Release Date: July 19, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Strong service sales growth at 9% and record high modernization orders.
- Sixth consecutive quarter of profitability improvement.
- Double-digit growth in orders in three out of four areas.
- Employee engagement improved and is well above the global benchmark.
- Solid cash flow from operations at EUR 330 million.
Negative Points
- Challenging market conditions in China, leading to a downgrade in market outlook.
- Significant decline in new building solutions sales driven by China.
- Persistent cost inflation increasing fixed costs.
- Logistics challenges in the Red Sea affecting inventory levels.
- Slight decline in the book-to-bill ratio in China, indicating slower order book rotation.
Q & A Highlights
Highlights from KONE Oyj (KNYJF, Financial) Q2 2024 Earnings Call
Q: Great to see better orders outside China. Seems to be driven by strong growth in modernization in all regions and then solid NBS growth in Europe and APMEA. Can I just confirm that the repairs business and the bolt-on M&A is not the key driver here. It's really modernization and NBS explaining it?
A: I can confirm that. So that's the case. We have actually had a very good execution, both market opportunities, but good execution also for us to be in a good position to deliver good growth. - Ilkka Hara, CFO
Q: North American orders were weaker in Q2. What drove this?
A: In North America, in Q2, yes, it was a bit weaker. But if you look at the first half, we actually are performing quite well. So particularly in North America, there are relatively larger orders, and they tend to be a bit lumpy between the quarters. So I would look at it more with two quarters in mind. So overall good performance there as well. - Ilkka Hara, CFO
A: And great performance in modernization in Americas. - Philippe Delorme, CEO
Q: What about modernization margins in orders?
A: We continue to see actually positive development in modernization, both in order margins, but also as we're scaling the business, we continue to see profitability improving in the business. So overall very, very good strong quarter in modernization. - Ilkka Hara, CFO
Q: There was a strong drop in sales in Q2 in China versus the rate in Q1, what drove this?
A: In the quarter we've continued to see construction activity being low if you look at the indicators for that. And as I said, we've also been very focused on cash flow, so managing also our deliveries with a credit risk in mind. So it's a bit both the market as well as our own focus on managing the risk in the market. - Ilkka Hara, CFO
A: And just building on your answer on China and sales, there is a bit of a good news, bad news, depending on what you say. Basically China is a bit less than 25% of our sales. But now with actually the growth of service and modernization in China and the decrease in NBS, now the sales we have in NBS in China are slightly more than 15%. - Philippe Delorme, CEO
Q: The guidance of 4% at the top end of sales growth guidance implies a strong acceleration in second half. What would drive this if that would materialize?
A: We have a strong order book to deliver on and continue to see good opportunities to drive sales growth. And we are expecting somewhat better sales growth in the second half than we've seen in the first half and of course, there's many parts contributing to it. - Ilkka Hara, CFO
Q: How is the M&A pipeline going forward?
A: We continue to see the market being quite active and see good opportunities, let's see how those materialize. But I'm actually quite positive about the opportunities. Clearly, the fact that the business is digitalizing is giving opportunities for larger companies to make it happen. - Ilkka Hara, CFO
A: And it's also, I would say, a weapon when we engage with those family businesses because we talk about their life and the fact that we are a respectful buyer, we are demanding buyer, meaning we would keep want to raise a bar on safety, on quality, on digital. But we are a very respectful buyer, and we are known for this on the marketplace. - Philippe Delorme, CEO
Q: Margin expansion beyond 2024, what will be the key drivers of this as the backlog margin has been stable now and the operating model renewal savings finish in 2024?
A: The fact that we continue to see very strong growth in services, in modernization has a positive mix impact to our results. And also strategically, we want to build scale. The fact that we want to drive growth is also helping us deliver margins. - Ilkka Hara, CFO
Q: Price mix headwinds in China amounted to over 10% for three consecutive quarters. How do you see the phasing of the group margins development in second half? What levers will you use to offset this headwind?
A: We have services and modernization that now represent one third of the business already and they are growing, whereas the NBS business has been declining. So the relative weight continues to go up. - Ilkka Hara, CFO
A: Our NBS business in China is slightly north of 15%. But the share of the profit, because this business is at a lower margin than average, is less than this 15% that I mentioned. - Philippe Delorme, CEO
Q: Where is the profitability of the new building solutions margin in China at the moment versus your average?
A: China margins compared to a group average are clearly lower than the group margins. So the NBS business is a big chunk of that decline and relative decline compared to the group. - Ilkka Hara, CFO
Q: What are the end market drivers for North American modernization? We upgraded the guidance for the outlook comment for that part of the market. Why? Which segment is driving it?
A: Overall in modernization also applies to Americas. We see a lot of opportunities there. We just don't modernize as an industry enough of the elevators. - Ilkka Hara, CFO
A: Sustainability and behind sustainability, making sure that owners sustain the value of their assets, because assets that will be non-retrofitted, a bit old fashioned, will really not be attractive. - Philippe Delorme, CEO
Q: You've been getting strong orders, especially compared to the market in China. Last year's second half was strong. When do you expect to see these flow-through to P&L?
AFor the complete transcript of the earnings call, please refer to the full earnings call transcript.
