Schindler Holding AG (SHLAF) Q4 2023 Earnings Call Transcript

Schindler Holding AG (OTCPK:SHLAF) Q4 2023 Earnings Call Transcript February 14, 2024 3:30 AM ET

Company Participants

Nicole Wesch – Head of Corporate Communications

Silvio Napoli – CEO & Chairman

Paolo Compagna – COO & Deputy CEO

Carla De Geyseleer – Chief Financial Officer

Conference Call Participants

Remo Rosenau – Helvetische Bank

Lothar Lubinetzki – Octavian

Alexander Koller – Stife

Johannes Borner – Santro Invest

Klas Bergelind – Citi

Nicole Wesch

Good morning, ladies and gentlemen, and welcome to our Full Year 2023 Results Conference, online and to you here in Ebikon. My name is Nicole Wesch. I lead the Global Communications and Branding Department at Schindler, and I’m standing in for Marco Knuchel today. I’m sharing the stage with our Chairman and CEO, Silvio Napoli, our CFO, Carla Geyseleer, and Paolo Compagna, our COO.

So what’s on the agenda today. Silvio will provide a snapshot on the highlights of the year. Then Paolo will summarize the main developments in the markets and in the industry and at Schindler, followed by Carla, who will lead us through the financials. Silvio will then take over again and talk about our operational priorities for 2024 and our ambitions beyond. We are happy to take your questions after the presentation and close the session at around 11:00 a.m.

With that, please go ahead, Silvio.

Silvio Napoli

Thank you, Nicole. Good morning, everyone, here in the auditorium in Ebikon and online. In 2022, when we met here for this later cycle of our company, we had to perform an emergency landing. Today, 2 years later, we are back. And in fact, we are on a steep climb. When I say that, I refer in the same way as we did 2 years ago, very factually on actual performance elements. And in the same way, let’s start off with some highlights for the year 2023.

Starting with the financial highlights. Our EBIT is up 31% year-on-year. Our net profit and earnings per share are up 42% year-on-year. Our revenue growth measured in local currency, we’ll come later to the Swiss franc effects, and not withstanding challenging market conditions, is up 7.4%.

Our cash flows from operation are up 85%. Based on these results, together with the Board of Directors and also to celebrate our 105th anniversary, we decided to propose to the shareholders’ meeting scheduled for next month to add an extra CHF 1 dividend, which will bring our total dividend to CHF 5. Now that would bring, and you’ll see later with the CFO the total payout for the year to 62%, which is just at the threshold of the current payout ratio maximum of 65%. So looking ahead, but also taking onboard some of your comments in the past, we have decided to allow for more optionality going forward and therefore, decided to increase our payout ratio range to 50% to 80%.

These are some of the financials. And again, our CFO will take us in much more detail in many more numbers later. But besides financials, I would, in my mind, one has to look at what led to these financials. And I’m saying, my attitude, forgive me, but financials are the output. What is more important is the input. And this is what we decided to focus on 2 years ago.

And so let’s look at some of the highlights. Let’s start with the first one there, which is our mantra, which we declared openly as of 2022, which is that pricing plus efficiency have to always be bigger than inflation. This is how you drive, especially in an inflationary environment, which came back precisely in 2022.

And I’m very pleased to say that this is working. In fact, as you will see later, our efficiency measures in ’23 offset by themselves all of the inflationary pressure. So that pricing allowed us to generate the margin improvement that I just described before.

Second operational highlight is our service portfolio growth. It can be sometimes taken for granted, but it is the result of hard work, of the discipline, and I’m pleased to say our portfolio grew 5% again this year. Now the portfolio don’t grow by itself. There is a lot of competition, especially as some of the markets are struggling. And so it is key to be able to differentiate.

And there I’m very pleased that our technology, some of which you’ve seen when some of you visited our Technology Day last October. allowed us to increase what we call digital service revenues, which is digital revenues driven by connectivity, by cloud connectivity in what we call our technical operations center, whereby we can monitor, we can improve. We can even intervene in some units with technical operations center in every country, sometimes in every region, managed by experts that differentiates yourself from competition in particular from the ISPs and that then results in these additional revenues.

Now looking at the last column on the right-hand side. As we do all that, we, of course, have to prepare for the next phase of the climb. And that means launching new products. And I’m very pleased to say that our new standardized modular platform is ready for global launch. Equally as we look at the forward in the future, we need to think about sustainability. And I’m very pleased to say this is news from last week that CDP, again, reconfirm our belonging to the A list of companies operating under the highest environmental standards.

And finally, in the bottom right corner, we were very surprised, we didn’t apply, that Newsweek included us in the list of most trustworthy companies worldwide. And this is for us most important because we are in the business of trust. It’s trust from our employees because buildings are supposed to stay for a long time. It’s trust from our customers, it is trust from our investors and shareholders.

So based on those highlights, let’s see perhaps in more detail what does that mean? Because when we started, we said, again, that we will deliver on the commitment we formulated in ’22, which was improving how we execute. In fact, there is no magic bullet. It is improving day by day, project by project, unit by unit. And with this input, then you have as an output the quarter-after-quarter performance improvement.

And here on the chart you see how as ultimate result we manage indeed to deliver our commitment to improve profitability. To be clear, we don’t take this as a final point, I’ll come to that. We’re still — we’re very aware that we still have some way to go before being the best-in-class. And we are resolved to move in that direction to continue moving towards improvement. And you can see here on this chart that in fact, we are building a track record of credibility towards the investors, towards our customers, but also towards our employees.

Now what is important on this chart, again, our CFO will take us into more detail, is the Q4 profitability. This 11.4% EBIT adjusted is important, not only per se because of the improvement, but this provides the run rate validation for a target that we have declared for 2024.

Now disciplined execution applies throughout the whole value chain. And another key input before you get the output is how we sell, how we produce, how we install and of course, how we hand over to our customers and how we collect the money.

Now this, therefore, takes us to this chart. You remember we called it the boa constrictor chart. Because in fact, the story of our business is that whatever you sell, takes a long time to work its way through the digestion system of our business processes. And unfortunately, when we met in ’22, we acknowledged that having a low-margin, bad quality, overly complex backlog was one of the main problems we had.

So what do we do since then? First of all, we started improving the food we ingested. So you can see here on the left-hand side that our sales margins have, in fact, improved. And you can see here, we’re going to go through it in more detail.

But now that by itself is not sufficient. You have to worry about the backlog. And so we had to execute the backlog and you see here 100% is this legacy backlog. And I’m pleased to say that by end of ’23, we already produced, expel, digested 70% of it. The remaining 30% will be executed over the next 2 years. So combining the new units with the backlog results in the backlog margin.

And I’m pleased to say that as you can tell here, from Q3 — Q2 2022, which was a low point, we now have had 5 consecutive improvement of backlog margin. And to give you an order of magnitude here between the low point of Q2 ’22 and the results in Q4 ’23, we’re talking about 100 basis points improvement.

And this is important because this is what then gets produced, this is what gives the margin. And I’d like to make one point too. You may have noticed, and I know you did because, of course, you follow very closely that the backlog overall value has decreased. We don’t see this as an issue at all. From the beginning, from 2022, we said we are not looking at quantity, we’re looking at quality. So we rather have a bit of a lower backlog, but a higher quality and that’s what we’re working on. That’s what we have delivered.

Moving on to another aspect of disciplined execution, which is closing projects. To be very candid, there was a period that we were very good at starting new initiatives, but then somehow they all stayed open there and somehow people worked very hard. But then it was very difficult to understand what was happening. And most importantly, you had a very inefficient use of resources.

So one of the things we started doing is saying, first of all, let’s be very careful before we start new things. But when we do, let’s make sure we follow up and we close. And I’m very pleased to say that we closed the Top Speed 23 project that I’m sure you remember, was started in 2021 to make as we said then future proof. And I’m very pleased to say that this project, which had an investment, total cost, sorry, to be specific, of CHF 167 million, has an estimated payback of 4 years, not easy to measure because it’s across different dimensions.

But one could say that some of the performance that we managed to deliver in ’22, ’23 is also the result of some of the output of this project, starting with our service, our portfolio, the ultimate objective of our strategy, where today, it is thanks to the 30%, 1/3 of our portfolio connected that we could generate this 50% increase in digital revenues.

Moving on to innovative products for strategic markets. Clearly, the key is to have cost-competitive solutions. We will speak later about the global modular platform. But here, this was more about having products for the Chinese market and for the U.S. market.

The third dimension was digital innovation. There are many aspects here. I only mentioned one, which is the Digital Twin prototype. Some of you will remember what we showed in October at the Technology Day. And finally, the essence, [Foreign Language] in French, which is cost competitiveness.

To be able to compete in today’s world, we managed to deploy, to build a state-of-the-art procurement operating model. And that today helps to deliver the margin and drive our competitiveness. So the key output one can say is resilience to tough market conditions, entering a tough market conditions in the NI market, while the service and modernizations are growing very strongly.

I like to pass the word to Chief Operating Officer, Paolo Compagna.

Paolo Compagna

Thank you, Silvio. Good morning, everyone. Zooming in on the market, in ’23, it’s evident, the story is quite different between New Installation, Modernization and Service.

Let’s begin with New Installation, ’23 was quite a special year as we had altogether witnessed that we call it double whammy. We have seen China and the rest of the world contracting.

This is quite different from the previous great financial crisis in which we have seen the U.S. market going down 57% between 2007 and 2010. But at the same time, the Chinese market was growing by 67%, adding almost 120,000 units to the overall market in new installation. Well, in ’23 in China, the market continued to decline as a result of the government’s effort to devaluate, but also in order — for the excess housing inventory.

In the rest of the world, despite strong underlying demand and in some countries, continued government investment in infrastructure, the year-on year markets were substantially pressured, this is mostly driven by interest rate hikes and the construction cost increase we have seen in the last 2 years.

Several markets sequentially deteriorated over the year and in the last quarter of the year, we saw its impact, which we show here on the chart in these red ovals. Different and much more encouraging was the development in modernization and in service which both we saw growing very nicely across the world.

Moving to ’24. We are in for another drop of the global NI market in ’24. Originally more driven by China, but also with a continued weakness in Americas and in EMEA. In China, the decline of the real estate investment in home sales is set to continue, and we expect the NI market to drop another 10%.

Outside of China, Asia Pacific region is expected to grow by more than 5%, mostly driven by India, where apartment launches had increased last year to a new record of 350,000 apartments. And we can say, is around 57%, close to 60% more compared to 2019 levels. The markets in South Asia, Southeast Asia will continue to grow while we see South Korea staying weak.

Americas still under pressure, with the key lead indicators in the largest market of the region, the U.S., obviously, still in negative territory. The so-called Architecture Building Index finished the year ’23 at 45.4 points, far below 50, which indicates quite a low construction activity. While the multifamily building permits were down close to 30, namely 27%, but some positive signs could be expected.

While we see the inflation rate coming closer to the 2%, one could hope for the interest cuts by the Fed, which obviously might be a positive stimulus to the real estate market. In the key North European market, Germany, the business climate in apartment construction was, end of the year, on an extraordinary low level. The so-called [Foreign Language] index was by minus 56.8 points, the lowest since introduction of this index in ’91.

Also, South Europe, we see with a decline in France, while markets like Spain promise staying stable. Overall, the growing Middle East is not able to offset the shrinking and reducing EMEA region. Heightened geopolitical uncertainty, prevalent wait-and-see attitude act as headwinds, while sizable demand is still there. The global installed base is growing at a healthy pace. And of course, one can expect that the declining NI markets will also decelerate the growth in the service going forward. However, we still see modernization continuing to develop very robust.

Our footprint. We are pleased to report that last year, we managed to outperform the market and to gain share in several key geographies. As you can see on the chart, we finished the year in a leading position in NI as of New Installation in Latin America and EMEA region. In EMEA region, we also are in a leading position in service. Elsewhere, you see on the chart, we are still in what we call challenger position, and we remain laser-focused on the opportunities to grow and to gain share in those markets. I like to emphasize that this challenger mindset has always been part of our DNA. And even in countries in which we are already in a leading position, we never stand still and will exhibit that specific challenger mindset.

Pausing for a moment on China. Here, the main real estate statistics point to another year of a contracting New Installation market. We estimate around 10%. With the floor space started having the client for the first year in consequence and another good indicator, the floor space under construction, is also declining. Well, the government is only actively trying to restore homebuyers’ confidence with, you see on the chart, the introduction of the presales accounts, whereby Chinese developers are allowed to sell residential projects before completion but are now required to put those funds into escrow accounts.

In order to limit the number of unfinished buildings, the local city governments permit the developers to withdraw a portion of these funds only depending from the progress of the projects. So — and in addition, only to spend those funds for that specific project, which the down paid has made for. One could see there is an effort by the government to improve the situation in addition to 750 policy easing measures issued in 330 cities across China. Expectation is there that those measures will help to stabilize what we call a new balance in the Chinese market.

And with this, I would like to hand over to Carla to guide us through the results of ’23.

Carla De Geyseleer

Thank you very much, Paolo. Good morning, everybody. Privilege to take you through our financial results, obviously covering quarter 4 and the full year ’23. Let me start here with a couple of KPIs. And as you can see on Slide 13, KPIs who are really providing evidence of our consistently positive ’23 year-on-year performance trajectory.

Silvio reminded us a couple of times of this good performance upticks. So in a declining New Installation market, order intake and revenue, both were up in local currencies in the fourth quarter. Now our operating results, they further improved, driven by first, operational efficiencies but also by procurement savings, supply chain recovery and positive pricing. So in every single quarter, we improved the EBIT margin year-on-year.

Net profit printed a significant year-on-year improvement, reaching now a margin of 8.2% in the fourth quarter. And finally, our cash flow for operating activities for the full year almost doubled.

Now one of the major headwinds that we were facing in ’23 and unfortunately we will also face that in ’24 is, of course, the sustained foreign exchange impact. So the major currencies in — that we are operating, so the dollar, the euro, the Chinese renminbi, they continue to weaken against the Swiss franc or maybe better said, the Swiss franc strengthened against these currency. And you can see here the significant impact it had on our full year ’23 results, CHF 721 million negative ForEx impact on our order intake, a comparable amount on the revenue, CHF 688 million and ForEx negative impact of CHF 74 million on the EBIT. So very significant and obviously also accelerating, if you compare it with ’22.

Now if you just would take the FX impact over the period from 2008 to 2023, you see what a staggering FX impact that we were experience on revenue, close to CHF 5 billion; EBIT, CHF 600 million. If you just apply and you take a bit of a shortcut and you say, okay, this would probably compare with a net profit impact of CHF 470 million. And if you apply to that our PE ratio, then you know what an impact it has on the market cap, obviously, fully realizing that is a bit of a simplification, but just to put things into perspective.

Now let’s have a more detailed look on what we can influence, starting with the order intake on Page 15. So in the fourth quarter of ’23, order intake grew by 1.5% in local currency to CHF 2.8 billion, and this against a tough market environment, and higher comparable base. Now this positive development is mainly driven by a strong performance of our modernization business and a solid growth of the service business, as Paolo already pointed out. New installation orders declined in the quarter. Acquisitions added CHF 49 million. FX impact amounted to CHF 196 million, and that led to a negative growth of 5% in Swiss franc.

Moving to the right-hand side and looking at the order intake for the full year, that reached CHF 11.4 billion corresponding to an increase of 1.7% in local currency. Now the new installation order intake was down mid-single digit, however, less than the development in the market or the decline in the market. Strong uptake of the growth in modernization in the second half of the year led to a full year single-digit growth and service continued to grow across all the regions obviously driven by the strong NI conversion but also by balanced pricing actions.

Now organic growth was 1.1% and the acquisitions contributed 0.6 percentage points while FX had an impact of 6.1 percentage points. Now from an all-time high in ’22, our order backlog decreased by 2.1% in local currency and by 9.4% in Swiss franc to CHF 8.7 billion. So the backlog margins progressed positively since quarter 4 ’22 and our order backlog as of the end of ’23 is now equivalent to more than 1 year of new installations, modernizations and repair business. Our modernization and repair backlog grew and as Silvio pointed out, our focus is definitely on value and less on volume.

Moving to the next slide and commenting here on the full year development of the order intake by region. Overall, the New Installation declined mid-single digits in value and lower digits in units. And that was mainly driven by EMEA and the Americas, which is, of course, reflecting the overall market decline in these regions. The decline was driven by both volume business in the key markets, but also a delay of large projects.

New Installation margins further improved compared to prior year in all regions and the modernization business grew substantially in all regions, except for EMEA, where we focus especially in the first half of the year on the supply chain legacy issues. In the second half, we caught up. However, the growth was definitely not fully offsetting the H1 decline. Service business continued to grow solidly, compensating the decline in new installation.

Now moving actually to the revenue development. So starting with quarter 4, revenue declined by 2.5% to CHF 2.960 billion, corresponding to an increase of 4.3% in local currency. We achieved continued growth in EMEA and the Americas region with higher single-digit growth rates. And revenue in Asia Pacific declined. Obviously, this was impacted by the slowdown of the Chinese New Installation market. New Installation revenue remained stable compared to the fourth quarter of ’22. Modernization and Service continued on their growth part.

Now looking at the full year ’23. Revenue in local currency grew by 7.4% to CHF 11.5 billion, equivalent to an increase of 1.3% in Swiss franc. Organic growth reached 6.7% and smaller acquisitions contributed 0.7 percentage points. Now the negative foreign exchange translation impact reached here the record high, as you have seen on the first slide, CHF 688 million, so evaporating 6.1 percentage points of revenue growth in Swiss franc.

Now the strong growth is obviously a result from a diligent working through the order backlog and a good growth in our existing installation business. Our Service business continued to grow steadily, and it was obviously supported by a solid uptick in units of approximately 5%, but also by balanced pricing measures.

The number of connected units increased in the full year now to over 30% of the total portfolio. From a regional perspective, all regions contributed to the full year revenue increase in local currencies except China, with a low single-digit revenue decline. So — but despite the negative revenue growth of China, the group New Installation revenue grew by mid-single digits. Existing installations grew with double-digit rates across all regions except the Americas, which contributed with mid-single-digit revenue growth. Now it is important to point out that, yes, we have a nice uptake of the profit. As you can see on this slide, and what really paid off in ’23 was a disciplined execution.

Now in line with our expectations, pricing and efficiency effects continue to grow with inflation. Silvio pointed out, and that is really, I would say, a first milestone. Strong focus on the disciplined execution resulted in an increased rate of efficiency gains that were clearly compensating the inflationary impacts. And going forward, we also expect the relative rate of efficiency measures continue to further increase.

So talking about our full year EBIT reported and EBIT adjusted, I’m very pleased to see that the positive year-on-year performance trajectory continued also, obviously, in quarter 4. And for the full year ’23 operational measures yielded CHF 282 million, whereas the foreign currency had a negative translation impact of CHF 74 million.

Now this operational improvement there resulted from the higher margin of the rollout backlog, the procurement saving and as I indicated already, higher margin in our aftersales business, but also a positive business mix impact. Additionally, the recovery of our supply chain and the increased installation efficiency supported in profitability improvement compared to ’22.

So we ended the year with an EBIT adjusted of CHF 1.255 billion, representing a year-on-year increase of 19.9%, 27.3% in local currency and the margin increased by 1.7 percentage points to 10.9%. EBIT reported increased by 31.4% to CHF 1.2 billion, also supported by the land sale of our former factory in Suzhou, China, less expenses of the Top Speed 23 program which we are finalizing in ’23 and restructuring cost. EBIT reported margin reached 10.3% and that is an equivalent to an increase of 2.3 percentage points.

Now moving to the next slide and outlining here the uptick of the net profit. You can see here that the net profit grew strongly both in quarter 4 and also in the full year and happy to see that our net profit is exceeding the 8% landmark. Net profit, CHF 935 million, also slightly above the upper limit of the guidance that we communicated last year. And it represents the second highest net profit posted in our company history, and I think that is a good coincidence now we turned 150 years.

Next, to the improved EBIT flowing through the net profit uptake was also fueled by an improved financing and investing result but also by a decrease in the effective tax rate, which is mainly due to geographical mix. Earnings per share increased to CHF 8.05 for the full year ’23.

Now important is to talk about our cash flow and I’m very pleased that I can share that we recovered our cash flow from operating activities and that it also accelerated in the last quarter, with an increase of 75%. For the full year ’23 cash flow improved by 85% to CHF 1.3 billion. And this improved cash flow operations resulted obviously, from the uptick of the profitability, but also a stabilized net working capital, which was mainly stemming from lower inventory but also higher accounts payable.

And before I summarize here the financial results, I would like to mention also the increase in dividend, but also the increase in our payout ratio range. So the proposed dividend, obviously subject to approval of the AGM, is maintained at CHF 4, but in celebration of the 150 years anniversary of our company, the Board of Directors proposes an extra dividend of CHF 1 and a dividend of CHF 5 is equivalent to a payout ratio of 62%.

Taking into consideration the closing prices of the shares listed on the stock exchange on the date of our Board decision yesterday, the dividend yield stood at 2.4%. And in addition, the Board has also decided to step up the payout ratio range for future years namely from a range between 35% up to 65% now to a revised range from 50% up to 80%.

And before I hand over to Silvio, let’s quickly move here to Slide 22. This gives you a short summary of our key figures for the full year ’23. I believe we covered them sufficiently. And also for your reference, the Q4 results are included in the backup of the presentation.

And allow me also to say that together with my colleagues in the Executive Committee, we are very proud on the achievements — financial achievements to date, but also very grateful for the persistent commitment of thousands of our colleagues in more than 100 markets. Big thank you for their outstanding contributions to these good results.

And I believe Silvio, we can close now ’23, and that we can look forward to ’24.

Silvio Napoli

That’s correct. That’s the way to do it. And actually, we have been doing so since the beginning of the year. And so it is time to look now at ’24. I concluded my first intervention by the word resilience. And resilience is what this is about because you’ll follow the elevator and escalator market, it is one that is very solid, one that offers big opportunities, but it’s also one that is getting tougher.

So I wanted to take a moment here to see — to share how we see the market going forward. So starting probably with the headwinds on the right-hand side of the chart. And first thing on the elevator and escalator specific. In fact, as Paolo Compagna explained, the NI markets are under pressure. And let’s face it upfront before China stabilizes and China remains more than 60% of the world market. And you can see the rest of the world also is in turmoil.

Probably there is more of a shorter-term issue because demand is there. The NI market remain under pressure. Equally, if you look at elevator and escalator specific industry, we have an issue which is interesting enough, not very much talked about of trade labor scarcity. We rely on service technicians, installation expert, project managers. And today, and this is true across many building industries, there is a scarcity of this type of labor. I’ll come to that later in the priorities.

Moving on to macro economic type of headwinds, wage inflations are here to stay, perhaps a bit more tamed than they were in the last couple of years, but nonetheless. And then of course, the other big macro element for us is the foreign exchange effects.

Then there are, of course, the political tensions. And there, first and foremost, the regulatory pressure is increasing. New standards are coming up. More countries are regulating, irrespective of a regional agreement, let’s take Europe where we have the — an EU standard for elevator and escalators but more and more countries decide to make their own legislations which override some element of that.

China is coming with their own code, India, so that issue. And then, of course, it is also related to the final point on the headwinds. This is the geopolitical tensions and I have no intention to get into the topic except to say that it, of course, impacts supply chain and impacts also technology and products since as we remember, some countries now ban technologies, microchip from the other. And when we try to develop a global platform, this in itself is a bit of a headache, more so than it was in the past.

Now at the same time, there are also tailwinds. And so let’s again start from the bottom — from the top of the left-hand side of the chart here, you have, first of all, the Modernization market. The expression is Modernization is the New Installation. That’s very much true, except this time on the base of the huge population of aging units in Asia, in particular, this Modernization market is increasing tremendously, as explained by Paolo Compagna.

The Service, as part of the conversion, there is also growing steadily, not even to mention in the digital services. as an add-on. Then there is the layer of micro-macro. Well, the inflation on material, in fact, is abating. And beginning of the year, there were some threats. But having seen the latest indexes, it seems to be under control. And that in turn brings to material cost tailwinds. Now moving — and the final point then in terms of issue on political pricing here, it’s more an issue of how do we deal with that. With this inflation situation, luckily because of the wage which — the wage inflation, which has tailed with our service contracts, we’re still going to have some sustained pricing opportunities.

And then the final one here is technology driven. You saw some of it in our Technology Day last October, but it is fair to say that thanks to generative AI, and you will see in our annual report, I even write a letter on this. Immediately, this provides opportunities. And there are many examples that we don’t have time to discuss today, but with pleasure we’ll do it throughout the year.

We’re already applying generative AI across the value chain. This applies to the way our finance team operates, the way we assess portfolio churns, the way we can anticipate pricing on some specific type of tenders. And then of course, there is BuildingMinds, which I’ll touch in a second, where, of course, they write — already a big portion of the software is actually written with the help of generative AI, not that they write the full code, but this, of course, accelerates developing, which in turn allows us to learn in what we do in the elevator and escalator core business.

So overall, nonetheless, let’s face it, the picture is challenging. And allow me to say, if you look at our history, it has always been in this moment that Schindler has done best. And so this then begs the question, what do we need in such an environment? Well, first point, allow me to say, I know that we have a maybe divergence of opinion, you need a very strong balance sheet. That’s point number one.

But the second question one could ask is, do we need a new strategy? And frankly, no. The strategy we started in 2022 is perfectly tailored for this environment. In fact, I’d like to say that this emergency lending that we have to perform by then gave us a bit of a head start because it forced us to concentrate on what makes a difference on the essential. And so you remember the strategy we presented as our ambition, our choices, our priorities. And then in terms of operations, it is deployed according to a model that we call 4P, people, product, performance, planet.

So according to the same model, now the only thing we need to do is to decide among those elements, which are the ones that are most crucial to deliver on our commitment. And our commitment now is clear. We said this for the first time at the beginning of the year is we need to deliver 11% EBIT this year. There is no way back.

And so having discussed with the team, looked at our strategy, we looked at and said, what is it that really we must win, what are the key points for 2024 to deliver on the 11%? And let’s start on the left top corner with people.

Of course, let’s not forget, 2/3 of our employees are technicians, 2/3 of employees are the ones that really make the difference. They wear the Schindler uniform with a logo. They are the ones that customers pay for. And so the key element of these people beside, of course, increasing talent across managerial role and things that I’m sure everyone would say, for us, we have this element called frontline is the bottom line. That’s where the battles are won or lost. It is with our technicians. And we are — and we have been refocusing everything we do for the sake of what happens in the frontline. And that is the key element, it has many implications which we can discuss more in detail.

Moving on to the right-hand side, of course, our people need product, they need processes. And there a key element for us is the successful launch of our standardized modular platform. We need to make sure also we support our service business with more and more digital services. And of course, one element that has become more and more of an issue with the markets getting tougher is what we call portfolio losses or rather we need to increase our retention rate. We — you actually, based on your calculation said that we are best-in-class, well, let’s be very open, this is a very tough benchmark to keep because with the customers being subject to more financial pressures, the situation becomes tougher.

Moving on to the third element, of course, delivering on our commitment doesn’t mean giving up on our sustainability road map. And that is something which is very high on our priorities. And this involves for us for ’24 continuing with our fleet transformation. Let’s not forget, we have a huge fleet of tens of thousands of cars because that’s the model to have a service technician reaching the targets, not in our world, but in most part of the other regions. And in doing that, we need to continue expanding our green services because thanks to connectivity, we can actually deliver a service with a much lower CO2 footprint, which in turn also helps Scope 1 and Scope 2 for our customers.

And then finally, there is BuildingMinds. Now one — some of you asked a question last time how we’re going to update investors on BuildingMinds. We provided an update in October. And now I think going forward, my commitment, at least once a year we’ll let you know how BuildingMinds does. What I can tell you that the year was very successful. Our ARR was multiplied by 3, and we continue operating with more customers and now even geographical expansion with more and more projects, not only in Northern Europe but across the world.

And if we do those first 3 Ps, then we come to performance. And then you will notice one word that is repeated many times is efficiency. This goes back to what Carla said. If you want to be — if you want to deliver and we will deliver this 11%, we need to be stronger than ever on organizational efficiency, field efficiency, procurement and supply chain efficiency and much more across everything we do. And there, of course, benchmarking with our competition ruthlessly really help because there is no discussion.

So there is no taboo. We are really going zero-based budgeting across everything we do. And while doing that, of course, we should not forget pricing discipline. We learned our lesson. Growth by itself is not going to cure anything. So yes, we will stay careful on our pricing, while at the same time, being competitive. Now with that, I mentioned before, allow me one more word on a key deliverable here of disciplined execution.

This is once more this launch of a new standardized modular related platform. This is working well and to be very clear, this has to work. This is the volume business in NI. This means not only being competitive with a unique product, which really distinguishes itself from any of its competitors.

And let’s not forget, Schindler created the business at the beginning of the century, which is high quality, good value elevators. But this is more than a product. This is a catalyst to drive complexity reduction across our business because by offering less options, by focusing on a specific market, systematically this in turn reduces the complexity across the way we sell, across the way we install, across the way we train, across the way we manage spare parts, across the way we manage our supply chain. So that, I wanted to stress once more, is key.

And how will we track performance? How did we learn a lesson? We have a number of KPIs. We’ll, of course, start with the customer Net Promoter Score, the sales margin, the way we do installation, again, going back to efficiency and execution and of course, the sales volume, how we deliver on time and, of course, how this is converted into a portfolio, which is at the end, the reason why we sell new installation in the first place.

With that, I’d like to pass on the word to Carla, our CFO, for the outlook.

Carla De Geyseleer

Thank you, Silvio. So I’d like to give you a bit more insight now in our plans, how we are going to drive profitability, but also on our commitment to deliver on the results going forward.

And I believe it’s always good to take a step back for a second because now we are in the year of 150 years of existence. We can say that our industry up to today was already an attractive one. But also, of course, going forward, we believe that it will remain an attractive one simply for the reasons that megatrends like urbanization, sustainable cities and transportation infrastructure as well as connectivity will continue to fuel the demand.

Now the share of the middle class, of course, will continue to increase, and the global population is aging, of course, also with the desire to live independently for longer. So no matter in what cycle we are, we are always offering competitive products over the entire lifetime of elevators and escalators, capitalizing on growth. And in this environment, obviously, we showed a resilient performance across cycles for the last 150 years.

And if we look now a bit at the key performance indicators and how we developed over that history, then we say — we can say that, okay, we have a stronghold in Europe. However, through the history, we have also been able to move to a more balanced footprint by increasing our revenue shares in the Americas and also in Asia Pacific. So our cumulated revenue growth in local currency over the last 10 years amounts to 64%, not only a very resilient one, but also a balanced one.

And the last time we posted a negative revenue growth was back in 2009. Now we run a successful service model which showed also a very robust growth over the last 10 years. And our portfolio grew by around 60% in units since 2013, and the revenue CAGR was close to 6%.

Generating cash, we touched already on it. That is definitely a strength of our company. And it is proven by a high and a very consistent cash conversion, generally fluctuating in a bandwidth between 10% and 150% in the period of 2013 to ’23. We generated consistently high cash flow, but also taking into consideration what is important is the very low capital needs. We have an asset-light service model and our net working capital is negative. And of course, if you combine then the 2, then it’s clear that our business is yielding a high capital returns.

Similar to the cash conversion, our return on invested capital moves in a band between 40% to 60%. And invested capital increased obviously with the implementation of the new lease standard in 2019. But here, on the graph, the lower graph in the middle, we actually have simulated the numbers in the period 2013 to 2080 to make them comparable.

And this, of course, comes all together in a very healthy balance sheet. And I realize or we realize some of you call it very conservative. But in the end, a strong balance sheet helps us to come out strongly of recessionary cycles, and it gives us a lot of flexibility going forward.

Our equity increased by more than CHF 2 billion to CHF 4.7 billion over that period and net liquidity exceeded now CHF 3 billion. And intangibles in percentage of total assets increased, I would say, slightly up to 12% over the period. So in summary, I think we can conclude that we showed very resilient results across the cycle.

But of course, there is also a lot of potential to improve our performance. Silvio pointed it out, and we are fully aware of that. So consistently with a commitment to continue driving for really a better competitive position, we also aim to reach an EBIT reported level of 13% in the midterm. And of course, we would not like to stop there. We stick to our long-term ambition to also — sorry, to also close or close the gap versus the best in class in the industry, but that is longer-term music.

Now there are different profitability drivers. We call them the building blocks which will help us in bringing us to that stronger competitive position going forward and obviously impact the uptick of our margins. You can see here on the slide that we have clustered in 3 main pillars: products, efficiency and processes. And out of the 3, we expect the pillar efficiency to be the biggest contributor to reaching that midterm target of 13%.

Now let us start with the products. What do we really mean there? So we touched already on it. A major element is the product launch of the modular elevator platform. But next to that, of course, the aging portfolio creates also Modernization opportunities for which we have now the products offering ready today. And to harvest the full potential, it is clear that we need to scale the Modernization business similar to what we did in the NI and if we add to that, the digital service offering that these 3 elements will actually fuel the creation of value for our customers and will create the growth opportunities.

Now moving to the second one, efficiency. And also there, it is actually a big element because efficiency initiatives, they will address the whole value chain from procurement to installation efficiency and supply chain optimization. So this efficiency, of course, is also linked to the increased portfolio density going forward. And it’s also impacted or strengthened by the increased connectivity. I pointed out already that we made some improvement already in ’23, and we are definitely committed to take that further.

And the third pillar, processes. This addresses the process transformation but also simplification and it goes beyond the traditional SG&A; addresses, again, the full value chain and it will impact every employee at Schindler in her or his daily life. Now also to close and touch on the fourth one, it is clear that the shift in the business mix will also support us in driving relative performance.

Now a strong focus on the action and the disciplined execution of these building blocks, that is actually key to reach the 13% in the midterm. When we talk about midterm, we talk about 3 to 4 years. And we expect a rather linear margin progression over the years, but it is clear that the action will trigger also investments, particular in the pillar, efficiency and processes. But you can expect the investments to happen closer to the first than second half of the midterm cycle.

And now to conclude for the full year ’24, we expect a low single-digit revenue growth in local currency and an EBIT reported margin of 11%. And I talked also about — I talk about EBIT reported and not EBIT adjusted. So just to be very clear to everybody, so that translates into a margin improvement of around 70 basis points versus 10.3% margin in ’23. And I would like, here also on the slide, we target to achieve the EBIT reported margin of 13% at midterm.

And with that, I think we come to the end, Silvio.

Silvio Napoli

Very good. Thank you, Carla. I think with this, we can then pass over the word to Nicole.

Question-and-Answer Session

A – Nicole Wesch

So we start the Q&A now. Thank you very much to all the presenters. We’re opening the lines. First, we would like to start also with questions here in the room. Please, in the interest of time, limit yourself to 2 questions, max per person.

Remo Rosenau

Remo Rosenau, Helvetische Bank. On the 70 basis points margin improvement in ’24 and also on the long-term target. I would like to dig a bit deeper into the impact of the business mix because clearly, there is an automatic margin improvement element coming from lower new equipment sales and higher modernization and service sales, which automatically increases the margin.

So could you kind of quantify how much of these improvements are based on that element, which is basically automatic? Then the second element on the non-adjusted margin might be the lower extra costs. I mean Top Speed 23 is over. So we should expect lower extra cost. How much of that is included in your forecast? And as a result, we get the underlying improvements, which you basically plan. So could you kind of split that up a little bit?

Silvio Napoli

Good. Carla, you should take that perhaps one element. Let me just say nothing. I wish it was automatic. It’s not automatic because as I mentioned before about the legacy backlog, like it’s not — we don’t decide. It is a function of the construction side. It is a function of what the customers do. And now more than ever, this is a bit uncertain. So I just wanted to make that point and I’m sure you appreciate transparency in us speaking about it openly. Carla, please go ahead.

Carla De Geyseleer

Yes. Thank you for the question. Yes, it doesn’t feel like it came automatically, but it is definitely there. But you could say that it’s like up to, yes, 1/3 of the uptake of the profitability, that is definitely. And we will work hard to ensure that we also have that in the — realize that in the coming years.

In terms of your question of the adjustments for ’24. Obviously, as there is no longer the Top Speed adjustments, so we are talking about restructuring, and we are talking about BuildingMinds. And in terms of restructuring, you can say, okay, we target a number which might be a bit slightly higher, although not totally uncomparable with what you have seen in ’23.

Silvio Napoli

And the restructuring is also a result of the NI slowdown. So this going back to the automatic. Nothing is automatic because you win on one, you go to the other.

Remo Rosenau

Okay. So 1/3 roughly is business mix in ’24. And in the longer-term target, I mean, what were your assumptions on the development of the New Equipment business versus Modernization and Services, you must have had kind of a view on that in order to come to the 13%?

Carla De Geyseleer

Yes. We will — let’s say that it would go, yes, around 1/4. That is a bit the assumptions, but we don’t count on this automatic, let’s be very clear. I mean we want to create value with the efficiencies and with the pillars that we gave you transparency and we are not betting on what comes automatically. We really want to drive the organization through transformation.

Lothar Lubinetzki

It’s Lothar Lubinetzki from Octavian. There’s this old saying, actions speak louder than words. So — and we were very pleased to see that you delivered on what you promised and also that from a relative perspective, you improved your margins faster in ’23 than your peers. I remember maybe 3, 4 months ago, we were sitting here in Ebikon and Silvio, you were saying there’s no reason why we shouldn’t be as profitable as our best-in-class peers. Are you still going for that?

Silvio Napoli

Thank you, first of all, for the feedback. I appreciate. This is part of what we hear. I still remain of the opinion that notwithstanding time, there is no reason why any competitor should be that much stronger than the others. Now the question is how long do we take there? Yes, I stand by that statement.

Lothar Lubinetzki

Okay. And I have 2 more technical questions. One on Slide 5 of your presentation. That is about the improvement of the order backlog margin.

Silvio Napoli

Or maybe, can anyone help me to go to Slide 5. This is a bit of — not very technological system.

Lothar Lubinetzki

I was just wondering if you compare Q3 with Q4, in Q3, the order backlog margin improvement was more or less flat. So in Q4, you have the significant increase again. What was the main driver there?

Silvio Napoli

Well, thank you for the question, Lothar. It’s a question also what happened in Q3, which we know we present — Carla, would you like to address that?

Carla De Geyseleer

Well, it is clear that as we are working through the legacy backlog, I mean that and taking in more profitable contracts that is the simple reason why we see this nice development. And that is also the point where Silvio you touched on, if you look at the difference between the low point and where we are now, we are talking already about 100 basis points.

Silvio Napoli

To your question. It is very difficult with a global backlog, which is CHF 11 billion to understand — to punctual, but in fact, simplification. Q3 is traditional business, a very high time for all around the world, construction side progress. And so in Q3, in fact, there wasn’t that much progress for reasons that, frankly, were unexpected. And now in Q4, that accelerated and then you see the results.

So it’s really going back to this boa constrictor effect. That combined with the new orders that came in the rest of the year, that made this efficiency effect. But it is not automatic, I’d like to stress. And this is really every month, it is something that — that’s why it takes time to flow through. So exactly more than that, it’s difficult to say. It’s about our geographical project, size, product mix, combined with the time execution of the site.

Lothar Lubinetzki

Okay. And then, again, more technical question. I’m assuming that you had a meaningful tailwind from material cost in ’23. Can you quantify that? And also what do you expect going forward for this year?

Silvio Napoli

Carla?

Carla De Geyseleer

Yes. In any case, yes, the raw material prices, they clearly stabilized over the — over ’23. When we look at overall ’23, we still did not have a tailwind. So overall, for the full year, if you compare it with ’22, we still had actually a headwind, but we expect that to turn into a bit of a tailwind into ’24. And that is also the way we lock in the prices, et cetera, the delay.

Silvio Napoli

Thank you. Are there more questions from the room?

Alexander Koller

Alexander Koller from Stifel. Some benchmarking, when we look at the orders in Q4, the direct competitors grew more strongly in the last quarter, even after adjusting for FX. Where do you see the reasons for that?

Silvio Napoli

Thank you for the question, Alexander, and I’ll tell you the first half, then maybe Paolo can definitely build on that. And as I said, the key element is this, we probably are, and I cannot speak of my competitors, extra careful on the quarter on the order quality. We don’t want to look great on the order intake and then having to postpone our commitment on delivering on the profitability. And there are some parts of the world, in particular, China, where one can accelerate very strongly order intake by being less price disciplined. And that we don’t do any more. Paolo, please.

Paolo Compagna

Thank you, Silvio. Very good question. Not going to what our competitors story was in Q4, but looking at ourselves, Silvio just mentioned, China was picking up, and we have seen in especially EMEA was also showing this in chart before, a declining trend in the market and as mentioned before, as we still stay to our margin policy, we were not falling into any trap of speeding up towards end of the year. So this might be one of the answers. All in all, also mentioned by Carla, one business which in our case was significantly picking up in Q4 was Modernization business. So in the mix could also be an explanation.

Silvio Napoli

But just to dissipate any question, we do intend to grow with quality.

Paolo Compagna

Absolutely.

Silvio Napoli

If we now launch this product with all the huge effort, it is because we want to not only remain strong, but also grow with quality in the volume segment, where, unfortunately, until this is not fully out, we are not firing on all cylinders. So that’s one of the objectives for the launch of this product and going forward. So I’m confident as part of this plan, which does include only next year, the 13% plan, achieving that presence and strength in the volume market is going to be a key contributor. Hopefully that helps.

Johannes Borner

Johannes Borner from Santro Invest. I have a question regarding — and going back to the cost, in fact, you were just mentioning that there was not really a tailwind from material cost reduction, if I may say, in ’23. So looking forward, you will have then on the other side, on the personnel cost side is a bit lagging usually, I suppose. So if you look at your guidance, is it fair to say that the one cost element will compensate for the other? Or what’s the net effect of delayed personnel cost increase and immediate material cost reduction, please?

Silvio Napoli

Thank you. For this question, Carla?

Carla De Geyseleer

Yes. I realize I need to be a bit clearer because I was probably not totally clear. When I was talking about the raw material, I was talking about the raw material inflation. It is clear that with the procurement savings that we realized, obviously, we completely offset that inflation. And we had actually called it a bit of a tailwind of what has been achieved through the procurement savings. So maybe I should be a bit clearer there.

And we expect also a strong continuation of this procurement saving, and they will also contribute pretty nicely to the uptake of the profitability because that was also one of the elements in the Top Speed program, as you are aware, and also one of the big results that we have now a procurement organization, which come really up to speed and up to standard.

Silvio Napoli

Thank you for that clarification.

Johannes Borner

And on the personnel cost side, what do you expect there?

Carla De Geyseleer

On the personnel cost side, obviously, the headwind will be slightly lower than what we have seen in ’23 and as you saw already, overall, I mean, also in terms there of the uptick of the efficiency, we will definitely — it’s our goal to continue that and offset the uptick of the personnel cost in ’24. Yes.

Johannes Borner

May I ask something on pricing. As volumes in New Installation going down and Modernization picking up, but the argument of inflation which is an argument in product sales, if I may say, it’s sort of an automatic price increase you can have with the understanding of the client or the client also realizes that there must be some inflation part of the — on the product pricing. So now inflation coming down sequentially, is it hard to negotiate on pricing in ’24? Or what are you seeing in terms of pricing dynamics, starting with maybe Q3, Q4 going to ’24?

Silvio Napoli

Thank you. Paolo, would you like to take this question?

Paolo Compagna

Yes. Very good question. Thank you very much. Is inflation helping pricing? One could say, yes. On the other hand side, as mentioned by Silvio before, we are very clear in — let me start with New Installation, I’ll come to Modernization in a second. With the new modular platform we are launching right now starting in Europe, we are in to make sure we receive the prices that we deserve to have for the product.

So to a certain extent, we can also say to disconnect pure pricing from inflation. We have to move much more when we talk about pricing to benefit for the customers, service offer to the customers and all these topics, which may be in the last 2, 3 years of inflation was a bit forgotten. So in Modernization, these arguments to play in our personal opinion and also my very personal opinion even more a role.

When we go to Modernization, does inflation helps, for sure, it can be a little help, but I think in Modernization, even more than in New Installation, the way — the solution, the way you propose a solution to the customers, the time you need to modernize the installation, it means the time the elevator is off from service in a building, which is occupied to modernization. All these arguments to play a major role compared to the pure material price effect, which is there, but much less impactful than in New Installation.

Unidentified Analyst

[indiscernible]. I have a simple question as you are guiding now on reported EBIT and you distribute CHF 1 to the shareholders as anniversary dividend, I’m wondering to distribute also anything to your employees, for example, so that we have to consider some significant extra costs for the anniversary year because this can quickly become a significant amount for activities, extra salaries, whatever it is.

Silvio Napoli

Thank you for this question. Candidly, I was expecting this question more from the press than from the analysts, but never mind. Really, I love that. No, no, I love this question. It’s one that, of course, we thought about it very carefully. And as you know, we’ve always been very disciplined in the way we manage dividend in the past.

The best thing we can do for the company, for our shareholders, but also for our employees is to have a successful year, especially after we come there. So there were plans from Italy to have big expenditures in relation to anniversary. Already back in ’22 when we had to do this emergency lending, we decided we don’t do this. Because the last thing we want to do is to have this and come with an excuse, oh, yes, we would have been 11%, but then listen, no, we cannot because we spend the money. We don’t do that.

So what we did is this 11% includes everything we do, which is not much. In fact, because we don’t want to be on the list of companies that then they had a great anniversary, a few years later, they’re not here anymore. We don’t do that. So to be very clear, every country as part of their own independent initiative is allowed to do things which they consider appropriate for their place. In Switzerland, by the way, since we’re here, you will see our Switzerland operating unit, [indiscernible] will have a couple of very remarkable things for the employees.

We’re going to have all our employees coming here in September, 5,000 people in the [indiscernible] Lucerne, we’re going to have a whole day out. We’re going to have the Switzerland Expo Day, I don’t know if you think, in July, will be held here hosted by Schindler here in Ebikon. So we’re going to do a couple of events. This is for Switzerland. U.S. will do what they think will work for them. China has already done something for 40 years in China. So — but to your answer to your question, sorry, no major expenditures are planned, anything that might be done locally is included in the price — is included in the 11%. Thank you.

Unidentified Analyst

[indiscernible], Z Capital. I have a question on the 13%, 3 to 4 years. Could we expect to see a gradual improvement, so 50 to 65 basis points over 3 to 4 years from this 11% to 13%? Or will it more be like a hockey stick because measurement is in time? What can you tell us about that?

Silvio Napoli

Carla?

Carla De Geyseleer

Personally, I don’t believe in hockey sticks, so I try to avoid the hockey sticks. So no, we are targeting a more gradual improvement. But as I said, obviously, you will have to make some investments, and we obviously will do that in the earlier part, but it’s not like — so maybe a bit of an acceleration, but not — definitely not a hockey stick, yes. So you should be able to monitor us closely.

Silvio Napoli

Thank you. If there are no more questions here from the room, perhaps we can move to the questions online.

Operator

Our first question comes from the line of Klas Bergelind with Citi.

Klas Bergelind

So my first one is on the order backlog margin improving this much quarter-on-quarter. It would suggest that the new order margin went up as well versus the third quarter, i.e., not only driven by the legacy backlog being executed. I guess this means that the order pricing in China wasn’t too bad for you, maybe stable to slightly lower. If you could confirm that because some of your peers have obviously been very aggressive on pricing in China to take share in the last couple of quarters, but it doesn’t look like you participated there, Silvio, if we can start there.

Silvio Napoli

Thank you. So if I understand correctly, the question is, when you’re looking at this Q4 backlog margin improvement, what does that say about our pricing policy in particular, in China, whether we are facing headwinds, Paolo, go ahead.

Paolo Compagna

Very, very good question. I think the impact we see in the margins of Q4 are also obviously due to pricing and sales made a couple of months before. So it’s not a day-to-day relationship. So if the question goes in direction is this something which happened in Q4, the backlog improvement, yes, the sales and the pricing impact is maybe 5 to 6, 7 months before and this happens when you go and sell the units of the projects. And it applies also to China for sure, if the question was more on the Chinese market. [Call Ends Abruptly]