Schindler Hldg Ag Akt

Ladies and gentlemen, welcome to the Schindler Conference call on the Q3 results 2023. I am Sandra, the course call 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, sir.

Good morning, ladies and gentlemen, and welcome to our third quarter results presentation. My name is Marco Knuchel. I'm Heading 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 a progress update, followed by an overview of the development of the various markets. Carla then will lead you 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, I'm happy to hand over to Silvio. Silvio, please go ahead.

Thank you, Marco. Good morning, everyone. Thank you for your time, for joining us today for our Q3 results. Starting with our introduction, in January 22, we said we would fix the issues we were confronted with. And today, we are delivering on this commitment, and I'm pleased to confirm that we will deliver on the targets for 2023. Now, our headline we chose for today is On Track to Deliver. You can say on track to deliver on our commitments. But what does that mean exactly? So we have here a summary slide, I'm on slide three here, which provides a few other headlines. First of all, it means improved profitability, where for now the fifth quarter in a row, we provide an improvement in our bottom line results. Delivering our commitments also means improving the order intake and revenue growth against tough market environment. Delivery on commitments also means a growing service business, which then leads to network density, which in turn leads to efficiency gains. We'll come to that as part of the CFO presentation. Now, we are also confident to continue on this trajectory in spite of intensifying exchange headwinds. Actually, the figures are becoming more quite sporty. It also means that we are confident to continue on this trajectory because of our balanced global footprint, which will see to, especially in relation to the situation in China. And also, we are confident to continue because of a strong balance sheet, which will provide strength and flexibility ahead of the turbulent times in geopolitical and microeconomic situations. So overall, I think we're really confident to continue on this trajectory thanks to the focus on our strategic priorities and on the discipline execution that some of you have seen in your report referred to as self-help. And that all will bring continued trajectory also in terms of net profit, earning per share and cash flow uptake that we've delivered so far. Now, moving on to the market update. And now allow me here today, I'd like to take a bit of a different format because before we address the market itself, I wanted to address the question that seems to be on everyone's mind. Interestingly, this is a question that does not directly relate to Schindler. In fact, not even to the elevator and escalator market. And the question is China. So having read your reports and addressed some of your questions in meetings we had the pleasure to have together, it is clear that the situation in China is like a cloud overhanging anything we do. So let's talk about China. And let's talk to something which we normally don't do, we speak a bit about microeconomics, but as it happens, the IMF World Economy Outlook, which was published in October. And this is some data that you can find on this report. And the first finding there is that, in fact, yes, in spite of this lowdown, China will be the largest contributor to the global economy growth in 2024-2028. So you can see here on the top line chart that the GDP in China will continue to decline. However, even for the four years to come, we talk about 3.9%, but the slowdown will continue. Interesting, if you look at this, you can see that even with the slowdown, China will still be the third highest of the GDP growth during the period. But then if you look at the bottom chart, you see that in terms of value addition to the world economy china with about 1.2 trillion will be the largest contributor to the world economy in terms of value so what does it mean it means that yes The risk profile in China has increased. Yes, growth has to be managed in a different way. But nonetheless, China as a market, China as a value generator will continue to be predominant, if anything, even more important than ever in the mid-term. Now, I was in China last week with some of my colleagues here, and I can confirm that the domestic economy, the industrial activity is picking up in line also with the announcement yesterday of the GDP growth for the third quarter, which peaks about 4.9%. But now, let's move on to the next slide, because clearly, having said that, there is no question that the property situation in China is a huge problem. When one talks about 1.7 trillion US dollars of debt related to property, we don't talk only about a China problem, it is a global issue. But what does that mean for the global NI prospects? Is the NI global demand going to evaporate because of China? And I wanted to stress, the answer is no. And here, I thought I was going to put together some data here to show how the global housing deficit by itself, there are other factors, will continue to fuel future NI residential demand in this case. And yes, China has a current oversupply, which you see on the left-hand chart, which is at a staggering figure of 72 million units of dwellings. But on the other hand, you see on the same chart that you have countries like India, which has a 34 million deficit. Indonesia, 13 million. Brazil, 7 million. Philippines, 6.6. US, 6 million. UK, 4 million deficit. Egypt, 3. Mexico, 2.2. Germany, 0.7. So it is important to keep this balanced view. And then what does that mean? Of course, since we are company in the probably so in the elevator and escalator business you can see on the right hand side we took a shot at approximating based on conversion factors here what does it mean in terms of elevator and escalator demand and you can see that The figures are huge. So India only would be 1.8 million units against today's market, which is less than 100,000. You will see Indonesia 320,000, Brazil 170,000, et cetera, et cetera. So in conclusion, the NI business, regardless of what's going to happen in China, and we'll come to that, will continue to grow worldwide. Now, NI market, of course, but moving on to page seven, though NI, of course, what we talk about most of the time, we shouldn't forget that our strategic choice, which I presented to you all, is to drive portfolio density. And what is the outlook for the elevator and escalator service market? And then you see that on this Pareto chart we put there, based on the 2022 install base, but also combined with the CAGR, the global service market is to outgrow the new installation one, with a CAGR estimated until 2030 of about 5.8%. And what are the key contributors until the end of the decade? And you can see basically all markets will grow, but especially the ones in Asia. as these countries transition from NI to EI market, as we discussed last time, just the way it happened in Europe, in the US, and in other mature markets over periods of time. Arguably here, Asia being Asia, this is going to happen faster than ever. And you can see that there, China itself will have a CAGR until the end of the decade of 5.8%. And it will not even be the fastest. The fastest, the biggest, will be India with 9.4%, followed by Southeast Asia at 4.8%. So you can see that we talk here about a very, I'm going to say, solid, if not exciting prospect for the service market. Now that we have provided your context, let's indeed have a look at a market update in the more traditional format that we have had. And of course, there we have to acknowledge the NI market is contracting, while the service and modernization remain strong, very strong. And looking at the NI market, let's maybe focus first on the two changes versus a latest report in Q2. And these are APAC, which is through China here, where you see that unfortunately there we have a change with a low single digit drop against the strong growth in India, but driven mainly by South Korea. and the weakening in Southeast Asia, which, of course, is tightly related to the situation also in China. The other, I must say, notable downgrade based on our market data is the Americas, where it's a different situation north and south. In South America, the growing demand is there. We'll discuss about Brazil in a second. But there is more a question of a supply slowdown because of the interest rate situation. But in North America, there is an overall decline. We'll discuss about the US, which overall brings to a double-digit decline foreseen until the year-end. Now, on the other hand, I'd like to stress again, the modernization and service markets remain very strong with high single-digit growth. as we just saw consistently with the data we presented now this whole picture in fact i wanted to stress look at the right hand side of the chart is good news for schindler somehow of course we wish we were growing also indiana but the our revenue generation is uh relying even more so on the service and modernization and the current situation sets us on a solid path going forward now as we traditionally do let's spend a moment on a few key markets first of all China where I'm afraid again the situation is such that we don't see any return to growth in the short term construction industry KPIs are still trending down, the housing inventories are increasing, and now new, you see there on the bottom right-hand side chart, we've now even found this data from the National Bureau of Statistics about funds available to developers, and those are further decreasing. And really, to this situation, electricity in China is mainly one that is driven by the liquidity situation. Otherwise, Other indicators too, floor space started, is declining for a fourth consecutive year, floor space under construction, key leading indicators for us is also down year to date 7%. And what is possibly more concerning is the housing inventory in lower cities picking up again, even though even in tier one cities, the trend, even though we're still not at the same level of alert, is also worsening. But moving on to the next chart, I'd like to stress again, on the other hand, the EI transition to tourism modernization continues to proceed. And so you can see that the China service and modernization markets continue to be strong. And China, also in terms of global presence, service will be by 2030 about half of the world modernization market. Now, what does that mean for us? And this is going to be my final point here on China. If you can move to page 11, you will see that we wanted to illustrate here what is Schindler's real exposure to the downturn in new installation in China. And while we obviously remain committed to China, and we believe there is a lot of value, understanding it is a concern from an investor point of view, I wanted here to illustrate how a balanced global footprint limits our exposure to the China downturn today. And we always had this idea that we want to produce where we have a market and of course, where there is enough scale to manufacturing. And this approach is paying off today because as you can see here, we have factories in North America, we have factories in Europe, we have factories in South Asia, in India. And of course, we have very strong, effective factories in China. But you can see that with that layout, Revenue from China is less than one-sixth of the total global revenue. Our factories in China are mainly dedicated to the domestic market in the order of 90%. And even if you look at the exposure of our global resources in China versus world requirement, and you take R&D as a proxy, you can see that R&D cost in China is approximately 50% global. In other words, we have R&D resources all around the world that are not and only dependent on the situation in China. But let's move on now that we now set up this picture on China. Of course, we are happy to address any questions as we go forward. The situation in other markets. I mentioned the downgrade of the US and high market. And you can see here we have actually this week new figures being published. As a matter of fact, the ABI, Architectural Building Index, which refers to all type of construction, was published yesterday. And you see now we have for September 44.8, which is in fact the lowest ABI since December 2020, which was in the middle of the pandemic. And all regions are down. And in terms of sectors, the only one which is above 50, i.e. still growing with a score of 50.1, is institutional. Otherwise, everything else is less than 50, including multifamily residential. That was the driving factor in the U.S. for some time. Multifamily residential ABI is a 43.5. building permits are also down and dodge momentum which refers to non-residential showed a bit of a pickup uh good news but still overall trend since the beginning of the year is uh is down um and that's important uh and i would say notable uh to to report now Staying on the American continent, two weeks ago, I happened to be in Brazil and meeting customers, I always try to do, I was impressed by their very positive market outlook. And this is not only driven by the economy, which is back on track, but also by the more specific things like inflation. I would say now people... are very proud to say that they never thought they would live in a moment where the inflation in Brazil would be lower than in Germany, or in the US for that matter. But that, of course, translates then in a construction output, and most of all, outlook that is very strong, as you can see on the projections on the right-hand side. And this, of course, will drive a high demand going forward. Moving on to India. And this is really the most exciting prospect of all. Is it new? No. But if anything, it's accelerating on the back of the strong economic growth in China. And I must admit, this is a country I particularly relate to because I was blessed to start a business there 25 years ago. By the way, on anniversary, we are about to celebrate when I'll travel there next month. And you can see, so India is by far the biggest and high growth opportunity for the years to come. driven by urbanization, by population growth. And today, India is already the second largest market worldwide. But you can see, if you look at the trend of the housing units you see on the left-hand side, where you have plus 18% year-on-year new housing projects launched, sales of homes plus 5.8%, one can be definitely surprised keen to assess the prospects, which then can be somehow guessed by the right-hand side chart, this elevated density about installed units per thousand inhabitants. We show that if this continues, if China continues progressing towards the same density per thousand inhabitants that we have in China, i.e. from 0.5 today to about 7 in China, that only would mean 9 million units of elevator and escalators added only if this was to happen. And the question is not if this is going to happen. The question is how quickly this will happen. And those 9 million units are on top of the 1.8 million due to the current deficit that we analyzed before. So I'm pleased to say that today we are leaders in India, which is remarkable. You think that we were zero 25 years ago. We have a strong portfolio. We have a top team and it is growing. And of course, we are factories. So before I conclude here, my section, maybe key messages we are delivering. Yes, the markets and I are down, but there are strong opportunities emerging in spite of the situation in China. The service and motivation markets are very strong and continue to grow. And the setup of the revenue structure and the balance manufacturing plus the strong balance sheet provide Schindler with a solid position for the times ahead. With that, I'd like to pass the word to our CFO, Carol De Geisler, please.

Thank you, Silvio. Good morning to all of you. So happy to continue the story and happy to confirm that we are really on track to deliver on our commitments. We generated in Q3 a solid set of results in what Silvio described already in an increasingly challenging construction market, while dealing also with tough foreign exchange headwinds. And now, referring to foreign exchange headwinds, let me turn your attention here to slide 16. Because on this slide, we indicate the weakening of the major currencies against the Swiss franc, and that's since 2008. Now, over that period, revenue has been affected by 4.5 billion Swiss franc and EBIT by 580 million Swiss franc. So this year, year to date, The negative FX impact amount to 480 million Swiss francs on revenue and 52 million Swiss francs on EBIT. Now, what can we do about this FX impact? Not a lot. As you all know that the vast majority of these losses are simply due to translation effects that we cannot influence. But obviously, going forward, we will continue to focus on what we can influence, and that is definitely the disciplined execution of our measures, which is clearly yielding results. Now, in line with expectations, pricing efficiency effects continue to outgrow inflation. And here on slide 17, It shows clearly that the efficiency offsets inflation year to date, and we expect the relative weight of efficiency measures versus pricing to increase. Now on slide 18, there we provide you with an overview on the new installation order intake and the backlog margin development. And on the left hand side, you see that the new installation order intake margin has been continuing its upward trend while we consistently reduced our legacy backlog. About 70% of the initial dilutive backlog will be consumed by year end. But what is very encouraging is the development of the new installation backlog margin. quarter on quarter it remained stable but it is definitely a nice year-on-year improvement and it's important to realize you know that we expect that to continue because the order intake margin is clearly increasing now going to slide 19 there we have actually a snapshot of the key indicators providing evidence here that we are on track to deliver on our commitments and following already an exceptionally strong second quarter we continue to improve our performance year on year now in quarter three and you see that here with the major indicators order intake revenue both were up in local currencies secondly operating results further improved driven by operational efficiency gains, but also the supply chain recovery and positive pricing effects. Thirdly, cash flow from operating activities almost doubled. And finally, the net profits printed a significant year on year improvement, reaching now a margin of 8.1%. Now, since I will discuss the P&L items in detail, I would like to move later, I would like to move to slide 22, showing our balance sheet. And honestly, I really dare to say that our balance sheet is one of the strongest in the industry. We have now an equity ratio that is standing at 40.8% and we have a net liquidity of 2.8 billion Swiss francs. So that provides a high degree of strength and flexibility. And I believe that these are two very important factors in a world of elevated interest rates and in an increasingly uncertain environment. Now moving to the order intake, in the third quarter of 2023, what you see here on the left-hand side of the slide, order intake grew by 3.8% in local currency, and this against a tough construction market environment and an increasingly higher comparable base to 2.7 billion Swiss francs. Now the after-sales market, namely service and modernization, they are the main driver for the positive development. New installations declined, and now in Swiss francs, order intake declined by 3%. Organic growth reached 94 million Swiss franc. Acquisitions added 11 million Swiss franc, more than absorbing the staggering 188 million Swiss franc negative impact from currency headwinds. Now moving to the right-hand side of the slide, showing the order intake for the nine months of 23. Order intake reached 8.6 billion Swiss franc, corresponding to an increase of 1.7% in local currencies. New installation orders declined, though less than the overall market. And modernization grew marginally while service continued to grow across all region, driven by mid single digit unit growth and pricing. Also positive is the fact that the number of connected units in percent of the total maintained portfolio crossed the 30% mark. Now, order intake margin continued to grow. I mentioned that already. So organic growth was 1.2%. Acquisitions contributed 0.5 percentage points. and the FX had a negative impact of 5.9% to growth, an equivalent of 525 million Swiss francs on the year-to-date order intake. Now, compared to year-end, the order backlog decreased by 2.4% to 9.3 billion Swiss francs, and that is equivalent to more than one year of new installation. modernization and repair business. In local currency, the order backlog remained flat. Now let me now move on to the revenue development, page 25. Again, on the left-hand side, the third quarter of 23, you see there that the revenue declined by 5.2% to 2.8 billion Swiss francs. corresponding to an increase of 0.9% in local currencies. Both regions, EMEA and Americas, they continued on the grow path while Asia-Pacific stalled, mainly due to a slowdown in the Chinese construction activities and, not to forget, a higher comparable base last year. New installations were negative, but the modernization and the service both were up. Looking at the right-hand side of the slide, revenue year-to-date reached 8.5 billion Swiss francs, equivalent to an increase of 2.7%, 8.5% in local currency. Now, with a solid growth here across all region and product lines. Organic growth reached 7.9%, acquisitions added 0.6 percentage points, while the FX had a negative impact of 5.8 percentage points to grow. So that is an equivalent of 480 million in Swiss franc. Now moving to the next slide where you see the development of the EBIT adjusted and the EBIT And of course, it's a very positive development and very pleased here to share that a positive year on year performance trajectory continued and that our implemented measures with respect to efficiency, pricing, different pricing discipline, but also the procurement savings clearly supported by supply chain recovery or yielding results. And now more than offsetting the impact of the inflationary pressure. Moving to the next slide. So for the nine months of 23, the operational measures resulted in a 231 million Swiss franc improvement. And foreign currency, I repeat, had a negative impact of 52 million Swiss franc. EBIT adjusted reached 970 million Swiss franc, representing a year on year increase of 24.3%. 31.6% in local currencies. And our margin increased by 1.8 percentage points to 10.7%. Now looking at EBIT, the EBIT increased by 36.2% to 892 million Swiss francs supplemented by the land sale of our former factory in Shuzhou, China, which added a one-off gain of 32 million Swiss francs, and obviously there are also less expenses for top speed and restructuring costs. Now we closed the year-to-date EBIT margin at a level of 10.5%, equivalent to an increase of 2.6 percentage points. Now moving to the net profit, Net profit reached 228 million Swiss francs in the third quarter, and that is an equivalent of 23.2%. And for the nine months of 23, our net profit was up by 43.7% and reached 698 million Swiss francs. Now, obviously in line with the net profit growth, earnings per share increased to 5.96 Swiss francs per share for the nine months and to 1.97 Swiss franc per share for the third quarter. Now moving on to the cash flow. Very positive, you know, to share the operating cash flow development. So cash flow from operating activities increased to 203 million Swiss franc in the third quarter and to 724 million for the nine months of 23. That is an equivalent to an increase of 92.6%, obviously driven by the solid increase of operating profit, but also lower networking capital requirements. Now, I would like to mention here that our bad debt allowance are increasing due to worsening financial conditions of Chinese real estate developers. However, we were able to mitigate the impact on EBIT thanks to our disciplined credit risk assessment. Now, let me conclude the story with the outlook for 2023, clearly on the back of the solid Q3 results. And I mentioned clearly that we are going to continue to focus on what we can influence. And as you see here on the right hand side, it is a clearly an overview of our strategic priorities where we will continue to focus on and we expect also those measures to result in a continued positive ebit margin trajectory going forward with respect you know to the outlook for the full year 23 we sharpened our outlook and so bearing unexpected event we now expect revenue growth development between 6 and 8% in local currency. And we expect a net profit between 880 million and 910 million. That is an equivalent to a year on year increase between 34 and 38% respectively. Now, before I finish, allow me to say that together with Silvio and together with my colleagues in the executive committee, We are proud on our achievements today, and it's clear that this could not have been possible without the ongoing persistent commitment of thousands of people in more than 100 markets. So a big thank you to the colleagues all over the world for their outstanding contributions to these good results. And with that, I hand back to Marco.

Thank you, Carla. Now we are happy to take your questions. In view of the limited time we have available, I, as usual, ask you to limit yourself to two questions only. And with that, I would like to hand over back to Sandra. Sandra, please.

The first question comes from Andrew Wilson from JP Morgan. Please go ahead.

Hi, good morning, everyone. Thanks for taking my question. I've got two slightly different but both on the numbers. Can I start with a question just to try and better understand? On slide 18, the chart which shows the new installations order backlog margin and the sequential development, because I think it was described that the new order intake or new installations, the margin was improving. But if I look at this sequential development, given that you're executing some of the old legacy backlog, which is presumably weaker margin, I would have thought that sequentially, if you're bringing in better margin work at the same time as taking out lower margin work, that actually that sequential development would look more like what we'd seen in the last three quarters than what we've seen now, because it would seem to imply that the margins on the new work are only as good as the backlog which is being executed, some of which we know is legacy lower margin. So maybe if we can start there and help me understand that.

Thank you, Andrew. Carla, of course, we understand it's a very legitimate question. Carla, please go ahead.

Yes, thank you for the question. And it's indeed, at first sight, what you would expect. First of all, I confirm that the order intake margin is increasing. But what is also important to understand is that the backlog is going beyond the one year's backlog. So, I mean, some of the projects, they cover a very long period. And that means that the order intake is a relatively small part of the overall backlog. That is number two. What is also important to understand is that Before the period, before 2020, we had an intake actually of, I would say, profitable business. Then the dilutive margin intake started from 2020, actually. And then, of course, it's depending on what projects are getting finalized and the size of these projects. So it's all also related to what is going out of the base and what is actually coming in and the relative weight of these new projects into the base. But it is clear that with a healthy order intake that, you know, the margin development in the base should further improve. Does that answer your question?

Yeah, if I can maybe just a quick follow up to that. Presumably on that explanation, we should all else being equal and assuming that the margin is going to continue to improve. relative to the backlog at least, once you've kind of executed some of this better work, which is older, you move into more of the legacy backlog, which is difficult. You know, next quarter and the coming quarters, we should probably see this same chart. If we do see it, it should probably be back in more positive territory. Just to check that I'm understanding that right.

Yeah, we will definitely be back in positive territory. You see also in the middle graph that we are moving on with the consumption of this dilutive backlog. And what we should also not forget is that you know we are improving when it comes to efficiency and productivity and you saw that also on an earlier slide our efficiency currently you know is already offsetting inflation but that will also you know help in the execution you know of some of these projects that's very helpful and maybe if i can for my second question ask around just in terms of the margin improvement if we

if we kind of talk to consensus at around, let's call it 11% round numbers, you can kind of back that out, I guess, from the guidance as well. So let's say 11% for this year, and that kind of compares to the 11% or so that we were doing in kind of 20 and 21. And obviously, you've had the dip in the middle. And I guess two sort of things I'd like to try and better understand is, when you think about kind of the journey from 11 to 9 and then back to 11, how much of that is simply... price cost and what we obviously have understood to be challenges because of the lag in that dynamic and how much is genuine improvement within the business because I'm obviously thinking about the trajectory for next year and how much more we have to go for and I guess linked to that when you look at the backlog margin today how does that compare to the margin which is going through the income statement currently yeah so

answering the first part of your question first. You saw that also on slide 17. First of all, the efficiency is picking up. So if you compare that, for instance, with the prior quarters, and we compare the relative weight of efficiency versus pricing, we always said that efficiency was reaching max one-third. Now that is changing gradually. And we are, let's say, already reaching a level of 50-50%. But you see it also on the slide, even the efficiency is already completely outweighing the inflation. So that means also that we become less and less dependent on the pricing effects. That is number one. Number two, when we talk about efficiency, that is obviously the combination of real productivity improvements. But of course, that hangs also together with the recovery of the supply chain. And it is, of course, very difficult, you know, to make the split. But because of the measures, you know, that we have proposed, have put in place, but also, you know, are still putting in place because, obviously, you know, we continue. I mean, we are very convinced that beyond the recovery of the supply chain, we continue, you know, to further improve the efficiency. And that is for us, you know, one of the strong underlying, I would say, uh elements you know that that is fueling uh the uh the positive outlook going forward did i forget sorry and just you know i'm sorry just for the final bit just in terms of where the the march the order backlog margin is today versus the income statement margin that you're printing currently yeah obviously i mean the uh the order, as I said, given where the order backlog margin, I don't think we need to necessarily compare it with the built rather than with the order intake margin. And there is quite, I would say, a significant difference what comes in now in terms of margin that what is in the order on hand. Because don't forget, I mean, what we because of the plant, you know, efficiencies, et cetera, will anyway result also in a positive built margin.

But you don't want to quantify the gap between the backlog margin and the income statement. We can say it's higher, but it's higher.

It's higher, it's improving. Andrew, I understand your question. Please bear with us. We are... not only because it's an evolving improvement, but we don't disclose this detail.

Thank you, and thank you for the patience on the questions. I appreciate it.

The question is very easy to understand, and thank you for your understanding and us not maybe disclosing it all. Thank you.

The next question comes from Klaas Bergerlin from Citi. Please go ahead.

Thank you. Hi, Sylvia and Carla. So first looking into the margin and thinking about America, I mean, you are guiding lower for America's new installations, but isn't that mixed positive to the margin for you, Sylvia, given that NI margins are typically lowest outside of China, and then you have the legacy backlog unwind on top of that? I'm just trying to gauge to what extent that America's NI downgrade really is very negative for you. I don't really see it as such. And So thoughts here on AmericasNI, how much of the group are we talking about and what are the customers telling you outside what we can see from the weak ABI that we got yesterday? I'll start here.

Thank you. It's a very good question indeed. If you look at today's situation, I would say over the last three years, it is fair to say that the margins in the US were not satisfactory in our view. while we're working hard to make sure that they improve, including preparing the launch of new products, we'll discuss maybe some of it during Technology Day here, today your assessment is correct. On the other hand, we intend to remain one of the leading companies in our industry, so we definitely want to grow in the U.S. where we have room to grow because there are some segments where we have never been that competitive because we don't have the products. So today the situation is right, at least for our situation. But in the past, I would say we did have also quite good margin in the U.S. So back a bit to the situation Carla mentioned. Indeed, over the last three years, the situation has been unfortunately a bit marred because the margins were going down. But as we speak, they are picking up again. So this downturn now maybe doesn't come at the worst possible time for us, but we are keen, as always. In my career in the US, there is always these downturns that come up and down, and they always come down. So you get a very long cycle that lasted until probably two years ago. Then it started picking up again. When it goes down, it's not overall concerning, but our challenge, our objective and resolve is that when the market picks up again, we are ready. And even if it was continued to go down through our segments, I insist, multifamily mid-rise typically where we definitely can grow regardless of any market downturn with the resolve to have higher margins. Now, second part of your question is what customers tell us. I was there last in the summer and going back there again in a couple of weeks. There is... I think today, based on everyone we talked to, everyone confirms that at the moment it's going down. But everyone is just waiting for the situation to improve. There are two elements here. One has been probably overbuilt in some cities and in some parts of the construction. The other point is labor scarcity. Labor scarcity is a major issue. Then there are some cities where indeed there has also been maybe another issue related to empty space, which then provides opportunity for modernization. So today there is no sense of panic whatsoever, more a type of acknowledgement and wait and see for this to pick up again.

Thank you, Silo. My second one is on the operational gearing in the quarter. I mean, China's sales have done quite a bit like I expected. I guess we no longer have the support to the same extent from completion, and the comp is tougher, and we have the weaker backlog. But with China's sales falling like this, and turning away from America into China here, that's mixed negative for you, right, in the quarter, given that MI margin in China is typically higher than in the rest of the world. So I just mean that if we didn't have that China decline in the P&L, I'm just trying to understand how much better the margin would have been. And also, Carla, if you could say how much pricing you had in the P&L and how much raw mats you had, that would be really helpful. Sorry, that was a lot of questions in one, but thank you.

I'll start with the first part. Yes, the margin in China are higher than the rest, than the other parts of the world, in particular because of the combination between field operation and supply chain, because the scale is such that if you run your supply chain well, and definitely we are improving there. In fact, and I hear we don't give specific numbers, but it is fair to say that even though the market is going down, we have not been going down in China. So the net effect so far for us, and possibly you can say, and let's be very humble here, the fact that we had lost some ground in market share over the last three years was a handicap. Now it could become a blessing in disguise because then, of course, it gives us room to grow even as the market declines. And by the way, we are launching a new product line made in China for China. uh next month which again suggests how we feel about the situation in china with the resolve to no excuse keep going forward and we believe we do have opportunities to continue growing in china regardless of the current situation in fact possibly on the back and why is also that let me just add maybe another is that we have always been very disciplined in terms of payment terms So, of course, the pressure is tremendous. But now probably the understanding of some customers that we have to be rigid on that, even though they may be struggling, then I will say that that opens up probably more opportunities for companies that are more strict like us.

Yeah, I meant, I know that you're outgrowing the market on orders, which is great to see. So I just mean when I back out the quarter from the nine month on revenues, it looks like China is down quite a bit from sort of legacy

backlog right from from last year's orders that that was a mixed negative on the margin right no no i don't see that we actually we're not we're not down on on revenue for for china last year the base effect maybe okay i understand what you want to say last year third and in particular fourth quarter in china was a big somehow post-covid recovery moment So the base effect in China there was huge. And so it is this year to outgrow the last two quarters of last year in China. And I'm pleased to say we are hanging in there. But last year was abnormally high in China. And so the idea for us is to continue growing regardless of this base effect. Does that answer your question, Klaus?

Yeah, absolutely. I know everything about the base. It was just on slide 25 when you back out the one plus by the quarter. It looks like you're down in the quarter year-over-year in China sales. But, yeah, I can take away Marco later. And then the very final one, Carla, on pricing in the P&L and also role maps, if you have it, that would be very, very good.

On China or overall?

Overall, sorry.

Yeah.

Yes. All right. So when we come to the pricing overall, if you look at the evolution, it is, as I said, on a year-to-date basis, more or less equivalent with the efficiencies. So that is, you know, in terms of relative weight, as I said, you know, quite a change, obviously in a positive direction, because it is definitely our goal, you know, to further improve, you know, the efficiencies and the productivity. And roadmaps in the quarter? And in the quarter, absolutely, you know, the... more or less you know the same the same uh comparison yeah for for the quarter okay thank you the next question comes from aurelio calderon from morgan stanley please go ahead hi good morning sylvia carla thanks for taking my questions

I guess the first question is picking up on one of your comments, Carla, on FX, which obviously has been a big headwind for revenues and EBIT. But if I look at the margin impact, it looks like you've done a pretty good job at reducing your cost base in Switzerland, I would imagine. So just curious to know what you're doing in terms of making sure you don't have that transactional impact if you wish to make it all translational now.

We definitely are focusing on the cost base in Switzerland. That is an ongoing one and we really optimize, I would say, also on the natural hedging in terms of what we can do with everything we source. And if you look at pure the cost base here in Switzerland, which actually comes down mainly to people, we are less than 1% of the total cost.

That's great, thank you.

And second question is a bit of a broader question, which is, obviously, we talk about the margins in the backlog, the margins in order intake and so on. I guess the question is, what gives you confidence that those margins are sustainable either? We're not going to see an erosion in backlog margins. Is it because you have just better knowledge of the projects that you're bringing in? Is it because you're hedging the kind of export of the suppliers earlier? Is it because you have indexation? What gives you that confidence that we can continue to see ongoing improvements in the P&L and we're not going to see any erosion in those backlog margins?

First of all, because we, as you say, strongly focus on bringing in profitable projects and we really sharpen to the governance. And so in order not to fall into the trap of, I would say, focusing more on volume than on a margin. That is number one. And then secondly, as we continue to work On our cost structures and bringing you know more productivity and efficiency, obviously, that that is an important one going forward. And then related to that, we touched already on it. Obviously, we are recovering strongly on our supply chain, that we still have a bit of room to go. And it is not only a question of productivity and efficiency, but we are also becoming better, I would say, when it comes to the procurement saving. So gradually, we are also getting results in that area. So it is actually a combination.

and maybe building on Carla's comment, if I may, to look at it from a field operation point of view, I would say four points, Aurélio. Pricing discipline, efficiency, new sales tools, and those sales tools include new aspects like the configurator that salespeople use in order to decide how to sell projects that are in the sweet spot in terms of customer demand, but also in terms of profitability on terms of supply chain and scale effects, and also all the flying instruments that combine not only the margin in the field operation, but also in the supply chain and equally to look at market conditions on a real-time basis. finally and uh hopefully uh so we'll have pleasure to show it tomorrow new products we are introducing new products who are exactly meant to make sure we finally get this modularity platform which then will create simplicity fast to market uh better better quality for the customer but also scale effect in a factory. So as we transition, this is absolutely key. And of course, the idea is to phase out all the old products like you've been doing. And all in all, we're doing everything, I would say, in our power to make sure that we don't repeat the mistakes of the past. A, amongst other benefits, keeping the backlog not only stable, but actually improving in terms of margin.

That's super helpful. Thank you very much, Luis. Thank you for your question.

The next question comes from Zhang Yifang from Goldman Sachs. Please go ahead.

Hi, good morning. It's actually Daniela here. Thanks for taking my question. I'll ask just one given the timing, but it's very clear how you see the margin trajectory going forward, but I wanted to explore cash conversion as well because I realized you mentioned some bad debt commentary increasing in China. And I assume given the underlying end market has deteriorated and you still want to get to your margin targets, whether there's more costs of restructuring that you need to book up front. So should we think about an improving cash conversion or along with the margins, or are there any near term impacts that we need to be aware from a cash perspective? And then maybe the segue into that, Why would it be a bad idea to propose to the board a buyback, for example, given your cash position?

Okay, so let me maybe, before I pass on the word to other, on Q4, definitely, the market is such that, you know, the weather report being what it is, we need... And building on our commitment to deliver improved profitability, this will also involve restructuring costs in Q4. So that is definitely the case. And our outlook that you saw there... definitely account for that. That is, Caroline, anything you'd like to add on the Q4 restructuring?

Not on the Q4 restructuring, that's correct, but maybe already going beyond, you know, a year and it is clear, you know, that it is also our goal to further improve the networking capital. You have seen the evolution, it's not a secret, we are not particularly proud on that piece, or at least I'm not particularly proud. So we definitely need to improve that also going forward. So from a cash conversion perspective, definitely should further improve because of the further uptake of the profitability. And it is definitely for me a priority to improve the network and capital going forward.

Daniela, your last question on the buyback. These are the questions that we discussed with the board. The evolution of all aspects, of course, brings this question on the agenda on a regular basis. There is nothing more I can say at this stage, but your point is taken.

Thank you.

Thank you.

Thank you, Daniela.

The last question for today's call comes from Marking Flukeke from Kepler Chevreux. Please go ahead.

Yeah, morning, Carla. Morning, gentlemen. Thanks for taking my questions. I've got two. Firstly, I was just wondering whether you could elaborate a little bit on the main drivers for your new installation order intake growth in China in Q3 and how you fared versus and how you think you fared versus the market. That would be my first question. And the second question is, could you provide us with an update on the, I suppose, tailwind that you're expecting from raw material and freight costs in 2023? Thanks so much.

Thank you, Martin, for the question. Let me take the first, Carla will take the second. In China, the market is going down. And I think broadly, I would say, if you compare to 21, which was the peak time, it will have gone by the end of this year down by about 30%. This year, the drop will be, depending on how you look at this, probably another, let's say, double digit low single digit depending on how you see this right well i'm pleased to say that this year and of course there is also base effect that i have to recognize because last year we we were based in shanghai which was the worst lockdown of all but unless everything we do this year we are not declining in in china as a matter of fact and i can confirm having been there we are actually increasing So to say exactly how much, we don't speak about the market share. And what is it driving this? Okay, there is a base effect, point one. But also, I would say we now have, as we've done in other parts of the world, but in China, we have a new team in place, first of all. Second, we have a new, more disciplined approach to sales. We have reduced the cost. We have a very strong supply chain, and this never faltered, even at the worst time. And of course, but then that combined with new product launches that are happening, as I mentioned before, that all of that allows us to position ourselves in parts of the market where we have room to grow. Clearly, this involves a lot of discipline in terms of pricing, in terms of payment conditions, and in terms also of deciding which pockets we want to tackle. This is all to some extent also work in progress and I like to stress it is Shinda China combined with our dual brands who also are able to operate actually in even tougher parts of the market because they are more in the tier 2, 3, 4 part of the city and I must say I'm very impressed how they manage to perform in adversity. So it's a whole set of things which we maybe may elaborate more when we speak about our plans for next year when we speak again in February.

Second part of the question.

I compliment with respect, I would say, to the procurement saving and the effect of the raw materials decrease that we have seen over the prior period. That is already, I would say, more or less to a big degree in the run rate of quarter three. There is still a bit to come, but I would say that the major part is in the run rate of quarter three. now obviously that is just a raw material piece what is definitely further uh increasing or the overall you know procurement savings and the effect you know they have on on the bottom uh line and we expect that also i would say to to further increase in in quarter four does that answer the question so much

Yeah, thank you.

Well, you know, I was wondering whether you could provide a number as the tailwind for this year, whether we're looking at 50, 100, 150 million ballpark numbers.

On the, if I just take on the, maybe, because you would like to have the total headwinds, I guess, and the total tailwinds. Yeah.

Martin, just a second. So the total tailwinds, if we look at the whole thing in detail, we are talking about tailwinds, that's the pricing impact or the pricing effects we have. We have the volume and mix and then the material, including the purchasing savings Carla mentioned and all together amounts to roughly 400 million.

Okay. For the nine months. Thank you. You're welcome.

So, thank you very much. And let me add one point. I look forward to seeing some of you to our Technology Day starting this afternoon. Thanks a lot for considering coming and thanks for your great questions. Again, once more to also help us see a business from the views of experts like yourself. Thank you.

And we would like to close now. Please feel free to reach out to me for any follow-ups if there are. Besides the technology day, the next event then will be obviously the full year results on February 14th, 2024. And with that, we wish you a nice autumn and bye-bye.