KONE Oyj (KNEBV) Earnings Call Transcript & Summary

Good afternoon, and welcome to KONE's Second Quarter Earnings Call. My name is Natalia Valtasaari. I'm KONE's Head of Investors, and I'm very pleased to be joined here today by our CEO, Henrik Ehrnrooth and our CFO, Ilkka Hara. As usual, Henrik will take you through the business and financial highlights to start with. Ilkka will then go through the financials in a bit more detail, and Henrik will end the presentation by running through the guidance, both from a business perspective and a market perspective. We'll move to a Q&A then. [Operator Instructions] So with that, Henrik, please?

Thank you, Natalia, and very warm welcome to everyone. Great to have you here today. And I'm also very happy that we have a lot of good news to share with you today. If I start with the highlight. Really, one of the key highlights for the quarter was the very broad-based growth we had in sales. We grew our sales strongly in all businesses and all geographic regions. That was really great. And also, we had a strong profitability improvement that I'm very happy about. We had another quarter, yet again, on excellent performance in services, both maintenance and modernization. Both of them had really, I would say, phenomenally strong sales growth in this quarter, and that is something I'm really, really happy about. New equipment orders. Clearly, they are lower now as a result of challenging markets in both Europe, North America as well as in China, although also some very positive opportunities in Asia. During the quarter, we implemented our new operating model. I am very happy of the strong performance that we had in -- during a time of organizational change. We are now really set up for better competitiveness, speed through a better -- even better local accountability in our organization. The objectives that we set for ourselves there of competitiveness, improving speed and decision-making closer to customers as well as profitability through cost savings, we are on track to achieve all of those. So those are the highlights, and let's start then with the key figures on Q2. As I mentioned already, really highlight was about very strong sales growth and a great improvement in our profitability. Our orders received, a bit shy of EUR 2.3 billion, a decline of 8.1% in comparable currencies. It's clear that our new equipment business did decline. At the same time, we had a continued good development in modernization. And also, I would highlight the great development we had in Asia-Pacific outside of China. What is great is that our order book continues to be at a very solid level, over EUR 9 billion. A year ago, it hit an all-time high of EUR 10 billion. We are now, in comparable currencies, EUR 2.9 billion below that, so a good level. So actually, we have had a positive book-to-bill if we look at last 12 months. Sales is EUR 2.8 billion, an 11% up and 16% up in comparable currencies. As I mentioned here, really the highlights here the phenomenal strong growth in modernization of almost 25% and 9.8% in our maintenance business, which is really, really strong. Operating income improved by about 50% to EUR 283 million. And our adjusted EBIT improved by 59% to EUR 332 million; and our margin, from 8.2% to 11.7%. So we are really on track with our objective of improving our margins, and that is, of course, positive. We're now cash flow of EUR 306 million compared to EUR 167 million a year ago. But as we always say, 6 months is a short period -- sorry, 3 months is a short period of time. Now we have full 6 months behind us, so we have a little bit more perspective of our performance. And if we look at the first 6 months of the year, very much similar trends to what we saw for the second quarter. So orders received, EUR 4.5 billion, down 6.6%. Sales, strong growth to almost EUR 5.4 billion, which is 11% growth; and also adjusted EBIT growing from EUR 406 million to EUR 574 million; and adjusted EBIT margin up from 8.1% to 10.6%, so 2.5 percentage points, so very good margin improvement. Also, if you look at a 6-month basis, cash flow, a good EUR 762 million is a really good cash conversion also for the first 6 months. And earnings per share from EUR 0.51 to EUR 0.79. So I would say our numbers, I think, are strong for the 6 -- first 6 months of the year. As I mentioned already, we have, in the past 6 months, implemented what we call our new operating model that has required a fair bit of organizational position changes. I'm very happy that during that change, we have had a strong performance. That really talks volumes about the motivation, the spirit and the forward-looking nature of KONE's employees. So a huge thanks to everyone for a very, very good job done. In the quarter, we performed our annual customer loyalty survey, and this year, we had a slight negative development. Here, what impacted was really lockdown-related challenges in China as well as supply chain challenges overall last year. What I'm very happy about, though, is that our Net Promoter Score in our services, especially modernization, continued the positive development that we have had over many years. In fact, actually, if I look at most of our countries, we had a positive development overall. And we are now back at the level we were in 2021, which was clearly a good level. And I think when I look at the background and the reasons for the slight decline now, I am confident that we can recover based on the feedback we have got and what we are seeing with our -- in our customer work right now. Key feedback, again, was really about KONE, reliable partner as a company, the great quality of our products and our services and the responsiveness we have as a company. So all of those are positive, but it's clear that we're not happy that it came down somewhat this year, and now a clear focus on improving our customer loyalty again. So those are some of the highlights of KONE's second quarter. Let's then talk about markets, where we clearly see 2 different situations. New equipment markets are clearly impacted by economic environment in China as well as Europe and North America. And we have seen a weakening of the new equipment markets in the second quarter. North America markets in Q2 declined significantly from, I would say, high base. What is positive with North America, though, is if you look at the Architectural Billing Index, which is an important leading indicator, we can see that it is at 51. So a 50 indicates stable markets. And of course, then above that means there's positive more billing and so forth. So we are seeing actually slightly positive development in that area, which is good. Europe, Middle East and Africa, also a significant decline, very much the trends that we talked about in connection with our Q1 result which is the further we go in Northern Europe, the Nordic countries are perhaps where we have seen the most significant weakness as well as Germany, whereas a little bit further south such as France and perhaps also U.K., we see a somewhat better situation. Middle East and Africa overall declined, although if I look at the Gulf countries there, we continue to see good demand. China markets declined clearly as a result of the weak consumer sentiment. This is clearly a bit weaker than what we expected in connection with Q1 results, but I'll come back to China and talk about that a little bit more in detail. Rest of Asia-Pacific, particularly India and Southeast Asia, we have very strong markets where demand is also growing. Southeast Asia has been growing and developing very positively, as has India. So that's where the best growth opportunities are right now in new equipment business. Now what we have to remember is that more than 50% of our business today are in growing markets. That means our services markets, which continue to develop positively across the board in all countries. Modernization business is -- modernization markets overall are at a good level, and they continue to grow slightly both in North America and Europe, Middle East and Africa. China modernization markets are back to a good growth trend after slightly weaker markets last year. Clearly, we had a COVID impact, but they are clearly back to a good growth trend, as are markets in rest of Asia Pacific. In maintenance, we have continued to see similar trends as before. In measure of units, slight growth in North America, Europe, Middle East and Africa and clear growth in rest of Asia-Pacific and in China. But I would say that if we look at the service markets, in monetary value, we actually have more growth than we have seen in the past years because of better pricing in the markets overall. So again, I believe that we are in an excellent industry because in this economic environment as well, more than 50% of the markets where we operate are clearly growing. Let's then talk a little bit more in detail about China. I know that interest is, of course, for us also very important. So we focus a lot on it. And if I give a little bit of perspective how we've seen China develop during this year. Beginning of the year and in connection with the Q1 result, we said that we expected the market to start recovering towards the end of the first half of the year. That situation seemed to be very much intact in Q1 because of good development we have seen in February, in March, continuing into April. However, then when May came, we saw that growth really petered out overall in the economy, and that also impacted property markets and consumer sentiments. And we've seen that savings rates in China have continued to go up. So it's really a question of consumer sentiment at the moment, why markets have been somewhat weaker than we had expected. What has held true, what we expect at the beginning of the year, was that there would be a strong focus on completions, and completions, in fact, would be at a good level. And this has clearly happened. When we look at the new equipment markets for the rest of the year, it is clear that policy actions are very important to how the markets develop end of the year. If you look at China, what we also have had as a very high focus in China, is to drive growth in services, both maintenance and modernization. We've seen those markets develop well, and we've seen good growth for us as well. We had extremely strong growth in our modernization sales now in the quarter. So again, that is where the growth is in China, and we're putting a lot of emphasis on this. And we can clearly see the challenging markets if we look at the statistics, real estate investments, particularly new starts. At the same time, we can see a positive situation in completions. And we believe this completion story will continue going forward as well. So that perhaps hopefully gives a little bit more context and views on how we think about China. But now I'll ask Ilkka to again dive a little bit deeper into our financial performance for Q2.

Thank you, Henrik, and also a warm welcome on my behalf to this second quarter results announcement webcast. And as Henrik already said, we have some good developments and performance in the second quarter. So let's dig deeper into the numbers. First, orders received. For the second quarter, they were EUR 2.275 billion. And on a result basis, that's a decline of 12.8%, and on a comparable basis, a decline of 8.1%. We saw orders received growing in Europe, Middle East, Africa, whereas Americas and APAC declined, especially driven by the market backdrop in China that Henrik already covered. When we look at the pricing, we saw positive development in pricing outside of China. In China, the market continues to be competitive, and both price as well as mix contributed slightly negatively in our orders received. At the same time, in China, component costs continue to come down, which is then mitigating the impact to margins. Overall, therefore, we continue to see our margin of orders received improve year-on-year and continue on a stable level compared to the good level that we were in first quarter. And as highlighted already by Henrik, especially good development in orders received was in the modernization that continues to grow well in this environment. Then to sales, which was EUR 2.836 billion for the quarter. On a reported basis, 11% growth, on a comparable basis, over 16% growth, so a very strong development in sales. And what I'm especially pleased about is how all areas as well as all businesses contributed to this positive growth in our sales. In new equipment, the growth was 18.5%. As Henrik already highlighted, maintenance grew very strongly at 9.8%. And maybe, again, the highlight of the quarter, as was the case also in the first quarter, is a very strong sales development in modernization, growing at 24.8%. We see both in the new equipment as well as in modernization, that after a more difficult period from a supply chain perspective, now both customers and ourselves, we are able to also get a positive order book development and get back to a more normal level, which is supporting the sales in those businesses. Then from an area perspective, we saw EMEA growing at 13%, Americas at 12.6%, and in APAC, strong growth at 21.6%. As already noted, APAC, of course, the comparison point for China due to COVID lockdowns is part of the explanation. But we did see strong performance also in Asia-Pacific, especially in India and Southeast Asia, from this perspective. Then to our adjusted EBIT and profitability. For the quarter, EUR 332 million at 11.7%. We are now seeing the profitability improving. That's been one of the focus areas for us. I'm very happy to see that now materializing continuously in this quarter. We also saw a strong broad-based contribution from all of the businesses contributing to this outcome. If I look at the key drivers for this growth, of course, contributes positively with the sales growth we had, but profitability also is a key part of the development. Pricing of the orders continues to improve. So the orders that we booked previously where the pricing is improving, is now materializing in deliveries. We see lower material costs contributing positively in this quarter and continue to see a better environment from that perspective. Also, with the strong growth, we get and had a stronger fixed cost absorption. But I'll also highlight that I'm very pleased about our fixed cost control, which has contributed also to this profitability improvement. At the same time, it's good to note that inflation continues to be on a high level, and that's something that is negatively then impacting our profitability in the quarter, but a very good development from a profitability perspective. Then to cash flow, which for the first half, it was EUR 762 million, clear improvement from last year, and particularly we continue to have a -- first quarter was very strong and a good development also in the second quarter. And our net working capital for the first half improved from EUR 904 million to EUR 949 million. Always, seasonality plays a role. So the maintenance invoicing cycle is contributing positively. And as already noted in earlier in the year, we had a timing of our accounts payable contributing negatively in the second quarter. It was more stable. But overall, a good first half from a cash flow perspective. With that, I'll hand over back to Henrik to talk about market and business outlook for the rest of the year.

Thank you, Ilkka. So let's wrap up with the market outlook. New equipment markets, we now expect China to decline by approximately 10% to 15% this year. Previously, we expected it would be slightly under 10%. And it's clear that policy actions by the central government will be very important to the market recovery. Rest of Asia-Pacific continues to grow. We see a good situation there. Again, India, Southeast Asia, very good demand there. We expect Europe, Middle East and Africa to decline clearly and North America to decline significantly from a good level or actually a high level. What is positive, and again, where more than 50% of our business is, that both modernization and maintenance markets are growing. Modernization, we expect to continue to grow in all regions, with clear growth in -- throughout Asia-Pacific, including China. Our maintenance markets continue to develop positively in number of units. And actually, as we've seen, trend growth in monetary value is a little bit higher than what it's been in the prior years. And the biggest growth opportunities are Asia Pacific, China and outside where we have good positions overall. So that's where definitely we have good opportunities. Then our business outlook. We have now specified our outlook as we have 6 months behind us. We now expect our sales to grow between 3% and 6% in comparable currencies. As you probably remember, we said previously that it would grow somewhat above the previous year. So this is really a specification of that somewhat -- so very much in line but now just a clear, tighter range. And the same thing we've done with adjusted EBIT, we've given now a specific range. We expect the margin to be in the range of 11% to 12%, which means that we will continue to see a recovery throughout this year and, previously said, it will start to recover. Now as I'm sure all of you have noticed is that the renminbi and the dollar has weakened compared to the euro. So from a translation perspective, we will have about EUR 50 million negative impact from foreign exchange for the full year. For the first 6 months, we had only about EUR 6 million. So most of the impact will come in the second half. Now we have a bunch of things that are supporting our good performance such as the continued positive outlook in services, both maintenance and modernization, as you've seen, markets are positive and we have had a really good performance here. We have a very solid order book and we have continuously improving margins in our order book. So there is also providing good support for our profitability. And we see easing commodity headwinds, which are clearly impacting, in particular, in China. But then the more challenging situation is, of course, the declining market for new equipment in China and also softer markets for new equipment in Europe and North America as well as wage inflation. Overall, I would say that, given the backdrop, we have a good situation to continue to improve our margins. So in summary, I would say, great development in sales and in profitability, really on track with the objectives we set us, and actually in sales, even better. The new operating model that we have implemented strengthens our customer focus and competitiveness, decision-making closer to the customer, provides a speed. And as you can see, we are very well positioned to capture growth in service markets everywhere and also selected new equipment markets. That provides good opportunities going forward. So with that, happy to take all of your questions.

The first question comes from Daniela Costa from Goldman Sachs.

I have 3, please. First one, I just wanted to check what scenario do we need to see in the second half so that you have enough of an order book to support growth in original equipment in '24? Or do you already think you have that? Would be interesting to hear your thoughts. Second thing, if you can update us regarding how much in terms of raw material tailwinds do we still have yet to come in the second half and beyond that? And then thirdly, just given you've weakened the market outlook in Europe, and North America as well, do you see some risk of backlog cancellations there? Or are you seeing any evidence of the product -- project delays. If you can talk a little bit about what led you to -- it was quite a large change.

Okay. Maybe I'll start and I guess -- so first of all, of course, at this point of the year, we are not guiding yet for '24. And so from an order book point of view, we actually have, I guess, you asked for new equipment business, but overall order book is on a very good level. So it's over EUR 9 billion, which is just shy of our all-time high overall. In modernization, our order book coverage actually is very good. But of course, that is a part of the order book that rotates faster. But I would say that overall, book-to-bill continues to be on a very good level, clearly over 1 on that one. In new equipment, we naturally, at this point of the year, still need to book orders for supporting our expectations for next year. But I would say that we are in a spot where we continue to follow how the markets develop. And as I said, we've now seen a few quarters of decline in our orders received in new equipment business, but let's see how the market develops there. Then to raw materials, which was another question. So overall, we expect raw materials for this year to be a tailwind -- raw materials or input costs, as I like to say it, of a tailwind of about a bit more than EUR 100 million. It's clearly up from what we said earlier. We've seen a more positive development than we expected. And I would say that a bit more than half of that is still yet to be expected in second half. So clearly something that if we're on this level, there would be still some tailwind left for '24, of course, assuming all things being similar in that equation. Then I think the last question was on cancellations. So we have not seen cancellations been different than in the past, so very much similar. So even though the markets have been more challenging to many of the developers, I think they've been taking the projects that have been where the orders have been booked forward. And as I said earlier on the revenue part, actually, in some cases, we now see those projects going forward faster than we've seen in '23 -- '22.

I would just one further context provide to this, Daniela. Because as you know, we have put a lot of emphasis on growing our services business, both maintenance and modernization. And that has worked very well. I'm actually very proud of the 9.8% in maintenance business. I know all of you have followed our business for a long time and know that this is an incredibly strong number for a maintenance business. And modernization, now a good order received growth first half of the year in double digits and now very, very strong sales growth. And then what we said is that in new equipment business, we have focused a lot on pricing. So the growth we can really drive from our highest margin businesses, and that's working very, very well. New equipment, we have said that there, our focus was a lot to improve margins, and we have a great situation there because the orders that we're booking today are clearly at the higher margin than what we are delivering. So we are in a good situation in that over 50% of the markets we operate are growing, and that's where we're driving growth. In new equipment, so far, we have focused a lot on improving margins, and that provides a further tailwind going forward. And I think that approach has worked, and that's the approach we have had so far.

We will move now to our next question, from Klas Bergelind from Citi.

Henrik and Ilkka, Klas from Citi. So my first one is on the second half margin implied by your guide. It looks like more than a bit improvement year-over-year at the midpoint. And that's good, but I had expected a little bit more considering how price cost is moving. Sales will come down a bit in the second half. But it seems like you now say, Ilkka, EUR 100 million on the cost side, guided growth in services are still strong, that's mix positive. We knew that equipment would slow quite a lot in the second half, but it implies quite a negative mix impact in my models. So here's my question really, how much of this is driven by China coming out of the backlog relative to also Americas and EMEA are coming down as we had very strong backlog conversion there also at the start of the year?

I guess first, there's still quite a few different outcomes for the second half if you think about the range of the sales guidance and then the margin range. So that's number one. And we've also said that one of the key priorities for us is to improve margins, and we continue to, with the guidance, say that we are improving margins also in the second half. So that's good. We saw our margin development being quite good in second quarter. If you look at the -- especially fixed cost absorption with a strong growth in orders, as on strong growth in sales contributing positively. And of course, like you said, there are a number of things that are positively -- as positive tailwinds for second half as well. But then, for example, inflation, now labor cost inflation, for example, we see more impacting second quarter. We see more of that impact in second half than we saw in the first half, just given the cycle how salary increases are going. So maybe those are a few other moving parts. Business mix, yes, it plays a role, and we did get a very good mix development. But of course, the order book rotation, which was faster in the first half, is also then negatively impacting the profitability where the profitability is lower.

Do you see a higher cost inflation on the wage side now compared to when we spoke last time, Ilkka, for the full year and, therefore, for the second half, obviously?

Not that different than what we talked about in conjunction with the first quarter results, but normally, it always takes a bit of time to negotiate agreements and also merit rounds and so forth. So you see part of that impact in second quarter, but then it's more fully impacting second half. But that's -- I would say that, that cycle is more a normal annual cycle. This is not that different year.

My second one is on the new order margin. It's up year-over-year, but it's flat quarter-on-quarter. Was that in line with your expectation? Or have you expected to increase the margin more versus the first quarter? And the reason I asked this, it seems, Henrik, you have taken the commercial decision again not to participate in China as much as the market. You're down 20% and market down 10%. Pricing is still weak. So would you say that the margin backdrop in China has worsened a bit from here?

So if we look at our margins of orders received, it's right that China pricing has been very tough in the market overall. We have focused on keeping that reasonably stable but, yes, margins are slightly down in China, whereas rest of the world, they are up, so very good development still outside of China. And then overall, it's about stable quarter-over-quarter. Still year-over-year positive, and as I said also that we clearly -- the margins that we are booking on an overall basis today are clearly higher than what we are delivering. So that gives a further good upside going forward.

Yes. And maybe to add to Henrik's comment is that in the rest of the world, I think the pricing developed quite well. And at the same time, also, as you saw, in the numbers as well, I think we had a -- from a volume perspective, also a good development. So I think we got both volume and price in outside of China.

Very quick final one on the new equipment guide in America. I thought this was going to come a bit later, given the commercial resi backlog and that you have quite solid exposure to multifamily there, which is pretty stable. Just curious, Henrik, why you saw this shift, if you can talk a little bit more in the second quarter in new equipment in North America.

We also have to remember that backdrop last year, the market was very strong. And both the markets were strong, and we had very strong growth. Now actually, if you look at the Architectural Billing Index, actually multifamily, that is down, many other segments are up. It is clear that as we have seen in many other cases that particularly U.S. market does react quite quickly to economic cycles. And there are many different situations in the country. So we can see the West Coast, which is very tech related there, we can see that declining significantly, whereas there continues to be opportunities in many of the Southern states where a lot of people and companies are moving right now. So it varies, but United States has usually been a market that goes quickly down, quickly recovers a little bit faster movements than we've usually seen in Europe. Just a -- how I think about it is that I would say, almost everywhere, we have a situation, particularly on residential side in Europe, where there is a lot of demand. We all know that Nordic countries, Germany, France, U.K., all of these countries have a shortage of apartments. However, consumer confidence and consumers' ability to pay is lower. And I think consumers are still worried about high interest rates and can they go even higher. So given that the demand is there in many countries, once we get to a cycle where people see that at least interest rates have peaked or could even come slightly down, I would think that we can see a recovery in the market. But of course, we're not quite there, particularly in Europe, and it's something we have to see. Well, as been widely publicized, for example, Germany, there's a huge shortage of apartments. But currently, the confidence of consumers to pay and take loans is too low to get the market going.

Our next question is from Jeff Sprague From Vertical Research.

I was wondering if we could just delve a little bit more into modernization and maintenance. And the nature of my question is really around service attachment, what's going on with connected services and the like. And so I wonder if you could just kind of unpack a little bit to what degree the strength is rising attachment or recapture versus maybe rising revenue per unit on contract because of additional services. Any way you could unpack that either in aggregate or by some key geographies would be very interesting.

Sure, sure. So on maintenance, as usual, in maintenance, there's not a silver bullet, but you need to get many things to work right. And if we look at the revenue side, why have we achieved now in Q2 a 9.8% growth and 9.5% for the first half, which is we haven't seen growth numbers in normal times like that before? It really comes from many different aspects. First of all, our service base, the number of units is growing a bit faster than usual. So we hit 1.6 million units in the second quarter, which was great. So it's number of units is growing faster. So that means that we have had a good development in retention rates in many countries. That is really helping and conversions have continued to be good. So that is providing the unit growth, which is of course the first very important aspect. Then clearly, on pricing, we have done very well. So a significant part of the growth also comes from pricing. So that is also an important contributor. Then connected services have continued to develop well. And as you know, we have quite a different strategy on connected services from most of our competitors is that we sell this as a commercial service. So it does contribute to our top line and to our profitability, which is important. And then also we can see a good development in repairs. And repairs, as you know, depends on the market, 25% to 1/3 of the revenues in maintenance. Now if I look at that, you can say, okay, are we going to continue to have as good repairs, but repairs is very much pricing driven, not necessarily unit-driven. So that, we think, therefore, can continue. So again, it's more or less all of the cylinders that need to work in maintenance have been contributed towards that, and that's how a maintenance business needs to be. You seldom have a silver bullet that moves quickly. It's a huge base you work with. And therefore, many things need to work right. And we've worked for many, many years on our offering. It was really 2016 that we started to really introduce differentiated offerings and constantly renew that and update it. That's worked very well, put a lot of focus here in how we serve our customers, what kind of digital services, and it's really paying off. But I said -- would again say it's a business that does not turn on a dime, that requires long-term consistent development. So hopefully, that helps with a long answer.

Maybe to add color, so Henrik is talking about the cylinders firing. So all of them were aligned and contribute in the same direction. But then also the interlink. So for example, when we have 24/7 connected units, we are able to do a better job, better outcomes for our customers, better availability and then the retention for those is actually higher. So all of this is also something where when you are executing well with all of the items, then actually also boost one another. So that's been very positive to see, actually.

I must say that in this business, I think our teams have been doing a really stellar job.

Can you give, just as a quick follow-up, some indication of kind of the growth in average revenue per service contract, or however you measure it, what kind of revenue per user uptick you're seeing with connected services maybe versus a baseline at a year or 2 ago?

I think first of all, Ilkka can answer that. He probably has a better grasp on it. But I would say, first of all, I think what we talked about many times, and it was actually 2018 was a watershed year for us because up until 2018, the average revenue per contract, and that's, of course, not all of the revenues in maintenance, but had been going down slightly year-over-year. And that clearly happened because we were growing fast in Asia where average contract revenue is lower than in Europe and North America. Now in 2018, we turned that because of our offering, because of pricing, because of value-added services. And now we've been able to improve it year-over-year. And because you have a mix effect when you have more Asia, it takes it down. But then with good actions, 24/7, pricing, retention, all of that, we've been able to get the whole portfolio value up and we're talking about a couple of percentage per unit per year or now actually even a little bit more, but that already helps. And just as a backdrop to this.

And today, if I look at what we sell, it's a combination of the digital and physical service as a combination. That's what we offer to our customers. So your question, how much is the uptick on price is maybe not a straightforward answer. But approximately, aim is to get 20% to 30% uptick on revenue per customer when we connect them to digital services. And of course, market by market, there's some variance on that one. But clearly, it is more something where we want to get additional revenue, see that as an opportunity and something that is adding value to our customers, and that's why we're also commencing a fee for it.

The next question is from Aurelio Calderon from Morgan Stanley.

My first question is actually a follow-up on the previous question and just trying to understand that very strong 9.8% growth in maintenance. You talk about pricing. I just want to make sure that have you taken pricing on top of the normal wage inflation clauses that you will have in some European contracts? I'm just trying to understand how the margin dynamic is evolving in those maintenance contracts.

So it's -- in Europe, you have in a pretty large part, but not all contracts, you usually have some kind of price escalation mechanism that's linked to a CPI or inflation or something like that. In many cases, we've been able to do even slightly more than that. In -- but still in majority of cases, these are commercial discussions. So yes, we've been able to increase prices that exceed a bit what labor costs have increased. I don't know if...

Yes. And if I think about it from a numbers perspective, out of the 9.8%, a bit more than 5 percentage units and the rest is price and value, and value to me is, for example, 24/7 connected service. So give you an idea, as Henrik said, so there's a mix of contracts that you cannot escalate. Some you can. So that's just to give you overall figures. And of course, the inflation is not everywhere in the world. But that's the type of development and drivers for the growth out of the 9.8%.

Okay. That's very helpful. And my last question is actually a follow-up on Klas's previous question on China. I think it's been well flagged that you've been growing less than the market or you've been declining more than the market. Is that a conscious decision to make sure that you finally get good projects? Or has there been any underlying market share shift probably more towards locals? Or you've not seen anything, it's just a conscious decision to take orders at good margins and good payment terms?

I would say, of course, margin and payment terms absolutely critical in China, and we've been working on those. So if you -- probably a little bit of a perspective that if you remember last year, our focus everywhere was twofold, very much that growing our services business was where we want to get growth in new equipment. It was about margin. The same thing in China. So we're really focused on margin over market share. And we can see, I think that, that's delivering results right now. Now we can see the impact of that in China as well, perhaps our development compared to the market. We wouldn't have wanted to be quite as what it is. Even if we have been slightly below market, it wouldn't have been an issue. Now we're a little bit too much. So clearly, this is something we are focusing on. When I look forward, I'm confident that we can keep our market position in China. These are quarterly impacts. And we have to remember, if you look at the first half of the year, last year, we actually had very strong order intake in China, so we have a very high comp. But it is what it is. But if I look at the full year, I'm still confident of retaining our strong market position in China.

We have a question from Andrew Wilson from JP Morgan.

I wanted to ask you around the comment that you make, Henrik, around policy being obviously important for the second half, which is clear, I guess. I wonder if you could just help with being a bit more specific in terms of exactly what you think is important there. Is it policy from a broader stimulus perspective, which would seem to help the consumer confidence problem? Or is it more specific to the property market? I ask because we're seeing a lot of news flow around property-specific stimulus or easing or removal of restrictions. And sort of as you allude to, as yet we haven't really seen that make enough of a difference. So I don't know if you could just help us sort of think about what we need to be looking for and thinking about.

Yes. Very good question. I think it's a bit of both that yes, we've seen certain cities lose restrictions. I still think we need to see developers having better access to financing. That is they have somewhat better, but that is still an important thing because they will not start projects and people need to be confident that they are on a solid financial footprint, which I think is improving. I still think very important is the whole consumer confidence. And we can see that savings rates are going up in China. We know that there is underlying demand. So I think that's going to be critical, overall consumer confidence. And that can you see for the whole economy, and that will go for the property sector as well. So what those specific measures will be, I don't have a specific view on that, but it's really about the confidence overall.

And maybe to add to Henrik's comment on this liquidity which has been targeted to the developers to complete projects, and that we do see happening if you look at the completion numbers. But then the new starts and new projects is both financing as well as confidence, which is maybe the next focus.

And maybe a follow-up. I guess as a follow-up to a couple of the margin questions and some of the observations that Klas made with regard to the second half. I guess looking further forward, then appreciating that you're not going to comment too much on this, but if you could help us at least frame the debate a little bit. It would seem to me that with the margins in the orders you're taking at the moment being ahead of the margins in the income statement, with the mix potentially shifting, given maintenance and modernization strength, given the operational improvements that you're making in the savings you've guided to on that, plus a little bit more tailwind from [ malmat ], it would seem to me that even with the current, obviously, relatively challenged new equipment market, the 2024 margin has decent potential to be decently ahead of the 2023 number. Now even if you're not going to say yes or no to that, can you at least help me if there's anything that I'm missing in terms of thinking about that margin bridge?

Well, maybe I'll start. And yes, you're right. So there's a number of things which are a tailwind for us. Of course, I already talked about that. There's also some headwinds, for example, inflation and so forth. But we've already said earlier that one of the key priorities for us is to drive our profitability up and improve profitability. And I don't see that, that goal is changing for '24. And we continue to be focused. I'm very happy to see that we continue to have, for example, orders margins on a good level supporting that.

Our next question is from Miguel Borrega from BNP Paribas.

So my first question is on the pricing of new equipment, which you said was up in the U.S. and also in Europe, but not in China. At the same time, you have a negative outlook for Europe and the U.S. So to what extent can you keep raising your prices? Or would you see price increases now effectively plateauing? That's my first question.

Sure. So we have talked about the margins of our orders received, which have gone up because of good pricing. Now when we look forward, we probably -- we have a better outlook now for component costs, raw materials and all of that. So that's, of course, also helping. So even if we cannot increase prices from here, we still have a good situation that the cost side of the equation should be better. But it's clear that when markets are weakening, competition are likely to be tougher. I would say that in this market, the way we have achieved -- or we have achieved our prices, I think is a great achievement. So we're starting from a really good position. And we always have -- margin's always a combination of price and cost, and now price has gone very well and outlook for cost is perhaps a bit better.

Maybe to give more color on the cost side of the equation, which is very much aligned with what Henrik already said. So majority of the EUR 100 million improvement is coming from China. But we are also starting to see that there is a slight tailwind in Europe and North America as well. And at the same time, I think looking forward, a focus on product cost improvements, which is a part of priorities in the R&D are actually yielding quite good results. So I think that's also supporting the margins going forward, and that's been progressing quite well.