KONE Oyj (KNEBV) Earnings Call Transcript & Summary

Good afternoon, and welcome to KONE's fourth quarter earnings call. My name is Natalia Valtasaari, I'm Head of KONE's Investor Relations. And as usual, I'm joined here today by our President and CEO, Henrik Ehrnrooth and our CFO, Ilkka Hara. As in previous presentations, Henrik will start by running through the key highlights of the quarter and the full year, both in terms of our business performance, financial performance and also what we're seeing in the markets. Ilkka will then follow up with a bit of in-depth review about the financials. And Henrik will end the presentation speaking about our outlook for this year. We'll go into Q&A then. [Operator Instructions] With that, Henrik.

Thank you, Natalia, and a warm welcome to our fourth quarter presentation. Today, we have again a lot of interesting and exciting news to share with you. So going straight into the highlights of Q4. So Q4, we had a solid sales development now, particularly if we look at the market conditions. So clearly, sales was a better level than it was in Q2 and Q3. Our service business continued to perform very strongly. That is something we put a lot of focus on during the past year, and we have continued to drive very nice growth in both maintenance and modernization. The Chinese market was clearly very challenging in Q4. And that had an impact on both orders and cash flow. It's clear that a lot has happened in China since end of Q4. And I would say that signs are much more encouraging now than they were just going back to November, for example. We continued to successfully increase our prices in all of our businesses, which have been driving continued margin recovery both year-over-year and sequentially. And our Board of Directors have today announced that they will propose to Annual General Meeting a dividend of EUR 1.75 per B share at the same level as the prior year. So what about Q4? I would say Q4 performance was very much in line with our expectations, and we did see an improvement in profitability. Orders received at EUR 1.9 billion, down about 11% in comparable currencies. It's clear that Chinese market weakness had a big impact in this. Order book remains at a very solid level of more than EUR 9 billion and if you look year-over-year, up 5%. As I mentioned, sales returned to growth now in this quarter just over $2.9 billion and 2.9% growth here. Clearly, services business was the key driver here and regionally was Americas. What I'm also happy about is that now our operating income increased 4.3% year-over-year to EUR 367 million, and our adjusted EBIT improved from EUR 359 million to EUR 365 million. So a slight improvement here, even though margin was still down 0.5 percentage points from 13% to 12.5%. Cash flow was EUR 33 million in the quarter, clearly not something we are happy with. So that is perhaps what was a disappointment in this quarter. And earnings per share, the same as previous year. As we always say, 1 quarter is a very short period of time. And now we have a full year to look back to on our performance. And it's clear that 2022 had many different phases. Q1 started reasonably normally. In Q2, we clearly faced the COVID lockdowns in China, which meant that our sales suffered a lot because we almost lost a month of sales because of the closure of our factory and Q3 continue to be challenging, now somewhat better Q4 if we look at profitability wise. Orders received in that year, EUR 9.1 billion, down 2.5% in comparable currencies, which I would say is actually an okay result in an environment like this. Sales, EUR 10.9 billion, down 1.8%, of course, varied a lot quarter by quarter and our return to growth. Operating income down 20% to EUR 1.31 billion and adjusted EBIT down from EUR 1.3 billion to EUR 1.077 billion. This is clearly something we are not happy about. And that's why we have such a strong focus on profitability improvement, which we, of course, could see partly already in Q4. And cash flow, EUR 754 million, down from an exceptionally strong EUR 1.8 billion before and EPS EUR 0.50. Now what I will talk about a lot today is what -- where we put our focus last year. And we can see that we made great progress in the focused areas we set for us. That again shows that KONE's team, when we set our mind to something, we can drive good improvement. That was again a sign of that last year. So I think the team at perspective did a great job again. As I mentioned, Board Directors made a proposal of a dividend of EUR 1.75, same level as last year, which means, of course, we're paying out now a bit over our EPS and provides a good dividend yield of 3.6%. But continued strong dividends, this is a bit over EUR 900 million that we will pay out again for last year's result. Now we know that markets have changed a lot over the last years. It's been about capturing opportunities where they have emerged. And therefore, in a very changing environment, we set our focus on 3 specific things during 2022. It was clearly about improving pricing. We've been talking about that a lot, then, of course, about driving productivity, absolutely critical in an inflationary environment where costs are going up. And then service business growth, [go] service markets have provided good growth opportunities, and that's what we have really pushed for growth in that business. So how did we do? Well, price increases did go well last year, and it meant that our margins of our orders received improved compared to sequentially and end of 2021. So when we look at outside of China, we had set ourselves a target of getting our margins of our new orders to a similar level where we were towards the end of 2020, and that is what we achieved. So great progress there. China, clearly more challenging. Also in our offering development and in our operations development, we focused a lot on productivity and product cost, both we had a clearly better improvement than in prior years. So again, great results there. And I think, which is very clear that we continued throughout last year to have market-leading services growth, both in maintenance and modernization. In maintenance, for example, we can see that our service base grew by 5.4%, whereas our revenue grew by 8%. So clearly, successful pricing, 24/7 connected services, all of them contributed to having a sales growth that was 1.5x higher than unit growth. So overall, that was our focus during last year, and clearly, we're setting a very tight focus for this year to continue our positive development in these areas. Also what I think is familiar to everyone that the way we measure our longer-term success is through our strategic targets. That's a balanced way of looking at how we are developing all the areas that are important to us. In a great place to work, our employee engagement continued to be clearly about global norms in a changing environment, absolutely critical to have motivated driven workforce. Most of our customers -- we could see that our customer loyalty based on customer active survey continued the upward trend in both of our businesses, both the services and new equipment and very broadly, geographically. So what we're doing clearly is delivering positive results from our customers' perspective. Our third target is to grow faster than our markets. We continued throughout last year to have market-leading growth in services. And that is, of course, where we really put our focus. In new equipment, we really said that the first and most important thing for us is improving our margins. So pricing increases that we did. Now in terms of market share, we were about in line with markets, varied a little bit region to region, but more or less in line with the markets for last year. Then our fourth target is to have the best financial performance. It's clear that this we are not happy with. Our current profitability is not something that is okay for us, something we want to improve, and we are driving improvement there. And in sustainability, we continued our strong performance in environmental sustainability, in our diversity metrics and safety. In environment, we continue to get a lot of external recognitions for the work we are doing there. So continued good progress for us and of course, a lot to do going forward. But I would say many good developments, but still on profitability, a fair bit to be done. Now the other thing that we announced today is that we are planning to renew our operating model. This is, of course, to improve our competitiveness and be able to react even faster to market changes. So what are we doing? We are simplifying our operating model. As you know, KONE has always had a culture of strong local accountability. Now we're driving even further accountability to our area organizations and our front clients. And at the same time, we want to continue benefiting from the global scale we have through our global product platforms, services platforms as well as our supply chain. So why did we decide we want to do this? Well, when we look at the past years, we can clearly see that the market environment has changed very rapidly and situations have changed in a different way in different regions. Going forward, we believe that, that will continue to be the situation that markets will change and the development in North America will differ from Europe or from Asia. And therefore, we want to drive even more accountability to our area organizations to be able to quicker make decisions to capture the opportunities as they emerge in order to drive better growth. Also, as part of this, we are going from 5 geographic areas to 4 geographic areas. So 2 areas in Europe will be combined to 1 called Europe. And that's part of this change. Now as I mentioned already, what we're really targeting with this is to better capture regional growth opportunities. It's, of course, about improving our competitiveness and our profitability. With better growth, we can drive also better profitable growth. At the same time, also in an environment that we are, we also want to reduce our costs. So the target of this program is to reduce cost by EUR 100 million also to support our profitability development. So those are some highlights of our financial performance and how we performed and worked last year and also the change in operating model. Let's next talk about our markets, how they developed in Q4. New equipment markets in Q4 globally declined. We can see that markets declined in each geographic area. So it's clear that we could start to see impact of increasing interest rates and lower consumer confidence that had an impact on, for example, market for apartments and housing. North America, which has been perhaps the best performing market, now declined clearly in Q4 same with Europe, where perhaps a bright spot continues to be Middle East. China declined by around 20% in Q4 and rest of Asia Pacific slightly, although their bright spot has clearly been India. Now on the other hand, services market, we can see a much more positive development. That is why we've been putting so much effort in our services business. We can see that the maintenance markets continue to grow as we've seen before and with best growth in Asia Pacific and China, and modernization market now slightly lower growth than prior quarters, but still positive growth, which created again opportunities, which we captured quite nicely. Now let's dive a little bit deeper into the China market in Q4. It is clear that Q4 was one of the tougher environments in China and pricing competition was very tough. We did see a lot of changes towards the end of Q4 with the abolishment of all COVID-19 restrictions, which had a lot of impact during the quarter. Now if we look at all the statistics for Q4, we can see that most of them actually were worse in Q4 than rest of 2022 except for completions. So we could start to see the focus on completing semifinished buildings, how important that is. So if I -- if we look at China and how I see it at the moment, it's clear that Q4 was a challenging quarter. At the same time, towards the end of the quarter, first, we saw an abolishment of all COVID restrictions and opening of the market, which we believe will have a positive impact now as the country goes through that current infection wave, which very far has done so already. At the same time, we have seen a lot of policy announcements to improve the situation for developers to enable them, to refinance themselves, to get financing, to be able to drive the whole property sector forward. So those have clearly created much more optimism and therefore, there are encouraging signs for the market. Before the market really starts to now recover, we still need to see an improvement in consumer sentiment, which would then be a result of markets opening up and starting going better now that COVID restrictions have been abolished. That's what we will say also, you will see in our outlook, we're saying that we expect Chinese markets, yes, to decline for the full year 2023, but to start recovering towards the end of the first half as a result of all of these measures that already have been taken, but I will come back to that. So clearly, if I compare situation now -- compared to, for example, November, outlook is -- has clearly improved. So that is about our markets a little bit more on China. And with that, I'll hand it over to Ilkka.

Thank you, Henrik, and also a warm welcome on my behalf to this fourth quarter result announcement webcast. I'll go through our financials as normal and start with orders received development for the quarter. For the quarter, orders received was EUR 1.944 billion, down on a reported basis, 9.8% and on a constant currency basis, 11.2%. This development was driven by China and the property sector continuing to see difficult environment, as Henrik already described. And as a result, Asia Pacific declined significantly in orders received. Also, Americas declined as well as we saw a slight decline in Europe, Middle East, Africa as well, contributing to this development. At the same time, as we've talked about earlier, pricing has been at the center of our focus in this inflatory environment. And also in fourth quarter, we continue to see our orders margins improving compared to last quarter, but as well as compared to last year. In China, pricing continued to be challenging, but lower commodity costs contributed to this development. At the same time, in other areas, we continue to see good momentum with pricing. And as Henrik already highlighted, now with the pricing actions we've taken, when you've been able to see our orders margin recovering back to the level where it was at the end of 2020. So very good development there. We've already highlighted the strength in modernization pricing earlier. And we've continued to now see good development also in new equipment outside of China. So very pleased to see this continuing in a positive manner. Then to sales. Sales for the quarter were EUR 2.9 billion. On a reported basis, 5.2% growth and on a comparable basis, 2.9%. From a geographical perspective, strong development in Americas, over 14% growth. Europe and Middle East, Africa, growing at 4.8% and Asia Pacific, down 3.9% mainly driven by the development in China there. Also, China impacted new equipment, which declined 2.4%. But as highlighted already earlier, our Services business continued its very strong performance. And as a result, maintenance grew 7.8 -- 7.6% and a modernization 11.4%. So very good performance on our services business. Our adjusted EBIT for the quarter was EUR 365 million and the margin for adjusted EBIT was 12.5%. We continue to see positive development here. It's been a focus to be able to recover our margins now towards the end of the year, absolute basis were slightly up, and margin-wise, we continue to narrow the gap compared to last year. The initial results of the pricing actions that we've taken on orders are now visible in the orders we deliver in this quarter. That contributes positively. We continue to see the widespread inflation creating cost headwinds, having a negative impact in our profits and profitability. And also, the mix impact from declining China sales is impacting negatively our profitability. Then cash flow, which for the quarter was EUR 33 million. And clearly, we saw our working capital having a negative impact to our cash flow, down from last year's exceptionally high level of EUR 525 million. As I highlighted earlier, both at the end of last year, but also in conjunction with third quarter results, timing of the -- on our accounts payable had a negative impact to our cash flow and working capital. And also, overall, the liquidity situation in China is impacting our customers and accounts receivable were up in the quarter. Also, I would say that orders received development in China, which was negative -- naturally contributes to the -- our advances and therefore, negatively on working capital development. But clearly, this cash flow is not something we're happy about and are expecting that in the coming quarters, we would then start to return to a more normalized development in our cash generation for the business. But with that, I'll stop and hand over to Henrik to continue with the market and business outlook.

Thanks, Ilkka. So how are we seeing 2023. First of all, let's start with the important China market. We expect that the Chinese market will decline by somewhat over 10% in 2023. Now as I mentioned already, we expect that recovery will start towards the end of the first half of the year as a result of the stimulus measures that have already been announced. So we don't expect anything new. We expect just that this will start taking effect and also when the economy improves, see better consumer confidence. Rest of the World market grow clearly in Asia Pacific, ex China, of course, driven by India, more stable in Europe, Middle East and Africa. Of course, there Middle East better than Europe and declined slightly in North America, of course, from a good level in North America. Modernization markets, we expect to continue to see growth in all regions and maintenance markets, good development that we've seen so far, trend to continue with slight growth in mature markets and, of course, good growth then in Asia Pacific. KONE's business outlook for 2023. We expect our sales in comparable currencies to be at the similar level to the previous year, and we expect our adjusted EBIT margin to start to recover due to the better margins of orders received that Ilkka talked about in our orders and also the continued solid development in our maintenance business. Now this whole outlook does assume that construction activity in China starts to recover towards second -- towards the end of the first half of the year as a result of the measures that have already been introduced in the property sector. Now there are a number of things that are supporting our performance is, of course, the positive outlook for our services, the good development we have there. We have a strong order book, and we're having gradually better margins that we deliver from that order book and of course, the easing commodity headwinds in Asia, well particularly in China, I would say. However, what is burning the result? The rotation, the order book continues to be slower throughout the world because of more uncertain outlook and many developers slowing down their projects or in some markets, still some material shortages. Then of course, the anticipated decline in China's new equipment market [indiscernible] China is by far our biggest market and a very good market for KONE. Then also wage inflation will be higher this year than in prior years, and component costs are still going up. So we always have for the components that we buy, there's a raw material part and the value-added part because of labor costs and other inflationary trends are driving up those costs still. But I think many good things, and of course, overall expectation is that we will start recovering our EBIT margins. Now to summarize, there continues to be good opportunities in services that we are focused on to continue drive the good performance we have had, and we are seeing positive results from profitability actions particularly when it comes to pricing and productivity. We have a competitive offering, and our focus is to continue to drive long-term growth. And then we've also taken action to further improve our competitiveness with our planned operating model renewal. So with that, we are ready for your questions and comments.

[Operator Instructions] The first question comes from the line of Lars Brorson from Barclays.

If I can start maybe on the full year guidance, we have 4 years history of giving earnings side how you don't appreciate there are variables within China. And if fall in 3 [indiscernible] maybe one forgives that on components -- trying to understand how to think about raw material on [current tradition]. Is the mix that European supply chain and wage inflation and that continues to be afraid [indiscernible] our and as fuel price business in China that [indiscernible] there. Just to frame it, we talked about EUR 400 million headwind over the last 2 years and that should start to reverse this year. I wonder from a sort of total raw mats and logistics and components cost standpoint, can you help us a little bit on what that number might look like in the 2023 bridge.

Thanks, Lars. First of all, I don't know it was elsewhere, but the line on our end was a bit a little bad, so slightly difficult to hear your question.

First was guidance and I'll take the raw materials.

Our guidance, I think we are being quite specific on our sales guidance and also that we will start to see a recovery in our EBIT margin clearly, there is some uncertainty still in the market that's how well the China market, which we all know is very important to us. It's a good and profitable market for KONE, how that will start taking off. But I still believe that we have a quite a specific outlook there. So I hope that's helpful to everyone the guidance we've given.

Maybe I'll then continue on the cost or raw material/component cost question. And as you said, so we are seeing raw materials, especially in China, having a positive impact. And that is something that we expect for year '23. At the same time, as Henrik was highlighting that even though the raw material part of the component cost is coming down, then we're seeing the inflation in general, having a negative impact to this value-added part, so the processing cost to the components. And as a result, raw mats are a tailwind. But then due to this overall inflation, so the component costs are a slight headwind. So it's not a huge headwind, so some tens of millions, but clearly a headwind still on an overall level.

Ilkka, that's helpful. Would it be fair to assume that the EUR 400 million headwind over the last couple of years would reverse, say, over the next 3 years, of which you could get, say, EUR 100 million this year. Just to help us a bit for our EBIT bridge for 2023.

So first, I guess, if I would know whether raw material prices for the next 3 years would go, I think there's other opportunities than just elevate the business.

But just assuming current start, obviously.

Yes, yes. That's -- sorry, a more of a joke. But -- so all in all, in your bridge for '23, as a result, the component purchases that we're making are a slight headwind. So even though the raw material comes down, then still the cost is a slight headwind for us as a result. So that's the situation in '23. Now if it continues to go down at the raw material part, then you need to take a view on the inflation. But obviously, if it continues to go down and inflation starts to come down as well, then it will start to be a tailwind as a result.

And then, of course, we're taking a lot of action to reduce our own product cost through the offering, and that's, of course, something that is also supporting. So a lot of moving parts here when we look at component costs and then, of course, offering where we are driving some quite positive change.

And maybe to add to that, as we talked about earlier in conjunction of the earlier results, clearly, in this cost environment, also the focus on scrutiny on product cost, for example, has been on a different level, and we've been able to see quite a good development there. So it is something that will contribute positively going forward, being able to then counter some of the inflation that we see overall.

Briefly secondly, if I can. And finally, just on the market outlook at Henrik, I was quite encouraged to see new equipment in EMEA led this year and modernization clear growth. I think we were all bracing ourselves maybe something that was bit worth. Maybe help us understand a bit better what you see in that part of your business? And secondly, within market outlook, negative 10% for China feels a bit conservative if we get a completion backlog pickup in that part of your business. Could you help us understand or frame how much of, should we say, completion backlog is already under booked today versus an order opportunity in 2023 potentially?

This order backlog, I would say, magnitude wise, and that's always going to be a backlog, but let's say that's probably close to a year of volumes in deliveries and half a year of volumes in orders. But how quickly does that come through? So that's uncertain, it is always going to be a backlog. But if we get a better financing situation, that could be a little bit tailwind. But it's clearly it's going to take some time before that starts improving. Therefore, the first half of the year is likely to be more challenging. When it comes to Europe, it's clear that it varies quite a lot. They are quite strong markets in the Middle East, in particular, of course, with high commodity costs, they have a good situation there. Then within Europe, it varies between segments, quite a lot infra building. So it varies a lot market to market. But the good thing is that there continues to be opportunities to be taken.

Next question comes from the line of Daniela Costa from Goldman Sachs.

What is the follow-up actually on the margin question? And the second one is on the cash flow from operations. But maybe starting by the one is follow-up, maybe I didn't fully grasp your answer there. But -- so you're guiding for your margins to be slightly up. Your volume are flat. Raw mats minus components seem like it's not a big driver. So what is -- is it some of the EUR 100 million of savings already in that bridge? Is it mix? Is it sort of what do you assume for China margins? If you can reexplain -- sorry to ask again about what drives that margin up? Because originally, I guess, I thought at least it would be raw materials, but it doesn't seem to be the case. And then I'll ask the second one afterwards.

Thank you piecemealing the questions, it's much easier for us. So yes, so as you said, volume-wise, we're quite flat with this guidance. Mix-wise, it's neutral in a sense that we continue to see good opportunities in services at the same time with the orders development that we've seen particularly in China, that has other side of the coin. Then it's good to note that we've seen increasing orders margins in the last quarters since third quarter of last year. So that's obviously something that we will now deliver. And as we go through the order book to new and newer orders, it will have a positive impact to our results this year, and some of that will carry over to '24 as well where the order book rotation is slower. Then negative side on that bridge is overall cost inflation. So for example, salary costs are continue to be on a higher-than-normal level headwind. And then, yes, there will be some cost benefits from the new operating model, but the EUR 100 million we set as a target. The full impact of that is only expected in '24, but there are some tens of millions that will help also in '23 as we go through the program and implement the new structure.

Okay. That's very clear. My second question is regarding the cash flow from operations, and you talked about the key makeup. But looking at the amount of advances, as a group, it doesn't look -- it doesn't look like a huge difference. So I guess it's really the receivables -- and can you talk about what's going on in China? Is -- was this a one-off in Q4? Do you expect to receive a big inflow from these receivables into the beginning of the year? If you could give us some clarity, I guess, sort of what visibility you have of getting paid in China?

Well, first, if I think about item, the net working capital development. So clearly, our payables are coming down quite a bit compared to end of last year -- sorry, end of '21 as well as in the quarter. And that's then normalizing, as I talked about the timing difference of the payables. Then on advances, normally, if we have a growing business in -- they are actually contributing positively to net working capital, meaning that it is further negative. And now we don't see that and orders growth in China is the key driver there. Elsewhere, we've seen a better development there. And I think on a quarterly basis, as we always say, cash flow will fluctuate. But if you look at the situation. So overall, we've seen a more difficult quarters in China, starting from lockdowns in Q2 and the tightness in liquidity overall, that is impacting and also having the impact on receivables being the key driver there.

Very quickly. So no bad debt increases or is just the timing?

Well, we've reserved bad debts as we see risks, but that's not the driver for our net working capital development.

The next question comes from the line of Oreo Calderon of Morgan Stanley.

I'll take them one at a time. First of all, is around the China market and apologies because I already asked this in the third quarter. But if I look at that slide, you show that you have slightly underperformed the market. So I just want to understand if that's driven by you not going after every single project? Or what's been the driver do you think you're losing market share? Or do you just think it's a conscious decision not to take orders at bad margins?

So if I look at -- for the full year in China last year, we're in line with the market or even perhaps slightly above, and it varied quarter-to-quarter, as it usually does. In second half of the year, we had quite a lot of focus on pricing, and that contributed positively in Q3. In Q4, we continued to be very focused on making sure that we take orders that are high quality, i.e., payment terms are in place and also margins make sense. So that's perhaps the biggest reason I would say it's quarter-to-quarter fluctuation. We continue to have a very strong position there. In end of the last year, particularly second half, the liquidity situation of many of the developers is most challenged. And yes, one is to be very focused on making sure you take orders where you're going to get paid. And that's one of the things we kept high focus on.

That's helpful. And it's probably a little bit of follow-up on one of the previous questions around raw materials. But if you could confirm what the raw material headwind was in 4Q? Is that -- sorry, that EUR 200 million sort of guidance for the full year and that you provided in sort of the number where you ended up? I'm just trying to understand how much of the run rate in 4Q for margin should we assume heading into 2023?

So the actual number for the full year is quite close to the EUR 200 million that I've quoted already earlier. And as a result, it was a slight, I guess, headwind in fourth quarter, but not big enough to be called out individually. And your question on the run rate on fourth quarter, I think it's also good to note, if you look at the seasonality that we tend to have quite a good margin always in the fourth quarter. And then given the timing of, for example, Chinese New Year and market development in China. So first quarter is a bit different. So you need to also take into account the seasonality in margins.

Next question -- sorry, the next question comes from Klas Bergelind from Citi.

So my first one is coming back on the cost side and looking at the China impact from lower raw mats. You don't have much hedges here versus rest of the world. So you see the impact already now. So let's ignore the component inflation for a moment and just zoom in on the raw mats. And if you look at the current spot level, I guess this is around EUR 80 million annual potential tailwind. And I guess that component cost electronics will likely -- elevated. But the raw mat impact in China, I think is 60% of a total headwind, which is now reversing, it already showed in the quarter. Is that a number you would agree with around EUR 80 million, and then you add the tens of millions headwind from component costs on top.

I guess your net-net impact is a different than mine. So meaning that raw materials plus the inflation is a headwind rather than tailwind. If I understood correctly, you are proposing it to be a tailwind for us. Particularly in China, the raw materials are developing more favorably and maybe also the inflation in overall is a lower impact there. But then in China, we've seen also pricing be more challenging. So I'm not going to comment area by area this, but dynamic-wise, it's a bit different dynamic in rest of the world versus China.

Yes. No, I was commenting on gross impact rather than net of pricing, but you might have a little bit of lesser pricing than India.

Yes. In Rest of the World, yes, clearly, pricing contributes positively.

Yes. Fine, I might circle back on that. In terms of -- my second one is on the orders margin where you say that's now back to levels before end of 2020. That's around 14%. When you look at the total backlog conversion now with China typically quicker versus EMEA, maybe 12-month Americas, maybe 18 months or more, that 14%. How quickly do you think you can convert that Henrik, is that end of 2023, start of 2024? I'm just trying to think about the total conversion.

Well, we haven't quoted any specific numbers on what that margin was. And I think it was pretty clear in his presentation that when we talk about recovering margin, we talk about outside of China. In China, pricing has been more challenging. But at the same time, costs -- the cost picture is clearly better in China than rest of the world. So from a margin perspective, it doesn't differ that much, but clearly, recovery has been better in other parts of the world. Then we also have to remember, mix that China is -- continues to be a very profitable new equipment market. So when that share comes down, that's from mix perspective, a little bit is it negative for us. But with this current rotation, we're going to start gradually more and more this year, get the good pricing coming through, but that's going to flow into 2024 as well, particularly larger projects in Europe and particularly in North America.

And it's good to remember that North America has been one of the markets where we've seen pricing developing most positively. So that gives us a good tailwind into '24 from that perspect.

Next question comes from the line of Miguel Borrega from Marktfeld.

Two questions for me. The first one, just on your market environment guidance for North America and Europe. Just wanted to dig a little bit deeper on that and your expectations, you said North America slightly down, flat in Europe. Can you just comment on your exposure in each market, I guess, in the U.S. is mostly non-resi, which is typically more resilient. So I was just wondering why you expect the market to be down. And in Europe, obviously, the resi market is quite weak. So also a bit surprised you think it's going to be flat. So I'm just wondering what you're seeing on the ground for each of the Western market.

Okay. So North America, clearly, there is a lower share of residential, but residential is an important part of the market, but also, we're seeing a slowdown in the office market there as well. It's clear that many companies are now thinking about their situation, also developers with higher financing costs, there's clearly less speculative construction right now. So that is what is impacting, but I would say it continues to be at a good level of the market there. In Europe, it varies a lot. If you look at housing, yes, we can see that housing starts and approvals are coming down in most places, but there's still apartment shortage in most of Europe. But what are the sectors that are improving. So when we look at Europe, we say Europe, Middle East and Africa. So it's clear that Middle East, there are some very strong markets that are actually growing very nicely with a lot of opportunities. So Middle East is clearly the bright spot. Then you can see quite a lot of continued infrastructure construction. And actually, some office continues to be pretty okay in many parts of Europe. So it varies a lot. And I would say, really, the strength comes from Middle East -- it's the big strong part.

And maybe to add just to make clear that we're talking about the same thing. So when we talk about market outlook, we look at the total market for elevators and escalators there with a comment and mainly it means elevators given the volumes, then we don't guide ourselves, our orders received. We only comment on sales. So that's also good to note.

And then In services, can you give us a bit more color on pricing for 2023? I appreciate the color on Slide 6, where you grew your maintenance base by 5%volume,which leaves pricing roughly at 3% in 2022. I suppose if you update pricing by, let's say, last year's inflation, so how much are we talking about for 2023? And how easy is it to enforce these price increases? And then lastly, how--where do you stand on the connected units?

So first of all, it's not that 3% is how much we increase prices because if you think about our portfolio, where we're growing the fastest. It's in Asia, particularly China and India, where average monetary value per unit is clearly lower, but it's in Europe or North America. So that's, of course, making the value lower per unit, but then through successful pricing, 24/7 connected services and so forth is actually making it higher. So I think the gap is actually quite positive there. If you look at prior to 2018, it was always -- almost the opposite, the average value per unit. Now we are not going to comment so much on pricing yet because pricing for maintenance is happening right now for the year. So we can talk about in the first quarter more results. Only thing I can say it's higher than prior year because of the trends. But then let's see, we're always very cautious that we don't comment on pricing going forward, but we are just negotiating with customers. So let's see what the outcome is when it comes, but I would say I'm quite encouraged there. On connected units, we are now over 20% of all KONE units connected and roughly 15% of our total base is connected. So continuous good growth, and that also contributed more than 1 percentage point to our growth last year.

And in the markets where we have maintenance contracts, which are tied to some kind of inflation index, Naturally, that index last year did not fully reflect yet the inflation we've seen because inflation was just picking up. So in those markets, the inflation now has been a bigger part and then gives a good environment for escalations. But as I said, we'll come back on pricing when we look at both the fact what we've been able to accomplish.

The next question comes from the lines of [ Jingyi Zhang ] from Credit Suisse.

I have 2 questions. And the first one is on pricing. Firstly, for China. In the presentation, you mentioned like-for-like new equipment prices declined slightly and pricing environment continues to be intense. And I'm wondering if you have observed any sequential signs of improvement or at least stabilization on China pricing. And now with China commodity prices now roughly reverse all the inflation we saw over 2021 and '22. I wonder what's your expectation on pricing environment in China going forward? And on the same topic more broadly for other regions, would you say like low teens is a sensible estimate of the price increase in North America and Europe on new equipment. And now with raw materials turning in to -- with raw material, almost into a tailwind. But on the other hand, will the industry has been lagging its larger peers in building space in terms of pricing action. So net-net, I'm curious how you see the price environment develop in 2023 in North America and Europe as well?

I would say, first of all, we are not going to comment on pricing environment going forward. That we don't do because that is something between us and our customers. And then in hindsight, we're going to look at what commercial strategies we deployed. In China, where we can say that, yes, pricing environment was challenging. Perhaps we started to see some signs of stabilization because it's clear that with the environment for everyone has been very challenging even though, as you said, that steel prices have declined clearly there. So that is a helpful thing for China market, but pricing has been very tough there. So we expect -- we have seen some stabilization now what we're going to see going forward. Let's see.

It's very helpful. And my second question is on maintenance conversion rate in China. If I remember correctly, you previously mentioned about 60% for KONE-owned brands. So I'm wondering what is the road map for conversion rate we developed and catch up with other regions going forward in the midterm.

So pretty much the same level last year as previously it's clear that we're taking a lot of action to improve conversions and retentions. We know that the market there is very competitive and a lot of independent players. So through value-added services, through connective services, those are, for example, ways how we can improve our both conversion and retention. And also, we're seeing that where they're starting to deploy condition-based maintenance, where you can use more connectivity, and you can therefore reduce your visits that there is a better situation but it's still only a few cities that have this. And we're going to start to see a gradual increase in that, but that's going to take some time. So those are the actions that are on the table to be able to improve conversion. So I think regulatory environment also is an important factor there.

Next question comes from the line of John Kim from Deutsche Bank.

I was wondering if we could pivot back to China for a second. Some color or context on the following ideas or topics. When you think about broad-based stimulus, are there specific programs or initiatives perhaps we should focus on. I'd also be interested to hear about kind of adoption of the newer lower ASP product that I think you had mentioned in the Q3 call, do you find that the market is evolving to a lower ASP? And how should we think about that when we think about the market on perhaps a 2- or 3-year view?

So when you think about the China market that what has been important, if you look at last year, the biggest challenge in the market was clearly the liquidity for developers. Three red lines policy was a very strict rule. And therefore, developers that had a weaker situation just didn't get financing and they were unable to refinance or even restructure themselves. That has changed. That is perhaps the most important thing that developers, both private and the ones with state backing are able to refinance themselves and get financing. They will, of course, first need to get their bonds refinanced and all that, and then we think the market will start to flow better. But that is perhaps the most important thing. And it was really in November, the 16-points plan that was announced by the government that had many of these elements in there. And we can also see the importance of 3 red lines policy has been declining. It's clear that the developers, many of them need to strengthen their balance sheet. But as I said, the most important thing that now they are able to do it. They weren't able to do it during last year. Before we start to see an upturn, the other thing we will need is consumer confidence for consumers again to have confidence to buy apartments. And that probably is going to take some time when the economy starts to pick up now when COVID policy have been loosened. So there seems to be some encouraging signs now already during Chinese New Year of consumers' propensity to spend and be out there. So I think those are the important things we need to see.