Kone's (KNYJF) CEO Henrik Ehrnrooth on Q4 2015 Results - Earnings Call Transcript

| About: Kone Oyj (KNYJF)

Kone Oyj (OTCPK:KNYJF) Q4 2015 Results Earnings Conference Call January 28, 2016 8:45 AM ET

Executives

Katri Saarenheimo - Director, IR

Henrik Ehrnrooth - President and CEO

Eriikka Soderstrom - CFO

Analysts

Elina Riutta - Evli Bank

Pekka Spolander - Pohjola Bank

Guillermo Peigneux - UBS

Ben Maslen - Morgan Stanley

Erik Karlsson - Bodenholm Capital

Manu Rimpela - Nordea Markets

Justin Bracken - AllianceBernstein

Martin Flueckiger - Kepler Cheuvreux

Antti Suttelin - Danske Markets Equities

Phil Wilson - Redburn

Daniel Gleim - MainFirst

Tomi Railo - SEB

Michael Kaloghiros - Bank of America Merrill Lynch

Katri Saarenheimo

Good afternoon, everybody and welcome to KONE's Q4 and Full Year Results Presentation. Here in Espoo, Finland we have today with us our CEO, Henrik Ehrnrooth and CFO Eriikka Soderstrom. I am Katri Saarenheimo from Investor Relations.

As usual we will first go through some highlights from the Q4 as well as our past year results. After this we will have plenty of time again for Q&A and some discussion. So let's get started with a review of Q4 and the full year. Henrik, the stage is yours.

Henrik Ehrnrooth

Thank you Katri and also a warm welcome to everyone from me to those of you who are in the room and people who are following the webcast. First of all it's a great pleasure for me to present our full year results. We had a very good performance throughout 2015 and we had a great finish to the year in the fourth quarter. I would say that in the fourth quarter we performed strongly on a very broad basis. So I am very pleased about that.

As usual I will go first through our key figures, after that I’ll go a little bit deeper into some of them. I will also talk about then our businesses, our markets and a few highlights from 2015 and after that about we are developing going forward and our outlook. So diving straight into what happened in Q4. As the heading says we had a very strong finish to the year. We continue to grow. Our orders received were more than €1.9 billion, growth of 14% or 7% in comparable currencies. We had a very strong order book at €8.2 billion and it has grown in comparable currencies almost 12% from last year. This of course gives us a good position to continue from here.

Our sales growth accelerated in Q4 and was more than €2.5 billion, growth of 10.8% in comparable currencies. And the good growth in sales also drove a good improvement in our EBIT. So EBIT was €378.5 million for the quarter and the EBIT margin improved from 14.6% to 14.8%.

To round off the great development, I'd like to highlight also our cash flow which is more than €400 million, so we continue to have a very strong cash conversion. This shows that again in the last quarter of the year, like we have done throughout last year and last years is that we have maintained very healthy business practices and it of course shows in our cash flow. Earnings per share €0.71 but in this earnings per share we had a one-time gain from a dividend we received in December from Toshiba Elevator Company. So if you back out that one-time gain our earnings per share was €0.49 compared to €0.40 a year ago.

And that's quarter four, what about then the full year 2015? Again gives a little bit longer perspective of our development. And as you can see I think the highlight here is that we had a profitable growth in a changing environment. As you know our market environment changed quite a lot during last year and we showed that also in this kind of environment we can perform strongly. Orders received grew almost €8 billion, 5.6% in comparable currencies. Our sales did grow throughout the year at 8.3% and sales was €8.6 billion.

And also throughout the year we had profitable growth and had a strong EBIT of €1.241 billion and our EBIT margin grew from 14.1% to 14.4%. And also for the full year very strong cash conversion. We had a good cash flow of almost €1.5 billion. So we had €1.473 billion in cash flow on an EBIT a little bit over €1.2 billion. So that shows the health and strength of our business.

Earnings per share is €2 but again here we had the one-time gain from the Toshiba dividend, so if you back that out it was €1.79 earnings per share compared to €1.47 a year ago. And given the good improvement in our EPS and our cash flow and our results, our Board is proposing to the Annual General Meeting to increase our dividend to €1.40 when it was last year €1.20.

So then the great development we had in 2015 in a changing environment would of course not have been possible without great contributions from our employees. I must say that from what we can see from all of our operations and from how we lead the company is that we have a great spirit and strong motivation and commitment amongst our employees. And I would actually argue that we have the best team in this industry and that really has helped us perform very strongly and will help us perform strongly in a continued changing environment. So a very big thank you to all of our employees for a very good job done during last year.

So that's the highlight of the results. Let me first go into our orders received a bit more in detail. So quarter four, again strong growth in orders received as we had throughout the year, and now our growth was driven by continued good growth in North America and also a strong growth in Europe, Middle East and Africa. Our growth in North America, Europe, Middle East and Africa was in both geographic areas strong double digits. Orders received was now more stable in Asia Pacific and they were stable due to a slight decline now in our Chinese orders -- orders received in China.

But if you look at the development in China, we continue to outperform the market. The market in the fourth quarter in China declined at a little bit over -- a little bit more than 5%, and that's in number of units. If we measure our development in number of units, we increased a little bit but in monetary value it was a slight decline. So good development also there in a challenging environment.

If I then turn to our sales, as I mentioned we were able to accelerate our sales growth in the last quarter. In comparable currency it was 10.8%, and of course we had again good headwind from currencies. The good thing here is that we had growth in all geographic areas. We grew at almost 19% in North America, 12.4% in Asia Pacific and 6% in Europe, Middle East and Africa. So good growth across the board.

Growth was very strong in new equipment, so you can see we're delivering on our strong order book. Growth in new equipment was 15% and what I'm very pleased about is in our maintenance business we were again able to slightly improve our growth rate. So our maintenance business we grew at 7.5%. So constant improvement in the growth rate in our maintenance business. For the full year growth in maintenance was 6.7%. So overall strong development and good acceleration of sales growth in Q4.

And the good growth in sales resulted also in a good development in our operating income, in our EBIT, and here development was due to a broad-based positive development. I would say the biggest contributor was again in new equipment because of the strong growth there, but we also had good contribution from services. And when we look at geographically a good development overall. So very good profitability improvement and very good profitability in both new equipment and our maintenance business.

When we look at overall our EBIT, we can also see that we have continued to invest in our future, so what is burdening our EBIT is a continued increase in our investment in R&D, process development, IT, and we also continue to strengthen our resourcing in areas where we are growing and where we have a strong order book to make sure that we can continue to perform well in these markets. So we also in this environment continue to invest strongly into the future.

Throughout the year translation exchange rates were a strong tailwind for us, so for the full year positive development of about €120 million positive contribution from exchange rates and last quarter about €25 million. But even if you back this out, you can see that in comparable currencies also EBIT had a good development in 2015 and in the last quarter. So overall strong profitability development.

Our business mix; the change in our business mix continued along the same patterns you have seen before. So the share of new equipment was now 57% compared to 55% a year ago. Now the shift in mix of 2 percentage points was as much due to underlying growth as translation exchange rates, because in new equipment we have more non-euro sales than in the other businesses.

And the same thing when we look at sales by market. For the first time in Kone's history Asia Pacific became the largest geographic area for us and was now already 44% of our sales compared to 39% for Europe, Middle East and Africa. Here again about half of this change in mix was due to currencies. North America share increased due to the good growth we had in that area.

So that's about 2015 and when it's full year results it's always also good to look a little bit at a longer perspective of our development. So here I have since 2005 how our sales have developed by market. And as we all know, a very significant growth driver for Kone over the past 10 years and the past five years has been our growth in Asia Pacific. Since 2005 if you look to today, our business perhaps is tenfold today compared to 2005.

But as important as that is that we can see that we have compounded at a good rate in both North America as well as Europe, Middle East and Africa. In fact, if you compare to 2005 our North American business is double and we have compounded at over 5% also Europe, Middle East and Africa. So I would argue that this shows that our growth is actually quite broad based, and not only in Asia Pacific, but of course strongest growth from Asia Pacific. This has of course changed Kone a lot over the past years in a very positive sense.

If we then look at sales by business, a similar story. Strongest growth in new equipment due to growth in Asia Pacific, a 16% compound over this period of time. But here also our maintenance business has been growing at 7.9% for this period. So over this period of time it's doubled and also modernization business at 6.7%. So again to highlight, yes, new equipment Asia Pacific have been great growth drivers for us and continue to be important to our growth, but also we're growing in all other parts of the world in all of our businesses.

So that's about a little bit longer perspective. Now I'll turn back to Q4 and our various businesses and what's happening in the markets. And let's start with the new equipment business. I commented already on our overall orders received, but if you just look at the new equipment business, here same story, growth in Europe, Middle East and Africa and North America. Asia Pacific at previous year levels due to a slight decline in China. But as we discussed already, China we clearly outperformed the market.

So then what's happening in our markets overall in new equipment? Europe, Middle East and Africa, in new equipment we have a clear growth in Central and North Europe. There market growth was stronger during the year. Some growth in Middle East and South Europe is then more stable at a weak level. North America has been the strongest growing market over the past couple of years. Here market continued to grow and is at a high and strong level at the moment. And if you look at Asia Pacific overall, now the whole market weakened slightly due to declining market in China, but the rest we saw some growth in rest of Asia Pacific.

And let me here, as usual, now pause a little bit and talk a bit more about what's happening in China, because I know many of you have lots of questions about this and I'll try to answer some of it here upfront. So first of all, as I mentioned earlier, the market in China for the full year declined at about 5% and in the last quarter at a little bit more than 5%. Price competition in markets continues to be very intense. Competition on market share in this market has been very tough and we can see that in the pricing. However, in this environment we performed very strongly. For the full year, our growth was a little bit less than 5% in units and in last quarter a little bit -- just a little bit in units and then a slight decline in monetary value.

If we look at our sales, very strong. Deliveries have continued to be strong and also in this market we have continued to improve our profitability. So very good development in a challenging market, and that speaks a lot about the great competitiveness we have in the Chinese market, and I believe it continued to improve last year. So what's happening in China? First of all, again, as we discussed many times before, it is not one homogeneous market. If you look at the higher tier cities, Tier 1 cities are in pretty good shape. Inventory levels at pretty normalized levels, transaction volumes have grown very well throughout the year.

And the same story for the majority of Tier 2 cities. In China overall we've seen 10 months now of improvement in transaction volumes for real estate and that means that Tier 1 and the majority of Tier 2 cities actually development is quite okay. However, if you look at the lower tier cities, Tier 3, Tier 4, smaller cities, the situation is challenging and it's tough. There the inventory of unsold apartments is at a high level and despite the increase of transactions it has not significantly changed. So that will take a while before this market turns healthier.

If we look at what do we think about going forward when we look at year 2016, you will see it in our outlook, but our expectation is, the market this year will decline between 5% and 10% and price competition will remain tough. So what's then our strategy for this year? Our overall, if you look at again a longer period of time, full year or even longer, our objective continues to be to outperform the market, to grow faster than the market. Again this is not on a quarter-by-quarter basis, it's on a full year basis.

If you look at it historically and also the same thing in 2015, our outperformance compared to the market tends to be the strongest in the first half or beginning of the year, and that has worked well for us. We're probably looking at a more even development this year but let's see. Overall if we look at a longer period of time and full year, still clear ambition to outgrow. And I feel good about our ability to do that because we are in a very good position. We have a very strong team and we have a very good product competitiveness. That is a great combination to have. So that's a little bit more in detail about China and the new equipment market there.

So let me then turn next to our maintenance business. Here, as you can see in the headline, growth accelerated in the maintenance business. I'm very happy about that. That's a key strategic objective we set two years ago for ourselves. So we were able to grow in all geographic regions and stronger sales growth was in Asia Pacific overall. In China our maintenance business continued to grow at clearly above 20% and in rest of Asia Pacific growth was also strong double-digit. So good development there.

What's happening overall in the market? If you look at Europe and North America, maintenance markets grew somewhat but pricing environment continues to be very competitive in many of these markets. So we have clear differences market to market but that's the general trend. Asia Pacific markets continue to grow as a result of good new equipment deliveries over the past years and what we can see is that we have been very good at capturing a good part of this growth.

And then finally our modernization business. Here the same thing as our maintenance business, our objective is to accelerate our growth and what we can see now in the last quarter in particular we were able to accelerate our growth in orders received. So we had a good growth in orders received and we grew in all regions. Sales didn't grow so fast but in North America we grew at a good rate. The order book has strengthened here.

If we look at the markets, I would say in Europe overall modernization market got slightly better, I would underline slightly, but it got slightly better during the year, particularly in Central and North Europe. Here the markets continued to grow. However, in South Europe it remained weak and not much improvement in sight there. North America markets continued to grow as well as in Asia Pacific, certainly were strong markets. So, as you can see from our various businesses and markets that there are lots of different situations and of course what we need to do is find a good opportunities in these varying market environment that we operate in.

And on to full year results let me share a few highlights from last year and start with our new equipment business. First of all, overall we were able to strengthen again our offering in the new equipment business and strengthen our competitiveness. At the beginning of the year we launched an important product for the Indian market, the Kone I MonoSpace, later in the year the I MiniSpace also for the Indian market. For the Chinese market second half of the year we launched the Z MiniSpace which is for the affordable housing market and all of these new introductions, these are just some examples, our most important introductions, were very well received by the market.

In China also we know that the fastest-growing segment is the infrastructure segment, although it's not a very huge segment but it's growing because of government stimulus. Here we brought to the market an updated version of our infrastructure escalator, the so-called TransitMaster 140. Also, as I think most of you are aware, in the last quarter we inaugurated our new test tower in Kunshan in China. That's one of the world's highest test towers at 236.5 meters. It's not only a beautiful tower, it's really a landmark where it is, the most important thing, it is truly a world-class R&D and testing facility. So it will again help us further strengthen our competitiveness and improve our capabilities. So it is an important milestone again how we can develop going forward.

So in 2015 overall, our expectation, the data we have, is that the new equipment market declined globally slightly, for the first time in well over a decade. But we were able to increase our new orders received. So in total we booked about 161,000 orders for elevators and escalators, it's about a 5% increase over the prior year. And last year we delivered to our customers about 137,000 elevators and escalators.

And here to just put it a little bit in context, in a year there is about 120,000 working minutes. So that means that during working hours we delivered more than one elevator or escalator per minute. So during this presentation we would have delivered 25, 30 elevators or escalators, just to put it in context. So we're moving forward all the time. So good improvement in our competitiveness in our new equipment business during the year.

Our services business, we were able to accelerate our growth as I mentioned, that is an important objective of ours and that was because of good conversions from new equipment into the service space. We also improved our so-called competition balance, how many units we win and lose in the market of our existing base. It was still negative but an improvement over the prior year. And the reason we've been able to do this or one of the reasons is that about two years ago we started a program to sharpen our focus in sales with more clarity on sales roles, sharpened our sales management, and we can see that that is leading to results and we have been able to accelerate our growth in services.

Also as a one important development last year, we were able to improve the response time of our technicians and the speed of problem resolution by the introduction of a new generation of field mobility device. That's of course only a device that they have that's important but it's the whole process and system we have behind it that provides them with better capability on serving our customers. Our maintenance base at the end of the year was close to 1.1 million units, went a bit over 1 million a year before, so good growth also in the maintenance base overall. So good development I would say both in our new equipment and our service business.

As you also know, it was two years ago we launched our latest set of five development programs, so we've been developing these now for two years. We're coming into the last year so putting in a final push here. We have still a lot to be done in each of these programs but we have had also good developments.

In our First in Customer Loyalty program we have been able to improve our customer loyalty very strongly in the past two years. So we can see we're making improvements here. In A Winning Team of True Professionals, one of our key objectives here is to help every Kone employee to perform at their best and we can see that now virtually all of our employees have an individual development plan and we have continued to increase our investments in training and development. So we can see from our surveys that we're making also good progress here.

In The Most Competitive People Flow Solutions; a couple of objectives, to have the most competitive elevator and escalator offering and bring new solutions for smart buildings. I talked earlier about our competitive position in the new equipment market, which is very good. And we have also brought important solutions for smart buildings that we call People Flow intelligence. Preferred Maintenance Partner, we have a lot of activity here to bring a new and absolutely much better customer and end-user experience through developing our service business and it's a lot about digitalization. But the end goal here is to improve the customer and user experience and again we have good developments here and we can see that we have been able to accelerate our growth.

And Top Modernization Provider, here the same, to make sure that we have improved our capabilities. And we can see that our orders received is starting to grow here as well. So we still have a lot to be done in each of these programs but we can also see a good development overall.

So with that, let me finish with our market outlook for 2016. What do we expect of overall markets? So first of all Asia Pacific. I already talked about China. Here we expect the market to decline by between 5% and 10% and the price competition will continue to be intense. The rest of Asia Pacific we expect to see some growth. Europe, Middle East and Africa, market is expected to grow slightly with growth in Central and North Europe and a more stable development in South Europe and the Middle East. And North America market is a strong high level and we expect that to continue growing a bit from here.

In the maintenance markets we expect to see very much the same trends we see in this year, good growth in Asia Pacific but also growth in most other areas, although clear variance outside of Asia Pacific. And modernization expected to grow slightly in Europe markets and continue to grow in both North America and Asia Pacific. So a mixed environment overall, as we can see.

And then finally our business outlook, what do we expect, what are we committing to deliver this year? We expect that our sales growth is in the range of 2% to 6% in comparable currencies and we expect our EBIT to be in the range of €1.220 billion to €1.320 billion and this now assumes that the translation exchange rates will remain approximately at the average level of January 2016. And as all of you know, translation exchange rates have a very significant impact on our EBIT but we expect that if it stays at the level -- average level of January 2016, then in this year we now have some headwinds from currencies. With this current rate it would be roughly €20 million on a full year basis.

So with that, let me summarize. We can see that we have a changing market environment but in that environment we have been able to perform very strongly. We have been able to accelerate our growth in our maintenance business and despite a challenging environment in China, we have performed very strongly. So I feel that overall we are in a very good position.

So with that, I'm happy to turn over to questions.

Katri Saarenheimo

Thank you, Henrik. And let's start with questions from those present here in Espoo, Finland.

Question-and-Answer Session

Q - Elina Riutta

Hello, Elina Riutta from Evli Bank. You mentioned on China that the first half of the year tends to be strong for you, and just out of curiosity why is that?

Henrik Ehrnrooth

That has been -- I think it's partly target setting and partly who wants to get very strongly out of the box. But that has been if you compare previous years our market share first half versus second. Not a huge difference but a little bit stronger.

Elina Riutta

Okay, thank you. And then still on China, are there any changes now in behavior in the Chinese market in how competition acts or is it -- has it been similar all year?

Henrik Ehrnrooth

Well, we have to remember that 2015 was the first time in a very long time, well, I don't know how far back in history it would go, to see the market decline. So of course it was a new situation for everyone in the market. And competition for market share is tough there. So we can see that a lot of companies with growth ambitions. But despite this environment, we could see that we had good development both in new equipment and strong growth in services.

Elina Riutta

Okay and then finally on the Middle East. Can you talk a bit about what you're seeing? You say in your outlook that you expect it to be relatively stable. Is it -- with the lower oil price what kind of attitudes are you seeing?

Henrik Ehrnrooth

It's a good question. What we see now in Middle East, first of all last year there was quite a lot of infrastructure investment and you have growing populations so they need that. But also we can see that a lot of the countries continue to invest in their tourism industry to compensate for the oil price, but also quite a lot of good standard business, housing and so forth, because of the growing population. So I would say development has been quite good in many segments but perhaps the strongest in more the standard business now rather than -- standard business and in infrastructure rather than high rises and such.

Pekka Spolander

Pekka Spolander from Pohjola Bank. Coming back to China again, first about the pricing there. If I recall right, during last year you talked about the price decline to be somewhere from 3% to 5%. Is it still the same or have you seen more deeper declines in the prices?

Henrik Ehrnrooth

I would say if you look at the market overall you'd probably talk about a little bit more than that but not significantly somewhere. It's difficult to say exactly where the market is but probably a bit more price declines than what we talked about.

Pekka Spolander

And your own price declines, are they in line or still smaller than the market on average?

Henrik Ehrnrooth

Well, it depends on always quarter-to-quarter how you adjust. But actually in the last quarter we had a pretty good development compared to the market. That's our understanding.

Pekka Spolander

Then about the projects and their progress in China. Have you seen any delays in the projects, that people are becoming more hesitant to continue, and have you seen any cancellations in the projects in China?

Henrik Ehrnrooth

First of all, cancellations again throughout last year continued to be at a very low level. So no change really there. If we look at our top line growth and how important China is, it's about 35% of our revenues, for the full year we can see that actually deliveries have done well. We are perhaps seeing a slight increase in the rotation but it's nothing dramatic. Overall what we can see from our top line and our profitability is that actually deliveries have done well last year.

Pekka Spolander

And the last question about this competitive balance. You have mentioned that it has improved but still somewhat negative. Is this your assessment? What are the reasons behind this to be negative and what do you should do?

Henrik Ehrnrooth

The most challenging area is clearly South Europe. Here we have a weak new equipment market and weak modernization market. A lot of smaller independent players, there's just very high competition for them and also a lot of price competition. And perhaps we are very strict on where we are willing to go with our pricing and then we have lost a little bit more than we have won, particularly in South Europe. So the market there continues to be challenging and competitive, a lot of small independent players who historically also have installed some elevators and modernized that business alone. So a lot of people chasing the same business.

Pekka Spolander

Thank you.

Katri Saarenheimo

Thank you. So let's then move ahead and now we are ready to take questions from those present on the phone lines. I hand over to the operator. Please?

Operator

Thank you. [Operator Instructions]. We will take our first question from Andre Kukhnin from Credit Suisse.

Unidentified Analyst

Hi, everyone. This is [indiscernible] asking a question on behalf of Andre. Our first question is that in your 5% to 10% decline in China order outlook what kind of underlying assumptions do you have behind the outlook and is there anything happened at the end of the year that would make you feel that this decline will accelerate into next year? Thank you.

Henrik Ehrnrooth

Well, first of all, that's the whole market, 5% to 10%, so that means that at the best end we're saying about the same as 2015, at the worst end the decline would be worse than this year. I would say that if we look at the underlying market we expect largely to see the same trends as in 2015 if we look at by tier of city or if we look at by segment. So the most challenging areas are lower tier cities, higher tier doing better, also affordable housing, commercial and infrastructure doing a little bit better than standard residential is more challenging. This is what we largely -- a similar trend that we expect for the coming year.

Unidentified Analyst

Great, thank you very much. The second question is on outlook and you said that the modernization market in Asia is expected to grow strongly. We were just wondering what is that mainly driven by? Is that mostly Australia, South-East Asia or that includes China too? Do you see any change in the underlying market trend there? Thank you.

Henrik Ehrnrooth

Yes, so first of all, that's the whole market 5% to 10%. So that means that at the best end we're saying about the same as 2015, at the worst end the decline would be worse than this year. I would say that if we look at the underlying market we expect largely to see the same trends as in 2015 if we look at by tier of city or if we look at by segment. So the most challenging areas are lower tier cities, higher tier doing better, also affordable housing, commercial and infrastructure doing a little bit better than standard residential is a bit more challenging. This is what we largely -- a similar trend that we expect for the coming year.

Unidentified Analyst

Great, thank you very much. The second question is on outlook and you said that the modernization market in Asia is expected to grow strongly. We were just wondering, what is that mainly driven by? Is that mostly Australia, Southeast Asia or that includes China too? Do you see any change in the underlying market trend there? Thank you.

Henrik Ehrnrooth

Yes, so first of all, as you know, the modernization market in Asia Pacific outside of Australia is still quite small, given a lot of much newer equipment based there. So Australia continues to develop well, it has developed very well over the past years and there we continue to see good development. But also, we're starting to see good growth in China. The market is not huge yet, but it's growing at a good rate as in other markets. But also, we have to remember that China also -- equipment starts do age there or is ageing every year. So the opportunity will improve year by year. But clearly, the largest modernization markets are Europe first, then North America, and then Asia Pacific.

Unidentified Analyst

Sure, understood. Thank you very much. And the last question would be on Iran. We know that the sanction has been lifted and you have been supplying to that market before. We were wondering, if there has been any progress on going back into the market and when would we expect you to have any meaningful progress there? Thank you.

Henrik Ehrnrooth

So Iran is a very interesting market. It's a large elevator market. And we see good opportunities there. We are monitoring the situation closely and so we're staying close to the situation.

Unidentified Analyst

So there is nothing material at this moment?

Henrik Ehrnrooth

No, nothing material to announce right now.

Unidentified Analyst

Okay, thank you very much.

Henrik Ehrnrooth

Thank you.

Operator

Thank you. We will take now our next question from Guillermo Peigneux from UBS.

Guillermo Peigneux

Good afternoon, everyone, Guillermo Peigneux from UBS. Just a question regarding your backlog. As China slows down and you say your North America has continued to outgrow the rest of the industry -- or regions. Is it fair to assume that the margin in the backlog -- the mix in the backlog is deteriorating as we speak? Thank you.

Henrik Ehrnrooth

So clearly, as you know, our new equipment profitability in China is very strong, and stronger than we have in other parts of the world. But on the other hand, also in North America, we're clearly improving. But the margin is not as good there. So from a mix perspective, yes, that's a slight headwind.

Guillermo Peigneux

Will it be a headwind more for 2017, right?

Henrik Ehrnrooth

We have to see how orders received develop in the coming year and we have to see how we're able to improve our competitiveness. So -- on the other hand, we are also growing many of our other businesses. So that's one aspect of it. But if you just look at new equipment there, yes, you have strong growth in North America which would be from new equipment perspective a slight headwind, yes.

Guillermo Peigneux

Thank you. One more question regarding currency contribution to your EBIT in Q4. I maybe missed it in your commentary?

Henrik Ehrnrooth

It's about €25 million. Full year, roughly €120 million, quarter €25 million.

Guillermo Peigneux

Okay, thank you. And I think I'll leave it at that, I'll come back if I have any.

Henrik Ehrnrooth

Yes.

Operator

Thank you. We will now take our next question from Ben Maslen from Morgan Stanley. Please go ahead.

Ben Maslen

Yes, thank you. Hi, Henrik. Firstly just a question on China pricing, if I can, which you say is difficult and maybe the market level got a bit worse in Q4. Have you been able to offset this, do you think, with lower raw material prices over the last 12 months? And how are the gross margins in China that are in your backlog trending at the moment? That's the first question.

Henrik Ehrnrooth

Okay, so as you can see from our profitability development, we have done very well in that market to improve our overall competitiveness, including cost competitiveness. Raw materials is naturally one aspect of it but that's only part of it. Also the actions we have taken on our products, on our sourcing and so forth, have resulted in a good situation. So the relative margin has stayed at a good level. Clearly though, if prices are lower, then the absolute contribution is somewhat lower. But we have been able to perform well in that market. And, of course, you can see it from our results.

Ben Maslen

Thank you. Apologies about this echo. And then on orders, you've said in the statement you're seeing much faster growth in large projects at the moment. So of the €8.2 billion order book, can you give us any sense of how much of that is large projects and how much falls into 2017 and beyond, in terms of deliveries? I assume the length of that order book is still extending? Thank you.

Henrik Ehrnrooth

Eriikka, why don't you comment first on the structure of the order book. And I can then talk about the trends.

Eriikka Soderstrom

So as we have communicated earlier already, so the situation is about the same. So from the order book, about one-third is longer, major projects. They usually take from two to five years to complete.

Henrik Ehrnrooth

When you said, Ben, that we've seen now more growth in major projects, again that's a quarter-to-quarter question. If you remember when we had our Capital Markets Day, we talked about this, until then year-to-date our growth had been more driven by the volume business. Now in the last quarter was more larger projects. So again, I wouldn't -- it's quarter-to-quarter fluctuation between these -- between two categories. But as you said, over the past years, structurally, that rotation has become a little bit longer if you look over two years then orders received in major projects has grown even faster.

Ben Maslen

Got it, thank you. Then just finally on the services or maintenance market in China. Sorry, I missed it earlier, can you just say how fast that's growing? And would you expect it to slow down with a lag as the equipment business starts to slow down or do you see opportunities to penetrate that market further? Thanks.

Henrik Ehrnrooth

So we were clearly above 20%, again, growth in maintenance in China. We have to remember that the units that we're converting now, what have been installed, perhaps on average a couple of years ago. So we continue to see a good backlog of conversions. And we see that that opportunity is definitely there. So the market is developing well and it's growing. We have to also remember that every time we get the higher maintenance base, we have to convert even more every time to maintain that growth rate. But we have been able to maintain a very good growth rate over the past years.

Ben Maslen

Got it, thanks Henrik.

Operator

Thank you. We will now take a question from Erik Karlsson from Bodenholm Capital. Please go ahead.

Erik Karlsson

Thanks for taking my question. I had a question on the maintenance business and specifically about the competition balance. I think you said the competition balance was negative in 2015 but less so than in 2014. We know you as a very ambitious company, what's the target here for 2016? Do you think you could go into net positive competition balance in this year potentially?

Henrik Ehrnrooth

Well, to have a target, anything but positive would not be like us. So clearly we have a target of being positive and capitalizing on all the good actions we're taking in our maintenance business. Is it easy? Absolutely not. Are we going to get there? Let's see. We are working very hard on that. I think the most important thing, though, in the maintenance business last year was good improvements we had on overall growth in number of units we converted. So that was what was really driving our growth.

Erik Karlsson

Can I just ask a follow up on that? You talked about the maintenance market that is broadly similar in growth profile 2016 versus 2015. Then on top of that, we have conversion at continued good levels, maybe even a little bit higher in some regions such as China. Then you have a competition balance potentially moving from a small negative to, let's hope then, a small positive perhaps. Is there any reason to believe that maintenance growth would not be higher in local currencies this year than it was last year?

Henrik Ehrnrooth

We don't guide each individual business. But clearly our ambitions are -- we continue to be ambitious. Just remember that in maintenance, there are many different aspects to our maintenance growth. There is the conversions, there's the competition balance, then there's acquisitions. Then the units taken out of use, which continues to run at about 1% of the maintenance base. Then we have repairs and spare parts and things like that and there we also performed well in the past year. So there are many different things that come into it. But of course, the most important thing is conversions. So of course, we have a good objective to grow. So when you say the markets are growing, where is the market growth coming from? It's clearly coming from the conversions. Then the point is that we need to, of course, capture as many of those conversions in the market as possible.

Erik Karlsson

Sorry to harp on this but on the conversion rates then, are you seeing declining conversion rates anywhere?

Henrik Ehrnrooth

No, we're not seeing declining conversion rates anywhere. If we look at the total mix for Kone, given that China also here becomes more important, then the overall average perhaps not moving forward because China conversion rates are lower. But overall, good growth in absolute number of conversions.

Erik Karlsson

Very good. Thank you very much.

Henrik Ehrnrooth

Thank you.

Operator

Thank you very much. We will now take our next question from Manu Rimpela from Nordea. Please go ahead.

Manu Rimpela

Good afternoon, can you hear me?

Henrik Ehrnrooth

Yes. Very well.

Manu Rimpela

Okay. A few questions from me. Firstly, can you give us some better understanding on the visibility that you have into the pipeline in China of new projects and what kind of monitoring systems do you have in place? So last year, you find tuned the outlook for China as the year progressed. And just wondering, as to kind of how are you assessing the outlook? You have for 2016 a 5% to 10% decline and what other monitoring you have in place in order to see that you're progressing along with that?

Henrik Ehrnrooth

So of course, there is not one source of information we use. We have to remember that we have a very broad organization in China with a network throughout the country. So of course we look at, well, everything, from macro data, we look at feedback from our customers, we look at our tendering pipelines and so forth. All of this goes then into what is our best view of the market today.

Manu Rimpela

Okay. Then second question, could you give us some light on how the profitability by the different reporting segments developed compared to the previous years? You've mentioned that you saw Chinese new equipment margins still improving but less new equipment as a whole saw improving margins. So just help us understand where the improvement came on a divisional level?

Henrik Ehrnrooth

So first off we don't -- as you know, we don't break down our margins by various businesses. What I wanted to highlight, the reason I highlighted China was that we know it's a challenging market but what we've shown last year is that also in that kind of a market, we performed very well. And we improved our profitability last year. Our EBIT improved because of improvement on a broad basis both in service as well as in new equipment and in many different geographic regions. Given the absolute growth of new equipment which was -- for the full year, our new equipment growth rate was double digit, it was about 11% in comparable currencies. That's clearly had a strong contribution. And the strengthening of our competitiveness in new equipment meant that we were able to perform extremely well there.

Manu Rimpela

Okay, and final question, just to clarify. When you mentioned the Chinese maintenance growth of more than 20%, so is that on organic currency basis -- or organic basis and not including currency impacts or including currencies?

Henrik Ehrnrooth

Local currency. So all organic, local currency growth.

Manu Rimpela

Okay. Thank you, no further questions.

Operator

Thank you very much. We will now take our next question from Justin Bracken, AllianceBernstein. Please go ahead.

Justin Bracken

Thank you. Good afternoon, everybody, good afternoon, Henrik. I would like to ask three short questions. Two about engineer availability and one on China maintenance growth. I'll start with the engineer availability. So looking at your business model, Henrik, and having a sufficient number of qualified engineers is fundamental to your growth rates in terms of the impact of them or constraining your growth rate, particularly in high growth countries. Could you comment upon how big a concern is a potential shortage of engineers to Kone's growth rate? And how you can reassure investors that you're able to build up a sufficient number of qualified engineers in high growth countries particularly with the increasing safety standards in a few places?

Henrik Ehrnrooth

So I think that where you need capacity to be able to grow new equipment business you need in engineering when you design the products, particularly if you have non-standard products. Then you need to have competent field people, supervisors and installers. But very much the supervisors who are supervising and testing and commissioning the installation of new equipment. If we look at our development over the past years, I think we have a pretty good track record of doing that. We invest quite a lot in field competence development to make sure that we have those competencies there. And of course, we are able to move around resources around the company when growth rates between different areas change. Where do we need most new competent people on supervising and testing, commissioning and so forth? It's clearly in countries such as Southeast Asia where we have had a lot of growth over the past years. But we are building it up. North America is also growing, so we're building it up. It's something we've been dealing with for a long time so I'm not -- of course it takes a lot of effort but I'm not too concerned about that.

Justin Bracken

Okay, thank you. And lastly, a quick question about what's driving your maintenance revenue in China. You're quite positive about maintenance growth here, as you mentioned in your presentation. Could I ask if this revenue is purely driven from your own installed base or are you acquiring maintenance, if I can use that phrase from other people?

Henrik Ehrnrooth

It's 100% organic. Converting Kone installed equipment to our maintenance base. So virtually all of our units we service in China are Kone or joint Kone branded.

Justin Bracken

Wonderful, thank you very much.

Operator

Thank you. Our next question comes now from Martin Flueckiger from Kepler Cheuvreux. Please go ahead.

Martin Flueckiger

Yes, thanks for taking my questions. Martin Flueckiger here from Kepler Cheuvreux. A couple of questions if I may. I was firstly wondering, what you think about the growth rates currently seen in the European new equipment and modernization markets? I know you've talked about it in qualitative terms but I was wondering, whether you could put a number to it? That would be my first question. Then the second question would be on orders received. I think if I've read this correctly, you started to register orders received differently now. If you could explain what exactly has changed and why you've decided to change that format? And then thirdly on orders received again…

Henrik Ehrnrooth

One question at a time. Sorry to interrupt, can we take -- maybe take the first two questions and then you can come back with your last one.

Martin Flueckiger

Okay.

Henrik Ehrnrooth

So first of all, Europe growth, there some markets are growing well. It's particularly in Central and North Europe they are growing well. And there, we have been able to in the second half, particularly, of the year, we have clearly had a strong double-digit growth rate. Germany is doing very well. The U.K., Sweden and some other markets around also doing quite well. So in the good markets, we are clearly growing at double-digit rates. Then we have not changed anything in our principles of how we book our orders received. I think what you probably refer to is that we've just explained it a little bit more in detail in this interim report. But otherwise, no changes to that.

Martin Flueckiger

Okay, thanks. And then my last question would again be on orders received. They grew by 5.6% in local currencies in 2015, 11.9% in 2014. And yet you're guiding for net sales growth of 2% to 6% at comparable exchange rate for 2016. So I'm wondering, why does Kone think that sales growth will be below order intake growth over the past two years? Many thanks.

Henrik Ehrnrooth

First of all, you have to remember that order intake covers only a part of the business, the order bound business. But I would say that first of all, we expect to continue to grow in 2016. Secondly, what we discussed a little bit earlier, what Guillermo was asking about, was more mix towards major projects and North America. There, the rotation of the order book is slower than in some other markets. So we're seeing a little bit of a shift in the order book from a mix perspective. And perhaps in China, a slight slowdown in the rotation. But as I said, the key thing last year was a very good -- continued good deliveries. So all of this brings a mix and with that we expect to achieve the growth that we are guiding for.

Martin Flueckiger

Okay, many thanks.

Henrik Ehrnrooth

Thank you.

Operator

Thank you. We take our next question now from Antti Suttelin from Danske Bank. Please go ahead.

Antti Suttelin

Thank you. You know, China, China, China. You just said you've improved your China margin in 2015. Where are we now with China versus rest of Kone in terms of EBIT margin? That's my first question please.

Henrik Ehrnrooth

China has a very good margin, it would be above Kone's average margin.

Antti Suttelin

Okay, so Kone China is higher than Kone on the average. And then we know that China is very much still steered towards new equipment. So new equipment margin must be the driving force there. Is it -- do you really think that the Chinese new equipment margin can remain on a strong level given that the market is now falling for the first time in the history?

Henrik Ehrnrooth

Well, as you saw when I explained what we did last year. We have very good competitiveness, so we're working for that all the time. But I would also say that we are improving in other parts of the world. So of course, our overall profitability comes from mix, what we deliver from various parts of the world. We are -- globally we are in a good position from a competitiveness perspective and that's how we plan to drive our business going forward.

Antti Suttelin

But that's specifically on China new equipment, are you budgeting for still improving margin or same margin in China new equipment as you had in 2015 or how are you thinking about that?

Henrik Ehrnrooth

First of all, Antti, as you very well know, we don't guide for various businesses or go through what we have as specific budgets. I think our commitment is the overall guidance that we have. And clearly, the market is more challenging in China. But as I said, in Chinese market, we are in a pretty good spot with our competitiveness. Do we have to continue to improve that? Absolutely. So our margin development will be dependent on how we can continue to improve our competitiveness in that market. It's as simple as that.

Antti Suttelin

Yes, I just wonder what is the reason that the Chinese equipment margin wouldn't converge to the same level where it's at globally?

Henrik Ehrnrooth

Well, I don't know if everyone has margins like us in China. I think we are very competitive. And then we have this -- of course, when services become a larger share and that's also a good business in China, no question about that. So we see opportunities from many different perspectives.

Antti Suttelin

Yes. All right, thanks a lot.

Henrik Ehrnrooth

Thank you.

Operator

Thank you. We take now our next question from Phil Wilson from Redburn. Please go ahead.

Phil Wilson

Yes, good afternoon, everyone. Thank you for taking my questions. I've got three, please. Firstly, your U.S. new equipment market outlook for 2016 appears to have been toned down a bit compared to the growth you saw in 2015. Can you give some commentary why you see a slower rate of growth in the U.S.? As I imagine the residential side of your exposure still should be pretty strong, given the multi-family shift. That's the first question.

Henrik Ehrnrooth

So we expect a continued good development of the North American and U.S. market in particular. But you have to remember, the market is already at a high level. So we continue to expect a growth from a high level. So I think that that's quite a good situation. That's just in summary how it is.

Phil Wilson

Okay, so no particular end markets within the U.S. that you see as softening?

Henrik Ehrnrooth

Not necessarily.

Phil Wilson

Okay, thank you. Secondly, apologies if I misheard this, but did you say that your growth in China in 2016 may be more in line with the market than it has been in the past? So your market share gains easing? And if that is the case, can you comment why you expect this to happen?

Henrik Ehrnrooth

What I said is that our ambition continues to be able to outperform the market and that feels pretty good when we look at full year, for example, that we can do that. What I said is, we're probably looking at more even developments throughout the year rather than a very first half weighted.

Phil Wilson

Oh okay, thank you, that's clear. And then finally, I imagine that the strong maintenance growth, 7.5% in the quarter, is helped by the mix of this Chinese growth growing at 25%. As this mix changes in your maintenance revenues, are you able to maintain the same level of EBIT margins in maintenance?

Henrik Ehrnrooth

In our business of course they vary from market to market. But overall, we have good margins in our maintenance business. But I think the most important thing is that to achieve on a maintenance base that you have a growth of 7.5%, it was not only China. We actually grew in all geographic areas. There was a good performance across the board.

Phil Wilson

I know this is often asked, but as it becomes more material, can you give a little bit more color as to where the Chinese maintenance margin sits?

Henrik Ehrnrooth

They sit at a good level.

Phil Wilson

Okay, thank you very much.

Henrik Ehrnrooth

Thank you.

Operator

Thank you. Our next question comes now from Daniel Gleim from MainFirst. Please go ahead.

Daniel Gleim

Yes, hello, everyone. Thank you very much for taking my question. The first one would be on the lead period in China. I think during the Capital Market Day, you mentioned that the lead period between order intake, new equipment and revenue recognition for new equipment is around six to nine months. Then you mentioned in the call today that there has been some changes in the order book rotation. Could you please comment within your guidance for 2016, what is the expected lead period between order intake and revenue recognition in China?

Henrik Ehrnrooth

As I commented firstly, there is no significant changes. What I said was we experienced last year was a slight lengthening. But at the same time, it's important to remember if you look at our top line growth, our deliveries have been very strong in China last year. Actually we did very well there and so no dramatic changes. The biggest difference from a rotation perspective is in geographical mix. A mix between -- if you look over the past years, between volume business and major project business.

Daniel Gleim

So given that the order intake has been rather stable the last quarter and this quarter, we should expect flattish revenues in the second half of 2016 in China. Is that the correct way to look at it or am I missing something?

Henrik Ehrnrooth

Well, we don't guide specifically quarter by quarter or by market. We have our overall guidance and we have to see how the Chinese market develops. When we look at our overall situation, we are look at a 2% to 6% growth for the full year. And this of course -- as always, there are fluctuations quarter-to-quarter.

Daniel Gleim

Okay. Maybe then briefly on the recognition of maintenance revenues in China, am I correct that there's a difference between the recognition and the maintenance base that is that after you have installed the new equipment, you would record revenues during the initial service period in the maintenance business already?

Henrik Ehrnrooth

So you accrue a part of the new equipment revenue and then you recognize that over the first service period, which is part of your new equipment price when you've sold it.

Daniel Gleim

But it's recognized within the maintenance business?

Henrik Ehrnrooth

Yes.

Operator

Thank you. We will take now our next question from Tomi Railo from SEB. Please go ahead.

Tomi Railo

Yes, good afternoon. I hope you can hear me. I think I need to come back on the China and 2016. Are you expecting revenues to grow in China in 2016?

Henrik Ehrnrooth

We don't -- we are guiding for full revenues, we're not guiding for specific markets.

Tomi Railo

But have your order backlogs been up in China in the end of 2015?

Henrik Ehrnrooth

We have a strong order backlog both in China and rest of the world as well. So we are in a good situation there.

Tomi Railo

Thank you.

Operator

Thank you. We now take a follow-up question from Guillermo Peigneux. Please go ahead.

Guillermo Peigneux

Thank you very much. Just a follow up on pricing again. Is there a month or a period in the year in which the main operators in the Chinese market announce those price decreases or is that on an order-by-order basis?

Henrik Ehrnrooth

There are no such thing as people who announce prices or something like that. You have to remember that pricing is something -- each individual order is a negotiation between us or someone else and a customer and when you have enough of these, it becomes a market price. And that's where pricing is then formed. And we of course make a view of what our understanding was of all of these transactions at what prices they've happened. So it's natural to say it's an ongoing process, it's not a step change at any point in time.

Guillermo Peigneux

Okay, thank you.

Operator

We have now another follow-up question from Andre Kukhnin from Credit Suisse. Please go ahead.

Unidentified Analyst

Hi, it's [indiscernible] again. Yes, I have two quick follow-ups. How much is maintenance of China revenue at the moment? Is it still below 10% or has it gone past it?

Henrik Ehrnrooth

Still slightly below 10%, yes.

Unidentified Analyst

Okay. And the second question is what's your split between tier 1 and 2 versus tier 3 and 4 cities at the moment?

Henrik Ehrnrooth

So the Kone brand in particularly would have more than 50% of the business in tier 1 and tier 2 cities. What would you say, Eriikka?

Eriikka Soderstrom

I would say our second brand would be the opposite. So the total would be about 50-50.

Unidentified Analyst

The total would be 50-50?

Henrik Ehrnrooth

[indiscernible].

Operator

Thank you, has it then answered your question?

Unidentified Analyst

Yes, sorry, the line broken. Thank you very much.

Operator

We will now take another question from Erik Karlsson from Bodenholm Capital. Please go ahead.

Erik Karlsson

Thanks for taking another question. I wanted to know on the North American markets, you've shown very good developments also versus the market growth. Of course the trend to machine-room-less elevators are helping you here. But are there any other ways you're strengthening your competitiveness that can explain the strong performance versus the market here?

Henrik Ehrnrooth

Yes, good question. So one of the areas, naturally, the shift from hydraulic towards machine room-less and we are being very strong in machine room-less, so that's why we're taking bigger market share all the time there. But I think we have also, if you look at North America, our product competitiveness, particularly for the segments are growing well, is strong. And we have had good development and strengthening of our field operations, so that we strengthened that way also our overall competiveness. So again, as you know in this business, it's not only about the product, it's how we can install it in the field. And I feel that we have had a good development in both. And the segments that are growing, that's where we have a good competitiveness as well.

Erik Karlsson

Thank you very much.

Operator

Thank you. Another question now also from Martin Flueckiger from Kepler Cheuvreux. Please go ahead.

Martin Flueckiger

Yes, thanks for taking my follow-up question. Just a clarification question, very quickly. Did I understand you, Henrik, correctly that you were mentioning a €20 million headwind from currencies on EBIT in 2016?

Henrik Ehrnrooth

What is included in our guidance and that's -- we said that if currencies would stay at the average level of January, that's what would happen. Where currency is going to be for the full year, that's -- unfortunately we don't know. But with the current level, it would be a roughly €20 million headwind.

Martin Flueckiger

On EBIT?

Henrik Ehrnrooth

On EBIT, yes.

Martin Flueckiger

Thanks so much.

Operator

Thank you. We now take a question from Michael Kaloghiros from Bank of America.

Michael Kaloghiros

Yes, hi, good afternoon. Thanks for taking the question. I think, Henrik, you highlighted that there is some cash flow in the year and you basically ended up the year with net cash of €1.5 billion. My first question would be, at what point of financial structure would you consider doing something with that cash? Maybe returning it to shareholders? And my second question is, if you don't see a return to shareholders as imminent, are you seeing anything in terms of transaction activity, especially on the maintenance operators in Europe, for example, now that the markets have kind of stabilized?

Henrik Ehrnrooth

So first of all, I think we're again handing out quite a lot of cash to our shareholders in March, so long as the shareholders' meeting decides on the proposed dividend that that would be I think around [€730 million] or something like that that we would pay out in March. So that's, again, a good growth in our dividend. But, yes, we will continue to have a strong balance sheet also after that. And nothing has changed here, we continue to be interested in finding acquisitions. Last year we bought, I think, 23 companies again. So we continue to buy. They are small but also naturally have appetite for bigger targets. So that's why we think it makes sense to maintain a strong balance sheet.

Katri Saarenheimo

I believe we will be running out of time soon. Is there still a final question from the line?

Operator

We have one final question in the queue here. We now take the final question from Daniel Gleim from MainFirst. Please go ahead.

Daniel Gleim

Yes, thank you very much for taking my last question. Eriikka, could you please elaborate on the disconnect between reported net interest and the cash interest within your cash flow statement? I assume it has something to do with the dividend payment from Toshiba potentially, a revaluation loss from option liabilities? Could you elaborate on that please?

Eriikka Soderstrom

Yes. So we have two extraordinary items now reported in our 2015 numbers in that sense that impact on our -- well, the option liability-related acquisitions, we have had and the impact there is around €37 million, FX impact about €10 million. But the bigger one, which is exceptional for 2015, is this dividend almost €120 million coming from Toshiba as Henrik was describing earlier.

Daniel Gleim

Okay, thank you. Maybe one last on the order intake. Have there been any extraordinary high orders in the fourth quarter or would you call this business as usual?

Henrik Ehrnrooth

Business as usual. As always, sometimes you have big orders, sometimes not, but that fluctuates quarter-to-quarter. But I would call it quite business as usual.

Daniel Gleim

All right, thank you very much.

Henrik Ehrnrooth

Thank you.

Katri Saarenheimo

Okay, thank you very much, everybody, for your participation today. It is time to conclude the call. So we would all like to thank you very much and wish you a good rest of the day. Thank you.

Henrik Ehrnrooth

Thank you.

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