Afternoon, and welcome to KONE's Q3 Results Webcast. Here in Espoo, Finland, we have today our CEO, Henrik Andrut and CFO, Erika Soderstrom. We will again start with a review of the highlights of our results as well as the recent developments in the market environment. After this, we will have plenty of time for Q and A and discussion. So Henrik, let's get started.
Okay. Thank you, Katri. And also welcome on my behalf to our Q3 results call, and I'm very pleased to present our results. As we can see in Q3, our strategy and execution continued to bring good results. So we have positive news to tell.
I will start with going through our key numbers. After that, I'll go a little bit deeper into the numbers as well as development of our businesses, our markets and then how we develop KONE and finally, our outlook. I will start with looking at the key numbers. In Q3, we continued our profitable growth, and we had very strong cash flow. Our orders received, they grew close to €1,800,000,000 growth of about 12% or 3.6% in comparable currencies.
Our order book at a strong level of more than EUR 8,300,000,000 growth in comparable currencies of about 14% compared to last year. So this naturally gives us a good position going forward from here. Sales closed at €2,200,000,000 growth of 16.3% or 7.7% in comparable currencies. So we're able to slightly accelerate the growth compared to the previous quarters this year. Our profitable growth continued, EBIT of EUR 326,000,000.
And as you can see, our EBIT margin improved slightly from 14.8 percent to 14.9 percent. It's a good performance also in this respect. Very pleased with our strong cash flow of EUR 432,000,000, continued very strong cash conversion, which shows that we have continued to maintain healthy business practices throughout our operations. Earnings per share, EUR 0.50 compared to EUR 0.41 last year. This is Q3.
We know 1 quarter is a short period of time to look at performance. So if you look at it from a little bit longer perspective for the 1st 9 months of the year, we can see and as you know, we have had a strong development on a broad basis. Orders received in the 1st 9 months, more than EUR 6,000,000,000 growth in comparable currencies of 5.2%. Also continued good sales growth, sales of also more than EUR 6,000,000,000 in the 1st 9 months and growth in comparable currencies of 7.2 percent. A good EBIT, dollars 863,000,000 an improvement of from 13.9% to 14.2% in the EBIT margin.
And cash flow, for the first time in our history in 9 month period, we had over €1,000,000,000 of cash flow in the 1st 9 months of the year. It's a good performance here. And EPS increased from €1.07 to €1.30 The overall strong development on a broad basis is what we have achieved during the 1st 9 months of this year. At this stage, again, we'd like to express a big thank you to all of KONE's employees for the great work they have done, for the continued good development of executing on our strategy and executing our projects, which has resulted in the good achievements we have had, again, the 1st 3 quarters of this year. So those are the key numbers.
If you then go into starting with orders received into our numbers a little bit more in detail. Orders received, as I mentioned, we had a growth of 11.9 percent or 3.6 percent. Here, the highlight is that we had a slight slowdown in our orders received in China, but we were able to accelerate our growth in many markets to compensate for that. We continue to grow our volume business, and our strongest growth were in the modernization business. If you look at our development geographically, we continued our strong growth in North America, and we were able to achieve very strong growth in Central and North Europe.
That was a good achievement. Also, if you look at the volume business, that grew very strongly in Asia Pacific outside of China. So as you can see, a broad based development and was able to compensate the slight decline we had in the Chinese market. Price competition continued, particularly in China but elsewhere as well. Despite that, given the improvements we have had in our competitiveness, the focus we have had on pricing meant that we have been able to maintain good margins of our orders received.
Then if we turn to sales. Here, we had good development in both our new equipment business and our maintenance business. Our new equipment business grew at about 10%, so good growth continued there. And I'm pleased to say that in our maintenance business, we're able to slightly accelerate our growth, which is pleasing. We now had 6.7% growth in comparable currencies in maintenance.
Modernization was now seasonally more stable. If you look at the growth regionally, as you know, we have had good growth in orders received in North America for a couple of years already, more than 2 years already. And now we can see that this is coming through in sales. So our sales growth in North America was almost 20%. It's very good growth.
And we continued our double digit growth in sales in Asia Pacific as well. So again, here a broad based good development. If we then go to our EBIT operating income, what is the most important point here is that our profitable growth continues. We had a broad based good development in our EBIT, driven by strong development in our new equipment business and also good development in our maintenance business. If we look at the development geographically, it was good on a broad basis.
That is something that I'm very pleased about. Exchange rates continued to contribute positively to our results. About €30,000,000 in the quarter came from translation exchange rates. But even if we take out the impact from exchange rates, we can see that we had a good development in our EBIT. I'm also pleased that we've been able to continue to significantly invest in the development of our future competitiveness and keep up a profitable growth at the same time.
So we have continued to increase the investments in research and development, process development and in IT. And also in North America, we're also resourcing our organization stronger to deliver on the strong growth that we have achieved in orders received over the past years. I guess highlight here is the broad based good development. Then if you look at our business mix and start with sales by business. Here, we can see a continuation of the trend that we have had for a while already, which is that the share of new equipment of the new equipment business continues to increase.
New equipment the share of new equipment increased to 57% of our sales. Now the increase now in the share of new equipment was mainly driven by changes in exchange rates. That is due to the fact that we have more of noneuro sales in new equipment than we have overall for KONE. If we look at geographically, we can see that now Asia Pacific was 45% of our sales, the largest geographic region. And here, the change in the mix was both due to exchange rates as well as to underlying growth and the increase of North America from 14% to 16% is natural due to the strong growth we have had in the 1st 9 months in the Americas.
So overall, as you can see, solid and good financial performance across the board throughout this year. If we then turn to our businesses and the market development in the various businesses. So first of all, new equipment. Orders received in new equipment was stable overall. We grew in the volume business, but major projects declined slightly.
In the volume business, as I mentioned, we had good growth on a very broad basis. In many European countries, very strong in North America and strong growth in Asia Pacific in the volume business. But that strong growth then compensated for the slight decline in China and the decline in our major projects. If you look specifically at China, orders received, if you measure that in units, was stable. And we had a slight decline if you measure that in monetary value.
If we then look at the development of our markets overall and starting with Europe, Middle East and Africa. Here, we continue to see positive development in Central and North Europe, particularly in the residential segment. Middle East also continues to develop positively, and South Europe is slightly recovering from a low level. We believe that France has found its bottom, and we continue to see a recovery in Spain, although from a low level. North America markets continue their good development.
And Asia Pacific, if you look at the volumes overall, they were slightly declined slightly because of a decline in the Chinese market, although we had growth in other Asia Pacific markets such as India, Australia and some Southeast Asian markets. India continues to grow not quite as fast as we had predicted at the beginning of the year, but at least the direction is the right one. At this stage, it's always good also to pause a little bit and talk a little bit more in detail about what's happening in China. First of all, situation is very much what we discussed at our Capital Markets Day about a month ago in Shanghai. So overall, market continues to be challenging as we had expected.
If we look at the market overall in Q3, it declined slightly. And also if you look at the 1st 9 months, markets declined slightly. We have continued to outperform the market. In Q3, we were stable when the markets declined slightly. And in the 1st 9 months, also markets slight decline compared to a close to 5% growth for KONE overall.
If we look at the markets, what do we see there? Well, it's exactly as we discussed at the Capital Markets Day in Shanghai is that they remain mixed. Much better development in the higher tier cities, particularly Tier 1 and most of Tier 2 cities, where we continue to see a good development. Inventory levels are at a pretty good level. We can see a good improvement in the overall real estate markets.
However, if you look at many lower tier cities, particularly northern parts of China, we see a much more challenging situation and a situation where inventory levels overall are at a quite high level. The good thing is that market is large and there continues to be good opportunities in the higher tier cities. Competition for market share in China remains, as you know, it remains intense, and pricing trends have continued to be pretty similar in the Q3 as they were earlier in the year. If you look at our development, we can see that given the improvements we have continuously been able to drive in our total competitiveness, we have been able to retain healthy margins in China. If you look at the segments a bit closer in China, similar trends what we saw beginning of the year is that standard residential is declining slightly, affordable housing more stable and also stable or slight decline in the commercial markets.
The infrastructure markets, on the other hand, are growing well due to government stimulus. So if you look at the property markets as a whole, not only our market but the property markets as a whole, we see both better and less good news. The good news is that for 7 months already, we've seen continued improvements in overall transactions in real estate market. And we've also seen a continuous improvement in the pricing in real estate market, and this is positive. So we can see that the markets are going forward and developing.
On the other hand, when we look at overall real estate investments and new construction starts, we see a more negative picture. So and again, we continue to see different situations in different tiers of cities. So situation continues to be, as we have discussed before, uncertain, and our expectation for the full year is that the markets will decline slightly. So that's a little bit more in detail again on China. Next, I'll turn to our maintenance business.
First of all, in our maintenance business, pleased to say that we grew in all geographic regions. And we continue to have strong growth in Asia Pacific. Here, we are achieving strong growth because of the strong deliveries of new equipment we have had over the past years. Most significant growth continues to be in China, where our growth continues to be at about 25% in the service business, continued very strong growth there. If then look at the maintenance markets as a whole.
First of all, Europe and North America, really no change to the market environment. Markets continue to grow slightly overall. And in markets where we have had a more difficult new equipment market over the past years, we see a more difficult pricing situation. So very much the same trends we've seen before. On the other hand, Asia Pacific also, as we've seen before, continues good growth in the service business due to the high level of installations in the past years.
So positive growth here, and we've been able to capture that growth in a very good way. And then Modernization business. First of all, our performance, we had good growth in all geographic regions in our modernization business. Now seasonally, monetization sales were more stable with slightly better performance in Europe, Middle East and Africa, but overall quite stable sales. If you then look at the markets, North America continues to grow, so similar good trends we've seen before.
In Europe, Central and North Europe, the market is growing and South Europe market remains weak. Here, we can see a nugget of positiveness through Spain, where the market is recovering from a low level. But overall, South Europe is weak. So that's about our markets and our businesses. Then in connection with our quarter results, we usually highlight one area where we have strengthened again our business through our development programs.
This time, we're highlighting our preferred maintenance partner development program. And as you know, one of our important strategic objectives is to strengthen our differentiation in our service business. Here, we have further improved our capabilities to service our customers and drive productivity. During this year, we continue to roll out our next generation, our what we call our field mobility device to our service technicians to improve the connectivity of them, provide them with better information, with faster problem resolution times and that way be able to serve our customers in a more effective way and improve our productivity. As you also know, we have over the past years invested significantly in developing our sales setups, our sales management and also in our customer interactions.
Now we are we have those implemented throughout KONE and now driving benefits of this. And again, giving us a better opportunity to understanding customer requirements, offering better services to them and this way driving a better growth. Again, I think in the maintenance business, we have a very strong development agenda and we can see it is moving forward. And then finally, our outlook, which is the same that we discussed in connection with the Capital Markets Day in Shanghai recently, slightly specified relative to what we said in Q2. Asia Pacific, we expect the markets to decline slightly in 2015 due to the slight decline in the Chinese market.
Other Asia Pacific markets overall, we expect to continue growing. Europe, Middle East and Africa, expect that market to grow as a whole slightly. Central North Europe to continue to grow. Market in South Europe gradually recover from a low level, similar trend to what we see now, and Middle East continued growth. North America, we expect that a good trend will continue throughout this year.
Maintenance markets, very much the same trends that I talked about earlier, continue to expect to see those some growth in Europe and North America and continued good growth in the Asia Pacific market. Modernization. If you look at Europe as a whole, rather stable with growth in Central North Europe and a weaker market in South Europe and continued growth in both North America and Asia Pacific. So very much the same outlook that we have seen before. If you then look at 1 S business outlook that we have only slightly specified, If you look at our sales, here we have kept our outlook unchanged.
So we expect our sales to grow between 6% 8% for the full year in comparable exchange rates. And if you look at our EBIT, here we have slightly specified our outlook. We now expect our EBIT for the full year to be in the range of EUR 1,200,000,000 EUR 1,250,000,000, again assuming that there won't be a significant change to translation exchange rates compared to the average of January, September. Previously, we had lower end of the range €1,190,000,000 so a small improvement in the bottom end of the range. So with this outlook, what we can see is that we have good confidence that we will deliver strong results for the full year and continue our strong execution and deliver upon our strategy.
With those words, we are ready for questions.
Thank you, Henrik. We are indeed ready for the Q and A. And unless we have questions from those present here in the room, I think we can go straight and take questions from those listening via the phone lines. So I'm handing over to the operator, please.
We will take our first question from Lars Brorson from Barclays. Please go ahead.
Thanks very much. Hi, Henrik. It's Lars here from Barclays. I was a little late on the call, so I apologize if you covered this. But I wonder whether you could give a little bit of granularity on the mix impact on your margins, both in the quarter, but also on the orders received.
In terms of orders received margin, that's been flat since mid-twenty 14. I wonder whether, again, you could give some granularity around that regionally. Presumably, your OR margins in the U. S. Are improving quite nicely and probably Europe is or EMEA is coming off the lows.
Should we think about OR margins in APAC as weighing negatively on that? That will be my first question. Thank you.
First of all, overall, what we're saying is that despite the competition we see, we have been able to keep our margins at a good level. So we continue to have a healthy and good new equipment business. When we look at the margin of our orders, you see it very much look at that still what we do in the various regions. We have to remember that China is clearly about close to 40% of our orders received. So that has a big impact.
I would say that where we have seen improvements is in North America. That's the most positive story. I wouldn't say that there hasn't been any significant changes in other markets.
Thank you. And then secondly and finally, just on pricing in China. Can you give us an order of magnitude of how that's declining year over year on an apples to apples basis? I think in the first half, you talked about pricing in China down some 2% to 5%. Where are we currently?
So we are looking at similar trends, I would say, 3% to 5 percent approximately year over year. That's why we said it's a trend we have seen earlier in the year is pretty much the same what we continue to see.
And on China, when you look into 2016, you're obviously not gaining a formal outlook as just of yet. But at the CMD, you talked about the same trend, which presumably means that you are seeing the market down again in China slightly. Boat is obviously talking about a double digit decline in 2016, but with different mix there. Can you give a little bit of an update as to what you see? I know it's early days still, but based on some of the leading indicators you talked about earlier, is there perhaps an opportunity to be a little more optimistic here relative to what you were seeing at the Capital Markets Day?
I think what we said in the Capital Markets Day, as I mentioned in the presentation now as well, the situation we described there is very much intact. So when we look at next year, it's we will give our formal outlook in January. It's too early for us to give a formal outlook for that. But as I said during the Capital Markets Day, we expect a similar trend to continue, and we don't expect any dramatic changes to the market overall. Thanks.
We will now take our next question from Erik Karlsson from Bodenholm. Please go ahead.
Hello. Thank you very much for taking my question. I wanted to ask you about the development of the maintenance business. If we think about Kona in the very long term, maintenance is clearly the biggest value driver in the business. And if we look at the local currency growth in the maintenance business, it's accelerated over the last 12 months here.
It was CHF 5.3 percent in Q4 last year, accelerated to 6.1% in Q1 this year, then 6.4% and now 6.7%. Could you just help us understand a little bit more what is driving the acceleration and how we should think about the maintenance business going forward here?
Okay. So when we look at what's driving the growth of the maintenance business, well, it's the most important reason is a growth in number of new conversions that we're converting from new equipment sales to our service business. As you know, we have grown a lot with our new installations over the past years that we can see coming into our service base. So that's perhaps the most important part of that. We have also been able to be more proactive in our service business, have improved our sales competencies, which we can see a slightly better development in pricing compared to the prior year.
But still the most important part is the improvement in conversions year over year.
And could you just help us what is the conversion for the group now?
So we are if you look at I think it's worthwhile looking at China separately because it's such a big market and dynamics are different there. As you know, if you look at the rest of the world, we are somewhere north of 80% on average Europe, quite a high level. Then China conversion rates remain pretty much has remained pretty stable, roughly 60% for the KONE brand. If you look at KONE overall in China, around 50 ish percent. Very good.
Thank you very much. Thank you.
We will now take our next question from Maarten Vlueckiger from Kepler Cheuvreux. Please go ahead.
Yes. Good afternoon, gentlemen. Martin Flueckiger from Kepler Cheuvreux. A few questions. I'll take them 1 by 1.
First one, I suppose the slight downgrade for the China market, new equipment market was probably less surprising for most people. But considering a further worsening in real estate investment growth in Q3, Do you expect a larger decline in the new equipment market growth in China in Q4? That would be my first question.
So first of all, the outlook for the Chinese market is we have markets declined slightly at the beginning of the year, and that's our outlook for the full year as well. So we don't expect a significant change to the trend for the 4th quarter. So pretty much similar trend to what we've seen in the past quarter.
Okay. Thanks. And looking at EMEA sales, they were down 0.5% in Q3 in constant exchange rates. Could you elaborate a little bit on the main drivers in terms of markets, please? And also if you could mention the acquisition impact on EMEA sales growth in Q3.
Thank you very much.
So acquisition driven sales growth throughout KONE is small. So it doesn't have any material impact. Now if you look at Europe, Middle East and Africa and start with Central and North Europe, first of all, we had strong orders received growth. So that's positive. So we're building a stronger order book.
Now seasonally, we had somewhat weaker sales than earlier in the year. I would more say this is a seasonal matter because we are building up our order book overall if you look at Europe, Middle East and Africa. So this is the 0.5 negative in the comparable currencies. That's pretty much the organic development overall.
Okay. Thanks. And then finally, financial results and the tax provision, they were significantly higher year on year in Q3. Could you explain that in more detail, please?
You want to, Erika, explain our full taxes?
About the taxes, so our effective tax rate was 23.5%. Last year, it was 23.3%. So of course, the business has been growing. There we have been specifying, especially the withholding taxes related to dividends because we are towards the end of the year. And also, we have seen growth in our North America business.
So that is also increasing somewhat our taxes.
Okay, thanks. And the financial result, that was also some $20,000,000 higher year on year in Q3?
You want to also address the financial results?
Yes, sure. So our financial income was stronger. Now in Q3 due to two reasons. We had dividends coming from Toshiba where we are having the minority shareholding. And also the other issue was related to the valuation, the FX valuation of the option liability on acquisitions.
And that has been now this quarter slightly positive.
Okay. Thank you very much.
We will now take our next question from Andre Kukhnmann from Credit Suisse. Please go ahead.
Yes. Good afternoon. I've got a couple of questions. Take one at a time. Firstly, on the maintenance business operational gearing and related to that pricing, could you just walk us through that related to previous questions about growth accelerating?
And is that yielding operational gearing within the group that is consumed elsewhere given that the margin progression has slowed down a little bit? If you could talk us through that, that would be great.
If you look at our maintenance business overall, it has continued its profitable growth. I think we have developed most of our business in a good way. We have what should I say? We have a good profitable growth in our maintenance business. The difference in mix hasn't actually changed that much if you take out currencies, a little bit even more still on new equipment.
So that's perhaps the biggest impact on our overall margin. The good thing is that both our new equipment and our service business continued their profitable growth, both 1st 9 months and also in the quarter.
Got it. So just to confirm, within the overall EBIT, your maintenance operating profit margin has expanded year on year in Q3 with the 6.7% growth?
As you know, we don't open up our margins by business, and we look at this as a whole. I would say what you can see and what the most important point is, is that we are we have been able to slightly improve our growth in the maintenance business.
Got it. And a couple of questions on the broader markets. Just I think there's a new standard coming up in next year for elevator equipment, and it looks like it's going to be global standard. Could you talk us through the impact of that on KONI and on competitive landscape as well? It looks like something that some of the smaller players may struggle to keep up with.
And where do you think that China will actually implement and release this standard?
Yes. There is a new so called EN81 code being implemented. That has some implications on safety devices, mainly for elevators. And I believe that this could have some impact on the market, but I don't think it will be dramatic. As far as we know, most competitors are able to deal with those changes.
China is implementing most of these. Again, I think if you look at the structure of the market, I think many of the suppliers large suppliers in the market will be able to resolve it for most players. So I don't think that there will be a significant impact from that change.
Got it. Thank you.
And the last question on a specific end market on Iran. Actually, it looks like it's going to be opening up soon. Could you tell us what your position is currently in this market? And if it becomes kind of widely more widely open to international suppliers like yourselves, what would be your plan for that?
So we are of course, as I think a lot of companies watching the situation very closely. We don't have our own subsidiary in Iran. But if the market opens up, I think we are ready to move and following that market. And we know who the partners are, and we think we can move quite fast if the market now opens up on a more broad basis.
Got it. Thanks very much.
Thank you.
We will now take our next question from Manu Rimpela from Nordea. Please go ahead.
Okay. Good afternoon. My first question would be on maintenance pricing. Could you just maybe help us understand a bit better that in those markets where we are starting to see some growth like in the U. S.
In the equipment side and maybe some countries in Europe, are you starting to see any sort of improvement in maintenance pricing? And how do you see that working if we see kind of more sustained equipment growth in those markets?
The first, we have to remember that even though we have seen a good development now in orders received in the United States and now we can see more deliveries, the service business comes with quite a delay with that because they are still being delivered to the market. And then when you start them, they come off the so called first service period. So therefore, pricing continues to be challenging in these markets the same way it's been before. So we haven't seen significant changes overall.
Would it be fair to say that if the U. S. Market is seeing deliveries now that maybe 12 months onwards we should see an improvement?
Well, let's see how the market develops. We are, of course, continuously developing our competitiveness and differentiation so that we can have a good development. That is what we can impact. I can't make a prediction on what's going to happen in the market overall.
Okay. And then second question on the Giant Kona revaluation, which I think Erika mentioned was a positive item in the Q3. So I think that's been a headwind over the last year. So would you be able to give us any sort of a guidance? How do you expect that revaluation to impact the financial expenses line maybe this year and for the next couple of years?
Well, guiding that kind of items is not necessarily the right thing to do here. But just as a reminder, so on quarterly basis, we have the FX valuation. And then at the end of the year, we do the whole valuation for the acquisition related option liability.
As I mentioned, we don't predict currency exchange rates. So that depends very much on those.
Okay. And then final question on the balance sheet. The cash flow remains very impressive. At what point do you start feeling that the balance sheet becomes too heavy in terms of the cash position?
We have a strong balance sheet and we are comfortable. We think that the world has many uncertainties. We have growth ambitions. And therefore, we think it makes sense to have a strong balance sheet to be able to capture opportunities should they present themselves in the market. That's how we think about it.
Okay. Thank you.
Thank you.
We will now take our next question from Phil Wilson from Redburn. Please go ahead.
Good afternoon, Henrik, Henriette, Catria, it's Phil Wilson from Redburn. I've got a few three questions. I'll just do one at a time. But firstly, can you quantify the maintenance sales growth in comparable FX that you saw for EMEA and Americas in 3Q? I mean, you said 25% to China.
What was it from EMEA Americas? And how has that changed during the year? Thank you.
So we don't break out those sales. But as we said, we have grown in all geographic areas. So growth is it's clearly lower, the growth rate in Europe, Middle East and Africa and North America and the overall, so we talk about a slight growth overall in those markets.
Thank you. What I was trying to hope to understand was that given EMEA has turned negative, minus 0.5%, has that been driven by maintenance slowing sharply? Or is it just because of the timing of major projects in your modernization business?
It's the latter. So pretty steady, the development in the maintenance business.
Okay. And then just turning to the U. S. In terms of new equipment. I assume you're seeing double digit growth and peers are talking about 20% growth.
When you look to 2016 and you think about the drivers of this good growth, I assume it's things like the shift from single to multifamily homes. Do you think the U. S. Can sustain the double digit growth next year? Just as a sense as to what your thoughts are next year in the U.
S.
So first of all, the same as with China, I said we are not making yet the prediction of what we expect for the Chinese market for next year. If we look at more longer term, I think that there continues to be good opportunities, as you mentioned, in the shifting patterns of how younger generations live, an increase in single households with only one person lives, all of this is driving a need for more smaller apartments and more multifamily housing over the long term. How it's going to develop next year, I think that we need to come back to in our prediction in January.
But we should still think about the U. S. Being a growth market next year for you?
What we expect for this year is a continued growth market with good trends. And again, let's look at next year in beginning of January.
Thank you. And just a final technical question. You talked about the new technology and innovation units starting from next year. Can you just scale the incremental cost that we should expect from this just in case it's material?
We haven't given a specific guidance. As you know, we have continuously increased our investments in these areas. So we are not looking at a step change from this. And once we have all those plans and strategy clear, we may give some more insight into that.
Okay. Thank
you. We will now take our next question from Julien Pernier from UBS. Please go ahead.
Hi, good afternoon. It's Guillermo Penais from UBS. I wanted to ask about credit days and an evolution of prepayment terms in China. How are they progressing as we speak? I have follow ups, but I'll wait for your answer first.
Okay. So first of all, as you saw, and I think most important sign of that is we continue the strong cash flow, which means we've been able to maintain healthy payment terms and healthy business practices. It's clear that the credit in many parts of the Chinese market is tight and that's putting some pressure on payment terms. And maybe there's been some small adjustment, but no significant changes for us. And you can see through our cash flow that we have been able to have good terms.
But there is given the tightness of credit, it always gives some pressure on it and one has to deal with it. But I think been able to deal with it pretty well.
Thank you. And second, some of your peers in the industry, both local competitors and international players are in a way suggesting that they may temporarily break the discipline in the market when it comes to returns regarding China, obviously, when it comes to returns and operating profit margins. And I'm willing to understand whether you're ready to walk away when they become First of
First of all, we haven't seen yes, we've seen a tight competition for market share, but we haven't seen on a broad basis any irrational behavior. What we are focused on all the time is to provide value to our customers, to differentiate We believe that we have as we continue to have very strong product competitiveness with good and quality products, we deliver upon our promises, which is, I think, one of the hallmarks of KONE. We believe that we can maintain a good development in the market. That's what we focus on, and that's how we want to differentiate overall.
Thank you. And my last question actually, what's in Tier 1 cities that you mentioned is at the moment a little bit more solid when it comes to fundamentals or more solid when it comes to fundamentals. What's for you, what's the best brand? Is it Jan Kone or is it the regular Kone brand?
If we look at the higher tier cities, that's also where we have more of the larger developers, larger customers. That's where KONE would have a stronger presence in these markets.
Okay. But there's no aim to try to address that market with maybe a lower price range of products at all, right?
Well, I would say that, of course, Giant Kona is also present in that. But we have to remember that we have a dual brand strategy, and that is with a purpose. We want to have a dual brand strategy, and we want these 2 brands to be differentiated. That gives us a broader market coverage, and I think that is what we will continue with.
Thank you very much. Very helpful.
Thank you.
We will now take our next question from Martin Flueckiger from Kepler Cheuvreux. Please go
ahead. Yes, thanks for taking my further questions. Coming back to the Chinese property market, I've been looking at the latest statistics from the National Bureau of Statistics, and I've seen some contradicting signals, at least to my mind, and I was wondering what your view was on this. If you take a look at real estate investment growth, that's been that decline has been accelerating slightly in September. But on the other hand, based on my calculations, new construction area was up in the mid teens, and I thought that was pretty surprising after quite a number of months now where we've seen some pretty hefty declines.
My first question here would be, how would you interpret this? Is this just a 1 month flip? Or how do you see this?
I think with all of these statistics, you may have some differences in national holidays and things like that. So just looking at the 1 month, month to month figure is not always the best picture. So it always makes sense to look at them over a little bit longer period of time, and that tends to give a better picture. But as I said, we have 2 different messages coming. 1 is the total sales area that has been sold, number of transactions, sales area and pricing that is developing has been developing for about 7 months in a positive direction, a pretty good positive direction.
And then we have, as you mentioned, real estate investment. If you look at Q3, slightly negative and continued negative starts. So there's, of course, a timing difference between these two. I think it's important and positive that sales there is improving because that's fundamentally naturally has an impact on the overall inventory and then on the willingness for developers to start new projects.
Okay. Thanks. And then coming to my final question on M and A. I seem to remember that Kona had previously argued that M and A was or continue to be one of the main thrusts going forward. And I was even though in the last few months, it's been rather quiet, if I remember correctly.
I was wondering what your aspirations here are, whether there's been any strategic shift or changes. How do you see M and A going forward for KONE?
We continue to be interested in acquisitions, and we've been continuing to do a number of acquisitions this year, mainly for smaller independent companies on the service side and also some of our former distributors. That will continue. We want to have high activity there. It's a question of the supply of these opportunities in the market.
Okay. And if I remember correctly, you you used to say that you were also interested in bigger players if they were willing to discuss the issue. Is that still the case?
If there were some bigger opportunities in the market available, yes, we would be interested. But you need to have a willing seller to be able to buy something.
Sure. Thank you so much.
We will
now take our next question from Andre Kukhnmann from Credit Suisse. Please go ahead.
Yes. Hello, again. It's Andre from CS. Thanks for taking further questions. I've got a couple on invariably on China.
Firstly, could you tell us how your own brand versus Giant performed in Q3 and the year to date?
As I mentioned here earlier, Kone is more prevalent in the higher tier cities, GiantONE perhaps more than in the lower tier cities. So based on this, I mean, we, of course, look at China as a whole market. But here we see that now the market where KONE operates and the customer base they have, they are in better situations. Therefore, the performance of the KONE brand has now been stronger than for Giant KONE brand. But if you go a couple of years back, the situation was reversed.
And therefore, we want to continuously have these 2 brands so we can address different market situations. And this is precisely the reason why we have a dual brand strategy.
Yes, absolutely. And just on acquiring the service portfolios in China, our understanding is that sort of distributors or sort of the in a layer between you and the customer, they sort of build up service portfolios of up to a couple of 100 units or 500 units and then they're willing to sell. Are you seeing any change in that behavior at the moment? Are you seeing maybe some more of these portfolios coming to the market of those players willing to sell out given the incidents that took place and given the increased scrutiny on the maintenance of the equipment?
So we have not actively started to buy maintenance portfolios in China. Our organic growth remains very strong, and that's what we're focusing on. And that's what strategically makes sense to focus on at the moment. So we have been buying maintenance portfolios mainly in Europe, Africa and some Balkan countries in North America. That's where we are mainly active.
China, we have not yet become active in buying these maintenance portfolios. And there hasn't been that many of those transactions. There are some that move hands, but not a lot of activity there yet. And again, I think when you say organic growth like we have, the main focus needs to be on growing the organization, building up the capabilities so you can continue to do that with a very good quality that we do at the moment.
Right. Very clear. And that's kind of not pursuing those maintenance portfolios in China is because of, I guess, the sheer capacity constraint of how many technicians you have to train to satisfy own demand? Or is there some other reasons? Because I presume there are some of them that contain a lot of KONE elevators.
As I said, we haven't seen a lot of activity there yet. And this may change, but currently, we are mainly focused on our on the organic growth in that market.
Got it. Thanks very much.
Thank you.
We will now take our next question from Matthew Spur from RBC. Please go ahead.
Hi there. Yes, Matthew Spur at RBC. Your growth delta over the underlying new equipment market in China and referring to the Slide 15, your graphic there, perhaps a few percentage points this quarter and in previous quarters, it looks and years, it looks like it's 5 or more. Do you have any additional insight on why you think that slight change was the case perhaps in terms of sort of talking about segments or large projects? I understand, of course, the limitation of looking at 1 quarter in isolation, but anything else you could add there would be helpful.
Well, first of all, I think you said it exactly, It's 1 quarter. We have to remember that we are the market leader in China. We are by far the largest volume. If we look at the absolute growth, we believe that we have had the strongest growth of anyone in China if you look at absolute numbers. When you are have our scale and size, you need total time in absolute volume grow so much faster than the others to keep up the percentage rate.
So we believe that we have a continued good performance, and one shouldn't stare at 1 individual quarter. There are always going to be differences quarter to quarter, very much dependent on what previous how strong the previous year was and so forth. So it's best for us to look at it over a little bit longer period of time. And I believe that we have continued to outperform the market in a good way in China.
And just in your statement, you mentioned that some of the larger major projects were slower. Was that talking then globally? Or was that specific to China as well?
That's globally. If you look at both quarter 2 and quarter 3 last year, we had a higher proportion of very large projects. So we have had continued good activity where we have had even better performance this year. It's been a standard volume business That is in the end still the majority of the business.
Okay. Thanks.
Thank you.
We will now take our next question from Erik Karlsson from Bodenholm. Please go ahead.
Thanks for taking another question. You mentioned in the report you had good margins on new orders, 1, in terms of OE orders. I was just curious to know, does that vary by region so that margins are going up in some regions and down in some and they are stable overall? Or are they stable in most of the regions?
So of course, you always have variation of business. No business has linear trends in all markets at the same time. As you know, if you look at our margins overall, the best margins we have in our new equipment business in China. And here, we have been able to maintain good margins overall. Where we have had a slight improvement has been in yes, over already a couple of years' time has been in North America.
Very good. Thank you very much. Thank you.
We will now take our final question from Phil Wilson from Redburn. Please go ahead.
Hi, thanks for letting me come back. Just two final questions. Just looking at your maintenance base growth, can you say in Europe and in the U. S, what level of retirement do you see from your maintenance base on an annual basis?
So what we see in developed markets is a very rough number, but perhaps 1 percentage point of the maintenance base gets retired every year. So that's the number of buildings that gets taken out of use either temporarily or permanently.
And how does that change? I imagine that hasn't changed much over the last
3 years. That's pretty constant.
Okay, great. And then just actually changing gears, just going back to China and you talked about the high growth in KONE versus Giant KONE. And I know when you acquired Giant KONE, you disclosed the 10% EBIT margin in that business. And I imagine that's gone up a little bit. But given your commentary on overall Chinese profitability that you made in the past, I imagine that KONE is doing a higher margin than Giant KONE still.
Is that the case? And if so, going forward, as your orders feed into your revenue, should we actually expect a positive margin benefit from that mix shift?
First of all, we have we don't we haven't disclosed our margins for China for the business. We have a good business in China, both for KONE and for Giant KONE. KONE's benefit compared to most of our competitors that we have very good volumes there. And yes, it's a we have a good business in China.
Are they the same or is it kind of higher or lower than Giant Kone? Just a rough sense.
Again, I said that Kone has a benefit compared to, I think, everyone else given the volumes and the scale that we have.
Okay, great. Thank you very much.
We now have another question from Lars Rasmussen from Barclays. Please go ahead.
Thanks. Sorry, I'll sneak another 2 in, if I can. Just on the affordable housing segment in China, the preliminary numbers we hear is that ahead of the 13th 5 year plan, that this program will be down some 20%, 25% in unit terms from the current program. Is that your view too? And if so, how are you positioning your business and inevitably your go to market strategy for that?
We don't have any specific information on that. So I think we have to wait and see what government plans are in that respect.
And finally, if I can you give us a sense for how much of your China sales is Tier 3 to 5 cities in rough numbers?
The majority of our sales well over half is in Tier 1 and Tier 2 cities. But of course, we have important business there in the lower tier cities as well.
Understood. Thank you.
Thank you.
There are no more questions in the phone queue at this time. Therefore, I would like to turn the call back to the speaker for any additional or closing remarks.
Okay. Thank you very much. I believe we are ready then to conclude this call. So we would like to thank you everybody very much for your active participation and wish you a very good rest of the day. Thank you.
Thank you.