Start with a presentation by our President and CEO, Matti Alahuhta, and continue with your questions and our questions and our answers to them. Without any further introductions, Matti, please go ahead.
Thank you, Karla. Yes. Welcome to KONE's Quarter 2 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 two and first half of the year, give an update on the market development, then followed by some comments about how we have been developing our competitiveness during the last few months. Finally, I will naturally tell about 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 two numbers. Starting from orders received, the growth was 23.4%, and in comparable currency, 16.1%. In quarter two, we exceeded EUR 1.5 billion level, and this is the highest level ever in quarter two we have had.
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 received margins to grow, and we started to get better progress in quarter one, and this has now beautifully continued. This is what I feel to be very essential. Order book end of the quarter was a little bit more than one-third higher than a year ago. Sales growth was 20%, again, supported significantly by favorable currency development. In comparable exchange rates, the growth was 13.6%. The operating income growth was 13% and reached EUR 208.5 million, excluding the EUR 37 million one-time cost related to the support function development and cost adjustment programs.
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 GiantKONE that we consolidated last year in the beginning of December. This year, in this set of numbers, also EBITA, operating income before amortizations. There you see that the growth was 15.5%. Later on, I will also comment in detail what were the reasons for the -0.8 percentage gap between the operating margin last year in quarter two and now in this quarter. One factor naturally was this GiantKONE amortization, which represented 0.3% of that. Cash flow developed very nicely. It is very important to see that in today's uncertain economy environment. It went up from last year's EUR 130 million to more than EUR 190 million now in this quarter.
Of course, January, June, six months is much more informative in our kind of business, therefore, let's review now the development in this six-month time period. The orders received went up by 26.8%, in comparable currencies, 21.1%. Order book I already mentioned. Sales growth has been 19%, at comparable rates, 14.3%. Operating income growth, excluding this one-time cost, was 12.5%, the EBITA growth was 15.6%. In operating income, we reached, excluding this one-time cost, EUR 341 million. Cash flow also in this long period was strong and clearly up from last year's EUR 367 million to EUR 440 million. I have to say, when considering the mixed market picture that we have had during the last three months and which we also are facing, I'm very pleased with this development in our financial performance.
I have to say that our teams in different parts of the world have done a good job, 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 EUR 1.5 billion represents a record level for us, 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 first of all, in units, in volumes, the market growth that we expected to be 0%-5%, was close to 10%. When we take only the organic growth in KONE, our longtime operation, and in GiantKONE, our growth was about 25%.
If we would take the full acquisition impact, naturally, the growth would be clearly higher. The growth in orders was also good in the Americas, 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 especially Southern European markets. Let's move on to sales, where also we had a good step up, the very positive headline here is that growth in all geographies and businesses. If I start with the businesses, growth in all businesses, our growth in new equipment business during these three months was as high as 28%.
It was also good in the service business, where the growth was at a 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 first quarter for a long time, when we had a 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 GiantKONE 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 by raw material costs we had in quarter four last year and quarter one this year. As we have said, we have still some impact now in quarter two, and it looks like we are now moving to a neutral phase this ongoing quarter, then to a 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 competence 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 first six months of this year in orders and margins, but the deliveries of those orders will come later. Further, the solution wages inflation in Asia had a negative impact. I would also like to mention that in quarter two, because of our fast and strong development in new equipment business, the share of new equipment business of our total sales in quarter two went up to 51% of our total sales.
This factor also has a negative impact to our relative operating margin this year. 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%. As I mentioned, in quarter two, the share of new equipment business was even more. All of this naturally demonstrates that our development in the new equipment business has continued to be very strong. As we mentioned in the Capital Markets Day in early June, last year we reached the number two 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 Pacific of our sales has gone up from 26% to 33%.
However, also in quarter two, Europe, Middle East, Africa remained clearly the biggest geographical area with a bit more than 50% of our sales. 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 one. Now in quarter two, the market declined also there.
In Belgium, we also saw some signs for market starting to decline. 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. Starting from new equipment in the U.S., the gradual recovery of the market continued, 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 mid-sized 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 four 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. Asia Pacific, where the headline says that growth at a somewhat lower rate than in the first quarter. 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 one.
Again, I remind that in quarter one, the growth was clearly more than 10%, and in quarter two, actually, the growth was a little bit more than what we expected. It was close to 10%, although we estimated in April that that would be between 0%-5%. The development was best in the affordable housing segment. It was also good in the rest of the residential segment, except in the coastal area. Naturally, the interesting question is: how will the market in China develop during the second half of this year? 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 have almost stopped, so that in June the decline was only -3%. Another key point is that during the first half of the year, the growth in the real estate investment in China was 16%, which means that the 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 third key point is naturally that already from November last year, the Chinese government has taken actions to improve liquidity in the construction sector.
Now during the last couple of weeks, the leaders in China have repeatedly communicated about need for new stimulus packages in the economy, 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, during the last 10 years, the growth in construction and in our markets has been like a sinus curve where the logic goes so that always when the growth starts to be strong, China starts to take actions to slow down growth. When it is slowing down, the actions start early to create a new growth phase again.
When interpreting all of this to the elevator and escalator market, our estimate is that during the second half, the elevator and escalator markets in China will be practically flat, may be growing a little bit in quarter three, and could be a little bit negative in quarter four. However, starting to enter the growth phase quite early next year. This is how it looks like to us at the moment. In India, the market grew only about 5% in quarter two because of the difficulties in financing. In Australia, the market was relatively stable, although with regional variations. In Southeast Asia, markets continued growth that started already in the latter half of 2010, 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.
Here I would like to again point out that although the business in Asia Pacific includes a big part of the business there is new equipment business . Already during the last two to three years, also maintenance business has been a significant business for KONE there. As many of you remember, in the Capital Markets Day, just more than one month ago, we took the example of China, where the average annual growth in our maintenance base has been 35% in the period of 2006 to 2011. That is developing in a very good angle. This is what I had to say about the market development. 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 five 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 selected initiatives in all of these. 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. 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, ride 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 most 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 range 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 two has been the relocation to a new factory in China in Kunshan. The good news is 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 smoothly. Big part of the rest will move during the next few months, overall, this move will be completed during 2013. In April, we told about our decision to start to plan two 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 for adjusting our operations in certain countries where the market has remained weak for a prolonged period.
We have defined these plans, and as a result, we expect that these projects will reduce approximately 550 jobs at KONE by the end of 2013. During the next 18 months' time. Our very strong objective is to manage this to the largest extent possible through natural attrition and through reductions in the temporary employees. The expected annualized cost saving is approximately EUR 35 million, and we will have the comparable monthly run rate end of next year. The total one-time cost related to these projects is EUR 37.3 million, which we have booked in quarter two this year now. Next about market outlook. The new equipment markets in Asia Pacific are expected to be relatively stable or grow somewhat as compared with the second quarter 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. 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 2011. The maintenance markets are expected to continue to develop well. Let's say first that we have upgraded both our sales outlook for the full year and the operating income outlook. In sales outlook for both of these, 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%-17% at comparable exchange rates as compared to 2011. What 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 one-time costs, is expected to be in the range of EUR 760 million-EUR 820 million. The previous outlook was EUR 750 million-EUR 800 million, provided that we will not have any material 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. Now we have good time for your questions.
Thank you very much, Matti. As Matti indicated, we can now start with the questions here from the people present here in Espoo. Go ahead, Elina.
Yes. Elina Riutta from Evli 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, what would you say on that?
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, then U.S. would come next. 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. The second question about the improvement in margins in new orders, 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. Naturally, the starting point in order to get the margins growing is that the product competitiveness has to be very good. This is what we have, and this is what we had already last year. 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 I can clearly say that we have got good learning and this is naturally the main reason. Naturally, in addition, it is important to again mention that since 2005, 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. We have had a lot of training, our salespeople, sales managers.
We have got our sales activity level to a new level. During last couple of years, we have been more actively working 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.
Thank you.
Part of the one important element of the sales training has been value-based selling. That also relates, of course, to the price development. 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.
Ladies and gentlemen, if you have a question, please press zero one on your telephone keypad and you'll enter a queue. Our first question comes from Mr. Ben Maslen at Merrill Lynch. Please go ahead.
Yeah, good afternoon, everyone. It's Ben Maslen 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 kind of flows 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. Finally, just on your order Both year-on-year, if you strip out currency and Giant, I make it about 4%-5%. I just wanted to confirm that. Thank you.
Yeah. First of all, the question related to the order backlog. I think that our sales outlook is very informative in understanding 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%, or somewhat over 90% also in the modernization business. The increasing uncertainty, naturally the development of the First 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 all of these difficulties have continued in Europe, in so-called Euro crisis already quite a long time, some of the impact start to be seen also in some of the countries in Central and Northern Europe. 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. Henrik, maybe your comment on the others.
If you look at the organic order growth excluding GiantKONE 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. Maybe if we 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 2013 or is there a portion of your order book that's quite long dated and flows into 2014? Finally, just on the 5% order growth, Henrik, I mean, that slowed down quite a lot. I think it was about 20% during the first quarter. Which regions for you year-on-year are negative at the moment? Thank you.
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. As we mentioned, our organic growth in China was at around 25%. That continued to be strong and Asia Pacific was strong. I would say then other market it was lower in Asia Pacific. 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. Some growth in North America. This is where it came from.
Thank you.
The order backlog, on average, our order backlog would be around a year. There is of course a mixed difference. There are some markets where it rotates a bit faster, particularly in China. Then in large projects, of course, there are projects that can reach into 2014 and even someone up in 2015. 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 these very long projects.
Got it. Great job. Thank you.
Our next question comes from Lars Brorson 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?
Well, I think that the orders growth in China has been particularly strong both in quarter one and quarter two. In China, there also during the last year, there has been such move which looks like to be that the bigger companies have done better in orders compared to the small companies. GiantKONE as such can be already now really included at least in the mid-sized companies. GiantKONE has been doing very well. As the third element here, we have the point that we have been doing Primarily because our very strong product competitiveness, that also is the case in the affordable 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 EN 81? 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.
For France specifically, if I could?
Also in France. As I mentioned also in new equipment markets, the development in France in quarter two was somewhat declining as opposed to improvement in quarter one.
That's useful, Matti, thank you. Just a final question, if I could. As you start rollout now in this quarter, 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 scaling your organization to support the rollout of that product range. Perhaps help us scope some of the cost pressures we may see from that. 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 cost from this. It's clear there are some, but remember that we are rolling out this project market by market in a gradual way. We will start tendering the product now in the autumn, which means that deliveries will come gradually and it's a gradual move from our current product range to the new product range. 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 Reed 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 times, our approach in everything is open competition. Our mindset is that by far the best way to get maximum number 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 from new equipment to maintenance. There is nothing so special that we would have planned in such a way that we would protect us, because that is not how we work.
Right. It sounds like it's building the relationships through having a good product offer and then having the responsive service network as opposed to anything in terms of the technology and the product itself.
Exactly. The product itself, when we have designed that has been designed not only to be a good new equipment product, but also a product 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 Erm] from Marshall Wace. Please go ahead, sir.
Hello, good afternoon. Most of my questions have been asked. 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. 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 one and after quarter one, we estimated and also communicated that the quarter two growth in the Chinese market would be between 0% and 5%. It was somewhat higher. Now when really studying very carefully all the time, all of this background data that I mentioned, and also knowing the normal dynamics 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 growth 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 Skogman 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. Naturally, because of the economic situation there are situations that with, let's say, empty offices, for example, elevators are taken more out of use there than in other parts of the world. Even that is not significant as such. The other element naturally is the price competition in the public tenders. This is not something that would have, in any significant way, impacted our performance as such. Then, Henrik,
We have not opened up exactly our maintenance base per market. 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. It's clear that we have a clear majority of our units in maintenance are in Europe, Middle East, and Africa. If we compare Central and North Europe to the Southern parts of Europe, the 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. 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.
The last question comes from Mr. Alexis Denaud from Exane BNP Paribas. Please go ahead, sir.
Yes, good afternoon. Just a question about the cost savings. You say EUR 35 million annualized by 2013. How much of the improvement do you expect to see by 2012?
By the end of 2012?
Yes.
I would say that most of the actions will happen during next year. Yes, we will have some savings during next year. Beginning of next year, we will have certain run rate, but I would say that most of the actions are happening during next year. 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. We wish 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.