Afternoon, everyone, and welcome to Konev's Q3 Results Presentation. My name is Sanna Kalle, and I'm the Head of Investor Relations. I have here with me today our President and CEO, Henrik Anruth and CFO, Ilkka Hara. As usual, we will start with a presentation Henrik on the highlights of the quarter.
Okay. Thank you, Sanna. And also welcome, everyone, both here in the room and everyone following the webcast. It's again a great pleasure to report to you the results we have achieved in the Q3. We had a good performance again.
And I'm particularly pleased that we have continued to perform strongly in an environment that we all know that has been challenging already for a while. So I think we have, again, clearly demonstrated that also in a more challenging environment that we can continue our good performance and find good opportunities out in the markets by working with our customers. As usual, I'll start with our key figures, go a little bit deeper into some of them. Then I'll talk about some of the areas we have developed KONE and some developments in our programs. And after that, talk about markets and then wrap up with our outlook for the markets as well as Fonez outlook.
Now let's start with the key figures for the Q3 of this year. As you can see from the heading, we had a solid development on a broad basis. Our orders received were EUR 1,770,000,000, dollars growth of 0.4 percent, but if you look in comparable currencies, growth was now 3.3%. This I'm pleased about. Our order book remains very strong at $8,700,000,000 Also, it's grown at 5.6% in comparable currencies from last year.
This naturally gives us a good situation for the coming years. Our sales, €2,170,000,000 It declined slightly if we measured in reported currencies. However, in comparable currencies, we continue to grow, and we grew at 1.9%. What is most important with this is that we continue to grow profitably. Our EBIT of 331,000,000 dollars and we can see improvement in our EBIT margin from 14.9% to 15.3%, and this was a strong performance.
We also continued to have strong cash generation. We continued very positive cash generation at over $400,000,000 of cash flow in the quarter and also our EPS improved. Now as we've always said, 1 quarter is a very short period of time to look at our performance, and it's always better to look at a slightly longer period of time. And now at this stage of the year, we naturally have 9 months to look at. We can see how we're done on a slightly longer term.
For the 1st 9 months, we can say that it's been a continued good operating performance. Our orders received at just shy of €5,800,000,000, they declined at 3.8 percent or 1.2% in comparable currencies. Sales has continued to grow at SEK 6,200,000,000, 1.7% growth, but again in comparable currencies in this type of environment, what I believe is a very solid number, 4%. But again, here, perhaps if you look at the 1st 9 months, the highlights are our EBIT of more than SEK 900,000,000 for the 1st 9 months, improvement in our margin from 14.2% to 14.6%. And what I'm very pleased about is the very strong cash flow we have continued to drive at KONE.
Dollars 1,100,000,000 of cash flow for the 1st 9 months is a very strong achievement, and I'm very happy about that. Our EPS has also improved from $1.30 to $1.42 for the 1st 9 months. I think it's clear to everyone that performing strongly in an environment like this requires a committed, motivated and dedicated team, and this, I believe, we definitely have at Kona. Everyone at Kona has continued to really look at opportunities, look to find opportunities how we can improve in this environment, and this we've done. Again, my heartfelt thanks to all Kona employees for the great work that they have done during the 1st 9 months or ongoing what they do for us as a company to drive us forward.
So those are the key numbers. Let's go a little bit deeper into orders received, sales and EBIT. Orders received, growth of 3.3% in comparable currencies. And here, what I'm very pleased about is that we had a very broad based strong performance, and that compensated the challenging situation we are facing in the large Chinese market. Here in Europe, Middle East and Africa, we continue to grow in double digits, a very strong performance.
Also in North America, we continued our solid growth from a good level. And also, rest of Asia Pacific grew in a good way. We can see that the objective we have had during the past years is to find broader based growth to compensate for what we have already known for a while, the Chinese market is getting more difficult. This we are definitely delivering on. If you look at by business, continued double digit growth in our modernization business, which I'm very pleased about.
So also here, the efforts we have put in over the past few years to strengthen our modernization business and drive growth is happening. We also had a better month now, a good growth in our major projects business. If we look at China, I know that always a lot of questions about that. And of course, it's an important and big market for us. So in China now this quarter, we did outperform the market.
Our orders received grew at close to 5%. If we look at our orders received in monetary value, they declined in high single digits. So we can see that the market continues to be price competitive, and we can continue to see a shift in what our customers prefer to lower specification products. So if you look at this combination, impact for us continues to be roughly 5% in price and roughly 5% impact from mix to lower specification product. If they look at the margins for our orders received, the most important point is that the margin of our order book remains healthy.
However, given the price pressure that we have seen in China, the margins for our orders received in the Chinese market did decline slightly now in the Q3. But overall, if you look at our orders received, I'm very pleased about the broad based strong performance that we have had. If I then turn to sales, the growth of 1.9% in comparable currencies and here to highlight is really our services business. Our Services business, we have been delivering good growth in that now for quite some time and that we continue. Modernization business continued solid double digit growth at 13.4%, and our maintenance business also a very solid good 6.1% growth.
So this then compensated the slight decline we had in our new equipment business. Also, if you look at this by region, both Europe, Middle East and Africa and the Americas growing at a good rate, then compensated before a decline in Asia Pacific. So here Asia Pacific outside of China continued to record strong growth, whereas our sales in China now declined at around 10%. And it's, of course, a natural consequence of the fact that our orders received start to decline earlier this year and order to delivery lead times are about 6 to 9 months. So I think this is totally logical.
But overall, very pleased about the growth in our service business where actually we have been growing at good rates in all geographic regions. And then turn to our operating income, our EBIT. Here, again, very pleased that we continued our profitable growth and improved our margins from 14.9% to 15.3%. And the driver of the good improvement in our margin was the positive development we have had in our services business, both maintenance and in modernization. Here, we're both growing at good rates and be able to improve our margins through the work that we have done.
It's clear that profitability in new equipment declined slightly but remained at a good level, but that was because sales declined in new equipment. We also continue to have other areas that burden our EBIT development, such as continued increase in investments in research and development, in IT. And also, foreign exchange continues to be a clear headwind. For the quarter, the headwind from foreign exchange is about €30,000,000 For the full for the 1st 9 months so far, the headwind from currencies is about €30,000,000 But overall, through a good development and the actions we have taken, we have been able to continue our good profitable growth. If we then turn to our sales split.
As a natural consequence of the fact that our services business has been growing faster, our new equipment business, their share of sales also increased, and particularly in modernization. And it's a good, slightly more balanced overall sales mix. If you look by area, it's natural that North America is increasing its share as that's the fastest growing area in terms of sales at the moment. China represented about 30% of our total sales in the quarter, a little bit over 30% of the sales in this quarter. Turn about our financials, and you can see that very good performance, and I'm pleased about the achievements.
Let me then next go to how we developed our business, bring again some highlights from our development programs, after which I will go into more detail into our markets as well as our outlook. Now starting with our development programs. As I believe it's familiar to all of you, it's now we are now in the 3rd year of the current set of development programs, and these are coming to the end at the end of this year. We have had a lot of good achievements, and we continue naturally to drive them with good momentum towards the end. I have 2 highlights here.
In Q3, as usual, we have completed our annual customer loyalty survey, where we got feedback from more than 30,000 customers from around the world. The results remained at a high level, but perhaps the most important development is that we had a good development in our services business. And that's really thanks to the structured approach we have had to drive actions based on feedback we have from customers and improved customer communications. These are very important in the services business. We're very encouraged at what we do.
We can see the results, and that's why we are continuing to drive forward those actions. The other highlight I wanted to bring up here is our most competitive Peopleflow Solutions development program. Here, I'm very pleased to say that we have a very good momentum in the adoption of our key high rise technologies, really technologies where we deliver very unique value to our customers and where we have very strong differentiation. Our AltaRope hoisting technology has good momentum. It has been ordered to some very prestigious buildings around the world, and we have a good tender pipeline for it.
Our jump lift construction time elevator has great momentum. This is really a unique solution that KONE provides, how we help our customers speed up construction work, make it safer and better. We have a number of great customer testimonials. And usually, when customers start using this, they realize that the productivity they get out of their construction for high rise buildings is very, very strong, and we can see that great development for that solution. And also, I would say in virtually all of the commercial buildings where we are delivering the solutions to our customer, we also have a people flow intelligence to make people flow in the building smoother, better with a better experience the users and better monitoring for the building owner.
So overall, good momentum in each of these. And then also a very nice accolade we had during the quarter is that Forbes Magazine every year lists their the 100 Most Innovative Companies in the World. We were 6th year running on this list as the only company in our industry on the and we were ranked number 56. So this is, of course, a nice encouragement and recognition for all the work we have done. Naturally, the way we measure the success of our innovation is how our customers view it and the adoption and the added value we can provide to them.
That is, of course, a nice encouragement to all of our teams for the good work they have done. Today's about our development programs. If I then turn to markets. So far, it's all been about how we develop, but now it's let's talk about market in more detail. And let's talk about new equipment markets, and I'll take them in the size order of the markets and start with Asia Pacific.
Now in the quarter, we did see that new equipment markets in Asia Pacific stabilized. And the reason for that is that the decline in the China market moderated in the quarter. So it declined only slightly now in the quarter, although price competition did remain intense in the Chinese market. Restoration Pacific, slight growth because particularly growth in India. Then if you look at Southeast Asia as a market, pretty stable but mixed.
And Australia slightly declined from a high level. As you know, Australia has been developing very positively already for many years, so it remained strong but came slightly down from a high level. I'll come at the end of this again a little bit back in more detail to China. Europe, Middle East and Africa. Now we saw some growth in South Europe.
That's positive. As we have predicted, the market is recovering not fast, but it's going in the right direction. However, Central and North Europe now in the quarter was a slight decline. We continue to see a good momentum of potential in the market. However, if we compare to the quarter last year, there was quite a lot of activity in the Q3 of last year.
And then on top of that, Brexit also had an impact on the market. So we saw a slight decline, although we think that in many markets, there's good momentum, particularly Germany is developing nicely as are many other Nordic countries. Middle East, rather stable despite the uncertainty in many parts of the region. North America, as you know, we are in the 7th growth year for the market. So it's at a good level, and it continues to grow slightly from there.
And also this has made that pricing in the market has continued to improve slightly. So overall, we can see a mixed environment on new equipment. But let me again, let me pause here and talk slightly more detail about China. As I mentioned already, in Q3, the market declined now slightly. The decline moderated somewhat compared to the first half of the year.
Year to date, our estimate is the market has declined at about 5%. However, if we look at the monetary value in the market, that has declined significantly more, both as a result of price competition and also what I mentioned, customer preferences going more to value to affordable product. So therefore, we can see a clear impact from this. Price competition has continued to be intense. I would say trend pretty much the same as we have seen earlier in the year.
As I already talked, what I'm pleased about is that in this quarter, both if we look at units of monetary value, we did outperform the market. But in units, we were KONE was up at close to 5%. And in monetary value, our decline was high single digits. Now what has been happening in the Chinese market? We, of course, all see that the market for real estate, the residential real estate has been very active and prices have gone up a lot.
And that is particularly in a limited set of the higher tiered cities where momentum from a property market perspective is very strong. However, as we know, lower tier cities, there continues to be an excess supply, which is putting a limit on development there. But if we look at total real estate investments, they are growing only slightly. And one can question that why is the market not growing faster given the very positive momentum and the strong market for residential apartments in particular. And we have 2 situations here.
I think we all understand why lower tier cities are not developing better because the inventories there, although they're coming down, they remain at a level where there's still room to be worked on. And therefore, of course, developers are cautious in starting much new in these areas. If you then look at the higher tier cities, what is restricting developers from accelerating the development and meeting more of this demand are very high land prices. So that is putting again a limit on the development potential in the higher tier cities. So we have these two areas that are impacting, and we can also see that in particularly Tier 1 cities, there has been a lot of restrictions imposed by the government to cool down the markets overall in these cities.
And then we've seen that growth has spread more to more Tier 2 and Tier 3 cities in the vicinity of Tier 1. So market continues to be challenging, particularly the residential side, which is a segment that is declining. As you know, our approach continues to be that we are not maximizing market share. What we want to do is to find a good balance between pricing, volume to have a good development, and I think that we've shown we've done so far this year. If we look at the markets, what we see from our outlook is that we have slightly changed the outlook for the Chinese market for this year.
Earlier, we expected the market will decline between 5% 10%. Now we expect that the market will decline at about 5% for the full year. And this is because this moderation or decline started perhaps a little bit earlier than we had expected and also the year to date decline is about 5%. So we expect similar level for the full year. So that is again a little bit more in detail on China.
And let's then go back to our markets and go back to our service markets. And I'll start with maintenance. Start with largest markets, Europe, Middle East and Africa. Here, markets continue to grow, although a clear difference market to market and price competition continues to be intense. Similar situation in North America, some growth and price competition rather intense, perhaps not as intense as in Europe.
Asia Pacific development continues to be positive throughout the region because of high new equipment deliveries over the past years. In modernization, markets grew somewhat in Central and North Europe. And South Europe, here we also have positive news in that we are starting to see early signs of recovery in many of South European markets. And that's good after many years of decline. So we that is definitely positive news.
And both North America and Asia Pacific markets are at good level and growing slightly. So with this, let's wrap up with our outlook. New Kupepem markets, here Asia Pacific, as I mentioned that China is expected to decline at approximately 5% in units ordered. However, competition is expected to continue intense. And Rest of Asia Pacific, some growth.
Europe, Middle East and Africa, grew slightly in Europe and stable in Middle East. And North America continued the same development we see in Settle Farm, so slight growth from a good level. And maintenance, very much the same trends we've seen so far, lower growth, but differs country to country with the best growth, of course, in Asia Pacific. And in modernization, also pretty much the same trends we've seen so far, grow slightly in Europe and continue to grow in both North America and Asia Pacific. In this environment, what do we expect from Pune?
Here, we can say that our outlook, we have specified it. We have now 9 months behind us, so we can make a little bit tighter range. We expect our sales to be in the between 3% to 5% growth in comparable currencies. Previously, we expect that between 2% 6%. So we can see we've just narrowed the range.
In EBIT, we expect our EBIT to be in the range of $1,260,000,000 to $1,320,000,000 assuming that translation exchange rates remain at the level of January to September. If they remain on that average level, then the headwind from currencies for this year is about EUR 45,000,000 So a little bit more headwind than we saw when we gave our guidance in Q2. And here previously, we had the EUR 1,250,000,000 to EUR 330,000,000 euros was our previous. But also here, despite the fact that we have a little bit more currency headwind, we have tightened the range a bit. And then just to wrap up highlights of this quarter.
I'm very pleased about the orders received growth because of good development we have had on a broad basis, also strong development in EBIT driven by the positive development we have had in our service business. And we can see that even in difficult environment, we have been able to find good opportunities to develop KONE going forward. So with that, I believe we have good time for questions.
Thank you, Henrik. Yes, now it's time for your questions. And please let's take one question at a time. Do we have any from the audience? I guess not.
Most of the people are following us over the telephone lines. So operator, I'll hand over to you.
We'll now take our first question from Ben Mayslin of Morgan Stanley. Please go ahead.
Yes, thank you. Good afternoon, Henrik. A couple from me, please. Firstly, just on China. You've raised your nudged up your guidance for this year.
But I think at the Capital Markets Day, you gave a preliminary view on 2017 that the market would be down, but down
less than this year.
I just wonder whether that view on 'seventeen had changed at all given your tweak to the 'sixteen guidance, firstly?
So in the Capital Markets Day, we said this that when we approach going into 2017, we expect that the decline will moderate and that we've seen now already. We haven't given an outlook for all of 2017. It was only as we go into the year. And that's a trend we are seeing now, perhaps starting a bit earlier than we had expected, but nothing new to report on VUE4 for next year.
And secondly, you mentioned that you need to step up your investment in R and D and IT going forward. I just wonder whether you'd already started increasing that spending or we would see that headwind more coming through next year?
If you look at our report, you can see that R and D expenditure is up compared to sales 0.2 percentage points for the Q3 now compared actually year to date compared to last year. So we are I mean, it's gradually something we're going to have a step change, and it's particularly in the services side, perhaps where investments are increasing more.
Got it. And then just looking at the dynamics in China, I mean pricing sounds tough. Just looking at your commentary, it looks like pricemix was weaker in Q3 than it was in Q2. And you talk about slightly weaker pricing in the backlog, which I guess is coming from China. Given steel is going up in China, wages are going up, I mean how confident are you that you can maintain the current level of margins there?
And I guess the only way you can do that is with productivity. How much can you keep squeezing out productivity and offsetting what is a tougher market? Thank you.
Yes. Just to get perspective on this, as you know, over the past couple of years, we have had a very positive development in our overall competitiveness, productivity and cost competitiveness in overall in China and elsewhere as well, but in particularly in China. And with that, we have been probably a little bit ahead of the curve of how prices have declined. And of course, one of the but only one of the areas that helped that has been declining raw material prices. So clearly, we continue with our actions.
We believe that there's continuous work we can do. But raw materials, it's clear that they are the trend currently for them are increasing. So that as we now look, it's likely to be a headwind. So we have to see how we are able to continue this. But so far this year, we have had a good momentum.
And perhaps the raw materials, that's a change in trend that we're looking into next year.
We'll now take our next question from Klas Bergelind of Citi. Please go ahead.
Yes. Hi, Henrik. It's Klas Citi. I was late on the call, so apologies if you have already provided answers on my question. Also want to get back to the price mix.
The pricemix last quarter was minus 10%. I was just wondering if it's similar this quarter. And then back then, you said pricing minus 5% and 6% -5%. Was it the similar relationship this time? I'll start there.
I would say very much similar trends, yes. I mean, of course, these are rough numbers. We're not talking about exact. But yes, direction, both are similar to what we saw in Q2.
Okay. Then we got some conflicting messages from your peers yesterday with Schindler saying that pricing is worsening and could land at 10% negative towards the end of the year, while August said that pricing is now more stable. This obviously depends on each company's previous price levels, the comparative and also exposures to Tier 1 through to Tier 3 cities. If we focus on your mix, can we talk a little bit about what you think about pricing going into the second half?
As always, we don't comment on pricing going forward. I mean each pricing decision is a negotiation between us and our customers. We can look at what history has been. What we can see is that the competition in the market remains intense, And we have this the trends we were talking about, which continue, but pricing that we have to see how that evolves and then that's something we can comment one something outcome. But again, that's something we have with our customers negotiation, each one separately.
Yes. No, absolutely. Then back to mix. So you said lower ASPs drove down the mix. Can you help us understand where you see customers trading down?
Is this just a result of mix between cities that have lower demand in Tier 3, 4, which is weighing on the ASPs? Or do you also see customers trading down in Tier 1 and Tier 2?
It's not only in some cities. It's I would say because of high land prices and other costs also increasing developers, they are looking at all options to find savings there as well. And also, there are a lot of good products in the lower categories. It's not that they are worse elevators or escalators, but based on the elevator side, we're talking about a more standardized product where you have less options when it comes to speeds and sizes and interiors and so forth. So it's just that you're going to a more standardized range, and therefore, it's more affordable.
That is what we're talking about.
We will now take our next question from Andre Kuchchin of Credit Suisse. Please go ahead.
Yes, good afternoon. Thanks so much for taking my questions. Just a couple. Firstly, in terms of your profitability on those low end products, would you say it's different to high end?
Margins, as we discussed before, the good thing the situation we have is that our core competitiveness is good on a broad basis. But it's clear to sell a more value product. Even if you have a good percentage margin on that, the monitored value of your profit is going to be less. So that's just a mathematical difference. But yes, we have good profitability also on more affordable products.
Great. Yes. Sorry, that was exactly about margins rather than the absolute size of profit. And then quite interesting to see your top line in China already declining at 10%, because we thought lead times are just a little bit longer than you'll see it in Q4, beginning of 2017. The balance of volume versus price mix within that 10% decline, Is it comparable to what you're booking right now, what you've been booking, say, in the last 6 months?
Should we expect it to change substantially? And the reason I'm asking is that I think the message has been quite consistent. So the prices were reduced at the beginning of the year by everyone and that's sort of been the same trend. But when we try to run some kind of average selling price calculations or change in value of your orders in China ex FX? It seems to have quite a clear trend of first worse volumes, but better ASP and now better volumes, lower ASP.
And just trying to understand whether that's something that we should be actually focusing on and whether what you're seeing in your sales right now is representative of what you will see, say, in 6 months' time.
Yes. I would say this mix shift has probably something that started more Q2, Q3 this year. So perhaps that mix is still coming through if you look at ASP on sales going forward. So there's, of course, a gradual shift. It's not going to happen overnight, Director.
You can see it in this environment, continue to have solid deliveries. And I think it's natural that when the orders really declined early in the year, we now start to see that in sales.
Right. And just very last one, if I may. Henrik, at the beginning of the year, it was quite clear, a message on China that, look, you're the biggest player now. You're not going to participate in price wars. You're not maximizing market share.
And we'll look for the mix of profitability and growth. And you've said in this presentation as well, is this message kind of as absolutely firm right here, right now as it was 9 months ago?
And you probably refer to the fact that now we grew faster in the market. We have to remember that 1 quarter is a very short period of time to measure. So you're going to have fluctuations from quarter to quarter. If you look at year to date, our development is probably roughly in line with the market. So I think that the message is definitely still intact.
We will now take our next question from James Moore of Redburn. Please go ahead.
Yes. Hi, everyone. I've got some questions on China. I wondered if you could help us a little bit more on this price mix. I think you said units down 5% for you and value sorry, units up 5% and new value down high single digits.
Does that mean that we're talking about a price mix that's sort of 12%, 13%, 14%, so a bit above what you saw last quarter? And I wonder if you could help us by splitting that into is price and mix about half half? Or has there been a bit of a shift around?
So volume growth, we said close to 5%, so probably a little bit less than that and then high single digits. So we're still looking at roughly 5.5. And again, as we discussed in the previous quarter, it's not exactly, but that's roughly what we're talking about. But that has remained pretty much the same as it was in Q2.
And the service margin, you talked about that being up today and driving the better group margin. Can you say if the equipment margin is flat year on year or up year on year or down year on year on a global basis?
The margin in new equipment continues to be good, but when your volumes are down also there, your absolute profits are down. So the main improvement in profitability clearly came from services. And then we have to remember that the new equipment, China was the one where actually the decline is coming from. And that's, as you know, is our where we have higher margins than in other parts of new equipment business.
So is the percentage margin down in equipment globally?
As a result of that, on a global basis, it
will be slightly down, yes. Okay. And finally, I wonder if you could help us a little bit with Chinese equipment margin today. I know you don't give it. A number of your peers have.
And I think in 2014, you talked about it being broadly in line with the group. And I think you helpfully said in 2015 that it has gone up from that. And I guess that revenues are still rising or about to term, but still rising this year in China. Is it fair to say that the Chinese margin has gone up again and might we dare to think of it as high as 20% yet? Or is it I'm thinking about a starting point to try and model the challenges that may come.
Okay. So revenues for China in the Q3 were down in total about close to 10%. So and but our margins are good. So we have if you look over the past years, up until 2015, we improved our margins significantly each year. So that has, of course, been an important driver for our profitability.
And we have good margins in China. And now sales in the quarter in China, they declined. And can you help us
at all with the starting point versus the group? Or is that difficult?
It is above the group, yes.
Okay. Thank you very much.
Thank you.
We will now take our next question from Lars Broson of Barclays. Please go ahead.
Hi, Henrik. Just two questions for me, please. Just on the outlook for China and the slightly better than earlier expected, can you say by segment where that is coming? Is infrastructure proving to be stronger than you previously expected? You obviously announced a very large order yesterday in China, one of the biggest ever for you in that market.
Or are you seeing something different in residential or commercial that's proving a little bit better? And as you look into 2017, I wonder whether you can give us a sense for whether you see some risk, particularly around Tier 12 cities on the back of the cooling measures we see coming through now?
As you know, the residential market is clearly the largest market. Infrastructure is important, but it's quite a small part of the that segment, small part of the overall market. So that has continued to develop well because of stimulus measures, also commercial more or less stable. So I guess it is always the residential market where that drives quite a lot of the bigger movements. So perhaps there, a slightly better impact.
And you're right, they have enacted cooling measures on some of the higher tier cities. I'm glad to see how much that spreads and what the impacts are. But if you look at the transaction volumes and the prices, they're, of course, very strong. So it's probably, if you look over a longer period of time, a healthy thing to cool down the situation a bit.
Thanks. And just secondly, a minor question perhaps on your minorities line, is there in a loss? Is there a special charge coming through? Or is Kona, giant Kona in an underlying loss? Or is there anything else in your minority line that I'm missing?
Peter, do you want to take that?
Yes. Sure. Thank you. Yes, that's actually correct. So the major driver of that is the closure of our acquisition of Giant Kone.
And as said, so once that is done, actually, we've seen less volatility going forward.
Sorry, just to be clear, so that's a charge, is it? Or is there an underlying loss in Jan Kona?
No. It's an adjustment as we close the transaction on what we had for the year. So nothing material there. Giant Corner continues to have a good profitability.
We will now take our next question from Manu Rimpela of Nordea. Please go ahead.
Okay. Good afternoon. Can you firstly help me to understand the margin in the 3rd quarter? It was very good. And you said in the Q2 that you I think you used the word like all stars were aligned or it was a very strong performance.
So just wondering that that continued into Q3 as well. So I mean, are you kind of being able to run the whole engine at a lot better pace now compared to previously? Or is that the kind of more that we're starting to see that service growth picking up and that's driving the margin improvement more than what you're losing in the equipment at the moment?
I would say that we have been each year, we have been able to improve our productivity, and that continues. As I said, what I'm happy about, and that doesn't always happen, but both in Q2 and now in Q3, the performance was broad based from many different businesses and regions. So we had good execution on a broad basis. And good execution means that you constantly in this environment, I mean, you constantly need to improve your productivity. You need to improve the value you provide to your customers to develop your pricing and so forth.
So all that has continued.
Okay. And then one question in China for me as well. You are commenting about the weaker margins in the order intake. So just trying to understand that what has changed because we you didn't have that comment in Q2. So what has changed between Q2 and Q3 to mean that the margins have become weaker?
So you have to remember that the margins you booked, that's an estimated margin you have of what you deliver when you are when you finish the project. And because of the very good momentum we have had in our competitiveness and cost that we have driving in China, we have been able to be a little bit ahead of the curve, you can say, of price declines. Now perhaps as they are we can see we start to see some headwinds in raw materials and others, it's not as easy to be as ahead of the curve. And this is probably where the change is coming. Still continue to see a lot of opportunities, and we think we can improve our competitiveness.
But there are then some things have been external tailwinds are now turning to a little bit headwind.
Okay. And then final question in terms of pricing outside of China. So I mean, are we starting to see prices versus North American services improving? I think you mentioned that the pricing has improved in North America, but was it related to new equipment or services or both?
In new equipment, we have been able to improve our pricing in North America. Services continues to be very competitive there, perhaps not quite as competitive as the European market, but particularly on new equipment where the improvements have been seen. And in Europe, in the stronger markets, we've been able to improve, particularly when it relates to compensate for costs of new codes and so forth.
Okay. And would you classify if you think globally, excluding China, about the pricing environment, both the new equipment and services that we are kind of starting to enter a phase where you would actually be able to gain some pricing power again after years of not having so much?
Well, we have to see. I mean, that all depends on how well we can deliver value to our customers because if you look at the world economy as a whole, we all know that it's quite fragile. So I don't think that the external environment will provide a lot of help to that. So it all depends on how we can drive forward and provide better value to our customers.
We'll now take our next question from Martin Friedrichiger of Kepler Cheuvreux. Please go ahead.
Yes. Good afternoon, gentlemen. Martin Fluglager from Kepler Cheuvreux. Thanks for taking my questions. Actually, a few of them have already been answered, but let me just stick to the ones that remain.
Coming back to your statements on the market, the new equipment market in China, I just wanted to clarify. When you talk about markets generally, not just for China, but for all regions, you talk about the relevant market for Kona? Or do you talk about the entire market? Will be my first question.
As we are not present in, for example, South Korea and Japan, we don't talk about those. We talk about the markets where we are present. That's where we have an insight and understand what's happening in them.
Thanks. I understand that. But just within China, because the reason where I'm coming from is also some conflicting statements made by some of your competitors recently compared to the ones that you've made in your Q3 report today. I was just wondering where the difference in assessment between the various peers comes from, whether it's the geographic positioning, whether it's the market segment positioning? What's again, is it the entire market, for instance, in China that you're looking at when you talk about market declines or increases?
Or is it just the market relevant to you?
As you know, given I don't think anyone has as broad of a footprint and broad presence in China as we do. So yes, we look at the whole market. And there's always going to be some differences between what we say and someone else's. We have to remember this, that market growth figures, that's not an absolute science. It's based on what we see in our judgment.
So I don't think that there are massive differences. But our approach in China is to understand the whole market because that's what we think that that's the market that we want to cover.
Okay. Understood. And then my second question would be on I'm not sure whether that giant Kona question previously that was asked refer to the same item. I was looking at your minority interest, which is negative this quarter. Was that what was the impact there, sorry?
Again, confirming what I said earlier. So it's an adjustment due to the acquisition of the remaining stake in Giant Kone. So it's not to do with the profitability of Giant Kona as such.
Understood. Thank you very much.
We will now take our next question from Brian Gregory of Liberum. Please go ahead.
Yes, good afternoon. Thanks for taking my question. Just one on cash flow. In the quarter, your EBIT was up 2%, but your operating cash was down 7%. And we saw similar development in Q2 as well.
So just wondering, could you provide a bit more color on your working capital? I see the cash flow from working capital this quarter was €40,000,000 which is about half what you've had historically in your 3rd quarters. Is that just a function of the China order declines we've seen given the favorable payment terms there? Or is
there something else going on?
Do you want to cover that? Yes, certainly.
So I think overall, we're very happy with the cash flow as such. So SEK 1,100,000,000 in 9 months this year is a good achievement as such. And naturally, there's many components that we work on. So we have a outside of China, but China included as well, a good balance between advanced payments and inventories. And in this typical environment, I'm quite happy how we performed on that one.
And then thirdly, I think also to highlight that our receivable collection has progressed well, and we've seen progress across the globe, but especially in Southern Europe, Europe in general in that respect. So all in all, I think a good progress there given the circumstances.
Okay. But are you seeing a negative impact from China in terms of advanced payments?
We haven't seen a change in payment terms as such. So obviously, that's part of a negotiation with customers. And obviously, any change in sales in China will have an impact there. But overall, no, it hasn't had a major change to the overall situation.
Brian, perhaps the only addition I would have to what Jirka said is, you said that we continue to improve our working capital. Remember, that working capital is negative to the €2,000,000,000 So continues to improve working capital and have better cash conversion EBIT, I think that's a continuous very strong achievement. Yes, sure.
We will now take our next question from Andre Kukhnin of Credit Suisse. Please go ahead.
Hi, yes. Thanks so much for taking the follow-up. So I just wanted to ask a more broader question about service. Looking to 2017, we kind of go across geographies and across maintenance versus modernization. And should we think of any reason why growth should slow down in those end markets?
When we try to add up kind of installed base additions and try to run kind of service model, it looks like, if anything, we should be accelerating. And then on modernization, it's harder to track, but you seem to be very firm on that end market and some of your peers are very bullish. So any kind of broader thoughts on that looking 2017 without obviously seeing an official outlook would be much appreciated.
If we look at this just kind of comment more in January rather than next year. So our service business, we have now been compounding that around 6% for the past few years. And for a service business like this, that's I would consider that a strong number. And of course, what's helped there has been good growth in deliveries in Asia Pacific. So and that we have a lot of new units coming into service.
So I believe that we have our ambition continues to drive a good growth there. Nothing has changed on that side. But remember, of course, the bigger the base gets, of course, we need to have even more growth the following year to get to the same percentage number. And that is just simple math. But the key point is our ambition level continues to be high and want to compound that at a good rate.
Okay. Got it. And just to double check on the increased level of investment that you highlighted at the Capital Markets Day, the 20 plus-twenty basis points, Of which base is that given that you are already ramping it up as you highlighted and there's already 20 bps improvement increase in R and D to sales year to date in 2016?
Well, probably if you look at it on a rolling basis from now on, It is not going to be each quarter that much, but that's kind of the trend. And it can fluctuate from quarter to quarter. But we can see that this year, it's increased quite a lot. We're going to see increase next year as well. So probably if you look at rolling basis from now on for the next year or so.
Got it. Thank you very much.
Thank you.
We will now take our next question from Michael Kaldiras of Bank of America. Please go ahead.
Yes. Hi, good afternoon. Question, I just want to put your comment on lower gross margin into context. I think in the past, you were referring on your pricing pressure, you were able to offset that by your cost competitiveness, basically supplier and raw materials, each of them being maybe onethree, onethree, onethree. I mean, going forward, I guess, raw materials, I mean, the raw material part probably disappears.
Do you think that the pressure you can put on your suppliers in an environment where raw materials are stabilizing or going up, I mean, are you still able to do that?
I would say, as you've seen from how we developed, we have been able to work very successfully together for the suppliers. Of course, we need to work with them on making sure that we can have a sustainable business with them and therefore, develop the solution and look at how we do things and what materials and what designs we use and so forth. That will definitely continue. However, as I said earlier, an added benefit to that and the main improvement has been through the actions we've taken. So that's important.
That we believe can continue. But the added benefit to that has been the raw materials that have been declining now for a few years and provided a good tailwind. Now if we look at steel prices, they are up actually quite significantly. And therefore, that's going to from turning from a tailwind a headwind. And the work with our suppliers, that continues, but this is something that is external factor.
It's more difficult to impact.
Okay. So basically, if we assume pricing is going down maybe 5%, maybe there's a couple of percent of this that you can't pass through and that is basically the difference in gross margin in your orders at the moment.
I would say that when we talk about orders received margin that you'll remember, that is the estimate of what we have today. And the real margin is what we deliver eventually to our customers when everything is delivered and we have done everything. And so we have to see. But at the moment, it looks like we are slightly down. I wouldn't quantify it now.
Okay. Then maybe just a follow-up on taking a bit of a longer term perspective on pricing in China. If I guess you had other countries which went through that phase of being very immature, nice margin on the OE and then maturing, getting a bigger services base with the OE margin probably going down a little bit. I mean, what how should we think about like pricing in China medium term and not just talking about the next few quarters, but is it a market that basically going to see 5% also pricing pressure for the next 10, 15 years? Or should we think of it differently?
Again, I can't make comments on pricing going forward. That we have to see. What is good is that the services business has continued to grow at a good rate. And if you look a few years forward, it's clear that the bigger share of the pie of profitability for the industry as a whole, and I believe for us as well, will come from services than it's today. So clearly, you have a gradual shift.
But how that will happen, we have to see.
Understood. And last one, Henrik, on the investment in R and D and IT. So we get a 20 bps increase for
both. Then I mean,
how should we think on an absolute level as you roll out the kind of like initiatives that are supported by those investments? Are these investments going on? I mean you need to do more investments as you go into more countries? Or is it kind of like one off investments, you do this, you go back to previous level of R and D IT? Or you stay stable?
How should we think of it beyond 2017 maybe?
Clearly, we have there's a lot of new technology happening in the market, and all this helps us to serve our customers even better and provide better value to them. So I think that this is a trend that technology is moving fast and shifting quite a lot, so I think we are in a certain period of time. We are now in a structurally higher investment environment. However, as I mentioned also in the Capital Markets Day, the results we have from some of the increased investments we've done, for example, on the services side, are very encouraging. So we believe that there is a payback, but of course, investments come first and then the payback comes later.
But I believe that as technology continues to move, that there's probably structurally slightly higher level we need to see over the coming years. But again, we're very excited of what that can provide us in terms of providing value to our customers and also improving productivity in our business.
I think everyone will agree that your capital allocation is I mean, that's already very good. So basically, I mean, the way you think about this extra investment at the moment is basically this will allow you to remain above 5% for maintenance and services growth for another many years after the kind of like in the super cycle in China comes to I mean basically slowdown. Is it how you thought about that?
Clearly, we are making these investments to continue our good growth, whatever that growth rate is. But yes, what why are we doing this is to differentiate from the market overall, provide we want to provide the best value to our customers. And when we do that, we see great growth opportunities in this industry. We see a lot of good growth opportunities in services. Remember, it's a very fragmented market and with good organic growth in particularly the Asian parts of the world.
So that's what we're investing because we see these good opportunities there.
We will now take our next question from Glen Liddy of JPMorgan. Please go ahead.
Good afternoon. If you looked at the revenue for Europe or the U. S. In terms of an OE cost relative to the aftermarket value over a period of 10 years, how does that compare in Europe, U. S.
And China?
In U. S, products are more expensive than Europe because you have higher labor cost there, and they tend to be larger and bigger equipment, but also service prices are higher. So I kind of look at what is the relative your new equipment to service price. I don't think that there's probably going to be massive differences between the two between the regions. So in China, yes, equipment are cheaper, partly because labor costs, partly because volumes and so forth, but also services are slightly cheaper than rest of the world.
So is the ratio different? I can't really I don't think there's going to be a huge difference.
And is the Chinese aftermarket profitability improving yet? Or are you still investing a lot, so it's not improving in its profitability?
What I would say about our Chinese service business is it has a good profitability.
Okay. And regulatory change in China, have you got a view on when that might happen to trigger a big wave of aftermarket opportunity?
You've had some regulations over the past years mainly related to installation and mainly related to bigger repairs. They have not significantly changed the market. Now you have in some areas, you have some specific service regulations. We have to see how that changes. But if we look over the years, we can see that OEMs, it's taken all the time a little bit bigger share of the service market.
It's not a huge shift, but it's growing. And I remember Bill Johnson showed that in his Capital Markets Day presentation. I believe that trend will continue. And the more demands there on service as equipment will start aging, also the larger OEMs can show the value from utilizing new technology. I believe that you will start to see a gradual consolidation of the industry.
And finally, on China, I mean, direct sales rather than via a third party, is that resulting in different pricing environment? Are you in more control of your prices if you're doing it direct rather than through a 3rd party?
Yes, a little bit different model. So you have different models in China, but there is not a significant difference.
We will now take our next question from Tommy Rehlo of SEB. Please go ahead.
Hello, can you hear me?
Now we can hear you, yes.
Okay, good. Apologies. Tomic from SEB. Can you just also on China give a comment on the maintenance growth for the Q3?
We continue to grow at a good rate year to date. We are at close 25 percent in the Q3. We're about 20% growth in China. So continue to compound at a good rate in China.
We will now take our next question from Ben Maitland of Morgan Stanley. Please go ahead.
Yes. Thank you. Just a couple of follow ups, please. I mean Henrik, just there's obviously a lot of focus on the line in the report that says the relative margin of orders is slightly lower. We've not seen that before really.
So I just wonder what you meant by that. I mean, do you mean that the margin is lower on a kind of like for like basis for the similar equipment? Or is it lower because the mix is different? Maybe there's more new equipment in U. S.
And Europe, less in China? Or is it a mix effect that, as you say, people are trading down in China? I'm just trying to understand, is it a kind of is it a commentary around on a like for like basis? Or is it a mix effect that's making the margin come down? Thank you.
So this margin going particularly related to China. There, on a like for like basis, margins are slightly lower. And as you know, they are that's our highest margin new equipment business. So then that is what has the impact.
Got it. And then just following up on China. Can you give us a sense maybe of what the kind of the book to bill ratio is on new equipment in China or how your backlog is looking? Just so we can perhaps understand if revenues in China are down 10% already, how much more of a decline will we have to kind of process as we go into 2017? Any help with that would be appreciated.
If you could you have our book to bill, what it was
for China now in Approximately in Q3, if I believe correctly, it was €900,000,000 if that's what I remember.
I think it's around that. You guys remember, Ben, also that the 3rd quarter is seasonally something where you have a bit more deliveries and less orders. So I think that's quite not that unusual.
Yes. Okay. Got it. So but then in terms of looking into next year, I mean, you would still see even if orders flatten out from here, which I guess is what your guidance is implying for the market, there's still a sales decline to process?
Yes. I mean orders received declined beginning of the year and or first half of the year. Now also, in monetary value, they declined. And you know that the lead time is 6 to 9 months usually. So that you can draw your conclusions from.
And then just came back to your point on raw material costs and how they can change going forward. So your margin is an estimate of what you deliver now. It may change. If you were to take an elevator order in China now, how much of the component cost is fixed at the point of order? And how much is kind of variable that you will lock in at a point closer to delivery?
So because the volumes are so high, you don't do them individually for elevator by elevator. But as you know, what we try to do is that we try to lock in our prices on a periodic basis to smooth out any development this year. We have been successful locking in our prices at favorable levels, and we have to see when those rollover what the impacts are. But you wouldn't do it individually because you have so many equipment in the order book, so you do it more rolling. But we know that with locking in prices and hedging, you can do that for a certain period of time.
But of course, after a while, it does if underlying comes through.
Okay. Thank you. Thanks, Henrik.
We will now take our next question from James Moore of Redburn. Please go ahead.
Yes, thanks. Henrik, I've just got a couple of follow ups. Really on the non Chinese business, so service pricing or maintenance pricing, I wondered if you could comment on pricing there in the U. S. And Europe and how that's changing?
I wouldn't say any significant changes. As you know, what we have talked about for a while is that the South European markets, in particular, that's where the most significant price competition has been seen. And given the fact that new equipment volumes have been low for many years there, that means that there's not that much new equipment following the market, and that has made them quite competitive. So not a big difference there. North American markets continue to be price competitive, but perhaps not quite as significant as we saw about a year back or so.
That's helpful. And just on the U. S. Market, I wonder if I could ask about the volume demand development. You've had a good run for the last few years.
And I'm just thinking about the MRL share of the market, which has gone up a lot from 4% to 60%, 70% over time. I think it was asked to the Capital Markets Day, but could you remind us what you think that and how fast it keeps going up? Does it stay here? Or do we go to 95%? Is it going to take a long time?
Or could it keep running at the same sort of pace? And embedded in that question is also, I see that starts for multifamily buildings, which I guess is where you have lifts, have come down quite a lot and your orders keep going up. I wonder whether you see some volume clouds on the horizon because of those multifamily starts.
We have to remember that let's start with this question about kind of machine room less elevator versus hydraulic because there's a so it continues to shift more towards machine room less. At what pace I can't say, but that's definitely the trend because also, if you look at buildings in the U. S, they're probably starting to graduate a little bit higher, and we can see that the average floors have gone up a little bit over the past years. So a hydraulic elevator usually is used in very low rise buildings. So we think that this trend is going in our favor.
And a machine robust elevator just provides better value of the life cycle for the owners and users. Now how do we look at we haven't given guidance for next year, but you have to remember that the U. S. Market in particular, North America's U. S.
Market in particular, there's quite a big commercial component. So it's not as residential driven as Europe. Residential has been one of the growing segments. And so far, we've seen pretty good momentum there over that as well. But maybe you have had some slowdown in some areas.
But as said, continued good momentum overall in the market of that we address with machine roomless.
That's very helpful. Can I just trouble you for a rough mix of commercial versus resi U? S?
What would it be? Maybe it's not an exact number, but commercial will probably still be more than half of the market, whereas in Europe, clearly, residential is clearly the largest.
Our final question comes from Martin Fluegge of Kepler Cheuvreux. Please go ahead.
Yes, thanks for taking my follow-up question. Just looking at your comparable base in for Q4, for Q4 in 2015 saw some pretty strong growth, if I remember correctly, I think close to 11%. That looks like a tough comp going forward. I'm a little bit surprised that you're still looking or considering 5% is doable as you put it in your revenue guidance going forward. Is there anything that we should be aware of, in particular with regards to top line growth going into Q4?
Or how should we think about the dynamics going into the final three months of the year? Thank you very much.
Nothing specific there. I would say, if I said a little bit lightheartedly, that we have a tough comp every quarter because we have now been growing our profits for 20 years in a row. So I don't think we have had a quarter where we would have an easy comparison point. So I don't think that there's anything new for us, but no, nothing specific in Q4. And we expect to have a good development towards the end of this year.
I guess it's now time to close the event. Thank you, Henrik.
Thank you.
Thank you, Ilkka. And thank you all for your good questions. I wish you all a good rest of the week. Thanks.
Thank you.