Schindler Hldg Ag Akt

Ladies and gentlemen, welcome to the Schindler Conference Call on the Q1 Results 2023 and Live Webcast. I am Sandra, the Chorus Call Operator. I would like to remind you that all participants will be in this synonym 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 our first quarter 2023 results presentation. My name is Marco Knuchel. I'm Head of Investor Relations at Schinzer. As usual, I'm here together with Silvio Napoli, our Chairman and CEO, and with Carla De Geisler, our CFO. Silvio will start with key messages and will provide an update on recent market developments. Carla will then lead us through the financials. After the presentation, we are happy to take your questions. Today, we plan to close the session at around 11 o'clock. With that, it's my pleasure to hand over to Silvio. Silvio, please go ahead.

Thank you, Marco. Good morning, everyone. Thank you for joining our Q1 results conference call. You have received the package and I will refer to the slides that you see also on your screens. But more than the slides, I just wanted to start by conveying a message. And this is the following. You will have seen on our media release that we chose Staying the Course as a title. And let me perhaps pause a second to explain why this is the case. When I... We introduced to you our results in February 22, together with this new governance model in place with the Chairman and CEO role. I stated very clearly that our priority is to close the gap versus competitors, in particular in terms of profitability, i.e. relative EBIT percentage. Well, today I must say we are delivering on this mission. We have still some way to go. But in spite of the many changes continue to happen in the market, I'm pleased to say that the measures we put in place are starting to pay off. And why is that? Now we can maybe refer more specifically to the slide. First of all, we are facing a new installation market which unfortunately continues to weaken globally most of all this weakening is associated with uncertainty with we'll see in a second some markets that were previously going very strong now suddenly showing sign of of hesitation others that were supposed to come back strongly which shows some delay that's a fact and of course again and the third we continue moving along our mission uh notwithstanding the situation Now, as a result of the weakening market, unfortunately, our order intake is decreasing as a reflection of that. At the same time, I like to stress this, and we then look at this more with a CFO in a second, with Carla, our margins are improving remarkably, possibly even above expectations in terms of new order intake. At the same time, our growth in service and repair continues very strongly. The third element are revenues, where there we are pleased to drive revenue growth across all regions and product lines, even in regions where the market is uncertain based on our strong backlog. Number four, of course, now we come to our main target and goal declare, which is the improvement in EBIT and net profit. This improvement is first and foremost operationally. In the case of Q1, you will have seen we have a particular, if you want, supplement due to the sale of our former factory land in Suzhou, China. Coming to the fifth highlight is that notwithstanding as i said we got somewhere to go we continue to progress on discipline execution of a strategic priority which are intended to drive competitiveness and performance not only short term but also medium and long term before i move on from this page i'll maybe like to add one six highlight and it is one i briefly mentioned before this is the one of our backlog Our backlog today stands at 9.6 billion, which is more or less equivalent to two years of new installation revenues. In other words, this backlog offers us what I would call a top-line buffer, which therefore allows us to continue driving orders while also improving margins. The backlog in terms of bottom line, as if you want a two-edged sword, on one hand, we are continuing to getting rid of the diluted margins from the old orders. You may remember this BOA constrictor slide, as I called it, showing how these diluted margins of the old orders will continue to hit the results until 2025 and some small portions even beyond. But at the same time in the backlog we have improving new OIT margins which ultimately will drive what I call a progressively positive backlog impact going forward. So with those six highlights, so the five here plus one, which is the backlog, we now can move to the other slide, which refers to one of our strategic priorities. Again, in February, I presented our strategic deployment framework. I mentioned how going from our purpose to our ambition, to our choices, on to our targets, deploy those across our organization along four Ps, people, product, performance, and planet. And the first of these four Ps is people. And there we announced today that we have a succession in chief technology officer, whereby Karl-Heinz Bauer, who after eight years come to his well-reserved retirement age uh he will be succeeded by donator carparelli uh who's someone that has been with a group 30 years someone who knows our products uh our markets and in particular domain competence in the elevator and escalator technology uh is the uh the ideal candidate to take over from carlines uh bauer uh Donato worked in Asia, he worked in Europe and in particular he has shown great performance in product management and innovation and has been now driving our simplified module elevator platform which is being launched as we speak so again we put a cto someone that has particular domain competence and direct involvement in what is today the most important aspect of a product strategy so we are very positive about this succession And perhaps you see on the right-hand side, we used the format we used in the past to communicate changes in the executive committee, and you see now this is the ninth change in 14 months. So, in terms of speed of change, in terms of continued evolution, you can see that on this front, too, we are proceeding unrelented along the target we set ourselves in February 22. now with this team now if there are many changes uh one thing to the contrary continues constant which is the the constant progress on delivering on our priority which is achieving a trajectory correction in terms of profitability and not only profitability you can see on the chart here with the red curve are revenues and you can see here that since q3 22 they have been improving steadily. And there is a number of factors there. Of course, the lockdown easing. There are also the supply chain bottlenecks easing out. And, of course, our drive to work with our customers to make sure that we could deliver on the construction site and proceed with the installation of the units in our order book. Now, the other curve on the chart is the one in gray, and then you see the gray chart shows the EBIT year-on-year gap or improvement, and you can see that the trough, both in terms of revenues, by the way, and an EBIT gap was in Q2 22, so half year last year. And year two, you can see that from Q3 22 onwards, this year-on-year EBIT has been improving. And you can see that in Q1 23, you have the first year-on-year improvement in this quarter, both in terms of revenue and in terms of in absolute figures. Now, moving to the relative EBIT percentage, you can see the box at the bottom of the chart. We can see the same trend. And in Q123, you can see this is now the first time we have an improvement both in positive and in relative EBIT performance year on year. So what does that say? Does that say that the profitability enhancing measures that we put in place are starting to pay off? I use the word starting because, of course, once more, we still have some way to go. But we are once more staying the course and proceeding onwards. Now, staying the course despite markets, which then takes us to the next slide, which is the updated market outlook. It's important that I I stress the word updated because indeed there are some changes. The chart again for everyone's understanding relates to units in terms of new installation and you have below modernization and service but starting with new installations. We do have some major updates but the first one regarding China is I'm not going to say positive but I would say it's a less negative sentiment. I was in China for the first time since March 19 two weeks ago, spent there almost two weeks, and maybe focusing on the market now, if maybe in February we said our assessment was for the year 23, between minus 10 and minus 15, today probably we are closer to the minus 10, but nonetheless we still talk about negative territory, unfortunately. And now we can see that the decline is slowing down but as we speak uh if one expects a recovery which unconfident will come but today it is still uncertain when the timing of this recovery will take place and what the magnitude of such recovery will be in any case we remain uh of the opinion, like in February, that there is probably no recovery in sight before the second half of 2023. The next market, Asia-Pacific, including China, where this is good news, there is no change. The markets remain very strong. not only in India but also in Southeast Asia. Of course one has to recognize these markets for having worked there myself a number of years are very much subject to global economy evolution. So if there was a global recession I'm afraid we will have also an impact on these markets where the fundamentals in terms of urbanization remain nonetheless very strongly. Moving on to the Americas, there we do have a downgrade. We had a flat assessment in February, and today you see we put there a minus, which is equivalent to a zero to minus 5% outlook for the year. And of course, this is... driven by a combination of North America and South America, mainly Brazil. But in America, we see the commercial sector in particular weakening. Maybe as one data point, the ABI has been minus 17% for the first two months or 23 in comparison to 22. So that is a sign. And of course, we're watching this very carefully. In Brazil, it is more of a question of slow down and that of course cannot offset the evolution in in North America another downgrade moving on to to the next one which is EMEA there is I would say quite a significant downgrade in the outlook is that we now have a negative outlook for the year because we see what used to be a strong markets with stable demand, moving on to a moment of delay projects and hesitation. To be clear, demand remains strong across Europe, but in Europe in particular, the cost of capital increase, combined with in specific markets, some political changes regarding construction, environment and other element brings to putting projects on hold, so the project is still there, but therefore for 2023, the outlook has been downgraded. Middle East and Africa continue strong, but unfortunately they cannot offset the European change that we observe at the moment. Finally, then, if you look at the overall outlook, then there is no change because we still see that between minus five and minus ten, uh where this weakening trend globally combined with uncertainty including china continues to affect markets on modernization the demand remains robust And in service, we observe continued growth across our regions. As you will see later, our OIT performance or in terms of service remains strong with modernization. Unfortunately, we are at a slow Q1. There is no other way to put it, but we remain confident that the large projects we are going after for modernization will materialize in the rest of the year. So with that, I thought it was important perhaps to spend one more slide on China, presenting the slide that we have shown every time as I think a strong indicator of the situation in China. Unfortunately, the latest figure we have are the ones of February, so clearly we don't have March yet. But you can see here, first of all, in terms of floor space sold, there is a pickup. So when we said the decline has slowed down, however, if you see from this curve, even for Tier 1, we still are below zero. So we still are in negative territory, but, of course, less negative than we used to be in the past. You can see that Tier 1 are still much better than Tier 2 to 4, but nonetheless, This has to be put in perspective with what you may have read, sales orders in China picking up in March for the first time by figures which even talk about 43% year on year. First of all, there is a base effect, but of course you can see that obviously there is a big absorption of the unsold inventory of goods. And that, of course, is good news because it means that then hopefully we will then evolve into the positive growth, which is something as in once more we are hopeful we materialize in the second half. But today it is still uncertain. I mentioned inventory, which then takes us to the right-hand slide, and then you can see that Tier 1, in fact, we are still within what I call healthy levels, so 10 to 15 months of consumption of housing inventory. Unfortunately, in the Tier 2 and 4, again, the decline has been arrested. However, we still are into the 20-month area of inventory, which is definitely very high at the level of the previous crisis, and this will have to be absorbed before we can then expect growth in new installation elevator markets. With that market outlook, I'd like to pass on the word to our CFO, Carla De Geesler. Carla, please.

Thank you, Silvio. Good morning, everybody. Since we met only a few weeks ago and because the first quarter is seasonally the least eventful one in the year, I try to keep my comments relatively brief to allow enough time for your questions at the end of the presentation. So, let me start with slide nine, results in a nutshell. First, some high-level comments summarizing our first quarter performance, and then I will give a deeper insight into the relevant topics later during the presentation. First of all, overall, we are very pleased with the first quarter results. Only the muted order intake development clouds the picture a bit. However, as Silvio explained, the year-on-year new installation order intake margin continued its upward trajectory. All regions, all product lines contributed to the solid year-on-year revenue growth. Our service business continued to grow solidly, supported by an increase in units of more than 4% and a continued execution of the pricing measures. EBIT adjusted and EBIT both printed year-on-year improvements in absolute and in margin terms. And of course, there is a one-off real estate gain of 26 million, which supplemented the EBIT and the net profit. Cash flow from operating activities almost matched the previous year result. Higher net working capital requirements could not completely be offset by the improved profit. Now we move to the following slide, which shows the figures for the first quarter. So first quarter 23 results confirm the positive trajectory with a 10% year-on-year improvement in revenue in local currency and an even higher growth rates in profit, which were supplemented by the real estate gain of 26 million Swiss franc. Since the Swiss franc strengthened against our main currencies, our revenue and profit growth were negatively impacted by Forex amounting to 380 basis points and 620 basis points respectively. Moving on to slide 11 to give you some insight into the order intake development. Order intake reached 2.9 billion Swiss franc corresponding to a decrease of 8.7% and to minus 5% in local currency. reflecting the weakening global markets, but also our continued focus on sales margin. Organic growth was minus 5.1%. Acquisitions contributed 0.1 percentage points, while the FX had a negative impact of 3.7 percentage points to growth. The right-hand side of the slide provides you with an overview of the year-on-year order intake evolution by region and product line. Order intake represents here all the product lines, new installation, modernization and service. As you can see, all regions contracted particularly due to the muted new installation markets. Modernization had a slow start into the year two, but on a positive note, new installation and modernization margins continue to improve in all the regions. The service business remained very robust and continued to grow. Order backlog decreased by 5.3% to 9.6 billion Swiss francs. In a local currency, order backlog growth was almost flattish at minus 0.2%. Given the lead times of more than 18 months combined with the improved new order intake margins, this backlog is now expected to fuel the continued performance going forward. Moving to slide 12. So the revenue here, shown here, increased by 6.2% year on year to 2.8 billion Swiss francs. corresponding to an increase of 10 percentage points in local currency. Organic growth reached 9.9%, supplemented by acquisitions, which contributed 0.1 percentage points, while the FX had a negative effect of 380 basis points to growth. Backlog execution remained strong in the first quarter, resulted in the highest growth rate since the second quarter of 2021. All regions recorded growth in local currencies and growth across new installation, modernization and service was robust and broadly similar. Now moving to the next slide, I give you some insight in the development of the EBIT adjusted and the EBIT. As Silvio pointed out, our implemented measures yield results and they are more than offsetting the declining impact of inflationary pressure. semiconductor shortage, product legacy and supply chain issues. And I believe that the two charts on the slide here nicely illustrate how EBIT adjusted and EBIT, including the margins, started to recover from the third quarter in 22. In the first quarter 23, operational measures resulted in a 49 million Swiss franc improvement. EBIT adjusted reached 272 million Swiss franc, representing a year-on-year increase of 15.3% and 20.8% in local currencies. The margin increased by 0.7 percentage points to 9.7%. EBIT increased by 33.6% to 282 million Swiss franc, supplemented by the land sale of our former factory in Shuzhou, China, resulting in a one-off capital gain of 26 million Swiss francs. The EBIT margin reached 10.1%, equivalent to an increase of 210 basis points. And for completeness, net profit reached 212 million Swiss francs, equivalent to an increase of 47.2%. And without the real estate gain, net profit totalled 186 million Swiss francs, representing a year-on-year improvement of 29.2%. I jump now to the slide outlining the operating cash flow development. With a decline of 1.7%, cash flow from operating activities reached 281 million Swiss francs, and could broadly be maintained at prior years level. The solid increase of profit has been offset by higher networking capital requirements, mainly driven by the year-on-year increase in accounts receivable and work in progress. So let me now conclude with the outlook for 2023. We very much focus on the disciplined execution of our strategic priorities and expect a positive EBIT adjusted margin trajectory to continue, since pricing and efficiency are expected to more than offset inflationary impacts. Our revenue outlook for 2023 remains unchanged, and hence Schindler expects low single-digit revenue growth in local currency for the full year. Allow me now to take the opportunity to thank all the colleagues around the world for their remarkable contribution to the solid revenue growth and the progressive uptake of profit. A sincere thank to all of you. And finally, I'm very happy to announce the date for our technology day in ABICOM Switzerland that is scheduled for the 20th of October 23. And we are very much looking forward to welcoming you and meeting you here in person at our headquarters. And with that, I hand over to Marco.

Thank you, Carla. We are now happy to take your questions. I would like to ask you to limit yourself to two questions only, given the very limited time we have today. With that, I would like to hand over back to Sandra. And the first question is coming from Lars. Sandra, to you.

The first question comes from Lars Borson from Barclays. Please go ahead.

Hi, good morning, Silvio, Carla, Marco. I'll restrict myself to two, one on the market outlook in developed markets, Silvio, and maybe one for Carla on the margin outlook for the year. I took note of your comments, Silvio, of new installation order margins improving above expectations, and I'll come back maybe in us to the 2023 earnings outlook. I appreciate that. We'll come more formally in a quarter's time. But firstly, if I can, on the market outlook in developed markets, I wonder whether you can help us a little bit with the specifics. I appreciate newspapers telling us things are going to get a lot worse. But I also took note that you were referencing the ABI in the first two months. That obviously swung back in March to an above 50 reading. I appreciate your core exposures in office and multifamily are softer. But maybe you can help us a little bit with what you're actually seeing in terms of any real financial stress. among your customers in that market, and equally so in Europe. I think you spoke about projects and hold. Can you scope that for us? When you look at sort of your total order funnel, what are we talking about in terms of how sort of the current environment is impacting your customers? That would be my first question. Thank you.

Thank you, Lars. Thank you for these two very relevant questions. I'll start with one indeed regarding market. Yes. let's be very specific yes in america the abi is from baltimore in march and this has to do with this uncertainty so in our overall global outlook you i did particularly refer to this uncertainty and this is a perfect sign of what we see and this is exactly why we were surprised and frankly disappointed to downgrade some of the markets uh between february and today because indeed things change so quickly hence our cautious view on the market today Now, let's talk of Americas. In Americas, we see the residential market still continuing strong, depending on whether there are some difference among different states. And I would say even the pricing at the moment continues to be, if you want, solid in terms of being able to offset inflation and even more in the US. but in terms of their two last projects this is what you will see there there is hesitation uh and this is true of course in the large metro cities but generally even in infrastructure and even smaller cities in spite of this you know grandiose plans that we have now in the us uh there is uh hesitation now the capital uh uncertainty came later probably in america they did in europe but overall we see um customers hesitating to uh to put ink on a page when it comes to uh to placing orders that is even stronger now coming to the other market which is europe and there let's talk even about this the most important market let's say germany or northern europe in general there you can really see customers tell us very clearly demand demand is there uh i was a meeting a month ago where i met many of our customers and then they'll tell me demand is there some even say if i wanted to start a project i probably would start would sell all the apartments in a in a matter of days but they are not happy with the returns they see yet and hence their hesitation to proceed to that there is also a combination in some particular markets like italy for example where some changes in political environment regarding uh support to some specific of uh of construction also in terms of energy savings and now put they are putting some projects on hold uh similar situation is there in france for other political reasons but so this all maybe there is there a bit more granularity market to market but overall the situation is this demand for new housing is there but for housing and for then commercial, then there is hesitation to proceed for a number of factors, including the capital, if you want, scarcity or the low return yields. Carla, would you like to address the second question regarding the profitability?

Yes, come on. Maybe if I – sorry, Sylvia, if I can, maybe just clarify my second question. I was after – I took note of the orders to see margins improving above expectations. A, I wonder whether you can give a bit of a call on that. I was also hoping, Carla, we could get a little bit of color around some of the key bridge items for 2023, at least on the key cost and saving items. It's a little bit unclear to me specifically on cost savings, how to think about 2023. Thank you.

Okay, yeah, thank you, Lars, for the question. So when you really, you know, take a step back and look at quarter one and you say, okay, where is the operational, you know, where is the profitability improvement coming from? Then there are a couple of elements there. First of all, we are working through the recovery of the supply chain and the legacy issues, which, you know, clearly, you know, support the improvement of the profitability. Secondly, you know, in terms of cost, We really keep them under control and for sure the overhead costs and step by step we are also getting some support obviously from the procurement savings that are coming through. uh when we look now forward and we say okay you know what will you know further i would further support the uptake of the profitability then we say okay we work continue to work through this legacy issue but more and more we are going to focus now and we are already focusing on real efficiencies that are independently from this legacy issue secondly you know we remain really disciplined when it comes to the pricing. And thirdly, as you know, in the coming quarters, we will have also a stronger support from the procurement savings. So that's why we are pretty comfortable to say that the trajectory upwards in terms of profit will continue and that pricing and efficiency are expected more than offset the inflationary impacts.

Can you be specific on the cost savings for this year, please?

Well, I mean, we don't give specific numbers with respect to the cost savings, but I think I try to be, you know, clear that, you know, we are comfortable with the continued uptake. And obviously in H2, we will give a guidance with respect to the profitability for the remainder of the year.

Thank you.

The next question comes from Andre Cook from Credit Suisse. Please go ahead.

Andre Cook Good morning. Thank you very much for taking my questions. I'll stick to two as well. Maybe just on margin while we're on it already, could I ask if I think about that 49 million operational improvement, it sounds like from what you're saying, Carlo, we should see that, if anything, expanding further in terms of per quarter impact as we go through the year. and certainly not shrinking. And then I'm just thinking about Q2 specifically. Last year, I think you had the 50 million impact from purely from Shanghai lockdowns. How should we think about that for Q2? Do we stack these up and hence get up to quite a substantial margin basis points improvement? Or is that Shanghai non-repeat part of that ongoing improvement?

Obviously, we take that part of the ongoing improvement because you cannot only stack up the positive movements because, of course, in the coming period, we will have also to deal with the impact of rich inflation.

But you were dealing with it in Q1 as well, right? And you delivered the plus 49.

Absolutely, yeah.

Andrea, if I may build on Carla's answer, to summarize and also to do with Lars' previous question. So in a nutshell, a profit recovery source comes from four elements today. Supply chain recovery, resolving legacy issues, three, cost control with particular focus on overhead, and fourth, pricing. So, if you know, to build on your question, you can say the Shanghai lockdown is between supply chain and legacy issues. That is clearly not going to happen this year. I mean, but there is uncertainty, to be clear. What else can happen? But at the moment, there is no sign. So, to your question, very simply, no, we don't expect to have a 50 million impact in Q2 due to Shanghai. But God knows what else could happen. But to your specific question, it's not. What is important is that going forward, we see – More gains coming in from the efficiency measures we have been putting in place over the last few months as we have committed to deliver. And so the trajectory, as I said, the trajectory correction is one that we don't see only short term, but we see continuing going forward.

Got it. Thank you. Thank you. I'll keep digging into that. And the second question I wanted to ask is on China, and particularly on pricing, if you could tell us how you've seen pricing developing in the market and for yourself, and maybe while we're there, if you could maybe comment on how you performed in the market versus the overall space.

so in china overall the situation is not the difference in some regard with the rest of the world the specificity in china with the big question i wanted to look into when i when i was there a few days ago was the situation with this you know largest real estate developers who as you know well used to account for the vast majority of the growth in the market the situation has not vastly improved to the contrary. You know, we see the cost of the government stepping in to help the mortgage holders. We see them coming progressively to help on restarting some specific sites in making sure there is maybe progressive consolidation in the market. But that's not really progressing that much. So in terms of pricing, that is reflected. Like in the market, we see the decline in pricing slowing down. Most of all, we are holding tight because the credit risk in China remains very high. I like to stress that. And so while we are very well protected in terms of process, but also in terms of balance sheet going to do with China, one has to be very, very careful about going forward. So when I mentioned no recovery inside once more before second half, it also reflects the pricing. and the credit risk situation. It's coming back, but we're not there yet, Andre. So one has to be disciplined in making sure we get good orders, and I'm pleased to say a few of them start to come in. And we continue driving what we call the mass residential, where at the end there is the bread and butter of the business, where we see some recovery. we also see as you know there is an element of working with agents in China which is very important and that it's about reinforcing and consolidating the agent network by putting in place also new incentives not only to stimulate demand but also to make sure that not only the volume is taken care into account but also the quality of the margin and the credit risk. These are all measures we have put in place together with other you know cost efficiency measures to make sure that we remain competitive But it's fair to say the China is still very much in motion as we speak.

Great. Thank you very much. Appreciate your time.

Thank you, Andrew, for the question.

The next question comes from James Moore from Redburn. Please go ahead.

Yeah. Hi, everyone. Silvio, Carla. I hope you're all well. I'll try two questions if I can. I wondered if we could start with pricing. Pricing, could you quantify pricing in orders versus sales as a year-on-year percentage at the group level in the quarter to give us a flavor for where we are at the moment because it's obviously quite important to the dynamics. That's the first question. And the second question is, whilst I'd love you to give your projected internal FY23 bridge by all the moving parts, if you were to compare what it looks like today to where you were Three months ago, after the last set of results, would it be possible to sort of characterize where you see the different components, whether volume, price, mix, wage, savings, currency have moved for the better or for the worse?

Thank you, James. Yes, we are well, definitely well busy as we should be. Thank you for your two questions. So let me first ask, maybe start with the first quantitative answer in terms of our pricing. We're talking for elevators overall, an increase of mid single digit across the board. across the board in terms of average. There are some parts of the market where we can see that higher, others a bit lower, but this is the overall sentiment for a number of reasons which I truly appreciate. I cannot give more specific in terms of areas. Now, Carla, in terms of the equation, what is this pricing in terms of overall impact and the other elements, the moving parts, as James calls them, would you like to address this question?

Yes, yes. When you really look at the bridge for 23, and I compare that with a couple of months ago, I would rather say that the bridge on itself has unchanged for 23. So, the pillars remain the same, maybe what changed is actually the positive sentiment in our ability to execute our plans for 2023. That's very helpful.

I presume that's because you're seeing the start of your plans come through. Are you referring predominantly your internal actions on new overhead and cost savings? Are you talking about some sort of more external factors of supply chain seizing?

No, I'm referring to the internal one and the one, you know, the initiatives that really that we are supporting and will continue to support the uptake of the profitability.

And thank you, Carla. And James, building on the previous question, perhaps, let me say, you know, remember, I already one year ago, but I keep this is something now everyone in the company knows about this formula that pricing plus efficiency has to be higher than inflation. So to your previous question, it is fair to say that so far it will be now. delivering on that on that formula but the key contributors so far are still been pricing more than efficiency uh in that we have we've had of course efficiency gains in terms of resolving legacy issues but to be completely honest when i say as we speak with the team we cannot really call this efficiency this is about fixing problems the real efficiency impact that we are driving will come going forward. And I think this is going to be very timely because, you know, with uncertainty in the market, one has to be also very conscious that pricing is not entirely in our hands. So we need to, of course, continue doing that. But then it's important that all the efficiency comes through as well. So it's a bit qualitative, but hopefully it helps to show how we look at this, but also giving an idea that today pricing indeed has been the main driver so far. Thank you. Thank you. Thank you. Thank you to both of you. Thank you.

The next question comes from Daniela Costa from Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for taking my question. Most of the operational questions have been answered, but I wanted to check in terms of like balance sheet and capital allocation. Obviously, you still have, I believe, the 15% stake on Hyundai. The litigation is done. You have sort of said last time around that you want to keep some cash on the balance sheet for future opportunities. Can you talk through sort of like the merits there of why does a 15% stake make sense, what's the pros and cons of smaller or bigger, and how that ties into your thinking about where you want your balance sheet to go more broadly.

Thank you, Daniela. Thank you for your question. Let me take the question in two parts. I'll answer about the Hyundai element, and Carla will speak about the balance sheet capital allocation. Perhaps to clarify one element, the litigation is not over, meaning we now have a Supreme Court unappealable verdict, which we definitely welcome. Now, of course, this has to be enforced, and the enforcement, as you may have seen in the paper, is still in progress. There are other, and I'm afraid, you know, we definitely don't like that, but that's a fact. There are other ongoing lawsuits which are already quite well advanced through the different instances which are active. And until those are not completed, we are in no position to make statements or even, I would say, let me be very open, plans about anything going forward. But maybe one element, why do we mention it? It's simply because it's important that while not being over-aggressive, and we're not a litigious company, however, whenever we feel that our rights are not being respected, we are prepared to stand our ground. And I think that is the thing that is important that comes across as a message. And yes, it took time, but we are confident that now even more than ever that we were right to initiate the proceeding that we did. Carla, regarding the balance sheet capital allocation perhaps you'd like to build on that?

Yes, thank you, Silvio. So, Daniela, thanks for your question. When we look at the balance sheet, first of all, there is no change in our overall position with respect to the balance sheet. But there are a couple of elements I would like to point out, because our liquidity, of course, reached quite a solid level. But there will be material outflows in Q2. First of all, you know, the dividend is quite a big cash outflow, you know, that happened already in April. That is number one. Secondly, we have a bond, you know, 400 million that expires in June. So that is the second element. Why do we remain conservative with respect to the balance sheet? Because obviously, you know, we really want to give ourselves the maneuvering room when we see interesting opportunities in the market that we really can go after it. And I think with the volatility that takes place in the market, it is not, you know, unlikely, you know, that some of interesting assets will come under pressure and hence, you know, we would like, you know, to keep that freedom. And actually, you know, after having dealt with the headaches for a couple now, for a long period on how to create a return on our cash on the balance sheet, now we finally move into areas with positive interest, it becomes less of a headache for us. And we moved from a treasury perspective, now we reached already more than 1% as an average return. So, you know, that at least, you know, brings in quite also a nice financial inflow in the coming period. Silvio, would you like to add something?

No, I think this said, and of course, we continue observing the general balance sheet, as we said, on a regular basis, while we're staying fairly, you know, faithful to our admittedly conservative views on how to ensure we take the business forward. Thank you Daniela for the question.

The next question comes from Patrick Reifheit from UBS. Please go ahead.

Yes, thanks and good morning everyone. Two questions from me please. The first one is on the backlog execution which is driving the top line right at this rate. Now, if I look forward, obviously you maintain the guidance here for low single digits in organic terms, but the constant Q2 will be super easy. So assuming a continued backlog execution, we might even see an acceleration in organic growth. So how How should we think about the second half? Are there any reasons why organics should slow down dramatically, potentially in negative territory? Or is it just still too uncertain of an environment to talk about that? That's the first question. The second one is on the... the delays you were mentioning in projects, especially with the hesitation. Is that something that's already affecting your ongoing business? So is the working capital absorption, for example, that you talked about in the cash flow, maybe already to a certain extent related to this or recovery for the cash expanding due to that? Is that something we should be concerned about? Thanks.

Good. Thank you, Patrick, for both questions. Let me start with the second one, and I'll pass to Carla for the one regarding the backlog execution. By all means, the project delay isn't only affecting our business today, but it has been affecting it in China, for example. In China, the backlog is particularly large. And there are many projects for a number of reasons, which has to do with the credit situation of some large developers, which is not so much affecting us, but the general sentiment in the market and generally availability of force due to COVID things. In China, that is an example where revenue has been slowed and before, I think there was a question relating to the 50 million lockdown impact in Q2 last year. That's an example. But so, yes, definitely, That has been affected. And now the situation today we talk about in Europe, it's more about new projects. So it's not about the backlog. But in Asia, in China, that project delay has also been affected, something that has to be taken into account. Now, on backlog execution, Carla, perhaps you have a question.

Yes, Patrick, thanks for the question. And yes, your statement with respect to Q2, I completely underwrite it. So, given, you know, I would say, assuming that there are no unexpected events, for sure, you know, it's very likely that we see a continuation of the top line development and also a progressive further progress in the uptake of the profitability. So yes, we stay prudent and it has to do with the uncertainty in the coming period and we allow ourselves also to reassess the situation at the end of the second quarter when we give also an outlook with respect to profitability.

Does that answer your question? Yeah, that's helpful. Thank you.

Super. Thank you. The next question comes from Johannes Brinkmann from AWP. Please go ahead.

Good morning. With respect to Hyundai, how many litigations are still open? And when do you expect the litigations to end?

Thank you for your question. We have two litigations open. now the second question one sorry two two two litigations two litigations open and as long i i asked you how long they take it is not in our hands you see the first one that was initiated beginning of 2014 took almost 10 years the other two were initiated in the following uh years so i i am no uh i have no information uh we definitely be trying to make sure that they are resolved asap uh but they are not uh i cannot tell you how long it will take i'd rather be conservative and say they will take the time they take and we respect the time needed by the republic of korea's tribunal to to to resolve all the issues

Is this going for months or years, what do you think?

Honestly, I'm not a lawyer, but I don't know, but based on the experience of the other one, I think it's better to be conservative and talk about years than in terms of months. But this is now, I shouldn't say that, it's really up to the tribunal, I don't know what to say.

Okay, thank you.

Thank you. Thank you for the question.

The next question comes from John Kim from DB. Please go ahead.

Good morning, everyone. I was wondering if we could go back to China and talk a little bit about any sort of specific policy initiatives or what you might call rescue capital financing going into your buyer base. Are we seeing consolidation on developers, either voluntary or forced merger? Also on price points, are you seeing perhaps trading down on new equipment orders or installations? A little bit cheeky, but last question. Within your order booking backlog, I think last time we spoke, you had mentioned that you were pruning that backlog for orders that were perhaps costs cost it or price it in a way that was pre-pandemic, i.e. disadvantaged. Thanks so much.

Thank you. Let me, if I understand, so let me, the first question is about China, right? So now the China measures evolve continuously. So I refer to this briefly, but I think the government definitely has made a statement that while until year end, there was, a distant position vis-à-vis real estate and construction, after the election of the new Standing Committee, after the appointment of the Prime Minister Li Sheng, who, by the way, used to be, as you know, the Party Secretary of Shanghai, so someone with FLE is close to business as well, then there has been specific referral to the fact that real estate and construction will be supported by the government. Now, with that, there has been the priority on protecting, first of all, the mortgage holders, whereby banks have been given special leeway in allowing for helping those distressed mortgage holders. The second element you observe is that the famous three red line policy that was imposed on construction and real estate companies has been partially relaxed. I would say this was more at least understand on an individual application basis to allow for some of these construction companies to restructure and come back to business. Finally, we see in terms of bank support credit to some of these companies. That's the other consequence. These have been encouraged and asked, and I think I referred to this when we spoke in February. However, what we see there, of course, this is the Beijing mandate, how the banks at regional and state level, province level, are applying those now is a matter of local execution. So all in all, And there are a few other measures that are coming through. I think it is reassuring to hear there is a will now in terms of execution. That's part of the timing and uncertainty. And that's why we remain of the opinion that before second half, this will not trickle down to our business yet. Now, in terms of backlog perhaps, Carla, would you like to take that question? John, do you mind repeating the question regarding the backlog, please?

Sure, no problem. I believe you went back to customers on orders that may have been priced at really disadvantaged levels, effectively looking to get a bit more commerciality in some of the backlog. So I'm wondering, is that process complete? And when we look at the order intake and order backlog, is that process largely done? Is the backlog lower year on year because your hurdles or your internal requirements are different materially? Thanks.

Thank you. Yeah, that is an ongoing process. So we really focus on these major projects and as they are getting executed, it's an ongoing process now to further improve. the margins and actually to ensure, you know, they are less dilutive. So that actually, you know, is covering, I would say, the lifespan of the project. Now, in some of the projects, we are more successful and in some of the projects, we are less successful.

And building on this, John, maybe one element here. So this is called, depending on which market you operate in, is either change notices or variation orders. so the ability to enforce that which is always very legitimate based on cost changes is also has also to do with the legal environment of the markets where we operate so for example in common law countries where there is there is really a construction a construction law and then you have quantity surveyors type competences both on the side of of the elevator company like us but also on the side of the customer this can be driven professionally and so we have been uh i would say quite successful even almost above expectation in driving those change notices uh in a in a very professional way which ultimately then improves the backlog margin and the execution of the projects profitably where we struggle more is in countries where such practices are not as well established typically you would say some parts of Asia for example China where this is less so established though there in those country we have an inflation clause in a new installation contract so there it's about enforcing those clauses, which again was admittedly, and this is definitely not a global thing for our industry, not so well applied. And now we are definitely insisting on these being applied. And so this is part of the challenge we face going forward. Great.

Very helpful. Thanks so much.

Thank you.

The last question for today's call comes from Martin Huesler from ZKV. Please go ahead.

Yes, good morning. My two questions. First of all, coming back to the sales growth of 10%, I think you alluded to that, but can you rephrase the trends in new installations and existing installations? And in connection to that, where did you see the stronger margin improvements of the 70 basis points in service or in new installation? That's the first question.

Thank you, Carla, would you like to take this question?

Yeah, the uptake in the margin is, as I said already in our... Sorry, we were discussing the sequence of the question, but if I just first take your last question with respect to the 70 basis points, it is actually a combination of the uptake in the NI, but also in the service business.

Okay, and the sales trend of this plus 10% for the whole group? Well, I mean, among...

Yeah. Okay. So the sales trend in the group is definitely, you know, coming to a degree from the new installation. And that is as we are working actually through the backlog in a very disciplined way. So the uptake is mainly related, you know, to the NI and we expect that also for the coming quarter. Yeah. And of course, as I mentioned also, you know, earlier, of course, there is also support, you know, from the expansion of the portfolio, as our units, you know, increased with around 4%. And then the third element, you know, which plays a role is the pricing, but we pointed that out also, and that is also one, you know, of these four levers, you know, that Silvio touched on, that is also supporting the profitability.

Okay, thank you. And then the second question, what do you think is really behind the weak development in order intake in modernization when the outlook is still so favorable? Is this project by project or is there an underlying dynamic that we should be aware of?

Thank you for this question. It is indeed one I myself addressed openly at the beginning. There is no other way to say we are disappointed with our Q1 order intake modernization. Well, because in the face of a robust market, we've fallen behind. So there's no excuse. That's something we need to fix and we will fix. Going granular, there are two elements to that. First of all, and this is the biggest part of our portfolio, so the biggest part of our modernization potential is largely in Europe and in the U.S. Now, you heard what I said before about market uncertainty, about delay projects. A lot of the projects that we have into our pipeline for award and order intake are in these two markets. customers hesitate to move not only new installation but also an existing installation any modernization as well so that has been the key one of the one of the two key other drivers for for unfortunately are are below power performance and the q1 the other one is that a lot of the mall growth has to come from uh from china uh and there uh you know to somehow drive the mindset of change of transitioning from an ni key focus to a modernization and service is one of the challenges we but i believe probably most of the industry faces in china which then results also in the in this gap overall therefore what does that mean in terms of going forward we need to become stronger in terms of the let me call bread and butter modernization which is less of large projects and more of the day-to-day business where indeed the launch of a new commodity or rather modular platform will help because some of the same components will also be applicable to the modernization. So your question is very well taken. And as you hear, we are taking this very seriously.

Okay. Thanks a lot and good luck.

Thank you. Thank you very much for attending this call today. We'd like to close now. Please feel free to reach out for any follow-ups you might have. The next event is the presentation of the half-year results on July 21st, well, obviously 2023. Thank you again. Take care and goodbye.

Ladies and gentlemen, the conference is now over. Thank you for choosing Coral School and thank you for participating in the conference. You may now disconnect the lines. Goodbye.