Schindler Holding AG

Thank you and good morning ladies and gentlemen and welcome to today's first quarter 2019 results conference call. My name is Thomas Oetterli, I'm the CEO of the Schindler Group and I'm here together with Urs Scheidegger, the Group CFO who will take us through the financial details and the outlook for 2019 later during the call.

Schindler began the year again by delivering solid growth and the level of EBIT achieved was according to our expectations. Higher costs and the planned increase in expenditure on strategic projects could only partially be compensated in the first quarter.

However, short-term headwinds will not prevent us from further improving our absolute operating results over time as we have the right measures in place to ensure the company's success. As you know we think long-term and therefore rate growth in operating revenue and absolute EBIT over margin development since the margin can be optimized short-term.

I would like to draw your attention now to slide number 2 which summarizes the highlights of the first quarter 2019. Market developments noted in 2018 continued in 2019 while political and macroeconomic uncertainties increased.

The competitive environment remains tough. Schindler's innovative mobility concepts were very well received by the markets.

As a result all product lines and regions achieved growth, supported by a further increase in the order volume for major projects especially in the public transport segment. The Asia-Pacific region generated the highest growth, mainly driven by China followed by the Americas and EMEA.

Order intake rose by 6.4% in local currencies and revenue increased by 5.8% in local currencies and was well within our guidance of 4% to 6%. As mentioned earlier, higher raw material cost, wage inflation, foreign currency impacts, and the planned increase in expenditure on strategic projects affected operating profit.

EBIT reached CHF274 million, a decrease of 1.1% in local currencies and the EBIT margin stood at 10.9% on a comparable basis before restructuring costs and expenses for BuildingMinds compared to 11.5% in the first quarter 2018. Net profit reached CHF197 million.

On a positive note cash flow from operating activities before one-off impacts strongly increased to CHF391 million. Now, let's move to slide number 3 and the recent developments in Asia-Pacific.

Overall, the market development in the region was positive. In the new installations business, China remains stable and price levels in the mass market improved.

India recorded continued growth driven by the residential segment and Southeast Asian markets showed positive developments in some market segments. Service markets were healthy driven by the conversions of new equipments.

Our performance was strong in both new installations and existing installations. High growth in China was supported by large project wins.

I move on to slide number 4 and the Americas region. The U.S.

market continued to drive the region supported by the residential but also the commercial segment. Sustained strong activities in public transport and office projects were visible.

Latin America also recorded positive demand overall while Brazil's rebound flattened. Schindler did very well.

The performance of our North American operations continued to be strong supported by large project wins. Latin America displayed good growth despite a muted development in Brazil.

The existing installation business generated sustained growth across the region. Now, let's move to the last market region EMEA on slide number 5.

Overall, the region showed a bit mixed developments. In the northern part of Europe, markets were solid, but the Eastern European markets recorded signs of slowing growth.

In Southern Europe, positive trends were maintained while Turkey continued to decline. Schindler was growing in almost all the countries with solid performance in both the new installations and existing installations business.

We note that the lack of qualified resources more and more becomes an issue impacting performance on construction sites. After these first insights into the different markets, I would like to hand it over to Urs for an update on the financial results and the outlook for 2019.

Urs please?

Thank you, Thomas. Good morning ladies and gentlemen and welcome on my behalf for this results conference call.

I will provide a bit more details on the actual financial results. I will talk about our revenue guidance and I will also extend my comments to the IFRS 16 lease impacts.

I start with slide 6. In the first quarter of 2019, the order intake rose by 5.2% to CHF2968 million corresponding to a solid growth of 6.4% in local currencies.

Order intake includes all business lines; new installation, modernization, service, and repairs. Growth was well balanced between the new installation business and the existing installation business.

The Asia-Pacific region generated the highest growth as a result of significant progress in China. This was followed by the Americas and EMEA regions.

We were able to accelerate the order intake for large projects particularly in public transportation projects. As of March 31, 2019, the order backlog rose by 7.6% to CHF9.128 billion, which is equivalent to a strong growth of 9.0% in local currencies.

In the first quarter, revenue improved by 4.4% respectively to CHF2,582 million corresponding to a growth of 5.8% in local currencies. This is a good achievement considering the demand being strong prior year by baseline and despite foreign exchange headwinds in the amount of CHF35 million, mainly due to stronger Swiss francs against euro and Brazilian reais only partly offset by the stronger U.S.

dollar. Revenue growth was balanced between new installation and existing installation activities.

The largest geographic contribution to growth was generated by the Asia-Pacific region, particularly strong in China, followed by the Americas and EMEA. Reported operating profit reached CHF274 million or 10.6%, a bit lower than last year of CHF281 million respectively 11.4%, as we have expected it for this quarter.

This is before restructuring cost of CHF4 million and expenses for ramping up the start of BuildingMinds of CHF4 million. The EBIT margin was 10.9% compared to 11.5% in the first quarter 2018.

There is also a headwind of foreign exchange impact of CHF4 million. The EBIT adjusted with those three items restructuring costs, expanded into BuildingMinds, FX impacts is CHF286 million at the similar absolute level as in previous periods.

EBIT is impacted by cost headwinds not fully compensated with cost savings as those are scheduled to materialize later in the year. Headwinds have been continue with higher raw material costs, wage inflation, planned strategic investments for Digital Twin and Schindler Ahead and backlog rollout of our lower margin projects in China sold about two years ago.

Cost savings are staged as per our plans, particularly from the modularity program and those other efficiency measures and will materialize mainly in the second half year. Net profit totaled CHF197 million versus CHF208 million in the previous period, negatively impacted by finance results mainly driven by hedging activities.

Cash flow from operating activities reached CHF263 million and was impacted by the settlement of pension obligations to third parties in the amount of CHF157 million, enabling the group to reduce our employee benefit liabilities significantly to only CHF320 million for the whole group. Excluding this one-off impact and the positive impact of CHF29 million of the introduction of the new accounting standard IFRS 16, cash flow from operating activities improved strongly like-for-like by 18.5% to CHF391 million.

The increase compared to the first quarter of 2018 is primarily attributable to net working capital optimization efforts. Last but not least, I'd like to mention that the introduction of IFRS 16 leases had no material impact on EBIT level nor on net profit.

It has expanded our balance sheet by approximately CHF400 million. I would like to conclude my overview with the outlook for 2019, which you can find on slide number 7.

For 2019, excluding any unforeseeable events, we expect to continue growth -- growing faster than the market with revenue increase between 4% to 6% in local currencies. As in previous years, the annual forecast for net profit will be provided with the publication of the half year results on August 14, 2019.

With this, I would like to hand back to Thomas.

Thank you very much Urs. I think it's now time for the Q&A session, and we already have some people in the row here.

Yes, thank you. Good morning.

How would you characterize Schindler's ability going forward to pass on labor cost increases to customers, especially factoring in large projects many of which are in the infrastructure space in emerging markets, government sponsored and associated with perhaps most likely competitive bidding process are increasingly making up a larger portion of your order book these days. And related to this in which of the functional areas of your business would you say skilled labor shortage is being mostly felt perhaps it's in maintenance service over manufacturing or production.

In new installations, you make use of third-party installers, but you also highlighted impacting performance at construction sites in your opening remarks today. And is this issue most prominent in Europe for you or in China and North America, you're also feeling increasing pressure and again in which specific functional areas there?

Finally, what about the position of your Asian competitors here in Europe on this topic, presumably on maintenance service they are all feeling the small pressure if not more or do they benefit from lower cost advantage of production in Asia? Thank you.

Thank you. Good morning Omid.

So I have noted three questions. First of all, how can we pass on labor cost increases?

Labor cost increases are happening all over the functions and in all the different areas. If we look more into the businesses, you have labor cost increase, of course, into service or existing installation business.

There in fact usually in many contracts, service contracts you have an inflation clause included. Sometimes it's linked to the labor cost increase, so it is usually an index about labor cost increase or it is linked to the Consumer Price Index.

These are usually the two indices we have. And we do have in many contracts the possibility to increase our prices for the service contracts to mitigate those labor cost increases.

So I think in the service business, we are pretty good hedged. Sometimes it's not always one-to-one.

The cost increase of the year is also the increase of the prices, because sometimes there is a one-year time lag, because the -- as an example, if labor cost have increased last year by x percent then this is the baseline for the price increase this year now with labor costs increases are higher this year then there is a certain mismatch. But overall over a couple of periods, I would say, we are able to pass those labor cost increases to the market.

A little bit different is in the new equipment business because there the time lag is longer. So if you have labor cost increase happening now, of course, we are calculating with that and we try to increase our prices, but the labor cost increase hits immediately just on hand.

Now you are right, usually the -- a lot of the new equipment business is also fulfilled with subcontractor costs, and that is not a big difference in labor cost impacts, because also the subcontracting companies do have higher labor costs and they try to pass that on to us. So we are little bit in sandwich position.

So labor cost impact is more negative in the new equipment and modernization business, and it's less an issue in the service and the repairs business. The shortage of labor is mainly in the -- we call it direct productive people.

So it is fitters, service technicians, or subcontractors, and it is almost all over the globe I have to say because everywhere we see now the shortage in labor. In fact it is a little bit the case that people don't want to work on construction anymore.

That's one reason, but also we had a lot of boom and we see in Europe, we definitely have the shortage but we also see, for example, in North America where the fulfillment is mainly organized by the unions, and the unions do have a bench of people they can offer to you and this bench has become extremely small. It is maybe less an issue in China I have to say.

In China, we still see that we have the capability to get labor, but we have more cost pressure because according to the Chinese government those functions in -- on construction are maybe a little bit lower in the overall salary, and they would like to increase the salaries of those people over proportionately. So there is a little bit more cost pressure, but there is less shortage.

Last question about Asian competitors in Europe, usually I do not want to comment too much on our competitors, but until now there is not a lot of activities of Asian competitors in Europe visible.

Okay. That’s brilliant.

Thanks for the clarification there.

Thank you, Omid

Thank you very much. I have two questions.

First wanted to ask you on BuildingMinds, how will you update us on this going forward? What should we expect in terms of the path over the next few years on the contribution from this initiative?

If you could just elaborate a little bit on that? And then I just wanted to check on your commentary in the press release that you've strengthened your market position on the back of the 6% organic order intake.

We've seen a few others growing even higher. Can you comment, on which regions did you improve your market share, and which regions you might have just basically getting further color on that one on the market position?

Thank you.

Thank you very much, Daniela. Well in BuildingMinds, we have mentioned that already with our annual closing or after our annual closing, BuildingMinds is a startup company.

So we have elaborated a little bit on that. It is a very early stage.

We have great hope that we can open a new territory in our business, but it's a very, very early stage. And, of course, once we have further information about the final MVP and also the first customer solutions, we will update you on a regular basis.

As in every startup company it's -- of course we have a business plan, but in the startup I have to admit, you have to be a little bit more patient at the beginning. In this year we will only have an impact of cost, mainly of cost.

And it is in the magnitude we already said in the past something like CHF40 million for the whole year. Now I think Urs maybe you could elaborate a little bit on the different market positions on the strengthening we have there.

Certainly. Good morning, Daniela.

So our total order intake in local currency was growing 6.4% and this is really very well balanced across the business lines, new installation versus existing installation with particularly strong growth in the public transportation segment and also in the existing installation with repairs. When we talk about geographies, Asia-Pacific was a strong growth driver, and thereof, we can say China was particularly strong, growing in value in the mid-teens and in units, in high single digit growth for the country of China, which is very pleasing for us.

But also in Americas, we were growing strongly particularly North America and Southeast Asia was another strong growth driver. But as a wrap up, we can say we have good and strong growth across business lines and geographies is our very well diversified business.

Thank you.

You're welcome

Good morning. Thanks so much for taking my questions.

Can I just start on the margin? Has the Q1 generally develop in line with what you expected, or was it a bit lighter on profitability?

I know you flagged the phasing of headwinds versus savings through the year being negative for the beginning of the year, but just wanted to really check if your kind of stance on profitability for the year to be overall stable ex BuildingMinds investment is still there or has that changed at all?

Good morning, Andre. Yes it is true, the margin was expected in that magnitude.

Honestly, I mean if you talk about something like 10, 20 basis points we -- to be super precise all the time in advance is maybe not feasible, because it depends a little bit also, which kind of large jobs you are executing at the moment. To give you an information, we were very, very happy that at the beginning of April, we have successfully completed and also opened the International Airport in Istanbul.

It was big, big job. We have recorded three years ago and we were executing that towards the end of the year and beginning of this year, and now we are happy that this works very well.

But jobs like this, of course, short term if you look only on the single quarter if you have a major part and this was also elaborated by Urs, you have a major part of your business in new equipment by certain projects, which might have maybe a little bit of lower margin then this can impact you quarter-by-quarter. But we knew that we have headwinds which are impacting us all the 12 months.

So the labor and the raw material costs as well as the planned investments into our strategic programs. And all of that has quite a sizable magnitude of maybe 100 basis points on year-on-year, quarter one 2018 to quarter one 2019 quite a sizable negative impact.

And as we have elaborated in the past, some of our efficiency improvement and cost improvements are ramping up over the year. So we don't have a flat margin to be expected during the year.

We have a slow start and then we will continuously improve and maybe Urs, you can give us a little bit of an outlook how we plan that year 2019 will look like.

Yes. Thank you, Thomas.

It is correct what we before said. Quarter one is according to our expectation.

Since cost savings and headwinds are not synchronized in 2019 we have strong initiatives running on track particularly on the modularity program and this is scheduled per plan. We are rolling out the components later this year in the second half year and then materializing savings.

And this is not yet the case now early in the year and also leads a bit to a transition year in terms of our procurement savings particularly now quarter-by-quarter.

Got it. Thank you.

My second question was on modularity, but you've confirmed that is running on plan. So I'll move to the next one.

Can I just ask on the backlog margin? I remember we discussed that in conjunction with full year results that you said I think it was slightly down at the end of 2018.

Now that we had another quarter of positive price in China and I guess raw material development favorable, has that change at all or has that still stands at the backlog margins kind of slightly down versus what you have right now?

Well the backlog margin of course is very simple. The margin is an outcome what we do on pricing and what do you have on cost.

And I think, we have reported over the last couple of months that we have worked very, very hard on the pricing area and we had all over the globe improved pricings in new equipment, but also in existing installations. Also in China, in the mass market area, we were able to improve our pricing.

If I look quarter one 2018 to quarter one 2019, I would say that our prices have increased in the volume business by low single-digit. So this helps us of course.

Now the backlog is also a function. What kind of jobs are going out and what kind of jobs are going in.

So the jobs going in, we can definitely say, they have a better margin than what we had in 2018. Now again, a little bit on the topic of what is the large project going in and out this can impact you a little bit and as we have higher shares than maybe orders in China, our lead time in China is a little bit longer as we are very strong in large projects and also public transports.

You usually have a total cycle time for those jobs two years, sometimes even three years. So if you look back pricing two years ago or three years ago was maybe not as bad like in 2018 because we had a deterioration of the prices, so some of the job still had a healthy margin which went out.

Some of the jobs already had not such a good margin which went out of the backlog. But overall, I can definitely say we were successful in pricing and it's always balancing how much do you push the prices versus the growth.

So this is a little bit the act we have to do to somehow balance this. And I think the team has done that very, very well.

Now in terms of cost of course, we have these headwinds from the raw materials and from the wage increases, they just come in and you can't really avoid that. But maybe Urs overall, I think we have done quite a good job overall in and out.

It looks not so bad.

Yes. In the -- we see that in our margins sold over the last nine months that they have slightly and gradually improved on the order intake.

It is now also resulting in a slightly improved margins on the overall backlog. So that then of course will be rolled out in the future.

Having said that, in the first quarter, we have impacted by the execution of projects sold as Thomas said two years ago, particularly in China, but also other larger projects with lower margins and they have now been executed and in progress.

Great. Thank you very much.

I really appreciate the comprehensive answer. My last one is just on digital investments.

I'm going back to what you said again at the start of the year, ramping up by probably another 30, 40 basis points where I think that places you in terms of kind of a run rate of investment places you as the highest amongst peers spending I think nearly CHF100 million a year on that. I just wanted to get more color if possible on what are the sort of incremental areas that you're spending on top of the initial sort of 50, 60 bps that you committed to building the platform and all analytics.

Are you maybe diversifying your vendor base on analytics and platform potentially?

Well digital investments have in fact in our company we have like two swords and I exclude BuildingMinds. So I focus on really the escalator business.

One is our Schindler Ahead product platform where we had to set up partnerships with major players in the market. We are working together with GE Digital, we are working together with Huawei and we are also in the area of connectivity and lines how you are -- what kind of provider you use for the transfer of this equipment.

We have strong partners and we'll announce pretty soon also at local partnership. So these are let's say strong partners we have.

And of course, we do have certain costs also related to this. But the major cost we have is development and continuous improvement of analytics, but also development of new digital products because our customers are asking for APIs, they want to integrate our solutions in their building solutions.

So this is another major central cost flow. And the third one, we also have is the more unit you connect and then you make Big Data analytics you need someone who is supporting the people in the field to do the right things.

So what we are doing in all the countries, but also centrally we have buildup now so-called Technical Operations Centers, TOC we name it. Technical Operations Center, so where really experts are able to take the data from our analytics and our remote monitoring platform and give direct advice to our technicians over there or highlighting hey something is going wrong here and then they take actions.

So these are central costs, we feel are building up. I think we don't have to expect that this increase will continue.

In the future, we – towards the end of the year, we will achieve a certain stage of service we are able to do. But we have a second investment in digital and that's the Digital Twin.

And as I have said in the past, we started first with escalators and we have some really good progress in that, and we are expecting that we will face first paybacks maybe second half 2021 and then later 2022. But we now also ramp up the Digital Twin for our elevator products and this is important because you first need the new type of products that's F3.

So our modularity products and now we start to digitize them in our R&D department, in our manufacturing, in our installation processes and even in our maintenance processes and this cost are at the moment ramping up on top of the Schindler Ahead. Now, if I look on Schindler Ahead, we always say that the payback will be – the breakeven point will be somewhere in 2021.

So we see now revenues coming in. We also see contributions coming in and we expect that the breakeven point is in 2021.

So I think we are on track with our investments and what we have announced this year should not have the same increase also in the future. But we believe, it's the right thing to do.

We will benefit from that internally, but also our customers will benefit from that in the years to come.

Got it. Thank you.

And payback on TOCs is through the field efficiency I presume right? The TOCs technicians may well –

That's true. The Technical Operations Center, they are not financed but the payback is coming from more efficiency.

And the efficiency is driven by two elements. One is that, you have an early signal that something maybe is not good and you go to the equipment before for example, you have a breakdown, but it's also if you have a breakdown.

They can guide the service technician in a much better way that the resolution of the breakdown is taken much faster.

Great. Thank you very much for your answers.

Thank you, Andre.

Hi. Good morning, gentlemen.

Thanks for taking my question. I have three questions.

I will go one at a time. The first one is actually a follow-up on the first question from Andre.

Maybe, I will ask it slightly differently, but can you confirm what you have said about a month ago about the margin being stable for the full year 2019. Does that still hold or is it still uncertain?

Thank you very much for the question, Lucie. So our strategy as you know is to grow faster than the markets.

And we want to increase our absolute profits every year and with our very solid order intake and the backlog of course this will allow us to continue our strong growth path. The headwind seen in quarter one will continue such as high material costs, wage inflation and the expenses into strategic projects.

On the other hand, our operational measures are absolutely on track to allow this profitable growth going forward. And some of the cost savings as I mentioned before in particular, the modularity savings are coming in a stacked way as per our original plans, particularly in the second half year.

So we are confident to achieve the target of growth above market and absolute profit growth this year. And from today's perspective, it is – it seems ambitious to maintain the margins of the previous year.

Thank you for the clarification. My second question is around some of the comments you put in the presentation.

You're mentioning some large markets to potentially come under pressure during the year. I was hoping you could give us a bit more color on which market you're precisely referring to and also what are the indicators, or maybe the anecdotal evidence that are giving you kind of confidence to make this comment or giving you the visibility on the potential weakening?

Well, there are – when you look in our business and especially in our company, one large market we have of course is Brazil. For us, it's a very important market, because we have a good market position there.

At the beginning of the year, we were or towards the end of the year, after the elections, we were more confident that there is the end of the real downturn and that markets will come back because the President also was seen as very friendly towards the economy, was pushing a lot to economy, but we have now to state that this progress has not been visible. It seems to be a little bit a pot situation also between him and the Congress.

And the mood in Brazil has definitely worsened. And I think we will see another very, very challenging year ahead of us.

And as our organization as I said has a very good market position and also the team is delivering strong results. This is hitting us, I have to say.

It was not according to our expectation. Then there are other, let's say then another market which is very positive is India.

In India, we see that it really continues very strong. Of course, like in many other countries, you always have to look on the political situation whether something is happening there, but there we are at the moment much more confident.

Then if I look on two other major markets for us China and the U.S. There of course, the U.S.

at the moment we see still a lot of activities, but we also see that some of the leading indicators might lead us to a more challenging future towards the end of the year, or beginning of next year. But I have to admit, if you ask different people you get a lot of different opinions.

So it's not Urs own or the same opinion, but some of the indicators like PMI Index or if you look on architects or if you look on new permissions for multifamily houses, there is a certain flattening or even a certain downtrend visible. But it's early stage I have to say.

Then of course, the conflict between China and the U.S. is not helping us, I have to say.

And at the end in our market 60% of the worldwide market in terms of units is in China. So at the end we come always back to the question how is China developing?

In the first quarter 2019, I think, we had a stable or even a slightly positive development of the Chinese market in terms of units. So I think this was pleasing all of us and with the strong growth we had we were able to take advantage of this positive development.

But there are also -- we look like everybody else we look on all those macroeconomic indicators and we also have a lot of internal research we are doing. So we look on the floor space started, we look on the completion, we look on the floor space sold and the residential area looks quite good in the floor space started, but when you look on completion or if you look on the floor space sold, especially, in the commercial and the retail area it looks slightly negative.

And also there is a certain flattening in the residential area. And then on the other side we have seen prices for apartments have -- going up again and it will depends extremely what the government will do.

If the government will retighten or even more tighten the financials in the real estate sector limiting the prices for a square meter asking for certain liquidity then this could reduce a little bit the positive -- at the moment a little bit more positive outlook of China. If the trade war, you know, between the U.S.

and China would not come to be resolved, I could also imagine that the government would push much more towards the real estate sector because this is usually a sector where you try to accelerate the economical development. But I do not know exactly what they will do but there are like two scenarios.

One scenario is that these, let's say, trade conflict will disappear. And then I think we -- it could be that the government is tightening a little bit more because the growth from GDP will come from other industries.

If the war continues then I would expect that the government will release a little bit some of those restrictions and that could be positive for us. So there is a certain uncertainty in the U.S.

and in China visible I have to admit. In Europe overall at the moment, we are on a high level in the markets.

We don't see so much further strong growth in the market. Especially also in Germany, we have achieved almost the peak and there is not so much imagination that it could continue to further strongly grow as it has done in the last couple of years.

But overall we still see that the global market with all these plus and minuses somehow will be flat.

Thank you very much. You have answered my third question which was on China.

So I have no more. Thank you.

Yes. Thank you.

I have two questions. Just an add-on to China.

If I now think about all you said, still if you assess China today it must be a bit more positive than it was in February, right? Because you had the double-digit growth in units, which was not expected.

I was just wondering if this could be market that you would say have some upside risks as well?

I think it's true when you look on the outlook of most of the players maybe a quarter ago or also towards the end of 2018. The trend or let's say the consensus was more between slight decrease and flat in best case.

Now Q1 was probably slightly up in the market, but you know its one quarter. So let's not now be too much optimistic and just extrapolate the first quarter.

But it is true, I think, we have seen good momentum in terms of units and we also have seen for us good momentum in prices. And at the end, we just execute what we have promised and we have promised we want to grow faster than the market and independent how good the market or how bad the market is we want to outperform the market.

And in Q1 we were able to do that.

Okay. And maybe just turning to project.

And if I run through my notes that I made the last couple of quarters, you were talking about project delays, cash shortages of customers, developers. What do you see there?

Is there a certain ease or better development than the last quarter or is there still some delays in projects?

There are some still delays in projects according to our assessment. What you see in the market is there is a consolidation process going on.

The big developers become stronger and the smaller developers become weaker. The -- I think, the shortage in cash is more an issue with smaller developers, but I have to admit also the one or the other larger developer we see that, let's say, the payment attitude is not always as good as it could be.

So I think the bigger the developers are stronger, but some of them still are not the on-time payers all the time. So smaller ones more under pressure, bigger ones in a better shape, but I don't see a real change in the liquidity of our market.

Okay. Thank you.

Yeah, good morning, gentlemen. Martin Flueckiger from Kepler Cheuvreux.

Thanks for taking my question. I've got two remaining actually since most have already been answered.

Thanks first of all very much for your elaborations on your market outlook for 2019. Now I realized that Brazil is an important market for you in LatAm, but you haven't talked about the other countries.

So I was wondering whether you could talk about the broader region of Latin America and how you see the new installation modernization and so and the -- those services and repairs business? That would be my first question.

And then the second one also very quickly, how many acquisitions have you been doing in Q1? And which business areas and geographies that was and what the impact was on orders received and sales growth?

That would be very helpful. Thanks.

Okay. Thank you, Martin.

Latin America overall is -- we have a strong presence in most of the countries. If you look on Mexico, Chile, Peru, Colombia, these are the ones, let's say, we are mainly focusing on.

There is a little bit of Argentina, but Argentina is a super, super, super atomic, I would say, market because there are so many players. And from a quote point of view there are not real quotes which you can follow up.

So there are a lot of local players. In all the other markets I have to say we have a strong position and we also have seen good development for us.

We were able to compensate some of the struggles we have maybe in Brazil by the rest of Latin America. And this is not only in new equipments, it's also in the service business where we have good -- really good developments scene over the last couple of months.

So I think Latin America, for us, is a good market. It's not such a big market, I have to say, if you look on a global scale.

But for us, Latin America is a proper -- prospering environment. Now maybe Urs on M&A, you could elaborate a little bit more.

Sure. So we are continuing with our operational, let's call it bread and butter M&A transactions.

We reported in 2018 to have acquired more than 25 companies in -- mainly in the segment of service companies, smaller local service companies. It is continuing in quarter one as per plan on a similar level we can say.

Okay. Thanks.

And so, it's a minor impact on sales growth than orders received growth. Is that correct?

Absolutely.

Absolutely.

Yes.

Negligible almost?

Well, negligible, it’s may be not very positive, I have to say. I should say it's really a minor impact, but in the city where you make this small acquisition, it has a major impact, because you are covering usually a wide spot and you create more density.

But on a global scale, it has really a minor impact, really a minor.

Thank you so much.

Thank you.

Yes. Good morning, gentlemen.

Two questions, please. Firstly, you mentioned the slowing growth in the Eastern Europe.

Can you please elaborate in which countries you really see the slower growth? And secondly again -- sorry -- coming back to BuildingMinds, CHF40 million in 2019 is quite an investment up to €150 million in the total in the coming years is quite a significant investment.

Could you somehow elaborate a little bit on your expectations regarding the time of the first contribution to you growth, the expected payback, the return on investment or the breakeven point? That would be very helpful.

Thank you.

Okay. Thank you very much.

So, if we look on Eastern Europe, we have seen that overall the pace of expansion has slowed down a little bit. It was not that we really have seen that markets were going down, but Eastern Europe is a very dynamic environment and if it is booming then it is booming very much.

But what we also saw is that in some of the markets and one is very typical for it, that's Poland. It's a very strong environment, it's a good economy, it's quite stable.

Warsaw, for example, one of the fastest and most booming cities in Europe, but the shortage of skilled people and the increased wages are burdening that. So this is the key driver why somehow those construction sites cannot be executed maybe as originally planned.

Then when you look on other markets, another strong market is the Czech Republic. There I think we still see a robust environment.

It's mainly driven by the residential sector which has been supported by low interest rates and also rising household incomes. The more you have create affordability, you also can generate some demand.

So Czech Republic is robust, it's not now going through the roof, but it's robust. And then, of course, one last big country for Eastern Europe is Russia.

Although, we have certain economy weakness there, we also see that the government puts a lot of efforts to revitalize the growth through investments in residential, transport, energy, infrastructure projects. But it's a market where we are extremely careful and extremely selective in order to be in line with our core values.

And maybe then on BuildingMinds, Urs, the overall investments we can confirm what we have said as an upward limit probably?

Right. We confirm this overall investment envelope of the €150 million.

As we communicated earlier in the year, we expect about a quarter of those costs to come in 2019 eventually a bit lower after the smaller cost in Q1.

Okay. Thank you, gentlemen.

Yes. Good morning.

Not much left from my side, maybe starting with the public projects in your order intake. Can you give a bit of a feeling how much your share of these public projects globally versus a longer term average?

And secondly, do you think this kind of rate of project wins because public projects are large and lumpy, do you think this is kind of a sustainable level, or is there a risk in the next quarters or next year that this could drop a bit lower this activity?

Okay. So public projects or public transport projects where -- what we count there is usually you have metro lines, you have railway stations and you have airports.

These are the -- let's say the key drivers. And usually these are very large projects.

In an airport either you have a new airport or you make a new terminal. And in the area of railway or of metro, it's usually when you have a new metro line.

So these are projects which are announced usually quite a long time in advance by the government. We also see that not always all those projects are exactly according to the time schedule executed.

But what we see worldwide and I think this is not only -- this is driven really by all the different governments. Infrastructure projects become more and more and more important, because it is the only way how you can survive in higher and higher urbanization.

I believe in many, many, many large megacities or large cities in general, traffic has become a nightmare. So all the governments see that the function of the city can only be guaranteed if you have a strong infrastructure of public transport.

So I do not see that there is a general trend that maybe those public transports jobs could disappear. Of course, there is another element, which is affordability by the governments.

But if we say that maybe we have a little bit more challenging futures ahead of us, I would even say that probably the governments will push even more that those jobs are executed. So overall, I think this is good.

Now the -- if you look on airports, on railways and on metros, a lot of those units are escalators. And the governments wants to have well-functioning high-quality and absolute safe escalators.

And Schindler has historically a very strong position, we have done a lot of efforts to further improve. All our public transport escalators are also connected with Schindler Ahead.

And this is one of the let's say important selling arguments we have in the market. Those governmental bodies who make the final decision has seen with good experience to have with us, but also with latest technology, super high standard of safety and reliability we are perceived or seen as a preferred partner.

So we are benefiting from this let's say market shift that this segment is growing faster than others. And as we have a strong position there, we want to take the benefit.

And then on top of it, we also believe that in terms of the after-sales business, so in existing installation, this is very important for us. Because very often, you have a chance, if you deliver a good service quality that then, because the function and the reliability is so important that customers are giving us and also long-term service contracts.

And as an example, we have seen that I don't want to mention the city, but we have seen that in the past sometimes those governments shifted modern services to low-cost suppliers, because they had budget constraints and then they had not enough reliability. And we have now for example two different metro lines in -- metro organizations in Europe who have said, wow you do such a good job.

Even if your costs are a little bit higher, but we are absolutely willing to do that with you. And they come to us with their equipments.

So far us, the public transport is looking good. Also for the future, we have taken the advantage.

We have increased our market share there as well. So in a growing market, we have a higher market share and this is one of the drivers also for growth.

So we are really positive about that.

Okay. Thank you.

Then coming back to the European market, particularly in Northern Europe. Can you elaborate a bit by country, where you're more positive, more negative?

And do you think if it's really labor shortage that is a limiting role, so do you see some market where we are at the peak or post the peak in real estate?

Yes. Maybe we are at the peak in some real estate markets, yes.

But we don't have seen now really indications that there should be a downturn or a slowdown in the real estate market. But of course, the real estate market is also impacted by general economic environment.

And I mean this also is driven by let's say some political developments. And if you follow all the Twitter accounts, I think it's not so easy at the moment to predict, to forecast how the world will look like in one year.

So we don't see at the moment any negative in Nordics. We see a stable Germany.

We see a stable Switzerland and also Austria. We have elaborated before a little bit about Eastern Europe.

And then we have the U.K. And if you have a good tip, how this will look like then I'm super happy if you can give me an outlook how you think that the Brexit will impact the environment.

I'm happy, if you could share it with me.

Unfortunately I cannot. But...

Interesting enough, we don't see -- there was a lot of uncertainty in the U.K. in 2018, but what we see is that there are a lot of new projects planned in the U.K.

in contradiction maybe what's a lot of people have expected. If all of them will be executed, I don't know.

But projects are there and probably a lot will depend on the outcome of the whole discussion about Brexit, how many of them will be executed. And maybe a last point, we have mentioned in the last quarters that we have strengthened our global key account management and we see that also now in Northern Europe, a lot of those global key accounts have projects and we are benefiting of that as we are one of the preferred suppliers of them.

And so we have in fact quite a positive outlook for us in the northern part of Europe.

Okay. Thank you very much.

Thank you.

Yes. Good morning.

Thank you for taking my questions. The first one would be a clarification on Urs comment that it would be ambitious to maintain the margin 2019 over 2018.

Were you referring to EBIT before or including the BuildingMinds impact?

Yes. Hello, Daniel.

I was referring to the adjusted EBIT. So the adjusted EBIT before or without BuildingMinds.

Very clear. Thank you very much.

And previously, we discussed the trends on the raw materials on several occasions. One or the other time, you mentioned there is a potential relief at the horizon.

Could you give us some color on where you see the raw materials heading at the moment from your supplier discussions? Just to get an incremental feeling for -- from your elevator industry perspective of where we're heading?

So when you look maybe you have to have a little bit a longer look because very often you are agreeing with suppliers for a couple of months on a certain price and then you are reevaluating the pricing according to the raw material development. So over the last two years 2017 and 2018, the basket our raw material price index went up by more than 30%.

So this was huge. And I think our team has done a very good job over the last two years to negotiate once more and once more and once more.

We have a lot of escalation rules, if there is a certain amount, even the supplier has to come to myself and has to come to Ebikon and then we are making a final call. So we were able to push back a lot of the desire of our suppliers.

Now, of course, if you don't get price increase as a supplier and you have the cost increase, you just come again. After the contract has expired, you are trying again to increase the prices and this we have definitely seen.

However, I have to say that, we have seen also stabilization, I mean, in some of the raw materials even a slight decrease in the last three months. Now as we are locked in usually for six to nine months and we have tried to lock-in in the last quarter of 2018, we do not benefit from the short-term development of the raw material price, if it now goes a little bit down.

So we can only expect a relief, in fact, towards the second half of the year. In case raw materials would further go down, then we would benefit from that.

If this is not the case, then we probably stay on similar level as we have been. So it is not further headwind, but it is the headwind we have seen also in the first three months.

So it will all depend how the trend will be in the second quarter 2019, because this will give us the baseline for negotiations in the second half of the year.

Very clear. And could you give us a little bit on guidance, how depreciation and amortization will look like in 2019 and post IFRS 16?

Good question. This I would like to hand over to the CFO.

Sure. Again, hello, Daniel.

The amortizations in terms of our acquired companies, I would say, will continue at similar level. Last year we had an amortization impact of close to CHF 30 million.

And if we have a similar level of transactions this year we will have, again, that impact in 2019.

What was the D&A number in Q1? We can maybe use that as a proxy for the full year number?

Yes. You can take a-quarter of that.

And what was the number, because it's not in the report?

So, in 2018, we had an amortization impact close to 30, 3-0, CHF 30 million impact. So I -- every quarter you have that, Daniel.

And maybe one last question on M&A, because you mentioned this is an ongoing exercise. I'm still a little bit puzzled, why you haven't done any service acquisitions in China.

Could you give us a little bit of color on why that has not been the case so far and when we would potentially see a change in that strategy?

Well, there is not a change in strategy. It's just -- let's say, the whole process takes a little bit longer.

And the reason for it is quite simple. We want to make sure we do not buy bad apples.

So we put a lot of efforts. We are screening the market, we have, let's say, an M&A funnel, we have candidates contacted.

We have seen interest, we are working on that. Of course, usually we only report after we have done an acquisition.

We have done some very small ones, but we also have some mid-sized companies on our screen, but we are checking very much the quality of the equipment, the reliability, the safety, also compliance topics. And if we can tick out all the boxes at the end and we can come to an agreement also with the seller, then we will also close the deal and we are on good progress, I have to say, but we have not yet closed one of those mid-sized deals.

We are not hesitant, but we are careful and we want to do the right thing. So, hopefully, we once can report an early success.

But it's no...

Well, discount was more on the new equipment side, I assume. I was referring a little bit more to the service side.

Have you done any service acquisition that we don't know yet?

I was referring to service companies, not to new equipment. I was referring to service companies.

Okay. And have you done any smaller service acquisitions already in China?

Yes. We have done very small ones, we have done that.

But not these mid-sized service companies.

All right. Very clear.

Thank you very much.

Thank you.

Hi. Good morning.

Thanks for taking my question. Just one left for me.

I was interested in your comment about the digital investment breaking even in 2021. Just wanted to understand your assumptions in that and in terms of are you assuming the investments continue to grow, but the contributions grow faster?

Or are you assuming the investments either flatline or start stock coming down in future years?

Thank you for this question. It is true, you have some central cost and there we are doing a lot of investments.

But the increase of these investments will flatten in the future, because we then once have established this infrastructure to run the digital business, so the cost centrally they will flatten. And then, yes, as we have rolled out in almost all the countries worldwide, our Schindler Ahead solutions.

We see now with the deliveries, all our new equipments are delivered with our Schindler Ahead solutions and then we try to connect. Then afterwards we try to negotiate the service contract for this Ahead piece.

And we see now that the development is positive. It is really positive for us.

But it takes some time. It takes some time, because you have a certain lead time.

When you ship the equipment, until you have finally the service contract, this can take a couple of months or even up to a year. So in our projections we see increasing operating revenue and we also see increased contributions to our margins in the service business and this will compensate later in 2021, our investments, we have centrally and in some major markets for the infrastructure.

Not included in that, let's say, breakeven point is, that we create more loyalty with our customers, that we have a better relationship with them, that we have maybe less losses to competitors. It's also not including that we have maybe more recoveries from the market.

It's really pure operating revenue coming from additional contract elements with Schindler Ahead and the contribution out of that. So in 2021 this should be then the breakeven point.

Thanks. That helps.

Thank you.

Good morning, gentlemen. Thank you for taking my questions.

I have two questions please. First one, could you update us on negotiations, which you're having with your suppliers, which you mentioned are getting tougher, particularly on your existing product portfolio.

And what kind of impact do you see from modularity program is having on those negotiations. And do you this situation to persist in 2019?

My second question is on pricing. How do you see your capability to push prices, particularly in the second half, given the impact from a raw material would be likely to be lower in the second half?

So these are the two questions. Thank you.

So optative suppliers. We have a program this is called CCQL.

It means Continuous cost and quality leadership. And this is a program we have since a couple of years in place, which is continuously driving down the costs with negotiations with higher productivity in the factory with the modularities of design changes, and we are looking on that on a weekly and on a monthly basis.

And there, of course, all those negotiations with suppliers are in. Most of the negotiations have been done.

So we are locked in for a minimum for the first half of the year, and I think the outcome was according to our expectation. So we can confirm that at the end of the year, we will try to generate out of those different elements like negotiation productivity and modularity that we will be on track.

So that's quite promising. Now some of those suppliers will be phased out, and then it is more difficult to negotiate the good price, because they say, it's maybe the last year or the last 1.5 years I can supply you.

So we have seen that, this is a little bit more difficult to create the better price level, because we still need them. Because we still use the old components, but they know we will not need them anymore maybe in the second half of 2020.

So when we have replaced all the existing products with the new product. So this is components with the new components.

So this is quite a challenging moment we have at the moment. On the other side, suppliers were -- they are striving for also to be the supplier in the future for us.

Of course, we try to get the benefit out of that. So overall, I would say, it was according to our expectation.

Now impact on modularity, so it means that part of savings which come from design changes was, we said, it will come more towards the second half of the year.

Yeah. Absolutely, our modularity initiative is on track.

The components are rolled out, and several of them will be rolled out in the second half year. And we certainly will do that materialize it in order to achieve our total net procurement savings.

Then the second question was about pricing. I think we have done a very good job in pricing all over the world.

I have to say that we were able in the North America, but also in Europe. We have put a lot of focus on pricing actions in new equipment, but also in the service business and in the repair business.

Now pricing is, of course, a continuous effort. It's -- I have said that in calls in the past that we have the so-called power pricing mechanism, so where we try to bring our salespeople to the -- with some peer benchmarks to the best prices possible.

It's not only increasing lease price, but also working on sales management. I think we have done a lot on lease price increases.

And then if the market does not allow you really to increase the price then you have to give more discounts on the lease price. So what we try to do is more now to manage this discounting by peer benchmarking, and having more a dynamic pricing model.

This will also continue in the second half of this year.

Very clear. Thank you very much.

If I may -- just one last question if I can push. Where do you stand in terms of the penetration of your digital services like Schindler Ahead or how do you see in terms of your install base?

How far you have gone in terms of the new services you're providing?

So penetration of Schindler Ahead, what we have stated one year ago is that all the new equipment will be equipped with Schindler Ahead. So our key driver is to -- with the new installation conversion into our service portfolio to add the normal service contract also a Schindler Ahead contract.

It's an element or a module of our service business. This is the key driver.

Then on the other side, you have of course a hugely installed base, and there we only equip with Schindler Ahead if the business case makes sense. We are not claiming that we want to connect everything, everybody, because at the end, we want to have a positive business case.

And the installation cost in an existing elevator, if you come now and you do let's say, an add-on within Ahead the cost, especially the labor cost are higher, because it's like a small modernization what you do. So we only do that if the customer is willing to pay for it.

And I see the opportunity in large contracts and large key accounts, there we see the highest positive feedback and we also see it in commercial buildings and in public transport areas. In fact, we win the one or the other service contract from the market, because the customer is very convinced about our Schindler Ahead solution.

But we do not plan to roll out Schindler Ahead for all the installed base, only there where it makes sense. But in the new equipment business, we say we rolled it out everywhere.

So it will take a couple of years, as I said, until you have this payback in mid 2021. And -- but we are quite confident, and we are in fact according to our plan.

Even I have to -- I can state that according to our internal plan we had, we were even more successful last year. Now the absolute number of connected units we do not disclose.

Very clear, thank you.

So the last two questions from Andre and Martin as a follow-up and I think we could close the call.

Yeah. Thanks so much for taking the follow-up.

So, I'll keep them brief. I wanted to just ask again about large project pricing in China.

I know it's kind of become a quarterly question, but is there any kind of respite in that pricing pressure that has been there for last two years?

We have not seen. If you look on large projects there are two different types of large projects.

One is the public transport area. We have elaborated on that.

The different pricing mechanism there, depending on the customers. Some customers go for the lowest bid, but some customers go for the middle bid.

So they take all the offers. And the closer you are to the average price offered.

The more points or the more scores you get. So, that's a quite unique pricing model.

Because you have to think about how everybody will try to price. So there I would say, there is -- it is -- there is no big change.

Now in the more commercial business, what we see is that in the large project these are usually the towers. The high-rise buildings and there we see still continuing pricing pressure.

And it's usually done because some of the markets are changing the specifications. They go to lower end specifications, which mean you do not cover the market with your absolute top-notch product, but with a middle segment product.

And this middle segment product has a lower price than the flagship product. So there is a certain shift in specifications happening.

The top end market definitely is tremendously still under price pressure. This we have not seen any relief from that.

Okay. Got it, thank you, and just a follow-up on labor inflation on the installation side, I have it from my notes that about 20% or 25% of your installation kind of work is outsourced is that right?

And is there a difference in terms of how you can manage that labor inflation in installation labor force? Is there any difference between kind of handling that as your own head count versus the outsourced head count or not?

Well the share where you have subcontractors is totally different from country-to-country, I have to say. It is not right to do a common share of 25%, 30% or 20% or 40%.

I think it's really country specific. Why is that so important?

Because the labor cost increases are also totally different from country-to-country. So a global share makes not so much sense.

Now in terms of pressure, honestly, I do not see so much difference in the pressure. It's mean legally in many countries you are obliged to pay, if you have a unionized labor workforce.

Honestly the chance you have is very little if you're part of the overall agreement. And you know there is an agreement that wages go up by 4% and wages go up by 4%.

You have not so much negotiation power there. On the subcontracting area usually they are not unionized.

So they but they have of course quite a similar pressure because usually the salaries in the subcontracting company are quite low and the pressure to increase is quite high. So you might have an increase on the lower base -- a higher increase on the lower base compared to own fitters.

But the overall increase at the end is more or less the same. I don't see so much advantage or disadvantage in terms of wage increases.

Got it. Thank you.

Thanks so much for your time.

Thank you. So we come to the last question with Martin.

Yeah. Thanks so much for your patience.

Just the final one a clarification question there because I think there was a misunderstanding in one of your previous answers. And I'm referring to Urs talking about the -- if I understood him correctly about the PPA impact on amortization last year.

But I think the question and I think it's a valid one was actually more on Q1 full depreciation and amortization. Because we don't have an EBITDA number or depreciation and amortization number for Q1.

Just something that after the implementation of IFRS 16 would be worth noting for our models. So the full depreciation and amortization charge for Q1 would be of interest.

Thank you so much.

All right, Martin. I will come back to that via Marco Knuchel.

We will follow-up on that. Thank you very much.

Thanks.

Thank you. That's it.

So ladies and gentlemen, thank you very much for attending this call. Looking forward, to hear or to see you again on the half year closing in -- I have to check once more on the date on August 14 2019.

Thank you very much and looking forward to hear and to see you again. Bye-bye.