With a presentation by our President and CEO, Matti Allahutta and continue with your questions and our answers today. Without any further introductions, Matti, please go ahead.
Thank you, Carla. Yes, welcome to KONE's Q2 conference call. We have again today many positive news to tell about how the business has developed at KONE. I will first tell about the financial performance in quarter 2 and first half of the year, give an update on the market development and then followed by some comments about how we have been developing our competitiveness during the last few months. And then finally, I will naturally tell about our how we see the market development for the rest of the year and what is our full year business outlook.
Let's start with the quarter 2 numbers. And starting from orders received, the growth was 23.4% and in comparable currency 16.1%. And in quarter 2, this was the we reached we exceeded €1,500,000,000 level and this is the highest level ever in quarter 2 we have had. But I have to say that even more pleased than I am with the orders received development, I am with the development in our orders margins, because as you remember last year we had some challenges in order to get our orders margins to grow. And we started to get better progress in quarter 1 and this has now beautifully continued.
And this is what I feel to be very essential. Order book end of the quarter was a little bit more than 1 third higher than a year ago. Sales growth was 20% again supported significantly by favorable currency development. So that comparable in comparable exchange rates, the growth was 13.6%. And operating the operating income growth was 13% and reached €208,500,000 excluding the €37,000,000 onetime cost related to the separate function development and cost adjustment programs.
And I will naturally tell more in detail about these programs after a while. Because this year, we have quite a lot of amortization in the intangible assets of Zay and KONE that we consolidated last year in the beginning of December. We now this year also saw in saw the in this set of numbers also EBITDA, operating income before amortizations. And there you see that the growth is growth was 15.5%. Later on, I will also comment in detail what were the reasons for the -0.8 percent percentage gap between the operating margin last year in quarter 2 and now in this quarter.
One factor naturally was this giant KONE amortization, with 50% to 0.3% of that. Cash flow developed very nicely. It is very important to see that in today's uncertain economic environment. It went up from last year's SEK 130,000,000 to more than SEK 190,000,000 now in this quarter. But of course, January, June 6 months is much more informative in our kind of business.
And therefore, let's review the now the development in this 6 months time period. The orders received went up by 26.8% and in comparable currencies 21.1 percent. Orefuk, I already mentioned. Sales growth was 19% has been 19% at comparable rates 14.3%. Operating income growth, excluding this one time cost, was 12.5% and the EBITA growth was 15.6%.
And in operating income, we reached excluding this one time cost €341,000,000 Cash flow also in this longer period was strong and clearly up from last year's 3 67,000,000 to €440,000,000 I am I have to say, when considering the mixed market picture that we have had during the last 3 months and which we also are facing, I'm very pleased with this development in our financial performance. And I have to say that our teams in different parts of the world have done a good job. And also in this context, I want to say thanks to all of our people. Next, let's take again a closer look on the development in orders, sales and operating income, starting from orders received. Here you see how this SEK 1,500,000,000 represents a record level for us.
And geographically, the growth was fastest in Asia Pacific, where it was most rapid in China and in Southeast Asia. Regarding China, I would like to say that the 1st of all in units, in volumes, the market growth that we expected to be 0% to 5% was close to 10%. And when we take only the organic growth in KONE, our long time operation and in Giant Kone, our growth was about 25%. And then if we would take the full acquisition impact, naturally, the growth would be clearly higher. The growth also the growth in orders was also good in the Americas, but declined somewhat in Europe, Middle East and Africa.
In Europe, Middle East and Africa, the development was best in Finland, in Switzerland and Austria, in Russia and in the Middle East. When I will tell about the markets naturally in this European Economic Crisis, we naturally continue to see the weakness of the especially Southern European markets. Let's move on to sales, where also we had a good step up and the very positive headline here is that growth in all geographic and businesses. And if I start with the businesses, growth in all businesses, our growth in new equipment business in during these 3 months was as high as 28%. But it was also good in the service business where the growth was at good level both in maintenance and in modernization.
Geographically, the growth was fastest in Asia Pacific and there especially in China. The growth was positive and rather good also in the Americas and in Europe, Middle East and Africa. This was the first time for a long time or Q1 for a long time when we had positive sales growth in the Americas. The orders started to grow already end of 2010. Now I will move to operating income where the growth was as mentioned 13%.
The drivers for the growth were the strong growth in sales in new equipment in Asia Pacific and the good development of the business in maintenance. As an external factor, the favorable changes in the translation rates in the currencies contributed about half of the operating profit growth in this quarter. As factors that were a burden or slowed down our operating income growth, the key ones were the following. First of all, this amortization of the intangible assets of Zay and Kone that I already mentioned impacted in the relative margin by 0.3%. The second factor was the raw material costs where the development has gone as we have earlier said, so that the most severe negative impact to raw material costs we had in quarter 4 last year and quarter 1 this year.
And as we have said, we have still some impact now in quarter 2. And it looks like we are now moving to a neutral phase this ongoing quarter then to our more positive phase. The third factor here is the tough global price competition. As I already said in the beginning, we had last year difficulties. It took time and necessary development of our pricing contents to get prices up.
And last year, our margins were a bit low in orders and now we are delivering those orders. I also mentioned that how we have got good development now during the 1st 6 months of this year in orders in margins, but deliveries of those orders will come later. Further, the wages inflation salaries of wages inflation in Asia had a negative impact. And I would also like to mention that in quarter 2, the because of the our fast and strong development in new equipment business, This year of new equipment business of our total sales in quarter 2 went up to 51% of our total sales. And that this factor also has a negative impact to our relative operating margin this year.
Then next about the changes in the sales mix by business and by geography. Here you'll see that year to date January, June, the share of new equipment sales went up from 44% to 47%. And as I mentioned in quarter 2, this era of Nuktgen business was even more. All of this naturally demonstrates that our development in the Nueck business has continued to be very strong. As we mentioned in the Capital Markets Day in the beginning of or in early June, last year, we reached the number 2 position globally in terms of orders received volumes in the new equipment business.
In the geographical split, the biggest change is that in January, June, the share of Asia Pacifica sales has gone up from 26% to 33%. However, also in quarter 2, Europe, Middle East and Africa remained clearly the biggest geographical area with a bit more than 50% of our sales. So this was about the development in our performance. And now I will give an update about how the markets developed in April, June in our key markets. Let's start from the new equipment markets, which declined somewhat in Central and North Europe, but still remained at a relatively good level.
Markets such as Germany, Switzerland and Austria continue to grow. Netherlands declined. Also Sweden declined, but was still at a good level. In South Europe, the market declined further from an already low level, especially so in Spain and in Italy. You remember that in France, the market development was positive in quarter 1.
Now in quarter 2, we had the market declined also there. In Belgium, we also saw some signals for or signs for market starting to decline, but in the same case as Sweden, the market continued to be at a good level. In Middle East, the market remained strong in Saudi Arabia and showed signs of recovery in Dubai and in Qatar. In Russia, the market continued to grow. It has continued to grow quite nicely already for quite some time.
The modernization market declined slightly and the maintenance market continued to have good development, but price competition remained intensive, especially in big public sector contracts or competitions. Next Americas, and starting from new equipment in the United States, the gradual recovery of the market continue to continue then. And geographically, the development continued to be best in the East Coast and West Coast and also in some of the central parts of the country. If we take another dimension, the growth was driven by midsized projects, especially in the residential and office segments. In Canada, the market grew slightly.
Canada has been a rather good market already, let's say, throughout the last 4 years more or less. In Mexico, the market was stable. In modernization, development in Americas was better than in Europe. It grew slightly. In maintenance, the development was good, but price competition was intense and again especially in the big public sector competitions.
Then Asia Pacific, where the headline says that growth at a somewhat lower rate than in the Q1. Now I start with some country specific comments in the new equipment markets. In China, all segments grew, but at somewhat lower rate than in quarter 1. Again, let's I remind that in quarter 1, the growth was clearly more than 10%. And in quarter 2 actually the growth was a little bit more than what we expected.
It was close to 10% or although we estimated in April that that would be between 0 to 5 persons. The development was best in the affordable housing segment. It was also good in the rest of the residential segment in the except in the coastal area. Now then naturally the interesting question is that how will the market in China develop during the second half of this year? And here some interesting and important data, which is mainly positive.
And that indicates that the soft landing is happening. First of all, the sales of new apartments that started to decline end of last year in about November of last year that seems to be having stopped almost stopped, so that in June, the decline was only minus 3%. Another key point is that during the first half of the year, the growth in the real estate investments in China was 16%, which means that project execution continued in a consistent way. Projects were not, let's say, delayed or stopped. And this is also what we have seen in our sales.
Our sales completions in China were very much in line with our plans. The 3rd key point is naturally that already from November last year, the Chinese government has taken actions to improve liquidity in the construction sector. And now during the last couple of weeks, the leaders in China, they have repeatedly communicated about need or need for new stimulus packages in the economy. And one of the items is infrastructure investments that also partly relate to our business. All in all, although the new construction starts continue to be negative, All of this indicates that China is moving towards a new growth cycle.
As I have so often mentioned, we are in the last 10 years, the growth in construction and in our markets have been like a sinus curve that which we are logical so that always when the growth started to be strong, the China starts its actions to slow down growth. And when it is slowing down, the actions start early to create a new growth phase again. And then when interpreting all of this to the elevator and escalator market, Our estimate is that the second half during the second half, the elevator and escalator markets in China will be practically flat, maybe growing a little bit in quarter 3 and could be a little bit negative in quarter 4. However, then starting to enter the growth phase quite early next year. So this is how it looks like to us at the moment.
In India, the market grew only about 5% in quarter 2 because of the difficulties in financing. In Australia, the market was relatively stable, also with regional variations. And in Southeast Asia, markets continued growth that started already in the latter half of twenty ten and that good growth has continued. In modernization, Australia is the biggest market in this geography and that market was relatively stable. In maintenance, the good development continued.
And here I would like to again point out that also the business in Asia Pacific includes a lot of or the big part of the business there is new equipment business. Already during the last 2 to 3 years also maintenance business has been a significant business for KONE there. And as many of you remember in the Capital Markets Day just more than 1 month ago, we took the example of China where the average annual growth in our maintenance base has been 35% from in the period of 2,006, 2011. So that is developing in a very good angle. This is what I had to say about the market development.
And next, I would like to tell about some of the key topics related to our development activities when we are developing our competitiveness. Here you see the 5 programs that we started in the beginning of last year and continue to work actively with to the end of next year. We have a few selective initiatives in all of this. So this means that our approach in developing our competitiveness is such that we all the time work in a broad basis and in a very focused way. Now in this quarter, we got the biggest progress in the third one, in innovative solutions for People Flow.
And because we introduced our most important product introduction during the last 16 years by introducing the new global product range to the volume market. This introduction is a major step forward in the areas of eco efficiency, flight comfort, visual design and space efficiency. This is very important for us because in this product range, we will be extremely competitive in all of these factors that are mostly essential to the users of our products and to our customers. We expect that over a couple of years, this new product range will cover about 60% of our new elevator volume and 90% of the full replacement elevator volume. We start sales in Europe and Asia Pacific now in the second half of this year and in Americas in the first half of next year.
One additional and very important comment is that I'm so pleased with the situation that we are bringing such a significant new product trends to the markets in the situation when the competitiveness of our current products is very strong, as our good market progress so nicely demonstrates also during the first half of this year. The second highlight in quarter 2 has been the relocation to a new factory in China in Kunshan. And the good news is that we that already now a big majority of production has moved from the old factory to the new factory and this move has gone so far very, very smoothly. Big part of the rest will move during the next few months. And overall, this move will be completed during 2030.
In April, we told about our plans of our plans to start to plan our decision to start to plan 2 different projects. The first one, to improve the quality and productivity of our support functions globally. By clarifying the roles, further harmonization of the processes and by simplification. The second program is to for adjusting our operations in certain countries where the market has remained weak for a prolonged period. Now we have defined these plans.
And as a result, we expect that these projects will reduce approximately 550 shops at KONE by the end of 2013, so during the next 18 months' time. And our very strong objective is to manage this to the largest extent possible by through natural attrition and through reductions in the temporary employees. The expected annualized cost saving will is approximately €35,000,000 and we will have the comparable monthly run rate end of next year. The total one time cost related to these projects is €37,300,000 which we have booked in quarter 2 this year now. And then next about market outlook.
The new equivalent markets in Asia Pacific are expected to be relatively stable or grow somewhat as compared with the Q2 of 2011. The markets in Central and North Europe are expected to decline slightly, and the markets in South Europe are expected to further decline from an already weak level. Whereas the market in North America is expected to continue to gradually recover from a low level. The modernization markets are expected to be at about the same level or decline slightly as compared to the second half of twenty eleven. And the maintenance markets are expected to continue to develop well.
Because of let's say first that we have upgraded both our sales outlook for the full year and the operating income outlook. In sales outlook and in both of these for both of these, the key the reasons have been the strong growth in orders and sales in Asia Pacific and the good development in the maintenance business. In net sales, our business outlook is now that we estimate the growth this year to be 12% to 17% at comparability rates as compared to 2011. When it comes to operating income, we have an additional factor that is the favorable changes in the translation rates of currencies. And now the outlook is that the operating income, excluding onetime costs, is expected to be in the range of SEK 760,000,000 to SEK 820,000,000.
The previous outlook was €750,000,000 to €800,000,000 provided that we will not have any material changes in the changes in currencies as compared to the beginning of this year. This is what I wanted to say to start with a little bit longer, but hopefully a little bit more substance as well. And now we have a good time for your questions.
Thank you very much, Matti. So as Matti indicated, we can now start with the questions here from the people present here in Espoo. Go ahead, Elena.
Elena Ryotter from Evbu Bank. Two questions. First of all, the service growth that you have seen during the beginning of the year roughly 12%, Can you say how much of that is generated by Asia Pacific?
Henrik and what would you say for that?
Well, I would say that if you look as a totality, it's clear that the clear majority of our service sales is from Europe, Middle East and Africa and then United States would come next. So even though we have had a good growth in the service business in Asia Pacific, it's clear that to the total number the biggest contributor to that is a good development particularly in Europe, Middle East and Africa and to some extent also in North America.
Okay. Thank you. And then the second question about the improvement in margins in new orders. What is the prime what is driving that? Just looking at the market conditions, it doesn't look like there's been very big improvement in market conditions.
And what's behind this?
Yes. What comes to the market development, I very much agree. But naturally, the starting point in order to get margins growing is that the product competitiveness has to be very good. And this is what we have and this is what we had already last year. But although we have been developing pricing competency during last years more or less continuously, We started a major effort in April last year and it took some time.
But now we really I can really say that clearly say that we have got good learning and this is the naturally the main reason. Naturally, in addition, it is important to again mention that since 2,005, we have very actively developed everything related to our sales activity, meaning that we have developed much more advanced tools bringing up to date information to our salespeople, have a lot has had a lot we have had a lot of training our salespeople, sales managers. We have got our sales activity level to a new level. We have during last couple of years, we have been more actively working with in order to understand with better granularity the different markets, so that even in weak markets, we can identify growth opportunities and all of this has helped, of course. And part of the one important element of the sales training has been value based selling.
So that also relates, of course, to the price development. But price development is something that we have learned that has to be worked continuously. And in this uncertain tough environment, it's a big effort.
Thank you.
Thank you.
Thank you. We are ready for the questions from the lines please.
Our first question comes from Mr. Ben Masman at Merrill Lynch. Please go ahead.
Yes. Good afternoon, everyone. It's Ben Masman from Merrill Lynch. Few questions, please. Firstly, the backlog is now at a very high level.
I wonder if you could give us a sense of how much of that is going to be delivered this year and how much flows in, in 2013 and beyond? Secondly, you mentioned increased uncertainty in the global economy. I just wonder whether you see that in your business anywhere in tendering, in lower maintenance demand. When a cycle slows, where do you pick that up in your business first? I guess that's the question.
And then finally, just on your order growth. I'm just trying to ask what is the organic order growth year on year if you strip out currency and Giant? I make it about 4% to 5%. I just wanted to confirm that. Thank you.
Yeah. The first of all, the question related to the order backlog. I think that our sales outlook gives, let's say, very is very informative in understanding that what will be delivered this year and what will flow to next year and to the following years. Additional comment is that our order book coverage at the moment in new equipment business is close to 100% for this year and well over 90% somewhat over 90% also in the modernization business. Then the increasing uncertainty, naturally, the development of the 1st of all, let's say that in the core of this is, of course, Europe and in Europe, of course, Southern Europe, where the market declines in some markets has continued already quite a long time.
And some other markets start to be already now at a relatively low level. Naturally, when this all of this has all of these difficulties have continued in Europe, in so called Europe crisis already quite a long time. Some of the impact start to has start to be seen also in some of the countries in Central and Northern Europe. And all of this, we have, let's say, taken also as a basis and try to describe in our market outlook in those comments that I mentioned. And then Henrik maybe your comment on the orders.
So if you look at the organic order growth excluding Giant Kone and at comparable rates, what you mentioned Ben, it's around 5% for Q2 and around 12% for the first half of the
year. Got it. Thanks. So maybe if I can just follow-up. Firstly, then on the backlog, I mean, you're right, I can work out from your guidance what's for this year.
But the orders that flow in beyond that, do most of those flow into 13% or is there a portion of your order book that's quite long dated and flows into 14%? And then finally, just on the 5% order growth Henrik, I mean that slowed down quite a lot. I think it was about 20% during the Q1. Which regions for you year on year are negative at the moment? Thank you.
So if I start with the second question, which was relating to the organic growth, it's clear if you look at the Asia Pacific business, their growth continued to be strong. So as we mentioned our organic growth in China was at around 25%. So that continued to be strong. And Asia Pacific was strong, I would say. Then other market, it was lower in Asia Pacific.
But as we said in our report, we had a decline in orders received in Europe, Middle East and Africa both in central northern parts and in the southern parts and then some growth in North America. So this is where it came from.
Thank you.
And so and the order backlog, on average, our order backlog would be around a year. There's of course a mix difference. There are some markets where it rotates a bit faster, particularly in China. And then in large projects of course there are projects that can reach into 2014 and even someone up to 2015. But of course those are in the end the majority I would say of our projects are such that we will deliver within a year and then a smaller part would be those very long projects.
Got it. Great job. Thank you.
Our next question comes from Mr. Lars Dorson from DNB. Please go ahead sir.
Thank you very much. I had three questions if I could. On China, it looks like your growth relative to the market is perhaps normalizing a little bit at least sequentially from Q1. If that's right, how much of this would you say is due to perhaps more of a normalization of some of the temporary factors that may have supported your market share gains over the past 12 months such as for example the adverse effect on Otis from the fatal Beijing accident in Q2 last year?
No. I think that the orders in the growth in China has been particularly strong both in quarter 1 and in quarter 2. In China, there also during the last year, there has been a move such a move that it which looks like to be that the bigger companies have done better in orders compared to the small companies. And Giant Kone as such can be already now really included in at least in the mid sized companies. Giant Kone has been doing very well.
Then as the third element here, we have the point that we have been doing because primarily because our very strong product competitiveness that also is the case in the Operable Housing segment that we have been doing better than some of our key competitors.
That's useful. Thanks. Separately, just a follow-up question on your market outlook. Particularly in Europe, it looks like you're taking your market outlook down on modernization versus what you said in Q1. Just as a follow-up to the earlier question, can I ask if that's a reflection of general cyclical pressures you're seeing in Europe in the second half or perhaps more of a factor of a fading regulatory impetus from the adoption cycle we've seen on Snell regulation?
And within that, I'd be interested if you could comment on Europe generally, but also France specifically, which you've seen weaken in Q2.
Well, I think that the most important factor has been the weakening economy in the Southern Europe.
And for France specifically if I could?
Well in also in France. As I mentioned also in new equipment markets, the development in France in quarter 2 was somewhat declining as opposed to improvement in quarter 1.
That's useful, Matti. Thank you. But just a final question, if I could. As you start rollout now in this quarter, the your new product range, could you help us perhaps and Henrik to scope some of the cost pressures you see if at all? And to what extent you're seeing great regional differences there?
You've obviously been building up your cost structure or your organizational scaling your organization to support the rollout of that product range, but perhaps help us scope some of the cost pressures we may see from that? And also I'd be keen to learn a little bit more about what the sort of key execution risks you see around the rollout of that?
Would you like to?
I can answer that. I would say, firstly, we are not estimating any major additional costs from this. They're clear there are some, but remember that we are rolling out this project market by market in a gradual way. And we will start tendering the product now in the autumn, which means that deliveries will come gradually and we're moving and it's a gradual move from our current product range to the new product range. And therefore, it's and that is also how we are looking to manage the execution risk here is to make sure that we are gradually introducing a new one and therefore ramping it up in a measured way.
That's useful. Thanks.
Our next question comes from Mr. Chris Reid from Capital Research. Please go ahead sir.
Hi. Another question on the new volume product, please. Sort of a longer term question about how you think it will impact your service business. When a customer has an elevator that they need servicing on, they can get the servicing from the company that built it and installed it or they can go to a local service company. Is there anything different or evolved with this new product that would encourage them to increasingly get the maintenance from you as opposed to a local service company?
Does that kind of equation in their minds change at all?
Well, as we have said many, many times, our approach in this in everything is open competition. And our mindset is that the best by far the best way to get maximum number of our of the products that we have installed to our maintenance is best possible customer satisfaction. And then naturally a very good process to follow-up the case and have a good handover to the from new equipment to maintenance. So there is nothing such special that we would have planned in such a way that we would protect us because that is not how we work.
Right. So it sounds like it's building the relationships to having a good product to offer and then having the service network responsive service network as opposed to anything in terms of the technology and the product itself?
Exactly. And the product itself when we have designed that, that has been designed not only to be a good new equivalent product, but also a product that is easy that is good for us to maintenance in a high quality and productive way.
Okay. That's helpful. Thank you. Our next question comes from Mr. Austin from Marshall Leys.
Please go ahead sir.
Hello, good afternoon. Most of my questions have been asked. So I just want to maybe clarify on the outlook that you have from China. Am I correct in thinking that at the time of the Q1, you were guiding that in the second half of the year, you expected China to be flat, but you didn't have much conviction. And now you're still guiding to it to be flat, but it sounds as if you have great conviction.
Is that roughly correct?
Well, it is true that in quarter 1 and after quarter 1, we estimated and also communicated that the quarter 2 growth in the Chinese market would be between 0% 5%, but it was somewhat higher. And now when really studying very carefully all the time with all of this background data that I mentioned and also knowing the dynamics, the normal dynamics in the of the growth phase and then declining phase and then how China is creating the growth phase with different kind of actions again. And then study carefully what has happened in the previous just phases and what have been the time differences. This is why we are now saying what we are saying about second half and early next year.
Okay. That's great. Thank you very much.
Thank you.
Our next question comes from Mr. Tom Skogma from Handelsbanken. Please go ahead, sir.
Thank you. This is Tom from Handelsbanken. As the economic crisis is worsening in Southern Europe, I'm increasingly curious to get a view of how big part of your maintenance business is actually coming from Southern Europe and also whether you have seen some worrying signs there about surprising customers walking out of all deals or some threat of changing legislation or any other bad signs?
I will start and then Henrik, if you comment on how big part of our maintenance is in Southern Europe. No, we have not seen such worrying signs. We have very good and professional teams in Southern Europe. And it is naturally, because of the economic situation there, there are situations that with, let's say, empty offices, for example, elevators are taken more into use more out of use there than in other parts of the world, but even that is not significant as such. And the other element naturally is the price competition in the public tenders.
But this is not something that would have in any big way impacted our significant way impacted our performance as such. And then Henrik, the
So we have not opened up exactly our maintenance base per market. But what I can give as an indication is that Europe, Middle East and Africa represents about half of the world's total units in maintenance. So it's clear that we have a majority of our units in maintenance or clear majority of our units in maintenance are in Europe, Middle East and Africa. But if we compare Central and North Europe to Southern parts of Europe, Central and Northern parts would be a larger proportion than Southern Europe. It's clear that Southern Europe is an important market for us and we have a significant amount of elevators there.
But as Matti said that what we have seen even in some of the toughest markets in Southern Europe that the maintenance market has remained overall relatively stable although it's of course very heavily competed.
Thank you. And the last question comes from Mr. Alexis Denard from Exane BNP Paribas. Please go ahead sir. Yes.
Good afternoon. Just a question about the cost savings. So you say €35,000,000 annualized by 2013. How much of the improvement do you expect to see by 2012?
By the end of 2012? Yes. So I would say that most of the actions will happen during next year. So yes, we will have some savings during next year. But beginning of next year, we will have certain run rate, but I would say that most of the actions are happening during next year.
So that's really when we will build up the run rate mainly during next year.
Okay. Thank you.
There are no further questions at this time. Please go ahead speakers.
Thank you very much for your questions and your active participation. And we wish you all of you a very nice end of the week and a good summer and great holidays when that time comes if you haven't already had your holidays. Thank you very much.