Ladies and gentlemen, welcome to the Schindler Conference Call on Half Year Results 2020. I am Moira, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. The conference must not be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Schindler. Please go ahead.
Good morning, ladies and gentlemen, and welcome to our first half twenty twenty results call. My name is Nicole Wech. I'm the Head of Global Communications here at Schindler. And I'm here today with our CEO, Thomas Atzli and Urs Scheidegger, our CFO. Thomas will give a short introduction and guide you through our results.
Ulf will then take you through our financials. After this presentation, we are happy to take your questions. I would like to ask you to limit your questions to 2 questions per person only. With that, I hand over to Thomas. Please, Thomas, go ahead.
Thank you, Nicole. Good morning, ladies and gentlemen, also from my side. You will have seen our statement from this morning in which we announced the launch of our cost optimization program. As an industry leader with 146 years of heritage, our focus has always been the long term health of our company. Our ambition is to grow faster than the market and shape our industry by customer excellence, quality and by driving technology, change and innovation.
However, we find ourselves in a changing and challenging market environment. As a Swiss company with a global footprint, the accelerated appreciation of the Swiss francs continues to impact us, damaging our cost competitiveness. Just consider the following. Over the last decade, the continuous appreciation of the Swiss francs has hit our revenue by a staggering CHF2.5 billion and our EBIT by CHF 364,000,000. At the same time, we increased our global footprint.
Our workforce increased by 24 1,000 employees to now more than 65,000 employees worldwide despite these challenges. The foreign currency headwinds are here to stay. The Swiss franc is regarded a safe haven and symbol of economic resilience. Meanwhile, the COVID-nineteen crisis has accelerated a global recession, and we see a high level of uncertainty regarding all economic developments. We expect markets to further contract, and we expect pricing pressure to rise.
Therefore, we need to act now. Firstly, we will align or realign our capacities and resources, which means launching a cost optimization program. We will also reduce some 2,000 jobs globally over the next 2 years. Although where possible, we will use natural attrition, early retirements and voluntary redundancies. Secondly, we will continue to pursue our long term strategy of driving digitization and innovation.
We keep investing in strategic projects to shape the future of our industry and that of our cities with smart urban mobility. This means, on the one hand, transforming our business digitally. We believe digitization is a catalyst and key change agent for our industry, enhancing customer experience and the safety of our products, transforming our whole value chain, opening up new opportunities to create value for our customers, our users and our employees. All of this is happening faster than ever, changing the way we work. In addition, we will continue to accelerate innovation.
As you know, we have launched our new modular elevator generation, which helps not only reduce the complexity and variety of components in our global product offering, but also gives customers a better user experience and more convenience during elevator journeys. And you will have seen that in recent months and you will have seen that in recent months, we have launched clean mobility solutions encompassing touchless and on hygiene and sanitization focused solutions for elevators, escalators and moving walks. A time of crisis, therefore, also means a time of change. The last few months have once again shown us what we are capable of. With incredible agility, Tim Schindler has brought the ballast tremendous innovation in a very short time.
I've said it before, and I will say it again, I'm really proud to be at the helm of such a company. With that, I'd like to draw your attention now to our results presentation. And I would like to draw your attention to Slide number 2, which gives you a market overview. Many countries came out of lockdown and have gradually reopened in late Q2. However, every country displays a different recovery curve with some countries even taking steps towards lockdowns again.
We will provide details about the individual markets on the Slides 6 to 8. But just to give you a short overview, China came back very strongly in new installations in Q2. EMEA displays very mixed fixtures by country and by business line. The situation in the Americas remains very challenging, which translates into a continued difficult market situation. The service business remains resilient, and we still see uncertainties in the market and project delays.
Moreover, pricing has intensified. In addition, some customers face liquidity issues even though our teams continued doing a great job, especially in networking capital. On top of this, the appreciation of the Swiss francs has again accelerated in Q2, negatively impacting the translation of our results into Swiss francs. Let me now turn to Slide number 3. You see what the strong Swiss francs did to our revenue and our EBIT in the last 10 years.
As I already mentioned, accumulated translation impacts amounted to more than CHF2.5 billion for the top line, which represents more than 22% of our full year 2019 revenue. The negative impact on EBIT is also staggering, amounting to over CHF 360,000,000. Despite having implemented various measures in the recent years, the exposure from corporate functions in Switzerland still leads to a negative impact on EBIT and on EBIT margin when translating consolidated results into Swiss francs. I now move to Slide number 4. The safety and the well-being of our employees, the family members of our customers and the passengers who use Schindler elevators and escalators throughout the world every day continues to have our highest priority.
This absolutely remains unchanged. I am now I'm very proud how Schindler, as a global team, has executed on measures during this crisis. The focus always was on our 4 priorities: our employees, our customers, the supply chain and on protecting our financials. All plants are up and running again, while office staff is still working from home in many places with high levels of motivation. As a highlight in Q2, net liquidity and operating cash flow came in very, very strong despite the difficulties we encountered.
Moreover, we have quickly rolled out new clean mobility solutions, promoting touchless, sanitization and physical distancing innovations to boost hygiene and safety in elevators, on escalators and on moving walks. Let me turn to Slide number 5 for some further details. Schindler already offers a growing range of future ready, highly scalable services for the digitally enabled world. However, health and well-being now require a new service offering, Clean and topsolets operation as well as a passenger space solution are now also part of our growing range of services. Touchless elevator calls are possible with our Schindler Clean Call with non contact sensor solutions, with the Schindler Elevate Me app and, of course, with the already long term well established MyPort solutions now as a public app solution.
Additionally, Schinkler Clean Cover provides an antibacterial protective film to cover elevated surfaces. New offerings also cover sanitization solutions as the Schindler Ultraviolet Clean Air Air Purification System and Schindler Ultraviolet Clean Car System that cleans the cabin surfaces without using harmful chemicals and Schindler Ultraviolet solutions for escalators and moving work handrails, providing reliable and automatic disinfection. Our new solutions have been very, very well received by our customers. Now let me move to the different markets, and I will start on Slide number 6 with Asia Pacific. China.
China recovered in Q2, showing strong growth in new installations. The speed of recovery was supported by government spending for infrastructure projects. The strong Q2 order intake brought the year to date order intake of China back to 2019 levels. Markets in Southeast Asia contracted significantly, particularly in the commercial sector. We still see limited recovery in India.
The market activity is still severely impacted by the lockdown. Order intake remains well below 2019 levels. We also know increased price pressure throughout the whole region. On a positive note, we have successfully launched our modular product range in a number of markets in Asia. And we still see modernization opportunities now with the new clean mobility solutions.
Last but not least, all factories are up and running again. Let me now move to Slide 7, the Americas. In the Americas, the uncertainty remains high. The Americas were not only late in the pandemic cycle, but also many countries now show signs of a second pandemic wave. New installation activity in North America has slowed down tremendously, and we also see severe impacts on service and repairs and modernization in the nonresidential segment.
Latin America new installation markets experienced a severe decline. Also here, we see increased price pressure, not only in new installations but also in the service business. Nevertheless, I'm happy to say that everywhere, all our factories are up and running again. So I move to the last market, EMEA. With the reopening of markets, particularly in the Northern Europe, displaying a solid development with stable new installations and service businesses.
Southern Europe markets returned slower than in Northern Europe but with intensified price pressure. New installations order intake came in at 2019 levels. Maintenance markets remained resilient. Our modular product range has been successfully launched in several markets. Product introductions will continue in quarter 3.
Also here, I'm happy to say that all factories are up and running. Now with this, I would like to hand over to Urs for an update on the financial results and the outlook for 2020. Urs, please.
Thank you very much, Thomas. Good morning, ladies and gentlemen, and welcome on my behalf to today's conference call. So let's take a look on our financial performance in more details. I start with the key figures of the Q2 2020 on Slide number 10. In the Q2 of 2020, order intake was clearly impacted by COVID-nineteen and decreased by minus 15.6 percent to CHF 2,600,000,000 corresponding to a decline of 9.9% in local currencies.
Please remember, order intake includes all product lines, new installations, modernization, service and repairs. Order intake declined in all three regions, with EMEA being always slightly negative, followed by Asia Pacific and the Americas. Results in EMEA were driven by a resilient maintenance business and food order intake in Northern Europe. Asia Pacific saw a fast recovery of the business in China with double digit growth. However, this did not offset the significant drop in Southeast Asia and in the Americas, new installations and discretionary spending on repairs and modernization contracted severely, only partly offset by the relatively resilient maintenance business.
Revenue was CHF 2,500,000,000 in the Q2 of 2020, a decline of 11.8% compared to last year's quarter and equivalent to minus 5.8% in local currencies. All key currencies against CHF decreased strongly. Foreign exchange translation effects have been CHF 172,000,000. The deterioration of revenue was mostly here in the Americas region, followed by EMEA. Asia Pacific was slightly positive in Q2, but showing a mixed picture.
China reported strong double digit growth figures, whereas the rest of Asia was negatively impacted. Operating profit was significantly impacted by extraordinary impacts and decreased by 20.8% to CHF 255 1,000,000 equivalent to a drop of 12.7% in local currencies. Foreign exchange translation effects had a negative impact of CHF 27,000,000 restructuring costs of CHF 26,000,000 expenses for building lines
of CHF
5,000,000 protective measures related to COVID-nineteen pandemic had further negative impacts on EBIT. EBIT adjusted before restructuring costs in building mines amounted to CHF286,000,000, equivalent to a decrease of 14.4% against previous year's CHF 334 1,000,000. This led to an adjusted EBIT margin of 11.4%, down by 30 basis points compared to previous year. However, it is a remarkable increase of 2 40 basis points compared to the Q1 of 2020, mainly due to the realization of cost measures and strong performance in China. Net profit in the 2nd quarter totaled to CHF188 1,000,000, a decrease of 21.8 percent caused by the operational performance.
Cash flow from operating activities reached CHF313,000,000 versus CHF 85,000,000 in previous year, impacted positively by a strong performance in net working capital, which I'm really happy about it. Now I would like to draw your attention to the performance after 6 months on Slide 11. In the first half of twenty twenty, order intake decreased by 12.1 percent to CHF5.4 billion corresponding to a reduction of 6 0.6% in local currencies. Apart from a good performance in maintenance, all business lines contracted, mainly impacted by reduced overall business activities due to the COVID-nineteen related lockdown measures. The EMEA region was the only region to slightly grow its order intake compared to previous year.
The Asia Pacific and the
Americas region showed severe reductions in order intake. Revenue fell by 8.7 percent to CHF 5,000,000,000, equivalent to a negative growth rate of minus 3.1 percent in local currencies. Negative foreign exchange take a quick look on Slide number 16 for an overview on the order backlog and revenue development by region in local currencies. Despite the positive contribution from China, the Asia Pacific region decreased most, followed by the Americas and EMEA region. And to the right, you can see the distribution of backlog by region.
Please now return back to Slide number 11. Operating profit in the first half of twenty twenty totaled CHF421 million, 29.4 percent less than in the previous year. In local currencies, it is negative 22.7%. EBIT was severely impacted by lower revenue generation due to the global recession. Therefore, the EBIT margin dropped significantly by 2 50 basis points to 8.5%.
Before restructuring costs of CHF 77,000,000 and expenses for building lines of CHF 9,000,000, EBIT adjusted dropped to 10.7% and in local currencies to CHF507 1,000,000, equivalent to a margin of 10.2% versus 11.3% in the previous year. The restructuring cost of CHF 77,000,000 were recognized for the closure of the factory in Spain and efficient initiatives in the countries. Net profit reached CHF313,000,000 compared to CHF 436,000,000 in the previous year, reflecting a deterioration of 28.2 percent. Cash flow from operating activities totaled to CHF 636,000,000. This shows a significant increase compared to the first half of twenty nineteen, which was CHF 348,000,000.
Remember, in hardly a close in 2019 included a settlement of pension obligations in a country in Europe. Adjusted by that, cash flow in previous year amounted to CHF 505 1,000,000. Schindler was able to significantly strengthen its cash flow and net liquidity, thanks to improving net working capital and based on solid cash flows and maintenance. Our net liquidity amounts to CHF1.9 billion. As of June 30, the order backlog was stable at CHF 8,900,000,000 coming in 1.2% lower than in the previous year.
In local currencies, it is an increase of 2.4%. As Thomas has already mentioned in his opening remarks, enhancing our cost structure is essential to remain competitive. Please turn to Slide 12 for an overview of our cost optimization program, which we announced today. We see 3 forces providing headwind. It's the strong Swiss franc, Thomas was already referring to.
Then there is significant pricing pressure in the market, particularly in new installations and finally, contracting markets due to the global recession. In order to stay competitive in the market, allowing us to generate sufficient profit to deliver on our growth agenda and invest into the future, we need to reduce 2,000 jobs globally. These cost optimization measures are estimated to cost up to CHF 150,000,000 for the duration of the program. With that, I'd like to conclude my part by giving you our outlook for the full year 2020 on Slide 13. Uncertainty regarding economic developments remains high, and we expect no market recovery to 2019 level before 2020 2.
Foreign exchange translation effect continued to impact our business negatively. We also expect increasing price pressure across our business with the service business being more resilient than new installation and modernization. Based on no further shocks or unexpected events in the key markets, revenue growth for the full year 2020 is expected to reach between 0% and minus 6% in local currencies. We expect around SEK 130,000,000 restructuring costs, SEK 30,000,000 higher compared to previous announcements. About €100,000,000 are related to today's announced cost optimization program.
Net profit for the year should be expected to reach between CHF680,000,000 to CHF 720,000,000. This outlook also includes the first time consolidation of forkliftjingle Elevator in China.jingle holds a 49% participation in this company and will consolidate it starting in July as contractual rights to increase its stake to 51% will become exercisable. OCSF Schindler is a local Chinese elevator and escalator company and is expected to generate approximately CHF 130,000,000 of revenue for the full financial year 2020.
Thank you, Orest. We are
now happy to take your questions. The first question is from Fabian Hecke from UBS. Please go ahead.
Yes. Good morning. And I will stick to 2 questions here. The first one is a bit that when I read you release, I had seen there's a bit a gap or disconnect between how conservative you describe the markets and the global new insulation outlook and how you describe your business performance by region in Q2. So basically, you say China is back to 2019 level, had quite a significant recovery.
But also in Europe, you say that your business performance is back to 2019 level. When we take I mean,
if you take and at
the same time, you say global new insulation market is unlikely to recover before 2022. But if we take China and EMEA together, this is about 80% of the global new insulation base. So is this I mean, is this a very conservative description of the market and you're expecting to continue to outperform how you did? Or how shall we exactly read your guidance here? This is my first question.
Thank you very much for this good question. It is true that when you look globally, it is true that in China, we had a real V shape. So we had a fast drop in quarter 1, but we also had a fast recovery of the market in in quarter 1, but we also had a fast recovery of the market in quarter 2. And we are expecting that this market continues to be plusminus on the level of the previous year for the second half of the year. Our performance was very strong, I have to say, in China.
We were suffering a lot in quarter 1, like many, many others have done as well. But I have to say, the team has really done a very strong job in the Q2 and was catching up what we lost in Q1 so that at the end, by the mid of the year, we were on previous year's level. And I talked about order intake. I think that's very important. When we look on Europe, we have a very mixed picture.
We have a very, very mixed picture. Some of the countries have done very well, especially Northern Europe. Some of the countries have been hit less than others. But we do see that in 1,000 European countries, this was a really tough, tough impact. So when I look on Spain, on Italy, when I look on Turkey, when I look on France, it was a really severe impact.
Now we are expecting that somehow those markets will start to recover and because we have seen that lockdowns have been removed to a certain degree. But we also see that the markets who had a big hit, they are coming back a little bit slower in Europe. Then when I look on Asia Pacific, and I think this is very important, there is still a big, big market in Asia Pacific outside of China. There, the picture looks different. The 2nd biggest market in the world is India in terms of units.
And as you know, we also have a very strong position in Southeast Asia. We have a very strong position in Australia. So the Asia Pacific market is an important market for us. And there, I have to say, the impact was very severe, and we do not see that those key markets are coming back very rapidly again. So yes, we had a very strong performance in some parts of Europe.
We were happy with this, and we were extremely strong also in China. And then, of course, there is a unit, the last in the row who was hit by the pandemic was Americas. And we all are following up what is happening in the U. S, what is happening in Mexico, what is happening in Brazil. And I have to say that we do not see that those markets will come back on previous year level, so 2019 level towards the end of this year.
We believe this will take much longer, especially certain sub segments are hit much more when you think about the retail segment in the U. S, when you think about the commercial segment in the U. S, there we believe we will not be back overall on 2019 levels before 2022. So Asia Pacific and Americas are those 2 key markets where we see a longer time until markets are coming back, plus certain countries in Southern Europe.
Okay. That is clear. Thank you very much. Then to my second question is on the service business.
So first of
all, you said it's been resilient.
If I have it on
top of mind correctly, I think you expected initially also to grow services throughout the year. Is this still the case? And have you been even growing in services during Q2? And then also to services, you talk about pricing pressure. Is this related mostly to new insulation?
Or do you also see some pressure on service contract? Or is this more protected given the duration of the contract? And maybe you can also separate here what has been the impact of COVID-nineteen on some temporary reduction outside China. Has this been a big topic at all? This will be my second question.
Okay. Thank you very much. So yes, we have grown in local currencies our service business, also in Q2 and throughout the whole period of the first half twenty twenty. So yes, our service business was growing. However, when you then look into the service business in variable rates, so actual rates.
There, of course, we also have this negative impact of the translation losses. Now coming to the
second question
or a little bit more in detail, how the resilience has been. Yes, it has been resilient. Definitely, we can say we have a very strong installed base. And I think also thanks to our technology and the well trained people, customers in such a very difficult environment, value high, that we do deliver a premium service. So I think that was good for us.
And Schindler Ahead has also helped us in that, that we were able to support our customers also in moments where maybe we had difficulties to reach an installed unit. We also had to do rebates. We had to do rebates, and we discussed that in Q1. We are willing to do that because we believe it is very important also to show loyalty to the customers because customers will pay that back as a loyalty for the future. And this is different from market to market.
Probably the most severe impact we had in the U. S, which the U. S. Has reacted from a customer point of view very fast. And in the U.
S, when you look on the installed base, it's a little bit different to other markets where we have much, much more residential units installed. In the U. S, we have a lot of commercial units installed, including retail. And there, I have to say, we had to act very fast to support our customers, and we had some substantial rebates we had to give or to grant to our customers, which, of course, has not only hit our top line, but it also has hit our bottom line. In the other areas of the globe, we see that there is an intensivation of pricing.
So customers have become more price sensitive, especially when you want to renew a contract or when you have a new installation and you want to convert it now into a paid maintenance, there as some of the buildings have not been occupied for a long time, there was some delay in this NI conversion. Thank you.
The next question is from Martin Husler from Zuylka Cantonal Bank. Please go ahead.
Yes, good morning and thank
you for taking my questions. Just first question for understanding reasons. So you say of the EUR 150,000,000 restructuring costs that will occur in the next 2 years, EUR 100,000,000 is already reflected in the program for this year, which means that for next year, only about €50,000,000 incremental restructuring costs should incur. And is this all for next year? Or do you have usual restructuring costs in the range of €20,000,000 to €30,000,000 on top of that?
That's the first question. Maybe Urs, yes. Thank you very much for the question. Yes, we have announced cost optimization program of SEK 150,000,000. It's correct.
Your understanding, SEK 100,000,000 will be charged to this year. So the to do for this year of about CHF 50,000,000 is related to it. And also, already some charges are in the hardware closing. Additional €50,000,000 are planned for next year on this program. But it's also fair to say that there will be some small local efficiency programs possible next year.
We will have to confirm it later. Okay. And the new clean mobility solutions. I was just wondering whether each of those product is retrofitable for existing installations? And if yes, I mean, it must be a huge market actually to retrofit basically all of the existing installations?
Yes. Maybe I can answer that. Of course, when you look on this Slide 5, when you have the ultraviolet cleaning of the handrails in escalators, you can do that for all escalators, definitely. Then you do have a certain the clean coal, of course, you can do that only with a newer elevator where, let's say, these fixtures also fit into the existing elevator system. But overall, when you then move more to the right side, these are elements when you have ports.
Of course, you can use that wherever you have port installation today. You can use this public MyPort app. And sanitization or the hygienic tools for the air and for the car, you can use everywhere. It's independent from your elevator system you have. So some of those solutions are available for everything.
Some of those solutions are a little bit specific for certain type of elevators. But as we have 8 different solutions, you find for every type of installation a Schindler clean mobility solution. And I can say and I can confirm that the, let's say, appreciation of our customers has been huge. We were very, very satisfied by the feedback of the market. In fact, honestly, some of the subcomponents are difficult to find in the market.
When you have ultraviolet lamps at the moment, this is the ramen in the market. So you really have to set up a very good supply chain for this.
Okay. Thanks a lot.
Thank you.
Maybe the next person?
Next question is from Lucy Carrier from Morgan Stanley. Please go ahead.
Good morning, gentlemen. Thanks for taking my question. The first one would be on your cost saving program. So I understand you have EUR 150,000,000 in terms of restructuring costs related to that. But could you help us a little bit to quantify the actual savings you are expecting out of those initiatives?
And how this should be phased from the second half of twenty twenty and into the future, please?
Thank you very much for the question, Lucie. This cost optimization program is has a global scale and across the world. And we have just announced it, and now we are finalizing the plans to realize it. It's a program over the next 2 years. And hence, savings will depend on timing of realization very much so.
And I think we also have to add on this, maybe a little bit the big picture, just to put it into perspective. So if you assume that you have some contracting markets or markets are not coming back as big as we all would wish, The consequence out of it is increasing price pressure. So this will have a pressure on the margins of us because we don't want to deviate from our overall ambition. We have said that many times, we would like to grow faster than the market. Now this is not only an ambition for a single quarter.
This is a long term ambition. Now with our assessment of the future that some major markets only come back until not before 2022 And considering that we do have a disadvantage now with the currencies because we do have these translation losses also with a heavier structure here in the Swiss francs, and this costs us some basic points. We have to say that this can be up to 30 basic points. We are losing because of just this is our home country here in Switzerland. Those savings are mainly to compensate those negative impacts we are facing.
And so it's not that we have the view that now we will dramatically overshoot or increase due to the cost optimization program our EBIT margin, but it's more to compensate all those negative impacts we are facing as a Swiss based company.
Thank you very much for the color. That's very helpful. My second question was around kind of your services maintenance business. So first of all, just to clarify completely because one of your competitor defined services, including maintenance and modernization. Sounds like for you, it's mostly maintenance.
So my question is, if you think about your sales in maintenance, how much of your maintenance revenues globally are coming from commercial installation rather than residential?
So you can say well, it depends. Just maybe first clarification, yes, when we talk about the service business, we talk about the maintenance business. This is correct. We do separately, we have a modernization business, and we do have a service business and a repair business. So yes, when we talk about service, we talk about maintenance, correct.
Now this split into residential and commercial, we do not provide on a global scale. But what I can say is that it is very different from country to country. So in the European markets, you can definitely say that the residential business is much bigger than, for example, in the U. S. Market.
So there are a lot of markets where you have a very strong residential baseline. This is mainly Europe. This is also Latin America and also some countries in Asia. And then you have markets where you have a strong commercial segment. This is especially in the U.
S. Why? It's very easy to say because the country is very big. The density of people in the living areas is quite low. And also the buildings are not so high.
In the U. S, many multifamily houses only have 2 or 3 floors. But they have a lot of big commercial buildings and retail buildings. So the installed base in the U. S.
Is much more dominated by commercial buildings than, for example, in Europe, where the market is mainly a residential market. So it's not one size fits all. It's really different from country to country.
Can you maybe provide the same qualitative comments around your APAC business ex China and China specifically?
Yes. So you do have let's say, if you look on Asia Pacific, again, and similar drivers for it. When you look, for example, in a country like Australia, very big country, 25,000,000 people, people have the space to have a single family house. But when you look into the cities and you look downtown on the business district, you have a lot of skyscrapers and you have a lot of high quality, highly sophisticated buildings. And so there you do have a big share of commercial buildings and commercial elevators.
Similar, for example, in cities like Hong Kong, similar like places like Singapore. And then you have all the Southeast Asian countries like Malaysia, Vietnam, Thailand, Philippines and Indonesia, where you do have a substantial share also of residential buildings. And we also have seen that there was a certain slowdown of the commercial market. So again, also within Asia Pacific, you have a different picture from country to country.
Thank you, Ed. And I guess my last question, if I may, would be on the modernization side, considering you're not including it in your services. I know there was lots of hope for this market considering the age of the installed base in many countries. But considering it's quite discretionary, how do you think about this part of your business at the moment?
Well, there is a difference between at the moment and long term. Long term modernization business is a key growth driver because all the mega drivers, also in a crisis, you always have to look at the mega drivers of our business are still intact. And so what we have shared in the past with you, that the aging of buildings is going on. Let's say, the appetite or the demand of new technology is increasing, I do not worry about it long term. Short term, the picture looks different because modernization is something you can decide whether you want to do it or not.
And our clients, our customers, of course, also are now analyzing their own financial situation. And if there is a certain uncertainty, you probably decide at the moment to say, you know what, wait a minute, I think let's not rush too fast. Let's wait how we are doing in the next couple of months, and then you can we can discuss whether we want to modernize. So the modernization business definitely has a very high negative impact in the 1st 6 months, maybe almost the biggest impact negatively in the business for us. And but long term, this will come back.
I have no doubt. But short term modernization, which was a very strong business for us, had the highest negative impact. Thank you.
Thank you very much. The next question is from Daniella Costa from Goldman Sachs. Please go ahead.
Hi, good morning. I want to ask 3 things, if possible. The first one is a clarification on the net income guidance. It sounds like the midpoint is implies a year on year, which is pretty similar to what you had before in 1Q, but you talk about high restructuring, higher FX headwinds and general, you sound a little bit more cautious. So I was wondering as sort of what's the offset that drives it to be less where it was.
Good morning, Andrea. And here is Urs. Last year, we had a net profit of SEK 929,000,000. And after the Q1, we have announced that our net profit will drop by approximately 20% and about CHF 740,000,000. In the meantime, today, we are announcing a cost optimization program of up to CHF 130,000,000 cost charges to this year, so €30,000,000 more than what we previously announced.
And that brings down our net profit guidance to now about 25% compared to last year. I hope this is clarifying your question.
Yes. It was more
like the midpoint is not so distant, but fine. The second point I wanted to ask was regarding balance sheet and capital allocation. I know you're doing now this increased stake in China. But overall, how do you think about the balance sheet positioning the leverage? Do you think you're at an optimal point or you see further opportunities from using it as a continuation of more consolidation or buybacks?
First of all, I must tell you that I feel very comfortable that we achieved the current liquidity situation in our balance sheet for the Schindler Group in these very uncertain and very difficult times of COVID-nineteen with strong performances of our networking capital management. And going forward, we have to protect ourselves. It's uncertain. The times can also be worse. And therefore, it's really important that Schindler Group has this very healthy and strong balance sheet in order to independently invest into the future strategically, into projects or when it arises also touch on the opportunities.
And my final question is a follow-up regarding some of the points you've been mentioning on service and your sort of 2022 outlook as well. But do you see clients with lower building utilization in any sense trying to revisit more longer term terms of the contracts or building utilization doesn't really matter here, particularly non resi on the non resi side?
Well, of course, it matters, and we all are experiencing the time of home office and office buildings are half empty or even 70% or 80% empty. This is definitely a trend, and we have to see, okay, post COVID, what will be maybe a change on the customer side. It can be that customers will open up much more home office policies. And so this would be that you have less people in the building. On the other side, those who are in the building, we also will face that now social distancing becomes more important.
So according to our analysis, there are like two trends, which might compensate each other in the long term. Now short term, of course, it is true that the occupancy is severely reduced. And therefore, for big customers, there was, of course, one or the other request maybe to review the actual pricing. So we do not renegotiate long term a new service price contract level or a new service contract price level. But we had the one or the other case where we had to do an individual temporary rebate.
And this is definitely one megatrend. And the other megatrend, of course, is that we are very well prepared also in such environment with our digitization program. So Schindler Ahead, Internet of Things, but also our destination control systems allow people to travel safer. So we also can manage that an elevator only takes a certain number of people into an elevator, and you don't have to touch anymore the button. So this also gives confidence to our customers that it is safe and healthy to work in a building where you have a shingle elevator.
So we do not see at the moment long term negative impact for
that. Next
question from Andre Kukhnin from Credit Suisse. Please go ahead.
Good morning. Thanks very much for taking my questions. I want to start with pricing. Clearly, that's the new piece of communication and differs a lot to what we heard from you before. And especially on China, could you maybe start with finding out how your business did in China in Q2, maybe in terms of order units versus value and how pricing developed there?
So as I have mentioned before, quarter 2 was a rebound in the Chinese market. Definitely, the Chinese market has grown compared to the previous year in quarter 2. Some of it might be also a catch up of quarter 1. Now we believe that we have outgrown the market in the Q2. We had a very strong performance in China.
The team did really well. It was definitely double digit growth in the second quarter, a good double digit growth in the second quarter above, let's say, even our own expectation. Now when you look where the market comes from, I can say that we have quite resilient or promising residential business segment. I have to say, this was strong. And also there, the pricing was not that bad.
It was not tanking too much. It was maybe a little bit under pressure, depends on the city. But more or less, it was quite stable. What we also have seen is that there was not a full rebound in the commercial segment. This did not come back totally.
And there, we also have a lot of large projects, large commercial projects. And there we clearly see in the area of large projects like in the past that the pricing is still, still, still very demanding. And we have seen price drops in the market substantially. So the commercial segment was definitely price wise a lowdown pressure. And then the last topic maybe also was public transport.
Public transport, of course, is a strong domain of us. It is a lot driven by escalators, and we do have a very strong footprint in escalators in China, and we are benefiting from that. And we saw after almost 0 activity in 2 months, February, March, the market was really coming back and we were appreciating good awards, but we have not yet been able to book that as order intake because we only book it as an order intake when we receive the down payment. And let's say the administrative speed is not yet back to pre COVID level in some of those governmental functions and departments. But we are happy with the award pipeline we have, and this should also bring us some strong order intake in the coming months in the public transport area.
However, we see that there the pricing also has been intensified. So residential volume business, rather stable, rather good commercial business, more under pressure price wise and volume wise and public transport stable back to previous levels in terms of units, but pricing has become more demanding.
Thank you very much for this color, Thomas. And just if we sum it up on China in Q2, pricing overall sequentially, I guess, small down from what
you indicated. I'm just trying
to think about relative sizes and applying some numbers to it or
Of course, we do have historically, we are strong in commercial and public transport. So we have to take that to our grade in the pricing, although we still achieve some overall pricing went slightly down. That's correct.
Thank you. And just my second part of the question, Odliss, and I think really the key thing for many of us is, what does this feel like? I mean, is this does this feel like end of 2015 sort of early or 2016 situation where you had some clear moves by price list and another following and then the whole thing sparked off?
You mean that the market
Yes, the market pricing situation in China. Or is this more kind of we've had volume volatility, we're coming out of lockdowns, eager to book business, there is a bit of raw materials, maybe tailwind there that gives us a bit of room to maneuver. How would you assess that without kind of trying to pin you down any numbers, but just more to kind of really touch feel whether this is thinking of something bigger or more transitory?
We do have confidence into the Chinese market. This, I clearly want to say. We still believe, 1st of all, it's by far the biggest market. We believe it also stays and remains strong in the future. This is definitely the case.
I also have experienced that the Chinese government always was supporting the market development, especially now in a downturn environment. Real estate business infrastructure is something you can push as a government, and I think the Chinese government has shown a lot of agility also in the past that to support and to act very fast. Now definitely, I can say short term, one driver of the pricing pressure is that people stayed at home for 2 months and it's like in a horse race, everybody is behind the barrier, the barrier goes up and then everybody starts to run. So and wants to catch up what they lost in the Q1. So I think there is definitely a temporary pricing pressure coming because of the lockdown in Q1.
And now maybe everybody wants to catch up in Q2. It's difficult to say whether this will continue also in the future quarters. It will depend how other markets will develop because if other markets are not so well on track, maybe you try to compensate with more volume in China, which then could bring some additional pressure into the Chinese market. But I also have to say that China is not only new installation. I mean, this was 10 years ago.
Now we do have and we see much, much more also opportunities in the installed base. So increasing our installed base, having a good service business, having a lot and increasing modernization opportunities will help us in the long term that China stays attractive for us. Thank
you. The next question is from Martin Flutiger from Kepler Cheuvreux. Please go ahead.
Thanks, gentlemen, for taking my question. Actually, I'd like
to get back to the
pricing issue since it is, I guess, the most incremental news today. Just to clarify, because on the one hand, with the picture, particularly when you look at H1 and Q2 earnings, particularly adjusted EBIT, it's difficult to see the pricing pressure impact, to be honest. And at the same time, you emphasized it so strongly. So it would be very nice if you could put a ballpark number group for the group overall as a price tag. How much price how much was pricing down in Q2 on order intake and on revenue growth?
What was the impact there? That would be my first question.
Okay. So pricing, you do not see in the P and L immediately. Pricing, especially in the project business, so when we talk about new installation projects and modernization projects, you get them on board. You are the order intake. But then when you have to execute in the modernization maybe within 6 to 12 months or in the new installation maybe within 12 to 20 4 months, then you see the impact on your P and L.
So the margin will be impacted next year by the pricing. And this is exactly one of the reasons why we have to act now to adjust our structure, and we have to make this cost optimization program. That's very important. You don't see that now. And so you feel maybe still comfortable.
Let's be honest, Q2 was not that bad from the margin, but we know and we also expect how the market will further develop and impacting our results in the future. Now in certain markets, we have seen that prices went down between 5% to 10%. That's not always everywhere and also every segment, but we have seen severe pricing deterioration in the project business, especially in the new equipment business in some markets. And we do not see that this will come back in the next 12 to 18 months, especially in those markets where you don't have a V shape, but you do have a slow recovery of the market. Pricing will remain very challenging.
So some markets really had an impact of 5% to 10%. Now in China, we discussed before. This is one part of the market only in China, more in the commercial area. But I would not exclude that this could also happen in the residential area in the next couple of months. But there, I am a little bit more confident.
In other markets, I clearly have to say, when you have a huge longer lasting impact of COVID, prices are coming down. And it will continue also the pressure will continue into the service and into the repair business. I have no doubt at all. Because what happens is that due to the cost competitiveness of the big OEMs, smaller players in the different markets will have problems to execute or to gain more new equipment and modernization business and will try to escape to maybe gain more share in the service and repair business. So we are more prudent or more conservative on the overall pricing, especially outside of China.
Okay. Thanks for the clarification. So now I understand the difference between revenue and order intake pricing. But just to clarify, how much did rebates and particularly in Q2 cut your revenue growth? And how much is the order intake gross margin down going forward?
Just to clarify my question on the pricing globally.
So rebates have an immediate impact on your P and L. That's true. Rebates in service have an immediate impact on your P and L. And we definitely had a double digit number of rebates given in the service business just for the Q2. This is clearly the case, mainly driven by some Asian markets, but especially also driven by the U.
S. Market, right? We had to do that. If you have installation in Las Vegas, then there is no service happening, and you have to make almost 80% to 90% rebate on the certain months. So this was definitely impacting us quite severely in the U.
S. Market in the Q2. So and this has an immediate P and L impact, definitely. Not the others, but the service and repair business, we have seen an immediate impact. Was that on?
Yes. And the order intake margin, how much are we talking about? 50, 100 bps down in Q2?
No, it was slightly down, yes. It was slightly down. This is clearly the case, especially in order intake. Yes, it was going down maybe in that magnitude, I can say. But of course, on the order backlog, it was still a minor impact.
But over time, if this would continue, then it has more substantial impact on the order backlog. 1 quarter does not destroy your whole future business model. If you look on our order backlog, it's very big. We just had a look on this page number or Slide number 16. If you are having €9,000,000,000 order off, then 1 quarter does not destroy your overall margin.
But the single quarter, definitely, it was going down in the magnitude you mentioned.
That's great. Thank you so much for the clarification. And the second question I have is on putting the whole puzzle together. I understand that you're still in the process of doing your budget on the restructuring programs and the targeted cost savings. But just to help us out here a little bit and to clarify some of the confusions around the whole COVID-nineteen mess and all the impacts related to it.
What is your best guess, I would think, at this stage with regards to the EBIT margin progression for H2 in 2021 at this stage, considering that there are no further lockdowns beyond what we're currently seeing in the market?
So maybe I split the answer, and I will start maybe in terms of what we expect from the cost optimization program. As I mentioned, this should compensate, especially headwinds
we will
have in the margin and in the volume 2021, 2022. Because even if the markets are back in 2022, the P and L impact then is in 2023. So we will suffer from some headwinds in 2021 2020 2, and this cost optimization program should help us to compensate those negative impacts. Now Urs in the margin development for the rest of the year? I mean, we are not giving you an exact number, but maybe an indication, but under certain conditions you could expect.
So the group reached 11.4 percent EBIT adjusted margin in the second quarter. This second quarter was quite an extraordinary one. We all know the situation. There were headwinds, of course, due to COVID-nineteen with really a negative operational leverage, heavy drop through. Actually, as and the result of that is that we lost 1.1% on the full EBIT, but also the 30 basis points in the 2nd quarter on EBIT adjusted.
We also need to consider that actually the 2nd quarter margin was a bit supported by a favorable business mix. I think new installation was severely impacted compared to the maintenance business. That helped a bit on the margin. But on the other hand, we also had very strong protective financial measures in place with a lot of cost saving measures in place on personal cost and OpEx, and that was supporting the margin. Going forward, we certainly want to be at the level of 2nd quarter.
We will do our best to slightly improve it with increasing volume in second half year and continue to protect the financial strong cost measures in place.
Is there at least 11.4% for H2? That's your key message.
The key message is we will work hard and try best to further improve compared to the Q2. This is what we would like to do. We have many, many measures in place. And so this will have a positive impact. Probably the mix change will have a little bit of negative impact in the second half of the year because as markets are coming back, we should expect some more project business, which might have a slightly lower overall margin.
But we would like to further improve every single quarter.
Okay. Thank you so much.
Thank you.
The next question is from James Moore from Redburn. Please go ahead.
Yes. Hi, everyone. It's James from Redburn. Good morning, Thomas. Thanks for taking the questions.
My question is really around profitability. And thank you for all the color. And I'm sorry to ask again on the savings quantification of the new program. But I'm just trying to think about how I model this compared to the previous savings program of over $100,000,000 I presume it's incremental to that. And I understand the headwinds that are now present that you're trying to offset, particularly in 2021 2022.
Would it be fair to assume one for 1 and spread it over 2021 2022? Or is the savings number less than the charge?
Yes. Good morning, James. And as I mentioned at the beginning, this whole program is now in full making, and the timing is not yet perfectly confirmed. But after the 2 years, your assumption of 1 to 1 is about right.
And that's incremental to the existing savings, which are partly led by modularization. And are those existing savings largely unchanged? Or have they been pushed upwards due to COVID?
And have they been
You
of course, is related to this cost optimization program, which we just now talked. And obviously, it will have a cost saving benefit. But the other moving parts are really the market, are the pricing pressures in the market and our strong growth ambitions. We also will continue to increase our cost on strategic projects related to our Ahead IOE platform, related to corporate R and D innovations, which are a must win for us. And those topics likely will offset the cost savings we achieve.
That's very helpful. And if I just think about your full year 2020 implied adjusted EBIT margin behind your new net income guidance and you've been relatively clear on that. I'm a bit lost on some of the moving parts given the situation with COVID. I wondered if you might be able to help us with some of the other bridge items. For instance, the currency, I'm thinking around $85,000,000 for the year.
But if you think it's different picture, but I'd be interested. But also, how do you see raw material and wage inflation now for this year compared to what you might have seen previously?
I think your currency assumptions are pretty okay, above SEK 80,000,000 for the total year and probably roughly SEK 600,000,000 on the top line. So this is the currency impact. If currencies more or less will stay where they are today, I mean, that's the assumption behind there. And I think when you look on our overall EBIT margin, you also have to yes, you have consider that we do have wage in place. Some of it, of course, we tried to mitigate in the 1st couple of months.
We were postponing some of will come now in the second half of the year. We were very cautious in terms of operating expenses. We try to be super prudent there like everybody. You anyway could not travel. So you have no travel cost.
And there is not too much to come back. Partially, it will maybe some costs are coming back. And then last but not least, yes, modularity, I think we can more or less stay what we also have discussed in Q1. It's maybe slightly lower because due to COVID, the rollout of the products had a certain shift because it was just difficult how do you want to launch a product if nobody there is no market and people are staying at home. This is so we have a certain shift of these savings, not run rate, but the impact on P and L this year.
So and inflation, let's say, material costs, you can keep the assumptions you had in the already before, I would say.
In material costs, there was certainly a bit of drop in the second in between the 1st and the second quarter. Prices were a bit dropping, but in the meantime, they have recovered. I would suggest that going forward, prices are similar to last year's level. So not much change versus last year overall to the full year.
Thank you so much for the color. Thank you. Maybe
the 2 last persons I would propose, and then I would propose that Nicole we would do afterwards. You still have, of course, the time also to talk to Nicole and to Eric Muehrer in a 1 on 1, I would propose. So maybe 2 more persons for questions.
The next question is from Christian Hoops from Baader Bank. Please go
ahead. Yes, thank you. First, I have a question concerning the commercial area. So big projects are some kind of a targeted growth area for you also going forward. And you talked about the short term impact, of course, from COVID-nineteen.
But going forward, in a longer term, strategic, so airport business, shopping centers, there might be a severe change in structural growth. What do you expect here? Maybe you have to adjust a little bit your strategy. Is that the right point to look at is the first question. And second one is over the last years, you build up, of course, high quality IT personnel increased the personnel costs from 33% in 2014, 2015 to above 40% now in the first half of twenty twenty.
So where do you like to adjust your staff? So personnel, where do you reduce the personnel going forward? Because I assume that you will keep, of course, your high quality personnel IT people there in the group? Thank you.
So maybe
I start with question number 2. So development or activities we now do with this cost optimization program. We are targeting mainly administrative people, so at headquarters here centrally in Switzerland, but also headquarter functions in our country organizations. And of course, we are doing that in the most meaningful way on two sides. One side is we always treat people fair, transparent and honest, and we are supporting our people also how to find new jobs.
So we always are very, very careful with this stakeholder entity. The second topic is what is very important, but you mentioned this is know how retention. So yes, it is true. Of course, we are not planning that high skilled people with a lot of know how should left should leave the company. But I also have to say, this is a long journey.
We have started many years ago already to transfer certain capabilities outside of Switzerland into other places in the world, not only because of cost, but we want to have our skilled support functions where the markets are. So today, if you take corporate R and D, our R and D organizations outside of Switzerland in terms of head count are already today much bigger than our R and D we have in Switzerland. So yes, we play we are very, very careful about know how retention and whether this is in the business processes, whether this is in R and D or also in IT. We don't intend to sacrifice our capabilities. And also for a good reason because what has been mentioned by Urs and also by myself, we continue to execute our strategic initiative agenda.
So we continue with the modularity program. We continue with the digital twin, with Schindler Ahead, with our quality programs, with our innovation programs. And for this, we need highly skilled people. And with that, we prepare the company to be even better in 5 or 10 years. 2nd topic, commercial area, a very good question.
It's a little bit early to say whether there will be a shift or not. I believe mid term, you might be right that there is a certain pressure on some commercial areas or also public transport areas.
That's true.
You know less people are flying, 2, 3, 4 years. Now interesting enough, those investments are investments you do for decades. And if you believe that it comes back, it's the right time to do the investment now. So there are like 2 different trends that run against each other. What is now the net outcome?
I have to admit, this is difficult to judge at the moment. We are just in the middle, and it's difficult to judge, but it's definitely something you have to observe as we have a good position in this public transport and commercial area. But we also have, of course, a very strong position in the residential area, which is much more resilient and where we are very cost competitive and where we, by the way, also have launched the first part of our modularity program was, in fact, now in the residential area. So we believe that maybe the one or the other hiccup we have in the commercial area, we will compensate in the residential area.
Of course. Thank you very much. But in the end, of course, the main growth driver going forward should be, in the end, commercial public health. What? And if there is some kind of a strategic shift, maybe you have to increase your adjustments of cost and structures within your group.
But this remains to be seen, of course.
That's true. Okay.
Thank you very much.
Thank you. Maybe the last person.
The last question is from Bernd Prombreen from Vontobel. Please go ahead.
Yes. Thank you, gentlemen, for taking my question. Firstly, your investing cash flow in H1 shows that you again have become more active with the acquisitions. Are there again more M and A opportunities out there? Or have you been encouraged to do more M and A in an environment of lower growth?
And then secondly, CapEx came down quite significantly in the first half. Are you able to provide a CapEx guidance for the full year? Thank you.
Yes. Thank you very much. You have seen in our consolidated cash flow statement that the group was active in M and A. You see it on the business combinations. It's CHF 99,000,000.
So that's already closed transactions, actually 1 in Switzerland and 2 in the United States, which will add to our service portfolio nicely. We will certainly continue to identify very attractive targets, particularly attractive service portfolios, and that will certainly be an important strategic pillar for us. In terms of investments to property, plant and equipment, It's indeed clearly lower than last year, SEK 66,000,000 versus SEK 117,000,000. 2 parts of it. 1 is related to large investments last year on our EBITCOON campus because we have built a state of the art fantastic visitor center to welcome customers.
We also invested into our Berlin campus and into our India campus. So this is not recurring. But the second part was related to protect financial measures this year to reduce not non necessary investments. Full year guidance, maybe about CHF 200,000,000, probably a bit less.
Okay, excellent. Thank you very much. It was very helpful.
You're welcome.
You, ladies and gentlemen. And with that, we'd like to close today's call. Thank you very much for attending. And as we discussed, if you have additional questions, please get in touch with our Investor Relations team for 1 on 1 discussions. On that note, I'd like to remind you that our Q3 call is on October 23.
And with that, I wish you a beautiful day, a happy summer, and looking forward to talking to you very soon. Thank you, and bye bye.
Thank you. Bye.
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