Schindler Hldg Ag Akt

Ladies and gentlemen, welcome to the Schindler Conference Call on Half Year Results 2023. I am Alice, the Coruscant operator. 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.

Good morning, ladies and gentlemen, and welcome to our Half Year Results 2023. My name is Marco Knuchel. I'm Head of Investor Relations at Schindler. I'm here together with Silvio Napoli, our Chairman and CEO, And with Carla De Geisler, our CFO. Silvio will start his presentation with the highlights of the first six months of the year, followed by the market update and performance update. Carla will then lead you through the financials. After the presentation, we are happy to take your questions. Today, we plan to close our session at around 11 o'clock. 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. I'll start with the highlights, and that is slide three on your package. Before diving into numbers, I thought it was helpful to take a moment to look back at where we are and how we got here. It's about eight months ago. that we had the unpleasant yet dutiful task of confronting you with our situation, explaining how we were losing altitude, but also explaining how we identified the issues that led us to the situation we were in, and also we detailed the measures that we launched in order to fix the issues. We said it would take time, but we expressed a commitment to drive this improvement. Since then, We've indeed been working hard, making a few mistakes, but overall improving step by step, quarter after quarter. And now, with our half-year results, I'm pleased to say that these results show that we're gaining momentum. And that means that now we're ready for the next phase. Interesting enough, these improvements come as the market, in fact, worse and dramatically in comparison to what it was 18 months ago. And this worsening environment can maybe be summarized in two main things. One is the market itself, we'll come to that, and the foreign exchange. But starting with the market in terms of highlights, the new installation market continues to be under pressure, mainly driven by China, but now, as we'll see in a second, also followed by Europe, as signaled last time, but now lately also North America. On the other hand, the service and modernization markets continue to be strong and growing. The other element of this worsening environment is the foreign exchange situation, where indeed we have those foreign exchange headwinds increasing, but notwithstanding that, I'm pleased to report that we have an order intake recovery with a strong uptake in Q2, which then leads, as we'll see later in more detail, to an increase in Q2 of 6.7% in terms of total order intake for an overall stable half-year report. Now, moving on to the next set of improvements, staying on the top line, We also had a pleasing revenue growth which was underpinned by a strong backlog execution across all regions and product lines. Moving from top line to bottom line, which was really one of the key mandates we've given ourselves as a commitment towards our investors, we had in a half year a strong profitability uptake. with a NEBIT improvement year-on-year of 199 million. And most importantly, this is not just a blip, this is a continued sustained trend over the last four quarters. This was driven by our operational measures, first and foremost, our supply chain stabilization, combined with our pricing efforts, which altogether yielded these results. Finally, on cash flow, which of course are more important than ever nowadays. We are also reassured to see an improvement of 227 million year on year, driven by improving profits and networking capital, reduced consumption. But let's maybe dive next into the market, which is one of the key evolutions. I'll now move to slide number five. Without going into all detail, maybe I would like to refer to our market assessment presented in Q1 and just focus on what changes there are versus then. And the key difference here is the Americas, which were highlighted in red here for your convenience on this slide, where we can see we now downgraded our outlook for the market development driven by North America for now a latest assessment of minus five to minus 10%, unfortunately still in declining phase. And I spoke on North America where we already observe a decline in commercial and multifamily construction. It has to be said though, though clearly the declining trend is there, that this decline also has to be seen against the base effect because first half 22 was definitely a record period of what one could call the post-COVID revenge building. So clearly the question is, how will a second half look like? Indicators so far are not very positive, but the question nonetheless is worthwhile to be asked. But overall, the market displays a high overall uncertainty with perhaps two pockets of continued growth, which are Asia and Middle East, North Africa. It has to be said though that neither of them are sufficiently growing to offset the decline in China, Americas, but also Europe. Maybe last point on Europe here is that the underlying demand is still very much there. I was myself in Germany two weeks ago and you can see there the demand for new apartments, new dwellings is very strong. Today, because of a set of circumstances, developers are not prepared yet to put out the money because of what they see as uncertain returns. So nonetheless, for now, that's where we are, and that is the overall NI market. Once more, we must stress that for modernization, the market remains strong with robust demand, has a service where, fueled by previous conversions, and also higher demand, and I would say good pricing development, growth continues across all regions. Moving on to the next slide, and I think it is due and fair that we spend some time on China. As we all know, China is the largest market for new installations. And when we spoke last time, we said that though there were signs of possible recovery, the timing and magnitude were uncertain for the second half. Well, today I must say we are still at the same place and arguably I would say I recognize that we might have been more cautious than some of our competitors in Q1, I must say I'm not at all pleased to say but in fact our predictions are becoming more and more reality looking now from the situation already now that we are in the second half. So what do we observe? We observe that the construction starts, first of all, continue to decline for the fourth consecutive year. For the first half of 23, we talk about minus 24.3%, which is, you can argue, less prominent than the full drop of the year of minus 39.4% in 22, but nonetheless, it is, again, negative. Equally now in terms of inventory, we see that inventory is finally decreasing a bit in old city tiers, but nonetheless we still stay at levels which are way above what I call the health line of one year. Tier one is barely around 12-13 months, but tier two plus, we talk about 15 months plus of housing inventory, which doesn't augur for a recovery anytime soon. A little more data that is not on this slide. Real estate investment for the year is down 7.9%. Floor space and the construction is down 6.6%. Now, one positive area is that the floor space completed, so completions, which by the way drove our revenue, we'll come to that, they are up 19%. That is good. However, if one compares that with the May year to date, which was a 19.6%, one observes that there is a decline even in that positive trend. So what does that leave us? For the E&I market in China, the 2023 outlook remained for us similar to last time where we said minus 10%, minus 15%, responding to one question from one of you, last time I said it was probably closer to minus 10% than minus 15. Today, I'm afraid my answer will be different. I think we're now getting closer to minus 15% rather than 10%. The next question of course would be what do we see for 24? Considering the speed at which things change nowadays, it's probably difficult to say, but nonetheless, I think it is fair and reasonable to say that we expect more decline in 24 in view of today's situation. I was staying on China on slide seven. Again, and I, first of all, declining but it is once again the largest market in the world accounting for 60 to 70 percent of worldwide volume so that's a fact so China cannot and will not be ignored and let's not forget even if you compare it to India the second largest market is still seven to eight times bigger than India for about a similar population and that's the world population needs to be kept in mind and that's why I wanted to stress this idea about the potential of China going forward, notwithstanding today's decline. If you look on the left hand side, we have this elevator intensity study that we used to present on a regular basis, showing that China, on the base of the immense historic growth of the last 20 years, now is barely, if one measures at installed base of elevator escalator per thousand inhabitants, at half the density level of, let's say, South Korea. So if one imagines a type of social development or urban development similar, you could say there's still the opportunity to at least double up in the future. And we know in China cities continue to grow, and therefore this drives, again, more potential going forward, both for new installation and existing installations. And speaking of existing installations, that also leads to modernization. And that's the chart on the right-hand side where you see that the forecast for the cager of the modernization market for China still is about in the order of 20%. To give you an idea, today we have a population of elevators of an age between 12 and 15 years, which is typically the age at which a unit with a type of consumption of usage in China needs to be modernized. We talk about a full population of units of about 1.5 million. Now, of course, not all of them are modernized. And then if you look at the chart here, you see an estimate for the modernization market in China of about 130,000 units for 2023. And if you take this 130,000 and you compare it to the new installation market for Europe and North America, It's about the same. So only the modernization market in China by itself is as big as the new installation market in Europe and North America. I just wanted to give those data points because that puts the idea of the market in China, its importance into perspective while at the same time taking stock of the recent decline. I'm sure we're going to have more questions on the market, but for now I'd like to move on to our performance because we saw highlights before the CFO goes into more detail, which then takes us to slide number nine. So amidst those challenging markets, I'm pleased to say that we are indeed improving. And ironically, I like to say, perhaps the efforts that we had to undertake while the market was still coming up, maybe that gives a bit of an upper hand now as market declined because we started working on the hard measures already we're definitely not where we want to be but we are improving now again the CFO will give more details but here the importance is that this improvement has been steady over the last one month so we don't talk about a blip we started first by delivering a trajectory correction then we sustained it and now we are into the accelerating phase on the back of the momentum we have created. If you look at the left hand side showing a revenue and EBIT evolution, what I also wanted to stress here besides the figures themselves is that improvement in 2023 has been driven in spite of the increasing foreign exchange pressure. In Q1, to give an idea, 23, the top line pressure, the top line negative impact of foreign exchange or the Swiss franc appreciation was 100 million, chopped off about our top line. And now in the second quarter, we talk about 200 million for an aggregate of about 300 million. So a doubling headwind between Q1 and Q2, which says something about the urgency to do what we are doing now in terms of improvements. moving on perhaps to the question so the question can be saying you know how did how did we get here what is it that brought us here and we'll continue to create this momentum i'd like to move to slide number 10. and i like i like to highlight two elements the the pricing and supply chain stabilization and you will remember how much we were open about the fact that we had lost ground in terms of pricing and how a series of issues in our supply chain were causing our difficulties in 2022. So I'm pleased to say that those two are inputs to the overall performance and on both inputs we've been improving. You can see on the left hand side here how the pricing here focus on the modular platform, on what we also call sometimes a commodity product, have started to yield results with positive improvements starting on in Q2 but also getting into positive territory as of Q3 22 and continuing into Q2 23. Another input was the supply chain and you can see there we were definitely embarrassed to display our own time delivery performance due to our supply chain issues and you can see that this KPI which I consider a good proxy for the overall supply chain performance is now back in check with on-time delivery as per our commitment, getting close to 100% across the world. Now, these were inputs. Looking at outputs and moving on to page 11, if you do the things right in pricing, in supply chain, you then have a positive impact in terms of order intake margins. And you can see here on the left-hand side, how our margins into the new installation order intake have been roughly doubling between half year 21 and half year 23, where we are today. Now, this order intake margin in turn drives backlog margins, which you see on the right hand side of the chart, where you see the sequential improvement of our order backlog. And you can see that again, that took probably one quarter more than we saw there in the pricing but now as of quarter 422 our order backlog margin has been improving and overall driving our overall bottom line performance now that by itself wouldn't be enough if we did not have moving on to page 12 another key input i.e. fixing our product and in particular our module elevator platform for which I'm pleased to say the relaunch is on track, driving complexity reduction, cost competitiveness, and higher margins. And you see here just a summary chart. We have seen it already. Apologies for that, but I thought it was important because it is really one of the key drivers here, how we now have three platforms that were previously independent now combined into a single one, which in turn drives many benefits. And besides the ones that are on the chart, We talked about a seamless customer experience in terms of buying, in terms of designing. Other maybe data point, we used to have 25 different car modules, now consolidated into three car modules from 25 to three, which in turns, we do the same on other components, drives a radical reduction in variance, which in turn drive efficiency, cost reductions, and also quality. and ultimately better margins, better supply chain performance. Now, moving on to slide 13, I'd like to make one point clear. If there is any sense that we feel satisfied about where we are now, I'd like to dispel that sense. We are absolutely not in any position to feel satisfied. There is no sense of accomplishment per se. Today's results, if anything, are just a springboard for the improvement that we are resolved to continue driving. And this improvement will be continuing doing what you've been doing, but then doubling up on a number of things. And first and foremost, that's going to be efficiency. Efficiency, which will be our biggest priority going forward. And why is that? Two elements. First of all, because if you look at benchmarking with some of our competitors, very honestly, we see we got room to go and we view this as an opportunity. But also because inflation, even though now there are economists saying whether it's going to be reduced or not, we believe it's going to be here to stay. So it is key to stay focused on this mantra we have had since 18 months, which is that pricing plus efficiency has to be bigger than inflation. And so now on this chart here, We just summarized maybe the main fronts where we believe efficiency needs to be driven faster than ever, starting of course with a new installation modernization business. And besides the product there, it's about process simplification. Of course, service and repairs where with our portfolio growing, we need to continue driving density, scale effects, and digital services, which are now coming very strongly into the business. The number three, of course, is procurement where we knew we were a bit behind some of our competitors and there with this new platform, but also by streamlining supplier matrix, we'll continue driving improvements. And let's not forget back office processes. And they're really the benchmarking exercise made us realize that the potential once more is substantial. And so we're working now on redesigning some of our processes. which will yield improvement in terms of efficiency and quality and customer service and also bottom line. So of course, I'm sure you see that to drive this efficiency we require some investments and these investments will come in the second half of the year where the CFO will probably mention that we will need some structural adaptation costs all over the world in order to make sure that we stay on track with the momentum we've generated so far. So with that, I'll give the word to our CFO. Carla, please, to take us into more details.

Thank you very much, Silvio. Good morning to everybody. It's a real pleasure and a privilege to present you the strong half-year results. You heard it already from Silvio, we gained momentum and for me it is clear that the Q2 performance now proves that the measures that we have put in place are really becoming effective. Overall, we have been operating globally in a tough market environment. Maybe, sorry, I'm on page 15. We have been operating in a tough market environment. Nevertheless, order intake was up in local currencies, sequentially recovering the second quarter from a muted order intake development in the first quarter. New installation order intake margin continued its upward trajectory and almost doubled since the second half of 21, clearly reflecting our continued focus on margin-accretive projects. Now, the good news is that all regions and product lines contributed to the solid year-on-year top line growth. So also our service business continued to grow, supported by an increase of units of 5% and also continued execution of the pricing measures. Number of connected units reached almost 30% now of the total maintained portfolio. Moving now to the profitability. At the lower part of the chart, EBIT adjusted and EBIT Both actually printed now significant year-on-year improvements in absolute and in margin terms. And you heard it already, the second quarter EBIT was supplemented by one of real estate gain of $6 million, which is now at a level or comparable with the level of quarter four 2019. Last but not least, cash flow from operating activities improved by more than 70%. And this was particularly driven by the higher operating profit and the lower networking capital requirements. And finally, the Swiss franc strengthened against almost all of our currencies, and that significantly impacted our results. It had an impact of approximately 300 million on the top line, and it impacted our operating profit with 35 million. So let's move now to the following slide, slide 16, which shows the key figures for the second quarter. So second quarter, 23 results. They really confirm the positive trajectory. And you see here that we realized the 15.2% year-on-year improvement in revenue and in local currencies. And even higher growth in profits. Order intake rebounded after a slow first quarter and increased by 6.7% in local currencies, admittedly, of course, supported by a favorable low prior year comparison. Revenue and operating profits were negatively impacted by Forex, amounting to quite an impactful 7.3 percentage points and an 11.4 percentage points respectively. Moving to the next slide, slide 17. And there we see the first half key figures. And I can actually be very brief on that one because the key figures for the first half, they show basically a similar picture with substantial growth in all the line items. This allows me then to move to the next slide, which gives you a bit of insight into our strong balance sheet and particularly our strong cash position, despite a bond repayment of 400 million Swiss francs in June, just to be clear, so no renewal of the bond. Obviously, the improving interest rates led to also a stronger financial income. Financial income increased to approximately 30 million Swiss francs for the first half year. Now, referring to our investments, I'd like to inform you that Schindler Holding AG has been reducing its investment in Hyundai Elevate Limited Korea, while it is the intention to remain a large shareholder with a significant stake there above 10% in the company. Moving to slide 19, that gives you a bit more insight in the order intake. And we said it already, we have been operating in a tough market environment, but you see here the evolution of the order intake in the second quarter of 2023, which is shown on the left-hand side of the slide. And the order intake for the second quarter reached 3 billion Swiss francs, corresponding to a decrease of 0.5%. However, in local currencies, order intake increased by 6.7%. That was supported by a strong after sales business and obviously also a favorable prior year comparison since the second quarter of 22 was heavily impacted by the lockdowns in China. Organic Road reached 183 million in the second quarter. Acquisitions added 22 million Swiss francs and that more than compensated a 290 million Swiss franc negative foreign currency impact. Moving to the right-hand side of the slide, order intake for the first six months of 23 reached 5.9 billion Swiss franc, corresponding to a decrease of 4.6% and an increase of 0.8% in local currencies. Organic growth was 0.3%, acquisitions contributed 0.5 percentage points, while the FX had a negative effect of 5.4 percentage points to the growth. Moving to slide 20, and slide 20 provides you with an overview of the order intake by region. and by product line, comparing 23 with 22. Again, on the left-hand side, the comparison for the second quarter, and on the right-hand side, the comparison for the first half. Order intake here represents all product lines, so the new installation that you see, the modernization, and the service. And I comment now on the six-month development indicated on the right-hand side. So new installation, modernization, they had a slow start in the year, but showed a significantly improving trend in the second quarter. New installations and modernization margins also continued to improve in all the regions. And the service business remained very robust throughout the first half year and continued to grow, driven by the unit, but also supported by pricing effects. To be complete, the order backlog decreased by 7.5% to 9.5 billion Swiss francs, and in local currencies, the order backlog declined by 0.9%. And then if you consider then our lead times of 12 months combined with the improved new order intake margins, I believe that the backlog is a robust base for a continued solid improvement going forward. Moving to slide 21, that gives you some insight into the revenue development. So the backlog execution remains very strong in the second quarter. And as a result, revenue shown increased by 7.9% to 2.9 billion Swiss francs for the second quarter corresponding to an increase of 15.2% in local currencies. Obviously, you know, here also, you know, prior year comparison was supportive. Now, all the regions continued on their growth path with Asia Pacific growing the most. And then new installation, modernization, and service, they were up all double digits. Moving to the right-hand side of the slide, you see the revenue development for the first six months of 2023. Revenue reached 5.7 billion Swiss francs, equivalent to an increase of 7.1% and 12.6% in local currency. Also here, solid growth across all regions and product lines. Organic growth reached 12%. Acquisitions contributed 0.6% And of course, you see the significant impact of the FX, a staggering negative impact of 5.5% points to the growth. Then moving to the next slide and taking a bit of a deep dive into the development of the profitability, starting with slide 22. We mentioned it's already a positive trajectory continued during the first half year and you see here the nice evolution at the left-hand side of the slide and the effect it has on the EBITDA justice and on the EBIT. So it's clear that our implemented measures yield results and they are more than offsetting the declining effect of inflationary pressures And of course, that is supported by the improved supply chain. Second quarter absolute EBIT was supplemented by a one-off real estate gain of 6 million, but it was the highest since the fourth quarter of 2019. So moving to the following slides, where we have a comparison of the year-on-year EBIT adjusted and EBIT, And there you can see that actually the uptake of the profitability is really supported or driven by the operational measures. Operational measures resulted year on year in 175 million Swiss franc improvement. Foreign currency again had a negative effect of 35 million on the EBIT. EBIT adjusted reached 606 million Swiss franc. which is a year-on-year increase of 30% and 37.8% in local currencies. Overall, the margin increased by 190 basis points to 10.6%. EBIT, a similar uptake, it increased by 49.4% to 602 million Swiss francs, which was supplemented by the land sale of our former factory in Shuzhou, China, and which resulted in a one-off gain of 32 million Swiss francs in the first quarter. But in addition to that, we also incurred less expenses for top speed 23 and less restructuring costs compared to last year. So the EBIT margin reached 10.5%, and that represents an increase of 300 basis points. Maybe a short note on top speed program that has been aligned now and really included in our newly established operating model. And we also plan and expect the initiatives launched under this program to be completed by year end. Just for completeness reason, we achieved a net profit for the sixth month of the year of 463 million Swiss francs which is an equivalent of 56.4% and which is one of the highest operational net profits that were achieved in the history of the company. Referring now to the operating cash flow, page 24, and you see here, that the operating cash flow from operating activities increased to 240 million in the second quarter and to 521 million for the first six months of the year so an equivalent of 74.2 percent and that is really driven by the solid increase of the operating profit and to a lower degree the lower networking capital requirements so that brings us now to the outlook of 23. So considering the first year development of the top line and the profitability, and Sylvia also alluded to it or referred to it, it's clear that we will continue to focus strongly on the disciplined execution of our strategic priorities going forward and hence we expect a positive EBIT adjusted margin trajectory to continue. Based on that and taking into consideration the market developments, we lift our revenue outlook for 2023 from low single-digit revenue growth in local currencies to a growth between 5% and 8% in local currencies. Please keep in mind, prior year comparison become much tougher in the second half, And when we reflect on net profit, net profit we expect to reach between 860 million Swiss francs and 900 million Swiss francs, an increase between 31 and 37% compared to the 22 results. And before I finish and hand over to Silvio, I really would like to thank all colleagues around the world there because it is clear You know that they made an outstanding contribution to the solid revenue growth and the progressive uptake of profit. So a big thank you to all our colleagues over the world. And it has been really a pleasure, I must say, to join this organization almost a year ago. Silvio Marco, I hand over to you.

Thank you, Carla. We are happy to take your questions now. Well, the queue is quite long. Therefore, and given the limited time, I ask you to limit yourself to two questions only. Operator, please, Alice.

Our first question comes from a line of Klaas Bergelin with Citi. Please go ahead.

Thank you. Hi, Silvio and Carla, Klaas at Citi. So the first one I had was the growth in orders. You're facing an easier comp. than some of your peers in several regions. But orders are also improving quarter on quarter as well. And I'm curious to hear about the development, perhaps month on month, through the quarter, Silvio. Are you doing better in China on orders versus the market year over year, but easy comp there as well, as you were underperforming last year? Or are you also taking share quarter on quarter? And then on modernization and in EMEA, there's a lot of repurposing of buildings, green efficiency upgrades, and you say that the market is strong. So I'm wondering why you're not growing faster there in EMEA tanks.

Thank you, Klaas. Thank you for your questions. I think you show how well you know our industry. Clearly, it is true that, as we also highlighted, our comm bases for last year is easier. But let me just turn it away. Last year was really tough. we had seven weeks lockdown in Shanghai with a factory. So yes, now, so coming back this year is not easy in any case, I like to stress. So it's not easy, but yes, if you look at numbers, that is something we have to recognize. So Q1, as you saw, was for us very slow because also it was the organization needed to be realigned. And also when the supply chain collapsed, was still not in line. So what we observe is a month-on-month improvement. This is important. And clearly June, the last month, showed a continued improvement, and now we resolve to continue moving in that regard in China and across the world. I must also say very transparently that one of the leadership challenges we had here was to make the organization understand that I always say profits equal growth. There was a moment when we refocused organization on what mattered that some people in sales in particular wondered, well, do you want profits or do you want sales? And it may sound basic, but that's the reality. And so there has been a lot of change management in explaining to our sales force that getting products at the right margin considering our premium provider position was what they had to drive. And yes, we have to change it to people. We have to make sure the targets are aligned. And that is coming through now. Are we there where we want to be? Not yet. And so I foresee this continuing to be one of our main challenges going forward. The second question on modernization. Let me be very open. I'm not happy about where we are in modernization. You're right. We should grow faster. not only in EMEA but also I must say in China where the opportunity is there. There are different situations there. In EMEA it was in Europe or essentially it was more of a question of having the supply chain ready. Now that it is, I think we can definitely push more modernization where we have seen that in some of the markets we probably not have been as performing as we used to. China, it's a different discussion. There we really need to do better on the product. That's today a handicap, but an opportunity going forward. And we are all driven to bring the product to the market. Part of our top 23 investment, we're focused on that. And that's the direction we're taking. Hopefully that answers your question, Klaas.

Thank you, Silvio.

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

hi good morning thank you for for taking my question uh questions even i just firstly i was hoping you'd help us a little bit with some of the the drivers on obviously what's been very encouraging margin development i think previously you sort of helped us around things like raw materials and the most clarity program wage inflation a little bit on productivity and also i think you mentioned sort of additional investment for the second half so it'd be super helpful to some of those numbers more specifically and i guess secondly and much broader question is to Just around what you're seeing in China and the various policy measures you've seen so far, specifically on the property sector, it's the view now that you just need a stronger China macro and therefore bigger, broader sort of macro-type stimulus that we've maybe seen historically, rather than just more measures specifically on the property sector specifically. So I appreciate that's a broad one, but I'd be very interested in your view on that.

Thank you, Andrew. Maybe for the first question, if I understand, it's about profit drivers and headwinds and tailwinds going forward. Carla, would you like to address that?

Yes, absolutely, Andrew, and thank you for the question. Of course, there are a couple of drivers that lead to the uptake that I presented. For sure, the first one is the material cost. Material costs are coming down, so we take also there our fair share. But it's also fair to say that, of course, we have been disciplined in the past and we remain disciplined when it comes to the pricing. So that is also having its positive effect. And then Silvio referred already to it. We are strongly focusing on the efficiency. So this is also coming in different fronts too. And that is also really contributing to the uptake of the profitability. Now, in terms of labor inflation, labor inflation is, of course, a headwind, and it is a headwind that mainly came through in quarter two. And there, of course, we will come to a full run rate in the second half of the year. But that has been, of course, that should not be a surprise. So that is one of the major, I would say, headwinds that will come our way, yeah. But we for sure will continue to work on the efficiencies to offset part of that effect.

Thank you, Carla. Coming to your second question, Andrew. I was in China twice already this year. I was there in April and then I was there about a month ago in different parts of the country. Your question is really the one that everyone would like to have an answer for. A lot has been done on the micro. However, one has to take stock of the fact it's not working. A lot to the private developers have not yet recovered. And the SOEs or the state-owned or partially owned developers stepped in initially to take a lot of the ongoing projects or taking on the new ones. However, what you observe, even the liquidity crunch or even the over-indebtedness is also touching them. So if anything, that situation is not really improving. We don't see any improvement for the term. The good news is that the underlying demand is there. However, people are very cautious. And I remember in a city like Shanghai, a family to invest in a flat may have to invest as much as 20 plus years of income And that is a huge risk. So the government also is careful to protect those. But in terms of creating new demand for new buildings, I was surprised and frankly disappointed that there is not much more happening. Now, what should happen? I don't see, and again, I don't claim to be an expert here. There are much higher powers here at stake. I don't see, there is no signal at least of any major intervention at government level to restart the construction industry. That, of course, would be very helpful, even if it wasn't the bazooka type that we observe in 2015, 2016, or in 2008. However, at the moment, so the way I see this is that the digestion of the situation, that possibly, hopefully not a painful landing of all those companies that will have to fold, and then going forward, where a micro-intervention would be helpful, would be at the service level, where in fact, there has been these pilots ongoing to allow for this data-driven service in China. These pilots have been going on for, I think, before COVID, so it's now three years, but there is no result yet. If that was to be released, then I think you would have a huge value-generating opportunity, efficiency, and quality, and safety happening in China. So that is... two-part to answering. In an eye, I don't see anything coming short-term, but I see maybe some opportunities on the service side. Sorry, I cannot say more.

It's extremely helpful. Thank you very much.

Thank you, Andrew.

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

Yeah. Morning, Carla. Morning, gentlemen. Thanks for taking my questions. I've got two, actually. Firstly, I guess they're more directed at Carla. Firstly, I was wondering whether you could quantify the kind of incremental cost savings you expect from restructuring the top speed 23 program this year. It's just something that we've got some input for our EBIT bridge here. Along the same lines also, I was wondering what the expected pricing impact as well as the raw material and components price impact on EBIT are likely to be according to your assessment in 2023. That's it for me. Thanks.

Thank you, Martin. Carla?

Yes. Thank you, Martin, for the question. I start with your second question on the material savings. So yeah, we definitely will have, you know, substantial full year impact. And let's say, I mean, it's, yeah, it's somewhere, you know, between, I would say between 50 and 70, you know, million we could easily have when it comes to the net saving for the full year. Referring to the incremental cost saving coming from the restructure, ring you will appreciate you know that we are in the middle of the year and you know we are working on a number of initiatives so we are clearly not in a position you know to give you some insight into that one okay got it and anything on top speed 23 because my understanding is that you'll get achieve further efficiencies there Yes, yeah, can you repeat your question there, please, Martin?

Yeah, you know, it's basically about, you know, what kind of impact we should put into our EBIT bridges for top speeds 23 this year in terms of, you know, the positive cost savings, the efficiency gains.

Maybe, Marco, because you were more in the, from just the past in the top speed, yeah.

Martin, I mean, the TOPSC23 program, as the program says, I mean, it's terminated by the end of this year. And you might remember one of the slides we had earlier. I don't remember when, but it's a while ago. But there you see that the impacts only start to flow through the P&L from the next year onwards and then gradually coming into the P&L. At the same time, And Garth also mentioned that the TOCSIS 23 program has been implemented now into our operating model. So it's within the whole framework we apply now, and now it's considered in the four elements that were shown by Silvio earlier during the presentation. But I can't give you a clear number in that respect now. But the impact in 23, anyhow, it would be very, very slim.

Okay, thanks.

The next question comes from the line of Aurelio Calderón with Morgan Stanley. Please go ahead.

Hi, good morning, Silvia or Carla. Thanks for taking my questions. I have two, if I may, please. The first one is kind of coming back to those investments in the second half because if we look at your sort of guidance for the full year, it implies that margins remain flat half and even declining from the two key levels. I wonder if that's just a reflection of those additional investments that you're putting in the business. And the second question is more a bit broader question as well. It's just trying to think about that growth that you've seen in services, how much you think, I think you've mentioned 5% is coming from units, if you can give us, and also you gave us an update on the number of connected units. How do you see that digital or connected development going forward and also in terms of pricing, if you're pricing above inflation there, please?

Very good, thank you. So let me start, maybe Carla, I'll take the second question first.

Yes, and I'll come back to it.

And then you come back to the second part. Yes, thank you for picking up this topic on connected units. This is really one of the few real novelties, game changers in our industry coming forward. So by year end, we're going to be having about one third of our portfolio connected. Now, as you may remember, Aurelio, we Today there is unfortunately a portion of our portfolio, which they broadly have, of very old units, analog type, that are difficult to connect on today's technology. We're working on that too, but that has to be seen almost as a maximum target to be had, which we are confident to reach within the next couple of years. We'll come with more detail when we present the plan for next year. This is the idea. I confirm that the connected units then drive digital services. Digital services are one of our strategic targets. We're not in a position to disclose figures, but what I can say is that the growth is exponential. I confirm that those units are connected as a premium, price and margin. But at the same time, they also drive huge value for the customer in terms of reliability, in terms of less callbacks, in terms of anticipating breakdowns, and also in terms of CO2 footprint. So this is one of the areas we are driving. It does, going back to the point I said before, involve also a big change management because the way you sell a traditional service contract is different from the way you sell a connected unit a quote unquote green contract. So there too, the speed is probably not as fast as we wish, but the fact is that we need to drive that into the different operating units. So in some countries, typically in Europe, that's coming through a lot better, also because the customer demand is more mature. In others, we need to do a bit more groundwork, but I'm confident there will be no return, and I'm confident that is the model for the future. And that's where our investment in connected units will pay off. And going back to the earlier question, let's not forget, TOSP23 was also the largest part of this cost. was investing in connected units. So part of the answer to the previous one is that one of the paybacks will be being able to generate digital services with that. Hopefully that raised your question already. Carla, would you take the question?

Yes, absolutely. So, yes, referring to your questions with respect to the margin, definitely this has to do, you know, with the additional investments that we will take, but also I referred already to it, you know, the effect of the labor cost inflation. Obviously it will be upset at the other side by the increased efficiencies And, of course, partly also through pricing effects.

That's very helpful. Thank you.

Thank you. Today's last question comes from the line of André Kugnin with Credit Suisse. Please go ahead.

Good morning. Thank you very much for squeezing me in. I'll be quick. My first question is on China modernization, if we can just come back to that. I wonder if you could comment on the revenue opportunity there per unit, how that compares to new equipment. We think it's comparable, but we've seen some contract awards that point to substantially high numbers, so I just wanted to check with you on that. Secondary to that, how do you expect the profitability in China modernization to pan out? And the second question is more broadly on profitability. Thank you for the charts on slide 11. Just looking at the cadence of your backlog to sales, it looks like in Q2 you're still delivering some of that kind of heavily dropped margins. So I wondered if you could comment on where is the backlog profitability now versus what you're printing. Clearly it's above, but are we talking about tens of basis points or in hundreds? Thank you.

Thank you, Andre. Can you, if you don't mind, repeat your first question about modernization in China? I did get the topic on the profitability, but the first part about the units, can you just, if you don't mind, repeat that part? Sure.

Of course, sorry. It was just to check how you expect the revenue per unit in modernization to compare to, for example, revenue per unit in new equipment in China, because we certainly agree on the growth in units, but we just wanted to see how that translates into revenue growth opportunity.

All right, so let me start with that one. The revenue per unit in mod is higher than NI if you take the commodity. The answer overall is, of course, as a total number, it will be lower than new installation because new installation still has those large projects. But if you were to take a single unit, let's say residential, the mod per unit revenue is higher than new installation. The profitability in itself today in China is unfortunately lower than new installation. And why is that? It's a question of labor. There is, first of all, scarcity. Modernization is a more sophisticated job than new installation. It happens in an occupied building, so there are different processes, different safety measures, and the skills or the competent labor to drive this type of jobs is scarcer and, by result, also more expensive. Not to mention that perhaps also the process maturity is not at the level of what it is in Europe. So in China, I like to stress, in China the profitability of modernization is lower than new installation. I would say not majorly, we're talking about probably low single digit, but nonetheless, it is lower. Carla, would you like to take the second question?

Yes, absolutely. So referring to page 11, and the impact there of the new installation or the intake margin it's clear you know that it has an effect on the orders on hand and we talk about here now improvement sequentially quarter on quarter you know in intense not in hundreds of basis points but it's also you know the third quarter in a row and it's also year on year you know that we are in the positive territory and obviously You know, we see that further increasing, not only because of the order intake margin, but because we are also working through the dilutive business, you know, that has been taken in in 21. And you remember there, you know, the chart that we showed last quarter. the so-called BOA chart. So we are really working through according to the chart that we actually presented to that. And if we continue to go at the speed that we are currently doing, we believe that approximately 70% of the dilutive backlog would have been worked through by the end of the year.

Thank you very much.

Thank you.

Thank you very much for attending this call today. Unfortunately, or well, we have to close now. Please feel free to reach out to me for any follow-ups. The next event is the presentation of the first quarter results on October 19th, followed by our technology day on October 20th. If you would like to register, please contact me. With that, we wish you a nice summer break and hope to welcome you at the end of October in ABICOM. Thank you very much again. Take care and goodbye. Bye bye.

Bye bye. Thank you. Ladies and gentlemen, the conference is now over. Thank you for choosing Coruscant and thank you for participating in the conference. You may now disconnect your lines. Goodbye.