Schindler Hldg Ag Akt

Ladies and gentlemen, welcome to the Schindler Conference Call on Q1 Results 2022 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 broadcast. At this time, it's my pleasure to hand over to Marco Knuchel, Head Investor Relations. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to the first quarter 2022 results conference call. My name is Marco Knuchel. I'm Head Investor Relations at Ginger. I'm here together with Silvio Napoli, our Chairman and CEO, and Urs Scheidegger, our CFO. Silvio will, as usual, start with an introduction, and Urs will then lead us through the financials. After the presentation, we are happy to take your questions. As in previous sessions, I would like to ask you to limit yourself to two questions only. Thank you. With that, I would like to hand over to Silvio, please.

Thank you, Marco, and good morning, everyone. Thank you for joining us today. And it's my pleasure to present our Q1 results together with our CFO, Ulrich Heidegger. Let me just start with a brief introduction. It's in fact not so long ago, about two months ago, that we met as I had just taken over the double role of Chairman and CEO. Back then, I presented what I called our challenges in view of the macro, micro, but also internal situation we were facing. We did it in total transparency. One of you actually called it brutal honesty, which, frankly, I took as a compliment. And today, two months later, exactly in the same spirit, I would like to start this Q1 presentation with an update on each of the same challenges and provide you with a more specific update on the actions deployed so far to tackle them. In February, actually, when I presented, I spoke of an unprecedented mix of challenges. And frankly, little did I know that two months later, the situation would have gotten even more challenging. And on page two of the handout you should have received, you see I listed exactly the same five challenges that we faced then, providing for each of them a very short summary written in red about the latest situation. Later on in this presentation, you will see I'll provide more color on each one of them. But perhaps starting with this overall summary and with the macro aspect, and of course the topic of the foreign exchange, which for us, a company that consolidates results in Swiss francs, remains very much a current and real headwind The situation update is that the Swiss franc has further strengthened and in particular against the euro, a very important currency for our business, which has lost almost 5% to the Swiss franc. Moving on to the next four challenges, which are more specific to the elevator and escalator industry. The first one I mentioned was this urgency to regain competitive new installation margins. And then, unfortunately, you see the situation as further worsened, in particular because of the material cost inflation. Back then in February, we reported to you a forecast impact on our P&L of 150 million, today based on latest estimates and the latest prices for commodities and other raw material, including components, the same estimate now has increased to 200 million for the year. Moving on to the third challenge, I mentioned our supply chain disruption issues. Now there too, I don't need to tell you how the Ukraine war and the China lockdowns have created additional challenges in this regard. Then moving on to the fortress, this time more internal, I did openly speak about the challenges in streamlining our product portfolio complexity. In particular, I mentioned then about the situation in our factories having to deal with the old products, the legacy ones, in combination with the ramping up of the new modularity platform ones. who are selling, still is, very successfully. Well, today, unfortunately, I have to report, and we'll provide more details in a second, that after an analysis of the backlog, we see that even the new platform in itself does present some challenges in that, unfortunately, it offered too many optionality to customers, who of course loved it, and because of this excess sales and choices of options, the whole portfolio complexity, in fact, has this additional front to be dealt with. More on that in a second. Moving to the fifth and final challenge, at least the big picture one, the topic of the Chinese market was addressed last time, where we explained, as our competitors did as well, that the issue that the largest developers are facing, the most famous, one of the most being ever grounded, were leading to a contraction in the market, which at the time we estimated around minus five, minus 10%. Well, today we're talking about minus 15% latest forecast on China. And the main reason behind that is that the construction industry situation has further worsened. In particular, the consumption of the housing inventory where last time figures showed that it was still within healthy levels and today unfortunately the latest figures released from China show that in tier 2, 3 and 4 cities the housing inventory unfortunately is shifting to alert levels while at the same time housing starts continues to fall. China market, which of course is large in the world, is providing itself another challenge. So this was the overall picture. Now let's move on specific updates for challenges two to five. Since on the foreign exchange, I'm afraid this is not really our business and you probably know much more than we do about that. So let's start with challenge number two. which is, we called it, regaining competitive NI margins. Now, of course, there are many aspects. Last time I actually had specific points on four aspects, but today I'd like to focus on two aspects of this NI margins recovery, which is inflation, and of course how we combat it, and pricing. Now, The biggest evolution here, as far as we're concerned, is the evolution of raw materials, and in particular, I'd like to focus here, and you can see on slide three, on the most relevant metals for our business, which are steel and aluminum. Steel, of course, is the one we use in most elevators and escalators. Aluminum is particularly important because we produce escalator steps with a proprietary technology, which provides many advantages. Unfortunately, of course, when aluminum goes up, we have to accept that additional cost in particular in our escalator business. And you can see on the pie chart on the left, we show the relevance of these metals, where in between you also put the electronic components, which of course last time I mentioned the case of a semiconductor whose price had increased 40 times in the period over a year. But now let's focus on metals. And you can see in the middle chart how literally since our session last time, cost of both steel and aluminum has exploded literally, bringing it back to record levels. Clearly here one of the key contributors to the situation is the war in Ukraine, and there no other point but just having to fight it. And so what are we doing? You see here the key actions on the right hand side. We clearly have to look at it from a strategic procurement point of view whereby we are increasing dual sourcing, whereby we're negotiating with all our key suppliers on how to find win-win solutions whereby we navigate through this period while retaining our relationship But of course, there are transactional aspects whereby we work with the same suppliers on locking in higher volumes. But also there are also new measures that frankly so far we're not been doing, which consists of, for example, of edging both metals. In particular, you would imagine it is aluminum, which is one of the rare metals that we buy in bulk as opposed than separate components. So of course, this is what we have to endure and manage. The question, of course, is how do you offset that situation? And then, of course, the first thing that comes to mind is pricing. So I'd like to move on to slide four in your package. Now, last time I did mention that very openly we were behind in terms of pricing in some markets in particular, and that's why we presented the chart that you can see here on the left hand side below. Now, the shaded part of the slide is the situation we presented last time. The other one you can see from year end until March is the evolution since last time. As you can see, yes, we've been able to increase prices. Unfortunately, the nature of our business is that you issue prices on new tenders, and by the time those tenders are negotiated, awarded, and of course, by the time we get down payment, which for us is the condition to recognize an order intake, this whole offer to bill takes time. So even the price increases we have enacted will take time to materialize. Nonetheless, if you look now at the key actions that you can see on the right-hand side of the slide, we have launched a very aggressive first series of price increases across all product lines and regions. First, meaning that more are likely to come as a result of what we just discussed before in terms of raw materials and inflation in general. But also we have looked at our contracts and realized that we have room to enforce inflation clauses, which are predominantly applied, except in some markets where they're in fact not possible. And so we've gone back to our operating units and most importantly to our customers both on open tenders or even on tenders that were awarded in the backlog to renegotiate based on these inflows and closes so that we can cover at least some part of this inflation pressure that we're facing. At the same time, we also spoke last time about the necessity to change mindset in terms of our sales force, and there we've introduced a new incentive scheme for our sales force based on pricing quality, not only on volume and market share. Pricing clearly is something which will continue moving as aggressively as one can in every market as part of dealing with this inflation. Now, let's now move on to page five on challenges three and four, which are rather update together because in fact they are very closely tied to one another. In February, I openly shared the issue linked to our modularity platform, Ramp-Up. And again, the complexity of this led in a supply chain in terms of managing both legacy and new platforms. And you can see, again, I presented the chart that you have on the bottom left part of this slide, number five, where you could see the status of sales in different regions of the modular platform versus the legacy product lines because the product was not launched at the same time across the world. So there is a lag and difference also linked to some codes and standards that need to be built into the modularity platform. And as we have been dealing with this very actively over the last two months, we also did a backlog analysis and only of the legacy but also the new modular platform and there i have to say in the spirit of openness uh displayed uh last time we unfortunately found a bad surprise because this backlog analysis uh which we do you know strictly as we would do in Schindler looking at every detail and we discovered that there was an excessive number of options that were not only offered but most importantly sold on a new modular platform which of course creates a ripple down effects across the whole value chain and adds complexity in preparing the delivery, in managing suppliers, which in turn creates delivery delays to site, which in turn creates revenue shortfalls, or rather revenue delays. Clearly not a good finding, one that of course we have immediately acted upon. And how did we do that? We immediately created a task force which we called executive because we need decisions to be taken fast. This task force reports directly to the chief operating officer. We have also given instructions to our field operation to reassess in detail the outstanding backlog and tenders to make sure that we will go back to customers to discuss with them whether we could optimize the design, because sometimes these options could be dealt with with a much tighter set of choices, and so that they can also get a faster delivery time, which in turn of course allows a supply chain to work with the efficiency that we aim at. We also, of course, had to look at a product management approach whereby we immediately moved towards a drastic reduction of options offered. How did we do that? We looked at the market. We looked at what really 80% of the market really needs, the famous Gauss curve, and anything which is plus 10%, minus 10% of this 80% is essence. We just cut it out. And we did that not only by giving instruction to sales, but actually as far as changing the sales configurator so that these options can no longer be ordered. Or if ordered, they would be then ordered as a customs requirement with, of course, with all different pricing schemes. Moving on to the next challenge, which refers to the market. So from internal, now let's go back to market topics from product to the markets, and we move to slide six with China. China, as you all know, remains far and large, clearly the biggest part of the market, more than 50%. Nonetheless, as I mentioned last time, as a result of the large developer liquidity crisis, Evergrande first of all, the market was already subject to a slowdown, which we estimated at minus five, minus 10%. Again, the last time we did say, I did say, that based on figures we had, the housing inventory was still at healthy levels. Today, as you can see on the charts in this slide number six, this is no longer the situation. In fact, larger developers still are in trouble. In fact, even more so are being challenged by liquidity crunch in the market. But in fact, the slowdown of the industry is remarkable by speed and by its extent. On the one hand, this is the left hand chart, floor space, further declines across all city tiers. But then on the right hand side chart, you see that for tier three, tier two, three, and four cities, the housing inventory is back to alert levels. Now, how do we assess alert levels? element of judgment but based on our you know experience in previous crisis and you can see here the history of of the recent ones on the same chart we estimate that our inventory level between nine and twelve months is really what we call the the healthy level so you can see that while tier one cities which is the red line still are very much within healthy levels tier two and three have now expanded into alert territory very clearly and very rapidly. So as a result, we have this 15% drop year on year that we estimate by year end, but it's not all. This is clearly a concerning situation. There is of course another big unknown in the Chinese market today, and these are lockdowns. Lockdowns due to COVID. And so I'd like to move to the next slide on page seven. where very openly we presented the situation of the lockdowns in our different units, namely H.J. Schindler in the Henan province, Shinda China in Shanghai, and Forte Schindler in neighboring state province of Zhejiang. Now in Henan, the lockdown was extremely severe beginning of the year, but by now this is now There are still lockdown in cities, but at least in terms of production, we can produce and we can install in the province. Where the situation is unfortunately very, very tense, and I know that you'll be following this in the news, and I'm sure other companies suffer from the same situation, that is in Shanghai. In Shanghai, as you can see here, we started with a first lockdown mid-March. Then it was a short reopening. followed, unfortunately, with the next even tighter lockdown, which still goes on today. The situation is, very frankly, very difficult. We have employees that came to the office on a Friday and then were not allowed to leave. And I understand this is the situation there. So they had to stay on premises. We are actually just sharing a few things here. We had to buy sleeping bags. We had to buy camping beds. Some people had to sleep on pallets in the factory. And overall, I must say this here, I'm extremely impressed by the resilience and resolve of our employees who continue to work throughout the period and continue to do so. In the meantime, some of them have been released from our facilities. They went back into these quarantine centers. So the challenge continues. And again, too, I'm extremely impressed how our management leadership manages the business while at the same time dealing with the situation. And maybe in the neighboring province, the lockdown started a bit later. It is, I understand, not as harsh as in Shanghai, but of course, this is also a major impediment. And situations like this happen, of course, across the country, which in turn creates a big unknown for the market and definitely has an impact on our business. So what are we doing to deal with this? Clearly, the first priority for us, I say very openly, is supporting our staff during the lockdown. This includes amenities, but also by now also include distributing food, not only for people who are in factories, but actually for people in their homes because the situation becomes difficult. But of course, as this happens, we're also preparing for the reopening. We don't know when this will be. And this, of course, is in the factory. but also in the field where we have to make sure we have fulfillment capacity sufficient for the ramp up. And based on the situation in 2020, I know that our team, everyone in China will go out of the way to catch up. And we've done it in 2020 and being in touch with them on a daily basis, I know that they are just preparing so that we can get off the starting blocks as soon as this will be over. And once more, I'm extremely grateful to our staff. Moving on to the maybe overall summary, that is page eight. There is not a way to put it. The combination of order backlog, operational legacy, and declining market creates a highly challenging situation. With the new leadership team, we are resolved to deal with this, and this demands brutal focus on priorities. And the priorities here are listed here on this chart A, and it starts with a revised incentive scheme, not only for the salespeople, but for the whole group, which is the same for everyone based on these priorities. And the top one is priority is this NIMO profitability. The second, of course, I mentioned before, is price increases where we have to catch up in order to offset this inflation. At the same time, we need to accelerate all measures to streamline the product offering. This finding on the modular platform was extremely sobering. And clearly, if anything, adds to our urgency to further streamline, further move to modularity real modularity, making sure that this is now implemented one for all. We have to clean up our backlog. I mentioned before that it's actually a very tough task that demands extreme resilience and also proximity to our customers, but also change of mindset within our team. Complete the supply chain turnaround. It's absolutely essential. We're moving on that one. We see some progress already, but it will take time. But of course, now maybe coming to the last one there, efficiency drive. Efficiency drive is key because pricing alone will not be enough to offset inflation. So I say that it's always this magic formula. Pricing plus efficiency has to be bigger than inflation. We're working on that. This means, of course, efficient in terms of material, efficiency in terms of labor, and structure and overhead. Now, talking of structure and overhead, let me come to the first point on this slide, which I have not mentioned because there is one more slide here, that's slide nine, which is the and the illustration of what we do of our results. Change starts at the top. When we speak about streamlining, about efficiency, we want to send a clear message to our team, but to everyone here, that we are resolved to work in a different way. So that's why, as of May 1st, as we announced today, we will have a leaner, even leaner group executive committee. In February we announced that we had combined the chairman and CEO, that we had created a new CEO role to help dealing with the situation, and we removed the function from the executive committee. Today we are announcing that actually we have two more positions removed executive committee the one we called operations and the one which covered the region Americas. So all in all this means that in less than three months we have reduced our executive committee positions from 14 to 11. This is just one illustration of our result because in conclusion now we have a challenging situation. We will fix it. We have been here before. To resolve it at the core, to go to the root causes, though, will take time. We will keep you informed of our progress on a continuous basis. And with that, I think we should start with this information on providing more details on a Q1 with us here for Urs Heidegger. Urs, please.

Thank you, Silvio, and good morning, everyone. Let me start with a few qualitative statements to the results in the first three months of the year. Page 10. It was a challenging start to the year. Nonetheless, Schindler generated growth in order intake and revenue. The operating results have been heavily affected by aggravated supply chain issues, cost inflation, lockdowns, and the Chinese market in a severe slowdown. The team is sharpening focus to offset the inflation by increasing prices, streamlining the product offering and driving efficiency. Now on slide 11, I am providing more details on the order intake. In the first quarter, order intake reached 3.2 billion Swiss francs, corresponding to an increase of percent equivalent to 8.9% in local currencies. Organic growth was 8.5%, acquisition impact contributed 0.4%, while FX had a negative impact of 1.2 percentage points to growth. The following slide 12 provides an overview of order intake, growth by region and product line compared to the first quarter. Order intake includes all product lines, new installation, modernization, repair and maintenance. All regions and product lines generate the growth, as activity levels remain robust across almost the whole world, resulting in a further sequential increase compared to the fourth quarter 2021. The Americas region generated the highest growth rate, up double digits, driven by a strong new installation business. The EMEA region also generated double-digit growth, just a touch below the Americas region, supported by a very solid new installation business and a large volume of modernization projects. Asia Pacific was still slightly up, despite the significant drop in the China new installation business, which could be more than compensated by strong performance in all product lines of other countries in the region. New installations remained robust, generating mid-signal digit growth in value terms, growing in EMEA in the Americas regions, while the Asia-Pacific region dropped due to the issues in China. Modernization had a good start to the year, growing more than 20%, particularly in EMEA and Asia-Pacific, admittedly benefiting from relatively low comparables. Same for repairs, resulting in double digit growth, while maintenance was steadily mid-single digit up. Our portfolio of maintained units increased by more than 5% year-on-year. The order backlog was 7.2% higher. Margins, though, declined by 100 basis points year-on-year, reflecting price pressure and very significant cost inflation. I move to slide 13, showing the revenue developments. In the first quarter, the revenue was up by 1.2% to 2.6 billion, this ranks, corresponding to an increase of 1.9% in local currencies. Organic growth reached 1.5%, acquisitions contributed 0.4%, while FX had a negative impact of 0.7% to growth. Revenue rose in the EMEA and Americas region while the Asia-Pacific region declined as a consequence of the situation in China. New installations suffered in all regions, driven by issues in supply chain and delays in project execution. Modernization, repair and maintenance remained solid, growing overall mid to high single digits. Moving to slide 14, showing the EBIT adjusted development. EVIT adjusted in the first quarter reached $236 million, which is equivalent to a drop of 21.6%, respectively 20.6% in local currencies. Substantially higher raw material costs, disruptions in supply chains, complemented with the additional internal challenges arising from the phasing of modular platforms replacing legacy product lines, and an excessive number of auctions, which have been offered on our new modular platform, resulted in bottlenecks, delays, and inefficiencies. As a consequence, the EBIT adjusted margin dropped to 9.0%. Slide number 15 shows you the net profit and cash flow. As a result, net profit totalled 144 million Swiss francs 32.4% less than in prior year. Cashflow from operating activities declined by 37.4% to 286 million Swiss francs. Since the change in net working capital didn't meet the extraordinary level of the previous year, the lower margin and onset of top speed 20 day costs. Let's now turn to the outlook for 22 on slide 18. The order backlog, product complexity, and operational legacy continue to affect margins. Further price increases across all products and regions are still unlikely to offset the cost pressure. For the second quarter 22, revenue growth and profitability are expected at similar levels as in Q1 22. For the full year, revenue growth will be within 1-6% in local currencies. With that, I hand back to Marco.

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

We begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and 1 on the touchtone 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 choose only answers 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 Bronson with Barclays. Please go ahead.

Oh, hi. Good morning, Silvio, Urs, Marco. I had three, if I can squeeze the third one in. First on China new equipment pricing, Silvio. I wonder whether you could give us a little more color. My understanding is price mix was down mid-single digit in Q1. That will be consistent with your slide 12, I guess. Just trying to understand like-for-like pricing and trying to understand whether country three on your slide four is indeed China, and if it is, how that squares with the slide 12. And just to your comment earlier around inflation clause enforcement, can you help us how much of the backlog that might cover and whether that also includes China and how much of an offset that might be coming through as far as those re-engagement or reinforcements are concerned?

Lars, thank you for these two very specific questions on China. Urs, perhaps, is as a Best place to answer. Please go ahead, Urs.

Thank you. Hello, Lars. Indeed, it's a tough first quarter for the China region, and our order intake is down by about 15% overall. very much driven by the new installation business and, of course, also driven by the overall very difficult market situation. We said the market is down around 15% for the full year. Pricing remains very competitive in China, also now for the first quarter. you need to see that the time between offering to an order intake is long. And therefore, whatever we push for higher prices cannot yet seem very well, which means pricing overall was slightly down for the China regions.

And of course,

We are working very strongly in enforcing price adjustment clauses to our backlog contracts around the world. We talk about the commercial term, which allows us above a certain threshold to go back and adjust prices. The teams around the world are working very hard on that to increase their prices on platforms. For China, it is a bit more difficult, I must admit.

Thank you, Urs.

Secondly, can I ask to the margin outlook for the second half? I appreciate you only give full year earnings guidance in July. It looks to me like analysts are forecasting a very strong margin recovery to about 11% in the second half from around 9% in the first half. And I'm trying to understand why that would be. My understanding is backlog margins was down around 50 basis points sequentially, if I understood your investor relations earlier correctly. At raw match, you're guiding 200. Feels like that could be getting worse from here, even from that level. And I appreciate you get some savings coming through, but there are also additional quote-unquote complexity costs that are arising from these simplification measures. So just trying to get a sense for how to think about second half margin recovery versus that relatively steep expansion that seems to be embedded in expectations at this point.

Right. Also, thank you for this question, Lars. It's clear, right? We will only provide a net profit guidance to half your closing results. To give you a bit of color, obviously the team is intensively working on price increase. As I said before, enforcing price adjustment clauses is one measure we take. We work on tough cost discipline measures. For the second half year, I also expect higher revenue growth that provides scale effects.

Last one, sir. Candidly, we're not able to provide this. As you appreciate, things move very fast at the moment. There is not only pricing, there is efficiency. I would say this magic formula, pricing plus efficiency has to beat inflation. Now, at the same time, you say things keep moving. So honestly, we are working here on a forecast. We provide you all the color, including our actual impact when we speak again in a half year. I hope you can bear with us.

I can. Thank you, Silvio. Can I squeeze a third quick one in? I have to ask around organizational changes. They're coming much more sudden and much more rapid than what we've seen historically. We saw Thomas leaving relatively rapidly earlier this year, or suddenly now the COO, head of Americas, are leaving. I guess a couple of questions springs to mind. First of all, region Americas, is that permanently now removed from the executive committee? And if so, what's the rationale for that? What the final organizational structure is still is a fairly big executive committee. Should we expect further sort of simplification around that? And then finally, Sylvia, forgive me, you say change starts at the top. Some might say that's rather incompatible with the decision to combine the chairman and CEO roles under you. You've been with the company for 30 years. So can you give us some sense for how you think about your own timeframe in the CEO role?

Thank you. So it's a very specific and I'm going to say almost personal question. So even though it's a fourth one, Lars, let me address it. So it's like this. First of all, one by one. America, the reason for having it reporting to the COO is because America is a very important market. One that we need to be able to act in an impactful and direct way. And that's exactly what we're doing. Those of you who have been around for some time may remember that when I became CEO the first time, we did exactly the same thing. And progressively, once we identified the, once the situation was, quote-unquote, going in the way we wanted, the trajectory had been corrected, then we introduced a new head of America. So to your question, it is possible that in the near future, or I guess that may change. Second question, the organization. When you say it's quite large, well, one thing at a time. If you look now at the size of the leadership structure of our competitors, I think with these changes, we are, I think, we are not only aligned, but possibly a bit leaner. But I'll let you come with that, about that judgment. Now, change at the top versus someone who belongs. I think this is a question now of semantics. I don't think change necessarily means bringing new people from outside. Change means working in a different way, means working with less silos, means working in a spirit of transparency that I hope you can see. It's your judgment. We're also displaying in the way we present the results. Change means taking decisions faster. Change means having clarity about who's accountable for what. In that regard, for one, I believe the board believes that having someone that knows the company, knows the market, and has been there before, if anything, it's an additional advantage. So this is a position on that. And now the question was asked last time how long the chairman CEO will stay. I can only restate the position. He will stay as long as it takes to navigate through the situation. Obviously, I said this last time, our desire is within a medium term. I mentioned last time 2024, but this will depend on many factors. Definitely, having two jobs is probably not something I would enjoy for too long, but I do this as a mission for the time it takes. Understood, Silvio.

Thank you for your openness. Appreciate that. I'll pass it on. Thank you, Lars.

The next question comes from the line of Andre Kuchnin with Credit Suisse. Please go ahead.

Yes, good morning. Thank you very much for taking my questions. I'll stick to two. Can we start with the cost of complexity and the clash of modularity versus legacy products? I think you've been able to provide a bit more quantification of that. Could I just get an update on that? What is that cost together with the kind of newly discovered complexity in the backlog for modular products that you mentioned? And how do you expect that to phase through this year?

Thank you, Andre.

Urs, please. Right.

Hello.

Good morning, Andre. For the issue with our modularity platform, We estimated a cost impact of about 20 million Swiss to the quarter one EBIT results. As we guide into Q2 with similar profitability, you can assume a similar amount for quarter two. And then I will provide you an update of the key actions for the second quarter. But of course, it's clear the team is working very hard to get it resolved. ASAP.

Got it. If I may just follow up. So if we annualize that 20 million, it's obviously 180 million. So is that right then if you were fully modularized as of now, then you would have roughly 80 basis points higher margin?

That's okay, yes.

I mean, these are incremental to our bottom line right now.

Thank you. And the second question is on top speed 23. You seem to not mention it much in the presentation. I appreciate you've got substantial near-term priorities to fight through. But is there an update on the connectivity and digital adoption?

Andre, good point. We, again, for the sake of time, we didn't provide an update on everything I'd have here. We definitely will. Connectivity continues. Let me just give you this approach. Where we are now, unfortunately, very much limited execution is the biggest market is China. where there is definitely not only demand for the connectivity, but of course the biggest room to go. And now you cannot, you cannot go to site, you cannot install. So, but besides China, we are proceeding all out according to plan. Now on the specific of TOSP23, this continues on all the modules that we established as priority. But in all openness, I think we also are looking at, in the scope of streamlining and focusing on priorities, we are actively considering, in terms of making top choices, which of the top modules may maybe take a step aside and being given less speed and resources in the short term, while they continue to be done in the longer term. of our NIMO profitability and also making sure that we go back to profitability performance in the short term. So that will be part of our update when we meet next time.

Great. Thank you very much. I promise I'll stop at two. I'll do that. Thank you.

Thank you, Andrew.

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

Good morning, everyone. Hope you're well. I'll do two questions as well. Could you help with these price adjustment clauses that you're going to enforce? I wondered if you could say, of the China outstanding backlog for new equipment, what percentage you think you could do this for? You said that would be tougher. Are we talking, I don't know, a third? And how much of the US and European backlog do you think you can do this to? Is it the majority or half? some form of scaling as to how much you think you can get this through would be helpful. That's my first question.

Thank you, James. Good to hear you. Thank you for this question. Urs.

Good morning, James. So you need to see that the team is working on this particular topic, right, to go after the backlog. now in q1 and therefore it's still a bit too early to really give you specific indications on this but i said it before it's easier to adjust here in the european and america's markets and in asia it is much harder because all the commercial terms are different and more difficult to enforce

But I understand, you know, this is for the modeling. It's very important. Right. I wish I had this exact answer myself, to be clear. And hopefully when we meet next time, I'll know more. But to be clear, the situation is like this. We know exactly which markets have inflation closures at the same time, very transparently with the low inflation we've had over the last 10 years. I mean, part of the curse of low inflation. was that people lost habit of enforcing the clauses, not only from the elevator and escalator industry OEM, but also most importantly on the customer side. So now this is a, a new way, a new mindset change, and therefore you have to go, and in some places you can enforce commercial terms. It always is more difficult. The legal environment in different countries also plays a role, and hence the, very candidly, the difficulty for us to give an exact number because this is very much a work in progress. It's not a steady state process yet, at least not for us, and I don't believe anyone in the industry has been used to enforce these clauses over the last, I'm going to say, 10 years. So I hope this is clear.

Thank you. Thank you. And my second question, if I can, is on input price inflation. And thank you for the 200 million new raw material guidance up from 150. I wondered if you could quantify any logistics and energy inflation to this year. Is that included in the 200 or could that be incremental? And more importantly for me, if we were to stay at current spot prices which is a huge assumption broadly what could fy 23 raw materials headwind look like i had originally thought six months ago it might be a tailwind but increasingly i could see another headwind and i wanted to see if you could help us scale that james thank you for the question or season right so

These costs you are mentioning, logistics and energy, is included in the new guidance of approximately 200 million cost inflation on material, logistics, energy. Thereof, about 10 million are related to logistics and 5 to 10 million on energy. And in fuel, Fuel would be on top of the 200 million ZIS ranks. We have about 60 million fuel costs per annum. And then you can calculate yourself cost increase on this volume.

But maybe to, James, to be clear, and you know our financial modeling good, right? Fuel costs in our case are mainly recognized as part of service margins, to be very clear. Because fuel is, well, We have in many countries service technicians driving cars.

But that's a direct cost for us.

That's helpful, thank you. And I was just thinking about next year, FY23, and if we were to stay at sort of current spot rates, should we expect a further raw material headwind of, I don't know, 50, 100 million, I was thinking, next year at current rates?

James, I don't know if Urs has a better answer. I wish, we're actually working and hopefully trying to scramble and getting ideas as we plan indeed for next year. So far, I'm not able to give an answer to this. Urs, would you be able to?

No, look, James, right, this is looking into a crystal ball. 23, you have seen the curves. They went down when we met each other last time in mid-February. We were a bit on a decline on alu steel cost, for example. But now we have an increase again in the last three, four weeks. So it's really, really, really not possible to give you a guide. But it's clear that the team is working on actions to find dual sources, multiple sources to hedge on bulk metals, and to do negotiations with the suppliers.

But to be fair, maybe to your point, I concur with your view, and this is whatever it takes, that it's probably likely much more to be a headwind than a tailwind today.

That's helpful. Thank you very much, gentlemen. Thank you, James.

The next question comes from the line of Daniela Costa with Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for taking my questions. I wanted to check on first on free cash flow and we talked to a lot of the headwinds on the P&L. Do you see sort of like the free cash flow situation sort of the drop year on year? Just more as a temporary thing given supply chains and how should we think about cash conversion this year and going forward? that would be sort of my first question the second question is in terms of like has if you could remind us like what we should be looking for in terms of like what you're going to communicate about timeframes and objectives to to close this gap with with competitors I think you've mentioned you would communicate something maybe around the summer sort of is that still a the idea and can you give any more color regarding formats and what we should be looking for? And then just a quick final one on the price increases. It's very clear you said price is not enough to offset inflation, but if we think about like the time lag between backlog and P&L, you're doing this first price increases now. When should we, how long would it take for us to see at least these new price increases coming through on the P&L. Is that in 2022 still, or that would only flow through later? Thank you.

Daniela, hello. Thank you. So I have now three questions. The one that you said on the free cash flow, whether it's temporary or element to stay. Number two, whether about the gold setting and the price increases, time offered to build. So let me just maybe take one of the three, and Urs can take the other two. The topic about by when will you have objective targets, I would say at this stage, I'd say around the summer. At the moment, that's what I can say. Probably is going to be late part of the summer. and that's something which will stay. As you appreciate, all this new change is happening. I've not really facilitated our timeliness and the quality of our forecast. Hopefully, we'll improve with a bit longer time. So that is the first answer. Urs, please, can you address the other two?

Yes. Good morning, Daniela. Talking about cash flow for 2022, the cash flow, obviously, certainly will follow our EPIC lower EBIT development versus last year, that correlates. You also have seen change of networking capital this year in quarter one, less improvement versus an extraordinary last year. For full year, I would expect a flattish change of networking capital versus last year. So these are the two parameters. influencing the cash flow for this year. As Silvio clearly presented, measures tackle and address the key issues in the company. But having said that, it takes time to get it resolved and it takes time to see the significant EBIT improvements going forward and then also cash flow generation. Price increases. In the past, a price increase would have been seen in the P&L for new installation modernization in about 12 months. However, in the current reality with supply chain bottlenecks and material shortages, this is beyond the 12 months. It's rather at about 18 months' time that you really see a significant impact to the P&L of the price increase in the new installation business. Of course, it's a bit shorter for smaller modernization jobs, and it's clearly shorter, much shorter, for our important repair business. This will be seen earlier.

Got it. Thank you. Thank you, Daniela.

The next question comes from the line of Andrew Wilson with JP Morgan. Please go ahead. Hi.

Good morning. Thanks for taking my question. I think the first one is probably a clarification, but just a couple of comments on the margin backlog. Was I right in understanding that there's been a sequential deterioration in terms of the Q1 margins on the orders versus the existing backlog? Or when you comment about further pressure on the backlog, is that the deterioration of the existing backlog because costs have increased? Hopefully that was clear enough to understand.

Thank you, Andrew, for the question.

Right, so as I said, the total backlog margins are now 100 basis points

lower year on year um sequentially we have seen flattish developments on backdrop that's very helpful thank you and then the second question i just want to probably again a clarification just on

On slide four where you show the price increases, I just wanted to understand, is that price increases or is it price realisation? I guess there's a difference between trying to put prices up and actually achieving prices going up. I just wanted to try and better understand whether that is actual price increases that customers and I guess the market as a whole is taking. Is that clear?

Yes. These are actual price increases to the order intake. So we see a slight uptick in most of the countries in quarter one.

Perfect. And then just, I guess, so a quick follow up on that. My understanding was that you started to put prices up in the middle of 2021. in a kind of meaningful manner. Is that the right timeline, or am I a little bit early on that?

Yeah, that's correct. Your memory that we started to increase prices last summer time, having said that, Silvia presented in the Analyze All conference exactly that chart, illustrating that we were actually not satisfied with the with the price increases to the order it takes. Somehow it was not sticking. And therefore we have now this renewed and strong plan, it's not a plan, action to increase prices to our offers.

And this is now managed in a much tighter way whereby this is reported to the executive committee on a monthly basis with the, as I mentioned, new incentive plans. And I think I mentioned earlier, this is where the first series now in February, and it is most likely that more will follow soon in the year because, you know, even though we drive efficiency like never before, the pressure from inflation continues.

So more will come. That's very helpful.

I appreciate the very clear commentary. Thank you.

Thank you. Thank you, Andrew.

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. The first one is a very general one. It's my understanding that you're still guiding actually kind of the same development for the first half year, namely minus 20% roughly on adjusted EBIT, even though environment deteriorated further as you explained since April. I was just wondering whether There are also some positive factors actually compensating this further weakness in the environment. That's the first question.

Your understanding is certainly correct. And of course, we have taken many mitigation actions to compensate the even more severe environment. This efficiency efficiency particularly in the fields and also in our back office and personal costs and control and discipline, which can a little bit compensate here these very strong headwinds and leading now to the guidance we have given for Q2.

And then the second question is about your order intake in the first quarter, which is one of the highest I think we saw in the last quarters, if not at all. I was just wondering whether this might not maybe lead to a further kind of margin pressure in new installations, when you are kind of chasing volumes maybe which I don't hope or how should we read this high order intake in an environment that is more challenging and still I think you clearly outgrow the market with such a good increase in order intake.

Thank you, Martin, for the question. Let me give you a brief answer, then I'll pass it over to Urs. Would VIA grow the market? I don't know. I've not seen the results of our competitors. That's really, I cannot say. On the other hand, I must say, to your point, we are absolutely not chasing volumes. we are now directing towards quality sales as opposed to just sales per se. I'd just like to give the direction which, by the way, might already give some sense of the way we are looking at future strategy. At the same time, some of the orders that come now in Q1, as you appreciate, you know our business very well, the offer to build, and I mentioned it before, takes some time. So the order intake in Q1 is, to a large extent, the result of tenders that were made in Q3 or Q4, or possibly in some cases for large projects, typically even much longer. So this is just to explain that, no, there's not that people got off in January and went out to sell like crazy. This is, if anything, actually in the last few weeks, a month, we actually even abandoned some tenders. Of course, I will not give details, but we did. and some of those quite large ones, some of those quite advanced, exactly, because we don't want to fall into that trap. Urs, would you like to comment further?

Yeah, well, you see the granularity on page 12 of our order intake growth, and the growth is mainly coming from our existing installation business, and mainly really good growth in modernization, and that's coming from our European markets, selected Asian markets, and then, of course, also repair and maintenance were growing very significantly. On the other hand, as Silvio clearly stated, China, we have a drop of order intake because we are not going anymore after very low profitable jobs. So the growth there in new installations, not coming from China but from the rest of the world and also here particularly from Europe and in the Americas where we have positive markets and we work on our good position to grow our business thanks a lot that's very helpful just if we have this slide open page 50 a page

maintenance growing 5 to 10 percent globally. Is this, if you have to make an assumption how much price, how much volume, what can you say there? Because we also face obviously salary inflation and as you were mentioning also fuel inflation.

yes so here clearly we have a price effect to our p l i would say it's about two percent price increases globally of course then really different by region and the rest is coming from the organic growth growing a number of units to our portfolio okay thanks a lot thank you martin

The next question comes from the line of Mighty Risk with Jefferies. Please go ahead.

Yes, good morning, gentlemen. Thank you for taking my questions. First of all, thanks for helping us with assessing the headwinds this year, which clearly has gotten worse. I was wondering if you could spend some time on the potential efficiencies and savings. I think Urs talked about better efficiencies in the field. than what you initially targeted earlier this year. So in my P&L, I have the cost optimization program savings of 40 million Swiss francs this year, efficiencies in the field of 50, 60 million. Am I missing anything or is there any update here on those two items that I mentioned?

Your understanding is pretty correct. We clearly work on this cost optimization program and this is according to plan. So the 40 million full year or 10 million for the quarter is a good assumption and then as I said and your assumption is correct that the team is working to create efficiencies in the fields it's good I agree with you okay thanks the second one is on price increases I might have missed your last comment but I was just wondering if you could comment on the price increases in your backlog currently

how much of those you are expecting to achieve this year? You talked about the delayed conversion of new installations, which has gotten longer. Basically, what I'm interested in is how much price increases do you think you can capture this year, excluding those escalation clauses?

Yeah, this is the same question as before. And I said before, it is too early. to further specify it. It's different by market to market. Silvia said it also clearly, customers are not yet so accustomed for this topic, but it's clear that we go after it. And this is one of our key action. We will give you an update in half a thousand.

And perhaps just to give some view on this, there are two elements on those outstanding tenders. One is the ones that we managed to renegotiate, but there's also the ones we step away from, which net also has an impact. And that's why it's the complexity, right? And some of those can be very big. Hence, this compound calculation is something which evolves continuously, and we just don't want to give a figure that then we have to come and correct, so hence the difficulty. Again, thank you for your understanding, but the question is fully understood.

Okay, thank you. The last one is, Silvio, on your chart on inventory of unsold homes, which you've said have reached alert levels. Is this not just the function of less sales rather than overbuilt? I think there's 400 million citizens in strict and severe lockdown. People are struggling to get food, let alone buying apartments. And if you go back in time in the period after the first COVID lockdown, you've seen in tier one cities that we've reached above our alert levels without the market being in significant decline afterwards.

I think, obviously, your comment is correct. It's a mixture of demand and also less sales. I, for one, believe, as you say, that urbanization in China will continue. And as you can see from the same chart, there have been ups and downs before. And the whole point is navigate those moments. So I am convinced that China will continue. There's no question. But, of course, though temporary, those shocks can be extremely violent. And if, so there is less sales, but the risk is that if you end up, for example, you know, having your selling in a moment like that in something which then is never completed, then you have those like, you know, skeleton lift left somewhere. We don't want to be in that position. Hence the importance to monitor that very closely. But long-term, that's going to, I for one believe it's going to come back because demand, inherent organic demand in China is there. But the demand It is also to be certain that the correction in the real estate and construction market in China today looks like it's deeper than the one we had before. Okay. Thank you very much. It involves those large developers that accounted, for those of you who have been looking at the industry, for more than 30% of the growth. So as long as this is not taken care of, I think this might create an issue. But the question is very well understood.

Thank you very much.

The next question comes from the line of Martin Flueckiger with Kepler-Chauvin. Please go ahead.

Yeah, morning, gentlemen. Thanks for taking my questions. I've got two small ones left, actually. Firstly, on your top speed 23 expenses, I was under the impression that the guidance for the full year was around 150, so your 16 million, if I remember correctly, is pretty significantly below the quarterly average. So I was just wondering, firstly, what the reasons for that are, And secondly, what kind of phasing over the next three quarters expect? And then my second question is really just a very tiny clarification question. I didn't quite understand what Urs was saying about the targeted cost savings from efficiency improvements this year. If you could just very briefly repeat that. Thanks so much.

Thank you, Martin, for the question. On the TOSP23, you already gave some direction, but perhaps, Urs, can you take...

Thank you, Martin. So top speed 23, I expect clearly lower costs than originally announced of 150 million. One example was, Sylvia was already explaining it, that the cost for connectivity of our existing portfolio in China will slow down this year. with this current position of the lockdowns and the difficult situation in the Chinese market. So of course we are reviewing and reprioritizing some of the initiatives of top speed 23 and leading to a lower amount than 150 million. You still need to assume a little bit higher costs compared to a quarter one. And then on the efficiency piece, Clearly, this was a topic in quarter one, right? We were partially compensating the very strong headwinds, this efficiency and operating leverage, and for the full year, this will be more than 100 million, as we also usually have, and now we are working on some actions to achieve this.

Great, thank you so much.

But again, it's only partially compensating these very strong headwinds, and you have now seen as well in quarter one.

Thank you. Thank you.

The last question for today comes from the line of Patrick for FISE with UBS. Please go ahead.

Thanks for taking my two last questions. Good morning, everyone. The first one is a clarification, and you've talked a lot about price and all the backlog, but very specifically to dissect the Q1 order in place in local currencies, how much in that number was actually price contribution or price mix from those projects? both in new installations, modernization, and services. And the second question is on the actions you're taking going forward with negotiating prices, enforcing inflation clauses, et cetera. Is there a risk of cancellations in your backlog that you foresee as you're doing this or as you're renegotiating some of the designs

and for the modular products is that something we should take into consideration for the common quarters thanks thank you for your question uh course would you right so for the first question is on the order intake i would estimate that pricing has a slight a slight optics positive impact to the growth of very low single digits, one to two percent in that region, driven by service price increase, repair price increase, and then much less on the new installation business. and question was on backlog and on the backlog cancellations i i don't see that yet that it has a significant impact it's a marginal impact that's my assumption okay great thanks thanks a lot

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