Kone Oyj's (KNYJF) CEO Henrik Ehrnrooth on Q1 2016 Results - Earnings Call Transcript

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Kone Oyj (OTCPK:KNYJF) Q1 2016 Earnings Conference Call April 21, 2016 8:45 AM ET

Executives

Katri Saarenheimo - Director, IR

Henrik Ehrnrooth - President & CEO

Eriikka Soderstrom - CFO

Analysts

Lars Brorson - Barclays

Andre Kukhnin - Credit Suisse

Phil Wilson - Redburn

Antti Suttelin - Danske Bank

Martin Flueckiger - Kepler Cheuvreux

Manu Rimpela - Nordea

Ben Maslen - Morgan Stanley

Daniel Gleim - MainFirst Bank

Katri Saarenheimo

Good afternoon and welcome to Kone's Q1 Results Webcast, here in Espoo, Finland we have today our CEO Henrik Ehrnrooth and CFO, Eriikka Soderstrom. I am Katri Saarenheimo from the Investor Relations.

As usual we will start with a brief introduction to our quarterly figures and the trends in the markets that we saw during Q1. After this we will have plenty of time for Q&A and discussion. Henrik please.

Henrik Ehrnrooth

Thank you, Katri and also welcome on my behalf. It's my pleasure to share you with you the good operating performance we had again in the first quarter and also share with you some exciting news on how our market share developed last year something we tend to do in connection with our first quarter results. But as usual what I'll start with is going through our key figures. Then we go little bit deeper into orders received, sales and EBIT. I will talk about how we're developing Kone, how markets are developing as I mentioned, market share and then finally our outlook. Well let's go straight into how our year started. We had strong operating performance in the first quarter, although orders received declined slightly, but we're at a good level of €1.9 billion.

So orders received declined at 5.4% or 4.3% in comparable currencies. Our order book remained strong, it's at more than €8.5 billion, in fact exactly the same level as it was last year but in comparable currencies it has grown by 7.6% from last year. Our sales has continued to grow. It was now €1.7 billion growth or 3.4% or 4.2% in comparable currencies. The most important point with our sales growth was it continued to be profitable and that we can see some of the factors are EBIT continue to grow, it was €221 million and EBIT margin improved from 12.5% to 12.7%. Our cash flow was strong at about €306 million and that shows that also in a more changing environment that we have had many places challenging and competitive environment, we have maintained good and healthy business practices and therefore maintained a very good cash conversion in our business.

Also, our earnings per share grew very well from €0.29 to €0.37. The strong growth gave [indiscernible] improvement in EBIT, but also in our financial items, we now had a positive impact from the reevaluations of options related to acquisitions. Whereas that same line had a negative impact last year, so we saw a little bit impact from this one as well and I would like to say that good performance, such as this in a challenging environment. It's not possible without a motivated, dedicated team with a clear direction how to develop the business. So again, a very big thanks to all of Kone's employees for very good job done during the first quarter of the year. So that's the key figures.

Let's start little bit deeper into orders received to start with. So orders received decline of 5.4% or 4.3% in comparable currencies. They declined due to a decline in China, the market declined at about 8%. Our orders received decline in units, little bit over 10% and value a bit more than that. However what was good is that we were able to compensate quite a lot of this with good development again in both North America as well as in Europe, Middle East and Africa and a few other markets. Europe, Middle East and Africa, we had broad based good development, strong growth in the Middle East and good development in Central and North Europe. And this was very broad based, this good development.

Also in North America, we continue to grow and we grew from a high and strong level, so that was positive. Also, if you look at Asia Pacific outside of China, good development in particular in important India market where we had a good growth. If you look at our various businesses, the best performance was in our major project business as well as in modernization and then we had a decline in our volume new equipment business. In a competitive environment that we're living in of course pricing is very important. In this environment, we have been very focused of pricing refining good opportunities and we can see from our competitiveness that it's good and therefore we have been able to maintain healthy margins at a relatively stable level even in this environment. So again, the performance shows that our competitiveness is strong and we have good positions going forward from here. Then turning next to sales, we continue to grow 3.4%, 4.2% in comparable currencies.

First, look at it geographically, the strongest growth was in North America at 11.3% and we also grew somewhat in Asia Pacific, whereas Europe, Middle East and Africa was more stable. In this quarter, we now had the fastest growth in our services business driven by very strong growth in modernization. Our maintenance business also continued its healthy growth, although it was slightly lower than we had last year. We had continuous very strong growth in Asia-Pacific, solid double digits in China over 25%, the slightly lower growth was due to a slightly slower start in Europe, but we have to remember that the end of last year was very strong and that perhaps slightly impacted the beginning of this year.

New equipment business was no more stable, but again here let's remember that follows a very strong growth in quarter four. So overall I would say good progress in sales as well. Then if we go to operating income, our profitable growth continued, EBIT was €221 million and we improved our margins from 12.5% to 12.7% and here perhaps the most important factor was the improvement was very broad based, across geographies and across businesses, the best improvement was in North America and in Asia-Pacific. We have continued to increase our investments in areas that support our competitiveness in the future, such as R&D, IT, process development and also by expanding our footprint in some of the key growth markets around the world. Last year, if you remember we had a good tailwind from currencies now, we have a slight headwind from currencies this year.

So there was a slightly negative impact from that overall, on our EBIT, but most important point here is that profitable growth continued. If we then turn to our business mix, here what we have seen for many years is the share of new equipment is increasing, however, now of course with strong growth in modernization, the share of modernization increased almost now 13%, maintenance were stable and then share of new equipment, slightly lower than last year. Geographically also, what we saw the trend during the second half of last year, the share of North America growing and as we can see was now 18% and that is good there is a little bit more balanced overall sales from various geographic areas. So, this was key financial development for the first quarter.

Let me turn next how we developed our business and markets, overall developed and let's start with some highlights from our development programs. As you know we started our current development programs in 2014 the three years these development programs so we're in the final year, very much pushing the accelerated to have a strong finish. We have achieved a lot in these development programs, but there's still a lot to be done. Couple of highlights our winning team, true professionals development program continues to have high activity and strong focus. Our objective is that our people is a key differentiator for Kone when our customers look at us. We have continued to pull people's opportunities for development through job rotation and also we have over the past years now rolled out more broadly and mobile training tools to be able to bring better training to our people and in particular people who work out in the field more than half of our employees are out in the field every day and again what we have done is again supporting every Kone employee to perform at their best.

I've talked about many other areas where they have taken action to help every Kone employee to perform at their best and this again a feature in how we're bringing better training solutions for them. In our Preferred Maintenance Partner here important milestone was the agreement that we signed with IBM to start co-operation with them and using their Watson IoT Cloud platform. With this we will collect data from our equipment to be able to improve the quality, reliability of our equipment, improve the performance for our customers, but also in providing new services and new ways for working with our customers. This has started very well and it will truly transform how we do service and what's happened in our industry over the coming years. So an important and good milestones in development for us. This is last year we have high activity within all of these programs and then we're looking forward already to next phase. Let me then turn to what's happening in our markets.

Let's start with the new equipment market and what happening in those in the first quarter. Let's start with Asia Pacific, that's also very important new equipment and here the markets weakened following the market decline in China. I mentioned already, the market in China declined. Our results in a while I will go through that little bit more in detail. But markets in India and Australia, continued to grow, other markets though in the region remained more varied. In China particular price competition continued to be tough. In Europe, Middle East, Africa good growth in Central and North Europe that we saw also during second half of last year and that has continued and also in South Europe we started to start to see the markets are known stabilizing.

So no longer declining as they have been and more stabilizing and the Middle East, there are still good opportunities in that market. North America, the markets may grow slightly driven by United States members that I think the U.S. markets are at a strong high level and they grew bit further from there. So you can see a good momentum in that market continuing. And also because of the strong markets pricing has improved somewhat in the U.S. market. So let me pause a bit now and look more into China. As I mentioned already that the markets in China declined measured in units by about 8% in the first quarter. And this was very much in line with our expectations, the markets remain challenging and the competition for market share is high. Again, here is important to remember that China is not one homogeneous market. We're very divided markets with the strong situation in Tier 1 and many Tier 2 cities whereas the situation in may Tier 3 and 4, lower-tier cities is very challenging.

So the overall market situation remains challenging in China. However, if you look at the property markets, we can also see some positive news. Real estate investments have increased by more than 6% in the first quarter, new construction starts after a clear decline last year, now has to start to grow, grow at 90% in the first quarter and property transactions have increased by 33% in the first quarter. So the increase in transactions has reduced inventories in all Tiers of cities so the situation in Tier 1 and many Tier 2 cities it's a healthy good level. Although in Tier 3, 4 and lower-tier cities inventory levels continue to be high. So let me say that Kone, our orders received declined by bit over 10%. So we declined more than the market. Why is this? After a very long and consistent outperformance of the market. But first of all, as the largest player in the market, we clearly took the approach beginning of this year that the priority for us was to maintain a commercially healthy business. We're by far the market leader and we felt that this made a lot of sense in the first quarter.

So I would say, the first quarter went very much in line with how we had expected. When we look at the situation going forward, what the priorities for us are to have a very deep understanding of the market, so that we can find the good opportunities we can continue to find good pricing. If you look at our ambition, that hasn't changed at all. Our ambition continues to grow faster on markets and to grow profitably. Those are important part of our ambition. And I must say that I have no doubt that we can that this wouldn't be possible, we can definitely do it because there is strong competitiveness, we have a strong brand, we're very broad distribution and we have a good team in China.

So overall, we have a good situation in a market that is a moment quite challenging. So that about the new equipment markets and China more in detail. Let me then turn to the service markets and it starts with maintenance. Here, the trends of the maintenance markets have remained pretty much the same. In both Europe, Middle East and Africa and in North America markets are growing, although clear variations from market to market and price competition continues to be intense. Although Asia-Pacific markets continue to grow at a good rate following the strong new markets over the past years there and the good thing is that we're really capitalizing on this good growth in the markets in Asia Pacific. In modernization, as we already indicated in connection with our first quarter results and we're starting to see a bit better market development from a global perspective and this has continued and there see Central North Europe where the markets are improving, but driven by market such as UK, Germany and a few other markets.

And also if you look at South Europe, we're seeing more stabilization now following a decline over the past years. In North America modernization markets grew slightly from a high level and continue to grow in Asia Pacific. So overall maturization go in a slightly better direction. As I promised in the beginning, happy to share some exciting good news about our market share in 2015 overall. So if you look at the global markets in 2015, the total market was about 840,000 units compared to about 850,000 units in 2014. For the ones of you who are reading carefully now, remember that last year we said that the global new equipment market was 815,000 units and I would say 850. So we have slightly reassessed the markets based on better understanding over a number of markets including Iran that we bigger than we expected a year ago but the most important one is the development of the market. So if you look at our development the markets declined by about 1% whereas we improved, we grew at about 5%. So we continue to take market share by over 1 percentage points.

So our market share increased from about 18% based on reassessed figure to little bit over 19%. And the most important thing here is that our market share grew on a very broad basis. We grew our market share strongly in China. We grew our market share by about 2 percentage points in the U.S. and we also grew our market share clearly, in Europe, Middle East and Africa as well as in Asia outside of China. So a very important feature of last year was that we were able to grow and increase our market share on a very broad basis and I think this speaks a lot about the competitiveness we have in the market. If then look at the equipment base in the world, that's about the end of last year they are about 13.5 million units in service overall growth coming across mainly from Asia, but the continued good growth in the total service base in the world. You can see that Europe, Africa, continues to be the largest market in the world, with 43% of all-installed equipment and China is now 28%.

I think it's very exciting to look at this picture and see what the growth opportunity that we will continue to have in our industry. If we think about where majority worlds urban population are and where they are growing it's in Asia where the big development is happening. And we have more people living in urban environments in Asia than in Europe for example and there more and more people of course leaved in higher buildings that need elevators. So we can see the penetration, improvement that can still happen for a long term in overall Asia-Pacific and in China. And we're also those are growing markets in rest of the world.

So we'll continue to see a good continued growth opportunity in the services business in this industry, if you then look at our market positions which are strong. If you look at our market positions in new equipment business, Europe, Middle East and Africa we're number two player. In North America we have clearly strengthened our positions and now we have caught up with the competition and we're already have shared number 3 place, so a very strong improvement over the past years. In China, we strengthened our market leader position and also we grew in Rest of Asia-Pacific, but we were also the market leader. So you can see new equipment we have had strong positions.

In maintenance we continue to be a challenger Company and because of that our ambition is to continue to grow faster than market and we can see that we're number 3 in Europe, Middle East and Africa, number 4 in North America. Although in Asia we have strong positions in both China and Rest of Asia-Pacific, what is most important from this picture is knowing we have a very strong position in new equipment in Asia-Pacific overall and that of course gives us great opportunity to continue to capitalize on the growth in the maintenance base in the years going forward.

So again this picture shows our good positions we have when we look at the situation going forward. Good news on market share and, then finally touch on our outlook which is unchanged, let's start from market outlook which is unchanged from what we said in connection with our full year results. Here we expect the new equipment market in Asia Pacific to decline, driven by decline in China of 5% to 10% and we expect the price competition to continue in that market.

Rest of Asia-Pacific we expect to see some growth particularly in India, Australia. Europe, Middle East and Africa market is expected to grow slightly due to the growth in Central and North Europe and we start to see more stable markets West and South Europe and quite stable also in Middle East. In North America, we expect the markets to grow somewhat from a strong and high-level. Maintenance markets are very much the same trends as we have seen before, some growth although varied in both North America, Europe, Middle East and Africa and continued good development of the markets in Asia-Pacific. And in modernization we expect the markets to grow slightly in Europe, [indiscernible] central and North Europe, more stable in South and continued growth in North America and Asia-Pacific. So very much the same as we said in beginning of the year.

Our business outlook is also unchanged. We expect our sales to grow between 2% and 6% in comparable currencies and we expect our EBIT to be in the range of €1.220 billion to a €1.320 billion, the only slight change here is that now we say that we assume here translation exchange rates remain approximately at the average level of January to March and we've previously said of course, the average level of January, euro has slightly strengthened since beginning of the year which means that the currency headwinds are a bit more than we had predicted at beginning of the year, so maybe €30 million-ish at these rates. But we're still maintaining our outlook intact.

So with that, we can see continued good operating performance, strong development in our market share last year and the good development we had many parts of the world, we're able to in a very good way compensate for a decline in China. Then very good confidence and looking forward, our competitiveness is strong good brand, good distribution and a strong team across the world. So with that, happy to turn to questions.

Question-and-Answer Session

Operator

A - Katri Saarenheimo

Thank you Henrik. And let's start with the questions from those present here in [indiscernible] Finland.

Unidentified Analyst

The comment about not wanting to maximize growth in China in this in the first quarter and then that against your ambitions still to grow faster than the market, is it fair to assume that during this year, you would have the same attitude as in Q1 that you wouldn't be looking to maximize growth in this market situation or before the market gets stronger? How should one see that?

Henrik Ehrnrooth

We don't make comments on the commercial approach we're going to take going forward. I think what I'm talking about is what continues to be our ambition level and then we have to see how we develop.

Katri Saarenheimo

Thank you. And let's enter into the questions from those present on the line. Operator, please.

Operator

[Operator Instructions]. We will now take our first question from Lars Brorson of Barclays. Please go ahead.

Lars Brorson

Couple of things if I could. Just on pricing, Henrik. I take the point you're being more disciplined on pricing, obviously the loss of market share implies that orders aren't it. Can you talk a little bit about where in the market you're seeing pricing pressure and also where we're on pricing? I think earlier, we've talked about down to the mid-single digits year-over-year on an apples-to-apples basis, have you seen that further the deteriorating in Q1 and what's different here in your approach from what you did in 2015? Thanks.

Henrik Ehrnrooth

Well, first of all when we talk about market share, let's remember as we've always said that we don't measure market share on a quarterly basis. That is too short of the period, our development was very much in line where ourselves expected beginning of the year. Pricing trends overall have remained the trend overall has remained pretty similar to last year. So we're talking about probably, I mean very rough and it depends on segment and geography and so forth, but average roughly five-ish percent on average.

Lars Brorson

Okay. Can you comment little about on the competitive situation, as I said, I mean obviously I appreciate your point that the quarters would swing around, but obviously Q1 breaks a trend of five years of outperformance in China. So, it's important only from a factor, you are underperforming the market versus five years of outperformance, what are you seeing competitively and particular perhaps relative to your Western competitors in terms of pricing approach?

Henrik Ehrnrooth

So we don't comment on specific competitors, it's clear that we'll be saying competition market shares is high in the market. But I would again let's remember, we're talking about one quarter, quarters good overall orders received we're at a good level of €1.9 billion. Last year, we increased our market share strongly in China. So I think our development has been very, very good and we took this approach now in quarter one. I think it makes sense. The approach we took as the largest player in the market. But, clearly what we're saying is that the price competition is tough in the market, strong competition for market share. We're a players with high ambitions there and in a declining market, this is usually what happens.

Lars Brorson

Just secondly on your sales guidance for the year, sorry, the 2% to 6% growth, can you just talk about whether that is predicated on improvement in your order intake in Q2, obviously, China down, it must be have been 15%, 20% in value terms in Q1 that's a third of your 2016 sales, it should be of course lead times here or shorter. So it should impact your invoicing this year. Talk a little bit about what is embedded in your guidance for the year as far as your China developments in Q2 is concerned?

Henrik Ehrnrooth

Again I said earlier, we don't guide our orders received. We're very committed to our sales guidance. We have a strong order book, we're growing our service business and with that we have confidence to get to our guidance for this year and that's why we're maintaining it. I think that's what I can say on that. As you know, we don't guide or comment on how we expect our orders received to develop. But we have a strong and good order book. That's important.

Lars Brorson

I just wonder whether it was a pretty clear on the churn in China in Q2, but I understand. Just finally from my side, new equipment that was a bit surprised to see new equipment sales declining significantly, you obviously grown orders in EMEA in the last couple of years, but presumably that's been more driven by modernization. Can you talk a little bit about what the sales is in and what's driving that new equipment significant decline in the quarter? Thanks.

Henrik Ehrnrooth

We have to remember look at our new equipment overall, we had a very strong growth in Q4 seasonal we have a good order book in EMEA as well, so more seasonally lower sales now both of EMEA and other parts of the world. So, I don't think there was anything dramatic related to this.

Operator

Our next question comes from Andre Kukhnin of Credit Suisse. Please go ahead.

Andre Kukhnin

I'll go one at a time please. Firstly on non-China obviously could you let us know how did the Kone brand do versus Giant in Q1.

Henrik Ehrnrooth

Well as you know, we have two brands because sometimes one brand is doing better than the other, the features throughout last year was slightly better development for the Kone and Giant KONE now it has perhaps slightly reversed, but that's what we have two brands that they are going to develop in a different way in each time of the market. So that's not a big deal which one is developing better. We have two strong brands and that is how we approach the market in China.

Andre Kukhnin

Sure, that's what we sort of sense and given that the Tier 1 Tier 2 cities are doing much better and my understanding was that you sort of skewed the other way, just trying to understand, was that just a [indiscernible] or Kone having done perfectly well in Q1 2015.

Henrik Ehrnrooth

You also have comparison effect and others, so that was of course that we had remembered at Q1 last year for Kone overall and for the Kone brand was very, very strong.

Andre Kukhnin

And could you just help us to calibrate where you are right now across the whole portfolio in China in terms of the mix of Tier 1 and Tier 2 cities versus Tier 3 and Tier 4.

Henrik Ehrnrooth

The market is probably split about half and half, what we would be a little bit more in the higher-tier cities overall, as we have been in the past as well.

Andre Kukhnin

And the second question was just on the cash side, your orders declined and that normally say should lead to slightly less cash with prepayments, but the opposite seems happened on the working capital, so could you help us to understand the movement there a little bit better?

Eriikka Soderstrom

So first of all talking about that net working capital, that was negative minus €1.1 billion so very strong level and we saw a strong level of advance payments and also good collection of receivables. And I think what is important to note that we saw this improvement from all parts of the world and from China I can say that we saw a good strong cash flow from there as well.

Andre Kukhnin

Right and my sense is that what's been happening in China just of late is that there is acceleration in actual construction activity, trying to capture the higher property prices and that is resulting in kind of faster or step up in the stage payments and milestone payments to actually get the production going further basis, is that something that you've seen in Q1 in new operations?

Eriikka Soderstrom

Let me continue so, from the payment terms, I could say that is part of the pricing. Yes, the competition has been intense. But we have only adjusted in some cases the payment terms for our important customers nothing dramatic there.

Henrik Ehrnrooth

Andre, what we're saying is that we could see that we had good deliveries in China. So yes customers are taking deliveries and healthy cash flow like I said because we have maintained good commercial discipline in our business.

Andre Kukhnin

Right, so would you think it's a sort of the trend that can continue, because we have that extension in the backlog to sales conversion for three years I think and now it looks like there may be accelerating the other way, the orders sales should be shrinking is that something that you think is a sustainable trend.

Henrik Ehrnrooth

It depends a little bit which part of the world you look at, if you look at outside of China, the share of mid-sized and larger projects has increased over the past years particularly partly in each market, but also because of the strong growth in U.S., in China rotation continues to be good. We can see that our deliveries are at good level. So overall, you probably look at the slightly compared to some historical trend slightly longer order book rotation because of the mix on the order book, but again, no dramatic changes here.

Andre Kukhnin

And very final question is, I think you've launched kind of low-end product in China recently [Z Mini] for the sort of more kind of price sensitive customers, how would you expect margins to - these sort of products I think it sounds like sort of completely listed to any results.

Henrik Ehrnrooth

I can tell you Z Mini is for the residential segment, it is actually a very good product, it's more standardized and that's why we can make sure it's very price competitive but it's actually when you see it, when you use it, it's a great elevator, so we can deliver very good value to our customers at good pricing it's by very high standardization that you can become competitive in that. So I wouldn't call, it's a very good, very good product with the great and good value to the customer.

Andre Kukhnin

It was secondhand knowledge, I didn’t have a chance to test myself and hence the question. But it sounds like profitability on that should not be too different to kind of your average of the portfolio as a result?

A - Henrik Ehrnrooth, KONE Corporation - President & CEO [32]

We have a good product competitiveness overall.

Operator

We will now take our next question from Phil Wilson of Redburn. Please go ahead.

Phil Wilson

I'll do one at a time, firstly thanks to your help on Chinese pricing for the market. Can you comment where your pricing was the first quarter and how that compared to the fourth quarter? Thank you.

Henrik Ehrnrooth

But if we look, I think what we have commented earlier on pricing trends if you look over in second half of last year began on this year, I believe we have outperformed the market in terms of pricing slightly, I can't say by exactly how much, but clearly there are price pressures and price declines for everyone. But at the same time, we've been able to work quite well on our product competitiveness and therefore we have kept a good profitability in the business.

Phil Wilson

But how the outperformance flown a little bit in the first quarter as markets become more intense?

Henrik Ehrnrooth

I think overall, we had a pretty good performance in the first quarter on this. I can't say exactly, but our understanding is that we have, when we look over this period and we have outperformed the market.

Phil Wilson

Secondly, so China but taking including actions in property given that the very high price rise and we should on our Tier 1 quite strong but are you seeing the impacts of cooling when you look at your forward looking, it indicates like it's like tenders or customer dialogs that maybe some of the strong Tier 1, Tier 2 amount may not be sustainable?

Henrik Ehrnrooth

The cooling measures have just recently taken by the same time, there are two approaches the government is taking at the moment which I think is a very sensible. Cooling measures in some of the cities where prices have been rising very fast such as Shanghai and Beijing. But at the same time they are working very actively on reducing finding ways to reduce the inventory in weaker cities. So this is something we see but the fundamental driver in the Tier 1 and Tier 2 cities is one of the healthy level of inventories people want to move into the city. So that's not changing overnight and what they are doing on cooling some of the markets, I think is quite sensible.

Phil Wilson

Sure. Have you seen that impacting your tender activity yet?

Henrik Ehrnrooth

We continuously see a pretty good development in those markets. And I don't think we don't comment on our tender activity specifically but good activity in those markets still.

Phil Wilson

Okay and then just final question. The maintenance growth just a group level slowed in the quarter, since the 7.5 I would have expected to carry on accelerating because the Chinese maintained business becoming a larger part of the mix growing faster. So can you give some detail where maintenance glowed regionally, what growth that you're seeing in Chinese maintenance and why we're seeing a slowdown in your maintenance growth rate? Thank you.

Henrik Ehrnrooth

So, our maintenance grows in China continue to be very strong. As I mentioned already, it was over 25% quarter so continue to compound that's a very good level. We had a very strong finish to last year at 7.5% and they're very strong finish to last year in the maintained growth probably little bit impacted beginning of this year. So I wouldn't read too much into it. And the main impact was in Europe where growth was now a bit slower than last year.

Phil Wilson

One final question on, but when that construction in the so when you look at investments completions work in progress, why don't you take the elevator market's or any real improvement, is there a structural trend going on that's start to think about?

Henrik Ehrnrooth

Now you have to remember that we have seen one quarter of solid improvement in new construction area, it started delivered last year but now very solid in the first following a decline in both 2014 and 2015. So when the markets were declining our market wasn't declining as much and therefore we don't see immediately this upturn either. Of course, it's a good positive indicators improving the fundamentals of the market, but we don't expect that to impact the same way when it came down, it didn't impact us much market either the other way, but it's still good that the market is developing.

I think the important indicator is this growth in total real estate investments, it shows that more money is going into the sector, developers are driving their projects forward and also customers are buying apartments and therefore total transactions are going up, but you can't read a direct link between these two in a short term, between our market and new construction starts.

Operator

Our next question ladies and gentlemen comes from Antti Suttelin of Danske Bank. Please go ahead.

Antti Suttelin

This is Antti, I mean even if you play down the importance of the Chinese actions. I would like to ask your view what do the Chinese really one, do you think these stimulus which we now clearly see impacting the construction numbers and statistics, is this something which is short term only or is this beginning of a new big construction boom in China, in what way are you looking at this.

Henrik Ehrnrooth

We're seeing stimulus in China that’s been the biggest stimulus happened in infrastructure and that's of course needed to drive urbanization going forward and we're also seeing stimulus to help the real estate sector and to help people to buy apartments. As if you look at, if we understand right what the Chinese government is trying to do again very sensible targets is to continue to improve the urbanization and get more and more people to live in cities and work in cities and therefore they have this target of 100 million [indiscernible] over the next five years which are very fundamental change.

So, the way I understand it is to make sure that economy continues to develop by improving the urbanization, having people move into cities now they are further helping it by starting to relax the [indiscernible] rules. So that is what we're seeing, as stimulus of course can have more shorter term impact these I talked about our more longer term drivers, but we continue to see higher tier cities, good demand, lot of people want to move there for more than as even impossible and then actions to reduce inventories in lower-tier cities where the inventories are quite high that is what we still need to see some type of improvement before that inventory situation improves. So I think that's perhaps more of broad answer to your question, Antti.

Antti Suttelin

May I ask differently, do you expect this strength that we have seen in in first quarter in statistics, I mean spikes up 19% for example would you expect that strength to continue over the next several quarters or would you expect that strength to eventually fade during the remainder of this year.

Henrik Ehrnrooth

I think we have to see, we're not the best forecasters of macro statistics for that market. I think where we give an estimate, where we have a good view where we understand the development is a total elevator and escalator market and there we have given our clear outlook of what we expect of the market and that's what we feel we have a good understanding and good confidence in. I wouldn't like to comment on where we expect some of these other indicators to move over the coming months.

Antti Suttelin

And you didn't raise this guidance even if the Chinese construction market has clearly at kicked-off does this mean that you don't expect this pickup to last or does this mean that you don't think the pickup will yes in 2016 affect the elevator demand.

Henrik Ehrnrooth

Let's put it this way that that the way the markets have been developing in the first quarter has not been a great surprise to us and what we expected in beginning of the year, we've seen that trend and we expect that our outlook is quite accurate for the full year between the 5% and 10% and of course can be within that range. It is of course positive that things are going in the right direction inventory levels are reducing in some of these lower-tier cities, but I don't think we're going to quite see yet in our industry.

Operator

Our next question comes from Martin Flueckiger of Kepler Cheuvreux. Please go ahead.

Martin Flueckiger

Again I will take one at a time, first one, coming back to the question in China regarding the market performance of Tier 1, Tier 2 and Tier 3, Tier 4 cities. Could you provide your best estimate for our new equipment market growth in these two categories.

Henrik Ehrnrooth

Well, if I would I give by perhaps if you look at the segments in China is where we see growth infrastructure more stable in commercial and then declining in residential, would you Katri or Eriikka have a comment on what you would say about exact growth rate by higher-tier versus lower-tier.

Eriikka Soderstrom

I believe it varies quite a lot. So you have differences depending on the province, depending on the second question like Henrik described already I think the general picture is that the higher tier cities are somewhat stronger.

Henrik Ehrnrooth

In the lower-tier cities when we look at the map of all the various provinces and areas there are very significant differences, some that are quite stable, some declining a lot and then we have markets really far in the West and then on the East Coast that actually a pretty decent growth rates, so you can't really give bondage it's a really big differences between the development in different markets and provinces.

Martin Flueckiger

And just to come back on the issue of the maintenance business and-or maintenance market in China and could you talk a little bit about the competitive environment and the situation regarding pricing in the Chinese maintenance business and also if you could update us on your current share with respect to maintenance of China?

Henrik Ehrnrooth

So the competition in China in the maintenance market is quite different from the new equipment market goes most of the competition there comes from small independent players. Most of the OEMs compete for their own brands into service and then against small independent companies and that's where a strong competition and that continues of course, a lot of people see the growth opportunities there and therefore want to grow in that business. Not a big change in that market overall in the dynamics and we have, of course, constantly improved our business which we have been doing to remain competitive and drive our business in a profitable way going forward as we have done. That's what I can say. So your second question was related to?

Martin Flueckiger

Your share of the maintenance business in China. It used to be below 10%, is it now above 10%?

Henrik Ehrnrooth

It hasn't quite reached 10% yet, although the share has increased. But it hasn't quite reached 10% yet if you just look at the maintenance. If you look at services overall, we're probably at that level.

Martin Flueckiger

And then finally my last question on Europe, if I look at building maintenance housing starts and important European markets, I believe this would suggest a healthy recovery for the new equipment market going forward. Do you share this view, do you see any signs of this what's your view that say 12 to 18 months on the European new equipment market?

Henrik Ehrnrooth

Well, for this year as I said in our outlook, we continue to expect a good development in central North Europe, Spain continued recovery. and then more stable markets in France and Italy, although France probably have now building permits have improved a bit but little bit too early to say how that's impacted our market, but I agree with you many Central North European markets, actually, the trends are all positive. And we can see that there are many cities have the same issue that there is a lack of apartments in the cities, so the residential activity is where we see good activity.

Martin Flueckiger

And then just a final one, if I may, what do you think it's a good proxy for the time lag between building permits being granted and new orders received by you guys for instance?

Henrik Ehrnrooth

Difficult to say, of course, depends very much on the segment. It's been quite residential, I don't know. There is clearly a time lag because you need to get your permits first and then you start planning it and then you're planning quite far and then you only order elevate usually, if it is a very standard building when you started. So they can be clear lag between the timings of those two, I can't say exactly how long that would be.

Operator

Our next question comes from [indiscernible]. Please go ahead.

Unidentified Analyst

Just a follow-up on the China maintenance and on the conversion rate there. So, if my memory is correct, I think the combined conversion rate for Kone and joined Kone brand is roughly 50% and that number has remained stable for the past two, three years. Correct me if I'm wrong, but I think this number should be going up as time goes and secondly, just a question for Henrik, do you think we'll see a further consolidation in the Chinese elevator market now that the new equipment sub-market has kind of matured and if so, it's keen to play a role in this consolidation game?

Henrik Ehrnrooth

So if you look at our conversion rates, they have remained quite stable, of course, we're working harder and improving them, they really depends on what segments are growing and so forth so brand 60%, no significant changes over the years. And the consolidation, we may probably see a consolidation in the market, I would say that we're very focused on organic growth, we have very strong market positions in China, very strong brand or two brands in fact that are both very strong. So we're in that sense in a good situation. On the maintenance side, we have strong organic growth and that is what we focus on how we drive our growth going forward.

Operator

Our next question comes from Manu Rimpela of Nordea. Please go ahead.

Manu Rimpela

Just one question from me. Can you comment about the maintenance pricing, I mean, if we see U.S., I think you mentioned the prices are going up versus also for the maintenance new equipment and also what's happening in China and Europe on that front?

Henrik Ehrnrooth

So the pricing in maintenance in the U.S. going to be tough price competition, not quite as severe as in Europe and particularly in South Europe. South Europe continues to be challenging, lot of small companies that are fighting for the business. No big changes to trends in China overall.

Manu Rimpela

Can I just follow up on the U.S. pricing, so why haven't we're not seeing maintenance prices starting to recover if we're starting to see a meaningful uptick in the market in terms of the new equipment.

Henrik Ehrnrooth

We see that the new equipment deliveries have only now started to pick up in the past kind of six to nine months. So they are now still in the first service, I think you would start to see that - we would hope we would start to see some of that impact going forward, but you have to remember that we have had strong orders say over the past years with that rotation in the U.S., it started only come through now. So, let's see it's better not to give any forward-looking comments on pricing may go, we have - pricing, it's an individual agreement between us and customers always.

Operator

[Operator Instructions]. Our next question comes from Ben Maslen of Morgan Stanley. Please go ahead.

Ben Maslen

Just a question, please on China revenues and what's the growth or did A&D grow in the quarter, I think you've given Asia-Pacific growth of 4.3% I just wondered how China revenue split within that firstly? Thanks.

Henrik Ehrnrooth

So China share of revenues was about 30% and I would say they were stable-ish in China in overall revenues.

Ben Maslen

And then if it would stay down 5% to 10% for the next few quarters of the year as your guidance what point would you expect revenues in China on the new build side to go into negative territory. Thanks.

Henrik Ehrnrooth

The outlook, we have that's for the market overall we haven't guided our orders received, but with the rotation you have orders received in China, of course if the orders received go down it will be reflected in your revenues with a let's say six months to nine month lag or in some case even shorter.

Ben Maslen

And then just coming back to cash flow, could you give us what is the typical cash flow profile of an order in China if there is such a thing and how much you get up front and what are the stage payments, I guess just the phasing of the cash, if you can generally explain.

Henrik Ehrnrooth

For Kone, we don't book an order unless we have a down payment and there is usually down payment that's not the largest part then you would have throughout when you start manufacturing the equipment, you have a down payment and then, by the time of delivery, you have quite a significant further payment and that means you want to be focused on covering your risk as you go forward. And down payment itself when you order is, let's say, on average, we look at minimum 5% down payments book and order and then you have milestone payments after that throughout the process of delivering a new equipment.

Ben Maslen

And then finally, you mentioned a significant pick up in modernization demand during the quarter. I just wonder what was driving that, is there any kind of specific components of demand and it sustainable? Thank you.

Henrik Ehrnrooth

There hasn't been a regulatory change, this is a market demand. We know that the motorization markets have been challenging for many years while there is a lot of need for modernization. So we can see in the economies that are doing somewhat better this demand you can see a pent-up demand is coming through, UK is a good example of that, Germany is another and we can even see the weaker South European markets so the markets are now stabilizing. So we know there is a lot of opportunity out there and the good thing is to see this started to come back better through in the markets now.

Operator

Our next question comes from [indiscernible]. Please go ahead.

Unidentified Analyst

I just wanted to confirm that I understand this issue that you talked about after the full-year results about easing the incentives in China for the sales people. So you wouldn't be first-half weighted in terms of growth and I just want to understand how much of an effect you thought that might have had on your orders and whether that will continue through the year and therefore, whether you would expect your market share, maybe to improve as the year progresses?

Henrik Ehrnrooth

As I said earlier, we don't make any predictions or any indications about how we expect our market share could develop or orders to see it develop. Only thing I would say that the development in the first quarter was in-line with what we had expected.

Operator

We will now take our next question from Daniel Gleim of MainFirst Bank.

Daniel Gleim

There are actually two of them. Could you give us a little bit of guidance, how sustainable the China maintenance of above 25% is, I mean now that orders are coming down for new equipment, new escalations probably at one point slowing and you're not actively acquiring maintenance business in China and are we going to see zero growth in maintenance, probably in 2017, what is your feeling on that? That would be my first question.

Henrik Ehrnrooth

Well, our first, even if you think that we have had a slower growth in many markets outside of China, many years in South Europe, we have been able to grow our maintenance business in lot of markets. So, you have to remember that we have a maintenance base and the larger that becomes to maintain your growth rate, you, of course, need to have more and more growth each year. So over time, the growth percentage will come down, but there is a lot of potential to continue to grow that business in a good way and there is a lot of equipment that this being installed or has been installed that is coming into commercial maintenance based on the coming years. So we continue to see good growth and as you can see, we have been able to compete in the compound at a good rate. But again, the bigger the underlying base becomes, the challenging order time we still have the same growth rate, but the growth is, there's a lot of growth opportunity still there.

Daniel Gleim

With regards to the order book rotation, you mentioned, it is getting longer at the moment. If you look at the overall group order book and at the end of the first quarter which still has grown quite substantially, can you give us some guidance what an adjusted number would be, do you have any feeling how the order book rotation has impacted to order book?

Henrik Ehrnrooth

It has impact the order book for sale, it means that when the book an order, it goes in order book and it takes a bit longer before is recognized as sales. So in that sense, I don't understand how we would adjust our order book it's just, it takes. It's a longer term, a little bit longer for orders when they are booked until they are final recognized as final sales because of somewhat larger projects.

Operator

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

Andre Kukhnin

Just two quick ones. Firstly, cash in the balance sheet, could you just share with us how you are thinking about this for the rest of the year and kind of what the opportunities are for that?

Henrik Ehrnrooth

I wouldn’t say there is any change here. We have a strong balance sheet, we're okay with that. And if they were to be any good acquisition opportunities we're ready for them and we're ready to find growth opportunities, but overall we're quite comfortable with the balance sheet. We have, it's strong and it's very good.

Andre Kukhnin

I think historically at this level, you've kind of released cash back to shareholders, so what's holding back at the moment if there's anything?

Henrik Ehrnrooth

Well that's of course always a question to our Board, how they deliver this but there's always been one-off decisions and nothing more I can say on that. We just recently paid our dividend, so we have just paid out what about €730 million to our shareholders. So that was a good dividend payout, again only some weeks ago.

Andre Kukhnin

Yes, indeed. And just last question on modernization in China. I understand you've given the numbers so that we're looking makes references on what size of it is that services about 10% altogether and majority of that is maintenance. But what do you think your market share is in the modernization market in China?

Henrik Ehrnrooth

It's not very high. I don't think anyone has a very high market share, it's a very fragmented mainly focused on component replacement than modernizations but as the equipment base ages, we see a good opportunity there. We don't see any one that really would have a strong market share in modernization today.

Operator

As there are no further questions, I'd like to hand the call back over to the speakers for any additional or closing remarks.

Katri Saarenheimo

Thank you very much everybody for the active discussion today. So let's conclude the call. Thank you and have a good rest of the day.

Henrik Ehrnrooth

Thank you, everyone.

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