Schindler Hldg Ag Akt

Ladies and gentlemen, welcome to the Schindler Half Year Results 2022 conference call and live webcast. 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 Cluchel, Head of Investor Relations. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to the conference call for results as of June 30th, 2022. My name is Marco Knuchel. I'm heading Investor Relations at Ginger. I'm here together with Silvio Napoli, our chairman and CEO, and Urs Scheidegger, our CFO. Silvio will, as usual, provide an overview on recent developments, and Urs will then lead us through the financials. After the presentation, we are happy to take your questions. We plan to close the call at 11.30 today. With that, I would like to hand over to Silvio. Silvio, please go ahead.

Thank you, Marco. Good morning, everyone. Thank you for joining our Q2 half-year results conference. Our results since the beginning of the year suffer from a combination of external and internal problems. Since we identified them, we have been working to fix the latter and managing the former. Now, since we last met in Q1, I'm afraid the external factors intensified. And in particular, three elements I would say deserve special attention and I'm sure will be the object of many discussions and questions today to which we look forward. The first of them is wage inflation. The second is the second wave of lockdowns in China. And the third one is the worsening scarcity in semiconductor supply. The three elements plus the other persisting ones have somehow worsened the whole environment and accelerated the impact, but at the same time also added to a resolve an investment to make sure we dealt with them in the right way. So maybe moving to slide three in the package you've received, I'd like to briefly provide an update on the five issues that we identified as early as February when the new organization was put in place. And I must say, not a question of satisfaction, but one we can say six months after they were really the right issues to focus on. The first one was the foreign exchange burden. Now, a lot is happening, but perhaps one element is the Euro, a very important currency for us, where if you look, the evolution year on year is minus 6% against the Swiss franc. But then moving on to the next four, which are really affecting our business directly, and by now you realize all four of them relate to our new equipment business. The first is how to regain competitive new installation margins that we have identified as you know as the main root cause for the competitiveness gap versus our main competitors and there already with last time we confirmed that the 200 million material cost inflation impact for the year was there we can further confirm that but then Of course, since the round of salaries and negotiation have taken place now across the world with our employees and labor, we now see, as expected, but of course the figure is impressive, that we have now on top of that a wage inflation of 120 million. Moving on to the other one, which is a topic with supply chain. And there, again, we were questioning last time still how the Ukraine war was affecting it, and we can see basically by now, besides energy prices, this is something we can discuss later, the other way in which this is impacting business is the topic of logistics and material flows, and in particular I wanted to say, of course, because everything coming from China used to be able, for example, for deliveries to Eastern Europe or to the Baltic countries, there was a passage through Russia. Well, that route is closed, which involves, that's one example of how the logistics are affected. But the one that we'll discuss more later is the topic of the semiconductor shortage, which is clearly worsening. The fourth challenge and the third of a new equipment is then a very much an internal one. the one about dealing with a poor product portfolio complexity and this is about new equipment complexity and you remember how we explained how we had to we're struggling to produce the backlog of all products at the same time the new modularity platform which was the bulk of a new order intake had shown issues that were not identified amongst other the far too many options that were offered. And there, in fact, we see that all that's happening has further delayed the backlog execution, therefore delaying the time that we can clear backlog. And then something new that we will present later is how this is affecting in fact our on-time delivery and by on-time delivery of course we means first and foremost our customers but also how this is affecting our revenue generation and then fifth and last but obviously probably the biggest is the topic of china and then on china like to make clear up front we discussed some data points later there is the impact of the lockdowns, particularly severe in the Shanghai region where we're based, but also the structural issue in the Chinese market, independent of the lockdown, which has to do with the credit crunch in the property market, which is not getting better at all. And because that affects the Chinese market severely, in turn, that has an impact on the global elevator and escalator market outlook. Having gone through this initial overview, I suggest now we move to slide four. And perhaps since I mentioned that we start having the first visible impact of what we started at the beginning of the year, the first one here is that our commitment to streamline the organization. And as you have read, We announced the two changes, one is the removal of the supply chain from the executive committee and the other one is the changes here, but first starting with the supply chain, you can see that as a result of that, our executive committee has now been reduced from 14 to 10 members, in fact, if you have the chairman and CEO combined, it would even be nine. if you consider that but nonetheless and this is important why because we said from the beginning we needed a streamlined simpler decision process in order to deal with the situation and well on that one we delivered and I think it's important that we stress how now the the new structure is in fact leaner and more impactful and I would say dealing with the situation over the last six months has also been possible thanks to the new structure and now with the latest changes will be even more so now one question that may anticipate or what happens then with supply chain is that no longer important well absolutely not in fact just as we did with the field quality and excellence that remains of highest importance while not being an executive committee here the decision on supply chain is really one that is intended to do so because we will now focus on supply chain at regional level because the issues that you heard on time delivery dealing with suppliers, dealing with clearing the backlog is something which has to be best managed locally. So the supply chain direct day to day management goes back to the individual regions who then focus on supplies, on our customers while At global level, reporting the chief operating officer, Paola Compagna, the coordination of all actions, including processes, is secured. But in question of priorities, we believe now it's important that we manage the topic where the customers are, therefore a local level. Then definitely I would like to say also a few words of the change of CFO. where the board felt that looking ahead but also in dealing with the situation have bringing on board someone from outside with extensive experience in public listed companies but also from other industries will be beneficial to the team at this stage but of course It is not an easy decision to be taken to change here for this time, but we believe it's also part of our commitment to continue involving the team, including taking people from outside. With that, I'd like to express my gratitude to URSA for the tremendous efforts and the very intense teamwork in his position of CFO over the last four plus years. And in particular, the last six months when we work even closer together. I'm very pleased to say that Urs will continue working with us as Chief Risk Officer, a key position that also we identified as essential almost as a learning from what we experienced today, where we realised that having someone, a seasoned professional going to help us, seeing issues coming at the horizon well beyond the day-to-day work is absolutely essential. So I do look forward to continue working with you in this position. Moving on to slide five, now I'd like to go into the update, okay, what do we do now to deal with the situation? And since February, we did say that, in fact, Schindler had sadly fallen behind the curve in terms of pricing, pricing per se, but also especially pricing as a way to offset inflation. And now I'm pleased to say that we have had two round of price increases, one was in April, the second was in July, which now bring us maybe not ahead of the curve, but at least in sync with the situation, which means that more price increases are definitely not excluded, to the contrary, more than probable. But so this price increases mainly on new installations and modernization. have also gained good traction. And you can see here we have a chart where we show that in EMEA and APAC, including China, we're talking about mid-single-digit impact, while in Americas, both in the USA and Brazil, for example, that we talk about high single-digit or double-digit. So this is very positive. Unfortunately, where price increases have not yet increased, proven effective is in China and that has to do not only with the competitive of the Chinese market which is by far the most competitive because there are the most players than anywhere else in the world but of course with the downturn in the market itself which by basic economic reality makes that increasing prices is extremely difficult nonetheless as you can read here i'm not going to go through every bullet we have put in place a lot of measures to make sure this price increases thick which go from the contractual from the front line and into incentives the second element on the high equipment, now of course talk about top line, how do you set inflation, not only by pricing but of course looking at the cost. And the goal here is to regain competitive and high margins. So now we are on slide 6, where here there are maybe two major updates. The first one is, as you all know well, that what we are seeing in April, I said there started to be an indication of a correction in metals bulk pricing, has now been confirmed over the last quarter as a reality. So, this is definitely good and welcome news. At the same time, as I write here on the slides, you will see, I just wanted to make clear that, of course, we have a stock in our factories, and this stock is, depending on which regions you're in, six months plus. of course now we're buying these metals at this better price but the impact the benefit will come only once we'll have consumed the stock so we're looking at six month plus and of course this has to do also by the speed at which we can we can continue producing But in the meantime, as we had committed last time, we did put in place measures like hedging bulk contracts. And this is already, but of course, we put everything on hold for now because we will not trigger that until the pricing has bottomed out and which pay time surely will proceed. Now, the other element of update is the semiconductor price. And you remember in February, I showed a chart showing a single component price going up 36 times. Now, that phenomenon, in fact, has not abated. To the contrary, it has continued to worsen. And you can see with the middle chart here. And there are two elements. One is the price. But the most crucial thing for a supply chain and margins and ability to deliver is the lead time. Lead time for semiconductors used to be 20 weeks until basically more than six months ago, around there. And now we're talking about 60 plus weeks, which means that you have to now be able to order semiconductors, microchips for orders that will be in a year's time, which of course is a major challenge itself and this affects our on-time delivery as you will see in a second. So, how do you do that? we have now as a learning an action we have to engage more with these suppliers shifting to possibly direct contract as opposed to going through agents at the same time building up strategic stocks and the reduced dependency on six single suppliers moving on to the next slide i did mention on-time delivery and that is something which maybe some of you will be surprised that we show so openly, but I think again in the spirit I tried to establish here since the beginning of the year, it's important that we share with you the situation here. Because here you can see both due to external and internal issues, we face a challenge and the key challenge here is how do we ensure that we can produce on time according to plan with this mixture of external and internal issues. and there the internal one is to do with this modular platform which i think we have to say failed launch the design which had too many options which complicates our supply chain further on top of the execution of the old backlog and then combined with a topic like supply chain and delay by suppliers from china or from outside because of logistics All of that basically results in an on-time delivery worldwide, which is in the order of 50%. This is a major challenge. Of course, with our customers, there is always a bit of a buffer. So this doesn't necessarily affect them directly. But for our business, this is an issue because as long as we cannot plan an on-time delivery correctly, this also results in delaying revenues. And so what are we doing to fix that? We mentioned last time how we are optimising a sales configurator to offer less options. This is now firmly in place all around the world. The product design has been adjusted, and of course we are, as I mentioned before, to the extent we can, stocking up on semiconductors. And the other aspect, of course, is how to reduce global supply chain dependency on China, because as you know, we do produce all around the world. However, there are some suppliers or components that come only from China and that of course results in the situation that you see on the chart that we show here, two regions and you can see the tremendous impact of the China lockdown in one of them drawn there in black. Of course the other element here is talk with the customers more than ever, being as close as ever with them and I must say some discussions are difficult but so far I'm very impressed and grateful for the understanding that we have had from them in dealing with the situation. now a lot of talk is about china and i'd like to stress again it's not only about that but it is a reality so we should talk about it and then moving on to slide eight you do see how the lockdown affected our our our three production sites in china two of them are a joint ventures xj schindler who's based in hanan and forklift schindler who is in chejan But of course, the main one, China, is in Shanghai. And as you all know, Shanghai was the strictest and toughest of all lockdowns. And we are within the Shanghai city perimeter. So all in all, what when we spoke last in April, I just started and what looked like it was on the way to resolution, it became an even tougher one. And so all in all, we ended up having a lockdown of seven weeks, which is now only towards the end of June fully resolved. And now, of course, we're back to full production. But the impact has been tremendous. But before we speak about business, it has had an impact on our employees. And I'll say a few words on that later. So what have we done is supporting them to the maximum extent, way and beyond, I think, any cost consideration. But, of course, on the business side, We had to prepare to ramp up capacity as soon as we could. And the other one, of course, taking into account what is now the reality of a contracted China market, we are working actively to resize a business in China. And this is something which happens today. But as we do that, of course, we have to keep our employees in mind. And maybe if you go to the next slide. I thought, you know, sometimes we speak about numbers and we forget there are people behind at the core of any business. And I just thought it was important to show what an employee is to deal with. we had more than 200 employees that were locked down on campus in Chading and you can see in these pictures how they had to be living blocked there in the factory and how they organised their life, we had to buy tents, we had to buy stretch beds, we had to buy blankets, we had to buy emergency toiletries and delivered to the factory and I'm so impressed by the way employees dealt with that and I have to say the people you see that are sleeping in the factory, they started to spend the time working so producing things with which supplies are still in the factory to be ready for when the factory reopened you can see that people had meeting rooms with beds on the side and the ones that actually were allowed to go home then had difficulty to put to to provide food for the families. And so because we were allowed to a few bands to maintain lifts, actually we ended up, we decided to provide food to our employees and that's on the right hand side. And actually, sorry, at the beginning, at the bottom, you see this message, thank you SCF with some vegetables, which was posted by one of our employees. scf stands for single china field operation as a testimony of gratitude for helping up during that point i just mentioned this to give some reality behind what you know may seem as just a lockdown there is much more to that and the way our employees dealt with that and now came back to work 200 is uh i would say is extremely humbling and definitely a huge pride for all of us here at schindler Now, unfortunately, and then moving on to the next slide, the market in China doesn't only suffer from COVID, once more there is a structural issue. And the structural issue has to do with this credit crunch in the property sector. And here you see some data that we obtained from the China Real Estate Institute in China, Society in China, which shows how the top developers' activities have been dramatically affected year-on-year, as you can see here. And you can see this is data as of April. We couldn't find anything more recent. But you see here about land reserves dropping, land purchase being about half, and the sales value of the developers even reducing by half, which, of course, this shows that the credit crunch, even from a cash generation point of view on their side, not even talking about their balance sheets, is severe. and that is also reflected moving on the next chart on the on the property element and you can see that there the floor space sold now has even dropped below the 2014 crisis levels but most importantly the housing inventory and this is for me I would say based on my experience in China probably the most impactful leading indicator for our industry that you can see that whether tier one tier two or tier three the excess inventory as is moving towards the 2014 crisis level and maybe on a trajectory to even surpass it and that is extremely concerning for the industry going forward so i would say what we said could be a market contraction above 15 for the year is materializing and one should not could not exclude the fact that the impact uh for the year for the chinese market uh might even be uh bigger uh going forward now talking about the chinese market i think we should also look at the global market and now i'd like to move to slide 12 And you can see that the drop in China is in fact in contrast with the relatively healthy situation in the markets in the other parts of the world, whether in APAC outside China, where actually there's been a strong recovery, India, but progressively also the rest of Southeast Asia. in EMEA, where it remains solid across all segments. And, of course, then there is still this strong comeback in the Americas, including, I must say, Brazil, which has a progressive return, and, of course, the U.S., uh where the market remains solid mainly in the infrastructure but also in the residential now the big question is how the us economy will evolve but that's not yet a reality in any case but so this whole equation china plus the rest of the world as you can see results in a contraction worldwide because of the impact of china this of course is for new installation existing installations remains on a growth pass across the world as units sold continues to be converted and that is very positive combined what i must say a very notable uptake in modernization as units are are are modernised and the portfolio ageing continues being driven, including in China, this must be said. With that, I'd like to conclude my initial review, I'll come back to speak about sustainability, but for now I'd like to hand over to Urs Scheidegger for the results.