Ladies and gentlemen, good morning. Welcome to the Schindler Half Year Results 2018 conference call. I'm Irena, the Chorus Call operator. I would like to remind you that all participants will listen-only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing Star and One on your telephone. Should you need assistance, please press Star and Zero to call an operator. 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. Oetterli. Please go ahead.
Good morning, ladies and gentlemen, and welcome to today's half-year results conference call. My name is Thomas Oetterli, CEO of the Schindler Group. I'm here together with Urs Scheidegger, our CFO, who will dive into the financial details and the outlook later during this call. I have to say I'm happy with our achievements and performances in the first half of 2018. Let's quickly jump to the highlights on slide number two. In the first half of 2018, Schindler continued to perform above global market development. All regions and business lines contributed to the growth. The share of major orders increased, driven by strong growth in infrastructure projects and by successful key account management for global clients. The Americas region achieved the highest increase, followed by EMEA and Asia Pacific. As a result, order intake grows by 7.9% in local currencies, and revenue increased by 8.4% in local currencies.
We are therefore lifting the range for our revenue guidance for the full year 2018. Operating profit improved in local currencies by 7.5% to CHF 613 million, and the EBIT margin stood at 11.7%, in line with the previous year. Net profit grew by 23.2%, impacted by a one-time tax refund. Excluding this one-off, growth was 10%. The execution of our strategic priorities is well on track. Here, I am particularly referring to our modularity program to harmonize our product platforms and the digital transformation of our business. In our modularity program, we brought to market our first harmonized major component in the first quarter of this year with the car, and the feedback from the supply chain as well as from our installation teams is very encouraging. More harmonized components will be introduced over the next two years.
In our digitization initiative, all new equipment features the Schindler Ahead CUBE and is digitally connected with the Internet of Elevators and Escalators, or how we call it, IoEE. In addition, we inaugurated two plants in Asia Pacific, of which one is in China and the other one is in India. Balanced growth is the headline of today's media release. With this title, we would like to express that our top-line growth was broad based across the regions and markets, but also across our business lines, including a strong modernization, repairs, and service business. The competitive environment remains tough, especially in large projects. In addition, we still suffer from substantially increased commodity prices and tough pricing in China, which all together put pressure on our margin. However, in the first half of 2018, we could compensate those higher costs, keeping the EBIT margin at the same level as in 2017.
We still plan to slightly increase the margin in the full year compared to the year 2017, but this will depend on our business mix, new installations versus the service business, and the development of raw material prices. Let's move to slide number three, which describes the development in Asia Pacific. Overall, the market sentiment in the region was positive, characterized by a stabilizing Chinese market. In the new installations business, China remained stable. Price pressure, however, continued. On a positive note, pricing was somewhat stabilized, at least in some segments and geographies. We expect a flat pitch market for 2018 in terms of units. In India, the market was further picking up, and in Southeast Asia, we saw robust markets in all business segments. At the end, the service markets remained healthy and further growing. Our performance was strong.
The new installations business achieved high growth rates, particularly driven by India and Southeast Asia. Across the region, service, repairs, and modernization recorded significant increases. I now move to slide number four and the Americas region. The U.S. market continues to grow and drove the region. The recovery of the Brazilian market is still slow. In North America, the positive development in the U.S. construction sector continued at a very high level, and in Latin America, besides Brazil, construction markets recorded growth. Schindler did very well. Our North American operations continued to deliver a strong performance. In Latin America, Schindler kept its position in Brazil and generated good growth in the other Latin American markets. Let's continue with the last market region, EMEA, on slide number five. Overall, the development in the construction industry remained strong.
In the northern part of Europe, the high construction activity continued, and the southern European countries posted sustained growth in most markets. With a very few exceptions, Schindler was growing in almost all the markets. The new installations business was the growth driver in this region. Our installed base generated solid results, too. I would like to briefly touch on two additional topics on the next two slides. On slide number six, as I mentioned earlier, growth in order intake was driven by a substantially higher share of major orders in the order intake. You see on this slide a flavor, and it also shows how we elevate the world and provide a contribution to the quality of life in dense urban areas, and a service to society. There is a variety of commercial centers, public transportation projects, and landmark buildings. I move on to slide number seven.
With the inauguration of the new escalator plant in India and our new escalator step factory in China, we completed our investments in our global production footprint, providing proximity to local markets, and consequently, a deep understanding of local needs. This local presence, together with our strong and timely service, are very well appreciated by our customers. The new escalator factory in Pune in India is the first of its kind in this market. We are ready to serve an ever-increasing demand in the Indian public transportation sector. The escalator step plant in China finally completes the supply chain on our campus in Jiaxing. After these insights into the different markets, I would like to hand over now to Urs for the financial results and the outlook for 2018. Urs, please, it's your turn.
Thank you very much, Thomas. Good morning, ladies and gentlemen. I'm pleased to report a solid set of results characterized by strong growth rate in order intake, operating revenue across geographies and business lines, and profits at stable margins. As an entry note, the first-time application of the new accounting standards, IFRS 9-15, had only very marginal impacts on our half-year results and are expected to further diminish by the end of the year. Full impact to the consolidated balance sheets and further explanations can be found in the interim report. Therefore, I won't make further comments on this topic during my speech. Now let's move on to the key figures for the second quarter of 2018 on slide number eight.
In the second quarter of 2018, order intake exceeded, for the first time ever, CHF 3 billion in a quarter, equivalent to year-over-year growth of 11.2% nominal and 8.2% in local currencies. Order intake includes all our business lines of new installations, modernization, maintenance, and repairs. The acceleration in activity for large projects continued. Our modernization, maintenance, and repair business outgrew the new installation business, so it is confirming our business model to perform strongly across the life cycle of our products. In the second quarter of 2018, revenue improved by 10.9% to CHF 2.8 billion, corresponding to year-over-year growth of 7.9% in local currencies. The largest growth was recorded in EMEA, followed by the Americas and Asia Pacific regions. Operating profit improved by 11.4% to CHF 332 million, equivalent to 7.7% in local currencies.
The EBIT margin reached 11.9%, in line with the previous year. We were able to offset the high raw material costs with operational efficiency measures. Before restructuring costs, the EBIT margin was 12.1% compared to 12.2% in the previous period. The net profit improved by 28.3% to CHF 308 million. A settlement in an arbitration procedure with regards to Schindler's tax position was recorded in the second quarter 2018, which had a positive impact of CHF 55 million. This impact is split into interest income of CHF 25 million and income tax refund of CHF 30 million. The net profit before tax refund grew by 5.4% to CHF 253 million. Cash flow from operating activities increased by 22.4% to CHF 104 million. I now move on to slide number 10, and will comment on the performance after six months.
In the first half of 2018, the order intake rose by 9.8% to CHF 5.9 billion, corresponding to a growth of 7.9% in local currencies, reflecting Schindler's well-balanced geographical strong presence. The share of major orders increased, driven by strong growth in infrastructure projects and by the key account management for global clients. Modernization, maintenance, and repair business outgrew the installation business. The Americas region achieved the strongest growth, followed by EMEA and Asia Pacific. In the Chinese new installation market, Schindler grew both in volume and in value. The revenue grew by 10.2% to CHF 5.3 billion in the first half of 2018, corresponding to an increase of 8.4% in local currencies. The largest contribution to growth was generated by the EMEA region, again followed by Americas and Asia Pacific. I'm now turning to slide number 12, which shows you the growth by region in detail.
To the left, you see the revenue growth by region in local currencies, characterized by very healthy growth rates in Europe and the Americas. Also, revenue growth in Asia Pacific has more than doubled. To the right, you see the distribution of revenue and backlog by region, which reflects particularly the strong growth in Europe. I would like to go back to slide number 10. The EBIT totaled CHF 613 million in the first half of 2018, corresponding to a growth of 9.9% in Swiss francs and 7.5% in local currencies. The EBIT margin stood at 11.7%. It is in line with the previous year. Economies of scale and efficiency gains offset the higher costs of raw material, as well as the pricing pressure in China. Before restructuring costs, the EBIT margin reached 11.8%.
Net profit development should be viewed considering the settlement in the arbitration procedure with the positive impact of CHF 55 million. As a consequence, net profit increased by 23.2% to CHF 560 million in the first half of 2018, mainly reflecting the improved operating results and impacted by the one-time tax refunds I just mentioned. Comparable net profit grew by 10% and amounted to CHF 461 million. Our cash flow from operating activities totaled CHF 434 million, compared to CHF 441 million in the previous period. It is negatively impacted by the change of net working capital. With our success in order intake of major projects in public transport and large commercial projects in the last two years, we are facing more challenging commercial terms, particularly regarding the down payment coverage to work in progress. As of June 30, 2018, the order backlog totaled CHF 8.7 billion.
Compared to the figure of CHF 7.8 billion as of June 30, 2017, the order backlog rose by 11.9% nominal and 8.9% in local currencies. With that, I'm moving now to the financial guidance you can find on slide number 13. Schindler expects the trends seen in its markets in the first half of 2018 to largely continue in the second half of the year. For the full year 2018, excluding any unforeseeable events, Schindler expects revenue growth of between 5% and 7% in local currencies, and net profits of between CHF 960 million to CHF 1,010 million for the financial full year 2018. With this, I would like to invite you to ask your questions.
We'll now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question from the phone comes from the line of Lucie Carrier with Morgan Stanley. Please go ahead.
Hi, good morning, gentlemen. Thanks for taking my question. The first one is more a question of clarification. Can you confirm that the net income guidance you have provided, so the CHF 960 million to CHF 1.01 billion, does include the CHF 55 million tax benefit that you recorded in the second quarter? Linked to that, should we expect significantly different, I would say, financial expenses or other items in the second half of the year versus last year? If I would remove the benefits you had in the second quarter from this guidance, it would seem more that you are guiding at the midpoint for CHF 935 million. I'm just trying to make sure I understand well the guidance here and what it implies for the second half of the year.
Good morning, Lucie. Thank you very much for the question. I think, Urs, this is good for you to answer.
Yes. Thank you very much for the question. I would like to start first with the OR guidance. We had a strong first half year in operating revenue, as I mentioned, of 8.4% in local currencies. Please consider our growth rate last year was a bit lower at 2.9%. We still confirm solid growth in the second half year, we will need to digest a base effect. We will need to climb in the second half year. Last year, second half year growth was 6.1%. We really enjoyed strong growth last year, which we now will have to top, this is clearly our aim to further grow. On the net profit guidance, as I said, we reported stable margins at EBIT and comparable net profits in half-year closing. We aim for a slight profitability increase versus last year for the full year.
Having said that, we are facing headwind to our profitability in the second half year with the business mix, because we will see our NI business lines growing stronger in the second half year. This is quite normal, quite seasonal in our industry versus service and repairs, that results in a bit unfavorable mix change. We will also see an increase to our strategic initiative expenditures in the second half year. This considering results in our full year net profit guidance.
Which includes the CHF 55 million?
Yes, that's correct.
Okay. Understood. Just my second question is, I was wondering if you could comment on the margin you have currently in the backlog and the margin you had on second quarter order intake. I understand you cannot give maybe a precise number, but if you could comment how this margin compare with where you were last year in terms of order margin.
Thank you very much for the second question. The margin in the backlog, of course, is slightly negatively impacted by the raw material price increases we had, as we cannot compensate that backwards with a price increase. There is a couple of basis points where we lose on our backlog, the margin. However, I have to say, I think we have been working very strong in the second quarter to manage pricing. We try to increase the pricing to offset this negative impact we have from the raw material prices. I think we were able to somehow stabilize this risk of deterioration of our backlog margin. We do have some negative impact from the past because we cannot change the pricing.
I think in the first six months, and especially in the second quarter 2018, we were able now to slightly improve our pricing all over the globe. In some regions, it works better, and in some regions, it may be more challenging to offset the negative impact. I expect, for the quarters and especially also for the next year to come, that we are able to manage that in a sustainable way. This, of course, includes a certain assumption that there is not a further raw material price increase. This is something we have to observe very carefully in the next few months.
Thank you very much. Just I was hoping if you could provide us a bit more granularity regarding the China business in the second quarter between volume and price. You were also mentioning high competition in large project. I mean, that's not the first time you do that. I was just curious to know whether you could give us some pointers where this competition is coming from, whether this is more domestic, Japanese or some of your other Western competitors, just for us to have a bit of a sense where that come from.
Well, first of all, I think our second quarter in China was really successful. It was a good quarter. We were fighting very hard, we are also trying to balance a little bit, the volume growth with the pricing. We do not go for every job which is available somewhere in the market. We try to be reasonable. I think Q2 was a good quarter for us, especially in the elevator and escalator business. We were able to catch some major projects in infrastructure. Infrastructure is something which is booming at the moment. Of course, those large projects do have tremendous price pressure. Now, the good thing on the infrastructure projects is they are usually long-term. You have maybe a hit at the moment in terms of pricing, but you are working on continuous cost improvements.
As your deliveries are very often, maybe one year or sometimes even two years later, you are able to further improve your margin after you have booked the job. Infrastructure is the key part of large projects at the moment in China. When you look more on the commercial business, there I have to say, a big driver, of course, in the past of the commercial business were shopping centers, commercial centers. I would say that due to the e-commerce, which is increasing, there is some pressure on the market there, not only in terms of price, but also in terms of volume. I think it's a market which is quite heavy under pressure also in terms of units.
As this is especially also an escalator business, we try to compensate that with our success in the infrastructure project, where also a lot of escalators are supplied. You have, in terms of units, maybe a little bit of drop, but in terms of value, you can further improve your size. When I move then to the last part, more the residential business. I think the residential business has become a little bit more flattish. We have seen in the last two, three years a very strong decline in some areas. I think now the market has been stable in terms of units and also in some areas in terms of pricing. Especially when you are not in the area of the top large developers, pricing was much more stable.
In the large area of developers, of course, there is still quite a lot of price pressure because there you are negotiating frame contracts for the next one or two years. Due to the very high volume you have there, everybody tries to jump on that. Now, the question you asked about how is competition behaving, I think everybody tries hard to somehow compensate this raw material increase headwind. I would not like to comment who is now a little bit more cautious in pricing and who is maybe not so cautious in pricing. I do not want to comment too much on the strategy of competition.
Okay. Yes, thank you. Just a final question. Of course, there is a lot of discussion around tariff, trade tension, and so on. I was just kind of curious if any of the already implemented tariffs could be impacting you in terms of sourcing. Also we've heard about some other companies talking about shortages in electronic components. I was wondering if this is something you were seeing or something that has affected you.
Yes, I take this question. The tariffs imposed by the U.S., of course, have a certain impact. We currently calculate an impact of approximately CHF 10 million, full year run rate, a bit less for this year. Having said that, Schindler is producing in many regions where we are selling, therefore the impact is really small for time being on the tariffs we already know. On your last question, do we see bottlenecks in electronics? I am not aware of such supply bottlenecks.
Okay. Thomas, thank you very much.
Thank you, Lucie.
The next question from the phone comes from Omid Vaziri with Jefferies. Please go ahead, sir.
Yes, thank you very much. When you set your net profit guidance, what assumptions are you factoring in for any further price escalations in the raw materials in the second half of this year?
Well, for our guidance, we have the assumption that we stay where we are at the moment. We had a substantial increase in the last 12 months. We assume, or our guidance includes that the raw material prices stay where they are at the moment.
Okay, thank you. Can I also get your latest market outlook for the Chinese market in the second half and also perhaps going into next year?
Of course, this is a question everybody always ask for him or herself, it's a question we also ask ourselves all the time. I mentioned that in the Q1 call. We, of course, always try to look like into a crystal ball, sometimes we are right and sometimes we are wrong because it can change very quickly. At the moment, I do not see really a big change of the situation where we are today. I believe that the market has really stabilized, especially in the residential area, this is also our assumption for the quarters to come. There is some additional push coming from infrastructure projects, although there it might be a financing issue also that maybe the government cannot execute all the planned infrastructure projects.
At the moment, I have to say, I'm slightly positive for the market in China as it is more or less today.
Yes, good. We have been seeing a fixed asset investment in China, the growth slowing down a little bit sequentially. At the same time, we know that the larger portion of that is for land purchases, which I guess you view as positive overall. How do you kind of digest, and does that change your view at all? In fact, the fixed asset investment is sort of softening a little bit. I guess you would expect that from a wider macro deleveraging environment within the country.
At the moment, as I said before, there are so many indicators you can look at. We have discussed many times, floor space started, net investments, floor space sold. Somehow in the crisis, we were struggling to get the right indicators to make a forecast of the market development in the future. I think the KPI you mentioned is one important one. I think also when you look on floor space started, it has come back to a more or less stable level with slight growth. Of course we are observing that every single month. At the moment, I'm not really in a negative mood or mode looking on the Chinese development. I still believe it will be on that level where we are today.
Yes. No, I really appreciate the commentary there. Not an easy one to make in terms of an outlook. My last question is, coming to your harmonization plan, the modularity program that you are currently undertaking. This year we saw first major components introduced, and that's already showing improvement in the margins. In terms of the margin impact, we expect obviously more in the second half and next year, but for how long do you think this will continue to have a year-over-year impact in your margin going forward?
Well, the introduction of the different component, of course, is a multi-year game. It goes until 2020. We have a slight improvement this year because we have introduced a harmonized car. Feedback from the factories as well as feedback from our installation teams is very good. I have to say, we could confirm our expectation. This is now impacting, of course, as we introduced it somewhere end of Q1, we had some slight positive impact in Q2. We will have the full impact of this component in the second half of the year. There will be new components being introduced, controllers, frequency converters, shaft material, machines, over the next 24 months. Next year you will have the full run rate of this year. With the introduction of new components, it will further pick up.
We believe that in the second half of 2020, we will have the full impact at a run rate. I think until then, we will see continuous positive impact coming from the modularity. We also mentioned in the past, that's not the only driver of it, of course. It also depends on the pricing and on the, let's say, raw material cost development. It could be that some of these positive impacts will be unfortunately compensated negatively by those cost increases.
Yes, that's very clear. You're essentially reiterating what you had told us before in terms of the impact.
Yes
after 2020. Thank you very much.
There is no delay in the program. We are exactly on track in terms of timing and introduction.
Thank you very much. That was all the questions that I had.
Thank you, Omid.
The next question from the phone comes from the line of Andre Kukhnin with Credit Suisse. Please go ahead, sir.
Yes, good morning. Thanks so much for taking my questions. I'll start with just following up on the guidance, on implications for second half, trying to reconcile that with your message on continuing to improve profitability in 2018. Obviously, the guidance implies assuming no change in run rates in financial and tax lines implies that second half margins will be down. I know we've been here before in the past few years. Just wanted to check if there's anything that we should be aware of for the second half of drivers coming up, that makes you maybe feel worried about something not working out and that margin improvement not happening? Is this just your traditional conservatism? If you could comment on that.
Well, Urs, I think let's try once more to explain the guidance.
Good morning, Andre, here is Urs again. As you know, we are working here on our plan, we are implementing our plan very diligently and very structured. This is certainly the case for our strategic investments into modularity, into digital twin, into our new Internet of Elevators, the Schindler Ahead, and the quality initiative. Yes, we do foresee a bit more expenditures in the second half year on those initiatives, as we may have seen a bit earlier in the year. As I also said to you, we will face business mix change. This is truly seasonal. Our NI volume will grow a bit more compared to the existing installations in the second half year. I do not foresee exceptional new items. We have here a good consistency to our messages quarter prior, and to our prior explanations to our results.
Sure. Yeah, I've heard the mix and investment arguments. Just on mix, is that going to be more negative than usual during the second half of any year or during 2017, for example?
I will not say it is more negative. This may be not. There is one uncertainty I have to admit, we are not totally sure how it will impact us, and this is IFRS 15, because with the change of revenue recognition, it might be that we have a tougher Q4 than we had in the past years. We will only recognize when you really have started installation, you have a transfer of ownership of material which has been shipped to construction site. I have to admit, this is a little bit an uncertainty. We do not know exactly how it will impact us. We had a positive impact at the beginning of the year. Far now, there is no impact anymore. Maybe there might be a little bit of negative impact in revenue and margin recognition due to IFRS 15 in the last quarter.
I think all in all, when you make the math, it is not so wrong. I think when you look on our EBIT we had in the first half, and the net profit we had in the first half, if you take the net profit, before any tax refund, we had CHF 461. If you double that, you are at CHF 920. If you add the CHF 55 million, you come to CHF 970. We say, okay, it will be a little bit better than it was in the first half. To come to the guidance of CHF 960 to CHF 1,010, including that we will have some negative impacts from the tariff now in the second half of the year. We have some higher investments. Operationally, without this let's say foreseen cost impacts, we will improve further our margins. That's what we plan to do.
I think the guidance could be explained like this.
That's very clear. Thank you, and sorry to labor it. I think it is just important to have it clear. If I sum it up as fundamentally what you see in your backlog and in how the business is trending, is consistent with margins to be stable or small up. There is a chance that you spend more on strategic programs and there is some uncertainty, as you said, about maybe mix and IFRS 15 and that's kind of what warrants a slightly more conservative net income guidance. Would that kind of sum it up rightly?
I think this is fair to say. At the end, we are a company which is driven by long-term growth, and we are driven also to do necessary investments when we believe we can create a competitive advantage. What we don't want to do is, we do not want to save now or postpone our strategic initiatives. We really want to get them done because we believe all of them, and I just want to name them, modularity, Internet of Elevators and Escalators, investment into the digital twin, investments to further improve our quality, and we have this Quality Champions program, and also investments we do into people development. We want to do that. We don't want to postpone it just for a further margin improvement because we believe that long-term it has a very good payback.
If we can execute it as fast as needed, then we will long-term benefit from the returns. This, of course, increases a little bit the investments in the second half and has to be compensated by additional operational improvements. This is more or less the story we do. We want to do a job which is as good as possible operationally to take some of the money to further invest into the future growth of our company.
That's very clear. Thank you. I've got a couple more quick ones. On Schindler Ahead, talking about the strategic investments, could you give us an update on how that's going, what the customer reactions are? Is there any kind of KPIs you could share with us in terms of maybe number of connected units or any examples on what benefits you yield from that?
Yes, I'm happy to do that. I think Schindler Ahead has been so far a big success. It's also a strategic investment we do. In whatever industry you are, if you ask the people whether Internet of Things already generates the payback you would like to have, probably nobody has already a positive payback. We always said that we believe that it will start in 2020 to contribute to our EBIT margin. At the moment, the returns we have from the sales is less than the investments we do centrally, but also we have started in this year to equip all our new installation deliveries with our Schindler Ahead cube. At the moment it is negatively impacting our P&L. What is the feedback? We have trained more than 1,000 salespeople with our Ahead products.
We have rolled it out really globally, and we have done tremendous investments into our own organization, that people are aware and able how to sell a digital product. Because it's something different to that what we had in the past. It's not exactly the same. In the past, we were selling an equipment or a service contract, now we are also selling a little bit the future. For this, we did a lot of training efforts. We also had all over the globe, a lot of customer events. We had more than 20 big customer events in our major markets with more than 5,000 customers Key customers. The feedback what I heard, and in some of the events I was participating by myself, the feedback was very good.
I think the people have understood that our technical solution is very stable, and I believe it's a leading-edge technology we have. They also start to see the benefits we have. We have equipped a lot of customers now with the CUBEs and the Schindler Ahead product, and so far feedback is really positive. There is much more to come. We are intensifying our efforts to really push it into the market, which is not that easy as one would thought, because you have to convince them about the benefits, you have to explain it, and then once customers have seen, especially large customers, then they see that it really helps them to do their business more successful. I am happy with the progress we have done so far.
Great, thank you. Just on that, obviously, in terms of your key partner there, GE Digital have been going through quite a lot of change. Has anything changed in terms of what you see from your side? Secondly on that, there was a big opportunity in China for potentially changing regulation on how often the lifts are visited and Digital could help changing that. Is there any progress on that front?
Well, first of all, we have two key strategic partners. One is Huawei, who is helping us in the connectivity devices. I think it's a leading technology company all over the world, and we are very happy with them. Then, of course, the second partner we have is GE or GE Digital, who helps us with the Predix software or platform to do big data analytics, to do simulations, to do prediction. We are also very happy with them. So all the informations you have seen or read about some changes which happened at or might happen at GE has not impacted our relationship with them. We have a very clear commitment from them, and we are very happy with the involvement they do. They are full on speed. We have a combined team with Huawei people and GE Digital people, and nothing has changed.
No change of resources, no change of people. We are absolutely satisfied with the involvement of our strategic partners. Looking to China, of course, China is already today the biggest market in installed elevators and escalators, and also, of course, the biggest market in the new installation business. Yes, we are equipping worldwide all our deliveries now with the CUBE. In China, you still have to further develop the customer benefits. There are a lot of benefits. One is connectivity. There are some trends also from the government that they would like to introduce tele-alarm systems for emergency calls. I think this is a key point where we believe we can generate future benefits with our Ahead solutions. The second part is, of course, in skyscrapers, infrastructure projects, and also in the large key accounts, we see a lot of interest for our Ahead solutions.
You also have to say that it's a long-term game. The cost awareness in China is maybe bigger than in other markets. You have to work very hard to really demonstrate the benefits that you have a great market success. We are on an early stage, but we have good ideas how we can really make this story also in China a success for the future.
Very clear. Thank you very much for your time.
Thank you, Andre.
The next question from the phone comes from Martin Hüsler with Zürcher Kantonalbank. Please go ahead, sir.
Yes, good morning. I have two questions. I'm now looking on page 12 in your presentation about the growth in Europe, basically, or EMEA. Can you maybe give some highlights and lowlights or which countries added most to this high increase of more than 10% in the first half, which was a clear positive for me? Maybe also split it a bit by growth in new installation and existing installation. I have a question to the CFO, if you could provide us the 2017 figures, the regional figures according to your new definition of Europe, Middle East, Asia. This is kind of the first question.
Okay. Maybe I'm first covering a little bit Europe, and then I would hand over to Urs maybe to give some more granularity. First of all, the good thing in Europe is we were growing in really all the markets. It was really a very strong environment. If we first start maybe a little bit more in the Northern European and Eastern European areas, I think the key driver was Germany. Germany still has a very strong construction environment and is a key driver for us for the growth. Not only in order intake, but also in our operating revenue. We now see that a lot of the successes we had in sales, now is executed also in our top line in the P&L. It was really remarkable high double-digit growth in many, many markets.
Germany, even in the U.K., even in Switzerland, we were able to have a positive momentum. You go more to the Southern European markets. I think a key change or a key positive trend we saw in Iberia. I have to say Spain is really starting to recover, and we are very well received there in the market. Whereas maybe France in the past was very strong and is still strong on a very high level, but maybe not growing so much anymore like in the past. I think really outperforming was Iberia, and there I talk about Spain in particular. Some other markets were maybe not that strongly growing, but all in all, I have to say, we were able really to grow our top line in all markets.
It was a very solid and very diversified growth with some peaks in some really booming areas like Germany or Spain. I think the second question, maybe when we talk a little bit about growth in the different businesses, maybe you can give some more insight, Urs.
gentlemen, when you look on page 12, you see on the right-hand side, the tables with the order backlog and the revenue split into the 3 reported regions. We are reporting the absolute value for both half-year closings, and the percentage splits for each region, which is then self-explanatory for each region on the absolute amount. Overall, we can say if you compare the 2 periods on revenue growth, there was not so much shift in the share of total operating revenue. Having said that, you see that Europe is really a strong engine, currently on our order intake, and as you see here, revenue growth.
Maybe just to add on that, when we look into the different businesses. Usually we have 3 type of businesses. One is the new equipments we have, new installation business. The second is the modernization business, and the third is our service business, which also includes repairs. All the 3 have been growing in the first 6 months. New installation had a good growth. When you compare that the market overall globally was maybe slightly positive, we were definitely growing faster than the market. Especially also in modernization and service and repairs, we had a very strong growth. We have pushed a lot, and we explained that in the past conference calls that there is a lot of opportunities in modernization due to the aging of the portfolio, due to the new requirements in terms of security and comfort.
Modernization and the service business were really booming. A little bit higher than our new installation business, which will probably change in the second half of the year when a lot of the job sites will be closed. There is a certain seasonality in new installation, and I'm expecting that the new installation part will have a bigger share than in the first half, in the second half of 2018. We will have strong momentum in the new equipment execution, which, as we mentioned before, might a little bit have an impact on our overall margin. Does that answer your question, Martin?
Yes, thank you. Maybe just one quick one on the development of currencies, foreign exchange. I think you will face a headwind in the second half year. Can you give your expectations? If the currencies stay where they are at the moment, and it's clearly less favorable than it was in the first half, what do you expect for the second half, the impact?
First of all, I think it is true, we had in the first half a little bit tailwind from a strong euro, to be clear. When we made all our guidances and forecasts, we said, "Well, that's great. It helps us." Within a couple of days, everything can change, and the euro drops immediately because there are some turbulences in some of the markets on the political and economical level. If you follow, let's say the latest debates or conflicts between Turkey and the U.S., which of course has an impact on the euro again. I think at the moment it's 113, so it's a little bit lower than what we have appreciated in the first 6 months. This might have a negative impact for us because the euro is a very important currency for us, because we are very strong in the European markets.
However, I have to say, on the other side, you have the dollar, and the dollar is also important for us as our operation in North America is first of all growing. It shows very nice growth. It also has, over the last couple of years, tremendously improved the performance. This couldn't have a positive impact. All in all, we might face some headwind now, depending on how the euro will especially develop then. It's difficult. I cannot tell you how the euro will be in 2 weeks. I really don't know. If it stays on the level we are, we will have a couple of million CHF negative impact in the second half year.
It is correct.
Okay, fair enough. I was also a bit just looking at the currencies in the more emerging markets, Latin America, but also Asia, that weakened significantly in the course of the year, which also proved that.
What happens there, this is maybe important. We try to have natural hedges. Let's say, in uncertain markets, we usually try to sell the equipment in US dollars or in euro towards the customer to have a certain natural hedge, and the local version is also billed in the local currency. This should protect us from some downside risks we have in some emerging markets.
Okay, thank you.
Thank you.
The next question from the phone comes from Bernd Pomrehn from Bank Vontobel. Please go ahead.
Yes, good morning, gentlemen. Two questions, if I may. Firstly, you mentioned that the infrastructure sector is currently booming, but I still have the impression that you're currently doing better in winning new projects than your competitors. What do you see as your key driver for this success? The second question, how does your bidding pipeline look like? Can we expect your order intake to continue to grow at this level? Thank you.
Well, thank you for acknowledging that we have done a good job in infrastructure. That's nice. Historically, Schindler is very strong in the escalator business, and infrastructure projects have a lot of escalators. We have done a lot of initiatives in the last three, four years to become more cost competitive with our solutions in the infrastructure area. That's one element. We have a traditionally strong presence in escalators, where infrastructure is a key market. We have worked very hard to become even more competitive in this environment. Now I think, it's somehow with more success, people believe also that you can win the next project, and it's not a perpetuum mobile. I would not like to say that, but it just helps you, and good feedback from infrastructure customers are spread within the customer base. They say, "Schindler has done a good job.
They have a very good product. The safety is very important there. More and more, also connectivity is important. All our infrastructure escalators are equipped with Schindler Ahead. This has become now a requirement from customers, which we can fulfill very good. They see that we are doing a good job. We won all over the globe, several large contracts in airports, in metro stations, in railway projects, in Europe, in the U.S., in Latin America, but also in Asia Pacific, and especially also in China. I think we have a historical benefit, but I think also we have worked very hard, and this customer base is not so big. It's not like in residential where you have millions of customers. They talk to each other. There are fairs, infrastructure fairs, and this helps us a lot.
I think the second topic we should also not underestimate is that we have pushed a lot our sales organization to reflect that a lot of our customers become more global. We have established a global key account management system. We have staffed this global key account management system, and I think this also helps us in a long-term partnership with really big customers in infrastructure, but also in other areas, to create a win-win situation with large customers. I think this just has been proven now as quite successful. When we look on the bidding, I think, yes, there are still a lot of projects in the pipeline. We see that. A lot of the governments are, especially in China, they are doing a lot of plans.
The question at the end will be if all of them will be executed, even if you are in a bidding or in the tender, sometimes you might face the risk that a project at the end is canceled before it has been awarded or recognized in the books. All the projects we have in the books, I have no doubt that they will be executed. The bidding activity is still very high.
Okay, excellent. Thank you, Thomas. Maybe one add-on question for Urs. CapEx was up in the first half of the year. Could you please provide an updated CapEx guidance for the full year? Thank you.
Thank you for that question, Martin. The CapEx in the first half-year has increased a bit due to our investments in various campuses. One is here in Switzerland. We are investing into a new headquarter office, also a customer center to have a reception for global clients, and this will be finished completely next year. Also operationally, we have now invested into new factories, an escalator factory in India, and a step escalator plant in Shanghai. This explains the development in the first half-year. For the second half-year, I would assume a continuation. The operational plans are done. It's now much more on the campus here in Switzerland and one or two bigger investments into headquarter offices in other countries. I would say it's a constant growth for the full year.
Slightly up year-on-year for the full year compared to 2017?
That's correct.
Okay. Thank you, Urs.
The next question from the phone comes from Martin Flückiger with Kepler. Please go ahead, sir.
Yeah, thanks for taking my question. Good morning, gentlemen. Firstly, I was just wondering, coming back to China, whether you could talk about the organic growth components in order intake, i.e., volume mix and pricing for Schindler. I'll go one step at a time.
Good morning, Martin. Thank you for this question. I think, first of all, the whole growth we have achieved in China was organic. It was not driven by M&A. I think this is important. In our growth we have achieved, I think it's more or less the same story as we had it in the past. We are strong with our key accounts, I have to say. I think the team in China does a very good job in getting frame contracts with key accounts. This is one of our key strategic initiatives we have there, and it secures you a certain volume, but it also puts you a little bit under pressure in terms of pricing. The second key driver was of course large projects, mainly in the infrastructure part.
We had all in all, a slight growth in terms of values in China. We had also a growth in terms of units. The price impact is not so visible immediately. There was a negative price impact in some of the major markets. There was a negative major project, and there was still a negative price impact on some commercial projects because it is not so stable like the residential one. In the residential one, pricing compared to the second quarter of 2017 was more and more flattish. We saw that in order intake, the pricing has much more stabilized now compared to the year-end of 2017. If you compare it to the first half of 2017, it still has a negative impact because the flattening started somehow in Q4. We were trying to increase prices.
We were much more prudent. We also let one or the other job go because we said we don't want to go into that race others are doing to get every single job, and we were putting more emphasis on the pricing element. We continued to do that in the first half of this year. If you compare it with the year-end, it is more flat. If you compare it one year ago, it still has some negative impact.
Thanks. Just to clarify, I think if I remember correctly, in Q1, I think you were up double digit in terms of organic growth, right, in China and in new installation. If I remember correctly, volumes were also up, maybe around mid-single digit. I think the mix component was particularly strong in Q1.
It is correct.
Now I was just wondering, with the developments that were referred to for H1, what's actually the incremental news coming out of China in terms of those organic growth drivers for the second quarter? I suppose volume was still up, but was mix also up? Pricing you already referred to. Sorry.
In terms of units, it was very good. In terms of units, we were better. The mix has a little bit changed in Q2. In Q1, which is usually not a very strong quarter in China due to the Chinese New Year, we were benefiting from a lot of large projects in infrastructure. In Q2, the market in the residential has picked up a little bit more, so we were doing more units, but we have not recorded as order intake so many large projects in infrastructure because we only recognize or report order intake in China if we have received a down payment. This, of course, can change really from quarter to quarter. Our pipeline is very strong. Our award pipeline in large infrastructure projects is very strong.
They will become order intake, maybe in Q3, maybe in Q4, maybe in Q1 next year, depending when the first down payment is received. This can sometimes take quite some time because you have a lot of approval processes in the government sector. Maybe, Urs, you can give some more insight there as well.
Yes. Thomas was mentioning infrastructure projects, which certainly is impacting our China value. It's also on the commercial segment, where Schindler is always strongly taking large projects in China. Every quarter has a little bit different mix between commercial and infrastructure and residential. Also on the commercial side, we had a bit less large projects reported with down payment in Q2. Still, the bidding pipeline is really good.
Okay. Just coming back to that comment about your award pipeline being very strong in China. I suppose that's not only infrastructure, that's across the board or overall, right?
That's across the board, but in fact, let's say the residential business is much more stable. This is like an ongoing bread-and-butter business, where you do not have so many changes quarter by quarter. In the infrastructure area, it is different because some infrastructure projects can be a couple of 100 units with high value. In terms of units and value, the swing usually quarter by quarter comes more from large projects and less from the normal residential business, which is, from a market point of view, stable and for us, slightly growing.
Okay. Just to expand the question on the award pipeline, you used to talk about award pipelines over the last few quarters, also on a global basis. Does that continue to be strong, or do you see the award pipeline slightly slowing?
No, I think the award pipeline for large projects is still strong, and also the bidding activity is still strong.
Globally, right?
Globally, yes. Not only in China. I see that globally. When you look a little bit into markets, I think, in the U.S., there's a lot of infrastructure going on. Even in Latin America, there are metro stations, new airports, for example, in Mexico, which are in planned. Even Brazil, they have some metro lines planned. It's not yet in the bidding time, and definitely it's not yet awarded, but I see a lot of activities. Some markets do it because they have the need, like the U.S., and some markets do it to support the economy, like maybe in Latin America and also in China. I'm quite confident. Even in Europe, I have to say, a lot is going on when I look on Germany, when I look on France, who's doing a lot. We had the win of Schiphol in the Netherlands.
I don't see any reason why it should change over the next couple of months.
Okay. Perfect. Thanks. Just coming back to China very quickly again. With respect to Tier 3 city developments, do you see any change in dynamics within China?
Well,
The building construction industry?
Well, there are, of course, at the moment, when you look into the market, we always say the market somehow for Tier 1 is something like 15%-20%, then maybe around 60% of the market is the Tier 2 cities, and then 25%-30% maybe are the Tier 3, 4, 5 cities. I think it has been stable in all the different areas, in all the different cities. The pressure is quite high from the government on Tier 1 and Tier 2 cities because there are a lot of restrictions implemented, and they also are somehow short in land. You see that the land price is going up tremendously in Tier 1 and Tier 2 cities.
What happens is in this urbanization, a lot is starting to merge into mega cities, where you have a Tier 1 city like Shanghai, you have Tier 2 cities around like Suzhou, it becomes a wider circle with Tier 3 cities. Within this metropolitan area, sometimes there's a shift more out of the center because there's nothing available anymore into the Tier 2 and Tier 3 cities, but it becomes more and more and more one area. This is definitely the case. I think this is more about the tiers. If you look geography-wise, I think it's still the case, the more you go to the south and the more you go to the east. Along the east coastline is probably the strongest activity.
If you are from Beijing, you go along down the coast, Beijing itself, Shandong, Jiangsu, Shanghai, Zhejiang provinces. These are very strong provinces. Also very much in the south Guangdong, where you have Shenzhen and Guangzhou, close to Hong Kong. These are also strong areas where we see a lot of activities. Maybe the more you go to the north, northeast and northwest, there is maybe less activity than in the past. The good thing is, these are not our strongest regions, for us, it has not such a negative impact.
Okay, perfect. Thanks. Just on the property tax that is being discussed, or I think is being prepared for 2019, 2020 or so, I believe. Do you expect any negative repercussions on market demand from this newly introduced property tax over the next one or two years?
At the moment, we don't see any further, let's say, negative impact. Let's wait and see. I think what I really admire with the Chinese government is, first of all, they are announcing now that they might change taxation or restrictions, I think the Chinese government is very wise, it's very agile, if they see that it could have a negative impact, they are also willing to change the policy again. I'm sure that the government doesn't want to have that it would have a negative impact on the GDP and the real estate and construction industry. If this would be the case, I think they probably would consider changing the policy. At the moment, I do not forecast any negative downturn because of that.
Okay, perfect. Thanks. Thank you so much for your patience. Again, on Schindler Ahead, I've been listening to your elaborations. I was just wondering from a different perspective, do you see any signs of regional players introducing similar fully integrated digital maintenance platforms like the Japanese or even the Chinese players? What's the feedback you're getting on pricing, particularly?
Well, first of all, I think everybody is working on platforms. That's point number 1. I think it's not only us who want to digitize to transform the business model. We do have the, let's say, historical competitors. They all try very hard to have also a digital platform. Some maybe are a little bit more advanced, some are a little bit less advanced. I think overall, we believe we do have a leading position. That's maybe in the competition landscape, clearly the case. Smaller competitors, of course, are struggling more because they do have to do a lot of investments. It's not only a question of money, it's also a question of resources. Do you have enough resources to really work on such digital solutions?
I believe that the smaller and mid-sized competitors, they might face some troubles for the future, that they cannot have such an offering as, for example, we can do towards the customers. I think it's still an early stage in the race. Everybody's working hard. We are happy with our solution. We are convinced that our solution is really a good solution. This is also feedback we get from the market. At the end, it's the customer who decides whether you are good or not. You can do as much marketing as you want, and you can promote as much as you want. If customers at the end are not interested, then you know you have invested a lot with no impact. Now, in terms of pricing or, let's say, impact on your P&L, there are 2 elements.
I think everybody tries to generate more revenue. We are on an early stage to do that. We do have now additional revenue coming. It is still not a lot because we are on a very early stage. The other topic, of course, is efficiency. You try to work on efficiency improvement by digitizing your elevators and escalators in order to have more prediction or maybe more adaption of your service model. Let's call it like this. Maybe it's not always only prediction because it's more maybe adaption, that you try to adapt your routes, you try to adapt your dispatching of service technicians according to the needs of the equipment and according to the needs of the customer. There we see first successes.
Pricing, we do have clear pricing from our side. I do not want to comment on the pricing from competitors because it is a very wide range how they try to market their solutions.
Okay, do you see a positive impact on your pricing component in order intake growth?
Yes, it's a very early stage. It has not yet a big impact because we first now ship all the equipment, then you do the installation. When you look on the timeline from January onwards, we equip our new installation, and all our new sales have the Schindler Ahead solution included. You have to install, then you have to hand over to the customer, and then usually you start to negotiate the contract for service and also for digital services. It's a little bit too early to see already a big impact on our order intake and operating revenue figures. Yes, it is our plan to contribute to the growth also with digital services. As I mentioned before, I believe really impact also then bottom line, we will only see with the break-even point in 2020.
Perfect. Thank you so much for your time.
Thank you.
The next question from the phone comes from Daniela Costa with Goldman Sachs. Please go ahead, madam.
Well, thank you very much. I'll just ask two quick ones. Thank you for taking them. First one, I wanted to ask you about competitive environment, given one of your main competitors is without a management team, another one belongs to a conglomerate where there's lots of discussion around the portfolio. Have you seen, in terms of activity on the ground, any impact on the pure play names like yourself being able to benefit in terms of market share, maybe because others are more busy with internal things? Just curious on that, then if so, if in any industries that easier competitive landscape amongst the global names has materialized. Just the second one, you talked already in the call a bit about the numbers and the savings and benefits around modularity.
Just in terms of practical actions, you said you have one harmonized car type now, and you launched it globally. Can you talk about what are the next steps, basically, in terms of actions on modularity? And whether you're launching them globally across all the markets at the same time or this phasing that you say until 2020 is you're going to do Europe first, Asia after all. How does it actually work? What in the day-to-day this modularity program means? Thank you.
Okay. Question number one, Daniela, our competitive environment, you understand that I do not want to comment on, let's say, changes at our competitors. What I can say is, the market is as it is, and it has not changed in the last couple of months. I do not see an impact now at the moment for us in terms of market success. I think the market success has been driven by our strategy. We always said we want to grow faster than the market, and in all fairness, I have to say, we did that last year, and we also did that in the years before. Then there were no, let's say, big news from our industry, from other competitors. I think it's just course normal.
It is our ambition to be as strong as we can because we believe growth is a key driver of absolute return. We mentioned that many times. We have a priority 1A, this is growth, and we have a priority 1B, this is improvement of the margin. We are struggling a little bit more on the margin because it's a tough environment, but we still are doing very well in the growth part. This is not now. This has been the case now for, I think, many quarters or even many years. I think there is no change for us there. When we talk about modularity, to answer your question number 2, it is true we now started with our first component. This was the car and also car decoration. It's not only how you produce, it's also how you install.
We also see the efficiency improvements with this new component for the people in the field. There is a lot to come. We talk about controllers, we talk about hoistway materials, we talk about frequency converters. This probably will come somewhere towards the year-end or beginning of next year. Then later we will start with door drives, doors, machines towards the end of 2019, beginning of 2020. As I said before, this is a 2-year program where like in a salami tactic, we come with one after the other. Why do we do it like that? Because we are changing worldwide our products. To answer this question, we are changing it worldwide, and it's the biggest product transformation Schindler has done in the history.
It also bears a certain risk because if something goes wrong, then it goes not only wrong in one country or it does not only go wrong in Switzerland or Germany, then it goes wrong everywhere. In order to control that, we are doing this step-by-step introduction. This has a lot to do with risk mitigation on one side. On the other side, it's also if you wait until you have done the development of the very last component, you miss all the savings on an earlier stage. It also helps us to continuously improve our competitive advantage we have with this modularity program. This year, I mentioned that earlier, we are maybe mid at somewhere around 10%-15% of all our impact, the rest, 80%-90%, they will come step by step over the next 2 years.
It will change all our products worldwide. It will change the commodity products, it will change our commercial products, it even will change. Also, we have added to this modularity program also in the escalator part. This modularity. We have introduced our new commercial escalator, the new 9300, half a year ago, and now a lot of those newly developed components we are using for our public transport business and also for our moving walk. Also there, modularity plays a role over the next 2 years and should solidify our strong position we have in the escalator and infrastructure program. It is worldwide, it's global. It goes step by step and will impact all our product lines. Of course, you always will have some specific product lines which are tailor-made for a certain market, because one-size-fits-all does not work.
In some areas may be better, but definitely in some areas it will not work. For example, in a market like China, we use as many components of the global harmonized platform as possible. You remember, we already have done a lot of harmonization for China with our harmonized China platform in the last three years. You will have some local adaptations, but overall, this component introduction will be globally.
Sorry, very quickly on your point on, you've modularized production and installation of the car on this step. What type of improvement did you get in terms of production, and installation times?
We always said, overall, we would like to improve the cost position of our product by 10%-20%. It depends a little bit what kind of product you have, then you can break that down to different components. In certain components, you achieve more, and in certain components, you achieve a little bit less. I think we had more than 10% additional cost reduction now, with this new car. In the installation, I think we even had more because it's easier to install. A key reason for it, very simple. I do not want to extend too much the call. In the past, we had many different types of screws, for example. The car, you put it together on the job site. Today, you only have 1 type of screw, so you only have one screwdriver.
This if you install at home an IKEA shelf, you know how much faster you are because you only have one type of screw. It's much less complex than if you have a very heterogeneous set of screws and screwdrivers. This helps us. We tried everywhere to consider that installation is easy, it's faster, and also of higher quality. There in the installation, we have even a higher saving out of this first component we now have introduced.
All right. Thank you very much.
Welcome.
The next question comes from Christian Obst from Baader Bank. Please go ahead.
Thank you very much for taking the question even after one and a half hour here. Two are a little bit in a longer view. In Q1, China was growing organically. You have installed new plants and capacities there. What is your M&A mix or your mix between M&A versus organic growth to reach your targeted leading position until 2025 and beyond? Is there currently any change in the M&A landscape in China as the market is really changing a little bit? This is the first question. The second one is on Schindler Ahead also. You trained your personnel, you're saying more than 1,000 people. Have you trained them, and told them to sell more flexible and other new types of services going forward?
Have you already indicated to your 5,000 customers you introduced there, also indicated that something might be changed in the structure of services going forward by applying to Schindler Ahead? The last one is on net working capital. The cash out for net working capital, the delta cash out was in the cash flow statement CHF 157 million. Did I get it right that this will be less in the second half? Thank you very much.
M&A, I think, first of all, we always have said that M&A plays an important part of our growth story. I think the impact now, we have seen a certain impact. It is one part of our growth was good. Maybe one percentage of our growth was driven by M&A. This is mainly M&A coming from smaller or mid-size service companies all over the world. We are continuing with that. We plan to do that also in the future. We have established a specified and dedicated M&A team. They are working very hard. We have good success. In the last, I would say, 18 months, I think we have accelerated our initiatives and our efforts in this area.
I'm confident that also in the future, we will have contribution coming from these smaller M&A companies who are mainly working in the service business. Now, specifically for China, the question will be how the market will further develop. I believe there is a concentration process still going on in China. Although it is not maybe the market has stabilized somehow, I still believe that the smaller and also the mid-sized companies have suffered a lot. Probably suffered more than the big OEMs, I have to say. This is an indication that further concentration of consolidation is going on. We are open, I have to say, but we are not others. It has to strategically fit.
Growth by M&A is good, it has to be growth where the culture fits, where the product range fits, where it is complementary and not congruent, because otherwise you just create cannibalization. We are observing the market and we are open for all type of possibilities. At the moment, I have to say, we have a strong footprint now in China, especially in the new equipment business with our Schindler brand. We have XJ Schindler, who is doing a really fantastic job. We also have a minority in Volkslift, which allows us in the future also to go into a majority and to have a third brand running. I do not believe that you can run four or five or six brands, then it becomes very complicated.
We also have to be careful that we have a clear multi-brand strategy, where it is clear who is serving what kind of markets, and what is the pricing and what is the differentiation. If you cannot differentiate anymore, then I think multi-brand does not make a lot of sense. However, I have to say there is a huge competitor base in the service business. We are also looking into that business, whether we can do more M&A activities in the service part in China, which we have not done in the past. Now we have started also to look there into such opportunities, and we have the first successes. It was smaller ones, because it is a very atomistic landscape of competitors, but we are in contact.
We have, let's say, a bidding funnel, and we are observing there is a good opportunity for us to further grow also in China in the service. Question number 2 regarding Schindler Ahead. What does the customer want? I mean, as an elevator company, very often we are excited about technology, we are excited about products and that type of drive and this type of machine. Honestly, if you look on the customer, the customer or the user, he would like to have a certain experience. When you enter an elevator, you look, "Does it look nice?" You look whether you have some interactive possibilities. You want to see whether you have to wait a long time or not. You do not want to have a breakdown, and especially, you do not want to have an entrapment.
This might change a little bit now with the digital possibilities. The more you have the possibility of prediction, you will focus more to further reduce the number of breakdowns and the number of entrapments. Especially in Asia Pacific, entrapment is really a cultural shock. It is the worst thing what can happen. All our efforts are directing into further reduce the number of callbacks and further reduce the number of entrapments. This is really value for our customers, and they are willing to pay for that. They are much more going into performance-oriented service contracts. You do not say, "I call them 10 times or 12 times," or in China, "24 or 26 times." They much more would like to have a service contract which says, "Okay, availability of an elevator is 98%.
If we are worse, then we would have to pay a penalty." This is a new service performance we are selling more and more. We more and more want to sell the performance of equipment, not only how many times we are there. The digitization helps us to detect as early as possible that there could be a breakdown, then we go there and fix it before it really happens. We do not want to sell number of visits, we want to sell more and more the performance. This might change slightly also the way how we plan our visits and the content of our visits.
We would like to be a preferred premium supplier where customers say, "I have chosen Schindler as a service provider because for me, quality, reliability and safety is really important." Digital helps us to fulfill this demand. Maybe the last question, networking capital, Urs, I would like to hand over to you.
Thank you very much for the question on the operating cash flow. I can structure my answer as follows. As you have noted, we had a deterioration of our networking capital position already last year, and it's continuing now into this year. As I mentioned earlier, this is very much driven by the success taking in larger projects. They come with tough and really very competitive commercial terms, in particular infrastructure projects, public projects. Having said that, you have noted an improvement of the cash flow in the second quarter. It is stabilizing on current levels. Now in the second half year, what we will see is that the very large increase of work in progress will convert into billings. I mentioned that our NI business will certainly grow quite a lot in the second half year.
It really depends on the cash conversion of those billings still in this year to improve our operating cash flow.
I do clearly see a stabilization, and I do see a slight improvement now in the second half year on that line.
Okay, perfect. Thank you very much. Maybe one last. Taking your framework of M&A and so on and so forth, I think I get you right that you're not interested if one of your main competitor might come to the market for a combination of two big companies that you might not interested in looking at that, right?
No, this was not what I said. I said what we have done in the past, what we have done in the past was that we are very active in the service business, where we have a lot of smaller competitors. I was referring to China that I see there is a consolidation topic. Let's say all the rumors and all the trends and developments we have seen in some of our major competitors, this topic is not new. Of course, we are closely monitoring the situation. Honestly, we would not like to further comment on this topic. We only want to discuss any strategy after we have generated facts.
Okay. Thank you very much. Understandable. Thank you very much.
Thank you.
The next question from the phone comes from the line of Daniel Gleim with MainFirst. Please go ahead.
Yes. Thank you very much for taking my question. The first one actually is, I'm trying to better understand what the underlying revenue growth momentum for revenues has been if I exclude the IFRS 15 impact, and apologies for belaboring the point. If I understood you correctly, in the first quarter, adjusting for IFRS, the local currency growth was lower than for the first half. It was a neutral, I assume in the second quarter, we would have to assume a higher growth than you actually have reported. Then it looks like quite a strong sequential acceleration in the like for like local currency growth Q2 over Q1. Also, if I look a little bit farther out in the previous quarters, it doesn't look like a quarterly fluctuation, but it looks more like a trend. My first question would be, is the observation correct?
If yes, what was driving the sequential acceleration?
Okay, Daniel. Welcome as the last person to question. The last questions are the best ones, I will forward, let's say a little bit the split of revenue growth and explanation to Urs.
Right. You are absolutely right that we have an acceleration in the second quarter to our operating revenue growth. If you take the half year closing nominal 10.2% growth, FX adjusted 8.4% growth, then we can further deduct about 0.9% growth on M&A impact because we have acquired smaller companies in the second half year of 2017, and we had still a smallish impact of the IFRS 15, which is about 0.3%. I said this will diminish for the full year. You have an organic growth for half year closing of 7.2%, and this is really strong in the current market environment.
I assume the second quarter must have been stronger than the 7.2% you just mentioned.
Yes, this is correct.
Would you like to shed some light on your current trading, whether it is more like the second quarter or the first half?
In the second quarter, well, the organic growth was bigger in the second quarter than in the first quarter. I can confirm that.
The third quarter, what you have seen so far is more in line with the second quarter of the first half of 2018?
Well, what we have is now July figures, honestly, July is usually not a very strong month. Why? It's a holiday month, holidays are impacting our repair business but also impacting that a lot of construction sites are July and August usually are not very strong months. What you can expect is that September will become a very strong month, and then November, December also, when you have to close a lot of jobs. I would expect that probably will be somewhere in the middle. We might have some negative impact now from FX. We will not have a positive impact anymore from M&A, because those M&As we have consolidated in the second half of last year. In the like for like comparison, we don't have this positive impact anymore.
Of course, maybe some new M&As will be consolidated, but not so much like we had a bigger acquisition last year. That's one reason why the overall growth will be a little bit less. Organically, I would say it's maybe somewhere between the Q1 and the Q2, because do not forget, last year second half was also very strong. To top that with the same run rate as we had it in Q1 and especially in Q2, this will not happen. The organic growth year-over-year in Q3 and Q4 will be a little bit less probably than in the Q2.
Very clear. Thank you very much.
Okay.
You mentioned that your assumption for the guidance for this year is a stable raw material price evolution. I'm wondering whether your working assumption is the same as you actually witness in dealing with your suppliers. The reason why I bring this up, if I recall correctly, in the first quarter, you mentioned that you were witnessing a supply reaction and that people were expanding supply in response to the higher pricing. Is this something that has reversed in the second quarter, or is it simply that your working assumption is not the same what you actually witness with suppliers?
I'm not exactly sure whether I have fully understood the question, if yes, I will try to answer it. It is true. How does it work? Raw material prices are going up. Suppliers at a certain moment come to you and say, "Hey, I need a higher price." They try to push higher prices. At this usually, you then try to lock in for a certain period, a supplier price. Prices or the index for us, how we calculate, over the last 18 months probably went up by about 35%. As an index, if I take the mix of all our raw materials, it went up by 35%. Of course, we have not witnessed 35% of price increases from the suppliers because also for them, maybe the impact is then a little bit less.
Some of them were pushing very hard and we had to accept some price increases. Some of them we were able to push back. Now, of course, after a certain period of time, as the prices stay on the high level, they come again, they knock on the door again and they try to increase now finally the price because they say, "Hey, nothing has changed. It's really becoming an unprofitable business for us. We need higher prices." Of course, with some of those competitors, you have to go into a renegotiation, and we will try to push back as much as we can. There might be the one or the other case where we cannot push it fully back, and so we have to compensate additional price increases by additional cost reduction activities as we do with our modularity program.
Now in our assumption for the guidance, we said the prices we have achieved today with the different suppliers, we assume we can keep that until the end of the year. There is a certain risk that the one or the other is asking for further increases. Okay, there is nothing in life without a risk.
Very clear. Thank you very much. The last question is on whether you could provide us any update on your negotiation with the South Korean government. Is there anything you can add on top of what we can read in the Korean press, or whether you could at least provide us a little bit of timeline how long it will take until you will take it maybe to a forum outside of South Korea?
Well, Daniel, this is a really tough last question, I have to say. It's a multi-year ongoing, let's say, exercise, and it goes back for more than 10 years. I think there is nothing to add in what you could read in the press. We are always interested at the end in a solution. There are, of course, different court actions also in place. We are observing that, what is happening with Hyundai, there is nothing to be reported at the moment new than what you can read in the press.
All right. Thank you very much for your patience.
Thank you very much. Thank you very much, ladies and gentlemen. It was a long and intensive discussion. Thank you for the good questions. Hopefully, we were able to answer most of your questions. I would like to thank you very much for attending this conference call. Now I would like to close, and I'm looking forward to the next event, our third quarter results conference call, which will be happening on October 23. Thank you very much and goodbye.
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