Welcome to KONE's Quarter 3 Results Webcast. Present here in Espoo, Finland today, we have CEO, Henrik Ehrnrooth, CFO, Eriikka Söderström, and Vice President for IR, Karla Lindahl. My name is Katri Saarenheimo. I am IR Director at KONE. As usual, we will have plenty of time for Q&A and discussion later in this call. Let's start with a review of our Q3 financial development as well as market trends by CEO Henrik Ehrnrooth.
Thank you, Katri, and welcome also on my behalf to our Quarter 3 webcast. I must say, it's my pleasure to, again, present a good set of numbers and good development for you. Particularly pleased with our strong growth in orders received, as well as our continued profitable growth and strong cash flow. Let's go into numbers in more detail to review our performance. First of all, if you look at the key numbers for Q3, we can see that orders received, we had a very strong growth. Orders received was close to EUR 1.6 billion, growth of 18.8% compared to last year, and in comparable currencies, 17.4%. If we look at our order book. Our order book reached a new record level of close to EUR 7 billion. Growth in our order book was 24% or 18.6% in comparable currencies.
This means that we have a good situation from here forward. Our sales grew by 8%, EUR 1.88 billion, and in comparable currencies, it was also close to 8% at 7.9%. We had continuously good development in our operating income, and if you remember, compared to last year, when we had an exceptionally good development in our EBIT margin, we are pleased that we reached the same very good level of EBIT margin in the quarter of 14.8%, where EBIT was EUR 277.5 million or 7.8% above last year. We improved our cash flow from a good level last year, and it was EUR 372 million. Our earnings per share was EUR 0.41, up EUR 0.01 compared to prior year.
Here, our EPS grew less than our EBIT because in our net financial items, we had some foreign exchange revaluations, which we can discuss in more detail, that impacted our net financial items, and therefore, our EPS growth was lower than our EBIT growth. If we can look at our performance on a slightly longer basis and look at the performance from January to September. Here we can also see that we have had continuous good performance throughout this year. Orders received has grown at 9.2% or 12.3% in comparable currencies. Here, as I think you remember, our growth in the first quarter was lower because of an exceptionally high comparison point, and then our growth rate has been accelerated in the second and third quarter. Our sales has continued to grow throughout this year. Sales growth of 5.5% or 7.9% in comparable currencies.
Very important, our growth throughout this year has continued to be profitable. EBIT EUR 720 million for the first nine months, growth of 9%, and our EBIT margin in the first nine months has increased from 13.5% to 13.9%. Also good development in our cash flow from the high level last year. I would like to again thank the whole KONE's all employees, our whole team, for a job really well done in what I would say is a very mixed environment. I think our team has again shown that we can perform well in both challenging and in better environments. That is our key numbers. If I go to more details of our orders received, sales, and EBIT. First of all, starting with orders received. As I mentioned, very strong growth, 18.8%.
Here, I think what is the most important point is that orders received grew in all geographic areas, and we grew our orders received in both new equipment as well as modernization. As you know, we don't include maintenance into our orders received. Our growth was particularly strong in the new equipment business. We had a strong growth in the volume business, and then I would say that our growth in our major project business was exceptionally high in the quarter. Good growth in both volume and major project business. If you look at regionally, our strongest growth was in North America, where we had very strong growth. Also we had strong growth in Asia-Pacific, driven by China, Malaysia, and Australia. We had some growth in Europe, Middle East, and Africa due to a very positive development in the Middle East.
Always, I know what interest is the share of China as a percentage of our orders received. Now in the quarter, China was a little bit less than 40% of our total orders received. Our orders growth in China was close to 20%, when the market growth was a little bit over 10%. Continuous strong outperformance compared to the market. Overall, I would say good development in orders received. Also, what I'm pleased with is, we have been able to keep our margins of our orders received at a stable, good level, despite the very heavy price competition that we see in many markets. Again, I think a good development for us in this area. If we turn to sales. Here, we continued our growth of 8%. Our new equipment business continued to grow a little bit over 10% in comparable currencies.
What I'm particularly pleased with is that we now were able to improve our growth in our services businesses. Our maintenance business now grew in the quarter at 6.3% in comparable currencies, so a slight improvement in the growth compared to earlier in the year. Our modernization business grew at 2.9%. If we look at regionally, we continued our strong growth in Asia Pacific. Throughout Asia Pacific. We had some growth in Europe, Middle East, and Africa. If we look at North America, where sales was more stable, here the situation is such that we have improved our orders received over the past year. As you know, our lead time from orders to deliveries is the longest in North America, so we're not quite seeing it in sales yet, but the order book is much stronger.
China's share of sales was now a bit less than 35%, but a strong double-digit growth in China as well. If you look at our operating income, our EBIT. Continued good development from the very good level that we had last year in quarter three. I think I'm very pleased with how our operating income developed. Here, we had a strong development in all businesses in both Asia Pacific as well as North America. If we look at globally, our maintenance business also improved in all geographic areas. I would say continuous good development in EBIT. Currencies were now, in this quarter, more or less neutral. They did not have a big impact.
If you look at raw material prices, we had perhaps a slight positive impact, but we have now had a situation where raw material prices have been at a good level for a longer period of time. We are at a favorable level, but not much improvement at this point. We continue to have some factors that burden our development in our EBIT. Those include heavy investments in process development and IT, but also expansion of our footprint and therefore increase in fixed costs in the key growth markets of the world in Asia Pacific as well as the Middle East. Overall, I would say throughout this year, good profitable growth. If we turn to our sales split. Here we can see that the trends that we have had in the recent past has continued, which is share of new equipment continues to increase.
Our share of new equipment was now 54% compared to 53% a year ago. One thing I'm pleased with here, if we look at our sales split, is that now share of maintenance has stayed stable at about 34% because we have been slightly able to accelerate our growth in maintenance. If you look at sales split by market, here we can see again that the share of Asia Pacific continues to increase, was now 42% up from 39%. Up three percentage points from last year. Here I already addressed North America. Share of North America declined, but here I think the prospects are good given the strength in the order book we have. I think that's about our performance in the third quarter and the first nine months of the year. We can see overall solid continued development. Let me next turn then to our markets.
As usual start with Europe, Middle East, and Africa. Here, market environment in Europe, Middle East, and Africa remain mixed. Here, uncertainty, particularly in Europe, we could see that increased somewhat now in the third quarter. If we start with new equipment markets and Central North Europe, here we saw the market was now rather stable. We can see a big difference in market development within Central and North Europe. We continue to have positive situations where we continue to see growth, such as Germany and a U.K. market that is at a good level. Despite what we all see, some reduction in the overall growth in Germany, we still continue to see good development in the construction market. We continue to have also more challenging situations in Central and North Europe.
In South Europe, demand remained weak across segments, here we see that demand continued to decline in both France as well as in Italy. If you look at Spain, the market is now growing slightly, but from a very low level. Finally, if you look at Middle East and Turkey, here markets and demand continue to grow, so continuous positive development. In the Middle East, particularly Saudi Arabia as well as UAE, developing positively. In Turkey, despite some uncertainty we see in the region, we continue to see a good development given the fundamental need for housing in the market. If you then turn to modernization markets, they declined slightly in Central North Europe and remained depressed in South Europe. Here we can actually see the impact of the current economic environment. In maintenance markets, they grew, although significant variation between countries.
Where we have had a better development in the new equipment market in the past years, we can also now see a better development in maintenance, whereas markets where we have had prolonged weakness in new equipment, we naturally have a more challenging situation. Price competition remains very heavy, particularly in South Europe. Turning to North America, where we continue to have a very positive situation. First start with new equipment markets in U.S. There we continue to see a solid growth driven by positive development in all segments, but in particular in residential and commercial construction. A good development there. The Canadian market, as you know, has been reasonably stable at a good level already for a while. That market remained stable at a good level.
I would say overall, new equipment markets in North America continue to be a good level and developing positively. Here we can also see that when we have now growth in the overall economy, we can also see a good development of the modernization market. Modernization demand continue to grow. Maintenance markets continue to grow, price competition here remains intense. If I still mention price competition in new equipment and modernization, here we can see as the markets have grown, pricing have actually improved somewhat during the year. If we turn to Asia Pacific, where we continue to see a positive development. Let me again here pause a little bit on the China market. I know it's something that all of you have a lot of questions on, I thought that I'd address it a little bit more in detail.
First of all, the Chinese market in the third quarter, we saw that it grew at a little bit over 10%. As I mentioned, we grew at close to 20%, very solid and a strong outperformance. We also believe it will grow at about 10% for the full year. What are we seeing then in the Chinese market at the moment? The Chinese market, what we can see and what William Johnson went through, I think in quite detail during our recent capital markets day, is that we can see a clear variation in the development within the Chinese market and even within provinces. We have areas where we continue to have solid, good growth, we have also areas where the situation is much more challenging. One of the features of the market is that we continue to have a tight liquidity situation.
We can see that this continuously impacts the smaller developers, whereas the bigger ones have overall a better situation. With this, how do we then see the overall market develop from here going on? First of all, short term, as I mentioned, we continue to see a continuous solid development throughout this year and a growth of approximately 10% for the full year. If you look more in the medium term, here, we are not expecting any dramatic changes to the overall market. We can all see that there is some uncertainty in the market, and we can see the recent real estate statistics that came out in China actually this morning. Here we can see a continuous solid development in real estate investments at 10%. We can also see that new construction starts turn to a slight growth now in the third quarter of positive 4.7%.
I think where the uncertainty comes from is overall transaction volumes, sales of real estate, which continues to decline a little bit over 12%. When we look at the midterm, we also see now that the government and the central bank have taken actions to make sure that we have a more stable development. These include relaxation of real estate purchase restrictions in the majority of 2nd-tier cities. We can also see that liquidity has been selectively improved in the market. I think one of the fundamental things that was announced at the end of Q3, end of September, by the central bank together with the banking regulator, was that mortgage rules, basically for second-time buyers, were relaxed. The down payments requirements taken down from 60% to 30%, and also overall allowing discounts to the mortgage benchmark rate.
We think that these actions, while they will not have an immediate strong impact on the market, we think that they will ensure that we have a more stable development, that we will not have dramatic changes to the overall market. If we look at Chinese market longer term, here we continue to believe that the longer-term development is favorable. Our view is fully intact there. Driven, as we have discussed many time, by urbanization growth in middle income population, as well as reduction in the average household size. All of these factors are driving a strong demand for housing and therefore for our market. Overall, long-term favorable situation. We look at the market like the Chinese market, we can say, okay, what is important there? How do you continue to perform well?
I think what is very important in a market like that is to have a very detailed understanding of market developments and customer needs. I think this is one of our strengths, how on a granular level we can understand the market. This we can see through the continuous outperformance we have had in China, both in terms of volumes but as well as in terms of pricing. When we look at pricing, we see that the price competition continues to be tough in China. The trend we have seen throughout the year has been pretty similar throughout the year. We have clearly outperformed the market in this respect. When we look forward, we may have to slightly adjust our pricing to maintain a higher than market growth.
I don't see this as anything significant because of the favorable raw material situation we have, as well as the fact that we continue to improve the price competition of our products. Therefore, I think we have a good and fully confident that we can continue a good profitable growth in the market. This was, again, a little bit more in detail of the Chinese market. Let me turn to other markets in Asia Pacific and first start with India. Here we continue to see a decline in the overall India market. What we have seen since the spring following the elections is that the overall economic confidence has improved in India. We are not quite seeing that coming through in investments as of yet. There's still uncertainty impacting decision making.
Our outlook and view of the India market continues to be very favorable, but we don't quite see the investments coming through as of yet. If we go to Australia, there we continue to see a good development and demand grew. In Southeast Asia, markets grew somewhat. Here again, in Southeast Asia, important to note that we continue to have big variance between the markets. We have some positive situations where markets are growing, such as Malaysia. We have countries that are currently burdened by political uncertainty. Here I would mention Thailand as one example. I would say the prospects of Southeast Asian markets, we continue to see them as positive. Modernization markets. As you know, the most important modernization market in Asia Pacific is Australia, and there we continue to see some growth.
Finally, maintenance markets, they continue to grow well. We continue to see strong market growth in China, and also we continue to see good growth throughout Asia Pacific. This is naturally a positive and important thing for us. Maintenance markets continue to develop well. That's about our markets. Let me go to how we continue to develop our competitiveness. As you know, we launched our development programs in the first quarter this year, and we have been progressing very actively with this. I would say our overall progress with our development programs has been good. I'm actually quite pleased again how we have been able to fundamentally continue to develop our competitiveness throughout this year. Let me take one example of one of our development programs, how we have developed.
The first one, which we call first in customer loyalty, where our objective is to have the most loyal customers in the industry. During the third quarter, we completed our customer loyalty survey, and here we had an improvement again in our customer loyalty. The positive thing is that we improved our customer loyalty in all geographic areas. I think what is interesting to see here is that if you look at what are the key reasons cited by our customers why they choose KONE over the competition, there are few things that come out more often than not. They are our technological advantage over our competition as well as KONE's people, that we are a company who deliver on our promises.
This is a very important factor in an industry like ours, which is both a services and a people intensive industry. I think this is something we continue to develop, but we are quite pleased over that we are seen as a company who delivers. How we then continue to develop our customer loyalty. First of all, we have started a more systematic and continuous feedback collection from our customers, not only annual customer loyalty surveys. These are, for example, getting instant feedback at the end of a service or an installation to be able to constantly understand better what is important to our customers, how they see that we are performing, and be able to give feedback to our teams on their performance. Then also we have improved our use of what we call field communication tools.
These are tools where we better inform our customers and end users of upcoming services or modernizations so they have a better understanding of what we are doing, when, and what the reasons are. I believe that these are very important for customer loyalty and end user satisfaction in a service business. Continuous, I think, quite concrete and important actions here. Finally, let's go to the market outlook. First of all, new equipment markets. If we look at markets in Asia Pacific, we expect them to grow clearly. As I mentioned, we expect China to grow at approximately 10% in 2014. Markets in Europe, Middle East, and Africa, new equipment markets expected to grow slightly. In Central and North Europe, they are to be stable or grow slightly and a further decline in Southern Europe. Continuous good development in the Middle East.
North America, we continue to believe that new equipment markets will continue to grow. Modernization markets overall is expected to be rather stable or grow slightly, and the maintenance markets to develop rather well in most countries. Again, similar trend to what we have seen where we can see the countries where we have had a better new equipment market, we continue to have good growth and where we have had a more challenging situation in a prolonged way in the new equipment market, more challenging situation, but continued growth in the markets. Finally, our business outlook, which we have specified. We have narrowed our range as we have only one quarter to go. We now expect our sales to grow between 6%-8% in comparable currencies for the full year. Previously, our outlook was between 6%-9%.
You can see we have specified the range. In operating income and EBIT, we now expect our full year EBIT to be EUR 1.015 billion-EUR 1.045 billion. Previously, our expectation was that it would be between EUR 1 billion and EUR 1.050 billion, assuming that translation exchange rates don't materially move from the beginning of the year. Again, here you can see that we have lifted bottom end a little more and also tightened a little bit from the upper end. We have narrowed our range. Overall, I think we are quite pleased again with our progress and how we continue to develop our competitiveness in the overall market. I think with this, we have now good time for your questions.
Thank you. We are ready to take the questions from those present on the line. For this, I'm handing over to the operator. Go ahead, please.
Ladies and gentlemen, if you would like to ask a question on the phone lines, please press star and one on your telephone keypad. The first question came from the line of Andre Kukhnin from Credit Suisse. Please ask your question.
Good afternoon. Yes, it's Andre from Credit Suisse. A couple of questions, please. Firstly, just taking a hypothetical scenario of, say, a flat market in China next year. How much would you expect to outgrow that if at all, given sort of the ongoing rollout plans, et cetera? If we can start with that, please.
First of all, as you know, we will give our outlook for the Chinese market beginning of next year, so we're not commenting on a growth rate for next year. I think our ambition, as you know, is to continuously grow faster than the market. Whether they are growing markets or more challenging in key markets, our objective will be to continue growing faster than the market. I don't think we have set a specific rate at how much, but that is definitely our objective continuously.
Got it. Yeah, I certainly didn't mean to imply sort of to tease out guidance, just more of a scenario. Then maybe somewhat linked to that, just what you said on pricing, saying that you may potentially accept lowering prices slightly. That's mainly sort of passing through a raw material deflation. Can I just confirm firstly that, would you be willing to accept a lower profit margin in the orders taken in order to continue to outgrow the market?
Well, first of all, I think let's remember that during this year and last year, I think we have clearly outperformed the market both in terms of volume as in terms of price. I think that's first, and that tells much about our competitiveness. We have been able to keep our margins of our orders received at a good level. I think what I said is I wouldn't take this as any big thing because we continuously want to improve our product competitiveness, which we're doing. I say we also continue to see a favorable raw material situation. I think the question is of how much can we swim against the tide for a longer period of time, is the question here. Again, I wouldn't take this as any big thing, but just a realization that price competition continues to be there.
We have developed very positively, our objective is to continue to outperform the market, both in volume and in price.
Sure. No, I certainly appreciate that you've taken a lot of share and certainly share of the profit pool. Just a very final one. Was there anything unusual in the order development in Q3? Was there any sort of catch up of the projects that got possibly delayed before that came through or anything else of a lumpy nature in your own order development across the regions in Q3 that can be sort of sustainable or aren't sustainable that we should be aware of?
First of all, I don't know if you remember, we had a good growth in Q2 as well, so it wasn't much slippage.
What I said earlier is that I think we had a solid broad-based development. We had a strong growth in our volume business, but then also in the major projects we had, I would say, exceptionally strong growth. I think we performed well there. I think the most important thing is that I think we had a very good development across the board. There wasn't any single huge orders. It was just a lot of orders where we were successful.
Great. If I may, just a final follow-up, if you could remind us, how big are the project orders now for you of the total order intake?
Major projects?
Major projects, yeah.
They are, and this is very roughly, a third of our order book.
Got it. Thank you very much. Appreciate the answers.
Thank you.
Your next question comes from the line of Guillaume Peigne from UBS. Please ask your question.
It's Guillaume Peigne from UBS. Thank you very much for letting me my questions. I was asking about the guidance. I was wondering that obviously your previous guidance was based on currency rates that have materially depreciated. I was, in a way, expecting KONE to lift the guidance rather than actually cut the guidance at an EBIT level. If my calculations were right, you actually had around EUR 20 million hit on the previous guidance of around EUR 1 billion-EUR 1.05 billion. We saw that actually trimmed down on the upper end. I guess the lower end looks consistent to me, but for some reason, I cannot understand why the upper end didn't follow the lower end in your new updated guidance. I was wondering what's going on there and if there's anything that is different.
I think, first of all, I think we have tightened our range. I think that's the most important point. I think if you look at it, our sales guidance is now between 6% and 8%. The sales growth that we expect for the final quarter is seasonally slightly lower than we have had so far. I think you have to take into account that last year we saw an acceleration of the growth, particularly in China in the fourth quarter. We have very demanding basis for that. We are not seeing an acceleration in the market there at the moment. I would say that there is nothing special here. I think we are fully within our guidance, and if you calculate this, I think we are saying that we will continue to have a good performance in Q4.
Yeah, thank you. Maybe a follow-up. I back calculated on your new, let's take the midpoint, and I know that it may change as you progress through the quarter, but if I take your revenue guidance, and I put the EBIT guidance all together, your incremental margins deteriorate significantly on Q3, and actually on the first half of 2014. I was wondering why this kind of lower incrementals as we finish the year. Is the same reason that you have tougher comps from last year?
First of all, as I said, we have a tough comp for both Q3, which we're able to exceed by a good margin now and for Q4 last year. We say that we have a range for both of these. We are not implying a specific margin. I think what you can see is that implied based on this is that we'll continue to have a good development in Q4. That's clearly the guidance we're giving.
Thank you very much.
Thank you.
Your next question comes from the line of Jonathan Hanks from Goldman Sachs. Please ask your question.
Hi there. Thanks for taking my question. I'm just wondering if you could give maybe a little bit of color on who you think you're taking market share from in China. I suppose what I'm trying to understand is how much more scope is there for the big Western and Asian players to take share from the local players before maybe they have to take share from each other, if that's not already happening. Thanks.
We usually don't comment on our competitors. I think you can see that we have a positive development. I don't think it's from anyone special that we are taking our market share from. I think, as always, there is a mixed development in the market. Sometimes it's from one player, sometimes for another player. We continue just to focus that we can grow, we can develop our competitiveness such compared to the overall market, that we have a possibility to take market share, and we continue to see it that we have that, not specifically targeting any one player.
Okay. Thank you very much. Very clear.
Your next question comes from the line of Ben Maslin from Bank of America. Please ask your question
Thank you. Hi, Henrik. A couple from me, please. Firstly, in China, obviously orders are very strong. I wonder if you are seeing any slippage in deliveries in any area. I have been surprised this year that given the very good order momentum that you have seen and the shorter lead times that you have in China, that has not translated to a kind of upward revision of your sales guidance. Obviously, you slightly trimmed that today. That is the first question.
I would say, first of all, as you can see from our orders received and from our cash flow, we continue to have a good development, and clearly cash flow like this, we need to have a good contribution from China as well. I would say that is a good overall development. If we look at the smaller developers, there we can see that perhaps on deliveries where you need to commit more money, slightly more sticky. This is not a big thing. Overall, as you can see from our solid double-digit growth in both orders and in sales, that overall the market is developing quite favorably. As you can see from our cash flow, we continue to progress quite well there.
Thank you. On your backlog, it is obviously very high. Is there any way you can give us a sense of what percentage of that is due for delivery next year? The conversion ratio, how that relates to last year. I think you said at the Capital Markets Day that the duration of the backlog is growing. Maybe help us understand what falls into 2015 and what is for delivery beyond that.
I do not think we are going to start giving guidance for next year. I think what we said also, I think it was in Eriikka Söderström's presentation in the Capital Markets Day. We said that the share of our major projects has increased and also the average size of our major projects has increased. That means that those naturally have a longer rotation. Overall, we have a slightly longer rotation for our order book. As North America has grown, their rotation is slower than in, for example, Europe or in Asia. All of these have some impact. I think the important thing is that we have a strong and solid order book right now.
Just a final, more technical one. Just on your financial expenses, income, anything exceptional in there in the quarter? Can you give us some guidance for the full year? I think the last couple of years you've had a revaluation of GiantKONE in Q4 as well. Thank you.
Eriikka, do you want to address that?
In the Q3, what you saw there was related to the weakening of EUR. There we saw the net financial impact being then negative. For the Q4, I wouldn't give any estimate at this point on the valuation or.
As you know, Ben, what we have said is that this option liability will be revalued always at year-end. It was more the currency impact there.
Okay. Perfect. Thank you.
As a reminder, if you would like to ask a question on the phone lines, please press star one on your telephone keypad. The next question comes from the line of Phil Wilson from Redburn. Please ask your question.
Yes, good afternoon, everyone. Thanks for taking the questions. I have two. I'll ask the first one first. At a group level, just to follow up on the leverage question, your headcount rose 5% sequentially, just over 2,000 new employees added. I think you've been growing about 1% sequentially in the first half. What drove this headcount increase? What level of headcount increases should we sort of expect going forward? Perhaps to ask another way, what sort of headcount level do you expect to reach in absolute terms by the end of 2015?
We have not given guidance on this. If you look at our headcount overall, I think where we have had the fastest increase has been in both service and as well as installation teams on the operative side. You know, this is a labor-intensive industry where you need people to install the elevators and to service them. I think it's quite normal this time of the year, you increase a bit as you have a higher backlog and quite active installation time, both now and for next year. I think that's where we have the biggest impact. I would say if you look at our headcount, the growth fluctuates. I would say in some of the weaker markets, we're naturally looking at particular staff headcounts much more actively than in the past, given the more uncertain environment.
Okay, thank you. On China, staying with China, in maintenance. Can you give some commentary on the pace of growth we're seeing in China maintenance at the moment? One of your peers this morning said that service legislation is starting to feed through local governments, lifting up their conversion rates and their maintenance growth. Perhaps if you give some commentary there, that'd be helpful. Thank you.
Our maintenance growth continued to be strong in China. As you know, that is a very high priority area for us. We believe we are the market leader in service in China. We continue to progress that and growth rates have continued to be good.
Are you still seeing that 30% growth rate that you've talked about in the past or has it sort of slowed from that level?
You have to remember that given it's a cumulative business all the time when you get a higher base, growth rate becomes more challenging to have. I would say that we have continued a strong growth rate in the business over a continuously increasing base.
Okay. Just finally on China. On the markets, I noticed that the affordable housing market growth, you say, was stable in the quarter, and it's been declining for the previous three, I think. Are you seeing some sort of improving trends in affordable housing?
I think what we've said over the past quarters is it continues to be an important part of the market. I think what you see, you see some specific programs by the governments in shantytown redevelopments and similar. That's where you have had a little bit more activity. I would say it has not been a growing segment this year. Now more stable, but it continues to be an important part of the market.
Okay. Thank you.
Your next question comes from the line of Antti Suttelin from Danske Bank. Please ask your question.
Yes. I have two questions. First of all, looking at the, let's call it relative weakness of your report, i.e., EBIT margin, it seems to me that for a big time or a long time, your sales grew somewhat slower than what your number of employees increased. I think your number of employees went up by 10%, sales grew by 8%. Why was this? This is very different from the past 10 years. Secondly, when you say that you'd expect no dramatic changes in the Chinese market, does that mean that you expect stable market, or what does that statement mean? Thank you.
Sorry, let's take the first question first. If I understand it right, you were challenging the development of our EBIT margin in the quarter. First of all, as I've already mentioned, that this development or headcount that fluctuates from quarter to quarter, very much depends on the installation activity and service activity, because that's where we usually need people and also depends a little bit in which parts of the world installations are growing, how much we're using subcontracting versus own. I wouldn't read much into this. This is a kind of fluctuation that doesn't go exactly with sales because our people are delivering on our work in progress, not necessarily just on final sales. I think when you look at our EBIT margin, you have to remember that what we said last year for Q3, that we had an exceptionally strong improvement in our EBIT margin.
It was a very strong improvement. We're starting from a high base, and I think we're in a good situation and we're able to grow profitably from that good basis.
Yeah. It's just that if I look at KONE over the past 10 years, it has been that every year, KONE sales grows faster than number of employees. Now if I take the average for the first nine months, your average number of employees is up by 10%, and your sales for the nine months is up by 8%. This is quite a bit different from the past. That's why I'm asking.
You also have to remember, we had a few things that we consolidated our Saudi Arabian joint venture in beginning of the year, which brought a fair bit of headcount. If you remember, that actually is slowing down our sales, because previously, when Saudi Arabia was acting as a distributor for us, we recognized revenue at an earlier stage. Now we do it only at completion. There are a few things like this. Again, I would say that this depends on very much which parts of the world are growing and whether one uses own installation people there or subcontracted and how we're developing our service business.
Okay. Thank you. Really the second question is, what you actually mean when you say that you expect no dramatic changes in the Chinese market in the midterm?
I would say to the overall market.
Does that mean that you expect a stable market, or do you expect no change in the growth rate of the market?
We will give our detailed guidance beginning of the year. I'm talking about the overall volume of the market.
Okay. That's clear. Thank you.
Thank you.
Your next question coming from the line of Martin Flueckiger from Kepler Cheuvreux. Please ask your question.
Yes, good afternoon, gentlemen, and ladies, of course. Martin Flueckiger from Kepler Cheuvreux. Three questions, please. Firstly, I'd like to talk a little bit more about Central and Northern Europe, and particularly here the outlook going forward for the new equipment business. If I remember correctly, you have pointed towards growth in this region in Q2, whereas the region is now stable. I was wondering whether you could provide a little bit of insight into the expected growth dynamics going forward for Central and Northern Europe. The second question is acquisitions-
Let's take one question at a time.
Sure.
We keep more clarity here. Yes, as we said that we saw in the quarter, we saw a slight increase in the uncertainty in the European market. I think that goes to some of the Central North European markets as well. In Central North Europe, we continue to see a positive development, as I said, in Germany, and the U.K. also is at good level. You have many challenging markets, where actually trend has reversed and been more negative. Finland is one of them. I think Netherlands also a little bit more uncertain than it was previously. I think it's not a dramatic change, but a slight increase in the uncertainty. I think this is naturally linked to the overall economic uncertainty that we're seeing in Europe at the moment.
Nothing dramatic and development will then depend on overall confidence and how much investments both on the investment side people want to put through as well as consumers buying apartment. Naturally you need consumer confidence for that. This is what we're talking about.
Second question is related to your M&A strategy. If I haven't missed anything, KONE has been rather quiet on the acquisition front this year, at least compared with other years. Could you update us whether there has changed anything in the mindset of KONE's management with respect to acquisitions in terms of timing and in terms of targets?
I would say, first of all, we continue to have high activity here. It's a seasonal thing, now there's just been less targets available. If you remember in 2013, we had a very active year, we were able to progress lots of those. I think it's one of these things that we had a very good progress then, now building up again a pipeline. We continue to have high activity there, something we definitely continue to look at and are interested in. It's just to buy something, you need to have someone who's willing to sell, and you need to agree a reasonable price for both parties. I think these are some of the reasons.
Okay. Understood. Thank you so much. Thirdly, I realize you would like to wait until February to talk about guidance, just to understand the dynamics a little bit better here and to try and assess whether a margin improvement is possible going forward into 2015. You've talked about pricing. You've also talked about raw material price environment, which is rather favorable if I understood you correctly. You've also talked about the development programs. What are we to make of all this? Are margins trending up or are they trending flat or down? Just as a qualitative picture.
We are not giving any guidance, usually we don't guide our margins either, because it will depends on very much also the business mix. It doesn't make sense for us to manage our business mix. Our objective is to grow profitably in each of our businesses. Depends on how that goes, it will also then have an impact on margin. I think what we are committed to do is continuously strengthen our competitiveness both our process and our people, our products, and improve our pricing and sales competencies so we can find a good opportunity in markets. Depends on naturally what the markets are, how they develop. I think we have a ambition to grow fast in our markets and have that growth to be profitable.
I think that's what we can say at the moment, then let's see what business mix is and so forth going forward.
Thank you very much.
Thank you.
Your next question comes from the line of Damian Klein from Commerzbank. Please ask your question.
Hello there, thank you very much for taking my question. The first one relates to your China order intake that is on a unit basis. Could you provide me with an indication whether this is materially different from the local currency growth? If yes, could you provide an indication of whether it's higher or lower and whether this is driven by mix and price?
Say that our growth in China was close to 20%, and that's on a unit basis. Our growth in monetary value locally was very similar, just slightly higher. Always mix can impact that. I would say pretty similar growth both in volumes and in monetary value.
Okay. Thank you. With regards to the GiantKONE acquisition, have you completed the retrieval of all synergies already, or is there something still in due process?
I think as we have said that for GiantKONE, we want to keep own distribution, own brand, and own products to have a clear differentiation between KONE and GiantKONE. What we are doing is to make sure that when it comes to, for example, sourcing and back office processes, those we can do in a more harmonized way. I think we have extracted some good benefits already in the first years from here, but I think we still continue to have some work to be done. I think we have made good progress on the sourcing side. When it comes to processes and systems, those always take a while to implement, but I think we're making good progress there as well.
Has GiantKONE in the past grown disproportionately strong to the KONE?
We look at China as one business. Therefore, at some points we have had GiantKONE growing faster, at some points KONE growing faster, but they fluctuate. I think this is really one of our key advantages that we have that depends very much on how the market is developing, how we can then drive these two brands and make sure we maintain a good pricing, even in a difficult environment, how we're steering these two brands. I think that's been one of our success factors as well.
Okay. Thank you. Finally, on the group, third quarter, there's been a sequential improvement in margins. What explains the seasonality here?
That you see every year that just we have second half of the year is more active in both new equipment and modernization deliveries. Therefore, you have a higher margin the second half than the first half. If you look at the history, that's very similar to what we've seen.
Okay. Thank you.
Your next question is a follow-up from Guillaume Peigne from UBS. Please ask your question.
Hi, it's Guillaume Peigne again from UBS. I wanted just to ask a follow-up on your organic growth Asia Pacific. Sorry if this is somewhere in your release, but I didn't check the difference between organic and your growth in Asia Pacific. I guess the growth is 16%. I'm just checking for the organic growth in revenues.
In Asia Pacific, all of our growth is organic.
All of it? The same goes for the U.S., right? It's declining 1%, it should be around the same, right?
Yeah. We have not had any major acquisitions over the past years. In Asia Pacific, the latest big acquisition was GiantKONE back in 2011.
Sorry, I was asking about the currency benefit.
Currency. Okay. Currency.
Yeah.
If you look at currency impact, it is both in historic and comparable. It is pretty similar now in this quarter.
Okay. Last but not least, in a way, I am a bit surprised that North America is still weak in revenues. Is this just timing of deliveries?
If you look at our development in North America. First, we have to remember that there we have the longest order to delivery lead time. In late 2012, first half of 2013, our focus was very much on improving our competitiveness, improving our pricing competencies, because we felt that the whole market and margins had gone to too low level. We were focused on lifting margins. We were successful in doing that, and then what we did middle of last year, we started then to accelerate our growth. Now we have been able to achieve growth with much better margins. It was one of the things that first you need to get your pricing to the right level, and then you can push the accelerator. It was from the second half of last year, we started to grow our orders received faster.
You have to remember that in U.S., lead times are easily 18 to 24 months.
Thank you. My last question, actually. When it comes to China, can you give us the revenue split nine months into the year, revenue split in between equipment and service?
I would say that we still have said that services represents slightly less than 10%. If I look at this year, we have had slightly some of faster growth now in services than in new equipment.
Okay, thank you. It's less than 10% of the overall China, right?
You have to remember, we have had a good solid double-digit growth in all our businesses.
Yeah.
It is not a huge difference.
Very clear. Thank you.
Your next question comes from the line of Austin Earl from Marshall Wace. Please ask your question.
Hi, good afternoon. I have a couple of questions, both related to the guidance. Regarding the sales growth, the top end of the range coming down from 9% to 8%, is that just an issue of you fine-tuning the timing of conversion from orders into sales? Orders have actually accelerated during the year, so I would be surprised if that is what has caused it.
I would say that there's nothing. Seasonally, you have to remember, a quarter is quite a short period of time. We have a very high basis because sales re-accelerated towards the end of last year, many Asia Pacific markets. We don't see that acceleration now. It's a quarterly thing, timing, nothing dramatic, I would say.
Is that because your orders have not been as good as expected? I don't quite understand why that would have changed since three months ago.
I would say that we just have tightened our range, nothing more specific than that.
Okay. Equally, still sticking on the idea of the guidance and the top end, this time in terms of the EBIT, the small lowering. When was the last time that KONE actually lowered the top end of its guidance range?
I can't remember now. We have specified our guidance from both ends in the past as well. I think, again, you have to remember that we now adjusted EUR 15 million from the bottom end of our range and then EUR 5 million from the top end. Throughout this year, we have lifted the bottom end of our range. I would say that we have all the time slightly improved our guidance. I don't think it's anything more dramatic to this.
Okay, that's great. Thank you very much for your answers.
Thank you.
Your next question is a follow-up from Andre Kukhnin from Credit Suisse. Please ask your question.
Yes, thanks for taking the follow-up. It's just a broader sort of question in terms of, we seem to be hitting pretty low troughs in Europe and U.S. recovery kind of has just barely started. Isn't this the time to really start to step up on the M&A effort in this space? If there is any of that spare capacity on maintenance that are sort of chasing the same install base for now several years, wouldn't it be time to really try to take some of that out? Is this something that you're thinking of, or is Europe trough just too hard to call still?
I would say that the answer to your question is yes, in terms of wanting to have a higher activity. M&A, as I said, you need to have a willing seller and you need to have a willing buyer, and you need to have a price that matches in between. I think we continue to have high activity and high ambitions there. Definitely we want to find more acquisitions both in Europe and in North America. They are all good synergistic transactions on a local basis. As you know, we can do quite a few of those because they tend to be quite local in nature. There are also more medium-sized companies that could be of interest.
The answer is yes, we have, but also, I think we have a good track record in being disciplined in the price we pay, and that we will continue doing as well.
Right. In terms of the pipeline, are you seeing any changes that just has been basically lack of candidates, and then the list has just been not long enough to generate sufficient hit ratio? Has that been changing at all? Has it been building up or still thinning out?
Well, as I said earlier, I think we were able to empty our pipeline pretty well towards the second half of last year if you look at the number of transactions we did.
I would say we have a healthy pipeline. I think that's what we can say.
Okay. Got it. Thank you very much.
Thank you.
Your next question comes from Glen Liddy from J.P. Morgan. Please ask your question.
Good afternoon. I know you won't tell us the duration of your portfolio of your order backlog or how much is delivered next year. Could you give us an indication how much it has changed over the last three or five years, particularly in China? Is the duration of the order backlog getting longer or not?
We have always separated by major projects and volume business. Our volume business has continued to develop positively. As I mentioned, not only China, but if we look at globally, share of major projects have increased and also the average size of our major projects have increased, which means that they are longer term in nature.
Okay. How much is the average size then in somewhere like China increased in percentage terms?
I can't say on top of my head how much they would have increased. I think the key thing is that we continue to see that our order book is moving forward. I think that is the most important thing.
Sure. When we're trying to get a grasp of how your revenue progresses, if you're taking on substantially larger projects that might be spread over three or five years, compared with three years ago where they might have been spread over one or two years, then that has a significant impact on what the revenue progression might be, even though your order backlog is at a record level.
Indeed. I understand. I think what we went through in the capital market or are going through in the capital markets there in this guidance, I think that's quite good transparency already.
Right. In principle, the duration of the portfolio is getting longer if for no other reason you're taking on larger and larger project over time.
I would say that, as I mentioned, there are few specific reasons to this longer duration. One is more major projects. Secondly, increased share of North America, where rotation is slower. Also, you have to remember that we consolidated KONE Areeco beginning of the year. If you remember in the first quarter, we talked quite a lot about this, which means that previously when we were in a minority in Saudi Arabia, we delivered to our joint venture partner there as a distributor. We recognized revenue at the time of equipment delivery. Now we recognize it when we complete the project. All of these factors are contributing, none of them being a huge one itself, but there are several different factors impacting, but nothing dramatic.
When we look at our volume business in various parts of the world, I think we can see that we continue to progress at more or similar rates to what we have had in the past. Of course, we always have a little bit fluctuation depending on mix and so forth, but no dramatic changes. You have had these three that I mentioned a little bit changing the structure over the past years.
Okay. Do you think it will continue to move in that direction going forward over the next few years? As in big projects become a bigger part of the business?
Let's see how successful we are. I think we don't give guidance in orders received, but it's clear that we continue to see a lot of good activity going forward in the major project markets. Of course, it depends on how successful we are in booking those orders.
Sure. Okay. Thank you very much.
Thank you.
The next question comes from the line of Tomi Railo from SEB. Please ask your question.
Yes, good afternoon. Just one question in terms of orders received. If you could comment on the mix there from Asia-Pacific, EMEA, and North America. I know that you comment the China share just below 40%, but if you could comment on wider geographical regions, please.
As you know, we don't break down our orders received. I think what I can repeat what I said earlier is that the fastest growth was in North America. We also had strong growth in Asia-Pacific overall and some growth in Europe, Middle East, and Africa. I think that's as much of how we can open here.
Tomi from the line.
Mr. Railo, does that answer your question?
Yes. Thank you. Although it's difficult to judge because we don't have a comparison from last year. Thank you.
Thank you.
There are no further questions from the phone lines.
Okay.
Okay, thank you very much. In this case, we are ready to conclude the call today. We would like to thank you for your participation and wish you a very good rest of the day.