Ladies and gentlemen, welcome to the Schindler conference call on the Q1 results 2023 and live webcast. I am Sandra, the Chorus Call operator. I would like to remind you that all participants will be 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, welcome to our first quarter 2023 results presentation. My name is Marco Knuchel, I'm Head of Investor Relations at Schindler. As usual, I'm here together with Silvio Napoli, our Chairman and CEO, and with Carla De Geyseleer, our CFO. Silvio will start with key messages, will provide an update on recent market developments. Carla will lead us through the financials. After the presentation, we are happy to take your questions. Today, we plan to close the session at around 11:00 A.M. With that, it's my pleasure to hand over to Silvio. Silvio, please go ahead.
Thank you, Marco. Good morning, everyone. Thank you for joining our Q1 results conference call. You have received the package, and I will refer to the slides that you see also on your screens. More than the slides, I just wanted to start by conveying a message, and this is the following. You will have seen on our media release that we chose Staying the Course as a title. Let me perhaps pause a second to explain why this is the case. When I introduced to you our results in February 2022, together with this new governance model we're in place with the Chairman and CEO role, I stated very clearly that our priority is to close the gap versus competitors, in particular in terms of profitability, i.e., relative EBIT percentage.
Well, today I must say we are delivering on this mission. We have still some way to go. But in spite of the many changes continuing to happen in the market, I'm pleased to say that the measures we put in place are starting to pay off. Why is that? Now we can maybe refer more specifically to the slide. First of all, we are facing a New Installation market, which unfortunately continues to weaken globally. Most of all, this weakening is associated with uncertainty, with we'll see in a second, some markets that were previously going very strong now suddenly showing sign of hesitation. Others that were supposed to come back strongly, we chose some delay. That's a fact. Of course, again, undeterred, we continue moving along our mission, notwithstanding the situation.
As a result of the weakening market, unfortunately, our order intake is decreasing as a reflection of that. At the same time, I'd like to stress this, and we then look at this more with the CFO in a second, with Carla, our margins are improving remarkably, possibly even above expectations in terms of new order intake. At the same time, our growth in service and repair continues very strongly. The third element are our revenues, where we are pleased to drive revenue growth across all regions and product lines, even in regions where the markets is uncertain based on our strong backlog. Number four, of course, now we come to our main target and goal, declare, which is the improvement in EBIT and net profit. This improvement is first and foremost operationally.
In the case of Q1, you will have seen we have a particular, so if you want, supplement due to the sale of our former factory land in Suzhou, China. Coming to the fifth highlight is that notwithstanding, as I said, we got some way to go, we continue to progress on disciplined execution of our strategic priority, which are intended to drive competitiveness and performance, not only short-term, but also medium and long-term. Before I move on from this page, I'll maybe like to add one sixth highlight, and it is one I briefly mentioned before. This is the one of our backlog. Our backlog today stands at CHF 9.6 billion, which is more or less equivalent to two years of New Installation revenues.
In other words, this backlog offers us what I would call a top-line buffer, which therefore allow us to continue driving orders while also improving margins. The backlog in terms of bottom line has, if you want, a two-edged sword. On one hand, we are continuing to getting rid of the dilutive margins from the old orders. You may remember this boa constrictor slide, as I called it, showing how this dilutive margins of the old orders will continue to hit the results until 2025 and some small portions even beyond.
At the same time, in the backlog, we have improving new OIT margins, which ultimately will drive what I call a progressively positive backlog impact going forward. With those six highlights, so the five here plus one, which is the backlog, we now can move to the other slide, which refers to one of our strategic priorities. In February, I presented our strategic deployment framework. I mentioned how going from our purpose to our ambition, to our choices, on to our targets, we then deploy those across our organization along four Ps: people, product, performance, and planet. The first of these four Ps is people.
There, we announced today that we have a succession in Chief Technology Officer, whereby Karl-Heinz Bauer, who after eight years come to his well-deserved retirement age, he will be succeeded by Donato Carparelli, who's someone that has been with the group 30 years, someone who knows our products, our markets, and in particular, domain competence in the elevator and escalator technology, is the ideal candidate to take over from Karl-Heinz Bauer. Donato worked in Asia, he worked in Europe, and in particular, he has shown great performance of product management and innovation. He has been now driving our simplified modular elevator platform, which is being launched as we speak.
Again, we put a CTO, someone that has particular domain competence and put direct involvement in what is today the most important aspect of our product strategy. We are very positive about this succession. Perhaps you see on the right-hand side, we use the format used in the past to communicate changes in the executive committee. You see now this is the ninth change in 14 months. In terms of speed of change, in terms of continued evolution, you can see that on this front too, we are proceeding unrelenting along the targets we set ourselves in February 2022.
Now, with this team now, if there are many changes, one thing and to the contrary continues constant, which is the constant progress on delivering on our priority, which is achieving a trajectory correction in terms of profitability. Not only profitability. You can see on the chart here with the red curve, our revenues. You can see here that, since Q3 2022, they have been improving steadily. There is a number of factors there, of course, the lockdown easing. There are also the supply chain bottlenecks easing out. Of course, our drive to work with our customers to make sure that we could deliver on the construction site and proceed with the installation of the units in our order book.
The other curve on this chart is the one in gray, and then you see the gray chart shows the EBIT year-on-year gap or improvement. You can see that the trough, both in terms of revenues, by the way, and in EBIT gap, was in Q2 2022, so half year last year. You can see that from Q3 2022 onwards, this year-on-year EBIT has been improving. You can see that in Q1 2023, you have the first year-on-year improvement in this quarter, both in terms of revenue and in terms of EBIT in absolute figures. Moving to the relative EBIT percentage, you can see the box at the bottom of the chart. We can see the same trend.
In Q1 2023, you can see this is now the first time we have an improvement, both in positive and in relative EBIT performance year-on-year. What does that say? That does say that the profitability-enhancing measures that we put in place are starting to pay off. I use the word starting because, of course, once more, we still have some way to go. We are once more staying the course and proceeding onwards. Staying the course despite markets, which then takes us to the next slide, which is the updated market outlook. It's important that I stress the word updated because indeed there are some changes. The chart, again, for everyone's understanding, relates to units in terms of New Installation and New Build, Modernization, and Service. Starting with New Installations.
We do have some major updates, the first one regarding China is, I'm not gonna say positive, but I would say it's a less negative sentiment. I was in China for the first time since March 2019, two weeks ago, spent there almost two weeks. Maybe focusing on the market now. If maybe in February, we said our assessment was for the year 2023, between -10% and -15%. Today, probably we are closer to the -10%, but nonetheless, we still talk about negative territory, unfortunately. Now we can see that the decline is slowing down.
As we speak, if one expects a recovery, which I'm confident will come, but today it is still uncertain when the timing of this recovery will take place and what the magnitude of such recovery will be. In any case, we remain of the opinion, like in February, that there is probably no recovery in sight before the second half of 2023. The next market, Asia Pacific, excluding China, where this is good news, there is no change. The markets remain very strong, not only in India, but also in Southeast Asia. One has to recognize these markets, for having worked there myself a number of years, are very much subject to global economy evolution.
If there was a global recession, I'm afraid we will have also an impact on this on these markets where the fundamentals in terms of urbanization remain nonetheless very strongly. Moving on to the Americas, there we do have a downgrade. We had a flat assessment in February, and today you see we put there a minus, which is equivalent to a 0% to -5% outlook for the year. Of course, this is driven by a combination of North America and South America, mainly Brazil. In America, we see the commercial sector, in particular, weakening. Maybe as one data point, the ABI has been -17% for the first two months of 2023 in comparison to 2022. That is a sign. Of course, we're watching this very carefully.
In Brazil, it is more of a question of a slowdown, that of course, cannot offset the evolution in North America. Another downgrade, moving on to the next one, which is EMEA. There is, I would say, quite a significant downgrade in the outlook, is that we now have a negative outlook for the year because we see what used to be strong markets with stable demand, moving on to a moment of delayed projects and hesitation. To be clear, demand remains strong across Europe, but in Europe, in particular, the cost of capital increase, combined with, in specific markets, some political changes regarding construction, environment, another element, brings to putting projects on hold. The projects are still there, but therefore for 2023, the outlook has been downgraded.
Middle East and Africa continue strong, unfortunately, they cannot offset the European change we observe at the moment. If you look at the overall outlook, there is no change because we still see that between -5 and -10, where this weakening trend globally, combined with uncertainty, including China, continues to affect markets. On Modernization, the demand remains robust, and in Service, do we observe continued growth across all regions. As you will see later, our OIT performance or in terms of Service remains strong with Modernization. Unfortunately, we had a slow Q1. There is not a way to put it, remain confident that the large projects we are going after for Modernization will materialize in the rest of the year.
With that, I thought it was important perhaps to spend one more slide on China, presenting the slide that we have shown every time as I think a strong indicator of the situation in China. Unfortunately, the latest figure we have are the ones for February, so clearly we don't have March yet. You can see here, first of all, in terms of floor space sold, there is a pickup. When we said the decline has slowed down. However, if you see from this curve, even for Tier 1, we still are below zero, so we still are in negative territory, but of course, less likely than we used to be in the past. You can see that Tier 1 are still much better than Tier 2 to Tier 4.
Nonetheless, this has to be put in perspective with what you may have read, sales orders in China picking up in March for the first time by figures which even talk about 43% year-on-year. First of all, there is a base effect, but of course, you can see there obviously there is a big absorption of the unsold inventory. That, of course, is good news because it means that then hopefully we will then evolve into the positive growth, which is something as in once more, we are hopeful will materialize in the second half. Today it is still uncertain.
I mentioned inventory, which then takes us to the right-hand slide. You can see that tier one, in fact, we are still within what I call healthy levels, so 10-15 months of consumption of housing inventory. Unfortunately, in the Tier 2 and Tier 4, again, the decline has been arrested. We still are into the 20-month area of inventory, which is definitely very high at the level of the previous crisis, and this will have to be absorbed before we can then expect growth in new installation elevator market. With that market outlook, I'd like to pass on the word to our CFO, Carla De Geyseleer. Carla, please.
Thank you, Silvio. Good morning, everybody. Since we met only a few weeks ago, and because the first quarter is seasonally the least eventful one in the year, I try to keep my comments relatively brief to allow enough time for your questions at the end of the presentation. Let me start with slide nine, results in a nutshell. First, some high level comments summarizing our first quarter performance. Then I will give a deeper insight into the relevant topics later during the presentation. Overall, we are very pleased with the first quarter results. Only the muted order intake development clouds the picture a bit. As Silvio explained, the year-on-year New Installation order intake margin continued its upward trajectory. All regions, all product lines contributed to the solid year-on-year revenue growth.
Our Service business continued to grow solidly, supported by an increase in units of more than 4% and a continued execution of the pricing measures. EBIT adjusted and EBIT both printed year-over-year improvements in absolute and in margin terms. Of course there is a one-off real estate gain of CHF 26 million, which supplemented the EBIT and the net profit. Cash flow from operating activities almost matched the previous year result. Higher networking capital requirements could not completely be offset by the improved profit. We move to the following slide, which shows the figures for the first quarter. First quarter 2023 results confirm the positive trajectory with a 10% year-over-year improvement in revenue in local currency and an even higher growth rates in profit, which were supplemented by the real estate gain of CHF 26 million.
Since the Swiss franc strengthened against our main currencies, our revenue and profit growth were negatively impacted by Forex, amounting to 380 basis points and 620 basis points, respectively. Moving on to slide 11 to give you some insight into the order intake development. Order intake reached CHF 2.9 billion, corresponding to a decrease of 8.7% and to -5% in local currency, reflecting the weakening global markets, but also our continued focus on sales margin. Organic growth was -5.1%. Acquisitions contributed 0.1 percentage points, while the FX had a negative impact of 3.7 percentage points to growth. The right-hand side of the slide provides you with an overview of the year-on-year order intake evolution by region and product line.
Order intake represents here all the product lines: New Installation, Modernization, and Service. As you can see, all regions contracted, particularly due to the muted New Installation markets. On a positive new note, New Installation and Modernization margins continued to improve in all the regions. The Service business remained very robust and continued to grow. Order backlog decreased by 5.3% to CHF 9.6 billion. In local currency, order backlog growth was almost flattish at - 0.2%. Given the lead times of more than 18 months, combined with the improved new order intake margins, this backlog is now expected to fuel the continued performance going forward. Moving to slide 12.
The revenue here shown here increased by 6.2% year-on-year to CHF 2.8 billion, corresponding to an increase of 10 percentage points in local currency. Organic growth reached 9.9%, supplemented by acquisitions which contributed 0.1 percentage points, while the FX had a negative effect of 380 basis points to growth. Backlog execution remained strong in the first quarter, resulted in the highest growth rate since the second quarter of 2021. All regions recorded growth in local currencies. Growth across New Installation, Modernization, and Service was robust and broadly similar. Moving to the next slide, I give you some insight in the development of the EBIT adjusted and the EBIT.
As Silvio pointed out, our implemented measures yield results, they are more than offsetting the declining impact of inflationary pressure, semiconductor shortage, product legacy, and supply chain issues. I believe that the two charts on the slide here nicely illustrate how EBIT adjusted and EBIT, including the margins, started to recover from the third quarter 2022. In the first quarter 2023, operational measures resulted in a CHF 49 million improvement. EBIT adjusted reached CHF 272 million, representing a year-on-year increase of 15.3% and 20.8% in local currencies. The margin increased by 0.7 percentage points to 9.7%.
EBIT increased by 33.6% to CHF 282 million, supplemented by the land sale of our former factory in Suzhou, China, resulting in a one-off capital gain of CHF 26 million. The EBIT margin reached 10.1%, equivalent to an increase of 210 basis points. For completeness, net profit reached CHF 212 million, equivalent to an increase of 47.2%. Without the real estate gain, net profit totaled CHF 186 million, representing a year-on-year improvement of 29.2%. I jump now to the slide outlining the operating cash flow development. With a decline of 1.7%, cash flow from operating activities reached CHF 281 million and could broadly be maintained at prior years level.
The solid increase of profit has been offset by higher net working capital requirements, mainly driven by the year-on-year increase in accounts receivable and work in progress. Let me now conclude with the outlook for 2023. We very much focus on the disciplined execution of our strategic priorities and expect a positive EBIT adjusted margin trajectory to continue. Since pricing and efficiency are expected to more than offset inflationary impacts. Our revenue outlook for 2023 remains unchanged, and hence Schindler expects low single-digit revenue growth in local currency for the full year. Allow me now to take the opportunity to thank all the colleagues around the world for their remarkable contribution to the solid revenue growth and the progressive uptake of profit. A sincere thank to all of you. Finally, I'm very happy to announce the date for our Technology Day in Ebikon, Switzerland.
That is scheduled for the October 20th, 2023. We are very much looking forward to welcoming you and meeting you here in person at our headquarters. With that, I hand over to Marco.
Thank you, Carla. We are now happy to take your questions. I would like to ask you to limit yourself to two questions only, given the very limited time we have today. With that, I would like to hand over back to Sandra. The first question is coming from Lars. Sandra, please.
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 the touchtone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from Lars Brorson from Barclays. Please go ahead.
Hi. Good morning, Silvio, Carla, Marco. I'll restrict myself to two. One on the market outlook in developed markets, Silvio, and maybe one for Carla on the margin outlook for the year. I took note of your comments, Silvio, of New Installation order margins improving above expectations. I'll come back maybe and ask to the 2023 earnings outlook. I appreciate that will come more formally in a quarter's time. Firstly, if I can, on the market outlook in developed markets, I wonder whether you can help us a little bit with the specifics. I appreciate newspapers telling us things are gonna get a lot worse, but I also took note that you were referencing the ABI on the first two months. That obviously swung back in March to an above 50 reading.
I appreciate your core exposures in office and multifamily are softer. Maybe you can help us a little bit with what you're actually seeing in terms of any real financial stress among your customers in that market. Equally so, in Europe, I think you spoke about projects on hold. Can you scope that for us? When you look at sort of your total order funnel, what are we talking about in terms of how the sort of the current environment is impacting your customers? That will be my first question. Thank you.
Thank you, Lars. Thank you for these two very relevant questions. I'll start with the one indeed regarding market. Yes. Let me be specific. Yes, in America, the ABI is from back in March, and this has to do with this uncertainty. In our overall global outlook, you, I did particularly refer to this uncertainty, and this is a perfect sign of what we see. This is exactly why we were surprised and frankly disappointed to downgrade some of the markets between February and today, because indeed things changed so quickly, hence our cautious view on the market today. Now let's talk of Americas. In Americas, we see the residential market still continuing strong, depending of course, there are some difference among different states.
I would say even the pricing at the moment continues to be, if you want, solid in terms of being able to offset inflation and even more in the U.S. In terms of to large projects, this is what you will see. There is hesitation. This is true, of course, in the large metro cities. Generally, even in infrastructure and even in smaller cities, in spite of this, you know, grandiose plans that we have now in the U.S., there is hesitation. The capital uncertainty came later probably there in America than it did in Europe. Overall, we see customers hesitating to put ink on a page when it comes to placing orders.
That is even stronger now coming to the other market, which is Europe. There let's talk even about the most important market, let's say Germany or Northern Europe in general. There you can really see customers tell us very clearly, demand is there. I was at MIPIM a month ago where I met many of our customers, they'll tell me, "Demand is there." Some even say, "If I wanted to start a project, I probably would sell all the apartments in a matter of days." They are not happy with the returns they see yet, and hence their hesitation to proceed.
To that, there is also a combination in some particular markets like Italy, for example, where some changes in political environment regarding support to some specific of construction also in terms of energy savings are putting some projects on hold. Similar situation is there in France for other political reasons. Maybe there is a bit more granularity market to market, but overall the situation is this: demand for new housing is there. For housing and for then commercial, then there is hesitation to proceed for a number of factors, including the capital, if you want, scarcity or the low, the low return yields. Carla, would you like to address the second question regarding the profitability?
Yes, I'm happy.
If.
Uh.
I maybe if I sorry, Silvio, if I, if I can maybe just clarify my second question. I was after... I took note of the orders received margins improving above expectations. I wonder whether you can give a bit of a color on that. I was also hoping, Carla, we could get a little bit of color around some of the key bridge items for 2023, at least on the key cost and saving items. It's a little bit unclear to me specifically on cost savings, how to think about 2023. Thank you.
Okay. Yeah. Thank you, Lars, for the question. When you really, you know, take a step back and look at quarter one and you say, "Okay, where is the operational, you know, where is the profitability improvement coming from?" There are a couple of elements there. First of all, we are working through the recovery of the supply chain and the legacy issues which, you know, clearly, you know, support the improvement of the profitability. Secondly, you know, in terms of cost, we really keep them under control and for sure, you know, the overhead cost. Step by step, you know, we are also, you know, getting, you know, some support obviously from, you know, the procurement savings, you know, that are coming through.
When we look now forward and we say, "Okay, you know, what will, you know, further, with further support the uptake of the profitability?" We say, "Okay, we continue to work through this legacy issue," more and more, we are going to focus now and we are already focusing on real efficiencies that are independently from this legacy issue. Secondly, you know, we remain really disciplined when it comes to, you know, the pricing. Thirdly, as you know, in the coming quarters, we will have also a stronger support from the procurement savings. That's why, you know, we are pretty comfortable, you know, to say that the trajectory upwards in terms of profit will continue and that pricing and efficiency are expected more than offset the inflationary impacts.
Can you be specific on the cost savings for this year, please?
I mean, we don't give specific numbers with respect to the cost savings, but I think I try to be, you know, clear, that, you know, we are comfortable with the continued uptake and obviously in H2, we will give a guidance with respect to the profitability for the remainder of the year then.
Thank you.
The next question comes from Andre Kukhnin from Credit Suisse. Please go ahead.
Good morning. Thank you very much for taking my questions. I'll stick to two as well. Maybe just on margin, while we're on it already, could I ask if I think about that CHF 49 million operational improvement, it sounds like from what you're saying, Carla, we should see that if anything expanding further in terms of per quarter impact as we go through the year, and certainly not shrinking. Then I'm just thinking about Q2 specifically. Last year, I think you had the CHF 50 million impact from purely from Shanghai lockdowns. How should we think about that for Q2? Do we stack these up and hence get to quite a substantial margin basis points improvement? Or is that Shanghai non-repeat part of that ongoing improvement?
Well...
I have a second question after.
Obviously we take that part of, you know, the ongoing improvement because you cannot only stack up, you know, the positive movements because of course in the coming period we will have also to deal with the impact of wage inflation.
You were dealing with it in Q1 as well, right? You delivered the CHF 49 million.
Yes. Absolutely. Yeah.
Andre, if I may build on Carla's answer, right? I think to summarize and also to do with Lars Brorson's previous question. In a nutshell, our profit recovery source comes from four elements today: supply chain recovery, resolving legacy issues. Three, cost control with particular focus on overhead. Fourth, pricing. If you're now to build on your question, the Shanghai lockdown is between supply chain and legacy issues. That is clearly not gonna happen this year. I mean, there is uncertainty to be clear. What else can happen? At the moment, there is no sign. To your question, very simply, no, we don't expect to a CHF 50 million impact in Q2 due to Shanghai, but God knows what else could happen. To your specific question is no.
What is important is that going forward, we see more gains coming in from the efficiency measures we have been putting in place, over the last few months as we had committed to deliver. The trajectory correction is one that we don't see only short-term, but we see continuing going forward.
Got it. Thank you. Thank you. We'll keep digging into that. Second question I wanted to ask is on China, and particularly on pricing, if you could tell us how you've seen pricing developing in the market and for yourself, and maybe while we're there, if you could maybe comment on how you performed in the market versus the overall space?
In China, overall, the situation is not that different in some regard with the rest of the world. The specificity in China with the big question I wanted to look into when I was there a few days ago was the situation with this, you know, largest real estate developers who, as you know well, used to account for the vast majority of the growth in the market. The situation has not vastly improved. To the contrary, you know, we see the cost of the government stepping in to help the mortgage holders. We need see them coming progressively to help on restarting some specific sites in making sure there is maybe progressive consolidation in the market, but that's not really progressing that much. In terms of pricing, that reflected.
The lack in the market, we see the decline in pricing slowing down. Most of all, we are holding tight because the credit risk in China remains very high. I'd like to stress that. While we are very well protected in terms of process, but also in terms of balance sheet, when to do with China, one has to be very, very careful about going forward. When I mention no recovery in sight once more before second half, it also reflects the pricing and the credit risk situation. It's coming back, but we're not there yet, Andre. One has to be disciplined in making sure we get good orders, and I'm pleased to say a few of them start to come in. And we have...
We continue driving what we call the mass residential, where at the end it is the bread and butter of the business, where we see some recovery. We also see, as you know, there is an element of working with agents in China, which is very important, and that is about reinforcing and consolidating the agent network by putting in place also new incentives, not only to stimulate demand, but also to make sure that not only the volume is taken care into account, but also the quality of the margin and the credit risk. These are all measures we have put in place together with other, you know, cost efficiency measures to make sure that we remain competitive. It's fair to say the China is still very much in motion as we speak.
Great. Thank you very much. Appreciate your time.
Thank you, Andre, for the question.
The next question comes from James Moore from Redburn. Please go ahead.
Hi, everyone. Silvio, Carla, I hope you're all well. I'll try two questions if I can. I wondered if we could start with pricing. Pricing, could you quantify pricing in orders versus sales as a year-on-year percentage at the group level in the quarter to give us a flavor for where we are at the moment? Because it's obviously quite important to the dynamics. That's the first question. The second question is, whilst I'd love you to give your projected internal FY 2023 bridge by all the moving parts, if you were to compare what it looks like today to where you were three months ago after the last set of results, would it be possible to sort of characterize where you see the different components, whether volume, price, mix, wage, savings, currency, have moved for the better or for the worse?
Thank you, James. Yes, we are well. Definitely well busy as we should be. Thank you for your two questions. Let me first ask to maybe start with the first, you know, quantitative answer in terms of our pricing. We're talking for elevators overall, an increase of mid-single- digit across the board. Across the board in terms of average. There are some parts of the market where we can see that higher, others a bit lower, but this is the overall sentiment for a number of reasons which I'm sure you appreciate. I cannot give more specific in terms of areas.
Carla, in terms of the question, what is this pricing in terms of overall impact and the other element, the moving parts as James calls them, would you maybe like to address this question?
Yes. Yes. When we really look at the bridge, for 2023 and I compare that, you know, with a couple of months ago, I would rather say that the bridge on itself has unchanged for 2023. The pillars, you know, remain the same.
Maybe what changed is actually the positive sentiment in our ability, you know, to execute our plans for 2023.
That's very helpful. I presume that's because you're seeing the start of your plans come through. Are you referring predominantly to your internal actions on new overheads and cost savings? Or are you talking about some sort of more external factors of supply chains easing?
No, I'm referring to the internal one and the one, you know, the initiatives that really, that we are supporting and will continue to support the uptake of the profitability.
Thank you, Carla. James, building on the previous question, perhaps let me say, you know, remember I already one year ago, but I keep this is something now everyone in the company knows about this formula, that pricing plus efficiency has to be higher than inflation in terms of impact. To your previous question, it is fair to say that so far we've been now delivering on that, on that formula, but the key contributors so far has still been pricing more than efficiency. In the net, we have, we've had, of course, efficiency gains in terms of resolving legacy issues. To be completely honest, when I say, as we speak with the team, we cannot really call this efficiency. This is about fixing problems.
The real efficiency impact that we are driving will come going forward, and I think this is gonna be very timely because, you know, with uncertainty in the market, I'll be very open how one has to be also very conscious that pricing is not entirely in our hands. We need to, of course, continue doing that, but then it's important how the efficiency comes through as well. It's a bit qualitative, but hopefully it helps to show how we look at this, but also giving an idea that today pricing indeed has been the main driver so far.
Thank you. Thank you. Thank you. Thank you to both of you.
Thank you.
Thank you, James.
The next question comes from Daniela Costa from Goldman Sachs. Please go ahead.
Hi. Good morning. Thanks for taking my question. Most of the operational questions have been answered, but I wanted to check in terms of like balance sheet and capital allocation. Obviously you still have, I believe a 15% stake on Hyundai. The litigation is done. You have sort of said last time around that you wanna keep some cash on the balance sheet for future opportunities. Can you talk through sort of like the merits there of why does a 15% stake make sense? What's the pros and cons of smaller or bigger and how that ties into your thinking about where you want your balance sheet to go more broadly?
Thank you, Daniela. Thank you for your question. I'll let me take the question in two parts. I'll answer about the Hyundai element and Carla will speak about the balance sheet, capital allocation. Perhaps to clarify one element, the litigation is not over, meaning we now have a Supreme Court unappealable verdict, which we definitely welcome. Now of course this has to be enforced and the enforcement, as you may have seen in the paper, is still in progress. There are other and I'm afraid, you know, we definitely don't like that, but that's a fact. There are other ongoing lawsuits which are already quite well advanced through the different instances which are active.
Until those are not completed, we are in no position to make statements or even I would say, let's be very open, plans about anything going forward. Maybe one element, why do we mention it? Is simply because, you know, it's important that, you know, while not being riding over, overall aggressive and we definitely we're not a litigious company. However, you know, where we feel that our rights are not being respected, we are prepared to stand our ground. I think that is a thing is important that comes across as a message. Yes, it took time, but we are confident that now even more than ever that we were right to initiate the proceeding that we did.
Carla, regarding the balance sheet capital allocation, perhaps you'd like to build on that.
Yes. Yes. Thank you, Silvio. Daniela, thanks for your question. When we look at the balance sheet, first of all, there is no change in our overall, in our position with respect to the balance sheet. There are a couple of elements I would like, you know, to point out. Because our liquidity of course reached quite a solid level, there will be material outflows in Q2. First of all, you know, the dividend is quite a big cash outflow. You know, that happened already in April. That is number one. Secondly, we have a bond, you know, CHF 400 million that expires in June. That is the second element.
Why do we remain conservative with respect to the balance sheet? Because obviously, you know, we really want to give ourself the maneuvering room when we see interesting opportunities in the market that we really can go after it. And I think with the volatility that takes place in the market, it is not, you know, unlikely, you know, that some of it, some of interesting assets will come under pressure and hence, you know, we would like, you know, to keep that freedom. And actually, you know, after having dealt with the headaches for a couple now, for a long period on how to create a return on our cash on the balance sheet, now we finally move into areas with a positive interest. It becomes less of a headache for us. And we moved from a treasury perspective.
Now we reached already more than 1% as an average return. You know, that at least, you know, brings in quite also a nice financial inflow in the coming period. Silvio, would you like to add something to this?
I think, this said and of course we continue observing the general balance s heet, as we said.
Yes
On a regular basis while we're staying, clearly, you know, faithful to our admittedly conservative views on how to make sure, we take the business forward. Thank you, Daniela, for the question.
The next question comes from Patrick Rafaisz from UBS. Please go ahead.
Yes, thanks, and good morning, everyone. Two questions from me, please. The first one is on the backlog execution, which is driving the top line right at this rate. Now, if I look forward, obviously you maintain the guidance here for low single- digits in organic terms, but, you know, the comps in Q2 will be super easy. Assuming a continued backlog execution, we might even see an acceleration, right, in organic growth. You know, how, yeah, how should we think about the second half? Are there any reasons why organic should slow down dramatically, potentially in negative territory? Or is it just still too, you know, too uncertain of an environment to talk about that? That's the first question.
The second one is on the delays you were mentioning, in projects, especially with transportation. Is that something that's already affecting your, well, ongoing business? Is the working capital absorption, for example, that you talked about in the cash flow maybe already to a certain extent related to this or recovery, base, for the cash expanding due to that? Is that something we should be concerned about? Thanks.
Good. Thank you, Patrick, for both questions. Let me start with the second one, then I'll pass to Carla for the one regarding the backlog execution. By all means, the project delay isn't only affecting our business today, but it has been affecting it in China, for example. In China, the backlog is particularly large and there, many projects for a number of reasons, which has to do with the credit situation of some large developers, which is not so much affecting us, but the general sentiment in the market.
Generally, availability of force due to COVID in China, that is an example where revenue has been slowed and before, I think, there was a question relating to the to the CHF 50 million lockdown impact in Q2 last year. That's an example. Yes, definitely that has been affected. Now, this situation today we talk about in Europe, it's more about new projects, so it's not about the backlog. In Asia, in China, that project delay has also been affected, something that has to be taken into account. Now on backlog execution, Carla, perhaps you just take a crack at it.
Yes. Yes. Patrick, thanks for the question. Yes, your statement with respect to Q2 are completely underrated. Given, you know, I would say assuming that there are no unexpected events, for sure, you know, it's very likely that we see a continuation of that top-line development and also a progressive, a further progress in the uptake of the profitability. Yes, we stay, you know, prudent, and it has to do with the uncertainty in the coming period. We allow ourselves also to reassess the situation at the end of the second quarter. Yeah. When we give also an outlook with respect to profitability. Does that answer your?
Okay, thanks. Yeah, yeah, it does help. Thank you.
Super. Thank you.
The next question comes from Johannes Brinkmann from AWP. Please go ahead.
Good morning. With respect to Hyundai, how many litigations are still open? When do you expect the litigations to end?
Thank you for your question. We have two litigations open. Now, the second question.
Sorry, two?
Two.
Two litigations?
Two litigations.
Yeah.
Open.
Okay.
As long as to how long they will take, it is not in our hands. You say the first one that was initiated beginning of 2014 took almost 10 years. The other two were initiated in the following years. I have no information. We'll definitely be trying to make sure they are, they are resolved ASAP. They are not. I cannot tell you how long it will take. I'd rather be conservative and say they will take the time that takes, and we respect the time needed by the Republic of Korea Tribunal to resolve all the issues.
Is this going for months or years? What do you think?
Honestly, I'm not a lawyer, I don't know. If based on the, on the experience, of the other one, I think it's best to be conservative talk about years, than in terms of month. This is now, but I shouldn't say that. This. It's really up to the tribunal. I don't know what to say.
Okay. Thank you.
Thank you. Thank you for the question.
The next question comes from John Kim from DB. Please go ahead.
Hi, good morning, everyone. I was wondering if we could go back to China and talk a little bit about any sort of specific policy initiatives or what you may call rescue capital financing going into your buyer base. Are we seeing consolidation on developers, either voluntary or forced merger? On price points, are you seeing, perhaps, trading down on new equipment orders or installations? A little bit cheeky, but last question. Within your order book and backlog, I think last time we spoke, you had mentioned that you were pruning that backlog for orders that were, perhaps costed or priced in a way that was pre-pandemic, i.e., disadvantaged. Thanks so much.
Thank you. If I understand, so let me. The first question is about China, right? Now the China measures evolve continuously. I refer to this briefly, but I think the government definitely has made a statement that while until year-end, there was a distant position vis-à-vis real estate and construction. After the election of the new standing committee, after the appointment of the Prime Minister Li Qiang, who by the way, he used to be, as you know, the party secretary of Shanghai, someone who definitely is close to business, as well. There has been specific referral to the fact that real estate and construction will be supported by the government.
With that, there has been the priority on protecting, first of all, as I mentioned, the mortgage holders, whereby banks have been given special leeway in in allowing for helping those distressed mortgage holders. The second element you observe is that the famous three red lines policy that was imposed on construction and real estate companies has been partially relaxed. I would say this was more, at least I understand, on an individual application basis to allow for some of these construction companies to restructure and come back to business. Finally, we see in terms of bank support credit to some of these companies, that's the other consequence. These have been encouraged and asked. I think, I referred to this when we spoke in February.
However, what we see there, of course, this is the Beijing mandate, how the banks at regional and state level, province level, are applying those now, is a matter of, local execution. All in all, and there are a few other measures that are coming through, It is reassuring to hear there is a, there is a will now in terms of execution. That's part of the timing and uncertainty, and that's why we remain of the opinion that before second half, this will not trickle down to our, to our business yet. In terms of backlog, perhaps would you, Carla, would you like to take, that question?
What, can you repeat the question?
John, do you mind repeating the question regarding the backlog, please?
Sure. No problem. I believe you went back to customers on orders that may have been priced at really disadvantaged levels, effectively looking to get a bit more commerciality in some of the backlog. Is that process complete? When we look at the order intake and order backlog, is that process largely done? i.e., is the backlog lower year-on-year because your hurdles or your internal requirements are different materially? Thanks.
Thank you. Yeah, that is an ongoing process. We really focus on these major pro-projects, and as they are getting executed, it's an ongoing process, you know, to further improve the margins and actually to ensure, you know, they are less dilutive. That actually, you know, is covering, I would say, the lifespan of the project. In some of the projects, we are more successful, and in some of the projects, we are less successful.
Building on this, John, maybe one element here. This is called, depending on which market you operate in, is either change notices or variation orders. The ability to enforce that, which is always legitimate based on cost changes, has also to do with the legal environment of the markets where we operate. For example, in common law countries where there is really a construction law, and then you have quantity surveyors type competencies, both on the side of the elevator company like us, but also on the side of the customer. This can be driven professionally.
We have been, I would say, quite successful, even almost above expectation in driving those change notices in a very professional way, which ultimately then improves the backlog margin and the execution of the projects profitably. Where we struggle more is in countries where such practices are not as well established. Typically, you would say, some parts of Asia, for example, China, where this is less so established. Though there in those countries, we have an inflation clause in our New Installation contract. There it's about enforcing those clauses, which again, was admittedly, and this is definitely not a glorious thing for our industry, not so, not so well applied.
Now we are definitely, insisting on these being applied, and so this is part of the challenge we face going forward.
Great. Very helpful. Thanks so much.
Thank you.
The last question for today's call comes from Martin Hüsler from ZKB. Please go ahead.
Yes, good morning. My two questions. First of all, coming back to the sales growth of 10%, I think you alluded to that, but can you rephrase the trends in New Installation and existing installations? In connection to that, where did you see the stronger margin improvements of the 70 basis points in Service or in New Installation? That's the first question.
Thank you. Carla, would you like to take this question?
Yeah. Yeah. The uptake in this, in the margin is, as I said already, you know.
Sure, please.
Oh, yeah. Sorry, we were discussing, you know, the sequence of the question, but if I just first, you know, take your last question, with respect to the 70 basis points, it is actually a combination. A combination of the uptake in NI, but also, you know, in the Service business.
Okay. The sales trend of this +10% for the whole group?
Well.
How is it split among?
The sales trend in the group is definitely, you know, coming to a degree from the New Installations, and that is as we are working actually through the backlog in a very disciplined way. The uptake is mainly related, you know, to NI, and we expect that also for the coming quarter. Of course...
Okay. Thanks for the help.
...as I mentioned also, you know, earlier, of course, there is also support, you know, from the expansion of the portfolio, yeah, as our units, you know, increased with around 4%. The third element, you know, which plays a role is the pricing. We pointed that out also. That is also one, you know, of these four levers, you know, that Silvio touched on that is also supporting the profitability.
Okay, thank you. Then the second question, what do you think is really behind the weak development in order intake in Modernization, when the outlook is still so favorable? Is this project by project, or is there an underlying dynamic that we should be aware of?
Thank you for this question. It is indeed one I myself addressed openly at the beginning. There is no, I think there is no other way to say we are disappointed with our Q1 order intake Modernization. Well, because in the face of a robust market, we've fallen behind. There, no, it's huge. That's something we need to fix, and we will fix. Going granular, there are two elements to that. First of all, this is, you know, biggest part of our portfolio, so the biggest part of our Modernization potential is largely in Europe and in the U.S. Now, you heard our what I said before about market uncertainty, about delayed projects.
A lot of the projects that we have into our pipeline for award and order intake are in these two markets. Customers hesitate to move not only new installation, but also in existing installation, any modernization as well. That has been the key, one of the two key other drivers for unfortunately our below par performance in the Q1. The other one is that a lot of the mod growth has to come from China. And there, you know, to somehow drive the mindset of change over transitioning from an NI key focus to a Modernization and Service is one of the challenges we, but I believe probably most of the industry faces in China, which then results also in this gap. Overall, therefore, what does that mean in terms of going forward?
We need to become stronger in terms of the, let me call, bread and butter modernization, which is less of large projects and more of the day-to-day business, where indeed, the launch of a new commodity or rather, modular platform will help because some of the same components will also be applicable to the Modernization. Your question is very well taken, and as you hear, we are taking this very seriously.
Okay. Thanks a lot and good luck.
Thank you.
Thank you very much for attending this call today. We'd like to close now. Please feel free to reach out for any follow-ups you might have. The next event is the presentation of the half year results on July 21st, well, obviously 2023. Thank you again. Take care and goodbye.
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