Ladies and gentlemen, welcome to the Schindler Half Year Results 2022 conference call and live webcast. I am Alice, the conference call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Marco Knuchel, Head of Investor Relations. Please go ahead, sir.
Good morning, ladies and gentlemen, and welcome to the conference call for results as of June 30, 2022. My name is Marco Knuchel. I'm Head of Investor Relations at Schindler. I'm here together with Silvio Napoli, our Chairman and CEO, and Urs Scheidegger, our CFO. Silvio will, as usual, provide an overview on recent developments, and Urs will then lead us through the financials. After the presentation, we are happy to take your questions. We plan to close the call at 11:30 A.M. today. With that, I would like to hand over to Silvio. Silvio, please go ahead.
Thank you, Marco Knuchel. Good morning, everyone. Thank you for joining our Q2 half year results conference. Our results since the beginning of the year suffer from a combination of external and internal problems. Since we identified them, we have been working to fix the latter and managing the former. Now, since we last met in Q1, I'm afraid the external factors intensified, and in particular, three elements, I would say, deserve special attention and I'm sure will be the object of many discussions and questions today to which we look forward. The first of them is wage inflation, the second is the second wave of lockdowns in China, and the third one is the worsening scarcity in semiconductor supply.
The three elements, plus the other persisting ones, have somehow worsened the old environment and accelerated the impact, but at the same time also added to our resolve and investment to make sure we dealt with them in the right way. Maybe moving to slide three in the package you've received. I'd like to briefly provide an update on the five issues that we identified as early as February when the new organization was put in place. I must say, not a question of satisfaction, but one we can say six months after, they were really the right issues to focus on. The first one was the foreign exchange burden.
Now a lot is happening, but perhaps, you know, one element is the euro, a very important currency for us, where if you look, the year-on-year evolution is -6% against the Swiss franc. Moving on to the, I would say, the next four, which are really affecting our business directly. By now you realize all four of them relate to our new equipment business. The first is how to regain a competitive new installation margins that we have identified, as you know, as the main root cause for the competitiveness gap versus our main competitors. There, already last time we confirmed that the CHF 200 million material cost inflation impact for the year was there, and we can further confirm that.
Of course, since the round of salaries and negotiation have taken place now across the world with our employees and labor, we now see as expected, but of course the figure is impressive, that we have now on top of that, a wage inflation of CHF 120 million. Moving on to the other one, which is a topic with supply chain. There, again, we were questioning last time still how the Ukraine war was affecting it, and we can see basically by now, besides energy prices, this is something which we can discuss later. The other way in which this is impacting business is the topic of logistics and material flows.
In particular, I wanted to say, of course, because everything coming from China used to be able to, for example, for deliveries to Eastern Europe or to the Baltic countries, there was a passage through Russia. Well, that route is closed. That's one example of how the logistics are affected. The one that we'll discuss more later is the topic of the semiconductor shortage, which is clearly worsening. The fourth challenge and the third of a new equipment is then a very much an internal one. The one about dealing with product portfolio complexity, and this is about new equipment complexity. You remember how we explained we're struggling to produce the backlog of all products.
At the same time, the new modularity platform, which was the bulk of our new order intake, had shown issues that were not identified amongst the other far too many options that were offered. In fact, we see that all that's happening has further delayed the backlog execution, therefore delaying the time that we can clear backlog. Something new that we will present later is how this is affecting, in fact, our on-time delivery. By on-time delivery, of course, we mean first and foremost our customers, but also how this is affecting our revenue generation. Fifth and last, but obviously probably the biggest is the topic of China. On China, I'd like to make clear upfront, we discuss some data points later.
There is the impact of the lockdowns, particularly severe in the Shanghai region where we're based, but also the structural issue in the Chinese market, independent of the lockdown, which is to do with the credit crunch in the property market, which is not getting better at all. Because that affects the Chinese market severely, in turn, that has an impact on the global elevator and escalator market outlook. Having gone through this initial overview, I suggest now we move to slide four. Perhaps since I mentioned that we started adding the first visible impact of what we started beginning of the year, the first one here is our commitment to streamline the organization. As you have read, we announced the two changes.
One is the removal of the supply chain from the executive committee and the other one is the change of CFO . First starting with the supply chain. You can see that as a result of that, our executive committee has now been reduced from 14 to 10 members. In fact, if you have the Chairman and CEO combined, it will even be nine, if you consider that. Nonetheless, and this is important, why? Because we said from the beginning, we needed a streamlined, simpler decision process, in order to deal with the situation. Well, on that one we delivered. I think it's important that we stress, how now the new structure is in fact, leaner and more impactful.
I would say, dealing with the situation over the last six months has also been possible thanks to a new structure. Now with the latest changes will be even more so. Now, one question that I may anticipate, or what happens then with supply chain is they're no longer important. Well, absolutely not. In fact, just as we did with the field quality and excellence, that remains of highest importance while not being on executive committee. Here the decision on supply chain is really one that is intended to do so because we will now focus on supply chain at regional level. Because the issues that you heard on time delivery, dealing with suppliers, dealing with clearing the backlog, is something which has to be best managed locally.
The supply chain direct day-to-day management goes back to the individual regions, who then focus on supplies, on our customers, while at global level reporting to the Chief Operating Officer, Paolo Compagna, the coordination of all actions, including processes, is secured. In question of priorities, we believe now it's important that we manage the topic where the customers are, therefore at local level. Definitely I would like to say also a few words on the change of CFO, where the board felt that, looking ahead, but also in dealing with the situation and bringing on board someone from outside, with extensive experience in publicly listed companies, but also from other industries, will be beneficial to the team at this stage.
Of course, it is not an easy decision to be taken and to change here for this time. We believe it's also part of our commitment to continue evolving the team, including taking people from outside. With that, I'd like to express my gratitude to Urs Scheidegger for the tremendous efforts and the very intense team teamwork in his position of CFO over the last 4+ years and in particular over the last six months when we worked even closer together. I'm very pleased to say that Urs Scheidegger will continue working with us as Chief Risk Officer. A key position that also we identified as essential in, almost as a learning from what we experience today, where we realized that, you know, having someone a seasoned professional are gonna help us.
Seeing issues coming on the horizon well and beyond the day-to-day work is absolutely essential. I do look forward to continue working with Urs in this position. Moving on to slide five. Now I'd like to go into the update. Okay, what do we do now to deal with the situation? Since February, we did say that in fact, Schindler had sadly fallen behind the curve in terms of pricing. Pricing per se, but also especially pricing as a way to offset inflation. Now I'm pleased to say that we have had two rounds of price increases. One was in April, the second was in July, which now bring us maybe not ahead of the curve, but at least in sync with the situation. Which means that more price increases are definitely not excluded; on the contrary, more than probable.
These price increases mainly on new installations and modernization have also gained good traction. You can see here we have a chart where we show that in EMEA and APAC, excluding China, we're talking about mid-single-digit impact. While in Americas, both in the USA and Brazil, for example, there we talk about high single-digit or double-digit. This is very positive. Unfortunately, where price increases have not yet proven effective is in China. That has to do not only with the competitiveness of Chinese market, which is by far the most competitive because there are more players than anywhere else in the world. Of course, with the downturn in the market itself, which by basic economic reality makes increasing prices extremely difficult.
Nonetheless, as you can read here, I'm not gonna go through every bullet, we are putting in place a lot of measures to make sure this price increases stick, which go from the contractual, from the front line, and into incentives. The second element on our equipment. Now, of course, talk about top line, how do you offset inflation? Not only by pricing, but of course, looking at the cost. The goal here is to regain competitive NI margins. Now we are on slide six, where here there are maybe two major updates. The first one is, as you all know well, that what we had seen in April, I said there started to be an indication of a correction in metals, bulk pricing, has now been confirmed over the last quarter as a reality.
This is definitely good and welcome news. At the same time, as I write here on the slides, you will see, I just wanted to make clear that, you know, of course, we have a stock in our factories. This stock is depending on which regions you're in, six-month plus. Of course, now we're buying these metals at this better price. The impact, the benefit will come only once we have consumed the stock. We're looking at six-month plus. Of course, this has to do also by the speed at which we can continue producing. In the meantime, as we had committed last time, we did put in place measures like hedging, bulk contracts.
This is all ready, but of course, we put everything on hold for now because we will not trigger that until the pricing has bottomed out, and which by then surely will proceed. Now, the other element of update is the semiconductor price. You remember in February, I showed a chart showing how the single component price had gone up 36 times. Now, that phenomenon, in fact, has not abated. To the contrary, it has continued to worsen, and you can see with the middle chart here. There are two elements. One is the price, but the most crucial thing for a supply chain and margins and our ability to deliver is the lead time. Lead times for semiconductors used to be 20 weeks until basically more than six months ago, around there.
Now we're talking about 60+ weeks, which means that you have to now be able to order semiconductors, microchips for orders that are gonna be in a year's time. Which of course is a major challenge itself, and this affects our on-time delivery, as you will see in a second. How do you do that? Of course, we have now as a learning in action, we have to engage more with the suppliers, shifting to possibly direct contract as opposed to going through agents. At the same time building up strategic stocks and to reduce dependency on single suppliers. Moving on to the next slide, I did mention on-time delivery, and that is something which maybe some of you will be surprised that we show so openly.
I think again, in the spirit I try to establish here, since the beginning of the year, it's important that we share with you the situation here. Because here you can see both due to external and internal issues, we face a challenge. The key challenge here is how to make sure that we can produce on time according to plan with this mixture of external and internal issues. The internal one is to do with this modular platform, which I think we have to say, failed launch. The design, which had too many options, which complicates our supply chain further on top of the execution of the old backlogs.
Combined with a topic like supply chain and delayed by suppliers from China or from outside because of logistics, all of that, basically, results in an on-time delivery worldwide, which is in the order of 50%. This is a major challenge. Of course, with our customers, there is always a bit of a buffer. This doesn't necessarily affect them directly. For our business, this is an issue because as long as we cannot plan an on-time delivery correctly, this also results in delay in revenues. What are we doing to fix that? We mentioned last time how we are optimizing our sales configurator to offer less options. This is now firmly in place all around the world. The product design has been adjusted.
Of course, we are, as I mentioned before, to the extent we can, stocking up on semiconductors. The other aspect, of course, is how to reduce global supply chain dependency on China. Because as you know, we do produce all around the world. However, there are some suppliers or components that come only from China, and that of course results in the situation that you see on the chart where we show here two regions, and you can see there a tremendous impact of the China lockdown in one of them, drawn there in black. Of course, the other element here is talk with the customers more than ever, being as close as ever with them.
I must say some discussions are difficult, but so far I'm very impressed and grateful for the understanding that we have had from them in dealing with the situation. Now, a lot of talk is about China, and I'd like to stress again, it's not only about that, but it is a reality, so we should talk about it. Then moving on to slide eight, you do see how the lockdown affected our three production sites in China. Two of them are joint ventures, XJ-Schindler, who's based in Henan, and Volkslift- Schindler, who is in Zhejiang. But of course, the main one, Schindler China, is in Shanghai. As you all know, Shanghai was the strictest and toughest of all lockdowns. We are within the Shanghai city perimeter. So all in all, what.
When we spoke last in April, I just started and what looked like it was on the way to resolution, it became an even tougher one. All in all, we ended up having a lockdown of seven weeks, which is now only toward end of June, fully resolved. Now, of course, we're back to full production, but the impact has been tremendous. Before we speak about business, it has had an impact on our employees, and I'll say a few words on that, later. What we have done is supporting them to maximum extent, way and beyond, I think, any cost consideration. Of course, on the business side, we had to prepare to ramp up capacity as soon as we could.
The other one, of course, taking into account what is now the reality of it, a contracted China market, we are working actively to resize our business in China. This is something which happens today. As we do that, of course, we have to keep our employees in mind. Maybe if you go to the next slide, I thought, you know, sometimes we speak about numbers and we forget there are people behind at the core of any business. I just thought it was important to show what our employees had to deal with. We had more than 200 employees that were locked down on campus in Jiading. You can see in these pictures how they had to be living, blocked there in the factory and how they organized their life. We had to buy tents.
We had to buy stretch beds. We had to buy blankets. We had to buy emergency toiletries and deliver to the factory. I'm so impressed by the way our employees dealt with that. I have to say, the people you see there sleeping in the factory, they even decided to spend the time working. Producing things would supply the facility in the factory to be ready for when the factory reopened. You can see that people had meeting rooms with beds on the side. The ones that actually were allowed to go home then had difficulty to provide food for the families. Because we were allowed to a few vans to maintain lifts, actually, we ended up, we decided to provide food to our employees, and that's on the right-hand side.
Actually, sort of at the beginning, at the bottom, you see this message, thank you, SCF, with some vegetables, which was posted by one of our employees. SCF stands for Schindler China Field Operation, as a testimony of gratitude for helping out during that point. I just mentioned this to give some reality behind what, you know, may seem as just a lockdown. There is much more to that, and the way our employees dealt with that and now came back to work 200% is, I would say, extremely humbling and definitely a huge pride for all of us here at Schindler. Now, unfortunately, and then moving on to the next slide, the market in China doesn't only suffer from COVID once and once more due to structural issue.
The structural issue has to do with this credit crunch in the property sector. Here you see some data that we obtained from the Real Estate Institute Society in China, which shows how the top developers' activities have been dramatically affected year-on-year, as you can see here. You can see this is data as of April. We couldn't find anything more recent. As you can see here about land reserves dropping, land purchase being about half, and the sales value of the developers even reducing by half, which of course this shows that the credit crunch, even from a cash generation point of view on their side, not even talking about their balance sheets, is severe.
That is also reflected, moving on to the next chart, on the property element. You can see that there the floor space sold now has even dropped below the 2014 crisis levels. Most importantly, the housing inventory, and this is for me, I would say, based on my experience in China, probably the most impactful leading indicator for our industry. There you can see that whether Tier 1 , Tier 2 , or Tier 3 , the excess inventory is moving towards the 2014 crisis level and maybe on a trajectory to even surpass it. That is extremely concerning for the industry going forward.
I would say what we said could be a market contraction above 15% for the year is materializing, and one should not, could not exclude the fact that the impact, for the year for the Chinese market, might even be bigger, going forward. Now, talking of the Chinese market, I think we should also look at the global market. Now I'd like to move to slide 12. You can see that the drop in China is in fact in contrast with the relatively healthy situation in the markets in the other parts of the world. Whether in APAC outside China, where actually there's been a strong recovery, India, but progressively also the rest of Southeast Asia. In EMEA, where it remains solid across all segments.
Of course, then there is still this strong comeback in the Americas, including, I must say, Brazil, which has a progressive return. Of course, the U.S., Where the market remains solid, mainly in the infrastructure, but also in the residential. Now, the big question is how the U.S. economy will evolve. That's not yet a reality in any case. So this whole equation, China plus the rest of the world, as you can see, results in a contraction worldwide because of the impact of China. This, of course, is for new installation. Existing installations remains on a growth path across the world, as units sold continues to be converted, and that is very positive.
Combined with, I must say, a very notable uptake in modernization, as units are modernized and the portfolio aging continues, being driven, including in China, this must be said. With that, I'd like to conclude my initial review. I'll come back to speak about sustainability, but for now, I'd like to hand over to Urs Scheidegger for the results. Urs, please.
Thank you very much, Silvio. Good morning, ladies and gentlemen also from my side. Let me first briefly summarize the first half year results. I'm on page 13. The order intake and revenue were strongly affected by the China market contraction and lockdowns. Cost inflation, semiconductor shortage, supply chain issues exacerbated by China lockdowns burdened the development of our profits. Given this challenging environment, we have a sharp focus on increasing prices across the business lines to offset inflation, streamline our product offering, and drive strongly the efficiency. On a positive note, we have a very solid order backlog reaching the CHF 10 billion milestone. With that, we are moving to slide 14. In the second quarter of 2022, the order intake reached CHF 3.1 billion, corresponding to a decrease of 1.4%, respectively 0.6% in local currencies.
As a result of the economic market downturn and lockdowns in China, the slowing growth momentum in new installation across the globe, and our focus on sales margins. Strong growth in the existing installation business lines, in particular modernization, were partly offsetting the negative drivers. In the first six months of 2022, order intake reached CHF 6.2 billion, corresponding to an increase of 3%, and equivalent to growth of 4% in local currencies. Organic growth was 3.2%. Acquisition contributed 0.8 percentage points, while FX had a negative impact of 1 percentage point to growth. In this six-month period, our existing installation growth was able to overcompensate the impact of China's market cooling and lockdowns. Slide 15 provides an overview of order intake growth by region and product line compared to the first six months of 2021.
Order intake represents all product lines, new installation, modernization, repair, and maintenance. As you see, the Americas and EMEA regions generated robust growth, while Asia-Pacific was negatively affected by a significant drop in new installations in China due to the economic downturn and lockdowns. Strong modernization and maintenance, including repair, turned overall growth into positive. Our portfolio of maintained units increased in a robust way by about 5 percentage points year-on-year. Order backlog was 7.2% higher, increasing to CHF 10.3 billion. The margins declined further by almost 50 basis points sequentially, reflecting cost inflation, product legacy, and portfolio rotation. I continue with the revenue development on slide 16. In the second quarter of 2022, revenues dropped by 5.6% to CHF 2.7 billion, corresponding to a decrease of 4.6% in local currencies.
Weak performance was particularly driven by a significant drop in Chinese new installation business and continued weak installation and modernization progress at construction sites due to disruptions in global supply chains, leading into delays in project execution. In the first half of 2022, revenues reached CHF 5.3 billion, a drop of 2.4% and 1.5% in local currencies. Organic growth reached a - 2.4%, and acquisitions contributed positively 0.9 percentage points. While FX offset this with a negative impact of 0.9 percentage points.
The increase in the EMEA and Americas region was offset by a decline in the Asia-Pacific region, where COVID-related lockdowns in China heavily affected, as I said before, the economy and supply chains. The revenue impact of the China lockdowns in April, May, and still in June is about CHF 200 million for Schindler. New installations suffered in all regions. Modernization was weak in Asia Pacific, while repair and maintenance remained solid across all regions. I am moving to slide 17. Persisting inflationary pressure, product legacy, semiconductor shortage, supply chain issues, and restructuring costs exacerbated by China lockdowns impacted our profitability in both the second quarter but also for the half year. The EBIT adjusted in the second quarter of 2022 reached CHF 230 million, which is a drop of 31.8%, respectively 30.3% in local currencies.
S ame picture in the first half of 2022, the EBIT adjusted was CHF 466 million, decreasing 27%, respectively 25.7% in local currency. Their profits have been burdened in these first six months by high material inflation cost of about CHF 100 million compared to last year, same period. Wage and other OpEx inflation was about CHF 80 million. The modularity-related quality costs attributed CHF 40 million to the bottom line negatively. Further, we have an impact of about CHF 50 million due to the China lockdowns in quarter two, with much, much less revenues in China. I am moving to slide 18. As a result, net profits in the second quarter have been 37.2% less than in the previous year.
In the first six months of 2022, net profit reached CHF 296 million, a drop of 34.9%. Cash flow from operating activities, this is shown on slide 19, has been heavily impacted by increased net working capital requirements, reflecting the challenges in the supply chain, driving up inventories, also less down payments in China for order intake due to the lockdowns and market cooling. As a result, cash flow from operating activities declined to only CHF 13 million in the second quarter. In the first half year, cash flow from operating activities reached CHF 299 million, a decline of 58%. With that, I'm now moving to the outlook 2022, which is on page 21.
In the remaining months of the year, the business environment will be characterized by a contracting Chinese market and presumably a slowing growth momentum elsewhere in the world. Construction site delays, which will continue to hinder project execution. Thirdly, inflation pressure and persisting supply chain bottlenecks and foreign exchange pressure on the Swiss franc. A set of actions, key actions, are in place to mitigate the impact from these challenges. However, as said, it will take time for them to materialize. For the full year 2022, we expect revenue growth between -2% to +2% in local currencies and net profit between CHF 620 million to CHF 660 million. Please allow me to close with a personal note. This was the last time for me as Group CFO to present the financial results to this audience.
I very much treasured the communication and interaction with all of you, and I would like to thank you for your great collaboration and support. With that, I hand back to Silvio Napoli.
Thank you, Urs. Normally, we would conclude here and move to Q&A, but this time I feel strongly we should speak about something else, something which is important for the company, for our investors, but also for society and the planet overall, and that is sustainability. Last June, I trust you all saw that we published our corporate responsibility report. It is the 10th edition showing that, you know, maybe before it became so fashionable, we have invested in that topic as a company, and one could argue if you see our history, what we've done, probably it's in our DNA. Yes, admittedly, maybe we didn't communicate it as much as we could have, but that's also some part of our culture.
Now one thing which is not included in that corporate responsibility report, because it just happened now, is what we describe on page 23, which is our carbon-neutral roadmap to 2040, to reach net zero with now an approach that's been validated, certified by Science Based Targets Initiative. That is very important. Those of you who are into the matter know that, only a few companies really got, according to the latest standard, that type of validation. I'm talking about a handful. Last time we checked, we were 18, but probably every day there are more, out of thousands of people that apply. It's important.
As you can imagine, this is something which we've been working for years, contrary to others, but as a part of our culture, we don't make aspirational declarations about reaching something unless we are sure that we got at least an understanding what this would mean for us, for the company, and for our employees. Now that we have it, now that we've done it internally, and we got it also validated by a third party, we can talk about it, and we should. You can see that now we have this net zero commitment, both in Scope 1 and 2, and Scope 3. I'd like to stress that. Which is now detailed, you can see on specific areas to focus. We are very conscious of this would mean. This is not just a target that you take lightly.
This will involve a whole rethink of the way we do business. Perhaps, to highlight that in terms of the first step will be 2030, and clearly the biggest aspect is our fuel efficiency in terms of our fleet because of our service business, where in many places people still have to take cars. At the same time, you can see that in the first element for our Scope 1 and 2, green electricity will play a huge role. Now, no one thought that when we did this was gonna become also a more urgent element due to the political situation and the scarcity. Definitely we are very, you know, not pleased, but we are comforted in our choice to have gone this way now more than ever.
The other element I wanted to stress here is that if you look at Scope 1 and 2, but also Scope 3, a huge element to reach those targets will be innovation. Now we have talked less of that over the last few conferences, but maybe I'd like to stress that you will hear more about that from us. We believe this is important also as a catalyst to differentiate in a market, but also to achieve this target. I wanted to stress that point. I look forward to discuss more of that when we present our overall strategic plan. I thought for today I wanted to stress that point because that's something which I didn't want to go unnoticed, even though we mentioned this in June.
With that, of course, now the hard part starts, which is to deliver, and we are very much resolved to do that. I'd like now to conclude here the formal part of the presentation and hand over back to Marco. Before we do that, maybe one final message to summarize what you just described. It is as follows, so we continue focusing on the key actions that we identified since the beginning of the year. The actions are starting to generate the first impacts. In other words, the ship is starting to head in the right direction. However, once more, it is important to stress that it will take time before the full impact will be visible in our results. The time horizon is becoming even more uncertain because of all these worsening external factors.
The biggest of them all today is China, which is causing a market slowdown. Again, once more, we will get through this and we believe we already started taking all the right measures. With that, I'd like to hand over to Marco. Marco, please.
Thank you, Silvio. We are now happy to take your questions. I would like to ask you to limit yourself to two questions only, given the limited time we have available for the call. Thank you very much. With this, I hand back to the operator to start the Q&A with the first question. Back to Alice.
Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to choose only handsets when asking a question. Anyone who has a question or a comment may press star and one at this time. Our first question comes from the line of Andre Kukhnin with Credit Suisse. Please go ahead, sir.
Good morning, gentlemen. Thank you very much for taking my questions. I'll limit to two, but just wanted to start with Urs. Best of luck with your new role, and thank you very much for all the support over the last four or five years. Really valued all the interactions we've had. Thank you. In terms of questions, I guess, could we start with the margin and the implied kind of second half run rate in the guidance and how that compares to Q2? If I may run a little bit of math, with what you said about China impact of CHF 50 million, and assuming about a 40% revenue decline, backing that out, I get to about 9.6% margin for the second quarter ex-China lockdown impact.
Then working through some math from your net income guidance, it looks like it implies about that run rate, maybe even a bit lower, for the second half of this year. I just wonder what are the puts and takes within that that lands us at kind of sequentially flat level? I thought we'd have some improvement coming in from the measures you've been undertaking, maybe some of the price actions that towards the end of the year, even with the delay. You talked about repricing some of the contracts as well. I just wanted to check if this math is correct, and what are the sensitivities around the major moving points there, please? Thank you.
Good morning, Andre. Thank you very much. Great to hear you today again.
Thank you for the question. When we talk about our net profit guidance for the full year, and also the run rate into H2, you need to consider continued headwinds first. These headwinds are coming key from material cost inflation, as also Silvio Napoli explained. We have to lock in cost prices on material for six months in order to safeguard the availability of material. We have those costs in our stocks mainly already for H2. When I said H1 CHF 100 million inflation incremental, you can assume it will be CHF 200 million for the full year. Wage inflation certainly will continue with a similar run rate.
You have OpEx and quite a big element are subcontracting cost inflation, which are also continuing to the run rate. I mentioned in my speech, unfortunately, we are burdened with the quality costs of the modularity program that was about CHF 40 million H1. We need to assume this will still continue in H2 until all the measures are taking traction and we will be on a better, much better shape with the modularity program. Finally, another headwind is backlog margins. I said it, we still see a sequential margin decline on our backlog driven by updated recalculations through the backlog due to the high inflation, driven by modularity, which comes with higher costs at the moment until we have mitigated it. We have a rotation in the backlog.
Much better margins from actually much longer ago are delivered, and much lower margins came in at the end of last year. Now we see finally better margins. Also this decline of backlog margins has now to be delivered in H2, and then it will be much better. On the tailwind, you can consider we have a bit more positive revenue growth, assuming that there are no additional lockdowns in China. All right. We have now quite a negative revenue drop in Q2, and assuming no lockdowns, of course, this will improve. Now, in the second half year, you see that as well in the guidance midpoint is better than H1. Of course, our measures in efficiency and in the existing installation pricing, you can think about short cycle products like repair, will realize certain benefits to the bottom line.
What you shouldn't assume are benefits from new installation pricing to the P&L in H2. This is too early. We can talk about it later. Prices are going up in several regions, and this is good news. Due to very long lead times and even longer than ever due to supply chain disruptions, those benefits will only be visible in next year. I hope this helps, Andre.
Great. Thank you, Urs. Yes, very helpful, as always. Thank you. Maybe a broader question. Silvio, it's been six months since you've taken over and came in really with kind of sense of urgency and focus on profitability foremost. Do you think that sort of mentality has now started shifting at Schindler? Or do you see evidence of that really moving in the right direction? I guess the pricing indications that you've given is probably the clear testament to that. But I wonder if there are any other kind of indicators or examples you could share with us, of the organization now starting to refocus on that kind of sense of urgency and profitability more firmly.
Sure, Andre. Thank you for the question. Some of the impact really to some extent is tremendous yet not yet in terms of reflecting the results, which as you can imagine, is a challenge per se, but it's such is the nature of business. Let me give you another example. Together with Paolo Compagna, the CEO, we looked at a corporate calendar and we cut down more than 80 meetings, committees, which involved members of top management. That sends a huge message. We in terms of preparing meetings we focus only on the priorities we identified, which are very much the same we presented today. That also sends a very important message.
Rather than, you know, giving us patting ourselves on the shoulder, I always say to people, "I'm sorry, there is no prize for effort." Maybe if you don't mind, ask me the question again in six months, and then hopefully the figures or the results will speak for themselves. On a more candid level, I must say anyone who doesn't get the message is no longer, if you want, an obstacle. That is, I think, what we're forcing through.
Got it. Thank you very much to both of you.
The next question comes from the line of Daniela Costa with Goldman Sachs. Please go ahead.
Hi. Good morning. Thanks for taking my question. I will stick to actually one, and I wanted to focus on cash because cash flow was also quite weak this quarter. I understand there's all the problems in the supply chain, which probably means building up some inventories, but would like to see how you plan to progress on that in the rest of the year. Also, actually to the second part to that question, but focus on cash as well, given the situation in China that we're seeing with the developers and with sort of like the risk, the potential risk around orders and the backlog there
Can you talk about sort of how you've been looking at that and, the confidence on the order book, both from a realization point, in China as well as from the cash quality of that order book in China, if you can give us, some comments there. Thank you.
Hello, Daniela. Thank you. Urs, please.
Thank you. Hello, Daniela. The net working capital deterioration, of course, has an impact on our net liquidity, as you also see it on page 29. One key element is indeed that we intentionally build up stocks in the supply chain globally. We are taking opportunity to get material when it is available, as I said, in order really to safeguard the running business, in particular of our NI and existing installations. The situation globally, I would like to differentiate a bit between China and the rest of the world. In the rest of the world, our net working capital performance, liquidity performance is running well. We have a lot of key actions in place since long.
I'm really confident that the receivables stock, work in progress coverage with down payments, accounts variable is very, very well managed. Here I don't see a deterioration. It's a bit more demanding in Asia, in particular, let's say, India and southeastern part of Asia. Now China, it's good that you pointed it out. Obviously, with the economic slowdown and in our industry market is severely dropping by more than 15% with the Three Red Lines policy leading to really credit tightening. Yes, we see that it is more demanding on the cash collection side. On the other hand, it is relatively stable, right? It is steadily more demanding. We really need to reach out to the customers in an even more active way.
Cash collection was not very very strong now in Q2, but I already see some improvements now into the second half year. Our company is focusing very strictly on strong payment terms with the customers. Otherwise, we also blacklist the customers. Of course, the overall picture is disturbing and concerning. Many developers are in real difficulties, and this is also the reason why the whole market is slowing down so much. The cash is getting scarce, I have to say. Final note, you talk about the quality of backlog. Here I can say so far this is quality in the backlog. We have very strong discipline in reviewing it, and what we have in the backlog is secured.
In China, we always have down payments, with the first signature of the contract, and then more milestone payments are following for each activity. From that point, so far, I can say we will deliver this backlog, going forward. Thank you.
Perhaps to summarize, Daniela, your very clear and important question. There are two elements here that led to where we are today. There is the net working capital requirements, and the other one is the EBIT reduction. So in the second half, we definitely hope to have a better EBIT to the extent that we can do with the backlog. The net working capital, as Urs said, will be a question essentially of how China turns out.
Yes.
Clear. Thank you very much, both.
Thank you.
The next question comes from the line of Andrew Wilson with JP Morgan. Please go ahead.
Hi, good morning. Thanks for taking the question and thanks again for the detail and the candor, Silvio. I've got two. I'll take them one at a time if that's OK for it. In terms of the on-time delivery numbers that you've given us, clearly you said that the impact on the customer is perhaps not as severe as that number looks like. I guess I'm interested as to what that number is in, I guess, normal times. Also whether you think this is an industry phenomenon or something which potentially risks some kind of share loss, if you end up underperforming some of the peers.
Thank you, Andrew. It is indeed an important question. First of all, on a normal period, our ONTD, it's above 90%. Actually, you can see in the chart, where even 100% is always a tough number, but it hovers around 100%. We are very reliable, and I must say, in most places, we even have very competitive lead times. In some countries, it plays a role, namely Europe and the U.S. In other countries like Asia, where I worked a long time, less so, in fact, because construction sites tend to have a less just-in-time type approach. That is one. Clearly, if that continued, that could become a serious competitive loss, because in the end, you know, you do compete on that too.
As you can see, things are coming back to normal and we've been able to manage, but we're definitely resolved to bring it back where it should be. Is it an industry one? I'd rather not talk about competitors. I can assume that during the lockdown in China, it was difficult for everyone. China suppliers, as you know, there is a famous story that in the triangle between Shanghai, Suzhou and Guangzhou, someone made a calculation years ago, one of you, I think it was, 80% of the world global supplies of elevator and escalator component come from there. So if that was to continue with China, that will affect everyone. But I think that's why the industry, I believe, but definitely we are working on reducing dependency on single source China suppliers.
That will also be addressed. I hope this helps.
Yep, it does. No, it's very helpful. Secondly, I wanted to ask around the changes in terms of the management structure and specifically around supply chain, I guess. I'm interested in sort of, I understand the explanation of dealing with supply chain locally and the specific regional challenges seem to make sense. I guess, do you feel like you need to add more capability on a local level in terms of managing that supply chain? I'm just thinking, unless I misunderstood, that if it was primarily being organized centrally and now it's going to be organized more locally, do you have that capability in each region or is that something you'll look to build?
Excellent question again. Thank you, Andrew. Definitely the situation today in supply chain is one that has never been seen before. One other CEO told me supply chain people were the ones that, you know, people only called to complain when things didn't come on time. Today, supply chain is again, I think as it should be as an engineer, at the core of every company. Whatever competences we had are, I think, need to be upgraded. This is something we're actively working on at central level, but also a local level. Supply chain staff is very much in demand as they should be. Post-COVID, where factories were closed, there was a lot of turnaround in this field.
Again, your question is very current in that there is a huge effort now to staff and upgrade supply chain around the world, both locally and centrally.
Thank you. That's very helpful. If I can just, sorry, squeeze in just a quick clarification on a previous comment. I just wanted to make sure that I heard correctly that the margin on new orders in the Q2 was down sequentially 50 basis points on the Q1. Just to check that perhaps with Urs.
Yeah. Good morning, Andrew. Yes, I said sequentially 50 basis points on the total backlog.
That's very helpful. Thank you, and good luck in the future.
Just to further clarify, this is because, point one, we have adjusted our pre-calculations to the backlog with the higher material and OpEx inflation to reflect reality. Point two, we also had to reflect some quality costs of modularity to the backlog. So again, to reflect reality. Last, interesting, it's also about the rotation in the backlog. With these long cycle times in the elevator industry, some good margins, even back to the year 2020, early 2021 have now moved out, and low margin order intake, in particular the second half of 2021 moved in. Latest now in H1, we see improving margins in the order intake. The new order intake margins are going up and that of course helps in the rotation of the backlog. In the future we will see more of that impact.
Finally then next year we will see it as well in the P&L. I hope this is clear.
Yeah, thank you. That's extremely helpful clarification. I appreciate it.
Thank you, Andrew.
The next question comes from the line of Patrick Rafaisz with UBS. Please go ahead.
Yes, thank you, and good morning, everyone. Two questions. The first one is a follow-up on just the previous one now, and also includes a bit of pricing. You mentioned the price increases in April and July. Are there additional price increases that we should factor in happening in the second half? And by the end of 2022, where would you expect the run rate of price increases to be at going into 2023? So that's the first question. The second one is on your revenue guidance. Let's say midpoint broadly flat, and we had now H1 with quite dynamic Americas, soft APAC. How do you construct then the, let's say, flattish outlook for the full year?
Should I assume a nice recovery for APAC and then maybe a sequential decline in Americas and EMEA sort of flattish? What's your thinking on the revenue tier? Thanks.
Yes. Thank you, Patrick. Let me address the first question. Urs will address the second on revenues. On prices, it's always a delicate subject because also there are guidelines on competition law things about what you can say or not say about prices coming up or not. However, the answer is it will also depend on how inflation develops. One of the key elements is that well, you know, operational focus internally. We really say that pricing and efficiency has to be able to offset inflation. Inflation, as you all know well, can no longer be something you plan in your budgeting phase 18 months in advance, and then you go with it. Today, we actually doing that too as part of the action.
We actually look at rotating financial planning on a regular basis, including evaluating inflation. The answer on pricing is how will inflation evolve and how will efficiency evolve? The key is that at the end, we have to be able to offset the inflation. The way this looks today, I wouldn't exclude that there is another price increase in the second half. Absolutely not. What could happen, and this is something we are actively discussing with Chief Operating Officer and with the head of the different regions, is we might then decide to do maybe local price actions depending on the wage inflation. Because wage inflation is something which is then local, not global.
This also gives you an idea, I believe, Patrick, of how we are really changing the way we work, by really going granular on specific actions, and planning. Now, Urs, perhaps you want to address the second element on revenue.
Thank you, Patrick, for the question. You already have pointed it out, well, where the revenue growth should come in H2, namely from China. I mentioned only in Q2 we had a revenue impact drop of CHF 200 million due to these harsh China lockdowns of our production facilities. Assuming there are no such additional lockdowns, that's the assumption, in the second half year, then our production will work at full speed. This helps not only domestic China, but we also have a very large export business out of China to many other countries.
Maybe to have an additional element, we see very strong order intake in repairs in H1, which also now will go into revenue recognition in H2 in regions like EMEA and the Americas. This could lead to this midpoint assumption. Always with the assumption, no China lockdown and no additional supply chain disruptions. Thank you.
Thank you both.
Thank you.
The next question comes from the line of Lars Brorson from Barclays. Please go ahead.
Yeah. Hi, good morning, Silvio, Urs. I'll just echo the earlier comment, Urs. Thanks for your help over the last few years and best of luck in your new role. Can I clarify? Thank you for clarifying actually the orders received margins sequentially better in the first half. I think that's consistent with what we've heard from KONE over the last three quarters. Maybe I could just ask specifically whether China indeed is also seeing operating margins higher sequentially, or whether that's all rest of world. Related to that, forgive me, if I can just clarify on your slide 30, which shows us new installation orders by region, by segment. I'm assuming Americas is up 5%-10%. In other words, the red circle is a mistake. It's not negative.
Just wanna clarify that, and I'll come back with a couple of questions after, please.
Sorry. Can you, which slide number you refer to? Sorry, Lars. We Hi. We just not sure. You talk about slide 12 or sorry.
No, slide 30. Sorry, we can take it offline as well. I look at slide 30, which shows you Q2, not first half of Q2, and it shows you new installation orders in Americas. It has both a red dot, I believe, and two black dots. Just wanna clarify if the red dot is a mistake. My more general question was just to get a little more regional color around the improving operating margins in the first half.
Very good. Thank you. Urs, would you like to maybe address the first point about the slide 30?
Right. Well, the Americas are in quarter two, you always need to as well assume even in units that you can have large orders affecting a bit the business. A quarterly view is a bit a sensitive thing. I always recommend to review a longer period. As you also see in value, the Americas are in good shape or in solid shape, I would say so.
I would like just to stress one point here to this point. There is the issue and need of big projects impact quarter-on-quarter, which as you can imagine, since America includes the U.S., large projects play a big role, and there were a couple of big ones in Q1. There is also another element, going back to the other question about impact or what you started doing. We now look at value of projects, which I said very clearly back in February that we are no longer going for growth at all costs. We're looking at profitable growth because this is the only way in which we're gonna fix our profitability. And clearly, we like to get every single job we can do, provided we have a decent margin.
Part of the impact and back to the fact that people start listening and acting upon, most importantly, is that unless the job is well sold with a good margin, we have no hesitation whatsoever to say, "No, thanks." This is an attitude that I must say I've been lost over the last few years, and now it's coming back and forth, as it should be for any sustainable business. Some of the quarter-on-quarter in particular, of course, notwithstanding what Urs said, might show these kind of surprises because we are no longer prepared to take on jobs that don't have a margin consistent with our ambition here to close the competitive gap. Of course, we have to work on our cost, on our efficiency to make sure that we can be profitable and getting all the job we can.
Today, as we have candidly said, that's not always the case.
Secondly, can I ask about complexity costs? I appreciate it's a bit of a moving picture. I don't feel I've got a very good handle on the level and duration of these complexity costs. The CHF 40 million in the first half, it sounds like there's another step up perhaps in the second half. Can you give us a sense of what you think will be total " product complexity costs" associated with sorting out modularity and how long they might run for, please?
Good morning, Lars. These modularity costs are driven, you know, as we also explained in Q1 call, very much by the topic of a lot of very individual and commissioned orders, which we now trim and we are standardizing and harmonizing, and the key actions are clearly in place. The backlog has those complexities of a lot of individual orders, and it has to be delivered, and that comes at higher costs than it should be. I mentioned CHF 40 million for H1, and I do assume we have to deliver this backlog now, so another CHF 40 million have to come by end of the year.
All the key actions we have explained earlier, of harmonizing, standardizing, getting the configurator in perfect shape will be in much better shape than next year. I clearly expect much less such costs next year.
Thank you. Can I squeeze a third and final one in? Just on the China outlook, I think I heard you, Silvio, say probably quite a lot worse than you're more than 50% down. Again, appreciate it's a moving picture, of course. I wonder whether you would offer a more specified view. Could it be down double that perhaps even? And maybe help us with the moving parts. I presume you're seeing a better infrastructure market. Obviously, that's quite small in unit terms. But you know, how bad could RESI be this year in your sort of base case for the market outlook? I'll stop there. Thank you.
Thank you, Lars. It is of course a super important question. I believe by now 15% contraction is a conservative figure. When we look at all scenarios, no, we didn't look at anything bigger than 30% because I cannot imagine even by simple, probably basic demand and outstanding tenders, we don't see that going below 30%. Honestly, between 15% and 30%, there is, I think, room for guessing in that. Now, what are the moving parts? Property developers is the biggest one. Now, that one, and you will probably through your banks, much more than we have, but through our sources in China, through our analysis, we don't see that being fixed in the short term.
As a matter of fact, you can see the government is not stepping in as they've done in the past, with any major campaign to support them. To the contrary, even bigger ones are left to disappear, trying not to hurt mortgage holders. What is concerning, I must say, is that even now, state-owned developers are starting to run into trouble. That, for me, was one of the worst developments of the year. So far they were mainly private ones, but now you see also one with a large government holdings starting to show difficulties. The outlook, I must say, is not good in that regard. Now, you're right, the offset could come by government infrastructure projects.
Though I must say, I don't see that compensating for the whole thing. Because there is only so much that China can do. There is a lot of them, by the way, a lot of the order intake is still a lot of projects. That is already factored into the projects in the market so far. There too, I think there is an issue of how much can be done, how much is the government prepared to finance it? Of course, which developers can then build the project. Today, that starts being a bit of a vicious circle, so I hate to paint such a gloomy picture, but I don't see now in the short term any magic card out of the problem.
Thank you.
Thank you, Lars.
The next question comes from the line of Andy Schnyder with zC apital. Please go ahead.
Hi, gentlemen. I have two questions. First, you mentioned in the past few meetings that you will give us hard KPIs we can measure you on, probably not at the results day, but in early fall. Any updates on that? When can we expect to see something or can you tell us any details on what kind of KPIs we should expect already today? Second question. Mr. Napoli, you talked before about walking away from projects with margin levels that are not satisfactory. Do you have any more insight in what types of clients and projects you lose and how long that correction and market share loss phase will continue? Is it really just a phase to get rid of these most price-conscious clients, and that is soon over?
Should we expect Schindler to rather grow less than some of your the biggest competitors for a few more quarters or even years?
Thank you for your question. Let me first and I'll address them both. Number one, KPIs or more presentation. The idea was indeed to have something together with the Q3 results. Now, in the meantime, we're gonna have a new CFO joining, and I think it is fair that we ask her what she thinks about it. Now, by the way, the idea is still, please allow me to confirm that, but the idea would be with Q3, we will provide probably, let me say, a wider picture of the way we see the next couple of years developing based on this new approach. I do believe it's important to do it once we have progressed a bit more on fixing the issues we've identified.
Otherwise, it's like giving you know a new routing signal out of a storm. That's not the point. That would be still planned for the Q3 results date. Hopefully next year we can do something more extensive with even more information on products, et cetera. Your second question on the market share loss. We don't intend, we don't like, we don't enjoy losing market share. By the way, it is not a topic about global. There are some markets in where we are very strong, where our brand is very strong, where actually we are also very profitable, where we have capabilities. There is no question whatsoever to lose any market share. To the contrary, we are very much into consolidating, getting stronger.
You may have seen that we have also smaller acquisitions in the first part of the year, but that is somehow consistent with that statement. There are other parts of the world where a business model, for a number of reasons, is maybe not as solid because of margin, sourcing, supply, and all, and all of that. There, clearly, we have to be careful. What are these type of projects? Well, they can change, but usually, typically, just to give an example, those super large project, typically, we say infrastructure or these kind of things, we are very costly to tender, very costly to realize. A lot of risk, where by the way, Schindler is very strong. In some parts of the world, we have been stronger than others.
These are the kind of project where unless we are sure that we can deliver, that we have a competitive offer, where I would say the market also provides for a price level that is acceptable, then we will be prepared, yes, not to take it. That is important. I always say the mantra here is higher margins equal growth. People say, "What does it mean? Oh, we have to grow, or we have to look at margins." No, it's the same. If you want to grow, you have to have healthy margins because healthy margins allow you to get the job and to grow and be prepared for the next one.
Otherwise, it becomes a negative spiral, which I have to say, over the last two years has been dangerously followed. That is clearly a change going forward.
Okay, thank you very much. It's helpful.
Thank you.
Today's last question comes from the line of [Mariam Buro] with Bank of America. Please go ahead.
Hi. It's Alex Virgo, Bank of America. Thanks for taking my question, gents. I guess the two if I may. The first one is.
I'm just wondering if you can give us some detail on how you're going to or how you are already incentivizing your sales force to not give up the pricing increases that you've put in place, and I guess give discounts to offset it, which I believe may have been part of the problem last year. The second question is just to clarify on the wage inflation, the CHF 120 million for the full year, did I hear you say correctly, Urs, that you've seen CHF 80 million in the first half? Just thinking about the implications of broader wage inflation that we're seeing in the market or in the world globally about for next year as well. Thanks very much.
If you could give us some idea of the percentage increase maybe that might be helpful. Thank you.
Thank you, Alex. Let me address the question on sales and also take the one on wage. On sales force, you're absolutely right. What happened in the past was that there was a price list and then there was a real price based on discounts. In a nutshell, the discount authority has been taken away, and it's been elevated to the top management in small units of the country, but in larger operations at the regional DP level. That is the simplest. Now, there are tools to do that. One is the way we have our configurator, so the way jobs are sold. People don't see the margin. You have a price, and that's the only one you can put into your cost calculation. That's it.
We removed away the margin visibility, which is a very classic engineering one. You may argue why it didn't happen before. I can only say better late than never. Finally, there is incentive. The incentives on the sales has been adjusted in a way that price quality is the key factors in driving salespeople incentive. That, as Urs mentioned, is starting to work, and you saw the chart we showed before. Exception there is China. We also have to consider that in China, in fact, in Q2, there was much less sales activity and the people had, frankly, other concerns. Nonetheless, I think it is fair to say China would be a tougher one also because I think I mentioned last time, China never dealt with inflation.
We have people that never dealt with the idea of increasing prices. That China has this additional element, which I would call almost a cultural training, which I believe is not only us, but definitely in our case, we are taking very seriously, including, in some cases, having to replace some people that say, frankly, "I cannot do this." Well, then we need to find someone else that can do it. Hopefully, that helps. Urs, will you have to take the second question?
Yes. On wage inflation, what I said for H1 was a number of CHF 80 million, and I said this is wage and sub con inflation. We have 3% wage inflation, which is CHF 60 million for H1, and it will be CHF 120 million for the full year. That's the 3%. It won't be a surprise to state, I do assume wage inflation is higher next year. This, of course, needs to be completely covered by applying our formula, pricing plus efficiencies higher than inflation. Such impacts need to be covered in our sales price increases we are applying now. But of course, this is a headwind. A headwind to our results, which we need to work with the key actions Silvio has outlined before.
Great. That's very helpful. Thanks very much, gentlemen.
Thank you, Alex.
Thank you very much for attending this call today. We have to close now. There are still a few people in the queue. Apologies that we are not able to answer all the questions on the call, but please feel free to reach out for any follow-up or any open question you still might have. The next event is the third quarter results on October 20, 2022. We wish you a nice summer. Take care. Thank you and goodbye.
Thank you, everyone. Thank you for joining, and thank you for your great questions. See you all speaking in October. Bye-bye.