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Edited Transcript of SCHP.VX earnings conference call or presentation 14-Aug-19 8:00am GMT

Half Year 2019 Schindler Holding AG Earnings Call

Hergiswil Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Schindler Holding AG earnings conference call or presentation Wednesday, August 14, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Thomas Oetterli

Schindler Holding AG - CEO

* Urs Scheidegger

Schindler Holding AG - CFO

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Conference Call Participants

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* Andre Kukhnin

Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst

* Bernd Pomrehn

Bank Vontobel AG, Research Division - Analyst

* Christian Obst

Baader-Helvea Equity Research - Analyst

* Daniel Gleim

MainFirst Bank AG, Research Division - Director

* Daniela C. R. de Carvalho e Costa

Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team

* Debashis Chand

Societe Generale Cross Asset Research - Equity Analyst

* Fabian Haecki

UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research

* Joseph Zhou

Redburn (Europe) Limited, Research Division - Research Analyst

* Martin Flueckiger

Kepler Cheuvreux, Research Division - Equity Analyst

* Martin Hüsler

Zürcher Kantonalbank, Research Division - Research Analyst

* Wasi Rizvi

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Schindler Conference Call on Half Year Results 2019. I'm Alessandro, the Chorus Call operator. (Operator Instructions) The conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Thomas Oetterli, Chief Executive Officer. Please go ahead, sir.

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Thomas Oetterli, Schindler Holding AG - CEO [2]

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Good morning, ladies and gentlemen, and welcome to our half year 2019 results conference call. My name is Thomas Oetterli. I'm the CEO of the Schindler Group. I'm here with Urs Scheidegger, the Group's CFO, who will take us through the financial details.

Before we dive into the results of the first 6 months in 2019, I'd like to highlight some of our sustainability focused achievements. At Schindler, we've always had a strong focus on the longer term to act in the best interests of the company and its stakeholders and to be a vital part of the communities we are active in. Our sustainability strategy, "We Elevate Our World," centers around 6 clearly defined priorities to manage the firm's impact on the economy, society and the environment. Employee safety, talent diversity, community engagement, smart urban mobility, the global vehicle fleet and the supply chain are our key areas for action for which we set ourselves ambitious targets for the upcoming 4 years. And we've been already active around the world for quite some time.

A few examples to showcase our efforts. We are running a fleet optimization program to keep reducing our carbon footprint whilst enhancing service concepts, especially in more densely inner city areas. Our new campus in Ebikon is LEED Gold certified with a strong focus on locally sourced, renewable energy and conserving resources overall. LEED is a building rating system and recognizes buildings that have been developed, planned and realized according to measurably sustainable criteria.

We are also focusing on creating a more gender-balanced workforce. Our Diversity Committee is driving this agenda forward. Our Women in Leadership program is now active in Europe, in the Americas and also in Asia. Besides that, Schindler Australia, for example, is running 2 leadership development programs, triggering cultural change.

We are also fostering the development of young talent beyond our well-established apprenticeship programs in which more than 3,000 young people worldwide engage. To date, Igniting Minds, Schindler's India's flagship program for corporate social responsibility, has successfully supported over 700 young people from disadvantaged backgrounds in the completion of their technical training, and we've won numerous awards for the program.

Since 2018, Schindler Switzerland has been pioneering vocational education and training programs aimed at equipping refugees with the skills they need to work in Switzerland. There are different courses depending on the participant's education and experience, but the objective is the same: give young people the skills to integrate into the workforce in Switzerland.

These are just examples that may showcase that [here] at Schindler, we define success not only by our financial outcomes, but the business ethics by which we operate and our impact to stakeholders worldwide. In addition, we live and breathe our commitment to highest quality and continuously improving in everything we do. More than 1/3 of all Schindler employees worldwide have now completed the Schindler Quality Champions Program that focuses on front-loading, collaborating and communicating. Our quality ambassador community is growing and will foster cultural change globally.

With that in mind, I'd like to draw your attention to Slide #2, which summarizes the highlights of the first semester 2019. In an overall highly competitive market environment, Schindler succeeded in maintaining growth momentum during the first half of 2019. At the same time, political and macroeconomic uncertainties remained eminent in many geographies and countries.

In a nutshell, growth and strategic investments characterized the first 6 months of the year. Schindler grew across all product lines and regions, and continued to invest in strategic projects identified to prepare for the future. These strategic projects are proceeding according to plan.

Order intake rose by 5.8% in local currencies, supported by a further increase in the order volume for major projects, especially in the public transport segment in North America and in China. Revenue increased by 5.4% in local currencies. For both indicators, the Asia Pacific region generated the highest growth, followed by the Americas and the EMEA regions.

As expected, the aggregate of higher raw material cost, wage inflation, foreign currency impacts and the planned increase in expenditure on strategic projects continued to affect operating profit. EBIT reached CHF 596 million, a smallish decrease of 0.7% in local currencies, and the EBIT margin came in at 11.0%. Adjusted for restructuring costs and expenses for BuildingMinds, it stood at 11.3%. It is encouraging to see that sequentially, the EBIT margin is increasing compared to the first quarter of this year. Net profit stood at CHF 436 million, and cash flow from operating activities reached CHF 444 million. This is the adjusted number before one-off impacts and was broadly in line with the previous year.

I turn to Slide #3 and the recent developments in Asia Pacific. Overall, the positive market development in the region continued. The Chinese new installation market was slightly up in the first 6 months, a development better than expected at the beginning of the year. And India continues to grow, driven by the residential and infrastructure segments. The development of Southeast Asia was diverse and showed a mixed picture. Service markets were healthy, enhanced by the conversions of new equipment. And particularly in China, activities in the modernization segment accelerated. Our performance was primarily strong in China and India in both new installations and existing installations market.

Let's move to the mark -- to the next market region in the Americas on Slide #4. The momentum in the U.S. has leveled off, and the market has stabilized on a high level. The public transport sector still recorded growth, while the low and mid-rise segment started to trend towards less activity. Latin America was somehow stable overall, but with a persistent challenging environment in Brazil.

We at Schindler, we did well. Our North American operations continued with their good performance, supported by a strong modernization business. On the other hand, the new installation business posted a slight decline. We find it increasingly challenging to find qualified field staff, consequently delaying projects and impairing our efficiency. Latin America displayed overall good growth as well, despite a challenging environment in Brazil, as mentioned before.

I continue with the EMEA region on Slide #5. Markets in Northern Europe remained solid on a high level. In the southern part of the region, a slight overall market contraction was observed, particularly driven by Turkey. Schindler recorded a minor negative development in the new installation business following an extraordinary strong previous year. The existing installation business continues to grow. The lack of qualified resources becomes also, particularly in Northern Europe, more and more an issue, impacting performance on construction sites.

Finally, I'd like to share an update on the development of our strategic projects on Slide #6. These projects identified to prepare for the future can basically be grouped into the modularity program; the digitization topic, which is composed of the development of digital customer solutions enabled by Schindler Ahead and PORT as well as the digitization of business processes; and last but not the least, BuildingMinds. All projects are on track. However, since we are in the ramp-up phase, they impact our results.

The modularity program aims to substantially reduce the complexity and variety of components in our global product offering. We've harmonized cars, hoistway materials and controller components. We have 3 groups of the modular components introduced by now. Schindler Ahead launched 2 new products for more convenience during elevator journeys, that's the AdScreen and the SmartMirror product. Connectivity and global rollout are progressing according to plan. It's worthwhile mentioning that Schindler Ahead solutions feature top-notch cybersecurity requirements.

And last but not least, BuildingMinds. BuildingMinds set up the core team, and the collaboration with Microsoft is established, and first customer solutions are being developed.

So overall, I would say good progress in the strategic initiatives and also progress in our operational performance.

And now I would like to hand over to Urs for an update on the financial results and the outlook for 2019. Urs, please.

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Urs Scheidegger, Schindler Holding AG - CFO [3]

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Thank you, Thomas. Good morning, ladies and gentlemen, and welcome on my behalf to today's conference call. The next few minutes, I would like to share some more details on our results and conclude with the revenue and net profit guidance for the year 2019.

As a general remark, negative foreign exchange impacts, particularly on the top line, should be considered when looking into our results. The strong Swiss franc has left its mark.

I start with the key figures on the second quarter of 2019 on Slide #7. In the second quarter of 2019, order intake rose by 2.5% to CHF 3.1 billion, corresponding to a growth of 5.1% in local currencies. This robust growth should be reviewed considering a high comparable base in the prior year. The second quarter 2018 was our best quarter by then.

Order intake includes all product lines, new installations, modernization, service and repairs. The Asia Pacific region again generated the highest growth rate, reflecting strong growth in both China and India across all product lines. This was followed by the Americas and EMEA regions. Growth was also fueled strongly by the existing installation business. Developments in major projects were noteworthy, particularly in the public transportation segment in North America and in Asia Pacific.

Revenues improved by 2.4% to CHF 2.8 billion in the second quarter of 2019. Considering the high prior year baseline and negative foreign exchange translation effects of CHF 73 million, particularly due to the strong Swiss franc against the euro, the Chinese renminbi and the Brazilian reais, this growth rate was quite remarkable. In local currencies, revenue were up by 5.0%, reflecting growth in both the new installation and existing installation business.

Operating profit was CHF 322 million or, as expected, 3% less than in the second quarter of 2018, equivalent to a decline of 0.3% in local currencies. Foreign exchange translation effect had a negative impact of CHF 9 million. EBIT adjusted amounted to CHF 334 million, this is EBIT before restructuring costs of CHF 7 million and expenses for BuildingMinds of CHF 5 million. The EBIT margin reached 11.3%. The margin for EBIT adjusted was 11.7%, a sequential increase of 70 basis points, respectively, 80 basis points compared to the first quarter of 2019.

In the second quarter of 2019, the net profit amounted to CHF 239 million. Excluding the tax refund, the CHF 55 million recorded in the second quarter of 2018, net profit was 5.5% behind the previous year, mainly due to the aggregate of our overall operating result and the deterioration in the financial result attributable to currency losses on financial hedges. These were only partly offset by lower income tax expenses. Cash flow from operating activities in the second quarter reached CHF 85 million.

With that, I'm moving on to Slide #8 and comment on the performance of the 6 months. In the first half of 2019, order intake increased by 3.8% to CHF 6.1 billion, corresponding to a growth rate of 5.8% in local currencies. All product lines and regions achieved growth. The margin profile in the order intake has improved, which is a good sign. The Asia Pacific region generated the strongest increase, followed by Americas and EMEA regions. In the Chinese, the new installation market, Schindler generated significant growth in value and delivered a substantial increase in volumes compared to the previous year. Again, developments in major projects were noteworthy, especially in the public-transport segment in North America and China. Revenue grew by 3.3% to CHF 5.4 billion, equivalent to a growth rate of 5.4% in local currencies. Negative foreign exchange translation effects of CHF 108 million were accounted.

We can take a quick look on Slide #9 for an overview on revenue growth by region in local currencies. The Asia Pacific region generated the strongest increase, followed by Americas and EMEA. After an extraordinary first half of 2018, growth rates in EMEA and the Americas have come back to more sustainable levels. To the right of the slide, you can see the distribution of revenue and backlog by region underlying our very balanced geographical footprint.

I now continue with Slide #8. Operating profit totaled to CHF 596 million in the first half of 2019 or 2.8% less than in the previous year. In local currencies, the decline was 0.7%. As expected, price adjustments, economies of scale and efficiency gains did not fully offset the aggregate impact of foreign exchange, wage inflation, higher material costs and planned accelerated spending on our important strategic projects. Consequently and since the impact of cost-saving measures is expected to materialize only in the second half of the year, the EBIT margin was 11.0%. Before restructuring costs of CHF 11 million and expenses for BuildingMinds of CHF 9 million, the EBIT adjusted increased in local currencies by 1.1% to CHF 616 million, equivalent to a margin of 11.3% compared to 11.8% in the previous year.

Net profit totaled to CHF 436 million in the first half of 2019 compared to CHF 516 million in the previous year, which included a onetime tax refund of CHF 55 million that was recognized in the second quarter of 2018. Excluding this onetime tax refund, net profit was 5.4% less than in the previous year, mainly due to lower operating profit and the deterioration in the financial result attributable to currency losses on financial hedges.

Cash flow from operating activities totaled to CHF 348 million; first half of 2018, CHF 434 million. Adjusted for the settlement of pension obligations and the introduction of the new accounting standard, IFRS 16, it amounted to CHF 444 million, a slight increase of 2.3% compared to previous year.

It is noteworthy that the group has reduced the overall employee benefit liabilities significantly to only CHF 280 million for the whole group. As of June 30, 2019, the order backlog totaled to CHF 2.9 billion, an increase compared to the previous year of 5.8% and 9.3% in local currencies, respectively. On a positive note, the margin profile in the order backlog is improving.

Last but not least, I would like to mention that the introduction of IFRS 16 leases have no material impact on EBIT level nor on net profit. It has extended our balance sheet by approximately CHF 400 million.

With regard to our outlook for the remainder of 2019, please turn to Slide #10. The markets may slightly weaken over the remainder of the year, but Schindler expects to achieve continued growth while delivering on the strategic projects identified to prepare for the future. For the full year 2019, excluding any unforeseeable events, Schindler expects a revenue growth between 4% to 6% in local currencies and net profits of between CHF 900 million to CHF 940 million.

With this, I'm handing back to Thomas.

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Thomas Oetterli, Schindler Holding AG - CEO [4]

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Thank you very much. I think now it's time for questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Daniela Costa from Goldman Sachs.

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Daniela C. R. de Carvalho e Costa, Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team [2]

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I have actually 3 questions. First, I wanted to ask you regarding how you think sort of market share by region has evolved. I think we've seen now sort of the 4 largest elevator companies reporting very, very different trends and orders across them, so I wanted to -- sort of some commentary on that if possible.

And then the second thing, I wanted to sort of get some views from you in terms of you maintain the 4% to 6% revenue growth guidance, but you also comment on the markets slightly weakening for the remainder of the year. Do we -- that comment on the weakness, is that something that we should mainly see even though [LIGOF] or backlog to sales reflected in 2020 or could impact your view of where you stand on the 4% to 6% within the range?

And then my third point, just wanted to get your latest thoughts in terms of capital allocation. You continue to have quite a lot of cash on the balance sheet. As we get towards end of the year, how you're thinking about remuneration to shareholders versus M&A and internal investments? Those are my 3 questions.

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Thomas Oetterli, Schindler Holding AG - CEO [3]

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Daniela, thank you very much for the questions. I probably will start with the first 2 one. And maybe capital allocation, I will also hand over to Urs. Well, market share by region, we do not comment on the market share we have region-by-region. But I think, all over the globe, as we had a strong performance in order intake, I think we have improved our market position, especially also in China. In some of the other markets, we have seen that market itself has been a little bit more flattish. Some bigger markets have been reaching a peak. And I think there, we probably stayed quite stable in our position. But I think the key story was that we were able to improve our position, in China notably, the biggest market in the world.

I think with the second question, the guidance of 4% to 6%, this is a range we see if we look on our tender activities which we have at the moment. We do see that there are also some major projects in the pipeline to tender and where we will shoot to get an award. Overall, we do have some, I would not say concerns, but I see that, especially in some markets, maybe growth of the market will not so much continue. But coming back to our strategic priorities, we always have said our absolute first priority is that we want to grow faster than the market, whatever the market is. So we believe that this 4% to 6% this year are achievable for us looking into our tender activities, even if the market might be a little bit softening in the second half of the year.

Looking ahead into 2020, I just can repeat. Whatever the market is, our clear ambition is that we would like to grow faster than the market. I do have to admit it's not that easy to make a proper forecast for 2020 at the moment. It will depend not only on us and on the construction industry, but there are certain uncertainties, political uncertainties, but also macroeconomic uncertainties. We do not plan at the moment any severe downturn. But if this would be the case, we would be prepared. And even in such an environment, we would like to grow faster than the market is growing.

Maybe on point #3, capital allocation, so M&A, dividend policy, I think, Urs, you can give some insight into that.

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Urs Scheidegger, Schindler Holding AG - CFO [4]

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Thank you. As you very well know, a very robust and healthy balance sheet is key for the Schindler Group as it provides a strong foundation for us to grow in the market fields and to invest into our strategic projects and also to take opportunities in the market for M&A when they occur. Any buyback or dividend decisions are, of course, subject to Board decisions and approvals.

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Operator [5]

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The next question comes from Martin Hüsler with Zürcher Kantonalbank.

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Martin Hüsler, Zürcher Kantonalbank, Research Division - Research Analyst [6]

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I have 2 actually. I'm looking on Page 5 to your overview on the EMEAs. I was just wondering, you say that the Northern Europe, you see continued solid markets on high level, which is basically to say (inaudible) us after Q1. I was just wondering whether this typical area you saw -- do you see no weakening at all in certain markets such as Germany, U.K., France? That's the first part of the question.

And then if I look on Page 9, where you show the organic growth rates or the growth rates in local currency, I must say, for the -- for each region. And I look at EMEA again. It looks like a bit growth below 4%. You were saying that in new installation business, you probably were down a bit year-on-year, which means that existing installations, you had quite a huge growth. And I was just wondering whether this growth, which might be between 4% to 5% in existing installation, was only organic or if you also had there some acquisitional effect?

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Thomas Oetterli, Schindler Holding AG - CEO [7]

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Okay. Thank you, Martin, for the questions. I think when we look on Europe North and Europe South, so over all the European countries, we do have some very strong markets. And the strongest market probably is still Germany. I have to say the construction activities have reached an -- almost an all-time high. And as we have strong presence in our -- in the German markets, we are of course benefiting from that, but the market is not so much growing anymore. It really has achieved a certain peak. So it is solid, it is strong, and we are benefiting of that. Other countries like Switzerland or Austria, so together with Germany, the so-called DAC countries, all the 3 have been quite similar in their behavior, strong on a high level in the construction activities.

And we should not forget this, that these are quite mature markets, so the elevators and escalators have quite -- are quite aged. So modernization opportunities are definitely there in these markets.

When you look to other markets which are, let's say noteworthy, you have mentioned the U.K. It's quite interesting that -- I mean looking on all those Brexit discussions, we do see still some strong project plans coming up. There are still some quite big projects being planned and in the pipeline where they will tender or they are in the tender stage at the moment. Quite interesting, we don't see yet a real downturn in the construction activities, especially around London, although we have all these Brexit discussions. But I also have to say, of course, uncertainty is increasing, and we will see whether all the announced projects at the end also will be executed. It's -- I have to admit, it's not so easy to properly forecast, but what we can say, the activity in the market is still there.

If we then look more into the southern part of Europe, I think we have good momentum still in Iberia. We have, let's say stable developments in Italy. And we had a very, very strong growth of the market in France last year, and it has maybe a little bit coming back, but it's not really a downturn. It maybe just a year-on-year adjustment.

The market which is, let's say the most under pressure and has almost collapsed is Turkey, and this has impacted us because we had a very strong track record in Turkey. It has been one of our key strategic markets where we have achieved some remarkable success. I would like to remember the new Istanbul Airport, which is in operation now, which was one of our biggest orders we ever had in the Schindler Group and definitely the biggest one ever in Turkey and the operation runs very, very smoothly. I'm super happy with the performance of our team. But the market itself probably almost was now cut by half, and that is one of the biggest markets in the world. Even this has generated this outlook from our stand, over all Europe. The southern part of Europe, where we put Turkey in, had overall a slight decrease not only in the market, but also in our sales performance because we were of course impacted a lot by this Turkish development.

Now when we look on organic growth, I think it is -- first of all, it is true, we have in many, many European markets and especially in the northern part, a very strong market position. So if the market does not grow really so much anymore in the new equipment business, then of course if you have a strong position, you have to be careful. You keep your, let's say share in the market. Maybe in the one or the other area, you are able to further improve, but you are more depending. When the market is stable, you also are more stable. Which then leads to the conclusion, if we have overall a good performance, yes, we had a strong performance also in our service, repair and modernization business in the European markets. And this is driven not really by acquisitions, it's really organic growth.

As we have mentioned in the past, we are selective in M&A. We are looking where we can do some acquisitions which make sense, where maybe we have not such a big density in a city or in a region. And if we have an opportunity, then we try to acquire more service companies, which help us to increase density in a market. But the growth in our service business was really driven by organic growth, and this tells you a little bit the story of how the past 3 years where we have seen very, very strong growth also in our European markets, in the new installation business. And now we are benefiting from the conversion of all those units which have been sold 2, 3 years ago, then they have been installed now, and now we can convert those installed units into our service space.

And this goes back to what I said before. For us, the growth in all the markets above the market is very, very important because it adds long-term value to the company. Because with this new equipment growth in all over the globe, we are able to feed our service portfolio. And it's as you mentioned, now in Europe, you see that very visible that we have benefited from the sales success in the past years, now transforming into our service portfolio.

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Operator [8]

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The next question comes from Andre Kukhnin from Crédit Suisse.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [9]

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Could I start with a follow-up on the end-market outlook comment? Obviously, that slowing bid was there in April already, and it's -- they're now still having -- as you said, put in some strong performance. I just wanted to check whether you are actually seeing anything in terms of clear, hard indicators that it's slowing down or whether that remains just a comment to flag end markets that have been strong and may not sustain at those strong levels?

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Thomas Oetterli, Schindler Holding AG - CEO [10]

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Well, I think -- Andre, I think we have to be a little bit careful and we have to distinguish between different markets. I think when we -- if I start on the global on the left and we look on the Americas, we can say that in the Americas, we see that some indicators are slightly going down. The purchasing index, we also see permissions for multifamily houses have reached a certain peak and have a little bit a softening trend at the moment. On the other side, we still see that there is a lot of infrastructure projects but also high or premium commercial projects are in the market, whereas this low and midrange market now has a certain softening.

Then when we go a little bit more to the south, in Mexico, I have to say there is now a little bit hesitance from the investors, also driven by the government, that some bigger projects are put on hold. And people are looking how the political situation is developing. The rest of Latin America is doing very well, I have to say, in minimum, in those markets which are important for us, except for Brazil. Brazil, somehow we have more hope that it will -- coming up, but we see that it is more stagnating at the moment.

I think Europe, I just have covered before, and then we go to -- more maybe to the East, to Asia Pacific. In Asia Pacific, the picture is really mixed. We have been surprised by China. I have to say China was performing as a market better than what we expected. We have more growth. My assessment is that we had a slight increase of the market, maybe up to mid-single-digit was the market development, and we were outperforming that market. Now in China, it's not so easy to forecast of course, but we have of course seen that the government has clearly expressed that they don't want to have that the prices are further increasing. They still keep these restrictions on the prices and on the financing. And we also have seen that there is still a widening gap between projects started and projects completed. So once -- [either] completions have to go up or then we have to expect that the new starts will slightly come down. Also, the government said in relation to this, let's say tense relationship with the U.S., that they do not want to boost the construction market because they see that in other industries in the long term are more important for them to generate future GDP growth. So we are a little bit more conservative for the second half of China.

When we look on the rest of Asia, I think India still has a boom after, let's say the elections. We have seen that they are really doing very well, and we are quite confident that we have a strong position in India that will be a benefit from that. Then the rest of Asia, Southeast Asia, there the picture is quite mixed. And when you look on countries like Indonesia, Malaysia, Vietnam, Myanmar, Thailand, Philippines, so this whole Southeast Asian area, we have the impression that the markets went slightly down. A lot has been driven by political reasons, elections, uncertainties. And we have a very strong position there, and this has slightly negatively impacted us, I have to admit.

And then the last market is Australia, where we also have a very strong position. The market in Australia went slightly down. So especially in the residential area, we have seen that the number of projects has decreased. It's not that we are in a downturn, but Australia had, or 20 years only one direction. It went up, up, up. And now we see that this has come to a halt. So that's a little bit our analytics of the different market trends.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [11]

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Great. That really completes the picture. Can I just change topic a little bit and shift on to margins? If I take your net income guidance and kind of work back upwards with 23% tax; doubling finance net; CHF 30 million on BuildingMinds investment; CHF 25 million, CHF 30 million of restructuring costs; it appears to imply kind of roughly stable year-on-year second half clean margin ex restructuring, ex BuildingMinds. Just wanted to check if that kind of computes with you. And if not, then what are we missing?

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Urs Scheidegger, Schindler Holding AG - CFO [12]

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Thank you very much for the question, Andre. So net profit guidance, CHF 900 million to CHF 940 million. In regards of margins, we clearly see a sequential margin improvement for the second half year and a very solid first half year. Modularity savings will gradually kick in, and we will also see a good revenue growth in the second half year. Of course, there remains moving parts towards the end of the year. It's also a bit depending on the geographical mix, revenue mix, depending on our rollout of large new installation and modernization project, which may influence margins. From today's perspective, it's a bit ambitious to reach the very same profitability as last year.

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Thomas Oetterli, Schindler Holding AG - CEO [13]

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For the total year.

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Urs Scheidegger, Schindler Holding AG - CFO [14]

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For the total year.

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Thomas Oetterli, Schindler Holding AG - CEO [15]

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But the second half of the year, you are I think right. It is in the range of the development we have seen last year. So as mentioned by Urs, we are expecting a stronger second half of 2019 compared to the first half 2019. And you remember what we always said, we said we will have a low Q1, we will have a better Q2 and this positive trend should continue in Q3 and Q4.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [16]

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Got it. And can I just double check on modularization? Do we still expect about CHF 50 million of kind of year-on-year benefit and whether any of that already materialized in H1?

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Thomas Oetterli, Schindler Holding AG - CEO [17]

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This is correct. There is no change. Our program is in line with our expectation, and the figure you mentioned is a couple of CHF 10 million we will achieve in 2019. Some of it we already have booked in the first half, maybe 1/3. We were able to book already in the first half of 2019, and the rest will come, as announced in the previous calls, in the second half of the year. And this will have an impact on the improved margins for the second half of this year.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [18]

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Got it. And just very lastly, to come back to China, in terms of competitive dynamics there, are you seeing any change? The reason I'm asking is that we picked up some maybe indications that kind of pricing is becoming a bit more mixed, but on the other hand, the market has been, as you said, healthier than expected, which usually is kind of conducive to better pricing environment. So just wanted to ask you what you're seeing kind of in reality in the market.

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Thomas Oetterli, Schindler Holding AG - CEO [19]

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Well, the reality I can especially speak for ourself. When we look on the jobs we have been involved, I always have to differentiate between the residential market. In the residential market, so the underlying mass market, we were able to improve our pricing during the whole first half of 2019, and we see that also that our backlog margins have been improved also in China, not only in the rest of the world, but also in China. In the areas of infrastructure project or large commercial projects, it's still very price intense, I have to say. We have not seen a softening in the pricing there. Our intention is, again, I have to repeat it once more, if I have to make a choice between optimizing the margin and optimizing the growth, we have clearly the first priority in every market that we want to grow faster than the market. This we have achieved in the first half of the year, and I am confident we also will do that in the second half of the year. And we have been even able to improve our sales performance in terms of pricing, but this is not a given gift looking ahead. It will depend a little bit also on competitor behavior and on the market trend. But so far, I'm quite satisfied with the performance we have achieved in the first 6 months of 2019.

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Operator [20]

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The next question comes from Bernd Pomrehn with Vontobel.

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Bernd Pomrehn, Bank Vontobel AG, Research Division - Analyst [21]

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One question for Urs, one question for Thomas, please. First one, accounting question. What was the depreciation on the right-of-use assets according to IFRS 16 in the first half year, please?

And then more an operational question. What do we expect for the conversion rate in the public transport segment in China? This currently seems to be a really strong growth driver for you, but how do you see competition in the service business for this sector developing in China in the coming years?

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Thomas Oetterli, Schindler Holding AG - CEO [22]

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Thank you very much, Bernd, for the 2 questions. It's good that you already distribute them to Urs and to myself. It makes my job easier. So maybe, as I already talked, I start with the conversion rate. As you know, again, as a long-term-oriented company, we want to do new equipment business because we want to feed our service portfolio because we have the strong opinion that in the long-term consideration, feeding our service portfolio, so the installed base where we have a maintenance contract, adds more value to the overall company and also adds more absolute EBIT to the group in the long run. So conversion rates are very important for us, and I can reconfirm that overall, our conversion rate remains on a very high level. I think it's one we don't have to be shy, which lies above 70%.

Now if you look on the different businesses, it is -- in the conversion rate for public-transport, I think it gives us opportunities to further increase our installed base. Some areas or some cities do have old maintenance teams in metro environments or railway environments. We are usually focusing especially on those jobs where we have a good chance also to get the service portfolio afterwards. And why is that possible for us? Because the public area has a very, very strong desire to have highest safety and highest quality. And in our key initiatives, we are putting a lot of emphasis on qualifying and further developing our service technicians. We have different systems in place where we train them continuously to be able to deliver best-class service, and this gives us a competitive advantage in public transport jobs.

On top of it, we also can say that our digital products, Schindler Ahead, are very well perceived by the Chinese government in those public transport areas because it adds more to the safety but also to the reliability and quality of the equipment. But as they are so much focused on having really first-class service, this gives us an additional competitive advantage.

Now on the depreciation right-of-use, I would hand over to Urs.

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Urs Scheidegger, Schindler Holding AG - CFO [23]

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Yes. Thank you very much. I'm also referring to Slide #13, which is outlined in the IFRS 16 lease impact. With the change of lease contracts previously classified as operating leases, we have increased our assets in the balance sheet, the magnitude of CHF 400 million, and are reclassifying cash flows between operating activities to finance activities of 8 -- of CHF 61 million. In regards of EBIT and income statement, the impact on net profit is insignificant.

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Bernd Pomrehn, Bank Vontobel AG, Research Division - Analyst [24]

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So the additional depreciation charges are also about CHF 61 million, correct?

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Urs Scheidegger, Schindler Holding AG - CFO [25]

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Yes.

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Operator [26]

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The next question comes from Martin Flueckiger with Kepler Cheuvreux.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [27]

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Martin Flueckiger from Kepler Cheuvreux. First one on the improving margins and your order intake and order backlog. Can you talk a little bit about the drivers of that? Is it just economies of scale and pricing? Is that also modularity? What's exactly driving that development? That would be my first question. I will go one at a time.

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Thomas Oetterli, Schindler Holding AG - CEO [28]

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Martin, the key driver has been pricing. I have to be clear. The key driver has been pricing because in the -- we have discussed a lot about pricing, especially in 2018, where I explained that overall, we have increased our prices. We also announced that to our customers. And besides a general price increase, I also discussed about power pricing or dynamic pricing where we were evaluating in which areas do we believe we can further improve the prices maybe above a general price increase. So the improvement on the backlog margins is mainly driven by the pricing.

Now you have mentioned as well efficiency, and you have mentioned as well continuous cost reduction with F3, but also negotiation with our suppliers. There, it was more that we were able to mitigate not always everything, but partially minimum our wage increases. We had also in the new installation and especially there in jobs where we have subcontracting. As everywhere, we have shortage of labor. Really, the increase was quite tremendous and was higher than what we had expected at the beginning of the year. And with the efficiency programs and the F3, partially F3 but also other cost-reduction programs, we were able to mitigate some of these wage and material cost increases. But the overall improvement is mainly driven by the pricing, where the team has done really a good job.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [29]

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Okay. Perfect. And then just coming back on your China new installation business. I understand it went rather well both in Q1 and Q2. But I'm just wondering, when you talk about significant and substantial improvement, firstly, are you referring to orders or sales? And what does significant and substantial mean to you?

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Thomas Oetterli, Schindler Holding AG - CEO [30]

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Well, I think it is in both areas. So order intake, we had -- in terms of order intake, we had really a mid-teen improvement of our order intake. And it was not only driven by unit, but it was also in value. In value, it was due to the mix of our project. As Urs and I have mentioned, we won some major projects even in the value, it was even higher than in the units. So there it was even high, mid-high teens in the value and maybe mid-teens in the terms of units. And a similar picture we have seen also in our operating revenue increase also there. China really has turned around. It was maybe a little bit lower, but it still was between mid -- roughly mid-teens in terms of value. So both indicators have been extremely positive in China 2019 compared to 2018.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [31]

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Okay. Perfect. And then my final question, and I'll get back in line. For Urs, when you were talking about your EBIT margin guidance probably not reaching the 2018 level, you -- were you referring to the adjusted or reported EBIT margin?

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Urs Scheidegger, Schindler Holding AG - CFO [32]

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Yes. I'm referring to both levels, but also EBIT adjusted of course. So EBIT adjusted without restructuring and BuildingMinds. You see where we are right now. And I would like to reemphasize, we will clearly see sequential improvements now in H2 because we have outlined good projects. This is clear. But we will see whether we really can reach the level of last year at the end of the year.

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Operator [33]

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The next question comes from Fabian Haecki from UBS.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [34]

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Yes. Many questions already answered, but maybe to follow up here on -- you said that prices are -- have further gone up in China, also more efficiency gains to flow into H2. What about pure material cost and wage inflation? Is that something you see any easing into H2? Or will this just kind of continue as we saw it in H1? That's my first question.

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Thomas Oetterli, Schindler Holding AG - CEO [35]

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Good morning, Fabian. I believe that there will be no easing in -- especially in the wage area. I have to say it has not taken us by surprise, but it's definitely the case that the wage inflation has been higher than what we expected and it is also higher than last year. And I don't see any reason with the shortage in labor that this will disappear in our major markets. I give you one example. When you look, for example, to the U.S. where all your employees are in the unions, we have many, many states where there is not a single person on the bench of the labor unions. Not a single person. So it is full capacity. There is no additional capacity available in the market. And so the -- let's say, the pressure on wages but also when you have overtime, when you want to get subcontracting, it's almost all over the construction industry that we have a shortage of qualified labor. And we see a similar trend also in some of the Northern European markets. When you look on a country like Germany, it is more or less exactly the same. You don't find more people to install. So your first target and ambition has to be to keep them. And in order to keep them, you also have to follow the market trend, what is the required salary or wage level of the market, of -- also other industries, and you have to follow that to keep the people onboard. And this is putting a lot of pressure in this year, and I see that this will continue also in the second half of 2019. And as long as the market environment overall is so favorable, I don't see that there will be a softening of this problem, which is not only our problem. It's a problem in the industry, but even in all the other industries in the construction market, we are all suffering in the shortage of labor.

In terms of material, I think we have been able to mitigate the pressure on inflation with our cost-reduction programs. But what we should not forget, on top of let's say the inflation in the market, we are also facing some impact from the trade war. So as all of you have seen, the tariffs from the U.S., for example, towards China have not softened. In contradiction, they have been further increased, and this will maybe impact our overall results up to 20 basis points in the year 2019. Only the tariffs of the U.S. So this should also not be forgotten.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [36]

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Okay. And then in China, I think you said in earlier quarters that it's more -- was more a material (inaudible) pressure, less on wage inflation. Is the kind of -- the wage inflation topic in China is such -- still not really a burden or...

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Thomas Oetterli, Schindler Holding AG - CEO [37]

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Well, I think also there you have to differentiate. In China, the average wage increase is bigger than in the rest of the world. I remember a couple of years ago, it was 10% per year. Now this has substantially come down, and they are maybe talking about overall 4% to 5%. But there usually the increase for the lowest salaries is higher than for the upper salaries or for higher salaries. And the lower salaries usually are people who are working directly, productive on the job sites. But so far, we always have been able with efficiency measures to mitigate wage increases or the salary increases of our fitters in China with efficiency programs. This is true.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [38]

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Okay. Then another question on your strong performance in China and at market share gains. You're outgrowing the market. Is this mainly through the win of larger infrastructure orders? Or do you think this was achieved relatively broadly through all segments and regions in China?

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Thomas Oetterli, Schindler Holding AG - CEO [39]

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No. It has been achieved all across the board. So I think in all the different customer segments, we were able to improve our sales performance.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [40]

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Okay. That was brief and clear. Last one on M&A again. You stated that you want to maintain a strong balance sheet to be ready for any opportunities that might occur. And you said on the -- that on the service side, you also go for selective acquisitions in some cities that you've got some weaker spots you want to further gain density. Am I right that, that rather calls for smaller to midsized acquisition smoothly to integrate? Or kind of -- did you plan to continue on the M&A side [that's gone] so far in the past years?

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Thomas Oetterli, Schindler Holding AG - CEO [41]

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Absolutely correct. Spot on. Usually, those smaller companies we integrate into our organization, as I said, in order to increase density. And if there is, let's say a midsized target available somewhere, then of course we are always carefully investigating into that.

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Operator [42]

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The next question comes from Joseph Zhou from Redburn.

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Joseph Zhou, Redburn (Europe) Limited, Research Division - Research Analyst [43]

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I have 2 questions on China, please. One is, we note the introduction of the new elevator regulation by the Ministry of Housing and Urban-Rural Developments in China at the end of February. So all new residential buildings with 4 floors or above are now required to have an elevator installed. Previously, this requirement only applied to buildings with 7 floors or more. And herein, China's policy and the enforcement is up to the local governments, so this may take time. But for you and the market, have you seen some tailwind from this new regulation in Q2? And what do you see as the ongoing impact for the future from this?

And my second question is on Schindler Ahead. And so far in your order pricing, how much impact has Schindler Ahead had on (inaudible) on the better pricing? And are we talking about, I don't know, half of the increment coming from Schindler Ahead or something a bit more significant or less?

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Thomas Oetterli, Schindler Holding AG - CEO [44]

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Thank you, Joseph. Two very good questions. Question #1 is in fact referring on the type of elevator we call it add-on. So you have an existing building which has no elevator at the moment. And the Chinese government, in the past, whenever they had a big program for a residential area, they just took down the old buildings, and then they have like constructed very high towers. Now they have moved away a little bit from that, especially in downtown areas because to a certain degree they want to keep a little bit the spirit of the city. But of course as people are becoming older and those buildings are in competition with new buildings, they have to refurbish those buildings. And they have launched an initiative with -- not only for elevators, it's also heating, isolation, electricity, but also including elevators. And so we call that an add-on. You have the existing building, and you attach -- usually outside of the building, you attach a steel shaft where you also have an elevator inside. And this improves, let's say the life quality of the people. This is a very important and also interesting initiative for us in China. It has not yet gained that type of momentum, but it has substantially contributed to our growth in China. The growth in China we had was based on, let's say old business models. But this can be a very interesting driver for future growth in the upcoming years because it's also subsidized partially by the Chinese government, and this should help to convince such condominiums that they should have such add-on elevator. But so far, it's now -- it takes some time until it is rolled out in the different cities and provinces.

Ahead, answering the second question, it has not so much an impact on our pricing in the order intake when we sell a new equipment. We deliver Ahead with the new equipment, but it's more impacting our service contract when we convert this new installed elevator or escalator and we try to convert it into our service portfolio and then to our service contract. There we are connecting those elevators and escalators and then we also add an additional contract. So besides the pure maintenance contract, we add the so-called Ahead contract. And what I have mentioned also in Q1 and in the annual press conference, we see that the average price of these conversion contracts has increased. And I would say, in those areas where they are able to do that, it may be 10%. Sometimes it's a little bit more, it depends a little bit how high the service contract is in a certain country. And this takes time as we have a very large installed base. Of course these new contracts added to our installed base, they have a better pricing, but it will take a couple of years because -- until you have a substantial increase of the value of all our service contracts. But it's a good contributor and it just confirms that our digitization strategy is right on track and is well perceived by the customers. They see really additional benefit as we can guarantee them uptime, we can guarantee them insights, they are always informed about the status of the elevator or escalator. And as I have mentioned in my slide about strategic investments, we now also develop more products for convenience. So interacting with our passengers because we would like to generate a unique user experience. But financially it comes with the service portfolio, and it is adding now over time more and more units of our service portfolio will be connected and more and more millions of people will be connected. And last point maybe, if you look on our latest publication of our sustainability strategy, we would like in 5 years that 500 million people every single day are using connected equipment of Schindler.

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Operator [45]

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The next question comes from Christian Obst from Baader Bank.

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Christian Obst, Baader-Helvea Equity Research - Analyst [46]

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Yes. First 4 questions. One, again coming to the personnel cost. You talked a lot about that so far. Over the years we have seen an increase in percent of reported revenues coming from 33%, 34%, to now in the first half to 39%. So is there some kind -- besides all the wage increases as a shortage of labor? You talked about also some kind of a structural increase in personnel expenses going forward because of average higher qualification, now all these kind of things. This is the first question.

And the second one is, I'd like to understand a little bit more the structure and possible risk of the bigger infrastructure and public transport projects. You mentioned that you are gaining more market shares there, especially in times of a slight softer overall market and there is it for margin also or price competition for these project, how to handle -- how do you handle these? And how do you try to really to avoid the increase of these projects will have a negative effect on your margin despite the fact that they're long term and have some positive effect on the service business?

And the third one is, do you see any market impact on the behavior of your clients or competitors from the upcoming IPO or sale of TK Elevator or the split of Otis from his -- from the mother company? And the last one is, any views concerning your cooperation with GE or Huawei?

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Thomas Oetterli, Schindler Holding AG - CEO [47]

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Maybe, Urs, you could answer the first question? Our development of personnel cost.

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Urs Scheidegger, Schindler Holding AG - CFO [48]

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Right. As we have said, personnel costs are substantially growing a bit more than 3%, and this is really driven by wage inflation for our own people but also for our subcontractors where we have in several countries due to the growth in the markets some bottlenecks driving up personnel costs. It's also another of the ramp-up to prepare for our future growth, not only in the field force but also in our back-office services. We have to invest to be prepared to fulfill in an excellent manner our backlog.

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Thomas Oetterli, Schindler Holding AG - CEO [49]

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Maybe to add on that, you also have to consider that some of our strategic costs we have are also driven by people because we have to build up data scientists, digital nerds, I sometimes call them. And this is also one part. When you talk about structure, yes, we are investing into certain structures. We are investing into digitization, into R&D capabilities, and these are usually people and less on the external cost, so this adds also a little bit on the pressure on that. But I think that overall we don't have structural issue.

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Christian Obst, Baader-Helvea Equity Research - Analyst [50]

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That's what I mean. First of all for a change in higher qualification, and this will increase personnel expenses in percent of reported revenue going forward also because you have to invest to these kind of IT people, for instance.

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Thomas Oetterli, Schindler Holding AG - CEO [51]

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No. But it is true and it is to a certain degree also a pre-investment we are doing. We don't do that only for fun. We also are expecting them to generate some return. And when you look into Ahead, we always said we are expecting the breakeven point in 2021. And so we are now doing a lot of pre-investments and we are expecting this also with the success visible with Ahead, that over time this comes back.

Now PT, the risks -- yes, PT is -- as all large jobs are usually very intensive and competitive in prices. But at Schindler, we have -- always have a long-term view. I do not want that we don't do business because it could maybe short-term impact our margin if we believe that long term it will add value in terms of absolute return, meaning service portfolio. So I mentioned before this is, for us, something we are really focusing mainly on those public-transport jobs where we have a high chance also to get the service portfolio afterwards. And I think it's the right thing to do and we don't want to deviate from that.

Now in -- when we talk about what could be a risk, sometimes the risk is more on the net working capital side because usually those public transport jobs don't have the best payment terms. It's mainly driven by government, and the government is dictating the payment terms. So our possibility to negotiate are very limited because it's part of the tender documentation. And you either take it or you leave it, and so we cannot so much negotiate that. And this has sometimes an impact on the down payments. We don't have the same amount of down payments like maybe in the private sector. And so there's a little bit of dilution in the net working capital.

Question #3, market impact of, let's say moves of our competitors. First of all, I don't want to comment on the moves of our competitors, and -- we are mainly -- no, no, we are mainly focusing in the same way as in the past on our strategic priorities independent on the market environment. Our clear ambition and our clear priority #1 is to grow faster than the market. And I think one advantage we have at Schindler is, now I think this is somehow my conference call for team and they always tell you exactly the same story. There is no change in our strategy and there is no change in our ambition. And as we have a very long-term view, having in 5 years our 150th anniversary, and we just keep the direction. Of course we are observing and we are looking whether we have risks or opportunities in cities or in countries. But in general, it does not change really our work and it does not change really our strategy. Our priority is to grow faster than all the others together. And I think so far we have achieved that. Not every quarter is as successful as the others, but all in all I think now since many, many years this has been proven as the right direction.

And maybe the last question, GE and Huawei. First of all, with both companies, we are now working since several years, and I think we had a very strong strategic alliance with both companies and the result has been our Ahead strategy. And the Ahead strategy can be proven that -- what is proven by the market, by our customers that our partners have done good work together with us. And our Ahead products are very well perceived by the market. Of course we are observing also, let's say political dialogues which are happening worldwide, but it doesn't really change our digitization strategy. We want to connect as many units as possible and where it makes sense. And all these discussions are not only discussions which are impacting Schindler, these are discussions impacting all companies in the industry and also outside of the industry. And like others, we always have like a plan B. So we always have also second sources. And so if there are tensions maybe in a market like in the U.S. at the moment, we do have a backup solution. But in general, we are happy with the development we have achieved in our digitization strategy.

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Operator [52]

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The next question comes from Daniel Gleim with MainFirst.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [53]

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Yes. Can you hear me well?

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Thomas Oetterli, Schindler Holding AG - CEO [54]

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Very good.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [55]

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So the first question would be on the Schindler commentary and China. I was just wondering whether you were commenting the growth rate for order intake and sales for H1 or Q2.

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Thomas Oetterli, Schindler Holding AG - CEO [56]

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You mean when we said the mid-teens or high teens in terms of operating revenue and in terms of order intake. In fact in both quarters, we had a very strong development. It was good in both quarters. I think quarter 1 was slightly stronger than quarter 2. But honestly, the differences have been minor. All in all, it's quite a similar picture, Q1 and Q2.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [57]

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Very clear. And you mentioned that you're conservative on the second half in China. And maybe look back at your comment on the -- in the last call, is it still that you think that overall 2019 would be stable at best? Or are you now slightly more optimistic given that you have been surprised positively in H1?

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Thomas Oetterli, Schindler Holding AG - CEO [58]

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I think it's fair to say that our assessment is stable at best. We have to revise for the total year. We should say it is stable or slightly up at best. That will be my new assessment. So it has improved for the total year because I do not believe that Q -- the second half of the year will be negative so that the overall year then would be negative. This I don't believe. I believe what we have in the pocket from the first half year, we have in the (inaudible) in the second half is maybe flat, more flattish. So as aggregation, it should be probably even slightly up for the total year.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [59]

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Very clear. Your (inaudible) margin commentary that is improving, for how many quarters have you observed this now?

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Urs Scheidegger, Schindler Holding AG - CFO [60]

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Well, this is now actually really happening this year, where we are improving our margins in China and also rest of the world and was good as well in Q2 now. Yes.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [61]

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Okay. So it was in Q1 and in Q2? And has the margin expanded or has it been stable over the first quarter? Just to get a little bit of granularity where you see the trend going? Is this going to improve even further or is it more stable-ish?

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Thomas Oetterli, Schindler Holding AG - CEO [62]

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I would say it's more stable-ish. However, we can say that probably in Q2, it has been even slightly improving from -- compared to Q1. And it's not so much that the new orders are much, much better -- or to be expected also much, much better than -- in second half than in first half, but it's also that the execution of all the jobs where we had a huge price pressure, they are now replaced in our order backlog. A little bit bad jobs are executed and will go out of our backlog and will be replaced with some better orders we just have taken in or we will take in. So it's also a little bit a timing issue that the ones we sold maybe 2 or 3 years ago, they are going out of the backlog, and the ones we have sold last year and this year, they are now in the backlog. And I do not expect further, let's say, really substantial pricing improvements. But it's more a calculatory exercise that worse units are going out and the good units in our sale are coming in. So that's more the impact on the backlog.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [63]

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And the better margins that are coming now in, they will be impacting 2020? Or this is not something that you expect until second half? Just to understand what's -- the drivers there are.

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Thomas Oetterli, Schindler Holding AG - CEO [64]

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It depends a little on the cycle time. Very important markets like the U.S. and in China, we see that the cycle time has been expanded. This is definitely something we have observed overall. But secondly also as we have a big impact on major projects that have even longer cycle time, so this can also easily go into '21 and '22, I have to say. So not everything is coming in 2020. It is really a long-term journey we will see.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [65]

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You wouldn't -- you wouldn't mind sharing how much improvement (inaudible) math, so you cannot give us a color on what the EBIT tailwind could be from this improvement?

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Thomas Oetterli, Schindler Holding AG - CEO [66]

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No. This we would not like to share. It's too early to say.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [67]

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Okay. And maybe one last question. On the Huawei cooperation, have you already installed hardware from Huawei? Or is this not happening? And that will be the first question on that.

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Thomas Oetterli, Schindler Holding AG - CEO [68]

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Well, every single CUBE we have installed with Schindler Ahead is a Huawei CUBE. Yes, we have installed many, many, many CUBES all over the world. And we had -- as I mentioned before, we also have established a second source where we have tested in some of the markets to be prepared in the case of -- which now looks, let's say mainly in the U.S. this -- in the case of, it's happening. And we are starting to install our second source CUBE.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [69]

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And could you remind us the price of the CUBE very roughly?

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Thomas Oetterli, Schindler Holding AG - CEO [70]

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No. It depends on the -- it really depends on the market because what we usually do is in many, many cases, you don't buy it. You make a service contract with us. But what I can say is -- so it's more a question of cost, but the cost of the CUBE, we would not like to share because this is too much confidential.

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Operator [71]

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The next question comes from Chand Debashis (sic) [Debashis Chand] with Societe Generale.

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Debashis Chand, Societe Generale Cross Asset Research - Equity Analyst [72]

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I have a follow-up question on margins. I just wanted to confirm your comment on the second half margins which you expect to be flattish. Now given the raw materials will be less of a headwind than the second half, and also the positive impact which is coming from the modularity program, I would have expected a bit slightly better performance in the second half. So I just want to understand like is it primarily due to the higher wages you talked about that day being incrementally worse versus what you were expecting at the beginning of the year or maybe due to tariffs? Or do you see any other factors which are impacting the margins in the second half? That's my first question.

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Thomas Oetterli, Schindler Holding AG - CEO [73]

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Thank you very much. Very good topic. Maybe before Urs goes more into the detail, I just want to clarify. We are -- you have to look half year by half year. So second half year, we will have an improved margin compared to first half year. This is very clear, our plan. As we also have mentioned that at the end of last year, this always has been our plan. Slow start, improvement Q2 and even a better second half of the year. So we think 2019 you can expect a better second half than we had at the first half. Now the second half comparison you can to -- total year 2018 compared to total year 2019, as we have by the middle of the year a negative, let's say margin development. First half '18 to first half '19, it will be very ambitious to catch up in the second half of the year or to improve so much that the total year '19 is as good like the total year '18. I would expect that our margins will be under pressure for the total year compared to '18. A little bit -- it's also a little bit luck what we will need. There we can execute what kind of jobs, but it is very ambitious to achieve the same margin for the total year. But definitely, second half will be better than first half.

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Urs Scheidegger, Schindler Holding AG - CFO [74]

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Yes. And I may add, so in this comparison prior year to full year this year, it's clear that the trend of wage inflation is continuing as we have clarified, and it is higher than expected and this is going forward. Also on the material inflation, it is now at similar levels. And particularly the tariffs, we need to consider they will have an impact now even bigger in the second half year. We will increase our costs for strategic initiatives as planned and always communicated, particularly on our Ahead platform and Digital Twin. And these are the main items where we have to see that we can then find compensating measures coming from efficiency in the fields, but also in our back offices and of course pricing, as Thomas has mentioned clearly before.

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Debashis Chand, Societe Generale Cross Asset Research - Equity Analyst [75]

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And my last question is on India. Like you mentioned good development. Could you also give a bit more color where you are seeing the growth a little more on the commercial side or you're seeing the residential market? I mean is it -- given that India has now been postelection environment, so where you are seeing the growth coming in the Indian market?

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Thomas Oetterli, Schindler Holding AG - CEO [76]

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I think all the segments are in fact positive, but there are definitely 2 segments which have the strongest growth potential. The first one is the residential area because urbanization is a strong driver of the -- of our industry in India. I really have to say some measurements we do, how many elevators are installed, how many people are moving into cities. I think urbanization is continuing in India. It's still on a very low level compared to other countries. So the residential business will definitely further grow.

But the second, I would say, strong pillar in the growth is infrastructure because there are a lot of plans to further invest into the railway system and into metro lines because these fast-growing cities, they have to do a lot of infrastructure, otherwise cities like Mumbai or Delhi are just completely collapsing. So you cannot do that without heavy investments into infrastructure projects. And what we see is that a lot of -- for example, in the railway system, a lot of the stations which are existing today, they don't have elevators or escalators. So they now are modernizing those railway stations and bring them up to a higher level of performance that they can move more people and not only they have to take the staircases. So residential and infrastructure I think are the 2 biggest drivers in India, but also the other segments like commercial, they are growing but not as fast like the other 2s.

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Operator [77]

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The next question comes from (inaudible) from (inaudible) bank.

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Unidentified Analyst, [78]

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Yes. I don't want to keep you much longer. Just this growth in China, which was all across the board, would you still attribute that to your big-time move into Tier 2 and Tier 3 cities a few years ago? Is that still kind of a base effect helping there? Or not that much anymore?

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Thomas Oetterli, Schindler Holding AG - CEO [79]

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It helps. Of course it helps because, as you know, we have at the moment consolidated, we have 2 entities. One is of course the Schindler entity and then we have a joint venture with XJ-Schindler. Schindler predominately being very active in Tier 1 and Tier 2 in the past, and then we expanded, as we have mentioned that in the past, into Tier 3 cities. And then we have XJ-Schindler, which is more dominant in Tier 3 and Tier 4 cities. And we have seen in the last 1, 2 years that the government has put also a lot of stimulus that those Tier 3 and Tier 4 cities are further developing. So with our geographical expansions we have done in the last couple of years, yes, we have benefited from that.

Now the trend is that definitely also Tier 2 cities are still further growing. So historically, a good domain for us. And all the different cities in fact have helped us in the overall growth. And then once again a key driver for our growth in China is also the key accounts. The big developers, this has been a critical key strategic initiative of us. A couple of years ago, we had not a single frame contract with big developers, now we are very well represented in their accounts, and we are following with our big developers into the cities where they have business. And the key accounts in fact have contributed a lot to our overall growth in the last couple of years.

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Unidentified Analyst, [80]

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Great. And the strong growth in service and modernization also in Asia-Pacific, as you mentioned, and I presume also in China, is that -- would you also attribute that to your strategy to have much more direct sales than some of your competitors leading to a higher conversion rate? So is that also a result of that?

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Thomas Oetterli, Schindler Holding AG - CEO [81]

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Yes. Definitely. Coming back to what I mentioned before, we are a long-term-oriented company, and our key ambition is to grow faster than the market in all the different businesses. So of course also in our service business. And it's right, it's easier to convert a new equipment if you have done the new equipment contract directly with the customer. And if you have a so-called distributor model, you are not the one who has the direct link to the customer. You can -- you ship a box to a distributor who then installs and makes the final contract with the customer. And it's much more difficult to get a service contract in such a business model. And yes, we are limiting the share of distributor business in China whether -- usually we say we don't want to have more than maybe 1/4 of our business like that in -- maybe in cities which are a little bit more away, and it makes not so much sense to establish our own service, we call it [dead pool] at the beginning. So yes, I think our new equipment [interest] model is supporting our very strong conversion in China.

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Unidentified Analyst, [82]

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Great. Last question. These negative impacts you had, could you break them down actually on how many -- how much basis points you lost on material costs, wage inflation, ForEx and the strategic investments on your EBIT margin, approximately?

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Urs Scheidegger, Schindler Holding AG - CFO [83]

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Thank you very much for the question. You are now referring to half year closing versus last year where we have a margin deterioration, as you see, of 50 basis points on EBIT adjusted. Well, the material costs and tariffs have approximately 30 to 40 basis points impact. Overall, material inflation was a bit less but then -- fueled then by the tariffs. Also wage inflation has a clear impact of up to actually 100 basis points, but this of course is then offset by pricing. So pricing measures in service and NI, which the net impact of wage inflation and price increases, if you (inaudible), are then 40 basis points negative.

Strategic costs, we always mentioned that we are investing into Digital Twin and Ahead platform. They have probably an impact of 20 basis points. So these 3 items together impact our results by 100 basis points. And then the rest of course are measures -- countermeasures. On efficiency, the group is working very hard on it, field and service, but also negotiation savings on the supplier front, which helped us to improve our margins again. And as we mentioned, we expect sequential improvements now going forward as modularity savings will be clearly higher than in the past going forward. So we improve our results.

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Operator [84]

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The next is a follow-up question from Andre Kukhnin with Crédit Suisse.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [85]

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Just 2 quick ones. Firstly, on the margin. Back to my first question, your subsequent commentary, when you talked about ambitious to be flat. Am I right to understand that this refers to full year? And then can I double check that first question, that the math from your guidance up, I'm taking into account what you already delivered in H1 suggests that your second half year-on-year underlying profit margin, excluding BuildingMinds and restructuring, is looking around flat. Does that math make sense?

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Thomas Oetterli, Schindler Holding AG - CEO [86]

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Question number one, yes, we were referring ambitious for the total year. This is true. Point number one. Point number two, I think second half, as I mentioned before, yes, we will have a better margin than in the first half of the year. And I think your analysis is correct.

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Urs Scheidegger, Schindler Holding AG - CFO [87]

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Roughly flat, Andre, but of course there are really moving parts ahead of us because -- I said it also during the conversation, it really depends on the rollout of projects. It depends on the geographical mix of revenue generation, and therefore, it's really (inaudible) are moving here towards the end of the year.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [88]

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That's very clear. And just on -- in that same vein, if we fast forward to 2020, and I know many things can change and you're obviously not kind of inducing to a forecast or anything. But just in the current environment, assuming no shocks to the system, similar kind of raw materials environment, wage inflation, et cetera, and what you see in the order backlog, do you think you can resume that margin expansion again in 2020?

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Thomas Oetterli, Schindler Holding AG - CEO [89]

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Well, I think it's a little bit early already to give an answer for 2020. But definitely, our ambition is that we want to grow faster than the market. And in the short term and in the long term, this has absolute highest priority for us. The growth is very important. Of course I understand the margin is also important. But for me it is more important that we say, okay, we want to achieve a certain margin, if I can grow even faster than how I could improve the margin, then I probably go for the growth because this will generate, in the long term, much more net present value. So I mentioned many times, I never have seen that the dividend is paid with a percentage, it's usually paid with cash. So we have to generate more cash and more absolute return. And even if our margin would be diluted by a couple of basis points but we can add more growth momentum, then I would go for more growth momentum.

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Operator [90]

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The next question comes from Martin Flueckiger with Kepler Cheuvreux with a follow-up.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [91]

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Just 2. Firstly on raw material prices, I was curious, based on what you're currently seeing in procurement as regards to raw material -- or material prices, assuming those will be stable, would there still be a headwind on -- from raw material prices next year? Or would you actually see a tailwind? That's my first question.

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Thomas Oetterli, Schindler Holding AG - CEO [92]

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Good question. I will be happy to answer that because I don't know yet how the raw material prices will develop. It's -- we will see what happens when we come towards September, October because usually then all the factories, mining factories in China are shut down for environmental reasons. This usually puts, again, pressure on the raw material prices, and we have seen that now in the last couple of years that this really can generate quite a big swing. So I do not dare to forecast at the moment how raw material prices really will develop. Of course if raw material prices would go down with a certain time lag because we are usually hedging or securing prices for 6 to 9 months, then this could have a positive impact on our overall margin. On the other side, I mentioned that the last time our team was extremely stubborn in the last couple of quarters to accept any -- the price increases requested by the suppliers. So I mentioned that the last time, they always come back. Every quarter, they come back and say, "Listen, you have not given us any increase the last time, now we need it really." So I think there still will be some pressure, but of course it will help if raw materials are stabilizing or getting maybe a little bit softer. But honestly, at the moment I do not really dare to forecast the development.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [93]

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And then final one on -- I realized you would -- with regards to EMEA, you were talking about a 0 acquisition impact. But if I remember correctly, at the beginning of the year, you guided for roughly 1 percentage point impact on local currency sales growth for the full year or going forward in fact there, longer term. Can we just have some granularity, please, how much acquisition impact for the group and in Americas and Asia-Pacific we saw in Q2 or in H1?

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Thomas Oetterli, Schindler Holding AG - CEO [94]

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It was -- it is true, we said in the long term we are shooting for that maybe we can add if (inaudible) every year up to 1 percentage point. At the moment, I would say in the first half of the year it was neglectable in all the different areas, so Asia-Pacific, Americas. Maybe there was a little bit of impact in Europe, but honestly this was really a minor one.

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Operator [95]

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The next question comes from Rizvi Wasi (sic) [Wasi Rizvi] with RBC Capital Markets.

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Wasi Rizvi, RBC Capital Markets, LLC, Research Division - Analyst [96]

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Just one detailed housekeeping kind of question left for me. On the interest charges, there are -- on the financing charges, there are a few moving parts on the year-on-year movement with the tax refund and then IFRS 16 and then also you mentioned some hedging losses. And what should -- what are you expecting for the full year? I mean I guess you have some idea of where the hedging might come out based on current rates and the levels you hedged at. And then what's the number you kind of built into your full year guidance?

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Thomas Oetterli, Schindler Holding AG - CEO [97]

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Thank you very much for the question. I think I will give that for the details for Urs. But of course, in general, I can say that in turbulent times, the Swiss franc is always strengthening compared to the other currencies and this has heavily impacted our half year results. And at the moment, I do not see that there is a weakening of the Swiss franc at the moment. This is probably quite unreasonable to think about that. So we will also have some negative impact in the second half of the year.

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Urs Scheidegger, Schindler Holding AG - CFO [98]

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Yes. Based on current assessments we have built in, that -- the situation will continue, and we will see a very similar impact in the second half year as we have in the first half year. 32 million negative impact in financing and investing activities for first half year. So you may have to double this impact for full year.

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Operator [99]

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The last question comes from the line of [Andreas Meyer] with (inaudible).

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Unidentified Analyst, [100]

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I have to mention now the name of Thyssenkrupp. The spin-off is now underway, and there is a possible -- also a sale of the business that could change probably the structure of the whole market. What is your stance on this development? And how do you involve in this development? And -- or more clear, would you -- could you buy Thyssenkrupp or get in any form of cooperation with them? And -- yes. What's your stance on that?

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Thomas Oetterli, Schindler Holding AG - CEO [101]

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That's the $20 billion dollar question at the end of the call. First of all, I don't want to comment really on what our competitors are doing. It is clear of course that all of us, we are observing the dynamics within the market, not only what is happening in the German part, but also what is happening in the U.S. part. And of course we are observing that with high interest. This is clear.

On the other side, I think what we have to say is that our industry, in general, is one of the most consolidated industries in the world. We -- in the past, we always said automotive, for example, is quite consolidated, but the elevator industry is one of the really most consolidated ones. So any strategic move between, let's say big players would immediately generate a lot of questions about antitrust. I think this will generate a lot of huge hurdles for any attempt if 2 of the big ones would like to come close with each other. And I believe that should not be underestimated. Incredible difficult to get approvals and also how you want to execute that. That's one part. The second part is when you look on what -- maybe not you or others, financial analysts, the press has stated, investment bankers, this also would come to a very high price. And we have seen that prices can be something like EUR 18 billion. So really very, very, very high. I think we also -- at Schindler, we usually do not comment on what kind of our intention is and what we plan to do for ourselves. We only report when we have generated facts. But I think really you have to keep in mind, from an industrial or from an economical point of view, the topic of antitrust is -- should not be underestimated and is definitely a big, big hurdle for any attempt. That's from my side.

Good. So ladies and gentlemen, thank you very much for attending this conference call. I would like to close now. And I am looking forward to our next event, our third quarter results conference call, which is on October 24, in 2019 of course.

And I would like to thank you for the participation and say goodbye.

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Operator [102]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines.

Goodbye.