Schindler Hldg Ag Akt

Ladies and gentlemen, welcome to the Schindler's Conference Call on Q1 Results 2021. I am Sandra, the Chorus Call Operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Marco Knuchel, Head of Investor Relations. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to our first call to 2021 Results Conference Call. My name is Marco Knuchel. I'm Head of Investor Relations at Schindler's. I'm here together with Thomas Oetterli, CEO of the Schindler Group, and Urs Scheidegger, our CFO. As usual, Thomas will set the scene and summarize the first quarter, and Urs will then lead us through the financials. After the presentation, we are happy to take your questions. I would like to ask you to limit your questions to two questions only. Thank you very much. With that, I would like to hand over to Thomas. Thomas, please go ahead.

Thank you, Marco. Good morning, ladies and gentlemen, and a warm welcome from me too. Before we take a closer look at our quarter one 2021 results, I would like to highlight the factors that continue to impact our business. I think we are facing a unique environment at the moment. Geopolitical uncertainties, slowing global trade, A volatile economic recovery underpinned with historically low interest rates and increasing national debt will continue to affect markets. Equally, the continued Swiss franc appreciation continues to impact Schindler and our business negatively. Looking at the past 10 years, we lost 2.7 billion in revenue last and 400 million Swiss francs in EBIT due to the strong Swiss franc. These meet to longer term circumstances and their effects on businesses drive our cautious market assessment. With that, please turn to the slide number three. In the first quarter, we saw improved results in all line items supported by the gradually improving economic environment and especially a favourable prior year comparison, particularly related to the lockdown in China in Q1 last year. However, Q1 2021 key figures are broadly only in line with Q1 2019 pre-pandemic performance. At the same time, We have a cautious assessment for the markets in the longer term, despite the fact that we currently see recovery signs in some geographies. In the first quarter of 2021, increasing pricing pressure and cost inflation also continued to wait on the order backlog margin. Meanwhile, uncertainty remains. and we accept pricing pressure and commodity price inflation to accelerate. Hence, we continue to be cautious. Against this backdrop, we will launch our new program to accelerate digitalization, boost product innovation, and address profitability gaps. I will elaborate on this later in the presentation. But for now, let me pause here, and I would like to hand over to our CFO, Urs Scheidegger, for the financials in Q1. Over to you, Urs.

Thank you, Thomas. Good morning to all of you. Please move to slide number four, the order intake development. In the first quarter of 2021, order intake increased by 8% to 2.9 billion Swiss francs, equivalent to 10.6% in local currencies. Growth was supported by favorable prior year comparison, particularly related to the first quarter 2020 lockdown in China. In absolute terms, first quarter 2021 order intake was still slightly below 2019 level, strongly impacted by unfavorable foreign currency impacts. The following slide five provides you an overview of order intake growth versus the first quarter of 2020. Order intake includes all product lines, new installation, modernization, repairs, and maintenance. All regions and product lines, except for repairs, generate the growth versus the first quarter of 2020. Overall, China was the driver for growth, strongly up, high double digit growth, also supported by the first-time consolidation of our joint venture, VOLXLIFT, in July 2020. And Asia-Pacific, other than China, grew low single-digit. The EMEA region generated mid-single-digit growth, mainly driven by Northern Europe and the solid performance in Southern Europe. The Americas region recorded mid-single-digit growth, both the North and the South contributing to the positive development. New installations overall were up more than 20% in both units and value terms. Across all regions, maintenance continued on its solid growth pattern. Our portfolio of maintained units increased mid single digit. Modernization and repairs are showing an improving trend, particularly in North America. I move on to slide number six, which shows the revenue development. In the first quarter of 2021, revenue increased by 6.3% to 2.6 billion Swiss francs, corresponding to an increase of 8.9% in local currencies. With that, revenue reached about the level of Q1 2019. All regions generated growth driven by high double-digit growth in China. The other regions were up low single-digit. New installation revenue were up about 20%. Modernization and maintenance recorded mid-single-digit growth. Repairs, though, were still below previous year's level. M&A activities contributed 2.6 percentage points to growth. Foreign exchange translation effects due to the strong Swiss franc, mainly against the US dollar, the Brazilian real, the Indian rupee and the Turkish lira had negative impact of 62 million Swiss francs. The next slide shows you the order backlog development. Our order backlog includes new installation, modernization and repairs, but no maintenance contracts. As of March 31st, order backlog increased despite strong revenue conversion during the quarter by 5.8% to 9.5 billion Swiss francs. This corresponds to an increase of 3.3% in local currencies. Total order backlog, including maintenance margin remained about 50 basis points below previous year's level, but didn't get worse sequentially. However, it goes without saying that margin erosion will translate into operating margin headwinds in the coming quarters. In addition, we will have higher raw material and logistic costs in the rollout of backlog to revenues in the future. I move on to slide number eight. EBIT adjusted reached 301 million Swiss francs with a margin of 11.6%, supported by operating leverage, effects of the cost optimization program and the modularity program, and supported by lower operating expenses due to COVID-19, as well as operational measures. These factors were compensating pricing and backlog margin pressure, as well as material and wage cost inflation and incremental expenses for strategic initiatives. Foreign currency exchange effects had a negative impact of 8 million Swiss francs. Restructuring costs were 8 million Swiss francs and expenses for building mines amounted to 5 million Swiss francs, translating into an operating profit of 288 million Swiss francs with an EBIT margin of 11.1%. Please keep in mind that previous year quarter was also impacted by restructuring costs of 51 million for the factory closure in Spain and other efficiency initiatives. Slide number nine shows the development of net profit and cash flow from operating activities. Net profit totaled 230 million Swiss francs, supported by higher operating profit and substantially reduced restructuring costs, while the financial result line was more negative than in the previous year due to comparatively less foreign currency gains. Cashflow from operating activities increased to 457 million Swiss francs as a result of rigid networking capital management and cash saving measures implemented across the group. Networking capital further improved strongly to more than negative 10% of revenue. With that, I hand over back to Thomas. Thank you Urs.

Let's move to slide number 10. Our quarter one results should be viewed in the context of the base effect created by the COVID-19 onset last year. We at Schindler remain cautious, particularly as the environment continues to be challenging due to the strong Swiss franc, increasing commodity pricing and pricing pressure. We also face a changing competitor landscape, contracting segments in strategic markets and increased speed and scope of digitization. Schindler has a 147 year old heritage of entrepreneurship. And it is key to stay on top of such changing conditions. So there is no better moment than the present to accelerate digital transformation, boost product innovation and address profitability gaps. Therefore, Schindler launches the Top Speed 23 program. Please move to slide number 11. With Top Speed 23, we aim to strengthen our position in key markets. create an industry-leading customer experience, and further integrate sustainability into our business model. We will spend up to 270 million Swiss francs until 2023 to accelerate new installation and profitability growth, portfolio growth, especially in key markets and segments. Drive mass connectivity and sustainable modernization solutions. To accelerate the digital twin for escalators and for our modular elevator product range. To boost product innovation for selected markets and to foster procurement excellence. Now let me move on to slide number 13 and the outlook for 2021. I just mentioned the challenges of a fast-changing environment we are facing in 2021 and also beyond that. For 2021, bearing unexpected events, Schindler updates the outlook for revenue growth to levels between 4 to 7% in local currencies. The guidance for the 2021 net profit will be provided with the publication of the half-year results in July. With this, I would like to hand over back to Marco.

Thank you, Thomas. We are happy to take your questions now. I would like to remind you to limit yourself to two questions only. Thank you very much. Sandra, please.

The first question comes from Andre Kuknin from Credit Suisse. Please go ahead, sir.

Good morning. Thank you very much for taking my questions. I'll start with the obvious one on the new program. Could you please help us in thinking about the savings from this program or should we think about it in terms of a certain margin level that you're looking to attain? And also, how does that program relate to the existing programs that you're running? Is this kind of completely different or is this something that kind of overlaps and therefore should we adjust our savings expectations for any other programs? And just related to that in terms of costs and the adjustment for that, how do you view this as a kind of maybe on a five, ten year view? Is this something that's kind of beginning of a series of programs for Schindler and therefore should we think about that kind of level of restructuring or certain level of restructuring that reoccurs? Or is this one very dedicated clear program and then after that you expect a clear decline in costs?

Thank you very much, Andre. In fact, these have been many questions, so I try to answer them the best way. Speed23, with Speed23, we aim to create an industry leading customer experience and we try to strengthen our position in key markets. And of course, also sustainability plays a major role. So at the end, Speed23 or with Speed23, we aim to become faster future ready. And it's very important to say faster because some of the elements we already have discussed in the past when we talked about the digital twin, when we talk about connectivity, when we talk about certain product innovation. But what we have seen is that now it is the right moment to accelerate those programs. So it's not another program in the sense that all those elements are now brand new. But also we have seen that the world is changing faster than in the past. There is more uncertainty around. So we decided together with the board of directors that we accelerate existing programs. And that we also add the one or the other maybe on top of our existing programs. So speed 23 or top speed 23 is an acceleration program. I do not expect that this is the next program and then there will be another program and another program. If you look at our actual situation, we are able to improve incrementally. So we have headwinds and we are fighting against that with our normal speed we had in the past. But with top speed 23, we want to be even more future ready and bring our performance in the long term to a new baseline. That's, in fact, what we are aiming for. And as you have seen, strategic markets, investment in our portfolio connectivity, so we call it mass connectivity, are major parts of that. We also have seen that modernization will play an even stronger role in the future, and we want to accelerate our solutions in the modernization business. I think the digital twin we have discussed for a couple of years already. And we saw that we would like to close this chapter until the end of 23, beginning of 24, in order to create this unique customer experience. And product innovation is an element where we have learned out of our modularity programs how strong we can act with new, tailor-made, future-oriented solutions. But the modularity program did not cover all the markets and it did not cover all the market segments. So now we want to take our learnings and accelerate for the remaining parts in the market our product innovations. And then last but not least, procurement excellence becomes even more important especially now in those challenging times so we want to drive that initiative also faster than in the past now the 270 million Swiss Franc distributed over this year and the next two years, and maybe Urs can say afterwards how you should expect the distribution of those costs, are one time costs. These are costs on top of what we have done. So it does not include costs we already had. And I remember in some of the discussions in the last quarters, that people said, well, you know, we always talk about strategic costs. In fact, these are almost running costs. So I think we have to change the way how we look at this. We have a one time additional cost block of 270 million. And then we should not talk any more about the strategic costs when we have finalized this acceleration program. Maybe you can highlight a little bit what we expected in the sense of distribution of those costs.

Yes, Thomas, so these incremental expenses of up to 270 million, you can expect about 50 to 70 million in 2021. Expenses for accelerator programs, And thereafter, about 100 million for each of the following years.

Now, maybe the last comment regarding profitability or expectation. Yes, we have seen, of course, that there are certain elements or certain segments where we do have also where we are not competitive enough. So we want to close in those segments our competitiveness gap. Where we will end at the end, you know, in terms of overall EBIT margin, this I think is far too early to say. But as I have mentioned before, we want to come to a new baseline of performance from which we can then further develop incrementally in the years to come after the top speed 23 program.

Thank you very much. That's very... Exhaustive. May I just ask last question on this, that new baseline that you talk about? How would that compare to your historic performance? Is it right to think about that being above the historic 12% that you've printed?

I think it's too early to give now such an outlook. I think let's first manage now 2021. This year is challenging enough. We have mentioned that we are facing tremendous commodity price increases to come in the next couple of months. And also freight costs are really challenging us. So it's difficult to say where you exactly land at the end of the year to make a good comparison where you would like to be at the end. But we always say that Schindler is aiming to be also in the overall margin on a competitive level. And we have to admit that in the last year, we had an increasing gap to some of our major competitors.

And this is definitely something we are not happy with.

Great. Thank you very much. I'll respect the number of questions. So I'll go back in the queue. Thank you.

Thank you.

The next question comes from Martin Flueckiger from Kepler-Chevreux. Please go ahead.

Yeah, morning, gentlemen. Thanks for taking my questions. Starting off with my first one, I was just wondering, you know, you've been talking about the high raw material prices and your key European competitors have been talking about higher steel and copper prices. But we also know that logistics costs are higher. So I was just wondering if I remember correctly at the four-year reporting stage, I think Urs mentioned an incremental total hit from those two items, raw materials and logistics. of about 50 million. I was wondering what your latest best estimate is for this year in terms of headwind from these two elements and also with respect to this, are you trying to offset this with higher selling prices going forward? My second question is on last year's orders received prices in new installations, which I remember and correct me if I'm wrong, were down quite significantly as a result of the changed competitive landscape following the onset of the pandemic. I was just wondering, when do you expect these lower order received prices in new installations from last year to impact your profitability this year? I'll go back into the queue after these two things.

Thank you, Martin. Maybe I start more a little bit with an explanation and then Urs can give some more details. So commodity prices, in fact, have skyrocketed in the last quarters and probably overall increased, if you take a basket, between 30 to 40 percent within 12 months. Now, of course, we mentioned that in the past that we somehow fixed prices for a couple of months. So quarter one was not yet severely impacted by commodity price increases. The freight cost is a little bit different because usually in the freight cost, you do not make long lasting contracts. It's much more short term. And there we saw already the first negative impacts in quarter one. But maybe Urs can elaborate a little bit, you know, what is our new baseline we see?

I can add some numbers. You are right, Martin, that we said we have an impact originally of about 40 million on material costs. So from the raw material inflation and about 10 million logistics, In the meantime, indeed, those prices have further increased and peaked. And we are now newly estimating P&L impact this year of 80 to 90 million in total compared to the 50 million you mentioned.

So as a consequence, additional headwind of roughly 30 to 40 million compared to what we already announced with the full year results 2020. The second question, OIT prices. So it is true. We have seen last year definitely pricing pressure. And also with a certain boom we saw in some markets coming back in the second half, everybody tried somehow to catch up compared to what they had as a personal target. And so prices were under pressure. I can say that the pricing from quarter one to maybe the last quarter of last year has been rather stable. So it has not further deteriorated. But all those sales we had now will come to the backlog rollout in the next coming months. Now, it depends a little bit on the countries. I would say in some countries it is between 9 to 12 months, especially the residential sector has a faster turn. And more in the commercial sector, large projects, but also public transport, it's probably even beyond two years. So it will start to hit us in the second half of this year. And then it will even more impact us in 2022. So it will put pressure on our new installation margins. And then on top, of course, now you have the further increase in commodity prices, which then will even more put pressure on our margins. So for that, I think we have to prepare ourselves. operationally and we are working very hard on that and we are benefiting, I have to say, from our modularity program, which really has compensated a lot of these additional costs. But it just demonstrates, you know, how fragile the future is at the moment, how uncertain And I want to come back. That's one good reason now, out of a moment of strength, seeing the clouds, you know, at the horizon to launch this Top Speed 23 program.

Okay, great. Thanks. And when you talk about pricing, were you talking about pricing across all three businesses or just new installations being able to do one?

mainly prices in the new installation partially also in the modernization business our service or maintenance business we were able to further achieve price increases because most of the contracts are linked to inflation clauses now inflation is not that high as it was in the past But we were able to increase our prices in the maintenance business. It is very, very, very resilient. And again, customers are willing to accept such a price increase if you can create a special customer experience.

And we also saw that... Sorry, so that price increase in maintenance is related to Schindler Ahead?

Not only, no, also the basic maintenance price is increased.

Okay. Very good, thanks.

The next question comes from Andrew Wilson from JP Morgan. Please go ahead.

Hi, good morning, everyone. Thanks for taking my questions. I just wanted to start on the top speed project. I'm just interested... In your thinking, how much of introducing this program is motivated by what you see as a change in the market? And obviously, you've talked to that a little bit. But how much of it is linked to a change in the market? And how much of it is sort of internally driven? Are you identifying areas that you feel that you've been underperforming and therefore can improve? I'm just trying to get a sense of the motivation for introducing that program today and whether that's internally or externally driven.

Mm-hmm. Thank you, Andrew, for that question. I think it's both. Some elements are really, we see a change in the customer landscape, or maybe in a wider sense, you know, we see that the environment is changing. When you think about the digital twin as an example, This is not a weakness we have. We are in fact a pioneer in our industry to go for the digital twin because we see that our customers are changing also the way how they work. They want to have integrated suppliers into their building models. They want to have the possibility to digitally interact with us because they are also moving on the digitization path. So here we just want to be a pioneer and a frontline runner in terms of supporting our customers on their journey. Others are very similar. Mass connectivity, maybe to mention that. We have elaborated on that also in the past that we saw that mass connectivity, in fact, we tried to generate with all our new installation equipment. So we equipped all our new sales with Schindler ahead. Now we have seen that in fact the perception by the customers is very, very good. And we have seen that we can increase our retention rate for units which are connected compared to units which are not connected. So we came to the decision that we have to adjust our plan, not only looking forward, but also looking backwards on our installed base. And of course we have to cluster our installed base in terms of age and technology, where does it really make sense to get information? A 50-year-old elevator, you don't get information out of the control. But we now have decided to connect also our installed base, wherever it makes sense, and to accelerate that within the next two and a half years. Then we tick the box and then it is done. So this is a one-time investment where we believe it's also driven by the environment. We have a very strong ahead solution. I would say it's really top-notch. And now we want to make this one-time sprint very, very fast to connect whatever we can connect. And then we will go back to the normal, let's say, connectivity run rate we have with our new installation equipment. Some others are maybe also based where we don't believe we are good enough at the moment, where we see that maybe we have not done a good enough job in the past. And instead of now investing, you know, the next five years in incremental improvements, we said, OK, let's squeeze all those efforts together into two and a half years to be much faster in providing good solutions. And I would say probably in modernization, this is the case that we have good products, but we are not somehow competitive enough. And also in our procurement excellence, for example, I think we still have room to improve. So both sides Covering and eliminating certain weak spots we have identified. But on the other side, also very much future ready solutions. What we see is required by our markets and by our customers.

Thank you. That's very helpful.

For my second question, I want to ask you. On the first of the two slides on Top Speed 23, and you've talked about it a couple of times as well in the words, the changing competitor landscape, I'm interested as to specifically what you mean by that. I mean, I can think of sort of numerous things it could mean, but I'm interested as to if there's anything specific that you'd highlight there or if that's just a broader general comment.

Well, it's in fact a general comment, but of course, we all are observing how our competitive landscape is changing. And we have seen that there have been among, let's say, the global OEMs, really substantial changes, you know, with the spin off of this out of the UTC group and also TK elevators becoming independent. And, of course, we are observing and we are also forecasting what could that mean for us. I think it will increase, you know, competition. And so we have to run faster and we have to run in a better way. That's one side. But on the other side, we also have discussed in the past, you know, that there are maybe new entrants into our competitor landscape. And those new entrants are mainly driving technology. So they are not elevator companies. These are more technology companies. And we see and we take them very seriously. We also see how they market themselves. We see if or if not they have at the moment success, but you should never underestimate if you have a new entrance into a market. Now, the good thing is, Whatever they do, we also are able to do, and we already do. But we might have to speed up the things we do. Coming back to this topic of connectivity and digital twin, which are really technology-driven initiatives, we want to protect ourselves. We want to be a first mover. And with that, I think we will be ahead of of others in the competition race.

Thank you. It's very helpful.

The next question comes from James Moore from Redburn. Please go ahead.

Hello, everyone. Thomas, Urs, I trust you're all well. My first question is on the order backlog margin and the negative impact for 22, not this year. Can you help us think a little bit about, I guess, two aspects of that, what the raw material might be at current spot? I was wondering if it's another 50, 100 million, you know, once hedges roll off and we move forward and what sort of EBIT margin decline we might have seen without the top 23. That's my first question. Maybe we'd go one at a time.

Okay. So good morning, James. Yes, we are all doing well. I hope you are doing well as well. By the way, I hope everybody's doing well in this very critical time. So, yes, we elaborated on the order backlog that we have seen, let's say, pricing pressure, especially also last year. And we somehow stayed on that level. And maybe Urs, we can elaborate a little bit, you know, what will be the impact also beyond 2021?

Yes. So if we assume we have now a burden of 80 to 90 million in the P&L this year for raw material and logistics, this is mainly for the second half year this year. As we have locked in our raw material prices last year and we benefit still now in Q1 and Q2, but not anymore starting from second half year. So then we have a spillover. into 22. And if prices are remaining at these high levels of today, we need to assume we have a run rate cost impact next year of approximately 150 million Swiss francs. On the backlog margins, I said, right, we have a a drop of about 50 basis points overall, including maintenance. Of course, the margins, the prices are eroding mostly in the inner business where the margin drop is clearly higher than 50 basis points. And this mostly will hit us in 22.

Very helpful. Thank you. And my second question is really, back on the the top 23 top speed 23 program could could you split the 270 million a little bit basically i'm trying to understand how much is for connecting the installed base which to me seems a very sensible and direct move to respond to some of the how can we put a newer nimbler digital service entrance and how much is other buckets

So at the moment, we do not yet provide a detailed split, but you are absolutely right. The biggest impact will come from the installed base connectivity program. This is clearly the case. It is the biggest cost block we will have because you always have to remember that These are one time on top costs, what we usually have. So, of course, also in the past, we have developed products. So we now do not just say, well, you know, if you had X million in the past, we now declare them as top speed and we somehow make a beauty case out of our P&L and balance sheet. That's not the case. It's really on top costs. So acceleration of certain programs, which are on top of our normal run rate of costs we have. So the major share is, in fact, the connectivity piece. This I can confirm because this is a global program everywhere. And it depends, of course, on the age and on the composition of our installed base in the different countries, how much you really can connect and how much you cannot connect. But it's the biggest cost block in those 270 million. And especially in 22 and 23, this acceleration will really be huge in terms of connectivity. But the detailed split we are not showing today.

Thank you very much. Thank you.

The next question comes from Daniela Costa from GS. Please go ahead.

Hi, good morning. I have two questions. The first question I just wanted to clarify back tying what you said before about the new program being to establish a new baseline and historically you always talk more about a focus on top line and absolute earnings rather than on margin. You mentioned several headwinds now in the last few questions to margins. What do you mean by new baseline? Is it new absolute baseline or a new margin baseline? And so these headwinds are more just temporary, but longer term you want a higher margin.

Thank you, Daniela, for that question. Probably this post. We are not changing our strategic targets. our key target priority number one is to grow faster than the market. And when you look on those elements of top speed 23, so pushing the growth of new installation and of our portfolio in strategic markets, this is a clear growth ambition. If you look into mass connectivity, it's probably both. And also in modernization, it's probably both. You try to push the top line because you have a higher portfolio retention and you have additional modernization business. But you also want to do it more profitable because with connectivity, you can have so-called adaptive services where you can use Schindler ahead to fulfill certain tasks where today you need a service technician to do that. The digital twin, I think, is primary, also something which will differentiate us from competition in the eyes of the customers. But in the long term, of course, it will also make our internal processes more efficient. So we will save costs. But it's mainly, but it's maybe the second ambition there. The first ambition is really to be much more customer-centric, to be, you know, fast in product adaptions. So time to market is very important there. Product innovation, again, is probably also both. It is more... On one side, you know, tapping into market segments or improving our position in certain market segments where we saw we are not that good at the moment and maybe also historically. And of course, if you have a very good, innovative and cost competitive product and you enter into that market, you also will add something to your bottom line. Whereas the procurement excellence, I would say, is more a cost improvement program. So it's a little bit both. Now, I also say at the end, and I mentioned that many, many times, with the growth, you will add absolute profits, clearly. But we also want to improve our profitability, so our margin. Because I think we have to be honest to ourselves that 2020, I think the second half of the year, we have done an okay job. But when I look on the total year, there was an increase of the gap to some of our competitors in terms of margin. And I think it cannot be our ambition that we want to have an increase. We further would like to have a narrowing of this gap. Whether it is exactly on that level, I think it's far too early to say that. So yes, top line, Absolute bottom line, but we also want to continue with our now already started margin improvement.

Thank you. And my second question relates to how shall we think about capital allocation during this period? Will you have to invest more organically? I know in the last few quarters you had actually talked about being organic a bit, but you didn't mention too much about that in this call. So can you talk about that dichotomy, organic versus inorganic investment? And I guess shareholders, and you used to historically have a buyback for quite so many years, but you haven't had that for a while. Is that out of the question now as you go through this transformation?

Well, you have seen in the quarter one, yes, the group is doing... smaller and medium sized M&A as in the past. And we see the effect this year, what we have done last year. And we certainly will continue to grow as well our service portfolio with smaller M&A. This is an important element of our growth strategy. For anything else, I cannot comment.

Okay, thank you.

The next question comes from Singh Madvendra from Bank of America.

Please go ahead.

Yes, hi. Thanks for taking my questions. A couple of them. Firstly, on the EBIT bridge, if you could give some breakdown of the 88 million operational bucket you have there, if you could give the breakdown details around operating leverage, modularity. So basically all the five items you have listed on the slide, if you could give some indications how much each of them actually contributed there. And secondly, just clarifying on the raw material cost headwind you were expecting for next year and the backlog margin impact. You were talking about all 50 basis point headwind there. um so if the 50 basis point had been inclusive of the uh raw material price increases you are seeing or the raw material price increase can actually be on top of the 50 basis point lower margin you already have there thank you thank you i think this would be good for you to answer that sure

So we really have a strong operating leverage quarter one versus quarter one 2020. Clearly in the magnitude, this is strong with our volume growth. We see this about 200 basis points from operating leverage. We also have a good modularity and the COP cost of personnel savings. Both programs are as well doing and materializing together. It's more than 100 basis points. And then we have a lower OPEX. We are really working with very rigid cost discipline and operational efficiency, which is also significant. But the negative two elements, pricing, backlog, margin pricing, pressure, that's more than 100 basis points. And the strategic costs in the Q1 are about 10 basis points. So that's overall the improvement of 260 basis points.

Now, the second question was about the raw material cost increase impact in our orders on hand. I think we can say whatever we already had as a cost increase we have in our order backlog. Now, if the material cost should further increase, then, of course, this would come on top of our deterioration we have on the orders on hand backlog. That's right. Yeah, correct.

So for us, it is fair to assume that you have around 50 basis point negative impact, which you had already flagged, let's say at the Q4 earnings. But then since then you have raised your raw material cost headwind estimate by about 30, 40 million. So the impact on backlog margin would be around the same line because of that.

Yes, you're right. In the rollout for this year, this is correct. And as I said before, this will further spill over for another six months into 2022 of this 150 million. And those headwinds, we will have to work to compensate those headwinds of backlog, margin erosion, raw material costs in particular. with the completion of the cost of personal program modularity program comes to an end and we need to leverage it and of course also field efficiency in new installation and in service those those headwinds shall compensate these negative elements okay thank you very much

The next question comes from Daniel Gleim from Stifel.

Please go ahead.

Yes, good morning, Thomas and Urs. Thank you very much for taking my questions. Thomas, maybe you can walk me a little bit through how you see the order intake momentum developing in the coming months. And specifically, I was wondering about APEC without China. You previously commented You expect the strongest end market growth in that area. I understand in the first quarter, China was still growing stronger for Schindler. Is that something we should expect from the second quarter? This is my question number one. And secondly, on the products, we think about modernization in EMEA. I read your slide. The order intake was still negative, modernization in EMEA. I was just wondering, from your discussions with customers and what you witness in the market, when do you expect inflection point for EMEA modernization to take place this fiscal? Thank you.

Thank you. Thank you very much for those questions. So OIT momentum, I think it is true when you look on the last year, we had the biggest drop in Asia-Pacific, but also in North America as a market development. And the question was, which market is coming back as the fastest? So I have to say that Asia-Pacific without China, yes, the market was coming back slightly by the low and mid-rise residential market. But this is also a market where you have a lot of commercial programs and commercial projects. Also quite a lot is entertainment and tourism, especially in Southeast Asia. And then last but not least, we should not underestimate India. So, in fact, India at the beginning of the year was coming back very strong. I have to say that the market was coming back very strong. But now in April, you know, everything has been put upside down. So the whole country at the moment has come to a halt. And this is a little bit what I see overall in Asia, that some markets come back, then there is an increase in COVID, and then there is an immediate drop down again. So it's quite volatile. And there are not many countries where I see, you know, consistently that the markets are coming back. It's more a roller coaster. Now, in Europe, we had surprisingly quite strong markets and resilience in 2020. And somehow we saw that 2021, especially in northern Europe, was good. Markets are good. They are not exploding, but they are good. But also Europe, the southern European countries, some of them really came back. And so Europe, I would call, is stable. And then, of course, besides Asia Pacific, it's also North America. I think North America has come back, especially in the residential market. What I still see is that large projects, decisions like in Asia Pacific, the projects are there, but they are not yet decided. So somehow there is a postponement of decisions. And one element I see is that for those who plan and want to execute those large buildings, they're also impacted by commodity price increases because they suddenly realize that the whole building becomes much more expensive than what they had maybe in their original business case. So they postpone at the moment certain decisions because of the uncertainty what the total cost of construction will be. And so those large projects are still High activity, but low decision criteria. Now modernization in Europe. Modernization in Europe is more a residential business. And I believe that in the second half of this year, modernization should start to come back and compensate the drop we had in 2020. I'm quite confident that the modernization will be coming back towards the end of this year.

Very clear. Urs, if I may, could you give us a very rough indication what share EMEA modernization has in group total modernization and what your latest estimates in the lead period order intake to revenue conversion for that business is?

I take the second question, Daniel. In modernization here in Europe, the cycle times are a bit shorter than normal and new installation of about six to nine months in that range. To your first question, we are not providing those detailed geographical information.

Very clear. Thank you very much to both of you.

The next question comes from Ritz Maidi from Jefferies. Please go ahead.

Yes, good morning, gentlemen. Thank you for taking the question. So I'll stick to two again. So firstly, on the margin, can you just perhaps help us with the phasing of the savings from top speed 23? You talked about the saving of the cost, maybe just on the savings. And last quarter, you mentioned that you're aiming to stay above 11% adjusted EBIT margin for this year, given the changes in Romazil headwinds and logistics costs. Is that sort of soft guidance still valid?

So maybe to the savings, we are not giving a detailed breakdown, you know, what exactly then the savings will be. First of all, the first saving is At the end of 23, we don't have the 270 million anymore. That's the first saving we have because these are really one time costs. Then, of course, we are working on the business cases. But you always have to see that as some of those initiatives are really future oriented, they will have a long term impact on what I also discussed with Daniel Acosta. they have a long-term impact on top line, on absolute profit, and they will also long-term improve our margin. But the detailed, let's say, saving like we had that in the modularity program, we are not communicating.

And on the second question, you have seen the group reported now the 11.6% EBIT adjusted for the first quarter. Obviously, we are having... The benefit of not yet seeing this large material cost inflation that will come in the second half year. Normally also wage inflation will then realize in the second half year a lot. Also, when the economies are recovering and our service portfolio has more traffic on it, we will see higher expenditures on the maintenance business going forward. And, but of course, we have saving measures, as I explained it in the annual conference, the cost of personnel program, the modularity saving program, also the field efficiency programs have to compensate those impacts for 21. And we continue to aim for an EBIT adjusted margin above 11% for this year.

Okay, thank you very much. The second one is just on China. If you could just give us an update on the three red line policy and how quickly the Chinese government wants real estate developers to comply with those regulations. Any early indications you're seeing there and what's your outlook for China this year?

Thank you. Well, I think overall China is very strong. As an economy, it is very strong. Also, the construction market, the real estate market remains strong. We believe that for our industry, the market will be, you know, something between flat leash to slightly up. Of course, quarter one somehow is a little bit misleading because we had a very weak quarter one last year. And last year, then starting somewhere in May until December, it was not only going back to a normal level, it was also catching up some of the misses we had for two or three months early in the year. So if I look on the total year, I believe it will be strong again in new installation. I think there are also increased modernization opportunities. And of course, as we always do, a key focus we have is also to focus on our portfolio or installed base growths. Now, the three lines policy, they have been put in place. They also have been communicated and it is valid now for certain large developers. And we see, of course, that this has, you know, created some disturbance, I would say, at the beginning, because everybody has somehow to. to adapt and adjust, and they have to manage now much stronger also the balance sheet, you know, with liability ratios, what kind of net debt do they have, what is their cash position. So we see, of course, that there was some turbulences, but I still believe in the long term, we are happy if we have healthy customers, because, you know, it's one thing to sell and then one thing to build. But at the end, cash is king and we have to get the cash into our pocket. And so I'm supporting that policy. We saw some hiccups, honestly. Yes, we saw that. And the more developers, you know, are getting into this free red line policy environment, they will also be challenged at the beginning. But I'm sure mid and long term, this is a good opportunity.

initiative for the whole industry.

Thank you very much.

The next question comes from Patrick Reifheitz from UBS. Please go ahead.

Thank you and good morning everyone. A couple of follow-ups from me please. The first one is on your new guidance for local currency growth. Obviously with such a start to the year makes sense to adjust the guidance. I was just wondering if you can share some more insights into what developed differently than planned or budgeted maybe earlier in the year. If I recall correctly at the full year 20 conference call you said modernization and repair and the timing of the comeback here was sort of a key key question mark you had. And the second question coming back to the EBIT bridge and you've already discussed especially the costs in quite detail but now to the savings can I assume that what you've communicated so far around the cost savings 50 million and also incremental 70 million from the modularity program Do these still hold? And the top speed program, I realize you're not quantifying, but will that already have an initial benefit this year already or is that too early? Thank you.

So maybe I start. Good morning. So low concurrency growth, maybe to start with that. Let's not be overenthusiastic about quarter one. To be very clear, because when we compare ourselves with quarter one 2020, you know, we were in the middle of disaster in China and other markets. So the baseline comparison is just, you know, makes no sense at all. Now, when you compare with 2019, you know, the picture already looks a little bit more realistic. In fact, it is flattish. So we have worked two years to be at the same point where we have been two years ago. And of course, it has a negative impact from currencies. But I just would like to say, hey, the baseline was really low. Now, interesting enough, when you look ahead, then it might the baseline might become very high, because especially in the Chinese market where they had a fast recovery, especially the second half of the year, the baseline is very high. So because it was back to normal level, plus catching up some of the misses we had in the first couple of months. So to top that baseline, this will be very challenging to achieve, because when you look on our order intake we had last year, we had in fact a drop compared to 2019. So this makes us cautious looking ahead for the next three quarters to come in terms of top line.

Yeah, absolutely. You explained it. There is this low comp baseline of last year. Don't forget, indeed, that we have this newly consolidated joint venture folks lift since July that gives us tailwind now still for the first half year, but then not anymore for the second half year. New installation revenue were a bit stronger now in the first quarter than we assumed. a bit faster activities on constructions, particularly in China again, which certainly will calm down going forward when this baseline effect is fading away. On your question on savings, Yes, I do confirm that these two programs are on track. We will finish the modularity program by end of the year, and that incrementally will support the P&L with 70 million. And also the cost of personnel program, we confirmed 50 million savings for 2021.

And maybe to add on top... I assume most of you are at home in the home office. So there is also, you know, savings we still have because there is no travel, there is no entertainment, there are much less costs, also operational costs. So we will continue with that. And of course, we also can compensate or we have a better impact from this compared to the first quarter last year where, let's say, COVID was impacting mainly Asia in quarter one. And then quarter two, it was Europe and the Americas. But this year, you know, we have the savings from lower operating expenses all over the globe. So this also has a positive impact that we did not have those operating expenses anymore.

Thank you for that.

on savings as well or not, please?

No, you cannot expect savings for top speed 23 in 21. In all fairness, we have worked on all the initiatives. We have worked on all the modules you have seen on this slide 11. But we are now more ramping up the teams. It's very, very important if you want to do in such a fast way, such impactful programs, then you need, you know, very strong project leads. You need a very strong commitment from senior management. You need the right people on board to accelerate. But even if we accelerate as fast as we want, the impact will not come this year and also not early next year. Maybe starts then towards the end of 2022. slightly, but full impact should start in the years 24-25, because some of the programs will not have on day one already a positive momentum, but it will take us a mid- or long-term perspective to really see all the benefits from that, but not in 21.

Great, thank you.

The next question comes from Lars Bronson from Barclays. Please go ahead.

Great. Thank you. I was a bit late, Thomas, on the call. So apologies if this is a bit repetitive, but I have to come back to the 270 million investment plan. I mean, I thought the big investment phase for you and the industry was behind us, not ahead of us. So I wonder whether you can help us reflect a little bit on your digital strategy. over the last three years. And I'm not really looking for a mea culpa here, but I'm just trying to understand why now. I mean, you talk about connectivity. You've been working with Huawei, I guess, since 2016, I presume. You've been adding some partners. What's going on as far as that partnership is concerned? And on digital, you've been working with GE Predix, I guess. You're now moving over to Azure. Is this part of what's going on here? And what are the competitive implications here? I guess Choose Group is built around Assure. So maybe you can help us understand that a little bit better. And I'll come back and maybe ask again around payback and communication around the program. But let me start there. Yeah.

Good morning, Lars. OK, so let's come back to the 270 million and the remark. you thought it is behind and not ahead. There are two different type of investments when you look on the digitization. One is you generate the product, the platform, the infrastructure. This we have always shown as so-called part, also of our strategic costs in the past. And I remember very well that I have been confronted with the question many times, why do you always have this increasing run rate of strategic costs? And we said last year, now we have achieved the level where we are and we don't have special additional, you know, on top investments for our remote monitoring platform, for our ahead platform, for our digital services platform. Yes, we have to maintain and there is sometimes replacement costs, but this is not included in these 270 million. Clearly not. The 270 million, and this is a change or maybe an adaption in our strategy. When we talked about Schindler ahead, we always said we will connect all our units we sell to the market with new installations. Because we thought this is the easiest way, you know, as we are fast growing in new installation over time. we will have a higher and higher and higher share of connected units in our overall installed base. Now the results we have seen and the feedback from customers we have seen are just so convincing that we have to say, hey, It's now the time not only to look ahead, but also looking behind or back on our installed base. And you might remember the one or the other discussion where we have been asked, well, do you want to connect the overall portfolio? We said, well, we are now focusing mainly on the new equipment. But the feedback is so good. We said, OK, we want to equip as much as we can of our installed base because we see that that the retention rate from our customers is higher than if we do not have connected units. And we have seen that the perception of our customers is so good that they like also the digital services we can offer to them. So why should we only have those digital services looking forward with new installation sales? Let's give them also backwards that service in order to increase our retention rate. Now, the topic is this is like a retrofit you do of an installed unit. You have to spend a little bit more time and spend a little bit more money because you go back to an installed installation. And we are convinced this one time investment will pay off. Definitely because we have efficiency gains we will be able to implement. But we also are able to have really future ready customer solutions, which they like. And this is really an investment where I'm totally convinced this will definitely create a big differentiation to existing competitors, but also to new entrants into our market. So sorry for that. So we have this one-time investment, but we are sure, first of all, end of 23, it's over. And we don't have another one then in 24. I mean, we cannot use that. And the last big, really big program we had was, in fact, the program LEAP 10 years ago. And then another one we had was RO3 20 years ago. So don't expect that now our frequency will increase to every three years we come with something new. That's it. And then we have achieved a new level.

Understood, Thomas. Sorry, I was also just trying to get a bit of clarity around your partnership program. to the extent that you can talk about that. I mean, we've heard you, as I said, roll out five years ago globally with Huawei. Is there a rethink there? Who are you working with now? And also, as far as GE Digital is concerned or GE Predix, am I right to assume you're now rebuilding around Azure? And can you help me understand what the competitive implications might be around that?

So it is correct we have moved away from GE Predix. We have a very strong relationship with Microsoft, but also with other tech players in the market because we have learned that it is important to have a very broad base of partners. Because we are a lot co-creating with our technology partners. So whether this is Microsoft or other partners we have, we want to benefit also from their experience they have. So it's correct we have moved away from Predicts. We also have increased the number of suppliers for our cubes in the Schindler Ahead solution for quite obvious reasons. We were a little bit, you know, under pressure, having only a Huawei solution. I do not want to elaborate more on that. But we had to open up new suppliers and we have done that. We still are delivering, you know, certain markets Huawei cubes, but we now have also two additional suppliers. And because we now go into mass connectivity, we might even have to increase the number of suppliers to be able to fulfill our ambition of mass connectivity.

Understood. If I can, finally, just in communication around this, and sorry to press the point a bit, but I find it quite rare for a company to come out and launch a multi-hundred million, in this case, Swiss franc plan with zero detail, frankly, on payback and expected returns. So I wonder whether I can just clarify your EBIT margin ambition is to bring it to the high level of the industry's long-term margin level, which I understand you define as 12% to 14%. So high end of that. Is that a correct understanding? And when should we expect to hear from you? And more generally, if I can, Thomas, did you learn much around how you launched your 150 million euro investment plan for building mines and how to communicate around some of these big investment programs? Anything learned from that in terms of how to communicate on this going forward, if you like?

Good point. So, of course, it was the question whether when do you announce such a program at which stage of maturity? So we have worked very hard in the last couple of months to fine tune what we exactly want to do. What are the necessary resources? What are our project plans? What are the different milestones? And of course, we will also in the future report more on that. This definitely we will be able to do so whenever it does not jeopardize, let's say, our competitive situation. We can maybe not share everything in detail. And you are right. It's always easier to work on the cost. It is also internally exactly the same. it's much easier for them to calculate what it costs than to calculate what it brings. Of course, we have done a high-level impact or business case calculation. And you're probably not totally wrong with your assessments, but this is, you know, it will depend a lot on how overall the market will develop. What I can say is we want to narrow the gap. This I can say. Wherever, let's say, competition is, we will have to narrow the gap because we all face the same environment. We all face commodity. We all face freight. We all face the wages. We all face, let's say, the political turmoil. But what is definitely not acceptable for us is that the gap is widening. So we have to work on narrowing this gap. But we don't want to give, you know, a margin target in three years of X. This we don't want to do. But let's say to have a substantial step up. This definitely you can assume.

Thank you.

The last question for today's call is from Jörg Rune from AWP.

Please go ahead, sir.

Yes, good morning. This is Jörg Rune. My question is, with the new program, what effects will it have on employment, especially in Switzerland? Where will you build up employment and where will you make cuts?

Thank you for this question. Of course, this is a it is a it is a program which is very much future oriented. So it talks about digitization. It talks about product innovation. It talks about sustainability. It talks about the customer experience. So it's more an investment into the future. And it's not a personal reduction program. This is not the aim of this program. Definitely not. However, I have to say we have done the cost optimization program or we have announced the cost optimization program mid of last year, which is really focused on getting costs out of the organization. And this is an ongoing exercise. We are well on track, but we said this will be something which will accompany us in 20, 21, 22. So we are continuing with that program. But here, Top Speed 23 is really more, you know, being industry leading in customer experience and not so much reducing jobs, honestly. I do not say that there is not a single case, you know, what can happen, but definitely this is not at all our main purpose. You know, Schindler is a company that really cares for the well-being of the current and also of the future generations in our workforce. And we are thrilled by the long-term health of the company. And when we have to take such decisions, we don't take them really lightly. For us, this is also difficult to do. But again, top speed is future-oriented, technology-based, new products and not cost-cutting.

But the cost-cutting program that is ongoing, that entails a reduction of the workforce in Switzerland and there is nothing changed there.

nothing changed we said we talked about roughly 2 000 jobs and we said up to 10 percent will be in switzerland so the 2000 are worldwide we are well on track with that yeah always are very very let's say employee-centric in the solutions to find okay thank you thank you very much for attending this conference call

We'd like to close now, and we're looking forward to our next event, our half-year results on July 23rd. Thank you, take care, and goodbye.