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Good afternoon, and welcome to KONE's Q1 results presentation. My name is Sanna Kaje, and I'm the Head of Investor Relations.I have here with me today our President and CEO, Henrik Ehrnrooth; and CFO, Ilkka Hara.Henrik will first go through the Q1 highlights. Ilkka will then take a closer look at the numbers, and Henrik will conclude with the market and business outlook. In the end, we will again have time for your questions. Henrik, please.
Thank you, Sanna, and welcome also on my behalf to our Q1 results webcast. Today, we have a lot of good news to share that I'm happy about. I'll start with talk about the highlights of the quarter, our key numbers. But also as usual in connection with our first quarter results, we also have updates on 2 of our strategic targets, namely whether we have grown faster than market last year and how we developed its sustainability. I'll share update on those, focus on the markets. As Sanna said, Ilkka will dive a little bit deeper into our financial performance, and I will wrap up by looking at our outlook for the year.Let me start with highlights of the first quarter. We had a good start to the year. Orders received grew strongly in all businesses. That is great. Also I'm very pleased about our performance in our maintenance business that developed good on a very broad basis and in all geographic areas. That was a really good start and good consistent development that we've had for a good while. Our cash flow was very strong. That's great, shows good development of our business, and also our adjusted EBIT grew. And we can also see that the strategic targets for which we have updates that they developed well.Now, let's start with the key figures. As I mentioned, highlights here are orders received and cash flow. And orders received at about EUR 2.1 billion grew at 8% in comparable currencies. In this environment, it is a good achievement. We have a good solid order book at about EUR 8.5 billion, which has grown about 4.6% year-over-year. Also in sales, we had a good start, almost EUR 2.2 billion for the first quarter of growth of 7.6%, which is a good growth rate.Our operating income, EUR 215 million compared to EUR 211 million last year. If you look at our adjusted EBIT, which is the main way how we measure our financial performance, it was EUR 228 million compared to EUR 218 million a year ago. So growth in adjusted EBIT. However, we continue to see a number of things that burden our margin. Therefore, margin was slightly lower at 10.4% compared to 10.9%. This was very much as we had expected for the first quarter.As I mentioned, cash flow very strong at EUR 378 million compared to EUR 179 million last year. And then finally, our earnings per share at about last year's level of EUR 0.33.If we just take a few of the highlights of the first quarter. We have now grown many quarters in a row faster than the market, very consistently and on very broad basis. It shows that our differentiation has strengthened. If I just take a few examples of this, what we have done to strengthen our differentiation. For example, in infrastructure market, which we see that will be very active over the coming years and has been very active, we have improved our differentiation and competitiveness by setting up competence hubs in our key areas to do this. What we have done is that we have structured the teams in totally different way. Instead of having people dispersed in different places, we put them together in competence hubs to be able to serve our customers in a better way and to be more competitive here. And at the same time, we have strengthened our offering with our new infrastructure offering over the past roughly a year. And we can see that this has clearly improved our positioning in the growing infrastructure segment.If I look at our new services, which we've talked a lot about, but what is important here is the ongoing strengthening our competitiveness in our services business, where we can see clear and good improvement, and in fact also improving our competitiveness in the new equipment business. Because we are talking about services that supports our customers in much better way, it gives us an even better opportunity to have a life cycle discussion with them to make sure that our products and services and solutions gets more specified and, therefore, stronger customer relationships. So we can see that also being stronger in services helps our new equipment side. And for orders received, we can see that this is the case.Our Accelerate program, which is important to us in speeding up our ability to bring new services and solutions to our customers, improve our customers' centricity and also improve our efficiency, is developing well.Here I'll just take a couple of highlights of what's happening. We have totally restructured our customer solutions engineering organization. In fact, it's a new organization we have set up, how we restructured our engineering organization to support our customers even better and also support our sales organizations better. That organization is now ramping up in a restructured and more efficient way. And we can see that, that is helping our front-line units in serving our customers better, bringing up [ signs ] to serve customers in a better way.We've also further harmonized our ways of working across business units, particularly on a geographic basis, and we can see that this is definitely bringing efficiency into our business, and that is where we are starting to see savings materialize as we speak.So many things are progressing there. We still have a lot to be done though in Accelerate, but it is progressing according to our plans.But as I mentioned, in connection with first quarter results, we also look at 2 of our strategic targets. As you know, we have 5 strategic targets through which we measure our longer-term success. Now we have an update on 2 of them. It's whether we have grown faster than the markets and how we were doing being the leader in sustainability.Let's start with how we have developed compared to the market. And now we have, again, a more deep dive into market sizing and market shares for 2018.In 2018, the new equipment market grew slightly in number of units, but it grew a little bit more if we look in monetary value. When we look at the total new equipment markets in 2018, we expect that they were about 900,000 units globally. Now we have slightly reassessed the total market size. We cannot completely compare it to previous year's number. We reassessed it because we have gained additional official data, particularly from China, which has shown that the market is little bit larger than we had previously assessed. But we have a comparison now year-over-year that is consistent.When we look at our development last year, we grew clearly faster than market. Our market share in the countries that we operate was about 20%, up about 1 percentage point from prior year. We clearly grew faster than the market. The market share gains were driven in particular by China and Europe, while we had many other areas that also continued to develop well.So if we look at new equipment markets, yes, we did grow faster than our market and had a good development overall in 2018.Service markets also continued to grow. Here also we have made some change based on -- we have slightly reassessed the total installed base globally, and we expect that the total installed base of elevators and escalators is about 16 million units. The market continue to grow slightly. And we could see the fastest growth was in China, as expected. Europe, Middle East and Africa continues to be the largest markets and in particular by far the largest market measured in monetary value. If we look at the fastest growing market, it is clearly China, which starts to be a significant share of the world's markets.In maintenance, we continue to grow faster than our key peers. And we have year-after-year slightly improved our market position, although we continue to be a challenger with about #3 market position globally. But it's our strong position -- a very strong position in many of the key markets around the world in new equipments that gives us the ability to continue to grow our service business in a very attractive way and at market-leading growth rate. So both in maintenance and in new equipment business, we grew faster than the markets in 2018.If you look at our overall market positions, we can see that in the really key Asian markets, China, Rest of Asia-Pacific, which are the largest markets in the world, where urbanization is the strongest, we have a very good position, #1 position overall in these markets. Europe, Middle East and Africa, our market position varies but has strengthened. Of the many markets we continue to be a challenger, of course, that gives us good impetus to drive further growth.North America, we continue to be #4, both in new equipment and maintenance. However, if I look at over the past 5, 6, 7 years, we had continuous good and strong development. And in new equipment, we in particularly have a very strong position in the most important segment that is growing the fastest, which is the [ machine-room-less ] segment. There is a very large hydraulic segment still in North America, but there we are not present, but we focus on modern energy efficient equipment that we think are the best solutions for our customers and also the fastest-growing market. So overall, our market positions, of course, give us a good basis to continue to develop KONE going forward.The other strategic targets where we have an update is we have a target of being the leader in sustainability in our industry. We know that sustainability is a very broad subject, and we have decided that we want to be good overall but then we want to be really a leader when it comes to energy and resource efficiencies.That we measure 2 ways. We measure, first of all, the carbon footprint from our own operations. Here we have a target of reducing our carbon footprint relative to sales by 3% per annum. That we have done consistently. Last year, we improved it by 4%, if you look at overall operations. And it may not sound a lot. 2017 was slightly less improvement than the other years, but if I go back 10, 15 years in history, we have -- every year we have improved by more than our targets. And that means that we actually continuously improving our operations. So we are meeting our targets here.The other aspect for us, is that we want to have the most energy-efficient elevators and escalators solutions for our customers. We have 14 elevator models that have the highest energy efficiency ratings based on new ISO standards. This is more than any of our competitors, and we know that we are the market leader here. We have 3 escalator models that have the best-in-class energy efficiency ratings. So we also help and ensure that our customers can have efficient -- energy-efficient, sustainable buildings.We have also continued to receive a lot of external use and also awards for the work we do in sustainability. If we look at the CDP, there we have an A- rating for the 6th consecutive year. That is clearly best-in-class in our industry. Also Forbes has ranked us as one of the world's 100 most innovative companies very consistently over the past years, and last year also one of the world's best employers. That is important in sustainability. And we are part of FTSE4Good Index. You can read much more about this in our sustainability report, which was published today.That is about the highlights for the first quarter and little bit more about our strategic targets that measures our performance on a longer-term basis.Then let's briefly look at market development for the start of the year. Here you can see that markets in new equipment grew slightly year-over-year. In North America, they stayed pretty stable at the high level. Europe, Middle East and Africa, they actually now grew a bit, and they were pretty stable in Q4. Particularly in Europe, but they -- many European markets were growing, whereas Middle East continues to be challenging. Asia-Pacific, slight growth in China, good growth in India and Southeast Asia and then Australia declining, with just a slight growth overall. There is perhaps a slightly better development, I think, in the Asia-Pacific markets than what we had expected for the first quarter of the year.Service markets, not much new here. Maintenance continued to grow everywhere, slightly in North America, Europe, Middle East and Africa and good growth in Asia-Pacific. And modernization also slight growth in the developed market and strong growth particularly in China.As always, let's look a little bit closer into what's happening in the Chinese market. We know it's very important to us. It's very important to our industry. And we can see that our performance was strong there. What was driving that? So let's start from the market overall. While there continues to be uncertainty in the Chinese property market, the start of the year was somewhat better than we had expected. Why was this? We can see last year when Chinese economy was going down, we could see that some restrictions that we have seen in the property market were slightly eased, and that immediately grew up the activity and particularly prices in the property markets. That clearly gave an incentive for developers to speed up projects, and we could see that both in our deliveries and in our orders received. But we even then, clearly, outperformed, with slightly higher activity. If you look at the markets, we can see that housing inventories have slightly increased, and that's particularly due to the cooling measures, but it's a slight increase in lower-tier cities. Higher-tier cities it's at a pretty good level, but that's something, of course, we need to continue to watch, inventories in lower-tier cities. Housing sales, as I mentioned, slight growth, but perhaps most important is that prices have increased. And if we look at total real estate investments, they are actually growing at about 12%. Last year, when we were talking about growth in real estate investments, it was mainly driven by increase in land prices and land sales. Now, actually it's construction activity. And this increase in construction activity clearly driven by the demand for housing but also a slightly better liquidity situation for developers that helps them drive projects going forward. And we saw then slight growth in our market.When we look at the situation going forward, what we can see is that if we have now a clear uptick in the market, particularly in prices, and we can see that PMI also in China is improving, I think it can be likely that we see again that many of the restrictions get moved back in place to make sure that property markets don't get too hot. So it's clear that, that is something the government seems to be very focused on. And because of that, we expect that for the full year markets are pretty stable. That is a slight improvement to what we believed beginning of the year, and we said that we expect the Chinese markets to have slightly decline or be stable. Now we expect them to be stable overall.So that's a little bit more of our views and thoughts on the Chinese market overall.And with that, I'll hand it over to Ilkka to dive a little bit deeper into our financial performance.
Thank you, Henrik, and welcome also on my behalf to this result announcement webcast for the first quarter 2019.As usual, I'll go through a bit more in detail our financials, and I'll start with orders received. We saw orders received at EUR 2.094 billion for the quarter, which reports -- which on a reported basis represents 9.7% growth and on comparable basis 8% growth. So clearly, good start from orders received point of view. And we saw growth in all businesses and particularly from an area perspective driven by China and Europe, Middle East, Africa from a growth perspective.If we look at the important Chinese markets and the developments for orders received there, we saw in units clear growth for orders in China. Also price -- like-for-like price as well as mix contributed slightly positively. And from a monetary value perspective, we saw significant growth in our orders received in China.At the same time, when we look at the margins for orders received in the quarter, they continue to be stable as we saw last year and since end of 2017. So overall, good growth in orders received for the quarter.Then looking at sales at EUR 2.199 billion, growth of 9.5% on a reported basis and 7.6% on a comparable basis. Good growth in all businesses, with new equipment contributing at 9% growth in a comparable basis, maintenance at 5.4% and modernization at 8.3%.From geographical perspective, we saw Europe, Middle East, Africa growing at 1.7% growth. And you have to remember that there is a strong comparison point last year for the sales in Europe, Middle East, Africa.Americas at 4.6% and Asia-Pacific at 17.4%. And there growth was driven by strong deliveries in China. Henrik was talking about the strong activity in the construction sector. That's also visible here in deliveries for us in China, where we saw our sales grow in first quarter about 20% for the quarter.It's good to note that we don't expect similar growth to continue from a sales perspective but for a stable development for the rest of the year in China.Then looking at adjusted EBIT. So we continued to grow our adjusted EBIT as we did in fourth quarter last year, and it reached EUR 228 million, which represents 4.6% growth for our adjusted EBIT. At the same time, if we look at the margin, so it came down from 10.9% to 10.4% as expected for the quarter. And as we said, we are seeing, of course, headwinds more pronounced at the beginning of the year and at the same time see better development towards the latter part of the year for our margin.Restructuring costs for the Accelerate program were EUR 13 million, and the savings from Accelerate program in the quarter were a bit less than EUR 10 million.Currencies had a positive impact of EUR 5 million. And also although a bit more in detail, but the impact of IFRS 16 for the quarter was positive during the year. I'll come back to that at the end of my presentation just to summarize the impact of that change in our accounting standards.Lastly, about cash flow. At EUR 378 million, it's clearly a strong cash flow for the quarter. And it's good to note that cash flow on a quarterly basis does fluctuate, but clearly, we saw a good start for the year from a cash flow perspective.Driven by networking, capital developed positively, especially in our advances received as well as in progress payments for the quarter. Also here IFRS 16 had a positive impact of EUR 28 million to our cash flow.So lastly, just to summarize the impact of IFRS 16, the new [ lease ] accounting method in our results. Very much aligned with what we already explained earlier, but from a balance sheet perspective, we saw a EUR 358 million increase in our opening interest-bearing debt. We saw EUR 5 million increase in our capital expenditure due to the lease agreements in there. From an income statement perspective, there was a EUR 2 million positive impact on Q1 EBIT. And correspondingly, in the financing expenses, we saw EUR 3 million increase in the expenses.And then from a cash flow statement perspective, on a cash flow from operations, there's a EUR 28 million positive impact. At the same time, there's a EUR 2 million negative impact on cash flow from financing items and taxes. And then EUR 26 million negative impact on cash flow from financing activities. So overall, the net impact naturally for cash flow is 0, but line-by-line there are some changes.With that, I'll hand over back to Henrik to go through market and business outlook for 2019.
Thank you. So that's the history of start to the year, and we now review what we expect from markets for the rest of the year and also from our performance for the rest of the year.So if you look at the outlook for 2019, we expect in new equipment the market to be relatively stable overall. China, as I mentioned, we expect now to be relatively stable in units ordered, while Rest of Asia-Pacific is expected to grow slightly, particularly driven by India and many Southeast Asian countries.New equipment in North America and Europe, Middle East and Africa expected to be rather stable.Maintenance, very much the same trends as we see for a long time already, slight growth in Europe and North America and good growth in Asia-Pacific.And modernization, pretty stable in Europe, slight growth in North America and good growth in Asia-Pacific. So pretty much in line with what we've seen so far.Then our business outlook for 2019, which we have slightly specified. We expect our sales to grow between 3% and 7%, where previously expected to be 2% to 7%. And of course, this is at comparable exchange rates. We expect adjusted EBIT to be in the range of EUR 1.160 billion to EUR 1.260 billion, where previously expected to be EUR 1.120 billion to EUR 1.240 billion. Now this assumes that exchange rates stay at the level that they were about in April. Now if they stay above the April level, then we expect to see about EUR 30 million positive impact from currencies, where the same number was about EUR 10 million previously. So this difference is one of the reasons we have slightly specified our guidance, but also particularly at the lower end, you can see a good start to the year, which means that we are fully on track with the targets that we have for the year, that we could also slightly improve it from that end more than the currencies.If I look at our performance, we can see what is boosting our performance. We saw in order book we have the continuous good development of our services business, performance improvement that we are driving and accelerate savings.There are still things burdening our results, and that's probably higher beginning of the year than end of the year. Raw material prices and trade tariffs slightly less than EUR 50 million and then a clear increase in labor and subcontracting cost.I'll just then wrap up. For the Q1 results, we are fully on track to meet our full year targets. It's actually a good start to the year. All metrics were either on track for what we had expected or actually a little bit ahead. And we can see that our strategy how we're driving differentiation works. You can see it from our growth and that it's positive. So that is what we continue executing on in the same way we had. I think that this start of the year sets us up for a clear improvement potential and a commitment to clearly improve our EDIT this year compared to last.With that, we are ready for your questions.
Thank you, Henrik. I guess, we are ready for the questions. Operator you can start taking them from the line.
[Operator Instructions] We will now take our first question from Andre Kukhnin from Crédit Suisse.
I'll start with 1 on China and your outperformance there. You've now for a few quarter taken share there in units while also outperforming the market in price. Could you just talk us through how you're doing that? And how should we think about that into the rest of the year? And at some point, do we need to think about your performance kind of normalizing towards the market or not?
Well, I would say first that we have had a good performance in China. It shows the competitiveness we have in the market overall. We have a very broad reach in the market, which means that we have been, again, able to be very good at finding the growth opportunities in a more uncertain market, a market that varies a lot from region to region. Also we have good competitiveness in product and services, our products and solutions. That is good. Now when we look at the rest of the year, as you know, Andre, we don't guide orders received for the rest of the year. But clearly, it was our ambition, and our target is to grow faster than the market. But at the same time, we want to be very clear that we also need to make sure that our pricing stays at a good level, and we are at the level where we have been able to slightly improve pricing year-over-year and at the same time grow volume. And that is clearly a place you want to be. But then, let's see how we perform for the rest of the year.
And just on the China and market outlook itself that you expect stable after a small up in Q1 and what looks like kind of an okay Q2 shaping up, I know you didn't say that, but with no tightening happening kind of right now there's just talks about it. So it just seems to imply that you do expect things to turn down at least a bit in the second half, to end up flat? Or is that just kind of normal conservatism? Just wanted to check if you're expecting tightening already within your flat guidance or not?
What I think we can -- actually, we, of course, have to see what happens. But we know that government policy has had a very significant impact on developing the markets and the restrictions that we've seen in place and also liquidity. Now what we can see is that the government very much emphasizes that houses are for living in, not speculation. That mean -- that we read in a way that if we start to see a significant increase in housing prices, there is a likelihood, and probably quite high likelihood, that we see more restrictions coming back. That is probably not unreasonable to expect. And then we have to see liquidity how that will shape up. We are seeing a slightly better PMI and economy picking up in many places. And perhaps that means a likelihood of more restrictions later in the year or even quite soon is probably there.
Got it. And my last one just on the combination of factors that impacted the margin in Q1 and the higher costs. Could you just give us a bit more detail on what were those costs for that ramp-up a bit more in Q1 and that you expect to normalize in the next 2 quarters in the year? Or would you say you expect the outperformance to improve? Just for us to have a better idea of the moving parts and the sensitivities.
So I'll -- Ilkka can answer that a little bit for you in detail. I would say, first of all, is that we expect performance to improve as we go through the year, already in this coming quarter, but particularly the further we go in the year. We have to also remember, of course, there are always some specific things. But at the end, you also have -- quarter-to-quarter, you have some fluctuation that may impact your margin. And clearly, there are always some of those things. But Ilkka, maybe you want to take that a little bit more in depth?
Yes. So if I look at the development of the margins. So what we talked about the potential and headwinds for cost, clearly, we've talked about the impact of raw material prices on a component cost perspective. We also talked about the cost for labor as well as subcontracting. We look at them -- how that develops. So we've seen those headwinds to be more pronounced in the beginning of the year, and that's very much in line with what we expected as a development.
And then -- if I could just follow up. Why would you expect labor inflation to be less prominent later in the year? Or was there any particular kind of spend in Q1?
I think what we said probably less prominent later in the year is the material cost. What you start to see on raw material cost towards the end of last year, it is -- we don't seen it yet because it was causing delay to us, but it will be less pronounced, therefore, as we go through the year.
Sorry, Andre. So just to repeat, your question was, was there anything particular? Well, there is nothing particular for the quarter from that perspective.
We will now take our next question from James Moore from Redburn.
I've got 3 questions if I may, and I'll go one at a time if I can. Firstly, on China. Can you help us understand the comparable order growth development in the quarter a little bit more? You're relatively clear with nominal and unit growth, and you talked about nominal growth being above 10%. I wondered if you could just be a little more precise as whether you're talking about 11% or 14%. And within that, there is, obviously, a very good price mix dynamic that we can see is continuing. Could you help us understand a little bit which is bigger, price or mix? That's the first question.
You want to take that?
Yes. So both price and mix had a slight positive impact in the quarter. They're not that different compared to the impact that they had. And I said earlier, I mean, we do a job trying to estimate the impact, but it's not [ successful ] on either. So both had a positive impact there.
I'm sorry. On the nominal growth, are we talking...
Never wanted so -- units -- we were kind of mid-single-digit growth in number of units and then more than 10% in value but less than 15%.
Thanks. And on your saving ambition. I think you previously raised the ambition from 100 to above 100. And again, I'm trying to nail down the range here. And I know that's difficult, but can you say if that is closer to 100 million or 150 million to give us some idea of quantity?
Closer to 100 million.
That's very kind of you. And just finally, returning to this margin point. The margin is down 50 bps year-on-year. I think you did a good job coming into the quarter explaining that there will be some challenges here, and I understand the point on the installation subcontracting costs. But we have had 6 quarters of stable equipment order margin, and we see this decline in the reported margin, and I understand that you have to make some assumptions on costs. And then that can then deviate in the outturn. And it feels like that subcontracting cost had ended up being more than you had anticipated that they might be. I wasn't clear as to why it is that you think those are going to improve as the year progresses? So could you just help us with that?
Well, of course, always in execution you have pluses and minuses, and some are external costs, some is your own performance. I would say our own performance was pretty much as we had expected. I don't think we said that subcontracting costs per se will improve towards -- as we go, perhaps more we talk about material cost not being such a headwind a it's been last year and still beginning of this year. So that is perhaps one of the other factors. And the variation will come from how well we execute. And overall, we are pretty much on track for what we were expecting at the beginning of the year.
We will now take our next question from Lucie Carrier from Morgan Stanley.
I will have 3 actually, and I will go through them one at a time. A follow-up may be on the margin question. I think if I understood well during the call, you were mentioning that China sales were approaching growth of something like 20%. I mean this is significantly higher than the group. And if we are looking at the margin, it's taken another leg down versus the first quarter '18, which was already down significantly. I remember in the past that the China business was quite accretive to the group mix. So I'm just trying to understand why we are not seeing this quarter any benefit from the strong momentum you've had in China on the sales side and whether this is something that has changed meaningfully around your China margin or whether this is another part of the business. That's my first question.
Do you want to...
Well, I'll start. Thanks for the question. So if I look at it in a context of, first, the China margin. So what we've said is that our new equipment business in China is above group average, and it continues to be so, but it is not as much above the group average that it used to be given the price pressure that we've seen. And while we've said our prices have enabled us to have stable margin, it doesn't mean that we've been able to increase the margins yet. So that's the one part. And yes, it does have a slight positive impact to our mix. But overall, if we look at the margin developments for of key driver, negatively impacting our margins for the quarter was as expected the more pronounced cost headwinds that we talked about already.
Apologies to push you a little bit on this just for our understanding. But if you -- I mean the question I had maybe even more directly, but if you are growing 20% or strong double digit, let's say, in China and in this -- and the margin is not able to lift up. I mean, the headwind must be quite significant. But when you are talking about the headwind also from the raw material standpoint, it actually seems that you're expecting less for this year. I understand they are more concentrated in the beginning of the year, but I mean, how much headwind than are we really -- can you quantify that for us to be able to kind of back out a little bit what's going on, on the margin bridge here between what you see in terms of very strong momentum in China, which you haven't seen in a while, sales-wise, and the margins which is coming down?
Well, first, if I think about it on a quarterly level, there's always a number of things that fluctuate, so which project get delivered. And if you look at the profitability, so that's the hard part, that there is so many moving parts underlying it. And then if we look at the raw material impact as a whole, so what we've said that it's a bit less than EUR 50 million including the tariffs for the year and that it's more pronounced in the first part of the year -- first quarter of the year than the latter part year-on-year comparison there. So we haven't given guidance on a quarterly impact of that, but it's more pronounced in the beginning of the year, that's what I would say.
Also, we have some seasonal fluctuation in our business. You know that Q1 is the smallest quarter in most markets. So this was more or less that we had actually -- this was very much as we had expected. And with this result, we are on track for what we were expecting for the year. I don't think there was anything special. We know that there are some things that are hurting our results, some things are helping it. And then we had slower growth in some markets and higher in others, and I think those kind of then take out each other. So I can't see anything that special in this result. Clearly, our desire and our target is to improve the margin, and we think we can do so as we go forward this year.
My second question was on North America. Just -- I know you're guiding the market to be really actually stable. It seems that you are starting the year order-wise kind of on a slightly negative foot. One of your competitor has also reported strongly negative order in the first quarter already. So what is your visibility to kind of assume that the market is actually going to improve during the year to kind of affect that negative start to the year from an order standpoint?
I would say North America you have a higher proportion of larger projects. So that means that it can be more lumpy than other markets. And I think the way we look at it is we can see the activity of tendering of new opportunities and so forth. And we see that that's -- we expect that to be pretty stable. So if you look at just basic volume business, that is more stable but then perhaps a little bit less of larger projects, and they just fluctuate from quarter-to-quarter. And our performance in the quarter was nothing more than difference in how many large projects you had year-over-year. So visibility is reasonably good and looks pretty stable.
And then just my last question. If you could remind us the impact or the benefits you expect on EBIT from IFRS 16? For 2019, it was EUR 2 million, I think, in the quarter. How do you see for the full year?
Yes. So the full year impact on EBIT is about EUR 10 million. That's what we expect for the full year.
EUR 10 million. Okay.
We'll take our next question from Manu Rimpelä from Nordea.
My first question would be on the general pricing environment in the industry. I mean we are seeing the whole industry margins have come down for the last 2 to 3 years, especially for one of the main competitors a lot longer. So are you seeing any kind of changes in the way pricing is behaving that you are talking about this maintenance pricing initiatives you have and also your competitors? So could you just run through a bit what kind of pricing environment is looking at? And do you see that it has changed in the last kind of 6 to 12 months?
Yes. Of course, it varies a lot, varies by business and by geography and so forth. I would say we have now being developing very systematically our services business with new ways of working with new offerings and new types of services. Therefore, we can see that on the maintenance business we are improving our pricing. And we can see that through how our average value per unit or so in all markets are developing positively. So that's clearly -- but I think that that's more through what we are doing markets continue to be competitive, lot of smaller midsize players. So there's a tough fight every day in the service business, but I think what you've done we can see that that's helping us improve. What you always want to do is make sure that you differentiate and, therefore, you can drive your pricing. I would say that if you look at China, which has been perhaps where pricing has been the toughest over the past 4 or 5 years, it's a combination of a lot of players want to increase their market share, at the same time markets declining. That's, of course, it gives a tough environment. But we can see that it's more stabilizing, and I would think that one of the main reasons for that is that not everyone earns money in China anymore. We continue to have good profitability. Clearly, it's come down a fair bit, but it continues to be at a good level, but there are -- we expect that there a lot of players who are not making money at this level, and that usually gives you a certain floor, particularly in the very standard volume business.
And if you specifically think about the new equipment business, I mean, for instance, looking at your orders, you've been able to grow orders like 6%, 7% organically last year and now very strong in the first quarter, but it still doesn't feel like the new equipment pricing is improving. I mean, growth has been -- even if you exclude China, the growth has been very strong. So why haven't we kind of started to see any type of improvement in the new equipment side from outside of China even though volume seems to be accelerating?
We've seen -- so I would say that in many markets we've seen a slight improvement in pricing, but that has been needed because we can see that both labor cost and other cost have gone up. I don't think there is that much of a link between [ their ] cost and so -- competition drives market pricing. But I think a lot of -- we have strong focus -- pricing. It's a high focus area to be able to improve our margins, and we can see development in some areas, but at the same time, we need to do that because of cost headwinds in many areas. So I think that pricing in many markets have come up a bit, but clearly, work continues to be -- needs to be done.
Okay. And final question on the cost and pricing differentials. So I mean, given the labor cost, it looks to be increasing in most regions and the pricing environment looks also. Do you think that you will be able to kind of get this year into a situation where you actually are able to get the margins on new orders up? Or are we more looking like it's still going to be challenging to do this year?
We don't predict what our pricing and margins will be going forward. We continue to execute on whatever commercial strategy we have, and that's, of course, something that we hold close to our chest. So we have to see then how it develops. I think the ambition we have shouldn't be unclear. But we don't give guidance or predictions for where we think it's going to be.
We will now take our next question from Daniela Costa from Goldman Sachs.
I have 2 things I wanted to ask about. First, can you give us maybe a little bit of an update on KONE care and 24/7 Connected Services on where the penetration stands and when do you expect that to start to show some margin accretion? And then the second thing I wanted to ask is about sort of one of the initiatives that we have seen one of your competitors doing recently. I guess Schindler announced BuildingMinds as a platform to connect many people in the building. What do you think, sort of, of that? Do you have something parallel to that? Does that change the dynamics potentially on the aftermarkets? Sort of how shall we read that?
When it comes to new KONE Care and 24/7 Connected Services, New KONE Care, of course, we have been longer in the market. There, in Europe, where we started, probably at a 10-ish percent penetration. And yes, we can see it in pricing; yes, we can see it in growth. It has a positive impact on both. And 24/7 Connected Services penetration is still less than 5%. Momentum is constantly building, actually at quite a good rate. We can see that the pricing for that continues to be good because we can see that the benefit to our customers is very tangible and real. And that is why we have decided this is a commercial service that we sell because of the benefits that our customers get how it improves them running their business. So I would say both of these are developing well. Do we want to get speed into both of them? Of course. But I think we are -- we can see that the business case and the benefits are there, and that's why we continue to drive them forward. And then as to other services. We -- as you know, we don't comment specifically on what other competitors are doing. I would say what we are focused on is we say it's on people flow. How can we help people move safer, more smoothly and more conveniently in and between buildings. Those are the solutions and systems that we focus on. We think that that's where we are good, where we have an edge and where we have lot of knowledge within the company. So that is what we are solely focused on is on helping people move in efficient, good ways, and that way making buildings and also their surroundings more efficient. That is where we're putting our money where we're investing. And it's good that various companies test various things, but this is our direction and what we want to do.
Very quickly on KONE Care. Have you now rolled it out to 100% of your locations? I remember the number was something around 85%, you mentioned a couple of quarters ago that you had rolled it out. Is it now 100%?
It's not 100%. There are still a number of large countries where we are not -- it covers a very large part of our service base. We started in Europe. This is where it makes most sense. It has absolutely the biggest value in smaller residential contracts, but we also expanded it to commercial contract. That's why we started in Europe because that is a big market, and Europe is the largest service market. We continue to roll it out. And what is great that every country we roll it out, we see the same benefit, we see higher hit rates, we see higher customer satisfaction and we see an improvement in pricing because we're delivering an outcome that meets the customer's individual needs, and that is why it's so good.
We will now take our next question from Klas Bergelind from Citi.
This is Klas Bergelind. A couple of questions from me, please. Firstly, on pricing there in China. Out of this 6%, 7% price mix, it seems like pricing was slightly higher year-over-year and stable versus the fourth quarter. Did you push through any price increases during the quarter which is yet to impact order pricing further out? Have you announced any list price increases? We're hearing that you might have made a push during the quarter. So I will start there.
This market -- this world where you say that you increase the list prices and expect things improve, I don't think we're quite in that world. We have tough market competition. We set clear targets for our people, and it's really how we can show our customers that we are actually adding value to their business. That is how you drive it. It's clear. It's a strong focus. You always need to have the right balance between your pricing and your volumes. And that is what we constantly trying to balance. Where prices are coming a lot down, we focused much more on pricing, on value. And it's always about finding the right mix, where we are going to be in the coming quarters. We have to see that. I'm not going to comment on that anymore. In the end, it's an individual agreement between us and our customers.
Maybe a follow-up, Henrik. Given the slightly better demand backdrop there in China with real estate volumes now improving not only driven by land prices, do you feel that might be a bit easier to hike prices now? Or is competition still perhaps means that you still have to largely depend on the cost inflation when you negotiate prices?
I think the most important thing what drives prices is market competition. And clearly, input price may have some impact, but I don't see that there's a direct impact to that. So it's really -- if you want to improve pricing, you need to be able to tangibly show your customers that it's better to work with you than with the closest alternative and that you add value to them. That is what you got to focus on every day. When you do that, you add value and you can improve pricing. Clearly, the strong competition in a market has an impact. And clearly, the fact that the market is consolidated towards the bigger developers also has its own dynamic. And we have shown that with that dynamic, we can do quite well.
Great. My third one is on -- a follow-up on digital. Seems like sales now is some 2% of group revenues, still softer 2, 3 years since the launch. Contract renewals, 2 to 3 years on average within KONE Care. Obviously, it takes some time to get the uptick. But 24/7 Connected should be quicker adoption, not dependent on renewals, but still lagging KONE Care. Can you help me, Henrik, a little bit to understand why 24/7 Connected is not catching up faster?
First of all, it is catching up. And I think that if you look at -- I think we are definitely leading the way in our industry and selling it commercially out in the markets broadly to our customers. You have to remember that this is something totally new to our customers as well, and it's something new that we're selling. It's something that we have to prove to our customers that their business is better off with them having this service than without it. And that usually -- the sales process is a bit longer than a normal service contract, but we can see that the customers are taking into use, that there are clear and tangible benefits. So I'm actually very positive because we can see it's getting there, perhaps not quite at a speed that we had hoped originally, but that's quite normal. But we can see the direction is the right one, and we can see its momentum is picking up. So I think we are in a pretty good spot here and particularly because of the fact that we have something that is tangible, it's real, it's working, the customers are getting benefits from it. So we're growing. And I think momentum is picking up. Would we like to grow faster? That's always, of course.
Yes. Good, good. My quick final one is on infrastructure by region. You're talking about this initiative of more hubs toward the infrastructure. You're typically a little bit less exposed versus peers in infra in China, but you're pushing out to expand outside, I mean, you are talking about infra-hubs. Could you help us, Henrik, how much is infra of our orders today, roughly, by region? If you have that number, it would be very helpful.
I don't have it exactly by region. It's not the largest segment, but it's some -- one segment that we expect that even if markets can fluctuate from residential and commercial, this is something that there is such a strong trend and such big pressure on improving, particularly public transport, that we continue to see a lot of growth. And where are the big growth areas? Throughout Asia. And I'm not so sure that we have a lower exposure in China than many of our competitors. We actually have a pretty good share there. Rest of Asia, we see a lot of activity because, again, the need for public transport. We can see France has a massive program. Middle East. There are many different markets where it's happening. So we can see both -- United States, there are several projects. So you can see whatever market there is, it tends to be a big challenge on having enough capacity in public transport that we see that it's going to be a growth trend for many, many years to come. And that's why I just highlighted as an example of what we do when we see growth, how do we strengthen our competitiveness to capture our fair share of that growth.
We will now take our next question from Guillermo Peigneux from UBS.
It's Guillermo Peigneux from UBS. Just really a follow-up on pricing and China in particular. I guess we've seen some consolidation moves with Hitachi and Jun Taiyo tying up together. And I just wonder within the commentary that you just said during the conference call and in your press release with lower raw material specifically, is it fair to assume that the pricing going forward, in order for you to hike prices, is going to be more difficult under the current scenario? Or would you see that now the industry, as it's becoming consolidated, it's a bit more disciplined on pricing?
As I said, we don't comment on pricing going forward. We think -- if I just look at competition, there are still many competitors in China. If there is some consolidation, I'm not sure, frankly, if that's going to have a huge impact on it. So we think that, that is the world's largest market. It is probably the most competitive market in the world. We are in a good shape there. We're okay to compete in that one. I don't see any reason why it would not continue to be as competitive as it is, but we continuously improve our operations and stay at the forefront there.
We will now take our next question from Antti Suttelin from Danske Bank.
This is Antti. I have 2 questions on China. First of all, since you are an order book company, you have a strong order book, can you comment where in that order book is China margin for equipment? Is it up from a year ago? Is it stable from a year ago? Or is it down from a year ago?
You want to?
From an order book margin perspective, I don't have the exact number here in my head, but the way I think about it is actually through the orders that we take in, and they are relatively stable as we said year-on-year and given the order book rotation, which in China is about 9 months on average, so that's how you can do the math. So it's relatively stable I would say.
Yes. I'm just also been surprised by your comments where you have been saying for a long time that the order intake margin has been stable but despite a strong sales increase in Q1 that the group margin came down. So I'm just struggling to understand whether it could be that China had some bad tails still in Q1 which pulled China margin down. Or was it really so that it wasn't China, it was the world outside China that pulled the margin down from a year ago?
Any specific reason? I think it's generally just higher input costs that had an impact on our total margin. I would say, overall, first quarter went as we had expected, in many aspects actually better than we had expected. So I don't -- there is always some fluctuation in margin quarter-to-quarter. I don't think there is, frankly, much more to it.
Okay. Let me do my final try to get more clarity. You are guiding group EBIT margin up for this year. In that guidance, what is the China margin that you're using? Or -- let's say what -- the China margin compared to last year?
As you know, Antti, that we -- we actually -- I think we give quite a specific guidance on our sales and our EDIT. We don't give guidance specifically for each margin and each area. But Ilkka mentioned that our backlog margin in China is pretty stable overall year-over-year. And if we get some benefit on -- or less headwind on material cost towards the end of the year, maybe we can see some improvement there, but let's see. We don't guide specifically area-to-area margins how they develop.
We will now take our next question from Martin Flueckiger from Kepler Cheuvreux.
Actually, 3 and I'll go one at a time. I realize you're not talking about pricing ex Antti. But looking back over Q1, could you indicate the overall, not for each business, but the overall level of price increase across the group that you have achieved? That would be my first question.
I think it's difficult to say what the overall because there are so many different markets, so many different specific products and so forth. I think in many markets we are improving, and in some markets, we are improving more than what the cost headwinds are; others more or less in line with that. So I can't really -- you have to go very much in detail that question. I think in the services business I would say more broad-based improvement, and in new equipment varies. But overall, actually, okay-ish, I would say.
Okay. But just to give me a feel for it. This 8% increase that you've had, is that -- does that feel more like -- more than half is volume mix? Or can you say something like that, just to give a very broad idea?
Ilkka mentioned on China, what our -- why don't you just repeat volume mix, which, of course, is the biggest one. The rest we had a few larger projects in the quarter which impacted, but you have sometimes there and sometimes not. But perhaps China where the volume mix is the biggest impact always.
Yes. And as Henrik said, China represents the biggest market at 63% of the total world market, so that's why we specifically called that out. But for us, the orders, we had clear growth in our orders in units. And then we saw from like-for-like prices as well as mix a slight improvement, approximately similar improvement from each contributing to our orders value, and the value then grew significantly, so more than 10%.
Okay. The prices were raised the strongest in China, right, compared to the rest of the world? Or were there other key markets where you had implemented similar price increases?
So as Henrik said, we don't implement price increases. Pricing at the end of the day is an agreement between us and the customer, and we can't choose to increase prices. It's something where we really need to be able to provide value to our customers. And like Henrik said as well, that he would say it's hard to say a general statement about pricing across the globe because there is a mix on products, mix on countries, mix on the businesses. So there's no general statement to be made. But at the same time, in general, I think we did do a good job in working with pricing in the quarter across the globe in many markets.
Okay. Got it. And then my second question would be on your investments into KONE Care, 24/7 Connected Services and other strategic initiatives. Have you stepped up these investments? Without going into specifics, but have investments here accelerated recently? Is that a key element in your EBIT bridge going forward?
So we have grown them year-over-year but I would say more or less in line with sales. So if we think about why over the past years have investments in research and development and IT increased is, in a historical world, there was more emphasis always on the, I would say, mechanical and product side. Now we have the whole digital side, so that is an additional aspect, but also gives us totally new revenues. But year-over-year, as a percentage of sales, they were pretty stable. It was pretty stable. So in that sense, not more of a ramp-up than what we are growing.
Okay. That's very helpful. And then my final question. I saw that you had some minor acquisition-related cash outflows of around EUR 8 million. Is it fair to say that the sales and orders received impact was of a similar magnitude in Q1?
No. So if you think about the acquisitions, I'll talk about maybe last year or last year's. So we do anything between EUR 20 million to EUR 30 million small maintenance acquisitions. And individually, none of them have a big impact to our orders or sales. And the timing of the cash outflows depends a bit when we close and when we have assets and milestones being met, so nothing particular there. We've made a few acquisitions in the quarter, but nothing particular that would impact either orders or sales as such.
If you look at the past couple of years, given the acquisition...
Would the impact be more than 0.5%?
No, no, nothing material in the quarter.
I mean, if you look at historically when there were some little bit bigger acquisitions. Now we haven't found -- it's good to have -- it had probably an impact of a percentage point or so to our sales growth and maintenance. Now it's probably clearly less than 0.5 percentage point, if even that.
Yes. And in the quarter, we didn't do anything which would impact materially.
Yes. So very small impact on our top line, but there's always some we can find attractive. We would like to find more of those small midsize acquisitions, but sometimes they are available and sometimes not.
We will now take our next question from Daniel Gleim from MainFirst.
First one would be when we think about the EUR 50 million savings from the Accelerate program, you mentioned less than EUR 10 million in the first quarter. How do you see the split between the first and the second half? Is it more evenly split, let's say, EUR 20 million each one? EUR 30 million in the second half? Or is it more geared towards the latter part? So let's say a bit more than EUR 10 million in the first half and less than EUR 40 million in the second. If you could provide a little bit more color on how you see that evolve in '19?
Well, from the Accelerate program, what I said was that in the first quarter we had a bit less than EUR 10 million savings. So if you start to do a bit of approximation how do you get to EUR 50 million, then I think that's a good way to approach it. So it's a bit more heavier on the second half than first half, but already we are seeing the savings in the P&L.
And the second question, and apologies to belabor the point, but if you think about the roughly EUR 50 million in raw materials and tariffs and you think about a rough calculation between H1 and H2, again, I assume the comparison base in the second half is much, much softer than the first half. So would it right to be assume to see like EUR 40 million in the first half and EUR 10 million in the second? Just to get a better understanding how much does is tilted towards the first half.
Cost headwinds?
Well, I guess we haven't given a specific number on a quarterly level. And part of that is that it's -- we're trying to estimate the cost impact of raw materials, but we don't really buy raw materials but components. So there's always a bit of an estimation there as well. And on a quarterly level, obviously, it gets a bit more difficult to give the number. But it is weighted more towards the first half of the year and a little bit less on -- than on the second half, and as I said, impact being the biggest in the first and second quarter.
How do you see the current prices evolve? Is that further softening? Or is the stabilization when we think about supplier contracts going forward?
Well, I guess, it's fair to say that in the beginning of the year we were saying it's approximately EUR 50 million the impact raw materials plus the tariffs. Now what we have seen so far is that the tariff impact on from -- especially the list 3 which were supposed to be going up to 25 has been postponed, so it's now 10%. So there's a few million improvements coming from there. And then from raw material -- sorry, raw materials, some millions of improvement. And that's why we are saying that it's a bit less than EUR 50 million. So compared to what we expected at the beginning of the year, there's some improvement but not that material compared to the total.
We can expect -- because there's hasn't been a big change to what we saw beginning of the year, I think what we can expect is quite a lot of volatility based on all the uncertainties we have in the world. So we can see there are many -- many different directions that we see in oil now sharply increase from having come down quite a lot the beginning of the year. So I think volatility is quite high, and that makes perhaps the predictions little bit more difficult to make.
Okay. Maybe one last question on the pilot projects you were running in China on remote maintenance. Can you provide us an update on that already? Or is it still too early to make an assessment?
Do you refer to this one where we had some pilots with some of the local authorities?
Yes, correct.
Yes. I think that is a -- they will always run certain pilots and tests, and then usually assess them a value. So there's no update on that I think. Willingness from the authority is to test various alternatives and see how they work, and we have worked closely with them on finding other opportunities, but there's no update and no big change overall in the regulation in the market.
What do you think your time line could be? Is this more a multiyear exercise? Or could this be more imminent? Just to get a sense on how relevant this could become for '19 and 20.
I think these are usually multiyear exercise because what you're looking at is that you have always a state-level regulation like you've also in Europe, you have codes on a European level. But then they have to be implemented in Europe in all the countries. And if you look at in China, all provinces separately. So that's why they usually are multiyear projects. But it shows the direction usually where regulators want to go and how they want to develop the market. So they see the benefit that there are technologies that can improve, and they want to test what they are. So I think we have to wait and see and then -- usually it then takes a while also then to roll it out throughout the country because the country is big.
We will now take your next question from Wasi Rizvi from RBC Capital Markets.
I just wanted to focus on mix in China actually. I found it interesting that you and your competitor earlier this week called out mix in China as positive in this quarter now. Is that just a coincidence? Or is there an underlying market trend, which means the mix is improving and something we can expect to be generally positive over the next few quarters? And I don't know whether there will be something like customer preferences changing or whether that's just where we are in the cycle with various types of investment.
I think one of -- I don't think that there's anything fundamental behind it. It really depends on which parts of the country that is growing, what types of -- if there are more infrastructure, than mix will be little bit heavier. But also if you sell more units to higher-tier cities, there tend to be a little bit higher specification, mix can be higher. So I don't think there's any fundamental behind it. And there will always be shifts in mix quarter-to-quarter. So yes, not much more to it, frankly.
We will now take a follow-up and our last question from Andre Kukhnin from Crédit Suisse.
Yes. I just wanted to take the opportunity to ask about those market size estimates, and you said that you increased the China market size estimate because of some latest data. Could you share with us what drove that? Is that anything to do with the retrofit market maybe?
No. This just -- Chinese authorities have now more specific data available than in the past. And there are so many players, there hasn't been exact data available, and we just took into account what additional information we had and slightly reassessed based on that. That's the background here.
Okay, that's the 20,000, 30,000. Okay. And on modernization -- and I probably have to apologize in advance for this question, but we were looking at the dynamics when you talk about development in Q1. And for the modernization side of the market, you stated North America being over 25% and EMEA over 1/3 and than Asia Pac over 15%, but that still is quite far away from 100%. And I presume Lat Am is the obvious one that's missing there, but looks like quite substantial for a modernization market in Latin America for what is about 3% of global deliveries in installed base. So just wanted to check what's that kind of missing pocket of modernization that is not there on that Slide 12?
And probably also, I think, then we wouldn't have Japan, South Korea, South America or places where we don't operate.
Got it. And could you specify the size of the modernization markets, either units or value, either globally or any of these regions that you operate in?
So the largest market, single market, is Europe, Middle East and Africa, but North America is very big. So that -- USA, as a market, is probably the biggest market overall, but then European markets are big. The global market, overall, including all countries is probably something EUR 8 billion, EUR 9 billion. EUR 9 billion, maybe.
EUR 9 billion. Great.
This concludes today's question-and-answer session. I would now like to turn the conference back to the speakers for any additional or closing remarks.
Many thanks, again, for all the questions and for being so active. I hope you have a nice and [ fine ] rest of the week like we are expecting here in Finland. Thank you.
Thank you all.
Thank you.