Schindler Holding AG

SIX:SCHP

Earnings Call Transcript 2022-Q4

[Marco Knuchel, Head of IR]

We miss you, that's how I started a year ago. Today, we have a small audience here, and I can tell you, it's completely different to talk to real people instead of just talking to a camera. So, thanks for coming.

My name is Marco Knuchel, I'm heading Investor Relations at Schindler. And welcome to the 2022 Full-Year Results Presentation. I am here together with Silvio Napoli, our Chairman; and with Carla De Geyseleer, our CFO.

Silvio will start with key messages and the highlights. Then he will talk about key developments in the markets, the industry and finish with the strategic framework. After that, Carla will lead us through the results. After the presentation, there will be a Q&A as usual. And then, yes, we will finish -- we aim to finish at about 11 o'clock.

Silvio, please.

[Silvio Napoli, Chairman and Chief Executive Officer]

Thank you, Marco. Good morning, everyone, first of all for those that kindly joined us here in person in our auditorium which we finally can use and also good morning to the ones that joined us online from remote locations. Yes, it is a pleasure to be here to present as traditionally our annual results for the year 2022.

Before we get on with the results and the, I would say, traditional business, I do think -- I wanted to say a few words about the tragedy in Turkey, not only because we have there a large company with very courageous and remarkable employees, but also because I -- the entity of -- the tragedy is difficult to fathom.

I'm happy to say that Schindler is bringing its small contribution with our employees becoming volunteers, going there to help people through the rubbles, releasing people in the buildings that were still standing and lifts, whether Schindler or not, but also helping the rescue teams. I -- again, it's a small word, but I thought that, that was important due -- and legitimate. So to all the people in Turkey, in Syria, affected by this strategy, we wanted to express on behalf of Schindler our strongest sentiment and condolences for the lives that were tragically lost.

Difficult to move on from that, but nonetheless that's what we have to do. So, let me first start with a few key messages. One year ago, it was an eventful beginning of the year, because we announced a change in governance. And my message was, we do have some issues, we are conscious of them, we will fix them, but it will take time. Today, my message to you is that we are progressing on fixing these issues. The issues were the right ones, we have progressed a lot, but we still need more time.

Now building on that, perhaps a few key messages that we will not perhaps touch on so much as we go through different points. Markets are developing fast with new installation declining, driven by China. Our order intake is such that our new installation order intake has declined on par with the market, I'd like to stress the point. And the decline has been offset by a robust growth in service and modernization.

Our measures have started to yield benefits and results already in the second half of the year under many fronts, sales margins, but also in terms of the profitability, which you saw as correctly trajectory in the second half of the year. We are progressing on resolving legacy issues, I'll come to that, in particular in terms of supply chain. And in order to continue with this momentum, we introduced a new strategy deployment framework, which I will present later on today. So again, we are progressing, but we still need more time before we can come out of the issue that was generated in previous years.

Moving on to now perhaps the other part of the presentation, continuing with the highlights, now here too I just -- we prepared here for you a set of highlights that perhaps are less addressed in the traditional financial results, nonetheless one that we believe are very relevant to our business, today and tomorrow. First of all, cloud connectivity; we were the first Company to start connecting units to the cloud, we introduced Schindler Ahead.

Today, I'm pleased to say that in spite of all the challenges with microchip suppliers' lockdowns, we already have one-quarter of our portfolio that is connected to the cloud. That is important, I'll come to that, because you see the next box there in green, this allows us to deploy innovative solutions and services, including the green service that I presented already when we did the Q3 results, which is really certified by [Toof] (ph), which is again an example of the massive opportunities that will present themselves thanks to this connectivity.

Another point I wanted to stress perhaps on this page is on the right-hand side, top corner. It has to do with our employees. We are very pleased that we are not obsessed by those rankings, but we were in many parts of the world ranked as top employers -- based on employees’ surveys. In Switzerland, we were very pleased, it was very recent, it was last week, number two favored employer. And I'd say -- allow me to -- normally we don't brag, but if you see companies much larger -- with even a much larger presence behind us, that is a humbling result.

Equally in Asia-Pacific, thanks for joint venture Jardine Schindler, in many parts we were actually -- we're in the Top 20 and in some of these countries we are number one. And somehow -- the engagement survey response rate of 87% that we obtained in 2022 is somehow a testimony to the efforts we bring around the world to engage our employees at this very crucial time in our history. And of course, I'm very proud of their engagement.

Talking about employees, perhaps on the bottom left corner, there is our simplified leadership structure. That was a key move we introduced one year ago and I'm pleased to say that one year after that was the right move at the right time. We now today can move faster, take faster decisions, with a much less complex set of processes, while at the same time staying focused on the key actions. And most importantly, we can adapt to changes, which will come to that -- continue to come very fast.

Finally, a word on Building Minds, and I will say as we go forward in the year, perhaps we'll dedicate more time to that. But the startup that we -- that only has a few years of existence has already 15,000 buildings connected to the platform, 15,000. So, the business concept has already been proven. Now, of course, it is still a start-up, so we are now into the ramp-up and scaling phase. And I look forward to sharing more of their results and performance with you all.

Now, these were the highlights of 2022. I also thought it was important to continue with what we started last year. Last year we introduced the set of key challenges that we were confronted with that led to our declining performance. And every quarter, we provided you with an update on how we were tackling these challenges. So today, to continue with the process and perhaps, let me say for the last time, I'll -- we thought it was important to share with you the progress on the challenges.

Now, as you can tell, and I'm not going through each one of them, but we can take it in the Q&A, I'm pleased to report that the progress has been substantial. Actually, in some of the challenges we are coming to the full resolution. At the same time, there is probably one where we are the most behind, and you can see it in the chart. This is the one about regaining competitive new installation margins. And you can see -- hang on a second, how come we're not more advanced, this is possibly the most crucial in terms regaining profitability.

And so, allow me here for a moment to explain why this is the case once more. And to do that, there are two ways, probably key drivers, to improve installation margins. One is the topline, by increasing prices; the other one is by taking care of efficiency and/or supply chain issues. But let's start with the first lever, which is pricing.

When we met one year ago, remember, I said -- you may remember, I said that in fact we were late in acknowledging the impact of inflation. And I'm pleased to say that in the year ‘22 our efforts throughout the world led to progress that I think we can say very openly probably was even beyond expectation and plans in terms of regaining the upper hand in terms of pricing. And these happened throughout the world with one exception unfortunately, it is the biggest market in the world, it is China.

Now clearly, some of it has to do with our own performance. I understand that some other companies expressed similar situations, but China market that I know well is indeed the most competitive where there is still like a chronic over-capacity and of course a very fierce competition with all players of the world competing for a piece of the market, including some very strong local players. So, there I must say, we have to acknowledge, in China we managed to keep flat prices.

Now in turn, you can see on the right-hand side of the chart, this had an immediate impact on our sales margins. And of course, it's pricing plus our resolve to focus on value as opposed to volume. Remember, we said we would stop to just focus on growth per se. And so you can see, quarter-after-quarter -- starting in Q2 you can see our sales margins improving. This is of course a very positive development.

Now, of course, you might tell me, why doesn't this improvement come right away into your P&L. Unfortunately, this is the nature of our business. And for that, there is now the second element which we have to acknowledge, which is what I call the boa constrictor effect.

What does that mean? I mean we are a business where you sell something and by the time you go and install it and you then generate the revenue and the profits there is a lack of time. So, this is similar to that of a constructor. In other words -- what does that mean? A boa constrictor has to digest the food it had at the beginning before new, possibly healthier food can be eaten and digested. And this is the situation today. And there is no way out of this.

So now, as part of us getting to grip with the situation, but also as part of us being able to present it to you in a clear way, we now prepare the chart, which was, in other words, we really looked order by order, delivery date by delivery date, platform by platform and observed what is coming for delivery when, what kind of capacity in the factory delivery. Remember, I spoke about our capacity also suffering from an element of increasing backlog and this contrast between legacy products and new orders.

And you see here -- and what does the chart tell us? That before we can really get rid of the bad food, before we can get rid of the orders with a low margin, even unfortunately take until end of 2024 to consume about 90% of this backlog. It's a lot. And so, this year already, we accelerated as much as we could. And you see this year in ‘22 -- sorry, last year actually, we managed to consume more than 40%. But now, the rest is not entirely in our hands. It has to do with delivery dates, it has to do with site readiness by our customers. Some of it has been delayed. And of course, as we show this, it doesn't mean it is not frozen. First of all, we are actively working against that. We're going to our customers, representing variation orders trying to re-price inflation clauses, a lot. So, that moves on one hand and our goal is what, to be able to get rid of that much faster.

On the other hand, there are also things which are outside of our control, typically site delays by the customers, change in suppliers' supply chain constraints. So, this is something which is a movement, but to give an idea as to why there is time needed to flow through, this is important to visualize this concept of the, again once more abusive probably term this, [Indiscernible] constructor effect.

Now, this is to do with the challenges. But let's now go back to the bigger picture, the picture of the market. And how does the market look, some of you already asked me over coffee, and I must say perhaps compared to one year ago the market as of course evolved. And now, while a year ago it was possibly pure headwinds, today the headwinds persist, but you also start having some signals of tailwinds. Let me start with the tailwinds first.

First of all, we have the energy crisis that is stabilizing, I would say, but if you want, we can come to specific numbers, which in turn is also bringing a stabilization in raw material costs including depending on which supplier or which material decline, but in some other cases, we'll come to that even increases. We see sustained pricing momentum depending on the market, typically not in China. And talking of China, we see positive signs, I'll come to that in a second, but that being the biggest market in the world that has a huge influence on the overall picture.

Now in terms of headwinds, besides the pressure on China, we see inflation continuing. That is very much there and that of course affects all our value chain. We see rising capital cost as a result of the rising inflation, because of interest rates, which of course has a huge impact on our customers' own real estate; labor constraints, first of all, by scarcity of labor, but also by in terms the labor cost and of course the persisting supply chain risk. So this is a mixed picture, but clearly this is not a rosy picture, it is one that shows market improvement. And what is -- let me come back to that, the key question in terms of movement, the key question is China. And on this one here, I'd like to present again a chart that we often present about the evolution of the real estate market in different cities. But before going into the separate charts, perhaps what is the key message here?

China after three years of decline still accounts for 60% of the global new installation market. So, what happens in China impacts the whole world. And whoever thinks that we can do without China leasing our business I think is not accepting reality. At the same time, China continues in a downturn, but the downturn is easing out. And that I think is a key message. However, even if this easing downturn continues, we don't see any recovery before the second half of 2023.

And now, perhaps to add some data to this assessment, you see here on the bottom left chart, we see here the floor space sold according to city tiers. The red are the Tier 1 cities, so Beijing, Shanghai, Guangzhou typically. And what do you see there? You see there that the floor space sold has had a recovery more pronounced in Tier 1 in the last quarter, which is positive. It is also -- some are coming back in Tier 2 and Tier 3.

What is equally important is the chart on the right-hand side where you can see the inventory, because you can see that unfortunately this crisis led to inventory, unused housing space, unsold, still at record levels in Tier 2 and Tier 3, so the gray dark and gray light. But in Tier 1 this inventory is declining. So, this is a very positive sign, especially for us, because we tend to be of course with our premium brand more present in Tier 1 cities.

What is -- why is that like this? And you can see -- on the right-hand side, we see that the key development here is that the government has started now deploying measures to support real estate again. 2022 -- 2021-2022 was the period where many of the large developers actually went bankrupt. They were confronted with financial difficulties, which are still there. And now, initially the government had decided to let them somehow deal with the issue, but today there is a 16-point rescue plan. The famous red lines -- three red lines policy is being eased a bit depending on the situation.

And most importantly, the infrastructure buildup is picking up. But now, whether this is the case or not -- and this will help, I think we are in the phase now that the China elevator and escalator market is transitioning towards a more modernization and service-driven market. And this -- to show that, I wanted to bring these other two charts. On the left-hand side, you see the installed base of units maintained. And you can see the growth rate there, if one project through 2030 is about 8%, which is more than double the global average, we show the China service business is literally in its, almost going to say, exponential growth phase.

Is it new? No, this is exactly the same thing that happened in Europe and the U.S. except China being China today, it is much bigger in impact and much faster. And the same applies to modernization, because in China you start having now a huge population of aging units, i.e., units that are more than 15-years, 20-years-old, which need renovation and therefore the modernization market pickup that you see there. So strategically, this then leads to the question, how do we adapt to this transition, which in itself presents huge opportunities, especially for a company like us.

Now with those headwinds and tailwinds, it is key that now we develop a strategy on how to deal with that. And if 2022 was the year of fixing issues, the year ‘23 is the year to deliver. And of course, there is huge time pressure and therefore it is not only delivering, it is delivering and accelerating. And to be successful, we need disciplined execution. And there is an old say that goes, whenever you feel you have no time to make a plan, then you really need a plan. And so this is exactly what we developed by in -- by assessing first of all the market, but also then by -- with a strategic framework.

And of course, the strategy is always the result of the environment. And here, for reference, we put together what I think is important to acknowledge, which are the eight key themes that shape our industry. And now you can see -- frankly, you can say, well, there is nothing new. However, it's important to understand how this goes. Yes, of course, there is future competition. Yes, of course, there is DNA market declining, as we discussed, but you can see that -- as new things, you can see that in the existing installation and more, there is a huge China market, but also worldwide this digital and sustainability technology, that become massive differentiators, while at the same time this differentiator is our key because one cannot compete on price only.

And this is not something new, on number four there, you see that around the world the biggest pressure on maintenance for OEMs is the local service providers that compete on O&M price and so the pressure is there. So, this opportunity of what they put here as number five, Industry 5.0, which is the combination of digitalization and sustainability, provides huge opportunities.

Now, the supply chain is point six, which I must admit, was probably forgotten, people took it for granted, and now the last few years we were provided a rude weakening of the importance, and then of course we need people, people not only in terms of talent and managerial functional, engineering level, but also in our case, in our industry, frontline. We were seeing -- we'll come to that, which is frontline is the bottom line, we need people at the frontline, and today with the cultural societal evolution, probably less people are interested to join an industry like ours. And we have to invest -- double up on things which are part of our tradition apprenticeship, technical career path, et cetera.

Now based on this situation, we came up with a response and our response is what you see here on this chart. It is our strategic framework for disciplined execution. It is again nothing trust and dental. It is quite basic. It starts with our purpose. And what is our purpose? What is our market?

Our market is quality of life in urban environment. Taking the stairs, whether you're going shopping or not, is never a pleasant experience unless you decide to do it, because you want to be fit. But whether you're in a station, an airport, and don't need to walk, it is quality of life. Once we acknowledge that, then we define our ambition. From our ambition, we define our strategic choices. From there, we have a target. And then, those are deployed in our 4P model, people, product, performance and planet, by having consistent priorities and execution drivers.

Now, I don't think we have time today, but we can go in Q&A to discuss all the points. But perhaps, I'd like to focus here on the central one, which is our choices. And our choices start with our key business, which is service. Our absolute priority is to create density in our maintenance portfolio. And once you define this, you also start deciding which are the new installation businesses that you want to go for. So, there is a topic of margin, but also a topic of what value accrual does that build to our portfolio. It's quite simple really, but I must admit, probably over the last few years, there was a bit of a different focus on volume and growth per se.

Equally, that applies to modernization. We will focus on modernization, on renewing our portfolio, on securing opportunity, which are also accretive to our service density portfolio. So, our choices here is what we do of course, the most important is what we don't do. So, we will stop taking jobs on low margins unless they are additive in terms of service density and portfolio. We will stop doing modernization businesses simply because it's an exciting engineering challenge, which of course as engineers we love.

Again, nothing dramatic, if you'd say, but in fact we have now to drive this disciplined execution across every corner of our organization, geography and function, and that's what we've been doing, starting last year, beginning of this year. There was no day lost. As we speak, this is being deployed throughout every corner of the organization.

Now again, as said, we don't have time to go through every single point. Let me perhaps focus on two elements of the 4P. The first is the planet. I presented already in Q3 our Net Zero commitment certified by Science-Based Target initiative. And now, what does that mean? In fact, it's a big picture. But you can see here on the right-hand side of the chart that this is of course split into two elements. One, probably on the left side here of these bubbles, these are what we need to do to deliver on our Scope 1 and Scope 2, which is an infrastructure, our car fleet, how we drive our factories.

On the right-hand side, there you can see the opportunities. What does that mean in terms of products, services? So, you have the green service here again, you have Class-A product sale, which in fact are huge opportunities. And I can tell you, more and more our customers demand that. This is becoming -- is no longer an option. It is key in the real estate. And by the way, we see also the same from our Building Minds effort where real estate customers with large portfolios are very keen to have a sustainable portfolio meeting the Paris COP Agreement target by 2030 and 2040. Otherwise, there is a risk of -- stranding risk of this portfolio becoming obsolete with a huge risk of value loss.

So another example, now going on our internal aspect, is one that I know very well, because I was involved in this from the very beginning. When we built our campus engineering, there are there two factories, now in the meantime they've become three, and from the beginning we decided to invest. Before any formal commitment, before any regulation, we started investing in sustainability.

So, you can see here on this picture, this is the escalator and elevator factory. This is the escalator one here, 80% of the whole energy requirement is generated by solar panels. And because it's a huge factory, we have space, that is how you use the space intelligently. What you don't see here is the geothermal installation that we did from the very beginning when we laid the ground for this factory, which then helps generating a huge part of the whole electricity in the rest of -- in the whole campus.

Moving on to the other part of the 4P, so there is people, product, performance, planet, we did planet, let me just focus for a moment here on the product. And this is much more than a product, this is a key lever for our not only recovery, but for our performance optimization. It has to do with our NI margins as well.

This is the reintroduction, or I could say relaunch, of the real, simplified modular retro platform, which we said already very openly was not deployed that we were supposed to, it wasn't even designed the way it was supposed to. And so, good news, we don't have to invest many years, because the key elements are. We just have -- the fixing took place in ‘22 and now in different waves which are highlighted on the chart by colors, we are now deploying quarter-by-quarter the factory -- the new product in each factory. It starts with standardization, the real -- radical reduction in components and variation with consistent configurator deployment. And of course, there is a topic of cyber security which we now can deploy into each one of our product, much more than we do today even though today we -- I think we are in the leading position.

The second wave will be about introducing Net Zero functionality, but also having much unique and advanced user interface. The third phase would be the one you see here in the contemporary design, and this combination of physical and digital functionalities. And finally, we're going to come with a product at the end of this evolution that will look very different, is going to be, I believe, the leader in its category, which Schindler was always a leader of, we were the leader in the commodity business. And now, this is finally going to come back towards the end of the year.

Now, there is much more to be said about that. And maybe I'd like to introduce one element here. As promised, now we plan to have more interaction with our investors and we plan here in the second half of the year to have a technology day, which we'll hold in the year in AB Con, where you'll be invited and we will present to you this product with this functionality and plus a few other things in our technology which we look forward to sharing with you and more details will follow in due course.

With that, I think now it is time to move to our financial results. And I'd like to hand over to Carla De Geyseleer, our CFO. Carla, please.

[Carla De Geyseleer, Chief Financial Officer]

Yes. Thank you, Silvio. It's -- I would say -- I would echo my two colleagues, it's a real pleasure to see some of you here in person, so thank you for coming. Before I start my presentation, just a couple of reflections on the current performance. So having now worked here six months together with Silvio and the colleagues, I am really convinced that we are focusing on the right priorities. And I think that is clearly evidence now by the progressive uptake of our profit, but also the recovery of the topline, especially in the second half of the year.

Now clearly, as Silvio mentioned, the nature of the challenges -- they are of that, I would say, nature that does require a reasonable time to solve them. So yes, we are making progress, but obviously we are not -- we have not reached the endpoint yet. But together with the colleagues, we are focusing on the measures that we have already implemented and at the same time, we are framing additional measures to really look beyond ‘23.

And in this context, I particularly focus on steering the performance, first through the pricing discipline; secondly through efficiency improvement; thirdly recovery of the supply chain and obviously the monetization of the procurement savings, which will also play quite an important role going forward, and last but not least, the net working capital management. So at the same time, we are developing that strategic framework, and that is really dedicated to secure the mid and the long-term success of our Company.

So, let me turn now here to the page, Results in a Nutshell. And obviously, I will not comment on all the elements here, as I'll touch on some of these topics further on in the presentation. However, just some high-level comments here. Overall, you've seen that the results came in at the upper end of our outlook. And that is driven by that progressive trajectory of the revenue and the profit in the second half of the year.

Order intake was broadly flat in local currencies for the 12-month period, and that is reflecting the deteriorating markets worldwide. But as importantly, our shifted focus to value and margin. Revenue, as I said, it recovered in the second half of the year with a growth of 6.3% in local currencies and an increase of 2.5% for the full-year, supported by a couple of bolt-on acquisitions, mainly in the Americas and in Asia-Pacific.

Our service business continued to grow solidly, and that was supported by an increase in units by approximately 4% and disciplined pricing measures. But I also like to draw your attention to the fact that the number of connected units now increased by almost 13% in 2002 and the number of digital service contracts increased even more, resulting in a monetization rate of more than 50%.

So EBIT adjusted, positive trajectory, resulting in a progressively improved margins in the second-half of the year. And if you look now at the cash flow at the right-hand side, then cash flow from operating activities recovered in the fourth quarter. However, for the full-year -- cash flow from operating activities remained significantly behind previous year for the full year.

So now, the fully -- the following two slides, they show the key figures for the fourth quarter and for the full-year respectively. And you notice here that for the fourth quarter 2022 the results confirm really that positive trend with continued progressive improvement in revenue and EBIT adjusted, printing a margin in the fourth quarter that was higher than any other quarterly result in the year.

Now, the weak second quarter which was particularly impacted by the lockdowns in our China operations over several weeks, but also impacted by the internal and external challenges, as presented by Silvio, they took clearly on the full-year 2022 results. And that resulted in a significant performance drop, affecting profit and cash flow. Nevertheless, revenue growth in local currency amounted to 2.5% and that is a result of this disciplined backlog execution.

So moving on now to the next slide, we take a closer look here at the order intake. For the fourth quarter of ‘22, order intake reached CHF3 billion, a corresponding to a decrease of 4.3% minus 2.7% in local currency. And this is a result of the slowing down growth, mainly in China, and towards the end of the year also in some European markets, but also because of our focus to value and margin.

Now on the right-hand side, you see the full-year ‘22. There for the full-year ‘22, order intake reached CHF12 billion, corresponding to a decrease of 1.7% and 0.2%, so let's say, flattish in local currency. So, the organic growth slightly decreased by 0.6%. Acquisitions contributed 0.4 percentage points, while the FX had a negative impact of 1.5 percentage points.

So, thanks to our continued efforts to increase the prices and focus on these higher-margin products, our order intake margins improved significantly. And in combination with the globally slowing down markets, the focus on higher-margin projects resulted in mid-teens drop of new installation units. The order intake margin for elevators -- escalators in contrast improved by more than 25%. You've seen it also on the earlier slide that Silvio commented on.

So, let's take a closer look now at the overview of the order intake by region and by product line, comparing ‘22 with ‘21. So on the left-hand side, you see the comparison for the fourth quarter, on the right-hand side you see the comparison for the full-year. The order intake here, it represents all product lines, so the new installations, the modernization and the surface. And I will only comment on the full-year development here.

So, you see here the Americas and the EMEA region, they grew in local currency, while the significant contraction of the Chinese new installation market weighted rather heavily on the Asia-Pacific performance. So overall, new installation markets -- new installations declined in units and in value, but on a positive note, the new installation margins improved in almost all the regions. And the modernization in the service business continued to grow and this actually is nearly compensating the decline in the new installations.

Order backlog, CHF9.6 billion, broadly unchanged, compared to last year, and the backlog margin sequentially improved in the fourth quarter for the first time in years. And the year-on year backlog margin drop stands now at less than 50 basis points, still reflecting cost inflation, product legacy and the portfolio rotation.

So I continue here with the revenue development, so starting with the left side, so the fourth quarter of 2002 generated a solid revenue growth, due to that continued strong backlog execution throughout the quarter. The revenue increased up to -- increased by 2.8%, up to CHF3 billion and that is corresponding to an increase of 4.7% in local currencies.

So, EMEA and the America regions, they continued on their growth part, while the growth in Asia-Pacific posted towards the end of the year, obviously impacted by the newly introduced lockdowns in China. Nevertheless, taking into -- taking everything into consideration, growth in Asia-Pacific was slightly up too.

Moving to the right-hand side here, there you see the development for the full-year. Revenue reached CHF11.3 billion, equivalent to an increase of 1%, 2.5% in local currencies respectively, and that was mainly driven of course by the strong development in the second part of the year. Organic growth reached 1.8%, acquisitions contributed 0.7 percentage points, while FX had a negative impact of 1.5 percentage points to the growth.

Solid increase in EMEA and the Americans -- the Americas region, which was diluted by the decline in the Asia-Pacific region, which was a consequence of the China situation during the second quarter, but also during the last two months of the year. So overall, growth in new installation was negative, particularly due to the weak growth across all the regions in the first six months of the year and due to the situation in China, but modernization was muted in Asia-Pacific, while service remained solid across all regions and throughout the whole year.

So, moving now to the development of the EBIT adjusted and the EBIT, and of course, inflationary pressures, the product legacy, semiconductor shortage, supply-chain issues, restructuring cost, they still persisted, impacting the fourth quarter. However, you see here clearly on the left side the positive performance trajectory, how that continued nicely, especially in the second quarter -- in the second half of the year and really printing an improved margin in Q3 and in Q4.

Now, EBIT adjusted in the fourth quarter of ‘22 reached CHF309 million. That is the highest quarterly result since the second quarter of 2021. And it represents an increase of 1% year-on-year and 3.6% in local currencies. Now for the full-year, so moving to the right-hand side of the slide, EBIT adjusted reached CHF1.047 million. That's a decrease of 16.4% and 14.5% in local currency.

Now, the adjustments between EBIT and EBIT adjusted, they relate to the Top Speed program, Top Speed ‘23, they relate to the restructuring cost and they relate to expenses for Building Minds. And the EBIT drop in the fourth quarter, that can be explained by a net increase in these adjustments, particularly the higher restructuring cost related to the resizing of our operations, mainly in China and mainly in the U.S.

Now coming back to the Top Speed program, so over the last two years we have spent CHF130 million for the program. Now, realignment with the operational priorities and lower investments for mass connectivity, they are expected to lead to a significantly reduced overall program cost of CHF170 million opposed to the initially planned CHF270 million. So as a consequence, for the remaining ‘23, the spend is expect is expected to amount to CHF40 million. We are making continuous progress on these various initiatives and one that stands out, that is clearly the fact that already a quarter of our portfolio today is cloud-connected.

Moving now to the operating cash flow, so cash flow from operating activities weakened and that has -- to a large extent is driven by the substantially increased network capital requirements. That's mainly an increase in inventory and work-in progress. And of course, that is related to the challenges that we have been facing and are facing in the supply chain. Cash flow from operating activities declined by 12.4% to CHF312 million for the fourth quarter in ‘22 and to CHF688 million for the full-year, equivalent to a decline of 47.6%.

Now, moving to the dividend and the dividend, obviously subject to approval of the Annual General Meeting, is maintained at CHF4, which is equivalent to a payout ratio of 70.5%, which is above our stated dividend policy range of 35% to 65%. So taking into consideration the closing price of the registered shares listed on the six -- Swiss Exchange on the date of the Board decision, which was yesterday, the dividend yield stood at 2.5%. And it should probably not be a surprise that we stick to our CHF4 dividend, because we have a very strong balance sheet, number one; but we also really believe in our recovery plans going forward. And obviously, we had no intention to break the -- our dividend track record here.

Now, you might have noticed that we are accelerating our initiatives in the area of sustainability over the last few years. It is clearly also part of our strategy going forward and a pretty important part. And on this slide, you see here now the overview of our achievements compared to our roadmap 2018-2022. So, that sustainability roadmap ended this year and Schindler met five of the six targets that were set in 2017.

So, we missed one and we missed it with 0.3 percentage points, and that is our -- this is our objective to reduce the CO2 emission by 24% -- by 25% in the global fleet. It is clear that our miss is partly also due to the plant -- or the slowdown of the plant conversion to e-mobility, which is related to the challenges that the automotive industry has been facing.

Now, with regards to the other targets, I believe that we have made good progress since 2018, so we comfortably met our ambition and now clearly our focus shifts to our 2030 sustainability roadmap, which is being developed on the basis of our updated materiality assessment and our Net Zero target.

So now, moving on to the outlook, so starting with the market, so the global new installation market was mid-teens negative in units in ‘22, that was mainly driven by the situation in the Chinese market. Modernization service held up well. So for ‘23, now we expect a similar pattern for the global new installation market, driven by a continued weak Chinese market as well as a slowdown in some European markets. And the overall development is very much dependent on the timing of the supportive measures in China and the effectiveness of the measures. Modernization and service markets, they are expected to grow between 5% and 10%.

And this is then the basis for our outlook ‘23. As already mentioned, we’re very much focus on pricing and efficiency and barring any unexpected events, we expect low-single-digit revenue growth in local currency for the full-year ’23. Positive EBIT adjusted margin trajectory is expected to continue since, of course, pricing and efficiency are expected to more than offset inflationary impact that we are facing.

And finally, I would like to assure all our colleagues around the world, wherever you are, that we very much appreciate your hard work in 2022, and -- but you can clearly see that this resulted in an improved performance in the second half of the year. We all know that tough times or not over and it will take a while before we can close all the identified gaps. However, we are very, very convinced that we will reach our ambition in a unified effort.

And with this, I hand over to Marco. Marco, floor is yours.

[Marco Knuchel, Head of IR]

Thank you, Carla. We move on to Q&A and we propose that we start with questions here from the audience, if there are any. Remo, please.

[Remo Rosenau, Helvetische Bank]

Thank you. Remo Rosenau, Helvetische Bank. In the outlook, you're positive on the modernization and the service business looking forward in ‘23. However, on slide 24 it looked like the momentum in modernization was negative in the fourth quarter of 2022 compared to the full year. This would rather suggest that modernization has a negative momentum entering the new year. However, you're positive on it for the full-year 2023. Could you elaborate a bit on this? It is a bit of a contradiction.

[Silvio Napoli, Chairman and Chief Executive Officer]

Excellent question, Mr. Rosenau. Indeed it is noteworthy. Modernization as different types of jobs, one are the -- I'm going to say bread-and-butter, components replacement for energy or simply for obsolescence reasons; the other one, our big large projects. And in fact, last year Q4 we had a number of those like very huge projects, typically a high-rise or an -- I think it was even a metro for Ghana market, if you can remember. So the year-on year development has to be also to be taken in that regard contrary to NI and service, which is still very much of a mature market where some of the big and the small can broadly offset one another. Modernization is a job that can be 20 million, 30 million plus, you will see it as a blip and conversely the following year.

So, this was the reason why you see this notable but circumstantial observation of the difference in order intake for the period. The trend is very much the one that we signaled, if anything, it's more an issue of having enough capacity, not only to produce but also to design and making sure we have the efficient way to deliver.

[Remo Rosenau, Helvetische Bank]

Okay, thank you. Then my second question is, going back to one of these legacy issues, could you give us a bit more detailed update on the configurator situation? I mean, a year ago you explained quite in detail what the big message was. I mean, you had to produce more cabins, not less. You took in orders which you were not supposed to take in because the configurator was wrong, so you had to produce cabins, which the size you not supposed to produce. So, has this been resolved. Are these bad cabins out of the system now or not yet? Yes, tell us a bit about that.

[Silvio Napoli, Chairman and Chief Executive Officer]

Thank you. So, let me start with the first with the last part of your question. I'm afraid those bad orders are not totally out of the system. You saw this slide reverse exponential; you see it will take until end of ‘24 to get rid of 90% of them and a few years more to get rid of them completely. However, we managed to reduce actively going back to the customers to do that. Now, this is the fixing, the fixing of supply they need to do configurator, so that there are different phases. Already -- as of half year, we had already blocked the configurator, call it a band-aid solution. So some options even -- they were not all more -- it couldn't be ordered.

For other options, we increased the price remarkably in a way that even if people wanted to order it, at least we were sure it wasn’t causing negative margin in the factory. That has been done effective since second half year, including what we call factory transfer price increase, that was somehow covering for inflation. Now, what is coming as part of this relaunch of the platform is a whole new configurator where it won't even be blocked, those options will no longer exist.

Let me make an example. We had -- because we thought we wanted to make great lifts, we even had on residential commodity products, we were providing 10-centimeter-thick marbles labs as an option. Now, you have to wonder it’s very open here, why anyone would like to have in a normal residential home this type of options. But we had it.

Well, so we first blocked it but now, in the meantime, it's no longer available, none. By the way, if you want it, we can give it to you. But then you have to buy another elevator, design elevator, which is designed for these type of luxury applications. So, this is a perfect example. And so, we now are as part of this reintroduction of demand is much more than a new product. It's really fixing the business or re-launching in the way was supposed to be. This is coming progressively starting in wave one. As we introduce this new product, the configurator will be reintroduced accordingly. It is a new challenge, but one in which we have worked non-stop, maybe one of the biggest that we invested on a lot in 2022.

[Remo Rosenau, Helvetische Bank]

Okay, so the pad or the -- so to speak from the wrong configurator are more or less fixed now? And -- however, you also had legacy cabins from the past. Are these -- worked not -- also not worked out yet?

[Silvio Napoli, Chairman and Chief Executive Officer]

No, as -- can we go back to that slide? Can you maybe revert to that when that we showed? Yes, and again, we are actively still working with our customers to say, are you sure you want this because we're going to -- and so we are actually -- we're never -- we're now taking it for unfrozen but there is a contract. So we -- but the customer, I trust, will see more and more reasons why they better change, but it's coming.

[Remo Rosenau, Helvetische Bank]

And have you lost any customers due to this -- all these issues?

[Silvio Napoli, Chairman and Chief Executive Officer]

Customers lost, if you look at our net promoter score, we don't see any evidence of that. There is a blip, but we did lose some orders, oh yes. In some case, where do -- we could apply the inflation clause and the customer -- in some cases, we said, okay, then we canceled the order. That is a tough choice, we have to take it, which involved in some markets losing locally some large orders. And overall, I think that's why I think we did, but we always explained why.

[Remo Rosenau, Helvetische Bank]

Okay, thank you.

[Silvio Napoli, Chairman and Chief Executive Officer]

Thank you.

[Alexander Koller, Stifel]

Alexander Koller, Stifel. Actually, is it fair to assume that the positive impact on margin from this simplified platform is negligible for the current year, since you are generating most your -- from your profitability in service business?

[Silvio Napoli, Chairman and Chief Executive Officer]

Sorry, can you -- for the new platform, of course, because the new platform, as you know, it will be introduced now. By the time -- we have usually a lead time, which is average 18 months, so that will be very -- I would say, this year very, very limited. What will start coming through, but at a limited time as well, is the order to the higher margin that we sold in Q2 last year. Q3 probably is not going to come yet, and so this is the one that will flow through. But what will come on top of that is the efficiency measures we are introducing across the value chain, which starts with supply chain, it starts within installation and all other aspects that are under influence, hoping to get what we call a better pre-post GAAP, meaning pre-margin -- pre-installation margin post installation, and that's something that we drive very actively. But -- hence our limited impact, to answer your question, of the new product coming this year. Thank you.

[Unidentified Participant]

Hi, Andres Schneider, [Zed Capital] (ph). First question would be on the market outlook in China. In the 3Q call you said it could again be minus 15% to minus 20%, now bigger minus 10%, which still means the same or did you become a little bit more positive because the indicators got better?

[Silvio Napoli, Chairman and Chief Executive Officer]

Honestly, two element here, speculating on China is something which is very difficult. So today already -- if we had this meeting in December, I would have told you minus 15%, minus 20%. Minus 10% already shows that there is an easing of the downturn and that is today the latest best estimate we could have. Is it -- what is the degree of margin of error? I think is large. I would say it’s plus-minus 50% or you probably go -- you can go again minus 15%, but you can also go back to minus 5%. Having lived in China, one thing I said, never underestimate the speed of China reaction. So data set to put your mind to it, the bump in the second-half could surprise, but it's big if -- so I cannot give you a better answer, I'm afraid.

[Unidentified Participant]

No, that's fine, thanks. And then on market share losses, we discussed that before too, and you said last time that you hope it does continue for 18 months. It obviously continued in 4Q. Can you give us an outlook on that for 2023?

[Silvio Napoli, Chairman and Chief Executive Officer]

As you know, we don't usually elaborate on specific market shares. However, what I can tell you that if you look at our order decline which makes it easy to explain, it's in fact in line with the market. In line with the market there are pockets where we lost some market share, it is clear. In particular, I mentioned, unfortunately in the commodity, because we -- the product, it wasn't suitable. There are -- and then there are some geographies where we were behind in price and we had to accelerate price increase more than in others, where also we had some local market share gaps. But overall, I'd like to stress, based on now the final market assessment 2022, if we had any market-share loss, we're talking about very minimal marginal -- due to some specific markets.

[Unidentified Participant]

And then last question, I think I asked that every time we spoke, KPIs mid-term targets, you promised or -- to give us something at some point. Can you give us an update on that? When do we hear something?

[Silvio Napoli, Chairman and Chief Executive Officer]

I promised to give, if anything, an idea of what direction, which as you can see, I am. I've already started today with our strategic framework. As we continue developing and moving, we can elaborate as we go forward. But today, if you ask me to give you a specific mid-term profitability target, there is too much in motion and I don't want to -- I'd rather be here and tell you I deliver on what we committed to which we did last year and I too continue in this way.

But I look forward to continuing this outlook. I understand you are asking for it, but I think at this stage there are so many things moving that its extremely, I'm going to say, not only risky, but it wouldn't be consistent now to give you a target where we are. There is too much in motion.

[Unidentified Participant]

But we can still expect that at some point, even if it takes another year?

[Silvio Napoli, Chairman and Chief Executive Officer]

You can expect that we continue improving. That's our commitment to you. But it will take time. Thank you.

[Unidentified Participant]

[Indiscernible], Santo Invest. I'd like to come back to standardization of new products. You have a long history in trying to standardize new products and you had some benefits in the past. They were then over-time a little bit diluted, if I may see. So, what makes you confident that this time it will work and it will be sustainable in terms of products that you will sell on the market going forward?

[Silvio Napoli, Chairman and Chief Executive Officer]

Thank you for this question, which goes at the heart of our issues today. First of all, what makes me confident is that we did it, as you say. We did it. I was actually in my very first job in Schindler in 1994, I was Head of Corporate Planning and I was involved in the introduction of the Schindler 001, which then became the 3,300. And so, I've seen how this was a major really a change in the Company mindset, which required massive efforts. And we did it and it brought us to lots of success, where we are today. Unfortunately, so the issue is more to maybe a question to your question, how could it be in the last few years, some people possibly driven by good intentions thought they could do better and changed that and having a seamless elevator offering, allow me here the analogy, a Fiat 500 with a Porsche engine? That cannot happen anymore. So, it is fixing that which also requires making sure we get the priorities right.

And the strategic framework execution we are reintroducing is exactly meant to do that. So, everyone understands what is our purpose, what are our employees ambition, our choices’, and it's armoring it through every corner of the organization. And I think to some extent, this was lost. Again, it is a leadership task to communicate and explain. And so, we are dedicating more and more of our time to do that. So, thank you for your question. It goes really to the heart of the situation we're in today. Thank you.

Shall we take a question from the line?

[Marco Knuchel, Head of IR]

Since there are no further questions here in the audience, so therefore I suggest we move on to people waiting in the line. Operator, please.

[Operator]

The first question from the telephone comes from the line of Andrew Wilson with JPMorgan. Please go ahead.

[Andrew Wilson, JPMorgan]

Hi, good morning, and thanks for the time and for the very extensive commentary around the market particularly. It's very helpful. I wanted to ask -- I guess it's probably a bit more specific around 2023 and just trying to understand some of the margin drivers. You clearly talked about looking to improve the profitability and clearly there were a lot of challenges in ‘22, which makes that I guess quite likely. But I'm just trying to understand, particularly around things like raw materials, around labor inflation and around the modularity, I guess, challenges that you had last year, I assume some of those headwinds will reverse in 2023.

And also if you could try and help us a little bit on the price contribution, we would expect to go through the sales line in 2023, that would be very, very helpful as well. So appreciate asking you to sell in my model, but if you could at least give us, I guess, some thoughts on those line items that will be helpful.

[Silvio Napoli, Chairman and Chief Executive Officer]

Andrew, hello, thank you for the question. I'd like to -- if I understand, it is about what are the key profitability drivers in ‘23. Carla, would you like to take that question?

[Carla De Geyseleer, Chief Financial Officer]

Yes, yes, thank you, Andrew. Maybe starting, as you point out which inflation, because that obviously is one that will stand out in ‘23, so if we, you know, make a bit of our estimate on which inflation we could say, this will be definitely around four 4%, 4.5% when -- in ‘23. But we are actually very, very confident, I would say, that these inflationary effective, if it's now which inflation or some of the other, that we will offset them with the pricing and with the efficiencies that we will generate in ‘23.

If you go to the other element, which -- material cost, which has actually had a big impact in ‘22, that will ease in ‘23. And with the measures that we have put in place and I particularly refer here to the procurement savings, we are actually more or less confident that whatever comes through there, that, that will be completely offset. We should also not forget that in terms of the commodity prices, these are actually coming down. So, we have also a positive effect next to the procurement savings coming from that.

But if you really look or compared ‘23 with ‘22, then I think the big difference is that, yes, we will also of course have positive effect from the pricing, but we are working hard on monetizing efficiencies in ‘23. And that is where overall we are aiming to continue that progressive trajectory of the profitability. Does that answer your question?

[Andrew Wilson, JPMorgan]

Thank you. Could I just follow-up? Yes, no, that's very -- it's very helpful indeed. Yes, I just wanted to maybe follow-up actually on the last comment around the productivity and just I guess I'm thinking of things that will be tailwinds in ‘23 versus ‘22. I guess it sounded like materials will likely be a tailwind, given the commodity prices have come down, which makes sense, but also further productivity and, as I said, assume it will be a lower headwind, at least on modularity year-on year, because that was a big challenge, I think in 2002.

I don't know if it's possible to kind of wrap up some of those sort of tailwinds into a number in terms of I guess the benefits that you would say that Schindler driving themselves, whether it be productivity or kind of a non-repeat of some of the challenges of modularity. It might be a hard number to give, but even just some sort of what quantum would be helpful just to try and think about that benefit.

[Carla De Geyseleer, Chief Financial Officer]

Well, I think I pointed out there the big pillars that are -- that will impact our results positively. And as you say, yes, there are a couple of these tailwinds and you referred to one internally there, but of course, the other one is what Silvio pointed out. We will -- as we're working through the backlog, yes, there is still an -- a major amount to work through, but also in ‘23, the impact will be already less than in ‘22. So, it is a combination of elements there that will impact our results.

[Silvio Napoli, Chairman and Chief Executive Officer]

Building on the question, perhaps here just to build-on Carla's point, I understand your question also for the deal of the model. We probably cannot go here in every detail. It wouldn't be even appropriate, but maybe the four blocks right there is the pricing, the efficiency, then another block is what I call one-off hits that we had in 2022 that will no longer be in 2023 and the fourth block is what I -- you can say, it's basically China, sorry, it's a big block in itself, but that caused a huge -- so if you then go backwards on things that hopefully will not go there, these are the four ideas.

Now, on the efficiency, this is why I said it may be complex to discuss here, there are in itself also there are a number of elements. There's efficiency in installation, there is the efficiency in servicing, there is the efficiency in procurement, there is the efficiency in supply chain, so it's -- and we are -- as you saw before from the strategic framework, there is a bullet for each one of these. Then you have a bullet, everyone is a module, everyone is a work stream on which we are driving targets, not only centrally, but deploy for single element of the organization.

Perhaps, if we can take it offline, I think -- but I wanted to explain to you the model, how we're going for it. By the same time, I said there are headwinds, biggest one of all is the backlog that you have to consume, we saw that. There is inflation, which is still there. And the whole topic of pricing, for example, now there is pricing of new things coming that we need to make sure we manage. This is somehow the big building blocks of the plan. I hope this helps and maybe we can discuss offline if you'd like to go into more detail.

[Andrew Wilson, JPMorgan]

That's very helpful. Thank you both for the color on that.

[Silvio Napoli, Chairman and Chief Executive Officer]

Thank you, Andrew.

[Operator]

The next question comes from the line of Andre Kukhnin with Credit Suisse. Please go ahead.

[Andre Kukhnin, Credit Suisse]

Good morning. Thank you very much for taking my questions. I'll go one at a time please. Firstly, could we talk about pricing? I'd love to hear what's your current intentions and kind of current actions on pricing front ex-China? Should we think about it as something that was quite a clear push as you demonstrate in the numbers with the double-digit increases, and now we are kind of stable at that level or are you continuing to push for price further? And then secondly, could you comment on how pricing has been developing in China, please?

[Silvio Napoli, Chairman and Chief Executive Officer]

Yes, Andre, hello. Let me comment on the topic of pricing. First of all, let me split it again in two big blocks, that is pricing service and pricing installations. Starting with service, as previously discussed and I'm sure most of you are well aware of, service contracts in many parts of the world are in fact already including an inflation index. So, then of course, the inflation of last year since the contracts were indexed would have by itself a flow-through impact on the topline pricing for this year.

All the price increases, inflation-driven or material-driven, are very carefully looked at because of course what we want to make sure is to minimize portfolio losses and we want to be sure we preserve this density as a priority. So, this is the first block. So there, it's -- the drive is there, but going back now to a very clearly spelled ambition and target, the goal remains to keep service density.

The second part is new installation. There I think ‘22 really recreated that reflex about driving price increases. When I -- when we spoke, I think in Q1, I did say how surprised you were to say that after a decade or more of negative interest rates the whole topic of price increases was for some of our staff unheard of, China being a particular example. That is for most of the world now being recovered. And now, I think this is going very well.

What are we doing? There is a pricing module as part of our strategic execution framework, which has been driven systematically with functions across the whole world. There are different elements to that. One is this market-based pricing model that we discussed already in the past that we introduced back when I was CEO the first time. But there is now another element, which is Artificial Intelligence. We now use data science to assess what is based on history, based on specifications, the most likely award price for a certain project. And I must say I'm so pleased at the same time also, so how effectively this method has been -- where did we introduce it? Now, we've introduced it in a few key markets and now it is being deployed worldwide.

China, the situation is tougher. I am -- I explained the reason why. There I think also the culture element is particularly important. And there we have -- I'm afraid we are restarting a bit from the base, but there too is to find the right element between market share and price, and making sure we drive new installation and we secure the drug we want to where we then have to be prepared even to make some price concessions. But in the other ones, we need to make sure that we get sufficient margins.

Pricing used analogy in the Company now of breaking on ice for those who drive in the winter or used to drive when there was snow on the roads. It's a bit of an art. And you can use technology that can help you fixing it. So, we are very much in the process. I cannot give more details now, in fact because it's extremely complex. But we are definitely all in to continue with the momentum.

[Andre Kukhnin, Credit Suisse]

That's very clear. Thank you. And if I may ask on the order backlog -- sorry, on the backlog margin evolution, we used to talk about that and now you're giving very helpful disclosure on how the order intake margin has been evolving. If we just try to translate that back to the backlog margin and think back of the historic, I think, was kind of minus 50 basis points that then flattened out, in Q4 did that backlog margin now go into a net positive? And maybe if you could comment to what extent.

[Silvio Napoli, Chairman and Chief Executive Officer]

Thank you, Andrea. Carla, we expected that question, so please do answer that.

[Carla De Geyseleer, Chief Financial Officer]

Absolutely. So yes, as I just pointed out, for the first time also between quarter three and quarter four, so sequentially, the backlog margin improved, hence the fact that it narrowed to less than 50 basis points. But obviously, also in terms of margin, it definitely became positive, yes.

[Andre Kukhnin, Credit Suisse]

Great, thank you. And if I may, just last one very quick one. On digital, the 25% cover of your maintenance base with connectivity, is that all Schindler Ahead units? And could you possibly comment on kind of the revenue level against that or at least is that now in the breakeven territory versus the kind of recurring cost that you are incurring on that program?

[Silvio Napoli, Chairman and Chief Executive Officer]

Sure, Andre, thank you. Let me answer the first question and then pass it on to Carla for the revenue part. Yes, it is all Schindler, right, so I'd like to specify, this is cloud connectivity. It doesn't include tele-alarm, yield, analog lines. This is really Schindler Ahead based.

Carla, the second part of the question?

[Carla De Geyseleer, Chief Financial Officer]

The second part regarding the revenue?

[Silvio Napoli, Chairman and Chief Executive Officer]

Yes.

[Carla De Geyseleer, Chief Financial Officer]

So -- I mean, we don't disclose the exact revenue, but it's already a substantial of high-10s of millions that are flowing through to the bottom line, so yeah -- and a very solid number, yeah.

[Silvio Napoli, Chairman and Chief Executive Officer]

And you can even -- I think we can say that probably year-on year we are talking about doubling. And you saw in our drive, again as part of our products, this is the first bullet, drive innovative services based on connectivity. This is something which after an investment we did because [P23] (ph) to get connected to as many users as possible, now we can start harvesting the benefits. And this involves now generating the services. And we have the tools for it and more is coming.

[Carla De Geyseleer, Chief Financial Officer]

Yes. And Silvio, if I just may add, because it -- next of course, to the financial benefits that it brings, it's also important, because it really relates very well to our sustainability ambition here. And that's also one of the reasons we're -- we were so forceful in accelerating the rollout.

[Andre Kukhnin, Credit Suisse]

Good point. Thank you very much for your time and for your answers. Really appreciate it.

[Silvio Napoli, Chairman and Chief Executive Officer]

Thank you, Andre.

[Operator]

The next question comes from the line of Soumava Banerjee with Citi. Please go ahead.

[Soumava Banerjee, Citi]

Hi, guys, just a quick question on slide seven where you disclose the new orders margin and also the margins that is still. Do we have some sense of how it is trending by geography? The reason I'm asking this question is also very strong 4Q and obviously driven by pricing trends to flow-through, but just wanted to know which regions are doing well and if we have some magnitude on that subject.

[Carla De Geyseleer, Chief Financial Officer]

Sorry, I didn't get your question, yes.

[Silvio Napoli, Chairman and Chief Executive Officer]

Your line was wan not excellent, apologies. Can you repeat, you hit about flow-through of the margin, am I correct? Maybe…

[Soumava Banerjee, Citi]

Yes.

[Silvio Napoli, Chairman and Chief Executive Officer]

In terms of timing?

[Soumava Banerjee, Citi]

No, I'm trying to get some sense on the -- sorry, I'm trying to get some sense in terms of the order margin. Do we have a split by geography, which regions are kind of driving this?

[Carla De Geyseleer, Chief Financial Officer]

Yes, no, on the -- when you look across all geographies, I mean it is a worldwide, I would say, positive development in the margin, yes, across the whole portfolio.

[Soumava Banerjee, Citi]

Do we know which regions are kind of doing well versus others? I mean, let's say China, is it around the Group level process TM somewhat lesser? Do we have some sense around that?

[Carla De Geyseleer, Chief Financial Officer]

Honestly, I mean -- they were pretty similar in terms of regions, so they are all on a similar level, the improvements here, yes.

[Silvio Napoli, Chairman and Chief Executive Officer]

Perhaps to clarify the recent -- how the answer is built, we look now more and more at what we call wall-to-wall margins and this is important, because it is what makes the difference. Wall-to-wall meaning from field operation when it is sold and installed all the way to the factory who delivers them. And so, to your question indeed, as you correctly hint to, in some part of the geography maybe the front -- the field operation margin might be a bit lower, but then the supply-chain margin is higher. So Carla's answer is exactly spot on, because no average you end up having similar positive evolution.

Of course, against the effect on the -- before it flows through the P&L it will take time because we have to first consume the backlog. Hopefully, this -- and this is again why it is important to drive efficiency, because if you drive efficiency today then this pricing effect, then into the wall-to-wall margin is even compounded with these other benefits, which are then -- are in our hands. That's why Carla said, this 2023 the key focus for us is on efficiency because in all these many multiple and fast-changing things, efficiency is in our hands.

And candidly, I say very openly here, we have we to go. And we use ruthless benchmarks, actually we invest a lot in that, to see what is the market benchmark, what is the best-in-class benchmark, and we operate towards that.

[Soumava Banerjee, Citi]

Thanks very much for the color. I'll step back in line.

[Silvio Napoli, Chairman and Chief Executive Officer]

Thank you.

[Operator]

The next question comes from the line of Angelika Gruber with Tamedia. Please go ahead.

[Angelika Gruber, Tamedia]

Yes, hi. Thanks for taking my question. I would have one on China, sorry. China has been a growth market for a very long time for you. So, I'm wondering whether you see it coming back or whether you need a different growth market in the long term? And there is also a political component to this question. I was wondering whether you are a bit more cautious on China, given the conflict between China and Taiwan after what's happened in Ukraine? Thanks.

[Silvio Napoli, Chairman and Chief Executive Officer]

Thank you. Let me take the question, so as explained, China in spite of the contraction in the last few years, remains 60% of the world market. You may remember, some of you, the Pareto chart we presented in Q3 where we showed that the second largest market is India, which is 7 times smaller still today than China. So, China remains the key market for any global player where one has to be successful, one wants to retain a global presence, including growth.

So at the moment, I think we need to grow all over the world, but we need to continue growing in China as well. So yes, we grew in India very successfully, we grew in the rest of Asia-Pacific which are the other fast-growing market as a result of urbanization, but today China remains the key driver. So, that's the first part of the question.

On the second one, are we cautious; first of all, I'm sure you saw the figures, yes, we just published a study last week whereby you can see that trade between China and United States grew by 2.5% in 2022 and this growth has never stopped, even at the high -- highest more of pensions. So, clearly, I want us to be carefully watching without taking any political side on the tensions. Trade so far continues and I think thank God for trade, because hopefully that also keeps people clever in avoiding to cross boundaries, which are then very costly once they're crossed.

At the same time, I think what we have to learn from the period of lockdowns in terms of -- what does it mean in terms of risk management, and this is a key element. The risk management -- because we see that we have many suppliers that are in fact producing only in China. We have been producing all over the world from the beginning, but we are -- with components that we don't produce. And so, these components are produced in China only. And that is the one thing we need to look at. And so, this is what we're actively -- you will see - you may have noticed, into the product, we have to know, to reduce drastically the number of single-sourcing components or suppliers that we have. And we had a lot. And by the way this used to be the fashion in the 90s, 2000, single-source outsource go for that. And now you can see, depending on where the single sources, it can be very risky.

So this is now -- and this of course in an engineering business like ours, it's not that easy because you have to make sure that the other supplier is certified that has the right quality derived engineering. So this is in itself a huge effort which has substantial cost which we're driving for now. And hopefully -- hopeful that -- this is our situation with China, but also with other countries, but of course China being so big this is the one that is the most affected. Hopefully that helps addressing your question.

[Angelika Gruber, Tamedia]

It does. Thanks very much.

[Silvio Napoli, Chairman and Chief Executive Officer]

Thank you.

[Operator]

The next question comes from the line of Xiaomeng Zhang with Goldman Sachs. Please go ahead.

[Xiaomeng Zhang, Goldman Sachs]

Good morning. Thank you for taking my questions. I have two, if I may. The first one is actually on the switch to other countries like US. I know you have a new CEO in the US. I'm just wondering if there are any changes in strategy there or what's the new direction there?

And the second one is on your orders, can you, if possible, so quantify how much percentage of decline is like voluntarily you take last because of lower margin? Thank you.

[Silvio Napoli, Chairman and Chief Executive Officer]

Thank you. So if I answer the first question is about the U.S., the -- any new direction with the new management. I'll take that. The second one, if I understand, is the -- can you repeat, is the percentage of market share or orders that we -- can you repeat the second question, sorry, again?

[Xiaomeng Zhang, Goldman Sachs]

Yes, sure, yes, no worries, yes, how much percentage orders like you voluntarily like decide to take -- not to take because of lower margins in your order decline in 4Q?

[Silvio Napoli, Chairman and Chief Executive Officer]

Okay, good. I will -- Carla will address the second question. So yes, you're well-informed indeed, we did disclose it as part of our effort. By the way, in 2022 we did change a number of key personnel, including leaders in some key markets, that is the U.S., but also our China field operation. There our -- most of our supply chain ends. So, all that has been again a huge investment of which, as you can imagine, I myself invested a lot.

In the U.S., the direction has not changed, it's disciplined execution. In the U.S., we need also to make sure we have the right products for the market, on which we have been investing as part of just P23, now it's about bringing them to the market. We probably have to do also some investment in the U.S. in terms of infrastructure. And of course, the whole topic about front-line capacity and which is true for most industrial companies, is a key burning platform in the U.S. So, we are working very actively towards it.

And to do that, we have streamlined there too like a residential level the whole organization in a way to make it much less complex, much more decentralized and close to the field with much closer proximity. This has involved some restructuring for which you may have seen some of the cost coming in Q4. This is -- it's about disciplined execution of our -- and the product introduction will play a key role.

Carla, would you like to take the second question on the orders?

[Carla De Geyseleer, Chief Financial Officer]

Yeah, on the orders, obviously, yes, we lost orders, but that's rather, I would say, a minor part and we actually don't quantify them as such. We don't disclose them here, yes. But it's not -- as you can see, it's not an -- I would say, a major problem. And in the cases, we were dealing with is that conscious decisions, yes, so...

[Silvio Napoli, Chairman and Chief Executive Officer]

Perhaps building on Carla's answer, the key maybe market where this has to be discussed carefully is large orders, typically infrastructure, because those are by and large volume, so they are very appetizing, one can get very quickly excited by huge figures. And then the question is, yes, we can do it. Do we have the right margin? And most of all, what will we do in terms of portfolio density.

Depending on the country, some of these orders have a -- I wouldn't say automatic, but they have a very high chance of conversion into service contract. And this is for us the key area. And to be candid -- now honestly, I'm not trying to evade the question, to comment -- they wouldn't be able to tell you what's the percentage, but there are large orders on which we backed out from because the maintenance was at risk. And then, unless you have the right margin in your equipment, you don't take it. And in the past, we did, and that is a very -- I think a very specific example of the type of orders we will now be scrutinizing much deeper in the future.

[Xiaomeng Zhang, Goldman Sachs]

Yes, very clear.

[Silvio Napoli, Chairman and Chief Executive Officer]

Thank you.

[Marco Knuchel, Head of IR]

I think we have time for one more last question from the call. And then, we are also looking back in the audience if there is one -- remaining one and then we close.

[Operator]

The last question from the telephone line is coming from the line of Miguel Borrega with BNP Paribas Exane. Please go ahead.

[Miguel Borrega, BNP Paribas Exane]

Hi, good morning. Thanks for taking my questions. Just following up on the recent price increases, obviously 2022 was an exceptional year. But looking forward, do you think it's possible to keep raising prices in a situation where construction end markets are becoming weaker? I understand some of the price increases are still yet to be delivered in the P&L. But once they do, what will be the key for improving your margins? Will you keep raising prices or is it to focus more on deposit costs and internal measures?

And then on China, you talked about the transition to modernization. Can you give us a sense on how a typical modernization project compares to new equipment in terms of size and margins? So, if by 2030 the modernization market in China is the same size as the new equipment today, how will your profitability compare modernization versus new equipment today? Thank you.

[Silvio Napoli, Chairman and Chief Executive Officer]

Thank you. So, let me start with the first question. You're absolutely right. As I highlighted in my headwinds, tailwinds slide, the real estate industry is under pressure, because of rising interest rates, increasing capital cost, in some parts of the world also risk of recession. Now, you've all heard the story about now is Europe or U.S. hard landing, soft landing, now no landing, so you in your institutions know this much better than I do, and so this is a big question.

And you're right, we are very conscious of the fact that pricing will be more challenging in 2023, so that's why we spoke about pricing momentum. And the key for us is to apply the formula that has carried us in ‘22, which I presented one year ago, which is pricing plus inflation -- efficiency has to be bigger than inflation. This is the magic formula, pricing plus efficiency has to be bigger than inflation.

Now, if inflation -- if we cannot get the pricing, we need to get the efficiency. And this is now -- we even have -- together with the Carla and her team we have now data and cockpit charts to observe how this evolves across the world. And in ‘22, we were very good on the pricing. We were not so successful on efficiency. So now, it's the perfect time to switch because indeed, I agree with you, pricing would be a risk.

Now, where would it be more at risk? I think the big key questions is, first of all, Europe. We can see even in Northern Europe some construction. The demand is still there, but some -- we see some of our customers start postponing decisions in terms of final investment. So, this is one too, because -- the other one is the U.S. where I think demand is there, but there, there is a scarcity of labor and delayed construction and with still uncertainty. This is one that has to be watched really carefully, including the vacancy rates in some cities, which then only is a question for future projects, but also in terms of service, so again, big tailwinds and big risk.

Now, the second question is about the modernization margins in China. There are there two type of modernization in China, one is the -- we call it the -- actually three, there is the replacement because as you -- just you have an old unit, you take down your unit and you're replacing the same shaft. And those margins are actually very healthy, very healthy. The tougher margin which is smaller in units, but bigger in volume is the transformation ones.

Transformation in China, this is an issue of scarcity of labor. It is very much of a skilled work and this is where we need to improve the margins. And to do that, we need to develop a self-standing delivery mode, which is there in Europe, which is there in the U.S., in China it wasn't there. So it's really the -- and we are working towards developing that in order to do that, provided it adds to the density of the business.

There's a third element of modernization in China, which is in between new installation modernization, which is the outside lift, the add-on shafts. Some old buildings in China back -- even when I was still there, there was a law until I think 2008 that lifts -- buildings less than seven floors could not have a lift. The -- with aging population this has changed. So now, you can actually -- instead of tearing down the building, which used to be what used to be done in the past, now less and less, you can actually add a shaft outside and connect it to the building. This is a fast-increasing business on which we are investing and we're -- which is showing improving margins as we go forward.

So now, honestly, how will this look into 2030, I cannot tell you today, but I am positive that this -- as it did in other parts of the world, this will provide a business, possibly even more profitable than what we have in new installation.

[Miguel Borrega, BNP Paribas Exane]

Very good. Thank you very much.

[Marco Knuchel, Head of IR]

Is there any last question from the audience? That doesn't seem to be the case. So therefore, thank you very much for attending this call. Please feel free to reach out if you have any follow-ups to me. I see there are a few questions still in the line. I will contact you in the course of the next few hours.

And yes, with that, we would like to say goodbye to you. The next call or the next occasion we are in contact with each other will be on April 20th. We are looking forward to that. And thank you very much and take care.

[Silvio Napoli, Chairman and Chief Executive Officer]

Thank you.

[Carla De Geyseleer, Chief Financial Officer]

Thank you.

[Silvio Napoli, Chairman and Chief Executive Officer]

Thank you for your question. Thank you for being here. Thank you.