Schindler Holding AG

Thomas Oetterli - CEO Erich Ammann - CFO

James Moore - Redburn Rizk Maidi - Berenberg Lars Brorson - Barclays Martin Flueckiger - Kepler Cheuvreux Fabian Hacki - UBS Martin Husler - Zurcher Kantonalbank Ben Maslen - Morgan Stanley Daniel Gleim - Mainfirst Bernd Pomrehn - Vontobel

Good morning dear ladies and gentleman and welcome to today's first quarter results conference call. I'm here together with Erich Ammann, our CFO we will go into all financial details later during the call.

As an introduction to the remark it is fair to say that we continued our successful plan of the last year as we kept our direction towards top-line growth and also higher profitability. Let's have a closer look on our highlights of the first quarter 2017 on slide two.

We made further operational and strategic progress. First, we were able to confirm our growth path.

Orders received increased by 5.9% in local currencies and also operating revenue rose by 3.8% in local currencies. Operating revenue was therefore within our guidance of 3% to 5% growth in 2017.

Our investments into our geographic diversification mainly into our strategic markets were paying off. Second, we also continued to improve our profitability.

The EBIT margin increased to 11.5% and even 11.7% before restructuring costs. Net profit stayed flat at CHF179 million due to some temporary booking losses on the ALSO exchangeable bond.

Third, we made further progress in our strategic initiatives. We are on track with our globally harmonized modular product platforms, but it is still a long way to go to finalize this, and we were also able to successfully launch our new Internet of Elevator and Escalator Solutions, Schindler Ahead.

Yesterday, we launched officially our new Schindler Ahead initiative and I would like to stay a little bit with that topic. As you can see on slide number 3, we will create significant customer benefits in the future.

We increased the uptime of our equipment with predictive maintenance, we offer comprehensive insights about all type of information of the equipment for a better building, maintenance and management, and we generate convenience with superior customer service by interactive and personalized passenger experience. On slide four, you find the solution concept of our enhanced service offerings.

There are four elements to be mentioned. First the Cube, The Cube enables machine intelligence, all relevant machine data are collected, filtered and transmitted to the cloud platform.

The Cube is an intelligent device, not only a transmitter or a gateway, as we can run apps and stream multimedia content and handle emergency calls. The second topic is the cloud platform.

The cloud platform creates real time insights. It acts as an engine for big data analytics and artificial intelligence.

We create at the end actionable outcome like predictive maintenance. The third element is the Schindler Ahead App Store, which allows instant access for customers and passengers to relevant equipment data in a personalized and customized way.

And the last element is our capability to future readiness by over-the-air updates from the App Store to the CUBE. With this, customers benefit with Schindler's continuous investment into the Schindler Ahead solutions are guaranteed.

Overall, we are convinced that we have laid the ground for our IoEE strategy, the Internet of Elevator and Escalator strategy in the future. This will create additional customer benefits and also allows us to create better product designs and more efficient and customer oriented processes.

After this short introduction about the highlights and some insights in Schindler Ahead, I would like to hand over to Erich, who will guide us through the key figures of the first quarter 2017.

Thank you, Thomas. Good morning, everyone.

I would like to use slide number 5, to discuss the performance in the first quarter of the Schindler Group. The highlight of the first quarter is the continued growth in order intake, revenue and profitability.

It underscores the success of the growth strategy pursued by Schindler. Orders received reached CHF2.6 billion in the first quarter 2017, up 5.9% in local currencies compared to Q1 2016.

In Swiss francs, orders received were up 5.7% compared to last year. The strongest growth in orders received was achieved by the Americas region, followed by Europe.

Orders received in Asia-Pacific were flat compared to the first quarter of 2016, while the number of units sold continued to rise in that region. Order backlog totaled CHF10.4 billion compared to December 31, 2016, this represents an increase of 4.5% in local currencies.

Thomas will comment on the markets in more details in a few minutes. Revenue reached CHF2.3 billion and was up 3.8% in local currencies versus prior year period.

The Americas region made the largest contribution to growth followed by Europe. Revenue in the region Asia-Pacific remained unchanged compared to the first quarter of 2016.

The growth rate achieved in the first quarter was right in the middle of the 3% to 5% range expected for the full year. The service business achieved pleasing growth in all regions.

Operating profit EBIT reached CHF260 million and is up 10.6% in Swiss francs. In local currencies, the increase was 9.4%.

EBIT margin improved to 11.5% and reflects the progress made in efficiency, economies of scale and cost optimization over the last 12 months. Before restructuring costs, the EBIT margin reached 11.7%.

Net profit reached CHF179 million, which is slightly below last year. The main reason for the shortfall is a temporary book loss of CHF16 million on the ALSO exchangeable bond.

The valuation of the bond reached more than 200% at the end of March. The higher liability had to be recorded through net income from financing activities.

This negative valuation impact will be fully reversed in June at maturity of the bond. You may also notice that taxes are low compared to last year.

Taxes include a positive impact on deferred taxes from an internal transaction and adjusted for this one-time impact, the tax rate was -- the run rate was 24%. Cash flow from operating activities amounted to CHF356 million, which was up by 6.9% versus prior year.

Net working capital was at the similar level as last year. Now, let's have a quick look at the balance sheet, which you'll find on slide number 15 in the back-up.

The balance sheet continues to be strong with cash and cash equivalents of CHF1.8 billion. Net liquidity reached CHF2.16 billion and was CHF300 million below the level of December 2016.

The good cash flow from operating activities helped to partly offset the large dividend payment of approximately CHF535 million, paid in the first quarter. Equity amounts to CHF2.5 billion and its down compared to end 2016, due to the large dividend payment.

Now, I would like to hand back to Thomas for comments on the markets.

Thank you, Erich. I'll now provide some more details on the different market.

Maybe as an introduction, overall the markets have shown quite heterogeneous development. Strong markets are supporting our growth in North America, in Europe and also in Southeast Asia, whereas we are still facing a challenging environment in China and India as well as in Latin America, particularly in Brazil.

In general, we see fierce price pressure in the more weakened markets, especially in large projects. In addition, Schindler is confronted with substantial increased commodity prices, which puts our margins under pressure.

So far, we were able to compensate this cost increases with material cost reduction initiatives and strict cost management. Schindler has also implemented pricing initiatives to increase prices for the products and services.

Let's now go into the different markets and we start with Asia-Pacific on slide number six. Overall, the market still showed a mixed development.

In the new installation business, we saw China stayed under pressure regarding volumes and prices. Especially, for large project, we saw fierce pricing pressure and in most of the larger cities, they have launched tighter controls of housing and apartment prices to cool down the pricing development.

India still showed the impact of the demonetization actions taken by the government. We expect the growth path coming back in the second half of 2017.

Southeast Asia continued to show good market developments, and the service markets are very healthy, driven by the conversions of the installed new equipments. Schindler performed well in this environment.

In China, we were able to further grow our units, whereas we were confronted with severe pricing pressure. The unit growth was driven by the good acceptance of our residential and commercial products.

The award pipeline for large projects is healthy, but we were not yet able to transform the awards into order intake. In Q2 2017, we expect some of these awards to turn into orders received.

In India, we have not seen a recovery in the new installation sales, but we continued to show good order intake in Southeast Asia. Let's now move on to the Americas on slide number seven.

We continue to see diverging market trends. The markets in North America are still very strong and show sustained growth in new installation, modernization and service -- across all the segments.

In Latin America, the markets were stable except of Brazil, which still is under pressure due to the recession. Schindler showed robust growth in this environment.

North America's sales strategy is paying off and we showed good order levels in all business lines. The order intake was supported by the successful product introductions in the US and also good large project successes.

In Latin America, we were able to show an overall growth. This was supported by a strong existing installation business.

Now, we move to the last market region, Europe, on slide eight. Overall, Europe continued to show strengths with the sustained growth in all businesses.

The Northern part of Europe showed continued momentum in the markets, driven by a strong German market and opportunities in the existing installation business, but also the Southern European countries demonstrated steady recovery in most countries. However, the levels are still far away from the sizes 10 years ago, especially in Spain.

Schindler grew based on a large number of countries, which were improving. In most of the countries, Schindler was able to grow above market levels.

The maintenance and the modernization growth was continuing as well, and our M&A activities have stayed warm key initiatives and we are working with high pressure to support our growth ambitions. This was the market overview in Asia, Americas and Europe, and now let's move on to the outlook 2017 and I would like to hand over back to Erich for this topic.

Yes. The slide -- you will find the outlook on slide number nine.

The outlook is really unchanged. It's the same as published with the annual result 2016.

We will continue to focus implementation of our growth strategy and our measures to further enhance productivity and margin. We continue to expect an increase in revenue between 3% and 5% in local currencies for the full year 2017.

The net profit guidance for the full year will be issued in publication of the half year results. And now, we would invite for questions.

Yes. Thank you, Erich.

So let's start with the Q&A session.

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

I've got three. I wondered, if I could start with a couple on China.

And if we look at the macro-level stocks data, which you commented on as well in the presentation. It looks as if stocks have continued to be quite strong.

There was some government cooling actions in August, September. It appears from the outside that these don't seem to have had an effect on volume growth of China housing stocks.

Now we see some further cooling actions. Do you think there was a lag issue and that future stocks will be affected by the government action or do you think that the policy is more impacting house prices rather than house volumes?

That's really my first question, maybe we could start there.

Good morning, James. Thank you for the question.

I have to admit it's quite difficult to look ahead into the future in China at the moment. You're absolutely right, if I look on some of the macroeconomic trends and also some of the figures published by the statistical Federal Bureau of Statistics.

And you see that on slide 16, in fact they are quite promising. We see that floor space started was increased, we see that floor space sold also shows a good trend.

I think, also looking on the housing inventories, they really came down. So it means that probably most of the developers now were able to reduce some of the backlog they had on apartments.

However, so far, we have not yet seen that the market really has picked up. So we still stay with our guidance.

We also have given in the annual press conference that we see a slight decrease still in the market and we also see quite severe pricing pressure. So although, every elevator and escalator company is facing commodity price increases, we do not see that somehow this has now tried to be pushed through to the sales prices.

And when I look on large projects, the price competition is even more intense. But looking a little bit more ahead, I still believe that we will see some flattening in the -- towards the second half of this year.

As we also said a few months ago and there is some, let's say, some promising signs that in fact the market should minimum stay flat or maybe slightly start to grow again. But honestly, so far, we have not yet seen this.

That's very helpful. Thanks.

My second question relates to the price pressure in China. I'd just really like to step back and ask a very simple question, which is whether the price mix is 10 or what have you for you and the other international elevator makers.

What do you think the principle source of the price pressure has been. Is it more Western competition or local competition or is it just the markets being down or other policy issues or combination of those things, and how do you think you see market pricing trends developing.

Do you think they can improve with your flattening of volumes as they move towards the second half?

Also a good question, I have to admit, also not very easy to answer. Maybe when I look on the different market segments maybe.

We clearly see that there is some pricing pressure driven by the market development. When I look on Tier 3, Tier 4, Tier 5 cities where markets really came down even when inventories has been reduced in the last few quarters a little bit, the markets really have dropped the most there.

And this is in fact a territory of the local competitors and that all the large OEMs have expanded the geographical footprint over the last two, three years. There is now much more intense price pressure also between the local competitors and the large OEMs.

So this is maybe a little bit a geographical battle, I would say. The second topic is that we also see that there is market development by segment.

There are still a lot of people moving into the cities, but de facto, these are less people per year than what we have seen in the past. So just because of this, the market size is a little bit lower in the residential area.

But we also see that in the commercial area, mainly retail business, shopping malls, the market is hit by the e-commerce business in China. We clearly see that the China is one of the most advanced countries in e-commerce and when you go into shopping malls, you don't see many peoples anymore really buying stuff, they mainly go for food and beverages or maybe for some leisure activities.

And we see that this market has an impact on the elevator and especially escalator market that escalators, commercial escalators are more under pressure. So this is maybe market driven.

There are also some good signs. I think the government has done a lot of announcements, but also investments now into infrastructure projects.

So we see really an increased number in large projects for public transport and we have been awarded several times in the last few months and we believe that some of those big awards we have won also will turn into order intake in the next two quarters. So I think this is one key focus we have, large public transport jobs.

Then when I look on the supplier side. In the last three, four years, almost every elevator and escalator company has expanded the geographical footprint, but also the manufacturing footprint.

So definitely, if you collect all the capacities of the factories in the market, this is far above the domestic demand at the moment, and even far above the domestic demand and export streams. So there is an oversupply in terms of capacity, which is naturally putting a lot of pressure on the manufacturers because the worst thing you can have is if you have a factory, which is half empty.

So I think it's market driven, but it's also a little bit supplier driven as everybody -- three, four years ago still was dreaming of 10%, 15% market growth and was in advance expanding the manufacturing footprint. So I think it's both sides.

Now the government actions, I think, are not so much turning down the market itself. I think it's really more an action to create affordability.

Today, when you go to cities like Shenzhen, a young couple just cannot afford anymore an apartment. It is more than 20 years of annual salary, which you would have to invest to buy an apartment and nobody has that money available because all the prices went through the roof.

So I think it's a very wise decision by the government to put some pressure on those pricing -- on this pricing to cool it down and I do not think that it will negatively impact our market, I think it will more positively impact our market because affordability is given for the people. And if they can afford an apartment, then they also will buy one.

If they buy one, we need more houses, more houses means more elevators and escalators.

Brilliant color. Great, Thomas.

Okay, I feel I've taken more than my fair share, so perhaps I'll get back in the queue and leave the floor to others. Thanks.

Okay.

Just a few questions please. So firstly on China, can you just tell us, I know you've been growing in terms of unit terms, but can you tell us what was the market growth in Q1.

And secondly, if you could just elaborate on what was the price effect and the mix effect in Q1. And I think you've highlighted with Q4 results that this should ease-up a bit this year and it doesn't sound like you've seen this happening.

What would make you feel that this would change going forward in the rest of 2017?

So maybe, Erich, I'll take those two questions about China.

Yes.

The market growth, we see -- when I look on market development, we saw that probably market there, the size in terms of units still went down something like 3% to 5%. This is what we are expecting slightly negative.

After a few months, it's sometimes not so clear and to have very reliable figures, how the overall market development is, you get more clarity over the years. So this is more an indication.

We assume something like 3% to 5%, maybe negative unit growth. Pricing, it is true.

We are expecting for the whole year that the price pressure is less than last year, but we also said at the annual call or the annual press conference that we do not see that already in the first half of the year because we still see that markets in units are going down. It's 3% to 5% and probably it's mid-single digit price pressure in 2017.

What is quite substantial is in large projects. It's really very, very tough, it's a very, very fierce price competition.

So there is like two scenarios, the normal bread and butter business maybe mid-single digits, but in large projects, I have to say from time-to-time, we see even double-digit price reductions.

Okay, very clear. And then finally on Schindler Ahead, can you just talk a bit about how you're willing to kind of monetize this offering?

Yes. So yesterday, we had the launch at the Hanover Fair and I was whole day there.

I was together with customers, I was together with many of our managers and employees. There were also our partners, GE and Huawei were there, and I have to say, it was a really super exciting day.

I think people really got aware about possibilities in the digital business of elevators and escalators. And when I look how do you monetize, first, you have to create a customer benefit, otherwise, you cannot monetize that and the customer benefits are in fact three key elements.

One is uptime, so with our system, we have, with the Cube, with the cloud, with predicts, we are really able now to not only monitor, but also to start predictive maintenance, so to know in advance if something is going wrong with the equipment and we can increase the availability or the uptime of the equipment. So one element is that you can also change your service contract.

In the past, we had a contract, okay, we come six times a year, but now we are moving more into performance service contracts, where customers are willing to pay a little bit more as you can guarantee a very high availability. The second benefit is insight.

So we have launched different products and this you can see at the Hanover Fair, which informs the customers. So one element for example is the action board, so customers get on their mobile phone, immediate real-time information about the status of all their equipment.

We also have launched in this action board. If you are for example a facility manager, the biggest pain point you have is if an elevator or other equipment is not working, then the first tenant is calling you, then the second tenant is calling you and at the end, 50 tenants have called you, because they do not know that already someone has called the facility manager about the breakdown.

So what we now can do, we can push this message to all the tenants on their mobile phones, on their iPads to say, hey, there was a breakdown of the elevator, it takes another 45 minutes, the service technician is already on the way, don't worry, everything will be solved. This in fact is a huge value for facility managers, because they spend more or less 50% of their time just with calls and complaints of customers and then somehow to act and give work to the different workers.

So they are willing to pay for that, because they can create efficiency. The third product maybe is the Schindler log book.

The log book is a product, which if you are the owner of an elevator, you need all the documentation. So if you have one elevator and you have some history, it's -- you easily have 10 binders and you find nothing in the 10 binders, because it's just chaos pool.

So what we now have offered to the owners of elevators and escalators is a log book. So we take the whole history, all the repairs, all the documentations, all the specifications, we take up to the cloud, so that's like a virtual safe where that has all the documents very well structured and easy to find and easy to observe what kind of information's they need.

And then the third benefit, what we are generating is convenience, we want to have comfort elements and we have launched several interactive products now. One is the door show, so for -- if you, for example, have a fair, we have seen that the doors of an elevator are in fact just space, where you can advertise and we have used and introduced that now already in several fairs, also large showrooms of bigger companies, we've started door show, it has a high acceptance and recognition and the margins we are achieving there is in fact very, very good.

So we see now and also feedback from customers, they are willing to pay for those different products and we are really excited about the launch we had yesterday.

Just back to China, if I could, Thomas, and on the large projects business there. I was hoping maybe you could help us put some numbers around that business both in terms of the size of it and in terms of the momentum and project awards.

I think when we met after Q4, I think you mentioned large project awards in China were up some 25% year-over-year. Is that the sort of order of magnitude you see in terms of momentum in that business?

And can I just make sure I understand how that leads your order intake, orders, which will be only booked when the first downpayment is received and I'm taking that to be sort of a lead on order intake by a good six months, is that the right way to think about it?

I think Erich can answer a little bit how we book the orders. Yes.

Yes, let me take that part. Certainly, we have the same rule for all orders centered in China, which means that we only book the orders based on downpayment received.

And the awards as Thomas has described in the past is basically where we have written letter of awards from the customers saying, yes, we would like to go ahead with Schindler. But we only record the job once we have the downpayment.

And due to the slowdown in the market, obviously there are many projects out there that contractors, builders, investors want to execute, but they are sort of in a waiting mode until maybe they have leased out the project or have sold part of the project or have financed it to 100% and this time lag is what we are experiencing here that between award and downpayment and the electricity order and also publish it externally, there is a time lag and this time lag is relatively difficult to estimate. I think on top of that, especially when we talk about public transport jobs, these are governmental driven.

So there it's quite difficult to put pressure for a downpayment and there are different levels of authorities, which have at the end to sign-off this first payment. So governmental infrastructure project awards are even a little bit more time consuming than privately financed tower awards.

So -- but you are right, somehow the six months is not so long. Usually, six months are quite a good lead time on an average, but now it is quite chopped by job driven.

But as I said, we know, because we have already seen now in April that the first of those large projects and public transport jobs have been -- have received downpayment. So we will be able to book them also in Q2.

So we would expect that our order intake in China is benefitting in the Q2 from the one or the other large project we can book as orders received.

And was I right in saying that your project awards in China were up sort of in the 20s year-over-year? Would that be the right kind of order of magnitude?

Last year, this was correct, but I also have to admit that awards in 2015 have not been brilliant. So you have a certain base effect when you compare 2015 to 2016, because 2015 was maybe not so good, but we had quite a strong momentum, I have to admit, in the second half of 2016, we also did quite a good job.

And this is for -- primarily for your infrastructure business, which is a good sort of 10%, 15% of volumes in China, would that be right?

No, it is also for towers. So our top range business, we had good awards with the Schindler 7000 and you might remember, we launched in the second half of last year, the new generation of the Schindler 7000 and this has been highly appreciated by the market, because it's a very strong high-quality product and people were willing to award Schindler maybe even more than in the past.

So it was both public transport, but also Schindler 7000 projects.

Sorry, one last one on pricing. I'm trying to reconcile your comment that pricing pressures is particularly fierce in large projects.

I think you mentioned double-digit, despite obviously the strong awards and order momentum. Can you try to explain to why you see that?

Are you seeing and presumably a lot of these projects are coming with a greater level of service contracts, maintenance contracts and presumably there's a great level of bundling of pricing around those contracts. Can you talk a little about those pricing dynamics and why it particular fears, whether you see that part of the business abating or the pricing pressures abate, as we see better uptake on orders as we get into the back-end of this year?

Like in many other countries, obviously, large projects are landmark projects, which get a lot of attention. It's also about product placement, for instance, in airports and it fills the factories.

Let's face it, these large projects is usually about large volumes, it's about many units. You get a lot of efficiency in installation, in site management and therefore these projects are quite attractive, probably even more attractive in a down market because there were lots of investments by us, by most competitors in the supply chain.

And obviously with these large projects, you can make sure that your factories are filled. That is certainly one big element why these projects are very attractive and also fiercely competitive.

I think this is absolutely right and probably the point you mentioned about the service contract also has some merit, I have to say. When you are in a high complex job like a tower and you have, let's say, a Schindler 7000 installation, you usually have the highest conversion rate.

So usually, you get the service contract, usually are not so quickly attacked because it's a first-class technology, which is not so easy to maintain by others unless they make a modernization. So there is some -- if you take a total cycle time consideration, you are of course focusing also on a good service contract, this is true.

Martin Flueckiger from Kepler Cheuvreux. Thanks for taking my questions.

I also have three questions, if I may. First, coming back to your statements about the China new installation market, I was just wondering, you've talked about the growth in terms of units that you've seen, a decline I should say 3% to 5%.

But if I understood you correctly, you haven't mentioned any estimates on mix and pricing. I was just wondering, whether you could quantify that a little bit and how you see that versus Q4 over the second half of 2016?

That would be my first question. Then the second one is on the strength in orders received and revenues in the Americas.

I was just wondering, how sustainable you think that is for the remainder of 2017. And what's -- what the latest, let's say, leading indicators are from your perspective with regards to the Brazilian new installation market?

Are we seeing signs of recovery for the second half or is there -- is it still same for 2018? That would be very helpful.

And then my final question is on your net financial loss of CHF32 million, which is partly due to the temporary book loss of CHF16 million and also the remaining CHF16 million, I was wondering, whether you could provide some insights there? What the main drivers were?

Thank you very much.

I will take a couple of questions. Let me start with the last one, the net financial loss.

It is true that CHF16 million is really a valuation loss on the bond, the exchangeable bond. That is still outstanding.

It is now marked at roughly 200% and therefore, we have to step up our liability through the financing activities, but this will all reverse at the time of expiration maturity of the bond. One thing, which sometime gets a little bit forgotten is another part related to ALSO.

And for the better part of 2016, we were still fully equity consolidating ALSO. In other words, we also got the share, the profit share that was attributable to us and this was as much as CHF10 million in the first quarter of 2016 and will now fully disappear in 2017, because we are now really only in a minority shareholding about 5% -- 4%-5%.

So this will fully disappear by the time this exchangeable bond is converted. So it's really related to ALSO and unfortunately this equity profit, if you want that we had in the past is fully gone, it's that part of the past.

That was CHF10 million, so if you combine those two elements, you have almost the full explanation for the difference to last year. Then to Brazil.

Brazil, it's really difficult. They are in a severe recession, probably one of the largest recessions of the last 20 years.

We believe that the market is stabilizing and there is probably not further downside to be expected. However, in our industry, you know it just as well as I do, it takes time to recover to rebuild.

We have not seen really growth in the new installation business, it will come back. That's what we hope, but impacts on revenues, impacts on profits will probably lag by 12-months at least.

Then further north to the United States I think that for 2017, order intake and revenues will still be strong. We have no reason to believe that this will change.

The revenue is largely dominated by the backlog, which is very healthy, has been built over the last few years. Our Company is different from the past, we have new products, so we have clearly improved performance in this part of the world in our Company.

What the future holds is rather difficult to say. It's really a good situation now in the US construction market and we are also wondering a bit how long it will last.

But currently, we have no signs that it will change immediately. I think the first question was about mix and pricing in China.

The pricing, if you look at order intake, it probably was down again about 3%, maybe 5% in this range average. So -- and let's not forget, even in the heydays in China, pricing was always down every year.

So in that sense, we are a bit used to deal with it. But the mix, that's a difficult one to really answer, I would say, first of all, [indiscernible] installation business to the large degrees no installation business.

Clearly, when I look at the revenue of the first quarter, there would be a bit lower share of a large project in our revenue than what we experienced over the last few years. That could be probably the biggest difference on mix.

Did I hit all your questions?

You already mentioned the time lag between awards and orders and obviously this has now been the also the third quarter in a row where revenue growth did not keep pace with the growth in order intake. Does this mean that the call of behavior of your customers has become more cautious?

And if yes, in which region? So is it only China?

And why does it seem to be the case that the call of behavior of your customers has become more cautious? Thank you.

Well, it will be primarily in those two regions. Yes, it will be China, but also to some degree in India due to the demonetization impact.

This has really put a slowdown to the market and also their customers are a bit more careful in calling off material for their projects. And obviously, also Brazil, let's face it, that has also not helped.

Overall, [indiscernible] revenue generation that is certainly another contributor to this effect.

I think there is one maybe additional topic is as we had a very good large project order intake in the second half of last year, which has usually a much longer timeline until it really turns into order -- operating revenue. We have, let's say, built up a little bit in the future.

We -- because it will become operating revenue maybe after 18 months to 24 months. And if you have large project, they usually take 1.5-years to 2-years.

So this real pickup we had in the second half and you remember Q4 was a real fantastic order intake month, like also now this first quarter. This will only be reflected towards 2018 as an operating revenue.

So it is true, you have some time lag. If you are very successful in large projects, then you do have some time lag.

What is very promising, I think, is also our existing installation business, which has really nicely developed and we were very pleased with that. Also in China, it was more than 20% growth in the service business, again.

So I do not worry so much about the operating revenue looking forward.

Again, quickly on China, just to make sure, your revenues were flat in Asia. And you say your aftermarket sales were up, this implies that your new machine -- sorry, new installation sales were down, but the new installation in units were actually up or you call it a number of units sold.

Am I right on it? Is that correct?

It is just correct. Yes.

This is correct.

Okay. So -- and the delta of this is mix and pricing as discussed?

Yes. To some degree, large projects, because this is clear when we enter into new market segments and therefore we always said that now we will sell more units at low average values and this [indiscernible] is good to have now that you have the products for the social housing segment and the residential segments.

So this has really helped. So therefore more units, but large projects obviously are also a bit below last year in the first quarter and therefore the value would be down slightly.

Okay. So there was a considerable mix effect as well?

Yes.

Okay. Then also you said that you were able to compensate or to safeguard your margin with more efficient procurements reducing costs and also reducing overall Company cost.

[indiscernible] compensate, let's say, pricing pressure mainly came from China. Did you safeguard all of your margin locally in China with local measures?

Or did you kind of compensate that with the good strong development in North America and in Europe?

I think it's both. I think honestly, we are pleased with the margin development in many, many markets, so it's quite interesting to see how margins are developing in a country like the US.

When the economy is booming, people are willing to pay more and on top of that we are working on our cost with the global introduction of the Schindler 3300 and the 5500, which are quite cost competitive. So we are like a double positive impact.

Also in Europe, I think we were able to work nicely on our overall profitability. And I think you are right mainly in China, we are working on Chinese actions.

One element -- or the key element is the modularity of our products. We have introduced new products which have another cost level than the older ones.

And so with that, we were able to mitigate the commodity price increase because it would have been very difficult to mitigate the commodity price increase just by negotiations. It's difficult if you supply us, they're also hit by the steel price, copper price, aluminum price increase and then to ask for a further price reduction is quite difficult to enforce.

But if you change the design of your product and you have come in with a product which has a lower cost baseline, then even if commodity prices are going up, your overall cost for the new product is still as good as or even a little bit lower than the older product and this now really pays off.

I have two questions. First of all, talking about the EBIT margin improvement of 570 basis point.

I was just wondering, from a top down perspective, if I look at -- is there a certain mix effect for example more service than new installation, which would reverse in the course of the year or also a mix effect, if I look at the regional growth and -- because there US had a very strong growth that this impacted in the first quarter a bit more than we would assume for the rest of the year? So that's a question about the mix and the EBIT margin.

And then another question to Brazil and the Brazilian real has increased quite a lot against the Swiss Franc. And I was just wondering, whether this has at all any impact on the profitability in Latin America, assuming that you export elevators from Brazil to other countries, if you are able to increase prices on those products if you export them?

Thank you.

The EBIT question, overall, it's a little bit what Thomas said. We have really worked diligently over the last years in many countries, many markets to improve profitability.

We have this fast forward program. We have introduced new products, particularly also in North America and North America was also obviously helped by the economic cycle.

So it's clear that when we look at certain geographies, certain geographies have improved and the United States is clearly one of the contributors to the improvement overall. It doesn't mean that the other companies would have become -- would have slipped back to the contrary.

But overall, it's really improvements in various countries, but also thanks to the new products that we have introduced. Overall when I look at the growth rates between NI and EI, the growth rates were good in both, actually fairly balanced growth, so no real mix impact.

But traditionally, when you look forward into the year, it's clear that the NI will grow more in the second, third and particularly then in the fourth quarter than EI. And so when I look at the margin, as it was in the first quarter, you should not expect now further improvements to the same magnitude quite to the contrary, I would say, a rather cautious at the level where we were in the first quarter, but at higher volumes now, because the new installation volumes will kick in to a larger degree.

But this is more seasonal effect that you see every year rather than a comparison to previous year. On Brazil, you're right, we are quite pleased with the currency development.

It has improved. We were suffering from this over the last 12 months to 18 months quite heavily, now, it has slightly improved.

It's not back to what it was before, but this has helped us obviously a bit in the consolidated financials as well. We are exporting from Brazil.

This is correct to mostly Latin American companies. So far, this higher reals has not really hindered exports.

In fact, we have moved back a little bit some volumes from China to Brazil a year ago, because actually overall the Brazilian factories are quite competitive also compared to auto manufacturing sites. So no impact that I could point to at this point.

A couple of questions, please. Firstly on Schindler Ahead.

I know, it's early days, but do you have any sense of how the legislation around elevator servicing will develop to reflect the new technologies that are in the markets? Do you think that there still will be the requirements to the same physical checks of the elevators and escalators or that the regulators will let some of the maintenance be done remotely?

That's the first question. And then secondly, we've seen similar moves by your bigger competitors, including partnerships with software names.

What risks do you see here that the industry all ends up with a fairly similar offering that's difficult to differentiate or charge for and the benefits of Internet of Things just gets passed to the customers? Thank you.

So maybe, I -- this time, I try to answer the two questions. It is true that in some countries, we have very strict legislation.

How many visits you have to do physically per-installation. In some of the market, it's very intense.

So for example, in China, you have to go 26 times, so every 14 days and you have to do it with two persons. So this is quite labor intense.

In some other markets, there is a very low number of visits given by the government. For example, in Italy, it is -- you go in fact legally twice a year.

And in many, many other markets, it's more common sense, how often you have to go there. So one size fits all does not work here.

So we are working on influencing legislations. For this, you need strong partners and you also have to demonstrate, of course, that you can achieve the same reliability and safety.

And in some countries, we are working now with the bodies together to show how good our solutions are. This will take time.

I never have seen that legislation, especially when it touches somehow labor, which is done within one or two years. This can be quite a long-term run.

But of course, in other countries where there is no legislation, we see that we can start also to improve our efficiency quite dramatically. And then on top of that, you still can improve efficiency even if you have legislation because some of the time you are spending is also handling callbacks.

And so if you can combine such a callback visit or eliminate a callback visit, by doing when you do the normal service visit already the necessary steps, then you nevertheless have an efficiency improvement. But you are right, in some countries this will be much more long run.

Now when I look on the overall picturing competition, I do not want to comment on their solutions. I think I just have seen at the Hanover Fair, five years ago, you just saw machines, you saw punching machines and today everybody talks about digitization.

So it is something which just happens, whether we want that or not. But it is quite similar like with elevators, elevators also do not so dramatically differentiate from one competitor to the other, it's more do you create the trust and with your customer baseline that you really have a good solution.

And I think the solution we now have at the moment, I would say, is really state-of-the-art. I'm really convinced that -- but its digitization can change quite quickly, but I would clearly say that we have a leading solution now in the market.

Others will follow. The question will be whether smaller and mid-sized companies will have the investment opportunities or resources to do all those investments because all the big OEMs are heavily investing now in digitization and maybe they do not differentiate so much from the one to the other at the end, but they probably will differentiate to the smaller competitors, which is also quite a big opportunity because especially in the service business, the pressure very often comes from the smaller, we call them cowboys or pirates, the smaller companies just focusing on service, they might struggle to have similar solutions.

Yes that makes sense. Thank you.

And then [indiscernible] in your comment around the overcapacity of elevator or escalator production in China, backing on pricing. I mean, do you have any sense as to how big that excess capacity is?

I know across a lot of end markets, it's very common in China, but in your industry, do you know how much excess capacity is sitting idle?

We don't know. Honestly, we don't know, but it's big.

I would say so much that over the last years, there was really a lot of supply chain investments by most competitors. But I would also say that in our industry, the manufacturing, that's generally is quite low.

And therefore, you're quite adjustable, quite easily you can adjust capacity. But it's clear, you want to somehow maximize the capacity that you have built.

But in -- I would say in many parts of China, there is quite a bit of overcapacity in our industry, probably not only in our industry, but generally speaking.

I would like to come back on the award pipeline for China. I think you mentioned 2015 was a soft comparison base explaining the strong increase year-over-year in 2016.

Maybe I've overheard the number for 2017, could you provide us with the current trading you see in the award pipeline in 2017 versus 2016?

Typically, I think we don't want to comment on the award pipeline because quite honestly, it's an internal figure that we track obviously very, very diligently, but it could also lead to wrong impressions in the market. I think at the end, we report order intake and that those are good orders that will not be canceled in the future.

That's why we want to be very careful before entering them into order intake, so I would rather step back from giving precise figures on award pipeline. Generally speaking, it is more filled than what we had a year ago.

Clearly, that I can say, but to give precise figures could lead you to wrong conclusions, could lead the market to wrong conclusion and therefore, I would like to not quote figures.

Okay. We spoke a little bit about mix and I understand you're referring to the number of large projects versus smaller ones.

But I was wondering, the last discussion we had together was on Chinese customers trading down in terms of specifications for the elevators and that has been a tangible driver of the overall monetary value decline in the past year. I'm wondering, whether this has bottomed out in 2017 or whether you would expect that to bottom out.

Because I do understand with the maturity of the market, you would not expect the customers to go to [indiscernible] the original specifications or go even higher? But is this going down further at the moment or has this bottomed out?

I think this is a very good observation. It is true that we see that customers in order to their, let's say also financial capabilities and also cost cautiousness, they are driving down specifications.

Let's say, when we talk about general projects, of course, if you have landmark projects, this is not seen. And then the customer really wants to have top class, high technology, state-of-the-art solutions.

But of course in terms of numbers, these are much, much -- it's a very small number of projects. If you look on the general market trend in residential and in commercial, it is true that also customers are driving down prices by lowering the specifications.

If then during the project they see that the building itself becomes a good business case for them and they might be able to get one or the other very good tenant on top, they might be willing them to add afterwards with an upselling process some features to their elevators and escalators, but it's true also specifications are reduced since quite some time now. Can they be further reduced?

I'm not so sure at the end, they still need an elevator going up and down and you need a bottom to press. So at the moment, I would say, it's probably not bottoming.

Okay, understood. And maybe one last question on the margin revolution of the 70 basis points that we've seen year-over-year.

Is it fair to assume this has been mainly driven by NI versus EI or is this evenly driven by both parts of your business?

I would say it's evenly driven. We had very good volume development in EI and obviously, as you know with economies of scale in the route, you immediately gain efficiencies.

But it was really [indiscernible] business of both product lines, major product lines improved really well in the first quarter. So maybe one last question from my side is on the harmonized product platform and the commodity prices.

So the harmonized product platform, I understand the lead period should be more than one quarter and you only started to take orders for that in the fourth quarter of 2016. So I wonder, to what degree we already see this in the current margin and on the same line for the commodity prices.

I understand you have locked in prices for few suppliers, so a higher commodity prices should not be seen in the current margin in the first quarter. Is this conceptually right phrase or have I missed the point here?

Maybe I can answer the topic of the sales and Erich can little bit talk about the commodity hedging and development. It is right, your assumptions are right.

What I referred the last time was that we also introduced new two product lines in China in October, so it was the last quarter. But we had already another product line launched beginning of the year last year, so there is a slight impact already on our -- positive impact on our margins.

And there will be another positive impact coming in the foreseeable future to compensate some of the commodity price impacts we will also face towards the end of the year. And maybe, Erich, you can once more elaborate on that topic?

Yes. It is true.

I mean, your assumption is correct. I can confirm that that the first quarter, the impact was minimal from commodity pricing because on at least the major components and materials, we are locked in, probably to a large degree through middle of the year, but I can assure you that our supply chain is very alert.

They are working very diligently, they have estimated potential impacts, run rate impacts, which are quite significant, as Thomas has mentioned. And we are now working with the supply chain with our suppliers to minimize those impacts in the second half and then particularly in 2018.

So this is ongoing work. We will be able to offset some of it, but not all of it.

And therefore, we also decided to raise price in some product lines and have announced that with our customers.

Thanks for taking the follow-up. Thomas, Erich, I wonder, if you could help me square-off that the China order value growth with the buckets of volume, price and mix.

I've listened to everything you just said, but I'm a little lost on project and specification mix versus peer price. I wonder, if I can just try some math on you and if you are able to correct me that will be very helpful, if it doesn't go too far.

But my math is -- I think you say that your total China order value in local FX is down, I sense low single-digits, so I'm guessing something like a 3, and you talk about continued good service growth, so I'm guessing something like 20, which makes to think that your 90% of China, your NI business must be down something like a 4. And what I'm trying to do is break that 4 down into volume, price and mix.

I think on price you talked about the 3 to 5, but I think that's only for the core business and I think you're also alluding to 10-ish price pressure in the larger project tower type part of the business. So one of my embedded questions is, does that mean overall China price is more like a 5 or 6, when you lump it together?

And if your volumes are up, because you say they're up and they're up high single-digits as I sense, so I'm guessing an 8. Does that mean that the remaining balancing item that I need to find, which I guess is a minus 6 is mix?

I'm sorry, there's a lot of guesstimates in there, but I'm just trying to understand these moving parts.

Well, I'm quite surprised, James, I have to say, you did a fantastic work. You're not so far away.

We do not usually comment on the single lines, but I think I can follow your argumentation and it seems to me reasonable.

And the second follow-up, if I could is the raw material point, you eluded to quite a big number in the second half and into next year and you have to offset that partly with the design and price. Are you able to help us with just the one side of the equation?

And how much, given your visibility, we're talking about in Swiss francs that you have to mitigate?

Well, it's an estimate from today. It's a point of view, but it could be a material cost as much as a CHF100 million and this is gross run rate.

This is -- if we wouldn't just sit idle and do nothing, probably in 2018, we will have a number to offset like this. But this is not what we are saying will happen, we will -- as I said before, we have [indiscernible] already a couple of months ago starting with the supply chain to mitigate it, but this will be sort of the net -- the gross impact [indiscernible] measures that potentially could take 2018.

So that's not including what you might see in the second half of 2017, that's just the 2018 number?

Well, that's a run rate. That's the full year --

Which could be starting in the second half?

Exactly.

So ladies and gentlemen, thank you very much for joining this call. I hope we were able to answer all your questions.

I would like to close now the conference call and I look forward to our half year conference call on August 15. Thank you very much, and goodbye.

Goodbye.