Schindler Holding AG

Thomas Oetterli - Chief Executive Officer Urs Scheidegger - Chief Financial Officer

Andre Kukhnin - Credit Suisse Lucie Carrier - Morgan Stanley Omid Vaziri - Jefferies Athira Pradeep - Goldman Sachs James Moore - Redburn Martin Flueckiger - Kepler Cheuvreux Denis Molina - Morningstar Bernd Pomrehn - Vontobel Fabian Haecki - UBS Torsten Wyss - BZ Bank Mustafa Okur - Bloomberg Intelligence Daniel Gleim - Mainfirst

Good morning, ladies and gentlemen, and welcome to today’s conference call on key figures of the third quarter 2018. My name is Thomas Oetterli, I’m the CEO of the Schindler Group.

And here together with Urs Scheidegger, our CFO, who will guide you through the financial details and outlook later. After three quarters of the year, Schindler is doing very well and we have achieved significant growth.

In fact, we are on track on our strategy and again grew faster than the market, while having improved absolute results. Now let's have a look at the highlights on Slide number 2.

In the first nine months of fiscal year 2018, Schindler achieved significant growth and delivered to further improvement in results, despite the return of foreign exchange headwinds in the third quarter. We continue growing across all regions and product lines.

The share of major orders continues to increase we managed to win large orders for airports in the U.S. and Metro lines in China, among other big jobs we were able to gain for us.

Our expertise as a global leader with a strong brand and the dedicated global key account management is well-recognized by our clients. Order intake rose by 7.1% and revenue increased by a healthy 7.9% despite higher raw material cost and ongoing pricing pressure in several markets, we were able to keep the EBIT margin stable at 11.7% in line with the previous year’s period.

With operational improvements, the new installations and the service business benefited from continuous efficiency gains. Net profit rose by 15.1%, mainly driven by continued operational progress and one-time tax refund recognized already in the second quarter before the tax refund net profit increased by 6.6%.

The execution of our major strategic initiatives, mainly the modularity program and digitization is well on track. In addition to these major initiatives we are progressing well also with other forward-looking project like to Digital Dream or R.I.S.E, our new breakthrough robotics installation system for elevators.

Furthermore, over the past few years Schindler has become more active in the field of M&A and since the beginning of 2018 has acquired more than 20 small and midsized service companies, mainly in Europe. So, we are constantly on the move to further advance on our goal to become a leading elevator and escalator provider in all our markets.

Now let’s move to the development by markets in the last nine months starting with Asia-Pacific on Slide number 3. The overall market sentiment remained positive in the new installations business China remained stable.

Overall, price pressure continued year-over-year with a low single-digit price decreases. Price competition remains particularly intense in large projects tenders, but we’re stabilizing at least in some segments and geographies.

We expect a flattish market for 2018 in terms of units. The Indian market really gained momentum with strong demand and the Southeast Asia markets continues to show solid growth in all business segments, and the service markets last but not least remain very healthy.

Schindler saw a strong new installation business, especially in India, in a challenging Chinese market, we could further increase the numbers of units sold. Across the region service, repair and maintenance generated high growth rates.

So let’s move to Slide number 4, the Americas region. The region grew across the board characterized by a strong U.S.

market and improving conditions in Latin America. Americas was our strongest region.

Our North American operations delivered double-digit growth. In Latin America, Brazil returns to growth in all product lines and we also performed well in other markets.

Let's move to the EMEA region on Slide number 5. Overall, the development in the European construction industry continues to be robust.

Market conditions in Northern Europe continued to be robust accompanied by signs of overheating in some countries, leading to labor shortages. Southern European countries recorded sustained growth in most markets, but there are concerns in a few countries like for example Turkey.

Schindler grew in almost all the markets with the new installations business being the growth driver. Our installed base reported solid results too.

After these insights into the market, I would like to hand over to Urs for the financial results and the outlook for 2018. Urs, please it's your turn.

Thank you, Thomas, and good morning, ladies and gentlemen. I’m to present the financial results in bit more details.

To start with the new accounting standard IFRS 15, IFRS 9, no impact on year-to-date results and the third quarter results, however, degree of uncertainty remains on potentially impacting the fourth quarter, as the method change we would recognized revenues for new installations and modernization after later fulfillment stage then before with the old methods. Now let have a look at the selected key figures of third-quarter 2018 on Slide number 6.

The third quarter 2018 is the first quarter in a while where growth was impacted by quite significant FX translation headwinds. Additionally, there was a base effect as in 2017 growth has accelerated in the second half of the year very significantly.

Order intake grew by 1.7% in Swiss francs 4.8% in local currencies. Order intake includes all business lines, new installations, modernization, maintenance and repairs.

Modernization, repairs and maintenance in total outgrew the new installation business. The Americas region achieved the highest growth driven by sustained drop-off U.S.

market, followed by the EMEA and Asia-Pacific regions. In the third quarter of 2018, the revenues improved by 3.6% to CHF2.7 billion, equivalent to a strong increase of 6.3% in local currencies.

All the regions in product lines contributed to the growth. Foreign exchange effects had a negative impact of CHF69 million.

Operating profit increased by 3.6% to CHF313 million, equivalent to a strong 7.0% increase in local currencies. Foreign exchange effect impacted operating profit negatively by CHF10 million.

The EBIT margin reached 11.7% in line with the previous year. Before restructuring cost of CHF6 million, the EBIT was 11.9% compared to 12.0 in the previous year.

Net profit amounted to CHF230 million in the third quarter, representing an increase of 0.4% compared to last year's period due to significant deterioration in the financial results mainly attributable to currency losses on financial hedges based on the strongest Swiss franc in Q3 particularly versus Brazilian reals, Indian rupee and Turkish lira. Furthermore, the previous year's financial results were supported by again from security sales.

Cash flow from operating activities increased to 282 million from 103 million in the third quarter 2017. This development is mainly explained by the base effects of networking capital stabilizing this year compared to a significant deterioration in 2017.

Now, I'm moving on to Slide number 8. I will comment on the performance of the nine months.

In the first nine months of 2018, order intake rose by 7.1% in Swiss francs and 6.8% in local currencies, respectively reaching CHF8.7 billion. The Americas reaching contributed the most followed by the EMEA and Asia-Pacific regions.

Revenue improved by 7.9% to CHF7.9 billion corresponding to a growth of 7.6% in local currencies. EMEA region generated the largest contribution to growth followed by the Americas and Asia-Pacific regions.

China was still slightly negative by the rest of Asia showed excellent performance is double digit growth rate. EBIT rose by 7.7% to 926 million the first nine months of 2018 equivalent to a 7.3 percentage increase in local currencies.

EBIT margin stood at 11.7% in line with the previous year with sustained headwinds from higher raw material costs for peers' competition further improvements to margins remained challenging. However, efficiency gains offset the higher cost of raw materials as well as pricing pressure.

Before restructuring cost of CHF50 million, the EBIT margin was 11.9% compared to 12.0% in the previous year. In line with our goal to grow absolute operating proceeds year-on-year, we will further improve absolute EBIT in the year 2018.

We also aim to further increase the margin until year-end. This ambition is becoming more, more challenging due to the recent headwinds mentioned.

There are drivers we cannot influence like tariffs and foreign exchange developments and overall political turbulences, which are not in favor, in our favor at the moment. Please keep in mind that the net profit development for the first 9 months of 2018 is supported by the previously announced tax settlement of CHF55 million recognizing the second quarter of 2018.

Obviously, my earlier comments about the impact of the third quarter financial results on net profit are also valid for the first nine months net profits. So I’m not going to repeat them yet again.

Net profit for the first 9 months 2018 increased by 15.1% to CHF746 million compared to last year period. Net profit before tax refund grew by 6.6% and amounted to CHF691 million.

Cash flows from operating activities reached CHF760 million compared to CHF544 million in the previous year’s period, as a result of our networking capital optimization. As of September 30, 2018, the order backlog totaled CHF8.6 billion an increase of 5.5% respectively 8.2% in local currencies.

Now, let’s move to the financial guidance which you can find on Slide number 10. Schindler Group expects that market trend seen in the first nine months of 2018 to continue.

For the full year 2018, excluding any unforeseeable events, Schindler expect revenue growth of between 5% to 7% in local currencies and net profit of between CHF960 million to CHF1,010 million. With this, I’m handing over to Thomas.

Thank you very much, Urs. I think now, it is the time to enter into Q&A.

Just taking step back and looking into 2019 and what’s in store for us there. Just want to answer a couple of things there.

Firstly, on the raw materials versus price balanced given, what do you see in the market right now in terms of price trends and the spot rates for materials. Where do you think that balance would end up, if nothing changed in the next sort of 6 to 12 months in terms of raw materials versus pricing development for yourselves for 2019?

Well, good morning, Andrea. Thank you for the question.

I think overall, we have seen quite a volatile market in raw material in the first couple of months. This year, we had a steep increase.

Now in the third quarter in some of the markets, we still had a slight increase of raw material costs, mainly in China aluminum and steel were further increasing, our biggest market and our biggest supply chain. There will probably be some additional pressure coming in the next couple of months because in China, a lot of construction, but also manufacturing activities will be put on hold due to environmental reasons.

So I don’t see that there will be, let’s say, some relief in the area of raw material costs, it's, but we assume it will stay somehow on the level where we are. So cost, hopefully like that and our input costs are then given the fact which should not have too much of a change anymore.

Nevertheless, we have tried to push as much as possible, potential increases of suppliers always months-by-months, quarter-by-quarter we try to lock in prices, and we are usually hedged something like 6 to 9 months. So there will be some further pressure coming on in the, towards year end that suppliers try to renegotiate prices due to the stable high level of raw material prices.

That's the input side. On the output side, I think in many markets, we have done a pretty good job starting to increase prices.

Of course, you always are in a balance price versus volume. If you are in some markets, the only one who tries to increase prices then you immediately see that you get some pressure on the volume.

But I think we should have next year a good balance between the input costs and now the increased prices we have started the early this year, because they will coming to execution next year. So I'm expecting no negative impact on the raw material price level for the next year.

Thank you. That's very comprehensive.

And just on the next kind of big driver there. The modularization program savings, from what I have in my notes of that you should be getting towards kind of halfway of the targeted CHF200 million savings run rate by the end of 2019.

So that would imply savings together with analyzing what you get this year should be something like CHF60 million CHF70 million is how I'm thinking about this, am I far off?

Well, this year we have launched, its correct we would like to be on halfway run rate by the end of '19, maybe it is even a little bit higher. As a run rate, if you'll not have the full impact because we are ramping up component by component.

So this year, we have started with the first component which was the new car, which has been pretty successful, well perceived by our own organization. The impact comes in the second half of the year because there is a ramp up in production.

And then during the next year, we will launched new components with the machine with the control and with the inverter, where we have the modularity program on track, but also there, of course, it will have a ramp up because of everything can be applied fully on your backlog. So some parts can be applied on the backlog we have where you replace the old component with the new one.

But this is not possible every day. So there will be a ramp up and it will be probably above this 50% run rate end of '19.

So, this year the impact might be something like 10% to 15% and the next year, we are somewhere that slightly about 50% maybe towards 60%.

And just last question from me before go back in the queue. In terms of China market outlook, you very clear on 2018 and that's certainly panning out in line with expectations have come flat or maybe marginally down.

But how are you thinking about 2019? I know you wouldn't give guidance, just more of an early indication really how you're thinking about it up or down or stable?

So our outlook is that it stays stable. We believe there are, like always in China, there’re positive and negative trends in fact we see of course that real estate investments have gone up, almost 10% year-to-date to the year before, but it is mainly driven by slight increases for the land.

So floor space started rent up into first three quarters by 16% year-to-date compared to the last year and this should help us, but floor space sold was quite flat. So what we see is that there’s a certain widening gap between project which starts and the completions, and so there’s a slowdown in purchases -- purchasing of residential and commercial space.

And there’s also quite some weak cash position of some of the development. And then on the other side you’ve high governmental pressures to restrict the pricing for apartment.

So I think this is somehow compensating positive trends we’ve from floor space starts. So putting that all into one pot and creating recipe of forecast, we see that the market will stay flat next year in terms of units.

So can I just follow up on this because there has been kind of deeply intriguing for us as well to see going up and completions going down, simultaneously. What do you see on the ground?

What are the customers telling you in terms of color on that or the dynamic? Are they kind of started projects being kind of putting hold and frozen permanently?

Or is it really just the speed of construction that is ongoing, but at a slow pace probably frozen?

Yes, I think probably it's both elements are playing a little bit. So one is, yes, there’s a little bit of slowdown of the construction itself.

And because when you look on inventory levels, the inventory levels are on a very healthy level now. But I think with the restriction of sales price in some cities, the government has clearly said.

What is the sales price you’re allowing to achieve to sell an apartment and probably real market price is above that restricted price. So I believe it is at the moment some holdback coming from the construction industry and from the developers, maybe hoping that there’ll be some relief in the release of government restrictions in the next coming months.

And I think we should also not underestimate that the cash situation is not every day as best. One element we’re focusing very much because we don’t want to have sales where we then cannot collect at the end of the money.

So I think it’s a little bit of slowdown. People are waiting to a certain degree.

That’s what I hear from developer. But I am positive, the government has shown in the past that they’re very quick to adapt, if there should be a further slowdown, there’ll probably remove some of the restrictions to active the machine again.

The first one would be, if I may follow up on your comment on the margin for the full year 2018. I am just trying maybe to read between the line here, but first of all, are you able to kind of provide us with a guidance for potential FX headwind in the fourth quarter, and similarly, you’ve been speaking about impact from trade tariff, which has to do surprise me a little bit considering you tend to be a generally quite localized in terms of new supply and new manufacturing.

And are you suggesting that you could be flat margin or actually down margin in ’18 verses ’17? That’s my first question.

Okay. So, Urs, I think impact on the raw materials and outlook, I think you can answer that.

Yes, certainly. So in regards of the FX developments, as I said, we have headwinds year-to-date and in particular Q3 mainly due to the appreciated Swiss franc against relevant currencies for us, which are the Brazilian reals, Indian rupee, Turkish lra, but there was also a slight depreciation in the dollar.

And with the outlook, I would suggest this will continue. And going forward, we have an impact in Q3 of CHF10 million.

And actually, the Swiss franc was quite depreciated in Q4 last year. So, we will have tried to be, strong headwind in this perspective going forward of at least the level of Q3.

In regards of tariffs, well, we have the same understanding as we have in our recent call. This year, the impact is limited to about CHF5 million.

However, if this tariff we announced ones, are absolutely materializing, we are talking about the run rate impact of CHF10 million based on current knowledge.

And just as a follow on, on to that, what are the components of supplies that are being impacted by these tariffs, because I have thought historically that most of your supply in China was done with Chinese supplier and that you also fairly local in the Americas in terms of supplies for in North American business?

This is correct. The situation could be much worse I have to say.

When we talk about 5 million in the second half of this year or we talk something like 10 million next year. We talked about 10 basis points and negative impact.

I think of course 10 basis points hurts but it is not that it becomes a disaster for us. And you are right.

We do have a strong supply chain base also in North America. So, certain components and certain products are imported by China or by Europe.

These are for example in the area of escalate is the steps are imported we do not produce them in the U.S. And also some other components are imported.

And there might be for certain, one or the other job as our competence centers, the global competence centers for escalators and high-rise products are in Shanghai. So for certain type of elevators and escalators, we are importing the food elevator or escalator out of China.

Now this is only the direct impact. I think what is maybe running a little bit more is the indirect impact.

Because even if we have a sourcing from supplies in the U.S. This supplier is sourcing a lot of components from China.

So what happens is that because roughly 70% of all the components used in our industry are manufactured in Shanghai and in the circle of 100 kilometer independent whether it is used in China or not. So a lot of the American suppliers we’ve they partially source certain top components out of China so they also have the significant tariff price increase, and of course now they come to us and they want to increase their sales price to us as well.

So there’s a direct impact of 5 million to 10 million as at the moment most say how much we get on the pressure for this indirect price increase pressure from our local suppliers in the Americas.

And just my last question is -- could you give us might be some indication on how you see the financial line evolving to into the end of the year? Because the delta this quarter of about 15 million versus last year is quite significant and considering you’re guiding on net income, I think it will be helpful for us to have mid-year from a calibration on the net financial lines, if you can?

As I mentioned in my first speech, there’re two impacts on Q3 results. So one thing is our hedge losses we have in Q3 based on the development on selected currency.

I mentioned before by 10 million, but then we also had an impact last year in Q3 2017, it was a one-off of security sales, which amounted to 8 million Swiss francs. And actually both -- and this will not continue because that was in Q3 ’17 and a bit earlier of ’17.

But on the FX development, I do foresee that we’ll have at least the amount of Q3 as well in Q4, which you can add to your guidance. And of course, there’s uncertainty with the Turkish lira, which hits us due to the instructed rate in Turkey, and we will have to work out now our backlog and really discuss as well because let’s say, the future rate to go with our backlog and that also has an impact going forward.

Most of my questions have been answered thanks very much for those. I just want to pick up on the working capital improvements.

You’ve made the progress this year compared to last year. And just where we’re on the improvements, is it much more left to do?

How much do you expect to just improving or going into the fourth quarter? Do you expect pretty much not all optimized now?

Or is there much more room for improvement? And my question is in relation to the conversion rates on new installations to ongoing service contract in China, but can you provide us with an update as to what the latest conversion rates you’re achieving there kind of on average for the market?

Maybe I’ll start first strictly with the conversion rate and then just introduce the topic of networking capital before handing over for the details to Urs. So conversion rate in China remain strong, as mentioned many, many, times this is a key focus area for us.

We are pushing very much to have a service network, so our conversion rates for Schindler remain above 70%, which I think is a very strong it's a very strong value. So, we believe that this will continue to do that as we will be able to continue to do that as we are further expanding our service depots.

Now networking capital, it has been disappointing fact last year. The environment has become much more challenging and we have put a lot of focus on networking capital.

It's something we are monitoring very good, I always make the sentence, a good customer is only the customer who pays, otherwise there is no good customer. So, we are putting a lot of emphasis on our cash collection and we also put a lot of emphasis on having a clear commercial term, which protect our company.

But maybe Urs, you can give some more details in that area.

So, it's absolutely correct that our networking capital last year has suffered very significantly. And last year we had change of networking capital of CHF279 million.

This was and is mainly related to less favorable coverage of our work in progress with down payments. And this is very much driven by our success of order intake with large projects and large key accounts where the payment terms commercial terms are even more demanding.

Now in the last 12 months with all our efforts to optimize the networking capital position we have stabilized the level of last year. And this is a -- the new reality now that our networking capital is negative roughly 5% of total operating revenue which is really a challenge to further improve again.

So I believe we will be at the level where we are now. Of course we have a lot of efforts on cash collection which is going reasonably well and we have a lot of efforts to further optimize our payment terms across the world and on all segments.

But market field is really competitive and the results you see in our networking capital position.

And then, you are reporting the portion of large orders are expanding seems to be the trend. That certainly puts a bit of pressure on you and on this topic.

Yes, clearly. We are really proud to have success with this very demanding large customers and fueling our growth in NI and of course equally important to our ER portfolio.

But in terms of our cash flow generation, this is a challenge and a bit burden on that aspect, yes.

My question was with regards to if you can give us a little more color on what you expect in terms of your buyback program? What does the board need to do for you to re-launch this program this year?

So, on buyback program and you perfectly know and we have stopped it about years ago, and this group has a lot of strategic targets, this is also the reason why we took a loan of 500 million Swiss francs this year to focus on our organic growth, on our strategic initiatives to mention our modularity program, our Internet of elevator flash ahead program and the quality campaign. And there are also an external growth targets, and this is our clear focus where we focus operationally and in our executive committee level.

Any buyback program is a matter of the boards and its strategic support and I cannot sort a comment on it.

I have few technical questions thanks for taking them. On raw material impact, I think you said in the past a 100 million gross two thirds mitigate it, is that still valid?

And more importantly, how does that look for full year '19. I was thinking 65 and two third mitigated the current metal pricing.

Maybe you can give one at a time.

Well, it's right, it even was high, our gross impact even was slightly higher than the 100 million and we always say that we see a negative impact on our margin of roughly 40 basis points, 20 basis points coming on the order backlog, and 20 basis points coming from our normal business. There is of course some additional pressure because we have now positive development now in the last couple of months.

But I think honestly I have to say, thanks to all the achievements which have been done by our sourcing department, and also thanks to some cost improvement, we were able to do starting now with the modularity program, we were able to mitigate this negative impact. So I think all in all its slightly higher and we assumed that about 40 basis points will be the negative impact this year.

Now looking ahead for the next year, we believe that this that this inflation on the raw material might be slightly lower than it has been this year because raw material input cost have somehow stabilize. We do face some headwinds because now some of the suppliers we were able to push to drag it on and track it on and they come back and they soft putting more and more.

So we do have do some concessions, yes, but I think the impact will be less than it has been this year. However, the reason of the part of inflation which we should not underestimate and because more savior I have to say, this is labor inflection.

Because we do have really shortage in the market for skilled labor, so we see that this might become quite a tough environment next year in certain markets when you’re negotiation with unions or work councils of labor cost increase. So maybe part we will have some reduction of the pressure in the raw material price, but I assume there will be some additional pressure coming from the labor part, and that our costs more or less are equal, the costs we have for materials slightly lower than the cost we have for our own people and subcontracted people.

This probably will balance out somehow. So, a little bit less on material and a little bit more on labor.

If I could turn to currency, thank you for the fourth quarter impact of CHF10 or more. I was thinking of next year I'm looking at about minus CHF20 million current rate, is that fair?

Or are we talking more than that?

You're looking into the crystal ball together with me, it's very difficult. The volatility in the currencies is remarkably high these days.

As I mentioned to you some relevant currencies trade-off like Brazilian reals or Turkish lira are really fluctuating tremendously. Based on current knowledge I don't think it's wrong that you foresee a certain negative impact in '19 as well.

But it's really difficult to predict the exact amount.

Thank you. And a couple more if I could.

Acquisitions, I think you talked about adding 1% to sales this year, the margin on those similar to the group? Or is there an accretion dilution effect this year from acquisitions?

Very good question, and I can tell you heavily discussed whenever we are in front of an acquisition because you have two impacts. You have the EBITDA, so the, let's say the performance of the acquired company is strong and is usually inline or even slightly above.

Our performance because these are usually service companies and the margin in the service business is slightly higher than in the new equipment business. So let's say from an operational point of view it is definitely an improvement.

However, we are a very conservative company. We are taking care that our balance sheet looks like.

So we also amortize our intangible assets we are generating and this can be our reported EBIT. And as an effect EBIT wise, there this the one or the case where it is dilutive, you're right.

I guessed that. I just wonder where there was a material one-off PPA step up effect that could drop out in the following year such that your adjusted EBIT margin is depressed compatible, it really is whether you can quantify the thing that we should know about for next year?

This would not be year-on-year, I do not see an impact, I think the impact we have seen we already had this year and we also had the last year. It's a little bit, the bitter pill of doing more M&A, if you are conservative in your accounting treatment, but from an investor point of view, I would say, we still do the, do the right thing.

Yes. Okay.

Thank you very much. And just on China.

Thanks for your answer earlier, but we hear a lot about stimulus. I see monetary fiscal announcements, but I don't see much industrially.

And I suggest, I think from your answer you're also saying that you've not seen any changes to policy HPR restrictions or other things. Is that right or have you started to see some evidence of stimulus taking effect in the marketplace yet?

You are right. We have not yet seen this.

Great, thank you very much for your answers.

Three and I'll take one at a time. Can we talk a little bit about the perceived slowdown in the order intake growth numbers that particularly in Q3, if I remember correctly in Q1 and Q2, you had quite significant the higher growth rates.

Did that have anything to do with the acquisition impact? Was it the global unique market that may have slowed?

Was there a particular shift in growth rates among the product lines? That will be my first question.

We had a certain degree of base line impact. We had acceleration of top line figures in the second half of last year.

You might remember that at the beginning of last year we were not that strong but we had a pretty good first quarter last year. So then you know the base line is increased.

I think all in all if FX adjusted we still have a growth of 4.8% in our order intake which is still I think a good figure. It is not as highlighted 8% or 7% in the first two quarters but it's not an impact of a slowdown we see in the market.

I think it's just the bar just becomes higher and higher to jump over. Of course on a quarter-to-quarter basis it's impacted whether you had the chance to book the one or the other large shop or not.

So in Q3 we still have good order intake in large shops but it was not as big as it has been in the quarters before, because we record them -- a lot of them are in China and we only report them when we have the first down payments.

If you could talk a little bit about your -- please about your operational performance in China particularly on the new installation side. How you see your performance versus the market?

And what has been the recent mood among the key Chinese developers that would be quite interesting to hear?

So we are very pleased with the operational performance of our colleagues in China. They are in a very difficult environment.

I think pricing was so severe in the last '15, '16, '17. And it all comes now in the backlog rollout.

So it hits now the P&L and the EBIT. So we were under pressure and we have worked a lot on mitigating this with improvement on our sourcing side but also on our efficiency side.

We had lost a little bit in the EBIT performance but we still are in line with our overall performance in the group. So it's not dilutive, China is not dilutive for us this is very important.

In terms of sales we have focused more and more on pricing. We have discussed that in the last two quarterly calls.

We put a lot of emphasis on pricing in the different segments. So large growth projects but also in our bread and butter business and we have seen that in the normal business we were able to slightly increase our prices but we still are heavy on the pressure in large projects.

So, all in all we are happy with the performance of our colleagues in China. We also believe that it should further improve over next one or two years.

But just to clarify where you were in orders to receive in units up in Q3 in China or not?

Yes, I would obviously see in Q3 was slightly down, so we had a slight in the single quarter Q3 we have slight less order intake in new installation elevators and escalators. It was mainly driven by escalators because China is the biggest by far and even more than in elevators the biggest escalator market, and the commercial escalators are heavy on the trade ship they are less chopping centers and being the public transport area.

We have remainder success in the first nine months in awards, but not all of these awards are over at the books as order intake because we wait until we get the down payment. However, in terms of the service business modernization and repair we had a stunning improvement in China also in the third quarter.

But just to clarify so orders received in China in Q3 was slightly down in value terms or in unit terms?

Both in value and in unit terms, it was slightly down compared to Q3 of last year.

Right, but the nine month it was up, correct?

Correct.

Then just the final one before I go back into queue. Could you talk about your latest observations in the raw material markets and what you are seeing particularly going into Q4 in H1 as given the fact that you are fixing prices for 6 to 9 months?

Yes, so I mentioned before we are assuming that we have achieved a very high level of cost in the raw material prices. We do not see at the moment that is really assigned that we will get a softening in that.

So our assumption is that it will be flat over the next couple of months, and there is one maybe topic which I mentioned shortly before, it also depends a little bit on the politics in China because a lot of the production is done in China, and lot of those factories have severe restrictions because of environmental issues in the northern part of China from the mid of October until the mid of March all the construction sites and there are lot of factories have to shutdown.

Two question. One is one think India.

I was just wondering, if you can compare as the competitive environment in India versus China whether you think there is more or less competition and what the pricing environment looks like now? And then the second question was on China, just wondering given the environment with the developers, if you think that their cash charges, if you think that there is any pickup in cancellations or if you're having trouble collecting on any of the previous projects?

I think I'll answer the first one competition and pricing and maybe the cash situation I would hand over to Urs. So competition remains fierce.

I think we do have different type of competitors off course we have the larger multinational companies. Everybody is interested to increase the prices because everybody is facing the topic of higher input costs.

And this year, we are feeling that also some of the competitors are trying to increase prices. Unfortunately, in every job you find someone who just has dropped the price.

So if you have a bunch of five competitors four are behaving reasonable and you always find someone who is maybe not so reasonable. I think what I clearly see is that smaller local competitors they’re more under pressure, then you look on the officially published results, they’ve quite severe problems in their profitability which almost dropped to zero percent.

So they are in a quite surviving mode and if you’re in a surviving mode, of course the worst thing what can happen is, if you don't have enough order. So they are putting a lot of pressure on the pricing.

But overall I’d say on the whole landscape in the residential area where you’ve less single unit, where you’ve certain single unit jobs or 10 units or 20 units, prices have slightly come up. And in the commercial public transport, high rise and key account area, prices are still under pressure.

So overall I would say that low single digit the price level has been reduced in the third quarter. Maybe to the topic of cash Urs, you can say what we are doing and how the situation is for us in China.

So, the situation in China remains ever demanding in particular in terms of accounts receivable collection. As you may know, we’re collecting money based on the progress down payments and on the status of the new installation project, and there’s cash attention off the final billings, and that lost part of the collection is the most demanding one, when equipment is already handed over and to collect it then off approximately one year.

Now overall seems many years our performance scheme cash flow generation ending collect chances evenly is actually really strong and positive. We’ve a very robust and solid collection organization in place in our operations.

Lately, we see that in particular with large accounts and particularly governments public accounts, payments are slowest than what we’ve seen recently. They’re slower.

It takes more time to go through the full administration and to accomplish the final accounts. But having said that, the default rate with such customers is really extremely low statistically and we’ve a lot of measures in place to work on it.

I wonder if you could just let us know why do you think the process is ticking slower if these are customers that you expect to pan in what would change for them?

Well it depends on the tier city and in China we’ve a lot of infrastructure projects in various tier 1, 2, 3, 4, 5 cities. And what we see is that in the lower tier cities where you have metro or airport project and it takes more time.

So, it is a bit more difficult for those provincial authorities to have to phone and to organize it there also with central authorities. That’s a bit my hypothesis about this and they just have included additional measures and process that to make it a bit more cumbersome to collect it.

I just want to clarify that my first question was actually with regard to India. I’m wondering, if you could contrast it ahead of landscape in India versus China?

I miss that sorry I miss that. Right, so now to add India in our cash flow generation, the picture is similar to China as we have in both countries, still a very weight on our new installation business, so it's really related to the payment terms and the collection efforts on progress payments and retention payments and the schedules are similar.

Have been said that and statically if you compare it to cash collection in India is more difficult than in this in China and this all different customers segments. Here you have even more the difficultly this customers really having liquidity bottleneck, but I don't see the short-term, it is more multiyear that new customers have limited liquidity and collect money first before payment paid, before they pay to the suppliers, so clearly more demanding India versus China in terms of cash flow generation.

Just one question left regarding your headcount which increased by more than 6% in the third quarter. How much of this increase is related to acquisitions I mean which businesses or region are you currently adding?

Is it mainly services? Or are you also increasing your headcount in manufacturing?

Thank you Bernd, it is mainly driven by the service business because the service business is very labor intensive. So, we are adding so many units due to our conversions to our service portfolio.

So it's clearly driven by the service business and not driven by manufacturing. So, we do not hire or we do not substantially increase our headcount in the manufacturing area.

If you look on the geographical area, it's all most all over the globe because our growth is really coming everywhere. So you remember that we have strong growth in America, strong growth in Europe but of course with conversion in Asia-Pacific.

So it’s almost equal in the differential graphic territories. But it's mainly driven by more service people.

Few question on my side one after the other. So first one is on IFRS 15 revenue rate recognition.

Do you have any visibility Q4? Will there be a bit of a more negative impact from headroom after the strong Q1 we have technically?

Thank you for this very good question. And indeed, as we always indicated, we will have operating revenue growth slowdown in the specific towards the Q4.

And this is because this is the new methodology. We recognized an installation of modernization revenues at the time of transfer of control which is the start of installation on site.

And versus the old methods where we have recognized royalty progress actually this prefers dollars or Swiss francs put on the project. So here we have a alter cognition of NI and growth revenue recognition.

And this clearly has an impact on Q4. And I clearly assume that this is quite significant slowdown.

Also having said that, of course that there was an impact in Q1 that you remember. This is a very strong increase of the restatement of IFRS 15.

Then going forward for 2019, it will be apple-to-apple and no impact anymore on this new IFRS 15 standard.

The next one is again on the wage inflation. Is that the topic that mostly concerns you affect Europe or U.S.

mature markets? Will it mostly be impacting your service business or also new installations?

I mean outside you modulation program, if there any way to mitigate wage inflation. Can you kind of adapt your service contracts?

So can you give a bit of color how strong could affect you and what measures you will have in place?

So labor inflation always place in the business where we have a lot of labor content. And the lot of labor content is really in the field.

It's not in the manufacturing where the labor part is really mid-term sometimes even low-single digit. It is much more in the installation of new equipment and in modernizations and it is in the service business.

So there you have most of the labor, most of the people working. Now the inflation of cost is mostly in the area of Europe and in the area of North America.

But it's also increasing now in our emerging markets. Because the share of existing installation business compared to the new installation business is increasing.

So also in companies like China or India wage increases are becoming more and more severe. Now, what we do we against that, I think we look ahead and we still ahead.

We will be able to have better and more efficient service models. So this will be future mitigation for our labor increases.

But it will not impact us really severely over in 2019. We have to work on traditional efficiency measures.

Now F3 also helps us. Why F3s fit for the future modularity program.

Why it is so important because the new installation, a lot is on this subcontract, and we have seen that subcontractors are asking for severe price increases because this labor also becomes now a bottleneck. So with new installation methods we can do more work with the same amount of people.

So we will not be able to mitigate -- we will not be able to eliminate labor increase, but we can mitigate the efficiency programs, that’s our plan. So we see clearly also for 2019 that labor cost increases will be mitigated by efficiency programs.

And in the service held off the pricing of the contract, how does that work? Are they of longer term nature?

Are you more kind of quoting those contracts?

Well, a lot of our service contracts especially in the more mature markets are index based. So the different indexes, there is -- there are labor indexes, labor cost indexes and there are consumer price indexes, but it is usually it has a time lag of up to one year.

So whatever has happened the year before, you then can use in the year afterwards and this is quite an automatic process where we increase the price of course then usually customers are coming back and they try to renegotiate. But I think we’re price good for take that with our index based pricing model for service contract.

Okay. And then the last question on I mean you have a heavy depreciation of emerging markets currencies.

Does it have any impact that I don’t get financing for real estate projects in countries like Turkey, Brazil and so forth? Do you see any effective slowdown or building projects?

Well I think the two markets you’ve mentioned these are markets of concerns. Yes, I think in Brazil we were a little bit positive in the first half of the year.

I have to say I see more clouds in the sky. I have to say now the political situation is not easy.

It has -- we had some strikes in the mid of the year for drivers all over the country, there was shortage. Now we have the latest news is that probably GDP will not be growing as we expected.

So I think Brazil is we'll have another challenging year ahead of them. And currency is only one of the elements, I mean the real has depreciated really I have to say for us not good because it's one of our strongest markets we have.

Now in Turkey, the situation is a little bit different, there’s in fact a good fundamental base for growth but we see that the market will shrink this year in the second half, really shrink, because there's a lot of uncertainty and some of the uncertainties given politically but some of the uncertainties also based on economical topics because with decrease of the government to convert all foreign exchange contacts into Turkish lira with the redefined exchange rates and a lot of things came to a halt and standstill. And everyone now tries to find out what does that really mean for them.

The same for us, all our order backlog so be converted into Turkish lira and sometimes we already have paid the material in US dollars that’s now the income the in Turkish lira at, not at spot rate, but at the predefined rate of the government which his 377 . That’s the spot rate of by the predefined days of the government which is 377.

That's the spot today for January 2 plus the inflation of the Company. So these acts together an exchange rate of about 4.5 but the actual rate is 6.

So we w will now on every single contract 25%. So of course are in negotiation with customers for these means that everything at the moment this could on hold and this has to be sorted over the next couple of weeks and months.

And I think this has a negative impact on the real estate and construction industry in Turkey.

Yes so good morning. Thanks for taking my questions I had few.

And on the sales cost. The service business in China, which you have been doing very well over the last few quarters and the years.

Can you confirm these trend to continue i.e. clear double digit growth?

And then on that topic as well the service frequency in China. I think there is some changes, perhaps elaborate on that I will go question-by-question please?

Yes okay. Good morning Torsten, and yes, we can confirm we still have a very good double digit growth of our service business.

Like in the past there is no change, so this machine is really running very well. And the second question was?

The service frequency in China, I don't know, if there are some changes going on there. Perhaps you kind of elaborate on that.

I mean your expectation business service et cetera, et cetera.

Exactly, so, today it's still the case that their reporting days to have to do service visit with two persons. So, this is the highest amount of service visit all over the world.

One key reason is the government is very much focusing on safety and quality. And they believe in the past, more often you go the better you can create a service level.

I think there are trends of course with digitization. And in our case of Schindler ahead, there are opportunities that you can have better service model meaning maybe some visits less but you are controlling via the digitization.

This is very important because some of the safety is even tell you how many units service technician maximum allowed to maintain. And if you have like Schindler ahead, the increased number you are allowed to maintain.

So it helps you in your service efficiency model. I believe over the long term, this will further change.

I'm quite convinced that the more we digitize our industry, the more there is the chance the government really says, we can go away from this requirement of 26 times too. And there are discussions about that, but there is moderate in my opinion any decrease or regulations launched.

And then speaking on IFRS-16 as you have elaborated before, there will be I think a significant clear impact on the sales growth in Q4. Could you quantify the impact of course not give the sales growth guidance but the impact.

So we make our estimate underlying sales growth and deduct the negative impact.

So what I can state is the following. In the fourth quarter 2017, the local currency growth was 5.9%, FX-adjusted and local currency 7.7%.

And for the fourth quarter I, do we expect and adjustment of 2% to 3% related to the IFRS 15 impact.

But this is the only affecting obviously sales not the order intake? Correct?

Yes.

Yes. And then speaking on the order intake, if I may, you have explained before on the question of Martin Flueckiger that the impact of the sequential flow slowing growth might be driven by less large projects in Q3 verses H1 so to speak.

Do you expect in Q4 the impact of large project speaking about the order intake to get back to the trends with H1 or continue as what we have seen in Q3? Speaking about large projects?

We have a lot of awards. We have a good award pipeline, and we are discussing a couple of large projects to come.

It's very difficult in a time frame or 3 months to make a proper forecast, which ones are coming through your books and which one not? But there is enough food let's call it like that.

However, I want to remind you last year Q4 was an absolute bombastic order intake quarter, so the last quarter of last year, we were at CHF2.9 billion order intake. It was on that time the highest, it was only the second quarter this year was higher than the last quarter of last year.

So, last quarter, our last year's quarter was really, really, very, very strong. So, I think it will be possible but it is tough to beat that.

And this is also in all our guidance is the last quarter of 2017 has been in terms of top line extremely strong. So we were a little bit careful with our guidance in OIT but also in operating revenue that there might be a little bit more of a flattish development Q4 to Q4 because we are a big baseline impact.

So food is there, we will have a good quarter I have no doubt. But it will be depended really on single job whether we can book them or not.

But the pipeline is there.

And just the last question speaking about guidance or indications you are giving about EBIT margin, the finality about EBIT margin improvement has for good reasons, you loaded a bit worse and then so is an estimate say of flat to say 20 basis points margin increased for the full year, year-over-year, ceteris paribus, no changes, so to speak, a good assumption? Would you agree on that?

We'll have to see. Year to date, we are at 11.7% and that's also for the single slot of Q3.

So kind of constant development and you have seen and heard now the headwinds we are challenged very recently, raw material costs are now going down even flattish or even an inch higher in Q3. We have the FX headwinds in the developing market, which is a clear burden to us.

And therefore, our quarter four will be a flattish constant development for sure with a chance that we inch very slightly higher.

I think 20 basis points is a very optimistic. Then a lot has to happen in Q4.

You should also not forget the euro was between 170 and 120 in Q4 last year. At the moment we are somewhere at 114 and 115.

And of course European markets are strong markets for us so high-performing markets. So this gives a certain translation negative translation impact if you compare Q4 to Q4.

So this has not helped us, had to improve really the margin compared to the last years first quarter. But we are confident that we will stay where we have been last year and then it needs a little bit of luck to improve.

Operationally we have everything in place, I have to say, operationally from all our activities everything is in place as we have the slight improvement as we have said all the year. But it will tremendously depend on currency situation not only the Euro but especially also Turkish Lira and the reals and the rupee in India, because India for us is also a very good performing market, that is also heats us at the moment.

So operationally I believe yes, we are doing well but taking all this into account I think the headwind is quite severe.

It's just a quarter, the big picture obviously, depends on other things like we have discussed Chinese service et cetera, et cetera which you are doing extremely well. Thanks for that.

I wanted to ask two big picture questions. So you sort of increasing exposure to large projects in China and we know developers are emerging and coins are getting bigger in China.

But given your competitive edge in large projects, public projects, would you say this is more of a sales mix change for Schindler as opposed to your peers in that market?

I believe the market itself has certain strength to large projects. First of all because the government has pushed a lot of infrastructure, so I think if you look on the buildings and the spend within the construction industry there are also certain shift to large projects driven by public transport.

I think it is mainly a topic of public transport, airports metro stations railway stations. So I think this is a market shift.

Now maybe we have benefited more than others from that because it is a domain where you need especially a lot of escalate this. And we are in a very strong position in the public transport escalator area.

So we have benefited a little bit from that. Now the merging of large developers, their purchasing power just becomes bigger, this is usually not a very good indication for pricing.

So I see that of course some developers are merging but also the top one 100 developers that higher and higher share of the total market. So there is a certain consolidation process and concentration process going on.

And this has not helped pricing.

And if you could shift gears to perhaps the labor shortages you mentioned, perhaps this is more of a phenomenon for the U.S. market where its full employment.

Would you say that you would struggle to add capacity because of tightness sin the labor market maybe in 2019? Or it's just an additional cost, but you will still be able to find the technicians especially in your services segment?

A very good question, I think it's not only a question for one year I think this is something we will face more and more and more. So there are two different trends.

One is there is a higher demand on labor because all the companies are growing all the service portfolios are growing so there is a higher need but even by the increase in service business. On the other side there is a competition between industries less people are willing to do a dirty job everybody would like to go to a nice office job while collar job and less and less people are willing to sit to blue collar jobs.

So, this is I think a challenge for whole industry. I'm not worried that we don’t have the capacity for 2019, I think it's more a cost issue why because since many years we are investing a lot into employer branding and to showing carrier process to people into making Schindler of area practice employer not only because of salary but also that we have the good chance and the way how our culture is and that we care that we can do a huge carrier in our organization.

We are working with a lot of technical schools, we have many countries now with 26 programs which are similar to the ones in Switzerland or in Germany, and this is highly appreciated by the labor market. So I think we are doing quite well in getting the capacity in the markets because we are attractive but we are facing cost issues because of wages increases.

So it's not a capacity topic at the moment for us it's always at the limit of cost but it’s more that cost impact which we have to mitigate.

Actually, a big picture on the component harmonization program, and I'm talking only about the gross impact and not a net of potential headwinds. So I think the 15% 65% to 100% has been very clear.

I would like to touch upon the 200 million plus gross cost savings. Is this the number still and has this your perspective on this number changed since the last time we talked?

I think I recall you mentioned it what the price budget savings you were achieving and installations, so has this hedged your expectation when it comes to sort of 200 million the strength? Or has there been any offsetting fed those that you would need to mention?

So when we talk about, we talk about the run rates, so we try to be somewhere at a run rate end of '19 which somehow has this 60% to 65% of savings, so not all will impact one-to-one our few and well by 100% because it is a ramp-up. First of all we can confirm our saving plan, we have communicated several times.

So we believe that we will be 200 million plus so it might be even at least the higher. It depends on the volume you have savings per unit and the more units you sale, the more of the absolute savings are, not relative on what the absolute savings are.

So it depends a little bit on the volume and we are well on track with our volume as we have seen we outgrow the market at the moment. So we can reconfirm the numbers and we can reconfirm when it should start to impact our P&L.

This has been mainly the -- it’s mainly driven by material cost savings so why 200 million plus because there might be also some additional savings on the installation side, and this you will know after introduction that it really will happen. We’ve seen in the car it happens yes, installation savings are coming besides material savings, and so I am confident that at the end we’ll have a plus and not only stay all together on the 200 million gross savings.

As we’ve said some of it will be unfortunately deteriorated by other manufacturers; so raw material prices are a negative factor for it, wage increases are a negative factor for installation savings but gross lines I clearly can confirm that we’ll have all the period of those of these introduction the 200 million plus gross savings.

You mentioned run rate was absolute savings, if you think about 2019 should the absolute savings be somewhere in between the 15% run rate at the end of this fiscal and the 65% run rate at the end of the next fiscal?

Correct.

Or would you see it rather at the high end?

The ramp up will be during the year, so it’s probably that if you take the middle point between that and it would be 40%. This is probably slightly at the upper end I have to say because maybe there’s something like 30 to 35 something like this.

So not a large rate, not a large rate, depends a little bit on when our shipment happen in next year. The late the shipments happen the more impact it will have from the savings because we already have introduced the new components in the shipment, and it is difficult to predict at the moment what is exactly the seasonality of shipment next year.

That’s the reason why I am -- I have a certain bench, but maybe it’s slightly below the average point which is at 40, but you’ll see during the next year. I see it's nothing to be worried.

All the programs are on track. We are on the pressure.

It’s my complex, but the team is working very good and we’re confident that it’ll show good progress next year.

May be took it a little head of myself here, but if I take the 35 and multiply it with 200, and I look at the absolute headwind that you mentioned in your deliberations before. Is it fair to say that you also have an aspiration to expand margins next year ’19 over ’18?

Well, we’ve these inspirations this year and we’re struggling to achieve because of some other factors, but it is true if you remember our key targets are always we want to grow faster than the market. We want to improve profitability, primarily in absolute but also in relative terms and we want to have a winning team.

I guess we’ve the condition it will depend not so much on our own performance it will depend much more on the environment we’re in and there’re some negative signs I have to say but I don’t want to make now any down scenario or back scenario we will we’re optimistic that we can further improve our profitability.

So maybe on the current performance very briefly, you mentioned that the 15% is end of year run rate. I think it fair to say that harmonization program has not had a meaningful impact on your quarterly numbers.

Thus far and do not have on the fourth quarter.

Well it is, if you take 15% out of 200 million than its easily calculated 20 million as a run rate and it will come only comes in the second half of the year. So there is the impact on the absolute figures is good enough to compensates the impact of raw material and tariffs we had in the second half of the year but has to helped us to improve our overall margin, but if you will have started, we would have probably have a negative margin development.

But the bigger offset for your headwind should be the existing efficiency gains including the harmonization?

Absolutely, as we say raw material was more than 100 million impact gross, so we have lot to work on purchasing and actual design changes to mitigate this. You’re right.

Okay. Maybe one last point, one of our key competitors mentioned that would be pilot programs in China, one pilot program for remote maintenance and I thought it very exciting particular in the context of bi-weekly maintenance intervals you have to do people, so potentially moving to needle and say largely.

So my question clearly is are you aware of that, are you participating, could you put some light on the potential timeline for broad base introduction.

Well broad base introduction in this country always depends on approved by the government. I think it's something everybody's working on we’re aware about first of all that competitor and also the program they have.

We’re on the discussion with local government bureaus, because if you’re doing pilots usually, you do with a certain municipality and you have similar discussions with them. And by the way just to add that, great support also by our department.

As you know in our program we’re working very close together with Huawei who is helping us also to connect and to convince and to open discussion with those efficient takers.

Just on the M&A impact, could you give us an idea of how much the contribution is to top line and year-to-date from the acquisitions, so I can have made an idea of how much still to look forward to when you annualize of 2019. And what is the level of amortization that you taking to EBIT related to acquisitions.

Alright, so the impacts of our acquisitions in terms of operating revenue year-to-date is about one percentage points and also for Q3 and I expect that we have same similar impact for the full year of 2018, so this clearly our target to add to our organic growth 1% also going forward. And in terms of our amortizations of intangible assets, so we do amortize our service portfolios depending a bit on the transactions on the nature of the transaction, the size of the transaction over 10 to 15 years.

And the impact to the bottom line, I'm just checking, Andre.

Sure thanks Urs.

Maybe I'm coming back to within 2-3 minutes.

Okay sure. The other follow-up I had and I'm sorry to be paying on this.

So we've gone through quite a few drivers of the profit bridge in 2019 in terms of inflation and offset factors. Can I run through what taken away from this call, and then you tell me what I've got wrong.

So you said raw materials impact is going to be smaller in 2019 than you are seeing in 2018 based on current rates et cetera. And then you said your pricing measures will more or less mitigate that and hence neutral overall.

Then you said labor inflation will be more severe in 2019 than what you seeing in 2018, but you have got efficiency measures like F3 that are compensating for that. And there is some effect from price escalators built in the contract, into contract albeit there is a lag there.

So that labor versus efficiency measure in some price is also neutral as far as I could understand. And then you also mentioned component inflation where your suppliers are coming to you and have taken a lot of pain already in last sort of 18 months and they have to, you may have to except from the price increases there.

And that is kind of left as it maybe unmitigated or modularity to offset.

Yes definitely. This is one of the elements.

So we clearly want, we clearly want to mitigate this, let's say. Additional inflation on the raw material so far is driven by the higher raw material cost and part it's driven by past raw material increase as we test not been pushed completely through to us.

So this should definitely compensate by our modularity program clearly.

So when you talk about raw material increases and now being balanced out by price increases. We're talking about pure raw material impact or does that include the component inflation already?

No. This is in fact raw material increases which have most been affected by us.

As I said the gross impact on our suppliers' input cost has been more than CHF100 million. Now as you know we have mitigated a lot of that, have mitigated by new components, have mitigated by design changes, we have mitigated by negotiation.

So at the end we do have negative impact something like 40 basis points. Based on our backlog and also let's say immaterial inflation, we will not able to somehow eliminate.

Now this was used for '18. Now we don't see we're able to pushback, of course they come back now towards the end of the year.

So if you have more than CHF100 million and you were able to bring it down to 40 million. There is still something like 80, 90 million left, that people come back again, and at a certain stage you know you have to give in and you have to do some price increases.

Because of past raw material cost increases and this definitely we will compensate with our modularity program because the modularity programs will try us to bring to a new level to a new cost base, well than maybe the some raw material price increases we have to be win, we are maximum on the level we has been a year ago. And of course we will try to even be better than before.

Last question I had was quite broad based just thinking about China market profitability and that dynamic of large projects pricing pressure being severe. It looks like this is a market segment where because conversion rates are quite high.

And I think in these large projects, they often comparable to what we see in developed world. That is probably what has been driving this kind of excessive severe pricing pressures of to their size and revenue contribution, but also the fact that you get the service revenue and with higher probability there than in normal residential business.

Where is that large project kind of profitability is right now market wide? And has it come down substantially or sufficiently now to think about stabilization or is there still a way to go there towards that sort of mid to low single digits where it is in developed world where it and becomes all about the service rather than making money in new equipment.

I think it's a very valid point and probably not only a quarterly topic. This is much more a strategic topic.

I think there is a certain shift maybe you know not only for us, but maybe also for others where you change your mindset. In the past, China was all about to make the money we’ve selling your equipments, that’s it.

And the lot of market players did not care so much about service part because the margins in new equipment were absolutely fantastic and good enough. Now of course there is a shift and I think there's also a shift in mindset the service becomes more important also driven by the government.

And this you see especially in large project what are large projects. Large projects are usually public transport areas where the safety is fundamental so you have to have a good service model to generate the good safety level.

Or very often it's our towers. So high value commercial projects and in those areas there is a good chance or a higher change to get a good service contract afterwards because you don’t compete with smaller companies.

And so usually the average price for such an installation and service is much higher than the average price you have for a normal residential elevated. And I think to a certain degree, this future benefits of services prices in the new installation offer.

So it goes a little bit into that direction I think the people are willing to suffer more in the new equipment price, because they would like to get a high value service contract and this drives down the new equipment price and I do not believe that we are already at the end, because that all depends whether they are good such enough such large projects in the market or not. And this is also depending on the government who there are some indications that the one or the other announced infrastructure project is good on hold.

Those there working they are continued, but some of the let's say announced ones have been good on hold. So then the case becomes smaller, and then the price inflation is becomes higher.

So do not see that at the end of the pricing pressure for large projects.

Thank you that's very insightful. And I just want to hear number should I circle back offline?

Certainly, no, so our year-to-date impact on amortization is close to CHF20 million. And for full year, it will be depending on future more acquisitions something within CHF25 million and CHF28 million.

And by chance, do you have a comparison for 2017 for that just to get an idea of the incremental pressure?

Yes year-to-date versus last year very similar.

Just very quickly two questions, board pipelines keywords. I think Thomas mentioned a few minutes ago.

Could you talk about the latest development in your award pipeline in Q3? Is growth waning or accelerating that will be my first question?

Well, the awards of course we always look, what has been converted in 2018 in order intake. So the award pipeline, it depends on new awards you get.

I think you are on a stable level over the quarters in terms of awards. And then as soon as we get the down payment, the award is converted into order intake.

So we were very strong in converting in Q2. We were a little bit less strong in converting in Q3.

I think we are expecting a normal conversion in Q4. So I think the overall pipeline then stays more or less healthy and stable.

So there was in order to have exceptional additional awards compared to other quarters but also not exceptional low awards compared to other quarters. It was very, very stable.

Okay that's interesting thanks. But would you agree that this would imply that order intake growth should accelerate again in Q4 despite that the tougher comp?

Well, as I said, it depends on how large you can convert. And a lot of those big jobs are public transport jobs.

Public transport is governmental driven. And in the government, if you want to get your first payment, in some of the areas I have seen one down payment later where there have been 16 signatures.

And you don't get the payments, if they have only collected 15 signatures. So, it is not that easy to predict when you get all the signatures in order that the customer usually then makes the first down payment.

I am a little hesitant to say which one will become an order intake in Q1 and which one not.

Okay fair enough. Thank you so much.

And then finally just talking about labor cost inflation, I understand your arguments, but I'm just wondering whether you could provide some granularity on the quantitative aspect of it. Are we talking about 3.5% to 4% 4.5% to 5%.

What kind of labor cost inflation or wage inflation or wage inflation should we expect for 2019?

Well, we are at the moment we are trying to make our plans for '19. And it is one element we are discussing, because, of course, a lot is negotiation.

But I think, we will be, if you say 3% of later, for example, of labor increase and you have like CHF3 billion of cost of personnel, this is an impact of CHF90 million. This is a substantial amount.

Now if it goes to 4% where I don't feel at the end we will beyond that high level all over the world and he would already be around CHF120 million or maybe the more people we have to go towards CHF130 million, CHF140 million. So this amount becomes really substantial for us and we see even in the Company like Switzerland, companies have announced that for the first time they start to increase salaries higher then they has already in the past.

So at the moment we are still finalizing our plans for '19, and maybe when we have the yearly press conference and also on the road shows, we might be able to give a little bit more insight into that.

Two follow-ups, if I could. Just returning to wage inflation, thank you for the explanation just then on 2019, if I think about 2018, I think in the past you mentioned 20 bps of wage inflation pressure, which, if I compare that to revenue.

Is about EUR 20 million which is only 4.6% of your annual wage bill? Is that right for the quantum for 2018 or have I misheard the past?

We said in the past that for '18, it was about 30 basis points.

Okay.

Presumption, it might be now and this is the direct impact. I think, if you take the pressure we have on top contractors then it's probably even a little bit above the 30 basis points.

And also the development when the final negotiation was happening in Germany, it is also has boost a little bit more pressure than the 30 basis points we have to announced somewhere, I think, in February or so when we did not have all the final negotiation. So it's probably 30 plus.

Right, but close to 1% inflation versus 3% of next year basically. And then on the modularization savings, if we exclude those, because I understand that as you've been very clear on them, you obviously have some general productivity in the Company.

And that's something you've always had, I don't know, if you have a target internally as a percentage of sales or percentage of cost of goods sold. I'm just trying to understand whether what that number is as a percentage?

In 2018 it is basically similar to what you've done in the last 5 years, and what you think you can do in the next 5 years? Or is there any change moving around there that we should understand?

So, in principle, when you go into the local organizations, because this is difficult, on a global scale, it's very difficult to talk about labor efficiency because it's very much driven on the maturity of an organization in the country and it's also driven by the capability of your people you know, how well trained are they. Are they young, are they older.

And it's also driven by the business split you have, how much is service, how much is new installation. But as a general rule, we give to all our organizations the task that they have to compensate labor inflation with efficiency improvements that’s the ultimate goal.

This has not always work because in some of our countries especially emerging countries you have labor inflation increases of 5%, 6%, 7%, 8% and its difficult to improve efficiency by these amounts. But as a general rule, we try to fully compensate wage inflation by efficiency improvements.

I would actually like to touch upon the last point that we just discussed. Of course net savings on the modularization kind of depends on the price increases.

You would have implemented without the modularization or stating it in different roads. I wonder how much you are willing of this incremental efficiency gains to share with customers on the roads.

Has that changed anything on your willingness to maybe to be a little more lenient on your sales prices to potentially gain market shares under current environment? And I specifically think of China where the market leader has implemented some very substantial price increases where I understand you haven’t seen that full of on your top line yet.

Maybe you could provide a little bit of color around the pricing, I know it's difficult but just a bit to understand whether this could be a potential headwind for the net savings from the modularization.

I think it’s a very good question, not easy to answer. But overall, we are ahead of our original plan in terms of growth.

I think in the last two three years we had very strong growth definitely far above the market development. So this has helped us to create bigger baseline where you can implement the savings.

So this helps us. Now looking ahead, do we consider that we will have exactly the growth rates in all the coming years?

This is something you have to balance how much additional volume do you want to get compared to the price you -- price increases you can implement. So, I cannot give you an exact number to say okay prices will go up as so this price sensitivity of demand.

This is a let's say a little bit crystal ball for us in the industry. Everybody tries and it is a dynamic process we are trying to increase and then we see what is the impact on volumes and then you start to balance it again a little bit.

But in China we definitely have made good progress. I'm not so convinced that all of our competitors have really increased price as they have tried which we have seen but then the figures are going down and they are in exactly the same dilemma as we are.

Volume against the pricing, I think for us important is we have kept our profitability level we had a year ago and now we are in our execution we are in the execution of the worst orders we had because it was an extreme tight gain in '16 and early '17. So I think it's also fair to say that we did not just reduced prices at all without thinking we were able to mitigate this price reduction with efficiency improvements.

Now, we see that in the first nine months, in that I call it more bread and butter business we have increased our realized prices definitely in China. A low single-digit I would say and so sometimes it's 2, 3, 4 at the same.

But on the other side off course we have the highest share of large protect I've just discussed before that the price competition is extremely severe still and this is somehow eliminating part of this benefit but we believe that we will be able to achieve better performances also next year in China than what we have achieved this year.

So maybe one last point is there any change on mix you would foresee for the current run rate in next year because that has been a big swing sector on the monitory very under passed?

Well, fortunately I have to say as we are pushing a lot into the growth you would assume that there's a negative mix change towards new installation but on the other side this impact negatively margin so besides this push in new installation we have extremely push also our service business to avoid that we shift to large in our business presence new equipment versus existing installation so at the moment we were able to keep plus or minus this mix stable.

I was not so much referring to new connection versus service, but more to average selling prices for like-for-like elevator.

Well, the like-for-like elevator I think we were able to increase our pricing. This we definitely have done and in the past there was a lot of especially in China was a trend to go to simpler elevators, and this I think has now come to an end, I think we are in the spread what type of elevator are requested by customers, I think we are now also quite stable.

So it's not only that we are improving the pricing but customer is asking for less. This does not happen anymore.

It's partly happened in high write elevators there we see that there is a certain shift moving away from top grade A buildings towards more let's say medium grade buildings with lower requirement. But in the mass business, I think there is no devaluation of the market size because customers ask for this.

Very clear, thank you very much.

Thank you. So, ladies and gentlemen, thank you very much for attending our conference call.

Thank you very much for all the interesting questions. I have to record it has been another almost two hours like the last time.

So it seems you are already interested in our performance and in our development and I would like to thank you. And I also would like to close now, and I'm looking forward to our full-year results conference on February 14 in 2019.

Thank you very much. Wish you all the best in the meantime I will be the first one who will be wish you good end off the year, Merry Christmas, and the Happy New Year.

Thank you and good bye.