Ladies and gentlemen, welcome to the Schindler conference call on Q3 Results 2019. I'm Alessandro, the conference 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&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. 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. Oetterli. Please go ahead.
Good morning, ladies and gentlemen, welcome to the update on results as of September 30, 2019. My name is Thomas Oetterli. I'm the CEO of the Schindler Group, I am here with Urs Scheidegger, the Group CFO, who will take us through the financial details later in the call. We are pleased with the results achieved in the first three quarters of the year, maintaining growth momentum and sequentially improving profitability quarter by quarter, in line with expectations. Please turn to slide number two, which summarizes the highlights of the first nine 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, 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 CHF 923 million in the first nine 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, EBIT 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 CHF 680 million, and cash flow from operating activities reached CHF 725 million. This is the adjusted number before one-off impacts and is slightly higher than in the previous years. I continue with slide number three 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 first nine months, a development better than expected at the beginning of the year. There are some signs of slowing in the third quarter. In the rest of Asia, the development was mixed. Political uncertainties and slowing construction activity in some countries weighted 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 number four. 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 multi-family 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 number five. 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 qualified 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. We'll conclude with the revenue and net profit guidance for the year 2019. I start with the key figures of the third quarter 2019 on slide number six. In the third quarter of 2019, order intake rose by 4.8% to CHF 2.9 billion, corresponding to a growth of 6.1% 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 rates. In China, the new installation business slowed a bit in the third 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% to CHF 2.8 billion in the third quarter of 2019. Negative foreign exchange translation effects amounted to CHF 38 million, particularly due to the strong Swiss franc against the EUR, the CNY, and the AUD. 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 CHF 327 million, equivalent to an increase of 6.1% in local currencies.
Foreign exchange translation effects had a negative impact of CHF 5 million. The EBIT margin reached 11.6%. EBIT adjusted of CHF 334 million, considering restructuring costs of CHF 2 million and expenses for BuildingMinds of CHF 5 million. The margin for EBIT adjusted was 11.8%, almost flat compared to previous years, and a sequential increase compared to the second quarter of 2019. In the third quarter of 2019, net profit amounted to CHF 244 million, an increase of 6.1%. Cash flow from operating activities in the third quarter was up by 9.2% and reached CHF 308 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 seven, showing key figures for nine-month year-to-date results.
In the first nine months of 2019, order intake increased by 4.1% to CHF 9 billion, corresponding to a growth rate of 5.9% in local currencies. All product lines and regions achieved growth. The 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 EMEA regions. Revenue increased by 4.0% to CHF 8.3 billion, equivalent to a growth rate of 5.8% in local currencies. Negative foreign exchange translation effects amounted to CHF 146 million. The Americas region was the strongest driver for revenue growth, followed by the Asia Pacific and EMEA regions. Operating profit reached CHF 923 million in the first nine months of 2019, 0.3% less than in the previous year. In local currencies, operating profit increased by 1.6%.
Price 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 CHF 13 million and expenses for BuildingMinds of CHF 14 million, the EBIT adjusted increased by 1.0%, effectively 2.9% in local currencies to CHF 950 million. Equivalent to an EBIT-adjusted margin of 11.5% compared to 11.9% in the first nine months of 2018. Net profit totaled CHF 680 million compared to CHF 746 million in the previous year, which included a one-time tax refund of CHF 55 million that was recognized in the second quarter of 2018. Excluding this one-time tax refund, net profit was up by 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 flow from operating activities was CHF 656 million. Adjusted for the settlement of pension obligations and the interruption of the new accounting standard IFRS 16, it amounted to CHF 725 million, an increase of 1.3% compared to the previous year. As of September 30, 2019, the order backlog totaled CHF 9.3 billion, an increase of 7.7%, effectively 9.0% in local currencies. Let's move to the unchanged financial guidance, which you can find on slide number eight. 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%-6% in local currencies and net profit between CHF 900 million-CHF 940 million for the full year 2019. With this, we would like to invite you to ask your questions.
For questions we might not be able to address due to time restraints, please contact Marco Knuchel, our Head Investor Relations, after the call.
We will now begin the question and answer session. Anyone who wishes to ask a question, may press star and one 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 queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from Andre Kuklin 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. Could we just dwell a little bit into that, on where you're seeing that and in what particular segments and maybe to what extent?
Yes. Good morning, Andre, this is Thomas speaking.
Morning, Thomas.
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. I think after the first 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. Also, the price environment was still stable, still challenging for larger projects, but we were quite good in also increasing slightly our prices over the last nine months. 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 have seen that the stock of unsold apartments have continuously been reduced.
We also have seen that there was maybe some softening in some of the CPIs in the residential area and slightly also in the commercial area. On the other side, also due to political environment, we 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 first three quarters, maybe not that strong anymore. We do see that there is some softening happening in the third quarter. 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. Thank you. Changing topics a little bit, on modularization savings, could you give us idea of, I think we were thinking about sort of CHF 30 million-CHF 40 million for 2019. How much of that has been materialized year-to-date? Do we have a figure for Q4 or not? Then probably more importantly for 2020, I think when we talked about phasing of the program, originally, it implied something maybe as high as CHF 80 million-CHF 90 million of incremental savings, at least on my math. I just wanted to get a chance to calibrate that, if that kind of 80+ number is credible given what we see now with the components they've introduced and planning to introduce already.
Good morning, Andre, here is Urs. Thank you. Morning. On modularization. Our modularization program is on track, and in 2019, we are generating a couple of CHF 10 million savings with the modularization program. That helps us to offset the ongoing material cost inflation as we normally are hedging our material cost for six to nine 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 roll it out into the supply chain and to the field stage by stage. The mentioned number is still in the realistic range. On the other hand, I would like to remind you that 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 are absolutely right with your forecast. The key question in 2020 will be when you start to sell also the new components, how 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 during 2020, because, of course, we try to also convert existing orders with the new components in order to achieve some savings. Otherwise, with a 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. This, of course, is not our ambition. We would like minimum partially to start to convert also our existing backlog.
Got it. Thank you. Very clear. The final one, maybe as we kind of led on to reinvestment already, I'll ask about that. Do you intend to ramp up your investment in digital further in 2020? On my math, you're at CHF 50 million-CHF 60 million on the ahead IoT platform and running up to about another CHF 15 million for digital twins. I think you have CHF 100 million of digital-related investments in 2019, whether that's exact math or not. Is this right, and does this have scope 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. You remember we had this slide that we say we want to grow, and we do have initiatives on the operational excellence side, but we also have our strategic priorities. We do not want to sacrifice the investment into strategic priorities into short-term, let's say, profitability push. Yes, you are right. We continue to invest into our digitalization program. These are in fact two big, big topics. One is Schindler Ahead, and the other side is the digital twin. Schindler Ahead, we probably achieve already the right level of cost, and we do not want to further substantially expand that.
On the digital twin side, as you know, we have started two 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. 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.
That's very clear and very helpful. Thank you very much to both of you. I will go back in queue.
Thank you.
The next question comes from Lucie Carrier from Morgan Stanley. Please go ahead.
Oh, hi. Good morning, gentlemen. Thanks for taking my question. I have three question. 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 main geographies, so North America, EMEA, and China. Also if you could maybe separate that between new installation and services, please.
Okay. Good morning, Lucie. Thomas speaking. If we start, maybe let's first 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 really to deliver quality in the service business, and our customers are appreciating that. We were able to increase everywhere in the world our service prices. Not everywhere in the same magnitude. There are different drivers like wage inflation, like the index of cost of living. 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. This 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 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 for Brazil, because Brazil still has not really rebounded. As we have a very strong position in Brazil, we are suffering from low prices in the new installation business. 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.
I would say now during this year, and especially the last three to six months, it was rather stable. When I move to Asia Pacific, I think I would segregate it into three 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. 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 been still 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.
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, that price trend. 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 to a little bit of these pricing concessions we have seen. In Southeast Asia, due to some political issues, some of the markets really have been, I would not say turbulent, but they have been under pressure. If I look on markets like Vietnam, Malaysia, Indonesia, there was really a softening of the market, and this had an impact also on the pricing. There I saw it was slightly negative maybe during this year.
I hope that those markets are coming back, and maybe this gives us some opportunities to get some of the price concessions back. That would be my overall global picture.
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 that 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. 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 fourth quarter 2019 that is coming, but also, I would say, in 2020?
Thank you, Lucie, for this question. In regards of material costs, you are right. The peak of very high material costs seems to be behind us, at least short term. After the first nine months of this year, where we certainly still had higher material costs due to the fixed prices we negotiated early this year or even last year, we should now see a softening of material costs. The material we are purchasing have stabilized, I would say so. Of course, it's a bit early to say what the trend is going forward into 2020. On your second question, in regards of 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. My question was more, are you feeling now comfortable for this margin to be higher year-on-year rather than specifically sequentially up? You are almost closing the gap now in the third quarter, you are down 10 basis points. When we look at the fourth quarter and when we look at next year, should we now expect considering some of the tailwind on potentially raw material savings, is it reasonable to expect your margin to expand again?
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 first three quarters, in the last quarter compared to last year. What we definitely can say is that we are expecting that the EBIT adjusted, let's say, will further increase also in Q4. The margin also has 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.
We 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. As normal in Q4, we expect a larger number of new installation jobs to get completed with final 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.
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. We do have confidence that it will be a strong quarter. Definitely in absolute returns, we will have a further increase of our results.
Understood. Thank you. 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%-6%. It kind of gives a very wide range for the fourth quarter between roughly -1.5% to +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 fourth quarter and kind of the exit rate, if I may 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%. We are at the upper limit of the range between four to six. I think it's fair to say that we do not expect that we go now, if you take this range of four to six and you take the 4%, okay, we would have to have a negative growth in the last quarter. This will not be the case. Our ambition is to really push the gas and to keep the right growth momentum. In local currencies, we do not expect a bad quarter in Q4, we probably are more towards the upper limit of our guidance. I think that's fair to say.
Thank you very much.
The next question comes from Martin Hüsler. Klipfel, please go ahead.
Yeah. Good morning, gentlemen. Thanks for taking my questions. Three, and also one at a time. Judging from your slides on the Americas and EMEA, I'm assuming that when you talk about your Schindler 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. In the new installation business, sorry.
No, I think we have not lost market share in North America and in Europe. In Europe, maybe. Definitely North America, this was not the case. In Europe, you should also look on the geographical mix you have. We do have very strong countries where we also have a very strong position. In Central Europe, Northern Europe, we do have a very strong position. Yes, this I can confirm. The markets have been rather stable, and we were able to keep our market position. When you look a little bit more to the southern 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, and this was Turkey.
Now we have done a lot of investments there, 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 which has gone. So we were negatively impacted in our geography mix by this downturn of Turkey. If you look on the single countries, no, we have not lost market share.
Okay, if I understand you correctly, your new installations business in Europe or EMEA is down because of Turkey. In North America, you would claim that your new installations business performance was in line with the market.
Yes.
Okay, thanks. 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 2018, and what the key drivers were for you?
I think overall margins have been rather stable. We have been able in the first three quarters to slightly improve our backlog margins. This, of course, is due to two effects. We have executed, in some countries, jobs with a lower margin, but we also were able in order intake to do pretty a good pricing initiative over the three quarters. 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. This really varies quarter by quarter and Q3, if I look on volume business, it was good.
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 would remind that in Q3, we had a very big project also in the U.S., this was Manhattan West, and this can sometimes in the quarterly benchmark can impact a little bit your overall margin. Overall, I would say we were able to slightly improve.
Now, is that sequentially or year-over-year?
Year-over-year.
Okay, thanks. My third question, if you could talk about the progress in your rollout of Schindler Ahead and how much you think the new digital services has added to your maintenance and repair growth in Q3 in the nine-month period, and I'll go back in line after that one?
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. 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. What happens is the following, that if you had in the past a certain price for the service contract and you had a new installation conversion into the portfolio, we now achieve a higher pricing. This has continued in Q3. I would even say it has accelerated the number of units we were able also to get an additional module in our service contract.
Now, if you look on the overall impact, this of course takes time because you only have this benefit mainly in those units you are converting. This is only impacting a few percentage points every year of your overall portfolio. If you look in the long-term view over two, three, four, five years, then you see more and more impact coming from that. Now, on these new installation conversions, we still can confirm that the average price of such a service contract can be improved by 10%-20%. This I think shows that long term, this is the right investment. Still, overall, even with this additional income and additional margins we can achieve, Schindler Ahead is still contributing negatively to our overall margin, and we expect a break-even point in 2021.
Perfect. Thanks.
The next question comes from Daniela Costa from GS. Please go ahead.
Hi, good morning. Thank you. Most of my questions have been answered. I wanted to see if you could give us a little bit more color by country in terms of the trends you're seeing in Europe, namely, if you can comment on what you see at the moment in terms of the construction market in Germany and Switzerland. That would be very helpful. Thank you.
Okay. Good morning, Daniela. 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 German, you say So there is really a problem around in the construction industry that you don't find enough qualified people. Now, this has an impact on the lead time of our order, not the order intake, but when we have an order intake, until when can we also then build our order. This has definitely increased over the last two years, I have to say, substantially increased. The overall lead times really are now on an all-time high. 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 position or even slightly increase. 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 Hüsler from Zürcher Kantonalbank. Please go ahead.
Yes, thank you. Two questions. To North America, you were mentioning that you had the highest sales growth in the Americas, and mentioning that the new installation were rather slightly declining. I'm calculating a positive development of service and modernization of probably more than 10%. Could you give some more insights into the driver of this performance in North America?
A good catch, Martin. It's true, we had exceptionally good development in our EI business in the Americas, and this was driven also by the U.S. market. Whereas, 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, we know about pricing initiatives. That's one reason. The second reason is that we also push a lot our modernization business to somehow mitigate a little bit the weakness of the market in new installation. 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 door lock 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. 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. 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 first three quarters.
Okay, thank you. My second question is turning to China. There I was wondering about the lead time there. You spoke about in terms of Switzerland. What do you see there? Is it more difficult to cash in the receivables?
Definitely, the market in terms of liquidity has become more challenging. There is a market trend happening, that on our customer base, there is a consolidation going on. Big developers become bigger, and smaller developers are more under pressure. 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. 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 volume 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 Fabian Hingst from UBS. Please go ahead.
Good morning, everyone. A quick few questions. On China, most other international uni players performed quite well in China in Q3. 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 a low single digit growing, and the major players are reporting good growth, then someone else has to lose. Just by definition, this assumption might be correct. Not all the time players are developing in the same way. I would say yes, smaller players have been more under pressure. Not only in Q3, I think overall in the year, they have lost some market presence and market share. I would agree to that.
Okay, thank you. The next one is on the cost savings modernization program. That will be completed in 2020, right? If this is the case, is there any other larger company-wide operational program that could follow up as of 2021?
Point number one, 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. That's what we always said. 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. If you cannot do that fully, then you have a little bit less of an improvement in 2020. Latest in 2021, you have all the improvements. I think when you look on our strategic chart that 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 for Schindler Ahead. I said the breakeven point will be in 2021.
You can expect that there will be an improvement coming from that, from the Schindler Ahead program. Operationally, of course, we are working on efficiency programs in the processes, so in installation, in maintenance, and also in our structure. This is a ongoing process we always have to work on. On the other side, what we will have every year is that we have wage inflation, 3% or something like that overall, globally. I don't know how the material costs will develop. Those programs ahead, S3000, efficiency, definitely will improve our operational performance. On the other side, we have some given facts which we cannot yet exactly determine. This is wage inflation and the material costs.
Last but not least, I would like to reconfirm, if you think about our three strategic priorities, we always said our absolute first priority is to grow faster than the market. We are willing to reinvest some of the operational improvements into our fast growth we have now driven over the last couple of years.
Thank you. A last one, just a financial one on the hedging costs in H1. You're saying that the hedging costs are going to double for the full year. They were quite high in Q2, and then now Q3, they were much lower. Will hedging costs still double from the H1 level? 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 US dollar, and that helps us. My forecast is not double amount, but rather now an impact of CHF 50 million to CHF 55 million for the full year.
Okay. Very precise. Thank you.
The next question comes from James Moore from Redburn. 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 CHF 10 million of modularization savings. I just want to check, was that gross or net? Was that nine months for this year or the full year of this year?
Some CHF tens of million. Maybe you have misunderstood. It was not CHF 10 million, but it was some CHF tens of million. Meaning more than just CHF 10 million. I think otherwise I would be heavier on the pressures. This is clearly a misunderstanding.
Was that a gross savings number?
That's a gross saving, yes.
If we talked about something in the magnitude of CHF 50 million, that would be too much for your few tens?
No, I think it's not unreasonable. It's maybe on the upper part of the impact this year. To a range of CHF 40 million-CHF 50 million, I think that is absolutely valid.
Thank you. Your digital investment headwind of 20 basis points, was that an impact of 2020 or was that 2019? Whichever it was, could you give the other year? Just trying to understand whether it's a consistent pace of headwind or changes.
Point number one, the additional 20 basis points was the year 2020 compared to the year 2019. It is correct. Mainly driven by the digital twin investment we do, which is now ramping up. Of course, it does not give you immediately benefits. It is a multi-year investment we are doing. We always say, 2019 compared to 2018, we always said we have something like 30 basis points negatively impacting the result 2019 compared to the result 2018. If you make the bridge from 2018 to 2020, those strategic investments, mainly driven by digitization, dampen the overall EBIT margin by about 50 basis points.
Very helpful. 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 us a sense for what that might be in the second half and next year. Basically, I'm trying to understand whether the pace of wage inflation is changing, and one of your peers talked about expecting higher wage inflation next year than they are expecting this year.
Hello, James. 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&L. It's 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.
I think it's fair to say that as a best estimate, because some of the countries, it's driven by negotiation of the unions. 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. There, you do have, of course, some room to manage, but you still have to follow somehow the market. 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. Just if I could switch to demand, it looks to me like away from China, your other Asian order intake was quite strong. Is there a particular region? Am I right in that? Is there a particular region out of, I guess, Australia and Southeast Asia, if India is off 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. We were really happy. I mentioned before that some of the countries were struggling in the first half of the year. I mentioned Vietnam, I mentioned Malaysia, Indonesia. We see, and we also hope, because we have a very strong position in Southeast Asia with our joint venture, the Jardine Schindler Group. We now hope that we see a more prosperous future. 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.
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. We had really a strong Q3 in Asia Pacific.
That's great. Lastly, if I could, just your digital contribution to the maintenance revenue growth. I know that's a complex question because it's Schindler Ahead, BuildingMinds, PORT, digital twin, all at various different stages of their progression. Do you have a rough concept as to what the contribution, additional incremental contribution to maintenance growth is from these digital initiatives at the moment? Whether you think that's going to change, and how it changes going forward?
There are different initiatives, and maybe we have to split it a little bit. When we talk about our transit management group, this is PORT, this is myPORT. This is more impacting our new equipment sales. It's still the case that this is a key differentiator for tall buildings. 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 the, let's say, the best performing transit management system on the globe. This is more driving our new equipment sales, and that's one reason why we are pretty successful in large projects. Now, when you talk about Schindler Ahead, Schindler Ahead is more driving our service growth.
This is a multi-year push, and we have launched it all over the world. 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 which are proving that. These proofs, we are now also showing to our customers, and the customers say, "Wow, that's a pretty cool thing." Yes, I'm willing to do a further investment into the service contract because I have a better overall availability of the equipment. This will sequentially, it will grow quarter by quarter. We will increase our installed base with Schindler Ahead contract. Over the time, this will contribute to our profitability but also to our growth. The third one is what you mentioned is the BuildingMinds. BuildingMinds, of course, it's a startup.
We have basically started from scratch about one year ago. It's maybe too early now. It's not so meaningful to provide now a quarterly update. What is the impact? At the moment, it is cost. It's nothing else than cost. We have now set up the core team. We are developing these first client solutions. Interesting to mention, earlier this month, our BuildingMinds team has made the first public appearance at the EXPO REAL. 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. We really enjoyed a lot of discussing their solutions and how we can comply with their needs. It's a little bit too early.
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, but it is in early stage. Maybe, once in the future, we can give you more insights to that. BuildingMinds is separate, very early stage, more to support new installation growth. AHEAD, we do have the success. We see it very clearly, highly appreciated by the customers, but this is a long-term improvement.
Thank you. Very helpful.
The next question comes from Remo Rosenau from Helvetische Bank. Please go ahead.
Yes. Thank you. In the second quarter conference call, you were reassuring participants about the foreseen margin improvements due to improving margin quality of your order backlog, and you nicely delivered on that. I presume that among other reasons, that was due to complete orders which were still taken in at lower prices. Is this positive margin momentum from the order backlog still working? If so, is the particular momentum rather increasing or decreasing? For how long will it still persist?
Point number one, thank you that you confirm that we delivered according to what we also said. Being reliable and credible is very important. Yes, I can confirm 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. Our overall backlog margin has still slightly improved. I do not expect that it goes down. Let's say, I also do not expect that now the margin improvement due to pricing will further increase. I don't see that now in the new equipment business, prices are continuing to increase. I think everybody tried very hard to do a one-time step over a couple of quarters.
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. 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 an net margin of around 13% in the fourth quarter, which is clearly too high. From the 11.6 we see now, this 13%, which is too high, of course, something in the middle seems like a central assumption, right?
I think you are very aggressive in your forecast, I have to say. We mentioned before, it depends a little bit on the operating revenue we will roll out in the last quarter. How much of new equipment business is in our backlog to be rolled out. We do have a couple of very large projects we will roll out, which helps us in the pipeline. Usually, the fourth quarter is very strong in the new equipment business. Don't forget, as we have mentioned before, we continue to further increase our investments into strategic programs, especially now the [digital trade] investment has started to ramp up in Q3, and they will continue to increase also in Q4. This, of course, goes a little bit into the other direction.
Okay.
I would like to add and emphasize that our main and first priority is growth above market growth. Hence, we are reinvesting margin improvements into our growth journey.
Okay, great. Thank you very much.
The next question comes from Bernd Strompen from Deutsche. 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 BuildingMinds. Is the reason that it is just so difficult to get the required IT people? Would you like to provide an update for the expenses for BuildingMinds in the current year, maybe also next year? Thank you.
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 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? 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. 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. The core team is set up, and it works on these client solutions.
I mentioned before, very good feedback from the markets when we were at the EXPO REAL in Munich.
It was more we did not exactly know how much ou come over the quarters and over the years. Yes, there will be, of course, some increase running 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 this will be a success.
Okay, fair enough. Thank you, Thomas.
The next question comes from Daniel Blind from Bank Vontobel. Please go ahead.
Yes, good morning. Thank you very much for taking my questions. I would like to touch again on the adjustments to your EBIT number, apologies also for belaboring the point. Could you give us a rough number for both BuildingMinds and restructuring for the fourth quarter 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. For BuildingMinds, with our latest estimate and based on the explanations given by Thomas, we expect now a full-year impact of about CHF 20 million. It means we have year-to-date CHF 14 million, so CHF 6 million more as an estimate. For BuildingMinds next year, you need to anticipate acceleration of costs and investments, rather in the magnitude of CHF 30 million-CHF 40 million in 2020. Restructuring costs year-to-date, we have CHF 14 million. We do expect restructurings to come now in Q4 in various countries. We are at work on efficiency measures. It still could be a rather significant amount in Q4. Maybe in the magnitude of CHF 15 million to up to CHF 30 million, potentially. For 2020, it is too early to consider a guidance.
Would you expect the historic run rate of CHF 25 million to be a reasonable assumption for us for 2020? Similar to the other investments, should we anticipate an acceleration 2020 over 2019?
Well, I think there is a light normal ongoing restructuring, but as probably every company, we are at the moment looking ahead into 2020. We are in discussion with all the country organizations and the different zones for what do they plan to improve for 2020. As Urs has said, we are in the full process now of budgeting and analyzing. It's maybe a little bit early. You can expect that the normal, let's say, ongoing restructuring is on the level as we had it this year. We still are finalizing what are our key initiatives in our operational excellence to have more efficient processes and structures. This might impact them at the end, the overall figure, and we might be able to say more in our yearly call early February for our conference call.
Very clear. Thank you very much. You mentioned that your order intake in China saw a moderation in the third quarter after a very strong second quarter. Could you explain what the drivers are? What is just the project timing? Given that you've seen some mix of the fourth quarter now, would you expect this momentum on the order intake side, China, to re-accelerate in the fourth quarter?
Well, there is a certain base effect. Last year, we had a very strong increase of our order intake in the second half of the year. This, of course, brings you a little bit more under pressure on the year-to-year consideration for the single quarters. 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 nine-month China order intake should be firmly on the positive side, and therefore I would also anticipate that the prepayments from China have in absolute terms increased. Yet the free cash flow after nine months was more established after you did the adjustments that you mentioned during your presentation. Was this just a mix? You mentioned more infrastructure and share in China effectively offsetting the positive statement from China prepayments, or was there some other region globally which offsets the positive statement from China, so the overall free cash flow was more stable year-over-year? If you could help us with that would be appreciated.
Yes. As you know, our net working capital has deteriorated over some quarters. This is still critical, mainly due to the large project order intake, which we have accelerated in recent periods. They come with more demanding and unfavorable payment terms and less early advance payments. A higher share of later payments is the final billing, or even some cash retentions of the final billings. This is still a negative impact so far, but it has much more stabilized now for us. The good growth in China, of course, is on order intake. We also have seen that our backlog has grown very strongly, and hence those advance payments still have to materialize on the order intake when we roll it out, and should become visible in future periods.
Very clear. Thank you very much. One last question on Schindler order backlog. You previously mentioned this is both a global and a China observation. Does this still hold true as of today when you think about where the biggest cave-in is coming from? Is it a global observation, or can you pinpoint a specific region where the biggest absolute driver was coming from?
Okay. Good question. I think it's a little bit of history. The biggest pressure we had in the margins and in the pricing was in China. 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. We had a continuous price increase seen over the last two or three years also in the North American part. There was some downturn in Brazil, the market is maybe half of the size it has been a couple of years ago. We all hoped that it will rebound, but it did not. The price pressure is still substantial there.
During this year, in some of the Asia 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. Looking forward, as I said, I would consider that we now have achieved quite a stable environment.
If you think about lead periods of that improving order book coming through, I appreciate there's project phasing and there might be something earlier, something later. When would you expect a significant feel of the tailwind for margins? Is mid-2020 a fair assumption, or would this be pushed out even further?
Well, I think that's a little bit the dilemma. We have talked before about lead times. The enlargement of lead times in China happened not now. It already happened about one or two years ago when we were coming towards the end of the, let's say, interim downturn. Lead times in China are long, especially also in our business model. You have to understand that we are limiting the business model on the distributors. 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. Our lead times are longer than for other players in the market because we clearly for safety and quality reasons, don't want to overshoot a certain share of this distributor model.
On the other side, we also pushed a lot large projects on public transport. There, of course, lead times are sometimes three years. Bit of 2020, maybe second half, yes, part of it, and then more to come still in 2021 out of the efforts we have done in China.
Very clear. Thank you very much.
The next question comes from [Andy Schneider] from [Jet Capital]. Please go ahead.
Hi, gentlemen. Really sorry to again go back to the margins. I'm not sure if I got it right before. It's regarding this additional 28 headwind in 2020 from digital investments. Is this a gross or a net negative impact? Beside more investments in the digital twin, there are stable investments in Schindler Ahead, which, however, should come with more monetization revenues for Schindler Ahead as the plan to be breakeven there in 2021. Is it fair to say that because of these, let's say, lower losses for Schindler Ahead, the overall drag from digital investment might not incrementally increase next year?
No, the investment was a net investment. The increase is mainly driven by the digital twin, and their savings are coming only in a couple of years.
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 Knuchel as the Head of Investor Relations.
The last question is from Wajid Rizvi from RBC Capital Markets. Please go ahead.
Hi, good morning. Thanks for taking the time. Just a couple left from me. You've mentioned a couple of times on the call converting some of your backlog to modernization 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? Then is that a major factor in when we see margins accelerating, or is it more simply about when you convert the orders at the higher margins you've taken in recent quarters.
Just to follow 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 as the inventories have to rise to accommodate both types?
I start with question number 2. Yes, you are right. If you change technology and products, you have the risk that you have a little bit higher inventories, because you still have to ramp up in advance your inventories for the new products. You are still producing the old ones, so you have a little bit of doubling effect. This is true. Now, to your question number 1, the converting of the backlog. In fact, there are 2 type of conversions. One is you have the existing product, and you exchange the component. It 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 cars, now we have the inverters and the controllers. This is still the same product, but one of the components is changed. This is easier.
That's the easier part. 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. There, of course, it depends where the actual potential order is. If it's still discussed, and you have not yet done an offer, then you can do the offer with the new one. If you do an offer with the new product, it won't even be produced in 2021. That it has no impact. You should be able to switch existing orders. This depends on which status the order is towards the customer.
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 two holes for the product. Could you move 10 by 10 centimeters?" You cannot convert. This analysis, which orders are at the moment in which stage in order to be a candidate to be converted, is super critical, but also super difficult. That's the whole game. At the end, what we want to do to the customer is we would like to give the customer an even better product and service. Of course, we don't want to disturb their work. That's a little bit a delicate activity.
That's helpful. Thanks.
Thank you. 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 14th, 2020. If there are some questions left or we have not been able to address something and there are maybe follow ups, please call Marco Knuchel, our Head Investor Relations. I once more would like to thank you and say goodbye.
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