Ladies and gentlemen, welcome to the Schindler Conference Call and Q3 Results 2021 Conference Call. I am Paul, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. At this time, it's my pleasure hand over to Marco Nuchel, Head of Investor Relations. Please go ahead, sir.
Good morning, ladies and gentlemen, and welcome to our 9 month After the presentation, we are happy to take your questions. And I would like to ask you to limit yourself to 2 question only. Thank you very much, Mr. Abrams. With that, I hand over to Thomas.
Thomas, please go ahead. Thanks, Marco, and good morning, ladies and gentlemen. Also a warm welcome from you, too. In the 6th quarter, it is the 6th quarter in the midst of a global pandemic, and I sincerely hope that you are well and healthy. Looking back at these past 21 months.
I believe it's safe to say that we all have and still have to show new levels of resilience and agility at the same time. Our world, our ways of working and communicating have been transformed, And the environment we are operating in continues to be fast changing. We face 2 transformational revolutions at same time. Accentmental speed and with more and more sometimes yet to be revealed interdependencies. Digitization needs decarbonization and both affecting us and our customers in unprecedented ways and equally providing new opportunities to adapt our offering and challenge the current status quo.
As one of the responses to these tectonic shifts, we launched Top Speed 23, our program to accelerate digital transformation and product innovation. We will provide a more detailed update on the progress of this program with our 2021 full year results. But one thing I can tell you, the energy in the project teams is accelerating, and we are driving at top speed. Now let me dive into today's presentation, Let me start with Slide 2. We see markets recovering at varying speed, and COVID-nineteen related restrictions continue to have negative effects in Asia Pacific and Latin America.
The pandemic has introduced more volatility and has made our world far less predictable. Equally, we are faced by accelerated economic and social changes globally. 1 of those Easter events unfolding in the Chinese property market. While Schindler does not have any material exposure to Eversounde, neuropharmacy or others, we are keeping a close eye on the developments. Our exposure with Chinese customers is well diversified with a healthy mix of government and privately owned companies.
The majority of our ongoing projects are pre financed. Nonetheless, looking at the Chinese construction sector overall, We have been observing prolonged execution time in the most recent past. One big challenge of the past 9 months involves global supply shortages, at suppliers all over the world and delays in construction activities. Add to that rising cost for material and components and the shipping resulting from overbooked container ships, congested ports and shortages of truck drivers against the backdrop of rapidly rebounding consumer demand. This cost inflation and supply chain issues have negatively affected our revenue as well as our operating results in the 3rd quarter.
Year to date results, however, are back to 2019 pre pandemic levels. Let me now hand over to our CFO, Urs Scheidek, for more financial details. Urs, over to you. Thank you very much, Thomas. Good morning to everybody.
Let me take you through the financials for the Q3 9 months of 2021. Despite persisting uncertainties, disruptions in supply chains and related delays on construction activities and the higher prior year baseline, 3rd quarter order intake was increasing at solid growth rates. And with that, we are on Slide number 3. In the Q3 of 2021, order intake reached CHF 3,000,000,000 corresponding to an increase of 10.4% or 8.8% in local currencies compared to prior year. With this, the Q3 'twenty one order intake exceeds 2019 by 2.6% and equivalent to a growth of 8.4 percent in local currencies.
Order intake rose by 12 percent to CHF 9,000,000,000 in the 1st 9 months of the year, corresponding to an increase of 12.3% in local currencies, It's also reaching pre pandemic-nineteen levels. The following Slide 4 provides an overview of order intake growth by region and product line, 9 months year to date versus the 1st 9 months of 2020. Order intake includes all product lines, installation, modernization, repairs and maintenance. All regions and product lines generated growth. The Asia Pacific region generated highest growth rates, up mid teens, driven by new installation and modernization.
The Americas region was only slightly behind, recording strong growth across all product lines, while the EMEA region generated mid single digit growth and very solid results across all product lines. New installation remained robust, generating mid teens growth in value terms, and they're almost 20% up in units. After a slow start to the year, Growth in modernization accelerated from the Q2 and exceeded the prior year by more than 20% of the 9 months. Repairs followed a similar pattern and result in low double digit growth, while maintenance was steadily mid single digit op. Our portfolio of maintained units increased by more than 5 compared to the end of September 2020.
As of September 30, 21, Our order backlog was CHF 9,800,000,000 corresponding to a strong increase of 9.6%, respectively, 6.7% in local currency. Backlog margins, overall product line, were a bit under pressure due to the very significant material cost inflation compared to the previous year. I'm now moving to Slide number 5. In the 3rd quarter, revenue increased by 1.9 percent to CHF 2,800,000,000 corresponding to an increase of 0.4% in local currencies. As per our full year guidance, it was expected to record lower growth rates in the second half year due to a tougher prior year comparison and the ongoing disruptions in global supply chain, resulting in delays in construction activities.
In the 1st 9 months of 'twenty one, revenue amounted to CHF 8,300,000,000, which is equivalent to an increase of 7.4%, respectively 7.6% in local currencies. It surpassed pre pandemic levels, which is remarkable considering the strong appreciation of the Swiss francs since 2019. The translation loss was CHF555 1,000,000 during this time period. All regions generated growth, driven by China, that improved more than 20%. Asia Pacific other than China, the Americas and in other regions all were mid single digit up.
New installation increased double New installation increased low double digit, while modernization was only slightly up. Repairs and maintenance both recorded mid single digit growth. M and A activities contributed about 2 percentage points to the growth, mainly attributable to the financial consolidation of our joint venture, forklift, Gingwood, in China in July 2020. And now moving to Slide 6. Foreign exchange translation effects The negative impact of CHF 20,000,000 versus Q3 2020 Due to the strengthening Swiss franc, mainly against U.
S. Dollar, the Brazilian VL and the Turkish Lira Now the euro, the Chinese RMB and the Australian dollar were supportive for once. I continue with Slide 7. In the Q3 of 2021, The EBIT adjusted reached CHF 308,000,000, equivalent to a decrease of 8.6%, respectively, 10.4% in local currencies. The EBIT adjusted margin reached 11.0%.
The slowing operating revenue growth due to the supply chain disruptions affected the Evisions project execution, And the material cost inflation very significantly accelerated and was impacting the bottom line. EBIT adjusted margin year to date reached 11.4%, 90 basis points up from previous year and almost on par with 2019 levels. Top Speed 23 program costs CHF 16,000,000 restructuring costs CHF 20,000,000 and expenses for building CHF 99,000,000 to CHF 18,000,000. In the Q3, real estate gains of CHF 20,000,000 were realized, which were also considered in the EBITDA adjustments. On Slide 8, You'll see the 1st 9 months of 2021 EBIT adjusted reached CHF 946,000,000 supported by the top line growth, the operating leverage, efficiency and cost optimization, positive effects of the introduction of our modularity products and lower operating expenses due to COVID-nineteen.
These factors were compensating price and backlog margin pressure as well and, most importantly, the significant material and freight and cost inflation and supply chain disruptions. On Slide 9, You see the net profit. Net profit totaled to CHF 689,000,000 in the 1st 9 months of 'twenty 1, surcasting preplanned earnings levels and an increase of 26% compared to prior year. This result was supported by substantially lower restructuring costs, while the financial result line was more negative than in the previous year due to comparatively less foreign currency gains. On Slide 10, cash flow from operating activities was broadly unchanged and could be kept at €968,000,000 as a result of rigid net working capital management and cash saving measures across the group.
Net working capital and net liquidity remains at robust levels. I conclude with the outlook for 'twenty one on Slide 12. Markets are recovering at varying speeds, while competition remains intense. At the same time, material costs will be an issue also in the Q4, and we expect some additional CHF 40,000,000 to CHF 50,000,000 until the end of the year, which then would add up to some CHF 140,000,000 to CHF 150 for the full year 'twenty one. Shortage of electronics and other components are adding to situation as it results in delays on construction sites across the globe.
Lastly, the latest developments in the China property market are a challenge
we are closely
monitoring. Nonetheless, bearing unexpected events, Schindler confirms The full year 'twenty one outlook of revenue growth between 4% to 7% in local currencies, with net profit reaching between CHF840,000,000 to CHF 900,000,000 With that, I hand back to Martin. Thank you, Ruud. We are happy to take your questions. Now
The first question comes from Lucy Kalia Morgan Stanley.
The first one is around The nature and I guess the duration you are seeing in terms of the headwinds. Can you hear me? Yes.
Now we can hear you. Good morning, Lucie.
Okay. Perfect. Good morning. Good morning, gentlemen. Thanks for taking my question.
The first question I had was around the nature and potentially the duration of the headwind that you were mentioning around supply chain constraints And how this is affecting you, are you able to give us an indication around how much longer it takes for projects to actually get executed in this context. And when you think about the situation now in 2021, How do you see this evolving into 2022? I guess my question is, do you think we are now at the worst possible kind of outcome in terms of headwind? Or do you think things are staying at that level or would improve or would get worse?
Thank you very much for
the question, Lucie. It is true. At the moment, it is very challenging, I have to say. And there are Different type of challenges, I have to say. So one is the electronic shortage.
I think I don't have to tell to anybody what is at the moment happening. It is quite severe in it's very difficult to source Microelectronics at the moment. I have to say that we have done really very intensive work over the last couple of months. We were able to mostly mitigate this topic. It depends a little bit on the different chips we need.
So what we have done, we have tried to build up alternative sources. We also have worked very hard with our suppliers to increase the engagement. We have bought a lot of chips also on the spot market. And of course, we are also working on design changes. So certain chips which are not really available at the moment.
We try to redesign our boards and to switch to chips which are more available. So far, in the worst case, we start with the mechanical part. And then before we have to hand to the customer, we are then installing the electronics. I think this topic of the electronic shortage will go into 2022. This is definitely not yet over.
There are different, let's say, meanings and opinions. A lot of people say it goes until Q2 or maybe even until the mid of next year. And so This will be a challenge for us definitely for more for a minimum the next 6 months. Now there are also other shortages, shortages in steel, in copper, in aluminum. Here, I think we have seen in the quarter 3 certain reading shortages.
I think it has a little bit eased up, I have to say, the shortage itself. But the price levels have come through the roof, in all fairness. And we have seen that some of our suppliers were struggling to get material. And so they could not deliver on time material to our factories. So we were supporting them in their purchasing of raw material.
There I have the feeling, but it's very difficult to make a clear point to the future. I have the feeling that From a material supply, we are okay. But from a material cost, we are not okay. This is still on a very, very high level. And at the moment, looking forward, I have not yet signs that this, let's say, very high cost level will come down.
And the third element is freight. So freight costs also went through the roof, and it's lacking containers. We have problems at the ports. Here, I have to say, we do have the benefit that we are producing in all the major markets by ourselves. So we are a little bit less dependent on those shippings.
But still, costs are high. But we are lucky that we produce in China, in India, in Europe, in North America and in Latin America. This helps us. So Electronic shortage, in a nutshell, I don't see any slowdown of the problem until mid of next year. I think in other materials, it's a question of cost.
And freight, it's also mainly a question of cost, but not so much a question of supply. I like to compliment on the question of material cost inflation. We have now seen accelerated and significant material cost impact in quarter 3 about €50,000,000 additional material inflation after a half year closing of €40,000,000 So €90,000,000 versus last year. And I do expect it will be even higher in quarter 4, €50,000,000 to €60,000,000 additional. And with that, we reach full year material cost inflation of €140,000,000 to €150,000,000 compared to last year.
If prices are at the level we see it now, obviously, this has an additional incremental impact also for 'twenty two on material costs across the board, which can be in the range of €70,000,000 up to €100,000,000 But of course, this is uncertain. It really depends how raw material prices are now developing into the first half year of 'twenty two.
And just maybe a quick follow-up on that. One thing you haven't mentioned is labor shortages. Is it an issue now in terms of your project execution? Or it's not yet an issue or not an issue at
all? Well, labor shortage is always an issue, but it's not only the absolute It is also qualified labor. So we do a lot of efforts to train people. We are also very close to our subcontracted. At the moment, I can confirm that we have enough capacity to roll out the backlog.
But what you have to say is so we have enough capacity. What we see is that in many countries, There is a pressure on wage inflation, especially for the next year. Usually, we have something like 2% of wage inflation, and it probably pays up to 3% next year.
Thank you. My second question was around China. Thanks for giving us some color around your exposure and it's a bit too ever grounded. But How do you aside the Evergrande situation, which I understand you're not materially exposed to, How do you think about the dynamic that we have observed on the staffs on the property staffs in China, which are down for the past 12 months and seem to be even kind of worsening. How do you think about that dynamic as you go into 2022 And also some of the restriction on local government around the debt level because I know you're also quite exposed to infrastructure in China.
So this 3 red line policy, of course, was to control the debt level and to have a healthy balance sheet for the real estate developers. And I think the Chinese government wants to minimize the risk to become a systematic risk. So this has been implemented, in fact, already more than 1 year ago for the top 12 developers. And then this has been in 'twenty one industry wide. I think the authorities focus really to stabilize also house prices.
They don't want to have speculation. That's a key goal they have. And I think the government, According to my observation over many, many years, they are quite good in tightening or untighten certain measures. Now the top 50 developers, they have more than half of all the construction activities So then we measure the floor space sold. More than 50% are sold to the top 50 developers.
The good thing is none of those top developers has real substantial market share, so more than 3%, 4%, 5%. But still, we have seen that Evergrande is probably something like 4% of the total market. And we all know that there are some turbulence. Now looking forward, we see, of course, that there are cash constraints with quite some developers. And I believe that the second half, and we see that there is, let's say, postponement of construction.
So when you look on floorspace started, quarter 3 definitely went down substantially. You see those in one of our backup slides that in quarter 3, we were going down or China was going down by 17%. I would assume that also the next 2 or 3 quarters are challenging. You should not forget the first half year, of course, was a little bit Overstated because we had a very low baseline in 2020. So we had a baseline effect.
And there was some catch up for the from the second half of twenty twenty and the first half of twenty twenty one. So the market was, in fact, The first half year is quite strong, but we have seen that there is a slowdown happening in quarter 3. I'm expecting the same in quarter 4. And I'm also expecting, but now we look really into the future. I believe that the first half year in 2022 will be challenging.
But in the midterm and in the long run, I have to say, China is such a big market with such a lot of people still moving into the cities. I'm sure that the markets will bounce back. But The next couple of months will be challenging, and we do expect that Market 'twenty two compared to 'twenty one will slightly go down new equipment, mainly driven by the first half of twenty twenty two.
The next question comes from the line of Andre Kujimin from Credit Suisse. Please go ahead.
Good morning. Thank you very
much for taking my questions. I'll focus on the kind of net price and the margin dynamic. The questions I have are really versus that extra carryover or materials impact that you indicated for 2022, do you think the pricing actions that you are taking or have taken already will be sufficient to offset that? And maybe if you could talk related to that on the pricing dynamics and the take up of the price increases Globally and across the business lines, that would also be great. And maybe just to conclude that Taking the net price into account and the other factors on 2022, do you still feel confident that you'd be able to move margins Higher in the year of 2022 versus 2021?
Thank you, and Andre. Maybe I start with the question of talking a little bit about the pricing and then maybe the, let's say, the impact, also timing impact maybe I give to Urs. So the fact is that we are that we have to distinguish between the different businesses. So we have the service business where we do service and repairs. There, we are continuously working also on the pricing, and it has a short term impact.
So in, for example, in repairs, where you do also deliver spare parts, if you increase the prices, you can quite short term mitigate cost increases you are facing, and we have done that. In the service business, usually, we are increasing the prices once a year. It's normally based on an index. So it's and the index usually refers to certain inflation content. This can be labor inflation but also partially material inflation.
And we will continue to work on our pricing also in the service business. Much more challenging is, in fact, the new equipment and the modernization business, so the project business. In the new installation business, we and in the modernization, we have started to work on pricing over the in the middle of the year. So depending on the markets, I think we see now impacts already coming up in Europe but also in the Americas. It is a little bit more challenging in Asia Pacific and in China.
China as one of or maybe the most competitive market. We have not seen that market prices are going up. We always say there a slight negative market price impact, and we also saw that in quarter 3. Now important is that in this project business, when you start to increase the prices, You do not have an immediate impact on European Bell. It takes between 12 to 18 months until you really see it going through your P and L when you start to execute your orders.
Now when you try to fast forward that was to 2022, I think 2022 will be challenging. But I can confirm that nothing has changed in our ambition that we would like to improve every year. I have to admit, '22 will be more challenging. So this might be maybe a slight improvement, But the overall strategic direction does not change. Maybe also you can highlight a little bit below how we see the different timings and the impacts.
Certainly. And it's certainly more challenging now into 'twenty two as the material cost inflation is higher than anticipated earlier. In other clothing, it was expected to have a material cost inflation of 100 €120,000,000 upper range. But now we need to expect an inflation this year of €140,000,000 to €150,000,000 which is an increase of €20,000,000 to 30,000,000 inflation this year, which has a spillover into next year. Then as Thomas was indicating, There is a lag of the price increases in the project business, in new installation and modernization.
From offer to order, it certainly takes about 6 months on a global average. And from order intake to revenue generation, there is also a timing aspect of 12 to 18 months. So that means until we have the price increases in the P and L, It will go into the second half year of 'twenty two for the project business. Of course, for the repair business and smaller modernization activities, price increases have a bit the fastest and shorter lead time and effect. Also, wage inflation was indicated by Thomas will be higher next year, of about maybe 3% next year versus the 2% this year.
That clearly also has been. Then this, we have to compensate with the strong efficiency measures. We are intensively working in the field and also in our back office activities. We need to materialize the impact of the cost optimization program and the full benefit of the modularity program, which is finished by end of the year, and then we have the full impact next year. And with that, as Thomas said, we aim certainly to have a a slight margin expansion next year.
But there are a lot of uncertainties. There are really a lot of moving parts right now economically around the world.
Very helpful. Thank you very much. May I
just follow-up on the service price increases? Could you
give us some idea of the order of magnitude In that segment? Well, this depends always on the country, I have to Say, we do not disclose the overall price increases. But I can say, we do not expect any dilution of our margin in the service business. The only issue you have is usually those indexes are looking back to the last year. So as we expect some headwind from increased wage inflation in 2022.
This should impact our or this should be a tailwind for the price increases in 2023. So you sometimes struggle with the proper timing because usually, those indexes inflation forces are looking back for 12 months. And we have not sold margin inflation yet in 2021. So this challenges us a little bit, but we will compensate that efficiency improvement. So in the service business, I clearly can say We do not see a dilution.
The next question comes from the line of Fried Khmelady from Jefferies. Please go ahead.
So I have answered 2. And perhaps the first one is on the efficiency gains and the total savings that we should into 2022. So thanks for giving us all the clarity on the cost inflation, on the wage inflation headwind. Can you just help us with The offset impact is there, if you could just give us any numbers on the different program, whether that's cost optimization program, what would be the impact So modularity next year given the programs ending this year? And any other programs you're running?
I'll start with.
Yes, maybe Urs? You're right. Let's start with the modularity program, which is now coming to an end. And we were successfully rolling it out. We have additional material savings this year, dollars 60,000,000, dollars 70,000,000 And so with that, we reached $200,000,000 as we have expected.
And that clearly will help us now going forward with a much more standardized product range with much less to work on our purchasing power. And this will clearly help us to mitigate a bit of the material cost inflation. Then we also have the cost optimization program, which we rolled out for the last year. And we have as well in that aspect about CHF 60,000,000 CHF 6 now this year are savings, and we expect another CHF 40,000,000 to CHF 50,000,000 for next year. And then it will be closed to travel.
Then in addition and most important, The group is working on operational efficiencies, and we get efficiency in the field with much more the tensors and growing service portfolio, and that delivers service efficiency. Also, with the rollout of our new elevator products modularity, we will get new installation efficiency in the fields. And for sure, those measures at our aim shall compensate and slightly overcompensate the current headwinds. Moreover, I cannot get say for 'twenty two. It's Too early.
And there are too many moving parts. We will give an update in the next conference call.
Okay. Thank you very much for the clarity. And the second question is on your the China outlook. And thanks for giving us an early look into 2022. But from where we stand, it looks like you're seeing it as a year of 2 halves.
So essentially having a sort of a negative impact in H1 and then perhaps less so in H2. I'm a bit surprised by Comment. And maybe the question here is how do you see the phasing of those bad construction statistics hitting the Chinese elevator market? And more specifically, the floor space started or the reduction in land sales, that to me would Essentially, you mean that it will have a much longer impact on the Chinese delivery market, not just in H1 2022? Just perhaps any color there would be helpful.
Well, it is, you are right. Usually, you can, when you look on floors they started or real estate investments, And you usually can add depends a little bit on the segment 12 to 18 months, and you see the impact On the markets now, it already started, in fact, in quarter 2, 'twenty one, that flow slightly down and a little bit accelerated in quarter 3. So this will somehow impact the market of our business definitely in the first half year of 'twenty one. Maybe it goes a little bit longer. That could be.
But I also have learned that whenever the real estate market is a little bit shaking, The government takes immediate actions. They, in fact, want that every citizen in China has an apartment, And this is very important also from the cultural aspect. So I believe that what I have seen over many, many years, the Chinese government is is adjusting their measure quite rigid and fast. So if there is some slowdown in the market, they will open up the one or the other measure more on the consumer side. And then you will have an increase of floorspace sold.
Then the inventories will further go down. The cash is coming to the developers. The developers are starting to reinvest into new projects. Whether this is now exactly by the mid of the year or it is a little bit late, that's difficult to exactly assess. We believe that overall, the market 2022, as I mentioned, will slightly go down.
And let's also not forget that when you compare the first half of 'twenty 2, with the first half of 'twenty one, we will have a baseline effect because the first half of 'twenty one was super, super strong, catching up a little bit from the 2020 development. And if you take away that baseline, then you call maybe baseline effect and the catch up, then you come to a weak second half. And then we see that maybe on this weak second half, we did some pressure in the first half, and we believe that towards the second half of 'twenty two, it might come up again.
The next question comes from the line of Martin Vizler from Zurcher Kantral Bank. Please go ahead.
Thank you for taking my questions and good morning. I have two questions. First of all, coming back to China again. It might be helpful if you got an idea of the you roughly have 16% of your overall sales in China. How does this look like if we look at separate segments such as How much of the 16% is from developers?
How much is from infrastructure and commercial construction activities, if you could maybe try to give us some more insight into that. And the second question would be, if this change in market dynamics in China, if this does change at all any of your strategy how to address the market, I. E, if you now find it more feasible maybe to push the channel of distributors? Or if you stick to your proven strategy That you would like to have a higher conversion rate, I. E, which means that you rather have your own distribution network.
Good morning, Martin. Thank you very much. Two very good questions. So in China, when we talked about The split maybe, yes, we have expanded our sales with larger developers over the last couple of years. I would say today, we are somewhere at roughly onethree of our sales we do with developers and twothree we do with smaller ones or own sales activities for the public transport.
So we can say it's onethree to twothree. So we are a little bit underbalanced compared to the market. If you say that top developers have more than 50% of the market. We can say we have less than this 50%. So In these turbulent times, where the one of the other large developer is now under pressure, It is not yet, I have to say, impacting us.
I don't want to be too optimistic, but I think we are quite well balanced in our risk exposure. Nevertheless, going maybe forward, We do not really have planned a change in our strategy. We always said that we want to further increase our share of key accounts. This is something we do, and we are progressing well on that.
A couple
of years ago, when we go 10 years back, we had no exposure at all with large developers. Now we are at 1 third, and we want to further increase that. But we are very selective. We are very selective. So cash control and risk control is absolutely a must for us.
We rather prefer to skip one opportunity if we are not sure that whole cash collection is So then we step back and leave the field to someone else. The second topic you mentioned is distributor. Yes, we do have distributed business. And we always said it should not be no more than 25% to 30%, And we don't want to change that. There is not a change in strategy because you mentioned it correctly.
It's much more difficult to trans or to convert new orders into the maintained portfolio. And the portfolio in China is a key strategic target for us, and we want to keep our high conversion rate or even further improve our conversion rate. So we don't want to change our strategy because long term, it will be important to have a solid portfolio in China. Thank you.
The next question comes from the line of Lukiger Martin from Kepler Cheuvreux. Please go ahead.
Good morning, gentlemen. Thanks for taking my questions. 2, if I may. Firstly, if you could elaborate a little bit on the Operating cash flow development in Q3, if I remember correctly, it was down more than 20%. Yes.
I realize that there's quite a bit of volatility from 1 quarter to the next, but close 25% seems to be pretty harsh, at least at first glance. If you could just explain What's been happening there? That would be very helpful. And my second question would be on Schindler Ahead. And if you could give us an update on the On your penetration rate with paying customers for Schindler Ahead in the market and how that's developing with respect to your own expectations?
And And what you're seeing on the pricing front there, whether you still command a nice price premium versus traditional service?
Thank you. I take first the operating cash flow question. Indeed, We need to be careful in comparing to our 3 year cash flows. They are volatile. And I do recommend that you observe and monitor this metric much more on a full year basis.
However, quarter 3 versus quarter 3 'twenty Obviously, it was very much impacted as we had a very strong network and capital improvements Last year, you have watched that, that group has made substantial progress in the networking capital inflow over the last 2 years and in particular 2020. And now, it is very much flattening downwards. There were also some noncash items last year. For example, we had a higher bad debt allowance provided last year due to COVID-nineteen, which is not anymore needed this year, and the collection was actually solid. As a third element, in some locations, we are building Big stock and inventories as we have to as whatever is available in the market, shortage of material.
And in some occasions, We were able to get the material with bigger amounts, and this was also a little bit the cash flow of quarter 2. And maybe to the second question regarding Schindler Ahead. I can reconfirm that we have an attachment rate, as we call it, which is still above 50%. And we also still are generating this 10% 15% premium where we have an ahead contract. And maybe just one additional information.
Of course, Due to the electronic shortage we had in quarter 3 and starting in quarter 2, We have not enough ahead equipment to equip every single unit because we were having this shortage of microelectronics. The team has done a very good job. They have found new sources. We also found, together with our new flyers way now that we can now deliver all the cubes. So we don't have any shortage there anymore.
And our plan, we have internally, which I cannot share in detail, but we will come to our target level by the end of 2021. So in this Q4, there will be a huge effort by the team to do this mass connectivity, which we have also communicated on the Top Speed 23. So now we are somehow back on track in our installation of cubes. It will be a huge effort in October, November, December, yes, and then continuing next year. But I think I can say that we are happy with the with all our KPIs in the Ahead business.
Many thanks.
Thank you.
The next question comes from the line of Andrew Wilson from JPMorgan. Please go ahead.
Hi, good morning. Thanks for taking my questions. I've only got 2 relatively quick ones left, so hopefully it will be straightforward. Just on China again, just on the prepayment side, I just wanted to check if you've seen any sort of change in terms of contracting trends or contracting terms on the prepayment side or whether that was similarly unchanged so far? Right.
1st of all, in China, payment terms in the new installation business are more favorable than on global average, meaning we have coverage with down payments to the work in progress and projects are in execution, which is significantly higher than 100%. And those payment terms Not much changed or are relatively stable, particularly in the residential business. In the residential business, they are relatively stable. We are watching them very carefully, as Thomas has already indicated. And strong credit assessments are in place for customers.
And the cash collection has always been and is very much in our focus. And you see the results of this strong focus in the net working capital improvement and also in liquidity to the balance sheet. Of course, also in the segments of Chinese public transport, Particularly, payment terms are very demanding, very demanding, but that is not new. And we both have very, very fiercely competed in the market. And as a result, we get the cash.
It takes time, but we get the cash on public transport projects. Thank you. That's very helpful. And maybe just a quick I think it's probably a clarification question just on the The raw materials guide. I think we previously sort of wrapped up raw material and logistics sort of cost headwind together.
I'm assuming Today's comments are on a similar basis. And I guess linked to that, I think you previously guided to sort of the margin backlog fee. I think it was about a 15 basis points impact on the 'twenty one and the 'twenty two margin. I'm assuming there's no, I guess, update on those previous comments. Yes.
So first of all, it's apple to apple. We are talking about material and freight cost inflation, which we have now to lift up, I said before, from upper level of 120,000,000 to the 140,000,000 €150,000,000 this year. This includes both elements. Having said that, the freight is about 10% of this incremental inflation impact. So most of all, it's clearly on the material cost inflation.
On the backlog margins, for our memories, we said we have this 50% Margin, drop on the overall order intake. And it will drive 'nineteen and 2020, which, of course, comes into execution in 'twenty one
and in 'twenty two.
But we also said since Q4 20 that the margins have been relatively stable sequentially quarter to quarter. Now with the higher material inflation compared to earlier expectations, particularly in Q3 and now going forward, Obviously, these backlog margins are a bit under pressure for the execution. Short term, Q4, Q1 I will read into Q2 until, again, new order intake is flowing into it with higher prices, which then shall compensate the material cost
The next question comes from the line of Rafeis Patric from UBS. Please go ahead.
Two questions, please. The first one would be A follow-up on China. And you drew a pretty complete picture here on what you're expecting on the installation side of things into 2022. But if you throw in modernization and service into the mix, On the revenue level, would you still say that China will likely be down slightly in 2022 versus 2021? Or was that just really purely a comment on the installation side?
So this was a pure comment on the new installation side. It's clear that all the units which are executed by us or by the whole market, It's always flowing into the service business of the market. So this is growing every year. When you think about an installed base, which is €7,500,000 to €8,000,000 and you have €500,000, 600,000 new equipments coming in. This is always increasing during installed base.
So the service market continues to grow. Now you mentioned correct. We also see that Now we already see that the modernization business is starting to expand. And we also have Good growth from a lower level, of course, much lower level in China for the modernization business. And these are double digit growth and high double digit growth we have.
We talk about definitely more than 20% growth year on year in the modernization business, but it's still a much lower base than what we have in the new installation business. If you fast forward 5, 6, 7, 8 years, the picture will look different, and the modernization market will be much, much bigger than it is today. And we'll get closer to the new equipment market, which probably over many years then will slightly come down. So Our mentioning was really new equipment business.
Okay. So China could actually still be flattish, And if not slightly up in 2022.
If you take everything together, yes, that's probably a right assumption.
Okay. Excellent. And the second question is on your order intake outside of China Going into Q4, now you talked a lot about the supply chain challenges and shortages and Some project delays. Is that something that you particularly feel in your revenues On the execution side? Or is that also impacting the order intake?
So far, it has not impacted our order intake because very often due to the long lead time, People are maybe not so much scared about the what happened in 18 months. And you have seen that our quarter 3 result in terms of order intake were pretty solid, to use the expression, of course. And I'm also expecting that we will have solid order intake in the next couple of quarters. Where you are right is, I have seen the one or the other larger project where there is some postponement, Not governmental projects, but privately financed projects where the developers says, wow, We said only the cost for elevators, the cost for concrete, for steel, the cost for wood went through the roof, and they are, let's say recalculating the business case of buildings and say, shall I start now at the peak of cost or maybe I postpone my construction a little bit, and this might lead to the one or the other delay of decision also for the elevator and escalator business. But all in all, I have to say, I'm confident about our order intake also in the next couple of quarters.
Thank you.
The next question comes from the line of Nick Huttzen from RBC Capital Markets. Please go ahead.
Yes. Hi there. Thank you for taking my question. Just one quick clarification question from me Regarding costs related to the Top Speed program, you previously guided for cost Pay of €40,000,000 to €60,000,000 Can I just check that we're still on track to hit that range Given that we only had €16,000,000 of these costs in the 1st 9 months? Yes.
We are Still on track on this so important TS entity program. We said SEK 40,000,000, SEK 60,000,000. I would assume we have SEK 50,000,000 to SEK 60,000,000 now for the full year, meaning I do expect A significant amount
to be booked in Q4.
Thank you.
The next question comes from the line of Miguel Borrega from Exane BNP Paribas. Please go ahead.
Just two questions from me. The first one is on your order intake in China. I see that In the first half of the year, in value, it was over 20%. Now over the last 9 months, it was between 10% 20%. But in unit terms, it remains up by over 20% for the 9 months and the first half of the year.
Is this A function of mix or perhaps some pricing pressure?
I think it's both. It is a function of mix. I just mentioned before that the topic of large project is a little bit lacking. So then, of course, you have a mix change that you are more in the residential business, that the average amount per unit is lower. So you do have a mix impact.
And as Urs and myself said 4, there is some pricing pressure. We saw that already in the 1st two quarters. And definitely, it also was there in the Q3. And then there is a last topic you should also not forget, This is that we now consolidated in this year, since beginning of Since the mid of last year, we consolidated Volks Lift. And this was then accelerating the mix change because Volks shift mainly is in the residential area.
So the mix was organic mix change, But it was also a mix change via M and A where we have much more units due to the first consolidation, And the units are more from the residential area, which have a lower average price.
Very clear. And then I would be interested in understanding the revenue slowdown in the quarter from project delays. Could you Give us more color on that. Any particular region, do you feel developers in China are slowing down construction on purpose or just generally Construction works are seeing just some delays, and you can't effectively make the delivery.
Well, we saw that there was mainly a slowdown. When you look on the 1st 3 quarters, This was not China, I have to say. The China revenues was very, very strong also in the Q3. We were a little bit weaker in Europe because in Europe, the topic of material shortage It was stronger than maybe in the rest of the world. So the slowdown was especially driven by European delays.
And one reason is, of course, that some of the material for our suppliers is coming from other continents. And with the freight, with the high cost, they were struggling to get enough material to supply to us and then us supply to the customer. And on top of it, the customers also delayed some of the constructions. Almost in every country in Europe, you have slowdown or a postponement of construction activities. So we just are part of this process.
We are not the root cause. We're just following also this slowdown in the European markets. And interesting in Austria was especially more in the northern part of Europe, Switzerland, Germany, the Nordics, the U. K, where we saw some more Eastern Europe, where we saw more slowdown than, for example, in the 1,000 countries.
The next question comes from the line of Andreas Poongin from Berenberg. Please go ahead.
Good morning, everyone. So just a couple of quick ones, just coming back on China again, I'm afraid. So just Thinking with regards to your comments around the Chinese market being down from the installations in 2022, which seems pretty reasonable, What do you think the implication is for pricing as a result of that? Obviously, you said that pricing is pretty fierce in China anyway, and that's been a year where growth has been good. Is it reasonable to expect an intensification of pricing pressure in 2022 in China if the market is going to shrink?
I think there is a risk for that. Clearly, there is a risk of intensified fierce price competition. If the cake becomes smaller and everybody has an internal budget to reach or to exceed what they have sold this year, then it's just, from mathematics, it doesn't work. Everybody is struggling to reach their numbers. So there is a risk that some companies will try to get more share via price.
On the other side, I have to everybody is facing this raw material cost increase. So the cost structure is unfavorable for everybody. And the price structure might be also a little bit unfavorable. Northrenders, we are discussing that, of course, as well in our teams. And we want to hold the line and to work on pricing also in China.
This is clearly our ambition. But I cannot guarantee that everybody will follow, let's say, that flavored approach. Okay. Thank you
for that. Maybe just a follow on. I don't know if you have any observations around the market dynamics in China, Just thinking about that, is there any sign of stress amongst any of the local players, maybe that some of them this might act to actually force them out of the market? Maybe to put that another way, is it your observation that the Western OEMs are taking share in China?
Yes, I cannot comment. I have to say, first of all, it's too early now with the latest development. But I can definitely say, the market in China is very competitive for everybody. And Size matters. And yes, it's true that the large OEMs do have the advantage of economies of scale.
And the smaller ones always are suffering more when prices are going down, and this was always the case. And I do not see a reason why that should be different. So usually, in difficult times, you have more hour if you are, 1st of all, acting comfortably every day and also if you have a certain size.
Okay. Thank you very much for that.
Thank you.
The next question comes from the line of Bernd Pomrehn From Thorben. Please go ahead.
Good morning, gentlemen. We all know that the supply chain of your industry is heavily depending on China, and it seems that the current supply chain and logistics issues will be here for longer. Has this an impact on your view how the supply chain in your industry should be organized in general?
Thank you, Bernd, and good morning. This is, of course, a very strategic question. And usually, strategy should not be driven by a very short term environmental change. But I can say that, overall, We do have quite a good setup of our supply chain, and we are and we saw that also in the pandemic beginning of last year. We were able to supply to our customers all the time.
And this was mainly due to the fact that we have, in our most relevant market, own supply chain entities. Now you are right. Not in every market you have the supplier base. And a lot of suppliers, even in Europe, they are sourcing their subcomponents out of China. And as we see at the moment a certain deglobalization trend, This has put more pressure on the supply chain.
So what we did, we were opening up new sources. So we have helped our suppliers also to develop new sourcing channels for themselves, to be a little bit more independent from the one or the other sub supplier or also from the one or the other market. So I do not see that this can become now a bigger issue for us. This is not visible to us.
Okay. Very clear. Thank you, Thomas.
Thank you.
The next question comes from the line of Chandebashiste from Societe Generale. Please go ahead.
Good morning, gentlemen. I have just one question that I wanted to confirm on your plans on mass connectivity given the current scenario on component shortages. And if you see any shift In the timeline related to the impact from mask connectivity, which I guess was, as you mentioned, from 2023 onwards. So Is it impacting the current the conference shortages impacting that timeline? Thank you.
Thank you for this question, John, no, there is no change in our plan. We are fast track working on the mass connectivity. I mentioned that in quarter 2 and 3, we had shortage, but we were overcoming that situation. And we now have or I can confirm that we now can work according to our very aggressive plan until the end of 2023. So there is no change in that.
Thank you.
Thank you.
There are no more questions at this time.
Thank you very much for the time and deep contact call. It's Marco speaking again. By the way, we'd like to close now. Feel free to reach out to me if there are any follow ups. The next event is fully resolved on February 16, 2022.
Thank you very much again. Take care and goodbye. Thank you and goodbye. Thank you very much.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.