Kone Oyj

OMXH:KNEBV

Earnings Call Transcript 2021-Q1

[Natalia Valtasaari, Head of Investor Relations]

Good afternoon, and welcome to KONE's First Quarter Earnings call. My name is Natalia Valtasaari, and I'm Head of Investor Relations at KONE. I'm joined here today by our President and CEO, Henrik Ehrnrooth; and our CFO, Ilkka Hara. As usual, Henrik will go through the business highlights for the first quarter and speak about the business outlook for the remainder of the year. Any Ilkka, in turn, will talk through the financials in a bit more detail. Once the presentation is over, we'll have time for your questions and answers. Henrik, please?

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

Thank you, Natalia, and welcome, everyone, to our Q1 results presentation, and I'm very happy to again present good development to you. So we had overall a good start to the year, and that's something I'm very happy about particularly given -- following from a very strong performance during a difficult period -- or difficult environment last year, where we performed very strongly and that we continued again. So I'll start with some of the highlights. As Natalia mentioned, both financial business highlights. And also what I talk about now in connection with Q1 results is that how do we see more -- a more granular way, how the markets developed last year and market share and so forth, as we usually do in connection with our Q1 result. And some other business highlights for the first quarter then I'll hand over to -- then I'll talk about market development, hand over to Ilkka for financials and wrap up, as was mentioned with the outlook. Q1 we had good growth in our sales and our earnings, both grew at a very nice level. Again, one of the highlights was our cash flow, continued to be very strong. Last year, we had a all-time record by actually quite some margin, cash flow, and we continued a very strong development in Q1. And what is positive is that we are seeing clear signs of recovery in market activity. We're seeing that confidence is improving, and customer activity is increasing as people are seeing that we are returning, and we are returning back to offices, although we have to remember that the situation remains very different. Everything from China, which is at above pre-pandemic levels to, of course, a very challenging situation still in India, which is very concerning and of course, everything in between. But we'll talk about that a little bit more today, how we see that recovery happening and how we've been able to capture opportunities in this market. So Q1, orders received following actually a high comparison last year when we actually grew in Q1 last year, it was now EUR 2.75 billion. Our orders received, a growth of 1.3% in comparable currencies. Also, our order book is a very solid level. If you think about the type of year we had last year. After that, it's at EUR 8.2 billion, down 1.9%. So a solid and good order book. Our sales grew at 9.1% to EUR 2.3 billion. So a very good start to the year here. Our operating income, our EBIT grew by 26.7% to EUR 250 million, so a strong increase. But we're comparing now more adjusted EBIT to last year. Now there's no difference between our EBIT and our adjusted EBIT because, as we had talked, the Accelerate program ended, so there's no cost in between here. So now if you look at adjusted EBIT, that also improved by almost 22% from EUR 206 million to EUR 250 million, a margin from 9.4% to 10.7%. So good profitable growth. And as I mentioned, very strong cash flow at EUR 425 million compared to an EBIT of EUR 250 million, so incredibly strong cash conversion. And of course, earnings per share also up -- and up at 26.7%. Here, I usually mentioned the key reason for why we've done well. And that's, of course, the great work by all of KONE's employees. I think we've shown that we know how to navigate this environment. We continue to be able to deliver on our promises to our customers, and that shows in this result. So despite a difficult environment, we have operated in a very good way and in a very normalized way in many parts -- or most parts of the world, in fact. So over -- a good start to the year. Some of the business highlights. As you remember, in January, we launched our new strategy phase, as we always do every third or fourth year. And we talked about the couple of big shifts that we are driving: one, of course, rate in sustainability; the other one, how we scale and grow our value-added solutions. And what are we trying to do with this, is really to differentiate further through adaptability and sustainability. We are seeing that when we are getting out of this pandemic, I'm quite convinced that we will return to offices quite soon. It will not be exactly the same as in the past. It will be more mixed mode of working. But we see how important offices are for innovation, for sense of belonging, for apprenticeship, for learning and health and well-being. And those will be key things for offices in the future. And building owners, when we talk to them, they also see that they have to adapt. They need new services, they need new ways of operating to be able to meet the needs of today's tenants and users of buildings. With the connectivity that we are delivering, we can bring now an array of solutions to bring this adaptability to our customers. So that's really what we are focused on when we have connectivity and our APIs to bring both our own and third-party solutions. We have now rolled out our DX class elevators in Asia Pacific, Europe, Middle East and Africa. America is still to come. And we can see that the sales of our 24/7 Connected Services has actually accelerated. We had a really good first quarter in how it accelerated the sales. And here, we can see that pricing of these services remains good. And I think it's clear that we have a differentiated offering for 24/7, given the pricing we are able to command for that, and that really shows you that's value to our customers. Last year, we made many commitments to sustainability. In the first quarter, we made another pledge, which was around diversity and inclusion. We think this is critical to attracting the best people to KONE, but also inclusion to actually make sure that everyone can contribute, can get their voice heard and making KONE just constantly a better place to work, a more innovative place to work. And as part of this focus around diversity and inclusion, of course, we have a lot of training programs for our leaders here. But also we made one specific pledge which is to increase the share of women at Director level from 19% last year to 35% by 2030, so further pledges that we made here. Also today, we have released our sustainability report for last year. Our overall reduction in our own carbon footprint, down 8.9%, clearly better than the 3% target that we have had. Now we clearly increased that target. COVID helped us, but we also made some fundamental progress here. So we can see that we're going in the right direction. Of course, last year, we committed to science-based targets for significant reduction. In greenhouse gas emissions, not only through our own operations, but also the life cycle of our products and solutions. So very significant pledges here. We have, again, got many external recognitions for the work we are doing here, which is important. And also we could see last year that safety improved significantly again, in our industrial injury frequency rate, which is, how we measure it, is at 1.2, which is quite good benchmark to other companies, but of course, we have a way to 0, so we can always improve here as well. So overall, improvement -- good improvement in this front as well. Now as I promised, we dive a little bit deeper into how markets developed in 2020 overall and what happened to our market position. I know it's already a quarter ago, but now we have more granular data here. If you look at the total elevator and escalator market globally last year, in monetary value across businesses, it declined at about 3%. So we can see that this is a very resilient business that we are in. It's clear that there are very big differences market-to-market, but overall, that was the level. If you then look at the new equipment market, new equipment market was close to 1 million unit in total last year, and it declined just over 1%. So actually quite stable. KONE, we grew our units that we sold last year by 4%. And in total, we sold 180,000 elevators and escalators last year. And that means that we increased our market share by about 1 percentage point. So we continued to improve our market share and when we look at the increase in number of units sold last year, I don't think anyone did more than we did last year. So a good improvement in our market position and shows the competitiveness that we have. And of course, China was the strongest market. Central North Europe, okay-ish, but then significant declines in North America and rest of Asia Pacific. When we then look at the total installed base in the world, total maintenance base, that's over 18 million units. Here, we count both units in service and units in first service. This market grew at over 5% last year, so continued good development. And KONE, we continue to be, again, the fastest-growing of the major players in the industry. We grew our service base by 4.5% to over 1.4 million units. These 1.4 million units, that is what we have in our service base, plus then we have more than 10% of that additional in first service, which is, of course, as you know, comes as part of new equipment sales. So we have 1.4 million plus what we have in first service. And with that, we are close to 10% market share, and again, had market-leading growth in this area again last year. So overall, we could see that our market position has improved and competitiveness remains very strong. So let's look at this year then, at market development. So this is what's happening in the external markets. And let's start, again, as we have looked now, a few quarters on the usage of elevators and escalators. We've now shown this data throughout the crisis, and we can see that we are going in a better direction. As mentioned before, we have about 100,000 connected units behind this data. And in all countries, we can still see that the number of starts per elevator is still clearly below where it was pre-pandemic. But if you look at the numbers to the right, here, we compare where we are today compared to beginning of the year. And we can see in most countries, we have returned to buildings, more movement around U.S., up 21%. So we can see that as economies are opening up because of successful vaccination programs, that we are returning and going in the right direction. And I would expect U.K. to now -- when many companies are returning to offices to also go sharply up in the coming weeks. Why are we looking at this data? But this is a good predictor of a discretionary activity and maintenance, on repairs, spare parts, but also call-outs and service needs and so forth. So that's why we track this data. And we can see that we're going in a better direction, and we think that, that also bodes well for the maintenance markets to recover or the discretionary activity in maintenance markets to start recovering. But then in Q1, if we start with new equipment markets. North America, the markets compared to Q1 last year declined significantly. Markets were strong Q1 last year, but then, of course, declined throughout last year. Now we're starting to see signs of improved activity, but Q1 was clearly significantly below where it was a year ago. Europe, Middle East and Africa, slightly below where it was a year ago. Central and North Europe at a better level, declined slightly, Clearly a more challenging situation in South Europe and actually Middle East, pretty stable. And I would say that EMEA markets were very strong last year. So we -- actually, they have held up quite well, but big differences within EMEA. Asia Pacific, okay. Again, China started to recover already in Q2 last year, very strong recovery in Q3, recovery in Q4, continued recovery now and strong growth year-over-year. Whereas rest of Asia Pacific actually declined clearly. So big differences market to market. Then in services, North America, stable, both maintenance and modernization market. Modernization market actually is remarkably strong, and we're seeing a similar pattern to what we saw but after the financial crisis -- actually, the modernization market recovers faster than the new equipment market, but maintenance market also stable. Europe, Middle East and Africa, stable maintenance markets, but clearly down modernization market. Here, I would highlight that much of this is residential, which is a very big market in Europe, where a lot of decisions have been postponed and I think when we have a more -- start to have more normalized situation, we believe that this will also start recovering. Asia Pacific, good development maintenance, particularly China And modernization, also good development in China, weaker, other parts of Asia Pacific. But let's dive a little bit deeper into China for Q1. We know it's a very important market to us. And there, we saw a significant growth in the market year-over-year. So very strong recovery. Competition is tough there, intense competition overall in the market, but it is recovering. From economic perspective, we all could see the very strong growth in the Chinese economy in Q1. And also, we can see very healthy activity in the real estate markets, demand for apartments continues to be strong. And that is really what is driving activity in construction, of course, in our business, because there continues to be a lot of restrictions for financing, for developers, but also mortgages and purchase terms for consumers. But the demand is definitely there despite these restrictions. So when we look at some of the statistics, we thought let's not only compare to 2020, but also 2019 because we know that Q1 last year was actually very severe lockdowns in China, and therefore, clearly, we have strong growth. But real estate investment, up 26% year-over-year. But if you compare to 2019, so a compound rate of 7.6%. So the point is that we are back in construction activity clearly above pre-pandemic levels. Residential sales volumes up also a lot over last year, but also a 12% compound over 2019. New starts compared to 2019, slightly below. But as we know, that fluctuates quite a lot. And prices continues to go up somewhat in a healthy way. So overall, the way we see the Chinese market also for the rest of the year is that we see a robust solid market there. But that about the external environment. I'll now hand over to Ilkka to dive a little bit deeper into our financial development.

[Ilkka Hara, Executive VP, CFO & Member of Executive Board]

Thank you, Henrik, and also a warm welcome on my behalf to this first quarter result announcement webcast. I'll go through financials in more detail. And as for the last quarters, I've been using this overview. I'll start there. So a few highlights on how we developed in the first quarter. First, I would raise China. So across all businesses as well as in orders and sales, we saw very strong performance there. China clearly has and continues to recover in a very healthy way. Secondly, I would raise also the fact that as we've talked about in the last quarters that the decision-making in the modernization business is slow and impacting our orders received development. And also that is having an impact to our sales development in the modernization business, which is down as a result. At the same time, as talked about, even though the restrictions have had an impact in first quarter, we do see that new equipment sales continue to be growing also outside of China. But let's look at the numbers in more detail, and I'll start with orders received. For the first quarter, the orders received were EUR 2.076 billion. On a reported basis, down 1.6%, but growing on a comparable basis, 1.3%. As seen on the previous page, clearly, one of the drivers for this development was the performance in Asia Pacific and particularly in China, where our orders received grew both in units as well as in monetary value significantly. Prices were stable in the quarter and mix had a slight negative impact in China. To me, that's a very strong performance because actually, if you look at our performance in the previous year, in 2020 first quarter, we grew then despite the market being down due to COVID. So the comparison point was also a tough one. Then if you look at the overall margin of orders received in the quarter, it declined slightly. Despite prices being stable, we did see raw materials going sharply up in the quarter and causing the margins to be slightly down. Let's move then to sales. Our sales for the first quarter were EUR 2.326 billion. Growth of 5.8% on a reported basis, and on a comparable basis, a strong growth of 9.1%. From a business perspective, new equipment grew 17.9%. Our maintenance grew 3.2%. And as already said, modernization was down 4.2%. Geographically, EMEA grew 1% and whereas Americas declined 2.6%. Asia Pacific grew strongly, 26.8%. And again, there, the strong deliveries in the new equipment business in China was driving this performance, and we saw over 30% growth in our sales in China. Then to adjusted EBIT. The few highlights from these results. I would call out adjusted EBIT as, one, we grew 21.5% profit to EUR 250 million. And also, our adjusted EBIT margin grew, reached 10.7%, up from 9.4% previous year. Then if you look at the comparison point last year, obviously being impacted by the COVID, but if we look at the previous year, 2019 first quarter, we were also up against that 30 basis point. So in my mind, good development from a profitability perspective. The key drivers for that growth contributing positively, also the fact that our pricing in the orders previously received has a positive impact. Productivity developed positively as well as we continue to see lower discretionary spend having a positive impact. So good performance from adjusted EBIT perspective. As Henrik already highlighted, there no longer is a difference due to Accelerate program between adjusted EBIT and EBIT. But we continue to see the tail ends of the savings materializing in our results, and we are progressing well there. Then lastly, to cash flow. Obviously, one quarter is a short time to look at the cash flow development. It does fluctuate on a quarterly basis. But we continued to see in the first quarter, very strong -- exceptionally strong performance in our cash flow at EUR 425 million. Operating income having a positive impact, but also net working capital being further negative and having a positive impact to cash flow, both from an accounts receivable perspective, as well as advanced invoices in our businesses contributing positively. Very happy to see cash flow developing this strong, as I always said, it's one of the best proxies of the health of the business overall. But with that, I'll stop and hand over back to Henrik for market and business outlook. Henrik?

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

Thank you, Ilkka. So let's wrap up with how the rest of the year looks. And let's start from overall markets. As I mentioned, new equipment, Chinese market is expected to grow slightly. So we expect the market for the rest of the year to be solid there. And rest of the world, we expect market to gradually recover. As I mentioned several times that we've seen a good increase in activity in many places. Maintenance markets are expected to be resilient. And of course, the impact we've seen from lockdown measures and discretionary activity has had an impact. We think also that will start to improve over the year. And in modernization, it is expected to gradually recover as we are seeing improving confidence in the markets overall. And then to our business outlook, we now expect our sales to be in the range of 2% to 6%, previously 0% to 6% in comparable currencies. And we expect our adjusted EBIT margin to be in the range of 12.4% to 13.2%, previously the range of 12.4% to 13.4%. And of course, assumes that exchange rates remain at the April level. We have many things supporting our performance. We have a solid order book and maintenance base that we've seen. And also, we are seeing -- continue to see the benefits of the improved margin of orders received that we had during last year. Now the orders that we are developing -- delivering. And we actually have had a very positive development continuously in our quality and productivity. These 2, of course, always go hand-in-hand. But there's been good development there. And that's, of course, much behind the result today. But there are a number of things burning our result, increased material and logistics costs. In the beginning of the year, we expected that to be about the EUR 50 million headwind. Now that's around EUR 100 million headwind. So we could see, as Ilkka already mentioned, that significant increases in steel prices from the beginning of the year, and that is clearly having an impact on our business. And also, what is more of a positive thing is that we continue to invest significantly in our capability to sell, develop and deliver digital services and solutions. So overall, that's the outlook. And in summary, good start to the year, very good performance, following very strong performance in 2020. We continue that into Q1, very consistent, I would say. And of course, we're very focused now on offsetting the cost increases that we see with productivity, differentiated offering and so forth, all the good things that we've done for many years. And I feel that we are in a very good position competition-wise to benefit from a market recovery. And of course, we are very focused on capturing the opportunities from a growing market. So overall, with this start, I think we can have a good continuation of the year. But with that, we are now ready for questions.

[Natalia Valtasaari, Head of Investor Relations]

Yes. And we can go straight to the lines for questions. So operator, please.

[Operator]

[Operator Instructions]. We'll now take our first question from Andre Kukhnin of Crédit Suisse.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

I'll just go one at a time and maybe begin with the obvious one on raw materials. Could you firstly help us understand the step-up from the EUR 50 million to EUR 100 million, it seems to be slightly disproportionate versus the spot prices move that we've seen since you reported Q4 and secondly, are you -- is this triggering any additional actions from your side to compensate for it? And are there any signs in the industry of maybe looking to even price that up to customers, given that we've had a period of now -- I guess, mean a couple of years of stable pricing?

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

Why don't do you start, Ilkka?

[Ilkka Hara, Executive VP, CFO & Member of Executive Board]

I'll start. And if I look at what's driving the development from this EUR 50 million that we talked about, up to EUR 100 million. Now, so its main drivers for that is steel in different formats as well as copper. And if we look at the -- it depends a bit market by market, but the prices have been coming up 15% to 20%, even up to 25%, 30% in some markets since the beginning of the year. So in that sense, that's really the key driver. Logistics costs are part of that as well. And there, we have seen first quarter logistics cost -- been on quite a high level coming down somewhat, but still continuing to be on a higher than normal level.

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

And if you look at pricing, as you know, Andre, we don't talk about our -- how we price going forward. I think it's clear that everyone would like to compensate this with pricing, but that we have to see how it goes. I think one of the key actions, of course, always when this is -- as we have done year-over-year, continuously work on offering to make sure that it's more and more competitive, that we continue to do. Productivity, as said, that's developing in a good way and, of course, continue to do that and pricing. So all of the things are, of course, in the toolbox, and we continue to use them. Of course, the challenge is now a little bit higher than we had expected it to be beginning of the year, then you put a little bit more effort into it. So that's what I would say about it.

[Ilkka Hara, Executive VP, CFO & Member of Executive Board]

And if you look at our guidance as well, we are expecting that there's a good chance of us being able to fight some of this headwind to have a improved profitability for the year. So that's one way to think about it as well.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

That's very clear. And then just a couple of questions on China, and then I'll wrap up. One is on modernization. Could you just update us on how you're positioned there? And how big has this segment become for you as part of your China business? And the second question on China is on the potential regulatory change. There's been a trial of replacing physical visits with remote monitoring in some cities that's been going on now for I think nearly a year, is there an update from that? And is there sort of an update to your thinking on how soon we may see that regulatory change coming through in that country?

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

So modernization has been growing at a very good rate. So I feel that we have a good position in China, but it's still quite a small percentage of our overall sales, but it's growing, and we see a big potential there. I see a little bit analogies to -- when we started to grow our new equipment business, started from low level, but very strong compounding and then quite shortly, it becomes a large business. So overall, I think we have a good position in that and a lot of focus on growing that business. There are a lot of trials going on in China. On maintenance to go to -- condition-based maintenance to be able to replace some of the visits through connected solutions. That has not yet driven changes in regulation. Those trials are expanded, but there's no really big update yet. My understanding is that the experiences overall are positive. So I think it's going in the right direction, but nothing significant yet.

[Operator]

[Operator Instructions] We'll now take our next question from Lucie Carrier of Morgan Stanley.

[Lucie Anne Lise Carrier, Executive Director]

I wanted to come back on the raw material situation and also what you mentioned around the margin in the order received. First of all, I was hoping to understand a little bit how you expect that raw material impact you face? Because it seems that in the first quarter, you almost had nothing out of the EUR 100 million. So just wanted to double check that for the rest of the year. And then, Ilkka, you were mentioning that obviously, you were benefiting from better pricing in order received that you got last year. How long until those orders are executed and as a result, how long before we are seeing now the slightly lower margin order being executed? So that was my first question on the profitability dynamics.

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

Thanks, Lucie. And if I start, I'll try to, kind of piecemeal the answer to the question. So first, looking at the first quarter and the development from a raw material perspective. We actually were able to see a better-than-expected performance there. So we were able to push forward some of the increases better than we expected. And yes, there was some impact from increased material prices and logistics costs in first quarter. But definitely, we expect that to be more about headwind in the coming quarters. So that's from a timing perspective, and we have a pretty good visibility for raw materials covering next few quarters. Always when it's volatile, we tend to have a bit less locked in as a result. But then for the -- I would say the fourth quarter, there's still some contracts and also obviously, deliveries on the product side that will influence the outcome for the year. Then your second question, remind me now, what was it?

[Ilkka Hara, Executive VP, CFO & Member of Executive Board]

Kind of when this orders -- yes, so the lead time of the order.

[Lucie Anne Lise Carrier, Executive Director]

Yes. It was around the margin order.

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

Yes, lead time. Yes, exactly. Sorry. So lead time depends a bit market by market. But if you think about China being a largest new equipment market there, we do have a lead time of, say, 9 months on average right now for the delivery. So the orders that we deliver this year, some of them have already -- have been received in the first quarter. So we start to see the impact from the decrease in margins of orders received that we've seen in the first quarter be visible in the result sometime end of this year, early next year, depending on market by market. And the good thing, of course, there is still time to take big action. That's, of course, we're working on productivity and how we can offset some of that.

[Lucie Anne Lise Carrier, Executive Director]

Understood. And just maybe to come back a little bit on China. You're now guiding for market to be slightly up. From what I understand, the first quarter was still quite strong. So is it an indication that you, kind of expect the rest of the year to be, let's say, around 0, possibly slightly negative to kind of come to your slight increase? Or are you seeing indication for that? Or is it just more being conservative from your side?

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

I would say what we -- as I mentioned already, that we actually see the markets in China for the rest of the year to be very solid. You have to remember that in Q2, particularly Q3 and Q4, we saw a very sharp recovery last year. So we have a higher -- much higher comparison point. Q1 was, of course, a low comparison point to last year. But overall, we think the markets will remain solid and robust. And let's see, the end of the year what the growth was. But the message here is that we continue to see good markets.

[Lucie Anne Lise Carrier, Executive Director]

And lastly, if I may, a question on the Americas. I see that in the quarter, your order received in modernization are up quite a lot. Maintenance for some reason is a bit weaker. I know it can change from one quarter to the other. But generally speaking, in the Americas, I know you are a bit more skewed towards commercial. Can you comment, in terms of the market environment you are seeing, not specifically on the quarter, but the discussion you have with your customer, are they ready to kind of act and resume new construction quite quickly? Or modernization quite quickly? Or are you seeing that there's still quite a lot of uncertainty on the commercial side?

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

I would say that when we -- particularly, if we look at North America, we clearly are seeing more optimism there, more activity, so things that were put on hold last year, back on the drawing board and people talking about them. So clearly more activity because I think most developers, building owners, tenants and others are seeing that, hey, we will be back in offices. Offices will be critical to companies' competitiveness and how they develop and how to develop their people and how they attract the best employees. Then you need to have an office that actually is attractive and therefore, are investing accordingly. So I think it will be interesting to see if we have a similar trend to what we saw back in 2010, 2011, in United States where there, actually modernization market -- I still remember it very well that the modernization market recovered much faster new equipment market, because when building owners looked at, hey, I need to be now focused on the upturn and attract new tenants. Then if you want to attract new tenants, you need to have an office that is fit for purpose, and then you need to modernize it, all these aspects. Usually elevators are then part of it. And that is, therefore, shorter lead time, and that comes quicker. And I think we're starting to see some of that overall, we just -- we had a good quarter in modernization in North America. Let's also remember that one quarter is a short period of time overall. And there can be a lot of fluctuation from quarter-to-quarter. But overall, I think there is more optimism in the market.

[Ilkka Hara, Executive VP, CFO & Member of Executive Board]

And from a modernization perspective, Americas, we saw growth in both volume as well as major projects. So that's possibly a good sign for the future.

[Operator]

We'll now take our next question from Klas Bergelind of Citi.

[Klas Henrik Bergelind, Director]

Klas at Citi. First, on price cost, sorry to labor the point, but if I think about the cost backdrop versus the last inflation cycle, it's different in the sense that in the U.S., it's now also a significant inflation, particularly on steel this time around. So it's not only China seeing inflation. We often talk about your China business when we discuss price cost, but I'm also keen to understand what you see on the U.S. side, Henrik, as well and what you're doing into prices in the U.S., not only in China, is how we start there?

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

Well, I would say that, of course, we see it across the world. As you know, in the U.S., it's -- material cost is a smaller proportion of the overall price of an elevator or escalator labor cost and installation costs, there are higher than other parts of the world. So it has an impact, but proportionately, a lower impact. I would say the difference we have now compared to previously -- so then when that happened, markets overall came down. Now we see we're going into what looks like a recovering market. So I think that is also slightly different than what we saw last time around.

[Ilkka Hara, Executive VP, CFO & Member of Executive Board]

And I would add to also from a pricing perspective, that at least in the first quarter, the pricing was much more stable than last time we had a cost coming up and prices coming down, and that's not what we saw in the first quarter.

[Klas Henrik Bergelind, Director]

Yes. No, that makes perfect sense. And yes, no, I agree. The raw material content is obviously bigger in China. And the second one I had was on modernization, and I get the comment for EMEA is linked to residential projects being pushed to the right linked to COVID. But I'm interested to hear if you've seen any improvement, Henrik, on the commercial side, when you think about quotations? We heard today of others with exposure to nonres talking about improved commercial activity in Europe.

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

That -- we are starting to see more optimism there. I would say, the reason we may highlighted residential is that that's such a big part of the modernization market in Europe. And there, it's clear when you are -- during the pandemic, and people have been at home much more. So all types of building renovations have -- larger ones have probably been postponed and housing associations haven't met to be able to make decisions. And there are many, many reasons for postponements there. In many markets, you have had a slightly better development on commercial side or -- until now, but you're also seeing more optimism there.

[Klas Henrik Bergelind, Director]

Very good. My very final one is on the raised growth guide at the lower end. Your China backlog is quickest to convert out of all regions. Am I right to assume that better China was the sole reason for your raised outlook for growth at the lower end of the range? Or is there anything else that you see that I might have missed?

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

I would say, actually, if I look at our sales and I look at our results, we actually had a good performance across the board. And that -- and then, of course, the 9.1% growth in Q1, overall. So I wouldn't say there is one specific reason. Of course, China was an important reason, but not the only one.

[Operator]

We'll now take our next question from Guillermo Peigneux.

[Guillermo Peigneux-Lojo]

Yes, I wanted to ask about the growth outlook in China across the different tiers, if I may. I think you may find that the overall outlook is probably better in high tier cities versus low tier cities. I wanted to get your color about the potential growth prospects from that particular angle, if I may.

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

The growth is really concentrated in, I would say, the 3 main mega city cluster hubs. So Beijing, Tianjin, Hebei area, I would say, we look at around Shanghai and the Great Bay Area. All the satellite cities around there. So not necessarily the biggest cities themselves, but the satellites around them, public transport to them. And then you have also some other slightly smaller mega hubs. It's around those where we see most of the growth. And that's where you have the best job opportunities, opportunities for health and education, all of that. So that's, of course, drawing people but they're, of course, trying not to have all of the people in the bigger cities, but in the satellites around them is more what's happening right now.

[Guillermo Peigneux-Lojo]

And could you comment a little bit maybe on -- you elaborated already, but I wanted your comment on the different pricing outlook, where do you find the most competition as we speak within China? And probably if you can extend the comment to overall aftermarket maybe in EMEA, in Europe? What do you see there in terms of competing trends for China, I guess, equipment and obviously EMEA aftermarket?

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

So our pricing in China has actually been pretty stable, but okay, you have had some higher input costs now. Usually, you have more challenging situations in markets that are more challenged. And of course, you have some Southeast Asia and some southern European markets, but it really varies market to market. I would say on the maintenance side, actually quite a stable situation overall.

[Operator]

We'll now take our next question from Maddy Singh of Bank of America.

[Madhvendra Singh, Research Analyst]

My first question is on your existing contracts, whether there are any provisions to pass on raw material price increases at all? Or is there any specific let's say, trigger level beyond which you can pass on? Or there is no scope whatsoever to pass on in the existing contracts?

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

Existing contracts are at fixed prices, almost all of them. So if input costs go up, that's something for us to manage and vice versa, and I think that's normal in most industries. But we have usually a lead time of less than 1 year on order book. And I think that's something that's manageable.

[Ilkka Hara, Executive VP, CFO & Member of Executive Board]

And that's particularly then a comment on new equipment and modernization in maintenance, then the prices. We have escalation clauses for those depending on the market, a bit different, but they do follow inflation over time.

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

Yes. Good addition.

[Madhvendra Singh, Research Analyst]

Okay. And in terms of your contracts with your suppliers, typically, I understand there are like 3- to 9 month-long contracts typically. Correct me if I'm wrong there. How quickly -- if I were to look at your existing mix, what percentage of those supplier contracts have already been renegotiated? And how much further still yet to be negotiated?

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

I mean I would say that -- you have to remember, it's not that you negotiate some part of the year and then it's fixed. This is an ongoing rolling process and then we work with our suppliers to lock prices for raw materials and so forth. So I don't think I could -- this is a constantly rolling process. I don't think I have any other answer to that question.

[Ilkka Hara, Executive VP, CFO & Member of Executive Board]

Also I wanted to clarify something. So if we talk about raw material impact, and we try to provide a estimate of the impact of the raw material prices that are changing in the market. Then we -- based on that, have negotiation with our suppliers. Those negotiations look at a bit of the past and also then where we are. So both going up and down, there's a lag in the impact in our prices. And we buy actually fairly little raw material. So it's more the components that have -- their prices are impacted by raw material prices. So it's not a one-to-one link. Therefore, also the comment we make tries to estimate the impact that we see. Then depending on our capability to negotiate and also do redesigns, the net impact can be different. And normally, we've been actually quite good at seeing improvements compared to the just pure raw material price change.

[Madhvendra Singh, Research Analyst]

And one question around outlook for commercial market on residential side. It looks like -- it feels like you are seeing better trends there as well. So is that something which is a global trend you're seeing now? Or it is still limited to markets such as U.S. for now?

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

Well, U.S. is the one we highlighted because it's such an important segment. If you remember that, again, that Europe and much of Asia, by far, the biggest segment is residential, which will actually be more robust throughout the crisis. But we see same trend in many of the markets where confidence is improving, and we can start to see coming out of this crisis, then that's usually a theme. But of course, in North America, it's a bigger impact than it is in the rest of the world.

[Madhvendra Singh, Research Analyst]

And my final point, and it's a bit more subjective. Beyond the raw material prices, what would be your biggest concerns in the next couple of years? Or this year as well, if you want to?

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

Well, I would say, of course, we constantly have a lot of things. We look at and see that we have to continue to improve. I don't think that that's any different than in the past that, of course, we look at market development very closely as we do all the time. But that's what we've done year-over-year, constantly look forward, constant improvements at KONE. That's how we operate and want to find -- how do we find the changes we see in the market as opportunities and how do we capture them, and that's what we continue to be focused on. But of course, always, there are uncertainties and so forth, but then we deal with them.

[Operator]

We'll now take our next question from Joel Spungin of Berenberg.

[Joel Adam Spungin, Analyst]

I just had a couple actually. I was just wondering if I could start by asking, with regards to your orders received, just to help me understand a little bit more, obviously, 1.3% in the quarter. If I look at your chart on Slide 13. Obviously, you only read in one area in terms of new equipment, which was Americas. I mean given the relative size of Americas versus China, was there something unusual in the comp in Americas that explains why it was so weak in Q1? Or is that not what's sort of underpinning this?

[Ilkka Hara, Executive VP, CFO & Member of Executive Board]

Well, maybe I'll start with clarification. So when I talk about orders received, where you started with your question of 1.3% growth. We calculate into that number, orders in new equipment as well as in modernization and the repair orders for our maintenance business as well. So it's a totality. And out of that, then new equipment is a large part of that, but it's not only the -- it's all of those 3. And then in the new equipment in Americas, so I think we performed there quite well. And obviously, last year, the comparison point is quite high as it was a quarter largely not impacted by COVID-19 yet.

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

I mean North America market, monetary value is clearly more meaningful than it's in units. So it does have an impact.

[Joel Adam Spungin, Analyst]

Okay. Okay. And then maybe just moving on. I was wondering if I could ask, in terms of your comments around, obviously, the -- you talked a lot about the margin on new orders received. Could you maybe -- I think in the statement, you talked about it, obviously on a year-on-year basis, but sequentially, has there been any significant change compared to Q4? I'm just trying to get a sense of what the trend was. And I mean the reason I'm asking, obviously, is Otis commented on Monday that they've seen some easing in pricing Q1 versus Q4 2020. So just trying to reconcile whether that's also what you've seen or not?

[Ilkka Hara, Executive VP, CFO & Member of Executive Board]

Well, my comment on margin was on purpose year-on-year comment because if you look at quarter-on-quarter, then seasonality plays a role there. But particularly in pricing environment. So we did say that pricing was overall rather stable year-on-year. And I would say that quarter-on-quarter, that's also true. The clear difference driving the commentary on the margin of orders received is really the raw materials going up during the first quarter.

[Joel Adam Spungin, Analyst]

Okay. That's very helpful. And then maybe just one quick final one. I'm just wondering if you could just remind us, during 2020, did you offer any rebates to maintenance customers? And if so, have those all now been fully reversed out?

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

I would say it was never meaningful. It was in some situations last year that there were either suspensions of payments or rebates, temporary rebates. I would say that's at a very low level today. There are some places where still -- some resorts and hotels, but we're talking about -- it's not a meaningful number. You don't really -- it doesn't really impact the numbers overall anymore.

[Operator]

No further questions at this time. I would like to turn the conference back over to the speakers for any additional or closing remarks.

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

Well, thank you all for participating here today. I think we had some good questions and now Natalia for closing.

[Natalia Valtasaari, Head of Investor Relations]

Yes. Thanks on my behalf as well to -- both to Henrik and Ilkka and to everyone who joined online. Good participation, great questions. If you do have any follow-ups, please don't hesitate to reach out. We're here for you. And yes, with that, I'm wishing you a great rest of the week.

[Henrik Ehrnrooth, CEO, President & Member of the Executive Board]

Thank you, everyone.

[Ilkka Hara, Executive VP, CFO & Member of Executive Board]

Thank you.