €1,290,000,000 That assumes that translation exchange rates will stay at the average level of the Q1 of 2017. Previously, we estimated our EBIT to be in the range of €1,180,000,000 to €1,300,000,000 So here we have slightly specified and slightly improved our range. And we say we have done this despite the fact that when we look at, for example, raw material headwinds, that they are slightly stronger than what we expected in January. So we can see that because of what has been good execution beginning of the year, we expect that we can compensate an even higher headwind and get to this range.
But as Ilkka mentioned I mentioned also earlier, it's clear that we are not happy with the fact that our results slightly declined in Q1, and we continue to take action to improve that. As always, some of the most important actions we take are improved customer activity and providing value to our customer because that can be seen in pricing, and that is always the most important one. Our productivity, overall, we continue to develop that, something we constantly do and accelerating some actions there. And of course, we are looking at efficiency throughout the organization all the time, as we have done, so that we can continue to find opportunities. And as we have seen in the past years, we have continuously had a very good development of our overall product competitiveness and cost.
And clearly, we continue with actions there to develop our competitiveness and there I also see continued good progress. So we have a lot in store to develop our competitiveness, although we can see that the headwinds from particularly raw materials and others are going to be stronger in the coming quarter than in the Q1, but still we have good confidence for our full year outlook, as you can see from this specification that we have done. And with that, if I just summarize our Q1, we had a solid start to the year in a mixed operating environment. We have both headwinds and tailwinds ahead of us. Headwinds are slightly going to be stronger now in the coming quarters and the Q1, but also I believe that our execution continues to be strong.
And what I'm very happy about is that the new strategic phase that we started this year has started with very good momentum, great feedback from both our employees and our customers. That is, of course, it is key to continue to develop positively going forward. With that, we again have good time for your questions.
Yes, we are now ready for your questions. Are there any from the audience? If not, then let's start taking questions from the telephone lines.
We will now take our first question from Andrew Andree Kukhnin from Credit Suisse.
Yes, good afternoon. Thanks very much for taking my questions. I'll go one at a time, if that's okay. Firstly, on your comment on China orders received margin versus a year ago, that's very clear. Could you give us an indication where the margin of orders received is versus your current margin in Q1 now that we're 70 basis points lower?
Well, of course, the global margin is a function of many different things. And then in China margin, it's clear that when we saw during last year that prices came down throughout last year, and we started to see, particularly in the second half of the year, some headwinds to the margins. Those are only what we started to deliver now. So clearly, as they slightly increased during last year, we continue to have those headwinds. But that's what we continue to work on our productivity, quality in delivering to our customers.
And of course, going forward, that's why we're very focused on pricing where we've seen that we are starting to make first we see first positive signs, particularly in China here.
Okay. Thank you. And can I ask on China revenues run rate now that we've had 3 of consecutive double digit declines, where are we in that run rate versus what's in the order book run rate? Do we need to take a further step down?
I don't know I'm not sure I fully understand your question, but we had now our revenues in China declined at around 10%. And that's clear. That's a function of the fact that our orders received last year declined in China and orders received in monetary value continue to decline. So I think it's a very logical result of that.
Yes. Sorry, maybe I'll just clarify it. So we've seen your orders in China declining around 12% in 2016, you're down 10% in Q1 and we've had 3 quarters of double digit revenue declines. That sounds like we're kind of 2 quarters away from stabilization given what you're pointing to in terms of stabilization for units and pricing during Q1. Would that be the right logic?
Of course, very much depends on you know that orders can be quite fast turning in China. So depends on how we perform from here on, but otherwise, of course, it's logical what you say.
Great. Thank you. And then just a couple of questions. Firstly, on digital, could you give us some idea on how much of your installed base or your maintenance base is disconnected now?
We have had already for a long time. To the
full IoT platform?
Well, I would say that we have 2 things. We have our new IoT platform, then we have more legacy connectivity, which, of course, we're going to move also into new IoT platform. But total at KONE, we are about some 150,000 connected units, everything, of course, that we can move into the IoT platform. Where we see the fastest take up and growth of these new services selling, it's clearly well, some in Europe, but clearly China is the fastest take up. And that's happening quite rapidly at the moment.
Great. Thank you, Henrik. And if I may, just last one for Ilkka. On IFRS 15 change, if we just conceptually think about the change, the shape of it, will it be a kind of a one off lift to 1 year's of sales and profits and then the pull through happens and kind of the run rate stay the same? Or is it a lift across the years from this earlier recognition,
if you see what I mean?
If I understand your question, so in at the time when we actually implement the change, so we will actually book the profits to equities rate. So it doesn't influence our P and L in 2017. And then from 2018 onwards, we'll then be in the IFRS 15, so recognizing them as the project progress. So in that sense, it doesn't have a one off impact. We'll come back more in detail on the impacts to P and L and with the comparable data later.
So in that sense, hold on and wait before we give you more details. We just wanted to give a heads up on the changes to come as well as the key impacts on the P and L to start with.
It's very helpful. Thank you. But it lifts 'eighteen and then it doesn't come out in 'nineteen,
see what I mean?
From 2018 to 2019, they're comparable then thereafter. And we'll provide the data for 2017 as well.
Got it. Got it. Thanks very much for your time to both of you. Thank you.
Thank you.
Our next question is from Guillermo Peigneux from UBS.
Guillermo Peigneux from UBS. I had a question regarding raw materials and then another 2 regarding M and A and the North American market. On raw materials first, on Slide 17, it seems that raw materials had a very limited impact, even I would say a long low single digit number. I'm guessing just 1,000,000 or 2,000,000 and the rest is actually R and D according to that commentary that you actually put out on the presentation and your release. Is that meaning that as per your comment, the raw material pressure is going to be a lot greater during the quarters to come and obviously a lot greater in the framework of the €50,000,000 to €100,000,000 increase that you saw before or even higher as your comments recently?
Ilkari, do you want to answer that?
Yes. So let's start 2 fold. So our investments, first, to R and D and IT, they're ongoing and visible already now in, I would say, give or take, we said 0.2% both either. And now we're roughly about 0.5 percentage points, which is a bit more seasonal than normal. So we're not investing more as such.
It just hit Q1 more. And then from a raw material point of view, so we talked about this 50% to 100% impact earlier. And I think we were at the beginning of the year more in the 50 side of that range. And now with the increasing raw materials, maybe we're at the higher end of that range as of now. But at the same time, as Henrik said, so our specified guidance takes that into account.
So regardless of that, we see that we can raise the bottom end as such.
But perhaps just to add on the what your question also one of your questions, Guillermo, was that, yes, it had a smaller impact in Q1. We expect that the impact in the coming quarters will be bigger. But despite that, as Jokka mentioned, we still believe that we still slightly improved our guidance.
Of course, but is it right to assume since you didn't put the numbers in the bar in the waterfall chart, is it right to assume around EUR 1,000,000 €1,000,000 or €2,000,000 increase in raw material so far?
That would be a negligible number that we probably wouldn't mention, such a small number.
All right. That is okay. Understood. Then recently, Thyssenkrupp and also Toshiba have basically commented on how core their elevator businesses are to their strategy. And I was wondering, in fact, actually some it isn't just just said yesterday or 2 days ago that they don't see any further consolidation in the market.
I was wondering what's your commentary on that?
We can, of course, not comment on other companies. That's, of course, their decision and their views. I have nothing more to comment on that. You know that in general, we are interested to find further growth also by acquisitions. We have a strong balance sheet.
We can do that. We see a great value creating potential in all of them. Last year, we again acquired nearly 20 companies and our appetite for that continues to be there. That's what I can say about this.
Okay, fantastic. Thank you. One last question, I promise, regarding some again, your competitors are suggesting that the U. S. A.
Market is very strong for them. I only see a slight improvement on yours. Is this referring to the fact that maybe your critical mass was already grew a lot during 2016 and probably is also a mix comment rather than an overall market comment?
Well, if you look at our top line, it grew almost 20% in North America, which is a very strong growth rate if you think about how big role services play in that market. And our orders received in new equipment in North America grew very substantially.
Our next question comes from Claus Bergelind from Citi.
Henri, it's Claus from Citi. A couple of questions, please. First on pricing and mix in China is a minus 10%. You have said before that current tendering is showing up in orders on 4 months later. So I was wondering, when you talk about stabilization, I guess you mean that on tenders, pricing is now stable quarter on quarter, which means that price mix on new orders in the Q2 will only look better because of the easier year over year comp?
Or are you saying that pricing and mix is sequentially improving as well? I will start there.
Well, what we're saying is that within the quarter, we started to see a stabilization of the price and mix. And clearly, then we look at both actual prices as well as what we can see in our tender book. So that is what we see actual happening.
Okay. So no sequential improvement so far?
No. So here we then talk about what's happened within the quarter.
Okay. Good. My second question is on raw materials, the €50,000,000 to €100,000,000 guide. You say that you're likely going to end up towards the higher end of that range. Some of your peers are now saying that the raw material drag at current commodity prices can also last into 2018?
So if you stay at current price levels, would you also see a cost drag next year?
Raw material prices, we know that they can be very volatile. It all depends on also what kind of negotiations we can have with our suppliers. We went into this year with prices locked at very favorable levels and this is then impacting, of course, a headwind we see going forward. I think it's too early to say what we can negotiate, what actions we can take and where prices are going to be. What we have seen in the material markets recently has actually been quite a high volatility.
Most recently, it comes slightly down, but I'm not going to speculate where they're going to be towards the end of the year. But if they would stay at the current level, yes, it would be a continued drag for next year. But I think it's too early to draw any conclusions here.
Yes. Then just to understand the orders there in Americas in modernization and also orders in Asia Pac ex China. You're down a lot in modernization all of a sudden in Americas. Is this just a tough comp or is the market weakening there? And in Asia Pac outside of China, is this only India that is coming down for obvious reasons?
Or is the weakness seen in other countries as well in Asia Pac ex China?
I would say, again, we have to remember there's always going to be fluctuations quarter to quarter, both in smaller and larger projects. So the market in North America continues to be quite solid. So I wouldn't put this down to anything but quarter to quarter fluctuation. In Asia Pacific, the 2 largest markets there are India and Australia. Both of those markets are declining slightly, so those were the ones that had biggest impact on our orders received there.
Okay. My final one quickly is on China and the demand and discussions with your customers. You keep the guidance for the year, but have you seen that the business has picked up towards the end of the quarter? Market is flat in the quarter. But was the market also flat in March?
And how is the market trending in April? Are you just being cautious given that we're early in the year? I'm just trying to understand the exit rate in terms of China elevated demand.
Right. So clear that in the Q1, we were at the higher end of that range. Why do we still believe it can be as negative as 5%? That's because we expect that the restrictions in some of the bigger cities will start to have an impact on overall activity. But I would say that we have to remember that Chinese New Year was quite early this year, so it was difficult to compare January February to previous year.
That has a huge impact on activity. I would say that, therefore, March was, again, this year very important and, yes, pretty good activity in March overall. But also, Q1 is so much impacted by Chinese New Year when volumes are low.
Yes. Okay. Thank you, Henrik.
Thank you.
Our next question is from Michael Kalaguiris from Bank of America.
Yes. Hi, good afternoon, everyone. My first question, just clarification on the on all the raw material comments. Can you now that you've done 1 quarter, you usually hedge 2, 3 quarters ahead, so you should have like a very precise view on what's the raw material headwind going into this year. So I hear that you now point to the higher end of the guidance.
Should we assume 75 to 100 or is it 100 headwind? Can you just comment on that? And just looking on the sequential development, should we hit the kind of highest increase in raw material build in Q4 and grow gradually into Q4?
Efe, you want to take that?
Yes, certainly. So if I step back a bit and what we said about how we're locking our pricing, so we lock our prices for our components, let's say, 3 to 9 months forward, really depending a bit on the component. We also did say that we are about halfway locked in the beginning of the year. And now we have increased that somewhat, that locking. And pricing around us does play a role, obviously, when we have the negotiations on the prices.
So we are seeing a more of an impact in the coming quarters. And but at the same time, it's maybe too early to call 4th quarter impact yet. But in that range, we are on the higher end. And mathematically, that means that it's more the 75% to 100% than anything else, I would say.
Okay. Maybe one for you and Rich. I think you when you adjust the guidance, you adjust a bit the volumes and you said like it was a better start to the year. Can I ask you what was indeed better this year in Q1 that you originally expected? Where was the surprise from?
And also, you also the fact that you are able to compensate the kind of like bigger raw material headwind in your guidance? What is helping you in doing that?
When I said it was a little bit stronger start to the year, it was not any specific area. I think that just we continue to execute quite well, which you can see in our services business with a 7.1% growth in maintenance and close to double digit in modernization. Just these are things that you need to execute on every day and drive the growth every day. And I think there we've done a good job. So that then overall impacted the growth rate and also good execution in installations.
Don't think there was anything more specific into that. And as Ilkari mentioned, we went into this year. We had for Q1 quite well prices for our components locked, so and at pretty good prices, of course, that we knew already and that, of course, helped manage that headwind in Q1.
Okay. Last question on the new services concept. I mean, you've been saying that you rolled out in several countries and you've got like thousands of airlines signing to those new offering. Can you maybe give us some indication on, I mean, first on the timing of the full rollout? I think you say that in the release that it will last into 2018, but in terms of how much of the countries your installed base would be offered those services by the end of the year maybe and maybe the potential benefits when those clients sign a contract with you?
Is it, I don't know, 10% higher scope versus current contracts? What's the penetration of these contracts? And or is it a competitive balance factor, given an indication on the benefit of business services as you've seen in your launch?
So what we're seeing on both of these both the new KONE Care maintenance offering, which we already have in several countries rolled out and continue to roll out and these 20 fourseven connected services, we are rolling them out country by country. Because when you roll out something like this, you want to make sure that you really have all the capabilities in place to deliver it in a really good way to your customers. And that's what we're very focused on and I believe we have done a very good job where we have rolled it out already. So that is something we continue. You have to remember that in the maintenance business, you have a lot of customers with a and each customer usually has a small number of units in service.
So the rollout also depends on how quickly you are able to bring those to your customers. So usually, it doesn't happen so that you have a big part covered immediately. But the point is we will have it available in these markets, rollout for the benefit of our customers. And immediately, always when we have the capabilities in place, that's when we push the accelerator and roll them out. But you still have to remember that in a maintenance business to roll it out throughout the customer base takes actually quite a long time.
Okay. Understood. And on maybe on the cost side and should we assume that the R and D and IT effort that you've put in place to support these initiatives, they continue into 2018 as you continue on rolling those concepts out? And maybe just in terms
of the trajectory of this course,
should we expect basically, I mean, you took a step up now and we keep those costs going into 2018? Or now that you launched that in more and more countries, you can reduce a bit those investments? Or you have to increase them as you go into more countries? Can you just give us an idea of the trajectory of those costs?
We have to remember, now we just talk about one offering. Clearly, we have a pipeline of a lot of new products and solutions and services that we are looking to roll out over the coming years. So it's not only about you do one and then you're done. It's a constantly moving situation where we all the time bring new things, innovative things that adds value to our customers, and that we will continue to do. And therefore, I continue to see quite high activity in overall development, R and D, IT, process development and so forth for the coming years because there are just so many great new things we are seeing that we can bring really add further value to our customers.
And the good thing is that we can see when we bring them out, they actually do have good impact. So I do believe we are on the right path here.
And also to add to that, so we continuously evaluate the project we have ongoing and the impact it has to our financial return we have. So in that sense, it's not a discrete. It's rather a continuous decision point that we have on the project. So it's something that we validate every month, every quarter
going forward.
Our next question is from James Moore from Redburn.
Hi, everyone. Henrik, Ilkka. Thanks I'll go one at a time as well, please. Accelerating actions, you've talked about responding there. Could you perhaps put a €1,000,000 number or a percentage of sales on savings and general productivity?
I know you have it every year, but I sense that you feel you're going to put some additional action in place. Can you sort of quantify the change or what you're doing there, please?
I wouldn't put a number on it. I would say that, as you know, we have year over year get good through quality, productivity actions, we improve our operations that we continue to do. We continue to see also that some of the things we put in place over the past years are enabling us to slightly accelerate this. I wouldn't say that I wouldn't put a specific number on it more that we are putting significant effort to make sure that we can even better counteract these headwinds. If you look over the past years, we have had very significant improvements, for example, in our overall product competitiveness.
And that, of course, is now little bit more challenging given the raw material headwinds. But of course, on top of that, we're doing continue to do a lot and have good progress there. And then, of course, in field productivity, which is very important to us through good quality measures, we continue to also make progress. I wouldn't put a specific number to that at all. We have very high attention to this.
Okay. Thanks. And on the raw material headwind, why has your expectation nearly doubled when Chinese steel prices have fallen quite a bit since we spoke 3 months ago?
I don't think it has doubled. We said that we were perhaps slightly at lower end and now we are slightly at the higher end of the range. If you look at now maybe the recent week, it's come down. It's been extremely volatile. And where we see where we're able to lock down prices still in December, early January were at better prices than today.
Okay. And on your China slide, your macro chart, the right hand one, you showed the elevated units growing slower than investments. And if I look at start stage, they're growing a little bit slower as we've perhaps grown more in line in the past. What do you attribute that negative gap to? Do you think it's something structural that persists or temporary?
Well, there are many things that go into that. You can see if I find it here. We have remembered in this real estate investment, you have infrastructure there. You have also land purchase costs there. And we know the land purchase costs has come up a lot.
So that has I can't give you exactly a breakdown, but that has an impact why there's perhaps a slightly bigger gap between these 2 than in the past.
Thank you. And then on your service margin, I'm not entirely clear whether the language in the report relates to absolute EBIT or margin. I think it's margin. I think you said the service margin has lifted. Can you put a bit more color on that and say whether you're achieving new service margin highs?
Is it pricing driven? Do you see how is pricing in service? And what do you see the outlook on service margin from here, further increases?
Well, the main thing we are achieving in services, I would say, we know that there are certain markets that continue to be incredibly competitive. So I would say it's a picture that in some markets, we are clearly improving our service markets. In others, it's more challenging. But what we're seeing is that through the growth, we are gaining operational leverage. That is perhaps the key thing.
And in the slightly stronger markets, yes, pricing is more favorable, but then large markets such as, for example, South Europe continue to be very, very competitive. So it's kind of a it's a mix, but overall, the good growth we have there is translating into good absolute profit growth.
And just in terms of the absolute service margin, are we at a high level against history? And is there more to go? Where do you see that medium term trajectory?
We are at a pretty good level, I would say.
Can you do more?
We can always do more. I don't think we're ever happy with where we are. We can always do more and always strive for doing more.
Brilliant. Thanks, Henrik.
Thank
We'll now take our next question from Manu Rimpela from Nordea.
Good afternoon. Just one question on the volume outlook. So we've seen clearly improving trend in industry leading indicators and also in construction leading indicators. So just wondering that you keep your outlooks for the end markets unchanged. So are you seeing any sort of an improvement in the volume trends in Europe, for instance?
Or why are you taking a more positive stance on that?
Well, as you said, we see what we're seeing in Europe is a improving picture, but not strong growth. So we see slight improvement. It's particularly on the residential side where we can see a stronger market. But we're not seeing any strong growth. And it again varies market to market.
There are some markets that are growing really well and then there are more challenging markets. So I think the overall picture is slight growth, not more than that. And I think it's in line if you look at overall, for example, for Europe for construction outlook.
Okay. And then how do you see the relationship playing out between if you start seeing a pickup in volumes and then pricing in both new equipment, but more importantly, I guess, in the maintenance business. So what type of a lag do you see there typically?
Well, usually, it is clear that the higher volume in a market usually is favorable to pricing, as we all know. In the maintenance business, it can take quite a while because what is the challenge, for example, in Southern Europe? It's very small, the overall organic growth in the market because of the low new equipment volumes over the past years. If you now start to see improvement in orders received, it does take time before it's ordered, installed, delivered and passed its first service period. So there can be quite a lag before you start to see a stronger market overall.
But clearly, it comes over time.
Okay. Finally, did you comment on what the organic growth rate in the Chinese maintenance was in the quarter?
It will continue to be in the strong double digits.
Okay. Has that rate changed in terms of what we've seen last year? Because I think you commented that it was in the closer to the 20% range.
When your service base gets bigger, it's clear also that even though the absolute growth this year is higher than last year, the percentage comes slightly down. Also, you have to remember that maintenance revenue consists of 2 things or actually several things. It's the contracted revenue, it's repairs, but also you have the 1st service revenue part. And clearly, so the number of units we're converting, that is accelerating. But what given a more stable or actually slightly decline in new equipment business, the impact on this first service revenue is then that's more stable, therefore.
But when we look at how much we're converting, actually there we continue to have very good performance.
Okay. No further questions. Thank you.
Thank you.
Our next question is from Rick Mady from Berenberg.
Yes. Hi, good afternoon. Thank you for taking my questions. I have 3, please. So firstly and I'll take them all another time.
So firstly, I'm wondering why you're not turning more positive on the outlook for China Elevator Units this year given I mean, if you look at House and Stars real estate investments, they've been up strongly over the past 12 to 18 months. And then to your point on the government measures to cool the property market, if these were to have any effect that would impact your units demand next year and not this year? So if you could just clarify this, please.
I would think, as you say, there's definitely both positive factors such as real estate investments, how the overall volumes in real estate is developing and also inventories. But then on the other hand, we do expect that we start to see these restrictions happening during the second half of last year and they are getting stronger. So we think that they can have an impact and therefore can also then have slight impact on our market. Let's see where we end up. Now Q1, we were slightly at the better end of the range, but this is still our best estimate for the full year.
Okay. Thank you. And just a follow-up on, I think it was Andreas' question initially. So the margins in orders received declined slightly year over year. Can you say how if these margins are actually flat or down versus the Q4 level?
Right. In the back.
If I explain it as follows. If you think about during Q4, prices continue to decline. So end of Q4 was lower than beginning of Q4. Then if we look at Q1, we now see more of a stabilization. So probably in average, we're probably still slightly below, but starting to see a stabilization now.
Sorry, is that stabilization as well on the margin in the backlog as well on a sequential basis?
Probably still slightly down quarter on quarter.
Okay. Thank you. And then finally, just on the negotiations that you're having with your suppliers year to date. I'm just wondering how these are going. If you could give us a little bit more color there.
How open are there to actually absorb some of the pricing pressure? How easy is it for you to push these pricing pressures up to them kind of into the value chain? And how easy is it for you to switch from a supplier to another if they don't want it to actually get the price headwind?
Well, as always, it's not a new thing. This is something we've been working on year over year. It's not only about pushing prices to your suppliers. Clearly, we continue to work with some of the key ones that how do we improve each of the components, how do we improve our setups and our competitiveness. I would say, we are in a really good situation in that I believe we clearly have the most harmonized and modular product portfolio in our industry if you look from a global basis.
We clearly have the largest volumes in China, which is very key for supply. So we have a possibility we have a very good situation in how we can concentrate and get great volume benefits from our suppliers. This is something we, of course, been working over years. And the fact that they're coming up now is not if raw material prices are coming down, we, of course, we continue to work with them to reduce costs. And now, of course, we need to work maybe even a bit harder, but it's nothing new.
And clearly, we need to have several suppliers usually to key components and that's a normal thing. But I don't see a kind of step change or a because I would think that and I would say I would claim that our sourcing is quite well managed.
Okay. Thank you.
Our next question is from Martin Flueckiger from Kepler Cheuvreux.
Yes, good afternoon. Good afternoon, gentlemen. Martin Flueckiger from Kepler Cheuvreux. Three questions, please, and I'll take one at a time as well. Starting off with the capacity issue in new equipment in China, what's your current perception of the capacity situation in China for new equipment on the manufacturing side?
And how does that compare with last year? And if you could share your thoughts about what you think the trend or the development will be with respect to over or under capacities, I presume it's over capacities. I was wondering what kind of time frame we're looking at, What kind of industry consolidation or degree of industry consolidation is required here to balance supply demand back again? That would be my first question.
Okay. As we have discussed in the past, let's take a step back and think about the times when the Chinese market was growing over 20%, close to 30%. Capacity was never a bottleneck or an issue to growth. It was more installation resource and so forth. And we have to remember, I mean, most of you have been to Elevator and you can see that they actually tie very limited capital, and they are very modular, the factories, how you set them up.
So while there probably is nominal capacity much more than is needed, I don't see that this is clearly a factor, but I don't see that that's being the main factor for driving price competition. We have to remember that the amount of components and parts that each of the players in the industry make themselves in house is quite limited. So actually, you have to look at much broader than the elevator and escalator makers. You have to look at the supply chain and so forth. So and I think it's quite flexible and modular.
So in that sense, in my view, that is not the biggest reason. It's a reason, but not the biggest reason. So that's not one of my key worries.
Okay. And my second question would be on looking at your competitors' results over the last 2, 3 days And judging from your Q1 results, it looks like the majority of international players saw strong growth in new equipment in the U. S. And I was just wondering why is Coron Silky for only slight market growth in North America this year? Do you expect a significant slowdown for the remainder of the year?
Or what's the reason for your cautious view?
Well, when we guided market, it's we guided in number of units. And if we look at the Q1, I can't say for the competition, but my understanding is that and what I've seen is that there's been quite a lot of larger projects that have been awarded now beginning of this year, and that probably has an impact, positive impact on many of us. And that's not only we've had good both in our volume and very strong growth then in our major projects business.
Okay. But if I understand you correctly, that means that you don't expect a repetition of these larger projects as you've seen in Q1 and therefore, a slowdown going forward?
We have to put it in perspective that Is
that correct?
I would think that, yes, that's correct because we have to put it in perspective. We're coming to the 8th year of growth in the North America, particularly U. S. Market, which is clearly the largest market there. And we are at a good and high level.
Yes, we see solid development in all segments, but I think what is actually restricting growth in the U. S. At the moment is availability of labor, not only in our industry, but the whole construction trade. So there is clearly a limit of how much it can further grow. And therefore, I think Q1 was probably from a market perspective, a very, very strong performance compared to probably what we see rest of the year.
Okay. That's very helpful. And my final question would be on based on what I've heard from other companies, not necessarily in the elevator and escalator space, but there's been a working days impact and in some cases rather significant. I was just wondering how do you see the impact or the effect of 2 to 3 more working days in Q1? And if you could specify the number, that would be helpful.
And given the fact that this will most likely be reversed in Q2 and the fact that Q2 has higher comp in terms of revenues, do you expect or do you still expect to be to show positive sales growth for Q2?
We guide our full year sales and results. That is what's important. Actually haven't counted the days in Q1 and Q2. You always have various number of days and you have weather and you have various things that impact, but we continue to have to run our business. So I usually we usually don't pay too much attention to those.
Just want to continue to stay focused on good execution. So I would say about rest of the year, we have a clear guidance for the full year as we always have. We don't specifically guide Q2, Q3 or Q4. What we can say is that we have a good order backlog, but also what we have said is that when we look at the headwinds that we are facing, they are probably stronger in the coming quarters than in the Q1. But even with that, we slightly improved our range.
So that's what we think about how we are executing at the moment.
Okay. Very helpful. Thank you so much.
Thank you.
I think we have time for one more question and then we need to close.
No problem, ma'am. Our next question comes from Glenn Liddy from JPMorgan.
In light of the changes from IFRS 15, could you give us an indication of the duration of your order backlog for China and the whole business?
Yes. So we haven't specified in detail the order backlog as such. But there are differences market by market also depending on the nature of the project. So if you look at IFRS 15 perspective, so it really depends on also on the size of the project, what the impact is. As of today, we complete the whole project in most cases and then at the handover then recognize the revenue.
So in that case, if you have multiple different equipment there, it actually could have a more considerable impact. But all in all, from an order book point of view, it's more than 1 year kind of 1 year to 1 year, 1.5 years, which is impacted here.
Perhaps a bit on that.
And China radically different to the rest of the world?
What is perhaps before I what is clear is that when you recognize your revenue earlier, which we'll do in the future based on what Ilkka has explained, it's clear that the rotation gets fast gets shorter. And the impact probably bigger in Europe and North America than in China. Okay. Than in
China. Okay. And on raw materials, you said that the lead time or the coverage you have is between 3 9 months. Historically, in periods of rising input costs, how long have you been able to lock things in for historically?
Similar to what we do now. I think one of the challenges that biggest raw material we have is steel. There is not that liquid markets. For example, copper, you have much more liquid market, you can lock the prices for longer. So that's clearly the challenge.
But there hasn't been a significant change to what's been in the past.
Okay. And in Q3 and Q4 last year, you commented on the price in the margin in the order backlog declining. Could you give us an update on whether it's getting a bigger decline this quarter to the previous quarters?
We're talking about pretty similar impacts.
Similar impact. Okay. Thank you very much.
Thank you.
I will now turn the call back for any closing comments from our speakers.
Thank you very much again for your questions. I would also like to remind you that we have now announced the date and location for our Capital Markets Day, which will be held in London on September 29. So we hope to see many of you there. With that, thank you very much, and have a nice rest of the week.
Thank you for participating.