KNYJY - KONE Oyj (KNYJF) Q3 2023 Earnings Call Transcript
2023-10-25 15:24:06 ET
KONE Oyj (KNYJF)
Q3 2023 Earnings Conference Call
October 25, 2023 8:45 am ET
Corporate Participants
Natalia Valtasaari - Head, IR
Henrik Ehrnrooth - President and Chief Executive Officer
Ilkka Hara - Chief Financial Officer
Conference Call Participants
James Moore - Redburn
Daniela Costa - Goldman Sachs
Klas Bergelind - Citi
Miguel Nabeiro - BNP Paribas
Aurelio Calderon - Morgan Stanley
Panu Laitinmäki - Danske Bank
John Kim - Deutsche Bank
Ben Heelan - Bank of America
Vladimir Sergievskii - Barclays
Rizk Maidi - Jefferies
Debashis Chand - Societe General
Andrew Wilson - JPMorgan
Presentation
Natalia Valtasaari
Good afternoon, and welcome to KONE's third quarter earnings call. My name is Natalia Valtasaari. I'm head of Investor Relations here at KONE. And I'm very pleased to be joined by our President and CEO, Henrik Ehrnrooth, and by our CFO, Ilkka Hara. As usual Henrik will start the presentation by going through the main highlights of the quarter, and as well as what we're seeing in our markets. But before handing over to Ilkka, he will also talk about the leadership transition that we announced earlier today, which of course, is super exciting news.
Ilka will then go through the financials in a bit more detail and Henrik will round-off by speaking about our business and market outlook for the year, as well as sharing some initial thoughts on 2024. Then it's time for your questions and answers. And I'm expecting an active discussion, as always. So please do limit yourself to one question one follow-up that way, as many people as possible have the opportunity to ask questions.
And then, finally, before I hand over to Henrik one reflection from me. So I think you've probably noticed by now at least you would who have gone through the material. When we announced our new operating model, we at the same time changed our business things to better reflect their nature. So we now have our three businesses, new building solutions, service and modernization. And those names have been reflected into reporting as of Q3. So that was a bit of a technical niche. But with that, Henrik, please.
Henrik Ehrnrooth
Thank you, Natalia, and warm welcome to this webcast. And as Natalia already said, we have today, some good news and some exciting news to share. But if I go straight to the highlights of the quarter, what I'm very happy about is that we had another excellent quarter in our performance in both service and modernization. Strong top-line growth in both, and that is incredibly important. It just makes us more and more resilient all the time.
We also had a fantastic quarter in China, we really had strong momentum in orders in a market that we know is challenging. But also we're able to capture good opportunities in India, Middle East, which are two of the most important growth markets right now. And both markets where KONE has a strong leadership position. So all of this resulted in a stable development in orders received, which I think is a really good achievement, given the backdrop considering markets and construction markets globally right now.
So overall, I'm pleased with our Q3. So as usual, let's start with our key figures for the third quarter, as I mentioned, highlight really stable orders received and strong growth in service and modernization sales. So orders received just shy of €2 billion, increase of 0.3% in comparable currencies. So happy that we are able to get that to a positive number.
We continued to have a very solid order book of €8.8 billion that is down 3.7% in comparable currencies, as we can see everywhere foreign exchange translation has quite a big impact on the numbers this quarter. Sales just over 2.7 billion now down 1.4%, good growth in service and modernization particularly new building solutions down.
Also profitability improved now really no difference between operating income and adjusted EBIT, but adjusted EBIT improved from 306 million to 316 million, and our margin from 10.2% to 11.5%. So the consistent profitability improvement that we are on path continued. Also solid cash flow of 342 million for the quarter.
Now as we always say, one quarter is a short period of time. Now we also have nine months behind us, so three quarters of the year. And if we look at performance here, it's really about sales growth and profitability improvement. Orders received for the first nine months of €6.5 billion, down 4.6%. So you probably remember, we had a slight decline in Q1, then a little bit more in Q2 and now better performance in Q3.
Sales €8.1 billion, up 6.5% and operating income and adjusted EBIT up 25% from €712 million to €890 million and 2 percentage point improvement in margin from 8.9 to 10.9. So again, consistent profitability improvement, which is, of course, something we're driving, and we are well on track.
Cash flow from operations, a good €1.1 billion for the first 9 months, a clear improvement from last year and that I'm happy about and also EPS up 30% to €1.26.
I must say that I'm really pleased with these numbers for the quarter. We have to remember that as of 1 July, we implemented our new operating model, where, of course, we changed the structure of our organization and a lot of people had new roles. In that environment, we have continued a strong performance that again talks volumes about the commitment about the mindset and motivation of KONE's team and that, of course, very grateful for.
Now in the quarter, we had some announcements, and I start with announcement within KONE, which is that Axel Berkling, who has been on the Executive Board since 2016 in various different roles, leading our Asia business outside of China, leading our European business; and last, as Head of our Strategy and Transformation organization now became Executive Vice President of Commercial and Operations. Very happy to have Axel in that role with his long and very solid track record at KONE.
Also today, our Board of Directors made a decision announced that Philippe Delorme has been appointed CEO KONE as of 1 January, 2024. As many of you probably noticed, on the 2 October, we announced that I had informed the Board that I will leave my role at KONE in the first half of next year after that point, 10 years in this role. And I felt it was the right time to start thinking about next steps in my life.
And now the Board today appointed Philippe, which I'm very happy about. Philippe has a very illustrious career over 25 years at Schneider Electric, many different roles, many different geographies. I think actually the majority of his career, he has worked in Asia. He's worked in North America, of course in Europe. He is French and was last Head of Europe operations at Schneider Electric and part of their executive committee from 2009 to 2023. So definitely a very digitally focused, sustainability-focused, technology-focused leader, customer-focused leader. So happy to hand over a strong team and KONE business to Philippe.
On 1 January, I will remain around to ensure a smooth handover, I'll remain around until end of March, and of course, travel a lot with Philippe, introduce him into the KONE business and make sure things continue in a smooth and great way. So that was announced today as well.
With that, let's turn into market development. How our overall markets developing? And let's start for markets for new building solutions in the third quarter. We know that markets in North America, Europe, Middle East and Africa and China are impacted by clearly slower construction activity. It is clear that increased interest rates are impacting these markets and economic environments are impacting these markets quite clearly. So North America, we saw a significant decline from a high base. Europe, Middle East and Africa, something I said in Q2. The further north, we go in Europe, the more challenging situation, Nordic region, Germany, further south, a little bit better, if you go to Middle East, actually, a good situation, strong growth in those markets.
China market continued to decline at about 10%. On the other hand, rest of Asia Pacific driven by India, Southeast Asia, really nice growth in both India and throughout Southeast Asia. So that's where there are good growth opportunities.
At the same time, we know that our service and modernization markets are developing very positively.
Service is growing at its trend rate in all markets, North America, EMEA, good growth in China, very good growth in rest of Asia Pacific and also modernization markets continue to be strong. So growth in North America, Europe, Middle East and Africa and then good growth in China and rest of Asia Pacific. So it's really interesting to see how positive the markets are and the continued opportunities we see there. So clearly, a lot of focus for KONE to capture growth in these markets.
If I then touch a little bit more on China. It's clear that the weak consumer sentiment continues to impact the market. I would say there were 2 challenges in China. It's about consumer sentiment confidence and the second is continued tight financing situation for developers, which means that difficult to buy land, difficulties to drive business forward. It is clear that when the market is declining, it's a very price-intense market. At the same time, costs are coming down in China.
Perhaps what it continues to be positive is that there is a continued focus on completing unfinished projects. As we all know, there continues to be a huge base of buildings that are in progress and there continues to be focused on the authorities to complete this. So that will continue to be a tailwind going into next year. And service and modernization markets continue to be very robust. So as we look at all the statistics, we can see that they continue to be quite a negative territory, except for completions if we look at year-to-date.
So overall, the outlook for China is very much intact of what we have looked at. However, pulling all of this together, how do we think about the KONE business today. After our introduction of our new operating model, the way we think about our business is we have 4 geographic areas, North America, EMEA, China and rest of Asia Pacific.
In each, we have 3 businesses: new building solutions, service modernization. So 4 times 3, there are 12 markets that we are following and businesses that we are following very closely. When I look at this from a market backdrop, out of these 12 markets, 9 are growing. And even where EMEA is declining, there's growth in Middle East, so we continue to be in a really, really good industry because majority, well over half of the business, if we look at the markets behind them are growing. And we can also see that our business mix is going in this direction that our weight of service and modernization continues to increase. But this is so important. This is where we are focused to drive growth because there are plenty of growth opportunities in this industry despite some challenging construction markets in North America, Europe and China. Most markets are growing, and that is where we keep our focus and why we continue to have good growth opportunities next year and in the coming years.
So with that, as usual, I'll hand over to Ilkka to review a little bit more our financial performance.
Ilkka Hara
Thank you, Henrik, and also a warm welcome on my behalf to this third quarter results webcast. And I'll review the financials as normal in a bit more detail. I am starting with orders received.
Orders received for the quarter were €1.990 million declined on a reported basis of 7.7% as the currencies on a translation basis had a large negative impact to this quarter. On a comparable basis, as already highlighted by Henrik, we did see growth of 0.3%.
Geographically, EMEA was stable. Very happy to see our good performance in modernization, being able to mitigate the more difficult NBS market.
Then in the Americas, we did see we did see a decline in our orders received, but also there, our modernization volume business, which really is the bread and butter of the business did grow. And majority of the decline in orders received actually came from major projects overall. And they tend to vary quarter-by-quarter and our last year's comparison point was quite high.
In APAC, we saw our orders growing. And majority of that was driven by good performance in China, where our orders received value grew almost double-digit. So very good performance in the quarter in a very challenging market in China with our team.
From a margin perspective, we continued to see positive development in orders received margins. Year-on-year, they improved and they were stable quarter-on-quarter. Key driver for this in the rest of the world was a continued good focus on pricing. In China, the driver was more the reduction in our component and input costs, which were supporting our margin development. But overall, I consider this stable development in this environment to be a very good outcome for the quarter.
Then to sales. For the quarter, our sales were €2.75 billion. On a reported basis, a decline of 8.3% and on a comparable basis, a decline of 1.4%. And as Natalie already highlighted, so now with our 3 new business lines, so new building solutions was declining 13.6%. And of course, now in sales, we have the high comparison point post the lockdown measures in China impacting the outcome here.
Clearly, services was one of the highlights for the quarter in terms of sales growth, 9.2%, very strong performance again. But clearly now, again, modernization at 18.3% was the highlight from a sales growth perspective; very good performance, both service and modernization.
Geographically, strongest growth in Americas, 14.5%, EMEA growing 6.7% and Asia Pacific, including China, declining 15%, and I already talked about the impact of China last year.
Then to adjusted EBIT and profitability. Our adjusted EBIT for the quarter was €316 million. We saw growth on our absolute result, but also we continue to see our margins expanding from 10.2% to 11.5%. This time, with the decline in sales, our growth had a negative impact, but profitability improved driven by services and modernization sales growing strongly, both absolute number contributing to it, but also mix positive impact to our profitability.
We continue to see improved price cost dynamics on our deliveries as we were delivering those orders that continue to have better margins. At the same time, we did have fixed cost absorption being lower, and we continue to see inflation overall impacting our operating expenses negatively.
Then to conclude from my perspective, cash flow, which for the 9 months of this year was €1.1 billion. And main driver for improved cash flow has been the increase in our operating income and our net working capital has continued to be broadly stable compared to last year's end. We continue to see positive impact from accounts receivable. In this environment, the focus on collections, managing your credit risk is very important. At the same time, this quarter, accounts payable actually contributed negatively. So the timing of the payables now this time was more in this quarter than normally.
And then I said, the biggest difference between the year-end and current net working capital actually is the impact of currencies, which is close to €30 million. With that, we're very close to being stable from that perspective. And I think from a cash flow perspective, we continue to see positive development for the business.
But with that, I'll hand over to Henrik for market and business outlook.
Henrik Ehrnrooth
Thank you, Ilkka.
Market outlook, that is unchanged from our second quarter for this year. So the market for new building solution, we expect that China will decline between 10% and 15% in 2023. This is exactly the same thing we said in Q2, and we know that policy actions continue to be very important to a recovery of that market. Rest of Asia Pacific continued good development, clear growth there and clearly declined in Europe, Middle East and Africa and significant decline in North America, it's very much what we've seen so far.
Positive story, as I talked about it already, is the modernization markets are growing in all parts of the world and presenting good opportunities, something that we are very focused on. And also service markets are continuing their trend growth. Actually, if you look in unit trend growth is pretty stable. In value, actually, it is probably higher than before. So they are also a good story and something we've been focused on and capturing good growth there.
Our business outlook for this year, we are reiterating it. So it's unchanged. We expect our sales to grow between 3% and 6% in comparable currencies for this year and continue to see adjusted EBIT margin in the range of 11% to 12%. We're well on track for that for the full year.
With the current exchange rates impact of FX on EBIT would be about €40 million negative. We continue to have a number of things that are driving good performance for us. It is the growth in the service and modernization business. There, I continue to see really good momentum, good outlook. We have a good order book and all the time we are delivering better margins from that order book that will continue into next year.
And also then particularly in China, we can see that commodity costs are coming down and cost savings are really coming through. What is the challenge? Clearly, declining markets in China in new building solutions, also softer construction markets in Europe and North America. And I would say third one is the persistent inflation. We are a labor-intensive industry, leveraging the business. So we can see that salaries and wage increases are having an impact will continue also into next year and also purchase services and things like that.
But as Natalia said in the beginning, let me give a sneak peak into 2024, just what is the high-level situation looking. Of course, the outlook in detail we'll give in January. But if we just look at what are the drivers for next year. Again, positive outlook in service and modernization. I cannot overemphasize how important this is to us, how much we focus there and how that continues to be a great growth opportunity for us.
Continued improvement into next year of margins of orders received, that in all the time what we deliver is better. And of course, the cost savings related to the operating model renewal will be a benefit going into next year. What is the challenge? It's, of course, the continued soft outlook for new building solutions in several regions, as I think is familiar to everyone. And also this persistent inflation, it's clear that when it comes to employment costs, they are going up probably next year more than this year. At the same time, we have a business where we have shown in service, we have been successful in driving prices to offset that. But it's clear that also productivity will be really critical to continue to perform well there.
So overall, this is the picture as we see it going into next year. But as a summary, a solid quarter for us. What I'm very happy about is we have a really strong position in the key growth markets in new building solutions right now, which is India, Southeast Asia and the Middle East. We are very strong in those markets. And excellent continued performance in service and modernization. That is really what we're driving and what we have been achieving and that I'm happy about.
With that, we are now ready for your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. We will take the first question from line James Moore from Redburn. The line is open now. Please go ahead.
James Moore
Hi, everyone. Thanks for taking the question. I wonder if I could start with China new equipment and then follow up with service. It looks like from the charts at the back that maybe you grew 24% or so in unit volumes. And I guess if you're high single digit in value, the price mix must be sort of mid double-digit -- mid-teens negative. And I note that you talk about the order intake margin being stable Q-on-Q. And I guess when we saw pricing turns so negatively a few years back, it did have a lag into the P&L, and there was a sort of China NI margin drag. Could you say anything about the China NI order received margin? And whether you're comfortable that that's broadly a wash with the input inflation? That's the first question. Maybe start there.
Henrik Ehrnrooth
Okay. Let's start there. So yes, there was a negative both mix and price. But at the same time, you said that actually, when we look at this very clearly, our margins of our new orders are stable. So yes, prices have come down somewhat, not a lot, but to come down somewhat. But at the same time, we've been able to work on our costs in a really, really successful way. Also in China, you could see that mix in terms of what kind of products were sold a little bit more, actually quite strong performance also for our second brand, Giant KONE, that, of course, had a mix. So all of these had a contribution there. But then we are comfortable that in terms of margins of our orders, they were stable in the quarter.
James Moore
That's great. And if I could follow up on service. I mean you mentioned again and again how important it is to the business and the opportunity. Obviously, North American peer discloses profitability. I'm not expecting that. But if you were to give us some flavor, how our service margins over time and what I would call the maintenance business. Have they been very stable? Have we gone up over time? Have we fallen? Roughly where are we in the sort of 5, 10-year maintenance profitability story.
Henrik Ehrnrooth
If we look from an operating profit perspective, we are constantly on a slight upward scale. As you know, that this is not a business where things change very quickly. Of course, we have the COVID years in between that were quite special, and I wouldn't compare it to them. But other than that, it's a constant slight progression upwards. And now, of course, in absolute terms, so the profits clearly with the top-line growth that we are achieving is a really nice story. And that's really the key, is that this very strong top-line growth that we've been achieving now for a few years is really what has been the key driver.
Ilkka Hara
And hey, maybe to add to that services comment, also now we've seen inflation being a big part of driving pricing up in the last a bit more than a year or so.
I think what has changed in the last years has been that with digitalization, 24/7 connected services being really the spearhead of frame. We've been able to see that our pricing has continued to improve in all of the markets and globally as well, despite the mix with China growing quite strongly being there. So I think that part of the equation has changed with the broad offering that we have.
Henrik Ehrnrooth
And also then helped our retention because also when we're growing that service business, we now call it, service because we used to call it maintenance, but the fact is it's broader. It's more service when we have the digital services there and other value-added services. That's why we changed the name. When we look at it, to get to this 9% growth, it is not only pricing that is improving, we have higher unit growth than we have had in the past years, better pricing connected services contributing and actually good repairs growth. So all of these things. And as always, for a service business, you cannot have one thing that is going. You need to really have the whole, all of these things driving and we have a good story in all of them now.
James Moore
That's really helpful. Just to clarify one thing. I understand that the [euro million] [ph] operating profit will go up because of the top-line growth. Are you also saying that the profitability, the percentage has gone to a new record level?
Henrik Ehrnrooth
It has slightly improved all the time. Yes.
James Moore
Really helpful. Thanks.
Operator
Thank you. We will take the next question from Daniela Costa from Goldman Sachs. The line is now open. Please go ahead.
Daniela Costa
Hi. Good afternoon. Thanks for taking my question. I have first question on China and the second question is clarification on the margin commentary. But on China, I just wanted to understand, I mean when you look at yourself unit orders basically growing over 20% versus the market, minus 10%. Can you help us understand how much of that is just the comps were weaker for yourself last year versus you're gaining market share versus were there any large orders or anything, it's quite a big deviation, sorry, if you mentioned that before and I've missed it.
And the second question regarding the order book margins. You talked about them sequentially versus last year. But can you talk about them relative to prepandemic, where are we standing? Do we still have work to do to get back to prepandemic levels? And sort of like if you could guide us there, that would be great. Thank you.
Henrik Ehrnrooth
Sure. So if I start with China, clearly, we had a decline last year, but also markets have declined. So I think we just had a really strong outperformance in China in this quarter. And that I'm happy about it's clear that we were not happy with our development beginning of the year and we saw that, of course, the beginning of the year. So we changed our focus a bit. Last year, it was all about driving pricing. Now we have set more focus on growth. And we have also done adjustments to how we sell our product to diversify our sales channel to reflect the changing market and we've set that ambition, I must say that our team has done an excellent job and really we have a good momentum there right now.
Ilkka Hara
Then maybe to continue on this comparison on the margin of our orders received, also repeating a bit what I've said already in the past. So we saw overall the fastest recovery in the margins to the levels where they used to be before the cost increases started in the modernization business. And there, we have been booking orders with a good margin for some time now. In new equipment business, it took a bit longer given the tender negotiation periods. And also that's been a more difficult market. And we are now booking outside of China orders with a margin that is similar level than we had before the costs start to increase. So I guess, pre-COVID levels as you used the language.
And then in China, we are now stable in our margins, as Henrik was saying, but they are slightly on a lower level than the previous -- than they used to be. But we've seen now stability despite a good order growth given the dynamics with pricing, but especially on the product cost savings as well as the input costs. I would highlight also the fact that it's not only the market, it's actually our actions that are driving this stability in margin of orders received as well.
Daniela Costa
Sorry. Just to clarify, so back to pre-COVID outside of China or on the group as a whole?
Ilkka Hara
Back to a pre-COVID level outside of China, in China NBS, so the New Building Solutions were slightly lower than what we used to be.
Daniela Costa
Got it. Very clear. Thank you.
Operator
Thank you. We'll take the next question from the line Klas Bergelind from Citi. The line is open now. Please go ahead.
Klas Bergelind
Thank you. Hi, Henrik and Ilkka. So my first question I had was on the drop-through in the bridge. I wonder if you could help us with the impact from China falling this sharply out of the backlog. Obviously, even if the China new equipment margin has come down sharply for the peak, I guess, it's still higher than in the rest of the world. So you get sort of a mix under-absorption impact, if you like, to the margin. Can you quantify that? It's around the backward looking given that orders in China are now improving. And also if you could update us on the raw material and logistics impact for the year and what you saw this quarter? Thank you.
Ilkka Hara
Maybe the way I would build the bridge from my perspective is, for the quarter is clearly that services and modernization growth contributed positively both on an absolute basis, but also a relative profit mix is positive. Then when it comes to our deliveries, the improved price/cost dynamics contributed positively. Then where we did see some delay in seeing all of the benefits of the price cost dynamics on the orders, was that actually in Americas and Europe. The construction sites progress was somewhat slower in Q3 than what we saw in the first half, where there's a bit of a catch-up effect there.
And then in the quarter, we did have a very limited impact yet from the operating model change savings impacting our results yet. We expect that to be more visible in Q4 and then fully visible in '24, as Henrik talked about in his outlook for '24.
Then at the same time, in the bridge, it's good to note that the overall cost inflation, of course, is a headwind. It's not only salaries. It's operating expenses overall which are continuously inflated. And then in the quarter, as a result of the lower NBS deliveries due to construction site progress then the fixed cost absorption was lower.
China overall, yes, it progressed more in line with what we expected and the key difference between the quarters. This and last year was really this lockdown measures being released. So it's you should think about Q2 and Q3 as a totality rather than one quarter because there's quite a lot of fluctuation between those two.
Klas Bergelind
Okay. Fine. My follow-up was on the outperformance in China, which is great to see, Henrik, it seems like the equipment margin now, as you say, is more stable otherwise you wouldn't and made a decision to focus on growth. But can we talk about payment terms as well. And there's another discussion to what extent the challenges of some of the developers that they can impact your cash flow. Obviously, net working capital was actually quite stable in the quarter. If you can talk about what you're seeing both from a pricing and a cash flow point of view in China at the moment, that would be great. Thank you.
Ilkka Hara
Yes. We've done a good job in managing our payment, so I thought Henrik would take it. But all in all, so joking aside. So you saw our cash flow. It was quite good for the quarter. The continuous balancing act in China is this pricing and the commercial terms, managing the credit risk with the customers. And of course, you need to be very much in detail in the market, understand both the overall customers as well as the projects that you are working on. And there we continue to do a good job. We see overall that risk being managed well. Of course, it's not easy and from a receivable point of view, it also requires very much actions being taken on the collection. But on the commercial terms, we've been very focused that, hey, that's the one thing we don't want to give up on. So we want to win the orders with our customers without taking the wrong risk from a credit perspective or relaxing the payment terms as a result.
Operator
Thank you. We will take the next question from Miguel Nabeiro from BNP Paribas. The line is open now. Please go ahead.
Miguel Nabeiro
Hi. Hello, everyone. Thanks for taking my question. The first one, just on North America sales have been mid-teens for the last 4 quarters. Can you give us some color on what is driving such strong growth? I suspect this modernization, but perhaps you can detail a little bit more. And then if I look at new equipment order intake, specifically in North America, this is the sixth consecutive quarter of year-on-year declines. As we are almost in 2024, how do you see growth in new equipment into next year? I know it's still early, but you probably have good visibility. Does your backlog allow to still grow new equipment in the next year, what's like there?
Henrik Ehrnrooth
I can start. So all of our businesses are growing, and we have a very strong order book in North America. Last year, we had some quarters with phenomenal growth some a little bit lower, but all of those are actually quite long duration orders received. So we have a very good order book going into next year. But if you look at our North America business, we're actually growing strongly in all three businesses in service, in modernization, new building solutions. And that order book spans well far into next year and beyond.
Ilkka Hara
Yes. And I think that's a good understand is that our longest order book from a rotation perspective is in North America, and it is on a good level leading into next year.
Miguel Nabeiro
Thank you. And then on the orders that you have raised prices, specifically also in North America, are they being executed today or as you said, these are probably long duration, so likely in 2024 and 2025. I just wanted to understand where the higher margin is coming from given the growth in North America. Is that mostly driven by service or modernization? Thank you very much.
Ilkka Hara
I think maybe just to make sure that we're talking about the same I was talking a lot about the orders margin for the orders we booked. Then when it comes to results, we have the fastest rotating order book is in the monetization, and it also had the fastest recovery to on the margins. So that's clearly contributing positively in Americas as well.
Then in New Building Solutions, we are continuously seeing improving margins as more and more the orders that we're delivering have continuously increasing margins. And more of that is visible in Europe, where the order book is rotating faster. In Americas, it continues to be a tailwind going into 2024, given the order book rotation. And we continue also in Asia outside of China, which we don't talk much about, continue to have a good development from that perspective.
Operator
Thank you. We will take the next question from Aurelio Calderon from Morgan Stanley. The line is open now. Please go ahead.
Aurelio Calderon
Hi, good afternoon. Thanks for taking my questions. I'll take one and a follow-up, please. And the first question is around the $100 million in savings that you are talking about and kind of adjusting the cost base. Do you think that's enough that should take to the right place in the cost base, adjusting for the next, let's say, 4, 5 years? Or do you think that you may need more or do you think that this 100 million is enough?
Ilkka Hara
Well, I think, first, there are very few things we see that long in the future. And as in any good business, you need to adjust continuously as you move through the business cycles and business environment and of course, on a local level, that is even more true and that we will continue going forward doing as well. The operating model change was about savings, but it was also much more about also reflecting being close to customers, having faster decision-making, which is driven by the market environment and recognizing the world that has changed around us. So I think it's equal about that.
Aurelio Calderon
That's great. Thank you. And second question is a follow-up to one of the comments made earlier around the growth in units. I think the comment was that growth has accelerated compared to the past few years. So what's driving that, is it the penetration of 24/7 is that you are improving your offering versus, I don't know, other OEMs or versus ISPs. What's driving that growth in units, which, I guess looks quite good compared to [indiscernible]?
Henrik Ehrnrooth
I would say, as I mentioned in service, you kind of need to do all of those. One of the really key drivers has been an improved retention that is always critical in this business. So the more you can retain, the higher percentage you have there, the better. So that has been one key driver. But then I think all of the above. I think we have a very -- I don't think, I know we have a very competitive offering in service. It's a differentiated offering. Also, we know that our connected services are providing real value and therefore, customers are paying a good price for them as well. So all of these are contributing to it. You can't say it's one thing, and that's really a service business, how it works. And you need to get a lot of small things right to be able to grow that. When you get that right, you can probably sustain it because that's really ingrained in the organization.
Ilkka Hara
And of course, needless to say that underlying work to do the maintenance for the elevator as well to be able to have good outcomes for the customers needs to be right. So these are just initiatives that we're talking about.
Henrik Ehrnrooth
The service business, many people think it's easy business actually a very detailed, very hard work business, but when you get it right, it has big rewards. And I think we're getting it quite right now or for many years already, frankly.
Operator
Thank you. We will take the next question from [indiscernible].
Unidentified Analyst
Good afternoon. Thanks for taking my questions. Yes. It's basically 2 questions for Ilkka, I guess. I was just wondering whether you guys have an update for us on the expected tailwinds from raw material or component prices as well as logistic costs for 2023. If I remember correctly, you used to guide for roughly or a tailwind of roughly €100 million. I was wondering whether that's still the case.
And then, secondly, I was a little bit surprised to see your exceptional items being neutral to slightly positive. Can you elaborate a little bit what were the individual components here of that relatively neutral item and whether we're still looking at the overall cost related to the new operating model of around €70 million for this year. Thanks.
Ilkka Hara
Yes. So first, on the tailwind from input costs or raw materials, you're very much right. So it hasn't changed. So for '23, it's approximately €100 million this tailwind altogether. So no change there. And on the exceptional items, I noticed actually seen the consensus coming in that maybe we could have been even more clear on the communication that we booked much of the costs already in Q2 and overall, expect the 70. So I think in Q3, that was something that not everybody had realized or heard correctly, but no change there in our guidance. And you might have seen, we've concluded our divestment process for our Russian assets. So the positive number is actually the fluctuation in the currencies. So that's why it looks a bit off in Q3.
Unidentified Analyst
Okay. But just to clarify, so that €70 million is off the table, just it's now like more like 56 or so for the year?
Ilkka Hara
No, it's 70 for the year. So there's some to come.
Operator
We will take the next question from line Panu Laitinmäki from Danske Bank. The line is open now. Please go ahead.
Panu Laitinmäki
Thank you. I just wanted to ask about your view on the Chinese market. I mean you have given the outlook for '23, but it's 2 months until we are in '24. So any thoughts like what's your best assumption for the new equipment business is it flat or down or any comments on that?
Henrik Ehrnrooth
So we are not yet saying that's due up in January because we know that market development will be very dependent on policy action. And there, we've seen smaller, bigger policy action already happening, not the big impact on the market yet. We're probably going to see a challenging market next year as well what is the development going to be in percent? I think let's wait for that until next year. The way we're developing our business and we are focusing a lot in driving growth in the growing segments of service and modernization. And then, new building solution market probably more challenging still next year. What I would expect going into next year is we continue to have a tailwind from these completions and now, of course, with the growth we had in orders received, we're, of course, improving our own situation for next year.
Panu Laitinmäki
Thanks. If I can take one follow-up. You have previously commented on the margins like directionally with China being above or at group level and so on. So can you kind of give us an update like where it's China now compared to the group and where is China new equipment compared to the services in China.
Ilkka Hara
Yes. So on a broad level, China is on a group level, margins as a whole, I don't think I've commented in more detail by business, but that's what I've said, and it is the case right now.
Operator
We will take the next question from the line of John Kim from Deutsche Bank. The line is open now. Please go ahead.
John Kim
Hi. Two questions, please, if you don't mind. Can we get a little bit of color on the backlog. It'd be helpful to know how much as of Q3 is still focused on new equipment versus what you book for service and modernization? And then, secondly, unrelated, if you think about other markets, you've had peers talk about growth outside of China for new builds, particularly India. I'm wondering how you think about India in terms of the market opportunity over the next 3 to 5 years? Thank you.
Ilkka Hara
I guess you can take India.
Henrik Ehrnrooth
I can take India. It's the ones you have been following us and knowing me for a long time know that I've been bullish about India for many years. It took a while before it took off. And why am I so bullish on going forward in India? Is that over the past 10 years, there's been several fundamental reforms in India that's impacted the economy, but also is impacting our business. And every time those reforms happen, it was a short-term negative for the business. But everyone was always convinced when they happened, hey, these are good long term. And that's really what we're reaping the benefits of now and we can see that the fundamental drivers are there.
Economy is growing young population, we can see it continues to urbanize all of the drivers, digital economy in India is just amazing right now. All of these things are really driving positive growth there. So I expect India to be one of the secular growth markets for many years. Yes, of course, it can fluctuate a little bit year-to-year. But I have a very positive outlook. We have a very strong position in India, we're the market leader there and therefore, focusing a lot on continuing to grow there. So I must say really, yes, I'm very bullish on the market if we look long term. Is that clear enough?
Ilkka Hara
Yes. And I very much agree on your view on India. It is one of the growth pockets that we have in the market right now. On the order book, we haven't broken down that in very much detail. But the way to think about it is that our shortest rotating order book is the modernization order book. And that's in all markets, I would say, 8 to 9 months rotation on average, max. And then on new equipment order book, it is elsewhere rotating. So let's say, Europe is about one year plus China is 9 months or less, and U.S. is maybe 1.5-plus years and then on top of that, you have major projects that can be 1.5 to 2.5 years rotating. So majority of the order book is still due to the rotation this New Building Solution orders. The rest is rotating fast.
John Kim
And just a clarification question on India. We had about 100,000 units under that per annual sales to market [indiscernible].
Henrik Ehrnrooth
Market is probably a bit shy of 100,000, yes, at the moment.
Operator
We will take the next question from Ben Heelan from Bank of America. The line is open now. Please go ahead.
Ben Heelan
Thank you for taking my question. You mentioned in response to one of the questions, you do see a challenging environment in China next year. I was just wondering if you could talk a little bit about your ability to manage the cost base in that environment, given it does look as though the market is going to be down. And then in the past, given color about the performance between Northern Europe and Southern Europe in terms of market and the trends you're seeing there. Could you give us a bit of an update in terms of how that's trended in Q3? Thank you.
Ilkka Hara
If I take the China part and you can talk about the market. So I think it's also good to remember that we talk a lot about China and NBS, New Building Solutions market. But we have good opportunities to grow, as Henrik was highlighting with this 9/12 markets we have in both services and modernization in China. So those are structurally working against each other. Then when it comes to costs, a large part of our costs in this operating model that we have actually quite flexible when it comes to manufacturing, how we install elevators. And of course, that fluctuates based on the volumes that we see in the market, and we plan for the volumes as we see them. And then, of course, we do have also more fixed cost when it comes to go-to-market and that we always have to evaluate between the business opportunities and the market and what is the right level.
Henrik Ehrnrooth
Then on Europe, South versus northern parts of Europe. Actually, if you look at both South and North Europe, what are the positives that start from them. Modernization markets are growing both, service markets growing both clearly a little bit faster in northern parts of Europe. But I would say in both parts, we have had good pricing. And if you look at Europe overall, as you can see from our interim report. We had in the service business in Europe, we had a double-digit growth in the quarter for a stable market that is growing slightly. That is an amazing achievement. So you can see that we really captured that very nicely.
Now then construction markets, it's clear that at the moment, the decline is faster the further North you go. So Nordic region, Sweden, Finland, very challenging, Germany, challenging and then a little bit better situation if you go to south and that comes more that perhaps there's a little bit more mix-wise commercial construction there now. Also, they are down, but not quite as much, but I said that the good thing is that service modernization is growing across Europe, and that is a consistent story. And then construction markets are pretty challenging.
Operator
We will take the next question from Vladimir Sergievskii from Barclays. The line is open now. Please go ahead.
Vladimir Sergievskii
Good afternoon. And thanks for very much for taking my question. I'll start with China, if I may. Would you be able to disclose the book-to-bill ratio in China new equipment this quarter? And do you see the potential for your order intake to stay [indiscernible] coupled from the market, i.e., to continue to grow in the coming quarters while market continues to moderate. And also, if you are able to disclose the book-to-bill in new equipment on a global basis in the quarter would be helpful. Thank you.
Ilkka Hara
Yes. So there's quite a lot of fluctuation on a quarterly basis. So I normally tend to look at it more on a rolling basis. But yes, in China, on a rolling basis were below 1. But overall, we are above 1, given the performance we have. So in that sense, we're doing well.
Vladimir Sergievskii
Okay. Got it. And if I can ask question on working capital place. Obviously, you still carry a very attractive €900 million working capital position. Would you be able to give a rough idea of how it is split between new equipment and maintenance and maybe if you will be able to disclose what proportion of this €900 million sits in China at the moment?
Ilkka Hara
I think we can look at the details with our IR team in more detail after the call. The way I would analyze it is that we have roughly similar commercial terms in our business in New Building Solutions in China and the rest of the world. So if you look at the split of the business, that gives you an idea on that one. Then it's good to note that the advances that you see in the balance sheet, it's not only New Building Solutions, but we do get also the service agreements. And in modernization, we also build in advance in most cases, our customers.
Operator
We will take the next question from the line Rizk Maidi from Jefferies. The line is open now. Please go ahead.
Rizk Maidi
Yes. Hi. Thanks for taking the questions. Henrik, I have 2 and specifically on China. I mean, given your experience sort of running the group, a lot of the outlook, as you said, is depending on the policy actions. But at the same time, we've had the starts and land sales week for 2 years. Completions are a short-term boost to demand. And there is a view that even if you see sort of a policy action, you still have to sort of convert 2 years' worth of weak start and land sales for the next 2 years, basically. Just perhaps your thoughts on this comment?
And secondly, I'd love to know how we should think about the maintenance in China and what point, we should start to see weakness there driven by the new equipment. I know there is a 2-year first service period, just perhaps how we think about that flow from new equipment to maintenance, please. Thanks.
Henrik Ehrnrooth
Well, first of all, the overall markets in China, construction markets, markets for New Building Solutions. You're right that we have had now a pro-longed period with negative starts, land sales and all of that. And that has been reflected in our business. You can see that our revenues in China have declined clearly over the past few years. They peaked in 2021. I think -- yes, 2021, they peaked and be coming down, and that really reflects the market.
So if you think about China, the total value of the market, I think we should from -- sometimes next year we are going to start seeing a growth in the market when we look at all 3 businesses. So from that perspective, I'm actually quite positive about China that there is growth potential over the coming years, clear growth potential, but it's going to come from a little bit different areas. At the same time, the New Building Solutions market in China will continue to be the largest in the world. It will continue to be very large and a very important one for competitiveness for success, but it's clear that it's not as big as it was in the prior years.
But I think the key thing that we are focused on is that sometimes, and let's see exactly when it happens, but I think in the next year, we're going to see that the market is, again, on a growth path and that's going to enable revenues to start growing again in China for the industry as a whole. And of course, then our objective is to do that.
On service, yes, there is the first couple of years, it's the first service period, and now there's, of course, less conversions in China, but it's still a growing market. And we are very focused in China also capturing a lot of KONE elevators in the market that we are not servicing. I mean, KONE is the brand with the highest level of installations in the whole market that is the market leader brand. And therefore, by capturing back more of this, we're going to be able to continue to grow. So that's where we need to focus more than on conversions going forward. So again, the opportunity is there. But as market shift, it's going to be a little bit different. And I see that our teams are doing a really nice job in improving this all the time.
Ilkka Hara
Maybe a few words about modernization as well.
Henrik Ehrnrooth
That's surprising, I didn't say it because that every time I look at it, get very excited because that's a market that we're going to see 20% plus growth over the next 7 to 10 years. So that is a very exciting market. Yes, it's coming from a low level but everyone can calculate that if you're compounding at those kind of levels, it will become big markets and we've been compounding even clearly higher than that. So that is where future growth is going to come from. So clearly, we need to shift the business but that's okay. As long as the opportunities, then it's up to us to capture them.
Operator
Thank you. We will take the next question from line of Debashis Chand from Societe General. The line is open now. Please go ahead.
Debashis Chand
Hi. Thanks very much for taking my questions. Just one follow-up on the previous questions on China. The completions of unfinished projects which you mentioned as a tailwind for the next year. Could you give some more color on how much further runway do you think that is from these completions for next year? And also, do you think with the change in focus towards growth, which we have seen in this quarter, you have kind of turned corner in terms of your own performance in New Building Solutions in China and you can now outperform the market even if the new solution market is down, say, again next year. So yes. Thank you very much.
Henrik Ehrnrooth
So I would first say that I'm very happy about the quarter in China. We have really good momentum there. It's one quarter and there is definitely strong competition in that market. Everyone will want to capture the opportunities there. So we need to be competitive every day and I'm confident of our competitiveness, but let's see, I'm not going to start predicting our orders or market share or anything in that into next year.
Completions, it's a little bit difficult to get an exact picture of it. But if you look at starts over many years and completions, there's a huge gap, so there can be up to a year of extra kind of work in progress that should work out from a market. How quickly will it come is unclear, but it's clear that the focus is there and we continue to see that, that is supporting markets. But to give you the exact number there is perhaps a bit difficult.
Ilkka Hara
Yes, I would say the same thing.
Operator
Thank you. We will take the last question from Andrew Wilson from JPMorgan. The line is open now. Please go ahead.
Andrew Wilson
Hi. Good afternoon. Thank you very much for squeezing me in. It's hopefully a couple of quick broad question. Just on the connected 24X7 offering, I'm interested, it feels like that's making a difference and you've kind of talked about making a difference in terms of the ticket price on a maintenance contract, but also in terms of share gain. I guess I'm interested whether you're seeing kind of a shift to the OEMs from the ISPs with regards to the connected offering. So I guess that's a broader market question.
And then specifically, when you think about whether it be the retentions or whether it be winning the contracts from competitors. How do you feel you're performing when you can pay yourself to the other OEMs, appreciating that the business models are a little bit different. I kind of asked in the context of -- it's quite hard for us on the outside because I think all the company reported slightly differently. And also the business models are slightly different. So I guess just trying to get some kind of even if it's a qualitative perspective on that, that would be really helpful.
Henrik Ehrnrooth
Let me address it in the following way. I think when you look at the latest generations of products, at least of KONE, but maybe also some of our competitors, I think there the ability to keep them in your service after conversion will be better going forward. So retentions of these new higher technology-driven products with connectivity built in, that's why it is important to have a high market share, New Building Solutions. I think there we will see a better retention than we've seen in the past. Then older products as they get connected, yes, there's difference. But perhaps there is not going to be as big of a difference. But newer products, the more they come, I think you will have a higher retention, higher stickiness for them.
I'm not going to start comparing the various connected services or business models. We have different ones. That's okay. That's a competitive market. Everyone is trying to differentiate in their own way. And that is what the competitive market should be all about. I am very comfortable with what we are doing because it's one of these things that when you ask your organization to sell it at a good premium. And your customers need to pay. You need to really show that the customer outcome is the one you're focused on. And we're very focused on the customer outcomes, customer success with this.
If you only have something focusing on productivity, then the customer success may not be there. That can also be an approach, but this is the path we have chosen and I'm very comfortable with that because it's generating nice revenues for us. And we can also see it provides better customer outcomes. It provides stickiness. And we can see when penetration increases, we can also start capturing good productivity increases. So I think there are so many benefits of it. But I think like in every service or product, you've got to be super focused on the customer value because that is what long-term will drive the success of it.
Ilkka Hara
And hey, just to highlight Henrik about the long term and what will happen. But we can see it in our numbers. We can see the price increase in contracts when we have a connected unit. We can see productivity being higher for connected units, we get better availability of the elevators, we can fix them first time bit right and also then as a result, we get better retention on those units. So it's not theoretical something in the future, but it's already visible with the connected customers we have in our numbers.
Operator
Thank you. There is no further questions at this time. I will hand it back over to Natalia for closing remarks.
Natalia Valtasaari
Thanks, everybody, online for taking the time to dial in as well as for a very active Q&A session, a very varied one. It's always nice and refreshing. If you do have any follow-up or any questions that have been left unanswered, please feel free to reach out to me or the team. And I guess we look forward to continuing the dialogue in upcoming IR meetings. So have a great week, everyone.
Henrik Ehrnrooth
Thank you, everyone.
Ilkka Hara
Thank you.
Operator
Thank you for joining today's call. You may now disconnect.
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KONE Oyj (KNYJF) Q3 2023 Earnings Call Transcript