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&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 Schindler. Please go ahead.
Good morning, ladies and gentlemen, and welcome to our First Half 2020 results call. My name is Nicole Wesch, I'm the Head of Global Communications here at Schindler, and I'm here today with our CEO, Thomas Oetterli, and Urs Scheidegger, our CFO. Thomas will give a short introduction and guide you through our results. Urs will 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 two 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 a 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. We find ourselves in a changing and challenging market environment. As a Swiss company with a global footprint, the accelerated appreciation of the Swiss franc continues to impact us, damaging our cost competitiveness. Just consider the following. Over the last decade, the continuous appreciation of the Swiss franc has hit our revenue by a staggering CHF 2.5 billion, and our EBIT by CHF 364 million.
At the same time, we increased our global footprint. Our workforce increased by 24,000 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-19 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 two 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.
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, Team Schindler has brought about 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. I would like to draw your attention to slide number two, which gives you a market overview. Many countries came out of lockdown and have gradually reopened in late Q2.
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 six- eight. Just to give you a short overview, China came back very strongly in new installations in Q2. EMEA displays a very mixed picture 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 net working capital. On top of this, the appreciation of the Swiss franc has again accelerated in Q2, negatively impacting the translation of our results into Swiss francs. Let me now turn to slide number three.
You see what a strong CHF did to our revenue and our EBIT in the last 10 years. As I already mentioned, accumulated translation impacts amounted to more than CHF 2.5 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 million. Despite having implemented various measures in the recent years, the exposure from corporate functions in Switzerland still lead to a negative impact on EBIT and on EBIT margin when translating consolidated results into CHF. I now move to slide number four. 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 very proud how Schindler, as a global team, has executed on measures during this crisis. The focus always was on our four 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 five for some further details. Schindler already offers a growing range of future-ready, highly scalable services for the digitally enabled world. Health and well-being now require a new service offering.
Clean and touchless 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 CleanCall, with non-contact sensor solutions, with the Schindler ElevateMe app, and of course, with the already long-term, well-established myPORT solutions now as a public app solution. Additionally, Schindler CleanCover provides an antibacterial protective film to cover elevator surfaces. New offerings also cover sanitization solutions and the Schindler UV CleanAir air purification system, and Schindler UV CleanCar system that cleans the cabin surfaces without using harmful chemicals, and Schindler ultraviolet solutions for escalators and moving walk handrails, providing reliable and automatic disinfection. Our new solutions have been very well received by our customers. Now let me move to the different markets, and I will start on slide number six 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 note 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 number seven, 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 non-residential segment. Latin America new installation markets experienced a severe decline. Here, we see increased price pressure, not only in new installations, but also in the service business. I'm happy to say that everywhere, all our factories are up and running again. 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 three. Here, I'm happy to say that all factories are up and running. 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. Let's take a look on our financial performance in more details. I start with the key figures of the second quarter 2020 on slide number 10. In the second quarter of 2020, order intake was clearly impacted by COVID-19 and decreased by -15.6% to CHF 2.6 billion, 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 only slightly negative, followed by Asia-Pacific and the Americas. Results in EMEA were driven by a resilient maintenance business and good 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 2.5 billion in the second quarter of 2020, a decline of 11.8% compared to last year's quarter and equivalent to -5.8% in local currencies. All key currencies against the Swiss franc depreciated strongly. Foreign exchange translation effects have been CHF 172 million. The deterioration of revenue was most severe 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 million, equivalent to a drop of 12.7% in local currencies.
Foreign exchange translation effects had a negative impact of CHF 27 million. Restructuring costs of CHF 26 million, expenses for building management of CHF 5 million, protective measures related to COVID-19 pandemic had further negative impact on EBIT. EBIT adjusted before restructuring costs and building management amounted to CHF 286 million, equivalent to a decrease of 14.4% against previous year's CHF 334 million. This led to an adjusted EBIT margin of 11.4%, down by 30 basis points compared to previous year. It is a remarkable increase of 240 basis points compared to the first quarter of 2020, mainly due to the realization of cost measures and strong performance in China. Net profit in the second quarter totaled to CHF 188 million, a decrease of 21.8% caused by the operational performance.
Cash flow from operating activities reached CHF 313 million versus CHF 85 million in previous years, impacted positively by a strong performance in net working capital, which I'm really happy about it. I would like to draw your attention to the performance of the six months on slide number 11. In the first half of 2020, order intake decreased by 12.1% to CHF 5.4 billion, corresponding to a reduction of 6.6% 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-19 related lockdown measures. EMEA region was the only region to slightly grow its order intake compared to previous year. The Asia-Pacific and America region showed severe reductions in order intake. Revenue fell by 8.7% to CHF 5 billion, equivalent to a negative growth rate of -3.1% in local currencies.
Negative foreign exchange. Take a quick look on slide 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. To the right, you can see the distribution of backlog by region. Please now return back to slide 11. Operating profit in the first half of 2020 totaled CHF 421 million, 29.4% less than in the previous year. In local currencies, it is -22.7%. EBIT was severely impacted by lower revenue generation due to the global recession. The EBIT margin dropped significantly by 250 basis points to 8.5%.
Before restructuring costs of CHF 77 million and expenses for building management of CHF 9 million, EBIT adjusted dropped to 10.7% and in local currencies to CHF 507 million, equivalent to a margin of 10.2% versus 11.3% in the previous year. The restructuring cost of CHF 77 million were recognized for the closure of the factory in Spain and efficiency initiatives in the countries. Net profit reached CHF 313 million compared to CHF 436 million in the previous year, reflecting a deterioration of 28.2%. Cash flow from operating activities totaled to CHF 636 million. This shows a significant increase compared to the first half of 2019, which was CHF 348 million. Remember, in half year closing 2019 included a settlement of pension obligations in a country in Europe. Adjusted by that, cash flow in previous year amounted to CHF 505 million.
Schindler was able to significantly strengthen its cash flow and net liquidity, thanks to improving net working capital and based on solid cash flows in maintenance. Our net liquidity amounts to CHF 1.9 billion. As of June 30, the order backlog was stable at CHF 8.9 billion, 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 three forces providing headwind. It's the strong Swiss franc. Thomas was already referring to. There's 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 million for the duration of the program. With that, I 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 2022. Foreign exchange translation effects continue 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 -6% in local currencies.
We expect around CHF 130 million restructuring costs, CHF 30 million higher compared to previous announcements. About CHF 100 million are related to today's announced cost optimization program. Net profit for the year should be expected to reach between CHF 680 million- CHF 720 million. This outlook also includes the first-time consolidation of Volkslift- Schindler Elevator in China. Schindler 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. Volkslift- Schindler is a local Chinese elevator and escalator company and is expected to generate approximately CHF 130 million of revenue for the full financial year 2020.
Thank you, Urs. We are now happy to take your questions.
The first question is from Fabian Haecki from UBS. Please go ahead.
Yes, good morning. I will stick to two questions here. The first one is a bit when I read your release, I had feeling there's a bit a gap or disconnect between how conservatively you describe the markets and the global new installation outlook and how you describe your business performance by region, in Q2. 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. At the same time, you say global new installation market is unlikely to recover before 2022. If we take China and EMEA together, this is about 80% of the global new installation base. Is this a very conservative description of the market, and you are expecting to continue to outperform how you did? How should 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. We had a fast drop in quarter one, but we also had a fast recovery of the market in quarter two, and we are expecting that this market continues to be plus/minus 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 one, like many others have done as well. I have to say the team has really done a very strong job in the second quarter and was catching up what we lost in Q1, so that at the end, by the middle of the year, we were on previous year's level.
I talk about order intake. I think that's very important. When we look on Europe, we have a very mixed picture. We have a very mixed picture. Some of the countries have done very well, especially Northern Europe. Some of the countries have been hit less than others. We do see that in some Southern European countries, this was a really tough impact. 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. We also see that the markets who had a big hit, they are coming back a little bit slower in Europe.
When I look on Asia Pacific, and I think this is very important, there is still a big market in Asia Pacific outside of China. There, the picture looks different. The second biggest market in the world is India in terms of units. As you know, we also have a very strong position in Southeast Asia, and we have a very strong position in Australia. The Asia Pacific market is an important market for us. 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. 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. Of course, the last in the row who was hit by the pandemic was Americas.
We all are following up what is happening in the U.S., what is happening in Mexico, what is happening in Brazil. 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. Asia Pacific and Americas are those two 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. To my second question is on the service business. 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? Also to services, you talk about pricing pressure. Is this related mostly to new installation, or do you also see some pressure on service contract, or is this more protected given the duration of the contracts? Maybe you can also separate here what has been the impact of COVID-19 on some temporary reduction outside China. Has this been a big topic at all? This will be my second question. Thank you.
Okay. Thank you very much. Yes, we have grown in local currencies, our service business, also in Q2 and throughout the whole period of the first half, 2020. 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. 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.
I think that was good for us, and Schindler Ahead has also helped us in 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, 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. This is different from market to market. Probably the most severe impact we had in the U.S., because the U.S. has reacted from a customer point of view very fast. 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. 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 intensification of pricing. 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.
Okay. Thank you very much for answering my questions.
The next question is from Martin Hüsler from Zürcher Kantonalbank. Please go ahead.
Yes. Good morning, and thank you for taking my questions. Just first question for understanding reasons. You say of the CHF 150 million restructuring costs that will occur in the next two years, CHF 100 million is already reflected in the program for this year, which means that for next year, only about CHF 50 million incremental restructuring costs should incur. Is this all for next year, or do you have usual restructuring costs in the range of CHF 20 million-CHF 30 million on top of that? That's the first question.
Maybe Urs?
Yeah. Thank you very much for the question. Yes. We have announced cost optimization program of CHF 150 million. It's correct, your understanding. CHF 100 million will be charged to this year. The to-do for this year of about CHF 50 million is related to it, and also already some charges are in the half-year closing. Additional CHF 50 million are planned for next year on this program. 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. Thank you for that. The second question is about slide number five, I guess, the new clean mobility solutions. I was just wondering whether each of those product is retrofittable for existing installations, and if yes, it must be a huge market actually to retrofit basically all of the existing installations.
Yes, maybe I can answer that. When you look on this slide number five, when you have the ultraviolet cleaning of the handrails in escalators, you can do that for all escalators, definitely. When you do have a certain Schindler CleanCall. You can do that only with a newer elevator, where these fixtures also fit into the existing elevator system. Overall, when you move more to the right side, these are elements. When you have myPORT, you can use that wherever you have a myPORT installation today, you can use this public myPORT app. The 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. Some of those solutions are available for everything.
Some of those solutions are a little bit specific for certain type of elevators. As we have eight different solutions, you find for every type of installation, a Schindler-clean mobility solution. I can say, and I can confirm that the appreciation of our customers has been huge. We were very satisfied by the feedback of the market. In fact, honestly, some of the sub-components are difficult to find in the market. When you have ultraviolet lamps at the moment, this is the runner 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 Lucie 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. I understand you have CHF 150 million in terms of restructuring costs related to that. Could you help us a little bit to quantify the actual savings you are expecting out of these initiatives and how they should be phased from the second half of 2020 and into the future, please?
Thank you very much for the question, Lucie. This cost optimization program has a global scale, across the world. We have just announced it, now we are finalizing the plans to realize it. It's a program over the next two years, hence savings will depend on timing of realization, very much so. I think, we also have to add on this maybe a little bit the big picture, just to put it into perspective. If you assume that you have some contracting markets or markets are not coming back as quick as we all would wish, a consequence out of it is increasing price pressure. 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.
This is not only an ambition for a single quarter, this is a long-term ambition. With our assessment of the future that some major markets only come back not before 2022, considering that we do have a disadvantage now with the currencies, because we do have this translation losses, also with a heavier structure here in the Swiss franc, and this costs us some basic points, we have to say. 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. 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 your services/maintenance business. 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. My question is, if you think about yourselves in maintenance, how much of your maintenance revenues globally are coming from commercial installation rather than residential?
You can say. Well, it depends. 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. Yes, when we talk about service, we talk about maintenance. Correct. Now, the split into residential and commercial, we do not provide on a global scale. What I can say is that it is very different from country to country. In the European markets, you can definitely say that the residential business is much bigger than, for example, in the U.S. market. 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.
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 two or three floors. They have a lot of big commercial buildings and retail buildings. 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. 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 in China specifically?
Yes. 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 million people. People have the space to have a single-family house. 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. 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. You have other Southeast Asian countries like Malaysia, Vietnam, Thailand, Philippines and Indonesia, where you do have a substantial share also of residential buildings. We also have seen that there was a certain slowdown of the commercial market.
Again, also within Asia Pacific, you have a different picture from country to country.
Thank you. I guess my last question, if I may, would be on the modernization side, considering you are 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 is 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 that the mega drivers of our business are still intact. 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. Our clients, our customers, of course, also are now analyzing their own financial situation. 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 we can discuss whether we want to modernize." The modernization business definitely had a very high negative impact in the first six months, maybe almost the biggest impact negatively in the business for us. Long-term, this will come back, I have no doubt. 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 Daniela Costa from Goldman Sachs. Please go ahead.
Hi. Good morning. I want to ask three things, if possible. First one is a clarification on the net income guidance. It sounds like the midpoint implies a year-over-year, which is pretty similar to what you had before in 1Q. You talk about higher restructuring, higher FX headwinds, and in general, you sound a little bit more cautious. I was wondering as sort of what's the offset that drives it to be more or less where it was?
Good morning, Daniela. Here is Urs. Last year, we had a net profit of CHF 929 million. After the first quarter, we have announced that our net profit will drop by approximately 20%, hence about CHF 740 million. In the meantime, today, we are announcing a cost optimization program of up to CHF 130 million cost charges to this year, so CHF 30 million more than what we previously announced. 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 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 and that we achieved the current liquidity situation in our balance sheet for the Schindler Group in this very uncertain and very difficult times of COVID-19, with strong performances of our net working capital management. Going forward, we have to protect ourselves. It's uncertain. The times can also be worse. 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 M&A opportunities.
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. Do you see clients with lower building utilization, in any sense, trying to revisit more longer term in terms of the contracts, or building utilization doesn't really matter here, particularly 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. This would mean that you have less people in the building. On the other side, those who are in the building, you also will face that now social distancing becomes more important. According to our analysis, there are 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, the one or the other request, maybe to review the actual pricing.
We do not renegotiate long-term a new service price contract level or a new service contract price level. We had the one or the other case where we had to do an individual temporary rebate. This is definitely one mega-trend. The other mega-trend, of course, is that we are very well prepared also in such environments with our digitization programs. Schindler Ahead, Internet of Things, but also our destination control systems allow people to travel safer. 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. This also gives confidence to our customers that it is safe and healthy to work in a building where you have a Schindler elevator. We do not see at the moment a long-term negative impact for that.
Okay. Thank you very much.
Thanks. Thanks a lot.
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 that differs a lot to what we heard from you before. Especially on China, could you maybe start with finding out how your business did, in China in Q2, maybe in terms of ordered units versus value, and how pricing developed there?
As I have mentioned before, quarter two was a rebound in the Chinese market. The Chinese market has grown compared to the previous year in quarter two. Some of it might be also a catch-up of quarter one. We believe that we have outgrown the market in the second quarter. We had a very strong performance in China. The team did really well. It was definitely a double-digit growth in the second quarter, a good double-digit growth in the second quarter above, let's say, even our own expectation. When you look where the market comes from, I can say that we had quite a resilient or promising residential business segment. I have to say, this was strong. 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. These did not come back totally. There, we also have a lot of large projects, large commercial projects. There we clearly see in the area of large projects, like in the past, that the pricing is still very demanding. We have seen price drops in the market, substantially. The commercial segment was definitely, price-wise, a lot under pressure. 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.
We saw after almost zero activity in two months, February, March, the market was really coming back, and we were appreciating good awards. 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. Let's say the administrative speed is not yet back to pre-COVID level in some of those governmental functions and departments. 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. Residential volume business, rather stable, rather good. Commercial business, more under pressure, price-wise and volume-wise. Public transport, stable, back to previous levels in terms of units, but pricing has become more demanding.
Thank you very much for the color, Thomas. 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.
Of course, we do have historically, we are strong in commercial and public transport, we have to take that sour grape in the pricing, although we still achieve sometimes a premium because we have a very strong reputation due to the quality and the performance in the past. Yes, overall pricing went slightly down. That's correct.
Thank you. Just my second part of the question on this, and I think really the key thing for many of us is, what does this feel like? 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 the market?
Yeah. The market pricing situation in China. 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 trying to pin you down any numbers, but just more to kind of really touch, feel whether this is the beginning of something bigger or more transitory?
We do have confidence into the Chinese market. This I clearly want to say. We still believe, first 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, had 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 two months, and it's like in a horse race, everybody's behind the barrier.
The barrier goes up, and then everybody starts to run and wants to catch up what they lost in the first quarter. 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.
I also have to say that China is not only new installation. This was 10 years ago. Now we do have, and we see much, much more also opportunities in the installed base. 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. If I may just I'll get back to you. Thank you.
Thank you.
The next question is from Markus Frutig 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. At the same time, you emphasize it so strongly. It would be very nice if you could put a ballpark number for the group overall, as a price tag. 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. Pricing you do not see in the P&L immediately. Pricing, especially in the project business. When we talk about new installation projects and modernization projects, you get them on board, you're happy about the order intake, but then when you have to execute in the modernization, maybe within 6- 12 months, or in the new installation, maybe within 12- 24 months, then you see the impact on your P&L. The margin will be impacted next year by the pricing. 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, quarter two was not that bad from the margin.
We know, and we also expect how the market will further develop and impact our results in the future. Now, in certain markets, we have seen that prices went down between 5%-10%. That's not always everywhere and not for every segment. We have seen severe pricing deterioration in the project business, especially in the new equipment business in some markets. We do not see that this will come back in the next 12-18 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. Some markets really had an impact of 5%-10%. Now in China, we discussed before, this is one part of the market, only in China, more in the commercial area.
I would not exclude that this could also happen in the residential area in the next couple of months. 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. It will continue also, the pressure will continue into the service and into the repair business. I have no doubt at all. 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. We are more prudent or more conservative on the overall pricing, especially outside of China.
Okay, thanks for the clarification. Now I understand the difference between revenue and order intake pricing. Just to clarify, how much did rebates, and particularly in Q2, cut your revenue growth, and how much is the order intake growth margin down going forward? Just to clarify my question on the pricing globally.
Rebates have an immediate impact on your P&L. That's true. Rebates in service have an immediate impact on your P&L, and we definitely had a double-digit number of rebates given in the service business just for the second quarter. This is clearly the case. Mainly driven by some Asian markets, but especially also driven by the U.S. market. 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%-90% rebate on certain months. This was definitely impacting us quite severely in the U.S. market in the second quarter. This has an immediate P&L impact, definitely. Not the other part, the service and repair business, we have seen an immediate impact. Was that on?
Yeah, the order intake margin, how much we talking about? 50, 100 basis points 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. Of course, on the order backlog, it was still a minor impact. Over time, if this would continue, then it has a more substantial impact on the order backlog. One 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 the page number or slide number 16. If you are having CHF 9 billion order backlog, then one 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.
Thank you.
For the clarification. The second question I had 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. Just to help us out here a little bit, and to clarify some of the confusions around the whole COVID-19 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 of what we're currently seeing in the market?
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&L impact then is in 2023. We will suffer from some headwinds in 2021 and 2022, and this cost optimization program should help us to compensate those negative impacts. Urs, in the margin development for the rest of the year, we are not giving you an exact number, but maybe an indication, what, under certain conditions, you could expect.
The group reached 11.4% 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-19, with really a negative operational leverage, heavy drop through. Actually, the result of that is that we lost 1.1% on the full EBIT, but also the 30 basis points in the second quarter on EBIT adjusted. We also need to consider that actually the second quarter margin was a bit supported by a favorable business mix. Since new installation was severely impacted compared to the maintenance business, that helped a bit on the margin.
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 costs and OpEx, and that was supporting the margin. Going forward, we certainly want to be at the level of second quarter. We will do our best to slightly improve it with increasing volume in the second half year, and continue with protective financial strong cost measures in place.
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. 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 has a slightly lower overall margin. 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. Morning, Thomas, Urs. Thanks for taking the questions. My questions really surround around profitability. Thank you for all the color. I'm sorry to ask again on the savings quantification of the new program. I'm just trying to think about how I model this compared to the previous savings program of over CHF 100 million. I presume it's incremental to that. I understand the headwinds that are now present that you're trying to offset, particularly in 2021 and 2022. Would it be fair to assume one for one, spread it over 2021 and 2022, or is the savings number less than the charge?
Good morning, James. As I mentioned at the beginning, that this whole program is now in the full making, and the timing is not yet perfectly confirmed. After the two years, your assumption of one- to- one is about right.
That's incremental to the existing savings, which are partly led by modularization. Are those existing savings largely unchanged, or have they been pushed upwards due to COVID?
You have to be careful now. There are so many moving parts in the model. One, much, of course, is related to this cost optimization program, which we just now talked. Obviously, we'll have the cost-saving benefit. 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 IoT platform, related to corporate R&D innovations, which are a must win for us. Those topics likely will offset the cost savings we achieve.
That's very helpful, thanks. 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 for the year, but if you think it's different picture there, I'd be interested. 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 CHF 80 million for the total year and probably roughly CHF 600 million on the top line. This is the currency impact. If currencies more or less will stay where they are today. That's the assumption behind there. I think when you look on our overall EBIT margin . Yes, you have to consider that we do have wage inflation, some of it, of course, we tried to mitigate. In the first couple of months, we were postponing. Will come now in the second half of the year. We're very cautious in terms of operating expenses. We try to be super prudent there. Like everybody, you anyway could not travel, you have no travel cost. There is not too much to come back. Partially, well, maybe some costs are coming back.
Last but not least, yes, modularity. I think we can more or less say 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. It was just difficult. How do you want to launch a product if there is no market, and people are staying at home? We have a certain shift of these savings, not the run rate, but the impact on P&L this year. Inflation, let's say, material costs, you can keep the assumptions you had already before, I would say.
In material cost, there was certainly a bit drop between the first 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. Not much changed versus last year overall for full year.
Thank you so much for all the color. Thank you.
Thank you. Maybe the two last persons I would propose, then I would propose that, Nicole, we would do afterwards. You still have, of course, the time also to talk to Nicole and to Erich Murer in a one-on-one, I would propose. Maybe two more persons for questions.
The next question is from Christian Obst from Baader Bank. Please go ahead.
Yes, thank you. First, I have a question concerning the commercial area. The big projects are some kind of a targeted growth area for you also going forward. You talked about the short-term impact, of course, from COVID-19. 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.
Second one is, over the last years, you built up, of course, high quality IT personnel, increased the personal cost from 33% in 2014-2015 to above 40% now in the first half of 2020. Where do you like to adjust your staff? Personal, where do you reduce the personal going forward? I assume that you will keep, of course, your high-quality personal IT people there in the group. Thank you.
Maybe I start with question number two. 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. 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. We always are very careful with this stakeholder entity. The second topic is what is very important, what you mentioned, this is know-how retention. Yes, it is true, of course, we are not planning that high-skilled people with a lot of know-how should leave the company. 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. Today, if you take a corporate R&D, our R&D organizations outside of Switzerland in terms of headcount, are already today much bigger than our R&D we have in Switzerland. Yes, we are very careful about know-how retention and whether this is in the business processes, whether this is in R&D or also in IT. We don't intend to sacrifice our capabilities. Also for a good reason, because what has been mentioned by Urs and also by myself, we continue to execute our strategic initiative agenda. We continue with the modularity program, we continue with the digital twin, with Schindler Ahead, with our quality programs, with our innovation programs.
For this, we need highly skilled people. With that, we prepare the company to be even better in five or 10 years. Second 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 midterm, you might be right that there is a certain pressure on some commercial areas or also public transport areas. That's true. Less people are flying around, and this might last for not only a couple of months, but maybe these two, three, four years. Interestingly enough, those investments are investments you do for decades. If you believe that it comes back, it's the right time to do the investment now. There are two different trends, which 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, it's definitely something we have to observe as we have a good position in this public transport and commercial area. 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. 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. In the end, of course, the main growth driver going forward should be, in the end, commercial public transport. If there is some kind of a strategic shift, maybe you have to increase your adjustments of cost and structures within your group. This remains to be seen, of course.
Absolutely.
Okay. Thank you very much.
Thank you. Maybe the last person.
The last question is from Bernd Pomrehn 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&A opportunities out there, or have you been encouraged to do more M&A in an environment of lower growth? Secondly, CapEx came down quite significantly in the first half. Are you able to provide a CapEx guidance for the full year? Thank you.
Yeah. Thank you very much. You have seen in our consolidated cash flow statement that the group was active in M&A. You see it on the business combinations, it's CHF 99 million. That's already closed transactions, actually one in Switzerland and two in the U.S., 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, CHF 66 million versus CHF 117 million.
Two parts of it. One is related to large investments last year on our Ebikon 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. This is not recurring. The second part was related to protect financial measures this year to reduce non-necessary investments. Full year guidance, maybe about CHF 200 million, probably a bit less.
Okay. Excellent. Thank you very much. It was very helpful.
You're welcome.
Thank you, ladies and gentlemen. With that, we'd like to close today's call. Thank you very much for attending. As we discussed, if you have additional questions, please get in touch with our investor relations team for one-on-one discussions. On that note, I'd like to remind you that our third quarter call is on October the 23rd. 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. Bye-bye.
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