Welcome to KONE's Quarter 3 Results Webcast. Present here in Espoo Finland today, we have CEO, Henrik Ahnruz CFO, Erika Soderstrom and Vice President for IR, Carla Lindahl. My name is Kaffir Sarenheimo. I am IR Director at KONE. As usual, we will have plenty of time for Q and A and discussion later in this call.
But let's start with a review of our Q3 financial development as well as market trends by CEO, Hendrik Andrzej.
Okay. Thank you, Katri, and welcome also on my behalf to our quarter 3 webcast. And 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. But let's go into numbers in more detail to review our performance.
So first of all, if you look at the key numbers for Q3, we can see that orders received we had very strong growth. Orders received was close to €1,600,000,000 growth of 18.8% compared to last year and in comparable currencies 17.4%. Also, if we look at our order book, our order book reached a new record level of close to €7,000,000,000 Growth in our order book was 24% or 18.6% in comparable currencies. So this means that we have a good situation from here forward. Our sales grew by 8%, €1,880,000,000 and in comparable currencies it was also close to 8% to 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 $277,500,000 or 7.8 percent above last year. Also, we improved our cash flow from a good level last year and it was €372,000,000 Our earnings per share was €0.41 up €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. But if we can look at our performance on a slightly longer basis and look at the performance from January to September, here you 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 Q1 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.
But very important, our growth throughout this year has continued to be profitable. EBIT $720,000,000 for the 1st 9 months, growth of 9% and our EBIT margin in the 1st 9 months has increased from 13.5% to 13.9% and also good development in our cash flow from the high level last year. I would like to again thank the whole Connex all employees, our whole team for a job really well done in what I would say is a very mixed environment. So I think our team has again shown that we can perform well in both challenging and in better environments. So that is our key numbers.
If I then go to more details of our orders received, sales and EBIT. So 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, but 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. But also we had strong growth in Asia Pacific driven by China, Malaysia and Australia. And 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. And now in the quarter, China was a little bit less than 40% of our total orders received. Our orders received growth in China was close to 20% when the market growth was a little bit over 10%, so continuous strong outperformance compared to the market. So overall, I would say good development in order to see it. 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.
So again, I think a good development for us in this area. If we then turn to sales. Here, we continued our growth, 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.
So our maintenance business now grew in the quarter at 6.3% in comparable currencies, a slight improvement in the growth compared to earlier in the year. And 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. And if we look at then North America where sales was more stable, here the situation is such that we have improved our orders received over the past year.
But as you know, our lead time from orders to deliveries is the longest in North America. So we're not quite seeing any sales yet, but 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. And then if you look at our operating income, our EBIT, continued good development from the very good level that we had last year in quarter 3. So I think we're very pleased with how our operating income develops.
Here we had a strong development in all businesses in both Asia Pacific as well as North America. And then if we look at globally, our maintenance business also improved in all geographic areas. So I would say continuous good development in EBIT. Currencies were now in this quarter more or less neutral. Did not have a big impact.
And 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. So we are at 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 increasing fixed costs in the key growth markets of the world in Asia Pacific as well as the Middle East. But overall, I would say throughout this year good profitable growth.
If we then 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 by 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 3 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 Q3 and the 1st 9 months of the year. So we can see overall solid continued development. And let me next turn then to our markets.
And as usual, start with Europe, Middle East and Africa. Here market environment in Europe, Middle East and Africa remain mixed. And here, uncertainty, particularly in Europe, we could see that increase somewhat now in the Q3. Then 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.
But then we continue to have also more challenging situations in Central and North Europe. In South Europe, demand remained weak across segments. And 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. And then 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 in Saudi Arabia as well as UAE, developing positively. And 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 we then turn to modernization markets, they declined slightly in Central and North Europe and remained repressed in South Europe. So here we can actually see the impact of the current economic environment.
In maintenance markets, they grew, although significant variation between countries. So 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. So then turning to North America, where we continue to have a very positive situation. 1st, start with new equipment markets in United States.
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. So that market remained stable at a good level. So I would say overall, new equipment markets in North America continue to be a good level and developing positive.
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. And monetization demand continue to grow. Maintenance markets continue to grow, but price competition here remains intense. You will 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.
And then if we turn to Asia Pacific, where we continue to see a positive development. And 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, so I thought, but I'll address it a little bit more in detail. So first of all, the Chinese market in the Q3, we saw that it grew at a little bit over 10%. And as I mentioned, we grew at close to 20%, so very solid and strong outperformance.
We also believe that it will grow at about 10% for the full year. So what are we seeing then in the Chinese market at the moment? So 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. So we have areas where we continue to have solid good growth and 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 more the smaller developers whereas the bigger ones have overall a better situation. So with this, how do we then see the overall market develop from here going on? So first of all, short term, as I mentioned, we continue to see a continuous solid development throughout this year and 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 Q3 of positive 4.7%. So 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. And I think one of the fundamental things that was announced at the end of Q3, end of September together by the Central Bank, together with the banking regulator was that mortgage rules, liquid for 2nd time buyers, were relaxed, the down payments requirements taken down from 60% to 30% and also overall allowing discounts to the mortgage benchmark rate. So 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. Then if we look at Chinese market longer term, here we continue to believe that the longer term development is favorable. So our view is fully intact there, driven, as we have discussed many times, by urbanization, growth in middle income population, as well as reduction in the average household size.
So all of these factors are driving a strong demand for housing and therefore for our market. The overall long term favorable situation. So we look at the market like the Chinese market, we can say, okay, what is important there? How do you continue to perform well? And I think what is very important in a market like that is to have a very detailed understanding of market developments and customer needs.
And I think this is one of our strengths, how granular level we can understand the market. And as 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. So when we look at pricing, we can 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, But 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. So therefore, I think we have a good and fully confident that we can continue a good profitable growth in the market. So this was again a little bit more in detail of the Chinese market. Let me then turn to other markets in Asia Pacific and first start with India. Here, we continue to see a decline in the overall Indian market.
What we have seen since the spring following the elections is that the overall economic confidence has improved in India, but we are not quite seeing that coming through in investments as of yet. So there's still uncertainty impacting decision making. Our outlook and view of the Indian market continues to be very favorable, but we don't quite see the investments coming through as of yet. Then if we go to Australia, there we continue to see good development and demand grew. And in Southeast Asia, markets grew somewhat.
Here again in Southeast Asia, important to note that we continue to have big variance between the markets. So we have some positive situations where markets are growing, such as Malaysia. But then we have countries that are currently burdened by political uncertainty. And here, I would mention Thailand as one example. But I would say the prospects of Southeast Asian markets, we continue to see them as positive.
The modernization markets, as you know, the most important modernization market in Asia Pacific is Australia and there we continue to see some growth. And then finally, maintenance markets, they continue to grow well. So we continue to see strong market growth in China and also we continue to see good growth throughout Asia Pacific. So this is naturally a positive and important thing for us. Maintenance markets continue to develop well.
So that's about our markets. Let me then go to how we continue to develop our competitiveness. And as you know, we launched our development programs in the Q1 this year and we have been progressing very actively with this. And I would say our overall progress with our development programs has been good. So I'm actually quite pleased again how we have been able to fundamentally continue to develop our competitiveness throughout this year.
So let me take one example of one of our development programs how we have developed. And the first one, which we call first in customer loyalty, where our objective is to have the most loyal customers in the industry. So during the Q3, we completed our customer loyalty survey. And here, we had an improvement again in our customer loyalty. And the positive thing is that we improved our customer loyalty in all geographic areas.
And 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 and they are our technological advantage of our competition as well as honest people that we are a company who deliver on our promises. So I think this is a very important factor in an industry like ours, which is quality 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. So how we then continue to develop our customer loyalty? Well, first of all, we have started a more systematic and continuous feedback collection from our customers, not only annual customer loyalty surveys.
And these are 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. And then also we have improved our use of what we call field communication tools. And these are tools where we better inform our customers and end users of upcoming services or modernizations, but have a better understanding of what we're doing when and what the reasons are. And I believe that these are very important for customer loyalty and end user satisfaction in a service business. So continues, I think, quite concrete and important actions here.
And then finally, let's go to the market outlook. First of all, new equipment markets. And then if we look at markets in Asia Pacific, we expect them to grow clearly. And 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, it could be stable or grow slightly and a further decline in Southern Europe, but then 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. But 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 markets, more challenging situation, but continued growth in the markets.
And then finally, our business outlook, which we have specified. So we have narrowed our range as we have only 1 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.
And in operating income and EBIT, we now expect our full year EBIT to be €1,015,000,000 to €1,045,000,000 previously our expectation was that it would be between €1,000,000,000 and €1,050,000,000 assuming that translation exchange rates don't materially move from the beginning of the year. So again here you can see that we have lifted bottom end a little bit more and also tightened a little bit from the upper end. So we have narrowed our range. So overall, I think we're quite pleased again with our progress and how we continue to develop our competitiveness in the overall market. So I think with this, we have now good time for your questions.
Thank you. And we are ready to take the questions from those present on the line. And for this, I'm handing over to the operator. Go ahead please.
The first question comes 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 etcetera? So if you 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. And 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. Yes, I certainly didn't mean to imply sort of to tease out guidance, just more of a scenario. And then maybe somewhat linked to that. Just what you said on pricing saying that you may potentially accept lowering prices slightly, but that's mainly sort of passing through 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. So I think that's first and that tells much about our competitiveness. In that so 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. And I say we also continue to see a favorable raw material situation.
I think the question is that how much can we swim against the tide for a longer period of time is the question here. So again, I wouldn't make take this as any big thing, but just a realization that the price competition continues to be there. We have developed very positively and our objective is to continue to outperform the market both in volume and in price.
Sure, sure. No, I certainly appreciate that you've taken a lot of share and certainly share of the profitable. And 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 aren't sustainable that we should be aware of?
Well, 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. But what I said earlier is that I think we had a solid broad based development as we had a strong growth in our volume business, but then also major projects we had I would say, exceptionally strong growth. So I think we performed well there. But 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 final follow-up. How big if you could remind us how big are the project orders now for you of the total order intake?
Major projects.
Major projects, yes.
So they are and this is very, 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 Guilpierre from UBS. Please ask your question.
It's Guilherme Openigne from UBS. Thank you very much for opening my questions. I was asking about the guidance. And I was wondering that obviously your previous guidance was based on currency rates that are materially or that have materially depreciated. So I was in a way expecting KONE to lift the guidance rather than actually cut the guidance at an EBIT level.
And if my calculations were right, you actually had around €20,000,000 hit on the previous guidance of around €1,000,000,000 to 1,000,000,000 dollars we saw that actually trim down on the upper end. I guess the lower end was 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. So 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. But I think if you look at it our sales guidance is now between 6% 8%. So 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 4th quarter.
So we have a very demanding basis for that. We are not seeing an acceleration in the market there at the moment. So 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.
Yes. Thank you. Maybe a follow-up. But then I back calculated on your new let's say, 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 altogether, your incremental margins deteriorate significantly on Q3 and actually on the first half of twenty fourteen.
So 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?
So first of all, as you said, we have a tough comp for both Q3, which we are able to exceed by 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 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. And I suppose what I'm trying to understand is how much more escape 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 are we have a positive development. I don't think it's from anything 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 then we continue to see 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 Maslamps, Bank of America. Please ask your question.
Yes. Thank you. Hi, Henrik. A couple for me please. Firstly, just in China, just one obviously, orders are very strong.
I was wondering if you're seeing any slippage in deliveries in any area. Been surprised this year that given the very good order momentum that you've seen and the shorter lead times that you have China that that's not translated to a kind of upward revision of your sales guidance? And obviously, you slightly trim that to those. So that's the first question.
Okay. So I would say, 1st of all, as you can see from our orders received and from our cash flow, we continue to have a good development. Clearly cash flow like this, we need to have a good contribution from China as well. So I would say that a good overall development. If we then look at the smaller developers, there we can see that perhaps on deliveries where you need to commit more money, slightly more sticky.
But this is not a big thing. So 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. And as you can see from our cash flow, we continue to progress quite well there.
Thank you. And then on your backlog, it's 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?
Well, I don't think we're going to start giving guidance for next year. I think what we said also, I think it was in Erika Sertasen'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. So that means that those natural have a longer rotation. So overall, we have a slightly longer rotation for our order book.
Also as North America has grown, their rotation is slower than in for example Europe or in Asia. So all of this have some impact. I think the important thing is that we have a strong and solid order book right now.
And just a final more technical one. Just on your financial expenses income, anything exceptional in there in the quarter? And can you give us some guidance for the full year? Because I think the last couple of years you've had a revaluation of Giant in Q4 as well. Thank you.
Henrika, do you want to address that?
Well, in the Q3, what you saw there was related to the weakening of euro and there we saw net financial impact being then negative and for the Q4. So I wouldn't give any estimate at this point on the valuation.
Well, as you know, Ben, what we have said is that this option liability, we revalued always at year end. Now it was more the currency impact there. Okay.
Your next question comes from the line of Phil Wilson from Redburn. Please ask your question.
Yes. Good afternoon. Thanks for taking the questions. I have to 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. And I think you've been growing about 1% sequentially in the first half. What drove this headcount increase? And what level of headcount increases should we sort of expect going forward? Or perhaps start another way?
What sort of headcount level do you expect to reach in absolute turns by the end of 2015?
So 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. As you know, this is a labor intensive industry where you need people to install the elevators and to service them. So 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. So I think that's where we have the biggest impact.
I would say if you look at our headcount, it does the growth fluctuates. I would say in some of the weaker markets, we're naturally looking at particularly start headcount much more actively than in the past given the more uncertain environment.
Okay. Thank you. And 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. So perhaps if you could give some commentary there that would be helpful.
Thank you.
So our maintenance growth continued to be strong in China. So we as you know that is a very high priority area for us. We are we believe we are the market leader in service in China. We continue to progress that and growth rates have been continue 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. So I would say that we have continued a strong growth rate in the business over a continuously increasing base.
Okay. And just finally on China on the markets. I noticed that the affordable housing market growth you said was stable in the quarter and it's been declining to the previous 3 I think. Are you seeing some sort of improving trends in affordable housing?
I think what we said over the past quarter 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. So that's where we have had a little bit more activity. I would say it has not been a growing segment this year, now more stable, but it's continuously been an important part of the market.
Okay. Thank you.
Your next question comes from the line of Antti Sifelen from Danske Bank. Please ask your question.
Yes. Hi. Two questions. First of all, I mean, looking at the kind of 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? Because this is very different from the past 10 years. And then secondly, when you say that you 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, this as I've already mentioned that this development or headcount that fluctuates from quarter to quarter and 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. So 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. Then it was a very strong improvement. And so we're starting from a high base and I think we are in a good situation and we're able to grow profitably
from that
good basis. Yes. I mean, it's just that if I look Kona over the past 10 years, it has been that every year Kona sales grows faster than number of employees. But now if I take the average for the 9 1st 9 months, your average number of employees is up by 10% and your sales for the 9 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 that we had a few things that we consolidated our Saudi Arabian joint venture in the beginning of the year, which brought a fair bit of headcount. But 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. So there are a few things like this. But 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 subcontract it and how we're developing our service business.
Okay. Thank you. And then 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?
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 are we will give our detailed guidance beginning of the year. I would say that we're not talking about the overall volume of the market.
Okay. That's clear. Thank you.
Thank you.
Your next question comes from the line of Martin Flukeiger 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 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 had pointed towards growth in these or in this region in Q2 whereas the region is now stable. So I was wondering whether you could provide a little bit of insight into the expected growth dynamics going forward for Central and Northern Europe. Then the second question is acquisitions.
Let's take one question at a time. Sure. Let me give more clarity here. So yes, as we said that we saw in the quarter, we saw a slight increase in the uncertainty in the European market. And 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. Then but then you have many challenging markets where actually trend has reversed and been more negative. Finland is one of them.
I think Netherlands is also a little bit more uncertain than it was previously. So 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. So nothing dramatic and development will then depend on overall confidence and how much investments both on the investment side people went through as well as consumers buying apartments and naturally you need consumer confidence for that. So this is what we're talking about.
Okay. Very clear. Thank you so much. Then second question is related to your M and A strategy. If I haven't missed anything, it's Kona has been rather quiet on the acquisition front this year at least compared to with other years.
Could you update us whether there has changed anything in the mindset of Kona'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 and now there's just been less targets available. If you remember in 2013, we had a very active year and we were able to progress a lot of those. So 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. So I think these are some of the reasons.
Okay. And so thank you so much. Then thirdly, I realize you would like to wait until February to talk about guidance. But just to understand the dynamics a little bit better here and to try and assess whether margin improvement is possible going forward into 2015. We've talked about or you've talked about pricing.
You've also talked about raw material price environment, which is rather favorable as you've if I understood you correctly. You've also talked about the development programs. So 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're not giving any guidance. And usually we don't guide our margins either because it would depend on very much also the business mix. And it doesn't make sense for us to manage our business mix. Our objective is to grow profitably in each of our businesses. And 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 processing and our people and our products and improve our pricing and sales competencies, so we can find a good opportunity in markets. Then depends on naturally what the markets are, how they develop. So I think we have an 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. And 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 Daimo Klein from Commerzbank. Please ask your question.
Hello, Darren. Thank you very much for taking my question. The first one relates to your China order intake that is on a units basis. Could you provide me with an indication whether this is materially different from the local currency growth? And if yes, could you provide an indication of whether it's higher or lower and whether this is driven by mix and price?
I'd 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, but always mix can impact that. So I would say pretty similar growth both in volumes and in monetary value.
Okay. Thank you. With regards to the Giant Kona acquisition, have you completed the retrieval of all synergies already? Or is this something still in due process?
I think as we have said that for Giant Kone, we want to keep own distribution, own brand and own products to have a clear differentiation between KONE and Giant KONE. What we then are doing is to make sure that when it comes to, 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 1st 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. I think we and 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 Giant Kone in the past grown disproportionately strong to the Kone brand?
We look at China as one business. And therefore, at some points, we have had Giant Kone growing faster, at some points Kone growing faster, but they fluctuate. But 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 2 brands and make sure we maintain a good pricing even in a difficult environment, how we're steering these 2 brands. And I think that's been one of our success factors as well.
Okay. Thank you. Finally on the group, Q3, there has been a sequential improvement in margins. What explains the seasonality here?
So but 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 in 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 Gil Pegg from UBS. Please ask your question.
Hi. It's Gil Pegg here 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.
I mean in Asia Pacific all of our growth is organic.
All of it. And the same goes for the U. S. Right? It's declining 1%.
It should be around the same right?
Yeah. Yeah. So I mean we have not had any major acquisitions over the past years. And in Asia Pacific, the latest big acquisition was Giant's Corner back in 2011.
Sorry, I was asking about the currency benefit
for Okay. Currency. And if you look at currency impact, it is both in historic and comparable, it's pretty similar now in this quarter.
Okay. And then last but not least, in a way, I'm a bit surprised that North America is still weak on revenues. Is this just timing of deliveries?
If you look at our development in North America, so first if we go back first we had to remember that there we have the longest order to deliver a lead time. So in late twenty twelve, first half of twenty thirteen, our focus was very much on improving our competitiveness and 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.
And now we've been able to achieve growth with much better margins. There 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. And you have to remember that in U. S.
Lead times are easily 18 to 24 months.
Thank you. And my last question actually, when it comes to China, can you give us the revenue split 9 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, then we have had slightly some of faster growth now in services than in new equipment.
Okay. Thank you. But it's less than 10% of the overall China, right?
You have to remember we have had good solid double digit growth in all our businesses. So it's not a huge difference.
Very clear. Thank you.
Your next question comes from the line of Austin Earl from Marshall Waste. 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 sort of fine tuning the timing of conversion from orders into sales? Because I mean orders have actually accelerated during the year.
So I would be surprised if that's what's caused it.
I would say that there's nothing we have now seasonally you have to remember quarter is quite a short period of time. We have a very high basis compared because sales we accelerated towards the end of last year many Asia Pacific markets. We don't see that acceleration now. So it's a quarterly thing timing. So nothing dramatic I would say.
But I mean is that because your orders have not been as good as expected? Or so I don't quite understand why that would have changed since 3 months ago?
I would say that we just have tightened our range nothing more specific than that.
Okay. And then equally still sticking on the idea of the guidance and the top end, but 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 all of our but we have specified our guidance from both ends in the past as well. I think again you have to remember that we now adjusted $15,000,000 from the bottom end of our range and then $5,000,000 from the top end. Throughout this year, we have lifted the bottom end of our range. So I would see that we have all the time slightly improved our guidance. I don't think there'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 sort of step up on the M and A effort in the space? And if there is any of that spare capacity on maintenance that are sort of chasing the same installed 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 the answer to your question is yes in terms of wanting to have higher activity. M and 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. So definitely we want to find more acquisitions both in Europe and in North America. They are all good synergistic transactions on a local basis.
And 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. So 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. And in terms of the pipeline, are you seeing any changes? It just has been basically lack of candidates and then the list has just been not long enough to generate sufficient hit ratio? And has that been changing at all? Has it been building up or still thinning out?
Well, 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.
Got it. Thank you very much.
Thank you.
Your next question comes from Glen Liddy from JPMorgan. Please ask your question.
Good afternoon. I know you won't tell us the duration of your portfolio of your order backlog or when how much is delivered next year. But could you give us an indication how much it has changed over the last 3 or 5 years particularly in China? Is the duration of the sort of order backlog getting longer or not?
We have to always separate it by major projects and volume business. And 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 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. But 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 3 or 5 years compared with 3 years ago where they might have been spread over 1 or 2 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. Indeed. I understand. But I think what we went through in the Capital Mark or Rick went through in the Capital Markets Day in this guidance, I think that's quite I think good transparency already.
Right. But 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 there are as I mentioned, there are a few specific reasons to this longer duration. 1 is more major projects. Secondly, increased share of North America where rotation is slower. And then also you have to remember that we consolidated ConAgrico beginning of the year. If you remember in the Q1 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.
So we recognized revenue at the time of equipment delivery. Now we recognize it when we complete the project. So all of these factors are contributing it, none of them being a huge one itself. But there are several different factors impacting, but nothing dramatic. And 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 less similar rates to what we have had in the past.
And of course, we always have a little bit fluctuation depending on mix and so forth, but no dramatic changes. But you have had these 3 that I mentioned a little bit change in the structure over the past years.
Okay. And 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 order to see, but it's clear that we continue to see a lot of good activity going forward in the major project markets. But then of course it depends on how successful we are in booking those orders.
Sure. Okay, Kim. Thank you very much.
Thank you.
And your next question comes from the line of Tommy Rylow 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, but 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.
Mr. Rallo, does that answer your question?
Yes. Thank you. Although it's difficult to judge because we don't have a comparison from last year. But thank you. Thank you.
And there are no further questions from the phone lines.
Okay. Thank you very much. In this case, we are ready to conclude the call today. So we would like to thank you for your participation and wish you a very good rest of the day.