Hello and welcome to KONE's Q4 and Full-Year Results Review for 2011. As usual, we will start with a presentation by the President and CEO, Matti Alahuhta, and continue with your questions. Without any further introductions, Matti, please, go ahead.
So welcome to KONE's conference call. Today, we have again good news to tell. I will speak a little bit longer than normally. I will start with the numbers for quarter four and for the full year. Then I will continue with the market updates about how markets developed in different parts of the world towards the end of the year. After that, I will say a few concluding comments about how the year 2011 was for KONE. Finally, naturally, I will move to this year's market outlook and this year's business outlook for KONE. Let's start with the quarter four numbers. The orders received went up to close to EUR 1.1 billion, and the order inflow during that quarter was the highest ever level of orders in quarter four. The growth was also strong. It was at 9.2%, which as such was another good news.
The order book went up to EUR 4.348 billion, which also was the highest order book level we have ever had. Naturally, we have to remember that this was contributed by the EUR 280 million order book from GiantKONE because we have consolidated GiantKONE to KONE's numbers from the beginning of December. The year-to-year growth from end 2010 to 2011 was close to 21.9%. The sales growth was 6.7%, and we went close to EUR 1.6 billion in this quarter. The operating income growth was 2.5%, and also that was totally in line with what we told when announcing quarter three results. I will come back to that. The operating income reached EUR 233 million in the quarter. The relative operating margin was at 14.7%. As you see, this was 0.6% less than a year earlier.
However, half of this negative deviation was because of the consolidation of GiantKONE, and I will come back to that also later on. Without that impact, we are very, very close to the previous year's level. The cash flow was strong at about EUR 200 million and higher than a year ago. As I have always said, three months is a very short period to analyze the progress of the company, and let's therefore move to the full-year numbers. We start with very good news here because our orders received growth last year was 17.2%. In comparable currencies, even a little bit more. This is naturally something we are very, very pleased with when considering what kind of market environment we had in many, many markets. The order book I already mentioned. Sales growth was 4.8%, and in comparable currencies, 5.4%.
Totally in line with our guidance as well, a little bit at the high end. Operating income growth was last year 4%, 4.1%, and we reached EUR 725 million, which is exactly in the middle of our guidance that we gave throughout the year. The relative operating income was practically at the same level as a year ago, and cash flow was strong at more than EUR 800 million. The basic earnings per share went up from EUR 2.10 to EUR 2.52. However, I want to emphasize that this EUR 2.52 includes a one-time item from the consolidation of GiantKONE, and I will come back to that. The comparable number without this one-time item is EUR 2.30. From EUR 2.10 to EUR 2.30 without that major one-time positive item. The dividend, we have increased from EUR 0.90 to EUR 1.40. That was about the key numbers.
Next, I will move to take a closer look at some of the key numbers like orders, sales, and operating income, and how these developed in quarter three as compared to the same quarter in the previous years. As you see from this graphic, last year was clearly the record level in quarter four. We had growth in orders in all continents. The growth was clearly highest in Asia-Pacific, and there it was highest in China and India. In quarter four, because I am sure that you are interested about China, I want to now say that although the growth in the Chinese market went somewhat down in quarter four, and I will later discuss more about that, our orders received even in quarter four in China were at a very good level, close to 30%. For the full year, our orders growth in China was well over 30%.
In Europe, Middle East, and Africa, we had best progress in orders in Germany, Switzerland, Sweden, and in Russia. In America, we had growth in orders in all of our key markets, both in the United States, Canada, and in Mexico. Sales growth was 4.8%, and it was driven by the very strong growth in Asia-Pacific. The operating income, as I mentioned, had a growth of 2.5% in quarter four, and I promised to come back to that and tell a little bit more. It was not faster because it was burdened by the growing impact of the higher raw material costs and inflation in wages and salaries in Asia-Pacific, as well as increasing price competition. Exactly as we said after quarter three, we started to have that impact in quarter three, and we said that would increase in quarter four.
Now we can say that we will continue to have a quite major impact still in the early parts of this year, but then that impact will decrease, and I will come back to this, naturally, with the outlook. The business mix between new equipment and service business remains the same as in 2010, 46% for new equipment, 54% for the service business. However, in the geographical mix, we had a major change in sales. The share of sales in Asia-Pacific increased by 6% points last year from 21% to 27%. Sales in China represented just a little bit more than 15% of our sales during last year. If we would take GiantKONE fully for the full-year numbers, the share of China would have been close to 20% of our sales.
I want to also point out that the share of Europe, Middle East, and Africa continues to be clearly more than 50% in our sales. It was 55%. Overall, I would like to repeat what I have said also earlier, that this kind of mix, first of all, between new equipment and services, and then the all-time improving balance in the geographical mix, is a major asset for us in this still uncertain market environment and economic environment. I wanted to show also how the share of Asia-Pacific in our net sales has started to accelerate in 2009. The two reasons are very obvious. Since 2009, many of the markets in, especially Southern Europe and North America, have been at a weak level. At the same time, the growth has continued to be very good in Asia-Pacific.
You see that the share of Asia-Pacific has grown from 17% to 27%, so by 10% points in two years' time. From the right side of this picture, you see that the average annual growth of KONE from 2005 to 2011 in Asia-Pacific has been 23%, a little bit more than 5% in Europe and America. The average growth for the whole KONE over this time period has been 8%. As an interesting comment, the average annual operating income growth over the same period has been 18%. Next, I would like to move to the market review and start with Europe, Middle East, and Africa, which is characterized as a mixed and uncertain market environment. I will start with the new equipment markets. In Central and North Europe, that market in quarter four was stable.
As many of you remember, we had growth in the Central and North Europe market during the first half of the year. In quarter three, the growth started to level off and then was stable at that level at the end of last year. However, the growth was still good in some of the countries in Central and Northern Europe, like, for example, about the biggest markets in Germany. The market was also, I would say, at a good level, for example, in Finland and a few other countries. The market went down in Belgium and Netherlands, where we started to see later the impact of the economic crisis than compared to many other country markets. In Southern Europe, the market was weak again, continued to be weak, and further decreased in Italy and Spain.
In France, there was growth in the residential segment, while the other segments were rather stable. In the Middle East, in quarter four, much of the market growth came from Saudi Arabia. In Russia, where the market collapsed quite strongly in the end of 2008 and 2009, and the recovery and fast growth started in the end of 2010, this fast growth has continued. In the modernization market, there was growth in Central and Northern Europe, and the market in Southern Europe declined. In maintenance, the development continued to be rather good, but the price competition was increasingly intense. In the Americas, in the new equipment markets, the gradual recovery in the United States continued. However, the activity level varied quite a lot in the different parts of the country. Most positive, the development was in the East Coast and West Coast and Texas.
In the East Coast, especially in New York, Washington, and Boston, and in the West Coast in San Francisco. In Canada, which I again have to say that Canada has been over the last four years a similar kind of example as Germany in Europe, so that the market has been at a rather good level over time. That continues to be the case. In Mexico, where the market collapsed in 2009, we have continued to see recovery. The modernization markets in the Americas were rather stable, and the maintenance markets continue to have good development, but price competition remained intense there as well. Asia-Pacific, where we have seen rapid growth continuing, but at a lower rate than earlier in 2011. In the new equipment markets in China, all the other segments except the infrastructure segment continue to grow, but at a lower rate.
The most attractive was the development in the affordable housing segment throughout the country. The rest of the residential segment was growing well in the inner parts of the country. Overall, while the market was slowing down, we really see at the moment that China is succeeding in managing a soft landing from the exceptionally high growth levels that we still saw in the early parts of the third quarter. In India, the market grew slightly. The growth rate was clearly lower than in the first half of last year, and the reason came from financing constraints. In Australia, the weaker economic outlook led to postponements in decision-making, and hence to a declining market. In Southeast Asia, the good market growth continued. In modernization and maintenance markets, we continue to see very positive development in this geography. The question that how was year 2011 for KONE?
The overall conclusion in our opinion is that KONE performed rather well in a demanding environment. The factors that we are most delighted with were that the growth in orders was very strong, and that we have over the last few years and very much also last year, we have been able to build a very strong position in both of the two biggest new equipment markets globally. We said last spring when we said that we will increase our share in GiantKONE to 80%, that that would bring us to position number three in China. Now we can say that with KONE and GiantKONE combined, we are clear number two in the Chinese market.
Also, our development in India was good, and based on our understanding, we continue to be the leader in the Indian market that is in terms of the market size, the second biggest new equipment market globally. Of course, having very strong positions in the biggest growth markets globally is, let's say, strategically very important. In this kind of market environment where it was very tough in many countries, we continue to invest to areas that enable continuing growth, and more specifically to Asia, R&D, and to process development. Last year, we had rather good development in quality and productivity, but of course, this year, our objective is to accelerate that positive development. In modernization, we had growth both in orders and also in sales, and in maintenance, our maintenance base exceeded 850,000 last year as compared to reaching 800,000 a year earlier in the end of 2010.
Of course, one of the highlights was increasing the shareholding in GiantKONE from 40% to 80% and consolidating, hence, GiantKONE as a subsidiary as of December 1st, 2011. GiantKONE has developed since early 2005 when we acquired a 40% stake, staking that very well. It has been one of the fastest growing Chinese elevator and escalator companies and is at the moment one of the largest Chinese elevator and escalator companies. The key financial figures for 2011 were orders received, were at EUR 342 million, sales at EUR 247 million. EBIT margin was 11%, and I am sure that some of many of you remember that when we announced that we will increase our shareholding to 80%, and this announcement was last year in the spring, we said that operating income of GiantKONE in 2010 was close to 14%.
What happened is that during last year, GiantKONE was quite heavily impacted by the increasing raw material costs and inflation in wages and salaries, and last year, the level was approximately 11%, still at a good level. The personnel of GiantKONE is about 2,000 employees. As we have said also earlier, we have an option to buy and Giant holding the option to sell the remaining 20% whenever we want. More accurately, what was the financial impact of GiantKONE's consolidation to KONE last year, and then what will be the impact this year? First of all, in the consolidation, we got a one-time gain of EUR 63 million relating to the revaluation of the previously held 40% stake, which was recorded under the share of associated companies' net income. That was below operating income.
Other points last year is that GiantKONE had a slight negative impact on KONE's operating income in quarter four because we naturally immediately started the amortization of the intangible assets of GiantKONE, including what comes to the margin of the order book, in line with IFRS rules. That was what was impact last year, this one-time gain of EUR 63 million and then a slight negative impact on our operating income. Next, what will be the impact, GiantKONE impact, consolidation of GiantKONE impact in 2012? Because of this amortization of intangible assets, and we estimate that GiantKONE's EBIT contribution will be marginal for KONE in 2012. Naturally, in 2013, the situation will be different. This is about GiantKONE. Naturally, what comes to the developing KONE and KONE's competitiveness, here the central activity area are our five development programs.
This is a set that you remember we started in the beginning of 2011, and these are all three programs. I'm very, very pleased that in addition to good progress in these more specific development programs, we have had a lot of good progress in the first two, in improving the customer experience, a lot of good actions taken, as well as in employee engagement. Our long-term funds targets remain intact. Faster than market, for EBIT, the target continues to be 16%, and then our objective is to improve working capital rotation all the time. As we have said earlier, this difficult economic environment naturally has an impact of delaying the time when we reach 16%.
The other comment that I want to give is that, as we have also said from the year 2005, when we first told about our long-term targets, our own two most important long-term targets are, first of all, building as strong as possible market position in this attractive industry, as well as all the time improving and building a high absolute EBIT. Why do we, let's say, value absolute EBIT even more than relative EBIT? EBIT naturally comes from the fact that our operating capital is negative. Every euro we earn in our EBIT naturally increases our return on capital employed. Very straightforward. Finally, market outlook and business outlook. First, market outlook started from the new equipment markets, where in Asia-Pacific, we expect that the growth will continue, but at a clearly lower rate than in 2011. In 2011, this growth was exceptionally high.
Further in new equipment, the markets in Central and North Europe are expected to remain relatively stable at a rather good level or decline slightly. The markets in South Europe are expected to decline from the already weak level. We expect that the new equipment market in North America will continue to gradually recover from the low levels. The modernization markets, we expect to be at about the same level as in 2011 or grow slightly. In maintenance, we expect that rather good market development will continue. This is our business outlook. We estimate that KONE's sales will grow by 8% - 13% at comparable exchange rates as compared to 2011, and that the operating income is expected to be in the range of EUR 730 million - EUR 790 million, assuming that the translation exchange rates don't materially deviate from the situation of the beginning of 2012.
As I mentioned, in the early parts of the year, our operating income will still be burdened by the higher material costs and wages and salary inflation in Asia-Pacific. Therefore, the operating income during the first quarter will be roughly at the same level as in quarter one last year, and after that, we'll start to grow. Thank you. This was what I wanted to tell now to start with, and now we have a lot of time for your questions, please.
Thank you, Matti. Let's start with the questions from those who are present here in Espoo, Finland. Thank you, please.
Hi, it's Ed from Swedbank. Two questions, if I may. First, the impact of the GiantKONE order book amortization. Is it fair to assume it's around EUR 30 million this year?
Henrik, please.
We haven't opened up the exact amount, but what we have said is that we recorded intangible assets of EUR 61 million in total. Part of that is the order book, and part of that are other intangible assets. The order book will be amortized over one year, and the rest will be amortized over a longer period of time. We haven't opened up the exact value of the order book of GiantKONE. What we have said, what Matti mentioned, is that at the beginning of the year, the total order book stood at about EUR 280 million.
Thank you. Secondly, regarding the Chinese market, around the year-end, there were news that the new starts of affordable housing projects in China, the actual figure would actually decline from last year from 10 million to 7 million units. Could you comment on this, please?
Could you repeat what your specific?
That the starts of new affordable housings in China would actually decline due to financing constraints for the most part from 10 to 7. This was on Reuters in late December.
Okay. What comes to affordable housing, the plan for last year was 10 million, and the plan for this year is 7 million. However, this 10 million includes everything where the construction has even a little bit started, and that will continue this year. Also, when we take into account the phasing of the elevator market, we see that for us, the affordable housing market will be at last year's level this year or even slightly higher.
This would translate to around 100,000 elevators, am I right?
100,000 or a little bit more.
Okay, thanks.
Yes, hello. Is this on?
It is on.
Okay, good. Could you talk a bit more about the situation in Europe, the areas where you see the most pricing pressure, and whether that has changed? Do you see that markets are continuously weakening in terms of pricing? Has there been a change, or is it the same kind of pricing pressures that you have talked about earlier this year?
In this respect, there is quite a clear difference between Southern Europe and Central and Northern Europe. The markets in several markets in Southern Europe, I mean, especially Spain and Italy, they have been rather weak already for quite a long time. There we have seen an increasing pressure on prices. The economic situation in these countries also, we have seen an impact of the weak economic situation of these countries also in the size of the modernization market. As well as in France, but in France, the main reason to the decrease in modernization market last year was that the SNEL milestone in the end of 2010 accelerated high growth in the market in 2008, 2009, and 2010. When that milestone was over, the market clearly dropped down.
Thank you. One more question. You commented about market share development in China. Can you comment on market share development more widely if any changes have happened?
I didn't say much about the market share development in China. I only said it's a position.
[crosstalk]
I can say a little bit what we have said and in a way confirm that. Naturally, more accurately, we will tell about last year's market share development in our capital market today again, as typical. Coming to market shares in China, maybe you remember that in the spring when we announced our plan to increase shareholding in GiantKONE to 80%, we mentioned that in 2010 numbers, if we include KONE and GiantKONE, that would increase KONE's market share in 2010 to close to 14%. Now we estimate that last year, we strongly believe that our growth in the Chinese market last year was again faster than the market. More than this, we will say when we know.
a question from Pålöte. The dividend was clearly higher than we had expected. Is it a sign that you feel that the cash is too large, or is it some kind of change in the dividend policy also in the future?
As we have always said, we have flexibility in the dividend policy. We had a very strong cash flow again. We have a very strong balance sheet, and we wanted to take care of the total shareholder value by paying a clearly higher dividend last year.
We are now ready for questions from the line, please.
Ladies and gentlemen, if you have a question, please press zero one on your telephone keypad and you enter a queue. We have a question from Ms. Austin L at Marshall Wace. Please go ahead.
Hello, good afternoon. I just wanted to clarify a little bit on GiantKONE if it's possible. I did understand that you said that the order book at the end of the year was $280 million. What I didn't understand is what you thought maybe the contribution to sales was in or will be in 2012.
Henrik, please.
Perhaps good to repeat what Matti said about GiantKONE. The impacts on the result in 2011 were as follows. We had a $63 million one-off gain from the revaluation of the 40% stake that we held previously. That was recorded under income and associates, and that impacted our EPS. The EPS without this was $2.30. In 2011, we had GiantKONE consolidated for one month. During that one month, GiantKONE contributed slightly negatively to our EBIT due to these intangible asset amortizations. The sales was naturally quite small and orders were quite small because it was only consolidated for one month. If we look now at 2012, we have not given a figure of how much we expect GiantKONE to have sales for 2012. What we said is that for 2011, it had $247 million of sales.
At the end of the year, our order book stood at $280 million. We have to remember that in China, the order book rotation is clearly less than a year. The order book covers part of the sales for the year, and some of it goes longer. That is what we have given.
Right.
If I just want to repeat one more thing, it is that again, because of these intangible asset amortizations, particularly the order book amortization, the EBIT contribution of GiantKONE in 2012 will be marginal only.
I guess what I was trying to understand is on your guidance for the sales growth in 2012, you're saying 8% -1 3% at comparable exchange rates. What I'm trying to calculate is what that would be on an organic basis, and therefore once I strip out the acquisition of GiantKONE. I mean, I assume I should reduce it by what? $200 million, $250 million, something like that?
What Matti said in his presentation was that China in total represented about 15% of our sales in 2011, a bit more. If we would have had GiantKONE for the full year, it would be close to 20%. You can see that it would have been, and you can calculate the contribution of GiantKONE to our total sales in 2011. I would say close to 5 percentage points was what would have been if we would have had it for the full year in 2011. That probably gives you at least some view of also the future.
Okay. I understand from what you said earlier on in terms of the PPA amortization, you're still working on that for 2012, and presumably you'll come back and update the market on that.
No, we have completed it. What I said is that we recorded $61 million of intangible assets that will amortize. Our PPA is actually quite fully laid out in our financial statements that you can find that we have published today. We have completed that substantially.
Okay. On a second question, which is just regarding something which was touched upon earlier in the social housing or affordable housing in China, I actually understood maybe that completions were more like 5 million in 2011 and therefore not the 10 million. If they're going for 7 million in 2012, that actually would be an increase year on year rather than a decrease. Do you have a view on that?
What I mentioned is that it is naturally very difficult. It is impossible to know this exactly. What I said, based on what we estimate, is that the affordable housing market for us will either be stable or grow slightly during 2012.
It's a mixing system, yeah.
Right, right. Exactly.
Great. Okay. Those are the questions for the moment. Thank you very much.
Thank you.
The next question comes from Mr. Tom Skogman of Handelsbanken. Please go ahead.
Yes. Hi, this is Tom from Handelsbanken. I just wonder about the tax rate for 2012 and 2013. It has been very volatile the last couple of years. What is the guidance for this year now?
Henrik, please.
I would say that what we have said is that our operational tax rate has actually been very stable at around 25%. We then, for 2011, had a lower tax rate because we had several larger tax audits that were completed where we have had provisions that we were able to therefore release those provisions during last year, which took down our tax rate for 2011. The operational tax rate has actually been very stable at around 25%. If we look forward, the Finnish tax rate now has gone down by 1.5 percentage points from 26% to 24.5%. The impact on our tax rate going forward of that is about 1 percentage point. The 25%, the operational tax rate, is the one you should use as a basis.
All right. Thank you. Another question about pricing in China. I guess when you look at all kinds of markets, when you have several years of explosive growth and then growth just basically hits the wall and or fades out, you typically have strong margin pressure because all companies are investing too much. Do you see any risk of this happening already this year in China that there will be massive margin pressure on new orders?
We don't see any, let's say, massive pressures or pressures hugely changing. What we saw last year is that there was not any major change in the pricing pressure. Of course, when a market is 60% or more about a global market, the competition is very, very active. What we have done is that we continue to very actively develop our product competitiveness in China. For example, in the affordable housing segment, we have a very competitive offering at the moment. In addition to that, we all the time continue to expand our sales network, our number of branches in China. We continue to train our personnel very actively. What comes to price increases in China is one of China is such a country where we have done price increases and started to get those through, but not fully able to compensate those last year.
The profitability of our Chinese operations remained at a very good level last year.
All right. Finally, about the guidance, it's obvious that you guide for a margin increase and you have good reasons for this. If you take out all these new amortizations and so on, how do you see the EBIT margin underlying in your business in 2012 compared to 2011? Just make it simple for us.
Our outlook is always an honest, open outlook, and they have been very valid over the years. Henrik, would you answer this?
It's clear that the consolidation of GiantKONE, because of the amortization of the intangibles, will have a negative impact on our EBIT margin percentage. If we would exclude this, if you take the midpoint of our guidance and see how much the EBIT margin would decline at the midpoint, you can see about half or roughly half of that is due to these intangible asset amortizations.
Okay, thank you.
Yep.
The next question comes from Ms. Rosanna Burcher i at Artemis. Please go ahead.
Yes, hi. Two questions for me. Could you tell us the number of units delivering new equipment for KONE worldwide?
Henrik, you have your exact numbers there.
Yes. If we look at 2011, our exact deliveries, Karla, you want to answer both orders and deliveries? We delivered.
About 75,000 units.
Just above, yes.
For the deliveries, about 85,000 units were our orders received.
These were without GiantKONE order, only for one month.
For one month, yes.
What was the number last year?
You mean 2010?
Yes. In 2010, we delivered some 60,000 units, and our orders received were some units.
60,000. Okay. Can I ask you, sir, when reading your annual report, you're commenting that the margin on the order book is actually in decline, and you're mentioning raw material cost inflation and pricing pressure. How can I conciliate that with your guidance?
Henrik, would you like to answer this?
Okay. I think we have spoken for a few quarters that given the prolonged weakness in the new equipment markets, particularly in Southern Europe and the U.S., the pricing environment has been challenging, as well as, as you mentioned, raw material cost inflation and labor cost inflation in Asia-Pacific. As a result of this, our marginal order book has declined, but we said it's still at a good level. Of course, one of the biggest focus areas we have discussed is pricing. That is what we're working on, but it's clear that is a very challenging environment, particularly in these markets where we have had a prolonged weakness. I think, Matti, you discussed some of the pricing. You can probably give some more comments about that as well.
Yes. I already mentioned about pricing in China. Outside China, we have had, let's say, some good development also in some of the other countries in getting the price increases through. Especially in these weakest markets in Southern Europe, it has been very difficult to avoid a slight declining trend in the prices.
Is this weakness in price also in the maintenance business?
In the maintenance business, we have been able to, let's say, roughly, we can say that we have been able to increase prices in many markets in Central and Northern Europe and in many markets in Asia-Pacific. However, there has been a slight decline in North America and in Southern Europe, but slight.
Okay. I have another question. I remember there has been a cost of a classification done through the P&L. Could you just remind me where it is? Because when I look now at the P&L on the full year 2011, there is a very wide movement in the gross profit and in the personnel.
Sorry, could you repeat that question? I missed the beginning of your question, what you were referring to.
If I remember well, there has been a cost of reclassification. I don't know if it was 2011, probably during 2011, because there are some moving parts on the P&L, above all in terms of gross margin and personnel. If you can, or maybe I'm sort of wrong, but in my notes, I sort of put it, what cost of reclassification, because I see a very important movement in terms of personnel expenses and gross margin.
Yeah. Okay. There has been some clarification of what we have done and harmonized better how we record employment costs versus, I would say, social and other employment costs rather than direct salaries. Therefore, if you look at the note to our financial statements, you can see there are some slight differences. If you look at the total, there's, of course, no material differences. There are some small changes here, nothing significant.
Okay. Thank you.
I remind you, the rest of you who want to ask a question, you will have to press zero one on your telephone keypad. That is zero one .
Should we take from here?
Yes, let's continue with questions from those present here. Go ahead, Ed.
Yes, Ed, going to Swedbank again. If I recall it right, you usually hedge your raw material prices in the course of autumn for the next year. Last autumn, there was at least a temporary lapse or the raw material prices, at least the metal prices, were relatively low last autumn, and they have increased quite lately. Will you benefit from this if you did hedge those prices during the course of this year?
You can answer. If we look at the past few months, we, of course, have had a declining trend in raw materials now. Very recently, some of them have started to increase a bit. I would say that we don't have a specific policy to hedge during the autumn. It's just that if you look at the two years before 2011, they were good periods of time, so we did hedge. Now we have a lower hedging rate than we had previously because if you look at last autumn, the prices were at a very high level. We didn't feel it made sense at that point in time to go and fix our raw material prices for 2012. We have fixed some, but at a lower percentage than in the past two years before this.
Ed, when you refer to last year, I believe you meant in the early autumn of 2010.
Not exactly.
What I was just taking a look at was the LME prices, for LME, the metals prices. There was slightly on the decline in the course of autumn, but of course, in the last two months or so, they have come up pretty much.
Okay. I think that in our case, the material price development has been such that so far it has been the right decision not to fix as much prices early as we did earlier.
Okay, fair enough. Thanks.
Yes, hello. Elin from Every Bank. A question still on GiantKONE and the 11% EBIT margin. How big a part of GiantKONE's cost base is wages or then raw materials? Just looking at where this could go in the future and the pressures.
Yeah. We have not opened up either for us or for them what this is, but it's clear that in China, for the industry overall, a higher proportion of the total cost is material cost than, for example, installation cost, which is the more labor. If you look at Europe and North America, the proportion then of installation is higher than the proportion of material. That is what we have opened, but we haven't opened up in more detail the cost structure of GiantKONE.
Do you consider this 11% versus the 14%, which it was back when you announced the first time, as a temporary development because of the higher raw material prices now, or is the expectation that it is going to be on these levels going forward as well, the margin?
I would say, first of all, that if you again think about GiantKONE, they have, like KONE, clearly negative working capital. So 11% with negative working capital and relatively limited fixed assets is, I would say, a good margin. I think that we are at a good level. It is clear that in China, labor cost pressures continue. We have to continue to improve their competitiveness there and work also on pricing in China.
Thank you.
Unless we have further questions here, do we have further questions on the line? Yes, we have a question from Mr. Andreas Dahl at Cheuvreux. Please go ahead.
Hi, Andreas from Chevreux. I just wanted to go back to the Chinese market for a second. Matti commented that even though starts in the social housing segment will come down from 10 million to 7 million this year, the actual construction is lagging, and therefore, the market for elevators will be at a fairly similar level as last year or even slightly higher. At least to me, that sounds like the elevator market might actually contract next year given the lower number of housing starts this year. Is that something you are concerned about?
We see if I now understood your question correctly. The situation is that the elevator market, as I said, is either stable or higher than last year in the affordable housing.
Yes.
I think Andreas was talking about 2013.
I think that it is difficult or impossible to start to speak about 2013 in terms of any segment.
Fair enough. Just one more question, if I may. You're talking here about high salary inflation in China. Could you perhaps provide us with some numbers on what you're seeing?
In China, the increase in the wage and salary levels last year was about 10%. In India, a little bit higher.
Okay, thank you.
The next question comes from Ms. Rosanna Burcheri at Artemis. Please go ahead.
Yes, sorry. An exit for one. What is the pricing pressure? I mean, it looks like you are complaining, OTC is complaining, Schindler is complaining. You have raw material increasing. Why is everybody not increasing prices? Is there some other dynamics going on?
We have been, and we are working very hard in order to increase, improve, or further develop our pricing competencies in different parts of the world. Also, working very hard in order to get the price increases through. Naturally, what is very essential here is that there is, of course, a delay when making, let's say, putting the price increase to tenders and getting the contracts. As we said in, I think in quarter three, that we have started to, then we were seeing to a very limited extent the price increases going through. Now we see a little bit better development there. This, as Henrik said, continues to be one of our absolute focus areas for this year.
Okay. Thanks.
It is also a competence question, of course.
Do we have any further questions on the line? We have a question from Mr. Ben Madsen at Merrill Lynch Please go ahead.
Yeah, good afternoon. It's Ben Madsen from Merrill Lynch. Two questions, please. Firstly, North America, a similar size market, I think, for you than China. We've seen more positive construction data, lead indicators, and so forth over the last few months. Can you talk a little bit about tendering activity there and off a low base whether you see scope for the U.S. market to improve going forward? That's the first question. Secondly, in China, on the aftermarket side of the business, it is obviously very small. Lots of skepticism that you can build a service business in China. Can you talk a bit about how you go about doing that and how confident you are that there is a service opportunity in China going forward? Thank you.
Okay. First of all, in North America, specifically in the United States, which I think you referred to, the architecture's billing index, again, during the last couple of months, it has been more than 50. I think that newest one is 52. What is most important is that we have seen a good development, an increase in development in opportunity creation for us in the United States market. As I mentioned earlier, we saw a gradual, let's say, improvement in the U.S. market in new equipment during the last year, and we expect that to continue. The other question was related to service business in China. This is an area that we have taken very actively and seriously from the time when KONE entered China. Again, last year, we had a very good growth in our maintenance business in China.
Also, what comes to our profits in China, we have a good growth in how the share of total profits from China is, how the share of service businesses is increasing as a total profit in the Chinese market, which is, of course, a significant opportunity for us.
What is the conversion rate of kind of new installations in China into service contracts at the moment? How is that trending? Thank you.
In our case, it is a little bit more than 60%. What we have said is, as we have said, it has been, we have had a slight positive development there. Actually, this a little bit higher than 60% is a very good level at the moment in China because the maintenance market is divided, is split there in the following way. One-third of the market of the installed base is taken care in maintenance by companies like KONE, which deliver products and also have the maintenance capability. Another third by small, local, very local maintenance companies, and the remaining third by customers themselves. When the market develops that over time to become more similar than in Europe and North America, that naturally increases the opportunity in maintenance. With this structure that I mentioned, 60% is something that we are rather pleased with.
Sure. Okay. Thank you.
The next question comes from Mr. Jim Ayer at CC Investments. Please go ahead.
Hi. Yes, this is James from CCLA Investments. I just wanted to question you again on the dividend, really. If you could just be a bit more precise about how you're thinking about the dividend going forwards, given that this was a bit of a surprise in terms of the increase, is it reasonable to anticipate that this is going to be a bit more dependent on the level of free cash flow being generated by the company? That going forward, we might see this as a sort of new norm?
The first point is that, of course, what comes to what I said about our, let's say, very long-term key priorities, of course, we are a growth-driven company. This is why the first point is that we want us to have a strong balance sheet. Then secondly, we have always said that we have, let's say, we keep flexibility in the level of the dividend, but our objective is to take good care of the total shareholder value. I don't think there is much to add.
Okay. Thanks.
There are no further questions at this time. Please go ahead, speaker .
Thank you. Do we have any further questions here in Espoo? In case we do not, I would like to thank you very much for your active participation and wish you a good end of the week. Thank you very much.