Ladies and gentlemen, good morning. Welcome to the Schindler conference call on key figures for the first quarter of 2018. I'm Ira, the conference 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&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.
Thank you. Good morning, ladies and gentlemen, and welcome to today's first quarter results conference call. My name is Thomas Oetterli. I'm the CEO of the Schindler Group. I'm here together with Urs Scheidegger, our new CFO, who started in his role at the beginning of this month. Welcome, Urs.
Good morning.
Urs will dive into the financial details and the outlook later during the call. As an introductionary remark, again, Schindler, I think, had a good start in 2018, and we continued our profitable growth plan. Let's have a closer look on the highlights of the first quarter on slide number two. In the first quarter 2018, Schindler continued to perform above global market development. All regions and business lines contributed to the growth. The Asia Pacific region achieved the highest increase, followed by the Americas and EMEA region. We also recorded accelerated activity in the large project business. As a result, order intake rose by 7.6% in local currencies. Revenue even increased by 8.9% in local currencies and was therefore well above our guidance of 3%-5%.
It must be noted that out of this growth, the first-time application of the new accounting standard, IFRS 15, supported this phenomenal growth rate with 2.5%. The operating profit improved by CHF 21 million to CHF 281 million, and the EBIT margin stood with 11.4% almost at the previous year level. Net profit grew by 16.2%. 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. I would now like to share some more details on the different regions and markets. It is fair to say that development noted in 2017 also continued in 2018. Strong markets were supporting our growth in Southeast Asia, North America, and EMEA. China has stabilized, India continued to recover, and we observed improving construction activities in Brazil.
The competitive environment remained tough, especially in large projects. In addition, substantially increased commodity prices and wage increases put pressure on our margins. So far, we are confident that we will be able to compensate such cost increases with material cost reduction initiatives and strict cost management during the year 2018. Schindler has also implemented pricing initiatives to increase prices for products and services. Let's move to slide number three, which describes the recent developments in Asia Pacific. Overall, the market development of the region was positive. In the new installation business, China remained stable in terms of units, although price pressure was continued. We expect a flattish market development for 2018 in terms of units. India continued to recover, and Southeast Asia showed good market development in all business segments. The service markets were healthy, driven by the conversions of new equipment. Our performance was strong.
The new installations businesses in China and India achieved high-growth rates. Southeast Asia benefited from prospering markets in general. Across the region, service, repairs, and modernization recorded significant increases. I move to slide number four and the Americas region. The U.S. market continued to drive the region. Market conditions, particularly in Brazil, started to improve. In North America, the positive development in the U.S. construction sector continued, and in Latin America, activities in the construction sector started to recover, especially in Brazil. Schindler did very well. The performance of our North American operations continued to be strong, and in Latin America, Schindler defended its position in Brazil and generated good growth in other Latin American markets. I move to the last market region, EMEA, on slide number five. Overall, markets remained solid. The construction environment remained strong, leading to sustained growth in all business lines.
In the northern part of Europe, the positive market development continued. In the southern European countries, we posted robust growth in the residential markets. Schindler was growing in almost all the countries, particularly in the new installations business, we generated high growth rates, and we recorded solid growth in our installed base. After these insights into the different markets, I would like to hand over to Urs for an update on the financial results and the outlook for 2018. Urs, please.
Thank you very much, Thomas. Good morning, ladies and gentlemen. My name is Urs Scheidegger, and I am the successor of Erich Ammann as the CFO of the Schindler Group. It's the first time in my new role that I participate in such a call, and I'm very pleased to present the financial results for the first quarter 2018. To begin with, I would like to mention that results and their comparability with previous periods should be considered in light of the first-time application of the new revenue accounting standard, namely IFRS 9 and IFRS 15. Details of those impacts and changes in reporting with effect from 2018 can be found on slides 11 and 12 in the backup of the presentation. Let's move on to slide number six.
In the first quarter of 2018, order intake rose significantly by 8.2% to CHF 2,822 million, corresponding to a year-on-year growth of 7.6% in local currencies. Order intake includes all business lines, which means new installations, modernization, service, and repairs. Particularly modernization, repairs, and maintenance showed significant increases. In addition, we recognized an acceleration in activities for large projects. The Asia-Pacific region generated the largest growth, followed by the Americas and the EMEA regions. For China, order intake was strong, both in units and in value terms. In the first quarter of 2018, revenue improved by 9.4% to CHF 2,473 million, corresponding to a year-on-year growth of 8.9% in local currencies. Out of this growth, the first-time application of IFRS 15 had an impact on revenues of 2.5%. It is expected that the impact for the full year will be immaterial.
The EMEA region generated the highest contribution to revenues, followed by Asia-Pacific and the Americas. Operating profit was CHF 281 million compared to CHF 260 million achieved in the first quarter of 2017. EBIT improved by 8.1% and by 7.3% in local currencies. EBIT margin reached 11.4%. Before restructuring costs of CHF 4 million, the EBIT margin was 11.5% compared to 11.7% of the previous year's period. Profitability is slightly lower than last year, driven by raw material price increases and lower margins sold in the backlog 2017, mainly from China. Our key objective is to grow absolute profits year-on-year. We delivered this in 2017, we are on track in Q1, and we will continue this path in 2018. We have strong actions to improve operational performance in pricing and efficiency.
Having said that, we also face some headwinds in terms of higher raw material costs and lower margins in the backlog. We will aim to further improve our EBIT margins in 2018, the improvement will be a bit less than seen last year. The first-time application of the new accounting standard had no impact on the EBIT margin. Net profit improved by 16.2% to CHF 208 million. However, it should be remembered that the financial result for the first quarter of 2017 included a temporary revaluation loss of CHF 16 million on the ALSO exchangeable bonds. The tax rate in Q1 2018 stands at 23.5%, higher than in Q1 2017. In Q1 2017, the tax rate is low due to a group internal transaction, creating a one-time tax benefit. We expect about 23% tax rate for the full year 2018, better than last year's 24.2%.
I'm now moving on to slide number seven. Cash flow from operating activities reached CHF 330 million. Is CHF 26 million below last year, mainly because the improvement in net working capital in the first quarter 2018 was less than in same period of previous year. Cash flow 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 face more challenging commercial terms, in terms of down payment coverage of work in progress. Finally, the order backlog is now reported net of work in progress. As of March 2018, the order backlog was CHF 8,484,000,000. This is compared to the adjusted figure of CHF 7,915,000,000 for the first quarter of the previous year. The order backlog increased by 7.2%, respectively 6.6% in local currencies.
Let's move to the financial guidance, which you can find on slide number eight. Barring unforeseen circumstances, Schindler continues to expect revenue growth of 3% to 5% for 2018, measured in local currencies. In accordance with the established policy, the net profit forecast for 2018 will be provided with the publication of the half-year results. With this, we would like to invite you to ask your questions.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands while asking a question. Anyone who has a question may press star and one at this time. The first question is from Andre Kukhnin from Credit Suisse. Please go ahead. Mr. Kukhnin, your line is open.
Great. Thank you. Thank you very much, and good morning, everybody. I just wanted to pick on the margin progression in the quarter and how that's looking for the rest of the year. Clearly, you explained to everyone that we shouldn't expect as much progress in 2018, as you had in 2017. You were confident that the margin will be up, in 2018. So I just wanted to double-check, how the level of confidence has changed, given the Q1 performance and, maybe if you could walk us through, a couple of drivers, for these and how they're likely to evolve as we go through the quarters this year.
Okay. Good morning, Andre. Thank you very much for this question. As you all know, we always have claimed that first priority for us has the growth, and we want to generate more absolute return. Nevertheless, it is also clear we do not want to on a year-on-year basis, we don't want to jeopardize our margin. I think the margin was a little bit of sour grape for the first quarter, being slightly below last year's performance. I think there are good reasons for that. One reason, of course, is the raw material price increase, has achieved a certain peak in Q1 2018, and has hit us in the execution of the backlog. This was definitely one element. Also, some of the increases on wages, came in straightforward, from day one in the year 2018.
On the other side, our measures we have taken, we have done price increases, in Q4 last year, and we also are doing additional price adjustments at the moment in Q1 and Q2 of this year. The impact comes a little bit with a time difference, so later during the year. The same is for efficiency improvements, and the same is happening with our modularity program. With our continuous cost reduction programs, we also want to benefit out of this modularity program. I mentioned that, beginning of the year, the first part we have now harmonized was the car. This is now in the ramp-up phase in our factories. It will impact more and more and more with more and more deliveries during the year. It will impact positively our EBIT margin.
All in all, I think we stay where to our message we have given a couple of months ago, we are aiming to further improve our yearly margin. It will not be as much as it has been in the past, but I think we are overall we are quite happy with the start we had, a very strong top-line growth, also driven by a lot of increase of work in progress, where usually the recognition of the margin comes to a later stage. All the jobs where we have a so-called underrun, compared to your estimate, cost underrun, you only realize when you start to build. We believe that there is a good chance that we can further improve our margin during the year.
Great. Thank you very much, Thomas, for such an elaborate answer. Can I just follow up on the pricing piece and on one of our favorite topics in China? We speak to quite a few people there, and it looks like the picture is that the Western OEMs are trying to push price up with some success. The Japanese kind of following is somewhat mixed, and the locals are not following or kind of hesitating. At the same time, we see some contract awards data that points to ASPs improving. Firstly, that picture I've just drawn, would you agree with that or do you see it differently? Also, could you talk about what pricing you're seeing maybe in your pipeline of contract awards versus what is actually in the order intake in the quarter, if there's any difference in that?
I think we are trying hard to increase prices with different mechanisms. One is that you try to generally increase your list price, and then with the certain discounts you have, you hope that the realized net sales price is increased. This is a general price increase. The second topic, I said the last time, we are also doing some so-called power pricing. We try to apply different pricing mechanisms depending on the customer, depending on the geographical region, and also depending on size of the contract and product line. We try to do an intelligent price increases, because just overall trying to increase everywhere by X%, you can do that to a certain degree.
Sure
difficult to do that everywhere in the same way. This is what we try to do, and we have seen different success in different segments. Where we don't see any increase of prices is in large projects. We also don't see that with large key accounts. I think there, whenever you go into big volumes, so big jobs or big frame contracts, the pricing is very severe, and I do not see that us or the market, in general, has somehow changed the attitude. We try, and whenever we try to increase prices for such big jobs, we are out of the shortlist, let's say.
Right.
This will continue like that in 2018. For smaller jobs, individual jobs, not big customers, there I see that the market, and especially the large OEMs, they try to hold price, maybe even to increase a little bit the price. What you say about other competitors, I think it is true that according to our knowhow, the loss of share in the market of the mid-sized and small Chinese competitors has been very severe over the last two years. I think there will be a further consolidation process going on, and they just have to get volume, otherwise, they cannot fill their factories anymore. For that reason, they have some irrational behavior from job to job.
Very clear. Thank you. Just last question on the cash flow in Q1, that was down year-over-year. How much of that is explained by the prior highlighted drivers, like the business mix and geographic mix? I guess also the timing of Easter was unhelpful for Q1 because the weekend fell straight onto the end of the quarter. The question really is that do these explain all of the difference, or was there any actual underlying change in level of prepayments? If there was, if you could just give us a bit more detail on where it is and to what extent.
Yes. Hello, Andre. Here is Urs.
Hello, Urs.
The cash flow deterioration really can be explained very well by the deterioration of down payment coverage to work in progress. We have a certain drop of this coverage, and this is really driven by the intake of many public transport and major projects. Those projects come in with rather difficult payment terms, milestone payments through the life cycle of the project. The environment for those projects is very competitive. This we clearly feel now, in terms of change of net working capital and related to the cash flow. It's mainly related to the Asian countries, mainly related to China, India, Southeast Asia. Of course, also major projects elsewhere in the world have a bit unfavorable terms. This is clearly the main explanation.
Can I just follow up on this? Was this driven by customers, or was this a result of local competition? We hear about local competitors in China, in particular, being quite happy to give up on payment terms to get work. Is this what's driving it, or is it top-down customer? Indeed, if it's the international competitive views that are leading this?
I think it is mainly driven by, in China, by the change of the mix we had. What Urs explained, that we really have a shift in our, let's say, business footprint. You see that also in our order intake. In terms of value, our growth in China was bigger than in terms of units, and it was not because we were so fantastic in pricing. It was because we had a shift towards large projects, especially in the public transport area. There it is just government people usually pay all over the world, but they usually pay late. That's just a matter of fact. It has nothing to do with the change of behavior of local competitors. We do not compromise for our normal business. We do not compromise with our payment terms.
In contradiction due to, let's say, some challenging environments, we are very harsh and very strict in applying our payment terms.
Great. That's exactly what I wanted to double-check. Thank you very much to both of you for your time.
Thank you.
The next question is from James Moore from Redburn. Please go ahead.
Yes. Morning, everyone. I have got a few questions. I wonder if I could start with China as well. I wonder if you could help me understand the scale of the organic growth in the quarter for orders in China. I am thinking low double digits. I was wondering if you could help me with that. Within that, I am trying to get a sense for how much mix was a positive.
A second question on that would be whether you could help us in any way understand what the order breakdown is roughly between projects and normal or volume business, don't know what you call that. What the pricing pressure differences are between the two categories.
Okay. Morning, James. I will try to maybe give as good as possible a detailed answer on that. First of all, we had a very good start in China, I have to say. We were really pleased with our performance in terms of unit and value growth. We have achieved mid-single digit growth in terms of units, and we have achieved a double-digit growth in terms of value in China.
This is, let's say quite unusual because we still have seen that average prices, taking everything into account, average prices still went down. What is exactly? It would be my assumption, something like three, four percentage points prices still went down, mainly on this area of large projects. Big commercial projects, public transport, but also on key accounts. I think this is very important because the large developers become bigger and bigger. They have much more negotiation power, more and more every year. Everybody, of course, is jumping on that sales channel and tries to get a frame contract. This part, maybe those two together are, I don't know, maybe 40%, 42% depends a little bit, 40%-50% in value.
I see.
You have, let's say, the bread and butter business, which is the other 50% in the market, where somehow prices have been hold more. Maybe it was between 0% to -2%, and the others were maybe at The big jobs were maybe -5%, -6%. You come to an average of -3%, -4%. That would be my high level assumption. Now, as we have been very strong also in large projects, we of course also have been hit by this market price deterioration. We grew everywhere in all the different segments, but we were especially very strong in this first quarter in public transport jobs. This has put some pressure at probably our price level was more on the 4% and not on the 3% going down.
When you take that and you say, okay, somehow in middle single-digit is unit growth, double-digit is value. In fact, you would have to say, well, the value has been impacted by negative price.
Yeah.
You see the rest is mix change. The mix change has made more than this difference between value and unit growth. It has also compensated the price development.
Just to follow up on that, should we think of a margin implication of this going forward between the two categories? Is there a significant margin differential?
Well, of course, it is true. When you look on the single job, when you are fighting for a frame contract, usually the price level on such a big job where you can get hundreds or thousands of units per year or over two years, your initial price is worse than the price you have in a single unit job. However, you are working with economies of scale. You have much more standardized requirements, and if you win such a job, then you try to optimize your cost position for exactly that type of configuration. Over the next two years, if you have such a frame contract for two years, you start to improve your cost position, and at the end of the two years, you probably make more money with the large frame contract than you have done with a single small contract.
At the beginning it is a hit, but over time you try to do a more positive margin development. Overall, of course, margins is always the difference between price and cost reduction, and we are fighting very hard to further reduce the cost of our products.
Be clear. If I could turn to raw material, I think you mentioned 30 basis points for the year, but I'm thinking with some signs of steel price increases around the world, is there any spillover that you have any visibility on for what the impact could currently be at current commodity prices in 2019? Or is it too early for that?
That's a little bit, honestly, looking into a crystal ball. There are different drivers, of course, for this development. Fundamentally, I do not see a reason why the especially steel price should further increase, because one key driver was also that over this wintertime, a lot of factories in the northern part of China have been closed. Steel and coal manufacturing sites. Some of them have been opened or reopened again, so this is increasing the supply. I do not see that the demand has really heavily increased. I would expect that the pressure should not become even bigger now. Now, the question is, how much can you negotiate this year, and then maybe you are hit in a year? There is a risk for that, yes.
This risk we already have this year, and we see that because last year we were quite good in moving and massaging and negotiating away the increases of our suppliers. Now, of course, they are coming back, and they say, "Wow, we have even a further increase, so now we have to increase prices to you." Some of it is happening, yes, and that's the reason of this hit of 30 basis points. Some of it is also with clever design, you can compensate that you do not have further cost increases. This is our ambition for 2019. I think at the moment, we are optimistic that there is no margin deterioration because of raw material price increases going into 2019, because our modularity activities should overcompensate that.
Very helpful. Lastly, if I could. I think you mentioned some savings of up to CHF 200 million by 2020, I think you talked about a rough breakdown of 15% and then 50% and then 100% over the course of 2018 and 2019 and 2020. Is that still on track as a plan? Does that mean that there are no savings at this early stage of the first year, if you like?
This is true. There are out of the modularity program now the global one. Of course, we had already savings in China, otherwise we would be much more under pressure on our margin. It is correct. Just in February, we launched our first global harmonized component with the car. This now will ramp up, and it will bring something between 10%-15% of the overall savings in 2018. End of this year, we will have a very important additional milestone where we will launch the next three components, which will have an impact then with a ramp-up in Q1 '19. They will have an impact additionally in '19, where we want to have something like 60%-65% of this CHF 200 million, then full impact should be in 2020. There is no change. The team is very successfully working. They are under pressure.
It's a big job for us. I have to say, at the moment, I'm very satisfied with the progress we are doing. Looking ahead, I do not see that we should not be able to stay with our commitment.
Thank you very much. Excellent answers.
Okay. Thank you.
The next question is from Omid Vaziri from Jefferies. Please go ahead.
Yes, good morning. Thanks for taking my questions. Can I focus on the Chinese maintenance market, please? What's been your growth rate in the quarter with respect to maintenance revenue line in China? I guess second part of that question is, are you seeing yourself taking market share from the local players? How about from the overall market, including your large OEM peers in the region? Going forward, how do you see the margin for maintenance in China develop?
Maybe, Urs, you can refer a little bit what the growth was, and then maybe I can answer Omid more about the strategy and market shares and how it goes into the future.
Right. Yes, please.
Well, our China maintenance business is going well, consistent with also last year. We have a portfolio growth in China of a bit more than 20% in units and in value. Our conversion rate remains in China at a high level of 70%, as we also had in 2017. The maintenance business, of course, has a very high priority for us in China, and we are clearly investing into it and are very pleased with the growth in Q1.
Now, the interesting part, of course, is none of the big OEMs has really a big market share in the installed base. It is a very fragmented market in the service business. There are thousands of service companies. Some of them have a couple of hundred, some have a couple of thousand, but there is not really big ones. If you have a higher market share in new installation than you have in the service business, and you have a good conversion rate, you are gaining market share in service as well, just with the high conversions you have. We do not attack. We are not attacking other companies. We are mainly focusing on get a good new installation sales and an as good and as high as possible conversion.
With the figures we had last year, around 75%, and also good start this year, this adds so many units to our portfolio that we are gaining share in the service market. Last but not least, of course, we have a program, this is called Lost Son. Of course, sometimes we are losing units to those small independent service providers, where we cannot compete with the price they have. We also don't want to do that because our aim is, as one of our five strategic initiatives, to be perceived as a quality premium provider. Some of those customers, they come back. First they are excited by the low price, but then they are disappointed by the service quality they receive, and very often those customers are coming back to us.
In net, we do not lose more units than customers are coming back to us. This is for us very important in our overall strategy. Now, margin-wise, the margins are not substantially lower than in the rest of the world. The price per unit is lower, but we are working heavily on efficiency programs, and also digitization will support our future ambition to keep this margin. I think many years ahead of us, fast-forwarding to 2025 or whatever, the market also in terms of value and the share in terms of value of the Schindler portfolio will be substantially big. We have a very clear focus on the service business, and we are happy with the development we have achieved so far.
Okay. Thank you very much.
For any further questions, please press star and one. The next question is from Martin Flueckiger from Kepler Cheuvreux. Please go ahead.
Yeah, good morning, gentlemen. Martin Flueckiger from Credit Suisse. Actually, I have three questions. I'd just like to start off with a clarification question. When you talk about your organic order intake growth in China being double-digit, and in unit terms up mid-single-digits, is that including the maintenance business, or is there any qualitative change when you just look at the new installation business? That would be my first question. My second question is on the EBIT margin bit or rather the raw material price impact. Can you clarify quantitatively, if possible, please, how much the incremental raw material impact was in Q1? Are there any changes to your guidance of an impact of CHF 130 million in 2018? I've heard your qualitative statements before, but I would just like to have that quantitatively as well.
Also, with regards to the raw material impact, whether you think that's going to increase over the next few quarters compared to Q1. Finally, if you could just talk about the current state of your award pipeline, and the Q1 dynamics there, because I seem to remember that in 2017, the predecessor of Mr. Scheidegger had talked about strong award pipelines in China and in the U.S. particularly, and I was just wondering whether there had been any changes. Thank you very much.
Thank you, Martin. These are in fact 4 questions, not 3. I will take maybe the first one. It was about new installation sales, it was the organic order intake. You notice the mid-single digit and double digit in value was referring to new installation sales. New elevators and escalators and not to total order intake. I think, Urs, maybe you can elaborate on the impact of the raw material price increases on the EBIT, especially in Q1. Do we see that the impact is dissimilar, do we have some mitigating actions?
Right. The gross material inflation based on our latest estimates for 2018 full year will be approximately CHF 140 million. This impact will be mitigated very strongly by our actions of design changes and very strong procurement actions, leaving us with an impact of latest estimates, CHF 70 million, which is about CHF 30 million higher than last year. This is the 30 basis point impact we will face in 2018. Talking about Q1, our latest estimate for Q1 is an impact of roughly close to CHF 10 million, which is in line with our full year impact we have for the group. Having said that, our actions are really strong. We are locking in prices always for the next 3 to 9 months.
We really do not expect that this estimate should change much for the full year, as our supply chain has very strong procurement actions in place.
Maybe on the awards, I think we have a healthy award pipeline. We see that there are still large projects in the market, we are fighting hard in North America also to feed this award pipeline. I think with our new products we have, with the new release of our flagship product, Schindler 7000, with our [change now] escalator product, the Schindler 9300, also with the stronger introduction, especially in North America, with our Schindler 5500. We have all the competitive products in our hands to further win such awards. In China, I have to say, we are very active in the public transport area as we see that the so-called top-range market has coming down. There is less activity in high-rise buildings. What we have seen, there's a lot of projects, but not so many decisions.
We have been quite successful, and we do have a solid award pipeline also for public transport jobs. That was the reason why we try to push a little bit the prices up, and we are very happy if others would follow. At the moment, it does not look like this.
Okay, many thanks.
Thank you.
The next question is from Fabian Haecki from UBS. Please go ahead.
Good morning, gentlemen. A follow-up question on your order mix. Does it mean over the quarter and also what it turns into revenue? Do you think your mix of, particularly talking about China, of large projects, public transport, and so forth, will that rather decrease or remain stable? What is your view on that?
I think it depends a lot on the market development. The government was very active and very aggressive in launching a lot of public transport jobs. There are some questions at the horizon where everything can be financed, and they are continuously pushing that. At the moment, we see that there is a certain, let's say, market shift happening that in terms of values especially, more of those big jobs, public transport jobs are in the market. If this is the case, we will keep our share because we have, I think, a leading position in public transport, not only China but worldwide, thanks to our very competitive products we have. Also technology-wise, they are probably leading, as this public transport has high requirements on safety and quality. I do not see that there is suddenly another change now in our order intake.
Probably this will stay more or less like this. Of course, we are growing, as I said, are growing in all the different segments, not only in the public transport area. We also grow in the other segments, in residential, in commercial. Just now in Q1, the order intake was extremely high for public transport because there we only book, of course, it's less so when do you get the down payment to book the order intake. Awards are solid in all business lines.
Thank you. There may be a follow-up question on China. You were saying last year that the Tier 2 cities were a bit of the sweet spot for you, where you have a particular strong position.
It's less crowded than in the Tier 1 and it's less commoditized than in the lower tiers. How did that segment, and how did you there? Also in China in general, you sound quite constructive. You reported a good quarter. Do you see any risks out there, or are you relatively relaxed and sleep well with the Chinese market so to speak?
I think we have been continuing successful in the Tier 2 area, where we saw a strong development. I think Tier 3 and 4 cities might develop a little bit more now in the next coming months, because they are very often connected to the Tier 2 cities just in the circle around. Depending on the prices for apartment, then you see a shift going from Tier 2 into Tier 3 and 4 in the boundaries of those bigger cities. That might be a positive trend. We are prepared for that. We have reanalyzed our geographical footprint, and we are changing our sales force and our agent network also to get a little bit more granular again. To be prepared if this growth in smaller tier cities is really happening. This may be question number 1.
I have forgotten question number 2, I have to say. Could you give me, Fabian, once more?
Yeah, sure. Just a bit the question, how confident you feel.
yes
with the overall macro picture, let's say in the construction market, any tail risks, have they kind of really diminished? What is your feeling about that?
There is not one trend. There are a lot of indicators. When the market was good, everybody could somehow look on the floor space started, and this was a very good indicator. 15, 18 months later, this was the indicator for the new installation market. Now in the downturn, somehow, this indicator does not work anymore. Not as good as it should. Although floor space started has been increasing, we do not have seen the same trend also in our market development. I think a lot has to do, the start is you get the permission, but do you really finalize a project? If not, then there is no elevator or escalator needed. We see a certain delink. Of course, we are looking on investment in real estate, which have been increasing as well.
I think that's much more a pricing issue than really a volume issue. I think prices for land have become bigger and bigger, or higher and higher, and have increased. Developments are really struggling sometimes to get a land piece. Then it is at a very high price. On the other side, there are good trends. Inventories are on a low level. Sales, unfortunately, of apartments have come down a little bit in the last couple of months because of the pressure of the government on the apartment houses. The relation between inventory and sales has become bigger. You can now have, again, more months of inventory. Although in absolute terms inventory came down, sales even came more down. All the fundamentals are stable. Urbanization is continuing. People want to have a bigger apartment, second apartment. People become older.
I think what is interesting, and we have not yet concluded on that, is that there is a change in the market happening from a pure, I have to buy an apartment, to a rental model. This we see. There is now starting a change that this original model of selling or buying an apartment might switch into a rental model. I think that could help us to stabilize also those swings, because then you are not so much depending on the peak of the sales. We are quite confident. In all fairness, in the last 3 years, whenever I had to make an outlook for the next 12 months, I was never right. I was never completely right. We have to observe. I have a confident feeling about the Chinese development.
That was very clear. Thank you very much.
Thank you.
The next question is from Daniel Gleim from MainFirst. Please go ahead.
Yes, good morning. Thank you very much for taking my question. It would be on your statement that there was no impact on the margin from the IFRS accounting change. I just want to make sure what you exactly mean. I assume there was an impact on mix from this accounting change. The mix should have an impact on margin. By your statement, do you mean that the mix change driven by IFRS had a negligible impact on your margin? Or do you want to say that there was no impact from IFRS other than the mix? If it is the latter, could you maybe explain what the dilution roughly was in Q1?
Thank you, Daniel. This is a very complicated question. I hand over to Urs.
Thank you very much for the question. First of all, yes, we have this 2.5% OR impact due to IFRS 15, because we have deferred revenues with the new standard. We also restated the numbers by January 1st. What I meant by saying we have no EBIT impact on the margins, it is meaning that this revenue share comes with the same EBIT margin for the group. This is 11.4%, which is about CHF 7 million absolute EBIT impact.
Okay, very clear. What was the business that was now recognized? What is this, new installations or?
Well, you have two impacts. One is with our change, which we explain on page 11. We have changed the way to trigger the work in progress recognition. With the new standard, we only trigger it with the start of installation, which is deferring revenues going forward. This is the first change. This is very much on the NI and modernization business related. Then you have another change of the standard where we change the way of our free maintenance revenue recognition, and we recognize it now, instead of cost accruals, we do it on revenue accruals, which is growing our maintenance revenues. You have two impacts, and that's not very easy to calculate, and it's changing a bit the mix. Overall, it's neutralizing itself and gives an average EBIT margin on the revenue change.
This conclusion will also hold true for the remainder of the quarters this year, I assume?
The whole change of IFRS will now fade out through the quarters. We expect that at the end of the year, we should not have any or very limited IFRS 15 impact on revenues and on EBIT.
Very clear. Thank you very much.
Thank you very much.
The next question is from Martin Hüsler from ZKB. Please go ahead.
Yes, thank you. Maybe first just an add-on, on this IFRS topic. Basically, we should expect for the next couple of quarters negative impact, because this positive trend reverses. Is this correctly understood by me?
Yeah. It's true that we have now a very strong Q1 due to the IFRS 15 start. What will happen is that we will still have strong quarters Q2 and Q3, and then in Q4 we will have a bit seasonal lower operating revenue growth due to this new standard with the start of installation trigger. Overall, our quarters will show a more evenly distributed revenue growth going forward than it was in the past with the new standard.
Okay. All right. My main question basically was about Brazil. Just in order to understand correctly, did you say you speak about improved construction activities in Brazil? Whereas you speak that you defended your position in Brazil, I was wondering whether this means you grew, with the market or not? Maybe can you shed some light on how fast the improvement in Brazil is going on? What kind of volumes do you see for the market and for yourselves?
Looking into Brazil, I mentioned that several times over the last about four years, the market for new equipment was dropping by 50%, five, zero. This was really severe. What we now see is that the market, in 2017, was almost flat. Probably there is a slight increase in the new equipment market in 2018. What we have seen that we were able to grow in terms of units in the first quarter 2018 compared to the first quarter 2017. We had a slight growth in newly sold elevators and escalators. In minimum, according to the market, probably we were even a little bit growing above the market. If the market only was, let's say stabilizing or maybe very, very slightly growing and we were still growing, probably above the market level.
I do not expect that 2018 will become a record year. We are happy if the market is growing 3%, 4%, 5%. Of course, from a baseline, which is 50% lower than what it has been five years ago. That's where I see our position. I think I mentioned that several times, we have a super strong team in Brazil, and it was so important for us to defend our market share, because now with the growth, of course, we want to participate also with our very strong position in the market, participating over the next three years in this growth. I think our starting point is strong, and we hope that the market will further accelerate, and we will be participating as a major player of this market. We will participate in a very strong way.
Okay. Thanks a lot.
Thank you.
The next question is from Jörg Rune from AWP. Please go ahead.
Yes. Good morning, Mr. Oetterli and Scheidegger. We have heard a lot about China and Brazil. Can you give me an estimate of what you expect in North America and Europe, in the market development in the coming months?
Okay. Good morning. Well, North America is very stable. I have to say there, everybody's looking ahead, of course, and expecting somehow that the cycle comes to an end, sooner or later. We do not see that. There is a lot of activities going on in public transport. There is a lot of investments going on there, improving the infrastructure of the country. I think the Trump administration is really pushing that, which is good for us as we are producing elevators and escalators in the U.S., and this is part of our, let's say, decentralized production footprint. We also see in large commercial jobs, still a good environment, mainly in some large cities driven by New York City. I have to say, the environment is very good, and there are a lot of large jobs in the market.
Not every job is a good job, we are selective to choose, let's say, those which have a reasonable margin, and we do not go behind everything. In the residential area, I have to say, it's still okay. North America, we are positive. There's not a big growth, maybe 1%, 2%, 3% or something like that, or flat-ish.
On a very good level. It's a healthy level, and we are happy with our products that we can increase our position in this market continuously. In Europe, North and East, mainly driven by Germany on a very high level. There are some doubts where Germany will continue to grow as it has done in the past. I have to say, so far we see a good environment. Yes, prices are maybe a little bit more under pressure, but the environment is really strong. In Europe South, I have to say the upward trend is continuing in new installation equipment, especially in Spain, Portugal, and also Italy and France. I'm quite optimistic. Of course, they had a similar impact like Brazil. The baseline is quite low compared to the pre-crisis situation 10 years ago. This is a good environment.
In service of course, is always a battlefield. That's clear. We also see there, for example, in Spain, it has somehow become better in the environment. The only market where I still see, a very intense price pressure in terms of service is France. The reason is a lot of the installed base is in the ownership of the municipalities, and they are doing public tenders. Every year, they are tendering, and then you have 1,000 units in the market. Then, I have to say, some of the colleagues are going for really crazy prices, and we are not attending on that. We clearly say we are not a big fan of these huge public tender jobs. Some of them you have to participate because you cannot escape from a big share of the market.
For some tenders, we say we do not participate. All in all, North America, Europe, we are happy with the development.
Thank you.
The next question is a follow-up question from Martin Flueckiger from Kepler Cheuvreux. Please go ahead.
Yeah. Thanks, gents, for taking my follow-up questions. Actually, three again, if I may. Just to come back on the organic growth in China in Q1. Now, if I understood your answer previously correctly, you were talking about organic sales growth in China. I was curious also whether you could share some insights into organic order intake growth in China and how you performed there in terms of units and in terms of value. That would be my first question. The second question is just coming back to the Chinese new installation markets in terms of tier cities. I've heard you talk about tier 2 and tier 3, 4 cities. But just to clarify here, are you saying that tier 2 cities are still outgrowing tier 3, 4, and tier 1? Or has there been any change to the dynamics here? That's my second question.
My final question is on revenue growth in Q1 was particularly driven by EMEA, followed by Asia Pacific and the Americas. Is that a likely sustainable pattern throughout 2018? Thank you very much.
Thank you very much, Martin. This time, there were really three questions. Organic growth in China, maybe I was a little bit confusing and also with the words. I was referring on order intake. We had organic growth mid-single digit for new installation, mid-single digit in terms of units, and double digit in terms of value. This was order intake. Important to clarify this. When we look on operating revenue, which you consider as, you probably say this is sales. There it has been a little bit different because there we have not the same development. It was worse in our operating revenue. In fact, overall, the operating revenue for China was very strong in the service business. It was slightly negative for the new installation business because we have somehow this 12-18 months. Overall, it was slightly negative.
Operating revenue growth in China Q1 to Q1 was slightly negative. Order intake was, in terms of units, new installation, mid-single digit and double digit in value. Does that answer the first question?
Perfect. Thank you.
The Chinese NI market. Yes, the topic with the tier 1 cities is there is no land, and the prices are super high for apartments, and that's the reason why there was this cooling activities by the government. When you look on the apartment prices, it even has been that for tier 1 cities, apartment prices have been flat in the last 12 months. In the last couple of months, even slightly negative, I think something like 0.6% or so I saw in one of the reports. Because there is not a lot available, not a lot of land available, it is very difficult for this market really to grow. The Tier 2 cities are 50%-60% of the market in China, and there it is our traditional strong position we have, and we are benefiting. This market is still growing.
If the market is flat at the moment, flattish, it is probably even slightly negative in tier 1, and it is slightly positive in tier 2 cities. Not everywhere. Not every city has the same. We are, as I mentioned, changing our sales forces depending on the outlook we have for a certain province, for example. Looking ahead, I believe that also in the tier 2 cities, prices have been going up very, very strong. They are still increasing, not so much anymore because those cooling down measurements of the government also had an impact on these tier 2 cities. What is happening is now that people will try to get an apartment in a tier 3 city, which is in the environment of, or around a tier 2 city.
Looking ahead, I think there could be a small shift that maybe tier 2 is stagnating and tier 3 slightly increases and is compensating the decrease in the tier 1. That's my, let's say, outlook. Of course, we have to follow up that month by month. Maybe revenue growth. Urs, you could give an answer on that.
Right. I understood your question was on the revenue growth geographical composition for Q1 and whether this is the same trend in the next quarters. As Thomas explained, we faced a slight negative OR revenue growth in China for the first quarter, very much driven by harsh winter in the north of China, and also due to our new revenue recognition with the start of installation, which was deferring revenues a bit in China. On the other hand, in Q1, we had a very strong operating revenue growth in the EMEA region, in North America, and also in major cities of Southeast Asia, with high installation activities in the first quarter. Having said that, I would suggest that this pattern will kind of normalize in the next quarters. China will show rather better over those, not negative, but at least flattish.
The other regions may grow a little bit less. It will normalize a bit across the zones compared to the first quarter.
Thank you very much.
Okay. I think that were all questions. Ladies and gentlemen, thank you very much for attending this conference call. I would like to close now, and I'm looking forward to our next event, our half year results conference call on August 17, 2018. Thank you very much, and goodbye.
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