Schindler Hldg Ag Akt

Ladies and gentlemen, welcome to the Schindler Conference Call on the Q3 Results 2022 Conference Call and Live Webcast. I am Sandra, the Chorus Call Operator. 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 one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Marco Knuchel, Head of Investor Relations. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to the conference call for results as of September 30th, 2022. My name is Marco Knuchel. I'm head of Investor Relations at Ginger. I'm here together with Silvio Napoli, our chairman and CEO, and Carla De Geisler, our CFO. Silvio will provide an overview on recent developments, an update on the Top Speed 23 program, as well as on our priorities. And Carla will then lead us through the financials. After the presentation, we are happy to take your questions. Marco Hosler, the head area controlling at Schindler, will be present for this as well. We plan to close the call at around 11.30 at the latest. With that, I'd like to hand over to Silvio. Silvio, please.

Thank you, Marco. Good morning, everyone. Welcome to this quarterly conference call. I'd like to thank all of you for your time. I understand it's a busy period with many companies announcing the results, including some today. So I appreciate how difficult it must be for you to organize your time. So we'll try to be as effective and clear as possible. So before we dive into the slides, let me just start with a key message. Since I took over this double role chairman and CEO, and had the pleasure of meeting you again last February, I said very openly that we are facing a difficult situation. I also said that we will fix it and also said that this would take time. Accordingly, we initiated a process of change, confronting reality and focusing on what we call the vital few priorities. I share these priorities with you and we provide regular updates. Today, I must say that we have the first signs of improvement. At the same time, I'd like to stress it and say it again, we still have a long way to go. With that, perhaps let me start by addressing the first challenge, which was the market. And it is never easy to provide a market update or a market statement, but probably in my 28 years in the industry, I must say this is one of the most difficult periods because things change so quickly. So if we start with the new installation market, and you have here a chart where we try to summarize the situation, It is truly in continuous flux. The year started with a solid market development all around the world, with the exception of China. In quarter three, somehow the same trend continued with some initial signs of slowdowns. Now, if we look at quarter four, uh i must say the situation is that china would continue to contract as it has since the beginning of the year unchanged but then the change here is that the rest of the world has also now started to slow down in a much more visible and I must also say quite rapid fashion. And this includes key markets such as North America, South America, and also Europe. On the other hand, the existing installation market, there I'm pleased to say in the service, we continue to have stable growth, both in units and in volume, thanks to the conversion. And then, notably, the modernization pickup continues very strongly all over the world, including in China. We have a chance to discuss it later on in the presentation. With that first market outlook, and I'm sure we're going to come back to this also in relation to our order intake and address your questions, let's move on to our challenges. and these are the same challenges again we presented to you since the beginning of the year. And today I wanted to start maybe with a new format by first providing a general overview of all the challenges on the chart that you see here in front of you. Of course there is an element here of qualitative assessment but nonetheless I thought it was important for you to have a very transparent view of the overall progress. So before diving into the specific projects, let me perhaps add here the most important update. And that is that we stopped losing altitude. I say altitude in the sense of declining performance. we have started to stabilize the margins and we have initiated a new trajectory where we now plan to undertake profitable growth on a steady level at the same time once more we still have a long way to go and that is visible on the chart because when i said it will take time it was beginning it was in February beginning of the year and now if you think of our book to build cycle as you all know following us and our industry for some time we talk about 18 12 18 20 months depending on the type of project the type of units we sell and so now if you relate this 12 20 month proportion to the time that has incurred, we've had nine months, so you could say we're about one-third of the way about there. And you can see this is reflected somehow in the chart that you see here in front of you. And you can see we go through each one of the challenges in a second. However, once more, the point is that while we progress on individual priorities, individual aspects, we have to continue digesting the bad food that we ingested in the last few years. So sometimes in a company we call this the boa constrictor phenomenon. when you just have to digest the backlog, which then is affecting the P&L, but at the same time preparing the results of the future. Nonetheless, again, I'm pleased to say that progress starts to show. So, let's now have a look at each individual challenge. Starting with the first one, of the foreign exchange. Now, that is another very volatile environment where, you know, with the U.S. dollar appreciating, we were very much looking forward to having finally some tailwinds instead of frontwinds. Unfortunately, the improvement in U.S. dollar and to some extent also in the Brazilian reais has been wiped out by the steep decline in euro and also in the RMB. So again, this is the reality, we must deal with it. And at the same time, once more, we reaffirm our pride to be a Swiss company and in our deep roots in Switzerland. So in dealing with this reality, what do we do? Well, we focus on the efficiency of the Swiss-based a quarter cost. As you can see here on the chart on the right hand side, you see that this doubling down on efficiency has basically led us not only to a reduction in absolute value of the Swiss-based a quarter cost, but also, and most importantly here, on a reduction of the percentage of revenue reflected in this cost. As you see in 2022 actually we were hoping to be even lower unfortunately because of the initial slow pick up of the operating revenue, the percentage has not yet gone down as we planned but we are definitely firmly resolved to continue reducing that both in cost and in percentage of revenues. Moving on to the second challenge, And I can imagine this is one that is the source of much interest. By the way, not only among yourself, also for us within the company, because this is absolutely key. And you can see what we've been driving from day one, and we openly said that, unfortunately, we were a bit slow in the previous two years in reacting, or even we should have anticipated inflation. We see that our efforts are now paying off around the world, with the exception, unfortunately, of China, where you will have heard from other industry players, unfortunately, the situation makes for a very difficult environment to increase prices. But so far, I must say, you can see that we have high single-digit price increases in APAC outside China. We have double-digit, very strong price increases in the Americas, both north and south. And this is, I think, something notable. We even delivered price increases in the EMEA region. Now, that's good news. On the other hand, the fact that China is so big, of course, somehow dents this whole effort on a global level. Nonetheless, if you look at the right-hand side, you see here the trajectory of the order intake margins. This has been going up. At the same time, when we speak about digesting by food, you see that the backlog margin has, in fact, not improved. In fact, it even went down because more and more some of the orders that were sold with the overly optimistic cost base in the last two years. Now they flow through the P&L, and so you can see that the backlog margin, in fact, is reducing. And the plan is once these margins in the new orders will flow into the backlog, you will see that also increasing and then overall impacting, finally, our P&L. yes overall positive but i like here to stress three words of caution number one markets and we just discussed it a second ago are slowing down so the ability to continue increasing prices going forward has to be questioned we definitely continue unabated uh but that has to be said the second and again i'm sorry to be like a broken record on this but i think it's important is that sales margins do not equate bill margins. So this improvement will take time, again, 18, 18, 12, 18 months to flow through the P&L. Third words of caution, and this is something which is very clear, is wage inflation is now picking up very strongly. Unfortunately, as material inflation declines, wage inflation is picking up. And this is true in unionized environment, but also in non-unionized environment. So pricing alone, and we'll come to that when we speak about a priority, will not be sufficient to reestablish better margins. We will have to work on efficiency. And if you don't mind staying with me for a few minutes, we'll address that. Later when we speak about our priorities going forward. Moving on to the next two challenges, three and four, which we call supply chain and product complexity, and as the last time, combine them together. On the left-hand side, you see a positive development. When we spoke last time at half-year, we clearly highlighted the difficulty in producing in a factory to a large extent due to the lockdowns, in particular in China, but not only with us, also with some of our suppliers that in fact struggle to deliver their components all around the world, even in factories outside China, and hence the difficulty in on-time delivery, etc. The good news is that this has now started to change and you can see that as you see that July, August, September in Q3 production capacity has been ramping up very, very strongly, even well above the capacity production that was delivered in 2021. So this is positive. On the right hand side, you see this, again, digestion phenomena of the new orders versus old orders. But this time, the perspective is between modular elevators and legacy parallel lines. And we spread, remember, this is to do more about factory difficulty in managing multiple production lines in the lines. And the fact that, you know, for three years the world has slowed down, you know, this created this traffic jam in the factory. And you can see there is their progress in that, first of all, in the order intake. Now the new power lines are about half. year to date. But then in the order backlog, you know, there is then progress as the production capacity ramps up on the lifetime side. But it has to be noted that legacy products still constitute two thirds of the total order backlog. So going back, not only a question of margins here, but also a question of production efficiency in dealing with multiple product lines at the same time. Moving on to challenge number five, and then is maybe one that we spend a bit more time, which is China. And of course, China is so important that it affects the world market, as we saw before, on the market and on the pricing level. Now, you can see on the chart that we update for you on a regular basis. First of all, that the floor space sold continues to decline across all city tiers. And we now reach the levels of the latest crisis of 2017. What I find even more of immediate relevance for our industry is the housing inventory on the right-hand side chart. And then you see the crisis level is such that we now came back to the peak levels of the 2014 crisis in all three tiers now what could be a positive thing is that you can see there is based on official data a sign of an inflection of the curve and the key question is here does that mean that we hit bottom or could it be that this is a temporary one and then we'll continue increasing inventory going forward. This, of course, we all hope that would be the former, i.e. that this would be the peak of the crisis in terms of housing. But I must say for the moment, the estimate for the Chinese and high market is still about a contraction between 15 and 20%, we're not here now to provide forecasts, but based on latest indicators, including the ones you see here, is likely to extend into 2023. Now, what does that mean for China? And of course, there is a lot of doomsayer. And of course, there are also many other aspects of China, including geopolitics. But we're not going to go into that. But as far as our industry is concerned, and I know it's well known, but sometimes it doesn't hurt to restate the reality, is that in spite of this major contraction, China still remains by far the largest new installations market in the world. You see in the operator chart here on page 10 that China still accounts for 63% of the world market. Well, of course, this is in units. Last year it was 66. But most importantly, you see that the second largest market in India is, depending on how you measure it, about a tenth of the size of China. So we need to stay very close to China. And then you see that the other countries there on are actually even a smaller fraction of the world, but also the China market itself. So again, Not only is China the biggest market in the world, but we believe, moving on to the next slide, that China still has major potential for growth. And why do we say that? You see on the chart, and again, it's sometimes good to see it on a chart, it is the highest concentration by far of mega and large cities. I'm talking here of cities, about 10 million, between 10 and 3 million of anywhere else in the world. And as you may have seen in some studies by the EIUs and other independent organizations, these cities are still growing due to the continued urbanizations in China. Now, if you look more granularly at the industry and you look now at the right hand side, you look here at elevated density measured by number of installed units per thousand people. You may read, some of you may remember that when I was CEO in 14, 15, actually we use the chart on a regular basis to look at potential. And you can see that China here is still way behind South Korea, Germany, Japan, much more the markets than China. And China on the same chart you see had a tremendous progress as one expected. over the last 11 years, but still has wide range to grow before reaches the levels of, again, of South Korea. So, all in all, if you combine the two factual data points on this page, you see that China, medium term, long term, is still expected to continue growing. And this is true for the new installation, but it's also true for the existing installation market. Moving on now to the next page, page 12, where you see that the figure on the left hand side for the China install base or the overall number of units of maintenance, elevators or escalators is about to reach 50% of the world's total. And incidentally there, you can see that if the market over the period 17-21 grew by 12%, Schindler growth of portfolio in the same period was above market in the order of 15%. Now, much more to come. And this is only a unique opportunity, but one could even argue it's historic in size, and one that must be seized. So how do we go about this? We clearly, as a first big block, we have to invest in technology. And you may have heard some of the speeches at the uh cpcc congress happening at the moment you see there is a lot of talk about technology a lot of talk about how china continues embracing technology and this is true in the old economy including in our business. And so the authorities are now promoting, and this is, I'm sure, known to you, a new program to promote safety by remote monitoring. We are supporting them in that, running pilots. And then, of course, this whole topic about connectivity and digital services, we'll come to that in a second, which also only drives portfolio growth but also differentiation versus local players. Then there is the whole aspect of the more classic approach, which is regaining units that we have lost on the basis of differentiation and better quality, but also doing that to some extent by acquiring independent service companies. And there are several of those in China. But again, the focus there is to look at density efficiency quality to make sure that we overall gain efficiency as a whole. Then, of course, there is the modernization in China, because after all this growth over the last 20 years, there is now up to 1.5 million units which are aged. So which are especially in view of the high usage in China, there are often modernization, which constitutes a huge opportunity. And for that, we are introducing a new modular platform. You'll come to that. It was one of the programs that we're going to speed 23. And then there is, of course, a big opportunity by combining this by with sustainability solutions to reduce the carbon footprint of buildings and our customers. So this was an update on all the challenges. China is a key one. But again, the big opportunity now over the last two, three presentations we stopped here and then we started speaking about financial results. Now, I also meeting you and also through exchanging we had over e-mail, we understand there was a strong demand, which I understand very legitimate to get a bit more colour about how we operate, what are our priorities. And so, we clearly now that we start stabilising our performance, I think it's time that we also dedicate our resources to provide you with this update. And so here I would like first to provide an update on the TOSP23 program. You remember we announced it and we explained that it was something to build the future of Schindler with substantial investments. So today we'd like to provide you an update of where is this overall TOSP23 program. And then I'd like to move to page 14. And I think to say that overall, when one speaks about the Speed23, we have progress. We have a further focus on which module of the program address our immediate priorities. And third, most importantly, that some of these modules already start providing paying dividends. So let's have a look at the summary here. And again, you see the subtitle speaks about realigning with operational priorities, because yes, when the year started and we took stock of the situation, we said, yes, this is very important, but let's make sure that we apply the same aspect of efficiency and focus also to this program. And so the six modules you see here, some of them are either close, completed or close to closure. The first one is the one on new installation growth in selected strategic markets. And you can see part of the media payoff is what you've seen in improvement in margins, in a refocus in specific segments and markets where we can be the most successful. Another one that is very close to closure is the bottom one, which we call human excellence, which I would say it was about time, I admit. but now of course in confronting the challenges of inflation or now the quick changes in raw material changes, we now have an organisation that is set to address those and yield bottom line benefits, but also quality and safety. Is it not yet completed? We do have some staffing to be completed by year end, but clearly by year end this will be completed and we already start seeing some of the benefits. now maybe moving to the uh to the third one there sustainable modernization solutions i spoke about china as a unique opportunity uh and then you see we decided instead of looking at mode solution worldwide we saw we have this huge opportunity in china so again we refocus the project only on china that in fact brought us back a bit in terms of progress because we had to re-look about how we could really make sure that we had the right product for China using a modular platform, but we anticipate already even impact as of next year. Then you have two that are more long-term. They were so planned because even if they will be completed to some extent by end of 23, the EBIT impact as planned will take a bit longer. And this is Digital Twin. And there's new products for the market coverage in segments where we have been less present. Digital Twin, you see, we are much more advanced with escalators. This is the one we started with. where our factory and R&D modules are about to be launched beginning of next year. On the elevators, on the other hand, we started later, as planned, with a pilot phase where then we will focus much more on the field operations to make sure how we can apply this digital technology seamlessly with our other tools that we have for the NI, for the installation and service as well. Finally, and I mentioned it last because there I like to spend a bit more time, you see that the connectivity, which is the second module here on this page, has progressed very well. We have now 25% of our portfolio, which is cloud connected. I like to stress the point, it is cloud connected. So we do not include here the old tele-alarm or all these analog lines that we used to have before. These ones are there. And if you add those, the percentage is much higher. This is really, we shouldn't have had cloud-based with the whole software stack, edge computing, everything which we need to have in order to provide unique digital service to customers. And so this has progressed well. And it's starting already to, have an eb impact this year and maybe to elaborate i'd like to move to the next page on page 15 where you see here some some key numbers and i see some of our auto place industry uh presented the case and i think this is it was time we we spoke about hours uh and i'm pleased to say that the whole topic about connectivity in the elevator and the schedule business is now a business approval model And so, again, you see here 25% of our portfolio cloud connected. And what are the benefits immediately when I spoke about EBIT impact already this year? First of all, look at the right-hand side on the more classic aspect. Our portfolio loss rate, our number of units in maintenance that we lose to competitors is dramatically reduced. I'm talking about one-half. So this I would say is even beyond some optimistic scenario. That's exactly what I was hoping for when we launched it back in 2016 and I'm very pleased with this development and that's now a fact. Now the other one on the right hand side is that you can see thanks to the data connectivity, the type of early detection of defects, of callbacks remotely, thanks to our technical operating centers that we have in all key markets, which are on top of our normal call centers, we could reduce on these connected units callbacks by 30%. Now, and the 30% is compared to non-connected units. I know that some others have published higher numbers, but If we now include all the improvement of callbacks that we do as part of our quality effort, I'm talking about a much lower percentage. But this is simply the difference between connected and non-connected. And this in itself is a tremendous result. So I'm talking about one third efficiency gain. Now, on the left hand side, you see now the new areas of business that can be open thanks to this connectivity. And I'm very pleased to say that 50% of the connected units now provide revenues. So we call this the monetization rate, which is an important number, especially because to be very clear, from a marketing point of view, perhaps we still have some way to go. This is a bit of a change mindset, but also competencies throughout the organization. But this of course shows for very substantial potential. And then, you may remember I presented it in Q2, this whole aspect of green maintenance module that now we actively sell in some strategic markets, where, and this is now certified by TÜV, you may remember also I presented it last time, in fact the overall footprint for our customers, so it is for us scope 3, for them scope 2, for buildings due to elevator maintenance, goes down for as much as 99.5% if all the aspects are applied, including electric vehicles, et cetera. So that is, I think, a very important element, and again, showing how this top speed 23 investment was absolutely right. You can see on the next page we provide a bit more colour on explaining how this sustainability aspect has been addressed and how you reach this 99.5% reduction potential, if you apply more maintenance, less physical visits, and that thanks to the efficiency that you're of time, but also of course, that then the whenever we have to go because legally, we still have to go a number of times, then this is done with a with electric vehicles. That was the TOSP 23 update, and we continue providing you there and we can also address it if you like in the financial aspects. uh but before passing the word to uh carla de geisler our cfo i also wanted to address another question that was asked by you which is you know how do you operate what are your priorities and as you can imagine we have been addressing that and since the beginning of this transformation uh this is something that we have uh drum beaten across the organization, starting with the leadership on a regular basis. And if you now move to page 18, you see our priorities that I was seeing them shamelessly, maybe unoriginal manner for those of us that started marketing at business school, there was an expression called 4Ps. Well, I think 4Ps applies very well to us, except these are different 4Ps. And the priorities we've had are four P's, people, products, performance, and planet. And this is something that everyone in the organization now gets accustomed to. Everything that we do has to fit in one of these four boxes. Otherwise, we put it on hold or we just simply scrap it, perhaps giving some color within different boxes. You see in the people, the first point is front line is the bottom line. Let's not forget, two-thirds of our workforce are field people, technicians, installers, project managers. They are the ones that carry the Schindler brand. They are the ones that are the most important people in a company. So the idea is that all our resources must be driven in order to support the frontline. Anything that doesn't should be put as a second or third priority and, therefore, by definition, put on hold or scrapped. We're also a big element of culture, which then addresses the change management. We call it back to basics because I think we learned the hard way that we must avoid by all costs this gap between narrative and reality to make sure we confront the facts head on and simply deliver by sticking to our original values. There is, of course, a topic of inclusion and diversity and the fact that we have to upgrade all our teams to make sure we are prepared to perform with a quality second to none in our industry. The aspect of products, we already discussed it to a large extent, the topic of profitability in new equipment business, the idea of modernization growth and profitability to profit from the unique opportunities today. Then of course, we couldn't speak about products without addressing service, which is the essence of our value creation going forward with emphasis on efficiency. And then, of course, the topic of supply chain, where we addressed it as part of our priorities. There is the need of, after we fix the issues today, once we've done it, we need to look at a complete overall, which we're already starting to address. On the performance, I'd like perhaps to stress the first part here, which is a formula that I think people in our organization are tired of hearing me repeating like a broken record. Pricing plus efficiency has to be bigger than inflation. Again, pricing will not be enough to offset inflation, all the more now with the wage inflation being up. So it's about accepting inflation as a reality and driving the organization to stay above inflation with a combination of what people can do on pricing, but making sure we also drive efficiency to stay on top of it, to stay ahead of it. Then there is the aspect, of course, of strategic markets. Of course, China is one of them. But the idea is what? Is that one size does not fit all. We're markets with a dominant position where we are very profitable and there we have to continue growing. We have to make sure that we not only defend, but they build on these positions. Then there is a second group of markets where we are solid, but with a profitability that is on par with the group minimum requirement. And these markets can only grow if they either keep or improve the profitability. Then there's a third category which are markets where we are way behind in profitability. And in those markets the message is clear and it will be even clearer now as we go forward with the objective in 23, they can only grow if they improve the profitability. So this is the three-tier approach we apply worldwide. And of course, we shouldn't forget that at the end, the success is measured not by how we meet a target, but what a customer think of us. And so this is another message that is constantly driven across organization. Finally, and it could have been mentioned further, the aspect of planet. You remember I presented it last time, so this time we have less of that. We have a ESG roadmap, the first one of which comes to fruition in 2022. We're working incessantly to make sure we can deliver. There are some challenges, in particular in terms of electric vehicles, but nonetheless, we are doing everything we can and more. And we have a new net zero CO2 target certified by a science-based target organization. on which now we are making plan executing already driving. And finally, what we call industry 5.0 is the application of the new circular economy to the elevator and escalator model, which we are certain will provide unique opportunities and not only for our shareholders, but also for our contribution to the planet. In conclusion, maybe takeaways before I pass the word here. We have stopped losing altitude by focusing on the priority we established at the beginning of the year. We have stabilized our business and started a new trajectory towards profitable growth. At the same time, it will take time before we close all the gaps we identified. We have a long way to go, but our resolve is absolutely unabated. Thank you, and with that, I'd like to pass the word to Carlo De Gessler, our CFO. Carlo, please.