Ladies and gentlemen, welcome to the Schindler Conference Call on Q3 Results 2018. I'm Sherry, the Chorus Call operator. I would like to remind you that all participants will be in a listen only mode and the conference is being recorded. The presentation will be followed by Q and A session. The conference must not be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to the CEO of Schindler. Mr. Oterly, please go ahead.
Good morning, ladies and gentlemen, and welcome to today's conference call on key figures of the Q3 2018. My name is Thomas Heteli. I'm the CEO of the Schindler Group. I'm here together with Urs Scheidecker, our CFO, who will guide you through the financial details and the outlook later. After 3 quarters of the year, Schindler is doing very well, and we have achieved significant growth.
In fact, we are on track on our strategy and again grew faster than the market, while having improved our absolute results. Now let's have a look at the highlights on Slide number 2. In the 1st 9 months of the fiscal year 2018, Schindler achieved significant growth and delivered a further improvement in results despite the return of foreign exchange headwinds in the 3rd quarter. We continued growing across all regions and product lines. The share of major orders continued to increase.
We managed to win large orders for airports in the U. S. And metro lines in China, among other big jobs we were able to gain for us. Our expertise as a global leader with a strong brand and a dedicated global key account management is well recognized by our clients. Order intake rose by 7.1%, and revenue increased by a healthy 7.9% Despite higher raw material costs and ongoing pricing pressure in several markets, we were able to keep the EBIT margin stable at 11.7%, in line with the previous year's period.
With operational improvements, the new installations and the service business benefited from continuous efficiency gains. Net profit rose by 15.1%, mainly driven by continued operational progress and a onetime tax refund recognized already in the 2nd quarter. Before the tax refund, net profit increased by 6.6%. The execution of our major strategic initiatives, namely the modularity program and digitization, is well on track. In addition to these major initiatives, we are progressing well also with other forward looking projects like the Digital Twin OR RISE, our new breakthrough robotics installation system for elevators.
Furthermore, over the past few years, Schindler has become more active in the field of M and A and since the beginning of 2018 has acquired more than 20 small and midsized service companies, mainly in Europe. So we are constantly on the move to further advance on our goal to become a leading eN elevator and escalator provider in all our markets. Now let's move to the developments by market in the last 9 months, starting with Asia Pacific on Slide number 3. The overall market sentiment remained positive. In the new installations business, China remained stable.
Overall, price pressure continued year over year with low single digit price decreases. Price competition remained particularly intense in large project tenders, but were stabilizing at least in some segments and geographies. We expect a flattish market for 2018 in terms of units. The Indian market regained momentum with strong demand, and the Southeast Asian markets continued to show solid growth in all business segments. And the service markets, last but not least, remained very healthy.
Schindler saw a strong new installation business, especially in India. In a challenging Chinese market, we could further increase the numbers of units sold. Across the region, service, repairs and maintenance generated high growth rates. So let's move to Slide number 4, the Americas region. The region grew across the board, characterized by a strong U.
S. Market and improving conditions in Latin America. Americas was our strongest region. Our North American operations delivered double digit growth. In Latin America, Brazil returned to growth in all product lines and was and we also performed well in other markets.
Let's move to the EMEA region on Slide number 5. Overall, the development in the European construction industry continued to be robust. Market conditions in Northern Europe continued to be robust accompanied by signs of overheating in some countries leading to labor shortages. Southern European countries recorded sustained growth in most markets, but there are concerns in a few countries like, for example, Turkey. Shingle grew in almost all the markets with the new installations business being the growth driver.
Our installed base recorded solid results, too. After these insights into the market, I would like to hand over to Urs for the financial results and the outlook for 2018. Urs, please, it's your turn.
Thank you, Thomas, and good morning, ladies and gentlemen. I am to present the financial results in a bit more details. To start with, the new accounting standards, IFRS 15, IFRS 9, had no impact on year to date results and the 3rd quarter results. However, degree of uncertainty remains on potential impact in the 4th quarter as the method change with a recognized revenues for new installations and modernization at the later fulfillment stage than before with the old method. Now let's have a look at the selected key figures of the Q3 2018 on Slide number 6.
The Q3 2018 is the Q1 in a while where growth was impacted by quite significant FX translation headwinds. Additionally, there was a base effect. As in 2017, growth has accelerated in the second half of the year very significantly. Order intake grew by 1.7% in Swiss francs and 4.8% in local currencies. Order intake includes all business lines, new installations, modernization, maintenance and repairs.
Modernization, repairs and maintenance in total outgrew the new installation business. The Americas region achieved the highest growth, driven by sustained and robust U. S. Market, followed by the EMEA and the Asia Pacific regions. In the Q3 of 2018, revenues improved by 3.6 percent to CHF 2,700,000,000, equivalent to a strong increase of 6.3% in local currencies.
All the regions and product lines contributed to the growth. Foreign exchange effects had a negative impact of CHF 69,000,000. Operating profit increased by 3.6 percent to CHF 313,000,000, equivalent to a strong 7.0 percent increase in local currencies. Foreign exchange effect impacted operating profit negatively by CHF 10,000,000. The EBIT margin reached 11.7%, in line with the previous year.
Before restructuring costs of CHF 6,000,000, the EBIT margin was 11.9%
compared to
CHF 12.0 in the previous year. Net profit amounted to CHF 230,000,000 in the 3rd quarter, representing an increase of 0.4% compared to last year's period due to significant deterioration in the financial result, mainly attributable to currency losses on financial hedges based on the stronger Swiss franc in Q3, particularly versus Brazilian reais, India, rupiah and Turkish lira. Furthermore, the previous year's financial result was supported by a gain from security sales. Cash flow from operating activities increased to CHF 282,000,000 from CHF 103,000,000 in the Q3 2017. This development is mainly explained by the base effect of net working capital stabilizing this year compared to a significant deterioration in 2017.
Now I'm moving on to Slide 8. I will comment on the performance of the 9 months. In the 1st 9 months of 2018, order intake rose by 7.1 percent in Swiss francs and CHF 6.8 in local currencies, respectively, reaching CHF 8,700,000,000. The Americas region contributed the most, followed by the EMEA and Asia Pacific regions. Revenue improved by 7.9 percent to CHF 7,900,000,000, corresponding to a growth of 7.6 percent in local currencies.
The EMEA region generated the largest contribution to growth, followed by the Americas and Asia Pacific regions. China was still slightly negative, while the rest of Asia Pacific showed excellent performance with double digit growth rates. EBIT rose by 7.7% to €926,000,000 in the 1st 9 months of 2018, equivalent to a 7.3 percentage increase in local currencies. EBIT margin stood at 11.7%, in line with the previous year. With sustained headwinds from high raw material costs and fierce competition, further improvements to margins remained challenging.
However, efficiency gains offset the higher cost of raw materials as well as pricing pressure. Before restructuring cost of CHF 15,000,000, the EBIT margin was 11.9% compared to 12 0.0% in the previous year. In line with our goal to grow absolute operating profit year on year, we will further improve absolute EBIT in the year 2018. We also aim to further increase the margin until year end. This ambition is becoming more challenging due to the recent headwinds mentioned.
There are drivers we cannot influence like tariffs and foreign exchange developments and overall political turbulences, which are not in favor in our favor at the moment. Please keep in mind that the net profit development for the 1st 9 months of 2018 is supported by the previously announced tax settlement of CHF 55,000,000 recognized in the Q2 of 2018. Obviously, my earlier comments about the impact of the Q3 financial result on net profit are also valid for the 1st 9 months net profit. So I'm not going to repeat them here again. Net profit for the 1st 9 months 2018 increased by 15.1 percent to CHF 746,000,000 compared to last year's period.
Net profit before tax refund grew by 6.6% and amounted to CHF691,000,000. Cash flow from operating activities reached CHF 760,000,000 compared to CHF544,000,000 in the previous year's period as a result of our net working capital optimization. As of September 30, 2018, our DSO backlog totaled CHF 8,600,000,000, an increase of 5.5%, respectively, 8.2% in local currencies. Now let's move to the financial guidance, which you can find on Slide 10. Schindel Group expects the market trend seen in the 1st 9 months of 2018 to continue.
For the full year 2018, excluding any unforeseeable events, Schindler expects revenue growth of between 5% to 7% in local currencies and net profit of between CHF 960,000,000 to CHF 1010,000,000. With this, I'm handing over to Thomas. Thank you
very much, Urs. I think now it is the time to enter into Q and A.
We will now begin the question The first question is from Andre Kukhnin, Credit Suisse. Please go ahead.
Yes, good morning. Thanks very much for taking my questions. I'll go on at a time, please. Just taking a step back and looking into 2019 and what's in store for us there, just want to answer a couple of things there. Firstly, on the raw materials versus price balance, Given what you see in the markets right now in terms of pricing trends and the spot rates for raw materials, where do you think that balance would end up if nothing changed in the next sort of 6 to 12 months in terms of raw materials versus pricing development for yourselves for 2019?
Well, good morning, Andre. Thank you for the question. I think overall, we have seen quite a volatile market in raw material in the 1st couple of months this year. We had a steep increase. Now in the Q3 in some of the markets, we still had a slight increase of raw material costs, mainly in China, aluminum and steel were further increasing, our biggest market and our biggest supply chain.
There will probably be some additional pressure coming in the next couple of months because in China, a lot of construction, but also manufacturing activities will be put on hold due to environmental reasons. So I do not see that there will be, let's say, some relief in the area of raw material costs. It's but we assume it will stay somehow on the level where we are. So costs hopefully are like that. Then our input costs are then a given fact, which should not have too much of a change anymore.
Nevertheless, we have tried to push as much as possible potential increases of suppliers, always month by month, quarter by quarter, we try to log in prices, and we are usually hedged something like 6 to 9 months. So there will be some further pressure coming on in the towards year end as suppliers try to renegotiate prices due to the stable high level of raw material prices. That's the input side. On the output side, I think in many markets, we have done a pretty good job starting to increase prices. Of course, you always are in a balance, price versus volume.
If you are, in some markets, the only one who tries to increase prices, then you immediately see that you get some pressure on the volume. But I think we should have next year a good balance between the input cost and now the increased prices we have started early this year because they will come into execution next year. So I'm expecting no negative impact on the raw material price level for the next year.
That's very comprehensive. And just on the next kind of big driver there, the modularization program savings. From what I have in my notes is that you should be getting towards kind of halfway of the targeted EUR 200,000,000 savings run rate by the end of 2019. So that would imply savings together with annualizing what you get this year should be something like EUR 60,000,000, EUR 70,000,000 is how I'm thinking about this. Am I far off?
Well, this year, we have launched it's correct. We would like to be on halfway run rate by the end of 2019. Maybe it is even a little bit higher at a run rate. It will not have the full impact because we are ramping up component by component. So this year, we have started with the first component, which was the new car, which has been pretty successful, well perceived by our own organization.
The impact comes in the second half of the year because there is a ramp up in production. And then during the next year, we will launch new components with the machine, with the controller and with the inverter, We have the modularity program on track. But also there, of course, it will have a ramp up because not everything can be applied fully on your backlog, yes? So some parts can be applied on the backlog we have, where you replace the old component with the new one, but this is not possible everywhere. So there will be a ramp up, and we will be probably above this 50% run rate end of 2019.
So this year, the impact might be something like 10% to 15%. And then next year, we are somewhere at slightly above 50%, maybe towards 60%.
Great. And just last question for me before I go back in the queue. In terms of China market outlook, you're very clear on 2018, and that's certainly panning out in line with expectations of kind of flat or maybe marginally down. But how are you thinking about 2019? I know you wouldn't give guidance, just more of a early indication really.
Are you thinking about it up or down or stable?
Well, our outlook is that it stays stable. We believe there are like always in China, there are positive and negative trends. In fact, we see, of course, that real estate investments have gone up almost 10% year to date to the year before, but it is mainly driven by price increases for the land. So floor space started, went up in the 1st three quarters by 16% year to date compared to the last year, and this should help us. But floor space sold was quite flattish.
So what we see is that there is a certain widening gap between projects which start and the completions. And so there is a certain slowdown in purchases, purchasing of residential and commercial space. And there is also quite some weak cash position of some of the developers. And then on the other side, you have high governmental pressure to restrict the pricing for apartments. So I think this is somehow compensating the positive trends we have from floor space started.
So putting that all into one pot and creating a recipe of forecast, we see that the market will stay flat next year in terms of units.
That's very clear.
Thank you. And sorry, can I just follow-up on this because it has been kind of deeply intriguing for us as well to see starts going up and completion going down simultaneously? What do you see on the ground? What are the customers telling you in terms of color on that or the dynamic? Are they kind of started projects being kind of put in hold and frozen permanently?
Or is it really just the speed of construction that it is ongoing but at a slow pace rather than frozen? Yes, I think
probably both elements are playing a little bit. So one is, yes, there's a little bit of slowdown of the construction itself. And on because when you look on inventory levels, the inventory levels are on a very healthy level now. But I think with the restriction of sales price In some cities, the government has clearly said what is the sales price you are allowed to achieve to sell an apartment? And probably real market price is above that restricted price.
So I believe there is, at the moment, some holdback coming from the construction industry and from the developers, maybe hoping that there will be some relief in the release of government restrictions in the next coming months. And I think we should also not underestimate that the cash situation is not everywhere the best. One element we are focusing very much because we don't want to have sales where we then cannot collect at the end the money. So I think it's a little bit of slowdown. People are waiting to a certain degree.
That's what I hear from developers. But I'm positive that the government has shown in the past that they are very quick to adapt. If there should be a further slowdown, they will probably remove some of the restrictions to activate the machine again.
The next question comes from the line of Lucy Carrier, Morgan Stanley. Please go ahead.
Hi, good morning, gentlemen. Thanks for taking my question. The first one would be, if I may, a follow-up on your comment on the margin for the full year 2018. I'm just trying maybe to read between the lines here. But first of all, are you able to kind of provide us with a guidance for potential FX headwind in the Q4?
And similarly, you've been speaking about impact from trade tariffs, which I have to say surprised me a little bit considering you tend to be generally quite localized in terms of your supply and your manufacturing. And are you suggesting that you could be flat margin or actually down margin in 2018 versus 2017? That's my first question.
Okay. So with, I think, impact on raw materials and the outlook, I think you can answer that.
Yes, certainly. So in regards of the FX development, as I said, we have headwinds year to date and in particular Q3, mainly due to the appreciated Swiss francs against relevant currencies for us, which are the Brazilian reals, India, rupiah, Turkish lira, but there was also a slight depreciation in the dollar. And with the outlook, I would suggest this will continue. Going forward, we have an impact in Q3 of CHF 10,000,000. And actually, the Swiss franc was quite depreciated in Q4 last year.
So we will have quite a strong headwind in this perspective going forward of at least the level of Q3. In regards of tariffs, well, we have the same understanding as we had in our recent call. This year, the impact is limited to about CHF 5,000,000. However, if these tariffs, the announced ones, are absolutely materializing, we are talking about the run rate impact of CHF 10,000,000 based on current knowledge.
And just as a follow-up on that, what are the components of supplies that are being impacted by these tariffs? Because I have thought historically that most of your supply in China was done with Chinese supplier and that you also feel you're calling in the Americas in terms of supply for the North American business?
This is correct. The situation could be much worse, I have to say, yes, when we talk about €5,000,000 in the second half of this year or we talk something like €10,000,000 next year, we talk about 10 basic points, negative impact. I think, of course, 10 basic points hurts, but it is not that it becomes a disaster for us. And you are right, we do have a strong supply chain base also in North America. So certain components and certain products are imported by China or by Europe.
These are, for example, in the area of escalators, the steps are imported. We do not produce them in the U. S. And also some other components are imported. And there might be the 1 or the other job as our competence centers, the global competence centers for escalators and high rise products are in Shanghai.
So for certain type of elevators and escalators, we are importing the full elevator or escalator out of China. Now this is only the direct impact. I think what is maybe worrying a little bit more is the indirect impact because even if we have a sourcing from a supplier in the U. S, this supplier is sourcing a lot of components from China. So what happens is that because roughly 70% of all the components used in our industry are manufactured in Shanghai and in a circle of 100 kilometer, independent whether it is used in China or not.
So a lot of the American suppliers we have, they partially source certain subcomponents out of China. So they also have this significant tariff price increase. And of course, now they come to us and they want to increase their sales price to us as well. So there is a direct impact of €5,000,000 to €10,000,000 And we can, at the moment, not say how much we get under pressure for this indirect price increase pressure from our local suppliers in the Americas.
Thanks for the color. That's really helpful. And just my last question is could you give us maybe some indication on how you see the financial line evolve into the end of the year? Because the delta this quarter of about €15,000,000 versus last year is quite significant. And considering you're guiding on net income, I think it would be helpful for us to have maybe a form of calibration on the net financial line, if you can.
Yes. Thank you for the question. As I mentioned in my first speech,
there
are 2 impacts on Q3 results. So one thing is our hedge losses we have in Q3 based on the developments on selected currency I mentioned before, about SEK 10,000,000. But then we also had an impact last year in Q3 2017. It was a one off of security sales, which amounted to CHF 8,000,000. Actually, all and this is it will not continue because that was in Q3 'seventeen and a bit earlier of 'seventeen.
But on the FX development, I do foresee that we will have at least the amount of Q3 as well in Q4, which you can add to your guidance. And of course, there is uncertainty with the Turkish lira, which hits us due to the instructed rate in Turkey. And we will have to work out now our backlog and really discuss as well the goal, let's say, the future rate to go with our backlog, and that also has an impact going forward.
Thank you very much.
Thank you.
Next question is from Amit Vaziri, Jefferies. Please go ahead.
Yes, good morning, gentlemen. Most of your questions have been answered. Thanks very much for those. I just want to pick up on the working capital improvements. You've made good progress this year compared to last year.
Just where are we on the improvements? Is there much more left to do? How much do you expect to just going into the Q4? Do we expect it pretty much now all will optimize now? Or is there much more room for improvements?
And my second question is in relation to the conversion rates from new installations to ongoing service contracts in China. Can you please provide us
with an update as to what's one of
the latest conversion rates you're achieving there kind
of on average for the market? Okay. Thank you, Omid. Thank you for the question. Maybe I start first quickly with the conversion rate and then I'll just introduce the topic of networking capital before handing over for the details to Urs.
So conversion rate in China remains strong. As mentioned many, many times, this is a key focus area for us. We are pushing very much to have a good service network. So our conversion rates for Schindler remained at above 70%, which I think is a very strong value. So and we believe that this will continue to do that, that we can we'll be able to continue to do that as we are further expanding our service debt pools.
Now net working capital, it has been a disappointing fact last year. The environment has become much more challenging, and we have put a lot of focus on net working capital. It's something we are monitoring very good. I always make the sentence, a good customer is only a customer who pays. Otherwise, there is no good customer.
So we are putting a lot of emphasis on our cash collection, and we also put a lot of emphasis on having clear commercial terms, which protects our company. But maybe Urs,
you can give some more details in that area. So it's absolutely correct that our net working capital last year has suffered very significantly. And last year, we had a change of net working capital of CHF 279,000,000. This was and is mainly related to less favorable coverage of our work in progress with down payments. And this is very much driven by our success of order intake with large projects and large key accounts, where the payment terms, commercial terms are with all our efforts to optimize the net working capital position, we have stabilized the level of last year.
And this is a bit the new reality now that our net working capital is negative, roughly 5% of total operating revenue, which is really a challenge to further improve again. So I believe we will be at the level where we are now. Of course, we have a lot of efforts on cash collection, which is going reasonably well. And we have a lot of efforts to further optimize our payment terms across the world and on all segments. But market field is really competitive and the result you see in our net working capital position.
Yes. Thank you. That's very clear. And you are reporting the portion of large orders are expanding since through the trend. That certainly puts a bit of pressure on you on this topic.
Yes, clearly. We are really proud to have success with these very demanding large customers and fueling our growth in NI and, of course, equally important to our ER portfolio. But in terms of our cash flow generation, this is a challenge and the Peter Gurden on that aspect, yes.
Great. Thanks very much. That's all the questions from me.
The next question comes from the line of Atira Pradeep, Goldman Sachs. Please go ahead.
Hey, hi. Thanks for taking my question. My question was with regards to if you can give us a little more color on what you expect in terms of your buyback program. What does the Board need to do for you to relaunch this program this year?
So on
the buyback programs, as you perfectly know, we have stopped it about 2 years ago. And the group has a lot of strategic targets. This is also the reason why we took a loan of CHF 500,000,000 this year to focus on our organic growth, on our strategic initiatives, to mention our modularity program, our Internet Accelerate Ahead program and the quality campaign. And we have also external growth targets. And this is our clear focus where we focus operationally and in our Executive Committee level.
Any buyback programs is a matter of the Board. It's strategic. It's a Board matter, and I cannot further comment on it.
Thank you.
Thank you.
The next question comes from the line of Thomas More, Redburn. Please go ahead.
Good morning, Thomas. I have a few technical questions. Thanks for taking them. On raw material impact, I think you said in the past, euros 100,000,000 gross, twothree mitigated. Is that still valid?
And more importantly, how does that look for full year 2019? I was thinking EUR 65,000,000 and 2 thirds mitigated at current metal prices. Maybe we could go one at a time.
Well, it's right. It even was higher. Our gross impact even was slightly higher than the SEK 100,000,000. And we always said that we see a negative impact on our margin of roughly 40 basic points, 20 basis points coming on the backlog and 20 basis points coming from our normal business. There is, of course, some additional pressure because we have no positive development now in the last couple of months.
But I think, honestly, I have to say, thanks to all the achievements which have been done by our sourcing department and also thanks to some cost improvements we were able to do starting now with the modularity program, we were able to mitigate this negative impact. So I think all in all, it's slightly higher, and we assume that about 40 basis points will be the negative impact this year. Now looking ahead for the next year, we believe that this negative or that this inflation on the raw material might be slightly lower than it has been this year because raw material input costs have somehow stabilized. We will face some headwinds because now some of the suppliers we were able to push to drag it on and drag it on, they come back and they are suffering now more and more. And so we will have to do some concessions, yes.
But I think the impact will be less than it has been this year. However, there is another part of inflation which we should not underestimate and becomes more severe, I have to say, and this is labor inflation because we do have really shortage in the market for skilled labor. So we see that this might become quite a tough environment next year in certain markets when you are negotiating with unions or but
we will have some
reduction of the pressure in part, we will have some reduction of the pressure in the raw material price. But I'd assume there will be some additional pressure coming from the labor part. And that's our costs more or less are equal. The cost we have for a material is slightly lower than the cost we have for our owned people and subcontractor people. It's probably really balanced out somehow.
So a little bit less on material and a little bit more on labor.
Very helpful. If I could turn to currency, thank you for the Q4 impact of EUR 10,000,000 or more. But I was thinking of next year. I'm looking at about minus EUR 20,000,000 at current rate. Is that fair?
Or are we talking more than that?
Yes. You are looking into the crystal ball together with me. It's very difficult. The volatility in the currencies is remarkably high these days. As I mentioned to you, some relevant currencies for us like Brazilian reais or Turkish lira are really fluctuating tremendously.
Based on current knowledge, I don't think it's wrong that you foresee a certain negative impact in 'nineteen as well. But it's really difficult to predict the exact amount.
Thank you. And a couple more, if I could. Acquisitions, I think you talked about them adding 1% to sales this year. Is the margin on those similar to the group? Or is there an accretion dilution effect this year from acquisitions?
Very good question, and I can tell you heavily discussed whenever we are in front of an acquisition because you have 2 impacts. You have the EBITDA. So the let's say, the performance of the acquired company is strong and is usually in line or even slightly above our performance because these are usually service companies. And the margin in the service business is slightly higher than in the new equipment business. So let's say from an operational point of view, it is definitely an conservative company.
We are taking care that our balance sheet looks right. So we also amortize our intangible assets we are generating and this then hits our reported EBIT and in an as an effect EBIT wise. There is a one or the other case where it is dilutive. You are right.
I guess that. I just wonder whether there's a material one off PPA step up effect that could drop out in the following years such that your adjusted EBIT margin is depressed compared to what it really is, whether you could quantify anything that we should know about for next year.
There should not be year on year, I do not see an impact. I think the impact we have seen, we already had this year and we also had it last year. It's a little bit the bit the pill of doing more M and A if you are conservative in your accounting treatment. But from an investor point of view, I would say we still do the right thing.
Yes. Okay. Thank you very much. And just on China, thanks for your answer earlier. But we hear a lot of that stimulus.
I see monetary and fiscal announcements, but I don't see much industrially. And I suggest I think from your answer, you're also saying that you've not seen any changes to policy, HPRs, restrictions or other things. Is that right? Or have you started to see some evidence of stimulus taking effect in the marketplace yet?
You are right. We have not yet seen this.
Great. Thank you very much for your answers. Thank you, Dan.
Next question comes from the line of Martin Pukiger, Kepler Cheuvreux. Please go ahead.
Hey, good morning, gentlemen. Thanks for taking my questions. 3, and I'll take one at a time. Could we talk a little bit about the perceived slowdown in the order intake growth numbers, particularly in Q3? If I remember correctly, in Q1 and Q2, you had quite significantly higher growth rates.
Did that have anything to do with the acquisition impact? Was it the global E and E market that may have slowed? Or was there a particular shift in growth rates among the product lines? That would be my first question.
Okay. Martin, thank you very much for this. We had we have, to a certain degree, a baseline impact. We had acceleration of top line figures in the second half of last year. You might remember that at the beginning of last year, we were not that strong, but we had a pretty good Q3 last year.
And so then the baseline is increased. I think all in all, if FX adjusted, we still have a growth of 4.8% in our order intake, which is still, I think, a good figure. It is not as high like 8% or 7% in the 1st two quarters, But it's not an impact of a slowdown in the market. I think just the bar just becomes higher and higher to jump over. And of course, on a quarter to quarter basis, it always is impacted whether you have the chance to book the 1 or the other large job or not.
So in Q3, we still had good order intake in large jobs, but it was not as big as it has been maybe in the quarters before because we only record them. A lot of them are in China, and we only report them when we had the first down payment.
Okay. That's helpful. And if
you could talk a little
bit about your please about your operational performance in China, particularly on the new installation side, how you see your performance versus the market? And what has been the recent mood among the key Chinese developers? That would be quite interesting to hear.
So we are very pleased with the operational performance of our colleagues in China. They are in a very difficult environment. I think pricing was so severe in the last 'fifteen, 'sixteen, 'seventeen, and this all comes now in the backlog rollout. So it hits now the P and L and the EBIT. So we were under pressure, and we have worked a lot on mitigating this with improvement on our sourcing side, but also on our efficiency side.
We have lost a little bit in the EBIT performance, but we still are in line with our overall performance in the group. So it's not dilutive. China is not dilutive for us. This is very important. In terms of sales, we have focused more and more on pricing.
We have discussed that in the last two quarterly calls. We put a lot of emphasis on pricing in the different segments, so large projects, but also in our bread and butter business. And we have seen that in the normal business, we were able to slightly increase our prices, but we still are heavy under pressure in large projects. So all in all, we are happy with the performance of our colleagues in China. And we also believe that it should further improve over the next 1 or 2 years.
Okay. Sorry. But just to clarify, were your orders received in units up in Q3 in China or
not? Yes.
Our orders received in Q3 was slightly down. So we had a slight in the single quarter Q3, we had slight less order intake in new installation elevators and escalators. It was mainly driven by escalators because China is the biggest by far, even more than in elevators, the biggest escalator market. And the commercial escalators are heavy under pressure. There are less shopping centers.
And in the public transport area, we had tremendous success in the 1st 9 months in awards, but not all of these awards are already booked as order intake because we wait until we get the down payment. However, in terms of the service business and modernization and repairs, we had stunning improvements in China also in the Q3.
Okay. But just to clarify, so orders received in China in Q3 were slightly down in value terms or in unit terms?
Both in value and in unit terms, it was slightly down compared to Q3 of last year.
Right. But for 9 months, it was up, correct? Correct. Okay. Then just the final one before I go back into the queue.
Could you talk about your latest observations in the raw material markets and what you're seeing particularly going into Q4 and H1 given the fact that you're fixing prices for 6 to 9 months?
Yes. So I mentioned before, we are assuming that we have achieved a very high level, of course, in the raw material prices. We do not see at the moment that there is really a sign that we will get a softening in that. So our assumption is that it will be flat over the next couple of months. And there is one maybe topic which I mentioned shortly before.
It also depends a little bit on the politics in China because a lot of the production is done in China. And a lot of those factories have severe restrictions because of environmental issues. The northern part of China from the mid of October until the mid of March, all the construction sites and a lot of factories have to shut down.
Okay, very helpful. Thank you so much.
Thank you.
The next question comes from the line of Denise Molina, Morningstar. Please go ahead.
Thanks. I had two questions. One is on India. Just wondering if you compare the competitive environment India versus China, whether or not you think there's more or less competition and what the pricing environment looks like now? And then the second question was on China.
Just wondering, given the environment with the developers, if you think that they're cash strapped, if you think that there's any pickup in cancellations or if you're having trouble collecting on any of the previous projects?
Good morning, Benny. Thank you for the question. I think I will answer the first one, competition and pricing and maybe the cash situation. I would hand over to Urs. So competition remains fierce.
I think we do have different type of competitors. Of course, we have the large multinational companies. Everybody is interested to increase prices because everybody is facing the topic of higher input cost. And this, we are seeing that also some of the competitors are trying to increase prices. Unfortunately, in every job, you find someone who just has dropped the price.
So if you have a bunch of 5 competitors, 4 are behaving reasonable, and we always find someone who is maybe not so reasonable. I think what I clearly see is that smaller local competitors are more under pressure. When you look on the officially published results, they have quite severe problems in their profitability. It almost dropped to 0%. So they are in a quite surviving mode.
And if you are in a surviving mode, of course, the worst thing, what can happen is if you don't have enough orders. So they are putting a lot of pressure on the pricing. But overall, I say, with on the whole landscape, in the residential area, where you have less single unit, where you have certain single unit jobs or 10 units or 20 units, prices have slightly come up. And in the commercial, public transport, high rise and key account area, prices are still under pressure. So overall, I would say that low single digit, the price level has been reduced in the 3rd quarter.
Maybe to the topic of cash, Urs, you can say what we are doing and how the situation is for us in China.
So the situation in China remains ever demanding, in particular, in terms of accounts receivable collection. As you may know, we are collecting money based on the progress down payments on the status of the new installation projects. And there is cash retention of the final billings. And that last part of the collection is the most demanding one when equipment is already handed over and to collect it then after approximately 1 year. Now overall, since many years, our performance in cash flow generation and in collective transvestybel is actually really strong and positive.
We have a very robust and solid collection organization in place in our operations. Lately, we see that in particular with large accounts and in particular with government public accounts, payments are slower than what we have seen recently. They are slower. It takes more time to go through the full administration and to accomplish the final accounts. But having said that, the default rate with such customers is really extremely low statistically, and we have a lot of measures in place to work on it.
That's really helpful. I wonder if you could just let us know why do you think the process is taking slower if these are customers that you expect to pay in the end? What would change for them?
Well, it depends a bit on the tier city. In China, we have a lot of infrastructure projects in various Tier 1, 2, 3, 4, 5 cities. And what we see is that in the lower tiered cities, where you have metro or airport projects, it takes more time. So it could be that it is a bit more difficult for those provincial authorities to have the funds and to organize it also with the Beijing Central Authorities. That's a bit my hypothesis, what we see.
They just have included additional measures, process steps to make it a bit more cumbersome to collect it.
Okay. That's really helpful. I just want to clarify that my first question was actually with regard to India. I'm wondering if you could contrast the competitive landscape in India versus China.
So I missed that. Sorry, I missed that. Right.
So now to add, India in our cash flow generation, the picture is similar to China as we have in both countries still a very heavyweight on our new installation business. So it's really related to the payment terms and the collection efforts on progress payments and retention payments. And the schedules are similar. Having said that, statistically, if you compare the 2, cash collection in India is more difficult than it is in China with all different customer segments. Here, you have even more the difficulty with customers really having liquidity bottlenecks.
But I don't see this short term. This is more a multiyear view that customers have limited liquidity and collect money first before pay when paid, before they pay it to the suppliers. So clearly, more demand in India versus China in terms of cash flow generation.
Okay. Thank you very much.
Next question comes from the line of Bjorn Pomrein from Torben. Please go ahead.
Yes. Good morning, gentlemen. Just one question left regarding your headcount, which increased by more than 6% in the 3rd quarter. How much of this increase is related to acquisitions? And in which businesses or regions are you currently adding?
Is it mainly services? Or are you also increasing your headcount and manufacturing?
Thank you, Bernd. It is mainly driven by the service business because the service business is very labor intensive. So we are adding so many units due to our conversions to our service portfolio. So it is clearly driven by the service business. Business.
It's not driven by manufacturing. So we do not hire or we do not substantially increase our headcount in the manufacturing area. If you look on the geographical area, it's almost all over the globe because our growth is really coming everywhere. So you remember that we have strong growth in America, strong growth in Europe, but of course, also strong growth with conversions in Asia Pacific. So it's almost equal in the different geographic territories.
But it's mainly driven by more service people. Okay, very clear. Thank you, Thomas. Thank you.
The next question comes from the line of Sabin Hecke, UBS. Please go ahead.
Yes, good morning. A few questions left from my side, one off to the others. So first one is on IFRS 15 revenue recognition. Do you have any visibility on Q4? Will there be a bit of a more negative impact from headwinds after the strong Q1 we had technically?
Thank you for this very good question. Indeed, as we always indicated, we will have operating revenue growth slowdown in the specific quarter Q4. And this is because with the new methodology, we recognize new installation of modernization revenues at the time of transfer of control, which is the start of installation on-site. And versus the old method, where we have recognized work in progress, actually, this is the first dollar or Swiss franc put on the project. So here, we have a later recognition of NI and vault revenue recognition.
And this clearly has an impact on Q4, and I clearly assume that this is quite significant slowdown. Also having said that, of course, there was an impact in Q1, as you remember, with a very strong increase after the restatement of IFRS 15. Then going forward for 2019, it should be apple to apple and no impact anymore on this new IFRS 15 standard.
Thank you. Very clear. The next one is again on wage inflation. Is that a topic that mostly concerns you affecting Europe or U. S.
Like in mature markets? Will it mostly be impacting your service business or also new installation? And I mean outside your modularization program, is there any way to mitigate wage inflation? Can you kind of attack your service contracts? Or can you give a bit of color how strongly it could affect you and to what measures
you would have in place?
So labor inflation always plays in the business where we have a lot of labor content. And a lot of labor content is really in the field. It's not in the manufacturing where the labor part is really mid- or sometimes even low single digit. It is much more in the installation of new equipment and in modernizations, and it is in the service business. So there, you have most of the labor most of the people working.
Now the inflation, of course, is more severe in the area of Europe and in the area of North America. But it's also increasing now in our emerging markets because the share of existing installation business compared to the new installation business is increasing. So also in countries like China or India, wage increases are becoming more and more severe. Now what do we do against that? I think we look ahead and with Schindler Air, we will be able to have better and more efficient service models.
So this will be a future mitigation for our labor increase, but it will not impact us really severely already in 2019. We have to work on traditional efficiency measures. Now F3 also helps us. Why is F3 the Fit for the Future, the modularity program? Why is it so important?
Because in new installation, a lot is found in subcontractor. And we have seen that subcontractors are asking for severe price increases because this labor also becomes now a bottleneck. So with new installation methods, we can do more work with the same amount of people. So we will not be able to mitigate we will not be able to eliminate the labor increase, but we can mitigate the efficiency programs. That's our plan.
So we see clearly also for 2019 that labor cost increases will be mitigated by efficiency programs.
And in the service, how does the pricing of the contract, how does that work? Are they of longer term nature? Are you more kind of caught in those contracts?
Well, a lot of the a lot of our service contracts, especially in the more mature markets, are index based. So there are different indexes. There is there are labor indexes, labor cost indexes and there are consumer price indexes. But it is usually it has a time lag of up to 1 year. So whatever has happened the year before, you then can use in the year after it.
And this is quite an automatic process where we increase the price. Of course, then usually customers are coming back and they try to renegotiate. But I think we are quite good protected with our index based pricing model for service contracts.
Okay. And then a last question on, I mean, your heavy depreciation of emerging market currencies.
Did these
have any impact that they don't get the financing for real estate projects in countries like Turkey, Brazil and so forth? Do you see any impact in the slowdown of building projects?
Well, I think the 2 markets you have mentioned, these are markets of concerns, yes. I think in Brazil, we were a little bit positive in the first half of the year, I have to say. I see more clouds in the sky, I have to say. The political situation is not easy. It has we had some strikes in the middle of the year of drivers all over the country.
There was shortage. Now we have the latest news is that probably GDP will not be growing as we expected. So I think Brazil is will have another challenging year ahead of them. And currency is only one of the elements. I mean, the reais has depreciated really severely, I have to say.
For us, not good because it's one of our strongest markets we have. Now in Turkey, the situation is a little bit different. There is, in fact, a good fundamental base for growth. But we see that the market will shrink this year in the second half, severely shrink because there's a lot of uncertainty. And it's some of the uncertainty is given politically, but some of the uncertainty is based on economical topics because with the decree of the government to convert all foreign exchange contract into Turkish lira with a predefined exchange rate, a lot of things came to a halt and stand still.
And everybody now tries to find out what does that really mean for them. The same for us. All our order backlog shall be converted into Turkish lira. And sometimes, we already have paid the material in U. S.
Dollars. And now the income shall be in Turkish lira at the not at spot rate, but at the predefined rate of the government, which is 3.77, that's the spot rate of January 2, plus the inflation of the country. So this adds together an exchange rate of about 4.5, but the actual rate is 6. So we would lose now on every single contract 25%. So of course, we are in negotiation with customers, but this means that everything at the moment is put on hold.
And this has to be sorted out over the next couple of weeks months. And I think this has a negative impact on the real estate and construction industry in Turkey. Very clear. Thank you very much. Thank you.
Next question comes from the line of Thorsten Viss, BZ Bank. Please go ahead.
Yes. Good morning. Thanks for taking my questions. I have a few. On the sales growth of the service business in China, which you have been doing very well the last few quarters years, can you confirm this trend to continue, I.
E, clear double digit growth? And on that topic as well, the service frequency in China, I think there is some changes. Perhaps elaborate on that. I will go question by question, please.
Yes. Okay. Good morning, Thorsten. Yes, we can confirm we still have a very good double digit growth of our service business. Like in the past, there's no change.
So this machine is really running very well. And the second question was?
The service frequency in China, I don't know if there is some changes going on there. Perhaps you can elaborate on that. How many times the technician needs to do service, etcetera, etcetera?
So today, it's still the case that every 14 days, you have to do a service visit with 2 persons. So this is the highest amount of service visits all over the world. One key reason is the government is very much focusing on safety and quality. And they believed in the past that the more often you go, the better you can create the service level. I think there are trends, of course, with digitization.
And in our case, with Schindler Ahead, There are opportunities that you can have a better service model, meaning maybe some visits less, but you are controlling more via the digitization. This is very important because some of the cities even tell you how many units service technicians maximum allowed to maintain. And if you have a light Schindler Ahead, they increase the number you are allowed to maintain. So it helps you in your service efficiency model. I believe over the long term, this will further change.
I'm quite convinced that the more we digitize our industry, the more there is the chance that the government really says we move away from this requirement of 26x2. And there are discussions about that, but there is not yet, in my opinion, any decreed or regulation launched.
Okay. And then speaking on the IFRS 15, as you have elaborated before, there will be, I think you said, significant, a clear impact on the sales growth in Q4. Could you quantify the impact? Of course, not give the sales growth guidance, but the impact. So we make our estimate underlying sales growth and deduct the negative impact.
So what I can state is the following. In the Q4 2017, the local currency growth was 5 0.9%, FX adjusted and local currency 7.7%. And for the 4th quarter, I do expect an adjustment of 2% to 3% related to the IFRS fifteen impact.
Exactly. That's helpful. But this is only affecting, obviously, sales, not the order intake, correct?
Yes. Yes.
Yes. And then speaking on the order intake, if I may, you have explained before on the question of Martin Flickiger that the impact of the sequential slow slowing growth might be driven by less large projects in versus H1, so to speak. Do you expect in Q4 the impact of large projects, speaking about the order intake to get back to trend with H1 or continue as what we have seen in Q3, speaking about large projects?
We have a lot of awards. We have a good award pipeline, and we are discussing a couple of large projects to come. It's very difficult in a time frame of 3 months to make a proper forecast which ones are coming to your books and which one not. But there is enough food, let's call it like that. However, I want to remind you, last year, Q4 was an absolute bombastic order intake quarter.
So the last quarter of last year, we were at €2,900,000,000 order intake. It was, on that time, the highest. It was only the Q2 this year was higher than the last quarter of last year. So last quarter or last year's quarter was really, really very, very strong. So I think it will be possible, but it is tough to beat that.
So and this is also why in all our guidances, the last quarter of 2017 has been in terms of top line extremely strong. So we were a little bit careful with our guidance in OIT, but also in operating revenue that there might be a little bit more of a flattish development Q4 to Q4 because we have a big baseline impact. So food is there. We will have a good quarter, I have no doubt. But it will depend really on single jobs whether we can book them or not.
But the pipeline is there.
Okay, understood. And just the last question, speaking about guidance or indications you're giving about EBIT margin. The tonality about the EBIT margin improvement has for good reasons, you slowed it a bit worse. And so is an estimate, say, of flat to, say, 20 basis points margin increase for the full year, year over year, and it's a very positive, no changes, so to speak, a good assumption. Would you agree on that?
Well, as you
see, year to date, we are at 11.7%, and that's also for the single quarter Q3. So kind of constant development. And you have seen and heard now the headwinds we are challenged very recently. Raw material costs are not going down, even flattish or even an inch higher in Q3. We have the FX headwinds in the developing markets, which is a clear burden to us.
And therefore, our quarter 4 will be a flattish constant development for sure with chance that we can inch very slightly higher.
I think 20 basis points is very optimistic. Then a lot has to happen in Q4. You should also not forget the euro was between 1.17 and 1.20 in Q4 last year. At the moment, we are somewhere at €114,000,000 €115,000,000 And of course, the European markets are strong markets for us, so high performing markets. So this gives a certain translation negative translation impact if you compare Q4 to Q4.
So this does not help us to improve really the margin compared to the last year's Q4. But we are confident that we will stay where we have been last year. And then it needs a little bit of luck to improve. Operationally, we have everything in place, I have to say. Operationally, from all our activities, everything is in place that we have a slight improvement, as we have said, the whole year.
But it will tremendously depend on currency situation, not only the Europe, but especially also Turkish lira and the reais and the rupee in India, because India for us is also a very good performing market, and this also hits us at the moment. So operationally, I believe, yes, we are doing well. But taking all this into account, I think the headwind is quite severe.
It's just a quarter. I mean, big picture obviously depends on other things like we have discussed, Chinese service, etcetera, etcetera, which are doing extremely well. Thanks a lot. Very helpful. Thanks.
Next question comes from the line of Mustafa Akour, Bloomberg Intelligence. Please go ahead.
Hi there. Thank you for squeezing me in. I wanted to ask 2 big picture questions. So you started increasing exposure to large projects in China. And we know that developers are merging and clients are getting bigger in China.
But given your competitive edge in large projects, public projects, would you say this is more of a sales and exchange for Schindler as opposed to your peers in that market?
I believe the market itself has a certain trend to large projects. First of all, because the government has pushed a lot of infrastructure. So I think if you look on the buildings and the spend within the construction industry, there was a certain shift to large projects driven by public transport. I think it is mainly a topic of public transport, airports, metro stations, railway stations. So I think this is a market shift.
Now maybe we have benefited more than others from that because it is a domain where you need especially a lot of escalators. And we are in a very strong position in the public transport escalated area. So we have benefited a little bit from that. Now the merging of large developers, their purchasing power just becomes thicker. This is usually not a very good indication for pricing.
So I see that, of course, some developers are merging, but also the top 100 developers that have a higher and higher share of the total market. So there is a certain consolidation process and concentration process going on, and this does not help pricing.
Thank you. And if you could shift gears to perhaps the labor shortages you mentioned. Perhaps this is more of a phenomenon for the U. S. Market where it's at full employment.
Would you say that you would struggle to add capacity because of tightness in the labor market maybe in 2019? Or it's just an additional cost, but you will still be able to find the technicians, especially in your services segment? Thank you.
A very good question. I think it's not only a question for 1 year. I think this is something we will face more and more and more. So there are 2 different trends. 1 is there is a higher demand on labor because all the companies are growing, all the service portfolios are growing.
So there is a higher need driven by the increasing service business. On the other side, there is a competition between industries. Less people are willing to do a dirty job. Everybody would like to go to a nice office job, a white collar job and less and less people are really interested to do blue collar jobs. So this is, I think, a challenge for the whole industry.
I'm not worried that we don't have the capacity for 2019. I think it's not a cost issue. Why? Because since many years, we are investing a lot into employer branding, into showing career passes to people, into making Shingler a very attractive employer, not only because of salary, but also that you have a good chance and the way how our culture is and that we care that you can do your career in our organization. We are working with a lot of technical schools.
We have in many countries now apprenticeship programs, which are similar to the ones in Switzerland or in Germany. And this is highly appreciated by the labor market. So I think we are doing quite well in getting the capacity in the markets because we are attractive, but we are facing cost issues because of wages increases. So it's not a capacity topic at the moment for us. It's always at the limit, of course, but it's more the cost impact, which we have to mitigate.
That's great color. Thank you very much. Thank you.
The next question comes from the line of Daniel Klein, MainFirst. Please go ahead.
Yes, hello. Thank you very much for taking my question. It's actually a big picture on the component harmonization program, and I'm talking only about the gross impact, not the net of potential headwinds. So I think the 15%, 65% 100% have been very clear. I would like to touch upon the €200,000,000 plus gross cost savings.
Is this the number still? And has this your perspective on this number changed since the last time we talked? I think you mentioned you were surprised by the savings you were achieving in installations. So has this helped your expectation when it comes to this CHF 200,000,000 plus? Or have there been any offsetting factors that you would need to mention?
Okay. Very good question. So when we talk about we talk about the run rate. So we try to be somewhere at the run rate end of 2019, which somehow has this 60%, 65% of savings. So not all will impact 1 to 1 our P and L by 100% because it is a ramp up.
First of all, we can confirm our saving plan. We have communicated several times. So we believe that it will be $200,000,000 plus. So it might be even a little bit higher. It depends on the volume.
You have savings per unit. And the more units you sell, the more the absolute savings are, not the relative one, but the absolute savings are. So it depends a little bit on the volume, and we are well on track with our volume. As we have seen, we outgrow the market at the moment. So we can reconfirm the numbers, and we can reconfirm when it should start to impact our P and L.
This has been mainly the it's mainly driven by material cost savings. So why €200,000,000 plus? Because it might be also some additional savings on the installation side. And this, we will know after introduction whether it really will happen. We have seen in the car, it happens, yes.
Insulation savings are coming besides material savings. And so I'm confident that at the end, we will have a plus and not only stay altogether on this €200,000,000 gross savings. As we have said, some of it will be unfortunately deteriorated by other math factors. So raw material price increases are a negative factor for it. Wage increases are a negative factor for the installation savings.
But gross wise, I clearly can confirm we will have, over the period of those of this introduction, this €200,000,000 plus gross savings.
You mentioned run rate versus absolute savings. If we think about 2019, should the absolute savings be somewhere in between the 15% run rate at the end of this fiscal and the 65% run rate at the end of the next fiscal?
Correct.
Or would you see it rather at the higher end?
Yes. It is the ramp up will be during the year. So it's probably the if you take the middle point between that and you will be at 40%, this is probably slightly at the upper end, I have to say, because maybe it is something like 30% to 30% no, 35%, something like this. So not so much away, not so much away. Depends a little bit on when are the shipments happening next year.
The later the shipments happen, the more impact we will have from the savings because we already have introduced the new components in the shipments. And it's difficult to predict at the moment what is exactly the seasonality of shipments next year. That's the reason why I'm I have a certain bench, but maybe it's slightly below the average point, which is at 40, but this we will see during the next year. I think it's nothing to be worried. All the programs are on track.
We are under pressure. It's quite complex. But the team is working very good, and we are confident we will show good progress next year.
So maybe to get a little bit ahead of myself here, but if I take the €35,000,000 and multiply it with €200,000,000 and I look at the absolute headwinds that you mentioned in your elaborations before, is it fair to say that you also have an aspiration to expand margins next year, 'nineteen over 'eighteen?
Well, we have this or we have this inspiration this year, and we are struggling to achieve because of some other factors. But it is true, if you remember, our key targets are always we want to grow faster than the market. We want to improve profitability, primary in absolute but also in relative terms, and we want to have a winning team. And yes, we have this ambition. It will depend
not so much on our
own It will depend much more on the environment we are in. And there are some negative signs, I have to say, but I don't want to make now any down scenario or black scenario. We will we are optimistic that we can further improve our profitability.
So maybe on the current performance very briefly. You mentioned that the 15% is end of year run rate. So I think it's fair to say that the harmonization program has not had a meaningful impact on your quarterly numbers thus far and will not have on the Q4?
Well, it is if you take 15% out of €200,000,000 then it's easily calculated €30,000,000 as a run rate, and it will come or it comes in the second half of the year. So the impact on the absolute figures is good enough to compensate the impact of raw material and tariffs we have in the second half of the year but has not helped us to improve our overall margin. But if we would not have started with it, we would have probably had a negative margin development.
But the bigger offset for your headwinds should be the existing efficiency gains, including the harmonization?
Absolutely. As we say, raw material was more than EUR 100,000,000 impact gross. So we had a lot to work on purchasing and actual design changes to mitigate this. You're right.
Okay. Maybe one last point. One of your key competitors mentioned there would be pilot programs in China or one pilot program for remote maintenance. And I found it very exciting, particularly in the context of the b weekly maintenance intervals you have to do with 2 people, so potentially moving the needle in favor of large OEMs. So my question clearly is, are you aware of that?
Are you participating? Could you shed some light on the potential time line for broad based introduction?
Well, broad based introduction in this country always depends on approvals by the government.
I think
it's something everybody is working on. We are aware about, first of all, that competitor and also the program they have. We are under discussion with local governmental bureaus because if you are doing pilots, usually you do it with a certain city or with a certain municipality, and we have similar discussions with them. And by the way, just to add that great support also by our partner. As you know, in our program, we are working very close together with Huawei, who is helping us also to connect and to convince and to open, let's say, the discussion with those decision takers.
We have a follow-up question from Andre Kukhnin, Credit Suisse. Please go ahead.
Yes. Thanks so much for taking time to take this. Just on the M and A impact, could you give us an idea of how much the contribution is to top line year to date from the acquisitions, so we can have maybe an idea of how much still to look forward to when you annualize after 2019? And what is the level of amortization that you're taking through to EBIT at the moment related to acquisitions?
All right. So the impact of our acquisitions in terms of operating revenue year to date is about 1 percentage point. Also for Q3. And I expect that we have the same similar impact for the full year of 2018. It is clearly our target to add to our organic growth, 1% also going forward.
In terms of our amortizations of intangible assets, So we do amortize our service portfolios depending a bit on the transaction, on the nature of the transaction, the size of the transaction over 10 to 15 years. And the impact to the bottom line, I'm just checking, Andre. Sure.
Thanks, Richard.
Maybe I'm coming back to it in 2, 3 minutes.
Okay. Sure. The other follow-up I had, and I'm sorry to be paying on this, we've gone through quite a few kind of drivers of the profit bridge for 2019 in terms of inflation and offsetting factors. Can I just run through what I've taken away from this call and then you tell me what I've got wrong? So you said raw materials impact is going to be smaller in 2019 than you are seeing in 2018 based on current rates, etcetera.
And then you said your pricing measures will more or less mitigate that and hence neutral overall. Then you said labor inflation will be more severe in 2019 than what you see in 2018. But you have got efficiency measures like F3 that are compensating for that. And there is some effect from price escalators built into contracts, albeit there's a lag there. So that labor versus efficiency measures and price is also neutral as far as I can understand.
And then you also mentioned component inflation where your suppliers are coming to you and they've taken a lot of pain already in the last sort of 18 months and they may have to you may have to accept some of the price increases there. And that is kind of left as it may be unmitigated for modularity to offset?
Yes. Definitely, this is one of the elements. So we clearly want to mitigate this, let's say. Additional inflation on the raw materials. So part is driven by the higher raw material cost and part is driven by past raw material increases, which has not been pushed completely through to us.
So this, we should definitely compensate by our modularity program, clearly.
Right. So when we talk about raw material increases not being balanced out by price increases, we're talking about pure raw material impact? Or does that include the component inflation already?
No. This is, in fact, raw material increases, which have not been accepted by us. As I said, the gross impact on our suppliers' input cost has been more than EUR 100,000,000. Now as you know, we have mitigated a lot of that. We have mitigated by new components.
We have mitigated by design changes. We have mitigated by negotiation. So at the end, we do have a negative impact, something like 40 basis points. Based on our backlog and also, let's say, material inflation, we were not able to somehow eliminate. Now this was good for '18.
Now those we were able to push back. Of course, they come back now towards the end of the year. So if you had more than SEK 100,000,000 and you were able to bring it down to SEK 40,000,000, then there is still something like SEK 80,000,000, SEK 90,000,000 left that people come back again. And at a certain stage, you have give in and you have to do some price increases because of past material raw material cost increases. And this definitely will compensate with our modularity program because the modularity program will try us to bring to a new level, to a new cost base, where then maybe with some raw material price increases we have to give in, we are maximum on the level we have been a year ago.
And of course, we will try to even be better than before.
Got it. Got it. Last question I had was quite broad based. Just thinking about China market profitability and the dynamic of large projects pricing pressure being severe, It sounds it looks like this is a market segment where because conversion rates are quite high. And I think in these large projects, they're often comparable to what we see in developed world.
That is probably what has been driving this kind of excessive severe pricing pressure. So obviously, their size, and revenue contribution, but also the fact that you get the service revenue with higher probability there than in normal residential business. Where is that large project kind of profitability is right now market wide? Has it come down substantially or sufficiently now to think about stabilization? Or is there still a way to go there towards that sort of mid- to low single digit where it is in developed world, where it then becomes all about the service rather than making money on new equipment?
I think it's a very valid point and probably not only a quarterly topic. This is much more a strategic topic. I think there is a certain shift maybe, not only for us, but maybe also for others, where you change your mindset. In the past, China was all about you make the money with selling new equipments. That's it.
And a lot of the market players did not care so much about service part because the margins in new equipment were absolutely fantastic and good enough. Now of course, there is a shift, and I think there's also a shift in mindset. The service becomes more important, also driven by the government. And this you see especially in large projects. What are large projects?
Large projects are usually public transport areas where the safety is fundamental. So you have to have a good service model to generate a good safety level. All very often these are towers, so high value commercial projects. And in both areas, there is a good chance or a higher chance to get a good service contract afterwards because we don't compete with the smaller companies. And so usually, the average price for such an installation service is much higher than the average price you have for a normal residential elevator.
And I think to a certain degree, this future benefit of service is priced in the new installation offer. So it goes a little bit into that direction. I think that people are willing to suffer more in the new equipment price because they would like to get a high value service contract. And this drives down the new equipment price. And I do not believe that we are already at the end because it will all depend whether there are goods enough such large projects in the market or not.
And this is also depending on the government who there are some indications that the one or the other announced infrastructure project is put on hold. Those they are working on. They are continued. But some of the, let's say, announced ones have been put on hold. So then the cake becomes smaller and then the pricing pressure even becomes higher.
So I do not see that we are at the end of the pricing pressure for large projects.
Got it. That's very insightful. Ursa, I just wondered if you had that number or should I circle back offline?
Certainly. No. So our year to date impact on amortizations is close to CHF 20,000,000. And for full year, it will be, depending on future small acquisitions, something between CHF 25,000,000 CHF 28,000,000.
And if by chance you have a comparison for 2017 for that, just to get an idea of the incremental pressure?
Yes. Year to date versus last year, very similar.
Similar. Okay, great. Thank you very much to both of you.
Thank you.
The next follow-up question is from Martin Flueckiger. Please go ahead.
Yes, thanks. Gentlemen, just very quickly, two questions. World Pipelines, keyword, I think Thomas has mentioned a few minutes ago. Could you talk about the latest developments in your award pipeline in Q3? Is growth waning or accelerating?
That would be my first question.
Well, the awards, of course, we always look at what has been converted into OIT in order intake. So the award pipeline quarters in terms of awards. And then as soon as we get a down payment, the award is converted into order intake. So we were very strong in converting in Q2. We were a little bit less strong in converting in Q3.
I think we are expecting a normal conversion in Q4. So I think the overall pipeline then, that is more or less healthy and stable. So there was not that we had exceptional additional awards compared to other quarters, but also not exceptional low awards compared to other quarters. It was very, very stable. On the
Okay. That's interesting. But would you agree that this would imply that order intake growth should accelerate again in Q4 despite the tougher comps?
Well, as I said, it depends how much you can convert. And a lot of those big jobs are public transport jobs. And public transport is governmental driven. And in the government, if you want to get your first payment, in some of the areas, I have seen one down payment letter where there have been 16 signatures. So and you don't get the payment if they have only collected 15 signatures.
So it is not that easy to predict when you get all the signatures in order that the customer usually then makes the first down payment. I'm a little bit hesitant to say which one will become an order intake in Q4 and which one not.
Okay. Fair enough. Thank you so much. And then finally, just talking about labor cost inflation, I understand your argument, but I'm just wondering whether you could provide some granularity on the quantitative aspect of it. Are we talking about 3.5%, 4%, 4.5%, 5%?
What kind of labor cost inflation or wage inflation should we expect for 2019? Well,
we are at the moment, we are trying to make our plans for 2019. And it is one element we are discussing because, of course, a lot is negotiation. But I think we will be if you take 3% of labor, for example, of labor increase and you have like EUR 3,000,000,000 of cost of personnel, this is an impact of EUR 90,000,000. This is a substantial amount. Now if it goes to 4%, where I don't see that at the end, we will be on that high level all over the world, then you would already be at EUR 120,000,000 or maybe with more people we have to go towards €130,000,000 €140,000,000 So this amount becomes really substantial for us.
And we see it even in a country like Switzerland. Companies have announced that for the first time, they start to increase salaries higher than they have done it in the past. So at the moment, we are still finalizing our plans for 'nineteen. And maybe the when we have the yearly press conference and also on the roadshows, we might be able then to give a little bit more insight into that.
The last follow-up question is from James Moore. Please go ahead.
Thanks for your patience. Two follow ups, if I could. Just returning to wage inflation, thank you for the explanation just then on 2019. If I think about 2018, I think in the past, you mentioned 20 bps of wage inflation pressure, which, if I compare that to your revenues, is about €20,000,000 which is only 0.6% of your annual wage bill. Is that right for the quantum for 2018?
Or have I misheard the past?
We said in the past that for 2018, it was about 30 basic points. Okay. Assumption. It might be now and this is the direct impact. I think if you take the pressure we have on subcontractors, then it's probably even a little bit above the 30 basis points.
And also, the development when the final negotiation was happening in Germany, this also has pushed a little bit more pressure. Then the 30 basis points we have announced somewhere, I think, in February or so, then we did not have all the final negotiations. So it's probably 30 plus.
Thanks. So closer to 1% inflation versus the 3% of next year basically, yes. And then on the modularization savings, if we exclude those, because I understand those, you've been very clear on them. Obviously have some general productivity in the company, and that's something you've always had. I don't know if you have a target internally as
a percentage of sales or percentage
of cost of goods sold. I'm just trying to understand whether what that number is as a percentage in 2018 is basically similar to what you've done in the last 5 years and what you think you can do in the next 5 years? Or is there any change moving around there that we should understand?
So in principle, when you go into the local organizations because this is difficult on a global scale, it's very difficult to talk about labor efficiency because it's very much driven on the maturity of an organization in the country. It's also driven by the capability of your people, how well trained are they? Are they young? Are they older? And it's also driven by the business split you have, how much is service, how much is new installation.
But as a general rule, we give to all our organizations the task that they have to compensate labor inflation with efficiency improvements. That's the ultimate goal. This does not always work because in some of our countries, especially emerging countries, you have labor inflation increases of 5%, 6%, 7%, 8%, and it's difficult to improve efficiency by this amount. So but as a general rule, we try to fully compensate wage inflation by efficiency improvements.
Very helpful. Thank you.
We have another follow-up question from Daniel Gleim. Please go ahead.
Sorry, I was on mute. Thank you very much for taking my follow-up question. I would actually like to touch upon the last point that we just discussed. Of course, the net savings from the modularization kind of depends on the price increases you would have implemented without the modularization or stating it in different words. I wonder how much you're willing of this incremental efficiency gains to share with customers down the road.
Has that changed anything on your willingness to maybe be a little bit more lenient on your sales prices to potentially gain market share than the current environment? And I specifically think of China, where the market leader has implemented some very substantial price increases, where I understand you haven't seen that follow through on your own top line yet. Maybe you could provide a little bit around a little bit of color around pricing. I know it's difficult, but just to better understand whether this could be a potential headwind for the net savings on the modularization?
Okay. I think we it's a very good question, not easy to answer. But overall, we are ahead of our original plan in terms of growth. I think in the last 2, 3 years, we had very strong growth, definitely far above the market development. And so this has helped us to create a bigger baseline where you can implement the savings.
So this helps us. Now looking ahead, to be considered as we will have exactly the same growth rate in all the coming years, this is something you have to balance how much additional volume do you want to get compared to the price you price increases you can implement. So I cannot give you an exact number to say, okay, prices will go up. So this price sensitivity of demand, this is, let's say, a little bit a crystal ball for us in the industry. Everybody tries, and it is a dynamic process.
We try to increase, and then we see what is the impact on volumes. And then you start to balance it again a little bit. But in China, we definitely have made good progress. I'm not so convinced that all of our competitors have really increased prices. They have tried, this we have seen.
But then when figures are going down, then they are exactly in the same dilemma as we are, volume against pricing. I think for us, key important is we have kept our profitability level we had a year ago. And now we are in our execution. We are in the execution of the worst orders we had because it was an extreme tight game in 2016 early 2017. So I think it's also fair to say that we did not just reduce prices at all without thinking.
We were able to mitigate these price reductions with efficiency improvements. Now we see that in the 1st 9 months, in the, I call it more bread and butter business, we have increased our realized prices definitely in China, low single digit, I would say. So sometimes it's 2%, 3%, 4%. But on the other side, of course, we have a higher share of large projects. We have just discussed before that the price is price competition is extremely severe still, and this is somehow eliminating part of this benefit.
But we believe that we will be able to achieve better performances also next year in China than what we have achieved this year.
Thank you very much. Maybe one last point. Is there any change on mix you would foresee for the current run rate and next year? Because that has been a big swing factor on the monetary value in the past.
Well, fortunately, I have to say, as we are pushing a lot into the growth, you would assume that there is a negative mix change towards new installation. But on the other side, you know this impacts negatively your margin. So besides this push in new installation, we have extremely pushed also our service business to avoid that we shift too much in our business presence, new equipment versus existing installation. So at the moment, we were able to keep plusminus this mix stable.
I was not so much referring to new installation versus service but more to average selling prices for like for like elevator.
Okay. Okay. Well, the like for like elevator, I think we were able to
increase our pricing, this we definitely have done.
And in the past, there was a lot of especially in China, there was a trend to go to simpler elevators. And this, I think, has now come to an end. I think we are in the spread. What type of elevator are requested by customers, I think we are now also quite stable. So it's not only that we are improving the pricing, but the customer is asking for less.
This does not happen anymore. It partly happens in high rise elevators. There, we see that there is a certain shift moving away from top grade A buildings towards more, let's say, medium grade buildings with lower requirements. But in the mass business, I think there is no devaluation of the market size because customers ask for that.
Very clear. Thank you very much.
Thank you. So ladies and gentlemen, thank you very much for attending our conference call. Thank you very much for all the interesting questions. I have to record, it has been another almost 2 hours call like the last time. So it seems you are all very interested in our performance and in our development.
I would like to thank you. And I also would like to close now, and I'm looking forward to our full year results conference on February 14 in 2019. Thank you very much. Wish you all the best. In the meantime, I will be the first one who will wish you a good end of the year.
Merry Christmas and a Happy New Year. Thank you and goodbye.
Ladies and gentlemen, the conference is now over.