Afternoon, everybody, and welcome to Kone's Q2 Results Webcast. In Espoo, Finland today, we have our CEO, Henrik Anruth and CFO, Erik I am Kasper Saren Hemmock from the Investor Relations team. As usual, we will start with an overview by Henrik of our key figures and developments during the Q2. After this, Tubal again has plenty of time for Q and A and discussion. Henrik, please.
Okay. Thank you, Katri. It's also my great pleasure to welcome you to our Q2 webcast because we have good news to share with you. I must say that I'm very happy about the strong performance that we had in the quarter that again shows the good execution and breadth of our performance that we are able to achieve at the moment. I will as usual start with our key figures, a little bit more in detail into orders received, sales and EBIT.
After that, I'll talk about our businesses and the markets and then how we have strengthened our competitiveness and finish up with our markets and our guidance for the year. But starting with Q2 and our key numbers. As the heading also says, we had a very strong performance on a broad base. This we can see from starting with our orders received. Our orders received were €2,200,000,000 growth of 21.7% compared to last year or 6.3% in comparable currencies.
Our order book reached an all time high €8,600,000,000 a growth of 32% or 15% in comparable currencies. Our sales grew also was €2,200,000,000 growth of 15% or 6.8% in comparable currencies. What is important with our growth is that it continued to be profitable and that we can see from development of our operating income, which was now €325,000,000 in the quarter, a growth of 23.5% compared to last year. The profitable growth can also be seen from our operating income margin, which now improved from 14.2% percent to 14.7 percent. We also had a very strong cash flow.
We can say it was exceptionally EUR 426,000,000 And our earnings per share grew a little bit over 30% compared to last year and was now €0.51 So a very strong overall and broad based performance in Q2. Also if we take a little bit longer perspective and look at the first half of the year, we can also see a similar performance. Good growth in our orders received, which were €4,200,000,000 growth of 20.3% or 5.9% in comparable currency. Also solid sales growth in the first half, total sales of €3,900,000,000 growth of 18.6 percent or 6.9 percent in comparable currency. And we can also see that our growth was profitable if we look at it over a 6 month period with an EBIT of €537,000,000 a growth of a little bit over 21% and improvement in our operating income margin from 13.5% to 13.8%.
Our cash flow of operations, a very solid and strong €638,000,000 for the 1st 6 months. I'm very pleased now that we had a very good performance in Q2, because we can see now on a 6 month basis, we had a solid cash flow. We had a slightly slower cash start to the year in terms of cash flow, but I think we can see if we look on a 6 month perspective that even in a challenging market environment, we have been able to maintain good and healthy business practices, which can be seen from our cash flow. Earnings per share, €0.80 compared to €0.67 in the comparison period. Again, what has been the key enabler of this good development that we have had, I would say it's very good engagement.
We have amongst our 48,000 people and all of our employees' commitment continues to achieve good results and profitable growth. So of course, a very big thank you to all of our employees for the great work done in the first half of the year. If you look a little bit more closer at the numbers and start with orders received, which grew at 21.7% or 6.3% in comparable currency. Here, we had growth in orders received in all geographic areas and in both new equipment and modernization business. I think the highlight on our orders received is that we had a solid growth in our volume new equipment business with a good growth in both Europe and North America.
The growth in Asia Pacific was now somewhat slower due to also very high comparison points particularly major projects last year. In the important China market, we continue to grow faster than the market. We grew at close to 5% in volume terms when the market declined slightly. So a continued strong outperformance as well in China. So I would say overall, I'm very pleased with our performance in order to see how broad based it was and how well we were able to continue a strong growth in North America and accelerate our growth in Europe.
If we then look at pricing and the overall market environment, What we can see is that the fight for market share has continued to be very intense And we can see that, that has had some impact on pricing. But what I would say here is that in an environment where fight for market share and the impact on pricing has been tough, we have been able to, I think, it shows the strength of our performance. I think, shows the strength of our performance. In an environment where market prices have come down slightly, we have been able to maintain a solid develop solid level of margins for orders received and this has been achieved through a continuous improvement in our overall competitiveness and through a very good performance of our teams overall. So I would say overall broad based and good performance.
If you look at sales, here what's the good news is that we had growth in all geographic regions and all of our businesses. If we start geographically, fastest growth was in North America, where our growth was about 14% in comparable currencies. Our growth in Asia Pacific continued to be a solid 7% and in Europe, Middle East and Africa, we grew at 4%. If you look at our businesses, what I'm pleased about is that our growth in our services business accelerated slightly. Our growth in services overall was 7.1%, maintenance was 6.4% and in our modernization business 8.8%, a clear acceleration in our growth in our modernization business.
Also new equipment business continued to grow and was 6.6% overall. So you can see the solid broad based growth that we achieved also in sales. And then finally, turning to operating income. The main reason behind the broad based positive development was really what we achieved in sales on many fronts. So we were able to have a good development in both our services business as well as new equipment business and in each geographic region.
So I'm very happy about this underlying performance that we had. Translation exchange rates also had a significant positive impact on our operating income and they now contributed a little bit more than 40,000,000 dollars to our operating income. But even taking out that, we can see that the underlying growth was solid. We continued to increase our investments in areas that support our future growth such as our investments in R and D, process development and IT and expanding our footprint in key growth markets in Asia Pacific. Also, we continue to strengthen our resourcing in North America to cater to the strong growth that we are experiencing that far.
Again, also in operating income, a very broad based and positive development. And then finally, on our numbers, looking at our business mix. And if we start business mix by various business lines, we can see that the trend that we have seen already for a while, which is that our new equipment business continued to increase its share of our sales that continued and new equipment was now already 56% of total sales. Here the main reason for the increase in the share of new equipment was translation exchange rates. Because we have in new equipment business, we have more sales in other currencies than the euro than we would have in, for example, maintenance and modernization.
So the change in mix was mainly a foreign exchange driven mix change. Same very much comes when we look at by market. Here Asia Pacific was now 44% of total sales Europe, Middle East and Africa, 4%. But if you look at Americas, it increased from 14% to 16%. That is for growth due to the strong underlying growth in Americas comparable currencies as well as of course translation exchange rates.
That's about our numbers. Let me next go into our various business lines. We start with new equipment business and first about our performance. As I mentioned, I think the most important point is that our orders received in volume business grew clearly. In the major project business, it was now a slight growth as a result of a very significant comparison period last year.
The growth, as I mentioned, was strong in North America and also accelerated Europe, Middle East and Africa. In Asia Pacific, we're able to grow in China, in Australia and in India. Percentage wise, the growth was the fastest in Australia and India. But as I mentioned, in China, it grew at close to 5% in a market that declined slightly, so very strong performance overall. If you then look at the various markets and we start with the Europe, Middle East and Africa region.
First of all, markets in Central and North Europe were rather stable, but the positive thing is that we saw a stabilization now of the markets in South Europe. Here, a continued recovery, although from a low level in Spain, but also we saw markets such as France to start to stabilize. That's of course positive. So if you look at Europe overall, I would say that we are seeing a slightly more positive overall sentiment than in previous quarter, not significant, but at least slightly in the right direction. Also what has developed slightly better than we expected is the overall market in the Middle East that grew from a good level last year.
North America market continues to grow. Previous trends continued there. And Asia Pacific, their market volumes weakened marginally because of the slight decline in new equipment in China. Markets continue to grow in Australia and the recovery continued in India. Those were both positive.
Now let me address China again a little bit more detail because I know there's a lot of questions relating to that, so I can try to address some of them upfront. The first message related to China is that we had a good performance. We continued to outperform market and grew faster than the market at close to 5% when the market declined slightly. If we look at the market overall, one of the important points to remember is that the market is not one homogeneous market. The market actually has many different environments within it.
If you look at the Tier 1 cities, the market development continues to be positive. There's growth in the market, the overall real estate markets are quite strong and our customers in those markets are developing well and growing. If you on the other hand look at some of the lower tier cities, we see a clearly more challenging situation and we can see that our customers have challenges in getting financing and also inventory levels are at quite a high level in some of the cities. If you look at the overall market, we can also see that the area where we see most growth is infrastructure and that is of course driven by stimulus measures. Other than that, we don't see a significant impact from stimulus as of yet, but I'll return to that.
If you look at the overall pricing environment in China, as I mentioned earlier that the competition for market share, particularly in China, is very intense. But in particular in China, I would say that we have been able to grow in a declining market without sacrificing our margin and that we have been able to achieve as a result of a very good development in our overall product competitiveness, the strength of our team on the ground and our good and broad distribution in the market. I would say if you look at the overall pricing trends, they have continued to be challenging and we can expect also that that situation continues, but of course our objective is to continue to improve our competitiveness as we have very successfully done in the past as well. Now going forward, we expect the market for this full year this year to be stable or slightly down. If we look at the impact of government stimulus in the market, that is not significant and we can't really see it as of yet other than in the infrastructure segment.
The market remains uncertain and in some places very challenging. But I think also we have to see that there are some good news also coming out of the market. In Q2, for example, real estate transactions increased quite solidly throughout markets And we could start to see in the past few months that pricing improved in the top 100 cities now on a sequential basis. So I think that this positive development gives us again confidence in our longer term view in the Chinese market of the continued strong urbanization on the improving quality of urbanization. So you can say despite the challenging market, we can see that if the competitiveness is strong, it's a big market with a lot of opportunities, it's also possible to as we have shown to perform strongly in that market environment.
Just again a little bit more in detail about the Chinese market and our performance there. Let me then go to our Services business and start with maintenance. As all of you know, one of our most important strategic objectives is to accelerate the growth in our maintenance business. And I'm happy to say that our maintenance sales developed positively in all geographic regions on earlier good trend, in fact a slight acceleration even. And our sales growth in Asia Pacific continued to be strong.
So a good overall performance in the maintenance business. If you look at the markets, we can say, 1st of all, that Europe and North America markets continue to grow, although as before, there continues to be differences in the market environment overall. And competition competitive environment continues to be beat up in many markets. Asia Pacific, here we continue to see very good trends in the market. The markets continue to grow and that's of course a good thing for us given the very strong market position we have in Asia Pacific overall and that we can see how we are able to turn that into strong sales growth in that region.
Then if you look at our modernization business, here our orders received grew slightly. Also our objective here is to accelerate the growth, but it's an area where I think we can do better. Monetization sales grew strongly in North America. Here we are doing quite well. But in Europe, Middle East and Africa, I believe we have good potential to improve our growth rate.
If you look at the markets overall, North America markets continue to grow somewhat and also markets in Central and North Europe grew. But in South Europe, they remained at a weak level. In South Europe, I would like to highlight one positive market, which is Spain. And here we can see again from Spain that when the overall market economic environment improves, then we can also see a clear correlation to the modernization market. As we know, the Spanish economy is recovering and we can see that clearly in the modernization market.
But overall, as I said, many of the South European markets Let me then go to our development programs. As you know, we have always 3 year cycles in our development programs and we are now halfway through them. I would say, 1st of all, that I think we have had solid development in them overall and we can see that we have strengthened our competitiveness in many areas. Today, we always highlight one of the areas. I want to highlight what we've done in what we call our program the most competitive people flow solutions, where our objective is to have the most competitive elevator and escalator offering and develop solutions for smart buildings.
So first of all, here the focus is again on how we can strengthen our competitiveness in the key growth markets and that we have done again during the first half of the year. In the Q1, we launched the KONE I Monospace Elevator that is specifically designed for the Indian residential market. It brings all of Kornet's strength in this product with ride comfort, with energy efficiency. And what is new what we're bringing to the Indian residential market is a much more attractive visual design and options on that side. So I think that the attractiveness of the elevators we bring into the residential market in India, we are clearly taking to a new level with this product.
And I must say that I'm very pleased how this has been received by our customers since it has been launched. Another important growth market at the moment is the overall infrastructure and public transport market. For this, we have launched a new version of our infrastructure escalator, the Konec Travelmaster 140 to again make sure we have a stronger competitiveness in this key growth segment. And also when we look at the Smart Buildings, we have strengthened our offering in North America with our People Flow Intelligence solutions and related to that, they've also launched our Turnstile 100 product in that market. So again, you can see many different improvements in our competitiveness in key growth markets of the world.
And then finally, a market outlook, which we have slightly specified and starting with the new equipment market. First of all, Asia Pacific. The market is expected to be rather stable in 2015. And the Chinese market, as I mentioned already, we expect that to remain stable or decline slightly this year. In Europe, Middle East and Africa, we expect the market to grow slightly.
In Central and North Europe, markets expect to be stable or grow slightly. And in South Europe, we expect to start to see a recovery, although from a low level, but at least we can start to see a recovery. And this we can see through the recovery we're seeing already in Spain and the stabilization of the market in France. In the Middle East, we now expect the market to grow slightly this year. And in North America, we expect the good trend to continue, the markets continue to grow.
Then maintenance markets, here the overall outlook is the market environment will remain very much similar to what it's been so far, the market to grow overall, but with variations from market to market and we expect that the development in Asia Pacific will continue to be positive. Foreignization market is rather stable in Europe, but continues to grow in North America and Asia Pacific. And given the weight of Europe, we expect the markets overall to be rather stable or grow slightly. So I would say that perhaps the most important on the positive side, most important changes are that we are seeing a slightly better environment in Europe. And then finally, KONE's business outlook.
We have now 6 months of the year behind us. So we have specified our outlook. And on sales, we have now narrowed our range a little bit. We expect sales to be between 6% 8% in comparable currencies. Previously, we expected to be between 6% 9%.
In the first half year, we've grown at about 7%. So I think that this range is very much in line with that. And if you look at our operating income, here we now expect it to be $1,190,000,000 to $1,250,000,000 and here we assume that translation exchange rates now remain at the average level of January to June 2016. Previously, we expected the range to be from $1,140,000,000 to $1,230,000,000 assuming exchange rate at the level of January to March. So previously, we expected that translation exchange rates would bring about $100,000,000 positive to our results.
Now we're saying we expect with this translation exchange rate that it will be positive of about $100,000,000 to $120,000,000 So we look at the specification of our range, we can see that actually most of it is because of good underlying performance, but also because of improvement in translation exchange rates. So say if we look at this outlook, we look at the strong order book we have and the broad based strong execution we have, I think we have quite a good confidence for our performance for rest of the year. So with that, I think we have now good time again for questions.
And let's start with questions from people,
On the strong modernization sales, it was negative. 1, is it lumpy in the underlying sales?
If you look at our performance over the past quarters, so we have had better performance in orders received than in sales. Now we just had more of the sales coming through from the order book. There is some seasonality of it, but it's particularly the good performance in North America where our order book is stronger and we have grown our orders received for the past couple of years quite strongly where they start to come more through now.
And on the Middle East, you're expecting some growth now. Could you talk a bit about what's happening in the market?
So we see actually in Middle East, it's interesting. We see quite a broad based good market. It's in many different countries in the Middle East and many different sectors. So there's quite a lot of infrastructure happening, but also the residential market is quite good. So it's not one specific market, it's actually quite broad based.
Okay. And we are now ready to take questions from the line. So handing over to the operator, please.
Thank you.
We will just pause for a couple of seconds We can now take our first question. It comes from Andre Kuukhnin of Credit Suisse. Your line is open. Please go ahead.
Yes. Good afternoon. Thanks for taking my questions. Can I start with just a couple of questions on China? Could you tell us or could you confirm that in the backlog the margins that you're booking right now that they're comparable to the current backlog or to the sales level given what you said on the pricing environment and on your ability to compete in the falling market without sacrificing profitability?
So as I mentioned the strong competition in the market, but I think if you look at how we've been able to strengthen our competitiveness in this market environment, we have been able to compensate the pressure in the market overall. So yes, you're right. So the margins that we are booking are consistent with the margins in our backlog.
Got it. Thank you. And could you tell us in terms of your 2 brands in China Kony and Giancony, how are they performing against each other and against the market? Are both growing at the similar pace, one outgrowing the other versus the market?
First of all, we look at our China market as one whole and it's important to have the 2 different brands. Of course, when the market environment at some point, one grows more than the other. In this current specific environment, given that the performance is stronger in the higher tier cities with larger customers, then we see a better development overall for the Konevran given the overall market. So here in this, we can also see a slight difference between the two. But this situation varies between the 2.
So I think it really that's the strength we have is that we can really see the difference the market and cater to different market environments.
Got it. And just on Europe, it's nice to see the improvement in sentiment, but could you help us just thinking about the gearing of that impact on KONI? Should we think about it as a sort of a turning point, but in terms of actual meaningful or tangible improvement or impact on your bottom line, it will be somewhat later on once that starts translating into high additions to the installed base and therefore maybe pricing pressure easing on service? Or would you anticipate actually any early impact from this already from the new equipment piece? Just sort of being aware of very low profitability of that segment, just how should we think about the impact from Europe getting better on your bottom line?
Well, I would say, first of all, let's put it in perspective. As I said, slightly, Europe is going in the right direction. If you look at Europe, Middle East and Africa, about 40% of our overall sales, so of course, it's important. And I think what's important here is that now that we had a Asian market that was slightly slower, somewhat slower than we've seen in the past years, we were able to actually grow well because we're able to accelerate our growth Europe and continue to have a strong growth in North America. So of course, it has some impact when we start delivering these orders.
I think you have to remember that our revenue streams come from a broad set of countries, projects and different businesses in those countries. There's usually not one single market that is driving profitability, but as we saw again, it was broad based. So I don't know how I would I don't think I can go much more in detail into that. But of course, always a growing market is more favorable to profitability development overall.
Great. Thank you, Henrik. Appreciate it.
Thank you.
Thank you. We can now take our next question. It comes from Manu Rimpela of Nordea. Your line is open. Please go ahead.
Okay. Good afternoon. Two questions from me. Firstly, continuing on the China. So you mentioned that the you've been outperforming the market and we know that you've been doing that for quite some time already.
And you say that the improved distribution and improved competitiveness are the main reasons for that and also why you're able to keep prices higher. I was just wondering if you would be able to kind of give some more concrete examples of what this exactly means? And then secondly, on the outlook you gave for the group and especially for areas outside of China, so you sound cautiously optimistic on Europe and fairly upbeat on U. S. And then if I look at the order intake on an organic basis excluding China, I think it was up 8% in Q2 compared to last year.
So I think that's a pretty strong number. So should we read into that that 8% is a cautious growth number you think of? Or how should we think about that 8% in the context of your comments? Thanks.
Okay. Can I ask them if going on to take one question at a time because I must say that your second question was so long that I must say that I'm not sure I quite understood your second question? So if you could I'll start with the first one where you see if we can give something specific on China. I think the point is that it's a very broad market. We have a broad and I would say a very strong team in China.
It's a very broad customer base. So in a market where you have both strong and weaker situations, it's all about who has the best team on the ground with a strong product competitiveness and good distribution who finds these opportunities. So I don't think I can give you any more specifics behind it. It's about even a challenging environment, there are a lot of good opportunities in the market. How do you find them?
How do you make sure that you have a product that is competitive against it and a sales force that knows where the opportunities are and how you price them. That's what it's all about. It's not about individual situations. It's about having a broad based structure to be able to deliver that. And I must say sorry, Manavat, your second question I
I'll repeat that one.
I understand.
So I think your outlook is or if you look at the orders in Q2 on an organic basis, so take out China, so I get the number of something like 8% growth in organic order intake outside of China. And you sound still fairly cautious on the kind of European recovery and okay update on the U. S. So just trying to understand that how should I think about the cautious comments still on the kind of outlook, but then a pretty strong organic growth outside of China. So should we see that if Europe starts to picking up then that number should be a lot higher going forward?
Or just how should I think about that?
Well, first of all, as you know, we don't guide our orders received. So we don't give an outlook on that. And as you know, orders received can fluctuate. We have to remember this is 1 quarter. They can fluctuate quarter to quarter.
I would say that our message is that we are slightly and I would underline we're slightly more optimistic on Europe when we see the trends in there and we continue to see a good market in North America. So overall, if you have a growing market and if you have your competitors in shape, then you can of course find good growth opportunities. I don't know how more I would comment on that.
Okay. Thank you.
We can now take our next question. It comes from Jonathan Hanks of GS. Your line is open. Please go ahead.
Hi, there, Henrik. Just one on China again. Sorry about that. Just on payments specifically, we just had a number of peers comment on worsening payment terms in China specifically. Just wondering if you've seen any impact there at all.
Thanks.
Thanks. Well, Erika, do you want to address that?
Yes. So I can comment about the payment terms in China. So yes, it has been slightly tougher situation due to competition, but we have been able to fall into our good payment terms, so nothing dramatic there. So good cash flow from China.
Okay. Thank you very much.
I think the key point is you can see our continued strong cash flow. I think that shows how we've been able to run our business.
Thanks. Very clear.
Thank you. We can now take our next question. It comes from Michael Hagman of HSBC. Your line is open. Please go ahead.
Good afternoon. Several questions if I may. The first one, if we now look at the fact that you have 45% of your orders from China, 40% of sales, If you look at it from a risk controlling perspective, I was wondering have you been increasing your controls or changed the way that you manage the cash? How you get the cash out of the country just in order to make sure that if we see a precipitous decline in demand in China, the company is safeguarded? And second question then would be what is the risk that as we are now seeing orders?
Let's take one question. Okay. Sure. That would be appreciated. First of all, always when a certain market gets more challenging or a specific area in a market is more challenging, clearly you take a more deeper look at that with focus and controls in place and make sure you strengthen your resourcing in areas to make sure that you collect your money and you maintain your payment terms.
And also, as you know, we are being able to repatriate our cash China. So from that perspective, we are in a pretty good situation.
Okay. And then if you now look at the order trends, obviously, you've been saying that the market is now down in the Q2. We've seen as you know very weak housing starts and obviously also weak completions. I see that we are seeing a sequential improvement in pricing. Nevertheless, there is this overbuild that we have particularly in the lower tiered cities.
So how big do you think is the risk that we actually see a meaningful decline in the market for the rest of the year and in 2016?
Well, as always, the outlook that we give for the market that is our best and transparent outlook for the market. So we don't believe that we will see a situation that you are describing. We expect the market, let's say, to slightly decline or be stable year over year. What we continue to see, again, have to remember that the market is not one homogeneous market. There are many different situations and there are lots of higher tier cities that are actually in pretty good shape where inventory levels are improving and are not being higher than where they've been on average over the past several years.
And we continue to see good urbanization in a lot of cities. Then you have others where the situation is more challenging. So I think when we look at this net net, that's how we come to our outlook and based on customer activity and the activity on the ground that we see, that's our best and most transparent outlook for the market.
Would you dare to look into 2016?
As you know, Mikael, we don't at this stage of the year give outlook for 2016. I think what's important, as I mentioned, that we still are confident that urbanization will continue to be strong in China and the quality of urbanization will continue to improve and that is driving the density of elevators and escalators in the market driving higher standards of living, all of which are positive. So I think what I mentioned is that when we start to see now again transaction volumes improving quite strongly in Q2, that gives us confidence that longer term the market has good opportunities even though we see the clear uncertainty at the moment.
Thank you. Can I also ask about net working capital trends? Obviously, we had not quite a regular pattern if you look at the second half of last year Q1 this year and Q2 this year. Can you give us your expectation for net working capital development in the second half? Thank you.
So first of all, we don't give guidance to our balance sheet items and cash flow either. But yes, we have seen fluctuations, but that is like mostly related to payables. But I would say that if net working capital is negative €9.50 €950,000,000 So we are very pleased with that level.
Thank you very much.
Thank you. We can now take our next question. It comes from Fan Fang of Summit View. Please go ahead, sir.
Hi, there. Congratulations on the very good, very solid results for the second quarter. One thing I want to further understand is your EBIT margin in the second quarter actually advanced a lot. So could you help me to understand what kind of like the major reason that drives the EBIT margin growth?
Well, I would say that there are 2 main reasons behind it. 1 is the overall solid performance we had on a broad basis. That brought us good profitable growth and good profitability. Also when we have favorable translation exchange rates at this level that little bit also helps our margin because just if you look at costs such as research and development and process development, those are more euro weighted. So therefore, a shift in exchange rate a little bit helps our margin as well.
But I would say it's a combination of it's not one specific area. It's I would say it's the broad based solid execution plus then a little bit of exchange rates.
Thank you. Is the low material cost and also part supply also help to that?
That has helped a little bit. So, Rich, our raw material impact for the quarter was about €5,000,000 And we have to remember that one of the areas we said and we have strengthened the competitiveness of our offering, we have slightly benefited not much from raw material, but there has been design change and sourcing impact and so forth. There are many different areas that contribute to that and that's the reason we've been able to maintain a good and healthy level of our orders received.
Could you help me to understand the cost structure of your new equipment production?
In which way?
Like how much is from raw materials and parts? How much is from labor, things like that?
So first of all, raw material is not that significant of a part of it. You have to remember that we don't buy really raw material directly. It's embedded in components that we acquire. So a lot of the standard most of the standard components we buy from our suppliers. We then assemble some of the parts ourselves.
So I would say most of the cost comes from buying components from our suppliers. And of course they have all of the components. So
in the cost structure what's the breakdown of the component supply outsourced from 3rd party?
So that's a very significant part of our cost base in our new equipment is what we buy from suppliers.
Do we see like price decline from those component supplier?
They always you have to look at the answer is yes and you have to look at where does it come from. It comes from of course working with suppliers on improving designs. We have to remember that with the very significant volumes we have, we have a good benefit in the market of getting benefits from that volume. So it comes from many different sources.
I see. I see. The other thing I want to understand is you just confirm that the margin for the backlog is pretty much consistent from previous year. If you look at the new order intake from China, do you would you say on apple to apple base, the ASP also maintain as like pretty much the same level or ASP probably also slightly declined a little bit, which kind of like offset by the cost decline. How would you comment on that?
So as I mentioned because of the fight for market share there has been price pressures in the market and prices have been declining slightly. So yes, prices have declined slightly, but we have been able to compensate that with improvement in our competitiveness and as a result, been able to defend good margins in our business.
Thank you. If I use your full year guidance on the EBIT and then back out the second half EBIT, which is comparable to the second half of last year?
I would say if you look at our outlook and I think the point is that we expect a continued solid performance.
Yes, it's quite solid. Because second half of last year's EBIT margin was if it's not historically high, it should be close to historical high. So I'm not sure if my calculation is right. If I just use your EBIT full year EBIT margin EBIT guidance and then back out the second half EBIT margin for this year, which is quite comparable to last year?
Okay. Well, we don't guide our margin. We give a range for sales in comparable currencies. And we give a range for operating income. And from that you can see that we expect to continue to have a good and solid development in the second quarter.
That's the point.
Okay. Thank you very much. Clear.
Thank you.
Thank you. We can now take our next question. It comes from Guilherme Pigna of UBS. Your line is open. Please go ahead.
Hi. It's Guillermo Peigne from UBS. Two questions if I may. Could you comment a bit on how the price declines in China actually compared to the price declines that you saw in Q1? And is it fair to assume that as order declines for the market and not so much for you the price competition is probably going to increase going forward?
I would say that the overall trend, I don't think has changed that much from quarter 1. So in that sense, it's not a big surprise. And let's see. I think we continue to expect a very competitive environment, but also we expect that we can continue to perform strongly if you look over a period of time in that market as we have done so far. So I wouldn't expect any significant change to that overall equation.
And the second question is regarding a comment you mentioned earlier about density of elevators. I'm just puzzled a little bit because if total floor space and the construction at the moment is roughly flat just growing a bit. But actually on your statement you say that order intake orders for elevators are actually going down. That would imply actually the density is declining rather than increasing. So how can we read that density comment from yours?
Thank you.
Well, I think if you look over I think when you look at density you have to look at it over a few year period because when you look at orders and you look at floor space, those don't go they don't go exactly in sync. So you don't you can't compare them exactly. But if you look at it over some period of years, then you can see a continued improvement in the density. What the improvement is exactly right now, that's why it's difficult to say because you kind of have to average over a number of years. For the 2 statistics data points you can't they are not quite apples for apples.
That's interesting because I was doing that and theoretically, I can agree with you on the density comment when you compare elevator installations and new starts. Then I can see that there's an increasing amount of elevators per total 1,000,000,000 square meters added. But then if I compare the total elevator installations to the total for the space and the construction, it's actually a very, very let's say 1 to 1 relationship almost 90% correlated. So I just I'm puzzled because new starts is a very early indicator. It takes 3 years to build in China 2 to 3 years.
So I just wonder whether there's actually density increases at all over the last 5 years for the Chinese market?
We would expect that it has been. I don't have the exact numbers here with me, but that's based on our understanding that definitely has been a continued improvement in density when you look at what types of buildings and how many elevators they have and what regulation requires.
Okay. Thank you.
Thank you. We can now take our question. It comes from Max Lewis of JPMorgan. Your line is open. Please go ahead.
Hello. Thanks for taking my question.
I wanted to ask a
little bit more about what you're doing with supplies in order to lower your cost base moving forward. So if you tell me more about that and more about the supplier policy, not only in Europe, but also in China that would be interesting. Staying on the topic of suppliers, one of your key suppliers, Whittaker, recently announced they were starting production of elevated components in South America in order to service not only the South American, but also the North American market. What kind of opportunity do you see there? And did you view that as an opportunity to secure more components from one of your largest suppliers at a slightly lower rate than you may have
historically? Well, first of all, I think on the first question you had, I can't give you an exact answer because if there would be one specific area where you could get a very significant improvement, that would mean that you haven't had a good job in the past. So this comes from many different streams. It's really a combination of continued development of your offering, of your product, of the materials and components you use them, how you apply them, how you can reduce number of components. And of course, there is some also action on the sourcing side, how you can benefit from increasing volumes you have and standardization and so forth.
There's just such a broad plethora of areas you need to look at when you talk about the overall strengthening of your competitiveness. And South America supplying to the U. S, we have many suppliers. I don't know exactly what maybe it could give us some opportunities. As you know, we are not in South America.
Maybe it could help our suppliers in North America. I don't know. We have good suppliers there. There's a good competitive situation. So I think that's I don't think that that's such a big individual factor for us.
Okay. Thanks very much.
Thank you. We can now take our next question. It comes from Jihoon Wang of Exane. Your line is open. Please go ahead.
Hi. Thank you for taking my question. It's Jihoon from Exane. I have a question regarding the service business in China. Could you give us an update on the conversion rate in China in Q2, please?
And maybe the sales split between service and new equipment and the growth rate in service? Thank you.
So we continue first, we'll start from a growth perspective. We start continued strong growth in our service business in China. We've said that it's been compounding recently at about 25% and it continues to do that good level. So that's positive. It continues still to be less than 10% of our sales, so not much use on that front end.
And overall still conversion rates not a big change. So for the KONE brand, we continue to operate at around 60%. And then if we include Giant KONE, it's for the whole KONE, it's a bit lower.
That's very clear. Thanks. And I have a follow-up. You have increased your workforce in China last year by about 20%. I guess many of them, therefore, your investment in the service team.
And how is the headcount development in China for this year as for now? Or you have a general target for the end of the year?
Well, we haven't set specific targets, but we continue to increase our headcount in China, particularly as you said on the service side. That's a more, I would say, labor intensive part of the business. And I think there when you grow, one of the important areas is to continue to get more skilled technicians into your workforce to make sure that you can have a good service delivery. So we have very active training programs ongoing in China and we will continue to expand our service workforce in the market. That's I guess how specific we can be there.
Okay. Thank you. And maybe one last question about your American business. We see the order accelerated this quarter. It seems the biggest driver is volume product.
Maybe I'm wrong because I was just reconciling your comment with volume product growth. And so can you give a little bit more color on this? Are you getting more market share in the U. S? Or it's a general underlying market is rebounding more faster?
Thank you.
We believe that we would have grown in the first half of the year clearly faster than the market in the United States. I think we have a good competitiveness there. The market is growing, but I believe that we are growing faster than the market.
And then the key driver behind this, any reasons? Which segments are going faster?
I think it's segments are growing are both commercial and residential. If you look at the trends in the North American markets, they are favorable for us because the machine room less segment overall continues to take market share from the hydraulic segment and we are very strong player in the machine room less market. So we have a good overall competitiveness in the market. We have strengthened our team. So I think in that sense, we have just remember, it's not only product, it's team you have on the ground.
It's a combination of that then. And I think we have been able to improve on both sides.
Okay. Very clear. Thank you very much.
Thank you.
Thank you. We can now move on to our next question. It comes from Glen Liddy of JPMorgan. Please go ahead.
Good afternoon. In terms of the margins for original equipment, I think in the past you've suggested that China is around the group average. But in developed markets, it's below the group average. Is that still the case?
Our best new equipment margins are in China. That's correct.
So going forward, if we've got no growth in China and stronger growth in the rest of the world, do you think you can keep the order the margin in the order backlog at the current level?
I wouldn't start speculating on that. I think, Glenn, our objective is to continue to grow profitably. If we can continue to improve our competitiveness, we can also improve our profitability in each of the markets. That's how we look at it. The most important point is that when we grow, we grow profitably.
There are slightly differences in the profitability, but that's the most important point and that's the way we continue to generate good cash flow and returns in this business.
And for China, are you seeing the cancellations of orders?
No, not really. I mean, our cancellations overall have continued to be at the very low level as they have been in the past. The answer to that is no.
And in terms of the delivery profile, I know you don't give us an average delivery time. But the order backlog today particularly for China stretching over the next 12 months, is it the same percentage of the backlog that will be delivered over the next 12 months as you had over the last 12 months? Or is the time getting longer?
Do you want to comment on our delivery backlog profile? Yes.
I would say that the adult patient has remained approximately in the same level as in the previous years.
Okay then. Thank you very much.
Thank you. We can now take our next question from Bill Wilson of Redburn. Please go ahead, sir.
Yes. Good afternoon everyone. I've got two questions please. Firstly on new pricing back to the comments on China. Can you give some commentary on what's the pricing developments you've seen in Europe and North America?
I know there's some commentary in the press release of perhaps some quantifications as to what pricing trends you're seeing there. Thanks.
First of all, if we start on the most positive areas. So in North America, our pricing is improving. So that's good. In Europe overall, not significant change. As you remember, many European markets are still quite weak even though we see the slight positiveness and positive development we have.
And I think in China, as we said that pricing is slightly down given the strong competition for market share there.
I think in the part you said that your Chinese market price increase is down 2% to 5%. Can you scale where European pricing is versus that and where North America pricing is versus that?
We don't usually open up so deep. I mean, you have remember Europe there are so many different markets as well and a little bit different development there. But I think overall as I said positive trends in the U. S, Europe more mix, but more stable and China, I think we discussed already.
Okay. Thank you. And just going back on Chinese maintenance, growth rate is still growing at 25%. But I think you said that the conversion rates haven't really changed much. And I'm just curious as to why you're not seeing the conversion rates move up for either Giant Kona or Kona brand given the investment you're doing in maintenance with workforce there?
So perhaps a comment on why conversion rate appears to be stored a bit?
Well, as you know the overall market structure is such that there are a lot of independent players that also continue to grow there. I think what's important is that we continue to grow at a very good rate in China and we have a good performance. I think it's clear that over the coming years, our objective is to increase the conversion rates. But given the market structure, it's not something you would change overnight. But I think our clear objective over the coming years is to improve that.
Because the conversion rates have been rising though from the 2,007 to 2011 or so and then they appear to small to bits over the last few years. Do you think it's fair that we've hit kind of a level at which they can't really rise much further?
I don't think so. I think that as the market develops, I think the focus on quality of service and productivity of service will become more important, I think then we will have a good position. So I'm confident that over time that will be a favorable development, but it's not something that will change overnight. I would say the good thing is that particularly with the KONE brand, our performance continues to be solid and we are very significant present in the market.
And have you started to take share yet from competitive installed base in China? Or are you still very much focusing on your own installed base for now?
China basis is predominantly Kona Equipment and China Kona.
Okay. Thank you very much.
Our final question today comes from Martin Flueckiger. Go ahead, sir.
Yes. Good afternoon. This is Martin Fluegge from Kepler Cheuvreux. Two questions if I may. Just going back to your outlook on new equipment market growth in China.
Looking at the recent statistics coming from the National Bureau of Statistics of China, by the way, I'm aware of the statements you made on the heterogeneity of the market. But just looking at those statistics, particularly looking at land purchases and looking at new construction area, looking at inventory levels overall, looks the outlook of a stable to only slightly declining market, particularly given the fact that Q2 was already slightly declining, seems to be somewhat overly optimistic. How would you respond to such a claim? That's my first question. And then secondly, coming back
to Margie, let's take again one question at
a time.
I think it provides more clarity that way. I would say, you have to remember that we have a very I think first of all, we have a very good team on the ground in China. We have a very broad team on the ground in China. We follow the market very closely there, of course, have a close relation with our customers. Based on everything we see in development in the market in China, this is what we believe at the moment and also when we look at overall real estate investments in the market.
This is our best and most transparent view and what we of course are committed to seek.
Okay. Thank you very much. And then second question, coming back to EMEA, particularly Europe. If I remember correctly, the statement in the Q1 sorry, Q2 report was that Europe overall was flattish to slightly up. And if I remember also correctly, the statement on your own order intake growth in Europe was looking for clear or yes, clearly growing in Europe.
I think those were the words. So if there's a discrepancy, are you gaining market share? And if yes, from whom?
I would say that we had overall a good performance. And did we grow faster in the market? We probably did. We're taking market share. I mean, I don't know from probably that I can't exactly say, but I would say overall, I would say that we had I think the key message and the key kind of takeaway from the quarter is that our performance was very strong on a broad basis including Europe.
And I think that's important and that's why I'm very happy about the how strong the execution we had on a broad
basis. Okay. Thank you very
much. Thank you.
We have one final question from Robert Crettlow of Commerzbank. Go ahead sir.
Good afternoon, ladies and gentlemen. One follow-up on China, if I may. Could you share your view with us on the effect of the stock market drop? It looks like in particular private investors have been hurt. And could there be any spillover effect to developers offering a lower hassle return for their properties they sold?
I think there are better experts to assess the impact of the stock market volatility we've seen in China. I think based the best understanding we have is that if they can keep it more stable at these levels or if the market keeps stays more stable at these levels, the wealth effect should be limited. And in the end, the number of private individuals active in the stock market is not that high. So at least based on the intelligence and understanding we have, so far it has not had a significant impact on either investments in real estate. In fact, investments in real estate are going up at the moment and also consumption seems to be pretty solid.
So you're hearing no complaints in the developers, the real estate developers?
Any significant impacts on our developer customers on this?
Good to know. Thanks.
Thank you.
As we have no further questions at this time, I would now like to hand the call back to the speakers for any additional or concluding remarks. Thank you.
Thank you. We are then ready to conclude the call from today. So thank you everybody for your Thank you.
Thank you.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.