KONE Oyj — Call Transcript 2014

Speaker 8: Welcome to your conference call. Please continue to stand by. Your conference will begin shortly. You'll be standing by on background noise until your conference begins. As a reminder, please press star one on your telephone to ask a question during the Q&A session.

Speaker 5: Let's start with the presentation, then questions and answers as usual. Please, Matti, go ahead.

Speaker 7: Thank you, Karla. Yes, we have two important news that we have announced today. We will do it so that we will first have last year's report, how our performance was developing last year, then after that, Henrik and I will tell about how we see the transition in leadership at the end of March, beginning of April. Let's start with the financial performance. In addition to our development in quarter four and the full year of last year, I will also tell about market development, about some highlights of last year, then finally, naturally, about market outlook and business outlook. In addition, beginning of this year also marks a start for a new phase, not only in the change of the leadership from the beginning of April, also with the start of new development programs now. This is why Henrik and I will also tell about our achievements in our previous programs and what our programs for the next three years will be. Let's start with quarter four development. It was a good quarter. Orders received was growing by 11.5%, in comparable currencies, 16%. This is something Henrik and I are particularly pleased with. The orders received reached a level of EUR 1.47 billion. The order book grew by 10.6%, in comparable currency, 16%, and was more than EUR 5.5 billion end of last year. We have to remember again that we don't include maintenance contracts in our order book. This means that this gives us a, let's say, good basis to have started the new year. In sales, 9.4% growth. In comparable currencies, 13.1%. This was, in fact, the first quarter when our sales level exceeded EUR 2 billion. The growth in operating income has been strong throughout the year. In quarter four, it was 13.7%, and the operating income was EUR 292.8 million, so close to EUR 300 million. What was particularly delighting, again, also the EBIT percentage improved from 13.9%-14.4%. Cash flow continued to be strong at more than EUR 240 million. Let's move to the full year 2013. The growth in orders received also for the full year was strong, 11.9%, and in comparable currencies, 14.1%. The orders received reached a level of EUR 6.15 billion. Sales was also growing fast, 10.4%, in comparable currencies, 12.6%, and was close to EUR 7 billion. Operating income growth was really strong. Last year it was 15%, reaching EUR 953 million. What I also like a lot is that also the operating income margin for the full year improved from slightly more than 13%-14%. The cash flow also grew to a record level, to above EUR 1.2 billion. The basic earnings per share went up from EUR 1.23 to EUR 1.37. Today our board of directors has decided that it will propose to the annual shareholders meeting a dividend of EUR 1. I have to say that I am again very pleased with this development. It was a good year, and the development is again thanks to the job of our people all around the world. At end of the year, we had 43,000 people in different continents. Also in this context, I want to thank them. Let's take a closer look at what was the development in orders, sales, and operating income, and first orders. The growth in orders received was 11.5%, and in comparable currencies, 16%. The growth was fastest in Asia Pacific, there in India, Malaysia, and China. The growth was very strong also in the Americas. I have to say that our performance in North America clearly improved towards the end of the year broadly. The orders development was relatively good also in this quarter in Europe, Middle East, and Africa, where the development in orders was best in Great Britain, Germany, and Russia. Overall, good development in orders received. Next, sales. The growth in sales was very strong in new equipment. It was close to 20%, and in comparable currencies, clearly more than 20%. The growth in maintenance also continued at earlier good levels, whereas the modernization sales declined. However, in modernizations, the orders received was growing. We had sales growth in all main geographical areas. We come to operating income. The good growth in operating income was driven by continually strong progress in Asia Pacific and also by the overall strong development in North America. The interesting point here is that the operating income margin improved also the share of new equipment sales of our total sales increased. This was thanks to the good work we have been doing in different parts of the world in developing pricing competence. The better prices can grow increasingly also in North America, and the overall good development in the quality of our operations. Because of these developments that I have mentioned, our business mixes had, again, quite significant changes. First of all, the share of new equipment sales of our total sales grew from 50% to 54%. While the share of maintenance went slightly down to 32% and modernization to 14%. Geographically, the share of Asia Pacific grew by 3 percentage points to 38%. I want to point out that Europe, Middle East, and Africa still continues to be the biggest geographical area for us with its 46% share of our sales. The conclusion about the development of these two business mixes is that this is a good starting point for the future, because we are well-positioned to grow because of our strength in Asia Pacific. On the other hand, our global strength in service business gives us stability to our business. Let's now take a look at a little bit longer-term development in our geographical mix in sales. As we have several times discussed, our growth strategy is based on a target setting that since 2005, we have been targeting market share growth, especially in big growth markets. At the same time, our objective has all the time to grow our operating income. With this approach, by focusing on market share, let's say increasing market share, focusing on the big growth markets, we have been able to do both increase market share and increase operating income, more or less a continuous basis. You see that the share of Asia Pacific of our sales has grown from, in this time period, from 12% to 38%. The average annual growth in Asia Pacific has been as high as 26.9%. However, I have to say that when we remember how many markets in Europe and North America collapsed in 2008, I am almost equally pleased with the 6% in Americas as an average annual growth and about 5% in Europe, Middle East, and Africa. In the sales by business, the share of new equipment has grown from 40% to 54%. The average annual growth in new equipment has been 14%, but also in the service business is between 6% and 7%. Let's next move to the review of how markets developed in quarter four. I will start with Europe, Middle East and Africa, and with the new equipment markets. In Central and North Europe, the market declined slightly. The markets in Germany, in Great Britain and Russia, were growing, and markets were stable in Switzerland, in Austria and in Sweden. The other markets declined either slightly or a bit more. In South Europe, the demand continued to decline. However, a positive sign was that sequentially, the markets in top countries, in Italy and in Spain, were stable. That is a promising sign for the future development. However, the market in the third big country, France, where market level has continued to be better, continued to decline quite clearly. In the Middle East and Turkey, demand continued to grow. In modernization, the market grew somewhat in Central and North Europe, but remained weak in South Europe. Modernization market is, we are learning all the time, has a very close correlation to the GDP growth. Maintenance markets grew, although we saw significant variations between countries. Price competition continued to be intense, especially in South Europe, but also in some countries in Central and North Europe. North America, where growth continued. In new equipment in the U.S., growth continued driven by residential and office segments. In Canada, the market was stable. In Mexico, the demand declined. In the modernization market, the market grew slightly. It developed more positively than in Europe. In maintenance, the market continued to grow, but price competition remained intense, particularly in the non-residential segments. Asia Pacific, where growth continued across the region and accelerated in China. Again, some country-specific comments regarding the new equipment markets. In China, the market growth accelerated to slightly more than 20%. This means that the full year market growth in China was slightly more than 15%. Our growth in fourth quarter was same as market growth, slightly more than 20%, and for the full year, clearly more than market growth at 23%. We will tell you our, let's say, official estimates of the market sizes globally and in different geographical areas. We can already now give preliminary information that in China our market share last year grew from 17% to 18%, and our global market share increased from 18% to 19%. Last year actually developed, in our case, very much as we planned in the beginning of last year. We expected that the price competition will get tougher by the end of the year. Therefore, we worked very actively to have a very strong start for the year. In the first half, we were even able to slightly increase prices. What happened in the second half, where the price competition, as typical it is a pattern that typically in fourth quarter, the price competition is toughest. We were able to maintain our prices actually continued to increase our margins. What comes to the, let's say, comparison to competition we were the fastest growing company in this industry when compared to our three key competitors. In top 4, we were growing fastest. This means that the distance between us and number 2 increased. When we take all of the medium size and big companies, we were the second fastest growing company in China last year. I will soon come back to how we expect the market to develop and going forward, which looks solid as well. In China, the affordable housing market size declined slightly. However, the growth was strong everywhere in the other residential segment including the Tier 1 cities, where the government restrictions to manage prices continue to be in place. Good point is that the reason for the growth picking up also in the Tier 1 cities was that the demand was strong also there. The commercial segment was also growing fast by about 15%. The infrastructure market was quite stable. Looking at the development in the statistics of the fourth quarter real estate data, they also show promising indications about the future development. The new construction land purchases increased by more than 40%, new construction starts by more than 30%. Also, the new apartment sales continued to grow and was close to 10%. We estimate that this year the market growth in China will be about 10%. In India, the market growth continued, driven especially by the residential segment, also the activity in large projects was quite strong. In Australia, demand was stable both in new equipment as well as in modernization. In Southeast Asia, the markets grew somewhat. Markets were growing. Also, the growth was somewhat slower than in the previous quarter. In maintenance, all our markets continue to grow. Here are some highlights regarding last year. First of all, we launched in June the KONE UltraRope hoisting technology and in October, KONE People Flow Intelligence solutions. The KONE UltraRope, we have got a lot of strong interest to this technology. What we already now see regarding this KONE People Flow Intelligence entry is that while we now have an integrated implementation of access control and destination control, this has clearly improved our competitiveness again in the high-rise segment. Second important point is that the ramp-up of the new global elevator offering that we launched in the middle of 2012 has developed as planned, and we will be in our full volumes by the end of this year. In escalators we had continued to have product renewal last year. Now the design language that we have in escalators is same we have had in elevators, and we have got already several design awards also for these new products. Finally, this I have said and we have said also earlier, but it is a highlight of last year that while Forbes has listed the world's 100 Most Innovative Companies now for three years, we have been in the list every year with improving positions. Last year we were number 37. On the right side of this picture, you'll see some key figures. The new equipment orders were growing by 16%, the deliveries by 60% as well, and the maintenance base exceeded 950,000. Now I come to the development programs. This approach where we decide every three years five key development programs that best bring us to profitable growth or growth towards our vision has proven to be a very good way to develop competitive assets. This is now the fourth time we start this kind of new phase. Here you see the list of our development programs that we worked with from 2011 to end of last year. I will now just give some key comments about the development, which was good. Customer loyalty improved every year. Employee satisfaction as well improved every year. I already talked about these great product renewal that we have had during the last three years. In Service Leadership Program, we got good progress in Developing sales capabilities and quality and productivity of field activities and a Delivery Chain Excellence Program. We got very good development in the end-to-end logistics chain from suppliers to installation sites. Now I ask Henrik to tell about our way forward with the new development programs. Please, Henrik.

Speaker 4: Thank you, Matti, and also welcome on my behalf to our webcast. First of all, I wanted to say that it's clearly a huge honor and a very inspiring challenge to succeed Matti as CEO of KONE as of 1st of April. We'll come more to that later during this session. I want to talk about, again, how we plan to develop KONE during the next three-year period. Matti talked already about our development programs and how we use them to constantly develop KONE into a more competitive company. For the next three-year period, we have again chosen five development programs. The first one is we want to be the first in customer loyalty. Here, our simple target is to have the most loyal customers in our industry, and this we intend to achieve through better customer service and customer communication. The second one is we want to have a winning team of true professionals. By this, we want to have a committed and competent employee in every job, and this will make KONE an even better place to work. I think this is a good continuation of the very strong people development that KONE has been doing since 2008. The next three programs are really designed to, again, further differentiate us from our competition with our product services and solutions. The first one is we want to have the most competitive people flow solutions. This is a great continuation of what we have been doing and what we have been developing the past years. Here, we want to make sure that our products become even more competitive every year. The fourth one is that we want to be the preferred maintenance partner so that we can continue to drive profitable growth in our maintenance business. Here, we renew our maintenance offering and also improving our sales setup. The last one is to be the top modernization provider. We think that there are significant opportunities in the modernization markets, both in Europe and North America. Here we want to accelerate our growth by making sure we have the best modernization solutions in our industry. If I then turn to our holistic picture, many of you know our previous one, we have now updated it with our new development programs. This picture describes how we, in a systematic way, develop KONE towards our vision. First of all, we have our megatrends. We are operating in a growth industry driven by many strong megatrends. Those are very familiar to most of you. They are urbanization, demographic change, growth in middle income consumer, and aging population. The third one is safety, we have environment. These are continuous good growth drivers for our industry. We have our strategic targets. In the past years, we have measured our progress through five measures each year to see how we have developed and whether we have developed in a positive direction as a company. Now we have aligned our strategic targets with these five measures. Strategic targets are we want to have the most loyal customers in our industry, make KONE into a great place to work. Our ambition is to continuously grow faster in our markets and have the best financial development. The last one is to be the leader in sustainability. Of course, essential is that we continuously develop KONE towards our vision, which is that we deliver the best People Flow experience. This is our promise to our customers and our end users. Our way to make this strategy live and to get towards our vision are our development programs, which I talked about already. We have our high priority areas, which are the most important factors in everything we do, and those are safety and quality. All of this development is then supported by KONE's values and by KONE Way, which is our process architecture, which describes how we conduct our business. Again, our ambition is that every KONE person should know, every KONE employee should know what this picture means and understand how they, in their role, can contribute towards our development. If we achieve that, we have very strong possibilities to continue our strong development of KONE. At this stage, I'll give word back to Matti to finish with our outlook and both market outlook and our business outlook.

Speaker 7: Thank you, Henrik. As Henrik mentioned, market outlook. Starting with new equipment, the market in Asia Pacific is expected to grow clearly. The market in China, as I already mentioned, is expected to grow by about 10%. The market in the Europe, Middle East, and Africa region is expected to grow slightly. This is, let's say, a bit better than what was the development last year. With relatively stable demand in Central and North Europe and further slight decline in South Europe, and a growing demand in the Middle East. The market in North America is expected to continue to grow, and in modernization, globally, the market is expected to grow slightly. In maintenance, the market is expected to develop rather well in most countries. Finally, the business outlook for this year. Net sales is estimated to grow by 6%-9% at comparable exchange rates as compared to last year. The operating income is expected to be in the range of EUR 980 million-EUR 1 billion 50 million, assuming that translation exchange rates don't materially deviate from the situation or the beginning of 2014. This completes the review of our last year's results. Now we will move to the other big topic. That is the leadership change in the beginning of April. Now, Henrik and I, we will give our comments how we see this change, and maybe I will start with that. The decision to leave KONE as CEO and President was not easy. This has been an exciting job in a great company. However, this decision and this thinking started to develop in my mind gradually during the last 12 months, and it was based on a few factors. First of all, KONE's business is developing at the moment very well. We are in a strong phase at the moment. Secondly, our new development programs also are starting again, a new phase at KONE. Thirdly, I am very pleased with the engagement of our personnel 43,000 people and also with the spirit that we have in the company. I am also very pleased with our executive board, with my management team. In our management team, we have several strong people, and many of them were potential candidates to be my successors. My newly appointed successor, Henrik, has grown very well to his new responsibility during the last five years, and he clearly has brought new energy and new speed to our company. I am convinced that the decision that Henrik will be the new President and CEO after me is a good decision for KONE. In addition, nine years is already a quite long period as President and CEO of a company. At the age of 61, which I am now, it starts to be useful to think that, do I still want to be in this work couple of years, or do I decide to leave it now after nine years in order to be able to start the next phase of my career again with a little bit different challenges and again, new kind of learning opportunities? I decided to take the latter alternative and not to continue and maybe then again decide to continue and then finally run into phase when I would believe that I can't be replaced. That would not have been a nice path. This means that beginning of April, I will be involved with many interesting, let's say, responsibilities. I plan to continue with my current positions of trust. In addition, the scope of my activities will further expand also with new and even with new kind of interesting challenges. I see that this is a good change for KONE. Now I ask Henrik, how you see the situation and your situation in front of the new challenges for many years to come. Please, Henrik.

Speaker 4: Thank you again, Matti. As I already mentioned, it is naturally a huge privilege and a very inspiring challenge to take over after Matti as President and CEO of KONE. But I would say I am doing that with great confidence. Strong confidence that we can continue to develop KONE in a positive way that we have developed KONE in the past years as well. The reason for my confidence, first of all, the breadth, diversity, and strength of KONE's management, as well as the knowledge and skills and competencies of KONE's employees more broadly. I would say the whole people aspect we have in a very good shape, and that's of course very important. The second important factor is KONE's culture. We have a very strong culture, very dedicated people, and a culture to continuously drive renewal and improvement. Of course, the third one relates to what I discussed earlier, that we operate in an industry with many exciting growth opportunities. We have growth possibilities. We remain the challenger in our industry. Our objective is to continue to grow faster than our market. We see lots of opportunities in our markets, and we also see good opportunities to continuously develop KONE into even more competitive company. I think that all these three factors give me very strong confidence that we can continue this very good path of KONE. Even though we will be working for two months together with Matti, he's still President CEO until end of March. This is the last results announcement for him. I think I wanted to personally thank you for everything you have done for KONE, for the very strong development during your period, your unbelievable dedication and commitment constantly to this company and to develop both the company and its people and its leadership. I think I can say that all of us who work with you can be very privileged to have been working with you, and we have learnt a lot. That has been a true joy, and I think that gives us a great path going forward. With that, I think we will probably hand over then to Q&A, and I'll hand over word to Matti again.

Speaker 7: Thank you, Henrik. Now we are ready for your questions. You can ask your questions both in the area of the results or the transition, whatever you like. Karla.

Speaker 5: Thank you, Matti and Henrik. Let's start with the questions from those present here, in case you have questions.

Speaker 9: Pekka Spolander from Pohjola Bank. Last year, you still delivered some lower margin projects, big project. The strong result in fourth quarter, does this indicate that those projects are now more or less delivered out or shall we expect some to be delivered later this year?

Speaker 7: The density of those deliveries was highest this year, we still have these deliveries continuing next year but getting to low levels by the end of next year. The improvement in our North American and U.S. results very much was a result of the delivering of the orders that we had got with the improving, let's say, prices and margins. You remember that already in the middle of 2011, we started to increase prices and have increased those quite significantly over the last two and a half years.

Speaker 9: Thank you. The second question about the pricing competition. You mentioned in quite many points that the price competition remains tough, has there been any changes during the fourth quarter or generally speaking, 2013?

Speaker 7: Let's say so that the price competition continue to be intense. However, I would say that the only changes in quarter four compared to quarter three were that it got somewhat even tougher in South Europe and as I mentioned, in new equipment in China, the price competition was tougher as well.

Speaker 9: Okay. Thank you.

Speaker 10: Jussi Koskinen. New equipment business growth has been 14% a year over a long period of time.

Speaker 7: Yes.

Speaker 10: Maintenance growth has been only, let's say, good, but still clearly lower, only 6% plus. How do you see development in the future? How this maintenance business growth will continue?

Speaker 7: First of all, when we take this specific period from 2005 to 2013 and having a, let's say, closer to 7% growth there, I would say that that is a good growth. If I would a little bit evaluate that can be pleased with the development last year, a few factors. First of all, conversions continue to be at good levels. The globally conversion rate was about 80%. When outside China, it was between 85%-90%. In China, we have the highest conversions in the industry. With KONE brand, the conversion is and has been conversion level 60%. When we take also into account Giant KONE, where historically the maintenance business has been such a priority as in the KONE branded activity, the overall conversion rate was 50%. What comes acquisitions, we had a relatively good development also in acquisitions. They were about one-third of the new additions. We had also, let's say, a couple of negative factors. First of all, this is an interesting point. In the Western markets, close to 1% of the elevators and escalators were taken out of use during last year. Close to 1%. Operatively as we have said also earlier, during the first half of last year, we can't be fully satisfied with our development in competition balance. We took that to a stronger focus in the middle of last year, and the development towards the end of last year was very good. This means that we have a good possibility to let's say, further improve our maintenance activity from the maintenance base point of view. Now as Henrik mentioned, the maintenance is also one of our key development programs. The activity in developing that will be strong.

Speaker 4: Thank you.

Speaker 5: Okay. I think we are next ready for the questions from the lines. Just before we go there are usually quite a few questions during these calls about China's share of our orders and sales. Just for your reference, there is an additional slide at the very end of our results presentation that highlights some of the key figures for the Chinese market and our performance in 2013 there. You will see at what rate we estimate the market to have grown last year as well as our growth rate. In addition to this, China's share of our overall orders received and of our sales for the full year. In addition to this, I thought I would here just refer to China's share of our orders and sales in the last quarter of the year. These figures were a little less than 35% of our orders received. This is China's share of our Q4 orders received and roughly 25% of our sales in Q4. Next, we are ready for the first question from the lines. If I may ask you to please present one question at a time. Thank you.

Speaker 8: Thank you. As a reminder, please press star followed by one on your telephone to ask a question and the hash key to cancel. Your first question comes from the line of Ben Maslen. Please ask your question.

Speaker 1: Thank you. Hi, Matti. Hi, Henrik. Congratulations to both of you. First question, please. Just coming back to the growth of the maintenance base, your slide 13, which I guess you just touched on. It still seems like fairly low growth to kind of 900,000-950,000 units given the very strong deliveries and the M&A that you mentioned. What % of the book would you lose on a normal year, basically? How much bigger is that this year than you've seen, say, in 2011 or 2012? Thank you.

Speaker 7: Henrik, please.

Speaker 4: First of all, as Matti mentioned, our additions were at a good level during last years.

Speaker 1: Yeah.

Speaker 4: If we look at, Matti mentioned already that in the Western world, can take as a rule of thumb that about 1% of units are taken out of use each year. We have to remember that quite a large share of our base is still in Europe. That is a clear negative number, and that has been I would say, quite constant that number over the past few years. Of course, the absolute number grows a little bit every year as the base grows.

Speaker 1: Yeah.

Speaker 4: That's one point. The second one, which Matti mentioned, was competition balance, i.e., how many units we win versus how many units we lose in the market. As Matti already mentioned, in the beginning of the year, we were not satisfied with our performance, and we had clearly more losses than wins. The situation then improved towards the end of the year. When we look at additions, we think about gross adds, then we think about conversions and acquisitions. There conversions were about two-thirds, acquisitions one-third. Then we had these two negative factors.

Speaker 1: Got it. Thank you. Second question, just on sales growth in Asia, which seemed to slow down in the quarter quite a lot from the rate you saw in the first nine months. I think it was 11% in Q4, 20%-30% in the first nine months. Given orders and momentum is so strong in your Asian business and that you tend to have shorter lead times, just why are you seeing growth rates slow at the moment? Is that just a timing issue? Are there some deferrals? Is it capacity in terms of installation staff? That would be helpful. Thank you.

Speaker 7: The answer is here very straightforward because the sales growth in Asia Pacific was in historical currencies, 11.8%, but in comparable currencies, 17.5%.

Speaker 1: Okay, great. It's a currency effect. Thank you. My final one, if I can, just the extra charge you have in financial expenses of the revaluation of your Giant KONE option. I noticed you had it last year and you've had it this year. If we assume that the China business keeps growing and Giant KONE keeps growing, would it be right to assume that you have this revaluation charge every year? Thank you.

Speaker 4: Yeah. Thank you. Yes, I can take that question. Exactly as you said, the charge relates to the revaluation of the option of the 20% that we had the right to buy in Giant KONE. The charge of roughly 23%, EUR 23 million that we had, not all of it is Giant KONE, but the majority of it is. If we continue to grow, then the value of the option would increase each year and this charge to be there. It is, of course, at the moment a non-cash charge.

Speaker 1: Yeah.

Speaker 7: You can see it in our balance sheet, the value we have for all of such options to be able to buy out minority stakes.

Speaker 1: Got it. Thanks so much.

Speaker 7: Thank you.

Speaker 8: The next question comes from the line of Aron Ektetson. Please ask your question.

Speaker 11: Yes, hi there. Congratulations again to both of you to your new ventures. I have two questions, if I may. The first one was just if it was possible to get the organic growth in service, i.e., excluding the acquired bits. You said 2.6% in constant currency, so I assume there was a little bit of that that was acquired. Secondly, if I may, just on your top line guidance of 6% to 9% in constant currency. It seems as per usual practice, pretty conservative, I have to say, in light of backlog and orders up 16% and 14% on an equivalent basis and generally you do some small acquisitions as well. I'm trying to get my head around why if this is indeed, or if we should see this as a sort of normal conservative start to the year? This in particular in light of the 10% demand growth that you're expecting in China, which presumably is where you will experience sort of the vast majority of the infra orders in the year. Those were my two questions. Thank you.

Speaker 7: I will start with the latter one and then Henrik, I ask you to comment the first one. Yes, I understand your question very well. This is why only 69%. There are three key reasons. First of all, we have a major order book in major projects and in many of those, we have very little deliveries during this year and significant deliveries then in the future years. Second is the dynamics in the mix of the U.S. business. We have had a good growth there in orders and in the mix in orders the share of mid-size projects has been growing. Again, the time from order to delivery is longer in the case of this. Therefore our sales growth in the U.S. and North America is low this year. The third reason is the consolidation of KONE Areeco in Saudi Arabia. Until end of last year KONE Areeco was our distributor and therefore we recognized sales when we had delivered material. Now when KONE Areeco is in our management and we are consolidating that, we are naturally recognizing revenue in line with sales completions. This actually is a very good question because this is important because of two reasons. First of all, the impact of this means that this consolidation just for this year, it decreases our sales to KONE Areeco. It decreases our sales compared to the situation if we would not have done this transaction. The same is the case also for EBIT. The impact is strongest during the beginning of the year. This is again, one of the elements why also when we look at our outlook for this year both growth in both sales and operating income in the beginning of the year is clearly lower compared to last year than in the rest of the year.

Speaker 4: Okay, thank you. I think, one thing out of this, KONE Areeco is a complex one, why it has this impact, but one clarification, in the beginning, it has a negative impact to our sales. Of course, eventually, as we recognize the full project, it will have a positive impact to our sales. The cash flow profile is very similar to what it was previously, but it's one of these impacts of consolidating it. Your first question was in relation to the growth of our overall service business that was at comparable currencies in Q4, 2.6%. First of all, we have to remember here that our maintenance business grew at its historical good rate, and we had negative growth in the modernization business. We had continued good growth in our maintenance business.

Speaker 7: Yes, we did acquire businesses during the year and end of last year, but they are not a material part of our sales growth. They have a small impact, but not material.

Speaker 11: Okay. You did grow sort of organically as well in constant currency, so it was positive.

Speaker 4: Clearly, yes.

Speaker 11: Okay. In the maintenance business, yes. Okay. Thank you.

Speaker 8: Next question comes from the line of Fredrik Ståhl. Please ask your question.

Speaker 3: Hi, good afternoon. It is actually Guillermo Peigneux from UBS. I have three questions. Have you guided or can you guide us to how much of your China revenues are actually coming from tier 3 and tier 4 cities in China? Secondly, of the 10% growth that you expect for the overall market in China, can you basically guide us how is your backlog looking like versus that 10%? Why are you going to be outgrowing going into 2014, a year again, with all these capacity increases from your competitors, why would you be outgrowing the market? Last but not least, when it comes to working capital changes, we saw a EUR 72 million cash outflow, which is materially higher than what you saw actually last year. I was wondering the reasons behind this.

Speaker 7: The first question I understood that it related that what is our, let's say, split and outlook in the different tier cities in China that we have not opened and communicated. The second question, wait a moment. I think why we believe we can continue to outgrow the market and the 10% outlook for market growth. Okay. First of all why do we believe that, and why we are confident that we are able to grow faster than the market also this year in China, because of many reasons. First of all, our product competitiveness continues to be very strong, both in our both activities and the new global product range that we are ramping up is further improving this competitiveness. Secondly, what is very essential is that our broad management team in China, including the branches and regions, that has been developing very well and we have one very key strength is that our key management, we have stability in our key management in China. The other factors continue to be those that we have discussed several times. We are all of them expanding more and more, to the inner parts of China that increases the accessible market for us. This combination of having two parallel activities, two parallel brands, KONE brand and Giant KONE, it has really proven to us a very big strength in this phase when the market is very big and the price competition has become tougher.

Speaker 4: I would like to add one which was in your question, Guillermo, which was relating to the capacity increase in the industry. We do not think that capacity increase is a growth driver for anyone in China. Of course, one needs the capacity to deliver, but we have to remember that we operate in a very capital light industry where we assemble the products. I think we do not see that that is a concern or that is driving anyone's growth in China. Your third question was relating to working capital, and the negative working capital we had in the quarter. First of all, I would say that it is very normal for us to have negative working capital development in Q2 and Q4. Very much of our service billing happens in Q1 and Q3. Seasonally, this was a totally normal thing. In 2012, we had an exceptionally strong performance in working capital in Q4. I would say that the situation for Q4 in 2013 was a very normal one. At the end of the year, our working capital was again more than EUR 600 million negative, which I would consider to be a very good number. During the year, we again improved our working capital. We think actually that cash flow was at a good level in Q4, taking into account seasonal factors.

Speaker 7: Still would like to comment on this, let's say, production capacity issues and really when taking KONE, a company with sales of close to EUR 7 billion, our annual investments when excluding acquisitions are in the level of EUR 70 million to EUR 80 million. A relatively small part of that is in the production capacity. We never make, and we don't believe that other companies as well, for example, pricing decisions or other business decisions based on these investments.

Speaker 3: Can I ask the question differently, maybe? When you look at the European market or the U.S. market, and you compare basically total installed capacity from you and your competitors and total demand, ongoing demand. You look at the Chinese market and you see total installed capacity or actually the numbers that you probably see at the moment that is going to be in terms of installed capacity in 2015 versus current demand levels. Is China normal? Meaning that I've basically read reports talking about the fact that maybe 700,000 units capacity will be built by the end of 2015, which the current run rate of installations is around 475,000 to 500,000. I just wonder whether China is just normal and then you have 200,000, 300,000 extra capacity and that is just basically something that you see in other markets as well.

Speaker 7: I would say that this is not any kind of issues even, let's say, without commenting on these specific levels.

Speaker 4: I think I would add to this that I think when you look at what people talk about capacity in China, that is probably what they look at where they build their factory, the maximum design capacity. Let's remember in assembly operations, these are very modular. It's quite easy to expand then your capacity at your site. Frankly, if you have a little bit extra capacity, that means that you have an industrial hall that may not be fully utilized and that is frankly not a lot of extra capital charge to have that. We don't see the concern in the way that you describe it.

Speaker 3: This is very helpful. Thank you very much.

Speaker 7: Thank you very much.

Speaker 4: Thank you.

Speaker 8: Question comes from the line of Lars Brorson. Please ask your question.

Speaker 6: Yes, thank you very much, Mattti. Thanks very much for the last few years and best of luck to you and Henrik. Congratulations on the appointment. A couple of questions if I could. First on your 10% market growth for China in 2014. I was wondering if you could give us your segmental assumptions here across your non-residential, residential, and affordable housing segments in terms of what you expect to see here in 2014. Maybe just to that, whether you feel this year versus what we saw last year with affordable housing now a smaller portion in 2014 and arguably with liquidity concerns in that market, you feel that visibility on your market outlook here is perhaps somewhat reduced from what you had last year.

Speaker 7: Segment-wise, what we can say is that the peak of the current kind of affordable housing segment is over. It was declining slightly already last year and we expect that to decline also this year. On the other hand, we expect to see good growth both in the rest of the residential segment as well as in the commercial segment.

Speaker 6: You talk about 10% volume growth. What do you expect value growth to be? Maybe I could ask differently. Do you expect that to be the same delta as you saw in 2013?

Speaker 7: Henrik, would you like to comment? We have not predicted that but I would say that there shouldn't be a big reason for it to be a big deviation from what we have seen so far.

Speaker 6: Thanks, Henrik. Finally, if I just could on your maintenance growth in China. You talk about on your last slide a 35% CAGR since 2006. I think earlier we've talked about a 40% CAGR. I appreciate obviously in the mid-2000s you saw quite low base numbers and therefore quite high growth numbers. Can you give us a sense for how the Chinese maintenance base is growing or did grow in 2013 relative to 2012 and how we should think about that growth either accelerating or decelerating in 2014?

Speaker 7: What we said is that the average annual growth in the maintenance base between 2006 and 2013 has been more than 35%. Earlier we have said that it was less than 40% between 2006 and 2012. The growth has been strong but it has slightly declined just because of the comparison base has become much higher.

Speaker 6: Sorry, just to be clear. The growth has declined in 2013 relative to 2012, is that right?

Speaker 4: Well, slightly. Just because it's just the maintenance base that is the comparison point has been becoming bigger.

Speaker 6: That's clear, Matti. If I could fill out one final follow-up, please. Just on your current order book comment, that it currently has a lot of large project orders. Can you give us a sense of the order of magnitude of this, and what sort of margin impact we should think about this would have? I.e., what percentage of orders currently is large project orders relative to what has been, say, in the last five years or so? Any sort of margin differential between that and small base orders would be of interest. Thanks.

Speaker 4: Yeah, Henrik. Our order book in major projects is roughly 30% of our order book. That has grown somewhat from previous year. Overall, of course, our ambition through pricing otherwise is to continue a good margin development overall. This mix shift should not have a material impact over time on our margins. I'd like to, Lars, just still clarify on the maintenance growth in China in 2013, that it continued to be at a very good level.

Speaker 6: That's clear. Thanks very much.

Speaker 8: As a reminder, if you wish to ask a question, please press star followed by one on your telephone, and to cancel press the hash key. The next question comes from the line of Glenn Liddy. Please ask your question.

Speaker 2: Hi there. On the tax rate, could you give us an idea what's going to be changing with your tax rate going forward over this year and next year? Also some comments on the costs for purchasing materials and components, if there's any change in the outlook there.

Speaker 4: First of all, as you saw, our tax rate for the full year was higher than the previous year. The reason for the higher reported tax rate, there were two specific items that impact our result but are not tax deductible. One is this revaluation of these options for acquisitions. That reduced our result but not tax deductible. We have deferred tax assets in Finland and the Finnish tax rate, beginning of 2014, changed from 24.5% to 20%. When we revalued these deferred tax assets last year, that impacted our tax rate. Therefore, last year, the comparison point is our tax rate from our normal operation, normal business, was 23.6%. The impact then of the decline in the Finnish statutory tax rate will have an impact of close to one percentage point on our overall tax rate. As I said, as a comparison point, it is 23.6%.

Speaker 2: Okay. Thank you.

Speaker 8: There are no further questions at this time. Please continue.

Speaker 7: Karla.

Speaker 5: Okay. Before we close the call, I wanted to ask Matti whether there was something that you still wanted to close this call with?

Speaker 7: Yes. I will see many of you still during the next two months in road shows in different countries. However, because this is my last, let's say, quarterly conference call, I want to really thank you for a great cooperation during the last nine years. All of this has been very professional. We are all the time learning a lot from you, and I have to say, this has been very energizing. Thank you.

Speaker 5: Thank you very much. Have a nice rest of the day and of the week. Let's stay in touch. Thank you.