Ladies and gentlemen, welcome to the Schindler Conference Call on Half Year Results 2019. I am Alessandro, the 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 Thomas Oetterli, Chief Executive Officer. Please go ahead, sir.
Good morning, ladies and gentlemen, welcome to our Half Year 2019 Results Conference Call. My name is Thomas Oetterli. I'm the CEO of the Schindler Group. I'm here with Urs Scheidegger, the Group's CFO, who will take us through the financial details. Before we dive into the results of the first six months in 2019, I'd like to highlight some of our sustainability-focused achievements. At Schindler, we've always had a strong focus on the longer term to act in the best interest of the company and its stakeholders and to be a vital part of the communities we are active in. Our sustainability strategy, we elevate our world, centers around six clearly defined priorities to manage the firm's impact on the economy, society, and the environment.
Employee safety, talent diversity, community engagement, smart urban mobility, the global vehicle fleet, and the supply chain are our key areas for action, for which we set ourselves ambitious targets for the upcoming four years. We've been already active around the world for quite some time. A few examples to showcase our efforts. We are running a fleet optimization program to keep reducing our carbon footprint while enhancing service concepts, especially in more densely inner-city areas. Our new campus in Ebikon is LEED Gold certified with a strong focus on locally sourced renewable energy and conserving resources overall. LEED is a building rating system and recognizes buildings that have been developed, planned, and realized according to measurably sustainable criteria. We are also focusing on creating a more gender-balanced workforce. Our diversity committee is driving this agenda forward.
Our Women in Leadership program is now active in Europe, in the Americas, and also in Asia. Besides that, Schindler Australia, for example, is running two leadership development programs triggering cultural change. We are also fostering the development of young talent beyond our well-established apprenticeship programs in which more than 3,000 young people worldwide engage. To date, Schindler Igniting Minds, Schindler India's flagship program for corporate social responsibility, has successfully supported over 700 young people from disadvantaged backgrounds in the completion of their technical training, and we've won numerous awards for the program. Since 2018, Schindler Switzerland has been pioneering vocational education and training programs aimed at equipping refugees with the skills they need to work in Switzerland. There are different courses depending on the participant's education and experience, but the objective is the same: Give young people the skills to integrate into the workforce in Switzerland.
These are just examples that may showcase that we at Schindler, we define success not only by our financial outcomes, but the business ethics by which we operate and our impact to stakeholders worldwide. In addition, we live and breathe our commitment to highest quality and continuously improving in everything we do. More than a third of all Schindler employees worldwide have now completed the Schindler Quality Champions program that focuses on front-loading, collaborating, and communicating. Our quality ambassador community is growing and will foster cultural change globally. With that in mind, I'd like to draw your attention to slide number two, which summarizes the highlights of the first semester of 2019. In an overall highly competitive market environment, Schindler succeeded in maintaining growth momentum during the first half of 2019. At the same time, political and macroeconomic uncertainties remained eminent in many geographies and countries.
In a nutshell, growth and strategic investment characterized the first six months of the year. Schindler grew across all product lines and regions and continued to invest in strategic projects identified to prepare for the future. These strategic projects are proceeding according to plan. Order intake rose by 5.8% in local currencies, supported by a further increase in the order volume for major projects, especially in the public transport segment in North America and in China. Revenue increased by 5.4% in local currencies. For both indicators, the Asia-Pacific region generated the highest growth, followed by the Americas and the EMEA regions. As expected, the aggregate of higher raw material cost, wage inflation, foreign currency impact, and the planned increase in expenditure on strategic projects continued to affect operating profit. EBIT reached CHF 596 million, a smallish decrease of 0.7% in local currencies, and the EBIT margin came in at 11.0%.
Adjusted for restructuring costs and expenses for BuildingMinds, it stood at 11.3%. It is encouraging to see that sequentially, the EBIT margin is increasing compared to the first quarter of this year. Net profit stood at CHF 436 million, and cash flow from operating activities reached CHF 444 million. This is the adjusted number before one-off impact and was broadly in line with the previous year. I turn to slide number three and the recent development in Asia Pacific. Overall, the positive market development in the region continued. The Chinese new installation market was slightly up in the first six months, a development better than expected at the beginning of the year. India continues to grow, driven by the residential and infrastructure segments. The development of Southeast Asia was diverse and showed a mixed picture.
Service markets were healthy, enhanced by the conversions of new equipment. Particularly in China, activities in the modernization segment accelerated. Our performance was primarily strong in China and India, in both new installations and existing installations market. Let's move to the next market region, in the Americas on slide number four. The momentum in the U.S. has leveled off. The market has stabilized on a high level. The public transport sector still recorded growth, while the low and mid-rise segment started to trend towards less activity. Latin America was somehow stable overall. With a persistent challenging environment in Brazil. We at Schindler, we did well. Our North American operations continued with their good performance, supported by a strong modernization business. On the other hand, the new installation business posted a slight decline.
We find it increasingly challenging to find qualified field staff, consequently delaying projects and impairing our efficiency. Latin America displayed overall good growth as well, despite a challenging environment in Brazil, as mentioned before. I continue with the EMEA region on slide number five. Markets in Western Europe remain solid on a high level. In the southern part of the region, a slight overall market contraction was observed, particularly driven by Turkey. Schindler recorded a minor negative development in the new installation business following an extraordinarily strong previous year. The existing installation business continued to grow. The lack of qualified resources becomes also, particularly in Northern Europe, more and more an issue impacting performance on construction sites. Finally, I'd like to share an update on the development of our strategic projects on slide number six.
These projects identified to prepare for the future can basically be grouped into the modularity program, the digitization topic, which is composed of the development of digital customer solutions enabled by Schindler Ahead and CUBE, as well as the digitization of business processes, and last but not least, BuildingMinds. All projects are on track. However, since we are in the ramp-up phase, they impact our results. The modularity program aims to substantially reduce the complexity and variety of components in our global product offering. With harmonized cars, hoistway materials, and controller components, we have three groups of modular components introduced by now. Schindler Ahead launched two new products for more convenience during elevator journeys as the AdScreen and the SmartMirror product. Connectivity and global rollout are progressing according to plan. It's worthwhile mentioning that Schindler Ahead solutions feature top-notch cybersecurity requirements. Last but not least, BuildingMinds.
BuildingMinds set up a core team, and the collaboration with Microsoft is established, and first customer solutions are being developed. Overall, I would say good progress in the strategic initiatives and also progress in our operational performance. Now I would like to hand over to Urs for an update on the financial results and the outlook for 2019. Urs, please.
Thank you, Thomas. Good morning, ladies and gentlemen, and welcome on my behalf on today's conference call. The next few minutes, I would like to share some more details on our results and conclude with the revenue and net profit guidance for the year 2019. As a general remark, negative foreign exchange impacts, particularly on the top line, should be considered when looking into our results. The strong Swiss franc has left its mark. I start with the key figures on the second quarter of 2019 on slide number seven. In the second quarter of 2019, order intake rose by 2.5% to CHF 3.1 billion, corresponding to a growth of 5.1% in local currencies. This robust growth should be reviewed considering the high comparable base in the prior year. The second quarter 2018 was our best quarter by then.
Order intake includes all product lines, new installations, modernization, service, and repairs. The Asia-Pacific region again generated the highest growth rate, reflecting strong growth in both China and India across all product lines. This was followed by the Americas and EMEA regions. Growth was also fueled strongly by the existing installation business. Developments in major projects were noteworthy, particularly in the public transportation segment in North America and in Asia-Pacific. Revenues improved by 2.4% to CHF 2.8 billion in the second quarter of 2019. Considering the high prior year baseline and negative foreign exchange translation effects of CHF 73 million, particularly due to the strong Swiss franc against the EUR, the CNY, and the BRL. This growth rate was quite remarkable. In local currencies, revenue were up by 5.0%, reflecting growth in both the new installation and existing installation business.
Operating profit was CHF 322 million, or as expected, 3% less than in the second quarter of 2018, equivalent to a decline of 0.3% in local currencies. Foreign exchange translation effect had a negative impact of CHF 9 million. EBIT adjusted amounted to CHF 334 million. This is EBIT before restructuring costs of CHF 7 million and expenses for BuildingMinds of CHF 5 million. The EBIT margin reached 11.3%. The margin for EBIT adjusted was 11.7%, a sequential increase of 70 basis points, respectively 80 basis points compared to the first quarter of 2019. In the second quarter of 2019, the net profits amounted to CHF 239 million.
Excluding the tax refund of CHF 55 million recorded in the second quarter of 2018, net profit was 5.5% behind the previous year, mainly due to the aggregate of a lower operating result and the deterioration in the financial result attributable to currency losses on financial hedges. These were only partly offset by lower income tax expenses. Cash flow from operating activities in the second quarter reached CHF 85 million. With that, I'm moving on to slide number 8 and comment on the performance of the six months. In the first half of 2019, order intake increased by 3.8% to CHF 6.1 billion, corresponding to a growth rate of 5.8% in local currencies. All product lines and regions achieved growth. The margin profile in the order intake has improved, which is a good sign. The Asia-Pacific region generated the strongest increase, followed by Americas and EMEA regions.
In the Chinese in new installation markets, China generated significant growth in value and delivered a substantial increase in volumes compared to the previous year. Again, developments in major projects were noteworthy, especially in the public transport segment in North America and China. Revenue grew by 3.3% to CHF 5.4 billion, equivalent to a growth rate of 5.4% in local currencies. Negative foreign exchange translation effects of CHF 108 million were accounted. We can take a quick look on slide number nine for an overview on revenue growth by region in local currencies. The Asia-Pacific region generated the strongest increase, followed by Americas and EMEA. After an extraordinary first half of 2018, growth rates in EMEA and the Americas have come back to more sustainable levels.
To the right of the slide, you can see the distribution of revenue and backlog by region underlying our very balanced geographical footprint. I now continue with slide number eight. Operating profit totaled CHF 596 million in the first half of 2019. 2.8% less than the previous year. In local currencies, the decline was 0.7%. As expected, price adjustments, economy of scale, and efficiency gains did not fully offset the aggregate impact of foreign exchange, wage inflation, higher material costs, and planned accelerated spending on our important strategic projects. Consequently, and since the impact of cost-saving measures is expected to materialize only in the second half of the year, the EBIT margin was 11.0%.
Before restructuring costs of CHF 11 million and expenses for BuildingMinds of CHF 9 million, the EBIT adjusted increased in local currencies by 1.1% to CHF 616 million, equivalent to a margin of 11.3% compared to 11.8% in the previous year. Net profit totaled to CHF 436 million in the first half of 2019, compared to CHF 516 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 5.4% less than in the previous year, mainly due to lower operating profit and the deterioration in the financial result attributable to currency losses on financial hedges. Cash flow from operating activities totaled to CHF 348 million. First half of 2018, CHF 434 million.
Adjusted for the settlement of pension obligations and the introduction of the new accounting standard, IFRS 16, it amounted to CHF 444 million, a slight increase of 2.3% compared to previous year. It is noteworthy that the group has reduced the overall employee benefit liabilities significantly to only CHF 280 million for the whole group. As of June 30, 2019, the order backlog totaled to CHF 2.9 billion, an increase compared to the previous year of 5.8% and 9.3% in local currencies respectively. On a positive note, the margin profile in the order backlog is improving. Last but not least, I would like to mention that the introduction of IFRS 16 leases had no material impact on EBIT level, nor on net profit. It has extended our balance sheet by approximately CHF 400 million.
With regard to our outlook for the remainder of 2019, please turn to slide number 10. Markets may slightly weaken over the remainder of the year, but Schindler expects to achieve continuous growth while delivering on the strategic projects identified to prepare for the future. For the full year 2019, excluding any unforeseeable events, Schindler expects a revenue growth between 4%-6% in local currencies and net profits of between CHF 900 million-CHF 940 million. I'm handing back to Thomas. Thank you very much. I think now it's time for questions and answers.
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 question queue, you may press star and two. Participants are requested to use only handsets when asking a question. Anyone who has a question may press star and one at this time. The first question comes from Daniela Costa from Goldman Sachs. Please go ahead.
Hi. Good morning. Thanks for taking my question. I have actually three questions. First I wanted to ask you regarding how you think market share by region has evolved. I think we see now the four largest elevator companies reporting at a very different trend in orders across them. I wanted some commentary on that, if possible. The second thing I wanted to get some views from you in terms of you maintain the 4%-6% revenue growth guidance, but you also commented on the markets slightly weakening for the remainder of the year. Do you comment on the weakness? Is that something that we should mainly see given the lag of all backlog to sales reflected in 2020 or could impact your view of where you stand on the 4%-6% within the range?
My third point, just wanted to get your latest thoughts in terms of capital allocation. You continue to have quite a lot of cash on the balance sheet. As we get towards end of the year, how you're thinking about remuneration to shareholders versus M&A and internal investments. Those are my three questions. Thank you.
Good morning, Daniela. Thank you very much for the questions. I probably will start with the first two and maybe capital allocation, I will also hand over to Urs. Well, market share by region, we do not comment on the market share we have region by region. But I think all over
The globe, as we had a strong performance in order intakes, I think we have improved our market position, especially also in China. In some of the other markets, we have seen that the market itself has been a little bit more flattish. Some of the markets have been reaching a peak, and I think there we probably stayed quite stable in our position. I think the key story was that we were able to improve our position in China, notably the biggest market in the world. I think with the second question, the guidance of 4%-6%, it is a range we see if we look on our tender activities, which we have at the moment. We do see that there are also some major projects in the pipeline to tender and where we will shoot to get an award.
Overall, we do have some, I would not say concerns, but I see that especially in some markets, maybe growth of the market will not so much continue. Coming back to our strategic priorities, we always have said our absolute first priority is that we want to grow faster than the market, whatever the market is. We believe that this 4%-6% this year are achievable for us, looking into our tender activities, even if the market might be a little bit softening in the second half of the year. Looking ahead into 2020, I just can repeat, whatever the market is, our clear ambition is that we would like to grow faster than the market. I have to admit, it's not that easy to make a proper forecast for 2020 at the moment.
It will depend not only on us and on the construction industry, but there are certain uncertainties, political uncertainties, but also macroeconomic uncertainties. We do not plan at the moment any severe downturn, but if this would be the case, we would be prepared. Even in such an environment, we would like to grow faster than the market is growing. Maybe on point number three, capital allocation, so M&A, dividend policy, I think, Urs, you can give some insight into that.
Thank you. As you very well know, a very robust and healthy balance sheet is key for the Schindler Group as it provides a strong foundation for us to grow in the market fields and to invest into our strategic projects. Also to take opportunities in the market for M&A when they occur. Any buyback or dividend decisions are, of course, subject to board decisions and approvals.
Thank you.
Thank you.
The next question comes from Martin Hüsler with Zürcher Kantonalbank. Please go ahead.
Yes, good morning. Thank you for taking my questions. I have two, actually. I'm looking on page five to your overview on the EMEAs. I was just wondering, you say that in Northern Europe, you see continued solid markets on high level, which is basically the same wording as after Q1. I was just wondering, therefore, this typical area, you see no weakening at all in certain markets, such as Germany, U.K., France. That's the first part of the question. If I look on page nine, where you show the organic growth rates or the growth rate in local currency, I must say, for each region. I look at EMEA again, and it looks like a big growth below 4%.
You were saying that the new installation business, you probably were down a bit year-over-year, which means that existing installations, you have quite a huge growth. I was just wondering that this growth, which might be between 4% to 5% in existing installation, was only organic, or if you also had there some acquisitional effect. Thank you.
Okay. Thank you, Martin, for the questions. I think when we look on Europe North and Europe South, so overall, the European countries, we do have some very strong markets. The strongest market probably is still Germany. I have to say, the construction activities have reached an almost an all-time high. As we have a strong presence in the German markets, we are, of course, benefiting from that. The market is not so much growing anymore. It really has achieved a certain peak. It is solid, it is strong, and we are benefiting of that. Other countries like Switzerland or Austria, so together with Germany, the so-called DACH countries, all the three have been quite similar in their behavior, strong on a high level in the construction activities.
What we should not forget is that these are quite mature markets, the elevators and escalators are quite aged. Modernization opportunities are definitely there in these markets. When you look to other markets which are noteworthy, you have mentioned the U.K. It's quite interesting that, looking on all those Brexit discussions, we do see still some strong project plans coming up. There are still some quite big projects being planned and in the pipeline where they will tender, or they are in the tender stage at the moment. Quite interesting, we don't see yet a real downturn in the construction activities, especially around London, although we have all these Brexit discussions. I also have to say, of course, uncertainty is increasing, and we will see whether all the announced projects at the end also will be executed.
I have to admit it's not so easy to properly forecast. What we can say, the activity in the market is still there. We then look more into the southern part of Europe, I think we have good momentum still in Iberia. We have stable developments in Italy. We had a very strong growth of the market in France last year, and it has maybe a little bit coming back, but it's not really a downturn. It's maybe just a year-on-year adjustment. The market which is, I say the most under pressure and has almost collapsed is Turkey. This has impacted us because we had a very strong track record in Turkey. It has been one of our key strategic markets where we have achieved some remarkable success.
I would like to remember the new Istanbul Airport, which is in operation now, which was one of our biggest orders we ever had in the Schindler Group, and definitely the biggest one ever in Turkey. The operation runs very smoothly. I'm super happy with the performance of our team. The market itself probably almost was now cut by half, and that it is one of the biggest markets in the world. Even this has generated this outlook from us that overall Europe, the southern part of Europe where we put Turkey in, had overall a slight decrease, not only in the market, but also in our sales performance, because we were, of course, impacted a lot by this Turkish development.
When we look on organic growth, I think, first of all, it is true, we have in many European markets, and especially in the northern part, a very strong market position. If the market does not grow really so much anymore in the new equipment business, then of course, if you have a strong position, you have to be careful. You keep your share in the market. Maybe in the one or the other area, you are able to further improve, but you are more depending when the market is stable, you also are more stable. Which then leads to the conclusion, if we have overall a good performance, yes, we had a strong performance also in our service repair and modernization business in the European markets. This is driven not really by acquisitions. It's really organic growth.
As we have mentioned in the past, we are selective in M&A. We are looking where we can do some acquisitions which make sense, where maybe we have not such a big density in a city or in a region. If we have an opportunity, then we try to acquire more service companies which help us to increase density in the market. The growth in our service business was really driven by organic growth. This tells you a little bit the story of our past three years, where we have seen a very strong growth also in our European markets in the new equipment business. Now we are benefiting from the conversion of all those units which have been sold two, three years ago, then they have been installed now. Now we can convert those installed units into our service base.
This goes back to what I said before. For us, a growth in all the markets above the market is very important because it adds long-term value to the company. With this new equipment growth all over the globe, we are able to feed our service portfolio. As you mentioned, now in Europe, you see that very visible, that we have benefited from the sales success in the past years, now transforming into our service portfolio.
Okay. Thank you for the complete answer.
Thank you.
The next question comes from Andre Kuklin from Credit Suisse. Please go ahead.
Good morning. Thanks so much for taking my questions. Could I start with a follow-up on the market outlook comment? That slowing bit was there in April already, and it's there now still, having, as you said, put in some strong performance. I just wanted to check whether you're actually seeing anything in terms of clear, hard indicators that is slowing down or whether that remains common to flag on markets that have been strong and may not sustain at those strong levels.
Well, good morning, Andre. I think we have to be a little bit careful, and we have to distinguish between different markets. I think if I start on the globe on the left, and we look on the Americas, we can say that in the Americas, we see that some indicators are slightly going down. The purchasing index, we also see permissions for multi-family houses have reached a certain peak and have a little bit of softening trend at the moment. On the other side, we still see that there is a lot of infrastructure projects, but also higher or premium commercial projects are in the market. Whereas this low and mid-range market now has a certain softening.
When we go a little bit more south in Mexico, I have to say, there is now a little bit hesitance from the investors, also driven by the government, that some bigger projects are put on hold, and people are looking how the political situation is developing. The rest of Latin America is doing very well, I have to say. Minimum in those markets which are important for us, except for Brazil. Brazil, somehow we had more hope that it will coming up, but we see that it is more stagnating at the moment. I think Europe, I just have covered before, and then we go to more maybe to the east, to Asia Pacific. In Asia Pacific, the picture is really mixed. We have been surprised by China. I have to say China was performing as a market better than what we expected. We had more growth.
My assessment is that we had a slight increase of market, maybe up to mid-single digits was the market development. We were outperforming that market. In China, it's not so easy to forecast, of course. We have, of course, seen that the government has clearly expressed that they don't want to have that the prices are further increasing. They still keep these restrictions on the prices and on the financing. We also have seen that there is still a widening gap between projects started and projects completed. Once either completions have to go up, or we have to expect that the new starts will slightly come down.
The government said in relation to this, let's say, tense relationship with the U.S., that they do not want to boost the construction market because they see that other industries in the long term are more important for them to generate future GDP growth. We are a little bit more conservative for the second half of China. When we look on the rest of Asia, I think India still has a boom after the elections. We have seen that they are really doing very well. We are quite confident that we have a strong position in India, that we will benefit from that. The rest of Asia, Southeast Asia, there the picture is quite mixed. When you look on countries like Indonesia, Malaysia, Vietnam, Myanmar, Thailand, Philippines, this whole Southeast Asian area, we have the impression that the markets went slightly down.
A lot has been driven by political reasons, elections, uncertainties, and we have a very strong position there, and this has slightly negatively impacted us, I have to admit. The last market is Australia, where we also have a very strong position. The market in Australia went slightly down. Especially in the residential area, we have seen that the number of projects has decreased. It's not that we are in a downturn, but Australia had for 20 years, only one direction. It went up, up, up. Now we see that this has come to a halt. That's a little bit our analytics of the different market trends.
Great. Thank you. That really completes the picture. Can I just change just a little bit and shift on to margins? If I take your net income guidance and work backwards with 23% tax, doubling finance net, CHF 50 million on BuildingMinds investment, CHF 25 million-CHF 30 million of restructuring costs, it appears to imply roughly stable year-on-year, second half clean margin, ex restructuring, ex BuildingMinds. Just wanted to check if that competes with you and if not, then what are we missing?
Thank you very much for the question, Andre. Net profit guidance, CHF 900 million-CHF 940 million. In regards of margins.
We clearly see a sequential margin improvement for the second half year versus first half year. Modularity savings will gradually kick in, and we will also see good revenue growth in the second half year. Of course, there remains moving parts towards the end of the year, and it's also a bit depending on the geographical mix, revenue mix, depending on our rollout of large new installation and modernization projects, which may influence margins. From today's perspective, it's a bit ambitious to reach the very same profitability as last year.
For the total year?
For the total year.
For the second half of the year, you are, I think right. It is in the range of the development we have seen last year. As mentioned by Urs, we are expecting a stronger second half of 2019 compared to the first half 2019. You remember what we always said, we said we will have a low Q1, we will have a better Q2, and this positive trend should continue in Q3 and Q4.
Got it. Thank you. Can I just double-check on modularization, you still expect about CHF 50 million of some kind of year-on-year benefit, and whether any of that already materialized in H1?
It is correct. There is no change. Our program is in line with our expectation, and the figure you mentioned is a couple of CHF 10 million we will achieve in 2019. Some of it we already have booked in the first half, maybe one-third, we were able to book already in the first half of 2019. The rest will come as announced in the previous calls, in the second half of the year. This will have an impact on the improved margins of the second half of this year.
Got it. Thank you. Just very lastly, to come back to China, in terms of competitive dynamics there, are you seeing any change? The reason I am asking is I would pick up some maybe indications that pricing is becoming a bit more mixed, but on the other hand, the market has been, as you said, healthier than expected, which usually is conducive to better pricing environments. I wanted to ask you what you are seeing in reality in the market.
Well, the reality, I can especially speak for ourselves. When we look on the jobs we have been involved, I always have to differentiate between the residential markets. In the residential markets or the underlying mass market, we were able to improve our pricing during the whole first half of 2019. We see that also that our backlog margins have been improved also in China, not only in the rest of the world, but also in China. In the areas of infrastructure project or large commercial projects, it's still very price intense, I have to say. We have not seen a softening in the pricing there. Our intention is, again, I have to repeat it once more.
If I have to make a choice between optimizing the margin and optimizing the growth, we have clearly a first priority in every market that we want to grow faster than the market. This we have achieved in the first half of the year, and I'm confident we also will do that in the second half of the year. We have been even able to improve our sales performance in terms of pricing. This is not a given gift looking ahead. It will depend a little bit also on competitive behavior and on the market trend. So far, I'm quite satisfied with the performance we have achieved in the first six months of 2019.
Got it. Thank you very much, Thomas and Urs. Thank you for comparisons.
Thank you, Andre.
The next question comes from Bernd from RTT. Please go ahead.
Yes, good morning, gentlemen. One question for Urs, one question for Thomas, please. One accounting question. What was the depreciation on the right of use assets according to IFRS 16 in the first half year, please? More operational question, what do you expect for the conversion rate in the public transport segment in China? This currently seems to be a really strong growth driver for you. How do you see competition in the service business for this sector developing in China in the coming years? Thank you.
Thank you very much, Bernd, for the two questions. It's good that you already distribute them to Urs and to myself. It makes my job easier. Maybe as I already thought, I start with the conversion rate. As you know, again, as a long-term oriented company, we want to do new equipment business because we want to feed our service portfolio, because we have the strong opinion that in a long-term consideration, feeding our service portfolio, so the installed base where we have a maintenance contract, adds more value to the overall company, and also adds more absolute EBIT to the group in the long run. Conversion rates are very important for us, and I can reconfirm that overall, our conversion rate remains on a very high level. I think it's one we don't have to be shy, which lies above 70%.
If you look on the different businesses, it is in the conversion rate for public transport. I think it gives us opportunities to further increase our install base. Some areas or some cities do have own maintenance teams in metro environmental railway environments. We are usually focusing especially on those jobs, where we have a good chance also to get the service portfolio after it. Why is that possible for us? Because the public area has a very strong desire to have highest safety and highest quality. In our key initiatives, we are putting a lot of emphasis on qualifying and further developing our service technicians. We have different systems in place where we train them continuously to be able to deliver best-class service. This gives us a competitive advantage in public transport jobs.
On top of it, we also can say that our digital products, Schindler Ahead, are very well-perceived by the Chinese government in those public transport areas because it adds more to the safety, but also to the reliability and quality of the equipment. As they are so much focused on having really first-class service, this gives us an additional competitive advantage. Now, on the depreciation rate of Urs, I would hand over to Urs.
Yes. Thank you very much. I'm also referring to slide number 13, which is outlining the IFRS 16 lease impact. With the change of lease contracts previously classified as operating leases, we have increased our assets in the balance sheet to a magnitude of CHF 400 million and are reclassifying cash flows between operating activities to financing activities of CHF 61 million. In regards of EBIT and income statement, the impact on net profit is insignificant.
The additional depreciation charges are also about CHF 61 million, correct?
Yes.
Okay, excellent. Thank you very much.
The next question comes from Martin Flueckiger with Credit Suisse. Please go ahead.
Good morning, gentlemen. Thanks for taking my questions. Martin Flueckiger from Credit Suisse. First one on the improving margins in your order intake and order backlog. Can you talk a little bit about the drivers of that? Is it just economies of scale and pricing? Is it also modularity? What's exactly driving that development? That would be my first question. I will throw one at a time.
Good morning, Martin. The key driver has been pricing. I have to be clear, the key driver has been pricing, because we have discussed a lot about pricing, especially in 2018, where I explained that overall, we have increased our prices. We also announced that to our customers. Besides the general price increase, I also discussed about power pricing or dynamic pricing, where we were evaluating in which areas do we believe we can further improve the prices, maybe above a general price increase. The improvement on the backlog margins is mainly driven by the pricing. You have mentioned as well efficiency, and you have mentioned as well continuous cost reduction with F3 but also negotiation with our suppliers. There, it was more that we were able to mitigate, not always everything, but partially minimum our wage increases.
We had also new installation and especially there in jobs where we have subcontracting, as everywhere we have shortage of labor. Really the increase was quite tremendous and was higher than what we had expected at the beginning of the year. With the efficiency programs and partially S/3 but also other cost reduction programs, we were able to mitigate some of these wage and material cost increases. The overall improvement is mainly driven by the pricing, where the team has done really a good job.
Okay, perfect. Thanks. Just coming back on your China new installation business. I understand it went rather well, both in Q1 and Q2. I was just wondering, when you talk about significant and substantial improvements, firstly, are you referring to orders or sales? What does significant and substantial mean to you?
Well, I think, it is in both areas. Order intake, in terms of order intake, we had really a mid-teen improvement of our order intake. It was not only driven by unit, but it was also in value. In value, it was due to the mix of our projects. As Urs and I have mentioned, we won some major projects, even in the value, it was even higher than in the unit. There it was even high, mid-high teens in the value and maybe mid-teens in the terms of units. A similar picture we have seen also in our operating revenue increase. Also there, China really has turned around. It was maybe a little bit lower, but it still was between roughly mid-teen in terms of value. Both indicators have been extremely positive in China 2019 compared to 2018.
Okay, perfect. Then my final question, and I'll get back in line. For Urs, when you were talking about your EBIT margin guidance, probably not reaching the 2018 level, were you referring to the adjusted or reported EBIT margin?
Yeah, I'm referring to both levels. Also EBIT adjusted, of course. Adjusted without this structuring and BuildingMinds, you see where we are right now, and I would like to re-emphasize, we will clearly see sequential improvements now in H2, because we have outlined good projects. This is clear. We will see whether we really can reach the level of last year, at the end of the year.
Thank you.
The next question comes from Fabian Haecki from UBS. Please go ahead.
Yes. Thank you. Yeah, many questions already answered, but just maybe to follow up here on, you said that prices have further gone up in China, also more efficiency gains to flow into H2. What about pure material cost and wage inflation? Is that something you see any easing into H2, or will this just continuously soar in H1? That's my first question.
Good morning, Fabian. I believe that there will be no easing, especially in the wage area. I have to say, it has not taken us by surprise, but it's definitely the case that the wage inflation has been higher than what we expected, and it is also higher than last year. I don't see any reason with the shortage in labor, that this will disappear in our major markets. I give you one example. When you look, for example, to the U.S., where all your employees are in the unions, you have many, many states where there is not a single person on the bench of the labor unions, not a single person. With this full capacity, there's no additional capacity available in the market.
Let's say the pressure on wages, but also when you have overtime, when you want to get subcontracting, it's almost all over the construction industry that we have a shortage of qualified labor. We see a similar trend also in some of the Northern European markets. When you look on a country like Germany, it is more or less exactly the same. You don't find more people to install. Your first target and ambition has to be to keep them. In order to keep them, you also have to follow the market trend, what is the required salary or wage level of the market of also other industries. You have to follow that to keep the people on board. This is putting a lot of pressure in this year, and I see that this will continue also in the second half of 2019.
As long as the market environment overall is so favorable, I don't see that there will be a softening of this problem. Which is not only our problem, it's a problem in the industry, but even in all the other industries, in the construction market, we are all suffering in the shortage of labor. In terms of material, I think, we have been able to mitigate the pressure on inflation, with our cost reduction programs. What we should not forget, on top of, let's say, the inflation in the market, we are also facing some impacts from the trade war. As all of you have seen, the tariffs from the U.S., for example, towards China, have not often in contradiction, have been further increased, and this will maybe impact our overall results up to 20 basis points in the year 2019. Only the tariffs of the U.S.
This should also not be forgotten.
Okay. Thank you. In China, I think you said, in earlier quarters that it was more a material price pressure and less on wage inflation. Is the wage inflation problem in China still not really a burden or a topic.
Well, I think also there you have to differentiate. In China, the average wage increase is bigger than in the rest of the world. I remember a couple of years ago, it was 10% per year. Now this has substantially come down, and we are maybe talking about overall 4%-5%. There, usually the increase for the lower salaries is higher than for the upper salaries, of the higher salaries. The lower salaries usually are people who are working directly, productive on the job sites. So far, we always have been able, with efficiency measures, to mitigate the wage increases or the salary increases of our people in China with efficiency programs. This is true.
Okay. Thank you. Another question on your strong performance in China and at market share gains, so outgrowing the market. Is it mainly through the win of larger infrastructure orders, or do you think it was achieved relatively broadly through all segments and regions in China?
No, it has been achieved all across the board. I think in all the different customer segments, we were able to improve our sales performance.
Okay. Thank you. That was brief and clear. Well, also on M&A again, you stated that you want to maintain a strong balance sheet to be ready for any opportunities that might occur. You also said that on the services, you would rather go for selective acquisitions in some cities that you've got some weaker spots you want to further gain density. Am I right that it rather calls for smaller to mid-sized acquisitions smoothly to integrate, or do you plan to continue on M&A side like you've done so far in the past years?
Absolutely correct. Spot on. Usually those smaller companies we integrate into our organization, as I said, in order to increase density. If there is, let's say, a mid-size target available somewhere, then of course, we are always carefully investigating into that.
Okay. Thank you very much.
The next question comes from Joel Spungin from Redburn. Please go ahead.
Hello. Thank you for taking my questions. I have two questions on China, please. One is, we know the introduction of the new elevator regulation by the Ministry of Housing and Urban-Rural Development in China at the end of February. All new residential buildings with four floors or above are now required to have an elevator installed. Previously, this requirement only applied to buildings with seven floors or more. As you know, in Chinese policy, the enforcement is up to the local government, so this may take time. For you and the market, have you seen some tailwind from this new regulation in Q2? What do you see as the ongoing impact for the future from this? My second question is on Schindler Ahead. So far in your order pricing, how much impact has Schindler had on the better pricing?
Are we talking about, I don't know, half of the improvement coming from Schindler Ahead or something a bit more significant or less? Thank you.
Thank you, Joel. Two very good questions. Question number one is in fact referring on the type of elevator, we call it add-on. You have an existing building which has no elevator at the moment, and the Chinese government in the past, whenever they had a big program for a residential area, they just took down the old buildings, and then they have constructed very high towers. Now they have moved away a little bit from that, especially in downtown areas, because to a certain degree, they want to keep a little bit of spirit of the city. Of course, as people are becoming older and those buildings are in competition with new buildings, they have to refurbish those buildings. They have launched an initiative with not only for elevators, it is also heating, isolation, electricity, but also including elevators. We call that the add-on.
You have the existing building and you attach usually outside of the building, you attach a steel shaft where you also have an elevator inside, and this improves, let's say, the life quality of the people. This is a very important and also interesting initiative for us in China. It has not yet gained that type of momentum that it has substantially contributed to our growth in China. The growth in China we had was based on, let's say, old business models. This can be a very interesting driver for future growth in the upcoming years because it's also subsidized partially by the Chinese Government, and this should help to convince such condominiums that they should have such add-on elevator.
So far, it takes some time until it is rolled out in the different cities and provinces. Ahead, answering the second question, it has not so much an impact on our pricing in the order intake when they sell a new equipment. We deliver Ahead with the new equipment, but it's more impacting our service contract when we convert this new installed elevator or escalator, and we try to convert it into our service portfolio, into our service contracts. There, we are connecting those elevators and escalators, and then we also add an additional contract. Besides the pure maintenance contract, we add the so-called Ahead contract. What I have mentioned also in Q1 and in the annual press conference, we see that the average price of these conversion contracts has increased.
I would say in those areas where we are able to do that, it may be 10%, sometimes it's a little bit more. It depends a little bit how high the service contract is in a certain country. This takes time, as we have a very large installed base. Of course, these new contracts added to our installed base, they have a better pricing, but it will take a couple of years until we have a substantial increase of the value of all our service contracts. It's a good contributor, and it just confirms that our digitization strategy is right on track and is well-perceived by the customers. We see really additional benefit, as we can guarantee them uptime, we can guarantee them insights. They are always informed about the status of the elevator or escalator.
As I have mentioned in my slide about strategic investments, we now also develop more products for convenience, so interacting with our passengers, because we would like to generate a unique user experience. Financially, it comes with the service portfolio, and it is adding now over time, more and more units of our service portfolio will be connected, and more and more millions of people will be connected. Last point, maybe if you look on our latest publication of our sustainability strategy, we would like in five years that 500 million people every single day are using a connected equipment of Schindler.
Thank you.
The next question comes from Christian Obst from Baader Bank. Please go ahead.
Yes. Thank you very much. First, four questions. One, again, coming to the personnel cost. You talked a lot about that so far. Over the years, we have seen an increase in % of supported revenues coming from 33%, 34% to now in the first half to 39%. Is there some kind, beside all the wage increases and the shortage of labor you talked about, also some kind of a structural increase in personal expenses going forward because of average higher qualification and all these kind of things? This is the first question. The second one is, I like to understand a little bit more the structure and possible risk of the bigger infrastructure and public transport project. You mentioned that you are gaining more market share there, especially in times of a slight softer overall market.
There is a margin also or price competition for these projects. How do you handle these, and how do you try to really avoid that the increase of these projects will have a negative effect on your margin, which might affect in the long term, it has a positive effect on the service business. The third one is, do you see any market impact on the behavior of your clients with respect to skills from the upcoming IPO or sale of TK Elevator or the split of Otis from the mother company? The last one is, any news concerning your cooperation with GE or Huawei? Thank you.
Maybe Urs could answer the first question, our development of personnel cost.
Right. As we have said, personnel costs are potentially growing, I think more than 3%, and this is really driven by wage inflation for our own people, but also for our subcontractors, where we have in several countries, due to the growth in the markets, some automatic sliding of personnel costs. It's also a matter of the ramp-up to prepare for our future growth, not only in the field force but also in our back office services. We have to invest to be prepared to fulfill in an excellent manner our backlog.
Okay.
Maybe to add on that, you also have to consider that some of our strategic costs we have, are also driven by people because we have to build up data scientists, digital nerds, I sometimes call them. This is also one part. When you talk about structure, yes, we are investing into certain structures. We are investing into digitization, into R&D capabilities, and these are usually people and less on the external cost. This adds also a little bit on the pressure on that. I think overall, we don't have structural issue.
Yeah. That's what I mean. First, for a change in a higher qualification, this will increase personal expenses in % of recorded revenue going forward also because we have to invest into these kind of IT people, for instance.
It is true, and it is to a certain degree also a pre-investment we are doing. We don't do that only for fun. We also are expecting that we will generate some return. When we look into Ahead, we always said we are expecting the breakeven point in 2021. We are now doing a lot of pre-investments, and we are expecting with also with the success visible with Ahead that over time, this comes back. Now, PT, the risk, yes, PT is as all large jobs are usually very intensive and competitive in prices. At Schindler, we always have a long-term view. I do not want that we don't do business because it could maybe short-term impact our margin, if we believe that long-term it will add value in terms of absolute return, meaning service portfolio.
I mentioned before, this is for us something we are really focusing mainly on those public transport jobs where we have a high chance also to get the service portfolio afterwards. I think it's the right thing to do, and we don't want to deviate from that.
Now, when we talk about what could be a risk, sometimes the risk is more on the net working capital side because usually those public transport jobs don't have the best payment terms. It's mainly driven by government, and the government is dictating the payments terms. Our possibility to negotiate are very limited because it's part of the tender documentation, and you either take it or you leave it. We cannot so much negotiate that. This has sometimes an impact on the down payment. We don't have the same amount of down payments like maybe in the private sector. There is a little bit of dilution in the net working capital. Question number three, market impact of, let's say, moves of our competitors. First of all, I don't want to comment on the moves of our competitors.
Okay
we are mainly focusing in the same way as in the past on our strategic priorities, independent on the market environment. Our clear ambition and our clear priority number one is to grow faster than the market. I think one advantage we have at Schindler is, now I think this is somehow my conference call 14, and we always tell you exactly the same story. There's no change in our strategy, and there is no change in our ambition. As we have a very long-term view, now having in five years our 150th anniversary, and we just keep the direction. Of course, we are observing, and we are looking whether we have risks or opportunities in cities or in countries. In general, it does not change really our work, and it does not change really our strategy.
Our priority is to grow faster than all the others together. I think so far we have achieved that. Not every quarter is as successful as the others, all in all, I think now since many, many years, this has been proven as the right direction. Maybe the last question, GE and Huawei. First of all, with both companies, we are now working since several years, I think we have a very strong strategic alliance with both companies. The result has been our Ahead strategy. The Ahead strategy can be proven that, or it is proven by the market, by our customers that our partners have done a good work together with us and our Ahead products are very well perceived by the market. Of course, we are observing also, let's say, political dialogues which are happening worldwide.
It does not really change our digitization strategy. We want to connect as many units as possible and where it makes sense. All these discussions are not only discussions which are impacting Schindler, these are discussions impacting all companies in the industry and also outside of the industry. Like others, we always have like a plan B. We always have also second sources. If there are tensions maybe in a market like in the U.S. at the moment, we do have a backup solution. In general, we are happy with the development we have achieved in our digitization strategy.
Okay. Thank you very much.
Thank you.
The next question comes from Daniel Gleim . You may first. Please go ahead.
Yes. Good morning, gentlemen. Thank you very much for taking my questions. Can you hear me well?
Very good.
The first question would be on the Schindler commentary in China. I was just wondering whether you were commenting the growth rates for the entire space for H1 or Q2?
You mean when we said the mid-teens or high teens in terms of operating revenue and in terms of order intake? In fact, in both quarters, we had a very strong development. It was good in both quarters. I think quarter one was slightly stronger than quarter two, but honestly, the differences have been minor. All in all, it's quite a similar picture, Q1 and Q2.
Very clear. Thank you very much. You mentioned that you are conservative on the second half in China. When we look back at your comment in the last call, is it still that you think that overall 2019 will be stable at best, or are you now slightly more optimistic given that you have been surprised positively in H1?
I think it's fair to say that our assessment stable at best, we have to revise for the total year. We should say it is stable or slightly up at best. That would be my new assessment, how it has improved for the total year. I do not believe that the second half of the year will be negative so that the overall year then would be negative. This I don't believe. I believe what we have in the pocket from the first half year, we have in the pocket and the second half is maybe more flattish. As aggregation, it should be probably even slightly up for the total year.
Very clear. Your backlog margin commentary that is improving, for how many quarters have you observed this now?
Well, this is now actually really happening this year, where we are improving our margins in China and also rest of the world, and was good as well in Q2 now, yes.
Okay. It was in Q1 and in Q2, and has the margin expanded or has it been stable over the first quarter? Just to get a little bit of granularity where you see the trend going. Is this going to improve even further or is it more stable-ish?
I would say it's more stable-ish. However, we can say that probably in Q2 it has been even slightly improving compared to Q1. It's not so much that the new orders are much, much better, or to be expected also much, much better than in second half than in first half. It's also that the execution of older jobs where we had a huge size pressure. They are now replaced in our old backlog a little bit while the jobs are executed and will go out of our backlog and will be replaced with some better orders we just have taken in or we will take in. It's also a little bit a timing issue that the ones we sold maybe two or three years ago, they are going out of the backlog.
The ones we have sold last year and this year, they are now in the backlog. I do not expect further, let's say, really substantial pricing improvements. It's more a calculatory exercise that worse units are going out and the good units we now sell are coming in. That's more the impact on the backlog.
The better margins that are coming now in, they will be impacting 2020. Also, this is not something that you have baked into the second half. Just to understand how we are.
It depends a little bit on the cycle time. Very important markets like the U.S. and in China, we see that cycle time has been expanded. This is definitely something we have observed overall. Secondly, also, as we have a big impact on major projects that have even a longer cycle time. This can also easily go into 2021 and 2022, I have to say. Not everything is coming in 2020. It is really a long-term journey we will see.
You wouldn't mind sharing how much the improvement is, I assume? You cannot give us a color on what the EBIT statement could be from this improvement?
No, this we would not like to share. It's too early to say.
Okay. Maybe one last question. On the Huawei cooperation, have you already installed hardware from Huawei or is this not happening? That would be the first question on that, yeah.
Well, every single CUBE we have installed with Schindler Ahead is a Huawei CUBE. Yes, we have installed many, many CUBEs all over the world. We had, as I mentioned before, we also had established a second source where we have tested in some of the markets to be prepared in the case of, which now looks, let's say, mainly in the U.S., this in the case of is happening, and we are starting to install our second-source CUBE.
Could you remind us the price of the CUBE very roughly?
It really depends on the market because what we usually do is, in many cases, you don't buy it. You make a service contract with us.What I can say is, it's more a question of cost, but the cost of the quality, we would not like to share because this is too much confidential.
All right. Thank you very much.
Thank you, Daniela.
The next question comes from Debasis Chand, Société Générale. Please go ahead.
Yeah, man. Thanks for taking my question. I have a follow-up question on margins. I just wanted to confirm your comment on the second half margins, which you expect to be flattish. Given the raw materials will be less of an headwind in the second half and also the positive impact which is coming from the modernization program, I would have expected slightly better performance in the second half. Just want to understand, is it primarily due to the higher wages you talked about, that they're being incrementally worse versus what you were expecting at the beginning of the year? Maybe due to tariffs? Do you see any other factors which are impacting the margins in the second half? That's my first question.
Thank you very much. Very good topic. Maybe before Urs goes more into detail, just want to clarify. You have to look half year by half year. Second half year, we will have an improved margin compared to first half year. It is very clear, our plan. As we also have mentioned that at the end of last year, it always has been our plan, slow start, improvement Q2, and even a better second half of the year. Within 2019, you can expect a better second half than we had as a first half. Now, the second half comparison, you can do total year 2018 compared to total year 2019.
As we have, by the middle of the year, a negative, let's say, margin development, first half 2018 to first half 2019, it will be very ambitious to catch up in the second half of the year or to improve so much that the total year 2019 is as good like the total year 2018. I would expect that our margins will be under pressure for the total year compared to 2018. A little bit, it's also a little bit luck what we will need. Where we can execute what kind of jobs, it is very ambitious to achieve the same margin for the total year. Definitely second half will be better than first half.
I may add, in this comparison prior year to full year this year, it's clear that the trend of wage inflation is continuing. As we have clarified, it is higher than expected, and this is going forward. On the material inflation, it is now at similar levels, particularly the tariffs we need to consider, they will have an impact now, even bigger in the second half year. We will increase our cost for strategic initiatives as planned, and always communicated, particularly on our Ahead platform and digital twin. These are the main items where we have to see that we can find compensating measures coming from efficiency in the fields, but also in our back offices and of course, pricing, as Thomas has mentioned clearly before.
Thank you. My last question is on India. You mentioned good development. Could you also break it more where you are seeing the growth? Is it more on the commercial side, or you're seeing the residential market? Given that India has now been post-election environment, where you are seeing the growth coming in the Indian market?
I think all the segments are in fact positive, but there are definitely two segments which have the strongest growth potential. The first one is the residential area, because urbanization is a strong driver of our industry in India. I really have to say, some measurements we do, how many elevators are installed, how many people are moving into cities, I think urbanization is continuing in India. It's still on a very low level compared to other countries. The residential business will definitely further grow. The second, I would say strong pillar into growth is infrastructure, because there are a lot of plans to further invest into the railway system and into metro lines. These fast-growing cities, they have to do a lot of infrastructure, otherwise cities like Mumbai or Delhi are just completely collapsing. You cannot do that without heavy investment into infrastructure projects.
What we see is that a lot of, for example, in the railway system, a lot of the stations which are existing today, they don't have elevators or escalators. They now are modernizing those railway stations and bring them up to a higher level of performance that they can move more people, and not only they have to take the staircases. Residential and infrastructure, I think, are the two biggest drivers in India, but also the other segments like commercial, they are growing, but not as fast like the other two.
Thank you. Thanks for the answers.
Thank you.
The next question comes from Remo Rothenbühler from Zürcher Kantonalbank. Please go ahead.
Yes, thank you. Don't want to keep you much longer, just this growth in China, which was all across the board. Would you still attribute that to your big time move into tier 2 and tier 3 cities a few years ago? Is there still kind of a base effect helping there or not that much anymore?
Well, it helps. Of course, it helps. As you know, we have at the moment consolidated, we have two entities. One is, of course, the Schindler entity, then we have a joint venture with Jardine Schindler. Schindler predominantly being very active in tier 1 and tier 2 in the past. Then we expanded, as we have mentioned that in the past, into tier 3 cities. Then we have Jardine Schindler, which is more dominant in tier 3 and tier 4 cities. We have seen in the last one, two years, that the government has put also a lot of stimulus that those tier 3 and tier 4 cities are further developing. With our geographical expansions we have done in the last couple of years, yes, we have benefited from that. The trend is that definitely also tier 2 cities are still further growing.
Historically a good domain for us and all the different cities in fact have helped us in the overall growth. We should not forget, a key driver for our growth in China is also the key accounts. The big developers, it has been a critical key strategic initiative of us. A couple of years ago, we had not a single frame contact with big developers. Now we are very well represented in their accounts. We are following with our big developers into the cities where they have business, and the key accounts, in fact, have contributed a lot to our overall growth in the last couple of years.
Great, thank you. The strong growth in service and modernization also in Asia Pacific, as you mentioned, and I presume also in China, would you also attribute that to your strategy to have much more direct sales than some of your competitors, leading to a higher conversion rate? Is that also a result of that?
Yes, definitely. Coming back to what I mentioned before, we are a long-term oriented company. Our key ambition is to grow faster than the market in all the different businesses. Of course, also in our service business. It's right, it's easier to convert a new equipment if you have done the new equipment contract directly with the customer. If you have a so-called distributor model, you are not the one who has the direct link to the customer. You ship a box to a distributor who then installs and makes the final contract with the customer. It's much more difficult to get a service contract in such a business model.
Yes, we are limiting the share of distributor business in China, where usually we say we don't want to have more than maybe a quarter of our business like that in maybe in cities which are a little bit more away and it makes not so much sense to establish an own service, we call it depot at the beginning. Yes, I think our new equipment business model is supporting our very strong conversion in China.
Great. Last question. These negative impacts we heard, could you break them down actually on how much basis points you lost on material costs, wage inflation, Forex, and the strategic investments on your EBIT margin, approximately?
Thank you very much for the question. You are now referring to half year closing versus last year, where we have a margin deterioration as you see of 50 basis points on EBIT adjusted. Well, the material costs and tariffs have approximately 30-40 basis points impact. Overall material inflation was a bit less, fueled thereby the tariffs. Also wage inflation has a clear impact of up to actually 100 basis points. This of course is then offset by pricing. Pricing measures in service and NI, which net impact of wage inflation and price increases if we may say so are then 40 basis points negative. Strategic costs, we always mentioned that we are investing in digital twin and the Ahead platform. They have probably an impact of 20 basis points. These three items together impact our results by 100 basis points.
The rest, of course, are measures, countermeasures on efficiency. The Group is working very hard on it, field and service.
Also negotiation savings on the supplier front, which helped us to improve our margins again.
That's great.
As we mentioned, we expect sequential improvements now going forward as modularity savings will be clearly higher than in the past, going forward, to improve our results.
Great. Thanks for this granularity. I'm out now. Thank you.
Thank you.
The next is a follow-up question from Andre Kukhnin with Credit Suisse. Please go ahead.
Hello, thanks very much for taking time for the follow-up. Just two quick ones. On the margin, back to my first question, your opening commentary when you talked about ambitious to be flat. Am I right to understand that this refers the full year? Can I double-check that first question, that the math from your guidance up, and taking into account what you already delivered in H1, suggests that your second half year-on-year underlying profit margin, excluding BuildingMinds and restructuring, is looking around flat. Does that math make sense?
Question number 1, yes, we were referring ambitious for the total year. This is true on number 1. On number 2, I think second half, as I mentioned before, yes, we will have a better margin than in the first half of the year. I think your analysis is correct.
Great. Thank you.
Roughly flat, Andre. Of course, there are really moving parts ahead of us. I said it also during the conversation. It really depends on the rollout of projects. It depends on the geographical mix of revenue generation. Therefore, it's really a bandwidth we are moving here towards the end of the year.
That's perfectly clear. Thank you. Just on, in that same vein, if we fast forward to 2020, I know many things can change, we're obviously not kind of inducing to forecast or anything, but just in the current environment, assuming no shocks to the system, similar kind of raw materials environment, wage, inflation, et cetera, what you see in your backlog, do you think you can resume that margin expansion again in 2020?
Well, I think, it's a little bit early already to give an answer for 2020, but definitely our ambition is that we want to grow faster than the market, and in the short term and in the long term, these are absolute highest priority. For us, growth is very important. Of course, I understand the margin is also important, but for me it is more important that we say, okay, we want to achieve a certain margin. If I can grow even faster than how I could improve the margin, then I probably go for the growth because this will generate, in the long term, much more net present value. I mentioned many times, I never have seen that a dividend is paid with a percentage. It's usually paid with cash. We have to generate more cash and more absolute return.
Even if a margin would be diluted by a couple of basis points, but we can add more growth momentum, then I would go for more growth momentum.
Very clear. Thank you very much to both of you for taking some time.
Thank you.
The next question comes from Martin Flueckiger with Credit Suisse. It's a follow-up. Please go ahead.
Gentlemen, thanks for taking my follow-up questions. Just two. Firstly, on raw material prices, I was curious, based on what you're currently seeing in procurement as regards raw material prices, assuming those would be stable, would there still be a headwind from raw material prices next year, or would you actually see a tailwind? That's my first question.
Good question. I would be happy to answer that because I don't know yet how the raw material prices will develop. We will see what happens when we come towards September, October, because usually then, all the mining factories in China are shut down for environmental reasons. That usually puts, again, pressure on the raw material prices. We have seen that now in the last couple of years, that this really can generate quite a big swing. I do not dare to forecast at the moment how raw material prices really will develop. Of course, if raw material prices would go down with a certain time lag, because we are usually hedging or securing prices for six to nine months, then this could have a positive impact on our overall margin.
On the other side, I mentioned that the last time, our team was extremely stubborn in the last couple of quarters to accept any of the price increases requested by the suppliers. I mentioned that the last time. They always come back. Every quarter, they come back and say, "Listen, you have not given us any increase last time. Now we need it really." I think there still will be some pressure, but of course it will help if raw materials are stabilizing or getting maybe a little bit softer. Honestly, at the moment, I do not really dare to forecast the development.
Okay, thanks. Then final one on, I realize with regards to EMEA, you were talking about a zero acquisition impact, but if I remember correctly, at the beginning of the year, you guided for roughly 1 percentage point impact on local currency sales growth for the full year or going forward, in fact, longer term. Can we just have some kind of clarity, please, how much acquisition impact for the group and in Americas and Asia-Pacific we saw in Q2 or in H1?
Of course. It is true. We said in the long term, we are shooting for that maybe we can add, we can maintain every year up to one percentage point. At the moment, I would say in the first half of the year, it was negligible in all the different areas. Asia-Pacific, Americas, maybe there was a little bit of impact in Europe, but honestly, this was really a minor one.
Perfect. Thanks.
Thank you.
The next question comes from Rizk Maidi with RBC Capital Markets. Please go ahead.
Hi. Just one detail housekeeping type question left from me. On the interest charges, there are on the financing charges, there are a few moving parts in the year on your movement with the tax refund and then IFRS 16, and then also you mentioned some hedging losses. What are you expecting for the full year? I guess you have some idea of where the hedging might come out based on current rates and the levels you hedged at. What's the number you can build into the full year guidance?
Thank you very much for the question. I think I will give that for the details for Urs. Of course, in general, I can say that in turbulent times, the Swiss franc is always strengthening compared to the other currencies, and this has heavily impacted our half year results. At the moment, I do not see that there is a weakening of the Swiss franc at the moment. This is probably quite unreasonable to think about that. We will also have some negative impact in the second half of the year.
Yes. Based on current assessments, we have built in that the situation will continue, and we will see a very similar impact in the second half year as we have in the first half year. CHF 32 million negative impact in financing and investing activities for first half year. You may have to double this impact for full year.
That helps. Thank you.
The last question comes from the line of Andreas Meyer with Finanz und Wirtschaft. Please go ahead.
Yes, hello. Thank you for taking my question. I have to mention now the name of ThyssenKrupp. The spin-off seems now on the way. There is possible also a sale of the business that could change probably the structure of the whole market. What is your stance on this development? How do you involve in this development? More clear, could you buy ThyssenKrupp or get in any form of cooperation with them? Yeah, what's your stance on that? Thanks.
That's the CHF 20 billion question at the end of the call. First of all, I don't want to comment really on what our competitors are doing. It is clear, of course, that all of us, we are observing the dynamics within the market, not only what is happening in the German part, also what is happening in the U.S. part. Of course, we are observing that with high interest. It is clear. On the other side, I think what we have to say is that our industry in general is one of the most consolidated industries in the world. In the past, we always said automotive, for example, is quite consolidated, but the elevator industry is one of the really most consolidated ones. Any strategic move between, let's say, big players would immediately generate a lot of questions about antitrust.
I think this would generate a lot of huge hurdles for any attempt, if two of the big ones would like to compose with each other. I believe that should not be underestimated, incredibly difficult to get approvals and also how you want to execute that. That's one part. The second part is, when you look on what maybe what you or others, financial analysts, the press has stated, investment bankers, this also would come to a very high price, and we have seen that prices can be something like EUR 18 billion. Really very, very, very high. I think we also, at Schindler, we usually do not comment on what our intention is and what we plan to do for ourselves. We only report when we have generated facts.
I think really you have to keep in mind from an industrial or from economical point of view, the topic of antitrust should not be underestimated and is definitely a big hurdle for any attempt. That's from my side. Good. Ladies and gentlemen, thank you very much for attending this conference call. I would like to close now, and I'm looking forward to our next event, our third quarter results conference call, which is on October 24th in 2019, of course. I would like to thank you for the participation and say goodbye.
Ladies and gentlemen, the conference is now over. Thanks for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.