Ladies and gentlemen, welcome to the Ximbly Conference Call on Q3 Results 2019. I'm Alessandro, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. The conference must not be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to the CEO of Schindler, Mr. Italy. Please go ahead.
Good morning, ladies and gentlemen, and welcome to the update on results as of September 30, 2019. My name is Thomas Setterli. I'm the CEO of the Schindler Group, and I am here with Urs Scheifek, the group CFO, who will take us through the financial details later in the call. We are pleased with the results achieved in the 1st 3 quarters of the year, maintaining growth momentum and sequentially improving profitability quarter by quarter in line with expectations. Please turn to Slide number 2, which summarizes the highlights of the 1st 9 months of the year.
Schindler was able to maintain growth momentum in order intake and revenue despite currency headwinds. Order intake increased by 5.9% in local currency. The high level of major project wins continued, still in major infrastructure projects, but also increasingly in the commercial building segments. We generated growth across all regions and product lines. Revenue was up by 5.8% in local currencies.
Operating profit totaled CHF923 million in the 1st 9 months of 2019, corresponding to a marginal decline compared to the previous year. As foreseen, price adjustments and efficiency gains could not fully offset wage inflation, higher material costs and planned higher spend on strategic investments. As a result, heavy margin reached 11.2%. Before restructuring costs and expenses for BuildingMinds, EBIT margin was at 11.5%. It is positive to see that the margin has sequentially increased quarter by quarter this year.
Net profit stood at CHF680 1,000,000 and cash flow from operating activities reached CHF725 1,000,000. This is the adjusted number before one off impacts and is slightly higher than in the previous year. I continue with Slide number 3 and the recent developments in Asia Pacific. Overall, the positive market development in Asia Pacific continued, mainly driven by China. The Chinese new installation market was solid in the 1st 9 months, a development better than expected at the beginning of the year.
However, there are some signs of slowing in the Q3. In the rest of Asia, the development was mixed. Political uncertainties, mass slowing construction activity in some countries waited on the development. Service markets remained healthy, supported by the conversions of new equipment and particularly in China, activities in the modernization segment gained weight. Our performance was strong in both the new installations and the existing installations business driven by China.
The next market region is the Americas on Slide 4. The North American market remains broadly stable on a high level. The public transport segment and the large project sector still recorded growth. On the other hand, the commercial and the multifamily residential segments muted. Latin America remains stable overall with Brazil still challenging and recovering at a low pace.
Schindler did well with the U. S. As the growth engine. Our North American operations continued with a good performance supported by a strong service and modernization business. At the same time, growth in the new installations business was slightly negative.
To find qualified field staff was still a challenge, delaying projects and impairing our efficiency. Latin America displayed overall good growth as well despite the mentioned challenging environment in Brazil. Finally, I would like to conclude with the EMEA region on Slide 5. Markets in Northern Europe are stable on a high level. The southern part of the region overall declined a little bit, particularly driven by Turkey.
Growth in Schindler's new installation business was slightly negative following an extraordinary strong previous year. The development in existing installations business was solid with consistent portfolio growth. The shortage of fortified field workers remained an issue, particularly in Northern Europe, impacting performance on construction sites. With this, I would like to hand over to Urs for the details on the financial performance. Urs, please?
Thank you, Thomas. Good morning, ladies and gentlemen, and welcome on my behalf to today's conference call. I'm going to share some more details on our financial results and will conclude with the revenue and net profit guidance for the year 2019. I start with the key figures of the 3rd quarter 2019 on Slide number 6. In the Q3 of 2019, order intake rose by 4.8 percent to CHF2.9 billion, corresponding to a growth of 6.1 percent in local currencies.
Even though comps have slightly eased compared to previous quarters, our order intake includes all product lines, new installation, modernization, service and repairs. The Asia Pacific region generated the highest growth rate. In China, the new installation business slowed a bit in the 3rd quarter, slightly up year on year following the very strong growth in the previous quarters. The modernization and service product lines continued to generate very healthy growth rates. Other markets in the region were strong across all product lines.
In the Americas and EMEA regions, we observed a slightly decreasing new installation business, which could be overcompensated by strong growth in the existing installation business. Revenue improved by 5.2 percent to CHF2.8 billion in the Q3 of 2019. Negative foreign exchange translation effects amounted to CHF38 1,000,000, particularly due to the strong CHF against the euro, the Chinese renminbi and the Australian dollar. In local currencies, revenue was up by 6.6%, reflecting growth in both the new installation and existing installation businesses. The Americas region achieved the highest growth, followed by Asia Pacific and EMEA.
Operating profit increased by 4.5% to CHF327 1,000,000, equivalent to an increase of 6.1% in local currencies. Foreign exchange translation effects had a negative impact of CHF5 1,000,000. The EBIT margin reached 11.6%. EBIT adjusted of CHF 334,000,000 considering restructuring costs of CHF2 1,000,000 and expenses for building mines of CHF5 1,000,000. The margin for EBIT adjusted was 11.8%, almost flat compared to previous year and a sequential increase compared to the Q2 of 2019.
In the Q3 of 2019, net profit amounted to CHF244 1,000,000, an increase of 6.1%. Cash flow from operating activities in the 3rd quarter was up by 9.2% and reached CHF308 million, positively supported by the first time application of IFRS 16 leases. It was a flat development without this IFRS 16 impact. Please now turn to Slide number 7, showing key figures for 9 month year to date results. In the 1st 9 months of 2019, our retail increased by 4.1 percent to CHF9 billion corresponding to a growth rate of 5.9% in local currencies.
All product lines and regions achieved growth. Margin profile in the order intake has slightly improved. The Asia Pacific region generated the strongest increase, supported by the positive business development in China in value and in volume, followed by the Americas and India regions. Revenue increased by 4.0 percent to SEK8.3 billion, equivalent to a growth rate of 5.8% in local currencies. Negative foreign exchange translation effects amounted to CHF 146,000,000.
The Americas region was the strongest driver for revenue growth, followed by the Asia Pacific and EMEA regions. Operating profit reached CHF923 million in the 1st 9 months of 2019, 0.3% less than in the previous year. In local currencies, corporate profit increased by 1.6%. Drive adjustments and efficiency gains were not fully able to offset wage inflation, higher material costs and planned higher spend on strategic projects. The EBIT margin reached 11.2%.
Before restructuring costs of ZAR13 1,000,000 and expenses for building mines of ZAR14 1,000,000, the EBIT adjusted increased by 1.0 percent, respectively 2.9% in local currencies to CHF950 1,000,000. Attributable to an EBIT adjusted margin of 11.5% compared to 11.9% in the 1st 9 months of 2018. Net profit totaled CHF680,000,000 compared to CHF 746,000,000 in the previous year, which included a onetime tax refund of CHF55 million
that was recognized
in the Q2 of 2018. Excluding this onetime net tax refund, net profit was up by was 1.6% less than in the previous year, mainly due to a deterioration in the financial results attributable to currency losses on financial hedges. Cash flows on operating activities was CHF 56,000,000 adjusted for the settlement of pension obligations and the interruption of the new transit standard IFRS 16, we amounted to CHF 725 1,000,000, an increase of 1.3% compared to the previous year. As of September 30, 2019, the total backlog totaled CHF9.3 billion, an increase of 7.7 percent, effectively 9.0% in local currencies. Now let's move to the unchanged financial guidance, which you can find on Slide number 8.
For the remainder of the year, in spite of market uncertainty, Schindler expects to maintain growth momentum. Excluding any unforeseeable events, Schindler expects revenue growth of between 4% to 6% in local currencies and net profits between CHF900,000,000 to CHF940,000,000 for the full year 2019. With this, we would like to invite you to ask for questions. For questions we might not be able to rescue to time these days, please contact Marco Nuslu, our Head of Investor Relations after the call.
We will now begin the question and answer session.
May press star
and 1 on their touchtone telephone.
You will hear a tone
to confirm that you have entered the queue. If you wish to remove yourself from the questions you The first question comes from Andre Kukhnin from Credit Suisse. Please go ahead.
Good morning. It's Andre from Credit Suisse. Thank you for taking my questions. The first one, I just wanted to double check on China versus what you said. I think you said that you're seeing some signs of moderation there.
Can you just dwell a little bit into that on where you're seeing that and in what particular segment and maybe to what extent?
Yes. Good morning, Andre. This is Carlos. Good morning, Carlos. Well, China, at the beginning of the year, we were more pessimistic about the Chinese development.
Our assessment was that China will be slightly negative or maybe maximum stable. Now I think after the 1st three quarters, we can say that China was developing better than what we expected. It was probably low single, maybe up to mid single digit growth in terms of units. And also the price environment was still stable, still challenging for larger projects, but it was quite good in also increasing slightly our prices over the last 9 months. Now what we see, of course, is that there are many, many factors, which at the moment influence maybe our outlook for the Chinese market.
On one side, we see that we have seen that the stock of unsold apartments have continuously been reduced. We also have seen that there was maybe some softening and some of the KPIs in the residential area and slightly also in the commercial area. On the other side, also due to political environment, you have to see whether the government will do some stimulus packages for the real estate market. This is something we might can expect, and this would then lead to a market development, which should be as it has been in the 1st three quarters, but maybe not that strong anymore. We do see that there is some softening happening in the Q3.
Looking ahead into 2020, I have to admit, it looks a little bit like looking into the crystal ball. At the moment, I do not dare to make an outlook for 2020.
Right. Got it.
Got it. Thank you. And changing from a little bit, on modularization savings, could you give us an idea of I think we're talking about sort of €30,000,000 to €40,000,000 for 2019. How much of that has been materialized year to date?
Do we
have Q4 or not? And then probably more importantly, for 2020, I think when we talked about phasing of the program, originally, it's implied something maybe as high as €80,000,000 €19,000,000 of incremental savings. At least on my math, I just wanted to give you a chance to calibrate that if that kind of 80 plus number is credible given what we see now with the components that you've introduced and planning to introduce already?
Good morning, Andre. Here is Urs. And thank you for management's question on mobilization. Our mobilization program is on track. And in 2019, we are generating a couple of CHF 10,000,000 savings with the modernization program.
And that helps us to offset ongoing material cost inflation as we normally are hedging our material costs for 6 to 9 months. For your related question, ahead of 2020, As I say, our program is working well, and we are now implementing component by component and to roll it out into the supply chain and to the field stage by stage. You mentioned numbers is still in the realistic range. On the other hand, I would like to remind you that we need this is a kind of gross number and we need those savings to let our business grow and we are reinvesting some of those positive impacts into our business. Maybe to add one additional point.
I think you're absolutely right with your forecast. The key question in 2020 will be when you start to sell also the new components, what do you do with your backlog? Because the backlog, of course, part of it can be converted and part of it maybe cannot be converted. This we will have to figure out a little bit more than in during 2020 because of course we try to also convert existing orders with the new components in order to achieve the savings. Otherwise, with the lead time of 12 months, you can start to sell the new modularity program, but you would only have the savings in your supply chain in 2021.
And this, of course, is not our ambition. So we would like meaning partially to start to convert those to our existing backlog.
Got it. Thank you.
Very clear. And the final one, maybe as we kind of lead on to reinvestments already, I'll ask about that. And did you intend to ramp
up your investment in digital services
in 2020? On my math, you're kind of up €50,000,000 €60,000,000 on the ahead IoT platform and running up to about another €20,000,000 for digital twin. So I think you have €100,000,000 of kind of digital related investments in 2019, whether that's kind of exact rationale. Is this right? And is this how does this have gone to go up in 2020?
Well, first of all, I think it's very important to address this point. As we are very much long term driven, we are also investing into the future. And you remember, we have this slide where we say, we want to grow, and we do have initiatives on the operational excellence side, but we also have our strategic priorities. And we do not want to sacrifice investments into strategic priorities into short term, let's say, profitability push. So yes, you are right.
We continue to invest into our digitalization program. These are, in fact, 2 big, big topics. 1 is timber ahead and the other side is the digital twin. Now timberhead, we probably achieved already the right level of cost, and we do not want to further substantially expand that. But on the digital twin side, as you know, we have started 2 years ago with the escalator part, and now we are starting to ramp up the elevator part.
And we also will increase next year our investments into the digital twin. So you can expect that our investments next year into our strategic priorities will grow up by about maybe 20 basis points compared to this
year.
The next question comes from Lucy Karger from Morgan Stanley. Please go ahead.
Hi, good morning, gentlemen. Thanks for taking my questions. I have three questions and we go one at a time. I was hoping you could give us some color in terms of the pricing dynamics you see across the major geographies, so North America, India and China. And also if you could maybe separate that between new installation and services please?
Okay. Good morning, Lucie. Thomas speaking. So if we start maybe let's first have distinguish between the new equipment business or the new installations business and our service business. In service business, we were able to increase prices all around the globe.
I think this is also an outcome of our initiatives. We need to deliver quality in the service business, and our customers are appreciating that. And so we were able to increase everywhere in the world our service prices. Not every day in the same magnitude, there are different drivers like wage inflation, like the index of cost of living. And so usually, you have better chances in the Western part of the world or in mature markets.
It's more difficult to increase service prices in China, at least I have to say there. It's not in the same magnitude like in other places. If I switch to the new installation business, I can say that still U. S. Is on a very, very strong level.
I have to say, our team has done really good pricing initiatives there, and we have not seen any deterioration of the prices in the North American continent. South America is also okay, except of Brazil because Brazil still has not really rebounded. So as we have a very strong position in Brazil, we are suffering from low prices in the new installation business. And we have to mitigate that as good as we can also with cost initiatives, reducing our material costs, but also working on installation efficiency. If you go more to Europe, I would say in Europe, the prices of new installations have been pretty stable.
We have done a lot of efforts last year to address that topic and to slightly increase the prices. But I would say now during this year and especially in the last 3 to 6 months, it was rather stable. And then when I move to Asia Pacific, I think I would segregate it into 3 areas. One area is China. We have done there as well in the last few quarters a lot of initiatives to increase the prices in the volume business.
And I think we have been pretty successful that we were able to slightly increase the prices. In large projects, I have to admit, it's still, still, still very, very competitive. And there, I have not seen that prices are going up. In India, there was some slowdown in India because of liquidity issues in the real estate sector. So this has put a little bit pressure on the prices, and we have seen that prices have been more under pressure in the overall market, and we also had to follow, let's say, a price trend.
But I believe I'm more optimistic now for India if I make an outlook. I think we can expect that now this has been stabilized and maybe there are some opportunities to get back a little bit of these pricing concessions we have seen. And then in Southeast Asia, due to some political issues, some of the markets really have been I do not say in turbulence, but there has been under pressure. If I look at markets like Vietnam, Malaysia, Indonesia, that was really a softening of the market. And this had an impact also on the pricing.
So there, I saw it was slightly negative maybe during this year. And I had hoped that those markets are coming back and maybe this gives us some opportunities to get some of the price concessions back. So that would be my own growth over the next
year. Thank you, Thomas. My second question, I guess, is probably a bit of a follow-up on what Andre has asked so far. We haven't spoken yet much about the raw materials. There has been a headwind for you over the last few quarters.
The price of raw materials now has come down or at least I would say stabilized at the very minimum. So when you think about your setup in terms of profitability, I would assume that it should be a tailwind for you next year. Are you feeling comfortable now for your margin expansion year on year in the Q4 2019 that is coming, but also I would say in 2020?
Thank you, Lucie, for this question. In regard to material costs, you are right. The peak of very high material costs seems to be behind us, at least short term. And after the 1st 9 months of this year, we certainly still had higher material costs due to the fixed prices we negotiated earlier or even last year, we should now see a softening of material costs. The material we are purchasing have stabilized, I would say so.
But of course, it's a bit early to say what the trend is going forward into 20 20. On your second question, in regards to margin, as we have indicated during the year, the EBIT adjusted margin in H2 is expected to be higher than in H1.
Okay. I understand from H1, but I my question was more, are you feeling now comfortable for this margin to be higher year on year rather than specifically sequentially? So when we look at because you are almost closing the gap now in the Q3, you're down 10 bps.
When we look at
the Q4 and when we look at next year, should we now expect considering some of the tailwind on potentially raw materials and also savings? Is it reasonable to expect your margin to expand again?
So I think looking on this year's result, it will be ambitious to maintain the previous year margin for the total year. This definitely is a challenge. If you look where we are at the moment, it will not be possible to catch up the whole margin gap we have compared over the 1st 3 quarters in the last quarter compared to last year. But what we definitely can say that we are expecting that the EBIT adjusted, let's say, a little further increase also in Q4. Now the margin also had some other impacts, of course, and this is not absolutely predictable, but we can say we are expecting still a very strong quarter in Q4.
As you know, there are several moving parts to it. Yes, we have the softening of material costs. We will continue having a positive impact on the modularity program. And as normal in Q4, we expect a larger number of installation shops to get complete with signed billings. On the other hand, I clearly see a continuation of headwinds from wage inflation.
And we will continue accelerating the strategic investments, as Thomas already mentioned. And the investments into growth are also important to us and significant. So at the end, it depends a little bit on the mix we will have in Q4 and on some of the large projects we try to close. We are confident that we will have a good quarter, but I would not say, okay, this is now the percentage you should expect for the Q4. Overall, we do have confidence that it will be a strong quarter.
But definitely, in absolute returns, we will have a further increase of our results.
Understood. And just maybe as a last question, on the guidance for the top line, I appreciate you've maintained the guidance for the full year unchanged 4% to 6%, But it kind of gives a very wide range for the Q4 between roughly minus 1.5% to plus 6.5% if I take the top and the bottom of the guidance for the full year. Can you just maybe give us some color on how you see the organic development of the Q4 and kind of the excess rate, if I could say, to next year?
Well, of course, at the moment, when I look year to date in local currencies, our operating revenue has grown by 5.8%. So we are at the upper limit of the range between 4% to 6%. And I think it's fair to say that we do not expect that you go now, if you take this range of 4% to 6% and you take the 4%, okay, we would have to have a negative growth in the last quarter. This will not be the case. So our ambition is to really push the gas and to keep the right growth momentum.
So in local currencies, we do not expect a bad quarter in Q4. So we probably are more towards the upper proper limit of our guidance. I think that's fair to say.
Thank you very much.
The next question comes from Martin Klitberger from Kepler Cheuvreux. Please go ahead.
Yes, good morning gentlemen. Thanks for taking my questions. 3 and also 1 at a time. Judging from your slides on the Americas and EMEA, I'm assuming that when you talk about your gender performance, you talk about your order intake. Am I right in assuming that you think you may have lost a little bit of market share in North America and in EMEA?
That's my first question. Any cancellation business, sorry.
No, I think we have not lost market share in North America and in Europe. In Europe, maybe if you definitely North America, this was not the case. Now in Europe, you should also look on the mix, the geographical mix you have. So we do have very strong countries where we also have a very strong position. Central Europe, Northern Europe, we are we do have a very strong position.
Yes, this I can confirm. So the markets have been rather stable and we were able to keep our market position. When you look a little bit more to the housing part of Europe, I think also there performance overall was good. There is one country where we have invested a lot in the last couple of years to become really the leader in the market. I think this was Turkey.
Now we have done a lot of investments there. And now Turkey, I have to admit and I also feel sorry, has tremendously reduced the market size. It's probably more than 50% of the market we just own. And so we were negatively impacted in our geography mix by this downturn of 'thirty. But if you look on the single countries, no, we have not lost market share.
Okay. So if I understand you correctly, your new installations business in Europe or EMEA is down because of Turkey. And in North America, you would claim that your new installations business was in line performance was in line with the market?
Yes.
Okay. Thanks. And my second question is on your margin of orders received in Q3. Could you talk a little bit about the development here, how you see that number versus Q2 and also versus the prior year period, I. E.
Q3 'eighteen and what the key drivers were for you?
I think overall, margins have been rather stable. We have been able in the 1st 3 quarters to slightly improve our backlog margins. And this, of course, has is due to 2 effects. So we have executed in some countries jobs with the lower margin, but we also were able in order intake to do pretty good pricing initiative over the 3 quarters. So overall, we had a slight improvement on our backlog margin driven by good order intake.
Now in the order intake, it always depends a little bit what is the share of the large projects you have quarter by quarter, because this can really impact your overall margin development. And this really varies quarter by quarter and Q3. Let's say, if I look on volume business, it was good. And if I look on the large project business also, it was good. But there were some shifts and we had quite some success with the one or the other large project.
I will remind that in Q3, we had a very big project also in the U. S. This was Manhattan West. And this is sometimes in the quarterly benchmarked, can impact a little bit your overall margin. But overall, I would say we were able to slightly improve.
Now is that sequentially or year over year?
Year over year.
Okay. Thanks. And then my third question,
if you could talk about
the progress in your rollout of Shentur had and how much you think the digital services, the new digital services has added to your maintenance and repair growth in Q3 in the 9 months period? And I'll go back in line up for that one.
So progress in Ahead is exactly according to the plan. I think we have discussed that several times. We see that it is highly appreciated by the customers. Now the growth is mainly driven that we are equipping all our new installations with Ahead. And then we try to sell Ahead as part of our first service contract we do.
So what happens is the following that if you had in the past a certain price for the service contract and we had a new installation conversion into the portfolio, we now achieve a higher pricing. And this has continued in Q3. I would even say it has accelerated the number of units we were able also to get an additional volume in our service contract. Now if you look at the overall impact, this of course takes time because you only have this benefit mainly in those units you are converting. And so this is only impacting a few percentage points every year of your overall portfolio.
But if you look in a long term view over 2, 3, 4, 5 years, then we see more and more and more impact coming from that. Now on this new installation conversions, we still can confirm that the average price of such a service contract can be improved by 10% to 20%. And this, I think, shows that long term, this is the right investment. Still, overall, even if it's additional income and additional margins we can achieve, Schindler Ahead is still contributing negatively to our overall margin, and we expect the breakeven point in 2021.
Perfect. Thanks.
The next question comes from Daniela Costa from GES. Please go ahead.
Hi, good morning. Thank you. Most of my questions have been answered, but I wanted to see if you could give us a little bit more color like Century in terms of the trend you're seeing in Europe. And namely, if you can comment on what you see at the moment in terms of construction markets in Germany and Switzerland, that would be very helpful. Thank you.
Okay. Good morning, Daniel. Germany and Switzerland are still very strong. Our major concern we see there in those two countries, and we have a very strong position, by the way, in both countries. What we see is that there is really, in Germany, you say, stau on bau.
So there is really a problem around in the construction industry that we don't find enough qualified people. Now this has an impact on the lead time of our order, not the order intake, but until when we have an order intake, until when can we also then do our order. And this has definitely increased over the last 2 years, I have to say, substantially increased. So the overall lead times really are now on an all time high. And this is not due to us.
It is really due that the construction sites do not progress and it takes much, much more time now until the construction is finalized. Overall, I would say in the overall market, it is stable. We have not seen growth now anymore in the German or in the Swiss market. It's rather stable. And we were able definitely to keep our market condition or even slightly increase.
But in the operating revenue, we see that we are under pressure to really roll out the backlog because the construction sites are not progressing enough.
Thank you. The next question comes from Martin Husler from Societe Capital Bank. Please go ahead.
Yes. Thank you. Two questions. To North America, you were mentioning that you had the highest sales growth in America in Americas. And mentioning that the new installations were rather slightly declining, I'm calculating positive developments of service and modernization of probably more than 10%.
Could you give some more insight into the driver of this performance in North America?
A good catch, Martin. It's true. We had exceptionally good development in our reais business in the Americas, and this was driven also by the U. S. Market, whereas the, let's say, the new installation market and also our overall sales or order intake has been slightly negative.
There are several drivers for that. One driver, of course, is our service portfolio where we have talked before about pricing initiatives. That's one reason. And the second reason is that we also push a lot of our modernization business to somehow mitigate a little bit the weakness of the market in your installation. And then the third element is repair.
I think maybe to give a little bit of an insight, there is an initiative happening at the moment in New York City. That's a go and walk initiative because there were some accidents in the past in New York City, and the New York City government has launched an initiative in 2019 to rectify and to improve on the doors, let's say, the safety features. And this has given a one time push on the repair volumes There we also were benefiting like everybody else in the market. And this has to be closed by the end of 2019. So this will not happen again in 2020.
We were very well prepared for this initiative, and we have a tailor made solution for the customers. And we can expect that this positive development in Q4 will continue in North America as it was in the 1st three quarters.
Okay. And then my second question is turning to China. And there I was also that I was wondering about the lead time there. You spoke about the German Switzerland. What do you see there?
And is it more difficult to cash in the receivables?
Definitely, the market in term of liquidity has become more challenging. There is a market trend happening that on our customer base, there's a consolidation going on. Big developers become bigger and smaller developers are more on the pressure. So and the bigger developers in the past have mainly worked in the Tier 1 and Tier 2 cities, but they now have expanded into Tier 3 and Tier 4. So yes, it's true in the Tier 3 and Tier 4 cities where you still have a lot of smaller developers, they have some liquidity concerns.
On the other side, it's also a little bit driven by the mix of the business In public transport and in large projects, payment terms are more challenging than in the postal business, especially in public transport, where you need a lot of government approvals until payments are released. This puts pressure on us as we are quite strong, of course, in the escalator business, which is a key contributor in the public transport area. Overall, the overall lead times, I would say, if you look into the different segments, are more or less as they have been before.
Okay. Thanks a lot.
The next question comes from Fabienne Herky from UBS. Please go ahead.
Good morning, everyone. Quickly few questions. On China, I mean most of the international E and E players performed quite well in China in Q3. So was it more the locals that felt the slowdown? This is my first question.
Well, you can do the mathematics, If you say market is maybe low single digit growing and the major players are reporting good growth that someone else has to lose. And so just by definition, this assumption might be correct. Not all the Chinese players are developing in the same way, but I would say, yes, smaller players have been more under pressure in the not only in Q3, I think overall in the year, they have lost some market presence and market share. I did agree to that.
Okay. And the next one is on the cost savings modularization program. That will be completed in 2020, right? And if this is the case, is there any other larger company wide operational program that could follow-up as of 'twenty one?
Number 1, you are right. We try to finish the whole modularity program in 2020, which then means that the full run rate we will have in 2021, right? That's what we already said. But we already will get a substantial cost saving in 2020. I mentioned before, it depends a little bit how much of a backlog you can also convert.
And it would be if you cannot do that fully, then you have a little bit less of an improvement in 2020. But later in 2021, you have all the improvements. I think when you look on our strategy chart, and we have shown several times where we talk about operational excellence and the strategic priorities. One improvement which should come later, of course, is that we will have a positive business case latest in 2022. So, since we're ahead, I said, the breakeven point will be in 'twenty one.
So you can expect that there will be an improvement coming from that, from the Schindler Ahead program. And operationally, of course, we are working on efficiency programs in the processes, so in installation, in maintenance and also in our structure. So but this is a, let's say, ongoing process. We always have to work on Because on the other side, what you will have every year is that you have wage inflation, 3% or something like that overall, globally. And I don't know how the material costs will develop.
So those programs ahead, X3, efficiency definitely will improve our operational performance. And then on the other side, we have some given facts, which we cannot yet exactly determine business wage inflation and the material costs. And then last but not least, I would like to reconfirm, if you think about our 3 strategic priorities, we always said our absolute first priority is to grow faster than the market. And we are willing to reinvest some of the operational improvements into our fast growth we have now driven over the last couple of
years. Then a last one, just financial one on the hedging costs. I mean, H1, you're saying that the hedging costs are going to double for the full year. They were quite high in Q2, and now Q3, they were much lower. Will hedging costs still double from H1 level?
Or is this a bit too aggressive?
Thank you for that question. You are right in monitoring the currency developments. The Swiss franc has depreciated a little bit versus the withdrawal, and that helps us. So my forecast is not a total amount, but we're up now an impact of €50,000,000 to €55,000,000 for the full year.
Okay. Very precise. Thank you.
The next question comes from James Moore from Wedbush. Please go ahead.
Yes. Good morning, everyone. Thomas, Urs, thanks for
the opportunity to ask some questions. I've got some technical ones on the margin outlook, if I can clarify some points you made earlier. You mentioned €10,000,000 of modularization savings. I was wondering, was that gross or net? And was that 9 months for this year or the full year of this year?
Some pence of €1,000,000. Maybe we you have misunderstood. It was not €10,000,000, but it was some €1,000,000. So meaning more than plus €10,000,000 I think otherwise that would be heavier sound of pressure. So this was a misunderstanding.
And was that a gross savings number?
That's a gross saving, yes.
And so
if we could start something in the magnitude of €50,000,000 that would be too much for your 2 10s?
No, I think it's not unreasonable. It's mainly on the upper part of the impact this year. But to a range of €40,000,000 to €50,000,000 I think that's up to
about it. And your digital investment headwind of 20 bps, was that an impact for 2020? Or was that 2019? And whichever it was, could you give the update here? Just trying to understand whether it was a consistent pace of hedge funds or changes.
So volume number 1, the additional 20 basis points was the year 2020 compared to the year 2019. It is correct, mainly driven by the digital TRIM investment we do, which is now ramping up. And of course, it does not give you immediate benefits. It is a multiyear investment we are doing. And then we always say 'nineteen compared to 'eighteen, we always said we have something like 30 basis points negatively impacting the result 'nineteen compared to the results 'eighteen.
So if you make the bridge from 'eighteen to 2020, those strategic investments, mainly driven by digitization and the overall EBIT margin by about 50 basis points.
Very helpful. And the labor inflation, I think you said last quarter, it was 100 basis points dilution to the margin in the first half. I don't know if you're able to give a sense to what that might be in the second half and next year. And basically, I'm trying to understand whether the pace of wage inflation is changing and one of your peers talks about expecting higher wage inflation next year than they are expecting this year.
Hello, James here. This is Urs. The wage inflation is continuing strongly also in Q3. And therefore, the full year impact will remain at about 100 basis points to our P and L. And early to look into 2020, But having said that, the bottlenecks on construction sites in Germany or North America, but also other countries are visible and will certainly further impact incrementally the wage inflation going forward.
And I think it's fair to say that as a best estimate, because some of the wage inflation some of the countries is driven by negotiation of the unions. So it's a master agreement and we just are part of it and we have to follow and we cannot negotiate it by ourselves. In some countries, these are individual negotiations. So there you do have, of course, some room to manage, but you still have to follow somehow the market. And I would say that overall, I expect we will have a similar development for 2020 as we had it also in 2019, which was higher than what we had the years before.
Thank you. And Chris, if I could switch to demand. It looks to me like away from China, your operation order intake was quite strong. Is there a particular region? Am I right in that?
And is there a particular region out of, I guess, Australia and Southeast Asia, if India is soft, driving that?
I think we had a very strong Q3. Outside of China, in Asia Pacific, we had a very strong Q3, not only in the new installation business, but also in the service business. I believe we really have been. I mentioned before that some of the countries were struggling in the first half of the year. I mentioned Vietnam.
I mentioned Malaysia, Indonesia. And we see and we also hope because we have a very strong position in Southeast Asia with our 2020 at the target in the group. We now hope that we see a more prosperous future. And we were able to follow, let's say, the market development in Q3. We were able to follow that also with our order intake.
Besides that, again, I have to insist and to say, it also is driven by large projects. So we were able to get the one or the other large project in Asia Pacific, which helped us in terms of value, but also in unit. And we had a really a strong Q3 in Asia Pacific.
That's great. And lastly, if I could, just your digital contribution to the maintenance revenue growth. I know that's a complex question because it's hinted ahead, building mines, port, digital twin, all of various different stages of the progression. But do you have a rough concept as to what's the contribution, additional incremental contribution to maintenance growth is from these digital initiatives at the moment. And whether you think that's going to change and how it changes going forward?
So there are different initiatives. And maybe we have to split it a little bit. When we talk about our Santi management group, this is port, this is my port. So this is more impacting our new equipment sales. It's still the case that this is a key differentiator for whole buildings.
And customers really see that they have a better efficiency in the use of buildings if they choose our solution. We are not the only one in the market, but I clearly can say that I believe we have, let's say, the best performing transit management system on the globe. So this is more driving our newer businesses, and that's one reason why we are pretty successful in those projects. Now when you talk about timber ahead, timber ahead is more driving our service growth. But this is a multiyear push.
And we have launched it all over the world. So in all the countries, we are present. We have the proof of concept that we also can improve the availability of the equipment. We have clear indicators. We are proving that.
And this proof, we are now also showing to our customers. And the customers say, wow, that's a pretty cool thing. So yes, I'm willing to do a further investment into the service contract because I have a better overall availability of the equipment. And this will sequentially, it will go quarter by quarter. We will increase our
the
And the third one is what you mentioned is the BuildingMinds. And BuildingMinds, of course, is a startup. And we have basically started from scratch about 1 year ago. And it's maybe too early now. It's not so meaningful to provide now a quarterly update for this thing.
But at the moment, it is cost. It's nothing relative to cost. But we have now set up the core team. We are developing these first client solutions. And interestingly to mention earlier this month, our BuildingMinds team has made the first public appearance at the EXPOREAL.
It is one of the major real estate conventions worldwide in Munich. And we have seen a lot of interest in our growth potential client base who came to our booth. And we're really enjoying a lot of discussing their solutions and how we can combine with their needs. And so it's a little bit too early. And I always say, a startup at a certain milestone, you have to say, okay, does it fly or does it not fly?
At the moment, we are confident that this will become a success story. So it is an early stage. And maybe once in the future, we can give you more insights to that. So BuildingMinds is separate, very early stage, in order to put new intelligent growth. And ahead, we do have the success.
We see it very clearly, highly appreciated by the customers, but this is a long term improvement.
The next question comes from Raimo Rosanna from Investecia Bank.
In the Q2 conference call, you were reassuring participants about the 4th seen margin improvements due to improving margin quality of your own backlog, and you nicely delivered on that. I assume that among other reasons that was due to complete orders, which were still taking in at lower prices. Now is this positive margin momentum from the order backlog still working? And XL, is this particular momentum rather increasing or decreasing? And for how long will it still persist?
So point number 1, thank you that you confirm that we delivered according to what you also said. Being reliable and credible is very important. So yes, I can confirm that we are that we also were able to stay on this, let's say, margin level in our order intake in Q3. I think it is now a little bit flattening because the not so good jobs now went out of the backlog. But our overall backlog margin has still slightly improved.
And I do not expect that it goes down. But let's say, I also do not expect that now the margin improvement due to pricing will further increase. I don't think that now in the new equipment business, prices are continuing to increase. I think everybody tried very hard to do a onetime step over a couple of quarters. And I think now we have a stable price level.
And I do not see upside from the pricing for our order backlog.
Okay. That's very clear. And then before you said that we should not expect that you get back to the full year margin of the previous year, which I think is obvious because in order to reach that, you would need a net margin of around 13% in the Q4, which is still which is clearly too high. But from the 11.6%, we see now the 30%, which is too high, of course, something in the middle seems like a sensible assumption, right?
I think you are very aggressive in your forecast, I have to say. As we mentioned before, it depends a little bit on the operating revenue we will roll out in the last quarter. So March of new equipment business is in our backlog to be rolled out. We do have some a couple of very large projects we will roll out. It helps us in the pipeline.
And usually, the Q4 is very strong in the new equipment business. And don't forget, as we have mentioned before, we continue to further increase our investments into strategic programs, especially now the digital twin investment has started to ramp up in Q3, and they will continue to increase also in Q4. So this, of course, goes a little bit into the of the transaction. Okay. And I would like to add and emphasize that our main and first priority is growth above market growth.
And hence, we are reinvesting margin improvements into our growth
journey.
The next question comes from Benoit Ombrecht from Ombrecht.
Please go
ahead. Yes. Good morning, gentlemen.
Just one question left. The only area where you kind of seem to struggle is to spend more money on gold mines. Is the reason that it is just so difficult to get the required IT people? And would you like to provide an update for the expenses for building mines in the current year and maybe also next year? Thank you.
So point number 1, it's not that we don't have the people and we do not find the people. We have it's just when we were starting at the beginning of the year. And you really start from scratch, it's super, super difficult to say when do you have, what kind of investments, when do you have, how many people, when do you have, what kind of impact on the cost. So this was our best estimate we had. And now we see much more light, what is really needed and how much we really have to invest.
So it's not that we are not successful or we are not on track or we do not find the people. No, I can clearly assure this is all okay. And the team, the core team is set up and it works on this client solutions. And I mentioned before very good feedback from the markets when you heard that extraordinary, all in Munich. So it was more, we did not exactly know how much income over the quarters and over the years.
And yes, there could be some of course, some increase in volume also next year because we are developing the business. And in our assumption of a positive business case, overall, we will further increase our investments because we have confidence with DSS.
Okay, fair enough. Thank you, Thomas. The next question comes from Henan Plai from MainFirst.
I would like to touch again on the adjustments to your EBIT number and the punches of the laboring the point. But could you give us a rough number for both BuildingMinds and Restructuring for the Q4 and also for 2020 very roughly? When you say an increase year over year, where will we land very roughly?
Thank you very much, Daniel. Again, here is Urs. So for BuildingMinds, with our latest estimate and based on explanations given by Thomas, we expect now a full year impact of about CHF20 1,000,000. It means we have here today CHF 14,000,000, so CHF 6,000,000 more as an estimate. For building lines next year, you need to anticipate acceleration of costs and investments regarding the magnitude of €30,000,000 to €40,000,000 in 2020.
Production costs, year to date, we have CHF 14,000,000. We do expect restructurings to come now in Q4 in a variety of countries. We are asked to work on efficiency measures. So it still could be another significant amount in Q4, maybe in the magnitude of €15,000,000 to €30,000,000 potentially. For 2020, it is too early to consider a guidance.
But would you expect the historic run rate of €25,000,000 to be a reasonable assumption for us for 2020? Or similar to the other investments, we anticipate an acceleration 'twenty over 'nineteen?
Well, I think there is a like normal ongoing restructuring, but as probably every company here, we are at the moment looking ahead into 20.70. We are in discussion with all the company organizations and the different zones for what we very plan to improve for 2020. And as Ulla said, we are in the full process now of budgeting and analyzing. So it's maybe a little bit early. But you can expect that a normal, let's say, ongoing restructuring is on the level as we had it this year.
But we still are finalizing what are our key initiatives in our operational excellence to have more efficient processes and structures. And this might impact them at the end, the overall figure, and we might be able to say more in our yearly call early February or how confident it will fall.
Very clear. Thank you very much. You mentioned that your order intake in China saw moderation in the Q3 after a very strong Q2. To explain what the drivers are, what is just the project timing? I'm guessing that you've seen some mix of the Q4 now.
Would you expect this momentum on the order intake side China to reaccelerate in the 4th quarter?
Well, there is a certain base effect. Last year, we had a very, very strong increase of our order intake in the second half of the year. So this, of course, keeps you or brings you a little bit more under pressure on the year to year configuration for the single quarters. So yes, we were a little bit slowing down in the growth year on year, but we still have the feeling that it should be a strong Q4 also this year.
Very clear. I think your 9 month China order intake should be found in the positive side. And therefore, I would also anticipate that your prepayments from China have in absolute terms increased. Yet the free cash flow after 9 months was more stablished after you took the adjustments that you mentioned during your presentation. What's this just mix?
You mentioned more infrastructure and the share in China effectively offsetting the positive statement from China prepayments? Or was there some other region globally which offsets the positive payment from China? So the overall free cash flow was mostly year over year. If you could help us with that, that would be appreciated.
Yes. As you know, our net working capital has consolidated over some quarters. And this is still difficult, mainly due to the large project order intake, which we have accelerated in recent periods. And they come with more demanding and unfavorable payment terms and less early advanced payments and a higher share of later payments with the final billings or even some cash retentions of the final billings. So this is still a negative impact so far, but it has much more stabilized now for us.
And the good growth in China, of course, is on order intake. We also have seen that our backlog has grown very strongly. Hence, those gross payments still have to materialize on the order intake when we roll it out and should become visible in future periods.
Very clear. One last question on tethering other backlog. You previously mentioned this is both global and the China operation. Does this still hold true as of today when you think about where the biggest cabin is coming from? Is this a global observation?
Or can you pinpoint to a specific region where the business driver was coming from?
Okay. So good question. I think it's a little bit of history. The best expression we had in the margins and in the pricing was in China. So this was our key area and territory where we wanted to turn around the situation.
This, we did pretty successfully. In the other areas, the pressure was less. We had some improvement in Europe, and we have a continuous price increase seen over the last 2 or 3 years also in the North American part. And then there was some downturn in Brazil. The market is maybe half of the size it has been a the year, in the form of Central Pacific markets, I mentioned India, I mentioned Malaysia, Indonesia, Vietnam where we had, for different reasons, some weakening of the market.
We also saw some price pressure. So looking forward, as I said, I would really I would consider that we now have achieved quite a stable environment.
And if you think about the heat periods of that improving order book coming through, I appreciate there is project phasing and there might be something earlier, something later. But when would you expect a significant feelable tailwind for margins? Is mid-twenty 20 a fair assumption? Or will this be pushed out even further?
Well, I think that's a little bit the dilemma. We have talked before about lead times. And the enlargement of lead times in China happened not now. It's already happened about 1 or 2 years ago when we were coming towards the end of the, let's say, interim downturn. And lead times in China are long, especially also in our business model.
You have to understand that we are limiting the business model on with distributors. So we are more depending that really the job is closed and we do not just send the material to a distributor who then has to pay. So our lead times are long for other claims in the market because we clearly, for safety and quality reasons, don't want to overshoot a certain share of this distributed model. So and then on the other side, we also pushed a lot
of large projects and public transport. And there,
of course, lead times are sometimes 3 years. So mid of 2020, maybe second half, yes, part of it and then more to come still in 'twenty one out of the assets we have found in China.
Very clear. Thank you very much.
The next question comes from Endri Schneider from ZEC Capital. Please go ahead.
Hi, gentlemen. Really sorry to again go back to the margins. I'm not sure if I put it right before. It's regarding these additional 5% headwinds in 2020 from digital investments. Is this a growth or a net negative impact?
Because beside more investments in the Digital Twin, there are stable investments in Schindler Hat, which, however, should come with more monetization revenues for Schindler Ahead as it's time to do breakeven there in 2021. So is it fair to say that because of these, let's say, lower losses for Schindler Ahead, the overall drag from digital investments might not incrementally into the next year?
No, the investment was a net investment. Because increase is mainly driven by the Digital Twin and their savings are coming only in a couple of years.
Okay. Okay.
Thank you very much. I would propose that we maybe have one additional question and maybe I see on the list the others maybe then directly can contact also Marco Knucheren as our Head of Investor Relations.
The last question is from Wazirizvi from RBC Capital Markets. Please go ahead.
Hi, good morning. Thanks for taking the time. Just a couple left for me. You mentioned a couple of times on the call comparing some of your backlog to the authorization and that being a potential source of margin upside. Can you explain to me how that works?
Do you have to go back to the customer and say, can we amend what you ordered? Do you need to offer
them something in order to
do that? And then is that a major factor in when we see margins accelerating? Or is it more simply about when you convert the orders to higher margins you've taken in recent quarters? And then just to follow on, on that modularization point, is there also a risk that the inventory is a bit higher as you carry inventory for the new product and the older format product next year, so the cash conversion is a bit lower and as the inventory is a bit rise to accommodate that price?
I'll start with question number 2. Yes, you are right. If you change technology and products, you have to risk that you have a little bit higher inventories because you still have to be able to you have to ramp up in advance your inventories for the new products, but you are still producing your old ones. So you have a little bit of a doubling effect. This is true.
Now to your question number 1, the converting of the backlog. In fact, there are 2 types of conversions. One is you have the existing product and you have and you exchange the component. This is what you see in our business this year, that we were able to replace certain components with the new modularity components. We started first with the card.
Now we have the inverters and the controllers. And this is still the same product, but one of the components is changed. This is easier. That's the easier part. But now in order to achieve the discussed savings for 2020, this is not enough because now with the additional components coming in, you have to be able to switch the product.
And there, of course, it depends where the actual potential order is. If it's still discussed and you have not yet found an offer, then you can do the offer with the new one. But if you do an offer with the new product, it only will be produced in 2021. So that would have no impact. So you should be able to switch existing orders.
And this depends on which status the order is towards the customer. Because if there are different dimensions mechanically requested, maybe a change in the pit, a change in the headroom or you need different type of holes in the construction work, then honestly, it's very hard to go back to the customer and say, well, I'm sorry, you made 2 holes for the project, could you move 10 by 10 centimeters? Then you cannot convert. And this analysis, which orders are at the moment in which stage in order to be a candidate to be converted is super, super critical, but also super, super difficult. And that's the whole game.
Because at the end, what we want to do to the customer is we would like to give the customer an even better rollout and service, but of course, we don't want to disturb their work. And so that's a little bit of delicate activity.
That's helpful. Thanks.
Thank you. So ladies and gentlemen, thank you very much for attending this conference call. I'd like to close now. And I'm really looking forward to our next event. That's our full year results conference on February 14, 2020.
And if there are some questions left or we have not been able to address something and there are maybe follow Please call Marco to follow our Head of Investor Relations. And I once more would like to thank you and say goodbye.
Ladies and gentlemen, the conference is now over.