Welcome to KONE's 2016 Results Presentation. My name is Sandra Kalle, and I'm the Head of Investor Relations. I have here with me today our President and CEO, Henrik Andrut and CFO, Ilkka Haras. We have changed the structure of the presentation slightly for today. So Henrik will start with the 2016 highlights and market environment, after which Ilkka will go a bit deeper into the numbers, and then Hendrik will describe the 2017 outlook.
In the end, Hendrik will give a bit more color into the new strategic phase that we are entering and that we announced earlier today. After that, of course, as usual, we have time for questions both from the audience and from the telephone lines.
Thank you, and also welcome on my behalf. Today, again, a lot of good news to tell. Also, it's been an eventful day for us. We have not only announced our results. We have also announced our next phase in our development of our strategy.
And also, we have announced 2 new appointments to our Executive Board, all of which, I think, are, again, good in taking KONE forward. If you look at the highlights, what we're going to talk about. First, if we look at Q4 and full year, we have continued good development in our profitability, strong performance overall. One of the key highlights for us was that our services business continued to develop very positively with strong growth in both maintenance and in modernization. Our board has made a proposal for paying a dividend of €1.55 for each Class B share, which is an 11% increase over last year.
And we launched a new strategy also today. I also mentioned that we have made 2 new appointments to our Executive Board. I'm very pleased to welcome Susanne Skittparin, Executive Vice President for HR. She is succeeding Kertu Tuomas, who has been Head of HR for KONE for over 15 years. She has done, Kettel has been a very important person for us in developing our vision, developing our culture and in coaching, developing a lot of KONE people.
After 15 years, she's now taking next phase in her development. But Susane has a broad and strong leadership development within HR within KONE. Also announced that Birgitte Arval will become Executive Vice President for our Services business. He is succeeding Pekka Kempfijn, who is retiring at the end of April. And many of you have met Pekka.
He is someone who's been for a very long time with KONE and be very instrumental in many of our breakthroughs throughout KONE's past 20, 30 years. I would say that with both Susanne and Njuk, we have 2 very experienced KONE leaders. Susanne has been leading many of our factories in HR, and Hugues has been leading our maintenance business very successfully. Before that, he was heading our French business. So with that introduction, I think we can go straight into the highlights for the numbers for the Q4 of the year.
The Q4 again had a solid development in our profitability. Our orders received, they were a little bit over €1,800,000,000 They declined at 5.5% or 2.9% in comparable currencies. Our order book remains strong at close to €8,600,000,000 and has grown at about 5% year over year. Also, revenues developed well, close to EUR 2,600,000,000 for the quarter and growth in comparable currencies at 3.6%. The environment we are, I think that's a good growth rate.
But perhaps most importantly is that we improved our profitability again. Our EBIT was €392,000,000 and the EBIT margin improved from 14.9 percent or 14.8% to 15.1%. What I'm also very pleased about is that our cash flow remained very strong, close to €410,000,000 A strong cash flow, again, is a sign that we have maintained healthy business principle despite a challenging new equipment environment that we have. That, I'm very pleased about. Earnings per share was €0.58 If we compare it to last year when it was €0.71, that €0.71 included €118,000,000 extraordinary dividend from Toshiba Alaveta Company.
If we exclude that extra dividend that we received, and the comparison number was €0.49 So also a good growth in our EPS for the 4th quarter. But as we have always said, as the approach we have is that 1 quarter is a very short period of time to measure performance, and now we have a full year to look at. And the good thing is that we had a strong performance in the full year. All of our businesses contributed to the growth in operating income. Orders received for the full year at about €7,600,000,000 a decline of 1.6% in comparable currencies.
Our sales at about €8,800,000,000 good number, the growth of 3.9%, which I think is a good achievement in the environment that we have. And also, our EBIT, good growth in our EBIT. EBIT was €1,293,000,000 and EBIT margin improved from 14.4% to 14.7%. Also, if we look at the full year, we can see that our cash flow was very strong, was over €1,500,000,000 And our EPS at €2 per share compares to €1.79 We excluded Toshiba dividend, so also a good growth in our EPS. Now again, results like this, if you look at the environment that we have, not be possible without motivated, engaged people who are working towards a common goal.
As we can see, the Kona people have done again and again, very pleased, my heartfelt thanks to all Kona employees for a really great job done during 2016. If you look at how our business mix slightly changing given the market environment and given our growth, we can see that the share of services is increasing. Services contributed 45% of our revenues in 2016, particularly the share of modernization that increased. Also, if you look by area, we had a slightly more balanced mix, the share of North America growing to 19% and then pretty equal shares for Europe, Middle East and Africa and for Asia Pacific. So those were the highlights of our numbers.
If you look at some of the highlights of our businesses for 2016. If you look first at the new equipment business, here, we continue to improve our competitiveness in new equipment overall. We had new and successful product launches in each geographic area. A couple of highlights of this were the new Monospace 500 that we launched in North America and has been very well received by our customers. Also, a broadening of the so called I range in India that has also been very well received by our customers.
Also in Europe, Middle East and Africa and in China, we did have many good additions to our product range. So if you look at new equipment business last year, we all know that the global new equipment market, which we do to China, was challenging last year, and we're still able to perform very strongly. And that is because we were constantly able to improve our competitiveness. This helped and definitely was a key contributor to the strong performance last year. Also, we had some good extensions to our People Flow Intelligence solutions, a next generation destination solution for the commercial segment and also a broadened KONE access where we can now integrate to virtually all commercial access providers and bring a broader offering to our customers.
Our orders received, number of units last year was about 158,000 units in total. And last year, we delivered to our customers about 136 1,000 elevators and escalators. Again, to remind what that means is that in a year, we have about 120,000 working minutes. So every working minute, we deliver more than 1 elevator or escalator. Again, we've been here.
We have probably delivered another dozen or so. Services business, we had very good development there last year. Solid growth in maintenance in all geographic areas. That I'm pleased about. It was not only about Asia Pacific, good growth in both North America and Europe as well.
And that was due to a continued good growth in our conversions overall and also that we improved our competition balance clearly last year. Our monetization business has grown strongly. This has been driven by the much better proactiveness we have in our sales and how we segment our market. I believe that this has been a clear success story for us. And what we talked about in the Capital Markets Day is that we have started to launch and pilot new service concepts to our customers.
And the more we do this, I I can tell you that the results are very encouraging, and that is why we continue to expand our activities for new solutions, new services of course, the results we can see are positive. Our maintenance base continued to grow at over 6% last year, and at the end of the year, it was clearly above 1,100,000 units. So again, good growth in the maintenance base.
And then
final highlight, dividend, continued solid growth in dividends. A proposal to the shareholders meeting or the Board of Directors proposal shareholders meeting is to pay a dividend of €55,000,000 That is a 78 percent payout ratio and again, a good growth over the last year, about 11% growth. So again, a good and attractive dividend given our strong results and strong cash flow. So those were highlights of our business, our results and our dividend for next year. We then go into market development, how that is overall how that has developed during the last quarter of the year.
Let's start with the new equipment markets. Now in Q4, the global new equipment markets were overall rather stable after having declined for the 1st 3 quarters of the year. Europe, Middle East and Africa markets were pretty stable in new equipment, slight decline in Central and North Europe, particularly countries such as U. K. Is more uncertain at the moment.
But we continue to have good activity in the Nordics, in Germany and some other markets. And South Europe also continues its slight recovery. The Middle Eastern market, even though it's rather uncertain, I would say it was pretty stable overall. So over that, made the Europe, Middle East and Africa market pretty stable overall. North America continues to be a growth market, the 7th year or coming into the 8th year of growth.
And we can see that the market is at high level, and this has also continued to drive a good development in pricing. If you look at then the Asia Pacific markets, market in China climbed slightly if you measure in units, but clearly, if you measure in monetary value. The pricing environment remained tough in China in Q4. I will come back to China a little bit more in detail. India, the market now declined slightly in Q4 and was mainly a result of the demonetization in India towards the end of the year.
We could see that this resulted in some uncertainty. But if you look at the underlying trends in India, our belief is that it will recover rather quickly from this. Southeast Asia markets are growing, but clear difference market to market due to uncertainty. Now promised I'll talk a little more about China. China is clearly we know it's an important market for us and for our industry overall.
We start with the Chinese property market last year. And as you all saw, transaction volumes continued to be good in 2016 almost throughout the year. Beginning, it was more about the higher tier cities. In the end, it spread more throughout the country. And we can see that as a result of this, particularly in Tier 1 and Tier 2 cities, inventory levels are actually at a very good level if you compare it to the history.
If we look at the lower tier cities, inventories continue to be high, but they have clearly improved. So market is becoming more healthy. You can also see that the price level in the market increased throughout the year. And in some markets, some parts of the country, prices increased very significantly. Because of this, government measures towards the end of the year to restrict the markets and to cool them down.
And we can see early signs that, that is having an impact. You also see that real estate investments overall grew last year. And the question is then, of course, why is the elevated escalator market not growing faster? But what we've seen in higher tier cities, there the volumes have actually been good and quite stable for some years, but they've been at a good level. Lower tier cities, focus has been on reducing inventories, and this has happened.
That's why construction activity there hasn't substantially increased. And we look at the real estate investments, a very big impact on the increase in real estate investments is increase in land prices. It's included there, and that has had a very significant impact on overall real estate investments. So overall, we continue to see a challenging market. However, now when we see that raw material prices are increasing have increased clearly, We can also see for many players that they feel that pricing has gone probably too low.
We probably are looking at a somewhat better environment in 2017, although we expect competition to remain strong, but the dynamics are probably going to improve as we go into 2017. That's what we expect. That is about China and new equipment markets. If we then go into service markets, here we have a good and positive story to tell. Maintenance, all the markets are growing.
Europe, Middle East and Africa and North America, we have a slight growth and strong growth in North America. Modernization, the growth in all geographic regions. Europe, Middle East and Africa, particularly Central and North Europe is developing very nicely. North America and Asia Pacific is also developing nicely. And as you can see and what you will hear from Ilkka in more detail is that we have really been capitalizing on these growth opportunities again.
So with this, let me hand over to Ilkka to go a little bit deeper into our Q4 2016 financials.
Thank you, Henrik, and it's my pleasure to be here to walk through in more detail our financial figures for Q4. And what we will go through is, first, orders received, and look more details into the sales development for the quarter as well as the operating income. And as it is a year end, we also want to look at the key drivers for cash flow in Konec. So let's first look at the orders received development for the quarter. So as Henrik already highlighted, we saw a 5.5% decrease in the orders received in the quarter.
However, if we look at that in more detail, we see that all regions outside of China actually grew in both Q4 and in 2016. Now let's look at the figures more from a comparable currencies point of view and the geographies first. Europe, Middle East and Africa, we saw a slight growth in orders received for the quarter. If we look at North America or Americas, driven by North America, we saw clear growth in orders received, already good base given the environment there. And finally, for Asia Pacific region, we did see a clear decline, mainly driven or driven by China, which obviously has a big impact to the area there.
Outside of China, Asia Pacific was following slide. Let me comment a bit about the development in China for us. So first of all, from a unit perspective, we saw orders declining a bit more than 5% in the quarter. Also pricing as well as the mix shift to lower specification products had a significant impact to our orders received market value or monetary value, excuse me. And then if I look at then the perspective of the business, I would highlight modernization as one of the highlights for the orders received in the quarter.
So clearly, providing growth in our orders received. And then from an FX point of view, FX having a negative impact in a quarter of €54,000,000 into our orders received. If I then look at the profitability of our orders received in the quarter, so the relative margins of orders received declined slightly overall in second half of twenty sixteen, but remained at a good healthy level overall. Then let's shift gears to look at sales in more detail. Our sales in historical exchange rate grew 1.2% in the quarter.
And really, as highlighted already by Henrik, services was the key driver for our sales growth for both Q4 as well as the total 2016. If we then look at the sales development in comparable currencies, we saw 3.6% growth in our sales. And as said, so both modernization and maintenance grew in the quarter, modernization growing more than 12% and also maintenance contributing by more than 7% growth in the quarter. Overall, new equipment business was roughly flat in terms of development. From a geographical point of view, I would first highlight the strong development in Europe, Middle East and Africa.
So over 9.9 percentage growth in sales, the good progress from our perspective. Clearly starting to see a positive trend there compared to the past that we've seen. Also, Americas continued its strong performance at over 14% growth there in the quarter. And finally, Asia Pacific, decreasing by 6.9%, really driven by our performance in China and China overall having sales decreasing more than 10% in the quarter. And then finally, the currencies continued to have a negative impact to our sales as well as the orders received.
But in sales, the impact was €60,000,000 for the quarter. And let's look at operating income development in the quarter. So first of all, overall, SEK392,000,000 of operating income in quarter, up 3.6% in historical currencies, is a good progress and really reflects the progress we're making as a business. All of the businesses contributed to this EBIT growth, and the trend continues to be the same for 2016 Q4 both. And if we look at the drivers for the growth, so services going on an absolute basis, obviously, contributing to the operating income as well as then the progress we're making on the side of the new equipment has increased, from a profitability point of view, our operating income.
And that being said, while we actually increased our investments to both R and D and IT, as we've highlighted, both in our Capital Markets Day as well as in the 3rd quarter result announcement. And FX had a EUR 14,000,000 negative impact to our quarter and overall EUR 44,000,000 impact to the overall year. And let's finally look at cash flow. And I said earlier, so quarter is a fairly short time to look at cash flow as it does fluctuate quarter by quarter. But now that we are closing the year 2016, it's good to look at the key drivers for our cash flow.
So first of all, the SEK1.5 billion of cash flow from operations, up 2% is a good progress. Obviously, a key driver for that was our good profitability from an operating income point of view. And I would also highlight the contribution our Advanced received compared to inventories progress has made. So reaching 144%, up from 138% in the previous year is really helping us to positively drive the cash flow further. Also, our receivables continue to have a stable cycle times during the year.
I would also want
to highlight our investments in CapEx. So up from 1.1% to now 1.5 percent of net sales in 2016, really driven by investments that we're making through R and D in China, in U. S. As well as in Finland, really further improve our capability to develop product competitiveness, especially in the area of high rise capabilities. Also, we made investments to our manufacturing facilities and supply chain, really further drive our capabilities to automate and use robotics there in our facilities in U.
S, Italy as well as in Finland. And then lastly, we did close 19 acquisitions in 2016 with really a focus in acquiring maintenance base, both in Europe as well as in U. S. And as said, so GK, our Giant KONE acquisition, is not among these as it was already consolidated. But all in all, I think a good progress, and really, the cash flow reflects well the work and the progress we're making as a company in this year.
And with that being said, I'll actually hand over back to Henrik, who's going to look more towards the future as well as our expectations for 2017. Henrik, please.
You've seen good performance we had last year on a broad basis, and that's something I think we're quite happy about. So let's look into next year. Firstly, we'll start with the market outlook for next year, and we'll start with the new equipment markets, how we see them. If we start with Asia Pacific and China, we expect the Chinese market to decrease slightly, so between 0% 5% in units, and we expect the intense competition to continue. If we, however, look at the trends with increasing raw material prices and the impacts of factors in prices for the past couple of years, we expect that the environment is probably somewhat more constructive in 2017 than 'sixteen.
West of Asia Pacific are expected to grow. Europe, Middle East and Africa, slight growth. Same thing with North America from a high level. In the maintenance markets, we're not expecting to see any big shifts there in the trends, continued slight growth in Europe, Middle East and Africa, North America and good growth in Asia Pacific. Modernization markets.
We have now had strong market growth for close to 2 years. We expect the markets to grow next year, but perhaps slightly slower this year. If we then turn to KONE's outlook, we expect that our sales to grow from minus 1% to plus 3% at comparable exchange rates, and we expect our EBIT to be in the range of 1,180,000,000 yen 1,300,000,000 yen 1,300,000,000. That assumes that translation exchange rates remained about the January 2017 level. To that level, exchange rates will are not expected to have a big impact based on level where we are now.
If we look at our guidance, where we can see that based on this, we would exceed only 2016 results at the top end of the guidance. And why is this given the good development we have within KONE? We have many areas that are developing positively. We're growing our services business at a good rate and developing that in a good profitable direction. Europe and Latin Africa, North America are developing well as well as our many Asia Pacific areas countries, and then also our quality and productivity is developing in a good direction.
However, then we also have headwinds. One of the key headwinds is that our orders received in China has declined clearly in 2016. And also during the second half of the year, we saw some pressure, slight pressure on the margins. So that is clearly a headwind next year. Another important headwind for us going into 2017 is raw material prices and then also a slight headwind from the fact that we are expanding our activities in R and D, IT and other development, and that is also then burning the result somewhat.
However, I guess the most important point is that we expect that our competitiveness and our execution to remain strong and develop in a positive direction in 2017 and continue to make KONE an even stronger campaign. That is the main part with our financial performance, markets and our outlook. Now it's time to then look more forward. What does this new phase in our strategy mean? Before we go into that, I think most of you remember that we launched 3 years ago our latest set of development programs.
We launched them 3 years ago. You could already see that the global new equipment markets because of development in China was getting more challenging. That has really developed largely in line we had expected. And therefore, we also saw that objective was to expand our growth in other geographic regions and also to accelerate our growth in our services business. If you look at the results over that 3 year period, you can see that our top line has over a 3 year period grown by 8% and growth in all geographic regions.
Europe, Middle East and Africa started to grow now better towards the end of the period. And what I'm very happy about, if we look at our services business, is that we can see that we have been able to accelerate our growth, both maintenance and modernization. And also what is important is that our operating income has grown on average at 11% per annum, so exceeded that of our sales growth. So overall, we can see that the objectives we set ourselves 3 years ago, we have largely achieved, and it's been good performance over that period of time. At the heart of our development programs are these 5 programs that you see, we have talked about many times, and they have helped us again improve our competitiveness and drive good growth.
I will not go through all of them, but I'll just make a couple of highlights. In our winning team or crew professionals development program, here, our objective was to help every KONE employee to perform at their best. And here, we made some really good achievements. One of the areas was to ensure that every KONE employee has a personal development plan. Close to 100% of KONE's employees has a documented development plan that will follow-up how they need to develop as individuals.
Also, at the beginning of the period, we launched a new e learning platform, and we now have very active use in that. And that is incredibly important in an organization such as ours, where we have a lot of people spread out geographically, how we can bring new training programs, new capabilities to people in a broad distributed way. In our preferred maintenance partner development program, you can see that we achieved solid growth. We have continued to improve the technology and tools for our technicians to help them serve our customers even better. We are quite far with that.
And also, we have equipped our customers with new online tools to provide them with much better transparency understanding of what's happening. And then towards the end of the period, we have started to launch new service concepts that have created very encouraging results. Our top monetization provider, very happy about how we accelerated growth in modernization and have very good momentum in that business. That is now history, and it's time to look forward. If you think about our new phase, what is happening in our world around us, you can see that new technologies bring a lot of new opportunities, how we can add value for our customers in totally new ways.
We can also see that customer expectations are changing quite fast in good direction. Our customers are expecting all the time an increased transparency. They're expecting an increased predictability, and they're expecting increased uptimes. So we can see also that our customers are more and more starting to buy specific outcomes rather than product features. You can also see that the need for smart and sustainable urbanization is definitely there.
Cities are getting more crowded. How can we help them grow in a smart and sustainable way? All of these are important fundamentals and helping us drive our change. So this objective is to continue to increase our differentiation and to increase the speed at which we can bring new service and solutions to our customers. When we look at the world and what we can see from our activities is that when we deliver great service or solution or product to our customer and we help our customers succeed in their business, then we will win.
We have a lot of great examples for that. But when our customers succeed, then we will also succeed. That is why we have chosen this name for our next phase of our strategy is winning with customers. Because we also believe that in a fully connected world that we're living in, that the most sustainable form of growth comes from customers advocating on our behalf. We're seeing that already.
And if we can drive this even further, we think that, that is an incredibly powerful growth driver. That is why we believe if our customers succeed, then we will succeed. That's why we call it winning with customers. And again, for this space, we have again created a large holistic picture, which tells the whole story. Up to the left there's a familiar theme of urbanization, continues to be a strong driver for our industry.
200,000 people every day move into cities, That's 70,000,000 people a year. You can see that the need for small affordable apartments is increasing all the time as more and more people are living alone. We can see that elderly people moving back into cities to get better services. All of this continues to be great growth drivers throughout the world. You can also see that technological disruption is changing all of our lives and is changing our business also quite profoundly.
We see great opportunities how we can drive change as a result of this. These are the main megatrends that are driving our industry. At KONE, we have a clear purpose of our business, something we launched in 2016. To say our purpose, that's our mission. We said our mission is to improve the flow of urban life.
That's why we do our business. On top of the building, you see our vision. That remains unchanged. France delivers the best people to your experience, deliver ease, effectiveness and experiences to our customers and users throughout the life cycle. Then we have our strategic targets.
That is how we measure our success. Our strategic targets as well as our financial targets, they remain unchanged. At the bottom of the building, you can see a very strong foundation we have at KONE. Frontier really defines us as a company. That's our culture.
Our culture we define by the very strong commitment we have to safety and to quality as well as the four values which we live by and how we conduct our daily business. About delighting the customer, Kona, we are energized by our customers' success. We say energy for renewal is what we've been doing throughout our history, constantly renewing ourselves by finding better ways of working and serving our customers. We have passion for performance. We set the bar high we want to achieve and we want to stretch ourselves.
And it's about winning together. It's about winning together, collaborating as a team, but also winning together with our customers. So that sets the foundation for everything. Now the way we make, again, our strategy concrete, how we bring it alive is through, we call, ways to win. That is in the middle that I zoom into now.
So we have introduced 4 ways to win. That is how we will win with customers. And these ways to win, they provide a very clear direction of what all of what we do at KONE. So the first way to win, we call it collaborative innovation and new competencies. We all know that the world and technology is moving faster than ever.
We want to harness this in the best way everything is happening around us through innovating much more together with our partners and customers. And we are doing that already, and we can see great results. Perhaps remember, the innovation strategy that we launched a little bit over a year ago fully in line with this, and we can see great results when we collaborate with partners and customers to develop solutions in the best way. We can also see that it's the connect people that need to bring this to life. And in a more technologically advanced world, more connected world, that is requiring new capabilities from all of us.
And we do our business technology and business models. That's what we call the second part of this way to win is new competencies. So we continue to relentlessly focus on developing our people, and what I talked about what we have in our previous development program is a great foundation for this. A second way to win, we call it customer centric solutions and services. This we have chosen because we believe that customers choose partners who are the best of resolving their individual problems and meeting their individual needs.
Here, that is what we aim to do. And what I think is the most interesting thing with new technology enables us deliver specific solutions that meet specific needs of customers. We can call it mass customization. That is already what we have started to do in our service business with great results. Let's work even closer with our customers to be able to meet their specific and individual needs.
I think this is very powerful. 3rd way to win both fast and smart execution. Customers expect us to improve all the way, the way we do our business, how we serve them, how we manage projects, how we can be the best project managers, help them succeed on sites, how we can be the best ones at managing maintenance operations, for example, and how KONE is the easiest company in the industry to deal with. It's also how we can make our company even more lean, as we call fast and smart execution. And the 3rd sorry, the 4th way to win, we call it true service mindset.
It is about having the absolute best customer service in our industry. This is what we want to be known for, and I think what we are known for in many cases. So with this, with customers program, we're taking customer centricity through to a new level in our industry. We have been developing our customer service very actively over the past years. That's a good foundation.
I think this is taking us totally to a new level, somewhere no one is in our industry at the moment in the way we serve customers, and everything starts from their needs and how we develop value for them. And what I'm most excited about this is when we start to communicate this within KONE, it's creating a lot of, again, energy, passion and drive going forward. So this is hugely important time and very exciting time at Kona. So to wrap up, vision is to improve the flow of urban life, and that's what we're doing. 2016 was another strong year, looking very much forward to our next and new strategic phase to differentiate even stronger and develop with even stronger customer centricity.
Technology is bringing a lot of opportunities, deliver more value to our customers, and this we will continue to do with a challenging mindset, humble, straightforward, working as a team at Kona. So with this, I think we are time have time to go to questions.
Yes, indeed. We have any questions from the audience?
Jussi Koskin, you mentioned about conversions. And if I remember right, in China, conversions rate has been around 50 1,000,000 and rest of the world, around 80,000. So has direction improved since last, let's say, months or years?
Not a significant change in the conversion rate. If we look at the total number of units we're converting, there we continue to have a strong growth again year over year.
The other questions here? Not let's take questions from the telephone lines. So I'll hand over now to the operator.
Thank you. We will take our first question today from Klas Bergland of Citi. Please go ahead. Your line is open.
Yes. Henrik, hi, Jelica. It's Klas from Citi. A couple of questions, please. Firstly, on the pricing there in China.
1 of your competitors yesterday talked about better pricing driven by higher raw materials, but you're still reporting minus 10% pricemix, and you're underperforming the market again on volumes. Is your underlying pricing weaker quarter on quarter? Or is there something going on with respect to mix that we should be aware of? And if you could comment on the ASPs, where the developers in Tier 1 and Tier 2 are still trading down to the same extent?
Yes. First, we have to look at 1 quarter is quite a short period of time. If you look at China overall for last year, I think we developed pretty much in line with the market. Now if we look at Q4 specifically, and we continue to see strong price competition in the market. As I said, when we look forward, we probably are seeing a better dynamics because of the many factors you mentioned, such as raw material prices and the fact that prices have come down a lot.
But we have to also remember that there is about a 3 to 5 month tender book that you are delivering. So the orders that were booked in Q4 were something that was tendered later on. So looking forward, we probably see something that is slightly better dynamics, but we continue to see price pressure that was similar to the previous quarters in Q4 and also this mix impact of remember, it's year on year. So that trend really started kind of Q2, Q3 to be stronger. So that year over year, we still see a clear shift in the kind of mix of what type of solutions our customers are ordering.
Okay. So I think Oates had negative 5% to 6% on price, which would be similar to 16%, but then you have higher raw materials. So would you say 3%, 4% or have you thought about this?
I think it's too early to say. We have to see how the market develops. But we based on indications that we see and where the market has gone and some price pressures, we would expect that the dynamics are more favorable. I think it's to predict where a market price goes, I think it's too early. Remember, pricing is always an individual negotiation between us and our customers.
Then my second question is on productivity and also trying to look beyond 2017, if possible. The negative pricemix is 9% for 2016 in China, and this will gradually impact the backlog for delivery in 2017. And China is 35% of orders, so this is 3% negative pricemix at group level. Raw material is one thing, but let's say that we have to cope with another year with similar negative pricemix in 2017 for delivery in 2018. What cost actions do you have to put in place there?
Are you happy to just let the margin drift from a high level? My question is really, you have improved productivity a lot already. Can you improve productivity more?
So first, actually, we have to, of course, we're not happy to let margins drift. And as you can see, in 2016, we had a good development in productivity and quality and overall cost level. So we are all the time working very actively on this. I think it's always the more you develop something, the more opportunity that you see. It's clear that there continues to be opportunities in developing the competitiveness of the products.
In the past 2 years, there's been a tailwind of raw materials that has helped it. It's been only part of the story. Now that's a headwind. So that's why we have a little bit more challenging situation. But underlying improving quality and productivity, that's a constant game and we're by no means at the end there.
So that can continue. And we can also see that in our services business that is growing nicely and developing well in a few more parts of the world at the moment.
Okay. My final question is on the outlook for EMEA. You still see slight growth. I appreciate that you had a tough comparative last year on equipment. But looking ahead, shouldn't we start to see more improvement?
I mean construction PMIs are strong. We have others reporting about better activity in construction. Or is this just a lag of your business to construction activity that explains it? Or are you just a little bit cautious perhaps because it's early in the year? I'm just trying to understand the upside risk to Europe.
Yes. As you know, our industry comes a little bit later. You usually can for standard, particularly residential constructions, you can order your elevators when you are some way down in your construction. So we come a little bit later usually in that. And we see positive construction trends throughout Europe.
If you look at Central and North Europe, there are actually a lot of markets that are at a good level. If you look at the Nordic markets, they are at a good level. Germany is clearly at a very strong level. But then you have headwinds in countries such as the U. K.
And then, I would say, mixed elsewhere. There are many other strong markets. And South Europe has started to come up. So I would say, overall, we see slight growth, but we don't see strong growth. Also, if you look at construction activity, I think that is in line with that.
If we that is our comment is on the market. If you look at actually our performance and our growth in the past year, that has been very strong. If we look at our new equipment business, excluding China, we have a strong double digit growth in that in sales in last year.
Thank you,
Henrik. Thank you. Thank you. We now move to our next question from Erik Karlsson of Bodham. Please go ahead.
Your line is open.
Thanks for taking my question, gents. The growth in the maintenance is really impressive, and we seen an acceleration in the growth there in constant currency terms. I think it was 7.2% last quarter. Could you help us understand the reasons behind the acceleration and whether you think it's sustainable to keep it at this new higher level?
Of course, there's always fluctuations quarter to quarter. For the full year, we're at 6.2%. And we believe that if we have a business with a maintenance base, if we can continue to compound that about 6%, that is strong. And that is our objective. And we see that we have good growth opportunities there.
And what is driving this growth? It's clearly good conversions. Asia Pacific, China is a good growth driver here. But actually, we're also improving our growth in both EMEA and in North America as new equipment volumes have increased. So we see good opportunities there.
And if we look at what is driving growth in maintenance, clearly, conversions is an important one, but also activity on repairs in that has we've been able to improve those as well. So that's clearly an area where we have continued to have high ambition levels, and we believe it's an important area for us to continue to grow.
Very good. One more question, if I may. What's the biggest factor of uncertainty for the EBIT margin for 2017, do you think?
We look at clearly and this is not necessarily in order of importance, but clearly, raw material prices are one uncertainty. Those can be quite fluctuate. We clearly lock them for some period of time. But clearly, also the development of the market in China, because there the order book rotation is faster. Other than that, we, of course, have pretty good visibility into the coming year, except for if there would be any bigger impacts on the markets overall.
If I may there, is the service margin actually, particularly the maintenance part, going up? Or is that sort of more stable and you're growing the top line there?
In most markets, we are improving profitability as well. Then the mix effect may have some other impacts. But the majority of top line growth is clearly a key driver, but we also have the opportunity. In our service business, overall, we have improved our profitability.
Thank you. We will now take a question from Guillermo Peigneau of UBS. Please go ahead.
Hi, good afternoon, Henrik. Good afternoon, Ika. Just a question on transport costs and referring to China. I think we found out that the regulations on pollution or the environmental protection policies that have been put in place have resulted in a more restricted environment for transporting goods, amongst them actually elevators. And I was wondering also if there is an impact not only in the transport cost of elevators to be thinking about going forward, but also on the logistics around the service operations.
Do you have any thoughts on that?
It has not been a big focus area. I don't think it has a big impact on the service business that is so local. If we look at new equipment business, yes, we have one factory, but you have to remember, we take a lot from our suppliers, and we have several distribution centers within China. So it's not that everything is shipped from our factory in Kunshan. On the contrary, there's quite a lot of local suppliers close by.
So this has not been a key focal area or big challenge, at least so far.
And when it comes to pricing competition, can I ask, is it local competitors? Or is it the Western players that are putting pressure on the pricing?
Again, I don't think you can point a finger towards anyone specific. We have a market with many large players and many small players. I think most companies have ambitions in China. And when the markets have been shrinking, it has resulted in a tough environment. So I don't think you can point a finger towards anyone in particular.
And then last one actually. You mentioned raw material IT investments and R and D investments. And I know you gave an update in your Capital Markets Day about IT and R and D. I think raw material is clear. If I'm not mistaken, it's around about EUR 50 to EUR 100,000,000 impact there.
And I was wondering whether you could update us on the cost increases coming from IT and R and D. Thank you.
Luca, do you want to take that?
Yes. Certainly, I'll try to bring more clarity to that. So you already see for both R and D and IT that we are have started the investments, as we told earlier, and see, relatively speaking, that both of them have a roughly 0.2% impact to our costs relative to sales. So that's roughly where we are. And we continue to invest now to 'seventeen as we've done already started in 2016.
Thank you very much. I'll go back in line.
Thank you. We now move to Andrea Ricchi of Bank of Beliovis. Please go ahead.
Good afternoon, guys. Thank you for taking my questions. I would actually have 3, if you don't mind. The first one is the following. I would like you to comment possibly whether you see any pricing pressure, especially in maintenance for Europe and in North America as flagged by all these actually yesterday.
So whether you still see a good pricing environment there or you see a fierce competition I would like to understand whether you feel that this pressing competition that has been going on in China has somehow contributed put out of business some of the smaller players there and therefore driven consolidation? And if so, to what extent? And then the last question, I mean, more like a confirmation. You showed inventories in Tier 1, 2 and 3 cities. It looks from your plot that they have actually not really improved sequentially in Q4.
So I would appreciate if you could confirm on
that. Thanks. If we start with our first question you had about price pressure in maintenance, particularly in Europe and North America. As we have been saying for a while, price pressure in maintenance has been particularly tough in southern parts of Europe there because we have had a prolonged weakness in the new equipment market. There's very little new units coming in and a lot of small players.
So that has driven made those quite competitive. But despite that, we have developed nicely in those markets. North America continues to be price competitive, but not quite as bad as it was a couple of years ago. We're starting to see, of course, more conversions coming in now and more activity on both modernization and new equipment. So that's helping a bit.
But I would say South Europe continues to be challenging. Rest of Europe, I would say, it's mixed and North America also mixed. But overall, there's tough competition overall in that market. And your second question was about China. We have seen some small 1 or 2 a few players maybe go out of business, but very limited.
You have to remember that there are hundreds of new equipment suppliers in China. So consolidation has not been significant, at least as of yet. We could probably expect some, but when there are so many players, I don't think that has a big impact particularly yet. We are quite happy with the position we have. And then your last question was about inventories in Tier 1 Tier 3 and Tier 1 and 2 cities.
I think this chart is better to focus on the little bit longer term trends because they can fluctuate quarter to quarter, but we do see that transaction volumes continue to be positive in the last quarter as well and improving year over year. So I think those are charges worthwhile, always looking at a little bit of a trend over a few quarters.
You. We now take a question from James Moore of Redburn. Please go ahead.
Yes, good afternoon, everyone. Thanks for taking my questions. Perhaps I could go one at a time. My first question is about the slight decline in order margins for the 2nd quarter in a row. Is there any way you can define slight?
And does this just reflect the China price decline or both the price decline and the €50,000,000 to €100,000,000 raw material impact?
When we talk about changes in the margin, we, of course, look at how has our cost developed and how has our prices developed. And then there's, of course, always margin is the difference between those 2. Still, cost changes weren't that big yet Q4. I think we're starting now to see from this year more pressure on raw material prices. So I would say mainly a function of prices.
Slight means that it's not significant. And when you look at our contribution level, that but it's still slightly down.
And okay. And can you say what proportion of your full year 2017 raw material purchases are locked in by hedging or contracts? And how much could fluctuate with changes in spot prices?
I'll take that. And that's a good question. So from our perspective, we obviously continuously lock our prices and roll them forward. And the normal cycle from a timing perspective is something in between 6% to 9%, is probably the longest lockups that we have for our raw materials. And roughly where we are in it as of today is that we have locked about 50% of the prices already.
And obviously, we'll continue following that throughout the year and roll them out roll them further.
And the rolling field prices started to grow, increase already second half of the year. So those have started to come through now even though we have more assets under contracts.
And on productivity, your slide helpful slide sort of suggested CHF 14,000,000 of productivity in the Q4, which I'd annualize at EUR 50,000,000, EUR 60,000,000. You talk about some productivity objective for 2017. How does that number compare to that annualized number? Is that the same sort of magnitude? Or do you think you can accelerate that?
And what are the biggest buckets in that productivity?
That is, of course, the net number of many things. I think what Ilkka showed was there was one that came straight from growth and one part that came from margin. So of course, part of that is productivity. It can be pricing and many things. But clearly, we want to get several percentage points of productivity in all of our operations every year, and we are largely getting that.
Partly, you need to do that all the time to because of price pressures in the market. That's a natural thing. So we have clearly, in this environment, we have ambitious targets for our productivity. What exactly are, they vary from business to business, and you always have puts and takes as well.
Great. And
finally, if I
So obviously, that's actually one of the areas which, as a newcomer to Kona, I've been really impressed by the capability that the company has in every day looking for efficiencies and more efficient ways of working. And that's really at the heart of it. And I think I would also highlight and step a bit backwards and highlight the fast and smart execution that Henrik talked about as one area for the next 3 years that we invest and further develop. And that's really at the heart of it. It's about how do we serve our customers more efficiently and effectively.
And both of them actually contribute to the same financial outcome, in my mind.
Thanks. And just one final technical question. Your cash flow from financing items and taxes was SEK 331,000,000 and quite a big swing year on year. I couldn't think what that was. What's behind that big number?
Firstly, from a financial income point of view, last year, we had the large dividend from Toshiba Elevator Company at SEK 118,000,000 which is the biggest winger.
That still leaves $150,000,000 ish. Is there anything behind that I should we should be aware of?
No, nothing major there that I would highlight.
Thank you very much.
Thank you. We now take a question from Manu Rimpela of Nordea. Please go ahead.
Good afternoon. I would have two questions. Firstly, could you comment on how do you see your ability to pass on the cost inflation outside of China? So I mean, if you are going to if oil price still remains challenging outside of China and then we see raw material prices going up. So are you expecting to see margins being squeezed outside of China as well?
Actually, we have to see how the overall market picture develops. But clearly, yes, when we look at as you know, we don't comment on pricing going forward. That is always individual negotiation between us and our customers. But in an environment like this, clearly, we have objectives and targets, and that is one of the areas how we want to develop our margins, and the other one is through productivity. So that's a focus area throughout KONE in all geographic areas.
Okay. And maybe a follow-up question on that. Do you have a historical example? I mean we had previous times when raw material prices have been volatile. So what do you see as the lag when raw material prices stabilize that you are able to kind of recover that in pricing?
If I well, 2012 is one comparison point. You can see what how it developed there. But then, of course, there were many other factors, but there was one factor if we go back to that period. But you can say that if you think if we today book an order on average, we're going to deliver it in 1 year, that's one way of looking at, from a sales perspective, the delay. But of course, it's you have a little bit longer delay because if you tender something today, you probably book it as an order in 3 to 5 months and then from that, it's then a year.
There is clear lag, but that's part of this business. Sometimes it's a positive and sometimes a negative for you.
Okay. And then on the new measures that you are taking in terms of these R and D investments and all of these step ups in efforts in service and maintenance. So could you just help us understand that when do you expect to see some tangible benefits from this? So we are obviously seeing the cost coming in this year, but do you expect to see also benefits already in 'seventeen? Or is that more later?
In the service business, what we're doing, we can see some benefits already, and that's something you need to do all the time. In the service business, you have to remember that before you roll out the new service concept too broadly to your customer, it takes a while because you have it takes many years because you have so many individual customers, many small customers. But I think that when we start with them, we can start to see on a small scale, we constantly see that we're moving forward. Some of them, of course, take longer and longer term in nature. You always have a portfolio of some really long term measures and some shorter term measures, it's a combination of both of these.
Okay. And final question. Is this something that you're seeing also that you just have to do in order to stay competitive because we know that your main competitors are also investing? Or do you feel that you actually have been able to invent something new into the industry?
Of course, it's our objective is to differentiate. And all everyone always in market has slightly different approaches, how they have. But I think what we're seeing is that opportunities for us to deliver totally new value to our customers in a better way. It is there, and that's why we're investing in them. And obviously, we're not the only ones that are seeing that.
But again, always all of us have slightly different approaches. And we believe strongly that with our approach, we're going to continue to differentiate and develop well compared to our markets overall.
Okay. Thank you. No further questions.
Thank you.
Thank you. We will now move to Andre Koon of Credit Suisse. Please go ahead.
Yes, good afternoon. Thanks so much for taking my questions. I'll go one at a time. Firstly, just a clarification on pricing in China and what you're saying there in terms of seeing more positive dynamics or dynamics improving. What are you doing with your pricing in China this year in tendering or in orders that you're booking?
Again, pricing is always something between us and our customers. But I would say our approach in this type of environment, it's clear the approach needs to be more that you're focused on value rather than just volume. So but what we do on pricing is, again, between us and our customers.
Okay. But just to understand it a bit better, are you when you talk about dynamics improving, is this improvement in terms of a lower rate of decline of prices? Or is this improvement in prices absolutely year on year that you're seeing?
We have not seen that yet. And what we're saying is that we expect the market to remain competitive. And I don't we can't predict where market is going to be in 2017. What we're saying I think what we can say is that for us, focus is really more on the value rather than just volume of what we sell. That's one point.
And secondly, if you look at the environment, you can say that, that is more supportive and perhaps better dynamics than we've seen before because of what we have talked about the market. But where exactly it will go, I think we have to see.
Got it. And can I just check-in terms of your China margin during 2016? Has it turned out to be much different to where you were in 2015?
Yes. As you can see from our overall performance, we had good margins and good performance in China. Yes, we could see pressures on prices and volumes. However, the way we continue to develop our competitiveness, we actually had a good development in China.
Got it. And just a follow-up on the productivity, what you said about several percentage points that you target to achieve every year. Thinking about the base for that, would it be right to think about total cost base excluding the materials and components purchasing?
There are different types of productivity. Clearly, in our type of industry, what of it is field operations, both in maintenance, modernization, well, installation and both in new equipment and in modernization. And clearly, you want to constantly improve your quality. And when you improve your quality, can improve your productivity, having better operations. And those are, of course, a lot of those are labor costs.
But then you have, of course, on the product, you want to also constantly find improvements on the product cost in having either better productivity in your supply chain or new designs and so forth. So it comes from many different streams. And all of them need to work in order for you to develop well over long term, and that's what we've done.
Okay. So it sounds like it's broader than sort of involving some of the purchasing component purchasing lines as well.
You need to constantly have activities in all fronts because remember also in most countries, unless you have productivity, you're going to have increased cost all the time by labor cost increases. So what our objective is to clearly more than cover those.
Great. And then just final question on the extra investment in R and D and IT. I know we went through it in some detail at the Capital Markets Day, but there has been more time sort of passed since then. And could you share with us whether kind of your return on investment in these step ups in investment is kind of comparable to KONE's return on investment, KONI Group's? Or is it higher?
And where are we in that phase of investment versus payback? Is this sort of investing this year, payback in 20 eighteen-twenty 19? Or are there some quick opportunities? Or maybe, in fact, some of this acceleration in growth in service that we're seeing is already in effect of some of that? Just to understand that component a bit better.
We think over the past 3 years, we have constantly increased our activity, how we develop our service business, both maintenance and modernization. The growth we have had would clearly not have been possible without those extra efforts that we put in. And therefore, that is clearly what we look at going forward. Return investment tends to be good that you can see well, you've seen that from our track record. Clearly, when they go up, also push them out a little bit, but it's not a big area.
And we have to remember that for last year, we talked about in R and D in total 1.6% of sales. So we're not talking about any massive numbers here.
Okay, got it. Thanks very much, Henrik.
Thank you. We now take a question from Martin Flugiger of Kepler Cheuvreux. Please go ahead.
Yes, good afternoon, Henrik. It's Martin from Kepler Cheuvreux. Thanks for taking my questions. Actually, I got 3 questions as well, and I'll take them 1 at a time. Just coming back to your market outlook for the Chinese new equipment business.
You're looking at a decline between 0% and 5% in units. And at the same time, you're talking about an improved environment. So I'm kind of wondering, 0 to minus 5 still looks pretty grim, if you ask me. I was just wondering, what are the key assumptions for your forecast of a decline between 0% 5% in China?
So last year, we saw a decline in the market, close to 5% overall. So a bit worse than the range, it could be similar. Now in Q2 sorry, Q3 and Q4, we saw a slight moderation in decline, and we are somewhere in that range going forward. But I agree with you, market expected to remain challenging next year. We said that we have had the improvement in property markets last year.
However, that has led to lower inventories, which is good, healthy for the market. And now we see that the government is actually putting in clear restrictions to cool down the market. And we can see the first indications coming out of that is that, that is having an impact. And with that overall, when we look at it, we expect that market's raw will be in the range of 0 to minus 5. And we say that, again, people have said before that the pricing environment, we believe that the dynamics are better.
But of course, we have to see where it goes, and we can continue to see a very high competition for the market share in China.
Okay. Thanks. Got it. But just looking at new construction area, I suppose you would agree that new construction area is some sort of maybe loose leading indicator for your business in the new equipment space that based on the data that I've seen, it was up around 7% in 2016. Is that not a contradiction to your outlook for the new equipment market?
If you
look at new construction, it started to grow then in 2016, but that came after 2 years of declining. And it was if you look at longer term and take an average, you can see a link. But over the short term, it's usually there's not a strong correlation. But this is based on the outlook we see, based on feedback from many of our large customers. And particularly with the big developers, we have a strong market share there.
And feedback from them, what we see from markets and more expectations, we put it all together. This is the best view we have at the moment.
Okay. Then my next question would be on yes, I think you just touched upon it in your last answer, but maybe we could dive into that subject a little bit more. We've heard some news about China Central Bank now to curb excess leverage in the financial system, I. E. To strictly control new mortgage lending.
What is the feedback you're getting there? What are your views on the impact on the property market and new equipment growth going forward just from that latest development?
As I mentioned, there's only early signals because end of last year still was quite positive, but the early signals are that it is starting to have an impact on transaction volumes and prices. It's still early days, but it's clear that you have restrictions on mortgages, particularly for 2nd and third apartments. And then also you have restrictions for developers in how they can finance purchase of land. So we think that this will have an impact. But again, it's early days, so I think we had to follow how that develops.
Okay. Then coming to the U. S, I think if I remember correctly, you are guiding for slight growth in new equipment in the U. S. Now I'm a little bit surprised of that because if I understand correctly, the multifamily housing also has an important impact on your growth or on market growth in new equipment in the U.
S. And that here, we've seen building permits that we can considerably over the last few months even turn negative in the second half. Why do you still think that the North American market in new equipment can grow slightly in 2017?
You always look at new permits. Those can be volatile and are very leading indicators. But you have other leading indicators such as architectural billing index, which in most parts of the U. S. Continue to be in positive territory.
This is, again, what we see from our customers, what we see from the backlog, what we have in the market. It's clear that after a growth period that we have had that the growth is slower than it's been before, but we still expect the market to move a little bit further in a positive direction. And you have to also remember that from a building permit to when it impacts us can there can be a clear difference between that.
Okay. And yes, just final one on financials, maybe CapEx. Could you provide us with the latest update on CapEx and net working capital guidance for the foreseeable future? Many thanks.
Yes. Thank you. So from a CapEx point of view, as I said, so although we made investments last year, it didn't really fluctuate that much as a percentage of sales. So we continue to be in the same range going forward as we saw in 'sixteen. And then from a working capital point of view, I think it's a we made good progress this year and plan to continue making progress, but I think it's a good level already.
Okay. Thanks very much.
Thank you. We will now take a question from Rick Mady of Berenberg Bank.
I have 3. I'll take them 1 at a time. So first ly, just on the backlog. You started the year with a 5.4% increase in the backlog, and yet you're guiding for a minus 1% to plus 3% organic growth for this year. Can you just give us a sense for the conversion or the duration of the backlog and how you see that flowing into sales this year?
Yes. So I think what I would highlight there are a few things. So first of all, geographically, so we've seen good progress geographically in Americas, North America, which has a somewhat slower circulation time from order to then fulfillment as well as we've seen good progress in our major project business, which also has a longer cycle time. So those are influencing our guidance for 2017. In addition to that, we did see some slowdown in China in our order book, but I would highlight maybe the 2 first ones first in terms of importance.
Okay. Secondly, on the guidance 2017 for EBIT, can you share with us the assumptions for raw materials and FX impacts?
As I mentioned, FX, very negligible and raw material here.
Raw materials, we will look at the market price there and where we are in terms of having contracts on raw materials, which I already commented. So I think that's our best understanding as of today. And then we'll see how the year develops on both of those items.
Okay. And then lastly, just on the maintenance business in China. Can you share with us the level of growth you've seen that in Q4 and how big the maintenance now is in as a percentage of the overall Chinese business?
So now if you look at maintenance, it starts to be over 10% of our revenues, which has continued to grow at a good rate at over 20% last year. So good growth throughout the year. And it's clear that the growth percentage comes really down as the growth as the base underneath it has grown a lot, but continued good development in our maintenance base in China and our maintenance business. And now we surpassed the 10% mark of its share of revenues.
Thank
you. Thank you. Our next question comes from Glen Liddy of JPMorgan. Please go ahead.
It's a question on the aftermarket in Europe. Is the pricing pressure spreading north in Europe?
If we look at the pricing environment overall in Europe, we haven't seen any major changes in the trends. The markets where when you have more conversions where you have had stronger new equipment markets for a while, that tends to be a more supportive factor because there's more new units coming in, in the markets where you have had a prolonged weakness in new equipment. Those tend to be the most challenging ones, such as the South European markets.
And in the U. S, you've had volume growth for some time, but you flagged that the aftermarket pricing is tough. Is there any particular fact behind that? Are you getting more independent service agents appearing in the market?
Hasn't been a big shift in there. It continues to be. The U. S. Market is more consolidated perhaps the others, but we still have a lot of independence there.
I think we're probably going slightly in a better direction given that many of these units have been installed have now come to the market. So usually, there's a clear lag, but we're probably going to be looking at a slightly more slightly better environment.
And final question on the aftermarket. Are customers trading down in terms of the value added nature of their service contracts? If you enter into a long term service contract a couple of years ago, are they entering into the same quality of contract on your new service contracts today?
There's not a huge difference. And again, it's not necessarily a big difference in the business. If you have a fully comprehensive contract, for example, then you have everything included. If not, then you pay separately for the repairs. So one is more like an insurance contract and the other one you more pay as you go.
So for us, clearly, it has some impact, but there's no big changes in the frames there.
Thank you. Lars Rasmussen of Barclays has our next question. Please go ahead.
Hi. Thanks. Hi, Henrik, and happy New Year. A couple of
things from me. Just first
of all, on market share in China. I presume we'll get market share data as you often provide with your Q1 results. But it looks like based on what we've seen in 2016, you didn't gain. Perhaps you lost a bit of share this year or last year. That's the first time in the 10, 12 years you've been providing market share data there, and we've been able to track it.
Why do you think that is? Where are you now as far as product portfolio is concerned? What do you see competitively? And maybe just linked to that, I'm still a little bit puzzled with your commentary around an improving pricing outlook for 2017. I don't want to belabor it, but I appreciate we see raw material price inflation.
Perhaps we see volume declines a bit less than we saw in 2016. But why would you imply, if that's what you're doing, that we are seeing underlying improvement to the pricing environment? Sorry, that was 2 different questions, but I guess somewhat related.
If we start on your second question, so what I was very clear is that we have to see where prices go. I said if you look at the environment and you look at the impact it's had on many companies and the raw material, I said that we are probably seeing a somewhat better dynamics. But of course, we have to see how it goes. That is how we see the situation. I think we are not the only ones who want to focus more on the value rather than the unit volume in the market.
When you look at market share, if you look at over last year, we believe there's a preliminary basis that we developed roughly in line with the markets, no big changes. If you look at 2015, our market share increased by it was a little bit over 1.5 percentage points. So sometimes you take more. Now in this challenging market, we have not sought to maximize our market share, and we have this is very much based on the approach we have taken. If you look at our competitors in the China market, we have a we continue to have a broad and strong product portfolio.
So I feel actually pretty good about that.
Okay. Just to the first point that you don't think it could get much worse. I mean, if you're running at OE margins in China in the high teens, OE is in the low 20s, the industry probably, at least among the global OEMs in the mid teens. I just don't understand why it can't get much worse, but perhaps we can leave that for a separate discussion. Secondly, I just wanted to ask you about balance sheet.
I'm a bit surprised not to see any commentary around that. You obviously last paid out a special dividend in 2012. You've been very clear about your appetite to do a larger deal. It's also quite clear that there aren't any willing sellers. Well, perhaps we get a forced seller in 2017.
It looks like we might. But I guess my question is how much patience do you have here? How much patience do you think shareholders have to continue to wait for that larger opportunity to materialize? And what point do you think it's time to deal with what seems to be a rather overcapitalized balance sheet?
I would say we feel pretty good about that balance sheet. And with this dividend, we're going to pay out another about €800,000,000 So I think it's a pretty good payout. But clearly, our balance sheet will remain very strong after that as well. And as we have said, there are a lot of situations happening in the world, uncertain world. If there are opportunities, we are very keen to capitalize on them.
So therefore, we still think it makes sense to maintain a strong balance sheet. It's, of course, always up to our Board to decide how we think about payouts. But what we've been doing is that we've been increasing our dividends. If you look at the compound annual growth rate over the past years, it's actually it's rather high and good and that we feel good about. And then we also done some buybacks on top of that.
So overall, we have to see what opportunities come, and then our Board of Directors have to make decisions in accordance.
Certainly. And finally, if I can just ask to India. I thought it was interesting to hear the comment around that. Can you give us a sense for how much India declined in Q4 versus perhaps where you're running earlier in '16 and that impact of demonetization, it sounds like you see there's more of a temporary phenomenon. What's your view on 2017 for your new equipment business in
India? Let me address the markets overall. So the markets are growing. They were not growing strongly, but they were growing slightly throughout 2016 until the demonetization occurred. And that clearly had an impact, as many of you, I'm sure, have read on the property markets overall and caused some cautiousness amongst developers.
Over time, it's probably going to be a good thing. And but it had a temporary effect. And we expect overall the markets in 2017 to grow. Let's see when they recover, but we still see positive underlying demand and dynamics in that market. But this then was a little bit of a hiccup there in the short term.
And just how big was that in Q4, if I can just ask?
It was some single digit percentages of the market decline. Yes. Yes. Okay. It wasn't a strong decline in the market.
It was just some more uncertainty from a growth.
That's clear. Thanks, Henrik.
Thank you. We now have
2 really quick questions.
Hi, I think that was me, sorry. Just hi, Heineck, Heilke. On the backlog, you said the relative margins of orders received in the second half of the year declined slightly. Do all of those deliveries flow into 2017 and of course in your guidance
for this year? Or does some
of that kind of weaker margin flow into 'eighteen as well? That's the first one. Thanks.
You look at China, then most of it will be in 'seventeen because of the faster rotation from order to delivery.
And then you mentioned the competition balance
in the
presentation. If I look at your chart, it looks like if it grew by 6% in the maintenance space, that's maybe 70,000, 80,000 units. It's still a long way below the 130, 140,000 that you delivered both in 2015 2016. So I know there's
a lag and I know
that some buildings get demolished, but it still seems to me like the competition balance is quite negative.
So maybe can you give us
a figure on where that is and just more color around how much it's improved this year?
It was only slightly negative. We're not talking about the big numbers. So if you look at the puts and takes, so you have to remember, it's quite many years delay from delivering a unit until it comes to service base, particularly China, where first service periods can be 2 to 3 years long, so from when something has been installed until it comes there. But therefore, our conversions continue to grow, and they grew again at a good rate last year. So competition has improved.
It's only slightly negative. So it was a clear improvement year over year. Perhaps last year, we had even slightly more demolitions and buildings taken out of use than normal, but that's a little bit over a percentage point impact. So those are the main impacts to the Internet space. As I said, it grew clearly over 6% again.
And then just very quickly, so you outperformed the market very clearly in Q3 and then underperformed again in Q4. Why are there such big swings in market share? Is it you push harder in some quarters? There's some very large orders that come in and out of the order book? Or is this kind of your kind of tactical approach to the market and pricing and the need to build a backlog?
Why do we get these big swings?
First of all, I don't think that they have bigger swings. And we have to remember 1 quarter is quite a short period of time, and these are natural swings in the market, and we may have slightly different approach. But mainly, I wouldn't read I mean, again, 1 quarter in our industry is a very short period of time, so always worthwhile looking at it. Like we said also during our fastest growth period is, hey, let's not look at only 1 quarter. Let's look at a little bit more over a few quarters.
That's what makes sense.
Got it. Thank you.
Thank you. Our next question comes from Bernard Horne of Polaris Capital Management. Please go ahead.
Yes. Two questions. One is a little bit more detail on the service development in China and the second is export competition from China. But let me ask the first one and then we can ask the second later. On the development of service, historically, you've had a situation where the new equipment sales are often accompanied by service contracts, which may or may not be fully charged for.
And it's the conversion of those at the end. I know you talked a little bit about conversion, but I'm wondering if you might just give us more detail on how that development is working and the competition from some of the local service providers? Because it seems like you've made progress there.
Okay. So what you're referring to is when we deliver a new unit, the Kone brand, 100 percent of those units will come with a first service period that is included in the new equipment price, and that can be anywhere from 1 year to 3 years. So we will be servicing those units after 1st installation, all of them that we sell and install over the 1st 1 to 3 years. Then the conversion rate is how many of those we then get into a paid maintenance contract at the end of that period. And important part of our maintenance revenues in China come from the so called 1st service period because we, of course, that's where we recognize the revenue for the work we do there.
The conversion rates at the end of this, they have remained pretty stable. So we are at roughly 60% for KONE brand and clearly lower for Giant KONE, which brings the overall to around 50% as was discussed here in the beginning.
Okay. The second question is on competition that we seem to be seeing from China into the traditional Western elevator market. So for instance, in Southern Africa, we've heard of situations where wholesalers who have been very traditionally loyal, let's say, Western Elevator brand customers have switched to Chinese exports. And then a couple of weeks ago, I was in Sweden and unfortunately had to walk up 6 flights of stairs with my luggage. But when I got to the top, I asked the service techs kind of elevator it was, and they said it was a Chinese elevator.
I was kind of surprised that in a Nordic market, that we'd start to see actual Chinese competition was a relatively new building. So I'm just wondering if you might I know you can handle the competition as it's exported. But on the other hand, I'm just curious if you can maybe give us some factual details on where you're seeing kind of export competition from China, which markets and how big has it been up to this point?
Thank you. Chinese, maybe it's, of course, mainly the local manufacturing, it's not the global OEMs you talk about because, of course, the global also exports some from China. But if you look at these local Chinese brands want to penetrate other markets, its volumes are very small. We see them sporadically coming in and out of markets. And we have to remember that there is a segment that has been long term served by component manufacturers, for example, in Italy or Spain that have put together entire elevator packages and then sold them.
Then many of them have then been replaced by this Chinese imports. So we talk about very small volumes. Then in some new markets, they may have some distributor who imports their products. Again, we're not seeing any significant volumes or progress from them. What we have to see make sure that if we can't be very competitive in China, then there's no reason we can't compete against them abroad.
But again, we're talking about a very small phenomenon at least until now.
Okay. Thanks very much. That handles my questions. I appreciate it.
Thank you very much for your questions and your time. We wish you a very good rest of the week. Thanks.