Earnings call: KONE’s Q3 2024 results show resilience amid China’s market woes

In the third quarter of 2024, KONE Corporation (KNEBV.HE), a global leader in the elevator and escalator industry, reported a modest increase in sales growth and a slight improvement in adjusted EBIT margin, despite significant challenges in the Chinese market.

CEO Philippe Delorme stated that the company’s new strategy, aimed at scalable growth and resilience, has been well-received, with a particular focus on service and modernization sectors. KONE has revised its 2024 outlook, forecasting sales growth between 0% to 3% and an adjusted EBIT margin of 11.5% to 11.9%.

The company is also targeting mid-single-digit annual sales growth from 2025 to 2027, with a strategic focus on improving operational efficiency and profitability in the face of ongoing market difficulties.

Key Takeaways

• KONE’s new strategy focuses on scalable growth and resilience, particularly in service and modernization.
• The company reported nearly 10% growth in service sales and around 20% in modernization orders.
• Sales growth was 1.1%, with a 20% decline in China due to increased market challenges.
• Adjusted EBIT margin improved by 10 basis points year-over-year, reaching €319 million.
• 2024 sales growth forecast revised to 0%-3% and adjusted EBIT margin guidance to 11.5%-11.9%.
• Midterm targets include mid-single-digit annual sales growth and an adjusted EBIT margin of 13%-14% by 2027.

Company Outlook

• KONE expects sales growth of 0% to 3% in 2024, with an adjusted EBIT margin of 11.5% to 11.9%.
• The company aims for mid-single-digit annual sales growth from 2025 to 2027.
• Significant growth is anticipated in services and modernization, despite a further decline in the Chinese market.

Bearish Highlights

• KONE is facing inflation and a difficult Chinese market, with a 20% decline in China’s sales.
• The New Building Solutions sector in China is struggling, impacting overall margins.

Bullish Highlights

• Nearly 10% growth in service sales and double-digit growth in modernization orders.
• Performance improvement initiatives are expected to yield a 150 basis point improvement by late 2025.

Misses

• Sales growth forecast for 2024 has been lowered from the previous range of 0%-4%.

Q&A Highlights

• Executives discussed performance improvements driven by initiatives, digitalization, and efficiency enhancements.
• The company is focused on improving cash flow management and maintaining profitability in a challenging market.
• KONE’s Modernization business remains the most profitable segment, with stable margins.

In the recent Q3 2024 earnings call, KONE Corporation (KNEBV.HE) provided an update on its financial performance and strategic initiatives. Despite a challenging Chinese market, the company reported growth in service sales and modernization orders, with a revised sales growth forecast for 2024 and a shift in focus towards operational efficiency and cost management.

KONE’s executives also discussed their cautious approach to order deliveries in China and the ongoing pricing pressures in the competitive market. The company remains committed to improving profitability and working capital efficiency, with details on performance initiatives and expected savings to be provided in the coming quarters.

InvestingPro Insights

KONE Corporation’s (KNYJF) recent financial performance and strategic outlook align with several key insights from InvestingPro. The company’s focus on service and modernization sectors is reflected in its impressive gross profit margins, which InvestingPro data shows at 54.78% for the last twelve months as of Q2 2024. This robust margin supports KONE’s ability to navigate challenging market conditions, particularly in China.

An InvestingPro Tip highlights that KONE holds more cash than debt on its balance sheet, which is crucial for maintaining financial flexibility in the current economic environment. This strong cash position aligns with the company’s ability to pursue its strategic initiatives and manage working capital efficiently, as discussed in the earnings call.

Another relevant InvestingPro Tip notes that KONE has maintained dividend payments for 19 consecutive years. This consistent dividend history underscores the company’s financial stability and commitment to shareholder returns, even as it navigates market challenges and invests in growth initiatives.

However, investors should be aware that KONE is trading at a high P/E ratio relative to its near-term earnings growth, with a PEG ratio of 4.1 as of Q2 2024. This valuation metric suggests that the stock may be priced optimistically compared to its expected growth, which aligns with the company’s revised outlook for 2024 and the challenges it faces in the Chinese market.

For readers interested in a more comprehensive analysis, InvestingPro offers additional tips and insights that could provide further context to KONE’s financial position and market performance. There are 6 more InvestingPro Tips available for KONE, which could offer valuable perspectives for investors considering the company’s future prospects in light of its current strategy and market conditions.

Full transcript – Kone Oyj (KNYJF) Q3 2024:

Sanna Kaje: Good morning and welcome to KONE’s Q3 ’24 Results Announcement. I’m Sanna Kaje, Head of KONE’s Investor Relations. I have here with me today our President and CEO, Philippe Delorme.

Philippe Delorme: Good morning.

Sanna Kaje: And CFO, Ilkka Hara. Philippe will first go through the highlights of the quarter and say a couple of words on the strategy and Ilkka will then talk more about the market development and financials. Philippe, please?

Philippe Delorme: Thank you, Sanna. Good morning, everyone. So as usual, I’ll start by summarizing the highlights from the quarter which was, in many ways, an important and exciting one but didn’t come without some challenges, too. The big highlight for us was the launch of our new strategy in September which was very well received by both our employees and customers and gives a clear midterm direction for our business. I’m also very happy to share that the strong momentum we’ve seen in service and modernization continued also in Q3. We saw again a close to 10% service sales growth and around 20% growth in modernization orders at comparable currencies. From a geographic perspective, we made really good progress in Americas, Europe, Asia Pacific, Middle East and Africa, with a combined sales growth of around 10% at comparable currencies. Unfortunately, the headwinds in China intensified and our sales declined by 20% in the area and profitability declined as well. With that, we specified again our business outlook for 2024 and expect now sales to grow by 0% to 3% at comparable exchange rates and adjusted EBIT margin to be within the range of 11.5% to 11.9%. Now, let’s take a look at all of this in more detail. And let’s start with the financial highlights. Firstly, I’d like to say that we had a pretty good development in our orders received with 5.5% growth at comparable exchange rates. I’m especially happy similarly to Q2 that we had double-digit growth in orders in three of our four areas. In China, as I said, the market became increasingly difficult and our orders declined by over 20%. Our sales grew by 1.1% at comparable currencies in the quarter. On a positive note, service continued to grow strongly at close to 10% rate and modernization by over 10%. However, the challenging situation in China was also reflected in sales and there, our sales declined by 20%. If we look at EBIT, our adjusted EBIT margin improved by 10 basis points from the previous year. There was positive progress on many fronts but the difficult market conditions in China impacted us negatively. We have also identified points of attention where we need to improve our performance and have launched performance improvement initiative to accelerate profitability improvement. We are specifically executing pricing task forces, sales and operations excellence at branch level and amplification of procurement efficiency. And Ilkka will elaborate more on the financial in his part. As said, one of the big highlights for us in the quarter was the launch of our new strategy. I’ve been extremely happy and energized by all the excitement around the launch and the eagerness of people to start executing on the strategy from day one. I won’t go through the detail of the strategy now as we discussed it at our Investor Day but I wanted to repeat a couple of points on what we are after. So firstly, we want to have a simple strategy that drives scalable growth and Ilkka will recap what it means financially. We also want to transform KONE into a more resilient business with service and modernization as a key driver of our earnings growth. And hopefully, what we are showing here is demonstrating this. And finally, we believe that an important lever for succeeding in the execution of the strategy is to adapt our culture towards more courage, speed and simplicity which is a very high point of attention for the executive team. An important part of our strategic ambition is to lead the industry in innovation and sustainability. And here, we have some great news to share on our progress. In September, we had an important launch for the taller building, KONE High-Rise MiniSpace DX. This new offering is both — is valid for both new building and modernization and is a result of a significant hardware and software innovation combined. The product is extremely energy efficient and enables more rentable floor space in the building as well as a longer life cycle. It has also in-built connectivity with advanced predictive analytics for smart maintenance. We have also been actively rolling out our innovation for digitally enabled services. We have now reached 35% of connectivity in our service base and have rolled out dynamic maintenance which is a key enabler for productivity to eight countries and remote service to 10 countries. And we’ll continue to push for higher connectivity penetration and rollout of the digital enablers at speed also in the coming quarter. I would like also to share again a few exciting customer references as we do every time. Firstly, I want to share a new building solution example from the residential segment. We tend to talk a lot about the large project but there is actually a lot of exciting things happening also in the smaller projects. This specific case is a wooden building project from the Netherlands, where we are providing prefabricating elevators for these sustainable buildings. The total lead time for the project is less than a year. So stronger — faster lead time and the installation time is also half, almost half of what’s typical resulting in significant productivity at the site. The second reference is a high-rise project from Australia that actually I could witness. I was in Australia 2 weeks ago, where ground was broken this summer. The residential tower will feature the new KONE High-Rise MiniSpace DX with UltraRope as the first customer project for the new offering. So a great success here. The customer was impressed by our unique innovation capabilities and I must say I’m very happy to see the traction of this new innovation. The two other references represent different types of modernization. In the U.S., KONE will modernize 40 elevators and two escalators at the Harry Reid International Airport in Las Vegas which ranks one of the busiest airports in the country. KONE’s well-established relationships through an existing maintenance contract was key to helping us understand and meet the customer needs. The final case is from China where we upgraded a 20-year-old non-KONE elevators with KONE half replacement solution. So we retain some of the existing structure and focused on efficient project management which brought both sustainability and fast installation time. The building users benefit from the increased elevator capacity, improved ride comfort and with KONE 24/7 connected services to also improve the safety of the elevators. We also received some delighting external recognition in the quarter. KONE SiteFlow which is a digital innovation was recognized for innovation excellence at the 2024 Council for Tall Buildings and Urban Habitat. And in the same event, KONE was also recognized for equity, diversity and inclusion best practices. And we were again also on Forbes World’s Best Employers list which is in line with our strategic ambition to be the number one choice for both our employees and customers. Now, I will hand over to Ilkka who will go through the market development and financials.

Ilkka Hara: Thank you, Philippe. And also welcome on my behalf to this result announcement webcast. Let’s next look at how our markets are developing in Q3. In the third quarter, the market actually was quite similar to what we saw in the first quarters with a couple of things to highlight. In the New Building Solutions, the market stabilization in Americas and in Europe solidified with even some pickup in activity in Americas. On the other hand, in China, the market weakened further. Consumers continue to be hesitant to buy new apartments and the prolongation of this is making the liquidity situation of the project property developers increasingly difficult. In Services and Modernization, the markets continue to develop positively across all areas. Overall, the Asia Pacific, Middle East, Africa market continued to face the most positive market environment with plenty of opportunities in all businesses. Then let’s look at the Q3 financials. And I’ll start with orders received. As Philippe already highlighted, our orders grew at a double-digit rate in three of our four areas at the comparable exchange rates. Overall, our orders received grew by 5.5% in the quarter which to me was a good achievement given the market environment. We had strong orders in Modernization with growth of 20% but also very good progress in New Building Solutions in most parts of the world. In China, the New Building Solutions orders declined by over 15% in units and significantly more in monetary value. Our margin of orders received declined slightly driven by China. In the rest of the world, we saw a slight improvement in the margins. Then let’s look at sales. Overall, our sales grew 1.1% at the comparable currencies in Q3. Our New Building Solutions sales declined by 9.3% as a result of the slow construction market in China. On the positive side, we saw again a strong development in Services with 9.6% growth and in Modernization with 10.5% growth. Geographically, we saw strong growth in Americas at 11.6%, 6.3% growth in Europe and 15.8% growth in Asia Pacific, Middle East and Africa at comparable currencies. Altogether, these three areas grew by around 10% at the comparable exchange which to me was one of the highlights for the quarter. In China, we saw slow order book rotation due to slowness in the construction market but also because we continue to manage the deliveries very tightly to ensure cash flow. As a result, our sales declined by 19.7% at the comparable currencies in Greater China. The Services and Modernization sales have continued to develop positively also in that part of the world. Then let’s move to adjusted EBIT and profitability. Our adjusted EBIT margin continued to develop positively and improved 10 basis points compared to a year ago. And our adjusted EBIT was €319 million. The positive drivers for profitability were better margin in our New Building Solutions and Modernization deliveries outside of China as well as the favorable business mix. On the negative side, we continue to face broad-based inflation but the single biggest headwind for us was the margin decline in China. In China, we continue to be strongly focused on product cost reductions and overall adjusting to this harsh market reality. We also increased our provisions for bad debt and this had a negative impact of around €20 million on our adjusted EBIT in the quarter. As Philippe mentioned, we’re also launching global performance improvement initiatives to accelerate the margin improvement going forward. Then finally, our most important metric, cash flow. We had a solid cash flow from operations in the quarter at €345 million which was a bit above last year’s level. Year-to-date, our cash flow is slightly down from previous year. Our working capital continues to be strongly negative, although now slightly less negative than in the beginning of the year. We’ve seen positive development in our accounts payable while our inventories have increased somewhat. Also, our accounts receivables have increased slightly outside of China. Then let’s look at the market and business outlook for the year. Our market outlook for ’24 remains unchanged. And for 11 out of our 12 markets, the outlook continues to be positive or stable. Modernization markets are expected to remain very active and the outlook is positive also in Services. In New Building Solutions, the market continues to be mixed with a stable outlook for North America and Europe, growth expected in Asia Pacific, Middle East and Africa and China market to remain difficult. Then to our business outlook. As Philippe said, we have specified our guidance for the year slightly after the — we have 3 quarters behind us. We now expect our sales to grow by 0% to 3% at comparable exchange rates in ’24, while previously, the range was from 0% to 4%. The adjusted EBIT margin is now expected to be in the range of 11.5% to 11.9% while previously, the range was from 11.5% to 12.2%. The key reason for us lowering the guidance range from the top end is the increasingly difficult market environment we are facing in China. Overall, the drivers supporting our performance are the continued strong growth in both Services and Modernization, improved margins coming through in deliveries outside of China, the strong order book and the savings from operating model renewal which we saw in the first half of the year. The drivers burdening our performance are declining New Building Solutions market in China and globally, the persistent cost inflation we are facing. To close my part, I wanted to recap the new midterm targets that we introduced for ’27 in our Capital Markets Day and to say a couple of words of the ’25 outlook. So first, for the period of ’25 to ’27. We are targeting mid-single-digit annual sales growth driven by close to 10% growth in Services and a double-digit growth in Modernization. In the New Building Solutions, we expect low single-digit growth outside of China. And in China, we expect the market to decline further. For profitability, our target is to reach 13% to 14% adjusted EBIT margin by ’27. In ’25, we expect Services and Modernization businesses to continue to develop positively. And we have a solid order book now of our New Building Solutions in most part of the world. We also expect to start to see the first results from the performance improvement initiatives towards the end of ’25. However, there are some headwinds as well with the Chinese New Building Solutions market expected to continue to be difficult and wage inflation to persist. Overall, we target a margin improvement also next year but the margin improvement is expected to accelerate towards ’27 as the impact of the performance improvement initiatives fully kicks in and the negative impact from China gradually fades. I would next like to hand over back to Philippe to summarize our presentation. Please, Philippe.

Philippe Delorme: Thank you, Ilkka. So to summarize, we are now getting into full swing with our new strategy which has created a lot of excitement among our stakeholders. We are happy to show another quarter of strong growth in the resilient service and modernization businesses and we expect that to continue also in the coming quarters, in line with our new strategy. When we look at our markets, the outlook is mostly positive, while the Chinese New Building Solution market continues to be increasingly difficult. We are ramping up clear and focused performance initiatives to support delivery of our 13% to 14% adjusted EBIT margin by 2025 — sorry, 2027. I would like, again, to say a big thank you to everyone at KONE for their hard work demonstrated in the third quarter. And with that, we are ready for your questions.

Operator: [Operator Instructions] Today’s first question will be coming from Andre Kukhnin calling from UBS.

Andre Kukhnin: Maybe I’ll start with a follow-up. Just on the backlog margin evolution, you commented that it’s down slightly year-on-year. Could you comment on how it’s developed sequentially in Q3?

Ilkka Hara: Can you repeat the beginning, you’re talking about orders margin? Or what did you ask?

Andre Kukhnin: Sorry, order intake margin. Yes, you said it’s down slightly year-on-year. Could you comment on how it’s developed sequentially quarter-on-quarter? And how is the backlog margin developing, please?

Ilkka Hara: So sequentially, it’s slightly down as well as we’ve commented in the past and driven by China, where we see continued pressure on margins despite the actions we are taking on the product cost side that Philippe was talking about. And on order book, as I’ve said before, the order book, of course, fluctuates quite a bit depending on the contracts that you’re signing, whether they are major projects or more quicker rotating but it is on a good level in order book. And outside of China, we continue to book slightly higher margins in orders than we are delivering. In China, it’s the opposite.

Andre Kukhnin: And if I may, just briefly a question on your comments on the pickup in activity in Americas, could you elaborate on that in terms of whether this is U.S. or Canada? I guess South America is not relevant for you. And where are you seeing that and whether that is indicative of a trend or just a quarterly phenomenon?

Ilkka Hara: Yes. So it’s good to — so first, we are commenting the markets where we are active. So it’s a comment about Canada, U.S. and Mexico. And given the size, it’s a lot of — the comment is really mainly about U.S. And second which is good to remember that the volumes in U.S. are quite low, although the value per unit is quite high. So the swings in the market when we comment the market activity in units can be fluctuating. And in the third quarter, we did see positive development in the market. Also, part of the impact was coming from a few larger major projects where there are quite a few units being ordered. So overall, market continues to be stabilizing and this quarter was very good. But for the full year, our outlook was on the market to be stable. I consider that to be a start and then let’s see how it develops, where there are many moving parts still.

Philippe Delorme: And then maybe to build on your answer, just stating maybe one thing that’s obvious but I’ll make it clear which is now the Americas is our second area. It has taken the space of China. And when you look over a longer period of time, there has been an amazing job to drive the margin up and to drive a superior growth compared to market. So we are very proud of our team in Americas. We are supporting them fully and we see actually very good output out of now the second geography for KONE.

Ilkka Hara: That’s actually a good point. That’s a big milestone for the team in Americas to be the second biggest area for us in terms of sales.

Operator: Our next question will be coming from Daniela Costa of Goldman Sachs.

Daniela Costa: I have two questions. I’ll ask them one at a time. The first one is sort of like related to China, basically. And can you comment on if China is still profitable? And given the pricing trends that you and your peers have been flagging in China and the situation, do you see a possible outcome that maybe next year, China will not be profitable? Or do you have actions that you can take immediately now to prevent that?

Philippe Delorme: So maybe I can start with this. Yes, China is profitable but it’s lower than the company average. And we clearly see the mix of the business shifting. So we see Services and Modernization growing, on average, quite close to double digits, while actually, we’ve been pretty explicit on our trends in New Building Solutions but the three business lines are profitable. And maybe you want to complement on the actions going forward?

Ilkka Hara: Yes. And definitely, in this market environment, we continue to take actions in our cost base as well, aligned with the market and aim is to be able — aim is definitely to be profitable. And I think we have good actions to support that. Maybe on top of what Philippe was saying that, of course, in this type of market, what’s really important is the structure how you operate but especially on the product cost to really be ruthless in driving product cost reductions and really look at it from a perspective of what the customer needs are. And what I’m very happy about with our team in China who by the way, does a great job in this market environment, is that the product cost reductions that we’ve seen have been 3x of what we’ve seen in the past and we continue to see opportunities for that going forward. So that’s also one part of the actions that we’re taking in this market environment.

Philippe Delorme: And cash is our guiding principle. I mean you know this but KONE has a very strong cash culture. But I would say I’m impressed every time I engage with the China team on the discipline we have in cash in tough market conditions. So we are prudent. We always privilege cash to anything else and we intend to keep doing that going forward.

Daniela Costa: My second question may be related to some of the things that Ilkka was also talking about. But just going back to the CMD where you had the bridge to get to the 13% to 14% margin and also tying that up with the 2025 commentary that you just gave. The bridge had three parts basically, had the ones related to like product costs and what digitization and modularity in the individual business units, had the business mix which you just gave a comment on that, that will take time. Does it’s time to shift? And then have the big bar that was 100 basis points of performance initiatives. Can you give us a little bit more color exactly on what those performance initiatives are and whether they’re more back-end loaded, they’re more linear through the period? Just trying to tie up how you get to the 2027 given the commentary on ’25?

Ilkka Hara: Yes. And I actually gave a bigger expectation than that. I think it was 150 basis points for the performance initiatives. And then, of course, we have a choice then to reinvest some of the benefits back to the business if we so decide. So that’s then the net 100 that you’re referring to. But on the initiatives, Philippe talked about them. I’m sure he’s going to comment next. He is quite passionate about them. They will take some time to have impact. So we expect to start to see the impacts towards the end of ’25 and then throughout the period to ’27. The strategy, if you think about the performance initiatives, they will continue to deliver positively as well as then some other things like the mix change, digitalization, providing improvement in profitability for services and so forth, they continue to ramp up towards — with accelerating speed towards the end of the ’27. That was my main message on that one. But I think, Philippe, if you want to comment a bit about the performance initiatives.

Philippe Delorme: So the performance initiative, we gave some details in the Capital Market Day. There are nothing fancy but we know things that work and that work in a playbook of driving efficiency. So pricing there is an opportunity to do a better job, more data-driven on pricing. Sales and operational excellence at branch level, we think that we can drive a better discipline across the board to excel better on execution at the elementary unit of KONE which is a branch. So a team of 20, 30 people following a region, a district. There are tons of best practices across KONE but we are not always very good to document them and make sure that we do execute systematically and have a passion of excellence and execution. And the last one is procurement. And procurement. We’ve launched a work on procurement that we call Fuel for Growth a little more than a year ago. We think we have an opportunity to accelerate this in China but also out of China. And these three on top of a very strong attention on our global cost, we believe can yield into the 150 basis point opportunity. Some of it would then be reinvested into the growth because we need to invest in digital. But we want to have this space so that we can also adapt and maneuver with market conditions that we know will be changing.

Operator: We’ll now move to Vlad Sergievskiy of Barclays.

Vlad Sergievskiy: I’ll start with free cash flow, if I may. Equity free cash flow conversion below 100% this quarter which leaves room for improvement on the historical standards, I would say. Do you think you will be able to make progress to improve cash conversion in Q4 2025 to 100% or maybe above where it’s historically been for KONE before 2021? So that’s the first question.

Ilkka Hara: Simplify the question, can we improve? And are we aiming to do? Definitely so. And on cash flow, we don’t guide quarters. And I think actually, on a quarterly level, there’s always fluctuations. But definitely, that is focus, as Philippe was referring in context of China but also outside of China. So definitely, that’s the goal.

Vlad Sergievskiy: And maybe I can follow up on that. What would be the key levers for you to pull to actually improve?

Ilkka Hara: Well, of course, the main lever is to make more profit. So that’s why we’re going to grow and grow profitability but also equally in the working capital, we see opportunities to improve. And I guess I was commenting them also in CMD and they haven’t changed. So we see opportunities in extending our payables which are — where there’s clearly opportunities. The collection outside of China, we have large businesses with opportunities to collect faster. And there we see the biggest opportunities. On customer payment terms, we have quite a good payment terms across all businesses, so maybe less improvement opportunity there. And then lastly, I guess, on the other items on CapEx and M&A. On CapEx, we are quite low CapEx, if you look at the pure CapEx, around 1%. It fluctuates a bit but not much and that’s been enough for the business. We don’t see other than the investments that we’re making for CapEx in terms of optionality in manufacturing footprint which is already included in the actuals and continues on that speed to be major differences. And in M&A, we are then — if opportunities come to consolidate to these bolt-on acquisitions and good opportunities that we want to continue, lately we’ve actually had quite a lot of positive opportunities there. Market looks promising but that’s, of course, a choice that we make based on what’s available.

Philippe Delorme: And value creation.

Ilkka Hara: Yes, definitely.

Vlad Sergievskiy: Excellent. And if I can follow up — another follow-up. The second question will be on Modernization. Would you be able to comment what — on Modernization. Would you be able to comment what volume and pricing development separately, are you seeing in China Modernization market? And whether do you think Modernization will continue to be your most profitable business in China over the medium term, maybe long term?

Ilkka Hara: Maybe I’ll take in the reverse order the questions because I think Philippe will want to comment on the Modernization opportunity which was the first part. So Modernization continues to be the most profitable business we have in China and more stable business in terms of profitability, while it is growing. And then from a unit and price perspective, something that I very seldomly comment when it comes to Modernization because there’s so many things in Modernization. So starting from partial modernization to more full replacement of elevators. So it makes less sense. On a pricing environment, of course, China continues to be quite competitive overall. But in Modernization, I would say that the pricing environment has been more stable definitely than in NBS lately. But maybe you want to comment on the Modernization.

Philippe Delorme: Just a bigger picture context which is there are 10 million elevators in China out of 25 million in the world. Of which in China, 1.2 million are more than 15-year old. This 1.2 million elevator by 2030 will become more than 3 million. So you make the math of the unit number growth and you look at how the market is being addressed. There is ample opportunity for everyone. We think China actually will also be a market where the agility and the capacity to respond to real customer needs will be tested. In that context, we believe Chinese being very pragmatic and maybe being a bit more ruthless on cost, partial modernization would be more important. And we think that we actually, on that front, have a pretty good way of addressing the market which maybe explain why we have been so consistent to delivering modernization well in China.

Ilkka Hara: Maybe, Vlad, I still summarize my answer because I realized that I was quite lengthy. So we talk about China margins overall have come down and are below group average. That’s the comment we made earlier but it is not because of Modernization. That margin is stable. It’s because of NBS, both the volume as well as the profitability coming down. Just to be clear.

Operator: Our next question will be coming from Miguel Borrega coming from BNP Paribas (OTC:).

Miguel Borrega: The first one just around China. I remember you having a very strong order book in Q4 of last year. When would you expect that to flow through the P&L since China sales over Q2 and Q3 are still down 20%. So would you expect that to come through over the next coming quarters and to boost growth in China or not really? And then, I can ask the second question. On the full year guidance, you mentioned the reason for the cut was an increasingly difficult China market. But the reality is the cut is the same as the bad debt provision in Q3. So in other words, have you changed your expectations for Q4?

Ilkka Hara: That’s a good question. So I’ll start with China orders development in last year and what we see in deliveries. And I will — so China market is very dynamic. And what we see is that order book rotation is slowing down and that’s been consistently happening now for some time. But equally, we are selective and prudent focusing on cash. So as customers place orders, we do continue to make checks during the time of getting to the delivery to manage credit risk. And in some cases, more cash basis but in most cases you need to make prepayments before we deliver. And as liquidity is constrained, then of course, that slows down further or makes us more selective in which orders we’re delivering. So there’s maybe less correlation than the past on this order rotation as such.

Philippe Delorme: And that’s where prudence is — could be apparently impacting our P&L but we are back to the square rule of cash versus kind of visible short-term volume that actually would not deliver the cash. So I think this point of behavior is very important and we are very, very attached to it.

Ilkka Hara: Then the second part was that, hey, why and how did we change and what the impact is on the fourth quarter. So of course, there are many moving parts in the business. And this time, it happened to be similar numbers. And clearly, the driver for the — cutting the top end of the guidance range was the continued weakness in the NBS market. But I would not have a direct causality on how you proposed.

Operator: We’ll now move to Rizk Maidi of Jefferies.

Rizk Maidi: I’ll have two and then take them one at a time. So maybe just on — just again on China. I know it’s a smaller part of the business but sorry to come back to this. Price mix drop in excess of 10% in a quarter where you’ve actually underperformed the market when it comes to volumes. I rarely see sort of this sort of situation. I think this downturn compared to the previous ones, I think you always said that you competitors have actually less levers to be more aggressive on pricing just because they’re not making as much margin as they’ve done before. Can you just maybe talk about this overall sort of pricing dynamics? And just maybe to link this with the previous question. We’ve seen it in other markets when new equipment becomes weak for an extended period of time, we see price deceleration spreading into other segments, maintenance and modernization. What makes you think this is not going to happen this time?

Ilkka Hara: Well, if I start and then maybe you continue from there. So I would — and I’ve said this before, that on orders particularly, single quarters can fluctuate. And if you look at the 9 months of the year, the picture in terms of us and the market is much more stable as a result. So in single quarters, we can be above or below the market development in terms of volume. But your comment in terms of price pressure in the market and also mix contributing negatively. So it depends what’s being constructed and now it’s more the low end. So it is true. So it is very competitive and challenging market right now and that’s visible in our orders received for — in the quarter. Then on the pricing pressure, in China, it’s been always the most competitive market when it comes to pricing across all businesses. Of course, in the past, the NBS business has been the larger part of our commentary because of its size. But now increasingly, we see the impact of Services and Modernization as they’re growing fast to be part of the commentary. And both businesses have always been competitive in pricing. But I think from a pricing pressure perspective, we’ve seen more stability in those two businesses so far.

Philippe Delorme: Maybe to illustrate, I was mentioning on Modernization the fact that we are on partial modernization, talking about smaller projects. Given the size of the opportunity in Modernization, there is less — there are less people. I mean people in context of market tension will tend to look at the big price. And actually, when you go after the smaller projects where there are less people watching and it’s also more about customer intimacy, where we have actually a pretty large service base that allow us to have those leads on this elevator that’s kind of getting old and there is partial modernization opportunity where actually we have the service contract, we have the relationship. And therefore, the competitive intensity is less. Now I think Ilkka said it, it’s a competitive market. And on your point on NBS and orders and so on, we are clearly given the market trend and the liquidity tension. We are being more intentional with our team to say we want to put somewhat of a floor on our profitability and will privilege profit to volume. So we are adapting ourselves in market condition with, again, prudence and cash as the guiding principle to make sure that we protect the interest of the company.

Rizk Maidi: This is very helpful. The second one and again, thank you for giving us a little bit of an early comment on 2025 because that’s really the main debate, I guess, for us this morning. Just maybe if I could ask you on some of the items in the EBIT that you actually know from today. I know you don’t have a crystal ball on a lot of things and a lot of things can change between now and then. But can you assess or give us an assessment of roughly how much savings when you think about those performance initiatives that you talked about you’re estimating to achieve basically next year?

Ilkka Hara: So first, I think we’ve been now working with a new strategy, what 3, 4 weeks…

Philippe Delorme: Long time.

Ilkka Hara: A long time. But seriously speaking, of course, we’ve been preparing for this but it’s not been out there within the company or externally for a long time. So there’s a lot of work we need to still do to both. We know what we want to do but how we do it and how quickly can we get it done. And it will always take time to work, for example, the sales and operational excellence to work branch by branch or region by region through it. So we expect the savings to be starting towards the end of ’25. And of course, as we mature, we’ll give more details about those initiatives in the coming quarters.

Operator: Our next question will be coming from Klas Bergelind of Citi.

Klas Bergelind: I was a bit late on the call, so maybe you covered some of this already. First, on the Modernization business in China, it’s the best margin in China at the moment. But we’re hearing of incremental price pressure also in Mod. You’ve obviously done a great job in improving the Mod margin since 2020 for the group and you want to improve it further. It would require sort of a pretty good step up in China is obviously with that 1 billion of growth ambition that you have, Philippe, if this margin will be under pressure? Or do you think you can keep the margin there at the current level in China Mod despite a very competitive market? That’s my first one.

Philippe Delorme: Well, I guess there is a lot — on Modernization, I think we tried to explain that in the Capital Market Day but there are two types. There is one which is a full modernization which the attribute of that business are not too far from NBS, from the new construction and then the partial mod. I think in both but especially in partial mod, we want to standardize and come with this concept of packs or kits or whatever you call it but go with very standardized value proposition that takes a part of the value proposition of the full modernization but make it standard. And by doing this, we believe we can execute better, be actually more cost competitive, more replicable and therefore, hold our margin to — I mean, be easier to sell for our sales force and therefore, be more efficient from a cost standpoint but from a cost to deploy standpoint. And I think also on pricing here, having in mind that the smaller projects are indeed — there are a lot linked with customer intimacy and so on, for us to be able to evidence a value-based pricing is probably also an opportunity in China and outside of China, where we’ve not totally maxed out our potential.

Ilkka Hara: And I already — Klas, if you were late, I was expecting your question but now it’s here. I already commented to a question that in our decline in margins in China is not because of Modernization, it’s because of NBS volumes and margin coming down. And despite China always been challenging on pricing, we’ve seen more stable margins in the Modernization side and pricing support in that.

Klas Bergelind: Yes. And this is a good — this is a good bridge into my second question on Modernization and the offering. We have a very good impression at the Capital Markets Day that you or at least I felt that you’re relatively unique in terms of the increased standardization, partial modernization, all these kits. There are some peers though that are reporting very strong growth. It’s very similar to you this quarter and are talking about that they have introduced the standardized kits also into the market. So could you just remind us again and you were leading in the whole sort of standardization on equipment 20, 25 years ago. I think you have a strong position. But I’m still curious to hear your sort of USP versus some of the competition out there on the Mod business.

Philippe Delorme: I’m not sure I get the question.

Ilkka Hara: So how do you compare us and competition in terms of modularity and modernization. Maybe if I may first, so I think it’s good to remember, if you remember the blue dot and a huge box of pink around it, that there’s ample opportunity. None of us are modernizing or the industry as such is not modernizing nearly enough. And of course, there’s a competition but it’s also demand generation. So it’s a bit of both. And the main opportunity for us is actually to generate the demand. But maybe you want to comment on…

Philippe Delorme: Yes, we rarely comment on competition. So I suggest you challenge them on that one. But what’s clear is that this Modernization transformation has not started this year. It has started actually many years ago and I think we got momentum because we’ve been working on it for quite some time. And really, where I’ve seen some acceleration is more on the partial modernization where — I mean we are always watching competitors. We do believe that actually, we are doing pretty well here but I think we could do better and we could — we should do better. So, we are doing well but we are — the reason why we make it a shift and say it’s a big priority is actually, we think we can be even more focused and even better and we are determined to be better.

Operator: We’ll now move to Nick Housden of RBC.

Nick Housden: I have both on the Service business. Firstly, how much did M&A contribute to the 9.6% Service growth in Q3? And then secondly, can you just comment on whether you’re seeing any pricing pressure on Services in China and maybe just quantify that for us?

Ilkka Hara: So in Services growth, out of close to 10% growth, our unit growth was roughly 7%, including M&A. M&A had a positive impact but still the organic growth was the main driver for the growth. And then to China. So of course, the market continues to be challenging from a pricing perspective, as I said earlier but I think from our perspective, the service prices have been definitely more stable than we’ve seen in, for example, in NBS business. So yes, there is pressure because the economy is weak but we can also have been able to sustain quite well the margins.

Operator: We do not appear to have any further questions. At this time, I’d like to turn the call back over to Sanna for any additional or closing remarks. Thank you.

Sanna Kaje: Thank you. Thanks, Philippe. Thanks, Ilkka. And thank you for all of the great questions again. And if there’s any more questions, please reach out to us at the Investor Relations. With that, I think we’re ready to close. So have a lovely rest of the day.

Philippe Delorme: Thank you so much.

Ilkka Hara: Thank you.

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