Schindler Holding AG

Good morning, ladies and gentlemen and welcome to the first quarter 2022 results conference call. My name is Marco Knuchel.

I am heading Investor Relations at Schindler. I am here together with Silvio Napoli, our Chairman and CEO and Urs Scheidegger, our CFO.

Silvio will, as usual, start with an introduction and Urs will then lead us through the financials. After the presentation, we are happy to take your questions.

As in previous sessions, I would like to ask you to limit yourself to two questions only. Thank you already in advance.

With that, I would like to hand over to Silvio, please.

Thank you, Marco and good morning everyone. Thank you for joining us today.

And it’s my pleasure to present our Q1 results together with our CFO, Urs Scheidegger. Let me just start with a brief introduction.

It’s, in fact, not so long ago about 2 months ago that we met as I had just taken over the double role of Chairman and CEO. Back then, I presented what I called our challenges in view of the macro, micro, but also internal situation we are facing.

We did it in total transparency actually one of you actually called brutal honesty, which frankly I took as a complement. And today, 2 months later, exactly in the same spirit, I would like to start this Q1 presentation with an update on each of the same challenges and provide you with a more specific update on the actions deployed so far to tackle them.

In February, actually when I presented, I spoke of unprecedented mix of challenges. And frankly, little did I know that 2 months later the situation would have gotten even more challenging.

And on Page 2 of the handout you should have received, you see a list of exactly the same challenges that we faced in providing for each of them a very short summary written in red about the latest situation. Later on in this presentation, you will see I will provide more color on each one of them, but perhaps starting with this overall summary and with the macro aspect and of course, the topic of the foreign exchange, which for us, a company that consolidates results in Swiss francs remains very much a current and real headwind.

The situation update is that the Swiss franc has further strengthened, and in particular, against the euro, very important currency for our business, which has lost almost 5% today versus the Swiss franc. Moving on to the next four challenges, which are more specific to the elevator and escalator industry.

The first one I mentioned was this urgency to regain competitive new installation margins. And then unfortunately, you see the situation has further worsened in particular because of the material cost inflation.

Back then in February, we reported to you, i.e., forecast impact on our P&L of CHF150 million. Today, based on latest estimates and the latest prices for commodities and other raw materials, including components, the same estimate now has increased to CHF200 million for the year.

Moving on to the third challenge, I mentioned our supply chain disruption issues. Now there too I don’t need to tell you how the Ukraine war and the China lockdowns have created additional challenges in this regard.

Then moving on to the fourth challenge, which is this time more internal, I did openly speak about the challenges in streamlining our product portfolio complexity. In particular, I mentioned then about the situation in our factories having to deal with the old products, the legacy ones in combination with the ramping up of the new modularity platform ones, who are selling still is very successfully.

Well, today, unfortunately, you have to report and we will provide more details in a second that after an analysis of the backlog, we see that even the new platform in itself does present some challenges in that unfortunately, it offered too many optionality to customers. We of course loved it.

And because of this excess sales and choices of options, the whole portfolio complex, in fact, has this additional front to be dealt with, more on that in a second. Moving to the fifth and final challenge at least the big picture one, the topic of the Chinese market was addressed last time.

where we explained as our competitors did as well that the issue that the largest developers are facing, the most famous one of them all being ever granted were leading to our contraction in the market, which at the time, we estimated around minus 5%, minus 10%. Well, today, we are talking about minus 15% latest forecast on China.

And the main reason behind that is that the construction industry situation has further worsened. In particular, the consumption of the housing inventory, where last time figures showed that it was still within healthy levels.

And today, unfortunately, the latest figures released from China show that in Tier 2, 3 and 4 cities, the housing inventory unfortunately is shifting to alert levels, while at the same time, housing starts continues to fall. So the China market, which of course is large in the world, is providing itself another challenge.

So this was the overall picture. Now, let’s move on specific updates for challenges 2 to 5, since on the foreign exchange, I am afraid this is not really our business and you probably know much more than we do about that.

So, let’s start with challenge number two, which is recalled it regaining competitive margins. So of course, there are many aspects.

Last time, we actually had specific points on four aspects. But today, I’d like to focus on two aspects of this NI margins recovery, which is inflation and of course, how we combat it and pricing.

Now, the biggest evolution here as far as we are concerned is the evolution of raw materials and in particular, I’d like to focus here. And you can see on Slide 3, on the most relevant metals for our business, which are steel and aluminum.

Steel, of course, is the one we use in most elevators and escalators. Aluminum is particularly important, because we could use escalator steps with the proprietary technology, which provides many advantages.

Unfortunately of course, when aluminum goes up, we have to accept that additional cost in particular in our escalator business. And you can see on the pie chart on the left, we show the relevance of these metals, where in between, you also put the electronic component, which of course last time I mentioned the case of semiconductor, whose price had increased 40 times in the period over a year.

But now, let’s focus on metals. And you can see in the middle chart, how literally since our session last time, cost of both steel and aluminum has exploded, literally bringing back to record levels.

Clearly, here one of the key contributors to the situation is the war in Ukraine. And there is no other point, but deciding to fight it.

And so what are we doing? You see here the key actions in the right hand side.

We clearly have to look at it from a strategic procurement point of view, whereby we are increasing outsourcing, whereby we are renegotiating with all our key suppliers on how to find win-win solutions, whereby we navigate through this period, while retaining our relationship. But of course, there are transactional aspects whereby we work with the same suppliers unlocking in higher volumes, but also there are also new measures that frankly so far, we have not been doing, which consists of, for example, of hedging both metals in particular, you would imagine this aluminum, which is one of the rare metals that we buy in bulk as opposed than separate components.

So of course, this is what we have to endure and manage. The question, of course, is how do you offset that situation?

And then of course, the first thing that comes to mind is pricing. So I’d like to move on to Slide 4 in your package.

Last time, I did mention that very openly, we were behind in terms of pricing in some markets, in particular and that’s why we presented the chart that you can see here on the left hand side below. Now, the sheeted part of the slide is the situation we presented last time.

The other one you can see from year end until March is the evolution since last time. As you can see, yes, we have been able to increase prices.

Unfortunately, the nature of our business is that you issue prices on new tenders. And by the time those tenders are negotiated, awarded and of course, by the time we get a down payment, which for us is the condition to recognize an order intake.

This all offer to bill takes time. So, even the price increases we have enacted will take time to materialize.

Nonetheless, if you look now at the key actions that you can see on the right hand side of the slide, we have launched a very aggressive first series of price increases across all product lines and regions. I’d like to stress here first meaning that more are likely to come as a result of what we just discussed before in terms of raw materials and inflation in general.

But also, we have looked at our contracts and realized that we have room to enforce inflation clauses, which are predominantly applied except in some markets, where they are in fact not possible. And so we have gone back to our operating units and most importantly, to our customers both on open tenders or even attendants that were awarded in the backlog to renegotiate based on the process to make sure that we can cover at least some part of this inflation pressure that we are facing.

At the same time, we also spoke last time about the necessity to change mindset in terms of our sales force. And there, we have introduced a new incentive scheme for our sales force based on pricing quality, i.e., not only on volume and market share.

Pricing clearly is something which will continue moving as aggressively as one can in every market as part of dealing with this inflation. Now, let’s now move on to Page 5, on challenges three and four, which I rather update together, because in fact they are very closely tied to one another.

In February, I openly shared the issue linked to our modularity platform ramp up. And again, the complexity of this led in a supply chain in terms of managing both legacy and new platforms.

And you can see again, I present to the chart that you have on the bottom left part of the Slide #5, where you could see the status of sales in different regions of the modular platform versus the legacy product lines, because the product was not launched at the same time across the world. So, there is a lag and difference, also linked to the fact that there are some COVID standards that need to be built into the modularity platform.

And as we haven been dealing with this very actively over the last 2 months, we also did a backlog analysis, not only of the legacy, but also the new modular platform. And there, I have to say in the spirit of openness displayed last time, we unfortunately found about surprise.

Because this backlog analysis which we do strictly as we would do in Schindler looking at every detail. And we discovered there, there was an excessive number of options that were not only offered, but most importantly sold on a new modular platform, which of course creates a ripple-down effect across the whole value chain and adds complexity in preparing the delivery in managing suppliers, which in turn creates delivery delays to site, which in turn creates revenue shortfalls or rather revenue delays.

Clearly, not a good finding, one that of course we have immediately acted upon. And how do we do that?

We immediately created a task force, which we call the executive, because we need a decision to be taken fast. This task force reports directly to the Chief Operating Officer.

We have also given instructions to our field operations to reassess in detail the outstanding backlog and tenders to make sure that we will go back to customers, to discuss with them whether we could optimize the design, because sometimes these options could be dealt with, with a much tighter set of choices and so that they can also get a faster delivery time, which in turn of course allows the supply chain to work with the efficiency that we aim at. We also of course had to look at a product management approach, whereby we immediately move towards a drastic reduction of options offered.

How do we do that? We looked at the market, we looked at what really 80% of the market really needs the famous cost curve and anything which is plus 10%, minus 10% of this 80% is essence, we just cut it out.

And we did that only by giving instruction to sales, but actually went as far as changing the sales configurator. So that these options can no longer be ordered or if ordered, they would be then ordered as a customs requirement with of course all different pricing schemes.

Moving on to the next challenge, which refers to the market, so from internal now, let’s go back to market topics from product to the markets. And we move to Slide 6 with China.

China, as you all know, remains far and large, clearly the biggest part of the market, more than 50%. Nonetheless, as I mentioned last time, as a result of the large developer liquidity crisis, Evergrande, first of all, the market was already subject to a slowdown, which we estimated at minus 5%, minus 10%.

Again, the last time we did say – I did say that the based on figures we have, the housing inventory was still at healthy levels. Today, as you can see on the charts in the Slide #6, this is no longer the situation.

In fact, larger developers still are in trouble in fact even more so are being challenged by a liquidity crunch in the market. But in fact, the slowdown of the industry is remarkable by speed and by its extent.

On the one hand, you see the left hand chart, floor space further declines across all city tiers. But then on the right hand side chart, you see that for Tier 3 – Tier 2, 3 and 4 cities, the housing inventory is back to alert levels.

Now, how do we assess alert levels that is there an element of judgment, but based on our experience in previous crisis? And you can see here the history of the recent ones on the same chart we estimate that our inventory level between 9 and 12 months is really what we call the healthy level.

So, you can see that while Tier 1 cities, which is the red line still are very much within healthy levels, Tier 2 and 3 have now expanded into alert territory very clearly and very rapidly. So, as a result, we have this 15% drop year-on-year that we estimate by year end, but it’s not all.

This is clearly a concerning situation. But it is, of course, another big unknown in the Chinese market today and these are lockdowns – lockdowns due to COVID.

And so, I’d like to move to the next slide on Page 7, where very openly, we present the situation of the lockdowns in our different units, namely AJ Schindler in the Henan province in the China, in Shanghai and [indiscernible] in the neighboring province of Zhejiang. Now in Henan, the lockdown was extremely severe beginning of the year, but by now, this is now reopened.

There are still lockdown in cities, but at least in terms of production, we can produce and we can install in the products, where the situation is unfortunately very, very tense. And I know that you will be following this in the news and I am sure other companies suffer from the same situation that is in Shanghai.

In Shanghai, as you can see here, we started with the first lockdown mid-March, then you do the short reopening, then it was followed unfortunately for with the next even tighter lockdown, which still goes on today. The situation is very frankly, very difficult with employees that came to the office on a Friday and then we are not allowed to leave and understand this is the situation there.

So, they had to stay on premises. We are actually just sharing a few things here.

We had to buy sleeping bags. We have to buy camping beds.

Some people have to sleep on pallets in the factory. And overall, I want to say this year, I am extremely impressed by the resilience and results of our employees who continue to work throughout the period and continue to do so.

In the meantime, some of them have been released from our facilities. They went back into this quarantine centers.

So, the challenge continues and again, there two – which we have been priced to how our management leadership manages the business for the same time dealing with the situation. And in – maybe in Zhejiang in the neighboring province, the lockdown started a bit later, is I understand not as harsh as in Shanghai, but of course, this is also a major impediment and the situation like this happen, of course, across the country, which in turn creates a big unknown for the market and definitely has an impact on our business.

So, what are we doing to deal with this? Clearly, the first priority for us, I say, very openly is supporting our staff during the lockdown.

This includes amenities but also by now also include distributing food, not only for people who are in the factories, but actually for people in their homes, because situation becomes difficult. But of course, as this happens, we are also preparing for the reopening.

We don’t know when this would be – and this of course is in the factory. But also in the field where we have to make sure we have fulfillment capacity sufficient for the ramp up.

And based on the situation in 2020, I know that our team, everyone in China will go out of the way to catch up and we have done it in 2020 and being in touch with them on a daily basis, I know that they are just preparing so that we can get out the starting blocks as soon as this should be over and once more, I am extremely grateful to our staff. Moving on to the maybe overall summary that is Page 8, there is another way to put it.

The combination of order backlog, operational legacy and declining market creates a highly challenging situation. With the new leadership team, we are resolved to deal with this and this demands brutal focus on priorities.

And the priorities here are listed here on this chart A and it starts with a revised incentive scheme not only for the safety, but for the whole group, which is the same for everyone based on these priorities. And the top point of this priority is this NI profitability.

The second of course, I mentioned before, is price increases where we have to catch up in order to offset this inflation. At the same time, we need to accelerate all our measures to streamline the product offering this finding on the modular platform was extremely sobering.

And clearly, if anything adds to our urgency to further streamline, further move to modularity, real modularity making sure that this is now implemented one for all. We have to clean up our backlog.

I mentioned before that is actually it’s a very, I am going to say tough pass that demand is extremely resilient and also proximity to our customers, but also change your mindset within a team. We have to complete the supply chain turnaround.

It’s absolutely essential. We are moving on that one.

We see some progress already, but it will take time, but of course, now maybe coming to the last one there, efficiency drive. Efficiency drive is key, because pricing alone will not be enough to offset inflation.

So I’d say there is always magic formula pricing post efficiency has to be bigger than inflation. We are working on that.

This means, of course, efficient in terms of material, efficiency in terms of labor and structure and overhead. Now, talking of structure and overhead, let me come to the first point on the slide, which I have not mentioned, because there is one more slide here, that’s Slide 9, which is the illustration of what we do of our results change starts at the top.

When we speak about streamlining about efficiency, we want to send – we send a clear message to our team, but to everyone here that we are resolved to work in a different way. So that’s why as of May 1, as we announced today, we will have a leaner, even leaner group executive committee.

In February, we announced that we are combining the Chairman and CEO that we had created a new CEO role to help dealing with the situation. And we have removed one function from the executive committee.

Today, we are announcing that actually, we have two more positions removed from the Executive Committee, the one who hold operations and the one which covered the region Americas. So all in all, this means that in less than 3 months, we have reduced our Executive Committee position from 14 to 11.

This is just one illustration of our results, because in conclusion now, we have a challenging situation. We will fix it.

We have been here before to resolve it at the core to go to the root causes, though, will take time. We will keep you informed of our progress on a continuous basis.

And – with that, I think we should start with this information on providing more details on our Q1 with our CFO, Urs Scheidegger. Urs, please?

Thank you, Silvio, and good morning, everyone. Let me start with a few qualitative statements to the results in the first 3 months of the year.

Page 10. It was a challenging start to the year.

Nonetheless, seeing the generated growth in order intake and revenue. The operating results have been heavily affected by hydrated supply chain issues, cost inflation, lockdowns and the Chinese market in a severe slowdown.

The team is sharpening focus to offset the inflation by increasing prices streamlining the product offering and driving efficiency. Now on Slide 11, I am providing more details on the order intake.

In the first quarter, Order intake reached CHF3.2 billion, corresponding to an increase of 7.7%, equivalent to 8.9% in local currencies. Organic growth was 8.5%, acquisition impact contributed 0.4%, while FX had a negative impact of 1.2 percentage points to growth.

The following Slide 12 provides an overview of order intake growth by region and product line compared to the first quarter. Order intake includes all product lines, new installation, modernization, repair and maintenance.

All regions and product lines generate the growth as activity levels remained robust, across almost the whole world, resulting in a further sequential increase compared to the fourth quarter 2021. The Americas region generated the highest growth rate up double digits, driven by a strong new installation business.

The EMEA region also generated double-digit growth, just a touch below the Americas region supported by a very solid new installation business and the large volume of modernization projects. Asia-Pacific was still slightly up despite the significant drop in the China new installation business which could be more than compensated by strong performance in all product lines of other countries in the region.

New installations remained robust, generating mid-single-digit growth in value terms growing in EMEA in the Americas regions, while the Asia-Pacific region dropped due to the issues in China. Modernization had a good start to the year, growing more than 20%, particularly in EMEA and Asia-Pacific admittedly benefiting from relatively low comparables, same for repairs, resulting in double-digit growth, while maintenance was steadily mid single-digit up, our portfolio of maintained units increased by more than 5% year-on-year.

The order backlog was 7.2% higher. Margins though declined by 100 basis points year-on-year, reflecting price pressure and very significant cost inflation.

I move to Slide 13, showing the revenue development. In the first quarter, revenue was up by 1.2% to CHF2.6 billion, corresponding to an increase of 1.9% in local currencies.

Organic growth reached 1.5%. Acquisitions contributed 0.4% while FX had a negative impact of 0.7% to growth.

Revenue rose in the EMEA and Americas region, while the Asia Pacific region declined as a consequence of the situation in China. New installations suffered in all regions, driven by issues in supply chain and delays in project execution.

Modernization, repair and maintenance remained solid, growing overall mid- to high single digits. Moving to Slide 14, showing the EBIT-adjusted development.

EBIT adjusted in the first quarter reached CHF236 million, which is equivalent to a drop of 21.6%, respectively, 20.6% in local currencies. Substantially higher raw material costs, disruptions in supply chains complemented with the additional internal challenges arising from the phasing of model platform replacing legacy product lines and an excessive number of options, which have been offered on our new modular platform resulted in bottlenecks inefficiencies.

As a consequence, the EBIT adjusted margin dropped to 9.0%. Slide #15 shows you the net profit and cash flow.

As a result, net profit totaled CHF144 million, 32.4% less than in prior year. Cash flow from operating activities declined by 37.4% to CHF286 million.

Since the change in net working capital, didn’t meet the extraordinary level of the previous year. The lower margin and onset of Top speed 23 costs.

Let’s now turn to the outlook for ‘22, on Slide 17. The order backlog, product complexity and operational legacy continue to affect margins.

Further price increases across all products and regions are still unlikely to offset the cost pressure. For the second quarter ‘22, revenue growth and profitability are expected at similar levels as in Q1 ‘22.

For the full year, revenue growth will be between 1% to 6% in local currencies. With that, I hand back to Marco.

Thank you, Urs. We are happy to take your questions now.

I would like to remind you to limit yourself to two questions only.

Hi, good morning, Silvio, Urs, Marco. I had three, if I can squeeze the third one in.

First on China new equipment pricing at Silvio, I wonder whether you could give us a little more color. My understanding is price/mix was down mid-single digit in Q1, that will be consistent with your Slide 12, I guess.

Just trying to understand like-for-like pricing and trying to understand whether country three on your Slide 4 is indeed China and if it is, how that squares with the Slide 12, and just to your comment earlier around inflation close enforcement, can you help us how much of the backlog that might cover and whether that also includes China, and how much of an offset that might be coming through as far as those reengagement or reinforcements are concerned?

Lars, thank you for these two very specific questions on China. Urs perhaps is as a best place to answer.

Please go ahead Urs.

Thank you. Hello, Lars.

Indeed, it’s a tough first quarter for the China region and our order intake is down by mix about 15% overall, very much driven by the new installation business and of course, also driven by the overall very difficult market situation. We said it market is down around 15% for the full year.

Pricing remains very competitive in China. Also now for the first quarter, and you need to see that the time between offering to an order intake is long.

And therefore, whatever we push for higher prices cannot yet seen very well, which means pricing overall was slightly down for the China region. And of course, we are working very, very strongly in enforcing price adjustment closes to our backlog contracts around the world, right.

We talk here about the commercial term, which allows us above a certain threshold to go back and adjust prices, and the teams around the world are working very hard on that to increase the prices on the platform. But China, it is a bit more difficult, I must admit.

Thanks, Urs. Secondly, can I ask to the margin outlook for the second half?

I appreciate you only give full year earnings guidance in July. But – it looks to me like analysts are forecasting a very strong margin recovery to about 11% in the second half from around 9% in the first half.

And I’m trying to understand why that would be. My understanding is backlog margins was down around 50 basis points sequentially, if I understood your Investor Relations earlier correctly.

Raw mat, your guidance to 200, it feels like that could be getting worse from here, even from that level. And I appreciate you get some savings coming through, but there are also additional complexity cost that are arising from the simplification measures.

So – just trying to get a sense for how to think about second half margin recovery versus that relatively steep expectation that seems to be embedded in expectations at this point?

Right. Thank you for this question, Lars.

It’s clear, right? We will only provide a net profit guidance in the half year closing results.

To give you a bit color. Obviously, the team is intensively working on price increase.

I said before, and forensic adjustment closes is one measure we take, we work on tough cost discipline measures. And for the second half year, I also expect the higher revenue growth, and that provides scale effects.

So last to answer. Candidly, we’re not able to provide this.

As you appreciate, things move very fast at the moment. There is not only pricing, there is efficiency.

I would say this magic formula pricing plus efficiency has to beat inflation. Now at the same time, you see things keep moving.

So honestly, we are working here on a main or rolling forecast. We provide you all the color, including our actions and impact when we speak again in the half year.

I hope you can bear with us.

I can, thank you, Silvio. Can I squeeze a third quick one in.

I have to ask around organizational changes, there are coming much more sudden and much more rapid than what we’ve seen historically. We saw Thomas leaving relatively rapidly earlier this year.

Suddenly, now the COO, Head of Americas are leaving. I guess a couple of questions brings to mind.

First of all, Region Americas, is that permanently now removed from the Executive Committee? And if so, what’s the rationale for that?

What’s the final organizational structure, it still is a fairly big executive committee – should we expect further sort of simplification around that? And then finally, Silvio, forgive me, you say change starts at the top.

Some might say that’s rather incompatible with the decision to combine the Chairman and CEO roles under you. You’ve been with the company for 30 years.

So can you give us some sense for how you think about your own time frame in the CEO role?

Thank you. So it’s a very specific and I’m going to say almost personal question.

So even though it’s a fourth one last more – let me address it. So it’s like this.

First of all, one by one. America, the reason for having a report into the COO is because America is a very important market, one that we need to be able to act in an impactful and the right way.

And that’s exactly what we’re doing. For those of you who have been around for some time may remember that when I became CEO, the first time, we did exactly the same thing.

And progressively once we identified the – when the situation was going in the way we wanted the trajectory has been corrected. They introduced a new Head of America.

So to your question, it is possible that in the near future or was that may change. Second question, the organization, where you say it’s quite large.

Well, one thing at a time. If you look now at the size of the leadership structure of our competitors, I think with these changes, we are, I think, we are not only in line, but possibly linear, but I’ll let you come with that about the judgment.

Now change at the top versus someone belong I think this is a question of semantics. I don’t think changes certainly means bringing new people from outside, change meaning working in a different way, means working with less silos means working in a spirit of transparency that I hope you can see it’s your judgment.

We are also displaying in the way we present the results. Change means taking decisions faster, change means a clarity about who’s accountable for what.

In that regard, for one, I believe the Board believes that having someone who knows the company, knows the market and has been there before, if anything, it’s an additional advantage. So this is a position on that.

And now the question was at a time, how long the Chairman CEO will say, I can only restate the position. It will stay as long as it takes to navigate to the situation.

Obviously, I said it last time, our desire is within a medium term, I mentioned last time 2024, but this will depend on many factors that definitely having two jobs is probably not something I would enjoy for too long. But I do this as a mission for the time it takes.

Understood, Silvio. Thank you for your – appreciate that I will pass it on.

Thank you, Lars.

Yes. Good morning, thank you very much for taking my question.

I’ll stick to two. Can we start with the cost of complexity and the clash of modularity versus legacy products.

I think you’ve been able to provide a bit more quantification of that. Could I just get an update on that?

What is that cost together with the kind of newly discovered complexity in the backlog for modular products that you mentioned? And – how do you expect that to phase through this year?

Thank you, Andre. Urs, please.

Right. Hello, Andre.

For the issues, our modularity platform, we estimated a cost impact of about CHF20 million to the quarter one EBIT result. As we guide into Q2 with similar profitability, you can assume a similar amount for a quarter two.

And then I will provide you an update of the key actions for the second quarter. But of course, it’s clear.

The team is working very hard to get it resolved ASAP.

Got it. If I may just follow-up, so if we annualize that CHF20 million is obviously 100 – sorry, CHF80 million.

So is that right then if you were fully modularized as of now, then you would have roughly 80 basis points higher margin.

That’s okay, yes. I mean these are incremental to our bottom line right now, yes.

Thank you. And second question is on Top Speed 23, you seem to not mention as much in the presentation.

I appreciate you’ve got, obviously, substantial near-term priorities to fight through. But is there an update on the connectivity and digital adoption?

Andre, good point. We – again, for the sake of time, we didn’t provide an update on everything at half year, we definitely will.

Connectivity continues. Let me just give you this approach.

Where we are now, unfortunately, very much limited execution is the biggest market is China, where there is definitely no demand for the connectivity, but of course, the biggest room to go. And now you cannot go to site, you cannot install.

So – but besides China, we are proceeding all out according to plan. Now on the specific of Top Speed 23, this continues on all the modules that we establish as priority in all openness, I think we’re also looking at in the scope of streamlining and focusing on priorities.

There are – we are actively considering in terms of making top choices, which of the topside modules maybe take step aside and being given less speed and resources in the short-term, while that will continue to be done in the longer term. Maybe part also of our of our – NIM profitability and also making sure that we go back to profitability performance in the short-term.

So that will be part of our update when we meet next time.

Great. Thank you very much.

I will promise I will do that. Thank you.

Thanks, Andre.

Good morning, everyone. Hope you are well.

I will do two questions as well. Could you help with these price adjustment clauses that you are going to enforce.

I wondered if you could say of the China outstanding backlog for new equipment, what percentage you think you could do this for? You said that would be tougher.

Are we talking, I don’t know a third and how much of the U.S. and European backlog do you think you can do this, too?

Is it the majority or half is some form of scaling as to how much you think you can get this through would be helpful. That’s my first question.

Thank you, James. Good to hear you.

Thank you for this question. Urs?

Good morning, James. So you need to see that the team is working on this particular topic, right, to go after the backlog now in Q1.

And therefore, it’s still a bit too early to really give you specific indications on this. I said it before.

It’s easier to adjust here in the European and Americas markets. And in Asia, it is much harder because all the commercial terms are different and more difficult to enforce.

But to your point, I understand this is for the modeling it’s very important, right? I will share this exact answer myself, to be clear.

And hopefully, when we meet next time, I’ll know more. But to be clear that the distribution is like this.

We know exactly which markets are the inflation clauses. At the same time, very transparently with the low inflation we’ve had over the last 10 years.

I mean, part of the curse of low inflation was that people lost habit enforcing the clauses, not only from the mean elevator and escalator industry OEM, but also most importantly on the customer side. So now this is a new way – a new mindset change.

And therefore, you have to go. And in some places, you can enforce commercial terms, in order is more difficult.

The legal environment in different countries also plays a role. And hence, the very candidly difficult for us to give an exact number because this is very much work in progress.

It’s not a steady-state process yet, at least not for us, and I don’t believe anyone in the industry has been used to for disclosures over the last, I’m going to say, 10 years. So thank you.

I hope this is clear. Thank you.

Yes. Thank you.

And then my second question, if I can, is on input price inflation. And thank you for the CHF200 million new raw material guidance up from CHF150 million.

I wondered if you could quantify any logistics and energy inflation this year. Is that included in the CHF200 million?

Or could that be incremental? And more importantly for me, if we were to stay at current spot prices, which is a huge assumption, broadly, what could FY ‘23 raw materials headwind looked like.

I had originally thought 6 months ago, it might be a tailwind, but increasingly, I could see another headwind and I wanted to see if you could help us scale that?

James, thank you for your question. Urs, please?

So these costs, you are mentioning, logistics – and energy is included in the new guidance of approximately CHF200 million cost inflation on material logistic energy. There of about CHF10 million are related to logistics and CHF5 million to CHF10 million on energy.

And in fuel would be on top of the CHF200 million. We have about CHF60 million fuel costs per annum, and then you can calculate yourself cost increase on this volume.

But maybe James, to be clear, I think you know our financial model in good, but fuel costs in our case are mainly recognized as part of service margins. To be very clear, because fuel is – we have in many countries, service clinicians driving cars.

So that’s a direct cost for us.

That’s helpful. Thank you.

And I was just thinking about next year FY ‘23, and if we were to stay at sort of current spot rates, would we – should we expect a further raw material headwind of, I don’t know, CHF50 million, CHF100 million, I was thinking next year at current rates?

James, I don’t know, if Urs, has a better answer. I wish – we’re actually working and hopefully trying to scramble and getting ideas as we plan indeed for next year.

So far, I’m not able to give an answer to this. Urs, would you be able to?

No, look, James, right? It is looking into a crystal ball, ‘23.

You have seen the curves they went down when we met each other last time, mid of February, we were a bit of a decline on steel cost, for example. But now we have a very steep increase again in the last 3, 4 weeks.

So, it’s really, really, really not possible to give you a guidance. But it’s clearly the team is working on actions like to find tool sources, multiple sources to patch on bulk metals and to do negotiations with the suppliers.

But to be fair, maybe to your point, I concur with your view, and this is whatever it takes is that it’s probably likely much more to be a headwind than a tailwind today.

That’s helpful. Thank you very much gentlemen.

Thank you, James.

Hi, good morning. Thanks for taking my question.

Wanted to check on, first, on free cash flow, and you talk to a lot of the headwinds on the P&L. Do you see sort of like the free cash flow situation sort of a drop year-on-year just more as a temporary thing given supply chains?

And how should we think about cash conversion this year and going forward? That would be sort of my first question.

The second question is in terms of like has – if you could remind us like what we should be looking for in terms of like what you are going to communicate about timeframes and objectives to close this gap with competitors. I think you mentioned you would communicate something maybe around the summer, sort of is that still the idea?

And can you give any more color regarding format and what we should be looking for? And then just a quick final one, on the price increases, it’s very clear you said price is not enough to offset the inflation.

But if we think about like the time lag between backlog and P&L, you are doing these first price increases now. When should we – how long would it take for us to see at least these new price increases coming through on the P&L?

Is that in 2022 still, or that would only flow through later? Thank you.

Thank you. So, now three questions.

The one that you said on the free cash flow, whether it’s temporary or I mean to say, number two, whether about the gold setting and the price increases time offer to build. So, let me just maybe take one of the three and Urs can take the topic about by when will we have objective targets, I would say, at this stage, as aero the summer, at the moment is what I can say probably it’s going to be late part of the summer.

And that’s something which we will see. As you appreciate, all of this is new changes happening, have not re-facilitated our timeliness and the quality of our forecast hopefully will improve would have been longer time.

So, that is the first answer. Urs, please can you address the other two?

Yes. Good morning Daniela, talking about cash flow, for ‘22, the cash flow, obviously, certainly, we will follow our EBIT – lower EBIT development versus last year that correlates.

You also have seen change of net working capital this year in quarter one, less improvement versus an extraordinary last year. For full year, I would expect a flattish change of net working capital versus last year.

So, these are the two parameters influencing the cash flow for this year, as Silvio clearly presented measures and addressed the key issues in the company. But having said that, it takes time to get it resolved and it takes time to see the significant EBIT improvement going forward and then also cash flow generation.

Price increases. In the past, price increase would have been seen in the P&L for new installation monetization in about 12 months.

However, in the current reality with supply chain bottlenecks and material shortages, this is beyond the 12 months. It’s rather at about 18 months’ time that you really see a significant impact to the P&L of the price increase in the new installation business.

Of course, it’s a bit shorter for smaller modernization shops, and it’s clearly short, much shorter for our important repair business. This is – this will be seen earlier.

Alright. Thank you.

Thank you.

Hi, good morning. Thanks for taking my questions.

I think the first one is probably a clarification, but just a couple of comments on the margin backlog. Was it right in understanding that there has been a sequential deterioration in terms of the Q1 margins on the orders versus the existing backlog, or when you comment about further pressure on the backlog, is that the deterioration of the existing backlog because costs have increased.

Hopefully, that was clear enough to understand.

Thank you, Andrew, for the question. Urs?

Right. So, as I said, the total backlog margins are now 100 basis points lower year-on-year.

Sequentially, we have seen flattish development on backlog.

That’s very helpful. Thank you.

And then the second question, I just wanted – it’s probably again, a clarification. Just on Slide 4, where you show the price increases.

I just wanted to understand, is that price increases, or is it price realization, i.e., I guess there was a difference between trying to put prices up and actually achieving prices going up. And I just wanted to try and better understand whether that is actual price increases that customers and I guess the market as a whole is taking, if that’s clear.

These are actual price increases to the order intake. So, we see a slight uptick in most of the countries now in quarter one.

Perfect. And then just, I guess, a quick follow-up on that.

My understanding was that you started to put prices up in the middle of 2021 in a kind of meaningful manner? Is that the right timeline, or am I a little bit early on that?

Yes, that’s correct. Your memory that we started to increase prices last summertime, having said that, Silvio presented in the annual results conference exactly that chart, illustrating that we were actually not that size with the price increases to the order intake, somehow it was not sticking.

And therefore, we have now this renewed and strong plan, it’s not a plan action to increase prices to our offers.

And this is now managing a much tighter way, whereby this is reported to the executive committee on a monthly basis with, as I mentioned, new incentive plans. And I think as mentioned earlier, this is the first series now in February, and it is most likely that more will follow soon in the year because the – even though we drive efficiency like never before, the pressure from inflation continues.

So, more will come.

That’s very helpful. I appreciate the very clear commentary.

Thank you.

Thank you. Thank you, Andrew.

Yes. Good morning and thank you for taking my two questions.

First of all, the first one is a very channel one. It’s my understanding that you are still guiding actually kind of the same development for the first half year, namely minus 20% roughly on adjusted EBIT, even though environment deteriorated further, as you have explained since April.

I was just wondering whether there are also some positive factors actually compensating this further weakness in the environment? That’s the first question.

Your understanding is certainly correct. And of course, we have taken many mitigation actions to compensate even more severe environment.

As efficiency, efficiency, particularly in the fields and also in our back office and personnel costs control and discipline, which can a little bit compensate here these very strong headwinds and leading now to the guidance we have given for Q2.

Okay. And then the second question is about your order intake in the first quarter, which is one of the highest, I think we saw in the last quarter, if not at all.

I was just wondering whether this might not maybe lead to a further kind of margin pressure in new installation when you are kind of chasing volumes maybe which I don’t hope – or how should we read this high order intake in an environment that is more challenging. And still, I think you clearly outgrow the market with such a good increase in order intake.

Thank you, Martin, for the question. Let me brief answer and then I will pass it over to – when we grow the market, I don’t know, I have not seen the results of our competitors.

That’s clearly, I cannot say. On the other hand, I must say, to your point, we are absolutely not chasing volumes.

We are now directing towards quality sales as opposed to just sales per se. I would just like to give the direction, which by the way might already give some sense of the way we are looking at future strategy.

At the same time, some of the orders that come now in Q1, as you appreciate, you know our business very well. The offer to bill, and I mentioned it before, takes some time.

So, the order intake in Q1 is to a large extent, the result of tenders that were made in Q3 or Q4 or possibly in some cases for large projects typically even much longer. So, this is just to explain that, no, there is not that people who got up in January, I went out to sell – if anything, actually, in the last few weeks, a month, we actually even abandon some tenders.

Just of course, you will not give details, but we did. And some of those quite large ones, some of those quite advanced exactly because we don’t want to fall into that trap.

Urs, would you like to comment further?

Yes. Well, you see the granularity on Page 12 of our order intake growth, and the growth is mainly coming from our existing installation business and mainly really good growth in modernization and that’s coming from our European markets, selected Asian markets, and then, of course, also repair and maintenance were growing very significantly.

On the other hand, as Silvio clearly stated, China, we have a drop of order intake because we are not going anymore after a very low profitable jobs. So, the growth there in new installation is clearly not coming from China, but from the rest of the world and also here, particularly from Europe and Americas, where we have positive markets, and we work on our good position to grow our business.

Thanks a lot. That’s very helpful.

Just if we have this slide open, Page 50, Page 12, maintenance growing 5% to 10% and globally. Is this if you have to make an assumption how much price, how much volume – what can you say there?

Because we also face obviously salary inflation and that you were mentioning also fuel inflation?

Yes. So here, clearly, we have a price effect to our P&L.

I would say it’s about 2% price increases globally. Of course, then really different by region.

And the rest is coming from the organic growth, growing number of units to our portfolio.

Okay. Thanks a lot.

Thank you, Martin.

Yes. Good morning gentlemen.

Thank you for taking my questions. And first of all, thanks for helping us with assessing the headwinds this year, which clearly have gotten worse.

I was wondering if you could spend some time on the potential efficiencies and savings. And I think also you talked about better efficiencies in the field than what you initially targeted earlier this year.

So, in my P&L, I have a cost optimization program savings of CHF40 million this year, efficiencies in the field of CHF50 million, CHF60 million. Am I missing anything, or is there any update here on those two items that I mentioned?

Your understanding is pretty correct. We clearly work on this customization program, and this is according to plan.

So, the CHF40 million full year or CHF10 million for the quarter is a good assumption. And then as I said, and your assumption is correct that the team is working to create efficiencies in the field.

And it’s good. I agree with you.

Okay. The second one is on price increases.

I might have missed your last comment, but I was just wondering if you could comment on the price increases in your backlog currently, how much of those you are expecting to achieve this year, you talked about the delayed conversion of new installations, which has gone longer. Basically, what I am interested in is how much price increases do you think you can capture this year, excluding those escalation clauses?

Yes. This is the same question as before.

And I said before, it is too early to further specify it. It’s different by market-to-market, Silvio said it also clearly, customers are not yet so accustomed for this topic.

But it’s clear that we go after it, and this is one of our key actions. We will give you an update in other calls.

And perhaps just to give some alternative view on this. There are two elements on those outstanding tenders.

One is the ones that we managed to renegotiate, but there is also the ones we step away from, which net also has an impact. And that’s why it’s the complexity, right.

And some of those, candidly, can be very big. So hence, this compound calculation is something which evolves continuously.

And we just don’t want to give a figure, but then we have to come on correct, so hence a difficulty. Again, thank you for your understanding.

But the question is fully understood.

Okay. Thank you.

The last one is Silvio on your chart on inventory and sold homes, which you have said have reached alert levels. Is this not just a function of less sales rather than overbuilt.

I think there 400 million in strict and severe lockdown, people are struggling to get food let alone buying apartments. And if you go back in time in the period after the first COVID lockdown, we have seen in Tier 1 cities that reached above or alert levels without the market being in a significant decline afterwards?

I think – obviously, your comment is correct. It’s a mixture of demand on life sales.

I for one believe as you say, that urbanization in China will continue. And as you can see from the same chart, there have been ups and downs before.

And the old point is navigate those moments. So, I am convinced that China was opportunity.

There is no question. But of course, this – though temporary, those shocks can be extremely violent – so there is less sales, but the risk is that if you end of, for example, having you are selling in a moment like that in something which then is never completed.

Then you have those like skeleton, left somewhere. We don’t want to be in that position, hence, the importance to monitor that very closely.

But long-term, that’s going to – I for one believe it’s going to come back because the demand in near-end organic demand in China is there. But it is also to be a certain that the correction in the real estate and construction market in that today looks like it’s deeper than the one we had before.

Okay. Thank you very much.

It involves these large developers that accounted for those of you have been looking at the industry for more than 30% of the growth. So, as long as this is not taking care of, I think this might create an issue, but a question very well understood.

Thank you very much.

Yes. Good morning gentlemen.

Thanks for taking my questions. I have got two small ones left, actually.

Firstly, on your Top Speed 23 expenses, I was under the impression that the guidance for the full year was around CHF150 million. So, your CHF16 million, if I remember correctly, it’s pretty significantly below the quarterly average.

So, I was just wondering what the – firstly, what the reasons for that and secondly, what kind of phasing over the next three quarters we should expect. And then my second question is really just a very tiny clarification question.

I didn’t quite understand what Urs was saying about the targeted cost savings from efficiency improvements this year, if you could just very briefly repeat that? Thanks so much.

Thank you, Martin for your question. On the first, we already gave some direction, but perhaps Urs, can you take both…

Yes. Thank you.

Martin. So Top Speed 23, I expect clearly lower costs than originally CHF150 million.

One example was Silvio already explaining it. that the cost for connectivity of our existing portfolio in China will slowdown this year.

This is a current position of the lockdowns and the difficult situation in the Chinese market. So of course, we are reviewing and reprioritizing some of the initiatives of Top Speed 23 and leading to a lower amount than CHF150 million.

You still need to assume a little bit higher costs compared to quarter one. And then on the efficiency piece, clearly, this was a topic in quarter one, right.

We were partially compensating the very strong headwinds with efficiency in the operating leverage. And for the full year, this will be more than CHF100 million as we also usually have and now we are working on strong actions to achieve this.

But again, this is only partially right, compensating this very strong headwinds you have now seen as quarter one. Thank you.

Thanks for taking my two last questions. Good morning everyone.

The first one is a clarification. And you have talked a lot about price and order backlog.

But very specifically to dissect the Q1 order intake in local currencies, how much in that number was actually price contribution or price mix from those projects, both in new installations, organization and services. And the second question is on the actions you are taking going forward with renegotiating prices and forcing inflation clauses, etcetera.

Is there a risk of cancellations in your backlog that you foresee as you are doing this or as you are renegotiating some of the designs for the modular product. Is that something we should take into consideration for the coming quarters?

Thanks.

Thank you, Patrick, for your question. Urs, would you...

Right. So the first question is on the order intake and I would estimate that pricing has a slight uptick, positive impact to the growth of slide, that’s a very low-single digit, 1% to 2% in that region, driven by service, price increase, repair price increase and then much less on the new installation business.

And the question was on backlog.

And on the backlog cancellations, I don’t see that yet that it has a significant impact. It’s a marginal impact.

That’s my assumption.

Okay. Great.

Thanks a lot.

Thank you very much for attending this conference call today. We would like to close now.

Please feel free to reach out to me for any follow-ups you might have. The next event is the half year results 2022 presentation scheduled for July 22.

Thank you again for attending. Take care and goodbye.

Thank you everyone. Thank you for your questions for your attention.

Thank you.

Thank you.