Ladies and gentlemen, welcome to the Schindler Key Figures for the First Quarter 2019 Conference Call. I am Alice, the Chorus Call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Thomas Oterley, Chief Executive Officer. Please go ahead, sir.
Thank you, and good morning, ladies and gentlemen, and welcome to today's Q1 2019 results conference call. My name is Thomas Oetterli. I'm the CEO of the Schindler Group, And I'm here together with Urs Scheidek, the Group CFO, who will take us through the financial details and the outlook for 2019 later during the call. Schindler began the year again by delivering solid growth and the level of EBIT achieved was according to our expectations. Higher costs and the planned increase in expenditure on strategic projects could only partially be compensated in the Q1.
However, short term headwinds will not prevent us from further improving our absolute operating results over time as we have the right measures in place to ensure the company's success. As you know, we think long term and therefore weight growth in operating revenue and absolute EBIT over margin development since the margin can be optimized short term. I would like to draw your attention now to slide number 2, which summarizes the highlights of the Q1 2019. Market developments noted in 20 18 continued in 2019, while political and macroeconomic uncertainties increased. The competitive environment remained tough.
Schindler's innovative mobility concepts were very well received by the markets. As a result, all product lines and regions achieved growth supported by a further increase in the order volume for major projects, especially in the public transport segment. The Asia Pacific region generated the highest growth, mainly driven by China, followed by the Americas and EMEA. Order intake rose by 6.4% in local currencies and revenue increased by 5.8% in local currencies and was well within our guidance of 4% to 6%. As mentioned earlier, higher raw material cost, wage inflation, foreign currency impacts and the planned increase in expenditure on strategic projects affected operating profit.
EBIT reached CHF274 1,000,000, a decrease of 1.1 percent in local currencies and the EBIT margin stood at 10.9% on a comparable basis before restructuring costs and expenses for BuildingMinds compared to 11.5% in the Q1 2018. Net profit reached CHF197 1,000,000. On a positive note, cash flow from operating activities before one off impacts strongly increased to CHF391 1,000,000. Now let's move to Slide number 3 and the recent developments in Asia Pacific. Overall, the market development in the region was positive.
In the new installations business, China remained stable and price levels in the mass market improved. India recorded continued growth, driven by the residential segment and Southeast Asian markets showed positive developments in some market segments. Service markets were healthy driven by the conversions of new equipments. Our performance was strong in both new installations and existing installations. High growth in China was supported by large project wins.
I move on to Slide number 4 and the Americas region. The U. S. Market continued to drive the region, supported by the residential but also the commercial segment. Sustained strong activities in public transport and office projects were visible.
Latin America also recorded positive demand overall, while Brazil's rebound flattened. Schindler did very well. The performance of our North American operations continued to be strong, supported by large project wins. Latin America displayed good growth despite a muted development in Brazil. The existing installation business generated sustained growth across the region.
Now let's move to the last market region EMEA on slide number 5. Overall, the region showed a bit mixed developments. In the northern part of Europe, markets were solid, but Eastern European markets recorded signs of slowing growth. In Southern Europe, positive trends were maintained, while Turkey continued to decline. Schindler was growing in almost all the countries with solid performance in both the new installations and existing installations business.
We note that the lack of qualified resources more and more becomes an issue, impacting performance on construction sites. After these first insights into the different markets, 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 for this results conference call. I will provide a bit more details on the actual financial results. I will talk about our revenue guidance and I will also extend my comments to the IFRS 16 lease impacts. I start with Slide 6.
In the Q1 of 2019, the order intake rose by 5.2% to $2,968,000,000 corresponding to a solid growth of 6.4% in local currencies. Order intake includes all business lines, new installation, modernization, service and repairs. Growth was well balanced between the new installation business and the existing installation business. The Asia Pacific region generated the highest growth as a result of significant progress in China. This was followed by the Americas and EMEA regions.
We were able to accelerate the order intake for large projects, particularly in public transportation projects. As of March 31, 2019, the order backlog rose by 7.6% to $9,128,000,000 which is equivalent to a strong growth of 9.0% in local currencies. In the Q1, revenue improved by 4.4 percent, respectively, to DKK2,582,000,000 corresponding to a growth of 5.8 percent in local currencies. This is a good achievement considering the demanding strong prior year by baseline and despite foreign exchange headwinds in the amount of CHF 35,000,000, mainly to the stronger Swiss franc against euro and Brazilian reais, only partly offset by the stronger U. S.
Dollar. The revenue growth was balanced between new installation and existing installation activities. The largest geographic contribution to growth was generated by the Asia Pacific region, particularly strong in China, followed by the Americas and EMEA. Reported operating profit reached CHF274 1,000,000 or 10.6 percent, a bit lower than last year of CHF 281,000,000, respectively 11.4 percent as we have expected it for this quarter. This is before restructuring costs of CHF4 1,000,000 and expenses for ramping up the start up building mines of CHF4 1,000,000.
The EBIT margin was 10.9% compared to 11.5% in the Q1 2018. There is also a headwind of foreign exchange impacts of CHF4 1,000,000. The EBIT adjusted with those three items, restructuring costs, expenses into building mines, FX impacts is CHF286 1,000,000 at the similar absolute level as in previous periods. EBIT is impacted by cost headwinds not fully compensated with cost savings as those are scheduled to materialize later in the year. Headwinds have been continued high raw material costs, wage inflation, planned strategic investments for Digital Twin and Schindler Ahead and backlog rollout of our lower margin projects in China sold about 2 years ago.
Cost savings are staged as per our plans, particularly from the modularity program and also other efficiency measures and will materialize mainly in the second half year. Net profit totaled CHF197 1,000,000 versus CHF208 1,000,000 in the previous period, negatively impacted by finance results, mainly driven by hedging activities. Cash flow from operating activities reached CHF263 1,000,000 and was impacted by the settlement of pension obligations to third parties in the amount of CHF157 1,000,000, enabling the group to reduce our employee benefit liabilities significantly to only CHF320 1,000,000 for the whole group. Excluding this one off impact and the positive impact of CHF 29,000,000 of the introduction of the new accounting standard IFRS 16, cash flow from operating activities improved strongly like for like by 18.5 percent to CHF391 1,000,000. The increase compared to the Q1 of 2018 is primarily attributable to net working capital optimization efforts.
Last but not least, I'd like to mention that by approximately CHF400 1,000,000. By approximately CHF400 1,000,000. I would like to conclude my overview with the outlook for 2019, which you can find on slide number 7. For 2019, excluding any unforeseeable events, we expect to continue grow growing faster than the market with revenue increase between 4% to 6% in local currencies. As in previous years, the annual forecast for net profit will be provided with the publication of the half year results on August 14, 2019.
With this, I would like to hand back to Thomas.
Thank you very much. Urs, I think it's now time for the Q and A session. And we already have some people in the row here.
First question comes from the line of Omid Vaziri with Jefferies. Please go ahead.
Yes, thank you. Good morning. How would you characterize Schindler's ability going forward to pass on labor cost increases to customers, especially factoring in large projects, many of which are in the infrastructure space, in emerging markets, government sponsored and associated with perhaps most likely a competitive bidding process or increasingly making up a larger portion of your order book these days? And related to this, in which of the functional areas of your business would you say skilled labor shortage is being mostly felt? Perhaps it's in maintenance service over manufacturing or production?
In new installations, you make use of 3rd party installers, but you also highlighted impacting performance at construction site in your opening remarks today. And is this issue most prominent in Europe for you or in China and North America you're also feeling increasing pressure and again in which specific functional areas there? Finally, what about the position of your Asian competitors here in Europe on this topic? Presumably on maintenance service, they are all feeling the same pressures, if not more? Or do they benefit from lower cost advantage of production in Asia?
Thank you.
Thank you. Good morning, Omid. So I have noted 3 questions. First of all, how can we pass on labor cost increases? Labor cost increases are happening all over the functions and in all the different areas.
If we look more into the businesses, you have labor cost increase, of course, in the service or existing installation business. There in fact, usually in many contracts service contracts, you have an inflation clause included. Sometimes it's linked to the labor cost increase. So it is usually an index about labor cost increase or it is linked to the consumer price index. These are usually the 2 indices we have.
And we do have in many contracts the possibility to increase our prices for the service contracts to mitigate those labor cost increases. So I think in the service business, we are pretty good hedged. Sometimes it's not always one to 1. The cost increase of the year is also then the increase of the prices because sometimes there is a 1 year time lag because the as an example, if labor costs have increased last year by x%, then this is the baseline for the price increase this year. Now if labor costs increases are higher this year, then there is a certain mismatch.
But overall, over a couple of periods, I would say, we are able to pass those labor cost increases to the market. A little bit different is it in the new equipment business because there the time lag is longer. So if you have a labor cost increase happening now, of course, we are calculating with that and we try to increase our prices. But the labor cost increase hits immediately the orders on hand. Now you are right.
Usually the a lot of the new equipment business is also fulfilled with subcontractor costs. And there is not a big difference in labor cost impact because also the subcontracting companies do have higher labor costs and they try to pass that on to us. So we are a little bit in a sandwich position. So labor cost impact is more negative in the new equipment and modernization business and is less an issue in the service and repairs business. The shortage of labor is mainly in the we call it the direct productive people.
So it is fitters, service technicians or subcontractors. And it is almost all over the globe, I have to say, because everywhere we see now the shortage in labor. In fact, it is a little bit the case that people don't want to work on construction anymore. That's one reason, but also we had a lot of boom. And we see in Europe, we definitely have this shortage, but we also see it, for example, in North America where the fulfillment is mainly organized by the unions and the unions do have a bench of people they can offer to you and this bench has become extremely small.
It is maybe less an issue in China, I have to say. In China, we still see that we have the capability to get labor, but we have more cost pressure because according to the Chinese government, those functions in on construction are maybe a little bit lower in the overall salary and they would like to increase the salaries of those people over proportionally. So there is a little bit more cost pressure, but there is less shortage. Last question about Asian competitors in Europe. Usually, I do not want to comment too much on our competitors.
But until now there is not a lot of activities of Asian competitors in Europe visible.
Okay. That's brilliant. Thanks for the clarification there.
Thank you, Omid.
The next question comes from the line of Daniela Costa with Goldman Sachs. Please go ahead.
Thank you very much. I have two questions. First, wanted to ask you on BuildingMinds on how will you update us on this going forward? What should we expect in terms of the path over the next few years on the contribution from this initiative, if you could just elaborate a little bit on that. And then I just wanted to check on your commentary in the press release that you've strengthened your market position on the back of the 6% organic order intake.
We've seen a few others growing even higher. Can you comment on which regions did you improve your market share and which regions you might have, well, just basically getting further color on that on the market position? Thank you.
Thank you very much, Daniela. Well, in BuildingMinds, we have mentioned that already with our annual closing or after our annual closing. BuildingMinds is a startup company. So we have elaborated a little bit on that. It is a very early stage.
We have great hope that we can open a new territory in our business, but it's a very, very early stage. And of course, once we have further information about the final MVP and also the first customer solutions, we will update you on a regular basis. Lastly, in every start up company, it's of course, we have a business plan. But in a start up, I have to admit, you have to be a little bit more patient. At the beginning, in this year, we will only have an impact of cost, mainly of cost.
And it is in the magnitude we already said in the past something like CHF 40,000,000 for the whole year. Now I think Urs, maybe you could elaborate a little bit on the different market positions on the strengthening we
have there. Certainly. Good morning, Daniela. So our total order intake in local currency was growing 6.4%. And this is really very well balanced across the business lines, new installation versus existing installation, with particularly strong growth in the public transportation segment and also in the existing installation with repairs.
When we talk about geographies, Asia Pacific was a strong growth driver and thereof we can say China was particularly strong growing in value in the mid teens and in units in high single digit growth for the country of China, which is very pleasing for us. But also in Americas, we were growing strongly, particularly North America and Southeast Asia was another strong growth driver. But as a wrap up, we can say we have good and strong growth across business lines and geographies with our well diversified business.
You're welcome.
Your next question comes from the line of Andre Kukhnin with Credit Suisse. Please go ahead.
Good morning. Thanks so much for taking my questions. Can I just start on the margin? Has Q1 generally developed kind of in line with what you expected? Or was it a bit lighter on profitability?
I know you flagged the phasing of headwinds versus savings through the year being negative for the beginning of the year. But just wanted to really check if your kind of stands on profitability for the year to be overall stable ex BuildingMinds investment is still there or has that changed at all?
Good morning, Andre. Yes, it is true. The margin was expected in that magnitude. Honestly, I mean, if you talk about something like 10, 20 basic points, we to be super precise all the time in advance is maybe not feasible because it depends a little bit also which kind of large jobs you are executing at the moment. To give you an information, we were very, very happy that at the beginning of April, we
have successfully
completed and also opened the executing that towards the end of the and we were executing that towards the end of the year and beginning of this year and now we are happy that this worked very well. But jobs like this, of course, in the short term, if you look only on the single quarter, if you have a major part and this was also elaborated by Urs, if you have a major part of your business in new equipment by certain projects, which might have maybe a little bit a lower margin, then this can impact you quarter by quarter. But we knew that we have headwinds, which are impacting us all the 12 months. So the labor and the raw material costs as well as the planned investments into our strategic programs. And all of that has a quite a sizable magnitude of maybe 100 basic points on a year on year, quarter 1 2018 to quarter 1 2019 quite a sizable negative impact.
And as we have elaborated in the past, some of our efficiency improvements and cost improvements, they are ramping up over the year. So we don't have a flat margin to be expected during the year. We have a slow start and then look like.
Yes. Thank you, Thomas. It is correct what we before said. Quarter 1 is according to our expectation. Since cost savings and headwinds are not synchronized in 2019.
We have strong initiatives running on track, particularly on the modularity program. And this is scheduled per plan. We are rolling out the components later this year in the second half year and then materializing savings. And this is not yet the case now early in the year. And also leads a bit to a transition year in terms of our procurement savings, particularly now quarter by quarter.
Got it. Thank you. My second question was on modularity, but you've confirmed that it's running on plan. So I'll move to the next one. Can I just ask on the backlog margin, I remember we discussed that in conjunction with full year results that you said, I think it was slightly down at the end of 2018?
Now that we had another quarter of positive price in China and I guess raw material development favorable. Has that changed at all? Or is that still stands that the backlog margin is kind of slightly down versus what you have right now?
Well, the backlog margin, of course, it's very simple. The margin is an outcome what to do on pricing and what do you have on cost. And I think we have reported over the last couple of months that we have worked very, very hard on the pricing area. And we had all over the globe improved pricings in new equipment, but also in existing installations. Also in China, in the mass market area, we were able to improve our pricing.
If I look quarter 1 2018 to quarter 1 2019, I would say that our prices have increased in the volume business by low single digit. So this helps us of course. Now the backlog is also a function what what kind of jobs are going out
and
what are kind of jobs are going in. So the jobs going in, we can definitely say they have a better margin than what we had in 2018. Now again, a little bit on the topic of what is the large projects going in and out, this can impact you a little bit. And as we have higher share than maybe others in China, our lead time in China is a little bit longer as we are very strong in large projects and also public transports. You usually have a total cycle time for those jobs 2 years sometimes even 3 years.
So if you look back pricing 2 years ago or 3 years ago was maybe not as bad like in 2018 because we had a deterioration of the prices. So some of the jobs still had a healthy margin which went out. Some of the jobs already had not such a good margin which went out of the backlog. But overall, I can definitely say we were successful in pricing And it's always balancing how much do you push the prices versus the growth. So this is a little bit the act we have to do to somehow balance this.
And I think the team has done that very, very well. Now in terms of costs, of course, we have these headwinds from the raw materials and from the wage increases. They just come in and you can't really avoid that. But maybe Urs, overall, I think we have done quite a good job overall in and out. It looks not so bad.
Yes. We see that in our margins sold over the last 9 months that they have slightly and gradually improved on the order intake. It is now also resulting in slightly improved margins on the overall backlog. So that then of course will be rolled out and in the future. Having said that, in the Q1, we have impacted by the execution of projects sold, as Thomas said, 2 years ago, particularly in China, but also other larger projects with lower margins.
And they have now been executed and in the progress.
Great. Thank you very much. I really appreciate the comprehensive answer. My last one is just on digital investment. I'm going back to what you said again at the start of the year of ramping up by probably another 30, 40 basis points.
There, I think that places you in terms of kind of a run rate of investment places you as the highest amongst peers spending, I think, nearly EUR 100,000,000 a year on that. I just wanted to get more color, if possible, on what are the sort of incremental areas that you're spending on top of the initial sort of 50, 60 bps that you committed to building the platform all analytics. Are you maybe diversifying your vendor base on analytics and platform potentially?
Well, digital investments have in fact in our company, we have like 2 swords. And I exclude BuildingMinds. So I focus on really the lighter and escalator business. One is our Schindler Ahead product platform where we had to set up partnerships with major players in the market. We are working together with GE Digital.
We are working together with Huawei. And we are also in the area of connectivity and lines, how you are what kind of provider you use for the transfer of this equipment. We have strong partners and we'll announce pretty soon also a global partnership. So these are, let's say, strong partners we have. And of course, we do have certain costs also related to this.
But the major costs we have is development and continuous improvement of analytics, but also development of new digital products, because our customers are asking for APIs. They want to integrate our solutions in their building solutions. So this is another major central cost block. And the third one we also have is the more units you connect and then you make big data analytics, you need someone who is supporting the people in the field to do the right things. So what we are doing in all the countries, but also centrally, we have built up now so called Technical Operations Centers, TOC we name it, Technical Operation Centers, so where really experts are able to take the data from our analytics and our remote monitoring platform and give direct advice to our technicians or they are highlighting, hey, something is going wrong here and then they take action.
So these are central costs. We still are building up. I think we don't have to expect that this increase will continue in the future. We towards the end of the year, we will achieve a certain stage of service we are able to do. But we have a second investment in digital and that's the digital twin.
And as I have said in the past, we started first with escalators and we have done really good progress in that and we are expecting that we will face first paybacks maybe second half 'twenty one and then later 'twenty two. But we now also ramp up the digital twin for our elevator products. And this is important because it's you first need the new type of products that's F3, right? So our modularity products and now we start to digitize them in our R and D department, in our manufacturing, in our installation processes and even in our maintenance processes. And these costs are at the moment ramping up on top of the Schindler Ahead.
Now if I look on Schindler Ahead, we always say that the payback will be the breakeven point will be somewhere in 2021. So we see now revenues coming in. We also see contributions coming in. And we expect that the breakeven point is in 2021. So I think we are on track with our investments and what we have announced this year should not have the same increase also in the future.
But we believe it's the right thing to do. We will benefit from that internally, but also our customers will benefit from that in the years to come.
Got it. Thank you. And payback on TOX is through the field efficiency, I presume, right? The Well, the TOX. Technicians being able
to That's true. The technical operations center, they are not financed, but the payback is coming from more efficiency. And the efficiency is driven by 2 elements. 1 is that you have an early signal that something maybe is not good and you go to the equipment before, for example, you have a breakdown. But it's also if you have a breakdown, they can guide the service technician in a much better way that the resolution of the breakdown is taken much faster.
Great. Thank you very much for your answers.
Thank you, Andre.
The next question comes from the line of Lucie Carrier with Morgan Stanley. Please go ahead.
Hi, good morning, gentlemen. Thanks for taking my question. I have three questions. I will go one at a time. The first one is actually a follow-up on the first question from Andre.
Maybe I will ask it slightly differently, but can you confirm what you have said about a month ago about the margin being stable for the full year 2019? Does that still hold? Or is it still uncertain?
Thank you very much for the question, Lucie. So our strategy, as you know, is to grow faster than the market. And we want to increase our absolute profits every year. And with our very solid order intake and backlog, of course, this will allow us to continue our strong growth path. The headwinds seen in quarter 1 will continue such as high material costs, wage inflation and the expenses into the strategic projects.
On the
other hand, our operational measures are absolutely on track to allow this profitable growth going forward. And some of the cost savings, as I mentioned before, in particular the modularity savings are coming in a staggered way as per our original plans, particularly in the second half year. So we are confident to achieve the target of growth above market and absolute profit growth this year. And from today's perspective, it is it seems ambitious to maintain the margins of the previous year.
Thank you for the clarification. My second question is around some of the comments you put in the presentation. Are mentioning some large markets to potentially come under pressure during the year. I was hoping you could give us a bit more color on which market you're precisely referring to. And also what are the indicators or maybe the anecdotal evidence that are giving you kind of confidence to make this comment or giving you the visibility on the potential weakening?
Well, there are when you look in our business and especially in our company, one large market we have, of course, is Brazil. For us, it's a very important market because we have a good market position there. At the beginning of the year, we were or towards the end of the year after the elections, we were more confident that there is the end of the real downturn and that markets will come back because the President also was seen as very friendly towards the economy, was pushing a lot the economy, but we have now to state that this progress has not been visible. It seems to be a little bit of a pot situation also between him and the Congress. And the mood in Brazil has definitely worsened.
And I think we will see another very, very challenging year ahead of us. And as our organization, as I said, has a very good market position and also the team is delivering strong results, this is hitting us, I have to say. It was not according to our expectation. It really continues very strong. Of course, like in many other countries, you always have to look on the political situation whether something is happening there, but there we are at the moment much more confident.
Then if I look on 2 other major markets for us, China and the U. S, There, of course, the U. S. At the moment, we see still a lot of activities, but we also see that some of the leading indicators might lead us to a more challenging future towards the end of the year or beginning of next year. But I have to admit, if you ask different people, you get a lot of different opinions.
So it's not Udi's own or the same opinion. But some of the indicators like PMI index or if you look on architects, if you look on new permissions for multifamily houses, there is a certain flattening or even a certain downtrend visible. But it's early stage, I have to say. Then of course, the conflict between China and the U. S.
Is not helping us, I have to say. And at the end, in our market, 60% of the worldwide market in terms of units is in China. So at the end, we come always back to the question, how is China developing? In the Q1 2019, I think we had a stable or even a slightly positive development of the Chinese market in terms of units. So I think this was pleasing all of us.
And with the strong growth we had, we were able to take advantage of this positive development. But there are also we look like everybody else, we look on all those macroeconomic indicators and we also have a lot of internal research we are doing. So we look on floor space started, we look on the completion, we look on the floor space sold and the residential area looks quite good in the floor space started. But when you look on completion or if you look on the floor space sold, especially in the commercial and retail area, it looks slightly negative. And also there's a certain flattening in the residential area.
And then on the other side, we have seen that prices for apartments have going up again and it will depend extremely what the government will do. If the government will retighten or even more tighten the financials in the real estate sector, limiting the prices for a square meter, asking for certain liquidity, then this could reduce a little bit the positive at the moment a little bit more positive outlook of China. If the trade war between the U. S. And China would not come to be resolved, I could also imagine that the government would push much more towards the real estate sector because this is usually a sector where you try to accelerate economical development.
But I do not know exactly what they will do. But there are like 2 scenarios. One scenario is that this, let's say, trade conflict will disappear. And then I think we it could be that the government is tightening a little bit more because the growth from GDP will come from other industries. If the war continues then I would expect that the government will release a little bit some of those restrictions and that could be positive for us.
So there is a certain uncertainty in the U. S. And in China visible, I have to admit. In Europe overall, at the moment, we are on a high level in the markets. We don't see so much further strong growth in the markets.
Especially also in Germany, we have achieved almost a peak and there is not so much imagination that it could continue to further strongly grow as it has done in the last couple of years. But overall, we still see that the global market with all these pluses and minuses somehow will be flat.
Thank you very much. And you've answered my third question, which was on China. So I have no more. Thank you.
The next question comes from Martin Husler, Societe Generale Bank. Please go ahead.
Yes, thank you. I have two questions. Just an add on to China. If I now think about all you said, still if you assess China today, it must be a bit more positive than it was in February, right? Because you had a double digit growth in units, which was not expected.
I was just wondering if this could be a market that you say has some upside risks as well.
I think it's true when you look on the outlook of most of the players, maybe a quarter ago or also towards the end of 2018, the trend or let's say, the consensus was more between slight decrease and flat in best case. Now Q1 was probably slightly up in the market, but you know it's 1 quarter. So let's not now be too much optimistic and just extrapolate the Q1. But it is true, I think we have seen good momentum in terms of units and we also have seen for us good momentum in prices. And at the end, we just execute what we have promised.
And we have promised we want to grow faster than the market. And independent how good the market or how bad the market is, we want to outperform the market. And in Q1, we were able to do that.
Okay. And then maybe just turning to projects. And if I run through my notes that I made the last couple of quarters, you were talking about project delays, cash shortages of customers, developers. What do you see there? Is there a certain ease or a better development than the last quarter?
So is there still some delays in projects?
There are still some delays in projects according to our assessment. What you see in the market is there is a consolidation process going on. The big developers become stronger and the smaller developers become weaker. I think the shortage in cash is more an issue with smaller developers. But I have to admit also the one or the other larger developer, we see that, let's say, the payment attitude is not always as good as it could be.
So I think the bigger developers are stronger, but some of them still are not the on time payers all the time. So smaller ones, more under pressure, bigger ones in a better shape, but I don't see a real change in the liquidity of our market.
Okay. Thank you.
Next question comes from Martin Floeckiger, Kepler Cheuvreux. Please go ahead.
Yes, good morning gentlemen. Martin Flugiger from Kepler Cheuvreux. Thanks for taking my questions. I've got 2 remaining actually since most have already been answered. Thanks, first of all, very much for your elaborations on your market outlook for 2019.
Now I realize that Brazil is an important market for you in LatAm, but you haven't talked about the other countries. So I was wondering whether you could talk about the broader region of Latin America and how you see the new installation modernization and services and repairs business? That would be my first question. And then the second one, also very quickly, how many acquisitions have you been doing in Q1? And which business areas and geographies that was?
And what the impact was on orders received and sales growth? That would be very helpful. Thanks.
Okay. Thank you, Martin. Latin America overall is we have a strong presence in most of the countries. If you look on Mexico, Chile, Peru, Colombia. These are the ones, let's say, we are mainly focusing on.
There is a little bit of Argentina, but Argentina is a super, super, super atomic, I would say, market because there are so many players. And from a code point of view, there are not real codes, which you can follow-up. So there are a lot of local players. In all the other markets, I have to say, we have a strong position. And we also have seen good development for us.
We were able to compensate some of the struggles we have maybe in Brazil by the rest of Latin America. And this is not only in new equipment. It's also in the service business where we have good really good development seen over the last couple of months. So I think Latin America for us is a good market. It's not such a big market, I have to say, if you look on a global scale.
But for us, Latin America is a proper prospering environment. Now maybe Urs, on M and A, you could elaborate a little bit more.
Sure. So we are continuing with our operational, let's call it, bread and butter M and A transactions. We reported in 2018 to have acquired more than 25 companies in mainly in the segment of service companies, smaller local service companies. This is continuing in quarter 1 as per plan on a similar level, we can say.
Okay. Thanks. And so it's a minor impact on sales growth and orders received growth. Is that correct?
Absolutely.
Absolutely. Yes.
Negligible almost.
Well, negligible is maybe not very positive, I have to say. I would say it's a minor it's really a minor impact. But in the city where you make this small acquisition, has a major impact because you are covering usually a white spot and you create more density. But on a global scale, it has really a minor impact, really a minor impact.
Thank you so much. Thank you.
Next question comes from Bernd Pomrehn from Vontobel. Please go ahead.
Yes, good morning gentlemen. Two questions please. Firstly, you mentioned the slowing growth in Eastern Europe. Can you please elaborate in which countries you really see this lower growth? And secondly, again, sorry, coming back to building mines, CHF 40,000,000 in 2019 is quite an investment, up to EUR 150,000,000 in the total in the coming years is quite a significant investment.
Could you somehow elaborate a little bit on your expectations regarding the time of the first contribution to your growth, the expected payback, the return on investment or the breakeven point, that would be very helpful.
So if you look on Eastern Europe, we have seen that overall the pace of expansion has slowed down a little bit. It was not that we really have seen that markets were going down, but Eastern Europe is a very dynamic environment. And if it is booming, then it is booming very much. But what we also saw is that in some of the markets and one is very typical for it, that's Poland. It's a very strong environment.
It's a good economy. It's quite stable. Warsaw, for example, one of the fastest and most booming cities in Europe, but the shortage of skilled people and the increased wages are a burden in that. So this is the key driver why somehow those construction sites cannot be executed maybe as originally planned. Then when you look on other markets, another strong market is the Czech Republic.
There I think we still see a robust environment. It's mainly driven by the residential sector, which has been supported by low interest rates and also rising household incomes. The more you have create affordability, you also can generate some demand. So Czech Republic is robust. It's not now going through the roof, but it's robust.
And then of course, one last big country for Eastern Europe is Russia. And although we have a certain economic weakness there, we also see that the government puts a lot of effort to revitalize the growth through investments in residential transport, energy infrastructure projects. But it's a market where we are extremely careful and extremely selective in order to be in line with our core values. And maybe then on BuildingMinds Urs, the overall investments, we can confirm what we have said as an upper limit probably.
Right. We confirm this overall investment envelope of the €150,000,000 As we communicated earlier in the year, we expect about a quarter of those costs to come in 2019, eventually a bit lower after the smaller costs in Q1.
Okay. Thank you, gentlemen.
Next question comes from Fabian Hecke, UBS. Please go ahead.
Yes. Good morning. Not much left from my side. Maybe starting with the public projects in your order intake. Can you give a bit of a feeling how much your share of these public projects globally versus a longer term average?
And secondly, do you think this kind of rate of project wins because public projects are large and lumpy, do you think this is kind of a sustainable level? Or is there a risk in the next quarters or next year that this could drop a bit lower, this activity?
Okay. So public projects or public transport projects, what we count there is usually you have metro lines, you have railway stations and you have airports. These are, let's say, the key drivers. And usually these are very large projects. In an airport, either you have a new airport or you make a new terminal.
And in the area of railway or of metro, it's usually when you have a new metro line. So these are projects which are announced usually quite a long time in advance by the government. We also see that not always all those projects are exactly according to the time schedule executed. But what we see worldwide, and I think this is not only this is driven really by all the different governments. Infrastructure projects become more and more and more important because it is the only way how you can survive in higher and higher urbanization.
I believe in many, many, many large megacities or large cities in general, traffic has become a nightmare. So all the governments see that the function of the city can only be guaranteed if you have a strong infrastructure of public transport. So I do not see that there is a general trend that maybe those public transport jobs could disappear. Of course, there is another element which is affordability by the governments. But if we say that maybe we have a little bit more challenging futures ahead of us.
I would even say that probably the governments will push even more that those jobs are executed. So overall, I think this is good. Now the if you look on airports, on railways and on metros, a lot of those units are escalators. And the government wants to have well functioning, high quality and absolute safe escalators. And Schindler has historically a very strong position.
We have done a lot of efforts to further improve. All our public transport escalators are also connected with Schindler Ahead. And this is one of the, let's say, important selling arguments we have in the market. Those governmental bodies who make the final decision have seen with good experience to have with us, but also with the latest technology, super high standard of safety and reliability, we are perceived or seen as a preferred partner. So we are benefiting from this, let's say, market shift that this segment is growing faster than others.
And as we have a strong position there, we want to take the benefit. And then on top of it, we also believe that in terms of the aftersales business, so in existing installation, this is very important for us because very often you have a chance if you deliver a good service quality that then because the function and the reliability is so important that customers are giving us then also long term service contracts. And as an example, we have seen that I don't want to mention the city, but we have seen that in the past sometimes those governments shifted more and more than services to low cost suppliers because they had budget constraints and then they had not enough reliability. And we have now, for example, 2 different metro lines in or metro organizations in Europe who have said, wow, you do such a good job even if your costs are a little bit higher, but we are absolutely willing to do that with you and they come to us with their equipment. So for us, the public transport is looking good.
Also for the future, we have taken the advantage. We have increased our market share there as well. So in a growing market, we have a higher market share and this is one of the drivers also for growth. So we are really positive about that.
Okay. Thank you. Then coming back to the European market, particularly in Northern Europe. Can you elaborate a bit by country where you're more positive, more negative? And do you think is it really labor shortage that is a limiting growth?
Or do you see some markets where we are either at the peak or post peak in real estate?
Maybe we are at the peak in some real estate markets, yes. But we don't have seen now really indications that there should be a downturn or a slowdown in the real estate market. But of course, the real estate market is also impacted by general economic environment. And I mean, this also is driven by, let's say, some political developments. And if you follow all the Twitter accounts, I think it's not so easy at the moment to predict and to forecast how the world will look like in 1 year.
So we don't see at the moment any negative in the Nordics. We see a stable Germany. We see a stable Switzerland and also Austria. We have elaborated before a little bit about Eastern Europe and then we have the U. K.
And if you have a good tip how this will look like, then I'm super happy if you can give me an outlook how you think that the Brexit will impact the environment. I'm happy if you could share it with me.
Unfortunately, I cannot, but
Interesting enough, we don't see there was a lot of uncertainty in the U. K. In 2018. But what we see is that there are a lot of new projects planned in the U. K.
In contradiction maybe what a lot of people have expected. If all of them will be executed, I don't know, but projects are there. And probably a lot will depend on the outcome of the whole discussion about Brexit, how many of them will be executed. And maybe a last point, we have mentioned in the last quarters that we have strengthened our global key account management and we see that also now in Northern Europe, a lot of those global key accounts have projects and we are benefiting of that as we are one of the preferred suppliers of them. So we have in fact quite a positive outlook for us in the northern part of Europe.
Okay. Thank you very much. Thank you.
Next question comes from the line of Daniel Klaing, MainFirst. Please go ahead.
Yes, good morning. Thank you for taking my questions. The first one would be a clarification on Urs comment that it would be ambitious to maintain the margin 2019 over 2018. Were you referring to EBIT before or including the BuildingMinds impact?
Yes. Hello, Daniel. I was referring to the adjusted EBIT. So the adjusted EBIT before or without BuildingMinds.
Very clear. Thank you very much. Previously, we discussed the trends in the raw materials on several occasions. One or the other time, you mentioned there's a potential relief at the horizon. Could you give us some color on where you see the raw materials heading at the moment from your supplier discussions just to get an incremental feeling for from your elevator industry perspective where we're heading?
So when you look maybe you have to have a little bit a longer look because very often you are agreeing with suppliers for a couple of months on a certain price and then you are reevaluating the pricing according to the raw material development. So over the last 2 years, 2017 2018, the basket, if our raw material price index went up by more than 30%. So this was huge. And I think our team has done a very good job over the last 2 years to negotiate once more and once more and once more. We have a lot of escalation rules.
If there is a certain amount, even a supplier has to come to myself and has to come to Evicon and then we are making a final call. So we were able to push back a lot of the desire of our suppliers. Now of course, if you don't get the price increase as a supplier and you have the cost increase, you just come again. After the contract has expired, you are trying again to increase the prices. And this we have definitely seen.
However, I have to say that we have seen also stabilization and in some of the raw materials even a slight decrease in the last 3 months. Now as we are locked in usually for 6 to 9 months and we have tried to lock in the last quarter of 2018, we do not benefit from the short term development of the raw material price if it now goes a little bit down. So we can only expect a relief in fact towards the second half of the year. In case raw materials would further go down, then we would benefit from that. If this is not the case, then we probably stay on a similar level as we have been.
So it is not further headwind, but it is the headwind we have seen now also in the 1st 3 months. So it will all depend how the trend will be in the Q2 2019, because this will give us a baseline for negotiations in the second half of the year.
Very clear. Could you give us a little bit on guidance how depreciation and amortization will look like in 2019, post IFRS 16?
Good question. This I would like to hand over to the CFO.
Sure. Again, hello, Daniel. The amortizations in terms of our acquired companies, I would say, will continue at similar level. Last year, we had an amortization impact of close to CHF 30,000,000. And if we have a similar level of transactions this year, we will have again that impact in 2019.
What was the D and A number in Q1? We can maybe use that as a proxy for the full year number.
Yes. You can take a quarter of that.
And what was the number? Because it's not in the report.
So in 2018, we had an amortization impact close to 30,000,000 impact. So I say every quarter you have that.
And maybe one last question on M and A because you mentioned this is an ongoing exercise. I'm still a little bit puzzled why you haven't done any service acquisitions in China. Could you give us a little bit of color on why that has not been the case so far and when we would potentially see a change in that strategy?
Well, there is not a change in strategy. It's just, let's say, the whole process takes a little bit longer. And the reason for it is quite simple. We want to make sure we do not buy bad apples. So we put a lot of effort.
We are screening the market. We have, let's say, an M and A funnel. We have candidates contacted. We have seen interest. We are working on that.
Of course, usually we only report after we have done an acquisition. We have done some very small ones, but we also have some mid sized companies on our screen. But we are checking very much the quality of the equipment, the reliability, the safety, also compliance topics. And if we can tick out all the boxes at the end and we come to an agreement also with the seller, then we will also close the deal. And we are on good progress, I have to say, but we have not yet closed one of those mid sized deals.
We are not hesitant, but we are careful and we want to do the right thing. So hopefully, we once can report an early success. But there's no joint So
this comment was more on the new equipment side, I assume. I was referring a little bit more to the service side. Have you done any service acquisitions in China yet?
I was referring to service companies, not to new equipment. I was referring to service companies. Okay.
And have you done any smaller service acquisitions already in China?
Yes. We have done very small ones. We have done that, but not these midsized service companies.
All right. Very clear. Thank you very much.
Thank you.
The next question comes from the line of Wasi Rizvi, RBC Capital Markets. Please go ahead.
Hi, good morning. Thanks for taking my question. Just one left for me. I was interested in your comment about the digital investments breaking even in 2021. I just wanted to understand your assumptions in terms of are you assuming the investments continue to grow, but the contributions grow faster?
Or are you assuming the investments are the flat line or start coming down in future years?
Thank you for this question. It is true. You have some central cost and there we are doing a lot of investments, but the increase of these investments will flatten in the future because we then once have established this infrastructure to run the digital business. So the cost centrally they will flatten. And then yes, as we have rolled out in almost all the countries worldwide, our Schindler Ahead solutions.
We see now with the deliveries, all our new equipments are delivered with our Schindler Ahead solution, and then we try to connect. Then afterwards, we try to negotiate the service contract for this Ahead piece. And we see now that the development is positive. It is really positive for us. But it takes some time.
It takes some time because you have a certain lead time. When you ship the equipment until you have finally the service contract, this can take a couple of months or even up to a year. So in our projections, we see increasing operating revenue and we also see contributions to our margins in the service business. And this will compensate latest in 2021 our investments we have centrally and in some major markets for the infrastructure. Not included in that, let's say, a breakeven point is that we create more loyalty with our customers, that we have a better relationship with them, that we have maybe less losses to competitors.
It's also not including that we have maybe more recoveries from the market. It's really pure operating revenue coming from additional contract elements with Schindler Ahead and the contribution out of that. So in 2021, this should be then the breakeven point.
Thanks. That helps.
Thank you.
Next question comes from Debatesh Chand, Societe Generale. Please go ahead.
Good morning, gentlemen. Thank you for taking my questions. I have two questions, please. First one, could you update us on negotiations which you are having with your suppliers, which you mentioned are getting tougher, particularly on your existing product portfolio? And what kind of impact do you see from the modularity program is having on those negotiations?
And do you see this situation to persist in 2019? My second question is on pricing. How do you see your capability to push prices particularly in the second half given the impact from raw material would be likely to be lower in the second half? So these are the 2 questions. Thank you.
So update with suppliers. We have a program. This is called CCQL. It means Continuous Cost and Quality Leadership. And this is a program we have since a couple of years in place, which is continuously driving down the costs with negotiations, with higher productivity in the factory, with the modularities or design changes and we are looking on that on a weekly and on a monthly basis.
And there, of course, all those negotiations with suppliers are in. Most of the negotiations have been done. So we are locked in for a minimum for the first half of the year. And I think the outcome was according to our expectation. So we can confirm that at the end of the year, we will try to generate out of those different elements like negotiation, productivity and modularity that we will be on track.
So that's quite promising. Now some of those suppliers will be phased out. And there it is more difficult to negotiate the good price because they say, it's maybe the last year or the last one and a half year I can supply you. So we have seen that this is a little bit more difficult to create a better price level because we still need them, because we still use the old components. But I know we will not need them anymore maybe in the second half of twenty twenty.
So when we have replaced all the components. So this is quite a challenging moment we have at the moment. On the other side, suppliers where they are striving for also to be the supplier in the future for us, Of course, we try to get the benefit out of that. So overall, I would say it was according to our expectation. Now impact on modularity, so it means that part of savings which come from design changes was we said it will come more towards the second half
of the year. Yes. Absolutely, our modularity initiative is on track. The components are rolled out and several of them will be rolled out in the second half year. And we certainly will do that and materialize it in order to achieve our total net procurement savings.
Then the second question was about pricing. I think we have done a very good job in pricing all over the world. I have to say that we were able in the North America, but also in Europe. We have put a lot of focus on pricing actions in new equipment, but also in the service business and in the repair business. Now pricing is, of course, a continuous effort.
It's I have said that in calls in the past that we have a so called power pricing mechanism. So where we try to bring our salespeople to the with some peer benchmarks to the best prices possible. It's not only increasing list price, but also working on sales management. I think we have done a lot on list price increases. And then if the market does not allow you really to increase the price, then you have to give more discount on this list price.
So what we try to do is more now to manage this discounting by peer benchmarking and having more a dynamic pricing model. This will also continue in the second half of this year.
Very clear. Thank you very much. If I may, just one last question, if I can push. Where do you stand in terms of the penetration of your digital service selection ahead? So how do you see in terms of your installed base, how far you have gone in terms of the new services you're providing?
So penetration of Schindler Ahead, what we have stated 1 year ago is that all the new equipment will be equipped with Schindler Ahead. So our key driver is to with the new installation conversion into our service portfolio to add to the normal service contract also a Schindler Ahead contract. It's an element or a module of our service business. This is the key driver. Then on the other side, you have, of course, a hugely installed base.
And there, we only equip with Schindler Ahead if the business case makes sense. We are not claiming that we want to connect everything, everybody, because at the end we want to have a positive business case. And the installation cost in an existing elevator, if you come now and you do, let's say, an add on within Ahead, the cost, especially the labor costs are higher because it's like a small modernization what you do. So we only do that if the customer is willing to pay for it. And I see the opportunity in large contracts and large key accounts.
There we see the highest positive feedback and we also see it in commercial buildings and in public transport areas. In fact, we win the one or the other service contract from the market because the customer is very convinced about our Schindler Ahead solution. But we do not plan to roll out Schindler Ahead for all the installed base, only there where it makes sense. But in the new equipment business, we say we roll it out everywhere. So it will take a couple of years, as I said, until you have this payback in mid-twenty 21.
And but we are quite confident and we are in fact according to our plan even I have to I can state that according to our internal plan we had, we were even more successful last year. Now the absolute number of connected units we do not disclose.
Very clear. Thank you.
So the last two questions from Andre and Martin as a follow-up, and then I think we could close the call.
The next question is the first follow-up question from Mr. Korn Linden. Please go ahead.
Yes, thanks very much for taking the follow-up. So I'll keep them brief. I wanted to just ask again about large projects pricing in China. I know it's kind of become a quarterly question, but is there any kind of respite in that pricing pressure that has been there for the last 2 years?
We have not seen if you look on large projects, there are 2 different type of large projects. One is the public transport area. We have elaborated on that. There are different pricing mechanism there depending on the customer. Some customers go for the lowest bid, but some customer go for the middle bid.
So they take all the offers and the closer you are to the average price offered, the more points or the more scores you get. So that's quite a unique pricing model because you have to think about how everybody will try to price. So there I would say there is it is there is no big change. Now in the more commercial business, what we see is that in the large projects, these are usually the towers, the high rise buildings. And there we see still markets are changing the specifications.
They go to lower end specifications, which means you do not cover the market with your absolute top notch product, but with a middle segment product. And this middle segment product has a lower price than the flagship product. So there is a certain shift in specifications happening. The top end market definitely is tremendously still under price pressure. This we have not seen any relief from that.
Got it. Thank you. And just a follow-up on labor inflation on the installation side. I have it from my notes that about 20% or 25% of your installation kind of work is outsourced. Is that right?
And is there a difference in terms of how you can manage that labor inflation in installation labor force. Is there a difference between kind of handling that as your own headcount versus the outsourced headcount or not?
Well, the share where you have subcontractors is totally different from country to country, I have to say. It is not right to do a common share of 25% or 30% or 20% or 40%. I think it's really country specific. Why is that so important? Because the labor cost increases are also totally different from country to country.
So a global share makes not so much sense. Now in terms of pressure, honestly, I do not see so much difference in the pressure. It's meant legally in many countries you are obliged to pay if you have a unionized labor workforce. Honestly, the chance you have is very little if you are part of the overall agreement. And there is an agreement that wages go up by 4% and wages go up by 4%.
You have not so much negotiation power there. On the subcontracting area, usually they are not unionized. So they but they have, of course, quite a similar pressure because usually the salaries in the subcontracting company are quite low and the pressure to increase is quite high. So you might have an increase on a lower base a higher increase on a lower base compared to owned fitters, but the overall increase at the end is more or less the same. I don't see so much advantage or disadvantage in terms of wage increases.
Got it. Thank you. Thanks so much for your time.
Thank you. So we come to the last question with Martin.
Last question for today is the follow-up from Mr. Froegiger. Please go ahead.
Yes. Thanks so much for your patience. Just a final one, a clarification question, because I think there was a misunderstanding in one of your previous answers. And I'm referring to Urs talking about, if I understood him correctly, about the PPA impact on amortization last year. But I think the question, I think it's a valid one, was actually more on Q1 full depreciation and amortization because we don't have an EBITDA number or depreciation and amortization number for Q1, just something that after the implementation of IFRS 16 would be worth noting for our models.
So the full depreciation and amortization charge for Q1 will be of interest. Thank you so much.
All right, Martin. I will come back to that via Marco Knuchold. We will follow-up on that. Thank you very much.
Thanks. Thank you. That's it. So ladies and gentlemen, thank you very much for attending this call. Looking forward to hear or to see you again on the half year closing in I have to check once more on the date on August 14, 2019.
Thank you very much and looking forward to hear and to see you again. Bye bye.
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