Schindler Hldg Ag Akt

Ladies and gentlemen, welcome to the Schindler Conference Call on Half-Year Results 2021 Conference Call. I am Alice, the Chorus Call Operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcasting. 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 half-year 2021 results conference call. My name is Marco Knuchel. I'm Head of Investor Relations at Schindler. I'm here together with Thomas Oetterli, CEO of Schindler Group, and Urs Scheidegger, our CFO. As usual, Thomas will start 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 in advance. With that, I hand over to Thomas. Thomas, please go ahead.

Thank you, Marco, and good morning, ladies and gentlemen, and a warm welcome from me too. Before I go into the details of the first half, I want to take a moment to acknowledge our people around the world. who have under these very difficult circumstances managed to focus on our customers and they delivered also solid results. They have gone above and beyond to keep our customers and our community safe. And I would like to thank our suppliers and our partners for their outstanding collaboration. So let's start with slide number two. The markets recovered at varying speeds. Even though revenue and operating results broadly reached pre-pandemic levels of 2019, COVID-19 is far from over. Nevertheless, we saw encouraging growth for the first six months of 2021. Now, looking ahead, we remain cautious as virus mutations keep challenging the world, but also as foreign currency headwinds persist, and as raw material costs and logistic cost inflation is increasing. Besides other operational measures we have been taking, Schindler is increasing prices across all product lines and geographies to compensate for the higher cost base. Delays on construction sites globally are adding to the challenging situation. Therefore, we remain committed to our vision and to accelerating our future readiness. Let's move to slide number four, our Corporate Responsibility Report 2020 and have a look on some highlights. As part of this future readiness, sustainability and more broadly corporate responsibility continues to be a top priority. COVID-19 has made the centrality of corporate responsibility for business resilience very clear. In 2020, we already officially joined the UN Global Compact, the world's largest corporate sustainability initiative, reaffirming our commitment to align our operations and strategies to the UN Global Compact's 10 universally recognized principles in the areas of human rights, labor, environment, and anti-corruption, and collectively contribute to achieve a more sustainable world. Let's move to slide number five. our corporate responsibility roadmap. So far, we have made good progress, namely in the areas of safety, where we surpassed our goal last year, as well as our goal to attract diverse talents while increasing value in the communities in which we operate. In all the three areas, we are doing well. But we still have ways to go in some areas, namely the reduction of emissions generated by our vehicle fleet or the assessment of our supply chain regarding sustainability metrics. Let's move to slide number six on our agenda, how we drive the corporate responsibility. We continue to drive our sustainability agenda. In June, we announced our commitment to science-based targets, and we are now in the development stage of that journey. In addition, we are committed to continuously improve our reporting and we have outlined new sustainability initiatives, including a full transition to renewable electricity by 2025 and a no waste to landfill target across all our sites globally by 2023. Now let's move to slide number seven. And let's have a look on the Top Speed 23 program. Sustainability is not only the only priority we have. Being future ready also means accelerating digital transformation, boosting product innovation to strengthen our position in key markets and key segments, and addressing stability gaps over the longer term. So let's move to slide number eight and let's have a look how this all comes together with our actual macro environment. The top speed 23 program that we announced last quarter is designed to do just that. So we can meet some of the challenges that we as an industry face and turn them into chances proactively while still following the Schindler way. On slide number nine, you see the program structure. The program has now started, and we have received some good first initial feedback. The key initiatives focus around key competitive levers. 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 expand up to 270 million Swiss francs until the end of 2023 in order to accelerate our new installation growth, to drive portfolio growth and mass connectivity, to develop sustainable modernization solutions, to accelerate the digital twin for escalators and our modular elevator product range, to boost product innovation for selected markets and customer segments, and to foster procurement excellence. Up to half of the expenses will be dedicated to portfolio growth and mass connectivity. Some of the benefits will be felt as early as next year, while others will come through over the next few years all with an eye of speeding up some of our ongoing key initiatives. Let me pause here and bring you back to the here and the now, our results of the first six months of the year. I will hand you over now to our CFO, Urs Scheidecker, who will give you some color on what happened in the first six months. Urs, over to you. Thank you, Thomas.

Good morning, everyone. Overall, I'm pleased to be able to present robust results for the second quarter and the six months of 2021. Revenue and operating results broadly reached pre-pandemic levels, while order intake remains slightly below 2019 levels. For the year-on-year assessment, the week prior year comparison needs to be considered. Please now move to slide number 10, the order intake development. In the second quarter of 2021, order intake reached 3.1 billion Swiss franc, corresponding to an increase of 17.9% or 17.7% in local currencies. Growth was supported by weak prior year comparisons. In absolute terms, the second quarter 2021 order intake was still slightly below 2019 level, strongly impacted by unfavorable foreign currency impacts. The order intake rose by 12.8% to 6 billion Swiss francs in the first half of 2021, corresponding to an increase of 14.1% in local currencies. The following slide, 11, provides an overview of order intake growth in the first six months of the year versus the first half of 2020. Order intake includes all product lines, new installation, modernization, repair, and maintenance. All regions and product lines generate the growth. The Asia-Pacific region generated the highest growth rate, driven by new installations in China, which were more than 20% up. Asia-Pacific, other than China, overall grew mid-teens, and so did the Americas region, while the EMEA region generated high single-digit growth. New installations remained robust and generated growth of more than 20% in units and in value terms. The positive trends that could be observed towards the end of the first quarter in modernization and repairs continued. resulting in strong second quarter growth of more than 20%, compensating for declines in the first quarter. Our maintenance growth was very solid. Our portfolio of maintained units increased more than 5% compared to end of June 2020. Order backlog increased by 7.7% to 9.6 billion Swiss francs, corresponding to an increase of 5.9% in local currencies. Backlog margin over all product lines remained largely stable three quarters in succession. I move on to slides 12 and 13, the revenue development. In the second quarter of 2021, revenue increased by 14.4% to 2.9 billion francs. corresponding to an increase of 14.3% in local currencies. It's the first time for three years that we see a slight positive currency translation impact in a quarter. In the first half of 2021, revenue amounted to 5.5 billion Swiss francs, which is equivalent to an increase of 10.4% and 11.6% in local currencies, supported by a week prior year comparison. It surpassed pre-pandemic levels, which is remarkable considering the strong appreciation of the Swiss franc since 2019. All regions generated growth driven by China that improved more than 20%. Asia-Pacific, other than China, generated a double-digit improvement, while the Americas and EMEA regions were up high single-digit. New installation increased by almost 20%, Modernization and repair recorded mid-single-digit growth. Maintenance revenues were up more than 5%. M&A activities contributed about 2.8 percentage points to growth, mainly due to the first-time consolidation of our joint venture forklift in China in July 2020. And foreign exchange translation effects had a negative impact of 61 million Swiss francs due to the strong Swiss franc mainly against the US dollar, the Brazilian real, and the Turkish lira. I continue with slides number 14 and 15, the operating profit development. In the second quarter of 2021, EBIT adjusted reached 313 million Swiss francs, equivalent to an increase of 17.8%, up 16.4% in local currencies. EBIT adjusted margin reached 11.7%. In the first half of 2021, EBIT adjusted reached 638 million Swiss francs, supported by strong top-line growth, operating leverage, high efficiency and cost optimization, positive effects of the introduction of modularity products, and lower operating expenses due to COVID-19. These factors were compensating pricing and backlog margin pressure, as well as raw material and wage cost inflation. Foreign currency exchange effects had a negative impact of 4 million Swiss francs. EBIT adjusted margin reached 11.7%, 150 basis points up from previous year. Destructuring costs were 15 million Swiss francs, expenses for building mines amounted to 12 million Swiss francs, and expenses for the Top Speed 23 program reached 4 million Swiss francs. I combined slides 16 and 17 that show the development of net profit and cash flow from operating activities. Net profit totals 455 million Swiss francs in the first half of 2021, surpassing pre-pandemic levels and an increase of 45.4%, supported by higher operating profit and substantially lower restructuring costs, while the financial result line was more negative than in the previous year due to comparatively less foreign currency gains. Cash flow from operating activities increased by 13.4% to 721 million francs as a result of rigid networking capital management and cash saving measures implemented across the group. Networking capital remains at the solid level of about negative 10% of revenues. I conclude with the outlook for 2021 on slide 19. Markets are recovering at varying speeds, and we will still have to deal with the continued Swiss franc strength. At the same time, raw material costs are at the high level, and so are sea freight costs. Those two factors will substantially accelerate in the second half of the year, resulting in an incremental headwind of presumably some 70 to 80 million Swiss francs compared to the first six months of the year. The arising shortage of electronic components is adding to the situation as it results in delays on construction sites across the globe. Additionally, growth rates in the second half of the year are expected to slow due to a tougher prior year comparison. Keeping these elements in mind and bearing unexpected events, Schindler expects revenue growth between 4% to 7% in local currencies. Net profit is expected to reach between 840 million to 900 million Swiss francs. A lot of measures are in place to caution accelerating negative cost impacts, also under the umbrella of the TOPS B23 program. Additionally, our end market prices need to increase, and we are making substantial steps into this direction. Due to the lead times from order intake to revenue recognition, we will see such positive impacts from the second quarter 22 onward in our results. With that, I hand back to Marco.

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

We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and 1 on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use only handsets while asking a question. Anyone who has a question or a comment may press star and 1 at this time. Our first question comes from the line of Lars Brunson with Barclays. Please go ahead.

Hi. Good morning, Thomas. Good morning, Urs. I hope you can hear me okay. I wanted to start out on pricing, Urs, to your comment just now on the outlook and want to try and understand a little bit better the magnitude of the price increases in new equipment and that you've been pushing through and are pushing through, and maybe some of the regional variations around that. My understanding is that global new equipment pricing is up low mid-single digits on orders taken during or maybe late Q2. I wonder whether you can help me a little bit with what you see regionally. I'm particularly interested in China, and maybe also understand whether these price hikes go far enough now to offset the raw material and logistics costs inflation that you're facing in your equipment business. I'll start there. Thank you.

Good morning, Lars. This is Thomas speaking. Yes, we hear you loud and clearly good. So regarding pricing, you have to distinguish depending a little bit on the businesses. So you have to project business. This is new installation and modernization. where we have applied price increases in the middle of the year. So it's a very early stage. And then you have the service business, where anyway, we are increasing prices regularly every year with our inflation clauses we have in most of our service contracts. And then last but not least, you also have repairs, because in the repairs, you also use material and some spare parts prices or spare parts costs. also have increased, also increased in our repair business, the prices. Now, the impact of prices has a different timeline. Repairs, we can expect that we already will see some impact coming in towards the end of this year. And as Azouz has mentioned, in the project business, it's longer. So it will start to kick in in quarter two. But of course, it depends on the country what kind of a lead time you have. Some jobs can even go two years until you see the impact when we recognize operating revenue. Maybe Urs, you can highlight a little bit how we have done that and maybe which are the countries where, let's say, also the need was the biggest to increase prices.

Thank you, Thomas. Yes, it's regionally different. And now I'm talking about our new installation and modernization business. It also depends on inflation rates across the world. And we see already a higher interest rates and inflation rates in Latin America. And that helps to lift prices. But also in North America, it's already stronger on price increases across the board. Then Europe will be a bit in the average of price increases and the competitive environment in Asia and in particular also China is intense and tough. But also there we are lifting prices.

So in a nutshell we can say Asia is maybe more on the lower end Europe is more in the middle and America is more on the higher end. And of course, this is what we now try to implement. You know, the market at the end will also tell us whether everybody now is reasonable. But the good thing is our customers have realized it's not only, you know, an elevator and an escalator topic. This is in fact for everybody. General contractors, they are facing cost increases everywhere and for every type of material, steel, concrete, wood, for example. So I think we can be optimistic that there is a turnaround in the mindset that now costs will go up and prices will go up.

If I can just press you on China new installations, are we talking 100 basis points or so of pricing at this point or something materially higher than that?

Well, I think what we definitely can say is that the raw material cost, of course, as China has a lot, let's say, a much more unfavorable business mix because you have much more new equipment business compared to the service business. If you compare that with Europe, the pressure on cost is, of course, higher in Asia Pacific. So also there, I think increasing prices by one percentage point would not be enough. So we have to shoot for more.

Can I secondly just clarify, and then I'll go back in the queue, the raw material and logistics cost guidance for 2021 and your thoughts on 2022? My understanding is that you now expect 100 to 120 million headwind from raw mats this year, so up, I guess, 25 million Swiss franc at the midpoint. Can you clarify what you expect for 2022 at this point? I appreciate it's a moving target, but whether that equally is also moving up by 25 million at the midpoint and what the number might be for next year? Thank you.

Well, honestly, I have to admit it's difficult to make a proper forecast for 2022. Your assessment for 2021 is correct. So we have an acceleration in the second half of 2021. Why? Because we had price agreements with our suppliers And we somehow were hedged partially in the first half of 2021. Now, the commodity index, you know, has went through the roof. And we had 50% increases of the commodity price index. Now, of course, this does not mean that all our costs are increased by 50%. It's just the raw material part which goes up. But it is a substantial increase of our product cost. Now, it has somehow on a very high level over the last couple of weeks, it has stabilized. It has stabilized. And our assessment you mentioned, you know, with the 110 to 120 million is based on the assumption that this is now somehow the ceiling of the raw material price increase. So, of course, if it goes further up, then the negative impact even will be higher in the second half of the year. Now, as the majority of negative impact is coming in the second half of the year, next year, if we would assume that this level stays, and that's at the moment our assumption, then these higher commodity prices for six months in 2021 will impact 12 months in 2022. And this would put some more pressure on the yearly result, 2022 of roughly 50, 60 million on top what we had this year. However, I have to say, as we mentioned before, it should be then partially or maybe completely compensated by the kicking in of the price increases.

That's very clear. I'll go back in the queue. Thank you both. Thank you, Lars.

The next question comes from the line of James Moore with Redburn. Please go ahead.

Good morning, everyone. Thomas, Marco, hope you're all well. I've got one on price and raw material and then one on China, if I could. On price and raw material, I just want to make sure I understand what you just said. Are you talking about a year-on-year effect in the bridge of 50 to 60 million in 2022? Or are you talking more about 160 to 180 million in the single year of 2022? And then on net pricing, is your ambition to... fully pass on the raw material impact from this year and next year by a certain period? Or do you have to make up some of the balance with some productivity? That's my first question. Maybe I'll come back to China after that.

Thank you very much, James. So your understanding for 2021 is certainly correct. We have to increase the assumption on material inflation from 80 to 90 now to 100 to 100 in the P&L for the full year. And as explained, this additional 70 million now in the second half year will spill over into next year. And that should have an impact 21 to 22 of about 60 million.

That's clear, thanks. And overall, if we think about the whole thing of 170, 180 million over the two years, do you hope to be able to get all of that through in price or do we have to make up some of that with some other productivity savings?

So before you talk about, of course, we have the ambition to mitigate as much as we can with pricing. But in all fairness, this will not be enough. Why? Because with the time, you know, it's a timing issue. So even next year, even if you have now increased the prices, not everything will materialize next year. So we need additional productivity and efficiency improvements to mitigate that. Otherwise, we still would have a negative impact. So we will not be able with pricing to compensate all the commodity and freight cost increases. So we need other measures. And the good thing is we do have other measures. operationally we have now been cruising on a reasonable level and there is no reason why we should not be able to achieve additional productivity gains also in the future. But second half 21 and probably first half 22 will be tough.

It will be tough. And maybe I can compliment our modularity program will now come to an end and will be fully running this already is a good mitigation action this year and will allow us to achieve economies of scale on this much reduced number of components and variants for the supply chain next year.

That's very helpful. And just quickly on China, if I look at your very good growth, it looks to me as if you're up 20-30% on a two-year basis in China and the market is quite strong, perhaps stronger than Thomas you might have predicted two, three years ago and stronger than many of us might have. What do you attribute the general high level and what's your longer term view these days on what the right equilibrium level of the Chinese market is on units?

Yes, it is true. I think, first of all, we saw in 2020 a real V-shape. in the Chinese economy. I mean, we had a fast deterioration in quarter one and quarter two, but we also had a very strong rebound in the second half of 2020. And the market stayed on this high level. So when you now try to compare, you know, total year 21 with total year 2020, the market will grow in 2021 compared to total year 2020. Now, in the second half, the growth will not be so spectacular anymore because it's quite the high base of the last year second half. But we are, in principle, we are optimistic about China. We don't see that there is anything going down. So we believe that this year, The market definitely is going up. Now, looking ahead, I think the general megatrends for China are positive. So there is no reason why we somehow should lose that momentum. We think that it is stable or maybe slightly going up also in the years to come. However, I have to say, I think there will be, you know, midterm, there will be a certain shift from the new equipment business moving more towards the modernization business. But the residential market is still very stable, is very good. We see some, let's say, high vacancy rates in the commercial area. So there is a certain pressure on the commercial area. And last but not least, in public transport, I think the plans of the Chinese government are still very, very ambitious. And so we also should forecast that the public transport area will remain strong also in the future. Thank you very much.

The next question comes from the line of Andrej Kotnin with Credit Suisse. Please go ahead.

Good morning. Thank you very much for taking my questions. Can I start with firstly just to calibrate some pieces on the profit bridge in terms of the programs that you're running? and the field efficiency that I think you mentioned before being over 100 basis points. Could you tell us where you are on the first half across the modularity and then the kind of 2000 program and field efficiency and whether your thinking for the full year has changed at all?

Thank you very much, Andre. For the half year, you can see it as follows. We have an EBIT bridge year-on-year of 10.2% to 11.7% EBIT adjusted. And one headwind, of course, are the high material inflations that account about for 40 basis points. But this is also compensated well with our cost-saving measures with the modularity and And this is in line with our guidance in the past. We want to achieve 65 million savings from the modularity for the full year. And then we will reach the 200 million run rate we were always talking about. So that leaves you with strong leverage to explain the bridge. And the leverage comes from a very high top line growth. 11% revenue growth, which then comes with a lot of cost measures. And we have rolled out the cost optimization program last year. And that was adding 20 to 30 million last year. We'll now add 50 to 60 million this year. And the remainder next year. We currently have lower wage inflation than what we had in the past. You remember, currently around 2%, but in typical years, actually more than 3%. We have a lot of OPEX measures in place. Under the COVID-19 situation, obviously you have much less travel and expenses and so on, which is also helping right now to achieve this strong leverage we have. I hope that clarifies.

Yes, thank you very much. And the second question, could we talk a bit more about the top speed 23? You've given the major components of it, which is very helpful. Could you maybe talk about the biggest, the mass connectivity, and what are the benefits that you expect to reap from this, and what kind of payback scenarios should we be thinking about for this piece of the program?

Yes, thank you, Grant. Good morning, Andre. As we have shown on slide number nine, you know, there was also from the last time, of course, we said, okay, we would like to give you a little bit more insight what we are exactly doing and when you expect, you know, what is the year when the first, let's say, benefits are kicking in. Now, when you look on the connectivity, so our ambition is... First of all, as we have done now in the last two, three years, we are connecting every single new equipment with our Schindler Ahead solution. But we now also go back to our installed base. So we are connecting backwards all the elevators or a lot of elevators and escalators, which we already have in our service portfolio. Why do we do that? So there are... First, I would like to start with customer benefits. We have seen that retention rate of portfolio is higher for units which are connected than for units which are not connected. Why? Because we can deliver a better service to our customers with artificial intelligence, with big data analytics. we are able to pre-assume if we have in a certain equipment an issue to come up and we can correct potential mistakes before they really happen. On the second part there, it's also that some of those, let's say, breakdowns you sometimes face in an equipment, sometimes you don't know why it was breaking down. So what you do is you send the technician, the technician goes through the installation, he's somehow rebooting the elevator or the escalator. Now with Schindler Ahead, we have a functionality which is called over-the-air update. So we are able to reboot an elevator or an escalator over the air. So we don't have to send a person anymore. This has two positive impacts. One is The customer, in some of the cases, doesn't even realize that there was a breakdown. So from a customer point of view, the uptime is much, much better. But also internally, we will gain efficiency because we don't have to send a person in a city and the guy is stuck for two hours in a traffic jam. We can avoid that. So it brings me to some internal efficiency gains. And the more you connect, the more efficiency gains you can generate because you need economies of scale. Because what you do is you have to reroute because you can give maybe more units to a technician because not all the work has to be done anymore, you know, personally, but can be done also over the years. And last but not least, with Schindler ahead, we also delivered the possibility to have a so-called content management system. So if you want to do advertising, if you want to do messaging to tenants, you can do that with the Schindler Ahead platform. So we believe the loyalty, retention rate, efficiency, higher uptake, uptime is justifying that you connect more units in the future. Now, honestly, if you want to create that experience, you need a cube, our cube, our Schindler Ahead cube. And for this, you need semiconductor chips. Now, in all fairness, now we have seen the shortage globally of those chips. And so we are a little bit cautious now to use the chips for all those installation retrofits with cubes. So we are a little bit on a slowdown right at the moment until this, let's say, chip shortage is over. And then we have to even more accelerate in 22, 23, but also the years beyond to create this mass connectivity. So challenging at the moment, but it does not change our strategic direction at all.

Thank you. If I may just follow up on the technician efficiency, could you tell us just roughly what percentage of call-outs could have been dealt with remotely if connected?

Well, of course, a technician is working on two key tasks. One is the regular maintenance, and one is managing callbacks. And we can say that it depends on the product line and the quality of the controller, because the younger the controller is, the more you also can do over-the-air updates and rebooting. But I would say it's quite big range in this callback management. It is between 10% to 30% where in the future you can avoid that the guy has to be sent out to the installation.

Great. Thank you very much for your time.

Thanks a lot.

The next question comes from a line of Sumada Banerjee with Citigroup. Please go ahead.

Hi guys. Thanks for taking my questions. Just wanted to start with the raw materials guide of 100 to 120 million. It's time to understand how much is the split between raw materials, pure raw materials versus logistics. And when you say that you're facing a shortage of electrical components, which is also a kind of a headway. Do you include this in your guide or this will actually come on top? And if it does, How much headwind can you expect from the outside?

Right. So, well, overall on this 100 to 120 million, most is coming from the commodity material inflation in the area of 80 to 90%. The rest is sea freight and logistics inflation. smaller in value, but this one has tripled or even times five over the last 12 months. Of course, what you always need to consider on the commodity material inflation is that we have a small share of direct purchases of sheet metal. However, we purchase most of the components already with added value from suppliers. And that kind of helps to negotiate prices. And actually, the impact is a bit less than what you see on an index. But as I said, most of it is driven by material inflation and electronic component shortage. So prices for electronics are also highly up, to be honest. And that also has a significant share of the 80 to 90% of material inflation. Thank you.

Yes, just one more follow-up. Looking at your developed markets, just wanted to clarify that you've got to understand how much of this recovery is actually coming from projects that were on hold versus new projects discussed on pipeline. I'm specifically looking at North America.

So I was not sure I have fully understood the question whether you now talk about the order intake, whether there was a catch-up.

I'm talking about North America order intake. I'm just trying to understand how much is this actual recovery from projects that were on hold. or is it just like new projects that are discussed in the pipeline?

Okay, okay. So the major part of, let's say, the market growth, but also our growth, is not because there have been postponed projects, I would say. I think the U.S. always shows very high dynamics So we saw that it was going down very sharply, but when the confidence of people is increasing, then it also comes back quite fast. However, I have to say we are not yet on a level of 2019 in the market. Definitely not. The market dropped substantially in 2020, 25%, 20 to 25%, and this has not yet been catched up. However, for ourselves, we can say that I was very satisfied with the performance of our people in the US specifically, but also in Canada and Latin America, I have to say I was really pleased about the performance. And this is mainly driven by the fact that the first part of recovery came more in the residential area. In the commercial area, I think it has not yet been coming back so strongly, which also means, because these are usually then larger projects, so major projects is still on a low level in the US, but the residential market came strongly back. And also in Latin America, the residential market is very strong. Now, with our products we have in America, we are very strong in the residential area. And so we are benefiting, and I think the team was able to expand our footprint and also expand our position in this residential area.

Thank you. Thank you.

The next question comes from the line of Martin Hösler with ZKB. Please go ahead.

Yes, good morning and thank you for taking my two questions. First of all, a question on growth. How much growth really can you stem? And I was wondering, apart from supply chain issues, do you face any capacity constraints there? Or, for example, availability of educated staff? Maybe if you could shed some light here. And the other question is turning to China and I was wondering there whether the issue of developers facing some constraints there and liquidity issues, if this has any impact on your, let's say, payment terms or how you deal with the big developers there in China.

Okay, thank you very much, Martin. Maybe I will start with growth and maybe about the customer base and financing in China. I would hand over to Urs. So first of all, you know, it's much nicer to talk about the problem of growth than to talk about the problem of no growth. So last year we have seen what it means if you have no growth. Then you immediately run into overcapacities. You also have a negative operating leverage because you have your fixed cost base. So I'm happy that we have to think about how much growth can be really digested. I think when you look now on 2021, don't forget that there was a very strong baseline effect. So usually our resources, we do not build up, you know, due to a quarterly order intake. We have somehow a certain cruising speed or a cruising level which goes up continuously year by year. And so we had last year in order intake and partially in the revenues a dip. And now we are somehow back on a normal level. So we should not be too enthusiastic about the year-on-year growth. It's still okay in local currencies if you compare with 2019, but if you look at it on Swiss francs, then almost everything is eaten up by the strong Swiss franc. Now, how do you deal with such a growth? Schindler has since decades, I have to say. We always try to achieve the so-called equilibrium between fulfillment and growth. This means we only want to grow in a way that we can satisfy our customers. So this equilibrium is very, very important. And for this, we are investing in advance into the training of our people. I have explained that once in the past, we have for our fitness in the field, not only a capacity planning, but also a capability planning. And what we apply is a belt system, like in judo or karate. You start as a gray belt, then you become a yellow belt, you become a green belt, you become a red belt, and you even can become a black belt. And we are monitoring on a monthly basis how many people we have in which belt category to make sure that we are able to fulfill what we have sold in our sales organization. And the good thing is, If you sell it today, as we aim to do a lot of those jobs, you know, we do not only want to sell a box to someone, but you also want to manage the fulfillment. We have a couple of months, 12 months in an average, or 18 months, depends on the country, time to build up our resources. And everywhere in the world, we have a lot of training camps, but all those people have to go and to get a belt certification. Nobody is allowed to install or to maintain an elevator in the Schindler Group if you are not certified. So this comes at a cost, but we want to have a high quality reputation as a group. And so we are managing and monitoring that very, very well. Now, what is the limit? I think... Coming back to our three strategic priorities, priority number one is we want to grow faster than the market. And then, of course, we have to do the right training that we also can improve our profitability, which brings me to the third one, fostering a winning team. Yes, a winning team is if you have well-educated, trained people. So I do not see a real restriction for us globally. But in some markets or sometimes in some cities, we have to push the brake and say, hey, you're growing 20%. Now, no way. Now, growth, by the way, you can also achieve with pricing. So increasing pricing is also increasing your top line without adding more work to the people. So I would say for us, there is not a real limit as long as we work on this equilibrium. And maybe Urs, you could then talk about the customer base financing in China.

Yes, thank you. Indeed, in China, we have this three red line financial control policy in place and the clear government ambition to tighten financial controls on the developers, which means long term, is a very healthy measure to create stable developments in the property market. Short term, certainly this is giving some pressure on cash and liquidity of those listed top 20 developers. That's certainly true and visible. Payment terms are very demanding and very competitive in China. Now for us, we can maybe differentiate a bit. Payment terms historically in public transport are always very demanding and milestone payments are coming later, according to the schedule, until they are paid. In the residential sector, payment terms in China are better. than they are in most areas of the world, particularly when it comes to down payment, progress payments to cover work in progress. And those terms have been quite stable recently in the mass residential segment. We also have upgraded our commercial skills with our strong networking capital program we have in place since two years.

Thank you. That's very helpful.

Thank you.

The next question comes from the line of Patrick Refeis with UBS. Please go ahead.

Thank you and good morning everyone. I have two follow-up questions. The first one would again be on raw materials. You talked about a ceiling being likely reached now in terms of input cost inflation. Has that prompted you to adapt in any way your hedging policy for raw materials? Are you going to maybe

wind down or roll back the hedges in anticipation of maybe more favorable environments going forward well um maybe i need to be a little bit more specifically concrete we we are not doing um financial or commodity hedges what we do is we are locking in prices with suppliers for the next six to nine months historically um however in the current situation where you have this high material inflation and also even some shortages of components, it's not possible to lock in prices for a very long period. Periods have been shorter, leading also now to even more short-term P&L impact, and you see it in the second half year. So it's really demanding and tough negotiations with the suppliers to fix prices. Our assumption is that prices are now somehow peaking at very high levels, but to be honest, it's an assumption. It's difficult, and in a way, the trend was always going up and up in the recent quarters. That's the situation we have to deal, and we need to generate even higher saving measures across the board through modularity, which we have in place and additional measures we also are working on and are also partly part of Top Speed 23.

So when these fixed prices used to be six to nine months, where are you now? Is it really almost spot instantaneous or maybe three months?

What you do is you try to fix the price at the moment, again, for the six to nine months, but you have a deviator, a raw material price deviator included. So usually you have a bandwidth where you say, okay, if raw material prices are now moving up or down within 10 points, then it stays the price where it is. But if it goes beyond that, then you have to adjust the pricing. So there is an adjustment clause included. And this is now much shorter term than maybe it has been in the past. So in case the raw material costs should further go up, then we have to expect and accept even higher costs in the near future. However, when it should go to the other direction, then of course we also should be able to get some relaxation from that.

Okay, thanks. That's very helpful. And the second question is a follow-up on what you talked about with regards to mass connectivity and the top speed program. Can you give us an indication of how much of your current installed base and service portfolio will be eligible for these retrofits and how many retrofits can you do potentially in a single year once you accelerate the rollout in 2023 and beyond?

Thank you, Patrick. This is a very good question. So from a principle, you can connect or we can connect every single unit. Not only Schindler units, but we also can connect third-party equipment. I think that's a very important statement. We do have the technology that we can connect every single elevator or escalator in the world. Now, the second question is, does it make sense to connect every single elevator and escalator in the world? The older the equipment is, the less information you get from the controller. So if you then want to still have meaningful data, you have to have a sensor kit. Now sensor kits are much more expensive than if you just have a Schindler, a head box or cube. And there we, in a meaningful way, we have to say, you know, we do not connect for the purpose of connectivity. We connect because we want to generate customer experience, which is superior to that what they have today. So you are right, not every single unit makes sense to connect. But I would say it is definitely more than half of all the units. Because when you go back, maybe the last 20 years of controllers, you already get quite a lot of meaningful data. And then you have maybe less than half of the portfolio where you really have to think, OK, maybe I do not get data. But in minimum, what I can do is I can tell to the customer whether the equipment is running or not. That's quite interesting. Large customers, the first thing they want to know is the elevator running because they don't know by themselves. So if you look at our dashboards we are creating for our customers, because they see the same data as we see, we share that with them. So we have a so-called action board where they see all the equipment, whether they are running or not. But for the older equipment, maybe they only see they run or not. And for the younger one, they see even, you know, what kind of component maybe is malfunctioning. So meaningful, I would say more than half of the portfolio makes a lot of sense to connect. You could connect everything, but maybe it makes not so much sense. So now, of course, with the shortage of semiconductor, the pressure in 22 and 23 for the single year is even bigger to connect. And you have some resource limitation because you need physical work to do that. And it depends then country by country whether you can subcontract that work to a third-party supplier. or you have to have a certified lift engineer. In some countries, you are not allowed to do such a work if you are not a certified lift engineer. So this is very different from country to country. At the moment, we have all the plans in place. We have the capacity reserved to do that mass connectivity. And so there is at the moment, we don't see a limitation. But of course, the longer this shortage of semiconductor will ongoing, the more we have to press into the remaining period of 2022 and 2023, and then it could become that there is a certain slippage into 2024. This I have to admit. But I don't know how the situation will be in 12 months from now. Thank you. Okay, thanks.

The next question comes from the line of Madhvendra Singh with Bank of America. Please go ahead.

Yes, hi. Thanks a lot for taking my questions. Just a couple of questions from my side as well. Firstly, I just want to, you know, understand your views on year on year, you know, how you think operating profits will probably trend if everything stays where we are, FX, raw material cost, your estimates of that, and so on. Do you think there is scope for margins next year to be higher than this year, especially given that you are implementing price increases? So is that possible in the current set of information you have available? And or if you were to get margins higher next year, what additional things you would need to see to do that effect? That's the first question.

Thank you very much, Singh, for that question. Of course, you know, when we look into 2022, first of all, it's very early to make a judgment. There's still a lot of uncertainties. But you mentioned, you know, you mentioned on the so-called CETR is baribus condition. So everything as it is today. So first of all, we will have then for 12 months, the negative impact, raw material we have now in the second half of this year. So in fact, the starting point for 22 is the second half margin of 21. That's the starting point. So it is worse. than it has been in the first half of 2021. Second half of 2022 will be worse than the first half of, second half of 2021 will be worse than the first half of 2021 because of these raw material costs. That's the only reason. I think operationally we are well on track. The teams have all the measures in place and those measures also will have impact on the results in 2022. So it means that from this, lower starting point of the second half, of course, we want to further improve. Clearly. I mean, we have said we now have launched a top speed 23 because we want to work on the gaps to competitors. So, of course, we want to improve. I mean, this is clear. No doubt about that. The key question will be point number one, what is the starting point of the second half of 2020? So then maybe you can say, you know, as we have said also in quarter one, every year we want 20, 30, 40 maybe basic points we want to improve ourselves. Now, the second question is if raw material costs will further increase, of course, then it also means that we have an even higher negative impact in 2022. So, yes, from a low base, In the second half, we should, of course, improve for the total year 22. But it's a long way to go there because this impact is really substantial. But next year, we will have some positive measures which we are working on. We have the cost optimization program, which will add another maybe 50 to 60 million savings. We do have the pricing measures, you know, which should kick in somewhere in the second quarter of 2022. So I think we should be able to improve the margin compared to the second half 21. Yes, clear.

But then for 2021, would you be comfortable with the view that, you know, margins will improve for 21 compared to FY20?

Yeah, of course, of course. This should be the case. I think we cannot expect that the second half is on this level we have now, you know, with 11.7. This will not be the case because we do have the cost impact and it is not mitigated with the price impact and the cost optimization we have. So we will have a weaker second half. And so the total year margin will have to, will drop, right? compared to where we are in the first half. And then if you take the second half of 21, yes, we want to further improve for 22. Now where we land for the total year then in 21 and 22, this is difficult to fully assess. I do not dare to speak out at the moment. Let's wait. where we will end at the end of the year, and then let's focus on 2022, the next year.

Sure. And my second question is around the free cash flow trends. The second quarter number seems to be a bit lower than last year. I presume this is probably due to, you know, faster growth we are getting now. Do you think for 2021, your overall cash flows can increase growth compared to 2020?

Yeah, certainly compared to 2020, absolutely. Our second quarter cash flow was only a little bit weaker as we really had already very strong cash flow in the second quarter. Last year, these networking capital improvements But you see our strong and solid cash flow here today. Cash flow on a quarter level is a bit less meaningful. You have to look on a longer period. Half year is a better comparison. And for sure, if we are improving our operating profit, also next year, if we continue to be solid on our networking capital, you can expect better cash flow next year.

Okay, great. Thank you very much.

The next question comes from the line of Christian Obst with Baader Bank. Please go ahead.

Yes, hello and good morning. Two short questions. One is on cash distribution. Net liquidity is about 2.7 billion now. We talked about the cash flow going forward. Any news how to think about cash distribution to shareholders? This would be the first question. And the second one is, again, on this kind of mass connectivity. So you started with a partnership with GE and Worldwide. And of course, you have to change there and maybe you have a double sourcing. Does that have some kind of a negative impact on your overall margin expectations for these products of mass connectivity? Thank you.

Thank you very much, Christian. Cash distribution, you know, this is a very long story. It's now my 22nd press conference and I think 21 times this was a topic we are happy to be cash rich because it gives us independence. That's the most important thing for us. And independence means we can invest into the future, we can invest into the growth, and we can invest into important programs. And, you know, we also have to finance, for example, extraordinary costs like this Top Speed 23 program or the cost optimization program which is ongoing. Now, regarding any distribution, I have to just say this is to be discussed at the end with the Board of Directors. They will have to take the final decision what to do. I don't want to comment on that. It's good to have a lot of cash. It gives us all types of possibilities, but final decision has to be taken by the Board of Directors. Now, mass connectivity, maybe to answer your second question as well, you are right, you know, we started with GE, but already with GE, we had the cubes from Huawei. So it was more the software platform from GE, and then we moved, but we had physically cubes from Huawei. Now, we have, of course, you know, learned a lot, and we are now able to, you know, we have very strong partners in the IoT area, different type of partners. I think some of them are very famous. As an example, we are working very closely with Microsoft. We are very closely with Apple. We have other partners also all over the world. So we have created a very good ecosystem, but also own capabilities to run our remote monitoring platform. Now on the hardware side, yes, we had to switch from Huawei to other suppliers. And we did that already when there was the first tension in the past. And we have moved to multi-sourcing. We have done that and we were working very hard on the costs. And I can confirm that the costs for the cubes have not increased for us. So there's not a negative impact in costs It was a very long exercise, but somehow with our new partners, we have achieved that we have a higher performing solution at a not higher cost in the future.

Okay, very interesting. Thank you very much. Thank you.

The last question for today comes from the line of Joel Spangen with Berenberg. Please go ahead.

Yeah, hi. I've just got two, actually. Maybe just coming back to start off with in terms of just getting a bit of additional color on your thoughts about the second half. Obviously, your guidance implies the local currency growth will be sort of flattish, maybe even slightly down. Could you maybe just give us a little bit more color in terms of your thinking between the three product lines for the second half, how you would expect that to play out?

Good morning. Just to be clear, Joel, when you think about product lines, you mean new equipment, modernization? Yes, new equipment, modernization and maintenance, yes. Okay. So, you know, when I look on order intake, I think order intake is strong and it also will remain strong, you know, when we had... The difficult 2020, we were, of course, with all the countries, you know, going back and said, okay, how can we now use that somehow great to prepare ourselves to be even more aggressive in the market? And we have seen that the markets are coming back at varying speed. I think we have seen China very strong. Europe, in fact, is very solid. The southern part is not yet on the level it has been pandemic level. Latin America, especially Brazil, surprisingly hit so much by the pandemic, but somehow construction always went on. Americas came back, not yet on the pre-pandemic level, but quite good. Whereas some countries in Asia Pacific are not yet there. Now, don't forget that in order intake, as well as in revenue, We had, of course, a very good impact in the first half of this year because of the first-time consolidation of Volkslift. So this helped us. This we will not have anymore in the second half of the year because we already consolidated Volkslift in the second half of 2020. But still, I think order intake, we will do our utmost to also further increase in the second half of the year. Now, revenue is a little bit different. When I look on revenues, I think service is super resilient. Service continuously grows and continuously delivers us also a growth of our installed base. Modernization and repairs, they came back, but I have to say modernization came back a little bit earlier than even repairs. We are not yet on the 2019 levels, to be clear. So for me, there is still some upside potential in the quarters to come because the utilization of elevators, especially in the commercial area, is not yet there where it has been before. And in new installation, I think we all have to wait now whether our customers are able to do their constructions. So, of course, we see the shortage of microelectronics also for us, but we are very hardworking to mitigate that. We have re-engineered some of our boards. We have worked on new suppliers. Thanks God, we have a very good relationship with key distributors and producers of chips, and we are in daily contact with them. With highest level involvement, even with the board, myself, we have contacted them. So I think it's a bumpy road at the moment, but we are quite good in the survival mode and we do that quite well. But our customers, they are facing the same. You know, if you don't have chips, you don't get HVAC. If you don't have wood, you cannot do the windows. If you don't have steel, you cannot do the raw constructions. So we see that our customers are facing delays, and this can lead to delays in our execution. And that's the reason why we say, wow, you know, when you look on the lower band of 4% to 7%, it would mean that we are even at zero or even maybe slightly negative in the second half 2021 compared to second half 2020, because the second half 2020 was very strong. Because in execution, there was a catch up of the first half. Now to top that, you need very strong orders to be executed. And if our customers maybe have their own issues, it might be that the new equipment business cannot grow in execution second half 20 to second half 21. But that's a temporary shortage. It does not change our long-term goals. And I'm quite confident that in 2022, people have become more reasonable. Microelectronic production has been ramped up. Construction is better organized. And by the way, I hope that also freight, it's not only a question of price, it's also a question of capacity. that then the capacities have been increased, that let's say this shortage will disappear. So that will be my little bit extended answer to that. Thank you very much.

Thank you for that. That was very helpful. Maybe just one quick one other question, which is basically I just wanted to check. I think you said in your comments that the backlog margin was stable and that was the third quarter it's been stable. I don't know whether that's correct, but I thought in Q1 you'd said the backlog margin was down 50 basis points. So I was just wondering if you could clarify exactly what's going on there.

Yeah, well, we are talking about the year-on-year deterioration of the margins. When I was talking after Q1 or in the Q1 call, Then I said we have a margin reduction of 50 base points year on year on the total order intake, including new installation and also our maintenance business. When you now look quarter one to quarter two, then margins are stable. That was what I said.

Okay, so it's a sequential comment rather than a year-on-year comment.

Okay, thank you for that.

Thank you very much. Thank you very much for attending this conference call today. We'd like to close now. Please feel free to reach out to me for any follow-ups you might have. The next event is the nine-month result on October 21st, 2021. Thank you again. Take care and goodbye.

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