Welcome to today's Full Year Results Presentation. My name is Thomas Oetterli. I'm the CEO of the Schindler Group. I'm here together with Urs Scheidecker, our CFO, who will later guide us through the financial details and the outlook for 2019. The year 2018 saw a continuation of the trends that had already emerged in previous years, but challenges in the markets intensified.
Alongside material costs and wage inflation, pricing pressure and the return of foreign exchange headwinds, we faced a competitive market environment. Overall, 2018 was again a satisfying year for Schindler. It's fair to say that we're well managed to adapt to changing market conditions and successfully continued our growth path while at the same time improving results. Please let me start the presentation with a general overview of the market development and the megatrends, which are supporting long term demand for elevators and escalators. Urbanization and demographic changes are supporting demand.
Urban population is constantly increasing and by 2,030, more than 5,100,000,000 people will live in cities. At the same time, the middle class is expected to grow by more than 60%. These people require more living space. The aging population with its needs for efficient and safe mobility is another driver as their population will soon exceed 1,400,000,000. Ongoing demand for latest technology will in addition create further demand as the aging installed base creates modernization opportunities, particularly in the developed world.
With the Internet of Things, digitization is part of our everyday life. New business models emerge in the connected building world. Connectivity of our equipment will become a driver for new services for our customers and users and will generate additional revenue streams. Since 40% of global energy consumption relates to buildings, there is last but not least an increasing demand for energy efficient solutions. Let us now have a look into the new installation market development.
In the upper section of this slide, the global new installations market is split into the regions Americas, EMEA and Asia Pacific. Overall, it slightly grew by around 1% in 2018. In the Americas, the positive development in the U. S. Construction sector continued.
Ongoing urbanization supported demand for residential properties. In the institutional building sector, an acceleration of activity was visible. In contrast, there was a slight slowdown in commercial properties. After several years of recession, Brazil showed first signs of recovery. In EMEA, the positive trends in Northern and Southern Europe continued, driven primarily by residential construction.
Growth slowed in the commercial real estate sector. Germany developed very positively and most markets in Eastern Europe grew. Markets in Southern Europe mainly benefited from the strong residential construction sector. However, Turkey contracted sharply. Finally, Asia Pacific.
The Chinese market was slightly up and the other markets in the region generated a total slight growth. In the lower part of the slide, we look at the global new installations market in terms of value. Asia Pacific is also dominating here, but less than in units as the average price per unit is lower than in EMEA and North America in particular. On slide number 5, we show the same distribution as in the previous slide, but for the installed base. The key growth region is again Asia Pacific, which benefits from strong conversions of newly installed units into service contracts.
In terms of value, the distribution is more balanced as the average service price per unit is higher in Europe and North America than for example in China. This was the past. Now let's have a short look into the future. The new installation market outlook is not so rosy, I have to admit. Several headwinds are expected to hinder market growth, such as the Chinese market, which is expected to slow again, uncertainties about Brexit, a stabilizing U.
S. Market and trade tensions and tightening financing conditions. As a result, we expect in summary plusminus stable markets across all the regions resulting in a flattish global market development. With its vast geographical diversification, Schindler is ideally positioned to benefit from developments in several areas where markets still will continue to grow. I now like to move on the next agenda item.
Strategy and execution or our approach to mastering the challenges ahead. As already stated many times before, Schindler invests in the long term and this philosophy has never been influenced by short term turbulences and we plan to further accelerate our strategic investments going forward. Our strategy is defined along following 3 targets: grow faster than the market as priority number 1 improve profitability and foster a winning team on all company levels. 2 sets of initiatives support the achievement of the targets. 1st, operational excellence.
These are the focus areas to drive results in terms of growth and profitability. And this happens with unique products and services, a global key account management, efficient processes and structures, expansions in strategic markets and selective mergers and acquisitions secondly, our strategic priorities or long term investment programs to establish a better company for the future such as modular concepts for elevators, which generate seamless offerings for our customers, a higher quality and less complexity and reduce also our costs. Then digitization and mass connectivity with our Schindler Ahead solution, which allows us to build new future business models. The digital twin, we introduced an integrated three-dimensional design, which assures seamless data transfer from engineering to production, installation and maintenance processes, leading to higher flexibility, quality and efficiency in our operations and less time to market for product innovation. And then talent management, diversity and skills improvements, which are essential for the long term success And last but not least, the Schindler Quality Champions program, which avoids costs for non conformance and further enhances our premium quality reputation.
As an outcome of our operational excellence programs and the strategic priorities, we generate a superior user experience and value for our stakeholders. In 2018, Schindler grew above the market. I would like to highlight three examples of strategic priorities that supported our performance in terms of growth. Customer excellence is our global program to drive a customer centric culture throughout the whole organization. In 2018, our Net Promoter Score further progressed.
We conducted around 130,000 surveys to assess our customer satisfaction and we placed a strong focus on resolving challenging customer inquiries. The expansion in strategic markets continued. In China, we generated strong growth, particularly thanks to our competitive offering based on our harmonized product platform. In India, we strengthened our local presence with the new escalator plant. And in the U.
S, we have been very successful with the Schindler 3,300 and Schindler 5,500 and in public transportation projects. We were also successful in our M and A activities that accelerated in 2018. We acquired more than 25 service companies and further increased the stake in our Chinese joint venture, VolksLift Elevator to 49%. Growth in order intake was supported by a substantially higher share of major orders. Slide number 10 shows only a few examples where we provide a contribution to the quality of life in dense urban areas rendering a service to society.
There is a variety of commercial centers, public transportation projects and landmark buildings. Next to growth, to improve profitability is also a strategic target. Since 2014, we were able to improve our EBIT margin significantly from 10.1% to 11.7% in 2018. Absolute EBIT has grown with a CAGR of 8% during the same time period. Since value is generated in hard currencies and not by margins, primary focus is to increase absolute profits also in view that the margin can easily be changed by changing the business mix from new installation to existing installations, but cannibalizing future growth opportunities.
We have the ambition to be a leading employer in the urban mobility industry. In this respect, we are particularly proud of the results of our employee engagement survey where we achieved a 97% response rate, which is absolutely extraordinary. Results were well above industry benchmarks and showed a performance driven culture throughout the whole organization. Talent management is one of our strategic priorities. Cornerstones are our careful career and succession planning, training and certification at all levels.
Vocational training and education, we have more than 30 programs underway across the world, helping more than 2,000 young people to begin a career. In addition, Schindler has a dedicated career development program for young talents and last but not least, initiatives to promote diversity and inclusion across the world through, for example, diversity councils and women in leadership programs. With our Schindler Quality Champions program, we embed quality leadership along the Schindler value chain applying 3 guiding principles: 1st, front loading 2nd, collaboration and last, continuous improvement. Over the years, Schindler has built a tradition of pioneering innovative customer driven products. I would now like to touch upon 3 examples of innovation we launched over the last 12 months.
Schindler Climb Lift is a certified self climbing vertical transportation setup, which gets an elevator ready for normal operation in less time, optimizes site logistics, accelerates the overall construction process and increases safety for our field workers. With RISE, the robotic installation system for elevators, we are paving the way for a quantum change in quality assurance, work safety and installation speed in the elevator industry. And with the full integration of elevators and escalators into digital building models, the BIM, and planning tools, we enhance our customers' efficiency through better site coordination, ad hoc information and digital documentation. The following video snipped provides an impression of RISE in action. Digitization moves forward throughout the whole Schindler organization, and we made further progress with Schindler ahead.
With ahead Core, ahead Action Board, ahead Connectivity, Ahead Remote Monitoring, Ahead Ad Spot and Ahead Door Show, we launched 6 digital products in 2018. Schindler Ahead has been rolled out in more than 47 countries. We trained more than 1,000 salespeople and we conducted more than 20 big customer launch events. There is a lot of thrive in the whole Schindler Ahead organization and I'm pleased with the progress being made. Also our modularity program advances well.
Modular concepts for elevators are a core strategic element of Schindler's efforts to enhance competitiveness. At the end, modularity is about making things simple, simple for our customers because our product offering is seamless and flexible, but also simple for ourselves because less variants create less design efforts and enhances quality. In over 144 years of history, Schindler has grown around the world while being recognized as a responsible corporate citizen in each country in which the company operates. We have now consolidated all these efforts in which the company operate. We have now consolidated all these efforts in our sustainability strategy, which underscores our long term focus, our responsibility towards the environment and our social commitments.
Our sustainability strategy focuses on 6 areas selected to deliver the greatest impact and to be measured against ambitious targets set for 2022. At the end of 2018, we moved to our new headquarters in Abicom. The building will be one of the first in Central Switzerland to receive a LEED Gold Certification. Beyond this, we have green building certifications for our sites, not only in Switzerland, but also in India, in China, in the U. S.
And in Slovakia. So now let's move on to our results 2018. I have already elaborated on the different market developments earlier. So let me briefly summarize the key developments. Globally, the new installations market has slightly grown with sustained positive trends in key markets.
Overall pricing was still tough. Service and modernization markets globally showed a very strong momentum. When we look on the performance on Schindler, in a nutshell, Schindler performed well in a challenging environment. The team did a very good job. We are a strong organization with a winning spirit and we are well prepared for the challenges to come.
In terms of order intake, we were again able to grow faster than the market worldwide. Order intake and revenue grew more than 6%. The share of major orders continued to increase, particularly for infrastructure projects. Our expertise as a global leader with a strong brand and a dedicated global key account management is well recognized by our clients. Given the headwinds we faced, we are pleased with the results we achieved.
EBIT improved by CHF 82,000,000 at a margin in line with the previous year. Net profit was up by 14%. The next four slides show the regional market developments in more detail. As I have discussed them earlier, I won't repeat them again, and I would like to hand over to Urs, who will give us some insights into the financials and the outlook for 2019.
Thank you very much, Thomas, and good morning, ladies and gentlemen. I am pleased that I'm able to present a strong set of numbers on our annual closing. I will provide you more details on the 4th quarter and full year figures, and I will also summarize the impact of the new IFRS 16 lease standard to be effective as of 2019. Moving to Slide 25. You will see the key figures for the Q4 2018.
Our order intake increased by 3.8% to CHF 3,000,000,000 corresponding to a growth of 6.0% in local currencies. Our order intake includes all business lines, new installation, modernization, maintenance and repairs. The Asia Pacific region achieved the highest growth rate, followed with good growth rates by the Americas and EMEA regions. Our order intake in the important market China was strong in value and in units. All business lines contributed to the growth in the quarter.
We were particularly pleased with growth in modernization, showing double digit growth and maintenance, including repairs. The revenue improved by 4.3% to CHF2.9 billion equivalent to an increase of 6.5% in local currencies. We are pleased to see robust growth in all regions and business lines. Negative foreign exchange effects were heavy and had an impact of CHF 62,000,000 driven by the strong Swiss franc against currencies of developing countries such as the Brazilian reais, the Chinese RMB and Turkish Lido. Operating profit improved by 4.9% to CHF 3 43,000,000 corresponding to an increase of 8.0% in local currencies.
The EBIT margin reached 11.7 percent, 10 basis points higher than in the previous year. Before restructuring costs of CHF 11,000,000, the EBIT margin was 12.0. Raw material inflation was still high and required really strong operational efforts to offset them. The net profit amounted to CHF262 1,000,000 representing an increase of 11.0% compared to last year's period. We received an additional CHF 5,000,000 tax refund, of which CHF 3,000,000 were recorded in income tax and CHF 2,000,000 in interest income.
As a result, the net profit without the tax refund grew by 8.9% to CHF 257 1,000,000. We are also pleased to see robust growth in cash flow from operating activities of 8.6 percent to CHF 289,000,000. I'm now moving to Slide 26 to comment on the performance for the full year. Order intake for the full year rose by 6.2% and 6.6% in local currencies to a total of CHF 11,700,000,000. The Americas region, fueled by the U.
S, contributed the most, followed by the EMEA and Asia Pacific region. China new installation business generated high single digit growth in units. The revenue improved by 6.9 percent to CHF 10,900,000,000 corresponding to a growth of 7.3% in local currencies. Foreign exchange headwinds impacted the revenues by CHF 44,000,000, again mainly driven by the strong Swiss franc versus the Brazilian reais, U. S.
Dollar and the Turkish lira. I move to Slide 27. Revenue growth by region in local currencies shows that the Americas and EMEA region, you see that on the left hand side, accelerated growth to above 7.5%, followed by the Asia Pacific at 6.5%. Across the regions, growth was particularly pleasing in the existing installation business, which gained further momentum in Asia Pacific. Also, our backlog, you see that on the right hand side, grew strongly by 9.7 percent to CHF 8,600,000,000 with strong growth in all regions.
I'm back on Slide 26. EBIT rose by 6.9 percent to CHF 1269,000,000, equivalent to a strong growth of 7.5 percent in local currencies. Foreign exchange headwinds had a negative impact of CHF 7,000,000. The EBIT margin reached 11.7 percent, in line with the previous year. We were able to implement significant operational measures, inefficiency and overall costs to offset the strong headwinds from the raw material costs and growing wage inflation.
Before restructuring costs of CHF26 1,000,000, the EBIT margin reached 11.9%. Schindler's net profit increased by 14.0 percent to CHF 1008 million. This is the first time in Schindler's history to reach this CHF 1,000,000,000 milestone. This achievement was supported by the good operational profit contribution, but also the extraordinary tax settlement with an impact of CHF 60,000,000. Net profit before the tax refund increased by 7.2 percent to CHF 948,000,000.
Cash flow from operating activities was CHF 1000,005,000,000 also here a good increase of 24.1 percent supported by the EBITDA improvement and the contribution of the tax refund. There is also an improvement of CHF 35,000,000 in change of net working capital. This all leads to a strong increase of earnings per share of 14.2 percent to CHF 8 point 79 per share. Let me now move forward to Slide 28. An ordinary dividend payment of CHF 4 per share and participation certificate is proposed to the general meeting of shareholders on March 26.
This represents a payout ratio of 46% and is well in our payout ratio of 35% to 65%. These are the key points to our closing. Let me now move and provide you a heads up on the impacts of the lease down, the IFRS 16, effective as of January 1, 2019. This is shown on Slide 30. Lease contracts will make its way to the balance sheet, such as car fleet and office leases.
Lease contracts will be recognized in the balance sheet as a right of use asset and related lease liabilities. An estimate of our full year impact going forward is an increase of approximately CHF 400,000,000 in assets and lease liabilities, respectively. The EBIT will positively be impacted by CHF 5,000,000 to CHF 10,000,000 as the interest portion for the leases will be recognized as finance expenses. There is practically no impact on net profit. It's a reclassification between the lines.
Finally, the cash flow from operating activities will actually increase by approximately CHF 100,000,000 as the lease payments are now recognized in financing. However, cash flow from financing activities will decrease by the same amount. So overall, cash flow neutral. Coming to the outlook 2019 on Slide 31. Looking ahead, the global megatrends continue to be favorable to the development of the elevator and escalator markets in the long term, particularly the trend in urbanization, the aging of population and the wealth creation of the middle class.
However, some of the key elevator and escalator markets are expected to slow down in 2019. With its vast geographical diversification, Schindler is ideally positioned to benefit from developments in several areas where markets will continue to grow. For 2019, excluding any unforeseeable events, we provide a revenue growth guidance of 4% to 6% based on our strong backlog. We will further work on our strong set of operational measures to enhance profitability, such as pricing and efficiency, including the rollout of our modularity initiative. On the other hand, we will face headwinds, namely raw material costs and wage inflation.
In addition, we plan to accelerate our strategic investments. As in previous years, net profit guidance will be provided with the publication of the half year results. And now I would like to invite you for questions for about an hour, and I propose to first start with questions in the
room. So we will give you a microphone so also people who are on the line can understand.
Thank you very much. Martin Flutiger from Kepler Cheuvreux. First question I have 3, and I'll take 1 at a time. First question is on working capital in H2. Could you talk I don't recall what the operating cash flow was in Q3.
So if you could remind us what the developments were in the change of net working capital, whether there were any surprises or disappointments in H2? That would be my first question.
Thank you very much for the question. Net working capital has stabilized now towards Q4. I discussed that with you earlier that we had a very significant drop in the last 2 years on our net working capital of EUR 470,000,000. This was very much driven by our higher share of large projects, and the large projects come with key accounts and global customers with demanding payment terms. Secondly, the recession in Sao had an impact on our net working capital as payment terms in Brazil are actually favorable and the coverage of work in progress with down payment is actually very favorable.
So with less volume in Brazil, we have a mix in the net working capital unfavorably. And thirdly, in China, particularly on public transport projects in Tier 3, Tier 4 cities, we see a bit lower and later payments for those projects. As I said, in the second half year, it has stabilized. Actually, the change of net working capital is a little bit better, EUR 2 17,000,000 versus EUR 254,000,000 in the previous year. And this trend has now started in the 4th quarter.
So Q3 was a little bit negative, and now it was a little bit positive change in net working capital.
Thank you very much. And the second question is on China. Your outlook is for a flat at best market development for new installations in 2019. Could you elaborate a little bit on your key assumptions? And maybe also talk about what you're seeing in terms of tightening or relaxation of housing restrictions in China?
Maybe I'll take this question. Thank you for that. Of course, it's always the same question. How is the outlook for the next 12 months in China. And in reality, as it is the biggest market, 60% of the worldwide new installation market, everybody is extremely focused on the outlook.
We don't have a pessimistic view, but we also don't have an optimistic view. We believe that market will be somewhere between slightly negative until stable at its best in terms of units. I think pricing has stabilized in 2018 in the volume business, so especially in the residential areas. What we have seen in pricing in large projects continued also in quarter 4 that this has been very price intensive. Now when you look on some macroeconomic data, it is still the case that there is a lot of government pressure on Tier 1 and Tier 2 cities.
There are a lot of restrictions implemented not only in terms of financing, but also in terms of sales price. So in certain cities, there is even a cap what kind of a sales price you are allowed to ask for when you want to sell an apartment. Then as a consequence, we see a certain widening gap between project starts and completions. And this is mainly driven by slowing purchases of residential and commercial space, but also there is a weak cash position of certain developers because with the slowdown of completions and also sales, there is some cash shortage because they have less customer prepayments. And in general, we see certain delays of projects, certain delays in lead times of projects.
So for that reason, we say if we put everything into one pot, of course, there is still urbanization happening. There is still demand. People are going into the cities. But on the other side, there is some restriction coming from the government and there is also some cash shortage on the developer side. And that's the reason why our crystal ball outlook remains flattish.
So maybe slightly negative, but we do not see that there will be a growth in terms of units in the year 2019. Nevertheless, I would like to emphasize that it is the biggest market in the world, and it is an important market also for us for future growth. And we also have still our priority number 1 that we want to grow faster than the market, and this is also the case for China.
Thanks. And then my final question. Looking at your performance in terms of order intake in 2018, it would appear that also your new installation business outperformed the new installation market globally. Is that perception true? And what does your order pipeline suggest in terms of dynamism of order intake growth for 2019?
Well, all in all, I think as it has been mentioned also by Urs, we grew in not only all the geographical areas, but we also grew in all the different product lines, so new installations, modernizations and also a very strong service and repair business. And I think in all the different areas, we believe we have outgrown the market. Now looking ahead, it's still a little bit early days in the year and there are quite a lot of moving factors at the moment in the political, but also macroeconomical environment. So this, of course, has to be observed very strong. There is we have mentioned that.
We see that China is maybe a little bit flattish. We also come towards an end of the cycle in the U. S. Nobody exactly knows when and how this end will really impact our business. But we continue that we also want to outgrow the market in all the different businesses we have in 2019.
So we are confident that we can achieve that. And there is a question here in the front.
Thank you. Rem Rosenau, Helvetica Bank. Roughly a year ago, you told us that the raw material situation would probably cost you around 30 basis points in 2018, which you needed to catch up. Moreover, you said that the structure of the order backlog would also have a 40 basis point negative impact most likely. On top of that, we had wage inflation and pricing pressure.
So my question is, how much at the end of the day was the negative impact of all these elements? And what I'm trying to get at is, what were the underlying margin improvements, assuming that there had been no headwinds? And the adjacent question to that is, could you give some similar outlook on these elements for 2019 and if you expect to be able to overcome them as well?
So let me maybe first answer maybe a little bit on a broader level. Yes, it's true. We said 1 year ago that we expect higher raw material inflation, not only for new orders, but also in our order backlog because what you have sold, you have sold. So you price the sales price is fixed. And so when you have an increase in raw material cost, it hits you on the margin.
And we said that wage inflation, material cost inflation were maybe something like 50 to 70 basis points altogether. So we can confirm what we said a year ago. On top of that, we also had increased investments into strategic programs. This also has cost us some basic points. And at the end, we achieved a flat EBIT margin.
So there was a lot of efforts on our side to compensate those headwinds. And we have seen in the market that this was not only a challenge for us. This has also been a challenge for other players in the market. And I think we all have suffered from that. But I have to say the team has done a very good job.
We took very early initiatives and actions. One is our program. We call that CCQL, that's Continuous Cost and Quality Leadership. One element there is modularity. But the modularity only had a minor share of contribution in 2018.
So a lot was negotiation, but also we were benefiting from our harmonized China platform because there we tried to execute the first time this modularity concept and it helped us with design changes to come to a lower cost level. And then we were working very hard on efficiency improvements in the new installation business and also in the service business. And last but not least, we try to stay lean, not to be too expensive in the costs, which we have as a fixed cost. So at the end, we were able to mitigate those additional headwinds we had from raw material and wages as we have announced it and also our strategic costs. So for that reason, we stayed flat.
Now when we look ahead into the year 2019, as I said before, it's early days in the year. And there are, as I also mentioned, many moving factors influencing our results in 2019. I think we have a robust outlook in terms of top line, 4 4% to 6%, and this will generate also a strong absolute profit growth. This is a consequence if we can keep the margin. Now there are still significant headwinds.
We still have raw material cost increases because we were able to push it back in the year 2018. But the index of raw materials is still roughly 25% to 30% higher than it has been 2 years ago. So when you push back, suppliers usually come once more and knock on your door, and they try now to somehow increase the prices towards us. On top of it, we also have the tariffs, which are impacting us negatively. And we still have quite a substantial wage inflation.
And we still further invest into our strategic programs. So this altogether is, of course, impacting our margin. But on the other hand, we have now more impact from the modularity program. We have we are well on track. We have advanced our program and we still have strong operational measures.
And there is no change in our long term ambition that we want to continuously improve our profitability. Whether how much, this is always year on year, it's, as I said, very early days. But on our strategic goal to continuously improve margin, there is no change.
Okay. Thank you for that.
Just on the old structure of
the order backlog, is there still a negative impact there compared to euro? Or is that not the case anymore? Because that was also an element last year.
There is still some impact because it depends on the country and what is the lead time between the time when you get the order until you can do the final billing. And depending on the market and on the product, this can be 6 to 9 months. All those topics, let's say, we were able to, let's say, mitigate or to remove this negative impact on the backlog. But in many countries, you have a lead time of 18 or 24 months. On top of it, if you have a higher share of large projects, they even have a longer lead time.
So also there, we still have some negative impact on our order backlog. But as I said, we also have strong operational measures in place. We are continuously working on our modularity program. We will introduce this year additional harmonized components with the controllers, with the inverters and towards the end of the year or beginning of next year also with the machines. And so we are confident that we also will be able to execute those programs this year.
Thank you. My last question, dividends. Last year, you said that you will increase the payout ratio from 35% to 45% to 35% to 65%. Last year, it was 52%, the payout ratio. Now it is 45.5%.
Profits have been up. I mean, you gave a signal a year ago to basically increase the payout and now relatively speaking, it goes down. Some people expect a bit more here. Why?
I think a very correct calculation. So I think on the topic of dividend policy, First of all, I think Urs, our ambition is always to have a very strong balance sheet. This is definitely an element Schindler always had. And I remember what Erith Amon said in the past years. When we had the downturn 10 years ago, everybody was happy that we had a very strong cash position.
And I, of course, understand the appetite. But our philosophy is to have a very strong balance sheet. Why? Why is that now even more important? Because at the end for us, we don't change our strategy.
We want to have a strong growth organically, but also with M and A. And this needs investments. So we want to invest to further grow. And secondly, we also want to invest into the programs which will help the company in a couple of years to even become stronger than we are today. So we still want to do all the investments into our strategic programs in the future and this also demand certain money.
So we can expect a much higher payouts in the future?
Well, nice try. Nice try. At the end, the dividend policy is a task which has been which is given to the Board of Directors, and they will have to take the ultimate decision. And I cannot already forecast what they will decide in a year or so.
Thank you.
Then there is one question here on this side.
Thank you. Dan Pomeran from Vontobel. You mentioned that the share of large projects has increased quite significantly last year. How does your award pipeline look into 2019? Do you also see that the share of large projects is becoming more significant in your award pipeline?
And or do you also see that announced infrastructure projects are put on hold because of a more uncertain global macro environment?
So regarding awards, we are happy with the award pipeline we have. So it is a clear strategic initiative from us in terms of growth that we also want to have a good share in the major project market. So far we see that also in terms of awards, we are well on track because we only recognize that if we have received a down payment. So there are already contracts in the pipeline where we have not yet received the down payment and they should become order intake in the next 1, 2, 3 quarters. Sometimes this takes really a lot of time.
Now regarding change in policy of infrastructure projects. Yes, in some countries, sometimes you see that, let's say, the announced plan was extremely ambitious. And then maybe in the execution, there are less projects which then really are executed. But we do not see at the moment that the overall real executed amount of projects should be reduced. And I also believe that there is even a chance in some turbulent times usually government policies are more favorable for infrastructure projects because they boost somehow the overall economy.
Okay. Excellent. And then one second question, please. In the Q3 conference call, I understood that you were expecting the pressure from raw material prices rather to level out in 2019, while actually the pressure from personnel cost increases could even accelerate. Is this still your view?
Or are you now becoming even a little bit more concerned again on raw material prices because what we have seen with the iron ore prices, for example?
Yes. That's a very relevant question. Raw material costs still were at very high levels in quarter 4. And in some of the raw material commodities, it even went up. So this trend for our P and L is continuing.
We have headwinds of raw material inflation into 2019 as we are very normally locking in the prices with our suppliers in a range of 6 to 12 months. And this is still the case now middle of February. We don't see yet a relaxation of the prices.
And personal cost development?
And wage inflation is clearly a concerning issue. We see wage inflation increase, particularly in Europe and in North America.
Okay. Thank you, Urs.
There is one question here on the or 2 then.
Yes. Martin Hieslodziejko, Kantonalbank. I have two questions. Coming back to Page 5, I think, on your slides, where you showed the existing installation markets. Could you please repeat what you said about profitability for certain regions?
And the question I have to EMEA, you show there a market growth of 2% in units, if I understand correctly, whereas in new market new installation, there was actually a decrease by 2%. And I really cannot make out the difference. How can the new installation market shrink and existing installation market increase?
Thank you for the questions. First on profitability, I do not remember that I have shared different profitabilities for the existing installation market. But overall, they are not so different. Although the price levels are maybe different because usually a contract in the Western part of the world has a higher price than in Asia. You also have different wages.
So this brings you to similar profitability levels. Now what is different in the Asian market compared to the Western markets is very simple. In the Asian markets, you just have new buildings. And at the moment, when you look on the development, for example, in China, the markets have grown in new installation very much in the last 15 years. So the buildings are still there.
Whereas in the Western part of the world, part of the new installation growth is negatively compensated because you first take down an old building and then you make a new building. So this is a new installation. But on the other side, you also lose the old building and the old installed base. We call that shutdowns. So this phenomena of shutdowns, you don't have yet in Asia Pacific, but you have that in the U.
S. And you also have that in Europe. And so that's the reason why the growth that's one reason why the growth of the installed base is not so big. Secondly, if you look the relation between new installation market in terms of units to existing installation market, the ratio is much smaller in Europe. Usually in a well developed market, the new installation market is something like 3% of existing base.
And then you lose 1% because of shutdowns. So the installed base only grows about 2%. Now when you go to more environment and you take, for example, China where you have maybe 500,000 to 550,000 new installations per year and you have an installed base of 6,000,000, the ratio is almost 10%. So this also generates much more growth in the installed base. If you will look ahead 10 years, this ratio will be very similar to the European ones because the installed base will grow, grow, grow and this ratio between number of units in new installation and number of units in installed base will be similar to the Western world.
I may add to Slide 4, where you see this negative NI growth in EMEA. We made a comment as well in quarter 3. This is also very much related to Turkey. Turkey is one of the biggest elevator and escalator markets worldwide, but they took a very big hit in the second half year. And that influence is here disfigured.
Okay. And then maybe just one small question to your associates that you show in your annual report. And actually, the loss contribution increased. And I was wondering whether this was only VolxLift. And if this is the case, when do you expect Volkswagen to contribute positively to the profit to associates?
Yes.
Maybe I can refer to Slide 26, where you see aligned financing and investing activities. And you see a number, the negative EUR 17,000,000 for 2018 included this tax settlement interest income of EUR 27,000,000. So without that, we would have a negative figure of EUR 44,000,000. In that number, we have restructuring and refinancing impact of one of our associates. It's not VauxLift.
And VauxLift, we have now a minority of the 49%. In our sales and purchase agreements, we have call options to purchase majority. This very much depends now on how the business is growing and how we want to further integrate them to ZYNOLA China. So I cannot make very particular comment on the timing.
Then 2 rows behind. There was a question.
Thank you. Philippe Ray from Najafy. I have you have accelerated selective M and A 2018. Where do you see the best opportunity in this field? And where or which future do you see for the Indian market?
Okay. First of all, we have announced already some time ago that we want to have intensified M and A M and A activities. At the moment, the key activities are more in the so called service company area. So these are smaller companies. What we are doing, we are screening the landscape and we are looking where do we have high density in our portfolio.
And sometimes there are white spots on the landscape. For whatever reason, historically, we might not have a very strong presence. And then we are observing whether there is an acquisition candidate in such a white spot or also in a spot where we already have a good density and we can even further strengthen that. So the key focus at the moment is really on service companies because this helps us to create density and density creates more efficiency opportunities. That's the key driver.
Of course, we are also looking on bigger targets, but there are not a lot of bigger targets available. And we own we always look that also a company fits culturally into the Schindler Group because I think the cultural aspect often is under evaluated. And sometimes people mean that 1 plus 1 gives 2.5. And then the next morning they wake up and 1 plus 1 is 1.5. And this we try to avoid.
So we are very careful that the candidate fits into our strategy and also the culture fits into our strategy. But at the moment, our key focus is more on the service part. 2nd question is India. Very simple. You have roughly I have not counted all of them, but you have roughly 1,400,000,000 people in India and you have 1,400,000,000 people in China.
And we have a market in China, which is above 500,000 units. And the 2nd biggest market is India, which is 10 times smaller. So there is a certain, I think, evidence that this market will grow. Whether it will grow as much or to a dimension of China, I do not believe because it's another culture and the urbanization is very low. In fact, the urbanization is somewhere at 35%, whereas the urbanization in China gets closer and closer to 60%.
But this gives an indication it is a very, very, very strong future market. We believe in the market. And it is one of our key strategic markets besides China, Southeast Asia and still long term, I believe, in Turkey. India is a fast growing market in the future. And that was the reason why we have done a lot of investments.
So we have now completed our supply chain footprint in India. We do not only have an elevator factory. We're also the only one who have an escalator factory. And this plays an important role because in certain jobs, the domestic supply has an importance, especially for governmental customers. So that's one side.
And the other side is we are much faster. We are closer to the market for deliveries. And we have seen already first benefits. We were very pleased with our development in India. And we have big hope also for the future.
Christian Hoops from Baader Helvea. I have two questions. One is, you're talking about some kind of the end of the cycle slowing down of activities, and this normally goes with an increasing competitive environment, of course. Where do you see most of the pressure going forward in 20 19, 'twenty when it comes to region products or payment terms? This is the first one.
2nd one, is there some kind of a change in the service contracts you can acquire with the bigger projects when it comes to digitalizations and so on and so forth? So are you really able to benefit from that, that you have maybe different service contracts going forward? Does that have an effect on margin, a positive one or a negative one? And if there is some kind of an effect that you can sell different service contracts going forward, What is the growth rates on these kind of service contracts?
So the second question was very extensive, I have to say. So the first one was about competitive environment. Maybe Urs, you can take this one, and I will a little bit elaborate on the service part.
Right. Thank you very much for the question. When it comes to economic cycles, it is obvious that North America, the states, have reached a very high point of the cycle. And we see very strong order intake in the U. S.
In 2018, and that helps our backlog. But having said that, we are a bit cautious on cooling in North America going forward. Based on tariffs, based on political challenges, we see that, that could cool down. In China, as Thomas mentioned, our outlook is between slightly negative and neutral. Also here, a bit cooling in China, very much related to the lower tier cities, Tier 3, Tier 4, Tier 5, where we see that there are increasing bottlenecks of liquidity and funding for certain projects.
Maybe the second question in terms of service for large projects. Yes, there is maybe not a totally different service skyscrapers, very high demand. And there is also between those buildings in the big cities, if you go to New York, if you go to Hong Kong, if you go to Shanghai, there's competition between the buildings. You have to be attractive that you also can ask for a higher rental fee. So this is not only satisfied with a normal building and you some elevators moving up and down and bringing your people, you have to deliver also additional services.
So our destination control system port is very often requested by customers because it optimizes the travel times of people. When you go to a building like ICC in Hong Kong in the morning, 30,000 people are coming And they want to go to work. And they do not want to wait 45 minutes until they come to their office. So this is a clear request. There's a higher quality demand in those contracts also in the service afterwards because you have to generate the high uptime of the equipment.
Now we see that in those buildings Schindler Ahead is clearly a differentiator. With our digitization program, we can generate higher uptimes of our equipment because we have early detection of potential root causes of a failure. So customers are willing to invest into our Schindler Ahead products, not only because of uptime, but they are also interested because the management of such a building is highly complex. And you want to have real time information about all your equipments you have in place. You want to know immediately if something goes wrong.
You don't want to get a phone call of a tenant that an elevator is not running anymore. You rather prefer to be able to give to the tenant a phone call to say, hey, sorry, we have an issue with the elevator at the moment or the escalator, but the service technician of Schindler is already on the way. It will be fixed in the next 10 minutes. So customers are willing to pay for this. And the third one is also they try to move more forward in interaction with the tenants.
So very often those customers, they are interested in advertising in the elevator, information in the elevator, which helps them to have a good relationship to their tenants. Very often they have an app, an own app for the building, where you as a tenant get all the different information also about elevators and services and things like that. So we see that there is a demand for additional services besides the normal maintenance contract and customers are willing to pay for that more. The second part of large projects are public transportation projects where the availability of equipment is even higher demanding. Because when you go, for example, to an underground station, If there an escalator is not running, you do not only have a problem that people cannot move, you even generate a safety problem because people cannot leave the platform anymore.
New people are coming in with the train, with the next train and then it gets extremely crowded. So also those customers are very much interested in the service contract, which is not saying I come 12 times per year. They are much more interested in a performance figure. So we agree with them a certain key PI, a key performance indicator, availability of the equipment, which we can increase because of Schindler Ahead. And this gives us also a competitive advantage.
So one reason why we
have been very successful also in large projects
in the area of public rise buildings is that we can deliver an additional service with digitization. Okay, let's try to do this. The next one.
Daniel Gleim from MainFirst. Thank you very much for having the chance to ask a question. I would like to touch upon margin drivers for 2019. And if you could provide us a little bit an update on your component harmonization program, more specifically, how much absolute savings have you already realized gross in 2018? And do you still expect 35% of the total gross savings to be realized in 2019?
That would be the first question.
Good. Urs?
Right. So you are referring to our modularity initiative to harmonize our product platforms, which was initiated early last year. So in 2018, this was just the start. And we just introduced a new card of the modularity at the end of 2018. So that, to the P and L, was, as we indicated earlier, a small impact of 10% to 15% of the overall full impact.
For 2019, we now advance to roll it out component by component, group. And we estimate P and L impact of about CHF 50,000,000 in 20 19.
Is this the run rate or the increment over 2018?
That's the incremental, the additional savings. So at the end, of course, you will have the benefit of all the things we have done last year. We will have 100%. And then of all the initiatives we do this year, you are at the midpoint, so you don't get everything for the whole year. But it will have an impact of around CHF 50,000,000 in the P and L 2019, additionally to the P and L impact of 2018.
So it's year on year improvement.
So this sounds like a step up over our last discussion. Is this driven by the absolute cost savings going up? Or do you simply expect a higher share already in 2019?
No, I think we always said at the end of we talk something like a SEK200 1,000,000 program. So when you go end of and we want to achieve a run rate of 2019. Now if you have a run rate of 15% end of 2018, you add 35% within the year 2019. So what you have to do, you have to take the 15% of the previous year. You will have them as well.
And you add now half of it of the 35% of 2019 in the run rate. And then you will come together to around CHF 50,000,000. I mean this is what we have as an ambition. Of course, 1 month's delay or 1 month earlier. Usually in such programs, you are not 1 month earlier, you have more the risk to be 1 month delayed.
Then you can imagine this immediately has an impact of a couple of 1,000,000. But we are quite confident about the EUR 50,000,000 this year.
And these gross savings are cost consistent what we said earlier.
Very clear. Thank you very much. On the raw material prices, you have been very clear on the direction for 2019. Could you provide us also a little bit of color what this quantitatively means if you compare the increase in cost 2019 over 2018?
So as I said, the raw material inflation is indeed a topic. And raw material costs stay at high levels for us in all the elements we use for our products. That's very clear. End of the year were really high and still high. And we expect P and L impact, quite a significant one again in 2019.
Thank you.
Are there additional questions here from the room? There is one more here, so we can bridge the time with the digital problems we have.
Okay. Thanks very much. Martin Flucke here from Kepler Cheuvreux. Two questions, please. You've been talking about your installed base and that it's increased for Schindler or actually for the market.
How much has it increased for Schindler in 2018? And how much do you think of that was related to your Schindler Ahead program? That would be my first question.
So we do not give particular growth in the different businesses, but we can say that we had overall, our growth in service and repairs was above the average number we had. So in terms of order intake, we had a little bit more in the service and repairs and modernization and a little bit less in the new installation business. Now what we see with ahead, the growth is coming from different aspects in the installed base. But the key driver is NI conversions. So we make new installation business in order to convert the new installation afterwards into service portfolio.
Now is this supported by Ahead? To a certain degree, yes, because as we equip now all our deliverables in the new installation business with Ahead platform, we then try to immediately connect those units to our remote monitoring platform and also to sell that to our customers. And I can say what we have seen is that our price for new service contracts, we were able to increase because we could on top of our normal maintenance contract, we are able now to sell also a part with Ahead Services. So our average price has been increased. And also in countries where we thought it might be very difficult to sell, we were quite successful in applying this Ahead product.
One reason for it is you should never underestimate. Usually, especially in the European markets, you always have the requirement the legal requirement to have an alarm system. So you can push a button and then you are connected to our call center. In the old times, you need a telephone line for this. And so you have a month.
And this is the requirement of the owner of the building. He has to make a contract with the telephone company, 20, 30, sometimes even more Swiss francs or euro per month just for this telephone line. Now with our system where we go over the managing the SIM card. We are managing the SIM card. We are managing the SIM card.
We are managing the SIM card. We are managing the SIM card. We are creating we are managing the SIM card. We are managing the whole connectivity in the Ahead core package. You have the telealarm included.
So we can replace these costs you usually have with our Ahead product platform. On top of it, of course, you get additional services for it like more uptime and you get also the availability to see real time what is happening with those elevators. And that's the reason why a lot of our customers now say, yes, I take this ahead product on top of the normal service contract, especially in new installation conversions into the maintenance portfolio.
Okay. Thanks. Then my second question would be on Brazil, the new installation market that you've been talking about for 2018. Could you quantify how much you think units were up by in 2018? And what your outlook is for Brazil in 2019?
So the market was 4 years in a row just going south. So it almost was cut by half in terms of units. Then you have the topic, of course, if you have such a negative trend, also prices are going down. So in terms of value, it's even more. And then if you calculate into Swiss francs, then it's even less.
So it was really a very, very hard time for us in Brazil. Now in 2018, we have seen there was a recovery. It was the first time we had according to our market radar, there was a slight increase, maybe something like 5%. And we also see that in 2019, also with the change of the government, we see that there is more stimulus now in the market. And I have visited Brazil in January and had a lot of discussions with investors and construction companies.
And they are quite positive, I have to say. So we see maybe in the same magnitude further growth also in 2019 and the years onwards. I think there is in terms of economical outlook, there is a positive trend visible with the new government.
Thank you very much.
So now my question to the team, is now the connection working? So we would like to try once more to be connected with the ladies and gentlemen online. So maybe we can ask a question now online.
Go ahead.
Okay. Now I hear you. Good.
Hi, good morning. Yes, I hope you can hear me now.
Yes, very good.
Yes, okay, good. Real estate construction remains a key driver of China's overall economic growth. Now the widening gap between project starts and completions that we are observing and the dampening of demand for construction investment does not help China achieve its wider GDP targets under the 13 5 year plan, not to mention the organization target. Now with a slowdown of growth in many other key industries in China, now exports are at risk from trade tension. Can China really afford to allow real estate construction activity slowdown materially in 2019?
I'd be very interested to hear your views here.
Very good question, but probably you would have to ask Chinese government how they will react and not myself. But I have to say, I have lived by myself before I became CEO in China. And what I definitely can observe out of experience is that the government is quite fast in adapting their policy. So you are right. There is a chance that if other industries maybe are more under pressure that they would relieve some of the restrictions to motivate or to stipulate a little bit more the real estate market.
There is a chance that this happens. So then you would have from the supply side maybe more stimulus. Then you still have to then we still have to observe if from the demand side, we also see again an increase coming in. But usually, you are right. The government has the tendency to act very fast.
And I'm sure that if others other industries are more under pressure, I could imagine that this could happen. That would be an upside potential.
Yes. I guess what I'm trying to get to is does that give should that give us a bit of assurance over medium term or not?
I think I'm not worried that China is now going again into a sharp drop of the market as we have seen in 2015 2016. This is not our assumption. We have more a flattish assumption over the next 2, 3 years. But I have to say, making an outlook in China for 2, 3 years is like in Europe for 15 years. So there is some, let's say, some risk that you are wrong.
That's okay. That's good to hear. And my second and final question was really on this new digital twin initiative that you've just started. Are you able to quantify for us what sort of investment this will require and over what period?
So the digital twin, maybe first as a program and then maybe Urs can say a little bit more about, let's say, impact from all our strategic programs because we do not split them into the single initiatives. But probably the digital twin is the most long term program we have because what you do is you are first starting to put your whole R and D department. You don't test anymore in test towers. You create simulations and algorithms and every single nut and bolt is digitized. So this is a certain effort you have to do.
Then as a second stage, you are digitizing the production. So whatever you change in your R and D environment, if you make a change in a drawing, in your digital drawing, immediately your production is changed as well. And then 3rd, what in the 3rd stage it also impacts the field. So whenever you change the drawing in your corporate R and D in your design, you also will change the drawing in your information for the field people and your installation manuals in new installation and for service. And last but not least, if you once have digitized all your materials, also the spare part management will become much, much faster because today very often people struggle when they have to replace a part.
They make a photo and they send it to a central place and people try to find out what kind of a piece that is. And this can take quite a lot of time. So it is a program which will last and keep us busy for 4, 5, 6 years. It's a really long term investment. But what do we expect as benefits?
First of all, we expect that you have more efficiency in the field, for example, in this spare part and repair business, but you are also much more efficient in your product development and product production. So you will be faster also at the end time to market because you don't have to test everything 2, 3, 4, 5 times in an installation shaft and then get learnings. And we have seen that now in escalator. We started that program a little bit more than 1 year ago, and we are beyond half time. So we see now that tests we did in real time in the real in the reality, we now have modeled also in our digital programs and we came to exactly to the same results.
So those simulations start to work, but it takes time. And there is a big investment we do, because we believe that in a couple of years the integration of elevators and escalators into the whole building with BIM, the speed you need to adapt to market changes, but then also using all the information we are generating out of Schindler Ahead because we are collecting all this data as well. And we make now big data analytics not only to improve our efficiency in the field, but also to improve our products. So all those programs at the end are connected. You have less components.
On those components, you are measuring the reality with Schindler Ahead. You are feeding back the information into your digital twin scenarios. So you will learn much more with simulations to be faster in adaptations. But the impact, the benefit we will only have in a couple of years. There is no positive benefit we have at the moment.
It's pure investment into the future.
That's very clear. Thank you. So should we be expecting R and D levels to remain as they have been recently?
So these strategic initiatives, as Thomas explained, are absolutely important for us and for the future. You have seen it in the presentation with RISE, with BIM, with the Chomplifts. Schindler is an innovation leader. And that's now also applicable innovation leadership to this digital twin project covering the full value chain to a head platform connecting our portfolio and providing more functionalities to our maintenance portfolio. Overall, this impacts our P and L by 20 to 30 basis points, also again in 2019.
Yes. Okay. That's okay. And the question
to our global corporate R and D costs have now increased in 2018 as a percentage of operating revenue, and I would expect it stays at that level since the company is growing by 4% to 6% in operating revenue as well.
Thanks very much.
Thank you. Next question.
The next question from the telephone line comes from Lars Berson, Barclays. Please go ahead.
Thank you very much. Good morning, Thomas and Urs. Thanks for some very elaborate and detailed answers to the question. It's always very appreciated. Can I ask specifically to again, I apologize, to 2019 thoughts on margins?
And maybe just try and summarize where we are in terms of the numbers. There's been a lot of numbers on the call. Am I right understanding you're taking the modularity program to be about a 50 basis point incremental tailwind in 2019? I heard you say, I think, it was strategic investments a 20 to 30 basis point headwind, raw materials and wage inflation. It's not like it will be significant again in 2019.
1 of that is similar to the 50 to 70 basis point headwind we saw in 2018. And then whether you can comment a little bit on volume, leverage and mix. All combined, I could see the path towards a 40, 50 basis point margin improvement in 2019, which is obviously what folks are looking for in terms of the estimates. But can you help me maybe just talk through those key elements to the bridge? That will be helpful.
So thank you for the question. I was waiting that we now come to the very detailed ones in terms of margin improvements or not margin improvements. At the end, we usually we only comment on our profit guidance in the mid of the year and we don't make the guidance already at the beginning of the year. Why? Because it's very early days in the year and I mentioned that before there are a lot of factors.
You mentioned very important ones. So we have significant headwinds, raw material wage, maybe in a similar dimension like last year as well. Yes, we do these strategic investments. Yes. And then on the other side, we are working on strong operational measures.
1 is the modularity, but that's not enough because the modularity would not help us to compensate or to offset all these headwinds we have. So we need more. And the more comes from pricing and the more comes from efficiency gains. Where do we land at the end of 2019? Honestly, I think it's too early exactly to say.
And we are a little bit a cautious company, yes. We don't want to do any overpromise. But what I can confirm is that our long term ambition, it remains. We want to continuously improve also our profitability margin. But it will depend a lot what is happening in the world.
If there should be even more pressure coming up again from raw material prices, then of course this immediately impacts our profitability. So we have all the operational measures in place. We have no change in our strategic ambition. But I do not want to make a clear outlook in terms of basic points where we will land at the end of the year. We see that there is not only economical headwinds, but also political headwinds at the moment.
And you all can read that in the newspaper. And it's, I would not say, turbulent times, but challenging times. And we were able to keep our margin in a very challenging environment in 2018, and we will work to further improve our profitability. But I don't want to give any precise number on that. It's too early for us.
I understand that.
It's too early for us.
Yes. I fully appreciate that. Can I ask you maybe for, if you can, a little bit of regional color to margins in 2019 to get a sense for where you see the most and perhaps the least margin potential up side this year? And again, I appreciate you don't typically provide much color around margins regionally, but I'd be keen to get a little more flavor for the trends, not least, course, because of this wage inflation we see come through maybe more so in Europe incrementally and North America than elsewhere. But some regional color would be helpful.
So very good question. I mean, raw material is plus, minus everywhere, a little bit the same except of the U. S. Where you have the tariffs, which now hit us. And it's interesting people underestimate the impact because you have a direct impact.
If we are supplying out of China components or a product towards the U. S, then you have a direct impact of tariff. But much more severe is the indirect impact you have because the suppliers in the U. S. Also source a lot of subcomponents out of China.
Because you have we have to understand if you look on the whole global market, more than 70% of all the materials are produced in Shanghai and the circle of 100 kilometer. So even if you have a European supplier, the subcomponents are sourced by them out of China. So they have also the tariffs, which they have to pay and then they come to us and say, wow, we have higher costs. So now even if we are a U. S.
Supplier, we are asking for higher costs as well. So this is maybe the negative impact we have in the U. S. Then when you look on wage inflation, I think that's across the board. Emerging markets have that, but also the Europeans have that.
So as a consequence, it means all the efforts we do to improve our results have to come across the board. It's not that we say our improvements we want to do in our absolute profitability comes from 1 geographical area. All the geographical areas have to contribute. And all the geographical areas will contribute. So there is no real difference where we say it comes from there or it comes from there.
All the geographical areas will contribute to the improved results.
Can I ask a third and final question just for clarity on the Chinese service market, specifically on the affordable housing segment? I've heard slightly different messages on caps, on fees, on fertility management in the affordable housing segment. Is that something which is an incremental concern? In other words, are maintenance margins in that affordable housing segment under incremental pressure? Do you see that?
Well, the service margins in China are we mentioned that before. They are not so different for us from the margins we have somewhere else in the world. But this is, of course, a little bit also historically Schindler has been very strong in the commercial area where usually the prices for service are higher than in the residential area. Now with the geographical expansion we have done in the last years and also more focus on global on Chinese frame contracts, so big developers. And with our harmonized China platform, we have entered more into the residential market as well.
And yes, in the residential market, the average price for a service contract is lower than the average price for a commercial contract. And this gives you some pressure on your margin in the service business. But I'm a very simple thinker. If you have more pressure on the margin, you have to do a better job and you have to be a little bit more efficient and to run a little bit more faster and you have to have clever ideas. And what we do is with also there Schindler Ahead now starts to help us to create more efficiency.
Not that we can skip a service visit, But as the usage of elevators is much higher in China than in Europe in number of trips, you have also more breakdowns. So we try to avoid to have more breakdowns like maybe in non head equipped elevators. And when we have an issue, the resolution of this breakdown is much faster. So this also generates efficiency. So the efficiency improvements in China year on year are usually very high, higher than the average we have in the world, which helps us to mitigate this, let's say, lower price level and also maybe a little bit higher wage increase you have for service technicians than in other areas of the world.
So we are not yes, it is a concern, but I think it's not it's nothing where are worrying about. I still believe if you look 5 to 10 years ahead, those who have the highest density in the installed base in China, which have the highest maintained portfolio, they will also have the strongest position in the market. And this is the reason why we do everything to have a super high conversion rate, which is again also for 2018 above 70%, and I think which is leading in the market still because we put so much emphasis on this future service business.
Indeed. Thank you very much. Very clear. Thanks.
Thank you, Lars.
The next telephone question comes from Andre Guggenheim, Credit Suisse. Please go ahead.
Hi, good morning. This is Ashley Iris on behalf of Andre, who's asked me to send his regards. We have a few follow-up questions on Profit Bridge and China perhaps, but I think most of them have already been answered. So just to double check a few things. So perhaps firstly on China, given your comments, so shall we interpret that as that you are still increasing price in China in the volume segment?
So first of all, welcome, Iris. Also best regards to Andre Back,
who usually
is one of the most well informed and most demanding as I know. So China, the sales prices, there are 2 different elements. And you have mentioned well, we have seen a stabilization in pricing for the volume business. And we have been quite successful really to try not only to try, but also to increase prices in our order intake. So this definitely was a success story we had in China.
And it is, of course, a very difficult balancing volume growth versus price increase. So we have put a lot of focus on prices and we have taken a lot of measures generally, but also very product and city specific. I talked about that in past calls. Have a so called power pricing in place where we try to get the maximum price out of different scenarios in cities, but also customer segments. Then when you go to the large projects, in the large projects, the price battle is still very intense.
And it's also intense when you look on large developers because large developers just have a huge volume and everybody would like to benefit from the huge volume and their prices are still severe. But overall, our on our side, I think we have been quite successful in first stabilizing and afterwards slightly increasing our prices.
Thank you. Appreciate that. And maybe secondly to follow-up on the profit bridge. Appreciate your earlier quantification on modularity, the EUR 50,000,000 for 2019 as an incremental impact. And maybe just directionally on raw material versus pricing, given your previous comments on China pricing?
And also the fact that although we know that raw material is still a headwind for 2019, but perhaps between H1 and HQ, should we expect a better net pricing, I. E, pricing net of raw material inflation to be better in second half than the first half? And directionally, should the balance be positive or negative?
So yes, I confirm this gross savings for modularity in 2019 has an incremental impact. I would like to emphasize that this is a ramp up of an initiative component by component. Then on the material inflation. Compared to the past and previous periods, we clearly can say that material inflation was again very high in Q4, a bit higher than what we have expected early in earlier previous periods. And therefore, material inflation going forward in 2019 as we have locked in prices, we have striked agreements with our suppliers for 6 to 12 months.
Yes, this has a carry forward impact into the P and L 2019 of very roughly 40, 50 basis points.
Including the tariffs. Okay. And just on labor inflation maybe as well. So we have about 30 basis points impact for 2018. And so are we talking about more than 30 basis points into 2019, I mean, I.
E. Like a jump to 50, 60% incremental impact for 2019 or more like in line with the incremental impact as we've seen in 2018?
So wage inflation is one of the moving factors, I must say. It's really not that easy so early in the year to estimate now that impact. As in many countries, we have a bargaining agreement, and we have to work on this. And the outcome is not that easy to predict. It can be really different.
And the same as well in that's across the world. So it's difficult to make here a specific number indication on the wage inflation.
But usually what we can say
is
that the overall inflation, when you put it on your cost of personnel, what we have seen in the past is that it is somewhere between 2.5% 3% increase. This was in the past usually the case. And so I would expect that probably this is quite similar also this year. However, what we see is that in many countries, we now have seen that the labor side has become more demanding because one risk the whole industry is facing and there are some countries where this is really very serious, for example in the U. S.
Is shortage of labor. So your negotiation power an employer becomes much, much less because you are just happy to have the people on board. Otherwise, you cannot execute your jobs. And we see something similar also in those areas where you have a high subcontracting, so where you have a lot of third party installation capacities. Because of shortage, there is a certain war around those capacities, which is putting prices even more up.
So there is a certain risk now in this dynamic environment we have at the moment where we have shortage of labor. You have the books full with orders, not only us, but others as well. Less people who want to go to the construction industry, more and more people want to go into white collar jobs and less into blue collar jobs. There is even a higher risk now for 2019 or the years to come that wage and salary inflation could even become higher. And this is something we will see over the next couple of months because a lot of those bargaining agreements will in April or May.
And sometimes we even have a second round towards October. A lot of those deals have like a 2 step increase. 1 is coming somewhere in springtime and the second one is coming in autumn time. And I do expect that it will become more intensified and tense than in the past just because
shortages. And the fact yes, perhaps we can come around in Q1 results and get more clarity on that.
Of course.
Can we just yes, can I just quickly check on one last question, which is the productivity? So should we expect a usual 3% of cost based pace as we see before
on productivity?
I think our ambition is if you have salary increase, you have to have productivity and efficiency increase. So this is definitely a key driver. And one element of efficiency is supporting with tools. Now we are back in digitization. All our people in the field, all our people are equipped with smartphone where they get all the work instructions, all the support from the technical operation centers and call centers to make them more efficient.
And yes, there is an ambition we have to mitigate the wage increases with efficiency increases. So you have to work with continuous cost leadership on the product side in order to mitigate your a part of your material cost increase. You have to drive pricing in order to make up for the rest. And you have to minimum compensate wage increases with productivity. That's the simple game at the end.
And with the higher growth, which is our clear ambition number 1, we want to generate more absolute profit at the end.
Good? That's very clear. Thank you, Camacho.
Thank you. Next question.
The next phone question comes from the line of Lucie Carrier with Morgan Stanley. Please go ahead.
Hi, good morning, gentlemen. Thanks for taking my question. There are actually more follow-up. The first one would be on the U. S.
I understand you are commencing a bit more cautiously now on this market. Just as an indication, is that solely based on industry leading indicators you are seeing? Or have you observed maybe during the Q4 or the end of Q4 a bit of a weakening of the market already?
Well, there are, of course, different topics we are looking at. Usually, you have a cycle of 7 years. And now we are, I think, somewhere towards year 10. So now you can make your own mathematics with probability calculations whether you believe there is still 5 years to grow or whether maybe a cycle comes to the end. This is maybe to a certain degree also a little bit gut feeling.
So we believe that yes, and we don't know exactly when, but we see that once this cycle has to come to an end. On the other side, you are also looking on macroeconomical data. There was more a side trend. When you look on architecture billing index, there is a side trend. Then you can you have different indexes.
You know how much is the one family houses going up, which sectors are going up. We saw that it was still quite strong in the residential area, but we saw that there was some softening already happening in the commercial area. On the other side, we see a lot of public transport jobs. So it's we do not expect a disaster there. We just say we come towards the end of the cycle and there will be a softening.
And interesting enough is also that the when you look on new residential completions and permits, it also is now more a side movement. It does not grow anymore. Completions even have gone down a little bit. So these are all early indicators that one, 2 years, we will have a softening of this U. S.
Market.
Thank you very much. My second question was related to the margin in your order intake in your backlog. I know you've had that question earlier, but that wasn't clear to me whether the margin in the order backlog is now at the level of what you reported this year or whether this is still slightly below or potentially slightly above?
Yes. Thank you for that question. As you remember, prices have deteriorated, particularly in China already 2 years ago, very significantly. And of course, this is now in the rollout of operating revenue. And when you now compare our margins in the backlog in closing 2017 to closing 2018, we see that some projects with very good margins from the very past, because sometimes we have a lead time of even more than 2 years, have been executed in 2018.
And now we still have a bit the wave of the low prices from China in the backlog to be executed in 2019 and forward. So that means, in essence, that our backlog quality is slightly, slightly lower. Margins are slightly, slightly lower going forward because of these very long lead times that I have explained. The margins for 2018 in the order intake actually have been really stable. And because Thomas explained, we even see some slightly better prices now in China, and that has helped in the order intake.
But the average and the weighted average of the backlog is what I just explained.
And there's maybe a second phenomena coming from the larger share of large projects. Usually large projects have in the new equipment business a slightly lower margin because if you are shooting for a bigger cake, usually then the price is a little bit lower. But then after you have executed the job 2, 3 years afterwards, you will have what we discussed before, you have better service contracts. So I still believe as we are a company and looking always long term, we believe we should not only jump from quarter to quarter, but we should also invest into business segments where we believe we can, on the long term, add a lot of value to the company. So this has also put us a little bit under pressure, of course, in the margin, the higher share of large projects, which has been compensated in the order intake by better pricing in the volume business.
So overall, we could stabilize our margin in the order intake. We still have something left from the year 2016 2017, which have been very low prices. So that's the reason why the order on hand margin is slightly below the order intake margin.
Understood. That's very, very clear. And then just my last question. If you understand a bit more around the strategy between pricing and volume, I think on the pricing side, you have mentioned increasing prices in some area, but it seems in other part of your business, it's maybe a bit more difficult or hasn't really been done. Do you think that maybe you haven't seen the same momentum on pricing that some of your competitor also because of your volume strategy your objective of outperforming the market?
Good question. I do not want to comment what our competitors have done. I think you should ask them directly and not me. The only thing I can say is, yes, we are carefully always balancing volume against pricing. It's easy to grow if you say it doesn't matter what it costs.
This is not our strategy. We are growing because we want to be more competitive. And more competitive means not only competitive in the products and this is one topic of modularity program, it's also competitive in the way how we serve our customer. We have to create a premium from our customers because we want to stand for quality, we want to stand for innovation and we want to stand for customer excellence. Now when you look on overall profitability, I'm a former accountant, so it's quite easy.
It is price minus cost. Now if you have not a shrinking margin year on year, but costs have become under pressure because they go up, you probably have done something good on pricing. And you have to make your own conclusions how this was maybe in other elevator companies. You have to observe how they have developed in the margin and they had the same cost impact as we had. So then they might have had a different strategy than we had.
But definitely, we were able at the end with cost reductions and pricing to compensate some price increases we had to face. So I would not agree that we were less, let's say, successful in pricing. I think we were doing a good job there.
Okay. Thank you very much.
Thank you.
The last question from telephone line comes from Daniela Costa from Goldman Sachs. Please go ahead.
Hey, hi. This is actually Athira on behalf of Daniela. Thanks for taking my question. My first question is on your top line guidance of 4% to 6%. You mentioned that you had a very strong order backlog this year.
So why is this a very conservative guidance, your top end being only 6%, do you see any execution programs or any problems in the flow to top line?
Yes. You know, that's true. Our backlog has now increased by 9.7% and is very healthy. Now in the elevator industry, the rollout of large projects and overall, the volume business is really very much depending on the milestones. And the more large projects we have now, of course, we depend much more on that, and that makes an impact that, that has a big influence on our revenue growth for a single quarter or for the next 12 months.
We will roll it out, so we are very confident, and we have strong growth to come out of it. But it easily can be that revenue growth is a little bit less in a certain period compared to a backlog growth.
And we will update you again
in half year closing with an updated revenue guidance.
Okay, got it. That's very clear. Thanks. And my second question is on your buyback program. Do you see any reinitiating of the buyback program in the near term?
Well, the buyback program is not in our decision. The buyback program is something which has to be decided by the Board of Directors. And I do not want to speculate how they would decide. At the end, they will make a decision if they want to have another buyback program. And once they have decided that, then we will announce.
But I do not want to do any forecasting on that.
Got it, got it. Thanks. And one final question. You mentioned a widening gap in your project starts and project completion in China. Is this a phenomenon that you're seeing in other areas as well?
Or is this just restricted to China?
No, this was specifically for China. And it's following the Bureau of Statistics, which is deploying that every single month for more than 50 cities and also overall the whole country. And so this is public announced figures. And you see that there is a widening gap between the project starts and the completions.
Okay. Got it. Thanks a lot.
Thank you very much. And I think we have the last question.
Okay.
Your last question from the phone line comes from Joseph Zu from Redburn. Please go ahead.
Hello, everyone. Thank you for taking my questions. I have 2. First, can you talk about Chinese margins and how they developed in 2018, please? And second, can you also talk about any development in relation to any potential Chinese regulation changes to services, for example, to move away from the manual physical inspection every 14 days to a remote monitoring regime.
We heard there have been some pilots in China. What have the feedbacks been? Thank you.
So maybe the first can be answered by Urs about margins, and then I will quickly talk about regulation.
So as I said, we had strong headwinds in material costs. And obviously, since material costs are much higher share of the P and L in China versus other countries, this is quite a negative impact for China. And our operation was able to offset most of that, but not everything, which means it dropped a bit, but we are still running it at the group average EBIT in China.
And the second question about regulations, yes, there are there is a certain trend and I think also an openness from China that to use more and more digital tools to support the service business. And we also are participating in some of the pilots. And we of course, we know our own technical solution, and we have very promising results. We have installed 1,000 of our newer head solutions everywhere in China and especially in certain provinces. We also have worked closely together with the government.
And so we see that there is not so much the possibility so far that you get rid of 1 of these 14 day services. But what they allow you is that if you have a digital solution, a service technician can maintain in certain cities and provinces more units than if you don't have a digital solution. So it's not that you skip a visit. But as I said, as the traffic of those elevators is much, much higher, you have more breakdowns in China. Not that quality is lousy.
This is not what I want to say. It's just there is one factor which drives breakdowns is also how many times the elevator is moving up and down per day. And the more trips you have, the higher is the risk that you have a breakdown. So by eliminating that type of breakdowns, you can serve more units as a service technician. In some municipalities, there is a cap.
You're only allowed to maintain as many 30 or 35 units or 40 units. But if you have a well functioning remote monitoring system, you are allowed to maintain more units per service technician. And this is definitely one step I see. Of course, in the long run, everybody is interested that you can start to replace the one or the other physical visit with a digital visit, but this has not yet been decided. But China is extremely proactive in that area.
I think they are much more open than maybe other countries in the world.
Thank you.
Thank you very much. Good. It was a long shot, 2 hours. Ladies and gentlemen, thank you very much for attending this full year results presentation. I would like to close now.
And I look forward to see you or hear you all again on our Q1 results conference call on April 26, 2019. And I thank all of you and wish you a great rest of the week. Thank you and goodbye.