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Good afternoon, and welcome to KONE's Q1 2018 Results Webcast. My name is Essi Lipponen, and I'm from the Investor Relations team. I have here with me our President and CEO, Henrik Ehrnrooth; our CFO, Ilkka Hara; and Head of Investor Relations, Sanna Kaje. We will start with Henrik presenting the Q1 highlights and also the development in the market environment. After that, Ilkka will take us through the numbers. We will finish with Henrik presenting the market outlook and the business outlook. After the presentation, we will have time for your questions. [Operator Instructions] Let's get started. Henrik, please.
Thank you, Essi, and welcome also, on my behalf, to our Q1 results webcast. It's again my pleasure to present to you our progress during the first quarter of this year, and we have a lot of interesting news to share.And if we straight go into the highlights or how we developed during the first quarter this year, I'd like to start with the fact that we had a solid and good growth in our orders received on a broad basis, with stabilizing margins. This is really good news.Our profitability continued to be burdened by a number of headwinds. That's, of course, something we are not happy about. We'll go into that in more detail as well.I see good progress in how we're driving our differentiation from our competition to add better value to our customers, and we will talk about that as well during this webcast.But to dive straight into the highlight of the numbers. Here, clearly highlighted is the strong orders received that we had in Q1. Our orders received were just over EUR 1.9 billion. In comparable currencies, they grew by 6.8%. We can see though that the strengthening of the euro has a very significant impact on our reported numbers, and on a reported basis, it actually declined 0.2%. We continue to have a strong order book, about EUR 7.8 billion, and in comparable currencies, that's also grown slightly year-over-year.Our sales, I would say, call it exceptionally strong growth in Q1, just over EUR 2 billion and 10.6% growth in comparable currencies. Our EBIT was now EUR 211.5 million or the adjusted EBIT, EUR 218.3 million compared to EUR 245.8 million the year before.It is clear that we are not satisfied with the level of our EBIT and also the fact that our EBIT margin declined from 12.6% to 10.9%. It's something we are continuing to take action to improve this, and we continue to see now good progress in that.Also, our cash flow declined and was EUR 179 million compared to a strong EUR 305 million last year. Ilkka will talk more about this.EPS, EUR 0.33 compared to EUR 0.40 a year ago.As we all know, our markets are changing, customer expectations are changing. What I'm very happy about is the continued energy and positive forward-looking drive I can see throughout KONE, in developing KONE going forward. And that I'm very pleased about, and I think a big thanks goes to all of our employees for the great job they continue to do to develop KONE into even better direction and drive our differentiation.If I then look at the Q1 business highlights. Orders received growth, I talked about that, how we grew in all regions and all businesses. So what I'm very happy about is that the growth was broad-based, quite even, strongest was in Asia Pacific outside of China, where we had very strong growth, and also the fact that second quarter in a row now, we started to see a stabilization of our margins in our orders received.So we can see that the actions we are taking on improving our pricing are bearing fruit.We also had, again, a very solid development in our maintenance and modernization business. We continued good growth in good -- both businesses.Perhaps a highlight here is that when we look at Europe, and particularly, Central and North Europe, we can see that the good development in new equipment business now for a few years is starting to also be reflected in the maintenance business. And we can see an improvement in maintenance prices, particularly in Central and Northern Europe. I think we have done quite well in many of the countries here.We also see on the services side that our KONE Care and 24/7 Connected Services continue to be at momentum. We can see that both of these are differentiating us, and we can see continued good development, for example, KONE Care, how it's improving our pricing, how it's improving our hit rates and how the comments from customers are very clearly that, hey, now you're selling something that suits my needs, and that's why I like this. Also, 24/7 Connected Services, good momentum here, and we can see very strong overall progress in rolling out these services. KONE Care and 24/7 Connected Services are now available in more than 15 countries.Also in the quarter, we continued to strengthen our product competitiveness. In Asia, we had some very important product launches, particularly in India, where we launched a totally new mid-range -- sorry, mid-rise offering, specifically designed for the Indian market. I think the timing of this is actually very good. We're starting to see the Indian market recovering now, and I would claim that we have the most complete offering for the Indian market now and are very well positioned to capture the good growth we're seeing -- coming through in that market now.And we also strengthened and broadened our offering in China to make sure that we are strong in all of the key segments throughout the market, and that we have done.As you know, we started our Accelerate Winning with Customers program in September. Here, we continue to drive that forward, and we have good progress in the execution of this program. The whole idea here is to ensure that we can have more customer-facing time with new service and solutions and therefore bring a new service and solutions faster to our customers with higher efficiency. And there are a lot of things that are going in the right direction here, and we continue to execute on that program.Also, what we did in the quarter is that we launched a new offering structure. And this is to ensure that our offering structure, overall, what we sell to our customers, fully reflects our current strategy. And the whole idea here is to ensure that KONE is as easy of a company as possible for our customers to deal with. We can see that our customers' needs are changing very significantly. The way people work is changing, and we can therefore see that that's putting new demands on office buildings. We also see new demands on residential buildings, and we want our new offerings to better reflect the needs of our customers and reflect our strategy, what we call that we want to have consumer-centric solution and services that fits their needs. And therefore, we launched an offering structure that looks like we have on the screen now. And the basis of it, we have our basic core business: equipment for new buildings; elevators and escalators for new constructions to provide great people-flow in these buildings; and the maintenance and modernization business for existing buildings to ensure people-flow remains good and the equipment is kept in good condition and modernized. This remains the same and of course, a very core part of our business. And the next level, we have our advanced people-flow solutions. These are our solutions for smart buildings. Parts of these offering have been available already for many years, but that's, of course, an area we continue to strengthen and broaden to make sure that we have the best solutions for increasingly smarter buildings; everything from destination to access control, but also information, monitoring and how we can understand best what's happening in these buildings. And then we have added a new layer, what we call advanced people-flow planning -- people-flow planning and consulting. This service is specifically designed for our customers to meet their facing -- sorry, to meet their changing needs. Here, we are using all the insights and analytics we have from buildings when we connect the elevators and escalators, but also all the other data we have gathered over the years from these buildings. The idea here is to ensure that we can help our customers make their buildings the best buildings to work in or live in by having the best people-flow in them. We're seeing a lot of good demand for our services in providing the analytics design and planning for our customers as their needs are changing. So with this whole offering structure, we want, again, KONE to be constantly an easier company to deal with and very much structured in the way our customers want to face us and want to buy from us. So that's the idea of this new offering structure.So that's a little bit about how we're developing KONE and how also we're developing towards our strategy of winning with customers.Market development, what we have seen in the markets. We start with new equipment market overall. We can see that the new equipment markets grew slightly in the first quarter. And actually, we saw a slight growth in all geographic areas. North America, the market grew already from a high and good level. Europe, Middle East and Africa, also slight growth, particularly in South Europe and the Middle East. Central and North Europe, pretty stable on a good level. In Asia Pacific, we saw the Chinese market was now quite stable in units and rest of Asia Pacific grew, and it was particularly India that returned to growth; and because of that, we saw the whole rest of Asia Pacific growing.So overall, I would say, development of the new equipment market, we are very much in line with what we had expected at the beginning of the year.If I then look at the service markets, here, also, we see growth across markets and across businesses. North America, both maintenance and modernization markets, are growing slightly. And I would say, modernization, we can see also that given the good growth and momentum that market has had for a good while already, we're actually seeing that pricing has improved in the market.In Europe, Middle East and Africa, maintenance markets are growing slightly, and as I mentioned already, we're seeing a slight improvement in pricing overall in Europe. And clearly, the reason for this is that there are more units coming into service now from the better new equipment markets over the past years and also better economic environment. And this particularly can be seen in Central and North Europe.Also, modernization markets are growing slightly. Asia Pacific, good growth in maintenance and strong growth in modernization overall. Not much new there.But if I look a little bit closer at the Chinese market, as I mentioned, it was flat in the first quarter. Here, if you look at the fundamentals of the market and start with housing inventories, we can see that in the higher-tier cities, the relative inventory has a little bit edged up, whereas the development, if we look longer term, has improved in lower-tier cities. Actually, if we dive a little bit deeper into these numbers, we can see that the absolute number of apartments available for sale has actually declined. But if you look at the higher-tier cities, we have also seen a decline in transaction volumes, and therefore we see a little bit blip up here in the relative measure of the inventories. But overall, we can say it remained at the relatively healthy level. Housing sales and prices. Here, as I mentioned, the higher-tier cities, we've seen that transaction volumes have declined a bit and prices are pretty flat, whereas the development in the lower-tier cities is good. So we can see that the government restrictions that have been in place now already for a good while, that they are really having an impact. There are now some 100 cities where we see restrictions on apartment purchases and mortgages. And of course, the idea of the Chinese government here is to cool down the market, and we can see it is having a significant impact overall on the property market.If I look at the property construction markets overall, we can say that real estate investments actually grew very nicely beginning of the year. They grew at about 10%. The main driver behind this are the increasing land transactions and increasing prices of land.The overall elevator and escalator market was now pretty stable in the first quarter.Now in connection with the Q1 results, we also dive deeper into how the markets and how market shares developed in the prior year. In the first quarter, we always do a deep dive into market-sizing and market shares, and as usual, we then present that in connection with the Q1 results. And if I look at the global new equipment markets overall in 2017, as we discussed earlier, the markets remained stable overall at approximately 825,000 units of elevators and escalators. China maintained by -- remained by far the biggest market at 63%. The Chinese market was now quite stable after 2 years of decline in units and also pretty stable in monitor value, and that had declined for already some 3 years. So we saw a stabilization of that market.The growing markets are clearly Europe, Middle East and Africa and North America, whereas rest of Asia Pacific declined slightly.KONE's market share in 2017 was stable at approximately 19% if we measure it in number of units. But as I think all of you know, our principal objective last year was to gain market share measured in value in a stable market, or even in some are a declining market. Most important way to gain in those markets is to gain by value and look at your pricing very carefully. And as you know, that has been very much our approach, and if I look at our market share measured in value, it actually grew slightly. So I believe that, that was very much in line with our approach last year.The service markets continued to grow. The global installed base grew to almost 15 million units last year. Markets grew at close to about 6% in number of units last year. Clearly, the Chinese market is the fastest-growing, given the number of new installations we see every year there. Modernization markets also grew in all regions.We consider ourselves clearly a challenger in the maintenance markets. However, if I look at our major competitors, we clearly have the fastest growth rate. So we are catching up on the bigger competitors, and we can see now that we have improved, over the past years, our position and we are now #3 -- in the #3 position, if you measure it by global service base, how many units we have in service. So we continue to grow faster than our main competitors, and last year, our service base was more than 1.2 million units under service contracts at the end of last year.If you then look at our market positions in the various businesses and various markets, no big changes here. In Europe, Middle East and Africa, we continue to be #2 in the new equipment market, and in maintenance, we are #3, but we have gained share here.In North America, in new equipment, we continue to be #4. However, if I look at particularly the American market, the U.S.A., we can see that the difference between the second, third and fourth player actually is quite small. So we have constantly strengthened our position there, particularly given the very strong position we have in the machine-room-less segment there.In maintenance, we are a clear challenger with the #4 position.In China, we continue to be a clear leader in the new equipment market and also a leader in the maintenance market. Rest of Asia Pacific, we remain a leader in new equipment and #2 in maintenance.So the strong positions we have in new equipment clearly continues to fuel a good development in our maintenance base, and that we have seen consistently over the past years.So with this introduction of our highlights, markets and market shares, I'm happy to hand over to Ilkka to review our financial performance a little bit deeper during Q1.
Thank you, Henrik, and also welcome, on my behalf, to this result announcement call. And as normal, I'll go through our financials a bit more in detail, and I'll start with orders received development in the quarter. Our orders received grew and reached EUR 1.9 billion in the quarter. We saw growth in all regions and in all businesses on a comparable basis. On a comparable basis, our growth was 6.8% in the quarter, and more importantly, we saw the development that started already at the end of 2017 in our margins that continued to stabilize in the quarter.If we look at China in more detail, in China, we saw, in both volume as well as in value, growth in our orders. Our volumes grew about 5%, and value grew slightly less than that. Price contributed positively year-on-year to that development, but mix had a slight negative impact to -- in the quarter in China.Then moving onwards to sales. So our sales reached EUR 2,008,000,000 in the quarter, which is, on a reported basis, 3.3% growth. And as said earlier by Henrik, so the growth was very strong at 10.6% on a comparable basis, and a high level of project starts really drove this strong growth development in the quarter, especially in the new equipment but also in the modernization business. But overall, sales grew in all regions and in all businesses. And if I look at this more in detail, so the new equipment business grew at 14.6%, modernization at 10.3%, and maintenance contributed at 5.4% in this quarter to the growth.On a geographical perspective, the strongest growth was in Europe, Middle East and Africa, 19.8%. Americas contributed at 3.5% and Asia Pacific at 4.1% in this quarter in sales.Then looking at EBIT development more in detail. So our EBIT reached EUR 218 million and down in EBIT margin as we saw the headwinds continue to burden our results, both higher raw material costs as well as the price pressure that we've seen earlier in our orders in China contributing to this development. And our adjusted EBIT reached 10.9% in the quarter, down from 12.6% in the previous year's first quarter.It's good to note that, yes, we did have headwinds, but growth continued to positively contribute to our profit as well as the significant impact that FX and currencies play in our results. So we had a EUR 21 million impact from currencies in our results. Restructuring costs related to the Accelerate program were EUR 6.9 million in this quarter.Then to cash flow. Cash flow -- it is always difficult to measure cash flow in 1 quarter. You need to look at it in a larger context. But our cash flow in this quarter declined against the strong comparison period and reached EUR 179 million in this quarter. If we look at the key drivers for this development. First, change in our EBITDA was a negative contributed EUR 34 million. Also, from a working capital perspective, in the previous year, we saw a positive EUR 31 million contribution from working capital, whereas this year, we saw the working capital contributing negatively, EUR 62 million.If I look at the business fundamentals, they continue to be intact. Our customer payment terms as well as payment behavior continues to be the same.And I'm convinced that in the coming quarters, we see the cash conversion recovering for the business. Now handing it over back to Henrik to talk about market and business outlook for the remainder of the year.
Thanks, Ilkka. If we start with the market outlook, what do we expect for the full year 2018, firstly, it is unchanged from what we said in connection with the full year results. So we expect the new equipment markets in Asia Pacific, that the market in China, expected to decline slightly or to be stable in units, and that the tough competition there will continue. Rest of Asia Pacific market is expected to grow. Also, Europe, Middle East and Africa, North America, slight growth as well there. Maintenance, very much the same trends we've seen so far, with growth across markets, and of course, the strongest growth in Asia Pacific. And in modernization, slight growth in Europe, Middle East and Africa, North America and strong growth in Asia Pacific.If I then turn over to our business outlook. As we had promised, we have now specified, in connection with Q1 results, our business outlook. We expect our sales to grow between 3% and 7% in comparable currencies, and we expect our EBIT to be in the range of EUR 1,100,000,000 to EUR 1,200,000,000, and this assumes that foreign exchange rates remain at the level where they were at the end of March of this year. So with this level, there would be about a EUR 40 million negative impact from exchange rates on the EBIT.We have a number of things that are driving us in a positive direction. It's a solid order book that we have. It's a solid and continuous good development in our services business as well as the continued performance improvements that we have been able to drive. What is, however, burdening our result, it's clearly the price pressures we have been experiencing in China over the past years and now we are clearly delivering orders that were booked last year with a lower margin. That we can clearly see. Also, that in combination with higher raw material costs that we expect to burden our result by about EUR 100 million this year, those are clearly weighing on the result. And then if I look at translation exchange rates, the impact on our sales, if they stay at the level of where they are now, will be about EUR 300 million and on our EBIT, about EUR 40 million.So then to summarize. I'm very pleased with the good start we had to the year in orders received, given it was broad-based and given that we also stabilized our margins.The actions we are taking to improve our profitability and margins are working. We can see the focus we have on pricing is delivering results, and of course, we need to do more there. But also, the overall performance improvements are driving us forward.And I'm very pleased that our services that we have launched over the past year, that they are differentiating us, which are really a sign how we want to work, how we want to show our customers that we help them succeed in their business, they are very much gaining momentum. And therefore, we also see good progress in our strategy execution continues in driving us forward and finally, a lot of great opportunities from the changing markets and market environments that we are seeing.I'd also like to highlight that we have, today, published our sustainability report for last year. I hope you all read it. There's a lot of interesting information in it, how we continue to make KONE a more sustainable company and how we are developing towards our target of being the leader in sustainability in our industry.So with this, I'm happy to open up for your questions.
[ Lou Sikovski ] and a couple of questions. First about this new offering, how about this actual product or elevator portfolio? I haven't heard for a while about that. Any development directions in that area? You are talking much about new services, but how about the actual elevator portfolio?
If you look at new product introductions, actually, we have continuously upgraded our -- and launched new improvements and broadening of our offering. Over the past years, there's been a lot of work in North America, and we can see that has delivered a lot of results. Now we had launched a new mid-rise offering for the Indian market, and as I said, very well-timed to capture the growth opportunity we see there. And also, in China, we launched a new broadening of our range to capture more of the market. So we have continuously had new offerings and new launches for strengthening our product competitiveness. Last year, also, we had a lot on the high-rise side, how we strengthened and brought new values to our customers there.
Then a second question about this value market share. Could you a little bit elaborate, is it contributed by some specific market area or product area? Or in what area were you successful?
I think it was clearly everywhere. But I think in the market where we had perhaps the biggest difference between, in China, our market share remains stable at about 20%, so we are a clear market leader there. But there, we saw that we actually gained some market share if you measure it in value. So pretty stable in units, but gained in value, and that was through our -- the pricing focus that we had.
[Operator Instructions] We will now take the first question from Guillermo Peigneux from UBS.
This is Guillermo Peigneux from UBS. I have 2 questions on China, actually. First on pricing. Could you comment on how prices compare quarter-on-quarter? So I think you increased by 7%, if I recall correctly, your pricing for China in Q4. Did your prices increase sequentially on Q1? So that's the first question. And then the second question is kind of similar, thinking about the margin of orders that you commented in your press release and the presentation, can you comment on how those margins compare Q4 on Q1? You already mentioned that margins were stabilizing in Q4. I just wonder whether that stabilization means that your order margins are improving at this point.
Okay. So as you remember, in Q4, we had a very good pricing development in China. On the 7% you mentioned, that was a combination of price and mix, and most of that was price. Now year-on-year, we were able to improve our prices a bit. Now for Q1, quarter-on-quarter, they were pretty stable. So we actually had good growth now in volume, and we're able to maintain the good price increases we were able to get in Q4. So I would say Q4 from that perspective was a very strong quarter, and that was okay, that we're able to keep it, but that's clearly continued to have good momentum there and a high focus in this area. And then when it comes to margins, when you look at the margin, there are clearly 2 things that impact your margins. One is the price, and the other one is the general cost level or your cost level. So prices, as we have said, we have been able to improve slightly. But at the same time, we have seen significant pressure from increasing raw material costs. So what we're saying is that for us to improve our margin, we need to increase prices even more. But we are going in the right direction, but it's clear that the headwinds are quite strong from the raw materials.
So is that -- can I read that as your margins have stabilized and -- but are still suffering here in Q1 versus Q4?
Pretty stable Q1 versus Q4, yes.
We will now take our next question from Klas Bergelind of Citi.
So I have a couple of questions. First on EMEA, very solid growth this quarter, both on equipment and also when we look at maintenance sales versus my forecast. On equipment, is this your mix, looking at the different countries in Europe or market share gains, or did you land a lot of projects? I know project starts drove higher sales, and it's linked to IFRS 15. But I'm interested in the orders. And also on the maintenance side, where we're now seeing pricing accelerating, is this because of higher cost inflation, or are you taking market share on the back of KONE Care, 24/7, et cetera?
Let me start, if I address the orders received. In Europe, Middle East and Africa, we actually had a good performance on a broad basis. And as you know, there are growth opportunities in Europe. We have -- South Europe is growing, Germany is growing, and we can also see in Middle East. So I would suggest good broad-based performance. It was nothing -- it was not that there was one market that was driving at all, but I would say good broad-based performance, that's the message. On maintenance, yes, we had good growth, particularly in Central and North Europe in maintenance, and that is a combination of continued good conversions and good pricing performance. And one of the factors driving our pricing performance is our new KONE Care and our new services. So it's a combination of everything, and it shows that we are going in the right direction.
Yes. Because you're a bit late to talk about positive pricing compared to your peers, so we should basically say that, now, the reception around the digital offering is sort of biting more.
It's clear, when you bring new offerings like this that are totally new for the market, we have them broadly available, it's now a lot of work with our customers and showing them how it adds value. But I think we're getting a good momentum here. And in every market where you have it and new people are trained to do it, you're constantly gaining momentum. So yes, we're going a very good direction here.
Okay. Then I want to come back on price and mix in China. So pricing is up a bit, mix down a bit. It seems like pricing is stable quarter-on-quarter. Could you talk about why you didn't increase prices further quarter-on-quarter? Is it because you felt that the cost inflation is now under control? You didn't move on the EUR 100 million in raw mats. Or did the competitive pressures get worse this quarter? We're hearing that the consolidation among developers means that you and your competitors need to increasingly compete more on price. So I would be interested to hear why you didn't increase pricing further versus the fourth quarter.
When it comes to prices, of course, our ambition is very clear. And in some quarters, you have a better performance, and some quarters, you're more stable. Now Q4 was really good. I would say this was quite okay, not quite as good as Q4 from a pricing perspective. Pricing, of course, there's a decision you make that you want to increase prices. But you have to remember, that all of these are individual negotiations between us and our customers in a competitive environment. I would say, perhaps, what is impacting is, as you said, that it's a consolidation amongst developers, and we have very good position with the biggest developers in China. So that's okay. And also, the fact that more of the growth now came from lower-tier cities, where perhaps buildings are slightly lower, so average value, therefore, probably a little bit lower than in higher-tier cities.
That was actually my final one, Henrik, on the mix there. So it was not just the project with the tough comp or this is purely down to sales to less high-rise in lower-tier cities, which then means that it should continue throughout the year if you understand the mix as the year progresses, please.
Clearly, mix, if it's more in the lower-tier cities, there's some impact on the mix, and then you need to see what is the combination of price and mix. And overall, I think we did quite well in this in Q1.
We will take our next question from Manu Rimpelä of Nordea.
It's Manu Rimpelä from Nordea. The first question would be on just the sales recognition on this IFRS 15 accounting change. So obviously, we had a very strong Q1 in terms of sales recognition, and you're guiding for 3% to 7% organic sales growth. So can you just help us to understand the -- how we kind of -- having these very strong starts impacting the new equipment part of the business in Q1 and that will kind of fade off towards the end of the year? How do you think about your organic sales currently compared to what you did now in Q1 already? And how should we think about the progression through the year?
Ilkka, if I hand that question to you.
Yes. So we did see a very strong growth in our sales in the first quarter, and that is, like you said, driven by the number of starts and the installation starts at sites. And we're clearly expecting less growth in the second quarter, and the first half as such would then even itself out. And like you said, so now that we are in IFRS 15 world, we start to recognize the revenue immediately once we deliver the material onto the sites. So in that sense, it is different, but it's more driven by the way the work was timed in for this quarter.
Okay. And then obviously, the follow-up on the profitability of the business that we saw, a pretty big fall in the margins, but that's partly and then also probably impacted by the fact that you had a lot more revenue recognition in the project business. So should we also see an equal IFRS 15-related reversal of the -- or improvement of the profitability in the coming quarters when you have less of the project revenue getting recognized? Or how should we think about it, just so I understand how this new system works between the quarters?
Well, so there's some impact if I look at the -- look at how -- where we saw the growth. So Europe, Middle East, clearly growing faster than the rest of the business and yes, some timing impacts in profitability. But like I said, if you look at our guidance and how we talked about it, so we more see that there's -- the pressure on the margins will ease off at the very end of the year, towards the fourth quarter. So that's really where we see the development maybe turning compared to what it is today.
Okay. Final question. On the pricing improvements and maintenance in Europe you're talking about, so have you seen that already flow through to your P&L and improving the profitability? Because it doesn't seem so on the back of at least the kind of Q1 margin.
I mean, if I look at Europe and the maintenance business, it's clearly, of course, a good thing, and when you increase prices, yes, clearly, that has an impact on your bottom line. So the answer to that is yes. But at the same time, we also see much higher labor cost increases in Europe this year than in past years, and I think that's a general phenomenon in Europe at the moment. But clearly, it's a positive and a good thing, the price increases that we have achieved.
If I may follow up on that. Is the net price increases something we are seeing, or is it just the prices are going up on the back of the inflation as is the case in China as well?
No, I think it is a net improvement.
[Operator Instructions] We will take our next question from Lucie Carrier of Morgan Stanley.
Actually, as a starter, I had a follow-up on the -- on one of your previous question regarding the outlook for the rest of the year. So it's clear, you've mentioned that you expect, in new equipment, growth to kind of decelerate, of course, from what we've seen in the first quarter. But do you have -- I mean, what's the visibility you have really on your service business? Because maybe to the point of my colleague earlier, how should we think about the margin mix for you in the next few quarters, considering that, possibly, it looks like you will have less new equipment than what you had in this quarter and maybe a higher share of service. So I wanted to come back to that, please. Because the comment around the fourth quarter kind of margin pressure easing, that's something you had mentioned before, but now considering the mix we had in the first quarter and how you're guiding, I would like to have your view on the margin mix based on that.
I would say that if you look at our maintenance business there, our growth has been very consistent in that business. If we look for the past few years, so I think that's what you can expect of the longer term. Modernization, we have a good order book, so that should also grow. Yes, there's going to be a slight mix difference, but I would say, as Ilkka said, that if you look at the first half, the whole thing is probably going to be pretty normalized, both from a geographic and a business perspective. So probably a little bit more services than new equipment in Q2 than in Q1 and then second half of the year probably more normalized.
Okay. The second question was around the price increase in China. And you've mentioned that the fact that you had a bit more lower-tier city activity on average maybe was not reflecting so well on the overall price increase. Can you maybe tell us whether you've increased prices in China across the board or whether you focused on a specific segment? And also, of course, without naming anyone, but what are you seeing in terms of your competitor behavior in terms of pricing in China because one of your competitor yesterday was not -- maybe not as positive as you seem to be today.
Price increases, maybe in years gone by, you were able to say that, okay, I increased prices with a flat number across the board. Pricing is understanding your competitiveness, understanding your market and understanding how you differentiate in each and every single situation. They're all individual cases, and therefore, it is something that requires courage, knowledge and insight. And that's how you drive them. If you're going to say that, okay, I'm, across the board, going to do something that is different, it is not going to work. So that is what it's all about, and that is why we continue to develop our capabilities, develop our skills out in the field, understanding where we have the best opportunities to drive it then. And that's what it's all about. And I wouldn't start naming any competitors, but what we can see is that competition is tight there. China is, by far, the largest market. Yes, it's been more challenging over the past years, but it's still the largest market in the world. And clearly, a lot of companies have ambitions there as do we.
But do you -- I remember, you had taken the lead in terms of price increase in the third quarter. You had said that. Do you feel that you're still kind of leading in that effort in China?
I believe so, yes.
Okay. And then just one last question. It was just on -- are you -- I mean, what can you comment at the moment around potential impact from tariff in terms of your sourcing in the U.S., but also in China, where I know you source locally?
I think we have to see how this plays out, but so far, impact not significant. But it's clear that we see many steel prices. Different grades of steel in the United States have gone up a lot. And we also see an impact on certain materials in China going up a lot. I would say that the situation from that perspective has been volatile, and I think it's still unclear. So far, not a major impact. Perhaps Ilkka would like to clarify, if you've seen something more specific there.
Yes, we haven't seen a major impact and are not expecting with what we know today to 2018. But naturally, it's hard to estimate what the carry-on impact is across the globe for any possible actions that will be taken as countermeasures, and we follow that. And all that we know is included in our guidance when it comes to the raw material impact for the year.
We will take our next question from Omid Vaziri from Jefferies International.
I've got 2 questions. My first question is on the modernization market. When we look at North America, I mean, given the age of the installed base there, why are we not seeing stronger growth more than the slight growth that you're reporting in Q1? Let's say, and we add some of the picture in previous quarters, and we're seeing Asia Pacific market for modernization grow with significant growth. So it's just a bit surprising.
I would say, the North American market has been very active already for a few years, so actually it's growing from a good level. North America is absolutely one of the largest modernization markets. So I would say it's growing from a good level already, and therefore, I think the activity level is high there. Asia, on the other hand, is growing from a low level because the equipment base is quite young. So it's only -- the modernization market is only emerging there at the moment. And that's why we see good growth. So perhaps, that's the difference between the 2.
And just to clarify, when you guide for slight growth in modernization for this year, you're basically saying you're not expecting an acceleration in modernization growth in North America.
No. As I mentioned, the activity level is at a good level there already, and we're expecting a slight increase from there. So we're not expecting any further big jump. No.
Okay. That's clear. And my second question is around the maintenance market in China. You're clearly well positioned, and it looks like you have taken some share in the maintenance market there. Going forward, can we just again hear your thoughts -- latest thoughts on how -- whether KONE can take market share from the local service providers given how competitive this market has become regionally? And also how, with what sort of support? What would help KONE to do that?
Obviously in all markets, the way to gain share, clearly, the key way to grow in the service business is through conversions, when you have installed your new equipment to convert that to service. And that's clearly the best way to grow and the way we continue to grow in all markets. But at the same time, of course, active in the market and what is shown time after time again is that with great customer service, with good service quality and being able to provide services that fits your customers' needs more specifically, that's how you gain share and how we can win from the market overall. Here, in Europe, there are more competition from small independent players, still a lot of those in North America as well. So there is a broad competitive market, and of course, we want to compete against all of that with good services, good performance and providing good value to our customers.
And is it possible to just hear from you maybe 2 examples of what a good service in China for winning service -- for achieving high conversion rates in China is?
It's -- when you have large customers in China, I would say, there are 2 impacts, if I take a little bit broader your question. So there are 2 impacts of the market consolidating. So the bigger strategic customers who are taking more and more share, the top developers, they also -- service is more important to them because they have, of course, brand and reputation to make sure it stays intact because they often own these buildings and then want to have the service as well. And there, they can -- they are very good at understanding what your service performance is, what is the uptime of the elevators, what condition are you keeping them in, how well are you responding, how well are you keeping them informed of what's happening, what is your transparency, and what is your overall customer service. And we can see customer service also has a very big impact on the satisfaction of customers in this industry. So it starts from the basics, and then when you really understand what your customer is looking for, what type of buildings they have, what type of tenants they have and what the specific needs are, you can then cater to those specifically. And that is what we're doing and why we're performing well in that market.
Okay. And we're clearly seeing margin pressures on the maintenance business. Is this mainly because of lower pricing, a more competitive environment? Or is it more of a servicing cost rising in the region?
And which market you talk about now?
The Chinese maintenance market.
The Chinese maintenance market, actually, we have a good profitability there. There are big differences, and you need to make sure that you right segments and there, you can have good profitability. If you go to the most affordable segments there, it may be more challenging. So it really depends on what you cater to. But I believe that if you develop in a good way, your customers will understand and appreciate the service, in particular, as we can see an overall aging of the installed base there.
[Operator Instructions] We'll now take our next question from James Moore from Redburn.
Because I have 3, so I'm thinking which one to choose. Raw material. Your EUR 100 million guidance, you get that unchanged, but you mentioned steel prices are rising. You say you've got as much of the available information in the full year '18 guidance as possible. But could you help me with how much of that EUR 100 million or how much the year is locked in, if you like, and whether we should think about current raw material prices affecting the 2019 headwind and not '18? And if so, do you have an early read on whether that could be another EUR 100 million, given what's going on in steel prices?
Thanks, and thanks for the question, James. So if I look at the total, and just to summarize, so we said that we expect about EUR 100 million impact from raw materials to 2018. And we are about -- we normally lock our prices between 3 to 9 months, depending a bit on the components and what we're talking about. And we're roughly, I would say, halfway through locked for the year in our prices. And like you said, there's been a lot of volatility in the market, but at least, in the beginning of the year, we were able to push some of the impacts to the latter part of the year.
We will take our next question from Martin Flueckiger of Kepler Cheuvreux.
Martin Flueckiger from Kepler Cheuvreux. Just coming back to that raw material question. If I understood you correctly, you were talking about 2018 only, but what about the impact for 2019? I realize it's still early days. But given the pretty steep increases in hot steel prices, it looks like it's going to be delayed into next year. Is that the case? Is that how we should think about it?
So first, like I said, we have kept what we said earlier, same, and it's partly about us being able to work with our suppliers and partly about the market development. If I look at forward to 2019, so obviously, the impact of product mix as well as the geographical mix plays a big role there. And -- but all things being equal in trying to estimate what it would be for 2019, then we do expect that at current levels, we have a slight headwind for 2019 if the prices remain at this level.
Next question is from Glen Liddy, JPMorgan.
Just coming back to margins and cost again for the backlog. For Q1, the margin in the backlog is down again, I believe. How long will it be before all that negative margin has washed through to revenue?
Let me understand your question a bit. So we've said now for 2 quarters that the margin on orders received has stabilized. It's clear that we are now delivering orders that we booked in the first half mid-year last year. So those are coming through. And if I look at the margin that we're delivering and booking now, it's probably not a huge difference between the 2.
Right. So if we look to next year, if nothing changes on your raw material or your costs, you would expect your margins to rise?
Clearly, if you grow, then also, you get leverage from your costs. And it's too early to talk about 2019, but I think our -- the ambition and what we are driving for is pretty obvious.
We'll take our next question from Mattias Holmberg from DNB Markets.
Sorry to sort of nag on the raw material here again, but I was just wondering if you could give some clarity on how much of the EUR 100 million headwind on EBIT that has impacted already now in Q1 and also if there's any of the remaining 3 quarters of the year that you see sort of will be taking a larger or a bigger share of this EUR 100 million headwind, please.
So thanks for the question, Mattias, and no worries. For the EUR 100 million, it's roughly evenly split out between the quarters. So that's how it plays out.
We'll take our next question from Antti Suttelin from Danske Bank.
This is a big-picture question on China, where I'm really struggling to understand. When I look at the Chinese floor space starts, I can see that they increased 8% in 2016, then they increased again by 7% in 2017, and now they increased again year-over-year in the first quarter. But elevators don't follow for some reason, indicating that intensity going down. Can you talk a little bit about what's going on? Why is Chinese elevator intensity going down?
I don't think elevator intensity is going down. I think all of this -- there can be quite big differences in the timing. If you remember, for how long, the floor space starts went down and our markets were still growing. So I think it's difficult to draw direct conclusions out of these 2, but I don't think there's an indication that the intensity of elevators and escalators would go down in buildings. I don't have an exact answer to that. Perhaps where you've seen better correlation is if you look at total real estate investments because that's the real money going into buildings that you are constructing and buying materials and labor for them.
Yes. But if the intensity doesn't go down, then it has to mean that, at some point, elevators should start to follow the increase, which is now, I mean, over the past few years, we are talking about 15%, 16% or even more of growth in starts. When would you expect this turn in elevator demand to start becoming visible?
I think you have to look at, really, a start is a start, but you then need to see physical, actually things happening on the site. And therefore, I would more follow the real estate investments because it tells more how these sites and the starts are progressing and how much actual money is being used to build them further. So I don't have a perfect answer to your question, and we're just seeing that where we see better linkages to our sector compared to other leading indicators.
[Operator Instructions] We'll take our -- the next question is a follow-up question from James Moore from Redburn.
So I've got 2, if that's all right, at this point. On the cash flow, could you break out the inventory receivable payable and other working capital movements? I'm just trying to understand the EUR 93 million worse result than last year.
Thanks, James. So if I look at the big picture for the working capital development, so first, we did see an improvement in working capital in the previous year, and now it turned out to be the other way around. For example, unbuilt revenue increased in this quarter. We saw a lot of starts and a lot of installations, and you've got -- as the projects continue and progress, then you build them. But no one item that is developing as such negatively. And for example, receivables are developing quite okay. They contributed positively, but not as positively as the previous year.
They're positive. What's the other EUR 100 million? Is it inventory or payable or other?
Well, also currencies play a role. So if you've got year-on-year comparisons from a working capital perspective, it's just about a EUR 70 million impact that the currencies have year-on-year.
Okay. And the other question was a bigger-picture question on your savings plan. Could you just remind us of the timing of when the savings will land? Are you still basically on the same path as before? And could you help us or remind us what proportion of those savings come from headcount-related actions versus sourcing and efficiency? I ask because I noticed your employees are up 6% year-on-year, which I wasn't expecting given your saving actions.
Well, do you want to...
Perhaps I address first the employee and you can saving. Why -- where is actually employees growing? And we have had this question before. It's a good question. It's really because the service business in China and rest of Asia is growing quite fast. Remember, in last year, again, we hired about 2,000 new service technicians in China. So when it's the service business that's growing faster, that is much more labor-intensive, and that's our own labor. On the new equipment side, on the installation side, it's principally subcontracted labor. So that's why you see, I would say, the majority of this increase is in service technicians.
Good answer. And just on the topping of the savings, maybe Ilkka, are you still happy with the balance of most of it being in '19? Is the mix still the same?
Well, I think -- maybe I got your question wrong, but I'll answer what I think I heard. So first was a question about how the savings are developing, and we have said that we have a number of initiatives ongoing to really look at how we can work smarter across the company and therefore, decrease the cost base. And we're aiming for, at the end of this year, to be in a position where we get -- are having a EUR 50 million run rate savings achieved. Out of those savings we don't expect much of an impact this year yet as we are -- we need to still execute those projects. And then the total target for the program is EUR 100 million before end of 2020. So the remaining EUR 50 million then will be split between those years. But as said, it's still fairly early days. We're working hard, and we'll keep you updated on how that splits as we get through this '18 first.
So we are progressing according to what we discussed in connection with the Capital Markets Day back in September.
Our next question is a follow-up question from Martin Flueckiger of Kepler Cheuvreux.
Actually, also 2 very quick ones. Firstly, on EMEA. It looks like KONE is gaining market share, particularly in EMEA, also a little bit in China. But can you highlight the main reasons why you think that is, what you've been doing there, and why you think you're being so successful? And in that respect, are we supposed to assume that the strong sales growth in EMEA is more or less sustainable throughout 2018? That will be my first question.
Let me address the market share question, and then I hand over to Ilkka to talk about the sales growth in EMEA. While I'm very happy about our orders received growth in Q1, and it shows we had a very good performance after a good performance in Q4. Let's remember, 1 quarter in all numbers is a short period of time. What I'm happy about is our performance was good broad-based. I think when you look at market share, you want to look at it over a longer period of time. And there we could see EMEA, overall, we gained some share last year, but this is 1 quarter, and we don't measure our market share in just 1 quarter. But overall, I would say the performance was good. And then, Ilkka, on the revenue growth in EMEA for the year.
Yes. Well, overall -- so first, I just wanted to clarify as we started the discussion first in the quarter, so if we look at the EMEA sales growth, which was 19.8% in the quarter, it's clearly one which has now impacted about the number of starts that we saw very strongly coming into the first quarter. And we are expecting that to even itself out during the first half, so clearly, then seeing a lower growth in the second quarter as we get through the project and it normalizes more. And overall, for the year or so, so we are expecting a good growth in sales, but it's good to remember that maintenance business contributes more in EMEA. So that's much more stable than the new equipment business overall.
Next question comes from Ryan Gregory of Liberum Capital.
I just had a follow-up on the working capital question from earlier. How do you see working capital progressing through the rest of this year given the FX headwinds you're still seeing?
So overall, cash conversion, we're expecting that to recover in the coming quarters, and that's a similar comment on working capital. So now we saw a bit worse development in the working capital compared to the previous year, expecting that to then recover in coming quarters.
Our final question comes from Guillermo Peigneux of UBS.
Just regarding restructuring, are you happy with the current initiatives? Or at what point you would basically study or try to analyze whether you need further restructuring to deal with the current cost pricing environment?
We are happy with our current initiatives. We have to remember that this Accelerate program, the principal reason for that program is how we can speed up our ability to bring new service and solutions to the market. As I mentioned, we are in an environment where markets are moving and shifting quite fast. And you know what? This shift and movement in the market, that creates great opportunities. So these changes bring opportunities. And we just want to be faster in capturing them. That's why we are working on providing better resources for our frontline organizations to spend even more time at the customer-facing end. And therefore, we take a number of these functions that are not customer-facing and bringing some of those centralized. And I think those are very important and good actions. And what we will get from that is both ability to serve our customers better, be faster in bringing new services to the market, but at the same time, gain efficiencies. And we want to look at each 3 of these because then we really tie them to our strategy and how we develop KONE going forward. And I must say, I'm quite happy with the initiatives we have at the moment and think that they will have a good impact.
And my last follow-up is regarding China margins. I think, in the past, you mentioned that the China margins for equipment were significantly higher or higher than the group average. I just wonder whether this kind of gap has been diminishing over the last 3 years.
Clearly, it's been diminishing, that gap that was way much higher. There are still very good margins in China, not quite as good as they were some years ago.
We will now take a question from Daniel Gleim of MainFirst.
I have 2 clarification questions. The first one is on Ilkka's remark refers to the recovery of the net working capital. Were you referring to the absolute net working capital number or the cash flow contribution from net working capital?
I was more referring first to the cash conversion level overall in our cash flow.
So net working capital will become again a positive contributor to free cash flow. Is that the right read?
So default. So we said that we have quite a good business terms when it comes to overall working with our customers and getting paid in -- with those. We do see opportunities when it comes to working capital on managing our receivables better. As long as you have receivables, you can always do it better. And then obviously, we need to work closely with our suppliers as well. So I see opportunities, but from an advances payment perspective, I don't expect that the rate will improve much going forward.
And the second question would be on the lead periods for the stabilizing order quality that you're seeing at the moment. I think Henrik was referring to your being converting orders to sales at the moment that were taken in as orders at the mid of last year, i.e. less than a year lead period. Is this the right reading, or was it simply a misunderstanding?
I think I said first half to mid last year. But I think it varies. I think most markets' lead times are pretty stable, and clearly, with the new revenue recognition, we start recognizing the revenue earlier it's a question when it's completed. But actually, we're also seeing some markets where actually lead times are getting shorter, like China because we can see that when our customers -- when liquidity situation is tight, they want to order as late as possible and then get quick deliveries. And that's what we're seeing, and that's why we have had also good deliveries and good delivery growth from China. So that is also a competitive advantage in that market in being able to deliver fast. And that's what many customers are starting to ask for there. So overall, not a big change.
Our next question comes from Tomi Railo of SEB.
This is Tomi from SEB. Can you give a comment on the Chinese maintenance growth in the first quarter?
Yes, so our sales growth continued to be good double-digit growth in China. Our number of units under contract increased again by over 20%. And you asked why is there a gap between the 2. So our service revenues from contracting revenue is increasing at a good rate, but then what is quite stable is the revenue from the so-called first service contract, which is what is part of the new equipment sale but we didn't record as service revenue as they get for the first period. So that part of revenue is quite stable, whereas the contracting revenue is then growing at a good rate.
Our final question is a follow-up question from Martin Flueckiger of Kepler Cheuvreux.
Just a follow-up. Just trying to get this a little bit more structured in my head. Your sales growth performance in Q1 for both EMEA and the group, what would it have been at constant exchange rates without the adoption of IFRS 15?
Literally, there's no number that I can tell you without IFRS 15 because we have changed the systems to reflect the new revenue recognition. It's clear that the number of starts was stronger than normally, and if I look at FAS, we started to recognize the revenue as we completed the work. So it would have had negative impacts, but it's -- I don't have the number to tell you, unfortunately.
It probably would have been somewhat lower, but we don't know how much lower.
Yes.
We have no further questions at this time.
Okay. So as that was the last question for today, we are now ready to close the event. Thank you all for the active participation and good questions, and have a nice rest of the week.
Thank you.
Thank you.