Good afternoon from Finland. Good, and welcome to KONE's results review for the first quarter of the year. We have the usual setup, so we will start with a presentation highlighting the key figures and development during the first quarter, and thereafter, we have plenty of time for your questions. Without any further introductions from me, Matti, please go ahead.
Thank you, Carla. Yes, welcome to KONE's Quarter 1 conference call. We have, again, many positive news to tell. We had a very strong start for the year, indeed. We had a good development in all businesses and in all geographical areas. The growth in orders, operating income, cash flow, in all of those was strong, which demonstrates that our competitiveness has continued to improve. Again, we believe that the two key reasons for this continuous development of competitiveness is because of two reasons. First of all, the strength of our people continues to develop in different parts of the world. Secondly, our way to develop competitiveness in the broad scope, but in a focused way, works. I will first tell you about how our financial performance developed during Quarter 1 and how the markets developed in the different continents.
I will tell you our estimate about last year's market size and how KONE's market shares developed. I will also tell about what kind of progress we are doing in our development programs. Finally, of course, about the market outlook and business outlook. Let's start with the Quarter 1 numbers. The growth in orders received was 25%, and the orders received exceeded EUR 1.7 billion, which is an all-time high level. The order book growth was 20%, and the order book was EUR 5.8 billion. Again, I would like to remind that we don't include maintenance contracts in our order book. Especially remembering that this all-time high order book is a strong basis for us to continue to develop our business. Sales growth was almost 13%, and we almost reached EUR 1.4 billion level.
The operating income growth was strong as well, almost 20%, and the operating income was EUR 160 million compared to the EUR 135 level a year before in Quarter 1. The relative operating income improved by 0.7 points to 11.5%. As I believe all of you remember, last year our operating income was burdened by the amortization of intangible assets in GiantKONE. Therefore, it is better to take a look at the EBIT before amortizations, where you see that the improvement is like 0.3%. Cash flow also developed very well. It grew from the already strong level of EUR 250 million to almost EUR 300 million. Let's now again take a closer look to orders, sales, and operating income and what was our development this year in Quarter 1 as compared to the Quarter 1 previous years.
From here, you see clearly how this EUR 1.7 billion was the all-time high level and how we were able to take a nice step up here. Geographically, the orders received had a small decline in Europe, Middle East, and Africa. However, in such a way that we had some growth in Central and Northern Europe, but again, some decline in Southern Europe. On the other hand, in the Americas and in Asia Pacific, we had a very strong growth. In Americas, driven by success in a few big major project orders. In Asia Pacific, the key driver was very high growth in China during the first three months of this year. Sales growth was close to 13%, and what was good news is that we had growth in all geographies.
The growth was this time particularly strong in the Americas and in Asia Pacific, where again, it was strongest in China. This shows the development in operating income. The first point is that here you see Our solid growth in operating income over the last several years. Some years the step-up has been small, in some others it has been bigger. Now again, we got a bigger step up and the improvement was driven by mainly two factors. First of all, very strong deliveries in China during the first three months. Secondly, which was also very positive, was that the maintenance business developed well in all geographies. This about the development in the financial performance. I have to say that we are, and I am very pleased with our business progress now in the beginning of this year.
Also in this context, I would like to express my thanks to our whole personnel for the job very well done. Now, next to the development of our business mix and market mix in sales. As you know, and remember, we have had a very strong growth in new equipment business over the last several years. This growth continued now. The growth in new equipment business was more than 20% globally, and hence also the share of new equipment sales about our total sales continued to increase now by 3 percentage points from 43% to 46%. Also, the development was good also in the service business. There we had a growth of close to 6%. The share of service declined by the same 3% because of the very high growth in new equipment. Also in the geographical split, the development of last year's continued.
The share of Asia-Pacific increased by three. Americas, now this time increased by one. The share of Europe, Middle East, and Africa decreased by 4 percentage points. Overall, we see that this business split and this geographical split they enable us a very good focus on the future growth opportunities. Next about market development in the first quarter. I will start with Europe, Middle East, and Africa, new equipment markets. In Central and North Europe, the market declined in most countries, but was still at typically in a relatively good level. We saw some positive development during this period in the U.K. Germany and Austria continued to be strong markets, while most of the other, practically all of the other markets to a certain extent declined. We are still at a relatively good level, most of them.
In South Europe, the market continued to decline from the already low levels. This was the case with Spain, this was the case with Italy, and also increasingly as in France as well. In the Middle East, the market continued to grow. The market was strong in Saudi Arabia and developed positively also in Dubai and in Qatar. Modernization markets declined in most countries. Again, with a difference in the trends in Central Northern Europe and Southern Europe. In Central Northern Europe the modernization market had a slight growth, while in Southern Europe the markets declined. In the maintenance markets, the markets continued to grow, but clearer and clearer than earlier variations between countries. Some good development in some countries in the Central Northern Europe, while very weak development in the weakest markets in Southern Europe.
I would especially like to point out Spain, where the price declines led to the negative development of the market in this period. Price competition remained very intense, particularly of course in South Europe. About North America, where in new equipment markets in the U.S. the growth continued and now it was, I would say more or less countrywide and continued to be driven by small and medium-sized projects in the residential and office segments. In Canada, the market grew slightly, and in Mexico the market was rather stable. The modernization markets did also better than in Europe. The markets grew here. In North America and in maintenance markets, the market grew, but the price competition was very intense, particularly in non-residential segments. Asia Pacific. There the headline is that strong growth in China, and that was really the case.
Now I would like to comment the development in the new markets with a few country-specific comments, starting with China. In China, the market grew strongly, driven by positive development in all segments. The growth in China was indeed surprisingly high during the first months of the year. We see that the dynamics behind this were the following. It all starts from the middle of last year when both the sales of new apartments and the prices of apartments started to move up. In addition, in October, there was the, let's say, small positive shift in the development of GDP. All of this encouraged the developers to accelerate their existing projects. At the same time, the affordable housing segment that was at a record in sales levels in terms of completions last year, let's say, expanded in strength to the beginning of this year.
All of this resulted in the market growth of more than 20%, somewhere between 20%-25%. In case of KONE, the growth in orders in China was in volumes close to 40% and in monetary value more than 40%. Very high numbers indeed. In India, the market growth in quarter one was about 10%. In Australia, the market declined slightly, and in Southeast Asia, the positive development continued, and particularly so in Indonesia and Malaysia. In modernization, the biggest market in this region continues to be Australia, and the development was stable there. In maintenance, there's a good development in all of the markets. Now to the next interesting topic, which is our estimate about the market size last year. Many of you remember that in 2011, our global market size estimate was 610,000 units. Units, new elevators and escalators.
Last year, this increased to 670,000 units. Big part of the growth was driven by China. In 2011, our estimate was 390, and last year this went up to 435. This led to the development that last year 65% of the global market volume in new elevators and escalators came from China. When you listen to this you see this dark gray color which tells about the development particularly in India and in Southeast Asia. The market development also in this geography was in line with the global market growth. Japan and Korea kept their level and share at 4%. This means that Asia Pacific represented last year in terms of volumes in the new elevator and escalator market, 77% of the total global market.
At the same time, the share of Europe, Middle East, and Africa decreased from 18 to 17% and the share of North America stayed at 3%. As we have said all the time, although we have seen the gradual recovery in the new markets in the U.S., we have always said that the levels continue to be low. This 3% for the whole North America naturally is in line with that. This market size picture is very informative and it tells that companies such as KONE which were able to early enough develop a strong position in the Asia Pacific had and have good opportunities to grow. On the right side, we have the picture telling about the elevators and escalators in operation and what is the geographical split here.
You see that still almost or close to 60% of the elevator and escalator base is in Europe, Middle East, and Africa and in North America. However, this year was slightly last year declining and again even in this area the share of China is growing. In new equipment, KONE's global market share last year increased from 17 to 18, and in China, our market share increased from 15.5 to 17, and with that, we were the leader last year in the Chinese market. With this 18 globally, we were globally number two. A couple of comments about our development programs. This is now the third year we are working actively with this set of five major development programs.
During the coming months, during the summer, in the middle of this year, we start our work to be able to decide what is the best possible set or combination of five major development programs that again, during the following three years, enable us to support continuous profitable growth, make that possible, and secondly, also bring us closer and closer to our vision. A few comments about one of these development programs and what are our activities this year. Couple of weeks ago, we got our results of our annual employee satisfaction survey. The results overall were very encouraging. Very good positive development, and the response rate was again at the record level at a level of more than 90%.
This year we have an even stronger focus than in the previous years on individual development planning and the implementation of these plans through more active job rotation and people development programs. In these learning programs, we are continuing with all of the existing programs and have started new programs in project and project management and in development of sales skills. Finally, market outlook and business outlook to this year. Starting with market outlook and new equipment markets. The market in Asia Pacific is expected to grow clearly. I already mentioned that we estimate that the growth in China will this year be about 10%. The market in Central and North Europe is expected to decline slightly and the market in South Europe, we expect to further decline from the already weak levels. In North America, we expect that the growth will continue.
In modernization, we expect that the market will be at about the same level as last year or slightly decline. In maintenance markets, we expect that the maintenance markets will continue to develop rather well in most countries. Finally about the business outlook, where we have specified slightly both our sales outlook as well as operating income outlook because of the strong order intake level and the overall strong start for the year. In sales, in comparable currencies, we had earlier a window from 5%-9% sales growth as an outlook and in operating income, assuming that the translation exchange rates don't materially deviate from the situation in the beginning of this year, our earlier guidance was from EUR 840 million-EUR 920 million. The window is from EUR 870 million-EUR 920 million, so that the upper limit we have kept at the same level.
As you remember, last year our operating income was a bit more above EUR 820 million. This was what I wanted to start with, and what we both wanted to start with, and now we have time for your questions. Carla, please.
Thank you very much, Matti. As Matti already indicated, we are now ready for the questions from the lines, please.
If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, that's star and one to ask a question. Your first question comes from the line of Antti Sutelin from Danske Bank. Please ask your question.
Thank you. This is Antti from Danske. I would have two questions, please. First of all, China. I think you indicated that the growth in order intake and market volume growth is increasing explained by projects which have been started many years ago. My question is, how long can this order growth continue to grow without the help of building starts actually starting to turn up?
Okay. This is actually a very good question because as I mentioned from the middle of last year, the sales of new apartments has been growing all the time in every quarter. The same is the case for prices going up. Also the development in new construction starts that was very negative in the middle of last year have improved positively in that respect, that in fourth quarter they were much less negative than in the third quarter last year. Again, only minus two now in the first quarter of this year. This naturally brings some uncertainty to the development and therefore, although the growth in the market was very strong at more than 20% during the quarter one, we estimate that the growth will be clearly lower already in quarter two.
Part of this conclusion also comes from the decision of the Chinese government to slow down growth. These decisions were done as you remember in March. We estimate that the full year growth is at about 10%.
Okay. Thank you. My second question is a little bit more strategic. You have now reached number 2 position globally measured in volumes, in new equipment volumes. What about aftermarket and maintenance especially? I understand that your market share is considerably lower in maintenance compared to your new equipment market share. Can you bring your maintenance market share up, do you think?
When we take the last let's say close to 10 years we have been growing a little bit faster as an average over that period also in the maintenance space as compared to the data that we have about our key competitors. Because maintenance business is accumulative in nature, it is slow and this is why, of course in addition to all of the development actions to speed up organic growth we are also looking more and more actively to acquisitions. I think that as the base was more than 11 million and end of last year we had 900,000. This about 8.5% that was our market share in maintenance. In modernization, however, our market share according to our estimate was clearly higher than our market share in maintenance. That was at the level of about 15%-16%.
It is somewhat difficult to get a very clear understanding of the accurate modernization market size that it has globally.
Okay. Thank you.
Antti, the conclusion is that yes, we have been growing, but we have a lot of opportunities to win when we work hard.
Okay, thank you. Can I just clarify the first question answer. You said that you expect 10% growth in market in China. Does this mean that you expect building starts to start turn upwards sometime during the course of 2013 in China?
Yes. I repeat that our estimate for the full year market growth in terms of volumes is about 10%. I would say that it requires that at a certain time during this year the new construction starts would become positive.
Thank you very much.
Your next question comes from the line of Austin Earl from Marshall Wace. Please ask your question.
Hi. Good afternoon, everyone. I have a few questions and I can maybe take them one by one. If I could just maybe follow up on the guidance for China at around 10% growth for 2013. If you had 40% growth in volumes in Q1, unless my math is appalling, that means that you don't expect any growth for the rest of the year from China because you've already had your 10% annual growth in the first quarter. Have I understood that correctly or you're just being very conservative on your guidance?
Maybe I was not very clear in what I said because this close to 40% growth in volumes and more than 40% in monetary value, that was our growth in KONE's growth in quarter one. Our estimate about the market growth in quarter one was between 20%-25%.
Okay. I guess the obvious follow-up is then what do you expect for KONE's growth in 2013 if you expect the market to be at 10%?
Well, in quarter one, we continue to grow clearly faster than the market growth and our objective continues, of course, to be able to grow faster than the market. We don't give guidance in orders.
Sure. I just had a couple of questions, I guess both related to the order book. It seems to me that the order book in the Q1 compared to the end of last year, has grown 15% sequentially. I just wondered, is that usual? I mean, is that sort of an unusually high rate of growth to see from one quarter to the next in the order book?
Henrik, what do you answer this?
I think it's typical that our order book grows during the first quarter, because if you look at our sales in both new equipment and modernization, they are quite heavily second half weighted, whereas orders are more even, and in fact, Q1 is actually quite a strong order quarter. It's more of a seasonal pattern that is usual for our business.
That sort of 15% growth, is that not sort of unusually strong?
Clearly it's a very strong number, and that comes from the fact that our orders received grew by 25% in a quarter.
Sure. Of this order book that you have now, this, I guess roughly, EUR 5.8 billion, how much of that would you expect to be converted into revenues in 2013?
Henrik.
You can say the average lead time our order book is roughly one year. It varies a little bit from country to country. You can say that the orders that we are taking now, most of the orders we're taking now are going into 2014, and in the larger projects also beyond. You have to remember that our major project business has been quite strong over the past years. That part that is related to major projects would have a lead time that's clearly over a year and other business would then be roughly one year. Roughly.
Okay. Sorry, actually, I think I'll leave it at that and come back for more later. Thank you.
Okay. Thank you.
Your next question comes from the line of James Setzler from Canaccord. Please ask your question.
Yes, thank you. Good afternoon. Can you talk a bit about what you're seeing from the Japanese competitors who all want to expand more globally and now have the yen to help them? Then finally, looking at China, the comments we've had from Shanghai Electric are much more pessimistic on the market. Is this just an issue that you're gaining share and the locals are having more difficulty? Could you maybe give some more clarity on that? Thank you.
Okay. First about the Japanese competition. At the moment, the Japanese companies, in addition to Japan, some of them are very active in China, in some other Asia Pacific countries, but in a very limited way outside of those geographies. We have seen some expansion during the last couple of years, but not much. Henrik.
Also to refer to the yen, that does not have, as far as we know, a very significant impact because also the Japanese players would have their largest base of manufacturing and sourcing in China, for example. I think that from that perspective, currency should not have that big of an impact.
That was very sensible addition indeed. Could you repeat the second question? My handwriting is so unclear.
Yeah, just interesting hearing from Shanghai Electric, who claim to be the market leader in China. They just have a much more subdued view on the market than you have. Is that maybe just that they're losing share and they don't have the right technology?
I can't naturally comment what they are saying and how they see the development. What in general continues to be happening in the Chinese market is that, of course, Shanghai Electric with Shanghai Mitsubishi is one of the big players, but the demand seems to continue to be moving from smaller companies to bigger companies. What we have communicated about how the market development was and what it is, it is our transparent view, of course.
Indeed. Can you just say how your market share in social housing compares to that in normal commercial housing?
We have done rather well in the social housing, in the affordable housing segment. We have, let's say, very good product competitiveness, both with the KONE brand and GiantKONE brand. However, the number of competitors in that segment is huge. It is hundreds. Our market share in affordable housing is somewhat lower than what is our market share in China, in general.
Great. Thank you.
Thank you.
Once again, I'll start in one to ask a question. Your next question comes from the line of Volkan Gokmen from LD. Please ask your question.
Good afternoon. First of all, congratulations to the start into the new year. Just for my own curiosity and a better understanding how new installation translates into servicing, can you give us an idea how long grace periods are typically, let's say, in the various segments, in the residential segment? Particularly interested in those grace periods with high project content, for instance, a typical big public project. Can you give us an idea there from the finishing of the new equipment installation to the moment you make billable services?
Henrik, maybe you answer this.
In most countries, the so-called first service period, which is included in new equipment sales, is one year. However, in most countries, there tends to be some form of a lag from when we have handed over a completed working elevator until tenants move in. There may be a period of time before that and before the first service period starts. I would say most of the world, it's probably from the new equipment until then the paid service start would be about one and a half years. However, there are geographic differences here. In China, for example, the first service period can be up to two and a half, even in some cases three and a half years. As I said, that is then something that is part of new equipment sales.
It depends on, I would say, in the best case, it's a little bit over a year or a year and a half, up to probably three years.
Thank you.
Your next question comes from the line of Lars Brorson from DNB. Please ask your question.
I had three questions, if I could. Matti, can I first return to the earlier question about your guidance for China for 2013, your 10% market guidance there. I can appreciate, again, your commentary around a decelerating market. If Q1 grew 20% and you expect growth in Q2, even at clearly lower level than Q1, again, it would imply the market to decline into the second half. What is your visibility and conviction on that? Of course, we saw that the market outgrew your guidance quite significantly in 2012. Maybe just to that, if I can also understand your assumption for the affordable housing segment in 2013. Again, if that outgrew the overall market in Q1, say at 25%-30%, you are clearly guiding to a significant decline in the affordable housing segment if you maintain your view that that's flat in 2013. That's my first question.
Okay. In China, we believe that the market already in quarter two will be at a clearly lower level than it was in quarter one. This means that the market does not have to necessarily be at the negative levels in the second half. I have to also underline that the visibility, of course, to the second half is still weak. What comes to affordable housing, I remember that. First of all, in terms of new starts, 2011 was the record high year in terms of closes last year. Now, the estimate for this year for the start is 5 million and something, 6 million, and closings again about 1 million, less than last year. It is definitely going down.
Now, one of the key points here earlier was that the strength of last year continued to the beginning of this year but will now be going down. This is how we see it.
That's useful. My second question is on your big projects business. Can you just comment on whether that was unusually strong in Q1? I thought you made a comment that particularly in the U.S., it was very strong in Q1. Would you say overall for the business that you've seen an unusually strong major project business in Q1?
Well, yes. It was clearly so that it was a strong quarter in major projects. It is important to really underline that we continue to have quarterly variations as we always have had in the level of major project orders. In quarter two, I would be very surprised if we would have the same level of major project orders as we had in quarter one.
That's useful. Just thirdly, the margins of orders received continues to improve in the backlog as per your report. It looks like your margin assumption at the midpoint of your guidance in 2013 is quite conservative. Can you talk about the headwinds that you are seeing in 2013 on deliveries beyond the mix shift that we can obviously appreciate will hurt margins in 2013? What are the core headwinds that you see and perhaps that could explain the somewhat conservative margin guidance from you?
First of all, as compared to quarter one regarding the mix, I would like to really point out that our new equipment business sales is always second half weighted. It will be also this year. Therefore, the mix impact will be bigger in the second half than what it has been now in the beginning of the year. The second factor here is that before we started our so far very successful work in getting increasing to our prices through a very intensive pricing skills, pricing competence development, our prices went with the collapse of the U.S. market and U.S. construction. Our prices went to two low levels, and we are still suffering for that this year.
Thirdly, as I mentioned in the market development review, the markets in Central and Northern Europe, they are continuing to be at a relatively good level, although they are a bit sliding down. There is very clear weakness in Southern Europe that has expanded from new equipment also to service businesses. That is a third factor. Finally, the fourth very important point to mention is that, yes, our development has been, during last years, relatively good, but we continue to be challenged. We continue to have the challenges mindset and therefore we continue to invest in growth. This means investing especially in Asia Pacific, which is an area for growth opportunities and investing in our process development and IT and R&D. These are the key examples.
Thank you.
Okay, once again, let's star one to ask a question. Your next question comes from the line of Andre Kukhnin from Credit Suisse. Please ask your question.
Good afternoon. It's Andre from Credit Suisse. Thank you for taking my questions. I just wanted to follow up on your comment on price competition in Southern Europe that's led to actual market declining. Is this coming from across the board or is it particularly sort of smaller players or larger players that are impacting the pricing there?
What do you, Henrik, like to comment this?
I think our understanding that quite a lot of it comes from small independent players in the weak markets. We know that many of the Southern European markets have still a lot of small independent players and that is an important source of the price competition there.
Right. Is that resulting in some interesting roll-up opportunities in those markets?
Well, as we have said, we continuously are looking for acquisitions and as you know, we have done about 20 acquisitions of maintenance companies every year. We are constantly looking for attractive opportunities that are priced at the right level. You could say, yes, we are looking for them, that process has continued to be quite slow, the consolidation process.
Right. Very clear. Thank you. Also just a separate question on the new product rollout that you announced last year. Could you just give us an update on the progress there and what the plan is? Is it a global rollout? Are you doing region by region and what the timeline is there?
It is developing exactly in line with our plans. First of all, the customer feedback has been very positive and as we said at the time of the launch, the competitiveness of our current products is strong and therefore the very clear priority one element in our ramp-up is that we get the quality from the beginning. Therefore the ramp-up to full volumes takes up to the end of next year when we will have the, let's say, the full volumes in place. This means that for this year the impact of the new product range in terms of operating income and sales is not significant at all. Next year the situation already starts to be different and then of course very much so in 2015.
Great. Just final question on this. Normally these kind of new product ramp-ups go through a sort of a J-curve effect on the P&L where you are at some earlier stages incurring more costs than obviously generating profits. Are we through that or are we in the middle of that sort of J-curve effect or is that something that is going to come next year?
Well, what we are working with is that next year we would hopefully benefit a little bit also in the cost competitiveness as compared to our existing products.
Very clear. Thank you very much.
Your next question comes from the line of Alexi Deneux from BNP Paribas. Please ask your question.
Yes, good afternoon. 2 question for me. On the first one, if we look at the EBIT margin on the Q1, you mentioned the impact of projects taken during 2010, 2011, especially in Americas, I believe, which have lower margin. How long do you expect this impact to last? If you can give a guidance of how much impact it has on the quarter, that would be my first question.
Okay. Maybe Henrik you answer this. We have to remember that the lead time from order to delivery is clearly the longest in North America, and it can be usually up to 2 years. We can see that from the fact that now our North American business grew clearly, whereas if you remember, our orders received started to grow, already overgrow 2 years ago. We can see that this is about the lead time. We expect that that will continue at least throughout this year, that headwind, particularly on what relates to North America. We have not quantified the impact of this, but it clearly has an impact on our margin.
Thank you. The second question would be the maintenance market in China. If I look on the new installation, you grew at twice the pace of the market in China. Do you expect to have the same kind of pace on the maintenance market as well?
Our development also over the years also in the maintenance market has been good. What we have said is that between 2006, 2012, our average annual growth in maintenance sales has been roughly 35%. That has been our development.
Thank you.
Of course, we are working very actively in developing our maintenance competence there all the time because in the medium to long term, it is really a big opportunity because of many reasons. Because of the structure of the maintenance activity in China at the moment, 40% of the maintenance base being taken care of by customers. Of course, for example, that is in the medium to long term, a big opportunity for companies that have been able to build a country-wide maintenance network. We now have these more than 350, let's say, locations and continue to expand.
Thank you.
Once again, if you star one to ask a question. There are no questions at this time. Please continue.
Okay, thank you very much for all the questions and the active participation, and we would like to, at this point, wish you a very nice afternoon and rest of the week. Thank you very much.
Thank you very much.
Thank you. Bye bye.
That concludes conference for today. Thank you for participating. You may disconnect.