Ladies and gentlemen, welcome to the Schindler Conference Call on Half Year Results twenty nineteen. I am Alessandro, your host call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. The conference must now be recorded for publication or broadcast.
At this time, I would like to just hand over to Thomas Wertelli, Chief Executive Officer. Please go ahead, sir.
Good morning, ladies and gentlemen, and 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 Scheidek, the group's CFO, who will take us through the financial details. Before we dive into the results of the 1st 6 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 Growth, centers around 6 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 4 years. And 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 cities areas.
Our new campus in Epikoden 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 and the Americas and also in Asia.
Besides that, Shiver Australia, for example, is running 2 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, Igniting Minds, Schindler's 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 participants' 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 redefine 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 2, which summarizes the highlights of the 1st semester of 2019.
In an overall highly competitive market environment, Schindler succeeded in maintaining growth momentum during the first half of twenty nineteen. At the same time, political and macroeconomic uncertainties remained imminent in many geographies and countries. In a nutshell, growth and strategic investments characterized the 1st 6 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 percent 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 CHF596 1,000,000, a smallish decrease of 0.7 percent in local currencies, and the EBIT margin came in at 11.0%.
Adjusted for restructuring costs and expenses for building mines, it stood at 11.3%. It is encouraging to see that sequentially, the EBIT margin is increasing compared to the Q1 of this year. Net profit stood at €436,000,000 and cash flow from operating activities reached €444,000,000 This is the adjusted number before one off impact and was broadly in line with the previous year. I'll turn to Slide number 3 and the recent developments in Asia Pacific. Overall, a positive market development in the region continued.
The Chinese new installation market was slightly up in the 1st 6 months, a development better than expected at the beginning of the year. And 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 and 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 4. The momentum in the U. S. Has leveled off and 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, but with a persistent challenging environment in Brazil. We achieved we did well. Our North American operations continued with a 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 costs, 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'll continue with the EMEA region on Slide number 5. 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 extraordinary strong previous year.
The existing installation business continues to grow. The lack of qualified resources becomes also particularly in update on the development of our strategic projects on Slide number 6. 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 Korg as well as the digitization of business processes and last but not least, moving mines. 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, hoist high materials and controller components, we have 3 groups of modular components introduced by now. Schindler Ahead launched 2 new products for more convenience during Elevator journeys at the ad screen and the smart mirror product. Connectivity and global rollout are progressing according to plan.
It's worthwhile mentioning that timberhead solutions feature top notch cybersecurity requirements. And last but not least, BuildingMinds. BuildingMinds set up the core team. And the collaboration with MainFirstoft is established and first customer solutions are being developed. So overall, I would say good progress in the strategic initiatives and also progress in our operational performance.
And 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 to 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. As grown in Swiss franc as last March. I start with the key figures on the Q2 of 2019 on Slide 7. In the Q2 of 2019, order intake rose by 2.5 percent to CHF 3,100,000,000, corresponding to a growth of 5.1 percent in local currencies. This robust growth should be reviewed considering the high comparable base in the prior year.
The Q2 2018 was our best quarter by then. Order intake includes all product lines, new installations, the 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 percent to CHF2.8 billion in the Q2 of 2019. Considering the high prior year baseline and negative foreign exchange translation effects of CHF 73,000,000, particularly due to the strong Swiss franc against the euro, the Chinese renminbi and the Brazilian reais. This growth rate was quite remarkable. In local currencies, revenue were up by 5.0%, reflecting growth in both new installation and existing installation business.
Operating profit was CHF 322,000,000 or as expected 3% less than in the Q2 of 2018, equivalent to a decline of 0.3% in local currencies. Foreign exchange translation effect had a negative impact of CHF9 1,000,000. EBIT adjusted amounted to CHF 334,000,000. This is EBIT before restructuring costs of CHF 7,000,000 and expenses for building mines of CHF 5,000,000. 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 Q1 of 2019. In the Q2 of 2019, the net profits amounted to CHF 239,000,000 excluding the tax refund of CHF55 1,000,000 recorded in the Q2 of 2018, net profit was 5.5% behind the previous year, mainly due to the aggregate of our overall operating results 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 2nd quarter reached EUR 85,000,000. With that, I'm moving on to Slide number 8 and comment on the performance of the 6 months.
In the first half of twenty nineteen, order intake increased by 3.8 percent to CHF 6,100,000,000 corresponding to a growth rate of 5.8 percent 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, Schindler 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 percent to CHF5.4 billion, equivalent to a growth rate of 5.4 percent in local currencies. Negative foreign exchange translation effects of and 8,000,000 were accounted. I can take a quick look on Slide number 9 for an overview on revenue growth by region in local currencies. The Asia Pacific region generated the strongest decrease, followed by Americas and EMEA.
After an extraordinary first half of twenty eighteen, 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 8. Operating profit totaled to CHF596 1,000,000 in the first half of twenty nineteen or 2.8% less than in the previous year. On local currencies, the decline was 0.7%.
As expected, price adjustments, economiescale 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 €11,000,000 and expenses for building mines of €9,000,000, The EBIT adjusted increased in local currencies by 1.1 percent to CHF616,000,000, equivalent to a margin of 11.3% compared to 11.8% in the previous year. Net profit totaled to CHF436,000,000 in the first half of twenty nineteen compared to CHF516,000,000 in the previous year, which included a onetime tax refund of CHF 55,000,000 that was recognized in the Q2 of 2018. Excluding this onetime 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 results attributable to currency losses on financial hedges.
Cash flow from operating activities totaled CHF 348,000,000. Rest half of 2018, CHF434,000,000. Adjusted for the settlement of pension obligations and the introduction of the new accounting standard IFRS 16, it amounted to CHF444 1,000,000, a slight increase of 2.3% compared to previous year. It is noteworthy as the group has reduced the overall employee benefit liabilities significantly to only CHF 280,000,000 for the whole group. As of June 30, 2019, the order backlog totaled CHF2.9 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 audit backlog is improving. Last but not least, I would like to mention that the introduction of IFRS 16 leases have no material impact on EBIT level nor on net profit. It has extended our balance sheet by approximately CHF400 1,000,000. 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.
Pacino 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 revenue growth between 4% to 6% in local currencies and net profits of between CHF900,000,000 to CHF940,000,000. With this, 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. 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 sort of market share by region has evolved. I think we've seen now sort of the 4 largest elevator companies reporting at a very, very different trends in orders across them.
So I wanted to sort of go commentary on that if possible. And then the sequencing, I wanted to sort of get some views from you in terms of you maintain the 4% to 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 even the live off or backlog to sales reflected in 2020? Or what could impact your view of where you stand at the 4% to 6% within the range?
And then my third point, just wanted to get your latest thoughts in terms of capital allocation. And 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 and A and internal investments? Those are my three questions.
Daniela, thank you very much for the questions. I probably will start with the first two ones 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 intake, I think we have improved our market position, especially also in China.
In some of the other markets, we have seen that 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. But 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 4.4% to 6%, this 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. But coming back to our strategic priorities, we always have said, our we want to grow faster than the market, whatever the market is. So we believe that this 46% 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 addition is that we would like to grow faster than the market.
I do 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. And even in such an environment, we would like to grow faster than the market is growing.
Maybe on point number 3, capital allocation. So allocation. So M and 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 field and to invest into our strategic projects and also to take opportunities in the market for M and A when they occur.
Any buyback or dividend decisions are, of course, subject to Board's efficiency
and accruals.
Your next question comes from Martin Husner with Zugrzej Kompanoibank. Please go ahead.
Yes. Good morning. Thank you for taking my questions. I have 2 actually. I'm looking on Page 5 to your overview on the EMEA.
And I was just wondering, you say that in Northern Europe, you see continued solid markets on high level, which is basically the same volume as after Q1. I was just wondering where for this typical area we saw we see no weakening at all in Turkey markets, such as Germany, UK, France? That's the first part of the question. And then if I look on Page 9, where you show the organic growth rates or the growth rates in local currency, I must say, for each region. And I look at EMEA again, it looks like a bit growth below 4%.
You were saying that the new insulation business, you probably were down a bit year on year, which means that existing installations, you have quite a huge growth. And I was just wondering, but if this growth, which might be between 4% to 5% in existing installation, but only organic or if you also have there some acquisitional effect?
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. And I have to say, the construction activities have reached almost an all time high.
And as we have a strong presence in our 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. So it is solid. It is strong, and we are benefiting of that.
Other countries like Switzerland or Austria, so together with Germany, these are so called DACH countries. All the 3 have been quite similar in their behavior, strong on a high level in the construction activities. But you should not forget this that these are quite mature markets. So the elevators and escalators are quite aged. So more mitigation opportunities are definitely there in these markets.
When you look to other markets, which are, let's say, noteworthy, you have mentioned the U. K. It's quite interesting that I mean, looking on all those Brexit discussions, we do see still some strong project plans coming up. There's still some big projects being planned and in the pipeline where they do tendered or they are in a 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 that all the announced projects at the end also will be executed. It's I have to admit it's not so easy to properly forecast. But what we can say, the activity in the market is still there. If you then look more into the southern part of Europe, I think we have good momentum still in Iberia. We have, let's say, stable developments in Italy.
And we had a very, 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'd say, the most under pressure and has almost collapsed is Turkey. And this has impacted us because we have 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. And the operation runs very, very smoothly. I'm super happy with the performance of our team. But the market itself probably almost was now cut by half. And that 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. Now when we look on organic growth, I think it is first of all, it is true. We have in many, many European markets and especially in the northern part, a very strong market position. So 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, let's say, 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. And this is driven not really by acquisitions. It's really organic growth. As we have mentioned in the past, we are selective in M and A. We are looking where we can do some acquisitions, which make sense.
Then maybe we have not such a big in a city or in a region. And if we have an opportunity, then we try to acquire more service companies, which help us to increase density in the market. But the growth in our service business was really driven by organic growth. And this tells you a little bit the story of our past 3 years where we have seen a very, very strong growth also in our European markets in the new equipment business. And now we are benefiting from the conversion of all those units which have been sold 2, 3 years ago, then they have been installed now.
And now we can convert those installed units into our service base. And this goes back to what I said before. For us, the growth in all the markets above the market is very, very important because it adds long term value to the company. Because with this new equipment growth in all over the globe, we are able to feed our service portfolio. And as we mentioned, now in Europe, you see that very visible that it has that we have benefited from the sales success in the past years now transforming into our service portfolio.
Okay. Thank you for the detailed answer. Thank you.
The next question comes from Andre Kukhnin, from Credit Suisse.
Can I just ask one follow-up on the and Mark Alford comment? Obviously, that slowing bid was there in April already, and it's they're 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 just a comment to flag end markets that have been strong and may not sustain at those strong levels?
Well, I think good morning, Andre. I think we have to be a little bit careful and we have to distinguish between digital markets. I think when we if I start on the growth 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 multifamily houses have reached a certain peak and have a little bit the softening trend at the moment. On the other side, we still see that there is a lot of infrastructure projects, but also or premium commercial projects are in the market, whereas this low and mid range market now has a certain softening.
Then 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, We move in those markets here, which are important for us, except for Brazil. Brazil, somehow we have more hopes 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 digit or was the market development and we were outperforming that market. Now in China, it's not so easy to forecast, of course.
But 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. And we also have seen that there is still a widening gap between projects started and projects completed. So once either completions have to go up or then we have to expect that the new starts will slightly come down. Also, the government said in relation to this, let's say, hence 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. So 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, let's say, the elections. We have seen that they are really doing very well.
And we are quite confident that we have a strong position in India that we will benefit from that. Then the rest of Asia, Southeast Asia, there the picture is quite mixed. And you look on countries like Indonesia, Malaysia, Vietnam, Myanmar, Thailand, Philippines, so this whole Southeast Asian area, we had 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. And then the last market is Australia where we also have a very strong position.
The market in Australia went slightly down. So especially in the residential area, we have seen that the number of drone checked has decreased. It's not that we are in a downturn, but Australia has for 50 years, it's only one direction, it's like, and now we see that this has come to a halt. So that's a little bit our analytics of the different market trends.
Great. Thanks for that. Really complete picture. Can I just change a little bit and shift on to margins? If I take your net income guidance and kind of work backwards upwards with 23% tax, doubling finance net, €50,000,000 on floating mines investments, €25,000,000 €50,000,000 of restructuring costs.
It appeared to imply kind of roughly stable year on year second half clean margin, ex restructuring, ex building lines. Just wanted to check if that competes with you. And if not, then what we're missing?
Thank you very much for the question, Andre. So net profit guidance €900,000,000 to €940,000,000 in regard to margins. We clearly see a sequential margin improvement for the second half year versus first half year. Multilality savings will gradually click in and we will also see good revenue growth in the second half years. Of course, there remains moving parts towards the end of the year.
And it's also depending on the geographical mix, revenue mix, depending on our rollout of large installation and modernization projects, which may influence margins. From a today's perspective, it's a bit ambitious to reach the very same profitability as last 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.
So as mentioned by Juss, we are expecting a slowdown in the second half of twenty nineteen compared to the first half twenty nineteen. And 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. And can I just double check on motorization? Do you still expect about €50,000,000 of 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 €10,000,000 we will achieve in 2019. Some of it, we already have booked in the first half, maybe onethree.
We were able to book already in the first half of 2019, and the rest will come as announced in the previous calls in the second half of the year. And this will have an impact on the improved margins for the second half of this year.
Got it. And just very lastly, to come back to China, in terms of competitive dynamics there, are you seeing any change? What we're asking is that we've picked 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 produces a
bit of price environment. So just wanted to ask you what you're 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 market. In the residential market, so the underlying mass market, we were able to improve our pricing during the whole first half of twenty nineteen. And 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 the 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. And we have been even able to improve our sales performance in terms of pricing.
But this is not a given lift looking ahead. It will depend a little bit also on competitor behavior and on the market trend. So far, I'm quite satisfied with the performance we have achieved in the 1st 6 months of 2019.
Got it. Thank you very much, Thomas. And first, thank you for the conference.
Thank you, Andre.
Next question comes from Beren Saumel, please go ahead.
Yes. Good morning, gentlemen. One question for Urs, one question for Thomas, please. First one accounting question. What was the depreciation on the
right of used assets according to IFRS 16 in
the first half year, please? And then more operational question.
What do
you expect for the conversion rate in the public transport segment in China? Just how do you think it will be a really strong growth driver for you? But 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, Dan, for the two questions. It's good that you already distributed to Us and to myself. Sense here. So maybe as I already talked, I started 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 feeding our service portfolio to 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.
So 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 1, we don't have to be shy, which lies above 70%. Now if you look on the different weaknesses, it is in the conversion rate for public transport. I think it gives us opportunities to further increase our installed base. Some areas or some cities do have own maintenance teams in metro environment or railway environments.
We are usually focusing especially on those jobs. We have a good chance also to get the service portfolio afterwards. And why is that possible for us? Because the public area has a very, very strong desire to have highest safety and highest quality. And 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. And this gives us a competitive advantage in public transport jobs. On top of it, we also can say that our digital products, Xindra Head, 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. And as they are so much focused on having really 1st class service, it gives us an additional competitive advantage. Now on the depreciation right of use, 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 the lease contracts previously classified as operating leases. We have increased our assets in the balance sheet with a magnitude of €400,000,000 and are reclassifying cash flows between operating activities to financing duties of €61,000,000 In regards of EBIT and income statement, the impact on net profit is insignificant.
So the additional depreciation charges are also about €61,000,000 correct? Yes. Okay, excellent. Thank you very much.
The next question comes from Martin Flutiger with Kepler Cheuvreux. Please go ahead.
Yes, good morning, thanks for taking my questions. Martin Fluetiger from Kepler Cheuvreux. First one on the improving margins and 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 demand? That will be my first question. I'll tell 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 in the 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. And 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.
So the improvement on the backlog margins is mainly driven by the pricing. Now you have mentioned as well efficiency and you have mentioned as well with X3, but also negotiation with our suppliers. There it was more that we were able to mitigate not always everything, but partially minimum. Our rate 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.
And with the efficiency programs and the F3, partially F3 and production of the cost reduction programs, we were able to mitigate some of these wage and material cost increases. But the overall improvement is mainly driven by the pricing, where the team has done really a good job.
Okay, perfect. And then just going back on your China new installation business, I understand it went rather well both in Q1 and Q2. But I was just wondering, when you talk about significant and substantial improvements, firstly, you're referring to orders or sales? And what does significant and substantial mean to you?
Well, I think it is in both areas. So order intake, we had in terms of order intake, we had really a mid theme improvement of our order intake. And it was not only driven by unit, but it was also in value. In value, it was due to the mix of our project. As Urs and I have mentioned, we won some major projects.
Even in the value, it was even higher than in the unit. So there it was even high, mid teens in the value and maybe mid teens in the terms of units. And 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 mid roughly mid teens in terms of value.
So those indicators have been extremely positive in China 2019 compared to 2018.
Okay. Perfect. And then my final question and I'll get back in line. So Urs, when you were talking about your EBIT margin guidance probably not reaching the 2018 level, you were were you referring to the adjusted or reported margin?
Yes. I'm referring to both levels. But also EBIT adjustment, of course, is already adjusted without this structuring and building mines. You see where we are right now. And I would like to reemphasize, we will clearly see sequential improvement now in H2 because we have outlined good projects.
This is clear. But we will see whether we really can reach the level of last year, at the end of the year.
The next question comes from Svein Haecke from UBS. Please go ahead.
Yes, thank you. Yes, many questions already answered, but maybe to follow-up here on you said that prices have sort of 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 an easing into H2? Or will this just kind of continue to restart in H1?
That's my first question.
I believe that there will be no easing, especially in the 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. And I don't see any reason with the shortage in labor that this will disappear in our markets. I'll give you one example.
When you look, for example, to the U. S, where all new 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. So with this full capacity, there is no additional capacity available in the market. And so the, let's say, the pressure on wages, but also when you have overtime, when you want to look at subcontracting, it's almost all over the construction industry that we have a shortage of qualified labor. And you 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. So your first target and mission has to be to keep them. And in order to keep them, you also have to follow the market trend, what is the required salary or which level of the market or also other interest fees, but we 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 twenty nineteen.
And 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. But 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. So as all of you have seen, the tariffs from the U.
S. For example, towards China have not often in contradiction. It has 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. So this should also not be forgotten.
Okay. And then in China, I think you said in earlier quarters that it's more it was more a material pressure less on wage inflation. Is that kind of the wage inflation topic in China as such 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% to 5%. But then usually the increase for the lower salaries is higher than for the office salaries of the higher salaries.
And the lower salaries usually are people who are working directly, you know, productive on the job sites. But so far, we always have been able with efficiency measures to mitigate the rate increases or the salary increases of our fitness in China with efficiency programs. This is true.
Okay. Then another question on your strong performance in China and at market share gains or outgrowing the market. Is this 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. So I think in all different customer segments, we were able to improve our sales performance.
Okay. That was brief and clear. And also on M and A again, you stated that you want to maintain a strong balance sheet to be ready for the opportunities that may occur. And you said that on the services, you also go for selective acquisitions in some cities that you've got some weaker spots you want further gain density. Am I right that this rather calls for smaller to midsized acquisition smoothly to integrate?
Or did you plan to continue on the M and A side that you've done so far in the past years?
Absolutely correct, Soran. Usually, those smaller companies we integrate into our organization, as I said, in order to increase density. And if there is, let's say, a midsized target available somewhere, then of course, we are always carefully investigating into that.
Okay. Thank you very much. The next question comes from Joseph Lu from Redburn. Please go ahead.
Hello. Thank you for taking my questions. I have two questions from 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. So all new residential buildings with 4 floors or above are now required to have an elevator installed.
Previously, this requirement only applies to buildings with 7 floors or more. As you're in Chinese policy, the enforcement is up to the local government. So it may take time. But for you and the market, have you seen some tailwind from this new regulation in Q2? And what do you see as the ongoing impact for the future from this?
And my second question is on XINGLE Ahead. And so far in your order pricing, how much impact has Xingled had on the debt to pricing? And are we talking about, I don't know, half of the improvement coming from Shinola had or something more significant or less? Thank you.
Thank you, Joseph. Two very good questions. Question number 1 is in fact, referring on the type of elevated recall is at home. So 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 the 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. But of course, as people are becoming older and those buildings are in competition with new buildings, they have to refurbish those buildings. And they have launched an initiative with not only for elevators, it's also heating, isolation, electricity, but also including elevators. And so 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. But 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 our own elevator.
But so far, it's now it takes some time until it is rolled out in the different cities and provinces. Ahead, answering the second question, it had not so much an impact on our pricing in the order intake when they sell We delivered 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. So besides the fuel maintenance contract, we add the so called Ahead contract.
And what I have mentioned also in Q1 and in the annual press conference, we see that the average price of this conversion contract has increased. And I would say in those areas where you are able to do that, it may be 10%. Sometimes it's a little bit more. But depends a little bit how high the service contract is in a certain country. And 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 before 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 benefits as we can guarantee them uptime, we can guarantee them insights. They are always informed about the status of the elevator or escalators.
And 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. But 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. And last point, maybe if you look on our latest publication of our sustainability strategy, we would like in 5 years that 500,000,000 people every single day are using connected equipment of Schindler.
The
next question comes from Christian Ulst from Baden Bank. Please go ahead.
Yes. Thank you very much. First, I have four questions. 1, again, coming to the personnel cost. You talked a lot about that so far.
Over the years, we have seen an increase in percent of reported revenues coming from 33%, 34% to now in the first half, the 39%. So is there some kind, besides all the wage increases and the shortage of labor you talked about, also some kind of a structural increase in personnel expenses going forward because of average higher qualification and also these kind of things? This is the first question. And the second one is I'd like to understand
a little bit more of
the structure and possible risk of the bigger infrastructure and public transport projects. You mentioned that you are gaining more market share there, especially in terms of the slight softer overall market. And is it a margin also or price competition for these projects? How to handle how do you handle these? And how do you try to really to avoid that the increase of these projects will have a negative effect on your margin, which might affect that in long term, it has a positive effect on the Service business?
And the third one is, do you see any market impact on the behavior of your clients or competitors from the upcoming AMP or sale of Teekay Elevator or the split of Otis from his mother for another company? And the last one is any news concerning your operations, please,
GE or Uruguay? Thank you. Maybe Urs, you could answer the first question, our development of personnel costs, Right. As we have said, personnel costs are potentially growing a bit 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 of them are driving up personal costs.
It's also another 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. And this is also one part. When you talk about structure, yes, we are investing into certain structures. We are investing into digitization, into R and D capabilities, and these are usually people and less on the external costs. So this adds also a little bit on the pressure on that.
But I think overall, we don't have to talk to the issue.
Issues. Yes.
That's what I mean. 1st, for a change in higher qualification, and this will increase personnel expenses in percent of reported revenue going forward also because we have to invest into these kind of IP people, for instance.
Yes. But it is true, and it is certainly also a pre investment we are doing. We don't do that on the compound. We also are expecting that we generate some return. And when we look into ahead, we always said we are expecting the breakeven point in 2021.
And so 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 impressive and competitive in prices. But at Gimli, we always have long term view. I do not want that is on true 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. So 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 off of it.
And I think it's the right thing to do, and we don't want to deviate from that. Now in 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 stores don't have the best payment terms. It's mainly driven by government and the government is dictating the payments terms. So our possibility to negotiate are very limited because it's part of the pending documentation and you either take it or you leave it. And so we cannot so much negotiate that.
And this has sometimes an impact on the down payments. We don't have the same amount of down payments, like maybe in the private sector. And so there's a little bit of dilution in the networking capital. Question number 3, market impact of, let's say, moves of our competitors. 1st of all, I don't want to comment on the moves of our competitors.
And 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 1, is to grow faster than the market. And I think one advantage we have at Schindler is, now I think this is somehow my confidence for 14. And we always tell you exactly the same story. There's no change in our strategy, but there is no change in our ambition.
And as we have a very long term view, having in 5 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. But 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. And I think so far, we have achieved that.
Whatever we thought is as successful as the others. But all in all, I think now since many, many years, this has been proven us the right direction. And maybe the last question, Chi and Huawei. First of all, with both companies, we are now working since several years. And I think we had a very strong strategic alliance with both companies.
And the result has been our ahead strategy. And 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 health products are very well received by the market. Of course, we are observing also, let's say, political dialogues which are happening worldwide. But it doesn't really change our digitization strategy. We want to connect as many units as possible and where it makes sense.
And 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. And like others, we always have like a plan B. So we always have also second sources. And so if there are tensions maybe in the market like in the U. S.
At the moment, we do have a backup solution. But 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 Klein with MainFirst. Please go
ahead. Yes. Good morning, gentlemen, and thank you very much for taking my questions. Can you hear me well?
Very good.
So the first question would be on the Schindler commentary in China. I was just wondering whether you were commenting the growth rates for all the intake phase for H1 or Q2?
You mean that 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 1 was slightly stronger than quarter 2, 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. And you mentioned that you are conservative on the second half in China. And we look back at your comment
in the last call. Is it
still that you think that overall 2019 would 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 is stable at best. We have to revise for the whole to the year. We should say it is stable or slightly up at best. That will be my new assessment how it has improved for the full year because I do not believe that Q 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 basket and the second half is maybe flat more flattish. So as aggregation, it should be probably even slightly positive, slightly up for the total year.
Very clear.
Your backlog margin commentary that is improving, For how many quarters have you observed just now?
Well, this is now actually really happening this year, where we are improving our margins in China and also part of the world and was good as well in Q2 now, yes.
Okay. So both in Q1 and
in Q2, and has the margin expanded or has
it been stable over the Q1?
Just to get
a little bit of granularity where you see the trend going, is this going to improve even further? Or is this 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. And 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, but it's also that the execution of older jobs where we had a new price pressure, they are now replaced in our old backlog a little bit bad. 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. So it's also a little bit a timing issue that the ones we sold maybe 2 or 3 years ago, they are going out of the backlog.
And the ones we have sold last year and this year, they are now in the backlog. And I do not expect further, let's say, really substantial pricing improvements. But it's more a calculatory exercise that worse units are going out and the good units we now sell are coming in. So that's more the impact on the backboard.
And the better margins that are coming now in, they will be impacting
2020. Also, this is not something that you have
baked in the 2nd half, just to understand what's
the price of the year?
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.
But secondly, also, as we have a big impact on major projects that even longer cycle time, So this can also easily go into 2021 2022, I have to say. So not everything is coming in 2020. It is really a long term journey, we will see.
You wouldn't mind sharing how much improvement is, I assume, Matt? So you cannot give us a color on what's the EBITDA from this improvement?
No, this we would not like to share. It's worth to say.
Okay. And maybe one last question. On the Huawei cooperation, have you already installed hardware from Huawei? Or is this not happening? And that would be the first question on that, yes?
Well, every single tube we have installed with Schindler Ahead is a Huawei Cube. Yes, we have installed many, many, many, many cubes all over the world. And we had as I mentioned before, we also have established the 2nd 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 2nd source cube.
And could you remind us the price of the tube very roughly?
No, it depends on the it really depends market because what we usually do is in many, many cases, you don't buy it. You make a service contract with us. But what I can say is, so it's more a question of cost. But the cost of the Q, we would not like to share because this is too much confidential.
The next question comes from Chandigarhiz with Societe Generale. Please go ahead.
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 modularity program, I would have expected slightly better performance in the second half. So just want to understand, is it primarily due to the higher wages you talked about that they have been incrementally worse versus what you were expecting at the beginning of the year or 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 Uros goes more into the details, just want to clarify. We are you have to look half year by half year. So second half year, we will have an improved margin compared to first half year.
This is very clear our plan. As we also have mentioned that at the end of last year, it's always has been our plan, slow start, improvement Q2 and even a better second half of the year. So 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 mid of the year, a negative, let's say, margin development first half 'eighteen to first half 'nineteen, it will be very ambitious to catch up in the second half of the year or to improve so much that the total year 'nineteen is as good like the total year 'eighteen.
I would expect that our margins will be under pressure for the total year compared to 'eighteen. A little bit, it's also a little bit lost, how we will need, where we can execute what kind of jobs. But it is very ambitious to achieve the same margin for the total year. But definitely, second half will be better than first half. Yes.
And I may add, so 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, and it is higher than expected and this going forward. Also on the material inflation, it is now at similar levels. And particularly, the tariffs, we need to consider, they will have an impact now even bigger in the second half of the year. We will increase our cost for strategic initiatives as planned and always communicated, particularly on our Ahead platform and Digital Twin. And these are the main items where we have to see that we can find compensating measures coming from efficiency in the field, but also in our back offices and of course pricing as Thomas has mentioned clearly before.
Thank you. And my last question is on Kilia. Like you mentioned the development. Could you also get a bit more color on where you're seeing the growth? Is it more on the commercial side or you're seeing the residential market?
Given that India has now been a reflection environment, so where you're seeing the growth coming in the Indian market?
I think all the segments are in fact positive, but there are definitely 2 segments which have the strongest growth potential. The first one is the residential area because urbanization is a fast 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.
So the residential business will definitely show the growth. And the second, I would say, strong pillar in the growth is infrastructure because there are a lot of plans to further invest into the railway system and into metro lines because these fast growing cities, they have to do a lot of infrastructure otherwise. Cities like Mumbai or Delhi are just completely collapsing. So we cannot do that without heavy investments into infrastructure projects. And what we see is that a lot of, for example, the railway system, a lot of the stations which are existing today, they don't have elevators or escalators.
So 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 do they have to take staircases. So residential and infrastructure, I think, are the 2 biggest drivers in India, but also the other segments like commercial. They are growing, but not as fast like the other tools.
The next question comes from Remo Rosenhaugh from SVB.
Bank. I 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 deep time move into Tier 2 and Tier 3 such as 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 because, as you know, we have, at the moment, consolidated. We have 2 entities. 1 is, of course, the Schindler entity, and then we have a joint venture with XJ Schindler. Schindler predominantly being very active in Tier 1 and Tier 2 in the past.
And then we expanded, as we have mentioned that in the past, into Tier 3 cities. And then we have Istjei, which is more dominant in Tier 3 and Tier 4 cities. And we have seen in the last 1, 2 years that the government has put also a lot of stimulus that those Tier 3 and Tier 4 cities are further developing. So with our geographical expansions we have done in the last couple of years, yes, we have benefited from that. Now the trend is definitely also Tier 2 cities are principally growing.
So historically, a good domain for us. And all the different cities, in fact, have helped us in the overall growth. And then we should not forget the 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 friend contact with big developers.
Now we are very well represented in their accounts. And 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. And 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 and some of your competitors leading to a higher conversion rate. So is that also a result of that?
Yes, definitely. Coming back to what I mentioned before, we are a long term oriented company. And our key ambition is to grow faster than the market in all the different businesses. So of course, also in our service business. And it's right, it's easier to convert a new equipment if you have done the new equipment contract directly with the customer.
And if you have a so called distributor model, you are not the one who has the direct link to the customer. You can you ship the box to a distributor who then installs and make a final contract with the customer. And it's much more difficult to get a service contract in such a business model. And yes, we are limiting the share of this Prelude 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.
So 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 in material costs, wage inflation, ForEx and the strategic investments of 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 margin deterioration as you see of 50 basis points on EBIT adjusted. Well, the material costs and tariffs have approximately 30 to 40 to 80 points impact. Overall, material inflation was a bit less, but then fueled the end by the tariffs. Also wage inflation has a clear impact of up to actually 100 basis points.
But this, of course, is then offset by pricing. So pricing measures in service and NI, each an impact of wage inflation and price increases in Vermejo are then 40 basis points negative. Strategic costs, we always mentioned that we are investing in the digital twin and the head platform. They have probably an impact of 20 basis points. So these three items together impact our results by 100 basis points.
And then the rest, of course, are measures, accounting measures. On efficiency, the group is working very hard on it, field and service, but also negotiation savings on the supplier front, which helped us to improve our margins again. Thanks, Greg. And 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, and 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 the time for the follow-up. Just two quick ones. Firstly, on the margin, back to my first question and your strategic commentary when you talked about ambitions to be flat. Am I right to understand that this reflects the full year?
And then can I double check that first question that the math from your guidance up and taking into account what you've already delivered in H1 suggests that your second half year on year underlying profit margin, excluding Building Mines 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. And I think your analysis is correct.
Great. Thank you.
Roughly flat, Andre. But of course, there are really moving parts ahead of us. And because I said it also during the conversation, It really depends on the rollout of projects. It depends on the geographical mix of revenue generation. And therefore, it's really a bandwidth we are moving here towards the end of the year.
The year. That's very clear. And just on in that sense of vein, if we fast forward to 2020, and I know many things have changed and we're obviously not kind of inducing to forecast or anything. But just in the current environment, assuming no shocks to the system, similar raw materials environment, wage inflation, etcetera, and 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, the growth is very important. Of course, I understand the margin is also important.
But for me, it is more important that we say, okay, you 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. So I mentioned many times, I never have seen that a dividend is paid with a percentage. It's usually paid with cash. So we have to generate more cash and more absolute return.
And even if the 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 the time.
Thank you.
The next question comes from Martin Flutiger with Kepler Cheuvreux. Please go ahead.
Yes, gentlemen. Thanks for taking my follow-up questions. Just 2. Firstly, on raw material prices, I was curious based on what you're currently seeing in procurement as regards to 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 crisis will develop. Develop. It's we will see what happens when we come towards September, October because usually then, all the factories, mining factories in China are shut down for environmental reasons. It is usually good to get pressure on the raw material prices.
And we have seen that now in the last couple of years that this really can generate quite a big swing. So I do not dare to forecast at the moment how raw material prices really will be down. Of course, if raw material prices would go down, if a certain time lag because we are usually hedging or securing prices for 6 to 9 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. So I mentioned that the last time they always come back.
Every quarter they come back. They recently have not given us any increase last time. Now we need it really. So I think there still will be some pressure. But of course, it will help if raw materials are stabilized or getting maybe a little bit softer.
But honestly, at the moment, I do not really dare to forecast the development.
Okay. And then final one on I realized you with regards to EMEA, you were talking about a 0 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 color on the line to please how much acquisition impact for the group in Latin Americas and which specific we saw in Q2 or in H1?
Because it is true, we said in the long term, we are shooting for that maybe we can add the same on day every year up to 1 percentage point. At the moment, I would say in the first half of the year, it was neglectable in all the different areas. So Asia Pacific, Americas. And 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 Luis Biwazi with RBC Capital Markets. Please go ahead.
Just one
detail, I have to keep
a question left for me.
On the interest charge, there
are on the financing charges, there are
a few moving parts in the
year on year movement with
the tax refund and then IFRS 16 and then also you mentioned some hedging losses. What should what are you expecting
for the full year? I mean, I guess, you have some
idea of where the hedging might come out based on current rates and
the levels you hedged at? And then what's the number you're going
to build into your full year guidance?
Thank you very much for the question. I think I will give that the details for us. But 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. And 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.
So 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 had in the first half year, euros 32,000,000 negative impact in financing and the activities for the first half year. So you may have to double this impact for full year.
The last question comes from the line of Andreas Meyer with Financi
Ditschef. Yes. Hello. Thank you for taking my question. I have to mention now the name of Thyssenkrupp, the spin off is now underway and 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? And how do you involve in this development? And more clear, could you buy Hissinghoek or that in any form of cooperation with them? And yes, what is going on?
That's the $20,000,000,000 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, but also what is happening in the U. S. Part. And of course, we are observing that with high interest, which 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. So any strategic move between, let's say, big players would immediately generate a lot of questions about antitrust. I think that this will generate a lot of huge hurdles for any attempt if 2 of the big ones would like to compose a little trouble.
And I believe that should not be underestimated, incredible, difficult to get approvals and also how you're going to execute that. That's one part. The second part is, when you look on what you or others, financial analysts, the press has stated, investment bank is this also would come to a very high price. And we have seen that prices can be something like €18,000,000,000 So really very, very, very high. I think we also I think we usually do not comment on what kind of our intention is and what we plan to do for ourselves.
We own the report when we have generated facts. But I think really, you have to keep in mind from an industrial or from an economical point of view, the topic of antitrust is should not be underestimated and is definitely critical for any attempt. That's from my side. Good. So 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 3rd quarter results conference call, which is on October 24, 2019, of course. And 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.