Kone Oyj's (KNYJF) CEO Henrik Ehrnrooth on Q2 2016 Results - Earnings Call Transcript

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Kone Oyj (OTCPK:KNYJF)

Q2 2016 Earnings Conference Call

July 19, 2016 8:45 AM ET

Executives

Katri Saarenheimo - Director of Investor Relations

Henrik Ehrnrooth - President and Chief Executive Officer

Analysts

Pekka Spolander - OP Financial Group

Antti Suttelin - Danske Bank Markets

Ben Maslen - Morgan Stanley

Klas Bergelind - Citigroup

James Moore - Redburn Partners

Guillermo Peigneux - UBS

Manu Rimpela - Nordea Capital Markets

Tom Skogman - Handelsbanken Capital Markets

Andre Kukhnin - Credit Suisse

Martin Flueckiger - Kepler Cheuvreux

Glen Liddy - J.P. Morgan Cazenove

Piotr Ossowicz - Ironshield Capital Management LLP

Tomi Railo - SEB

Lars Brorson - Barclays Capital

Matthew Spurr - Royal Bank of Canada

Michael Kaloghiros - Bank of America Merrill Lynch

Presentation

Katri Saarenheimo

Good afternoon and welcome to KONE’s Q2 Results Webcast. Present here in Espoo, Finland today we have our CEO, Henrik Ehrnrooth; and Senior Vice President Corporate Control, Roberto Molteni. I am Katri Saarenheimo from Investor Relations.

As usual, we will start with an overview of our Q2 figures and development. After which we will have good time for discussion and questions. But let’s start from the Q2 development presented by CEO, Henrik Ehrnrooth.

Henrik Ehrnrooth

Welcome also on my behalf to our Q2 results webcast. And it’s a great pleasure again to present our results to you, because we have good news to tell, again from our performance during the second quarter and the first-half of the year 2016.

During the quarter, we had good progress overall. We can see that our development programs that we have been executing on are delivering results and that we also been able to continue good growth in many markets to compensate for some of the large markets that are weaker.

But as always, now it’s our Q2 results, so let’s go straight into the numbers. I’ll start again by going through our key figures; then a little bit more in detail on orders received, sales and operating income. After which, I’ll talk about how we have developed KONE and our markets as well as outlook. But let’s go straight into the key figures for the second quarter of 2016.

Highlight of this quarter was that we had strong execution and profitable sales growth. Our orders received, they declined slightly during the quarter. But they were good level of €2.067. They declined at 5.7% or 1.9% if you look at it in comparable currencies.

Our order book remains strong. It’s at more than €8.7 billion, and has grown at 1.6% or 5.5% in comparable currencies. So we have a strong order book and that gives us a good situation to develop KONE from here on.

Our sales also grew. It was almost €2.3 billion, growth of 2.8% or 6% in comparable currencies. What’s most important with this growth is that it was profitable and we had a good improvement in our operating income. So EBIT reached €349 million and improvement in the EBIT margin was good. It improved from 14.7% to 15.3%.

Also we can see that we have maintained good discipline in our business, because our cash flow continue to be strong, although was slightly lower than last year. But as I think all of you remember, last year in the second quarter we had an exceptionally high cash flow, but now at €393 million it was good. Also EPS improved from €0.51 to €0.54.

But as we always said, one quarter is a short period of time. Now we have half of the year behind us, so we have little bit more now perspective of how we’re developing over this year. So if you look at the first six months we can see solid progress overall. Our orders received, little bit over €4 billion, declined by 5.6% or just over 3% in comparable currencies. Our sales also little bit over €4 billion for the first six months, growth of 3.1% or 5.2% in comparable currencies.

Also if you look at the first six months we can see growth has been good and profitable and we had €570 million EBIT for the second quarter and relative EBIT margin improved by 0.4 percentage points from 13.8% to 14.2%.

Cash flow very strong for the first six months, almost €700 million good improvement over last year. If you remember, in 2015 we had slightly weaker start in terms of cash flow then exceptionally strong in the second quarter, now we have had a more even development throughout the first six months of the year.

Our EPS improved from €0.80 to €0.90. We know that many of our large markets are quite uncertain, particularly new equipment side, but we have continued to perform strongly also in this environment.

We have shown that we can also perform well in more uncertain environments. That’s clearly down to very strong commitment and dedication by our employees. So, again, a huge thanks to everyone at KONE for the great job they have done and for the results that we have achieved during six months of the year.

So those are the highlights of our figures. Let’s as usual go a little bit more in detail and start with orders received.

As I mentioned our orders received declined by 1.9% in comparable currencies, but were €2.068 billion. Even though they declined they were at a good level. This was the second highest level of KONE’s orders received in KONE’s history. We achieved this despite a significant decline in the orders received in China, because we’re able to grow in all other markets outside of China. So again, we’re almost able to compensate that impact and we can see that we’re developing well on a broad basis if you look globally.

Looking at orders received, we had strong growth now in our modernization business. And if you look at geographically, continued good growth in North America where we grew with double digits; and we also had good growth in both Europe Middle East and Africa, and Asia-Pacific outside of China. So again, I think the highlights from orders received perspective is really the good broad-based development we had and the good acceleration we have been able to achieve in our modernization business.

As you all know, price competition continues to be tough particularly in the large Chinese market. So that has of course had impact on selling prices. However, our competitiveness is in a good shape, so we have been able to maintain the margin of our order book at a good and healthy level, so that I’m very happy about.

That is about orders received. If you then go to sales, we grew in all our businesses. Comparable currencies our growth was 6%. New equipment business grew at little bit over 3% in comparable currencies. And what I’m very pleased about was the strong sales growth we had in services.

Our service business grew at 10% in the quarter. It was very strong in modernization. We grew close to 20%. But it’s also good growth in our maintenance business. We’ve now grew at 6.3% in the quarter. So I must say I’m very pleased with the overall sales growth we have achieved in services in the second quarter.

Geographically, best growth in North America where we are delivering on a very strong order book, growth about 19%, but also good growth in Asia-Pacific of 6.6% and particularly strong in markets outside of China. But we also grew slightly in China. When I look at Chinese growth, highlight there was that we continued our strong growth in our service business in China, which continues to grow at over 25% during the first-half of the year; so 25% plus growth in both Q1 and Q2. So we can see that we have good progress in that business.

But again, the most important factor with our sales growth was that it was profitable. And that we can see from our operating income or EBIT. EBIT reached €349 million, and as I mentioned the margin improved from 14.7% to 15.3%. This good improvement was achieved because we had a good development on a broad basis. We improved in all of our businesses, good improvement in our new equipment business as well as in services.

Geographically, the best improvement came from Asia-Pacific and North America. And we achieved a good improvement in our operating income, despite headwinds that we had in the second quarter. Headwinds were particularly from foreign exchange. Translation exchange rates impacted the result, almost €15 million negative, a little bit less than €15 million. And we continued to increase our investments in R&D, IT and in key growth markets of the world. So we are definitely investing in our competitiveness going forward.

So overall, I must say I’m very pleased with how our profitability improved both in the quarter and first-half of the year.

If you then turn to our sales split, here we can actually see the impact of the improvement we had in our services business and we can see that the share of both modernization and maintenance has increased a bit, and also the share of North America is increasing. All of this is good, as it slightly balances more our overall sales mix. So I think it’s been good development.

So this is about our numbers. I would say, overall, I’m pleased with how we have developed in both the first half of the year and if you look at Q2 as well.

Next, I’ll go to how our business has developed and how our markets are developing. Before I go to that, as you will have seen, in the quarter we have announced a few changes to our Executive Board. We will have - in the third quarter we will have Thomas Hinnerskov join us as a new head of our Central and North European business. He has a great experience in driving good growth in service businesses in many parts of the world.

We also have Ilkka Hara join us as our CFO in August. He is someone who has been spending most of his career in the technology sector, but a very business-focused finance leader. And then last week, we announced that Axel Berkling, who currently leads our German business and has grown that business very successfully through very good leadership, is moving to become head of our Asia-Pacific business as of beginning of October. Until that, Neeraj Sharma will continue to run that business. These are all I would say positive rotations that will again help KONE develop well as we go forward from here.

If you then look at how we developed overall and our development programs. As I think, many of you know this is the last year of our current development programs and we have achieved a lot of good things in them. I’ll highlight here a couple, one related to the most competitive People Flow Solutions program and one related to Top Modernization Provider program.

As you know, our strategy has been for a long time that we wanted to grow the fastest in the fastest growing markets of the world, so gain market share where the markets are most positive. This we’ve done in North America over the past years and we have now also invested in more in North America to support this growth. So in June, we opened a new R&D manufacturing facility in Allen in Texas. This will help us support our growth in North America and improve our customer service and competitiveness in both the new equipment and modernization market.

We are bringing also for North American market more R&D resources closer to our customers to have better products specifically for that market, where we have had a good development and a very strong order book.

Also Top Modernization Provider, as you all know, that’s an area where we’ve been focusing significantly over the past years to strengthen our offering, strengthen our processes and also improve our sales management and sales setup. We can see that this has definitely produced results. With the growth we’ve started to achieve towards last year already in orders received now we have continued with strong growth in orders received. And we can also see that our sales growth is good in modernization.

So we can see again, the actions that we have decided to take, they are producing good results. If you then turn next to our markets, I’ll start with the new equipment markets and start with Asia-Pacific, markets overall in Asia-Pacific declined slightly as a result of decline in the important Chinese market. At the end of this, I’ll address the China market little bit more in detail, so I jump over it now, just address the rest of Asia-Pacific.

Rest of Asia-Pacific has grown because of growth in India and Australia. If you look at Europe, Middle East and Africa, here we have seen a continuation of the improvement in our markets, in particular in Europe. In Central and North Europe, markets continue to grow at a good rate, whereas in South Europe we continue to see more stabilization of the market; Spain growing slightly; and more stabilization particularly in important market of France.

Also Middle East, there has been continued growth opportunities despite the uncertainty in the region. In North America, markets have now, already for several years, have been growing at a good rate. They are at a good level overall and continue to grow slightly from there. So we can see, if we look at new equipment markets from a global perspective compared to last year, we see a good level of activity in both Europe and North America. Whereas then, some of the Asia markets are slightly more uncertain, particularly China.

So let me then address China, take a little pause here and address that a bit more in detail. In the second quarter, the Chinese market declined by about 5% if you measure in volumes. That’s a slight improvement compared to the first quarter when the markets declined at about 8%. So year-to-date we are somewhere around 7% decline.

However, if you look at the market development, if you measure the monetary value, then the decline was in the mid-teens. So here, of course, you have the volume decline but also continued price pressure, which is continued more or less at similar levels to before.

But what we’ve seen an increasing trend is that the customers are selecting lower specification products or more affordable products, which has meant that average selling prices have been coming down. But we have a good competitiveness also in this segment, so with that perspective we have continued to develop largely in line with the market was our development in Q2.

If you then look at the various parts of China, how it’s developing, as we have discussed before the situation in Tier 1 and many Tier 2 cities continues to be good. In fact, if you look at the inventory levels overall in Tier 1 and Tier 2 cities they are at very healthy levels. I think we are overall, if you look at Tier 1 and Tier 2 cities at the lowest inventory levels for about seven years. So their markets continue to be healthy.

Growth is spreading more to Tier 2 and some Tier 3 cities now as a result of the cooling measures that the government has taken in Tier 1 cities. We can see that here urbanization continues and people are moving more and more into the cities. However, if you look at the lower-tier cities, here inventory levels although they are improving they continue to be rather high and therefore that is impacting our overall sector.

It’s residential, the residential market that is declining, particularly affordable housing, whereas commercial segments are more stable as well as infrastructure.

As you also have followed, if you look at the property markets overall in China, they have improved during this year. Sales area, total sales area for real estate has improved by about 28% in the first-half of the year. New construction starts are up 15% and total real estate investments are up 6%. So then you ask, why are we not seeing a better improvement in our sector, but we can see that still in many of the lower-tier cities, many developers are focused on reducing inventories whereas demand continues to be good in many of the high-tier cities.

What has then KONE’s approach been here? As I mentioned, now in Q2 we developed largely in line with the market. We look at our development in long-term basis and want to maintain healthy long-term fundamentals in our business.

We are looking very much at finding good opportunities, and as I mentioned, maintaining healthy business principles, and that we have done. And looking forward, of course, our ambition continues to develop well. I would say that the development we had so far has been very much in line with what we have planned and what we have expected.

The most important thing with China is that our distribution is strong and we can see - as you can see from our results our competitiveness is in a good shape. So that’s a little bit more in detail about new equipment markets and then more in detail about the important Chinese market. Let me then next turn to service markets and start with maintenance.

If you look at Europe and North America, we can see very much the same trends. Markets are growing in this region, although there is clear variation between country to country and price competition continues to be intense. However, Asia-Pacific markets continue to develop positively and as of course as a result of high new equipment deliveries over the past years.

In Modernization, as you probably remember, we started talk about improvement in market towards the end of last year. And this we definitely see. Modernization markets are now growing at the good rate in Central and North Europe, and South Europe are stabilizing.

In North America, modernization markets are growing slightly from a good level, and the same situation in Asia-Pacific, good growth from a good level already. So if you look at our markets overall, modernization improving, maintenance continues a good development, and then in new equipment better in Europe, continue good in North America, whereas bit more challenging in Asia-Pacific. So a good mix of various market situations.

And with that, let me turn then finally to our outlook. If you look at our overall market outlook, that has remained unchanged. Asia-Pacific, we expect the Chinese market to decline by 5% to 10% measured number of units and the price competition will continue to be intense. We have maintained this 5% to 10%, despite the fact that the market declined slightly less in Q2 than Q1. If the momentum in the property markets continues towards the end of the year, we’re probably going to be at slightly better end of this range, but now first-half we are exactly in the middle of it. Rest of Asia-Pacific we expect to see some growth because of India and Australia.

Europe, Middle East and Africa grow slightly because of growth in Central and North Europe, more stable in South Europe and the Middle East. And North America continues to see some growth from a good level.

In the maintenance markets, very much the same trends we seen so far; growth in Europe and North America, although variation between markets and good growth in Asia-Pacific. And in modernization, continuation of what had in Q2, some growth in Europe because of good growth in Central and North Europe, and both North America and Asia-Pacific growing.

And with that, finally I go to our business outlook, which we in terms of EBIT have slightly upgraded. Our sales outlook remains unchanged. Here we say that our sales will grow between 2% and 6% in comparable currencies. Our EBIT, we expect to be in the range of €1.250 billion to €1.330 billion, and now assuming that translation exchange rates remain at the level of January to June 2016.

Previously - our previous range was €1.220 billion to €1.320. If translation exchange rates stay at this level, then we are looking at a currency headwind of about €40 million for the full year, whereas in our previous outlook that would have been about €30 million. So we have little bit more currency headwind that we expected during Q1. But given the good performance we have had in the first six months we slightly upgraded the EBIT outlook.

So if I look at some of the highlights for the second quarter, here I will say the strong growth in services is the first highlight both in modernization as well as in maintenance, good growth.

The second point, I would highlight is the growth we had in all other geographic regions apart from China, which largely compensated for the decline in Chinese orders received. So it is a good broad based development. And then the fact that we grew at a good rate and that our growth was profitable. So those were some of the highlights and our outlook.

And with that, we have now good time to go into questions.

Question-and-Answer Session

A - Katri Saarenheimo

Thank you, Henrik. Do we have to start with questions from those present here in Espoo? Please.

Pekka Spolander

Pekka Spolander from OP Financial Group. First about China and the pricing again, when we look at the decline in units and the decline of the value of the market, and my question is about how much is the price erosion, if we talk about how much the prices have declined. And earlier it was discussed about something like 5%, is it still around 5% or more?

Henrik Ehrnrooth

On a like-for-like basis we are probably roughly 5%-ish. So you have probably three parts. You have the market decline. It was about 5% now in the quarter. Then you have the like-for-like price decline, and then also you have this mix effects from lower specification more affordable products, so each of them contribute, not exactly, but very roughly similar amount.

Pekka Spolander

And your own pricing policy in China has changed since first quarter?

Henrik Ehrnrooth

As you can see from our cash flow and our profits through - okay, of course, profits don’t come through straight away, but we have maintained healthy business practices. And we can see therefore that we have a good overall development. Our focus is to make sure that we maintain a healthy business over the long-term. That’s the most important point for us.

Pekka Spolander

Thank you. And second question about the European market, if you compare the situation today versus three months ago in Europe, would you say that sentiment has improved or is stable or…?

Henrik Ehrnrooth

In Central and North Europe, I would say it’s pretty much the same, perhaps during the quarter markets grew a little bit better than we had expected. But overall, I mean, Germany, Sweden and other markets continue to be strong. Clearly, England has or UK has been a strong growth market. There probably we’re going to see a little bit more uncertainty, so on balance, not a huge change. And in South Europe, I think the good thing is we’re seeing a continuation of the stabilization of the market. So perhaps on balance a similar to slightly positive-ish.

Pekka Spolander

Okay. And finally, you already referred to UK, what’s the role of the UK market as a whole?

Henrik Ehrnrooth

UK is one of our top 10 markets in terms of sales. We have a strong and good order book in the UK. Of course, quite a lot of business also there comes from our services. We of course have to see what the impact will be of Brexit. In discussions with customers so far, it seems that standard residential construction continues at good rate. We will probably see slightly more uncertainty on commercial construction. But it’s too early to say what the impacts are, and I think we have to - yes, I don’t think anyone really knows what the impacts will be.

Pekka Spolander

Thank you.

Katri Saarenheimo

Okay. We are then ready to switch to questions from those present from the line. Operator, I am handing over to you, please?

Operator

Thank you. [Operator Instructions] And we will now take our first question from Antti Suttelin from Danske Bank. Please go ahead, your line is open.

Antti Suttelin

Thank you very much. I would like to ask about modernization. What is going on, because that was the really strong support of the report, almost 20% growth in sales? Is this really pick up of the market or is this market share gain? And is this sustainable or is this kind of one-off as we should take it?

Henrik Ehrnrooth

So, Antti, as you probably remember, our orders received started to grow during last year already. So of course in sales growth it’s the good order backlog that we have that is coming through. But why are we growing so well?

First of all, the markets have, particularly well both in Central and North Europe and in South Europe where they are more stable, they have improved compared to where we were a year ago and we continue to have good markets both in North America and in Asia.

As you know, we have focused a lot on our competitiveness in modernization everything from our sales management, sales processes our offering and our overall process in modernization. And I would say we can see that what we have done is producing results. I can’t say exactly how market shares develop because there it’s not the market where you have good data on a short-term basis, but it clearly seems that we have developed well compared to the markets.

If you think about the modernization market from a longer-term perspective, given that we have had a pretty constant growth of our new equipment markets over the past 20 years, it’s clear that every year there will be more and more equipment than in previous year that reaches the age of 20 years. Not that that is an exact time, but it just indicates that the modernization needs will increase each year. And we also know that there has been little bit of a pent-up demand in Europe that we’re starting to see coming through as well.

Antti Suttelin

All right, and then on China and the stimulus that you referred earlier, when I look at the numbers from China, what I see is a fading impact of the momentum. If I compare the early start of the year versus the latest month in June, it seems that the stimulus impact is clearly fading now. What is your view on that and how sustainable would you consider that the kind of apparent improvement of the Chinese market is?

Henrik Ehrnrooth

You have to - when you look at the growth rates year over year, you have to remember that real estate transactions have grown now for over a year. So that means also that the comparison point start to be higher. But perhaps the stimulus impact was higher early in the year. But what I think is the most important point with the Chinese market is, if I look at the inventory levels, as the Tier 1 and Tier 2 are at very healthy levels and they are improving. While they’re still at a quite high level in many lower-tier cities they are improving there.

So you can see that when there are jobs, when there are infrastructures in cities then people do move into them. And that is what it seems that developers are focused now on reducing inventories in these cities, which is of course a good and healthy thing for the market over time. But if you look at the growth rates month over month, yes, they’re not quite as high in the past month as they were earlier in the year, but still the development is in the right direction.

Antti Suttelin

Yes, all right, thank you very much.

Henrik Ehrnrooth

Thank you.

Operator

And we will now take our next question from Ben Maslen from Morgan Stanley. Please go ahead, your line is open.

Ben Maslen

Thank you. Yes, good afternoon, Henrik. Three questions please. Firstly, the very strong margin you delivered in the quarter, can you give any more color around the drivers of that, because you have seen similar growth and mix in previous quarters with a much less significant impact? So is there anything specific in Q2 raw materials mix factor which drove it? That’s the first question. Thank you.

Henrik Ehrnrooth

There wasn’t anything specific. I would just say that we had a good execution on a broad basis, so nothing of one-off character. Raw materials, yes, that’s been a tailwind now for a while already. But actually, the impact of reducing raw material prices has also been one of the reasons for the price pressure in the market in China. So is there a tailwind or headwind, it’s a difficult thing to say.

But we have constantly been able to improve our competitiveness, improve our execution and that you can see in our result. I must say that we had a good overall execution in the quarter.

Ben Maslen

Thank you and then maybe a follow-up on that. I mean, in terms of your commentary that said that pricing intensified during the quarter, was weaker in Q2 relative to Q1, I mean, why would that be the case when end markets now are showing signs of some stabilization and the key commodity prices sequentially improved during the quarter? Why would pricing get worse Q2 versus Q1? Thank you.

Henrik Ehrnrooth

The competition for market share continues to be tough. That is just what we have observed. I would say it’s a combination of price pressure on like-for-like basis, and also then a mix change toward more affordable products. That is just a - the market is highly competitive, and that’s the trend that we have seen.

Ben Maslen

Thank you. And then just finally, you did - I think organically you’ve done about 5%, 5.5% growth in the first-half of the year. And you’re guiding for 2% to 6% for the full year. So the midpoint would suggest the slowdown in the second-half. Is that just you being prudent or do you see sales growth slowing as you go through the back-end of this year? And I guess I’m asking particularly around China, if your orders are down organically 15%, including volume and price mix, what point would that start to go negative? Thank you.

Henrik Ehrnrooth

As you know, the lead time from order to deliver in China is, say, on average six to nine months. So clearly the reduction in orders received will start to have an impact towards the end of the year. We have given a range, that’s a range we expect to be in, that’s our best estimate without saying where we are going to be in that range. But clearly, if you have in a certain market declining orders received at some point, it comes through in sales.

Ben Maslen

Got it, Henrik, thanks very much.

Henrik Ehrnrooth

Thank you.

Operator

And we will now take our next question from Klas Bergelind from Citi. Please go ahead, your line is open.

Klas Bergelind

Yes. Hi, Henrik, it’s Klas from Citi. A couple of questions, please; Firstly, just to get back on China pricing. So units are down 5% and in monetary terms you’re down 12% to 13% if I get this right. You’re falling in line with the market, both in units and in monetary terms. That would be 7% to 8% fall in price mix versus previously 3% to 5%, is that correct?

Henrik Ehrnrooth

As I mentioned, there are three different factors here. So one is if you look at like-for-like price decline, probably somewhere around, and very roughly, I am not giving exact numbers here, but very roughly 5%-ish plus/minus, but in also this there are mix shift that, of course, that has an impact on the average selling prices.

Klas Bergelind

So just the pure price here, if that was down 5%, last quarter was that down 3% or 2%? Or when you say that pricing is getting weaker, is it only mix that is getting weaker or is it also the absolute price level?

Henrik Ehrnrooth

I will say, unfortunately, a little bit of both.

Klas Bergelind

A bit of both, okay. Then when it comes to China in the market, if I look back at the year-over-year comps, it seems like I get 3 percentage points just on the comps. If the market is down 5% today and that compares to 8% down last quarter, in the first quarter, that is effectively a flattish volume quarter-on-quarter. Is that correct that we haven’t seen any improvement from the increasing housing start impacting the market yet? I just want to confirm that?

Henrik Ehrnrooth

No, we have not seen it. And you got to remember that housing starts in our industry were negative in both, if you look on full-year basis both in 2014 and 2015. So we come with somewhat a delay, because you can - particular, standard residential, you order the elevators quite at an advanced stage of the project.

Klas Bergelind

Okay. Then to come back to one of Ben’s questions on the guidance, you leave the like-for-like growth on change, despite services continuing to improve here. This is obviously short-cycling throughout. So shall we expect a slowdown in services in the second-half or tougher comps or what are you seeing there?

Henrik Ehrnrooth

Well, we had a good growth in our service - particularly, maintenance business last year. I am not guiding any specific business. I think we have a pretty specific and good range to indicate. And I think that’s - you can see - what you can see from our guidance is that we expect a good development also in the second-half of the year.

Klas Bergelind

Thank you.

Operator

And we will now take our next question from James Moore from Redburn, London. Please go ahead, your line is open.

James Moore

Yeah. Hi, everyone. Hi, Henrik, I’ve got a few questions. Just on the raw material and the direct material benefit. Could we quantify the change there at all year-on-year? I think last year, full-year, because in the annual you break out costs, but not quarterly. You said direct materials were 41.8% of sales. I was wondering whether that is moved favorably and if you could help us on that.

Secondly, on the modernization margin, given the excellent revenue growth you’re seeing there, my understanding is it was low-single-digit last year. And has that increased a lot? Could you help us perhaps think of a change in modernization margin?

Henrik Ehrnrooth

Okay. Let’s start with - again, this material, you have to remember that we buy very little material directly ourselves. I mean, we buy components from our suppliers. And, of course, as raw materials come down, that has an impact on the component prices. But of course, we continue to work with our suppliers on the design and how we develop to find savings there and to find better performance.

If you can see - as you can see from our development, we have been able to develop in a positive way both our product cost competitiveness as well as our overall execution. So it’s difficult and I don’t think it’s relevant to start breaking out individual numbers there, because it’s, of course, all comes to a total competitiveness relative to the pricing you have in the market.

In modernization, last year we had a slower top-line growth. However, we started to grow our orders received towards the end of the year. And we have good growth now in modernization orders received beginning of this year. This is a more short-cycle business, let’s say, three to six months on average from order to delivery. So you can see that coming through in sales now. If you look at the margin, yes, there’s good growth in sales and our improved execution has improved our margins in modernization. But it is a lower-margin business than both new equipment and maintenance.

James Moore

And in terms of modernization growth, the 20% or near 20% you’ve seen in the first-half, you sort of talked when you were talking about trends of continued good growth and then later you said maintenance comparative is difficult. Do you expect modernization growth to continue at the high level in the second-half?

Henrik Ehrnrooth

We have strong order books without giving any specific guidance. I mean, we have a strong order book that we can deliver on during this year. Of course, modernization is something we need to continue to book also orders, because we still - a big part of the modernization business that we have to do in Q4 is something we still need to book as orders during this year. But we have a good and healthy order book there to work on.

James Moore

Helpful, thank you. And finally just on China, you mentioned the mix which is sort of average selling price on affordable housing. I get the change in pure price, but was that mix effect there or was it zero in the last quarter, in the first quarter, against the five you called out for this quarter?

Henrik Ehrnrooth

Sorry. Can you repeat that? I didn’t quite understand your question?

James Moore

Yes. You broke down the Chinese organic growth into five, five and five; volume, price and mix. I’m just specifically, asking about the mix piece of that, where you mentioned the average selling price relative to affordable housing. What was that mix effect last quarter? Was that a zero last quarter? Is that a change?

Henrik Ehrnrooth

It’s not only affordable housing. It’s in all segments I would say, slightly lower specification. It was probably less in the first quarter than it was now. There was some impact of that, but it was less and it was a little bit more now than last year and in first quarter.

James Moore

Thank you very much.

Henrik Ehrnrooth

Thank you.

Operator

And we will now take our next question from Guillermo Peigneux from UBS. Please go ahead. Your line is open.

Guillermo Peigneux

Good afternoon, Henrik. Just maybe a couple of questions, one regarding the China aftermarket growth, I just wonder now that where you have been growing 25%, but the order book is - so the orders are declining. And obviously, I understand there is a time-lag between installation and service. But shouldn’t we see a slowdown, a material slowdown, on the aftermarket growth maybe, not one year out but maybe even more than one year out?

Henrik Ehrnrooth

We have a good order book and we are still delivering lot of products. And higher your service base is, of course, the more challenging is to achieve growth on that year over year. The good thing is that the backlog we have of units in first service to coming into service base is very strong. And we have healthy deliveries. So over time, yes, you will have a slowdown in the growth of the maintenance business as the base gets larger and larger. And that we’ve seen already, but I will say, we have a quite large maintenance business already that we are growing now at 25% random, which is I would say a very good rate.

Guillermo Peigneux

Okay. But installations are now falling I guess or no installations, but orders, so therefore maybe one year from now installations will fall as well. So presumably you will see that deceleration earlier than anticipate?

Henrik Ehrnrooth

Of course, we have to see. We have many levers in our service business that we can work on, including can we improve our conversion rates. So we still have a lot of potential to do in that business. So that’s, of course, that’s our objective to continue to drive a good growth in the maintenance business in China.

Guillermo Peigneux

Okay. Thank you. And then, once again, actually, obviously now you see a low, for the market is declining in terms of volumes and pricing. So I wonder what actions you are taking in terms of restructuring to keep the backlog margins at healthy levels as you suggested. So Is there any actions you were put in place to your capacity, to your employee headcount or supplier optimizations or anything that you are putting in place in order to mitigate pricing pressure - or, sorry, margin pressure?

Henrik Ehrnrooth

Of course, when we look at product and cost competitiveness, it’s something we’ve been working on every year all the time and we continue on that. Of course, we need to, all the time, look at the fact that we keep a good cost structure in our business and we have resources when they’re needed. The good thing is that given how we are growing our service business, and service is a more labor intensive business than new equipment, therefore in areas where new equipment markets are weaker, we can then take people who are very experienced and good in our industry and put them over to service.

So in that perspective we have a - and as you know most of the installation is sub-contracted, so we have a pretty flexible structure. But of course, when markets are weakening, of course, you look at your costs and what you can do. But we have to remember, we have an order book we can see. I think, we have been able to predict pretty well how the market has developed. So there is - we are not looking at any drastic or quick actions here. It’s a continuous development that we’ve been working on for a long-time already.

Guillermo Peigneux

Thank you. Thank you very much.

Henrik Ehrnrooth

Thank you.

Operator

And we will now take our next question from Manu Rimpela from Nordea. Please go ahead, your line is open.

Manu Rimpela

Okay, good afternoon. It’s Manu Rimpela from Nordea. The first question would be on the U.S. Have you seen any improvement in the maintenance pricing there?

Henrik Ehrnrooth

As you know, we’ve seen an improvement particularly in new equipment and in modernization. The good deliveries we’ve seen in new equipment is only starting to come in now to the service base. So perhaps some slight reduction in the price competition, but it continues to be a very competitive market there, but perhaps not at quite the same level as we saw, for example, last year.

Manu Rimpela

Okay, thank you. And then on China, I think in the first quarter you mentioned that you expect the orders to be more evenly distributed through this year. So would you still agree with that comment and is there any kind of read-through from that comment we can make into the second-half of the year? And would you expect volumes to be on the kind of first-half level in the second-half of the year as well or is there some sort of a pure seasonality in China that happens every year as we remember when thinking about those comments?

Henrik Ehrnrooth

I believe what we have commented was more from relative perspective. So if you look at China, it’s a market where first-half of the year tends to be larger in terms of orders received, second-half larger in terms of deliverers. That trend is not going anywhere. I think we now commented on that. I mean, if you look that, even though we don’t break down usually our market share in parts of the year, our market share usually during the first-half of the year is slightly higher than second-half for the year. And the comment I made then is perhaps this year we see a more even development relative to the markets.

Manu Rimpela

Okay, perfect. And then, finally, are you seeing any - when you’re mentioning this shift towards lower price point unit in Chinese market, are you seeing that the competitors are having the similar type of exposure as you are and they are able to respond to this demand or are you kind of seeing that KONE is in a better place to maybe return to growth - outgrowing the market in this dynamic or how do you feel about your position compared to the competition?

Henrik Ehrnrooth

Well, I think we have a great positioning. As you know, we are clearly the largest player in the Chinese market. In 2015, we increased our market share by almost 1.5 percentage points. So we are constantly growing. Now first-half for the year, we have not outgrown the market, but if you compare, our scale, our product competitiveness, our distribution we are in good shape, I would say.

Manu Rimpela

Okay. No further questions. Thank you.

Henrik Ehrnrooth

Thank you.

Operator

And we will now take our next question from Tom Skogman from Handelsbanken. Please go ahead. Your line is open.

Tom Skogman

Thank you and good afternoon, Henrik. I got a couple of questions starting with the competition balance in maintenance. Can you give any comments about the development there and the outlook for the second-half?

Henrik Ehrnrooth

It’s again this year we have been able to improve it. It is still slightly negative if you look year to date. But we’re constantly going in the right direction and I’m particularly pleased with the improvements we’re seeing in South Europe. So we can see that the actions we are taking are the right ones.

Tom Skogman

Thanks. Can you confirm still that the modernization EBIT margin is lower than in equipment on a global scale, but that it’s been better in then equipment in Europe?

Henrik Ehrnrooth

Well, I would just say that in new equipment we have a better margin overall. It may then slightly differ from market to market. But, overall, we have better margin in new equipment than in modernization. But modernization is, with the growth we’re having and improvement we’re driving the business, we go in the right direction.

Tom Skogman

And then, finally, I give you a chance to elaborate a bit about your IT investments. You have announced a lot of recruitments. And you have announced cooperation with IBM. And now I wonder whether you have anything new to tell us. What kind of new products and new revenue streams can we expect? What kind of findings have you done so far?

Henrik Ehrnrooth

What we are doing is that we have a lot of, I would say, very exciting new service concepts for our customers and also solutions. We are testing many of them out in the market. We can see with good result. You have to remember that we have more than - close to 450,000 customers at KONE. So you don’t change those contracts and how we work with them overnight. But you will start to see a gradual improvement and that’s a change you will see over the coming years. In this industry you don’t see it happening overnight.

Tom Skogman

But is it kind of fair to expect that the benefits three years ahead will be mainly in efficiency, in getting cost down and under billable hours up. But then beyond three years or would you say it’s even more, beyond that we should see new revenue streams?

Henrik Ehrnrooth

I would say the most important thing is, yes, we will get productivity and quality into our business. Most important thing we’re focusing on is how can we serve our customers and deliver solutions that are very specific for their needs in a better way with having a more connected and data-driven business. That is where we drive the value. And, yes, it will of course help us to be more efficient and deliver in a better way. But one should expect it’s only the cost side. We are very focused on how we find better services and ways of delivering value to our customers.

Tom Skogman

Okay. Thank you.

Operator

And we will now take our next question from Andre Kukhnin from Credit Suisse. Please go ahead. Your line is open.

Andre Kukhnin

Yes. Good afternoon. It’s Andre from CS. Thanks very much for taking my questions. Can I just briefly check on the service growth acceleration that you saw in Q2 versus Q1? Was there anything kind of unusual and was that maybe the day count effect that helped and was there any kind of difference by geographies in development there versus Q1?

Henrik Ehrnrooth

I don’t think - I must say, I haven’t counted the days compared to last year. I haven’t, but there was nothing specific. There is always little bit of seasonality. We have to remember that end of last year, Q4, we had a very strong growth in maintenance, then it was little bit slower Q1 and now little bit better. So of course, you can always have quarterly fluctuations. I wouldn’t so much look at quarterly fluctuations, more importantly, look at how the trend was going.

So I think, we are at good growth rate of more than 6%. And Q1 we were slightly above that. Q4 last year, we were clearly above that. So I would put it down to quarterly fluctuations, not much more than that.

Andre Kukhnin

Great, thank you. And a couple in China and probably on your incentive structure to distributors, did you change anything in Q2 in China?

Henrik Ehrnrooth

Not really, no.

Andre Kukhnin

Great. And against two brands KONE and Giant, were both of them in a negative territory in Q2 year on year in volume terms?

Henrik Ehrnrooth

As you know that we - the reason we have two brands, is that sometimes it’s the KONE brand doing better and sometimes GiantKONE brand doing better. It kind of varies from quarter to quarter. Now, if you look at overall China, it’s perhaps the larger brands are doing slightly better, because they tend to be more exposed to the larger developers who have a better overall situation, so in this quarter, therefore the KONE brand had slightly better development largely, because of the customer exposure that we would have there, compared to GiantKONE.

Andre Kukhnin

Very clear, thank you. And can I just check against that five, five, five that you talked about in terms of orders, volume, price and mix? Your numbers suggest that you’re not at five, five, five; you are at sort of adding up to around 10 or 11 in Q2 altogether. Is this - and then your units are obviously in line with the market. So between the price and mix, are you outperforming on one or the other or is it kind of equal, just to confirm against a pretty similar question earlier?

Henrik Ehrnrooth

So we haven’t, of course, announced exactly our growth rate there. But again please, please don’t take literally, exactly as five, five, five. It’s a kind of magnitude. All of them are kind of either plus or minus. So do not take that literally. So if you add them up you come to a specific number. It’s not that specific. So I can’t say exactly how the market would have been exactly compared to us. But, well, you can see from our cash flow, our result is that we’re focused on maintaining healthy principals in our business.

Andre Kukhnin

So, yes, that was more just to double check whether we should take those numbers or not. And then, finally, the comment on backlog margin, obviously, that’s forecast margin from your backlog. And just to confirm, this is - as you’re saying that the margins that you expect to see from the backlog into revenues are comparable to your current margins you’re delivering in revenues right now, is that the right way to take that?

Henrik Ehrnrooth

That’s what we indicate. It’s of course in the gross margin level where we can see it. We have had them relatively stable compared to where we’ve been previously, despite the fact that we’ve seen price competition that means we’ve been able to have a good development in our overall competitiveness. It’s something you’re going to of course see from our results as well.

Andre Kukhnin

Great. Thanks very much, Henrik.

Henrik Ehrnrooth

Thank you.

Operator

And we will now take our next question from Martin Flueckiger from Kepler Cheuvreux. Please go ahead, your line is open.

Martin Flueckiger

Yes. Hi, Martin Flueckiger from Kepler Cheuvreux. Thanks very much for taking the questions. Just two left really. First one, I would like to come back to your performance in EMEA. It looks to me like underlying growth here is not really picking up. And if I remember correctly, we’ve seen improvement in the market environment now for a few quarters. If you could just remind us, what is the most or whether the developments were in market or order intake growth in EMEA in 2015, and whether and when if you do, you expect the pickup here? That would be my first question.

And then the second one would be on your…

Henrik Ehrnrooth

Let’s take one at a time. It’s much easier to take one at a time. So you referred to our sales growth in EMEA. We were able to grow orders received at a good rate in Central and North Europe last year. It was more mixed in the Southern European markets. But we have an order book that has grown year over year in Europe, Middle East and Africa. I would put that the fact that top-line growth was only slight - I would put that down to, quarterly fluctuation is nothing more specific in that. Sometimes the structure of the order book a little bit changes with what types of projects you have and when they come through and so forth. So it’s not more than that.

Martin Flueckiger

Okay, thanks. And then the second question would be on the U.S. You’ve given us some hints on your performance there and why you think you’ve been doing so well, but could you elaborate a little bit more on that? I’m curious what were really the main reasons for KONE’s significant outperformance in the Americas you think?

Henrik Ehrnrooth

It’s not down to one thing. I would say it always starts with having good leadership and focused actions in the market. If you look at how the new equipment markets have been developing over the past years, we have good competitiveness in the good segments and we have been able to develop that. In North America also what is so important to your competiveness is the execution in the field. And we have been able to develop that in a good way and produce value to our customers. So it’s not only one action, but it starts from clarity of direction, what is important, what are we doing, developing constantly your product offering and competitiveness which we were doing in U.S., very important, the execution. Given the high labor cost content in U.S., execution is hugely important. And there we’ve seen good development over the past years.

Martin Flueckiger

Okay. Thank you very much.

Operator

And we will now take our next question from Glen Liddy from J.P. Morgan. Please go ahead. Your line is open.

Glen Liddy

Good afternoon. You’ve been clearly very successful in all your cost-saving measures. Can you quantify, either so far this year or over the last 12 months how much you’ve actually saved in money terms from all your cost-cutting actions?

Henrik Ehrnrooth

It’s always - we can see that we have had good development. I wouldn’t just call it cost-cutting actions. I would call it how we develop our offering and find new solutions or new components or new ways of doing things. And that has improved our overall competitiveness. And that we have been doing for many years already. And as you can see from the good development in our new equipment market, we are probably even a bit ahead of the curve, how we have developed that compared to the price competitiveness. So just you can see good execution there, but I think it is difficult to quantify the exact amount. It is significant.

But I would also - it’s not only about cutting cost. It’s about focusing on do you have the right offering to meet your needs of your customers, really understanding where the good opportunities are, staying very close to the markets, understanding our growth and picking up the right opportunities. That’s where we put a lot of emphasis. At the end, the better we can deliver value to our customers the better we will develop. So it’s a combination again of all of these factors.

Glen Liddy

Okay. And in China you grew less than the market or your decline was bigger than the market in Q1 and you are in line with the market in Q2. Have you made a specific decision about market share that’s acceptable or not, or is that just something that will fluctuate quarter by quarter?

Henrik Ehrnrooth

As you see and as you know, for us very high focus to maintain healthy business fundamentals and that we have done always. Your development will always fluctuate from quarter to quarter as it always has done for us. Sometimes we outperform more, sometimes less. Now, we’ve had first-half of the year, first quarter little bit below the market, now more in line. So again, you can always have this fluctuation. So I don’t think it’s more than that.

Glen Liddy

Decision, okay. And in terms of the conversion of an OE sale to an aftermarket contract in the different regions, is that changing at all? I mean, you want to grow the aftermarket in China clearly. So is your conversion rate improving in China and is it stable or improving in markets like the U.S.?

Henrik Ehrnrooth

In the U.S., we probably improved it a bit. In China it has been more stable; in Europe, in most markets already at a very good level.

Glen Liddy

Okay. Finally, the duration of your backlog in China, I know you don’t give it in number terms, but is it changing to all, getting better or worse?

Henrik Ehrnrooth

In terms of the overall order backlog?

Glen Liddy

For China, yes, the overall backlog is the length of delivery time changing at all?

Henrik Ehrnrooth

Not materially. There are slightly different trends there, but not materially, so not a huge difference in order to delivery times.

Glen Liddy

Okay. And then, thanks very much.

Henrik Ehrnrooth

Thank you.

Operator

And we will now take our next question from Piotr Ossowicz from Ironshield Capital. Please go ahead. Your line is open.

Piotr Ossowicz

Hello and thank you for quoting my question. Just a quick follow-up on the cost control measurements, again, particularly - well in China, you are seeing the increasing price pressure. To what extent are you able to pass on this price pressure on to the suppliers? I mean, looking at the like fairly weak commodity outlook and obviously the suppliers being competitive as well, like to what extent can you compensate for the margin decrease by also asking lower prices or looking for new suppliers, looking to local suppliers, like how much of this you can do?

Henrik Ehrnrooth

Of course, that is one of the things we’ve been doing a lot of. But it’s not only about - of course have to look at new components and new ways of doing them all the time. We have a good situation at KONE, given that we have a quite harmonized product portfolio and we have big volumes. So that gives us a good situation in market. If you look at our overall margin for KONE, you can see that we have had a good development in all these aspects over the past years and of course we continue to have high activity there right now.

Piotr Ossowicz

Do you think that this is something that you have more or less down in the first-half of the year or you think that there is even more to come in this regard?

Henrik Ehrnrooth

It is something we’ve always been doing. It’s not something that you do and then it stops, that’s not how business works. Over the past years, we clearly had - everyone in our industry has had more tailwind from raw materials that has reduced component prices. That tailwind isn’t there in the same way. It’s actually headwind in some cases. So from that perspective perhaps little bit less, but of course we continue to develop our product every day.

Piotr Ossowicz

Okay. And then last question on this one, like do you - are you seeing yourself using more local suppliers, especially in China, I mean can you get better deals from them?

Henrik Ehrnrooth

I mean what we - our Chinese products, almost all of the suppliers are local. Some of them may be international companies, but they make them local in China. We have very good supplier base there, very experienced high-quality good suppliers in China. Some of them are local Chinese companies and some of them are international companies, but with operations in China.

Piotr Ossowicz

Okay. Thank you.

Operator

And we will now take our next question from Tomi Railo from SEB. Please go ahead, your line is open.

Tomi Railo

Hello, Henrik. It’s Tomi from SEB. Can you comment on the currency impact, any currency impact from weak yuan in terms of your order revenues or profits in the second quarter?

Henrik Ehrnrooth

That’s clearly one of the reasons for the currency headwind. It’s clear that Chinese RMB is a very important current for us from a translation perspective. And we have good margins in China. So clearly that has an impact and that’s one of the reasons for the foreign exchange headwinds that we have.

Tomi Railo

So you have that in the €10 million. Is that purely from the Chinese currency in the second quarter and do you expect further impact in the second-half?

Henrik Ehrnrooth

I can, but I don’t know where - I can’t predict, I don’t know where currencies are going. So that’s why we always look at the first six months where we are and take that as an average. I think the average and where the spot is now, perhaps the RMB is slightly below. But it’s not too far away from the average year-to-date. But I think we have to see. I am not going to predict currency movements.

Tomi Railo

And then perhaps on the market direct question on China. Would you call that the market has troughed; I mean, minus 8% in the first quarter, minus 5% in the second? Your EBIT in the comment, 5% to 10% market decline. What’s your outlook for the second-half in particular?

Henrik Ehrnrooth

Well, I think if we have 7% year-to-date first-half of the year and we have 5% to 10%, so we are smack in the middle. So we are going to be somewhere in that range for the rest of the year. What I said already is that if we have a continued good momentum in the property markets for the rest of year, we’re probably going to see somewhere at the better end of this range, but if not then somewhere within this range. So let’s see. I think it’s quite a tight range already.

Tomi Railo

Thank you.

Operator

And we will now take our next question from Lars Brorson from Barclays. Please go ahead, your line is open.

Lars Brorson

Hi, thanks. Hi, Henrik. Hi, Katri. I had a couple of follow-ups on some of the topics that are already been discussed. Henrik, just on the China market volumes, I wonder whether you could tell us sequentially in Q2 versus Q1 how the new equipment volumes in China developed ideally on a seasonally adjusted basis. Did you actually see growth quarter over quarter in the market at all?

Henrik Ehrnrooth

Again, as I said, you have seasonal fluctuations, what is relevant to look at is compared to last year. And the market from a volume perspective was slightly better in the second quarter than the first quarter. So I think that is the key point.

Lars Brorson

And is the - I understand and I don’t want to pin you down. But it sounds like you’re obviously quite optimistic that that sequential recovery can continue on the basis of what we see in the leading indicators. With what you see, are you more confident that Tier 3 to 5 cities start to improve from here? And perhaps that we see a bit of a cooling down on Tier 1 to Tier 2 or do you see sustained momentum in that? And perhaps, if you could also just to us chat briefly on what you see on the affordable housing segment, that’ll be helpful. Thanks.

Henrik Ehrnrooth

I think, what we are seeing is exactly as I mentioned is that Tier 1 cities, because of the cooling measures that the government has taken we probably see a slight slowdown. But then the growth is definitely spreading to the more Tier 2 cities and to Tier 3 cities. And also we can see that if you look at lower tier cities overall that the inventory levels are going in the right direction. So that’s the overall trend that we see at the moment.

Lars Brorson

And just on your market shares in Q2, I mean, I appreciate your comment that obviously in any quarter there will be fluctuation. But you did highlight in Q1 that you were holding back on pricing versus earlier years, where you’ve started the year incentivizing your sales-force to drive greater new equipment orders in the beginning of the year. Other companies or other competitors weren’t following suit. I think one other OEM that was mentioning the same.

Should we then surmise that your in-line performance in Q2 is really more a function of others be more disciplined or per your earlier comment is it really more a matter of mix that you’re gaining from a slight trade-down into, as you say, the mid and value range?

Henrik Ehrnrooth

I would again put this little bit in perspective now. We’re looking at one quarter. You always have fluctuation for quarter to quarter how your backlog develops and how your tender rate develops. I would say we did overall very much in line as we had planned. And I would say at KONE also we did overall from a global perspective as we had planned. We know that the Chinese market is more difficult. So we put lot of efforts on growing in a good way in other parts of the world and that we have done. So I don’t think it makes no sense to try to go into some minute detail of why we did slightly better or slightly worsen in Q1 or Q2. You always have this fluctuation.

Lars Brorson

Understood. On that note, let me make just one final question on the modernization market. I appreciate your modernization business is a bit skewed towards Northern Europe, which obviously is doing very well, also talking about a reorganization in North America that may have supported your modernization business. To what extent is the outperformance you’re seeing in modernization a function of your push into more standardized harmonized product portfolio?

It seems to me you’ve been a little bit earlier than your peers there. Are you benefiting from what you did under new equipment side a few years back? And on that basis, do you think you can sustain that outperformance versus peers in the modernization market?

Henrik Ehrnrooth

What is of course important is you have standardized products and that way you get volume benefits. But at the same time, I would say the most important thing has really been how we go to market and how we make sure that we can deliver on the better product offering we have. So that’s where we have focused a lot again is on our - how we deliver value to our customers, how we manage our sales to be able to do what is relevant and find the good opportunities. Those are I would say the most important things we’ve done in the modernization business. It’s a market where there are lots and lots of small- to mid-sized opportunities.

Lars Brorson

Understood. Thanks, Henrik.

Henrik Ehrnrooth

Thank you.

Operator

And we will now take our next question from [Rysk Madi from Barenburg] [ph] Please go ahead. Your line is open.

Unidentified Analyst

Hi, Henrik. Hi, Katri. Two quick ones from me on China. I’ll take one at a time. So firstly, how big is the service business given the 25 increase, is it still less than 10% of revenues?

Henrik Ehrnrooth

Services in China is roughly 10% of revenues at the moment.

Unidentified Analyst

Okay. And then, secondly on pricing on the maintenance in China, have you seen any changes recently there?

Henrik Ehrnrooth

I would say, more stable. Of course, we also see competition there given that the new equipment markets are weaker. We have a good situation and a good maintenance business in China overall.

Unidentified Analyst

Thank you very much.

Henrik Ehrnrooth

Thank you.

Operator

And we will now take our next question from Matthew Spurr from Royal Bank Canada. Please go ahead. Your line is open.

Matthew Spurr

Good afternoon. Thanks for the opportunity to ask question. Did you say - I think in Q1 you said China sales overall were flat year on year. Can you say what that was in Q2? I can see Asia-Pacific sales accelerated, but are you able to say what China sales themselves did?

Henrik Ehrnrooth

China sales grew somewhat in Q2.

Matthew Spurr

Okay, thanks. And then I had another one on - just on your investment in the U.S., you say you’re investing in facilities and R&D for developing products, specifically for that market you’re already sort of outperforming quite nicely there. And we are quite a way into these cycles. What’s sort of driving that investment now then?

Henrik Ehrnrooth

We have a very large order book that we need to deliver on and this helps us deliver on that in a better way. But also I think eventually when the market is that strong, we will have a much better customer service and be able to much quicker react to market needs. So I think it’s something that makes a lot of sense and would be a good improvement to our business in the U.S. or North America overall.

Matthew Spurr

Okay, thanks.

Henrik Ehrnrooth

Thank you.

Operator

And we will now take our next question from Michael Kaloghiros from BoA. Please go ahead, your line is open.

Michael Kaloghiros

Yes. Hi, good afternoon, Henrik. Hi, good afternoon, Katri. My first question is just on your commentary on sales picking up a little bit in China in Q2 versus Q1. Just wondering whether you are seeing some of the orders that were maybe stuck in the backlog now being delivered as the developer side able to reduce their inventory, so orders being delivered at the moment?

Henrik Ehrnrooth

Not a huge change, I mean, our deliveries in China have been constantly good. So we’ve been delivering on our backlogs. Not a big change there, frankly.

Michael Kaloghiros

Okay, good. Thank you. Second question, just on maintenance, so you print a nice number again this quarter, if we take out the China growth, which is maybe a bit exceptional at the moment, the growth of 3% to 4% elsewhere. Going forward, if you want to grow in the kind of 5% plus, I mean, what do you think is going to drive that? Is it the other market that are going to pick up or do you think that you are going to have another growth boost maybe from converting more of your installed base in China, what is the next growth driver for you in maintenance?

Henrik Ehrnrooth

We have - as you know our new equipment business is growing in many place at the moment. So we expect - we are growing our service business and maintenance business in all geographic areas, so that’s a good thing. And we are focused on delivering good value in maintenance, and therefore we expect to continue to be able to grow. So even if you would have a lower growth rate in Asia overall or the coming year, still the share of it is growing. So that’s contributing in that sense in a good way to growth. So our objective is to continue to drive a good growth in our maintenance business over the coming years.

Michael Kaloghiros

Okay, very good. And just lastly maybe a clarification on maintenance and China, because we are leading - we are hearing sometimes a misleading indication on that market. And can you confirm that the margin on maintenance is above the margin on general equipment maybe first? And then as you grow with very good growth rate at the moment, are you able to improve the margin on maintenance in China or because you have to invest a lot in the margin [over that] [ph]?

Henrik Ehrnrooth

As you know, we don’t break down our margins between maintenance and new equipment elsewhere. But what I would say is that we have good margin in all of our businesses in China, not very significant differences between them.

Michael Kaloghiros

Okay. And with the growth that you’re seeing in maintenance, are you able to get some, I mean, not your operating leverage, because [there are] [ph] lots of business, but are you benefiting from density or anything potentially driving the margin up in maintenance in China?

Henrik Ehrnrooth

I’d say, overall our business in China is developing well. As you know, we don’t break down overall the margins, but overall we have had a good development.

Michael Kaloghiros

Makes sense, thank you very much.

Henrik Ehrnrooth

Thank you.

Operator

And we will now take our next question from Andre Kukhnin from Credit Suisse. Please go ahead, your line is open.

Andre Kukhnin

Yes. Hi, it’s Andre again, thanks very much for taking the follow-ups. Can I ask a quick question on Turkey, how relevant that is to you at the moment and what do you expect there in terms of impact from the recent events?

Henrik Ehrnrooth

Turkey has been a good and growing market over the past year. It’s still a small percentage of our revenues. So it’s not a big country. And the impact of the recent events, I think it’s too early to say. Of course, they are concerning. But it has been end markets developed very nicely over the past year overall.

Andre Kukhnin

And can you tell us roughly, how big is the market size there?

Henrik Ehrnrooth

The marketing in unit in Turkey is quite large. It has lot of local players that, if you look from volume perspective, are the largest. But I think we have been constantly able to kind of expand the approachable market for us. And that has been one of the reasons we’ve been growing well. But Turkey is a very significant market. And the young population, urbanizing population, it’s a country with good potential over the coming years.

Andre Kukhnin

Got it; thank you. And can I just pick up on a couple of things you said earlier. Firstly, you said that your margins in new equipment are up year on year and the two biggest contributors were Asia Pac and North America. Are China margins up within Asia Pac as well?

Henrik Ehrnrooth

Again, Andre, let’s keep it at relevant levels here. So I think overall we have had good development in our margins overall in our businesses. And, of course, to develop well in our new equipment business, China is a very important part of that.

Andre Kukhnin

Got it, and I guess final one on cash, just we see it obviously building back up after the dividend. How should we you think about it in the course of next 12 months or 6 to 12 months?

Henrik Ehrnrooth

We are comfortable having a strong balance sheet and we think it makes sense to have strong balance sheet in the type of an environment that we have. And as you know, if the opportunities arise, then we are very interested in those opportunities.

Andre Kukhnin

And if they don’t?

Henrik Ehrnrooth

That we then have to see over time, I can’t comment on what our Board may think over time.

Andre Kukhnin

Got it; thanks very much.

Henrik Ehrnrooth

Thank you.

Katri Saarenheimo

…discussion, I believe we have time for one last question. And then we need to conclude the call.

Operator

And we can now take our last question from James Moore from Redburn, London. Please go ahead. Your line is open.

James Moore

Yes, thanks for taking the follow-up. I just really wanted to follow up on this China mix-point. Could you explain again? I’m not sure I really understood as to what this minus 5% mix is. And will it continue at that level in the second-half or is it some sort of volatile lumpy event that is specific to the quarter?

Henrik Ehrnrooth

It’s not more difficult, that in any product you have things with higher specifications, and then you have products that are more standardized with lower specifications. Given the trends in the markets, some of our or many of our customers have probably opted for, which good products, very solid and good products that we deliver, but slightly lower spec-out rate for the elevators overall. There is nothing more than that. Probably that’s something we’re going to continue to see for at least sometime.

James Moore

Thank you. And earlier, I think you said that the five, five, five, that you gave us was not the right picture. Could you give us the right picture?

Henrik Ehrnrooth

James, come on, I said that it’s not an exact figure. I said they are all very rough figures, just if you see that the kind of magnitude of them. So as I said, don’t take them literally each of those numbers.

James Moore

Sure, but I understand that. But China is a significant part of your business and then you always have the opportunity to understand how it’s moving. It’s difficult when you say, it’s sort of that number, but it isn’t really.

Henrik Ehrnrooth

Hey, come on, James. I’m saying it’s roughly that number.

James Moore

Okay. Okay, all right. Thank you.

Henrik Ehrnrooth

Thank you.

Katri Saarenheimo

Okay. Thank you for the discussion everybody. And we also hope that we will see many of you in our Capital Markets Day which will be held on the 28 of September in Helsinki, Finland. So we can certainly continue the discussion there at the latest. So thank you everybody and we wish you a good rest of the day.

Henrik Ehrnrooth

Thank you.