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.