KONE Oyj (KNEBV) Earnings Call Transcript & Summary

Good afternoon, and welcome to KONE's Q2 results presentation. My name is Sanna Kaje, and I'm the Head of KONE's Investor Relations. I have here with me today our President and CEO, Henrik Ehrnrooth; and CFO, Ilkka Hara. Henrik will first go through the Q2 highlights. Ilkka will discuss the numbers in more detail, and Henrik will then discuss the outlook. In the end, we have plenty of time for your questions. Henrik, please.

Well, thank you, Sanna, and also welcome to our Q2 results announcement, and I'm very happy to share some great news with you today. We had a very strong quarter in a very difficult environment, an environment that I don't think anyone of us has experienced during their careers before. If we start with the highlights. We had a very strong recovery in China, that was clearly an important driver of our performance, but that was not only all, it was actually broad-based good performance. However, we can see that orders received have been impacted by a higher level of uncertainty around the world. But despite this environment, we were able to improve our earnings and have an exceptionally strong cash flow. Perhaps, the highlight to me in the quarter was the results of our employee engagement survey, which improved significantly from already high level. It shows that from our employees' perspective, we have done something right over the past years and in this crisis. As Sanna mentioned, I'll start with the key figures. Ilkka will, of course, as usual, dive more deeper into them, I'll then talk about how we have performed during the crisis. I'll talk about how we're developing KONE, a little bit more about our employee engagement survey and the markets. Ilkka will then talk about the numbers in more detail and I'll wrap up with the outlook. As I mentioned, highlight really in our Q2 figures were our EBIT. Our orders received. Here, we can see the more challenging business environment, were EUR 2.75 billion (sic) [ EUR 2.075 billion ], down 9.4% in comparable currencies. We continue to have a good and solid order book at EUR 8.3 billion, flat year-over-year. And our sales were also flat in the quarter at EUR 2.5 billion. Our EBIT, our operating income improved by 2.9% to EUR 315 million. And our adjusted EBIT, which is a key performance metric for us, improved from EUR 320 million to EUR 325 million. And our adjusted EBIT margin improved by 0.2 percentage points to 12.8%. So clearly, a performance that I'm very happy about. As I mentioned, an exceptionally strong cash flow at EUR 592 million. And earnings per share improved to EUR 0.47 from EUR 0.46. But as we always say, 1 quarter is a short period of time, and we have now 6 months behind us, so we can look at a little bit longer performance. That actually tells quite a lot how these crisis has impacted KONE. Clearly in the first quarter, it was more China that was impacted, we started to see some impact in rest of Asia and South Europe. But then really, broader-based impact in rest of the world outside of China really happened in Q2. And orders received for the first half declined by 4.8% to just shy of EUR 4.2 billion. Our sales flat year-over-year at EUR 4.7 billion. And operating income declined by 1.8% to EUR 513 million, and the adjusted EBIT declined from EUR 548 million to EUR 530 million. This is, of course, because of the weaker EBIT we had in Q1. And margin down to 11.2% from 11.6%. Clearly, a very strong cash flow in the first half at EUR 939 million by quite some margin, an all-time high for 6 months for us. And earnings per share, that EUR 0.76 compared to EUR 0.78. It's really environments like this that -- the culture, the commitment, dedication of employees are measured. And here, I'm very happy to say that I think we've done quite well from that perspective. Really, the KONE culture, which is a very much down-to-earth culture, where hard-working is valued, really, dedication to delivering upon our promises is very, very important. And we've seen that people really got out of their length to serve our customers doing that in a safe way, and that's something I am, of course, incredibly thankful for. I must say I couldn't be more proud of the entire KONE team on how they performed in the first quarter and genuinely thankful for everything they've done. So big, big thanks to all of our employees, just a stellar performance. So let's start by talking a little bit how the COVID crisis impacting KONE. If we start from more the installation side of business of new equipment and modernization, it's clear, China recovered very strongly, and we had significant growth across businesses in China. But the fact that construction sites and buildings were closed did impact our ability to install and modernize in many parts of the world, particularly in many Asian countries and in South Europe. Central North Europe and Americas, business has continued in installation more normally than in South Europe and rest of Asia. But we can also see that demand has been impacted significantly outside of China. In maintenance, our business has been very resilient because elevator and escalator maintenance is deemed as an essential service in most parts of the world, and therefore, contractual sales has been resilient. We can see that sales has declined slightly in our maintenance business, declined of 1.7%. I think the environment we've gone through, it shows a very strong resilience of that business. So we can see that contractual sales has continued quite normally. But it's clear that there's been an impact on repair and other discretionary activity that is directly impacted by the lockdowns. So big difference area to area, which I think is pretty clear to everyone already. If we then look at the situation of what restrictions we have in various markets in operating our business. As we all know, China has returned very much to business as usual and is operating normally. Also many countries in Central and North Europe, particularly the Nordic countries, Germany, I would say, quite normalized operations when it comes to installation and when it comes to services. And also, throughout Q2, North America, pretty actually good ability to install on construction sites there. South Europe has been harder hit, but we are going into a better direction where more of the markets are being opened up. And the toughest market from a restriction point of view at the moment is Asia Pacific outside of China, particularly India, Indonesia, Philippines and so forth. There, we continue to have clear restrictions in place. How the situation is going to develop? We, of course, don't know. And we, of course, know that the situation in North America looks concerning. So how have we operated in this environment? This we already presented to everyone in Q1 that we established 5 task forces on how we're going to manage throughout the crisis. And I feel that, that has worked quite well. It's clear that we have learned a lot during this quarter, and we continue to improve the way we react to situations such as this. As for most companies, the first and foremost priority has been safe working for our people and business continuity. This, our claim, has worked quite well. We have been able to constantly help our employees to work safely and provided them with equipment to do so. And our business continuity has been good. We have been able to continue to deliver to our customers throughout this period. Very important to us has also been the wellbeing, engagement and care for our people. We know that times like this can be concerning for a lot of people; and how can we help our employees to perform at their best, provide them with the resources, with the help, with the support for them to do a good job? Some examples of this is that we have had a very strong increase in completed courses in our e-learning platform, which already has been in very active use compared to most other companies. But we have also reached out to societies. We have provided support for children schooling. For example, by providing laptops to kids who can't afford them to provide -- to enable them to do remote schooling and other such efforts in over 40 countries. And this has been something that our employees have felt have been very important that not only are we working on helping our own company, but the societies around us. In a crisis, one, of course, always needs to take actions to contain costs. We have, for example, frozen recruitments. We have not traveled, which saves quite a lot of money and, of course, looked very carefully at financial risk management. As I already talked in Q1, a success story for us has been our customer activity and sales, how we quickly moved our sales organization to a virtual mode and got sales activity very high and in most places, doubled the number of customer meetings compared to before the crisis. Question, of course, is the quality of those meetings as high when they are only remotely. But I would say that we have also learned a lot here, which part of sales we're going to keep in face-to-face mode where we can be more virtual at how we really utilize our video channels and digital marketing much better. So this has been an area where we have taken big steps forward and learned a lot. We're also focused on a lot on -- what are the mid- and long-term opportunities, what are the big changes are going to happen as a result of this crisis and actually put some bets in that area. We have, in fact, increased our investments in R&D, IT platforms compared to what we had planned earlier in the year, given the situation we have, we can invest in the future. And of course, the objective of all of that is to come out as an even stronger company following the crisis. I feel that we are on the right path, but of course, the results will only be shown in some years' time, but that is clearly the objective that we have. But much of what we've done over the past years have been actually taking us in a good direction, considering what's happened over the past 4, 5 months. Our focus on our digital services, our 24/7 connected services, where we're leading the market is, of course, a service that is very well suited to this, less physical interactions, more doing things remotely, digitally and actually improving the service level. And because of the fact that we have that service everywhere in the world, we early on in the crisis decided that we're going to provide this as a free service to hospitals, other medical facilities, care homes during the pandemic, and this has been very appreciated. We have a large group of hospitals are taking up this service and very much appreciated having their most critical equipment and be able to move people more, better working and more transparency, more reliability and safety in this environment. That has clearly been appreciated. We launched our DX Class elevators in Q4 last year. And we can see what these solutions can do is again very well suited to an environment like this, not only do they come with antimicrobial surfaces, but the fact that they come with connectivity built in and with our digital platform, the ability to provide new services through application program interfaces is really perfectly suited to an environment like this, where our customers are looking for adaptability, where our customers are looking for new services that we can then provide to them remotely. That we can see is something that has really chimed with our customers. And in Europe, where we started to roll out, we can see that actually rollout has been successful, very good reception for our customers, and we can see that we're getting a premium for the services and the fact that they are future-proof, these products. But also, during the quarter, we launched our health and well-being solutions that had to do with touch-free elevator calls, has to do with air purification, has to do with sanitization of hand rails of escalators and so forth and many other things. And that is, of course, something that I believe will be interesting to customers. We can already see a lot of interest there, but of course, still early days. But an important thing we focused a lot on is we have our people for a planning and consulting team. We have actually trained a lot of people more in helping our customers plan their offices for safe return to office premises. So we have used case studies, and we have used best practices that we've shared that how do you set up your flow in your building to make sure that people can stay apart in a safe way, but still work efficiently in an office, of course, has a lot to do also with algorithms, how we set up your elevators, how you move people in the building. So this has also been something where we have had high activity and continue to focus on and how can we help our customers also return to offices safely and navigate this type of an environment. So those are some examples how we say we've been helping cities and buildings become smarter and safer in this environment and in general as well. Now I mentioned already that the highlight really for me during the quarter was the results of our employee -- employee engagement survey. Perhaps the most important number is our participation rate. Out of our 60,000 employees, 92% answered the survey, which we did in late May, early June. This is a phenomenal result. And that really shows that KONE's employees wanted to be heard, and we have a very relevant result. Already the last time we did the survey where we above the so-called high-performing norm. We've been above the high-performing norm for a few rounds already. But now we improved significantly from that. Out of 13 categories that we measure, 11 improved, one was stable and one was new. So very broad-based improvement. And we got particularly high scores for our strategy and the direction of our innovation. So that is, I feel very positive. It's also clear that in a crisis like this, the way we have responded to the crisis has had a positive impact on the results that I think is clear. But the magnitude of our increase shows that we have been going in the right direction and we have been able to make KONE a better place to work. That is our strategic target is for KONE to be a great place to work, and this shows that we're going in the right direction. Of course, we always have work to be done. There are areas for improvement, and we humbly going to look at those and continue to work on this. But overall, I feel that these results were very, very good. So let's turn to market development. That was more about how we developed KONE and some developments within KONE. Markets. So let's start with new equipment markets. As we know, big difference in demand. Overall, probably pretty stable, given the strong performance in China. But in North America, markets declined significantly. And we continue to see uncertainty there. Europe, Middle East and Africa, big difference between Central and North Europe and Southern parts of Europe. Central and North Europe, actually several good countries like Germany and Nordic countries, and of course, given the severity of lockdowns in many South European markets and in Middle East, we saw more clear declines. Asia Pacific, again, very big differences. China, significant growth, double-digit growth in the market in the quarter, whereas rest of Asia Pacific markets declined significantly, and I've talked already about the challenges in the markets such as India, Indonesia, Philippines and so forth. So there we saw some much bigger impact. So clearly, continue to see a challenging demand picture in many parts of the world. Services. We can see that maintenance markets have remained resilient. And in overall, number of units in the maintenance markets continue to grow. Where there's been more challenging part in the maintenance market has been a discretionary aspect like repairs. But overall, North America maintenance market is pretty stable. Europe, Middle East and Africa number of units continue to grow, and continue to grow clearly in Asia Pacific. Modernization, both in North America and Europe, Middle East and Africa has been impacted clearly, and therefore, markets declined significantly. And Asia Pacific, again, big difference is China grew and more difficult elsewhere. But talking about China, what about the Chinese property market in second quarter? Clearly, that was an important market and, of course, a very important market for KONE. In the second quarter, markets grew significantly year-over-year. Remember the first quarter declined and now they recovered strongly. We are seeing an intensified competition, and that is affecting the pricing environment. As we'll hear from Ilkka, we've done quite well in pricing, but it's clear that the environment is getting tougher. The government is stimulating via the infrastructure markets. So we continue to see high activity there. And while the activity in the residential market has been very strong, we have to remember that there are a lot of restrictions in place there still. And also liquidity has improved for developers. And looking at some of the numbers, real estate investment is up 8.5% June -- now compared to June. Residential sales volume up 2.1% year-to-date, so good recovery following Q1 and new starts also in June, up 9%. We don't have the latest -- we don't have the June numbers for price changes in the 70 biggest cities, but in May, it was 5% up. And as we talked about, the consolidation of property developers, that continued. So that is about the market a little bit more in detail. Let me next hand over to Ilkka to dive a little bit deeper into our financial performance. So Ilkka, please.

Thank you, Henrik, and also warm welcome on my behalf to this second quarter results webcast. I'll go through our financials in a bit more detail. And as already said, I have good news in number of fronts to share. And I'll start with orders received development first. So our orders received for the quarter were EUR 2.075 billion, which is actually down on a comparable basis, 9.4%. We clearly saw, the COVID-19 impacting our customers, the decision-making. Especially, if we look at Europe, Middle East, Africa, Americas and Asia Pacific, excluding China, where orders received declined significant. However, in China, we did see the recovery, as Henrik talked about, it's been quite swift in the second quarter. And our orders received measured in units grew significantly and in monetary value, clearly. Like-for-like prices continued to develop positively, had a positive impact, but mix was slightly negative in the quarter. Secondly, if we look at our orders received margins, we continue to see margins improving slightly in the quarter. Pricing developed positively. And there, I would call out, especially the introduction of our new product such as DX as well as the new services, helping us to differentiate. And at the same time, yes, there was some easing of the cost pressures that we've seen, also impacting our orders received margin. Then we move to sales. So our sales for the quarter were EUR 2.5 billion, effectively flat both on a report and comparable basis. We saw new equipment growing at 4.9%, and they are clearly the very strong recovery, especially in new equipment deliveries in China impacted that. In maintenance, our sales declined 1.7%. And there our contract sales actually developed well and we're quite resilient in this unprecedented environment. But as Henrik already highlighted, our repairs business, the part of the maintenance business is more discretionary, was impacted by the situation, especially as the buildings were used less. So we saw repairs being negatively impacted. As well as in modernization, where sales were down 15.3% in the quarter, as customers where both the decision-making was impacted, but also wanted to postpone some of the projects to minimize the risk in their buildings. If we look at geographically, the development. First, biggest impact was in EMEA, where we saw our sales declining 8.9% as well as in Americas, where sales declined 6.1%. In Asia Pacific, driven by the strong performance of China, we saw growth of 11.7%. And it's important to understand that in China, our sales grew more than 20% in the quarter due to a very strong recovery in the quarter. Whereas in rest of Asia Pacific, as was highlighted already earlier, we saw much more impact from the environment in sales. Then to adjusted EBIT. Our adjusted EBIT for the quarter was EUR 325 million. Very good performance, solid execution with our order book in this tough environment, very proud of this number. We grew 1.6% compared to last year, and also our EBIT margin grew from 12.6% to 12.8%. If we look at the drivers for this development. Obviously, we had the underlying positive margin outlook for the business. Also, the strong deliveries in China contributing positively. But at the same time, we did have extra cost negative costs and related to COVID-19, which were partly able to offset with the selective cost containment actions that we talked about already, as well as some items such as in China, we had some of the social security payments where there was discounts in the quarter. So they were less, and the impact of that was approximately EUR 7 million in the quarter positive. Restructuring cost for Accelerate program were about EUR 90 million, and the benefits were about EUR 15 million in the quarter. Then to cash flow, which was exceptionally strong in the quarter, EUR 592 million. And while there's always fluctuations on a quarterly basis on the working capital and cash flow. I would call out a few items that are specific to this quarter. So first, on the working capital, we saw a positive impact coming from increased payables due to a very strong recovery in China of approximately EUR 70 million. In addition to that, in some countries, the governments decided to delay payments for government-related payments, such as VAT, pension in some countries, which also had approximately EUR 50 million positive impact to our cash flow. But as such, cash flow always fluctuates on a quarterly basis. And I would have to say that in many cases, in this quarter, we saw that being positive impact to our cash flow. And with that, I'll stop and hand over back to Henrik to go through our market and business outlook for 2020.

Thank you, Ilkka. And let's wrap up with outlook for markets and business. So let's start with our overall market outlook. In new equipment market, we expect the Chinese market to be relatively stable. As we know, first quarter decline. Now it increased. And full year, we expect to be quite stable. Other regions, the new equipment market is expected to decline because of the uncertainty, and that's, I think, pretty clear to everyone. Maintenance markets, we expect it to remain resilient. And of course, excluding the more discretionary parts that are directly impacted by the lockdowns, as Ilkka already explained for our maintenance business. Modernization markets, there we continue to see good fundamental drivers. However, that's the business where we have seen most hesitation in decision-making and going forward. So therefore, that's probably going to continue to be impacted but still the drivers are there and intact. When it comes to our outlook, which we have specified, we have now 6 months behind us. As you remember, in March, we came out with our revised guidance when we could really start to see the magnitude of the crisis. We provided 3 scenarios. We were quite early on out there providing them. So we had 3 different scenarios, as you remember, and they all ranged in sales from minus 10% to 0. Now that we have 6 months behind us, we can narrow that range. And we believe that it's now -- our sales is going to be anywhere between minus 4% and 0 in comparable exchange rates compared to last year. The adjusted EBIT margin is expected to decline slightly or be stable at best. So continue with the performance that we have had would be very good. There are a number of things that are supporting our performance. We have a solid order book and maintenance base. Ilkka talked about the improved margins in our orders received that we have been able to deliver on. That's, of course, important behind our margins here and our Accelerate savings. But clearly, we have things burdening the result. Clearly, the costs of the COVID-19 outbreak, the fact that we have lower cost absorption that we had planned for. Safety and business continuity measures. There, in a crisis, it just makes sense to do anything that's required to keep business going. And of course, of course, there's costs. Subcontracting costs, particularly in Europe, some parts of Asia continue to be high. Now it's more -- not the question of very high demand. It's a question of -- of getting people to the right places and providing safe working environments without increasing costs, but it's the right thing to do. But also, we have proactively decided to invest in our capabilities to sell and deliver digital solutions and in R&D. So that's something where we are spending more, but it's something I'm very happy about, really strengthening our capabilities there. And if exchange rates stay at this level, that's going to be about a EUR 20 million headwind for the full year. So that about [ our ] business outlook. And then if I summarize, very happy about our strong performance in a very challenging environment. Again, a big thanks to all KONE employees for the fantastic work they have been doing. We can see that the investments we have done in differentiating, bringing out new solutions have really been well suited to what's happening now and putting us in a good position. And also we're facing this weaker economic environment from position of strength. If we looked at the skill and motivation of our employees, we look at our competitiveness overall and we look at our super strong balance sheet, those are really great ingredients to come out as an even stronger company as a result of this crisis. That is clearly our objective. As I said, results will be shown in some years' time, but lest I feel that we are going in the right direction. With that, I'm happy to open up for your questions.

[Operator Instructions] Our first question comes from Jeff Sprague with Vertical Research.

I'm just wondering if you could elaborate a little bit more on the interest level that you're seeing around DX and the well-being solutions, not surprisingly, you noted some uptake there. But maybe a little bit of additional color on how you see that play out. And is any particular vertical market or country taking the lead on considering these solutions?

So let me start with this health and well-being solutions. And it's interesting, you can see different preferences, priorities in different areas. And it's clear that in Asia, they seem to be more focused on touch free solutions, whereas in Europe and North America perhaps more on air purification, if you look at elevators. So we can see that a lot of active dialogue there, a lot of interest. But we can see that still, a lot of companies are still thinking about what are their -- what is their approach going to be. How are we going to change the way we work and how we move our people. So I believe that the interest is definitely there. A lot of -- yes, I would say, a lot of leads and requests there, but we are still early days. I would still say that, let's see. I think it's promising, but I still think we have to see. When it comes to DX, that's something we started to roll out in Europe beginning of the year. And there, we have very quickly ramped up sales of DX instead of our old products faster than we had expected. Because customers say, hey, I don't exactly even know what the digital services are that I want to have in the future, but this platform gives me the ability to be flexible to bring new services, I need them. And also this antimicrobial surfaces has, of course, been a big hit. So I think overall, good momentum early on. So we have to see. Now of course, the overall demand situation is a little bit more challenging. But we can also see that in a difficult environment, our customers they need to find ways of differentiating, how is my residential building different from someone else or my office building. And then you look at all aspects. And we can see that elevators have become more important. And therefore, we are more central to their discussions, how they think about offices for the future. So that's perhaps what I would say at this point.

We'll take our next question from Lars Brorson with Barclays.

Henrik, if I can try my luck with 3 questions. One on revenue guidance for the year. One, on your maintenance business in the Americas. And one, just on your China outlook and thoughts going forward there. If I can start with your revenue guidance, revised guidance down 0 to 4%. Just very simply, can you help us with a bit of color around your 3 key segments, new equipment, maintenance, modernization, and your expectations or at least maybe try to rank them? And what your thoughts are at this point for the full year from a revenue standpoint across those 3?

Well, I would say, of course, as you've seen in this quarter, big differences area to area. But it's clear that the maintenance business is the most resilient one. No question about that. We have a very solid and healthy order book on new equipment side. And if the markets continue as they are, we should have a pretty resilient business there as well. But of course, that depends on all -- on how markets are open and our ability to install. I said, in most places, that's quite -- that is very possible at the moment with the exception of some Asian markets outside of China. So we have to see there. Clearly, as I mentioned already, the most impacted is modernization. And I think that's kind of logical. A lot of modernization happens for example, residential buildings, so maybe people have not wanted to have a lot of work being done in their buildings now while they have to spend more time there and maybe not want to have so many workers there and so forth. So that's -- if that is more flavor on that. Ilkka, do you have anything to add to that?

No, I think it's a good way to describe it.

And maybe just following up on that and moving on to my questions with regards to maintenance in Americas down, what, mid- to high single-digit this quarter. I understand within that, your spare parts business is down solid double digits. That's about 1/4 of your maintenance business. That's obviously a higher margin, shorter cycle business. I presume that's part of the impact in your 2020 guidance. I was struck by your comment, I think, around North America outlook was "concerning," and I agree with that. It's not the first time we've heard it in this earnings season that the outlook around that part of the world does look more challenged. I wonder whether you can give us a bit of flavor for the developments around, particularly your spare parts business in North America. And I appreciate, again, it's a different type of business than your EMEA business, is much geared to commercial buildings. But the thoughts around whether you think that might pick up as we get into the second half of this year?

Yes. Maybe I'll start and if Henrik, you have more to add to that. But if I start from kind of putting things to context in terms of the maintenance business, so we saw overall, the maintenance business been down 1.7%. And if I look at the components, then really, as I said, the contract sales part of it is quite resilient. That's the ongoing maintenance. And then there's a discretionary part, spare parts business, which is a bit more than 25% on global level of that business. And there, we actually did see our sales being down about 10% in the quarter. And if I look at then North America, clearly there, our exposure to office and retail is higher than on average at KONE. So there that was clearly impacting it more.

Only thing, Lars, I would say -- you talked a lot about spare parts, of course, it's a repair. So overall, spare parts is only a part of that.

I'm sorry, Henrik. I did mean repair not spare part, indeed. And I wonder whether you can give a bit of flavor for what you're thinking for the second half of this year?

Yes. I think that business will be very much dependent on how people are returning to offices, how people are returning to shopping centers, all of that. But why is that business down? It's clear that there's been a lot of buildings that have not been used. And if they're not used, the need for repairs, of course, more or less goes away. And clearly, some customers are also working hard to contain costs in this environment. So I think that would depend on much how well companies are able to return to offices. We start to use facilities more broadly and so forth.

If I can try my luck with the third and final question, just on your China market outlook. We've seen a V-shaped recovery this quarter versus first quarter, unsurprisingly. You're keeping the market outlook for 2020 stable. That surprised me a little bit. First half is flattish overall. You're exiting first half at a double-digit run rate. I appreciate your comment, Henrik, around government restrictions. But I would have thought there would be enough to see growth overall in the market. Maybe the specific question around that would be, are you already starting to see sort of a slowdown or moderation visible in parts of your business after a very strong Q2?

I think the point really is that we saw a sharp decline in Q1, and now you saw a recovery in Q2. So you kind of recover to a normalized level, actually a little bit even beyond but then you start to have, of course, high comps to compare to. And I think compared to anywhere else in the world, if you have a stable market compared to what was a very strong market second half of last year, then I think it's not a bad situation. But I think we have to see. Let's see how it develops. Clearly, in the second quarter recovery was better than what we had expected.

Our next question comes from Lucie Carrier with Morgan Stanley.

Three questions from my side. I will go one at a time. If I could have a follow-up on Lars' question on China. I think you mentioned a negative mix in the quarter and probably a bit more pricing pressure. The last time we have seen pricing pressure, the market was down sharply at the time. So we could understand people being a bit more aggressive. What do you think is happening now with the mix and the pricing dynamic, which seems to be going slightly the wrong direction?

Ilkka, you want to start with the mix?

Yes, I'll start with the mix. So actually, for us, the mix comment was more between KONE and GiantKONE in Q2 being slightly towards more the GiantKONE than KONE. To remember, in Q1, it actually was the opposite. So I wouldn't read too much into this mix, it fluctuates on a quarterly level somewhat.

So -- sorry, second part of the question. Yes, pricing environment, sorry, of course. I think if you look at it from a global perspective that you have a lot of global players or regional players. And when the markets are down in most other parts of the world, clearly, people are focusing more on China. So I think you have to put it in a global context than rather than just China.

Okay. My second question was maybe I'll just come back to what you see at the moment in office buildings or other commercial facilities. I was wondering if -- thanks to all of your kind of digital tools now at various level of the maintenance, whether you had a good sense from your standpoint where -- or how quickly the ending of the lockdown measure or allowing people to come back to offices and retail shop. And I'm just curious to understand whether you are able to calibrate either your staff or your resources as you are seeing potentially this people going back to this building, kind of ramping up. Are you able to follow that? And if you, are you able to give us some indication on how quickly you are seeing all of these facilities reopening?

So the answer is, yes, of course, we can adjust our resources. And of course, we are in close contact with customers and how they are doing this. For the buildings where we have real-time connectivity and we can deploy analytics, we can see that. But we know that's still only part of our base where we have that ability. But there, we can see it, but I think what you can follow-on general movement of people traffic of people around where there's a lot of data around there now that chimes quite well with what we see.

Right. And I guess maybe the last question before I go back on the queue would be on the capital allocation. At the end of your commentary, you mentioned very strong balance sheet, which has been the case for many years. Obviously, at the moment, it looks like the thyssen opportunity is off the table. So how do you think of using this very strong balance sheet in the next couple of quarters, couple of years?

What I would say, just where we are right now, of course, it's a huge strength to have a balance sheet like we have. That means that we can make choices. We can find opportunities. And of course, we are looking for them in a crisis like this, I think it's a real strength to have a balance sheet like we have. And that's what I would say, very happy about it.

Sorry, it's maybe -- are you suggesting that this is more still looking on M&A opportunities, the way you want to be using this balance sheet?

Absolutely. If there are good M&A opportunities that will come up. Of course, yes, we're going to look at them. We have a lot of firepower to do such.

We'll take our next question from Guill Peigneux with UBS.

It's Guillermo Peigneux from UBS. I wanted to actually further elaborate on Lucie's questions. I guess your comment in the press release today of a stable Q-on-Q pricing in China and the mix also referring to China. I wanted to ask, first of all, when you say stable Q-on-Q, do you mean -- and then, again, you're commenting on the prices comment that you just did before. Could you explain us a little bit what has happened in the trend on pricing? The market is going up. And is it strange to see that pricing is now flat Q-on-Q after many quarters of increases? And then on the mix, you mentioned KONE -- GiantKONE and KONE. But is this related to GiantKONE maybe more focused to residential markets versus KONE into nonresidential [ other ] markets?

Maybe I'll start. And first, looking at the pricing. So if I look at the pricing, so year-on-year, we were actually slightly up. And yes, more stable quarter-on-quarter there as we've seen this improvement starting -- starting earlier. And I don't think the environment, yes, it's getting tougher, but we've been able to actually perform quite well, I would say, there. And I'm quite happy about that development from a pricing perspective. At the same time, then for this GiantKONE/KONE mix, as I already said, there's always fluctuations on the mix on a quarterly basis. So this time, we have a bit more weight on GiantKONE sites compared to KONE, in first quarter was actually the opposite. So I wouldn't say that really, if you can't read too much into it in the market. It's just the way this quarter, it happened to be.

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

So the first one, for you Ilkka on the bridge. So obviously, solid execution, and that's really good to see. But there is also a mix element that I would like to understand. So the orders, the sales conversion is very quick in China. And China has been higher-margin than other regions. The mix has been good. Could you comment Ilkka on what it did to the quarter in the bridge there? And to what extent execution on the cost side is sustainable, i.e., did you have savings that will drop out as activity increases? I will start there.

Well, first of all, I think it's good to remember that the environment that we're working on in Q2 has been quite unprecedented. So it's not as straightforward as -- as would normally be. But it is true that we had very strong recovery, strong deliveries in China. That's clearly is a positive impact in the bridge. Also, if you think about the bridge overall, we had accelerated savings contributing positively. But at the same time, there's also cost headwinds which were against us there, normal increases in costs. And I would say, then if I look at the COVID-19 related items, so we had extra costs related to operating in this environment. Some of them are really related to PPE protection and as such. But I would still maybe call out even more so that the complexity of this environment, how it causes us to maybe lose a bit of productivity and extra planning and really reaction times to our customer situations. That's a bigger cost. But in the COVID-19 related costs though, the extra costs were higher than what we were able to see as cost containment actions including the, what I call out as a special reduction in social security payments in China. So overall, this was a negative contributor.

Let me ask you like this instead. So when you look at the regional margin between China and developed markets, were you -- were you really sort of positively surprised about China? And were you -- but were you also positively surprised in developed markets? Do you feel that I'm just trying to gauge whether like the China component was really like a big driver to the margin than maybe we can see out of the numbers?

Well, along the fact that our sales in China grew more than 20%. Obviously, it's a big number. So that definitely was a positive contributor. And as we've been explicit, our new equipment business, in China is better-than-average profitability business. So that clearly contributes positively. In elsewhere, the situation has been much more about then working in this environment where the restrictions have been more tighter and coping with that complexity.

I would probably build on that [ Phil ] that actually our performance in North America, in particularly in Central Northern parts of Europe has been strong in the environment. Today, we actually there, we did better than we had even expected. And we've been able to deliver on the good pricing and on that good margin of our order book. So it is not only there and perhaps from a margin perspective, clearly, the fact that we have less repair sales is -- than a headwind on margins as well. So there are always puts and takes.

Yes. Yes. No, it's very impressive, well done. Then my second one is coming back to Lucie's on the balance sheet. So obviously, very strong cash flow and the macro environment is improving, and this could see the debate in the market resurfacing or whether KONE is ready to pay extra dividends. Now at the same time, thyssen is owned by private equity, and they might not be long-term holders. So no, thyssenkrupp might come back as an asset for sale at some point. So would it -- okay, I'm not sure how I'm going to ask this. Would it make sense to sit out and wait for that opportunity to come back even if it takes several years or to pay an extra dividend? Just want to hear a little bit more from you, Henrik.

Well, I would say that, first of all, that opportunity is now gone. We closed our books on that project, and we are looking forward and developing KONE as it is. So of course, the benefit, so that hasn't gone anywhere, but we are looking solidly forward. I would just, in general, say that in an environment like this, I'm really happy that we have a strong balance sheet, and I think there's real value to it.

Okay. Quick final one is on the sharp ramp of sales of the new range, and that's good to see. Could you also comment on the digital services, whether there has been any -- any like surprising change on the acceptance levels already now, sort of maybe in light of COVID, I mean, it's interlinked with the new DX, and i.e., how KONE Care and 24/7 is being rolled out. So is that also increasing as part of the maintenance mix?

So on our 24/7 Connected Services, of course, DX is very new. On our 24/7 Connected Services, yes, we have seen increase in month-on-month growth numbers there, particularly in many European countries and some Asian countries as well and China. So yes, we have built momentum there. And I think customers realize that those are services that are very good in an environment like this.

And maybe to add to that, we are also referring to new KONE Care. So just today, the way we sell our maintenance service. So there is no old way. We sell our service with this offering, and that continues to go -- roll out as we renegotiate contracts with customers, have new customers or add to our maintenance space.

Our next question comes from Andre Kukhnin with Crédit Suisse.

I wanted to just talk a bit about coming back to normal in the countries that unlocked and experience you're having there compared to China, where they obviously are trying to stage a catch-up as opposed to just coming back to normal. How would you set that sort of degree of urgency in Europe or in North America in kind of coming back to normal or trying to catch up compared to how you saw China developing 3 months ago?

I think we have to recognize that the situation is quite different. That China had a very quick, very sharp full lockdown, and they were able to do it quicker and then come back. And we can see that Chinese have remained very focused on wearing masks and tracing and all testing. So they've been very effective there and therefore, being able to keep the situation under control. I don't think the situation is as well under control in most other parts of the world. And therefore, we see a more gradual recovery. It's clear that -- also that the countries where we have had the most severe lockdowns and longest lockdowns takes longer to come back. So we're not really seeing this catching up, as you would say. We can see a better performance in the countries where lockdowns have been more limited and the virus is better under control, such as most European -- most Nordic countries, not, of course, except for one and Germany and countries such as that. So there, we see that business is becoming more normalized whereas I think it's going to take longer time for, for example, Southern Europe to become normalized. Whatever that normalized is, is of course, then a total different question.

Right. And one of the kind of arguments we've heard is that we won't be able to come back to prior level because with social distancing, labor productivity cannot be as high as it was. On the construction site, it takes longer to get people up, et cetera. Again, looking at China, it's proven to be otherwise. But is this just kind of plowing more hours into it? Or do you think, from your, again, experiences around the world, if it's possible with the kind of new rules to get to those kind of speeds of production as prior to COVID?

In China, also, there are measures in place to make sure you stay healthy, and very active monitoring and testing and so forth. But one very simple difference we see between China and many Asian countries and Europe is that everyone is wearing a mask, and that has an impact. And I'm not the scientist here, but anecdotal evidence and other evidence that we've been seeing seems to be, and that is just a cultural thing, and it does help.

And maybe also you're more maybe commenting on the construction site as a whole. But for us, obviously, we work quite a lot in the shaft alone. So it's a bit different situation for us. But obviously, if the construction sites are not progressing, then it's impacting us as well.

Got it. And I also wanted to ask about sort of slightly longer look -- not long, as -- like 12 months longer look forward. You've got, obviously, a benefit of an order book that spreads to that length and beyond. Would you say there's a risk building up of the kind of air pockets in any geographies of -- this concern that we've restarted the sites that were already operating pre-COVID, but there's not enough of the new permitting and approvals and budgeting and planning going on and that sort of -- do you see that kind of risk building up on maybe 9 to 12 months for you?

They could. Clearly, in some countries, I think that's probably going to happen. How a broad base that's going to be, we have to see. Again, the big difference is country to country. Clearly, the hardest hit countries, already they're planning, and that has slowed down, so you can get an air pocket. But I think it's a little bit too early to say. Yes, that's going to happen in some countries. How broad-based it is? I think we still need to see. At the moment, we have a solid order book going forward. And of course, that's important to continue to build on that.

Great. And if I could just maybe try one more. In terms of that piece of maintenance work that didn't happen during the lockdowns, the more discretionary part. Would you say all of that is kind of, okay, buildings were not used and hence, elevators didn't go up and down and didn't wear and tear and hence didn't need repairs and spare parts? Or is there an element of some work being delayed that is pushed into following quarters?

Well, it's obviously very hard to say. There probably is both. So some of the work is postponed, and maybe that's something we need to catch up. But then fundamentally, some of the equipment was not used as much. So that part, I don't see that as -- we're able to catch up. They just don't have the wear and tear that you normally would have.

Half-half, or is it skewed, one way or the other, in your view? Your guess is significantly better than mine.

I don't -- I'm not in a guessing game.

Oh no. I should -- sorry, if I may try just one other question. I just wanted to clarify completely for everyone. So in China, on new equipment pricing, you're up year-on-year and stable compared to Q1, but you talk about toughening environment because there is an increasing kind of commercial activity amongst your competitors or in the market generally, or have you actually seen anyone moving the prices clearly, like we've seen in end of 2015, '16?

I would say, when you have an environment like this, and the biggest opportunities and growth is in China, it's pretty normal. And usually that most companies put more of their focus into China. That's where we're going to capture the growth. And that just then fuels the competitiveness. And of course, it is the biggest market, and I don't think it's anything more really to that than the overall environment, and you want to find opportunities there.

Our next question comes from Antti Suttelin with Danske Bank.

This is Antti. On the margin issue, it seems that looking at your order intake margin improvement year-over-year and your sales margin improvement year-over-year, the explaining factor was the strong rebound in the Chinese new equipment margin -- market. Then at the same time, you are saying that you are seeing an underlying increase in competitive pressures in China. And then you also say that you are seeing the strong rebound in the market in Q2 as a one-off, basically compensating for the weaker Q1. So what happens to your margins, order intake and sales when those 2 impacts start to impact, meaning that the strong rebound no longer continues in China and then the underlying competitive pressure starts to impact?

I think we have to see what the situation is. The only thing we know at the moment is we have a healthy order book with a good margin. And I think you're a little bit overplaying China. Yes, China was, of course, very important to our performance in the quarter. But actually, if you look at our performance in many parts of Europe and in North America, it was actually also very strong. So it was not quite as one-sided as you suggested. I think we have to see what the situation is going forward. We don't know what prices will be going forward, and that's always a negotiation we have with our customers. Only thing that we know is that we have a healthy order book where year-over-year margins are up, and that's what we're going to deliver upon now going forward.