Good afternoon from Finland, and welcome to KONE's results review for the Q1 of the year. We have the usual set up, so we'll start with a presentation highlighting the key figures and development during the Q1. And thereafter, we have plenty of time for your questions. So 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. What was good about that 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, I believe that we believe that the 2 key factors the 2 key reasons for this continuous development of competitiveness is because of two reasons. And first of all, the strength of our people continues to develop in different parts of the world. And secondly, our way to develop competitiveness in the broad scope, but in a focused way works. Now I will now first tell you about how our financial performance developed during quarter 1 and how the markets developed in the different continents.
Then I will tell you our estimate about last year's market size and how KONE's market shares developed. And I will also tell about what kind of progress we are doing in our development programs. And then finally, of course, about the market outlook and business outlook. So let's start with the quarter one numbers. The growth in orders received was 25% and the orders received exceeded €1,700,000,000 which is an all time high level.
The order book growth was 20% and the order book was €5,800,000,000 And again, I want to would like to remind that we don't include maintenance contracts to our in our order book. So especially remembering that this all time high order book is strong basis for us to continue to develop our business. Sales growth was almost 13% and we almost reached €1,400,000,000 level. The operating income growth was strong as well almost 20 percent and the operating income was €160,000,000 compared to the €135,000,000 level a year before in quarter 1. The relative operating income improved by 0.7 points to 11.5%.
But as I believe all of you remember last year our operating income was burdened by the amortization of intangible assets in Sajant Kone. And 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 €250,000,000 to almost €300,000,000 But 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 that how this €1,700,000,000 was the all time high level and that's 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 sepsis in a few big nature projects. And in Asia Pacific, the key driver was very high growth in China during the 1st 3 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. And this shows the development in operating income. And 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 2 factors. First of all, very strong deliveries in China during the 1st 3 months. And secondly, the which was also very positive was that the maintenance business developed well in all geographies.
So this is about the development in the financial performance. And I have to say that we are and I am very pleased with our business progress now in the beginning of this year. And 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 from now by 3% points from 43% to 46%. Although 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 Asia Pacific the share of Asia Pacific increased by 3. Americas now this time increased by 1. And the share of Europe, Middle East and Africa decreased by 4% points. Overall, we see that this business split and this geographical split, they keep us very they enable us a very good focus on the future growth opportunities. Next about market development in the Q1 and I will start with Europe, Middle East and Africa and new equipment markets.
In Central and North Europe, the market declined in most countries, but was still at relatively good 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. But 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 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. However, again, with a difference in the trends in Central and Northern Europe and Southern Europe, so that in Central and Northern Europe, the modernization market had a slight growth, while in Southern Europe, the markets declined. In the area of maintenance markets, the markets continue to grow, but clearer and clearer than earlier variations between countries. Some good development in some countries in the 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 market due to the negative development of the market in this period.
Price competition was remained very intense, particularly, of course, in South Europe. Next about North America, where in new wicket markets in the United States, 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.
Demodenization markets, a little bit 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. And then Asia Pacific, where the headline is that strong growth in China that was really the case. And now I would like to comment the development in the new equipment 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 1st months of the year. And we see that the dynamics behind this we are the following. And 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.
And 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 the levels in terms of completions last year, let's say, expanded in strength to the beginning of this year. And all of this resulted in the market growth of more than 20%, somewhere between 20%, 25%. In case of KONE, the orders growth in orders in China was in volumes close to 40% and in monetary value more than 40%. So very, very high numbers indeed.
In India, the market growth in quarter 1 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 in this Australia and the development was stable there. In maintenance, there's a good development in all of the markets.
And now to the next interesting topic, which is our market estimate about last about the our estimate about the market size last year. Many of you remember that in 2011, our global market size estimate was 610,000 units. So units, new elevators and escalators. Now last year, this increased to 670,000 units. Big part of the growth was driven by China.
In 2011, our estimate was $390,000,000 and now last year, the earnings went up to 4.35 This led to the development that last year 65% of the global market volume in elevators and escalators came from China. When you listen to this, you see this dark gray color, which tells about the development in particularly in India and in Southeast Asia. The market development also in this geography was in line with the global market growth. And also 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 7% 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 market markets in the United States, we have always said that the levels continue to be low. And this 3% for the whole North America naturally is in line with that. This picture 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 have had and have good opportunities to grow. On the right side, we have the picture telling about the elevators and escalators in operation and how 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 Eastern Africa and in North America. However, this year is slight 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 2018 globally, we were number 2. Now a couple of comments about our development programs. This is now the 3rd year we are working actively with this set of 5 major development programs. And now during the coming months during the summer in the middle of this year, we start to our work to be able to decide that what are the let's say what is the best possible set of a combination of 5 major development programs that again during the following 3 years enable us to or let's say support continuous profitable growth, make that possible.
And then secondly, also bring us closer and closer to our visa. Now a few comments about one of these development programs and what are our results of our new of our annual employee satisfaction survey. And the results overall were very encouraging, very good positive development and the response rate was again at the record level at the 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 sub rotation and people development programs. In these learning programs, we are continuing with all of the existing programs and have started are starting new programs in project and project management and in developmental sales skills.
Now 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 expect that the growth in 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 decline from the 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. And now 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% to 9% sales growth as an outlook.
And in operating income, assuming that the translation expense rates don't materially deviate from the situation in the beginning of this year, we had our earlier guidance was from €840,000,000 to EUR 920,000,000 Now the window is from EUR 8.7 $1,000,000 to $920,000,000 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 820,000,000 This was what I wanted to start with and what we wanted to start with. And now we have time for your questions. Carla,
please. Thank you very much, Matti. And as Matti already indicated, we are now ready for the questions from the lines, please.
Your first question comes from the line of Antti Sutilin 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 explained by projects which have been started many years ago.
Now I'm concerned a little bit about the fact that new building starts have been falling in 2012 and also in the Q1 of 2013. So my question is, how long can this order growth continue to grow as without the help of building starts actually starting to turn start?
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. But 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 Q4, they were much less negative than in the Q3 last year. And again, only minus 2% now in the Q1 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. 1, we estimate that the growth will be lower, clearly lower already in quarter 2. And part of this naturally also comes 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. And we estimate that the full year growth is at about 10%.
Okay. Thank you. And my second question is a little bit more strategic. You have now reached number 2 position globally measured in volumes in new equipment volumes. But what about aftermarket and maintenance especially?
I understand that your market share is considerably lower in maintenance compared to your new equipment market share. Is there can you bring your maintenance market share up do you think?
We have 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. But because maintenance business is accumulative in nature, it is low. And this is why, of course, in addition to the all of the development actions to speed up organic growth, we are also looking more and more actively to acquisitions. I think that when the asset base was more than 11,000,000 and end of last year, we had 900,000 it is 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.
So that was at the level of about 15%, 16%. It is a little bit it is somewhat difficult to get very clear understanding of the accurate modernization market size that it has globally.
Okay.
So, 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. And 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 2030 during any China?
Yes. I repeat that our estimate for the full year market growth in terms of volumes is about 10%. And 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 Weiss. Please ask your question.
Hi, good afternoon, everyone. I have a few questions and I can maybe take them 1 by 1. If I could just maybe follow-up on the guidance for China at around 10% growth for 2013. I mean, if you had year from China to get because you've already had your 10% annual growth in the forecast quarter. Have I understood that correctly?
Or are you 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 1. The market our estimate about the market growth in quarter 1 was between 20% to 25%.
Okay. So I mean I guess the obvious follow-up is sort of what then what do you expect for Kona's growth in 2013 if you expect the market to be at 10%?
Well, we don't so in quarter 1, we continue to grow clearly faster than the market growth. And our objective continues of course to grow faster than the market, but we don't give guidance in orders.
Sure. I then just had a couple of questions, I guess, both related to the order book. And it seems to me that the order book compared to in the Q1 compared to the end of last year has grown 15% sequentially. And I just wondered is that usual? I mean is that sort of an unusually high rate of growth to see from 1 quarter to the next in the order book?
Henrik, why don't you answer this?
So I think it's typical that our order book grows during the Q1 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 quarter to quarter. So it's more of a seasonal pattern that is usual for our business.
But that sort of 15% growth is that not sort of unusually strong?
Well, it's clearly it's a very strong number and that comes from the fact that our orders received grew by 25% in the quarter.
Sure. And of this order book that you have now this I guess EUR 5,800,000,000 how much of that would you expect to be converted into revenues in 2013? Hendrik? So you can
say the average lead from our order book is roughly 1 year. It varies a little bit from country to country. But 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 larger projects also beyond. So you have to remember that our major project business has been quite strong over the past years. So 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 a year roughly.
Okay. And sorry, just I think 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 Jim Setler from Canaccord. Please ask your question.
Yes. Thank you and 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? And then finally looking at China, the comments we've had from Shanghai Electric are much more pessimistic on the market. Is it 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. The first about the Japanese competition. At the moment, the Japanese companies, they 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 all geographies. And we have seen some expansion during the last couple of years, but not much. Henrik?
And also what you referred to the yen that does not have a 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. So I think that from that perspective, currency should not have that big of an impact.
That was very, very extensive addition indeed. So could you repeat the second question? My handwriting is so unclear.
Yes. Just interesting curious from Shanghai Electric who claimed 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 or?
I can't naturally comment what they are saying and how they see the development. What in general is happening continues to be happening in the Chinese market is that, of course, Shanghai Electric with Shanghai Mitsubishi is one of the big players, but Reman seems to continue to be moving from smaller companies to bigger companies. But what we have communicated about how the market development was and what it is, it is our transparent view of course.
Indeed. And 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 operable housing segment. We have, let's say, very good product competitiveness both in Videoconf brand and Sionconf brand. However, the number of competitors in that segment is huge. It is 100. And our market share in affordable housing is somewhat lower than what is our markets here in China in general.
Great. Thank you.
Thank you.
And your next question comes from the line of Volkund Gokhmin from LVA. Please ask your question.
Yeah. 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, but then 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 can really you make billable services?
Henrik maybe you'll answer this. So
in most countries the so called first service period which is included in new equipment sales is 1 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. So there may be a period of time before that and before the first service period starts. So I would say most of the world it's probably from the new equipment until then the paid service start would be about 1.5 years. However, there are geographic differences here.
And in China, for example, the first service period can be up to 2.5 years, even in some cases 3 years. But I said that is then something that is part of new equipment sales. So it depends on, I would say, in the best case, it's a little bit over a year, or 1.5 years up to probably 3 years.
Thank you.
Your next question comes from the line of Lars Brostrom from DNB. Please ask your question.
I had three questions if I could. Mate, 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. But 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. And 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 2013? That's my first question.
Okay. In China, we our we believe that the market already in quarter 2 will be clearly at a clearly lower level than it was in quarter 1. This means that the market does not have to necessarily be at negative levels in the second half. But I have to also underline that the visibility of cost to the second half is still weak. What comes to affordable housing?
I remember that the so first of all in terms of new starts 2010, 2011 was the record high year in terms of closings last year. And now the estimate for this year for the start is €5,000,000 and something, dollars 6,000,000 and closings again about $1,000,000 less than last year. So it is definitely going down. And 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. And we continue to have it is important to really underline that we continue to have quarterly variations as we always have had in the level of major process orders. So in quarter 2, I will be very, very, very surprised if we would have the same level of metroprostat orders as we had in quarter 1.
That's useful. And 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 13% 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 they could explain the somewhat conservative margin guidance from you?
First of all, as compared to quarter 1 regarding the mix, I would like to really point out that our new equipment business sales is always 2nd half weighted. And so it will be also this year. So therefore, the mix impact will be thicker in the second half than what it has been now in the beginning of the year. Then the second factor here is that before we started our so far very successful work in increasing 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 too low levels. And we are still suffering for that this year.
And then thirdly, as I mentioned in the market review market development review, the markets in Central and Northern Europe, they are contributing to Piazza relatively good level off, so they are a bit sliding down. But there is very clear weakness in Southern Europe that has expanded from new equipment also to service businesses. So that is a third factor. And then finally, the 4th very important point to mention is that, yes, our development has been during the 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. And this means investing especially in Asia Pacific, which is an area for growth opportunities and investing in our growth development and IT to key view and R and D. These are the key examples.
Thank you.
And your next question comes from the line of Andrey Tikhnim from Credit Suisse. Please ask your question.
Good afternoon. It's Andrey 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 actually market declining. Is this coming from kind of across the board?
Or is it particularly sort of smaller players or larger players that are impacting the pricing there?
What do you have, 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. And is that resulting in some interesting roll up opportunities in those markets?
Well, we are 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. So we are constantly looking for attractive opportunities that are priced at the right level. So you could say, yes, we are looking for them, but that process has continued to be quite slow the consolidation process.
Right. Very clear. Thank you. And 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 it region by region? And what the time line is
on? It is developing in line exactly in line with our plans. So that first of all, the customer feedback has been very, very positive. And as we said at the time of the launch, our 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.
And 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. But next year the situation already starts to be different and then of course very much so in 2015.
Great. And 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 and L where you are at some earlier stages incurring more costs than also 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, our what we are working with is that next year we would accelerate benefit a little bit in 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 Alex Idenno from BNP Paribas. Please ask your question.
Yes. Good afternoon. Two questions for me. If I look so on the first one, if we look at the EBIT margin on the Q1, you mentioned the impact of project taken during 2010, 2011, especially in Americas, I believe, which have lower margin. How long do you expect this impact to last?
And 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.
Well, we have to remember that the lead time from order to delivery is clearly the longest in North America and it can be up to usually up to 2 years. And 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. So we can see that this is about the lead time. So we expect that that will continue at least throughout this year that headwind particularly on the what it relates to North America. We have not quantified the impact of this, but it clearly has an impact on our margin.
Thank you. And the second question would be in the mass transfer market in China. So if I look on the new installation, you grew at twice the pace of the market in China. I mean do you expect to have the same kind of pace so on the maintenance market as well?
Well, our development also over the years also in the maintenance market has been good. What we have said is that between 2,006, 2012, our average annual growth in maintenance sales has been roughly 35%. So that has been a longer development.
Thank you.
And 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 space is taken care by being taken care 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 countrywide maintenance network. We now have these more than 350, let's say, locations so and continue to expand.
Thank you.
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.