Good afternoon, and welcome to KONE's Q3 Results Review. As usual, we will start with a presentation by President and CEO Matti Alahuhta and continue with your questions and our answers to them. Go ahead, please, Matti.
Thank you, Karla. Welcome to KONE's Quarter 3 Conference Call. We have, again, several positive news to tell. The best of this positive news is that our orders received growth during Quarter 3 was close to 30%. This was in an environment where the new construction activity in Europe, especially in Southern Europe and in the United States, continues to be at a low level. I will now first tell about our given review on our business performance and how it developed during Quarter 3. Then we'll give an update on the market development on the key markets, as well as say a few comments about our development programs. Finally, tell about how we see the full-year market development and our business outlook for this year. Let's start with the numbers.
The first positive news really is the first one, orders received, where we had a growth of 26.6% and almost reached EUR 1.1 billion, which is by far the best orders received level that we have achieved in the third quarter ever. In comparable currencies, this was even higher, about a couple of percentage points higher. The key point here is that we did not have a good growth only in one or two markets, but we had positive development in orders received in all of the key geographies, meaning both in Asia-Pacific, Europe, Middle East and Africa, as well as also in North America. The second positive news is that the order book end of September was at a record level, all-time record level, and was about EUR 4.1 billion.
Naturally, in today's environment where the economic uncertainty has been growing both in Europe and also in the United States, this is naturally a very good starting point. Sales growth was 4.9% and in comparable currencies, a couple of percentage points higher. Operating income was the third positive news. It was this time 2.2% and the operating income went up to EUR 188.9 million. Hence, the relative operating income was slightly below last year's 15%. I said that this was a positive news, although the growth was only 2.2% because we have several factors that we have to remember. First of all, as we had communicated earlier in the year, during the second half, we had some impact from the growth in raw material costs, and we started now in third quarter and will continue in the fourth quarter. Second is the issue of inflation in salaries and wages in Asia-Pacific.
Third one is the increasing price pressures, especially in those markets where the new markets are weak. The fourth point is also important, and it is that we want to develop KONE’s competitiveness all the time, also in the current kind of economic environment. Therefore, we have continued throughout the year to increase our fixed costs, especially in those areas that enable growth. These areas are Asia-Pacific, R&D, and process development. The fourth positive news was that the cash flow returned to the strong level of EUR 240 million. I’ve always said that the longer the period, the more informative it is concerning the development of companies such as KONE. Let’s move now to January–September development. What is very positive here in orders received, as you see, that also for the nine-month period, the orders received growth has been more than 20%. In comparable currencies, 20.9%, in historical, 20.1%.
This is not such that we would have had a period of three months, a very short period of good progress, but this has now continued throughout the year so far. Sales have developed exactly in line with the guidance we have given earlier from the beginning of this year. It has grown by 4% and in comparable currencies by 4.8%. Also, the growth in operating income is totally in line with our guidance that we have given since January. The relative operating income level year to date is roughly at the level of last year, the same period of last year, slightly above. Cash flow has been strong. Let’s now again take a little bit closer look on orders received, sales, and operating income, and how these have been developing over different years and quarters.
From this picture, you clearly see that the orders received level was by far higher than in the earlier years, in our previous years in Quarter 3. The key point was that all of the geographies were growing. We had the strongest growth this time in Asia-Pacific and in North America, but also development in Europe, Middle East, and Africa was positive. In Asia-Pacific, the growth was fastest in India, but also the development in China was very strong. This means that these are in volumes, these are the two globally biggest new markets and where we at KONE have developed a very strong position during the last few years. In the Americas, the growth was fastest in the United States. The market continues to be there at a rather weak level.
However, there were growth opportunities in certain geographies like in the East Coast, West Coast, and Texas, and especially in the office segment. The key thing was that in this three-month period, we were growing much faster than the market was growing. In Europe, Middle East, and Africa, we had best growth in orders in the Middle East, Russia, Finland, Sweden, Belgium, and the UK. Orders received growth was in a very broad scope. In sales, what was good was that we had growth both in new equipment business as well as in service business. In new equipment, the growth was 2.4 percentage points, and in comparable currencies, a couple of percentage points more. In service business, the growth was in historical currencies 7.1%, and in comparable currencies 8.6%.
As we see also visually from here, the growth in the operating income was much lower than last year, and this was because of the several internal and external reasons that I mentioned earlier. In terms of the business split, the key change here is the growth of the share of Asia-Pacific about KONE sales. It went up from 22% in the same period of last year to 27%. The good news is that at the same time when we have been successful in new business, and especially so in Asia-Pacific, our service business has developed so that it has stayed at the, it continues to be 55% of our total sales. This combination gives us the stronger and stronger starting point for the future, even in difficult times. The business mix has clearly improved, especially in the geographical dimension.
This was about the development in business performance, and let's now move to discuss the market development. I will start with Europe, Middle East, and Africa, where I think that the correct headline is mixed and uncertain market environment. Maintenance markets in Europe, Middle East, and Africa developed well, but the pricing environment remained challenging, especially in those markets where new equipment markets are at a low level. Modernization markets developed positively in Central and Northern Europe and were stable in Southern Europe. In the new equipment markets, you remember that the development in Central and Northern Europe was positive during the first half. In Quarter 3, we saw a very slight decline. There, however, many markets continue to develop favorably, countries like Sweden, Germany, and Belgium. Markets in Southern Europe remained stable at a weak level. There was some slight improvement in France.
The overall market activity in the Middle East was at a good level, and the growth was now fastest in Saudi Arabia. Market growth in Russia that had started to, let's say, pick up during the end of last year has continued in a very positive way. East Americas, and here I think that the illustrative headline is continued recovering new equipment business from a low level, but uncertainty remains. Maintenance markets developed well, but especially I think that in North America, the price competition remained strong in the maintenance markets. Modernization market, on the other hand, developed positively. It had a slight growth. In the new equipment markets, the key points are that the time, the impact of the stimulus packages to the infrastructure segments is over.
At the same time, the commercial market in the commercial segments was picking up somewhat in, as I mentioned, in the East Coast, West Coast, and in Texas. Hence, provided some growth opportunities that we were able to take advantage from very well. In Canada, the market remains stable at a good level. Canada is a similar kind of case than Germany in Europe. In both of these countries, the market has been at a relatively good level over the last few years. In Mexico, the market growth driven by the residential office and multi-use building segments is clearly improving. Finally, Asia-Pacific, and this is characterized by rapid growth continuing in a broad scope. Development was positive in modernization and maintenance markets. I will give a few comments by key markets regarding the new equipment business or market. In China, all segments except the infrastructure segment continue to grow strongly.
In the same way as in the United States, the impact of the stimulus packages in infrastructure is over. The market was very much driven by the key driver for the market growth was the affordable housing segment. Also, the rest of the residential segment developed very strongly in the inner part of the country. In addition, segments such as hotels, offices, and so on also developed very well. What comes through the indicators on how the market in China will develop during the next few months, and whether we take a look either to the current construction area development or new construction area or especially new land acquisitions, the message is very clear. After more than a year, the government is taking actions to get the growth to become lower from the exceptionally high levels in the beginning of the year. They are getting successful.
It is clear that the growth is in a way of soft landing, entering or getting to a lower level, which we believe is good. We see to be good because this means that this helps to avoid overheating in the Chinese real estate market and manage the future development better. In India, the good market development continued. However, towards the end of the quarter, the growth was getting slower because of the financing constraints. Same thing that happened about a year ago, and then again the market accelerated. It's this kind of cycle that we quite often see in India. In Australia, the market remained active, and in Southeast Asia, markets remained strong with several countries developing quite well.
In this kind of environment where the uncertainty in the economy and weakness in the economy is increasing, especially in Europe, but also in North America, we have further strengthened and sharpened our development program activities. As many of you remember, all of these five programs, they are areas which help us to differentiate from competition, and differentiation naturally is particularly important in times of market weakness. Hence, these activities support our development both in short term and long term. The work and progress in all of these five has been developing well. If I take, for example, customer experience, you remember that from 2005 to 2010, we worked very actively with the customer process and defined it and implemented the process everywhere, including the tools and a set of integrated tools for salespeople from the leads to getting the orders to the SAP system.
Now, we are working with the whole business system and the customer experience in everything we do. What we have done is that we have really studied deeply what are the key touch points in the business systems with customers and have started to develop processes, how to make a, how to create KONE to a company with a better and better customer experience in everything we do. Finally, market outlook, and I will now only, let's say, focus on the differences compared to what we said in July. In Asia-Pacific, our outlook is exactly the same as in July. In what comes to Central and Northern Europe, we expected that the new equipment market would continue to grow also in the second half. Now we say that it is stable.
The outlook for Southern Europe is exactly the same as in July, and so is also the case for the new business market in North America. There we say that we expect that the gradual recovery will continue from the low level, but the outlook remains uncertain. What tells about this uncertainty is that, again, earlier this week when we got the architecture's billing index to the U.S., it was again less than 50%. It's like something up and down around 50%, and you remember that more than 50% indicates growth and less than 50% declining market. The statements of the outlooks for modernization and maintenance, they are exactly the same as in July. The business outlook, which we have further specified when now approaching the end of the year, we have specified both net sales outlook as well as operating income outlook.
KONE's net sales is now estimated to grow by 3%- 6% at comparable exchange rates as compared to last year. The previous outlook was 0%- 5%. The operating income is expected to be in the range of EUR 710 million- EUR 740 million, and the previous range was a little bit wider. It was from EUR 700 million- EUR 750 million. This is what I wanted to start with, and now we have time for your questions, please.
Yes, thank you, Matti. Let's start with the questions from those who are present here in Espoo, Finland.
Hello, [Elina Risto] from [Everly Bank]. The wage and salary pressures in Asia, could you talk a bit more about that? What are you seeing and what are you expecting going forward?
Inflation in the key markets, in the biggest markets in Asia, in reference to salaries in India and China, has been at about 10% level.
Has it been stable there, or has it increased now recently?
I would say that this is very much in line with what we expected in the beginning of the year.
Is there anything exceptional or surprising to you?
Not really.
Thank you.
[Sanna Kaje, and Skilta]. Firstly, could you comment the level of Chinese or China orders representing of total order intake?
The China orders, about the total order intake, was 25%. Okay, to be very accurate, slightly less than 25%.
Do you have any comment on India?
We haven't communicated that, but what is important is that the growth in orders of growth in India was even higher than what was from China.
Looking into the fourth quarter, which is usually seasonally higher in terms of activity, or at least in the past it has been, could you confirm the outlook that the order intake could be higher also this year in the fourth quarter compared to the third quarter, or what are the risks? Environment that this is not happening this year.
Okay, this shows how it has been. I don't see really the model that it would have been higher. It's about the same level. What is very important is just to remind that, as we always say, that in order to take three months is such a long short time that in this kind of business there are quarterly variations. Our activity level as such has been and is at a very good level. Impossible to say more.
Maybe also, if I can continue, can you update the status on Giant KONE?
We have not still got these approvals, but there are positive signs that there is progress.
Perhaps also, if you could comment, should we see any risks on margin pressure in terms of service operations? If I look at the performance, for example, in the third quarter, actually the mix was slightly better than a year ago, but the group margin still weakened slightly. Is it purely coming from the equipment side cost pressures and so on?
In those markets, especially in those markets where the markets are weak, as we have seen all the time that there are price pressures in all of the business segments.
That would be probably important to know that there hasn't been any big change compared to the quarter or the other ones that we communicated for a while.
Yes.
Iris Campaign from DNB Carnegie. What was the FX impact on the operating margin on a year-on-year basis?
FedEx?
Foreign exchange has had a very small impact on our profitability. If you look at the even margin percentage as previously, not really an impact on that. You can also see if you look at our sales historical versus comparable currencies, they're very close to each other. FX didn't have a big impact now.
A small negative impact in the absolute number.
What are the main reasons behind your specified guidance?
We always tell what we feel that we know and believe. It is impossible to know in advance, but we are closer to the end of the year, and we have, let's say, more information to analyze the situation. This is what we have been trying to do always. When we feel that we can give a more accurate guidance, we tell that.
What was the growth rate in North America in orders? Can you?
We have not communicated this by geography, but yes, it was very strong.
Thank you for the questions here. I think we are ready for questions from the lines.
I remind you that if you have a question, you need to press zero one on your telephone keypad.
The first question comes from [Ms. Daniela Costa] from [UBS Investment Bank]. Please go ahead.
Hi, gentlemen. I have two questions. First one is, are there any large orders that are distorting the orders number, the particularly strong orders number this quarter? The second question is, could you explain why financial income is relatively higher in this quarter?
I answer the first one, and Henrik, you will continue the other one. Throughout this year, we have had a good growth both in what comes to new equipment business, both in the so-called volume business as well as in the major projects. I would say that in third quarter, the growth in major projects was even stronger than in the previous quarters. It contributed nicely. Henrik, if you continue with the other question.
Financial items were clearly higher than a year ago. There are two main reasons for that. One is that we received a dividend from Toshiba Elevator Company, of which we own 19.9%. The second one is we have a strong net cash position. Interest rates are at a somewhat higher level this year than the previous year, which, of course, means that we have higher interest income.
Understood. Thank you.
The next question comes from [Mr. Matt Williams] from [MF Global]. Please go ahead, sir.
Hi, good morning, everybody. It's Matt Williams at MF Global. Two questions, please. Firstly, on maintenance, just wondering whether you've seen any trading down within maintenance contracts from customers perhaps willing to drop from a gold service package to a sort of bronze level of responsiveness, or have they held firm within the maintenance side of things? Secondly, overall, in terms of given the net cash position, can I ask what your plans are with regard to M&A going forward, especially given the changing valuations of competitors and so on?
In maintenance, no real change in the way as you asked. In M&A, we are very active and will continue to be very active.
If I could follow up, do you find that people are more or less willing to have conversations with you in the current environment for M&A activity? How do you see the environment developing?
I would say that maybe we have seen some change. We have to remember that most of our acquisitions really have been in this kind of small and medium-sized maintenance companies, and there is no big change in that respect. If there is a change, I think that the willingness has a little bit increased.
Thank you very much.
The next question comes from [Mr. Lars Brorson] from [DNB Carnegie]. Please go ahead, sir.
Yes, thank you very much. Good afternoon, gentlemen. Thanks for taking my questions. I had three, actually. Firstly, on your growth in Asia-Pacific. At your Q2, you guided to decelerating growth rates in Asia-Pacific into Q3, or rather into the second half. It looks like you might have seen growth accelerating in Asia-Pacific outside of India. Can you add a little bit of flavor on the order growth rates you're seeing in China and to what extent things have surprised on the upside here, if anything, in Q3? Within that, can you talk about how your growth breaks down between your affordable housing segment and other segments in China? Thanks.
Yes, what comes to China and orders received growth in quarter three and the market development in quarter three, we expected that we would already in quarter three see growth in the marketplace get slower than what it in fact has been. The market was better at the higher level. Market and growth was at a higher level in quarter three than what we expected. These indicators, the statistics, new statistics, they tell that now the growth is slowing down in a manageable way to a lower level. We have been working all the time throughout the years very actively to have a competitive product portfolio in all of the key segments in China, including this affordable housing segment. Therefore, we have been doing, I would say, roughly equally well in affordable housing than in other segments.
Can I ask specifically whether you expect the affordable housing segment to decelerate in Q4 and into 2012 from what you're seeing currently?
The newest information that has been confirmed from China is that the affordable housing segment will be at the same level as this year.
That's useful. My second question relates to your cost structure. Can I ask, in your new equipment segment, how would you compare the flexibility in your cost structure today versus 2008 and 2009? Is there any reason to believe that the margin resilience in this segment has been structurally enhanced since 2008?
Here I'll answer this question. I think, first of all, it's important to remember that in our new equipment business, we have very low capital employed. I mean, if you look at us as a company in total, we have around EUR 200 million of fixed assets. That means that we always have had a reasonably good flexibility. That hasn't changed fundamentally, that logic. We remain, I would say, a very capital-light business model that we have. It's clear that one of the reasons why we have improved over the past few years is that we have improved in our new equipment business. One of the important features there have been improvements in our total supply chain where we have shortened lead times and improved inventory rotation. Of course, all of this makes us overall in the longer term more flexible.
Is there a meaningful difference today versus 2008 in the percentage of your installation that is outsourced?
No, no significant difference is there.
That's useful. Thank you. One final question, if I could, just on Giant Corner, follow-up question. You had earlier guided to the transaction being completed in Q3, and now we're looking at Q4. Can I ask specifically to the question earlier, what is pushing back the completion date here, and do you see any risk to the transaction?
As said, although there has been some delay, we have positive indications that this is developing well.
Okay, thank you.
Next question comes from [Mr. Ben Marston] from [Merrill Lynch] . Please go ahead, sir.
Good afternoon, everyone. It's [Ben Marston] from [Merrill Lynch]. Three questions, please. Firstly, on raw materials, are we at the point, do you think, of the maximum year-on-year negative impacts of the raw material increases you've seen? Secondly, just kind of tied to that, at what point do you think you'll get a benefit from the fact that steel prices and input costs are now starting to come down? How long will that take to feed you? That's the first question.
Okay. The impact of the negative impact of the increase in raw material prices, that will be higher in the fourth quarter than in the third quarter. These are not, as we always say, the changes in raw material or the positive or negative impacts in raw material costs, they are in no way dramatic in our business, but this is the situation. What comes to your second question, the development in most of the raw materials during the last few months has been slightly, let's say, towards lower prices. At the moment, we expect this to continue. We have to remember that the levels still are at the higher level compared to those levels where we fixed our fixed price contracts for this year for a majority of the volume, but not all.
Okay, thank you very much, Matti. Just coming back to the fixed costs, you're saying you're still investing quite a lot for growth. Your sales growth in the quarter, I think, was about 6.7%. Can you just say how fast your fixed costs are growing just so we can understand how big a drag it is on your margin? If sales growth kind of slows down next year with the economy, hypothetically, how easy is it for you to kind of cut those fixed costs to protect your margin? Thank you.
First of all, we have not opened up the detailed level of our fixed costs. I would say that, yes, we are growing our fixed costs, but again, these percentages are not dramatic. Of course, we focus very much on still what the growth in fixed costs is compared to the overall growth of our business. Yes, it's a slight drag on the margin, but in no way a very significant one.
If you have to take action because there was a recession next year to take fixed costs out, how easy is it to do that?
Maybe you're comfortable. There are certain areas, of course, where we are investing in growth, in particular, where we can make decisions. However, we have decided that we think that for our long-term competitiveness, these are areas we want to continue to invest in. It is clear that we have to look at all of our operations in that case if the situation would be different than what we think at the moment. The message is that we see a lot of attractive things that we can do in these growth-related areas. Therefore, we naturally want to invest and not slow down our internal development just because of the uncertainty in the environment.
Got it. Very clear. Thank you.
Next question comes from [Mr. Klaus Baudin] from [RBS London]. Please go ahead, sir.
Yes, good afternoon. It's [Klaus from RBS in London]. Three questions, please. Firstly, you mentioned that the margin was held back this quarter by high wage inflation in Asia. I just wanted to get back to this. The question was asked before. It's sort of interesting given that you're the second captive goods company today that mentioned this, Schneider Electric as well this morning. I just don't get this really. I mean, wage inflation in China has been high for most of the year. What has changed here over the last couple of months for you to include this comment in the press release? You said it was in line with your expectations, but why did you include it? Just confirm that it hasn't changed over the last couple of weeks. Thanks.
Okay. As I said, it has been at about the same level and really very much as we expected. The point is that, and this is very much what also Henrik mentioned in line with the pitch of development, are such that this would not have a very strong impact. We have a set of different smaller factors, and we just wanted to write down the list more fully.
Okay. My second question is in Americas. Could you remind us when orders started to go down in Americas looking back over the last one to two years? I'm just trying to get a feel for when revenues can bottom out here given that the lead times, I think, are typically 15 months in the U.S.
Yes. The market in the Americas, when you look at the level of the construction activity, the market, the top year for the construction market in the U.S. was 2006. From there, it started to decline. In 2008, it was a real turning point. However, even in 2008, when the decline accelerated, we were able to increase market share and actually grow our order intake for quite a long time. I think that it was up to the first half of 2009. It went, the market had come to a very low level. We had a weak period. We had had a weak period of orders and had a weak period of orders from the middle of 2009 to roughly end of last year. Now it has been somewhat better. These three months was, I would say, exceptionally good.
Okay, very good. The final question on price pressure. You have mentioned this before, but has there been a step change here as of late, or is this the normal price pressure that you keep referring to? What pressure do you see on sales and finally on orders? Is it a big difference on orders and what you have in the backlog? Thanks.
No step change. What do you continue, Henrik?
Yeah, so we mentioned earlier that it's been a constant development. What we said is if you look at the margin of our order book, that has declined slightly, but again, nothing dramatic in that respect.
Okay, thank you very much.
Next question comes from [Mr. Andreas Dahl] from [Cheuvreux]. Please go ahead, sir.
Hi, it's Andreas from Chevreux. I have two questions. First of all, looking at the prepayments as a percentage of your inventories, it seems like it's coming down from around 120% to around 110% right now. How should we sort of reason around this going forward? The second question would be regarding your M&A pipeline. Do you see anything interesting out there, perhaps in South America? Thank you.
Okay. I can easily answer the second question because we have not really much to say there. Yes, we have some, let's say, interesting cases in the pipeline, but it's not our policy to comment.
Okay.
Eric, I'm the first one.
Yeah, if you look at our advanced payments relative to our inventories, you're right in that the ratio has come slightly down. We remain still at a very good level. We came from a, I would say, exceptionally high level. There is nothing that really has changed here. I think that the ratio a little bit fluctuates depending a little bit on the geographical spread of orders and a little bit of timing of projects. No big changes here, and this is a natural ratio that does fluctuate a little bit from quarter to quarter. I would say that we remain at 110% that you mentioned, which continues to be at a good level.
Thank you.
The next question comes from Mr. [Giacomo Picetto] from [Bank Suisse] . Please go ahead, sir.
Good afternoon, [Giacomo Picetto] from [Bank Suisse] . Two questions. The first is to understand if the duration of your backlog changed. I mean, just to understand if you're receiving more framework orders or long-term orders, or if we should expect that more or less the order to delivery time on average didn't change significantly. Second, on the margin, you were discussing the various reasons why the margin in Q3 went down. I would like to understand if this is any step change in the outlook for the midterm for margin increasing for the company. Thank you.
Okay. For the first question, the order to delivery time has become slightly shorter. The second question is that we have given the guidance for the whole year. What comes to next year, our policy always has been that since 2005, the first time we comment anything about the new year is after we have done our homework well and then give the guidance for both the market and our business in January when telling the whole year numbers.
I think we can add just to this that the long-term targets remain fully intact.
Yes, yes. That's a good addition. That is clear.
Thank you. Sorry, I'm still on the line.
Yes.
Sorry, just one thing on the first answer. Does this mean that if your order to delivery time didn't change or actually shorten a little bit, that we should see a strong acceleration in top line in 2012?
Okay, Henrik, this is a next-year question, but Henrik.
Yeah, sorry.
As Matti mentioned, we don't give any guidance for next year. I think if we look from a geographic perspective, our lead time has really shortened. As Matti mentioned, within this quarter, we were quite successful in major projects. Those are naturally then much longer in lead time. I think that geographic-wise, yes, slightly shorter lead time, but I think the mix of orders would then bring it now a little bit longer. That's what we can say right now.
Thank you.
The next question comes from [Mr. Petri Vesalu] from [Swedbank]. Please go ahead, sir.
Yeah, good afternoon, sir. Eric, actually. If I get you right, the Chinese officials have indicated that the affordable housing volumes in 2012 would be just about the same as this year, i.e., some 10 million units. Would this mean that you are going to lose the growth momentum in China regarding this segment if these figures are right?
Ten million is ten million next year and last year. That naturally indicates that in the affordable housing segment, the level will be the same. The other comment naturally is that the activity started pretty much this year and will continue next year. What comes to elevator and escalator market, I think that we will have some, let's say, higher opportunity level.
Okay, fair enough. Thanks.
Next question comes from [Mr. Glenn Liddy] from [JP Morgan]. Please go ahead, sir.
Good afternoon. I'm just coming back to raw materials. In your statement this morning, you highlighted that some materials were in short supply. Did that actually cause any disruption or additional costs? When you say you're going to be looking into entering into fixed-price contracts, could you give us an idea of all your material purchases? What are currently under fixed-price contracts for a year and what the percentage might be in the future?
Short supply, we have not suffered. In some situations, that has led to somewhat higher costs, but not significant. What comes to fixed-price contracts, what comes to the future, at the moment, we have not done much or many new contracts because we expect that raw material prices are in a declining trend.
What proportion of your raw material purchases at the moment are then covered by fixed contracts historically?
We have only done a small part for certain commodities, but I think it's very small and quite early still. We are reviewing the situation all the time.
Thank you. Thank you very much.
Next question comes from [Mr. Bernhard Horn] from [Polaris Capital Management]. Please go ahead, sir.
Yes, thank you. I'm just wondering if you could do a little bit more on the backlog. I'm trying to understand how the sales are trending relative to the changes in the backlog. For instance, in the 2009 period, obviously, backlog had declined. Then you had some deliveries related to orders received in 2010. I think it was a 15-month time period for delivery that you talked about earlier. If we kind of mix the order book changes in 2010 and 2009, we kind of get something like your mid-digit sales increases this year. I'm wondering, as we look forward, the increase in order book is much higher than it was in prior years.
I'm just wondering if you can tell us a little bit more about the flavor of that order book and how we might be able to understand whether the delivery of that was going to increase sales in 2012 a little bit more than it appeared in the last year.
You're one closer.
First of all, I would like to just again remind, as Matti said earlier, that it's our policy that we will not comment on our sales or profitability for next year until in January next year. The order book has a lot of different projects, has a lot of different geographic mixes. As Matti said, on average, it's slightly faster now than it was back in 2009. Of course, that means that we are in quite a strong position when we go into next year. I think that's what we can say. I don't think that currently there's much more guidance we can give to order book to sales for next year.
Yes. Okay. Two other questions. The first is, if we think about the change in the order book, how much could we think that order books have changed in terms of passing on raw material, wage increases, and foreign exchange changes, or other things that come into play there? In other words, are you trying to increase prices?
We've been able to pass on the pressures that Matti was mentioning, how much we've been able to pass those on to prices. I think first of all, I would reiterate what Matti said is that clearly we have in many markets a new equipment business that continues to be at a low level, in particular in Southern Europe and in the U.S. This, of course, has made these markets challenging. That has meant that passing on these price increases and these inflation pressures that we have seen has been very challenging. It is clear that pricing is one of the highest focused areas for us, and we are working hard on our pricing. The environment to achieve price increases currently is very challenging. That's what I said earlier, has led to a slight, and I would emphasize the word slight, decrease in the margin of our order book.
Okay, thanks. Lastly, I wonder if you could comment. Obviously, the markets or the investors are very concerned that the availability of credit around the world as it relates to this sovereign debt crisis and its impact on banking and so forth is on the minds of everybody. I'm wondering if your salespeople are reporting back to you in various geographic markets, whether that is beginning to affect the rate of their ability to book new orders or how it might be affecting them going forward.
Thinking that our good orders received level in quarter three tells already as such that we have not seen much of this. A very, very good example about increasing financial constraints is India.
Okay, thanks very much.
Thank you.
The next question comes from [Mr. Vladimir Sergievskii] from [BNP Paribas Exane]. Please go ahead, sir.
Excuse me, I have a question from Yves Fayut. First, could you comment on the development of the margin in the backlog since the last quarter? That would be my first question. My second would be on the midterm target of 16%. Do you assume in this target any recovery of the pricing in the market? Thank you.
The first question, sorry, can you repeat it? I missed your first question.
Sure. Can you comment just on the development of the margin in the backlog at the moment since the last quarter?
If you think about the overall order book margin, that doesn't develop very fast, but there are no big changes. I think we made the same statement in the prior quarters. No significant changes there.
What comes to this 60% long-term operating income target, reaching that depends on many different actions, very much on how good impact we get from our five development programs which very much, let's say, address all of the different parts of the business system. As we have already earlier told, already in the spring, we started active actions and increased attention on pricing. Also, that will continue and will be one important element there.
Thank you.
Next question comes from [Mr. Sam Dobson] from [Macquarie]. Please go ahead, sir.
Hi, it's [Sam Dobson] from [Macquarie Securities]. I just have two questions. My first relates to the conversion of steel equipment sales into maintenance contracts. I was just wondering if you'd be able to comment on the development of conversion rates, particularly in China. If you're seeing positive conversion rate development in China. Secondly, in India, you mentioned that the level of orders in India for this quarter was higher than in China. I was just wondering what the dominant segment of the market was in India.
Could you repeat the second question? Because the line was.
What's driving growth in India? Which segment?
Okay. In India, the residential segment and the hotel segment are the key drivers for growth.
Maybe you will comment on the conversion rate in China.
The conversion rate in China, we have commented that is at around 60%, and that is approximately the level where we are. It has improved slightly, but I would say quite stable overall.
Got it. Okay. All right. Thank you. Thanks very much.
Thank you.
Next question comes from [Ms. Susanna Virtue] from [RTNS]. Please go ahead, ma'am.
Yes, hi. I just want to come back on this pricing. Last night on the conference call, United Technologies, so the OTC segment, I was actually talking about price increase in the North American market for new equipment. It comes through this raw material increase. Is something that you're planning to do as the leader is starting doing? Because it looks like from your press release that you're still talking about Americas as further intensified price competition. I cannot reconciliate the two comments. Thank you.
We have and we are working on this pricing in all, all, all basically in all markets, including North America.
Is it because I remember in the past and the story of KONE, I know you're always seeing a sort of price deflation in the new equipment of 1% per annum, more or less. Is that also what you have seen this year? Therefore, do you have to start recorrecting?
Could you repeat it, please?
In the past, in the story of KONE, we've always seen around 1% price deflation in the new equipment. Is that something that actually you've seen also this year or has it actually accelerated?
I don't know where you have the number 1% of price deflation per year. I would say that we have commented now that in the markets where we have seen a prolonged weakness in the new equipment markets, those are the areas where it's challenging. It's clear that we are working very hard on raising our prices. I think we are more talking about the challenges and where it's difficult at the moment. I think we haven't talked about at least close what pricing has been. I think what we have said is really what we can comment on this matter.
Okay. The second question that I have is about, sorry, again about this wage inflation. Remember in the investor day, you added this when you were explaining the cost structure of the modernization and maintenance sort of business unit. The big chunk is really this fixed cost base. Then you add a sort of explanation of what are your tools to try to boost the productivity and compensate for the inflation in the cost base. Is it right to assume that actually because of the tremendous growth in China, it is something that you have not been able really to control in terms of the productivity measure? It will come over time, or is it actually something structural of the market that we are stumbling in the future?
Now, when you are referring to modernization and maintenance, and then again referring to India and China, in India and China, naturally, our business continues to be rated pretty much on new equipment business.
In this case, I don't understand your comment on.
are working, continue to work actively with the productive development both in modernization, installation for modernization, in maintenance, and also for installation for new equipment. The development in the productivity has been rather good.
Yeah, in this case, I don't understand your fact that you're commenting on the wage inflation in China and India.
I would like to remind that I mentioned that in price pressures, we don't have any single factor that would be a particularly important one. We have a set of several, and this was one of those. Naturally, the growth in wages and salaries, when it is at the level of about 10%, it is rather high. I don't think that we should now overemphasize this factor.
Okay, thank you.
There are no further questions at this time. Please go ahead, speakers.
At this time, I would like to thank you very much for your active participation and wish you a very nice end.