Afternoon, and welcome to KONE's results release for Q1 2014. This is the first time we have our new President and CEO, Henrik Enrout, presenting our results. And we also have our new CFO, Erik Kaffiras from here. Without any further introductions, Henrik, the floor is all yours.
Okay. Thank you, and welcome also on my behalf to our Q1 results conference call and webcast. As Karl mentioned, I'm very happy to be here presenting the Q1 result as President and CEO. I'm also pleased to do this because we have again good news to tell you. But if we start first, go straight to business.
In this presentation, I will first of all review how we performed during the quarter 1. I will then go through how our markets are developing. And after that, we'll look at how our markets developed overall in 2013 and also our market share developed, something we always do at the end of Q1. Then review how we have continued to develop our competitiveness and finally, I'll review our market and business outlook. So if we look at first the highlights for quarter 1.
So we had a good start to the year. Our orders received reached a new record high level from a very high comparison point last year. Our orders received were €1,730,000,000 They grew by 1%. And if you look at comparable currencies, they grew by 5.2%. Our order book exceeded €6,000,000,000 for the first time.
So also a record high order book. Growth in our order book was 6% or in comparable currencies 14.6%. This strong order book naturally give us a good basis for our continued development. If you look at our sales, as expected, our sales was slower Sales growth was slower than it was at the end of last year and our sales was €1,440,000,000 growth of 3.1 percent again comparable currencies 6.6%. But I'm very pleased to say that we continue to grow profitably and our operating income reached EUR 180,000,000, a growth of 12% over the comparison period.
Also important to see that we increased our relative EBIT margin by 1 percentage point. Our cash flow also was very strong. This shows that we have continued to have good discipline in our business and continue to develop in a positive way. So cash flow reached EUR 325,000,000 And finally, our earnings per share was €0.28 up about 14% from last year. So I guess in summary, I can say that very pleased with the start to this year and also this increase in our order book gives us a good basis for continued development.
And also important to say that this good performance would not have been possible without the great work and great performance of all of KONE's roughly 43,000 employees. So a huge thank you to all of our employees. Let me now next go in more detail into our orders received. So as I mentioned, our orders received grew to a new record high level, growth of 1% and comparable currencies 5.2%. And our comparison point, as you can see, was very high.
I think first of all, it's important to note that our new equipment orders received, they grew strongly continued strong performance in new equipment. However, our modernization orders, they declined significantly. And as you remember, in the comparison period last year, we had some individual very significant projects that impacted our modernization orders received last year. So our orders received growth was driven by Asia Pacific. Here, particularly China, continued to grow strongly in China.
Our growth in China was a bit over 15%. So we clearly outgrew the market again. So strong performance there. Also other markets where we grew in Asia Pacific were Australia and Indonesia. Also if you look at the Americas, here we had strong growth in the new equipment business, in particular, very strong growth in the U.
S. In the new equipment business. But it was the North American Modernization business that had significant orders last year where orders received declined substantially. Our orders received grew slightly in Europe, Middle East and Africa And growth was driven by Turkey and the Middle East, where we had good growth in both of these. Our share China's share of our orders received was a little bit over 40% in the quarter.
And as I mentioned, our growth in China in the Q1 was a little bit over 15%. So overall, I would say a strong performance in orders received. If we then go to sales. So as I mentioned, our sales grew 3.1% or 6.6% in comparable currencies. Growth did slow down as we had expected from end of last year.
However, growth was in fact a bit better than we had anticipated due to good project completions, particularly in Asia Pacific. Our orders received growth was strong in the new equipment business. In the new equipment business, we grew at 11.2% in comparable currencies. We also continue to have good growth in our maintenance business. Our maintenance business grew by 6.2% in comparable currencies, so continued good growth there.
However, our sales in modernization business declined by 7.4%. I would say the decline in the modernization business is more of a seasonal thing rather than any fundamental weakness. So good development overall in sales. And here, our sales growth, in particular in Asia Pacific, continued to be very strong. If we then go to operating income.
And as I mentioned, we had a strong development in operating income. Growth was driven by strong sales growth in Asia Pacific, but also a good development in our maintenance business. I think what I'm also pleased to say is that, as you know, we have been developing our pricing processes and pricing competencies very actively over the past years. And we're clearly starting to see that this development work is bearing fruit in many of our units. And this is naturally a very important area to develop in the very tight price competition that we have in very many of our markets.
I think what is also important with the operating result here is that we continued to invest in the long term development of KONE. So we increased our fixed cost in Asia Pacific, but also we continued to significantly increase our efforts and expenditure in R and D as well as process development and IT. So all of these are important to developing our competitiveness further. So I think it's important to show that our profitability developed positively. At the same time, we continue to develop the company going forward.
Foreign exchange had a negative impact. The impact in the quarter was about €7,000,000 On the other hand, we had a slight positive impact from favorable development in raw material prices and the impact of raw materials was approximately the same that the negative we had in currencies. So overall, I would say good and continued good profitable growth, which is very important to us. Let me then turn to our business mix in the Q1. So given if we start by sales by business, we can see that the share of new equipment increased from 46% to 48%.
And here was naturally the strong growth that we had, as I mentioned, in new equipment business that impacted this. But given the good continued good growth in the maintenance business, our share of maintenance business remained at 39%, whereas our share of modernization declined. If you then look at sales by market, our continued strong growth in Asia Pacific drove the increase in the share of Asia Pacific. That increased by 5 percentage point and was 38% in Q1. China's share of our total sales was a bit less than 30% in the Q1.
But as we can see, share of Europe, Middle East and Africa continues to be an important area at 47% of our total sales. I think what is important to note here is that if you look at this split, you can see that we are continuously becoming a more balanced global company and our position in the key growth markets globally is increasingly getting stronger. And that's naturally very important to our to us developing Konec going forward. So let me next then turn to our how our markets have developed. So now so far, I've talked about how Konec performed.
Now I'll talk about our overall markets. So we start with Europe, Middle East and Africa. I say that in a short look, I say the markets were very mixed. And starting with new equipment. In Central North Europe, the markets were overall rather stable.
We had a positive development in Germany, the U. K. And Sweden, whereas most other markets were very challenging and had a negative development. In South Europe, demand continues to decline, and this was particularly due to a decline in demand in France well as Italy. We had some slightly positive development in Spain.
So we can see that Spain is starting to have some very slight growth from we have to remember from very low levels. But at least the trend is better there now. And then we have a growing Middle East and Turkey. The monetization markets were stable in Central and North Europe, but continued to decline in South Europe. And in the maintenance markets, they overall they grew, although with significant variation between various markets.
And here, again, the markets where we have had a prolonged weakness in new equipment market continues to naturally be the most challenging markets. The pricing environment continues to be very intense, particularly in South European markets, but also in some Central North European markets. And this is again particularly the markets where we have had a prolonged weakness in new equipment. If we then go to North America, so if we start with new equipment. What is positive is that the new equipment markets in the United States grew strongly, driven by residential and office segments.
In Canada, Mexico demand was rather stable. In the modernization markets, they grew, particularly fueled by the United States. And if you look at the maintenance markets, they also grew, but price competition remained intense, particularly in other than residential segments. So I would say very particularly pleased with the strong development of the new equipment market in the United States. If we then turn to Asia Pacific.
As I know, many of you have lots of questions about China. Let me pause a little bit and talk about China a little bit more in detail first. First of all, the Chinese market grew by about 10% in the Q1. Our view for the full year is the market will grow by approximately 10% also for the full year. And we continue to have good confidence for the 10% and our confidence also for development midterm and longer term remains good.
And I would say the reasons for this, if you look first at what gives us the visibility and view for the full year. First of all, we're, of course, looking at our own business, our customer activity. That is, of course, a very important factor. But then also, if we look at total real estate investments in China in the Q1, they grew by about 17%, so continued strong growth in real estate investments. However, if we look at new construction starts and land purchase area, both of these declined.
Particularly, new construction starts declined by 25%. But I think we should put both of these also in context that if you look at new construction starts, they grew by 33% in the Q4 of last year and now we had a 25% decline. We're still in positive territory if we look at it over a little bit longer period of time. So we think, therefore, this despite the slight uncertainty we have in the real estate market in China, we are confident about the 10%. Now if we look at more medium term development, I would say that the measures introduced by the Chinese government recently give confidence also for the medium term.
These measures, they include a relaxation of the restrictions in many of the real estate markets that we have talked about many times. There are also measures to approve the financing access for property developers as well as the stimulus program that was announced for the infrastructure segment. And then again, if we look at the longer term, which of course the most important one when we look at how we continue developing our business, Our longer term view continues to be fully intact, and we continue to be confident and positive about the longer term development of the Chinese new equipment market. And here, we have many times discussed our view on the market why it's growing. And I would say that if you look at the recent new urbanization and green building targets announced by the Chinese government, they fully support this view.
And I would say actually what is even a positive compared to our view we have had so far is the number of residents that are targeted to urbanize with a residency permit. And urban residence with residency permit, this growth in the new plan would clearly accelerate. And we believe that this is good for the development of the real estate markets. Also if you look at the green building targets, currently about 2% of new construction in China are green buildings. The target is by 2020 that 50% of buildings would be green buildings.
And this is, of course, a very positive thing for a company like us in particular given the fact that we are the market leader in energy efficiency. So we are very excited about that green building target that they have announced. So that's about China. Then if we look at other Asia Pacific markets, let's start with the Indian new equipment market. The market continues to grow driven by the residential segment.
And I would say, I think it's a positive thing that the India market continues to grow despite the general economic uncertainty that we have in India market and the tightness of financing. So I would say despite these two factors, the market grew, which shows that we have a good underlying demand for particularly residential real estate. Also Australia continued to grow. And in Southeast Asia, the market grew somewhat, but with clear differences between various markets. Then if you look at modernization markets, and there Australia, as you know, is the most important modernization market.
And Australia, modernization market continued to grow. And also in maintenance, the markets continue to grow at a very good rate as previously. So that's about the Q1 markets. Let me then now turn, as we always do in end of quarter 1, review how the overall markets developed for the full year of 2013. So our estimate is that the new elevator escalator market last year was in total about 750,000 units globally.
That is an increase of approximately 12% on the prior year. So continued good growth in the new equipment market. The key growth driver continued to be China. So Chinese market grew by a little bit over 15%. And the share of China of total global elevator escalator market increased from 65% to 67%.
But we also had good growth in many of the other key global growth markets. Last year, we continued to grow fast in the market. So market share increased from a little bit less than 18% in the prior year to about 18.5% in 2013. And our market share in China, it grew from 17% to 18%. And I would say what is important with this growth is that we increased our market share in all of the key growth markets globally.
So we improved our market share in China, in Western Asia Pacific as well as in the Middle East. If you then look at elevators escalators overall in operation, We can see that the total market end of last year was roughly 12,000,000 units in operation. And Europe, Middle East and Africa remained clearly the largest market with 47% of the global elevated escalators in operation. What is interesting to see is that the share of China increased from 21% to 23%. And this again highlights the strong growth in the maintenance market and the great potential that that market has going forward.
Kone's service base at the end of 2013 was more than 950,000 units. So that's about markets last year. Let me now go to how we are developing Kone going forward. So as you know, in connection with our full year results, we announced our new development programs for the next 3 years. So I won't go in more detail into these programs now.
I would say that the main focus and emphasis during the Q1 has been to implement all of these programs in all of our units throughout KONE as well as active communication to make sure that all of our employees have good clarity on how we're driving the company going forward. And I think we have been able to get to a good start, but efforts continue to make sure that we really get to a good start and good traction with these new programs. But let me touch on one of these programs, which is the last one, top modernization provider, how we have strengthened our competitiveness in the modernization market, where we believe that in particularly in developed markets, there will be significant growth potential in the coming years. So during the quarter, we announced a new product called PONE Nanospace, and it's really a revolutionary full replacement solution. And what is so revolutionary about this is that it reduces the downtime of an elevator during full replacement from about 6 weeks to onethree of that, That's because it was 2 weeks.
And I think everyone can understand how important that is for residents living in the building where elevator is being replaced. And a much shorter period, of course, very important, particularly for elderly people and other people who require elevators to move. So this is a, we think, a very significant innovation for this market. Also, it is a very space efficient elevator, so it provides more than it can provide up to 50% more space inside the elevator. And I think it's clear that from accessibility perspective, this is hugely important for people with wheelchairs or parents with strollers for their kids.
Also in line with rest of our product offering very energy efficient, up to 70% more energy efficient than existing elevators. And also in line with how we develop our elevators, they need to have a great ride comfort and so does this. It's a very smooth leveling and silent operation. So we think it is a very interesting new solution for the full replacement market, and we are introducing this in Europe this year. And then let me finally go to our market outlook.
First of all, our market outlook is unchanged. We expect that the market in Asia Pacific will continue to grow clearly. And as I mentioned earlier, the Chinese market will grow approximately 10% this year. The market in Europe, Middle East and Africa is expected to grow slightly new equipment with relatively stable demand in Central and North Europe, but a further slight decline in South Europe. And then we have in Europe, Middle East, and Africa, Middle East continues to grow.
In North America, the market new equipment is expected to continue to grow as well. The monetization markets globally, we expect that they will grow slightly this year. And maintenance markets, we expect them to develop rather well in most countries. As we discussed previously, we have clear variations between different countries. And then finally, our business outlook.
So we have slightly specified our business outlook. First of all, sales outlook remains unchanged. We continue to expect that our sales will grow at between 6% to 9% in comparable currencies this year. And our our operating income or EBIT guidance, we have slightly specified. We now expect that our operating income will be in the range of €990,000,000 to €1,050,000,000 assuming that translation exchange rates won't materially deviate from situation at the beginning of this year.
Our previous operating income guidance or outlook was €980,000,000 to €1,050,000,000 So Ulfeld gave us gave you some insights on how Kornya developed during the Q1. And I think before we go into questions and answers, short message I think from Carla.
Yes. Thank you. So the message is that we have set the date for Capital Markets Day 2014. So we will hold our CMB in London on the 26th September that is a Friday and we will send out more information about the exact venue and timings and so on and agenda very soon. But please do save the date in your calendars already now.
So London on the 26th September. And now we are ready for your questions. Let's start with the questions from those present here in Espoo Finland. Yes, Elena, please.
Yes. Hello. About the higher R and D spend that you're having now 1.7%, is that a level where it can be expected to remain going forward?
So as you have seen, we have continued to increase R and D expenditure over the past years. I think if you look at the growth in our R and D expenditure in absolute terms that gives you an indication how we're developing that operation going forward. Our R and D expenditure have in the past years moved between 1.4% to 1.7% of sales. So it of course depends on also VAVA sales growth in any given period of time.
Thank you. And then secondly, on the rollout of the new elevator offering, could you talk a bit about how that's going?
So if you look at the our new elevator offering, Konec Mono 500 in Europe and N Mono or N Mini Space in Asia Pacific. I would say it's the rollout of that is going according to plan. If you look at our tendering volume in Europe, Middle East and Africa for that, they are very much in line with our plan and also strong volumes for new product in Asia Pacific.
Thank you.
Tom Rallo, SEB.
On China, if you can comment just what you have seen recently, let's say, during April. We have seen money supply coming down, etcetera, just to give a flavor how the quarter has started? And secondly, if you would comment on comparison. You obviously grew on top of 25% growth last year, which is very, very strong. How would you comment or guide us for rest of the quarters during this year?
For example, in China, would you assume that the growth comes down, let's say, to 5% in the Q2 and then accelerates against towards the end of
the year? Or are we
going to see 10% every quarter? Or what's your comment?
Okay. So Let's also take one question at a time, Rachel. So first of all, you asked about China development very recently. As we said in our quarter report, while there is some short term slight uncertainty in the Chinese market, we still have this confidence of the 10% for the full year. And I would say that what you can see from a financing perspective, which is really what you referred to, is that larger developers have a clearly better situation, actually a pretty good situation.
It is the smaller developers who have a more challenging situation and more difficult access to financing. The fundamental picture has not changed that much here. We have had this difference between these two, perhaps it got a little bit tighter for the small developers. But I would say that if you look at our full year sales guidance, for example, that this takes into account what we see throughout the market. So we continue to have a favorable view for the full year.
Then you asked about the comparison point. Yes, you're right. We had a very high comparison point in Q1 last year. We grew at about 25%. We had both a very strong growth in China last year as well as some very big individual orders.
So we're very pleased that we exceeded that high level. And then you asked how we should look at it going forward. As you know, we don't give an outlook or guidance for our orders received. What I can say, you asked about China, is that we expect the market to grow at approximately 10% for the full year, similar growth to the Q1. And as you know, our objective is to continue to grow faster in the market.
We are now ready for the questions from the lines please.
Thank Our first question comes from the line of Arren Ibostin. Please ask your question today.
Yes. Hi, there. Good afternoon. And first of all, thank you for splitting out the maintenance and modernization growth, much appreciated. I had just two quick questions.
The first one is just if you could sort of highlight the impact of this Saudi consolidation, if I recall it correctly. I assume that that has sort of is one of the reasons why your order book difference, for instance, between comparable change and historical change is so big. I thought I was hoping that you can maybe give, now when you have the numbers at hand, some guidance on how much that impacted your numbers? My second question was related to Let's
take one question at a time? It's I think we can set the strategy that way. So first of all, if you look at our development of our order book, so this consolidation of Saudi did not impact this difference between comparable and historic rates. That is just a currency difference. What I can say is if you look at we consolidated the Saudi Arabian joint venture at the end of last year.
And the difference in the order book at the end of last year, it was about 4 percentage point impact of the consolidation. So that gives you the magnitude of how much more order book we consolidated as a result of that consolidation. If you look at the impact, as we have said, this consolidation of the Saudi Arabian joint venture actually decreased our sales growth, Because previously, our joint venture had operated as a distributor to us, whereas we recorded revenue and deliver of the equipment. Now we record revenue on the delivery or completion of the full project, which means that the lead time from order to delivery is much slower. So a better order book, better quality order book, but slowing rotating more slowly.
Yes. That was just yes, no, I realized it decreased. I was just hoping to see if you had some sort of rough number of what that was on the sales or EBIT line or something like that. I assume it cut your sales by a few tens of 1,000,000 and maybe more.
It did have a slightly negative impact to our sales. I would say still the biggest impact was I mentioned on the order book earlier.
Okay. Okay. Thank you. But can I then clarify then sorry just on Page 2, because there's a 9% difference of the historical change in comparable change? And you're saying that all of that is currency then?
Yes. Because the spot rate at the end of the quarter compared to last year is quite significantly different.
Okay. Thank you. My second question was just on the U. S. Revenue line and I appreciate that it's lumpy, but I was just curious to hear your thoughts because it's been growing quite fast recently and it was down, I think, 10%, 11% in euros.
So I guess that leaves it 6%, 7% down in dollars. Was that just sort of weak in modernization? Or do you see any general weakness? Or was it just a couple of big deliveries last time that didn't come through this time on the sales?
It was very much well, there were two reasons. It was both in new equipment and in modernization. But it was exactly as we also communicated at the beginning of the year that what's happened in the U. S. So our order book has grown clearly, but the composition of the order book has changed a lot.
We used to have much more smaller projects in the order book that rotated much faster. So the average size of our orders has clearly grown in the U. S, which also are bigger projects that are rotating more slowly. So the quality of our order book and the size of our order book has clearly improved there, but it's rotating more slowly. And then we also had in predictive modernization, but also new equipment, some bigger deliveries in Q1 last year that impacted the sales.
So I would say that this is a timing question, but I would say if you look at underlying basis, we have a constantly improved order book both in the U. S. In new equipment and in modernization.
Okay. And finally, very quickly, these short term uncertainties in the Chinese market that you mentioned, I guess the question has largely been off, but should we understand it as if you're primarily referring to some of the smaller developers maybe having troubles financing temporarily? Or is this something you're hearing from any other source? Is it just a general comment related to property start date? Or is there anything more specific you'd want to highlight?
I think it relates in particular to the availability of financing in the Chinese market. As I said, bigger developers seem to have a clearly better situation. Also developers in bigger cities have a clearly better situation. So this is what we're referring to.
Okay. Perfect. Thank you very much.
Thank you. Our next question comes from the line of Andre Collin. Please ask your question.
Hi. It's Andre from Credit Suisse. Thanks for taking my questions. Firstly, on China kind of market share and market dynamics, you said market grew 10. Somebody else earlier said sort of similar number and yet you grew 15, I think Schindler grew similar, Otis 25, percent, some locals citing 20%, 30% growth rate.
So could you just help us to understand who's actually losing share in this sort of current market? I know you wouldn't name names, but kind of what type of players? How is it actually developing? And also could you help us to understand where your revenues in China are in terms of Tier 1 and Tier 2 cities versus Tier 3 and Tier 4?
So first of all this market growth, I think we have a pretty good intelligence of the Chinese market and we think it grew at about 10%. Our understanding based on our intelligence set of the large players, we had the fastest absolute growth of all players. So the one you mentioned about 25%, I don't know if that was relating to only one brand of that group or the whole group. That's something I don't know.
Okay.
So but I think many of the international players seem to have developed rather positively. So if you look then at the development of our business Tier 1 and 2 versus lower tier cities. So first of all, if you look at the overall Chinese market, it is approximately so and it's very roughly that Tier 1 and Tier 2 represents about 50% of the market and the rest of the 50%. And our position is generally stronger in the higher tier cities. So we would have a slightly higher exposure to this than to the lower tier cities.
Got it. So just to clarify your view and I appreciate you have very good intelligence on the China market given your presence. But your view is that your growth in China, which said was just over 15% in Q1, is the best absolute growth amongst major players?
So if you look at we are the largest player as you know in China. If you look at the absolute unit growth in units, our we believe that if you look at any players that we were the fastest we had the highest increase in absolute units in quarter 1 in China. That's our intelligence of the market.
Okay. But if you were to okay, that still makes it possible for higher percentages just in but not adding as many units. But no so would you comment on what kind of players are losing share in China at the moment? And how that's developing? I mean is this sort of shift towards more recognized brands?
Or is it just a presence game or pricing?
I'm not I will not start commenting on individual players, but if you remember what the ones that report their result, it's a very small part or if you even look at the big and medium the big and then the medium sized players. So I think it seems to happen so that the ones that have announced are the ones who have had a good development in Q1.
Right. Got it.
That's a very small sample in the end.
Okay. And then just taking 2 steps back and looking at your product offering right now and the sort of dynamics of the products you launched, where are you now would you say versus kind of the sweet spot where your kind of product is in the most kind of ramped up phase in the most optimal sort of point in terms of deriving maximum efficiencies of scale and of production and
being able
to fully sort of capitalize on that in terms of profitability? Because you seem to have launched quite a lot of new products. I wonder is that weighing at the moment? Or is this kind of steady state? Where are we in that dynamic?
So I think first of all, I think we're of course the biggest volumes are there in China. And here as you know we have constantly renewed our product portfolio. And I think that's one of the strengths we have in the market that we have a strong competitiveness on a broad basis in that market. And we have again continued to renew that portfolio. So that's been more, I would say, constant and gradual renewal of the portfolio.
But then I think you probably specifically referred to our new Mono 500 and then N Mini and N Mono in Asia Pacific. As we have said, that is something that we are last year was the year of starting to receive orders for that product. Now we are ramping up deliveries and we should start to be close to full volumes at the end of this year. So from a run rate basis, you can start to see the benefits towards the end of this year. So as we have said that they are not kind of a we don't believe that there are huge impacts on new product introductions.
This is perhaps one of the bigger ones we have had. And also then how it gradually gets into the Asia Pacific and Chinese product offering, I think it's gradual. So yes, we have some efficiencies and benefits of achieving from that. But again, as we have said previously, it's not a huge headwind either the introduction of this product.
Got it. Thanks very much.
Thank you.
Thank you. Our next question comes from the line of Erik Goland. Please ask your question.
Thank you. I have a few questions. The first one on maintenance growth, 2.9% adjusted for FX. Quite clearly historical comparison. What's the price component here year on year?
What is keeping that growth rate down for you? What's needed for it to improve after the sort of historical rate, which is much higher? I would assume given the number of elevators put out there in the market over the last few years that we would start to see a stronger growth rate on the maintenance side?
So first of all, I think that the relevant number to look at is the growth in comparable currencies, because a foreign currency is something we can't impact and that was 6.2%. And that is, I would say, pretty well in line with our historical growth rates. So growth is clearly driven by growing markets Asia Pacific. But in many European markets, we also grow. The biggest challenge is naturally in South Europe where the market is overall market is growing slowly and very strong price competition.
So I say if you look at the 6.2% that is more that is pretty well in line with our what we will call a good historical growth rate for the business.
Okay. And what was the rate in China? I think you talked about somewhere around 30% in the last few quarters. Is that still where it is?
It has continued to be at about that rate, yes. So very good growth there.
Thank you. Then the next one on price pressure. A bit surprising to see you saying both that price pressure is intensifying in some regions, but that the margins of orders received are actually improving. What are the main factors supporting your pricing here? Is a pass on of the pressure to suppliers simply?
Or what's the factors offsetting the ever toughening price pressure?
I don't think it's a passing on the pressure. So I think we have had competitive and good sourcing prices and a good partnership with our suppliers for a long time already. I would say here there are a few factors that impact this. 1, as I mentioned, we have continuously worked very hard on developing our pricing processes and pricing competencies. We can see that the better understanding you have your market, the more granular it can be.
It is possible even in difficult markets to be able to have a better development in the market overall. So there is but I think you're right is that we have very competitive end markets and can't be fully immune to that. But then the other impacts, so first of all, I would say the most important one has been developing our pricing competencies. 2nd, I will mention that there has been a slightly positive impact of raw material prices. Not a big one anymore, but if you look over last year, they have been slightly trending down.
And then also we have continuously renewed and made our product offering more competitive. So all of these together have helped us in this environment developed very positively.
Thank you.
Thank you.
Thank you. We have another 4 questions. The first of these questions comes from the line of Gilmira Nephavax. Please ask your question.
Good afternoon. I hope that was my name. It's Guillermo Peigne from UBS. I actually have a couple of questions. Regarding first China maintenance growth, can you disclose or set some light or share with us a little bit about the growth that you're seeing on those markets?
Maybe a follow-up later.
So as we have said before that the compounded annual growth rate in our services in China has been at around 35% historically. And as the service base is getting larger, also to maintain those growth rates is challenging, but we continue to grow as close to that historical rate. So very good growth continuously in China. And as we have said, we believe that the Chinese maintenance opportunity is a very significant one. And we believe that it continues to develop favorably, particularly in other segments apart from affordable housing.
Affordable housing is perhaps the most challenging sector in terms of or segment in terms of maintenance in China. Otherwise, development has continued to be positive.
Thank you very much. Then second question regarding your working capital moves and a balanced payments. Can you disclose or again set some light on the size of those advanced payments not only in terms of working capital moves, but also on your balance if that's possible? Thank you.
So you have the absolute advanced payments. We have you can find from our balance sheet. And I would say they have quantity. I would say that you can see from advanced payments, of course, there are 2 drivers to those. 1 is our growth in orders received.
Because that's where you get the advanced payments, but also through the progress of our project as well as how well we've been able to maintain our discipline in terms of pricing on payment terms. So I think that it's a sign this good development and we were able to improve the difference between our advanced payments and our inventories during the quarter and that was one of the reasons for our improvement in our working capital. If you look at the biggest and we also had last year a very good improvement in working capital in Q1. So year on year, the biggest difference was in cash flow overall was then the improvement in our operating income.
Are Chinese payment terms getting longer or just in line with what they were before? Is there any change in the way they pay?
Not really, no.
Okay. And then my last question. I understand the volatility on some of the floor space sold and the total floor space sold and the total residential construction index, they are down for the first time actually since mid late 2012. So it's a lot less volatile, but indicates that activity is slowing down and that negative growth rates are potentially occurring in the Chinese market. Would you say that that is the risk actually going forward maybe into 2015 that at some point actually you see negative growth rates in China?
As you know, we don't give an outlook for the market growth beyond the current year. I would say during my presentation, I talked about the factors that gives us confidence on the both short, mid and longer term development of the Chinese market. So clearly, you can have quarters with negative development. But if we look at the trends both midterm and longer term, we continue to believe that they are positive and they have good potential in the market.
Okay. Thank you.
Thank you.
Our next question comes from the line of Ben Maslin. Please ask your question.
Yes. Thank you. Good afternoon, Henrik. First question please just on price competition which you say is gradually intensifying in China and Europe. Just maybe you put a bit more color around that.
Do you mean pricing is declining in those regions or just going up less quickly? Just what your phraseology means? And do you are you actually getting to the point where you walk away from any business because of a tougher pricing environment? That's the first one. Thank you.
So a tougher pricing environment in a low inflation environment means that the market prices would be going down. And in an industry like this, that's why we have to continuously develop the competitiveness of our products and also the productivity of our installation operations. So those are the ways we manage these. So yes, unfortunately, in many of these tough markets, prices are going down. For us, what is important for us when we grow is that we grow profitably.
So therefore, we of course need to look all the time how our competitors is developing and what prices we can take. But I think what you can see again from our results that we continue to be very focused on profitable growth. Our objective is clearly to grow fast in the market, but objective is to grow profitably and that we have been able to continue to do. So as a policy, yes, we would not take business that we don't feel is commercial.
Got it. Thank you. And then just a question on major project orders, which I think you said they were an exceptional level in Q1 last year and you managed to grow against that very difficult comparative. Is there any way you can break out what percentage of your order intake now in Q1 is major projects? And give us a sense of whether that is a stable level?
Is it an abnormal level that sets you up for a difficult comparison next year? What is a normal level of large orders for you?
Well, it's difficult to say on a quarterly basis because they can fluctuate quite a lot quarter to quarter and we had an exceptional high level last year. I would say they were at a good level in quarter 1, but not at an exceptional level this year. So last year, they were at an exceptionally high level. Now I would say they were at a good level, but nothing exceptional. So yes, this will be a difficult comparison point next year, but that's what we'll continue to develop Konec going forward.
Okay. Great. And I mean, if there's any way going forward you could break out the level of large orders that would be helpful, I'm sure, for a lot of people. Thanks, Henrik.
Thank you.
Thank you. Our next question comes from the line of Austin Earl. Please ask your question.
Four questions hopefully reasonably quick. The first was just regarding your comment on the productivity gains that you need to offset the price deflation. What sort of productivity gains do you get on average per annum? Is it sort of 1%, 2% that sort of number or more than that?
Well, it would be a few percentage points that you would need to get each year in an environment that we live in, I would say in the Western world at the moment. In the developing world where you have higher inflation, you would need to achieve higher numbers than that. Thank you. Usually you have better ability to then slightly increase prices as well to reflect that.
Got you. And then moving just on the currency. You said that the currency impact on profit on EBIT was €7,000,000 That seems to imply to me that actually there's very little transaction that's really just translation that you have.
What I mentioned that is all translation
difference. Yes. Okay. And on the I didn't quite hear this issue on the Saudi the consolidation that you made in Saudi Arabia. Did that boosted the order book or the orders by 4 percentage points?
So it boosted the order book. So previously, our Saudi joint venture had been acting as
a distributor for us, so we did not consolidate it. At the end of last year, we consolidated our Saudi joint venture and then we consolidated the order book as well. So that increased the size of our order book by about 4 percentage points.
Got you. And the final question I have is just regarding your earnings guidance and the margin that you achieved in the Q1. The incremental margin, so the amount you grew your profit compared to the amount you grew your revenues was actually very strong. And to that rate of incremental margin will have to slow significantly for the rest of the year if you're only going to achieve the EUR 1,050,000,000 EBIT. Can you maybe just explain why going forward for the rest of the year that the incremental margin will be less good than it was in the Q1?
So first of all, you're looking at we have said that we believe our EBIT is in the range of $990,000,000 to $1,050,000,000 and that's where we have our view where we'll get to this year. You have a slight difference in the top line guidance and in the EBIT guidance. The sales guidance is at comparable currencies, whereas the EBIT guidance is at actual currencies. If currency stays at this level, we're going to have a roughly $30,000,000 negative FX impact compared to last year. So we need to adjust that into EBIT if you calculate margin.
Yes. But I thought we just discussed that there's very little. There's only a translation which doesn't affect the margins, any transaction that would affect the margin on for the EBIT margin. So I still haven't quite sort of understood. Is there maybe some sort of change in expenditure or maybe raw materials?
Or you think maybe pricing will get worse? Or the sales growth will slow? What is it that might actually then prevent the incremental margin in the next few quarters for being as good as it was in the first?
So again, let me explain in a different way, because it is all translation what I'm talking about. If you look at our sales guidance, that is at comparable currencies between 6% to 9%. If currency stay at this level, our historical sales will be lower than the comparable rate. And if you look at our EBIT, that is at the actual rate is at the average rate for the beginning of the year or at the beginning of the year, we're giving the guidance. So if currencies stay approximately where they have been at the beginning of the year, we're going to have a $30,000,000 translational negative impact on our EBIT for the full year.
When you compare the sales, which is at comparable currencies, I. E. Before translation impact and EBIT, you need to adjust the EBIT by roughly 30,000,000
Yes. No, I think maybe we're talking across purposes. I think I'll come back. Maybe we can discuss it offline with Carla. That'd be great.
Okay. Those are all of my questions. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Fang Fang.
Hello. This is Fang from Taibang Capital. Thank you for taking my question. My first question is about like China market growth estimate. I remember that at the beginning of last year your estimate of China's market growth is also 10%.
But actually at the end the market outgrow like exceed your estimate. So what makes a difference? And for this year, why you're so confident about your market growth in China? Thanks.
Well, I think currently this approximate 10% is the best view we have for the full year. If you look at the reason why the market was better than we expected, it was the strong acceleration in growth really towards the end of the year. We don't expect that to happen now. We expect the approximate 10% growth. So that is best currently our best view of how the Chinese market will develop this year.
Okay. Secondly, I think the other analysts have also asked a question, but I want to know a little bit more about like the China pricing pressure. Is it coming from the other like competitors or because of like the low inflation environment?
I think that the pricing pressure is coming from the fact that they are the Chinese elevated escalator market has quite a lot of players, a lot of players with strong growth ambitions. I think I can say for other players it of course comes from competition, the price competition that perhaps many players have seen this favorable raw material development and willing to price it into their product and therefore willing to reduce price as a result of that or because some companies may have very strong growth ambitions, they may have been willing to reduce price. That's something I can't answer on behalf of other companies, but the price pressure comes actually from a strong competition in the market.
Understood. Could you talk a little bit about your new equipment EBIT margin in China?
So as you know, we don't break out the EBIT margin of our various businesses. But what we have said is that our EBIT margin for our new equipment business in China is better than our EBIT margin on average for in the new equipment business for the group. And they are not that dissimilar from our overall EBIT margin for KONE. Okay.
As for your maintenance business in China, it looks like it's a very strong growth. So I want to see what percentage of your revenue in China comes from maintenance at this moment? And your outlook or target in 5 years, I mean maintenance revenue in China as a percentage of China revenue?
So maintenance is less than 10% of our China revenue and we haven't set a target for the next 5 years. Our objective is to continue to grow that business at a good rate continuously.
Okay. Thank you. That's my question.
Thank you.
Thank you. Our next question comes from the line of Rizik Mehdi. Please ask your question.
Hello. This is Rizk Mehdi from Barclays. Thank you for taking my questions. So the first one and sorry to come back to the Q1 margin. Can you maybe elaborate on the 1 percentage point increase in the margin year on year?
So you have quantified the FX raw material. I just struggle to reconcile the numbers and build a bridge on a year on year basis. And what really helped the margin in Q1? So that's the first one.
Well, I would say that our good margin performance was because of strong execution. In many places. We said that the reason for our EBIT growth was the growth we had in Asia Pacific and also the good development of our maintenance business globally plus the impact of pricing actions we have taken many units. And then we also see that it's also a reflection of the improved competitiveness of our products and improved productivity we have within the company. So I would say, I can't give you an exact bridge, but all of these factors have impacted that and shown that our development has continued to be favorable.
Okay. Thank you. And the second one is on the China market. So you have communicated on the past on the split of the Chinese market between residential, social housing and commercial. Can you give us what is Kona's exposure to these 3 sub segments?
So I would say that we would be slightly less exposed to the affordable housing in the market overall. We have a good position in the standard residential and commercial markets. But if you look at affordable housing, last year was perhaps around 30% of the total market in China. That is now that segment is growing, but still a very sorry, declining, but still a very important part of the market. But our exposure to that segment would be slightly less than the market overall.
Otherwise with our market share, we have a pretty good position in most segments.
Okay. Thank you. And my last one is on social housing really on China. So this market is expected to decline this year. I'm just wondering what are your thoughts on this market going forward given the that it has been mentioned in this mini stimulus in China recently?
There are currently no new targets for affordable housing in China. What we see at the moment is that the best growth if you look at residential are in the higher tier cities and in coastal cities, where in particular these real estate restrictions in the past years have been the strongest. And with the relaxation of these, we see that there we have the strongest growth now and also because of fundamental demand in strong fundamental demand in these areas.
Okay. Thanks.
Thank you.
Thank you. We have another question from the line of Andre Collin. Please ask your question.
Hi. Yes, it's Andre again. Can I just follow-up on 2 things? You said you're increasing your fixed costs and investing in the business. And I think you mentioned China within that.
Am I right to think that this is continuing to ramp up the presence opening the offices etcetera?
Not only in China, but all of Asia Pacific, it is to make sure we have improving our continuously improving our presence, Of course, building our competencies, our people in that market, those are very important, developing our processes. I would say that it's throughout our operation, but one of those is that it continues to expand our footprint.
Okay. And how are you finding that at the moment versus say a year ago or before? Is it I mean is this something that is starting to become a bottleneck? I mean from what I'm hearing is hiring sort of like service engineers in China for example or in Asia Pac is becoming increasingly difficult because there's just simply not that many around?
I think this has been for a longer period. Already if you remember we have a couple of years ago, we talked a lot about the challenge to find competent installation technicians and supervisors and so forth. That's why we over the past years have put a lot of effort into developing and training our people in China good cooperation with schools and technical universities and so forth to do that. So I think it's been a constant challenge. I'm not sure if it has increased.
But with the growth rates we have had over the past year, it's clearly been something we have had to deal with. But I think we have also built up a good capability of developing people in house to meet the growth demands that we have. You have to remember, we have had a very strong growth over the past year, so this is not necessarily anything new for us.
Yes. Okay. And just the other thing I want to pick up on. On the floor space started, sorry to leave with this. I know you addressed in your presentation, but I think we were talking about the same numbers sort of down 25% year on year.
And I think you said, well, it was very strong at the end of last year, so it's not kind of a disaster to come off that level. But obviously, the decline is year on year, so it's pointing to obviously very sharp or sharper decline into the year end as well as those kind of run rates to continue even with some seasonal pickup etcetera. Can you just elaborate a bit more on that how you're seeing it? And just generally how can you square that equation of investment up 17% and floor space started down 25%. Seems like enormous gap.
I think it is quite a big gap. That's why I think difficult to have a very deep view on this. I would say if you look at the new construction area and the elevator and escalator markets, the elevator and escalator market has always fluctuated less than the new construction starts at least in the history. And therefore, I think if you have looked at over a longer period of time the current trends then it seems to make more sense. It is I would say it is a data point that we're using, but naturally we have many other data points and most important one is looking at the pipeline of our own business and our customer activity.
Right. So there's nothing in your pipeline that's suggesting that sort of small lead time that there is there between the housing starts and lift orders is what's also resulting in the elevated market holding up still while the very early indicators already dipped. So am I right to think that from what you're seeing it, it's that's not the case?
Well, I would say that as I said that we have a good confidence on the 10% growth or approximately 10% growth for the market for this year. So I think that means that we believe that the market will continue to develop in a positive way this year.
Got it. Thanks very much for taking the additional questions.
Thank you.
Thank you. And our final question comes from the line of Gomera Perna. Please ask your question.
Almost there. It's Guillermo Pegna from UBS again. Just a question on advanced payments again on your balance sheet. Is it all equipment driven advanced payments? Or there's also a component that comes from maintenance long term contracts or anything similar?
And also can you quantify how much of the advanced payments will be new equipment based and how much basically will be maintenance based if anything?
So our advance payments is for new equipment and modernization. So the same things that are including our orders received. If you remember, our orders received does not include maintenance contracts. Yes. And therefore, advanced payments does not include advanced payments for maintenance contracts.
Okay. Thank you. And how much is modernization? How much is maintenance? Sorry, how much is new equipment?
The majority is new equipment. If you look at the sales split, it wouldn't be too far away from that, but clear majority is for new equipment.
Yes. Okay. Thank you. Understood. Fantastic.
Thank you.
Thank you.
I believe that was our final question from the lines. Thank you very much everyone for participating in our call and also for your active participation in terms of questions. Have a nice rest of the week. Thank you. Bye.
Thank you.
That does conclude today's conference call. Thank you for participating. You may now all disconnect.