Schindler Holding AG

SIX:SCHP

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, welcome to the Schindler Conference Call on the Q1 Results 2023 and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Marco Knuchel, Head of Investor Relations. Please go ahead, sir.

[Marco Knuchel, executive]

Good morning, ladies and gentlemen, and welcome to our first quarter 2023 results presentation. My name is Marco Knuchel. I'm heading Investor Relations at Schindler. As usual, I'm here together with Silvio Napoli, our Chairman and CEO; and Ms. Carla De Geyseleer, our CFO. Silvio will start with key messages and will provide an update on recent market developments. Carla will then lead us through the financials. After the presentation, we are happy to take your questions. Today, we plan to close the session at around 11 o'clock.

With that, it's my pleasure to hand over to Silvio. Silvio, please go ahead.

[Silvio Napoli, executive]

Thank you, Marco. Good morning, everyone. Thank you for joining our Q1 results conference call. You have received a package and I will refer to the slides that you see also in your screens. But more than the slides, I just wanted to start by conveying a message. And this is the following. You will have seen on our media release that we chose staying the course as a title.

And let me perhaps pause a second to explain why this is the case. When I introduced to you our results in February '22, together with this new governance model in place with the Chairman and CEO role, I stated very clearly that our priority is to close the gap versus competitors, in particular, in terms of profitability, i.e., relative EBIT percentage.

Well, today, I must say we are delivering on this mission. We have still some way to go. But in spite of the many changes continue to happen in the market, I'm pleased to say that the measures we put in place are starting to pay off. And why is that? Now we can maybe refer more specifically to the slide. First of all, we are facing a new installation market, which unfortunately continues to weaken globally.

Most of all, this weakening is associated with uncertainty with -- we'll see in a second, some markets that were previously going very strong now suddenly showing signs of hesitation. Orders that were supposed to come back strongly, which shows some delay. That's a fact. And of course, again, and the third, we continue moving along our mission, notwithstanding the situation.

Now as a result of the weakening market, unfortunately, our order intake is decreasing as a reflection of that. At the same time, I'd like to stress this and we then look at this more with a CFO in a second with Carla. Our margins are improving remarkably, possibly even above expectations in terms of new order intake. At the same time, our growth in service and repair continues very strongly.

The third element are our revenues where there, we are pleased to drive revenue growth across all regions and product lines, even in regions where the market is uncertain based on our strong backlog. Number 4, of course, now we come to our main target and goal which is the improvement in EBIT and net profit. This improvement is, first and foremost, operationally. In the case of Q1, you will have seen with particular, so if you want to supplement due to the sale of our former factory land in Suzhou, China.

Coming to the fifth highlight is that notwithstanding, as I said, we got some way to go. We continue to progress on disciplined execution of our strategic priority, which are intended to drive competitiveness and performance, not only short-term, but also medium- and long-term.

Before I move on from this page, I'll maybe like to add one sixth highlight. And it is one I briefly mentioned before. This is the one of our backlog. Our backlog today stands at CHF 9.6 billion, which is more or less equivalent to 2 years of new installation revenues. In other words, this backlog offers us what I would call a top line buffer, which therefore allow us to continue driving orders while also improving margins.

The backlog in terms of bottom line as if you want, as a 2-edged sword, on one hand, we are continuing to getting rid of the diluted margins from the old orders. You may remember this boa constrictor slide, as I called it, flowing out this dilutive margins of the old orders will continue to hit our results until '25 and some small portions even beyond. But at the same time, in the backlog, we are improving new [ OIT ] margins, which ultimately will drive what I call a progressively positive backlog impact going forward.

So with those 6 highlights, so the 5-year plus 1, which is the backlog, we now can move to the order slide, which refers to one of our strategic priorities. Again, in February, I presented a strategic deployment framework. I mentioned how going from a purpose to our ambition, to our choices on to our targets, we then deploy those across our organization along 4 Ps, people, product, performance and planet.

And the first of these 4 Ps is people. And there, we announced today that we have a succession in Chief Technology Officer, whereby Karl-Heinz Bauer, who after 8 years come to his well-deserved retirement age. He will be succeeded by Donato Carparelli, who's someone that has been with the group for 30 years, someone who knows our products, our markets and in particular, domain competence in the elevator and escalator technology is the ideal candidate to take over from Karl-Heinz Bauer.

Donato worked in Asia. He worked in Europe. And in particular, he has shown great performance of product management and innovation and has been now driving our simplified modulator platform, which is being launched as we speak. So again, we put a CTO, someone that has a particular domain competence and direct involvement in what is today the most important aspect of our product strategy. So we are very positive about this succession.

And perhaps you see on the right-hand side, we used the format viewed in the past to communicate changes in the executive committee. And you see now this is the ninth change in 14 months. So in terms of speed of change in terms of continued evolution, you can see that on this front too, we are proceeding un-relented along the target we set ourselves in February '22.

Now with this team now, if there are many changes, one thing to the contrary continues constant, which is the constant progress on delivering on our priority, which is achieving a trajectory correction in terms of profitability. And not only profitability, you can see on the chart here with the red curve, our revenues.

And you can see here that since Q3 '22, they have been improving steadily. And there is a number of factors there. Of course, the lockdown easing. There are also the supply chain bottlenecks easing out. And of course, our drive to work with our customers to make sure that we could deliver on the construction side and proceed with the installation of the units in our order book.

Now the other curve on this chart is the one in gray. And then you see the gray chart shows the EBIT year-on-year gap or improvement. And you can see that the trough both in terms of revenues, by the way and in EBIT gap was in Q2 '22, so half year last year. And year 2, you can see that from Q3 '22 onwards, this year-on-year EBIT has been improving. And you can see that in Q1 '23, you have the first year-on-year improvement in this quarter, both in terms of revenue and in terms of in absolute figures.

Now moving to the relative EBIT percentage. You can see the box at the bottom of the chart, we can see the same trend. And in Q1 '23, you can see this is not the first time we have an improvement, both in positive and in relative EBIT performance year-on-year. So what does that say? Let's say that the profitability-enhancing measures that we put in place are starting to pay off. I use the word starting because, of course, once more, we still have some way to go. But we are once more staying the course and proceeding onwards.

Now staying the course despite markets, which then takes us to the next slide, which is the updated market outlook. It's important that I stress the word updated because indeed, there are some changes. The chart again, for everyone's understanding, relates to units in terms of new installation and below modernization and service.

But starting with new installations. We do have some major updates, but the first one regarding China is I'm not going to say positive, but I would say it's a less negative sentiment. I was in China for the first time since March '19, 2 weeks ago, spent there almost 2 weeks and maybe focusing on the market now. If maybe in February, we said our assessment was for the year '23, between minus 10% and minus 15%. Today, probably we are closer to the minus 10%. But nonetheless, we still talk about negative territory, unfortunately.

And now we can see that the decline is slowing down. But as we speak, if one expects a recovery, which in confident will come. But today, it is still uncertain when the timing of this recovery will take place and what the magnitude of such recovery will be. In any case, we remain of the opinion like in February that there is probably no recovery inside before the second half of 2023.

The next market, Asia-Pacific, excluding China, where this is good news, there is no change. The markets remain very strong, not only in India, but also in Southeast Asia. Of course, one has to recognize these markets for having worked there myself a number of years are very much subject to global economy evolution. So if there was a global recession, I'm afraid we will have also an impact on these markets where the fundamentals in terms of urbanization remain nonetheless very strongly.

Moving on to the Americas. There, we do have a downgrade. We had a flat assessment in February. And today, you see we put there a minus, which is equivalent to a 0 to minus 5% outlook for the year. And of course, this is driven by a combination of North America and South America, mainly Brazil. But in America, we see the commercial sector, in particular, weakening. Maybe as one data point, the ABI has been minus 17% for the first 2 months or '23 in comparison to '22. So that is a sign. And of course, we're watching this very carefully. In Brazil, it is more of a question of the slowdown. And that, of course, cannot offset the evolution in North America.

Another downgrade, moving on to the next one, which is EMEA. There is, I would say, quite a significant downgrade in the outlook is that we now have a negative outlook for the year because we see what used to be strong markets with stable demand, moving on to a moment of delayed projects and hesitation.

To be clear, demand remains strong across Europe, but in Europe, in particular, the cost of capital increase, combined with in specific markets, some political changes regarding construction environment and other element brings to putting projects on hold. So the projects are still there. But therefore, for '23, the outlook has been downgraded. Middle East and Africa continue strong, but unfortunately, they cannot offset the European change that we observe at the moment.

Finally, then if you look at the overall outlook, then there is no change because we still see that between minus 5% and minus 10%, where this weakening trend globally, combined with uncertainty, including China, continues to affect markets. On modernization, the demand remains robust and in service that we observed continued growth across all regions.

As you will see later, our OIT performance or in terms of service remains strong organization. Unfortunately, we had a slow Q1. There is not a way to put it, but we remain confident that the large projects we are going after for modernization will materialize in the rest of the year.

With that, I thought it was important perhaps to spend one more slide on China present in the slide that we have shown every time as I think, a strong indicator situation in China. Unfortunately, the latest figure we have are the ones of February. So clearly, we don't have March yet. But you can see here, first of all, in terms of floor space sold, there is a pickup. So when we said the decline has slowed down.

However, if you see from this curve even for Tier 1, we still are below 0. So we still are in negative territory, but of course, less like it than we used to be in the past. You can see that Tier 1 are still much better than Tier 2 to 4. But nonetheless, this has to be put in perspective with what you may have read, sales orders in China picking up in March for the first time by figures, which even talk about 43% year-on-year.

First of all, there is a base effect. But of course, you can see that obviously, there is a big absorption of the unsold inventory of -- and that, of course, is good news because it means that then hopefully, we will then evolve into the positive growth, which is something as once more, we are hopeful will materialize in the second half. But today, it is still uncertain.

I mentioned inventory, which then takes us to the right-hand slide. And then you can see that Tier 1, in fact, we are still within what I call healthy level, so 10 to 15 months of consumption of housing inventory. Unfortunately, in the Tier 2 and 4, again the decline has been arrested. However, we still are into the 20-month area of inventory, which is definitely very high at the level of the previous crisis and this will have to be absorbed before we can then expect growth in new installation elevator market.

With that market outlook, I'd like to pass on the word to our CFO, Carla De Geyseleer. Carla, please?

[Carla Geyseleer, executive]

Thank you, Silvio. Good morning, everybody. Since we met only a few weeks ago and because the first quarter is seasonally the least eventful one in the year, I try to keep my comments relatively brief to allow enough time for your questions at the end of the presentation.

So let me start with Slide 9, results in a nutshell. First, some high-level comments, summarizing our first quarter performance and then I will give a deeper insight into the relevant topics later during the presentation. First of all, overall, we are very pleased with the first quarter results. Only the muted order intake development clouds the picture a bit. However, as Silvio explained, the year-on-year new installation order intake margin continued its upward trajectory.

All regions, all product lines contributed to the solid year-on-year revenue growth. Our service business continued to grow solidly, supported by an increase in units of more than 4% and a continued execution of the pricing measures. EBIT adjusted and EBIT both printed year-on-year improvements in absolute and margin terms.

And of course, there is a one-off real estate gain of CHF 26 million, which supplemented the EBIT and the net profit. Cash flow from operating activities almost matched the previous year result. Higher net working capital requirements could not completely be offset by the improved profit.

Now we move to the following slide, which shows the figures for the first quarter. So first quarter '23 results confirm the positive trajectory with a 10% year-on-year improvement in revenue in local currency and in even higher growth rates in profit, which were supplemented by the real estate gain of CHF 26 million. Since the Swiss franc strengthened against our main currencies, our revenue and profit growth were negatively impacted by ForEx amounting to 380 basis points and 620 basis points respectively.

Moving on to Slide 11 to give you some insight into the order intake development. Order intake reached CHF 2.9 billion, corresponding to a decrease of 8.7% and to minus 5% in local currency, reflecting the weakening global markets, but also our continued focus on sales margin. Organic growth was minus 5.1%. Acquisitions contributed 0.1 percentage points, while the FX had a negative impact of 3.7 percentage points to growth. The right-hand side of the slide provides you with an overview of the year-on-year order intake evolution by region and product line. Order intake represents here all the product lines, new installation, modernization and service.

As you can see, all regions contracted particularly due to the muted new installation market. Modernization had a slow start into the year 2, but on a positive new note, new installation and modernization margins continue to improve in all the regions. The Service business remained very robust and continued to grow. Order backlog decreased by 5.3% to CHF 9.6 billion. And in local currency, order backlog growth was almost flattish at minus 0.2%. Given the lead times of more than 18 months, combined with the improved new order intake margins, this backlog is now expected to fuel the continued performance going forward.

Moving to Slide 12. So the revenue here, shown here, increased by 6.2% year-on-year to CHF 2.8 billion, corresponding to an increase of 10 percentage points in local currency. Organic growth reached 9.9%, supplemented by acquisitions, which contributed 0.1 percentage points, while the FX had a negative effect of 380 basis points to growth. Backlog execution remained strong in the first quarter resulted in the highest growth rate since the second quarter of '21. All regions recorded growth in local currencies and growth across new installation, modernization and service was robust and broadly similar.

Now moving to the next slide, I'll give you some insight in the development of the EBIT adjusted and the EBIT. As Silvio pointed out, our implemented measures yield results and they are more than offsetting the declining impact of inflationary pressure, semiconductor shortage, product legacy and supply chain issues. And I believe that the 2 charts on the slide here nicely illustrate how EBIT adjusted and EBIT including the margins started to recover from the third quarter in '22.

In the first quarter, '23 operational measures resulted in a CHF 49 million improvement. EBIT adjusted reached CHF 272 million, representing a year-on-year increase of 15.3% and 20.8% in local currencies. The margin increased by 0.7 percentage points to 9.7%. EBIT increased by 33.6% to CHF 282 million, supplemented by the land sale of our former factory in Suzhou, China, resulting in a one-off capital gain of CHF 26 million. The EBIT margin reached 10.1%, equivalent to an increase of 210 basis points. And for completeness, net profit reached CHF 212 million, equivalent to an increase of 47.2% and without a real estate gain, net profit totaled CHF 186 million, representing a year-on-year improvement of 29.2%.

I jump now to the slide outlining the operating cash flow development. With a decline of 1.7%, cash flow from operating activities reached CHF 281 million and could broadly be maintained at prior year's level. The solid increase of profit has been offset by higher net working capital requirements, mainly driven by the year-on-year increase in accounts receivable and work-in-progress.

So let me now conclude with the outlook for '23. We very much focus on the disciplined execution of our strategic priorities and expect a positive EBIT adjusted margin trajectory to continue since pricing and efficiency are expected to more than offset inflationary impacts. Our revenue outlook for '23 remains unchanged and hence, Schindler expects low single-digit revenue growth in local currency for the full year.

Allow me now to take the opportunity to thank all the colleagues around the world for their remarkable contribution to the solid revenue growth and the progressive uptake of profit. A sincere thanks to all of you.

And finally, I'm very happy to announce the date for our Technology Day in Ebikon, Switzerland that is scheduled for the 20th of October '23. And we are very much looking forward to welcoming you and meeting you here in person at our headquarters.

And with that, I hand over to Marco.

[Marco Knuchel, executive]

Thank you, Carla. We are now happy to take your questions. I would like to ask you to limit yourself to 2 questions only given the very limited time we have today. With that, I would like to hand over back to Sandra. And the first question is coming from Lars. Sandra, please.

[Operator]

[Operator Instructions] The first question comes from Lars Brorson from Barclays.

[Lars Brorson, analyst]

I'll restrict myself to 2. One on the market outlook in developed markets, Silvio, and maybe one for Carla on the margin outlook for the year. I took note of your comments, Silvio, of new installation order margins improving above expectations. And I'll come back maybe and ask to the 2023 earnings outlook. I appreciate that will come more formally in a month -- in a quarter's time.

But firstly, if I can, on the market outlook in developed markets, I wonder whether you can help us a little bit with the specifics. I appreciate newspapers telling us things are going to get a lot worse. But I also took note that you were referencing the ABI in the first 2 months. That obviously swung back in March to an above 50 reading. I appreciate your core exposures in office and multifamily are softer.

But maybe you can help us a little bit with what you're actually seeing in terms of any real financial stress among your customers in that market. Equally so in Europe, I think you spoke about projects on hold. Can you scope that for us? When you look at sort of your total order funnel, what are we talking about in terms of how the sort of the current environment is impacting your customers? That will be my first question.

[Silvio Napoli, executive]

Thank you, Lars. Thank you for these 2 very relevant questions. I'll start with the one indeed regarding market. Yes, let's be very specific. Yes, in America, the ABI is from [indiscernible] in March and this has to do with this uncertainty. So in our overall global outlook, I did particularly refer to this uncertainty. And this is a perfect sign of what we see. And this is exactly why we were surprised and frankly disappointed to downgrade some of the markets between February and today because indeed things change so quickly. Hence, our cautious view on the market to date.

Now let's talk about Americas. In Americas, we see the residential market still continuing strong, depending of course there are some difference among different states. And I would say even the pricing at the moment continues to be, if you want, solid in terms of being able to offset inflation and even more in the U.S. But in terms of 2 large projects, this is what you can see. There, there is hesitation. And it is true, of course, in the large metro cities.

But generally, even in infrastructure and even smaller cities, in spite of this grandiose plans that we have now in the U.S., there is a hesitation. Now the capital uncertainty came later, probably in America than it did in Europe. But overall, we see customers hesitating to put ink on a page when it comes to placing orders. That is even stronger now coming to the other market, which is Europe. And there, let's talk even about the most important market, let's say, Germany or Northern Europe in general. There you can really see customers tell us very clearly, demand is there. I was a meeting a month ago where I met many of our customers.

And then they will tell me, demand is there, some even say, if I wanted to start a project, probably would sell all the apartments in a matter of days. But they are not happy with the returns they see yet and hence, their hesitation to proceed. To that, there is also a combination in some particular markets like Italy, for example, where some changes in political environment regarding support to some specific of construction, also in terms of energy savings and now are putting some projects on hold. Similar situation is in France for other political reasons. But so there's all -- maybe there is there bit more granularity market to market, but overall, the situation is this.

Demand for new housing is there. But for housing and for then commercial, then there is hesitation to proceed for a number of factors, including the capital if it was scarcity or the lower return yields. Carla, would you like to address the second question regarding the profitability?

[Lars Brorson, analyst]

Maybe if I -- sorry, if I can. Maybe just clarify my second question. I was after -- I took note of the orders to see margins improving above expectations. I wonder whether you give us a little color on that. I was also hoping, Carla, we could get a little bit of color around some of the key bridge items for 2023, at least on the key cost and saving items. It's a little bit unclear to me specifically on cost savings how to think about 2023.

[Carla Geyseleer, executive]

Okay. Yes. Thank you, Lars, for the question. So when you really take a step back and look at quarter 1 and you say, okay, where is the operational -- where is the profitability improvement coming from? Then there are a couple of elements there. First of all, we are working through the recovery of the supply chain and the legacy issues, which clearly support the improvement of the profitability.

Secondly, in terms of cost, we really keep them under control and for sure, the overhead costs. And step by step, we are also getting some support, obviously from the procurement savings that are coming through. When we look now forward and we say, okay, what will further -- I would further support the uptake of the profitability. Then we say, okay, we work -- continue to work through this legacy issue. But more and more, we are going to focus now and we are already focusing on real efficiencies that are independently from this legacy issue.

Secondly, we remain really disciplined when it comes to the pricing. And thirdly, as you know, in the coming quarters, we will have also a stronger support from the procurement savings. So that's why we are pretty comfortable to say that the trajectory offers in terms of profit will continue and that pricing and efficiency are expected more than offset the inflationary impacts.

[Lars Brorson, analyst]

Can you be specific on the cost savings for this year, please?

[Carla Geyseleer, executive]

Well, I mean, we don't give specific numbers with respect to the cost savings. But I think I try to be clear that we are comfortable with the continued uptake. And obviously, in H2, we will give a guidance with respect to the profitability for the remainder of the year then.

[Operator]

The next question comes from Andre Kukhnin from Credit Suisse.

[Andre Kukhnin, analyst]

I'll stick to 2 as well. Maybe just on margin, while we're on it already. Could I ask, if I think about the CHF 49 million operational improvement, it sounds like from what you're saying, Carla, we should see that, if anything, expanding further in terms of per quarter impact as we go through the year and certainly not shrinking. And then I'm just thinking about Q2 specifically. Last year, I think you had a CHF 50 million impact from -- purely from Shanghai lockdowns. How should we think about that for Q2? Do we stack these up and hence, get to quite a substantial margin basis points improvement or is that Shanghai non-repeat part of that ongoing improvement?

[Carla Geyseleer, executive]

Well, obviously, we take that part of the ongoing improvement because you cannot only stack up the positive movements because, of course, in the coming period, we will have also to deal with the impact of which inflation.

[Andre Kukhnin, analyst]

But you were dealing with it in Q1 as well, right? And you delivered CHF 49 million.

[Carla Geyseleer, executive]

Absolutely. Yes.

[Silvio Napoli, executive]

Andre, If I may build on Carla's answer, right? I think to summarize and also to do with Lars' previous question. So in a nutshell, our profit recovery source come from 4 elements today. Supply chain recovery, resolving legacy issues. Three, cost control with particular focus on overhead and fourth, pricing. So if you -- now to build on your question, the -- you can say the Shanghai lockdown is between supply chain and legacy issues. That is clearly not going to happen this year. I mean -- but there is uncertainty, to be clear, what else is going to happen.

But at the moment, there is no sign. So to your question, very simply, no, we don't expect to have a CHF 50 million impact in Q2 due to Shanghai. But God knows what else could happen. But to your specific question is not. What is important is that going forward, we see more gains coming from the efficiency measures we have been putting in place over the last few months as we had committed to deliver. And so the trajectory, as I said, the trajectory correction is one that we don't see only short-term, but we see continuing going forward.

[Andre Kukhnin, analyst]

Got it. We'll keep digging to that. And second question I wanted to ask is on China and particularly on pricing, if you could tell us how you've seen pricing developing in the market and for yourself? And maybe while we're there, if you could maybe comment on how you performed in the market versus the overall space?

[Silvio Napoli, executive]

So in China, overall, the situation is not a different -- in some regard with the rest of the world. The specificity in China with a big question I wanted to look into when I was there a few days ago, was the situation with this largest real estate developers who, as you know well, used to account for the vast majority of the growth in the market. The situation has not vastly improved. To the contrary, we see the government stepping in to help the mortgage holders. We see them coming progressively to help on restarting some specific sites in making sure there is maybe progressive consolidation in the market, but that's not really progressing that much.

So in terms of pricing, that is the fact like in the market, we see the decline in pricing is going down. Most of all, we are holding tight because the credit risk in China remains very high. I'd like to stress that. And so while we are very well-protected in terms of process, but also in terms of balance sheet, wanting to do with China, one has to be very careful about going forward. So when I mentioned no recovery in sight once more before second half, it also reflects the pricing and the credit risk situation. It's coming back, but we're not there yet, Andre.

So one has to be disciplined in making sure we get good orders and I'm pleased to say a few of them start to come in. And we continue driving what we call the mass residential where at the end there is the bread and butter of the business where we see some recovery. We also see, as you know, there is an element of working with agents in China, which is very important.

And that is about reinforcing and consolidating the agent network by putting in place also new incentives, not only to stimulate demand, but also to make sure that not only the volume is taking care into account, but also the quality of the margin and the credit risk. These are all measures we have put in place together with other cost efficiency measures to make sure that we remain competitive. But it's fair to say the China is still very much in motion as we speak.

[Operator]

The next question comes from James Moore from Redburn.

[James Moore, analyst]

I'll try 2 questions, if I can. I wondered if we could start with pricing. Pricing, could you quantify pricing in orders versus sales as a year-on-year percentage at the group level in the quarter to give us a flavor for where we are at the moment because it's obviously quite important to the dynamics? That's the first question. And the second question is, whilst I'd love you to give your projected internal FY '23 bridge by all the moving parts, if you were to compare what it looks like today to where you were 3 months ago after the last set of results, would it be possible to sort of characterize where you see the different components, whether volume, price, mix, wage, savings, currency have moved for the better or for the worse?

[Silvio Napoli, executive]

Thank you, James. Yes, we are well, definitely well busy as we should be. Thank you for your 2 questions. So let me first ask -- maybe start with the first quantitative answer in terms of our pricing. We're talking for elevators overall, an increase of mid-single digit across the board, across the board in terms of average. There are some parts of the market where we can see that higher, others are be lower, but this is the overall sentiment for a number of reasons, which I truly appreciate, I cannot give more specific in terms of areas. Now, Carla, in terms of the question in terms what is this pricing in terms of overall impact and the other element, the moving parts as James calls them, would you maybe like to address this question?

[Carla Geyseleer, executive]

Yes, yes. When we really look at a bridge for '23 and I compare that with a couple of months ago, I would rather say that the bridge on itself has unchanged for '23. So the pillars remain the same. Maybe what changed is actually the positive sentiment in our ability to execute our plans for '23.

[James Moore, analyst]

I presume that's because you're seeing the start of your plans come through. Are you referring predominantly to your internal actions on new overheads and cost savings? Are you talking about some sort of more external factors or supply chain easing?

[Carla Geyseleer, executive]

No. I'm referring to the internal one and the one that the initiatives that really -- that we are supporting and will continue to support the uptake of the profitability.

[Silvio Napoli, executive]

Thank you, Carla. And James, building on the previous question, perhaps, let me say, remember, I already 1 year ago, but I keep -- this is something that everyone in the company knows about this formula that pricing plus efficiency has to be higher than inflation in terms of impact. So to your previous question, it is fair to say that so far, we've been now delivering on that formula, but the key contributor so far are still been pricing more than efficiency.

In that, we've had, of course, efficiency gains in terms of resolving legacy issues, but to be completely honest, we may say, as we speak with a team, we cannot really call this efficiency. It's about fixing problems. The real efficiency impact that we are driving will come going forward.

And I think this is going to be very timely because with the uncertainty in the market, I'll be very -- how one has to be also very conscious that pricing will -- is not entirely in our hands. So we need to, of course, continue doing that. But then it's important that all the efficiency comes through as well. So it's a bit qualitative, but hopefully, it helps to show how we look at this, but also giving an idea that today pricing indeed has been the main driver so far.

[Operator]

The next question comes from Daniela Costa from Goldman Sachs.

[Daniela Costa, analyst]

Most of the operational questions have been answered, but I wanted to check in terms of like balance sheet and capital allocation. Obviously, you still have, I believe, the 15% stake on Hyundai. The litigation is done. You have sort of said last time around that you want to keep some cash on the balance sheet for future opportunities. And can you talk through sort of like the merits there of why does the 15% stake make sense? What's the pros and cons of smaller or bigger and how that ties into your thinking about where you want your balance sheet to go more broadly?

[Silvio Napoli, executive]

Thank you, Daniela. Thank you for your question. Let me take the question in 2 parts. I'll answer about the Hyundai element and Carla will speak about the balance sheet capital allocation. Perhaps to clarify one element, the litigation is not over, meaning we now have a Supreme Court an appealable verdict, which we definitely welcome. Now of course, this has to be enforced. And the enforcement, as you may have seen in the paper is still in progress. There are other -- and I'm afraid we definitely don't like that, but that's a fact.

There are other ongoing lawsuits, which are already quite well advanced through the different instances, which are active. And until those are not completed, we are in no position to make statements or even, I would say, let be very open plans about anything going forward. But maybe one element, why do we mention it is simply because it's important that while not being riding overall aggressive and definitely, we don't -- we're not a litigious company.

However, whenever we feel that our rights are not being respected, we are prepared to stay on the ground. And I think that is, I think, is important that comes across as a message. And yes, it took time, but we are confident that now even more than ever that we were right to initiate the proceeding that we did. Carla, regarding the balance sheet, capital allocation, perhaps you'd like to build on that.

[Carla Geyseleer, executive]

Yes. Yes. Thank you, Silvio. So Daniela, thanks for your question. When we look at the balance sheet, first of all, there is no change in our overall position with respect to the balance sheet. But there are a couple of elements I would like to point out, but because our liquidity, of course, reached quite a solid level. But there will be material outflows in Q2. First of all, the dividend is quite a big cash outflow that happened already in April. That is number one.

Secondly, we have a bond, CHF 400 million that expires in June. So that is the second element. Why do we remain conservative with respect to the balance sheet? Because obviously, we really want to give ourselves the maneuvering room when we see interesting opportunities in the market that we really can go after it. And I think with the volatility that takes place in the market, it is not unlikely that some of interesting assets will come under pressure. And hence, we would like to keep that freedom.

And actually, after having dealt with the headaches for a couple now for a long period on how to create a return on our cash on the balance sheet now we finally move into areas with positive interest, it becomes less of a headache for us. And we moved from a treasury perspective. Now we reached already more than 1% as an average return. So that at least brings in quite also a nice financial inflow in the coming period. Silvio, would you like to add something to that?

[Silvio Napoli, executive]

No. I think it is said. And of course, we continue observing the general balance sheet, as we said, on a regular basis, while because we're staying clearly faithful to our admittedly conservative views on how to make sure we take the business forward. Thank you, Daniela, for the question.

[Operator]

The next question comes from Patrick Rafaisz from UBS.

[Patrick Rafaisz, analyst]

2 questions for me, please. The first one is on the backlog execution which is driving the top line, right, at this rate now. If I look forward, obviously, you maintained the guidance, you follow single-digits in organic terms. But the comps in Q2 will be super easy. So assuming a continued backlog execution, we might even see an acceleration, right, in organic growth. So how should we think about the second half? Are there any reasons why organic should slow down dramatically, potentially in negative territory? Or is it just still too uncertain of an environment to talk about that? That's the first question.

Second one is on the delays you were mentioning in projects, especially with the hesitation. Is that something that's already affecting your ongoing business? If so is the working capital absorption, for example, that you talked about and the cash flow may be already to a certain extent related to this or recovery base for the cash expanding due to that? Is that something we should be concerned about?

[Silvio Napoli, executive]

Good. Thank you, Patrick, for both questions. Let me start with the second one, then I'll pass to Carla for the one regarding the backlog execution. By all means, the project delay is not only affecting our business today, but it has been affecting it in China, for example. In China, the backlog is particularly large. And there are many projects for a number of reasons, which has to do with the credit situation of some large developers, which is not so much affecting us, but the general sentiment in the market.

And generally, availability of force due to COVID things in China, that is example where revenue has been slowed. And before I think there was a question relating to the CHF 50 million lockdown impact in Q2 last year. That's an example. But so yes, definitely, that has been affected. And now this situation today, we talk about in Europe, it's more about new projects. So it's not about the backlog. But in Asia, in China, that project delay has also been affected something that has to be taken into account. Now on backlog execution, Carla, perhaps you will take that question.

[Carla Geyseleer, executive]

Yes. Yes. Patrick, thanks for the question. And yes, your statement with respect to Q2 are completely underwrite at. So given, I would say, assuming that there are no unexpected events for sure, it's very likely that we see a continuation of the top line development and also a progressive -- further progress in the uptake of the profitability. So yes, we stay prudent and it has to do with the uncertainty in the coming period. And we allow ourselves also to reassess the situation at the end of the second quarter, when we give also an outlook with respect to profitability. Does that answer your...

[Patrick Rafaisz, analyst]

Yes. It does help.

[Operator]

The next question comes from Johannes Brinkmann from AWP.

[Johannes Brinkmann, analyst]

With respect to Hyundai, how many litigations are still open? And when do you expect the litigations to end?

[Silvio Napoli, executive]

Thank you for your question. We have 2. Now the second question...

[Johannes Brinkmann, analyst]

I'm sorry, 2.

[Silvio Napoli, executive]

2.

[Johannes Brinkmann, analyst]

2 litigations?

[Silvio Napoli, executive]

2 litigation open and as to how long they will take, it is not in our hands. You see, the first one that was initiated beginning of 2014 took almost 10 years. The other 2 were initiated in the following years. So I have no information. We definitely were trying to make sure they are resolved ASAP, but they are not -- I cannot tell you how long it will take. I'd rather be conservative and say they will take the time they take and we respect the time needed by the Republic of Korea's tribunal to resolve all the issues.

[Johannes Brinkmann, analyst]

Is this going for months or years or what do you think?

[Silvio Napoli, executive]

Honestly, I'm not a lawyer, but I don't know. But based on the experience of the other one, I think it's better to be conservative to talk about years than in terms of month. But this is now what I shouldn't say that. It's really up to the tribunal. I don't know what to say.

[Operator]

The next question comes from John Kim from DB.

[John Kim, analyst]

I was wondering if we could go back to China and talk a little bit about any sort of specific policy initiatives or what you may call risk of capital of financing going into your buyer base? Are we seeing consolidation on developers, either voluntary or force merger? Also, on price points, are you seeing perhaps trading down on new equipment orders or installations? A little bit cheeky, but last question. Within your order booking backlog, I think last time we spoke, you had mentioned that you were pruning that backlog for orders that were perhaps cost that are priced in a way that was pre-pandemic, i.e., disadvantage.

[Silvio Napoli, executive]

Thank you. Let me -- if I understand. So let me -- the first question is about China, right? So now the China measures evolve continuously. So I referred to this briefly, but I think the government definitely has made a statement that while until year-end, there was a distant position vis-a-vis real estate and construction after the election of the new standing committee after the appointment of the Prime Minister Lee Chang, who by the way, used to be, as you know, the party secretary of Shanghai. So someone would -- actually is close to business as well. Then there has been specific referral to the fact that real estate and construction will be supported by the government.

Now with that, there has been the priority on protecting, first of all, the mortgage holders, whereby banks have been given special leeway in allowing for helping those distressed mortgage holders. The second element you observe is that the famous 3 red line policy that was imposed on construction and real estate companies has been partially relaxed. I would say this was more at least I understand on an individual application basis to allow for some of these construction companies to restructure and come back to business.

Finally, we see in terms of bank support credit to some of these companies. That's the other consequence. These have been encouraged and asked and I think I referred to this when we spoke in February. However, what we see there, of course, this is the Beijing mandate, how the banks at regional and state level, province level are applying those now is a matter of local execution. So all in all and there are a few other measures that are coming through. I think it is reassuring to hear there is a will.

Now in terms of execution, that's part of the timing and uncertainty. And that's why we remain of the opinion that before second half, this will not trickle down to our business yet. Now in terms of backlog, perhaps would you -- Carla, would you like to take that question?

[Carla Geyseleer, executive]

So can you repeat the question?

[Silvio Napoli, executive]

John, could you -- do you mind repeating the question regarding the backlog, please?

[John Kim, analyst]

Sure. No problem. I believe you went back to customers on orders that may have been priced at really disadvantaged levels, effectively looking to get a bit more commerciality in some of the backlog. So I'm wondering is that process complete? And when we look at the order intake and order backlog, is that process largely done, i.e., is the backlog lower year-on-year because your hurdles or your internal requirements are different materially?

[Carla Geyseleer, executive]

Thank you. Yes, that is an ongoing process. So we really focus on these major projects. And as they are getting executed, it's an ongoing process to further improve the margins and actually to ensure they are less dilutive. So that actually is covering, I would say, the large span of the project. Now in some of the projects, we are more successful and in some of the projects we are less successful.

[Silvio Napoli, executive]

I mean, building on this, John, maybe one element here. So this is called depending on which market you operate and is either change notices or variation orders. So the ability to enforce that, which is always the legitimate based on cost changes, has also to do with the legal environment of the markets where we operate.

So for example, in common law countries there is really a construction law and then you have quantity surveyors type competencies, both on the side of the elevator company like us, but also on the side of the customer. This can be driven professionally. And so we have been, I would say, quite successful, even almost above expectation in driving those change notices in a very professional way, which ultimately then improves the backlog margin and the execution of the projects profitably. Where we struggle more is in countries where such practices are not as well established.

Typically, you would see some parts of Asia, for example, China, where this is less so established. Though there in those countries, we have an inflation clause in our new installation contracts. So there, it's about enforcing those clauses, which again was admittedly and this is definitely not a global thing for our industry, not so well applied. And now we are definitely insisting on these being applied. And so this is part of the challenge we face going forward.

[Operator]

The last question for today's call comes from Martin Husler from ZKB.

[Martin Huesler, analyst]

My 2 questions. First of all, coming back to the sales growth of 10%. I think you alluded to that, but can you rephrase the trends in new installation and existing installations? And in connection to that, where did you see the stronger margin improvement of the 70 basis points, in service or in new installation? That's the first question.

[Silvio Napoli, executive]

Carla, would you like to take this question?

[Carla Geyseleer, executive]

Yes. Yes. The uptake in this -- in the margin is, as I said already, you know, yes, but it -- sorry, we were discussing the sequence of the question. But if I just first take your last question with respect to the 70 basis points, it is actually a combination of the uptake in the NI, but also in the service business.

[Martin Huesler, analyst]

Okay. And the sales trend of this plus 10% for the whole group?

[Carla Geyseleer, executive]

Well, I mean this -- yes. Okay. So the sales trend in the group is definitely coming to a degree from the new installation. And that is, as we are working actually through the backlog in a very disciplined way. So the uptake is mainly related to the NI and we expect that also for the coming quarter. And as I mentioned also earlier, of course, there is also support from the expansion of the portfolio as our units increased with around 4%. And then the third [indiscernible] which plays a role is the pricing, but we pointed that out also that is also one of these 4 levers that Silvio touched on that is also supporting the profitability.

[Martin Huesler, analyst]

Okay. And then the second question, what do you think is really behind the weak development in order intake in modernization, when the outlook is still so favorable? Is this project by project or is there an underlying dynamic that we should be aware of?

[Silvio Napoli, executive]

Thank you for this question. It is indeed one I myself addressed open at the beginning. I think there is no way to say we are disappointed with our Q1 order intake modernization well because in the face of a robust market, we've fallen behind. So there are no issues. That's something we need to fix and we will fix.

Going granular, there are 2 elements to that. First of all, and this is the biggest part of our portfolio, so the biggest part of our modernization potential is largely in Europe and in the U.S. Now you heard our -- what I said before about market uncertainty about delayed projects. A lot of the projects that we have into our pipeline for award and order intake are in these 2 markets. Customers hesitate to move not only new installation, but also an existing installation and modernization as well.

So that has been the key -- one of the 2 key other drivers for unfortunately, our below par performance in the Q1. The other one is that a lot of demand growth has to come from China. And there, to somehow drive the mindset of change of transitioning from an NI key focus to a modernization and service is one of the challenges, we, but I believe probably most of the industry faces in China, which then results also in this gap.

Overall, therefore, what does that mean in terms of going forward? We need to become stronger in terms of the, let me call bread and butter modernization, which is less of large projects and more of the day-to-day business where indeed the launch of a new commodity or rather modular platform will help because some of the same components will also be applicable to the modernization. So your question is very well taken. And as you hear, we are taking this very seriously.

[Marco Knuchel, executive]

Thank you very much for attending this call today. We'd like to close now. Please feel free to reach out for any follow-ups you might have. The next event is the presentation of the half year results on July 21. Well, obviously, 2023. Thank you again. Take care, and goodbye.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.