Ladies and gentlemen, good morning. Welcome to the Schindler Healthy Results 2018 Conference Call. I'm Yirona, the course call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. After the presentation, there will be a 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. Arturie. Please go ahead.
Good morning, ladies and gentlemen, and welcome to today's half year results conference call. My name is Thomas Suttelli, CEO of the Schindler Group. I'm here together with Urs Scheidecker, 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 twenty eighteen. So let's quickly jump to the highlights on Slide number 2.
In the first half of twenty eighteen, 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 rose 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 CHF613 1,000,000 and the EBIT margin stood at 11.7%, in line with the previous year. Net profit grew by 23.2%, impacted by a onetime tax refund. Excluding this one off, gross was 10%. The execution of our strategic priorities is well on track.
Here, I'm 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 1st harmonized major component in the Q1 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 2 years. In our digitization initiative, all new equipment features, the Schindler Ahead Cube and is digitally connected with the Internet of Elevator and escalators or how we call it, IOEE. In addition, we inaugurated 2 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 altogether put pressure on our margin. However, in the first half of twenty eighteen, 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. So let's move to Slide number 3, 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 flattish 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. And 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 4 and the Americas region. The U.
S. Market continued 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.
Now let's continue with the last market region, EMEA, on Slide number 5. 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 2 additional topics on the next two slides. So on Slide number 6. 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 7. 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 Jiaoding. 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. So Urs, please, it's your turn.
Thank you very much, Thomas, and 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 915, had only very marginal impact on our half year results and are expected to further diminish by the end of the year. Full impact to the consolidated balance sheet 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 Q2 of 2018 on Slide 8. In the Q2 of 2018, order intake exceeded for the first time ever the CHF 3,000,000,000 in a quarter, equivalent to year on year growth of 11.2 percent 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.
And so it is confirming our business model to perform strongly across the life cycle of our products. In the Q2 of 2018, revenue improved by 10.9 percent to CHF 2,800,000,000 corresponding to year on 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 332,000,000, 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 percent to CHF 308,000,000, A settlement in an arbitration procedure with regards to Schindler's tax position was recorded in the Q2 2018, which had a positive impact of CHF 55,000,000. This impact is split into interest income of CHF 25,000,000 and income tax refund of CHF 30,000,000. The net profit before tax refund grew by 5.4 percent to CHF253 1,000,000.
Cash flow from operating activities increased by 22.4 percent to CHF 104,000,000. I now move on to Slide number 10 and will comment on the performance after 6 months. In the first half of twenty eighteen, the order intake rose by 9.8% to CHF 5,900,000,000 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 repairs business, our crude 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 5,300,000,000 in the first half of twenty eighteen, 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. And 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. EBIT totaled CHF 613,000,000 in the first half of twenty eighteen, corresponding to a growth of 9.9 percent in Swiss francs and 7.5% in local currencies.
The EBIT margin stood at 11.7%. This is in line with the previous year. Economously 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 procedures with the positive impact of CHF 55,000,000.
As a consequence, net profit increased by 23.2 percent to CHF 560,000,000 in the first half of twenty eighteen, mainly reflecting the improved operating results and impacted by the onetime tax refund I just mentioned. Comparable net profit grew by 10% and amounted to EUR 461,000,000. Our cash flow from operating activities totaled €434,000,000 compared to €441,000,000 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 2 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 8,700,000,000
compared to the figure
of CHF 7,800,000,000 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 trend seen in its markets in the first half of twenty eighteen 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% 7% in local currencies and net profits of between CHF 960,000,000 to CHF 101,000,000 for the financial full year 2018. With this, I would like to invite you to ask your questions.
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 to the EUR 960,000,000 to EUR 1,010,000,000 does include the €55,000,000 tax benefit that you recorded in the 2nd quarter. And so linked to that, should we expect significantly different kind of, I would say, financial expenses or other items in the second half of the year versus last year?
Because if I would kind of remove the benefits you had in the Q2 from this guidance, it would seem more that you are guiding at the midpoint for €935,000,000 So 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 WAR 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, but 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, and 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. But having said that, we are facing headwinds to our profitability in second half year with the business mix because we will see our NI business lines growing stronger in the second half year. It is quite normal, quite seasonal in our industry versus service and repairs, and that results in a bit of an unfavorable mix change. We will also see an increase to our strategic initiative expenditures in the second half year. And this considering results in our full year net profit guidance.
Which includes the EUR 55,000,000? Yes. That's correct.
Okay. Understood. And then 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 Q2 order intake. I understand you cannot give maybe a precise number, but if you could comment how this market compares with where you were last year in terms of order margin?
So thank you very much for the second question. The margin in the backlog, of course, was or is slightly negatively impacted by the raw material price increase we have as we cannot compensate that backwards with a price increase. And there is a couple of basic points where we lose on our backlog the margin. However, I have to say, I think we have been working very, very strong in the Q2 to manage pricing. So we try to increase the pricing to offset this negative impact we have from the raw material prices.
And I think we were able to somehow stabilize this risk of deterioration of our backlog margin. So we do have some negative impact from the past because we cannot change the pricing. But I think in the 1st 6 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 worked better, and in some regions, it may be more challenging to offset the negative impact. So 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. So this is something we have to observe very carefully in the next few months.
Thank you very much. And just I was hoping if you could provide us a bit more granularity regarding the China business in the Q2 between volume and price? And then 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 comes from?
Well, I think first of all, I think our second quarter in China was really successful. It was a good quarter. We were fighting very hard, but we are also trying to balance a little bit the volume growth with the pricing. So we do not go for every job, which is available somewhere in the market. We try to be reasonable.
But 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. But of course, those large projects do have a tremendous price pressure. Now the good thing on the projects is they are usually long term.
So you have maybe a hit at the moment in terms of pricing, but you are working on continuous cost improvements. And as your deliveries are very often, maybe 1 year or sometimes even 2 years later, you are able to further improve your margin after you have booked the job. So 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 in shopping centers, commercial centers. And 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 on the pressure also in terms of units. And 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. So 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 2, 3 years a very strong decline in some areas. But 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 in 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 1 or 2 years. And 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. But 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. And just a final question. Of course, we are there's a lot of discussion around tariffs, 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. And also, we've heard about some other companies talking about shortages in electronic components.
I was wondering if that could if this is something you were seeing or something that has affected you?
Yes. I'll take this question. So the tariffs imposed by the United States, of course, have a certain impact. We currently calculate an impact of approximately CHF 10,000,000 full year run rate, a bit less for this year. Having said that, Schindler is producing in many regions where we are selling.
And therefore, the impact is really small for time being on the tariffs we already know. On your last question, the 2 VC bottlenecks in electronics, I am not aware of such supply bottlenecks.
The next question from the phone comes from Omid Vaidiri 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, we took as a for our guidance, we will have the assumption that we stay where we are at the moment. So we had a substantial increase in the last 12 months. And we assume or our guidance includes that the raw material prices stay where they are at the moment.
Okay. Thank you. And can I also get your latest market outlook for the Chinese market in the second half and perhaps going into next year?
Of course, this is a question everybody always ask for him or herself, and 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. And sometimes we are right and sometimes we are wrong because it can change very, 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, and 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. But at the moment, I have to say, I'm slightly positive for the market in China as it is more or less today.
Yes. We have been seeing a fixed asset investment in China, the growth slowing down a little bit sequentially. Now at the same time, we know that the larger portion of that is for land purchases, which I guess you view as positive overall. But how do you kind of digest? And does that change your view at all?
In fact, the 2000 investment is a bit sort of softening a little bit. I guess you would expect that from a wider macro deleveraging environment within the Belinda country.
No. At the moment, as I said before, there are so many indicators you can look at. We have discussed many times in all floor space started, net investments, floor space sold. And 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 it is one the KPI you mentioned is one important one, but I think also when you look on floor space started, it has come back to a more or less stable level with slight growth.
And so of course, we are observing that every single month. But 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 sort of harmonization plan, the modularity program that you are currently undertaking. This year, we saw 1st 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 on your margin going forward?
Well, the introduction of the different component, of course, is a multiyear game, and it goes until 2020. So multiyear game, and it goes until 2020. So we have a slight improvement because this year because we have introduced a harmonized car. And feedback from the factories as well as feedback from our installation teams is very good. So I have to say, we could confirm our expectation.
And this is now impacting, of course, we introduced it somewhere end of Q1. We had some slight positive impact in Q2, and we will have the full impact of this component in the second half of the year. Now there will be new components being introduced, controllers, frequency converters, shaft material, machines over the next 24 months. So next year, you will have the full run rate of this year. Plus, with the introduction of new components, it will further pick up.
So we believe that end meet in the second half of twenty twenty, we will have the full impact at a run rate. And then I think we will until then, we will see continuous positive impact coming from the modularity. But we also mentioned in the past that's not your only driver of it, of course. It also depends on the pricing and on the, let's say, raw material cost development. And it could be that some of these positive impacts will be unfortunately compensated negatively by those cost increases.
Yes. That's very clear. So you're essentially reiterating what you had told us before in terms of the EBIT impact after 2020.
There is no delay in the program. We are exactly on track in terms of timing and introduction.
Thank you, Simon. That was all the questions that I have. Thank you, Omid.
The next question from the phone comes from the line of Andre Kukhnin with Credit Suisse. Please go
I'll start with just following up on the guidance and implications for second half, trying to kind of 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. So 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 in the second half of drivers coming up that makes you maybe feel worried about something not working out and that margin improvement is not happening? Or is this just your traditional conservatism, if you could comment on that?
No, Urs, I think let's try once more to explain the guidance.
Good morning, Andre. Here is Urs again. So as you know, we are working here on our plan, and 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 Ahead products and the quality initiative. And 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 to prior and to our prior explanations to our results.
Sure. Yes, I've heard the mix and investments, I mean, 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 maybe a link. 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 it in the past years because you will only recognize when you really have started installation, you have a transfer of ownership of material which has been shipped to consumption side. 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. So far now, it is there is no impact anymore.
So maybe there might be a little bit of negative impact in the revenue and margin recognition due to IFRS 15 in the last quarter. But I think all in all, when you make the math, it's 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 the CHF 461,000,000 If you double that, you are at CHF 9 $20,000,000 If you add then the $55,000,000 you come to $970,000,000 And then we say, okay, it will be a little bit better than it was in the first half and then to come to the guidance of 9.60 to 101, including that we will have some negative impact from the tariff now in the second half of the year. We have some higher investments. So operationally, without this, let's say, foreseen cost impacts, we will improve further our margins.
So that's what we plan to do. I think the guidance could be explained like this.
Okay. That's very clear. And sorry to labor it. I think it's just important to be 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 as follow-up.
But there is a chance that you spend more on strategic programs and there's some uncertainty that you said about maybe mix and IFRS 16, and that's kind of what warrants a slightly more conservative net income guidance. Would that kind of sum it up right, Liam?
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. So 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 so 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. So if we can execute it as fast as needed, then we will long term benefit from the returns. And this, of course, increases a little bit the investments in the second half and has to be compensated by additional operational improvements. And 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 operationally to take some of the money to further invest into the future growth of our company.
That's very clear. Can I just I've got a couple more quick ones? On Schindler Ahead and 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 those what benefits you yield from now?
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. I mean, in whatever industry you are, if you ask the people that the Internet of Things already generates the payback you would like to have, probably nobody has already a positive payback.
And we always said that we believe that we will start in 2020 to contribute to our EBIT margin. So 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. So at the moment, it is negatively impacting our P and L. Now what is the feedback? We have trained more than 1,000 salespeople with our head products.
So 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, you were selling an equipment or a service contract. And now we are also selling a little bit the future. So 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. And the feedback I 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. And they also start to see the benefits we have.
We have equipped a lot of customers now with the cubes and the shingled 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.
And so I'm happy with the progress we have done so far.
Great. And just on that, obviously, in terms of your key partners, GU Digital has been going through quite a lot of change. Has anything changed in terms of what you see from your side? And 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 2 key strategic partners. 1 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 Credix software or platform to do big data analytics, to do simulations, to do prediction. And we are also very happy with them.
So all the informations you have seen or read about some changes which happened that or might happen at GE has not impacted our relationship with them. We have a very clear commitment from them, and we are very involvement they do. They are full on speed. And 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 really we are absolutely satisfied with the involvement of our strategic partners. Now looking to China. Of course, China is the biggest market or will is already today the biggest market in installed elevators and escalators and also, of course, the biggest market in the new installation business. And yes, we are equipping worldwide all our deliveries now with the cube.
In China, it's you still have to find you still have to further develop the customer benefits. There are a lot of benefits. 1 is connectivity, and there are some trends also from the government that they would like to introduce telealarm systems for emergency calls. And I think this is a key point where we believe we can generate future benefits with our ahead solution. And 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. On the other side, you also have to say that it's a long term game, and the cost awareness in China is maybe bigger than in other markets. So you have to work very hard to really demonstrate the benefits that you have a great market success. So 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 Husler with Citi, Capital Please go ahead, sir.
Yes. Good morning. I have two questions. And I'm looking at on Page 12 in your presentation about the growth in Europe basically or in EMEA. Can you maybe give some highlights and lowlights?
So which countries added most to this high increase of more than 10% in the first half, which was a clear positive for me. And maybe also split it a bit by growth in new installation and existing installation. And 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. So this is kind of the first question.
Okay. So 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, 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 and L. And it was really remarkable high double digit growth in many, many markets. So Germany, even in the UK, even in even in Switzerland, we were able to have positive momentum. Then you go more to the 1,000 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 perceived 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. But 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.
So 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.
So gentlemen, when you look on Page 12, you see on the right hand side the tables with the order backlog and revenue split into the 3 reported regions. We are reporting the absolute value for both half year closings and the percentage split for each region, which is then self explanatory for each region on the absolute demand. But overall, we can say if you compare the two periods on revenue growth, there was not so much shift in the share of total operating revenue. But having said that, you see that Europe is really a strong engine currently on our order intake and, as you see here, revenue growth.
And maybe just to add on that, when you look into the different businesses, so usually, we have like 3 type of business. Business. 1 is the new equipments we have, new installation business. And the second is the modernization business. And the third is then our service business, which includes repairs.
All the 3 have been growing in the 1st 6 months. New installation had a good growth. When you compare that to market overall globally was maybe slightly positive, but definitely growing faster than the market. But especially also in modernization and service repairs, we had a very, 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.
So modernization and the service business were really booming, a little bit higher than our new installation business, which then 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 twenty eighteen. So we will have strong momentum in the new equipment execution, which then, as we mentioned before, might a little bit have an impact on our overall margin. Does that answer your question, Martin?
Yes. Then 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 there your expectations if the currency stays 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 Europe, to be clear. Now when we made all our guidances and forecasts, then we said, well, that's great. It helps us. And then within a couple of days, everything can change and the euro drops immediately because there are some turbulences in some of the markets on a political and economical level.
If you follow, let's say, the latest debates or conflicts between Turkey and the U. S, This, of course, has an impact on the euro again. I think at the moment, it's $113,000,000 So it's a little bit lower than what we have appreciated in the 1st 6 months. So 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 important for us as our operation in North America is, 1st of all, growing. It has it shows very nice growth. And it also has, over the last couple of years, tremendously improved the performance. So this could then have a positive impact. All in all, we might face some headwind now depending on how the euro will especially develop.
But it's difficult. I cannot tell you how the euro will be in 2 weeks. I really don't know. But if it stays on the level we are, then we will have a couple of millions 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 kind of emerging markets, Latin America, but also Asia that weakened significantly in the course of the year, which also proved
What happens there, this is maybe important. We try to have natural hedges. In, let's say, in uncertain markets, we usually try to sell the equipment in U. S. Dollars or in euro towards the customer to have a certain natural hedge.
And the local burden is also built in the local currency. This should protect us from some downside risks we have in some emerging markets.
The next question from the phone comes from Paul Mery 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 are currently doing better in winning new projects than your competitors. What do you see as your key driver for this success?
And the second question, how does your bidding pipeline look like? Can we expect your order intake to grow to continue
to grow at this level?
Well, thank you for acknowledging that we have some good job in infrastructure. That's nice. Now historically, Schindler is very strong in the escalator business, and infrastructure projects have a lot of escalators. And we have done a lot of initiatives in the last 3, 4 years to become more cost competitive with our solutions in the infrastructure area. That's one element.
So we have a traditionally strong presence in escalators, which is a key market or where infrastructure is a key market. And we have worked very hard to become even more competitive in this environment. And now I think it's somehow with more success, people believe also that you can win the next project. And it's not a perpetual 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 Xyngro has done a good job. They have a very good product. They have the safety is very important there. And more and more also connectivity is important. And all our infrastructure escalators are equipped with Schindler Ahead.
So this is has become now a requirement from customers, which we can fulfill very good, and they see that we are doing a good job. And 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. So I think we have a historical benefit, but I think also we have worked very hard. And this customer base is not so big.
There are 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. So 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, big customers in infrastructure but also in other areas to create a win win situation with large customers. So I think this just has been proven now as quite successful. Now 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 plants. Now 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. But the bidding activity is still very high.
Okay. Excellent. Thank you, Thomas.
And 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?
Yes. Thank you for that question, Martin. The CapEx in the first half year has increased a bit due to our investments in various campus. One is here in Switzerland. We are investing into a new headquarters office, also a customer center to have a reception for global clients, and this will be finished completely next year.
But also operationally, we have now invested into new factories, an escalator factory in India and the STEP escalator plant in Shanghai. And this explains the development in the first half year. For the second half year, I would assume a continuation. So the operational plans are done. It's now much more on the campus here in Switzerland and 1 or 2 bigger investments into headquarter offices in other countries.
I would say it's a constant growth for the full year.
So slightly, slightly, 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 Flueckinger with Kepler Cheuvreux. Please go ahead, sir.
Yes. 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?
And I'll go one step at a time.
Okay. Good morning, Martin. Thank you for this question. I think, first of all, the whole growth we have achieved in China was organic. So it was not driven by M and A.
I think this is important In our growth, we have achieved, I think it's more or less same stories as we had in the past. We are strong with our key accounts. I have to say, we are doing I think the team in China does a very good job in getting friend 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.
So we had, all in all, a slight growth in terms of values in China, and we had also a growth in terms of units. So the price impact is not so visible immediately. Now there was a negative price impact in some of the major markets, and there was a negative major projects. 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 Q2 of 'seventeen was more and more flattish.
The we saw that in order intake, the pricing has much more stabilized now compared to the year end of 'seventeen.
If you compare it
to the first half of 'seventeen, it still has a negative impact because the flattening started somehow in Q4. We were trying to increase prices. We were much more prudent. And we also let the one more, 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.
And we continue to do that in the second in the first half of this year. So if you compare it with the year end, it is more flat. If you compare it 1 year ago, it still has some negative impact.
Okay. But 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. And therefore and if I remember correctly, volumes are also up, maybe around mid single digit. And I think the mix component was particularly strong in Q1. And 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 Q2.
I suppose volume was still up, but was mix also up? What happened to and pricing you already referred to, sorry?
So in terms of units, it was very good. In terms of units, we were better. So 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. Now 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 the down payment. And this, of course, can change really from quarter to quarter. Our pipeline is very strong. So our award pipeline in large infrastructure projects is very strong. So they will become order intake maybe in Q3, maybe in Q4, maybe in Q1 next year, depending when the first down payment is received.
And 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. It's Thomas was mentioning infrastructure projects, which certainly is impacting our China value.
But it's also on
the commercial segment where Schindler is always strong in taking large projects in China. But this is really every quarter has a little bit and infrastructure and residential. And also on the commercial side, we had a bit less large projects reported with down payments in Q2. But 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 overall, right?
Well, that's across the board. But in fact, the 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 of units with high value. So then 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. And just to expand the question on the award pipeline, is you used to talk about award pipelines over the last few quarters also on a global basis. Is that 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 is a lot of infrastructure going on. Even in Latin America, there are metro stations, new airports, for example, in Mexico, which are planned.
There are 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.
So I'm quite confident. And even in Europe, I have to say, a lot is going on when I look on Germany, when I look on France, who is doing a lot. We had the win of Schiphol in the Netherlands. So I don't see any reason why it should change over the next couple of months.
Okay. Perfect. Just going back to China very quickly again. With respect to tier city developments, do you see any change in dynamics within China?
Well, there are
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% to 20%, then maybe around 60% of the market is the Tier 2 cities and then 25% to 30% maybe are the Tier 3, 4, 5 cities. And 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. And you see that the land price is going up tremendously in Tier 1 and Tier 2 cities.
Now what happens is in this urbanization, a lot is starting to merge into mega cities where you have a Tier 1 city like Shanghai and then you have Tier 2 cities around like Suzhou. And then now it becomes a wider circle with Tier 3 cities. So within this metropolitan area, sometimes there's a shift more out of the center because there's nothing available anymore into the 2 Tier 2 and Tier 3 cities. But it becomes more and more and more one area. This is definitely the case.
So I think this is more about the tiers. Then 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, So along the East coastline is probably the strongest activity. If you are in from Beijing, you go along down the coast, Beijing itself, Shandong, Jiangsu, Shanghai, Zhejiang provinces, these are very strong provinces. And then 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. And 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 region. So for us, it has not such a negative impact.
Okay. Perfect. And just on the property tax that is being discussed or I think is being prepared for 20 19, 2020 or so, I believe. Do you expect any negative repercussions on market demand from this newly introduced property tax over the next 4 or 2 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 that they might change taxation or restrictions. But I think the Chinese government is very wise, is very agile. And if they see that it could have a negative impact, they are also willing to change the policy again.
So 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 a change in the policy. At the moment, I do not forecast any negative downturn because of that.
Okay. Perfect. Thanks. Just my final one, and thank you so much for your patience. Again, on Schindler Ahead, I've been listening to your elaborations.
And I was just wondering 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? And 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 or to transform the business model. There are the 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. But I think overall, we believe we do have a leading position. That's maybe in a competition landscape, clearly the case. Smaller competitors, of course, are struggling more because they do have to do a lot of investments. And they're also 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? And 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. So I think it's still an early stage in the race. Everybody is working hard. We are happy with our solution.
We are convinced that our solution is really a good solution. This is also feedback 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 have invested a lot with no impact.
Now in terms of pricing or, let's say, impact on your P and L, there are 2 elements. I think everybody tries to generate more revenue, and we are on an early stage to do that. We do have now additional revenue coming, but it is still not a lot because we are on a very early stage. And the other topic, of course, is efficiency. So 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. So there, we see first successes. Pricing, we do have clear pricing from our side. And I do not want to comment on the pricing from competitors because it's a very wide range how they try to market their solutions.
Okay. But do you see a
positive impact on your pricing component in order intake growth?
Yes. But 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 time line from January onwards, we equip our new installation and all our new sales have the Shielded Ahead solution included. But then 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. So it's a little bit too early to see already a big impact on our order intake and operating revenue figures. But yes, it is our plan to contribute to the growth also with digital services. But as I mentioned before, I believe really impact also the bottom line, we will only see with the breakeven 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.
Thank you very much. I'll just ask 2 quick ones. Thank you for taking them. First one, I wanted to ask you about sort of like 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 sort of more busy with internal things?
Just curious on that. Then if so, if in any industry, is that sort of easier competitive landscape amongst the global names has materialized? And then just the second one, you talked already in the call a bit about the numbers and the savings and benefits around modularity. But 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?
Okay. So question number 1, Daniel, our competitive environment, you understand that I do not want to comment on, let's say, a change in the understand that I do not want to comment on, let's say, changes at our competitors. But 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. And then there were no, let's say, big news from our industry, from other competitors. So I think it's just guror normal. It is our ambition to be as strong as we can because we believe growth is a key driver of absolute return.
And 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. Now 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. But this is not now. This has been the case now for, I think, many quarters or even many years. And so I think there is no change for us there.
Now 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, the way how and it's not only how you produce, it's also how you install. So we also see the efficiency improvements with this new component for the people in the field. Now 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 the next year. And then later, we will start with store drives, stores, machines towards the end of 'nineteen, beginning of 'twenty. So as I said before, this is a 2 year program where like in a salami toxic, here we come with 1 after the other.
Why do we do it like that? Because we are changing worldwide our products. So to answer this question, we are changing it worldwide. And it's the biggest product transformation Schindler has done in the history. So 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.
So 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. So it also helps us to continuously improve our competitive advantage we have is this modularity program. So this year, I mentioned that earlier, we are maybe mid somewhere around 10% to 15% of all our impact.
And then the rest, the 80% to 90 percent, they will come step by step over the next 2 years. And but it will change all our products worldwide. So it will change the commodity products. It will change our commercial products. And 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 9,300 up 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 wall. So 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. So 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 doesn't work. In some areas, it may be better, but indefinitely in some areas, it will not work. And for example, in a market like China, we use as many components of the global harmonized platform as possible.
But you remember, we already have done a lot of harmonization for China with our harmonized China platform in the last 3 years. So you will have some local adaptations, but overall, this component introduction will be globally.
And sorry, very quickly on your point on you've modularized production and installation of the car on this last step. What type of improvement did you get in terms of production and installation time?
Well, we always said, overall, we would like to improve the cost position of our products by 10%, 20%. It depends a little bit on what kind of product you have, and 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. But in the installation, I think we even had more because it's easier to install.
A key reason for it, very simple, and I do not want to extend too much the call, but in the past, we had many different types of screws, for example. And the car, you put together on the job site. Today, you only have one type of screw. So you only have one screwdriver. And this, if you install at home an IKEA shelf, you know how much faster you are because you only have one type of screw.
And it's much less complex than if you have a very heterogeneous set of screws and screwdrivers. So this helps us. So we tried everywhere to consider that installation is easy, it's faster and also higher quality. So there in the installation, we have even a higher saving out of this first component we now have introduced.
The next question comes from Christian Hopps from Baader Bank. Please go ahead.
Thank you very much for taking the question even after 1.5 hour. Figure. So 2 are a little bit in a longer view. So in Q1, China was growing organically. You have installed on new plants and capacities there.
So what is your M and A mix or your mix between M and A versus organic growth to target your or to reach your targeted leading position until 2025 and beyond? And is there currently any change in the M and A landscape in China as the market is really changing a little bit?
This is the first question.
The second one is on Chitla head also. So 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? And have you already indicated to your 5,000 customers You introduced there also indicated that something might be changed in the of services going forward by applying to Schindler Ahead. And 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, €157,000,000 Did I get it right that this will be less in the second half?
Okay. So M and A, I think, first of all, we always have said that M and A plays an important part of our growth story. But I think the impact now, we have seen a certain impact. It is one part of our growth was good. Maybe 1 percentage of our growth was driven by M and A.
This is mainly M and A coming from smaller or midsized service companies all over the world. So we are continuing with that. Now refer and we plan to do that also in the future. We have established a specified and dedicated M and 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. So I'm confident that also in the future, we will have contribution coming from these smaller M and 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. And so this is an indication that further concentration of consolidation is going on. We are open, I have to say, but we are not as others it has to fit. It has to strategically fit. Growth by end on day is good, but it has to be growth where the culture fits, where the product range fits, where it is complementary and not congruent because otherwise, it just creates cannibalization.
So we are observing the market, and we are open for all type of possibilities. But at the moment, I have to say, we have a strong footprint now in China in especially in the new equipment business with our Schindler brand, and we have XJ Schindler, who is doing really a fantastic job. And we also have a minority in Volkswift, which allows us in the future also to go into a majority and to have like a 3rd brand running. I do not believe that you can run 4 or 5 or 6 brands, then it becomes very complicated. So I think 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, And we are also looking into that business, whether we can do more M and A activities in the service part in China, which we have not done in the past. But now we have started also to look there into such opportunities, and we have the first successes. It was smaller ones because it's a very, very optimistic 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. Now question number 2 regarding Ahead. At the end, what does the customer want? I mean, we are all as an elevator company, we are very often, we are excited about technology, and we are excited about products and that type of drive and this type of machine. But honestly, if you look on the customer, the customer has or the user, he would like to have a certain experience.
He and then 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 don't want to have a breakdown and especially you don't want to have an entrapment. So 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 breakouts and the number of entrapment. Especially in Asia Pacific, entrapment is really a cultural shock. It's the worst thing what can happen. So all our efforts are directing into further reduce the number of callbacks and further reduce the number of engagements. And this is really value for our customers, and they are willing to pay for that.
So they are much more going into performance oriented service contracts. You do not say I call them 10x or 12x or in China 24x or 26x. They much more would like to have a service contract which says, okay, availability of an elevator is 98%. And if we are worse, then we would have to pay a penalty. But this is a new service performance.
We are selling more and more. We more and more want to sell the performance of equipment and not only how many times we are there because the digitization helps us to detect as early as possible that there could be a breakdown. And then we go there and fix it before it really happens. And we do not want to sell number of visits. We want to sell more and more the performance.
And 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. And digital helps us to fulfill this demand. And maybe the last question, net working capital, Luz, 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 net working 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, and 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 Q2.
So it is stabilizing on current levels. And 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 NII business will certainly grow quite a lot in the second half year. And then 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. And maybe one last. Taking your framework of M and 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 2 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. And 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. And I was referring to China that I see there is a consolidation topic. Let's say, all the rumors and all the, let's say, trends and developments we have seen in some of our major competitors, This topic is not new.
And of course, we are closely monitoring this situation. But 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. So if I understood you correctly, in the Q1, adjusting for IFRS, the local currency growth was lower than for the first half. It was a neutral.
So I assume in the Q2, we would have to assume a higher growth than you actually have reported. And then it looks like quite a strong sequential acceleration in the like for like local currency growth Q2 over Q1. And 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. So my first question would be, is the observation correct? And if yes, what was driving the sequential acceleration?
Okay, Daniel. Welcome as the last person to questions. The last questions are the best ones. So I will forward, let's say, a little bit split of revenue growth and explanation to Urs.
All right. So you are absolutely right that we have an acceleration an acceleration in the Q2 to our operating revenue growth. And if you take the half year closing, nominal 10.2 percent growth, FX adjusted 8.4% growth, then we can further deduct about 0.9% growth on M and A impact because we have acquired smaller companies in the second half year of twenty seventeen. And we had still a smallish impact of the IFRS 15, which is about 0.3%. And I said this will diminish for the full year.
So you have an organic growth for half year closing of 7.2%. And this is really strong in the current market environment.
So but I assume the Q2 must have been stronger than the 7.2% you just mentioned?
Yes, it 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?
Yes. So in the second quarter, well, organic growth was bigger in the 2nd quarter than in the 3rd quarter. I can confirm that.
And as you have the Q3, what you have seen so far, is it more in line with the second quarter or after the first half of twenty eighteen?
Well, July what we have is now July figures. And honestly, July is usually not a very strong month. Why? Because it's a holiday month. And holidays are impacting our repair business, but also impacting that a lot of construction sites are July August usually are not very strong months.
But then 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. So 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 and A because those M and 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 and A's will be consolidated, but not so much like we had the bigger acquisitions last year. So 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's second half was also very, very strong. So to top that with the same run rate as we had it in Q1 and especially in Q2, this will not happen. So organic growth year for year in Q3 and Q4 will be a little bit less probably than in the Q2.
Very clear. Thank you very much.
Okay.
And
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 witnessed in dealing with your suppliers. And the reason why I bring this up, if I recall correctly, in the Q1, you mentioned that you were witnessing a supply reaction and the people were expanding supply in response to the higher pricing. Is this something that has reversed in the Q2? Or is it simply that your working assumption is not the same what you actually witnessed with suppliers?
I'm not exactly sure whether I have fully understood the question. But if yes, I will try to answer it. So 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. So they try to push higher prices. At this usually, you then try to log in for a certain period a supplier price. Now prices or the index for us, how we calculate over the last 18 months probably went up by about 35%. So 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. So some of them were pushing very hard, and we had to accept some price increases. Some of them, we were able to push back. And 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. And of course, with some of those competitors, then you have to go into a renegotiation. And we will try to push back as much as we can. But that might be the one or the other case where we can not 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. That's a little bit how it works. So now we 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. So there is a certain risk that the one or the other is asking for further increases. But okay, I mean, there is nothing in life without the 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 time line, 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. I mean, it's a multi multiyear ongoing, let's say, exercise. And I mean, it goes back for more than 10 years. I think there is nothing to add than what you could read in the press. We are always interested in, 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. But 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.
And so I would like to thank you very much for attending this conference call. And now I would like to close, and I'm looking forward to the next event, our Q3 results conference call, which will be happening on October 23. So thank you very much, and goodbye.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.