Schindler Holding AG (SCHN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Schindler Conference Call on Q3 Results 2021 Conference Call. I am Paul, the Chorus Call operator, [Operator Instructions] And the conference is being recorded. The presentation will be followed by a Q&A session. [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, Investor Relations. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to our 9 months 2021 results conference call. My name is Marco Knuchel, I'm Head of Investor Relations at Schindler. I'm here together with Thomas Oetterli, our CEO of Schindler Group; and Urs Scheidegger, our CFO. As usual, Thomas will start, and Urs will then lead us through the financials. After the presentation, we are happy to take your questions. [Operator Instructions] Thank you very much in advance. With that, I hand over to Thomas. Thomas, please go ahead.

Thanks, Marco, and good morning, ladies and gentlemen. Also a warm welcome from me too. In the sixth quarter, it is the sixth quarter in the midst of a global pandemic, and I sincerely hope that you are well and healthy. Looking back at this past 21 months, I believe it's safe to say that we all have and still have to show new levels of resilience and agility at the same time. Our world, our ways of working and communicating have been transformed. And the environment we are operating in continues to be fast changing. We faced 2 transformational evolutions at the same time: actual length of speed and with more and more sometimes yet to be revealed inter-dependencies. Digitization meets decarbonization, and both affecting us and our customers in unprecedented ways and equally providing new opportunities to adapt our offering and challenge the current status quo. As one of the responses to these tectonic shifts, we launched Top Speed 23, our program to accelerate digital transformation and product innovation. We will provide a more detailed update on the progress of this program with our 2021 full year results. But one thing I can tell you, the energy in the project teams is accelerating, and we are driving at top speed. Now let me dive into today's presentation. Let me start with Slide 2. We see markets recovering at various speed, and COVID-19-related restrictions continue to have negative effects in Asia Pacific and Latin America. The pandemic has introduced more volatility and has made our world far less predictable. Equally, we are faced by accelerated economic and social changes globally. One of those is the events unfolding in the Chinese property market. While Schindler does not have any material exposure to Evergrande nor Fantasia or others, we are keeping a close eye on the developments. Our exposure with Chinese customers is well diversified with a healthy mix of government and privately owned companies. The majority of our ongoing projects are prefinanced. Nonetheless, looking at the Chinese construction sector overall, we have been observing prolonged execution time in the most recent past. One big challenge of the past 9 months involves global supply shortages, with disruption at suppliers all over the world and delays in construction activities, add to that rising costs for material and components and the shipping resulting from overbooked containerships, congested ports and shortages of truck drivers against the backdrop of rapidly rebounding consumer demand. This cost inflation and supply chain issues have negatively affected our revenue as well as our operating results in the third quarter. Year-to-date results, however, are back to 2019 pre-pandemic levels. Let me now hand over to our CFO, Urs Scheidegger, for more financial details. Urs, over to you.

Thank you very much, Thomas. Good morning to everybody. Let me take you through the financials for the third quarter and the 9 months of 2021. Despite persisting uncertainties, disruptions in supply chains and related delays on construction activities and the higher prior year baseline, third quarter order intake was increasing at solid growth rates. And we start -- we are on Slide #3. In the third quarter of 2021, order intake reached CHF 3 billion, corresponding to an increase of 10.4% or 8.8% in local currencies compared to prior year. With this, the third quarter '21 order intake exceeds 2019 by 2.6% and equivalent to a growth of 8.4% in local currencies. Order intake rose by 12% to CHF 9 billion in the first 9 months of the year, corresponding to an increase of 12.3% in local currencies, and those reaching pre-pandemic '19 levels. The following Slide 4 provides an overview of order intake growth by region and product line, 9 months year-to-date versus the first 9 months of 2020. Order intake includes all product lines, new installation, modernization, repairs and maintenance. All regions and product lines generated growth. The Asia Pacific region generated highest growth rates, up mid-teens, driven by new installation and modernization. The America region was only slightly behind, recording strong growth across all product lines, while the EMEA region generated mid-single-digit growth and very solid results across all product lines. New installation remained robust, generating mid-teens growth in value terms and were almost 20% up in units. After a slow start to the year, growth in modernization accelerated from the second quarter and exceeded the prior year by more than 20% off the 9 months. Repairs followed a similar pattern and resulted in low double-digit growth, while maintenance was steadily mid-single-digit up. Our portfolio of maintained units increased by more than 5% compared to the end of September 2020. As of September 30, '21, our order backlog was CHF 9.8 billion, corresponding to a strong increase of 9.6%, respectively, 6.7% in local currency. Backlog margins overall product line were a bit under pressure due to the very significant material cost inflation compared to the previous year. I'm now moving to Slide #5. In the third quarter, revenue increased by 1.9% to CHF 2.8 billion, corresponding to an increase of 0.4% in local currencies. As per our full year guidance, it was expected to record lower growth rates in the second half year due to a tougher prior year comparison and the ongoing disruptions in global supply chain, resulting in delays in construction activities. In the first 9 months of '21, revenue amounted to CHF 8.3 billion, which is equivalent to an increase of 7.4%, respectively, 7.6% in local currencies. It surpassed pre-pandemic levels, which is remarkable, considering the strong appreciation of the Swiss franc since 2019. The translation loss was CHF 555 million during this time period. All regions generated growth, driven by China. That improved more than 20%. Asia Pacific, other than China, the Americas and EMEA regions all were mid-single-digit up. New installation increased double -- new installation increased low double digits, while modernization was only slightly up. Repair and maintenance both recorded mid-single-digit growth. M&A activities contributed by 2 percentage points to the growth, mainly attributable to the financial consolidation of our joint venture, Volkslift-Schindler in China in July 2020. I'm now moving to Slide 6. Foreign exchange translation effects had a negative impact of CHF 20 million versus Q3 2020, due to the strengthening Swiss francs, mainly against U.S. dollars, the Brazilian real and the Turkish lira, while the euro, the Chinese RMB and the Australian dollar were supportive for once. I continue with Slide 7. In the third quarter of 2021, the EBIT adjusted reached CHF 308 million, equivalent to a decrease of 8.6%, respectively, 10.4% in local currencies. The EBIT-adjusted margin reached 11.0%. The slowing operating revenue growth due to the supply chain disruptions affected the vision's project execution and the material cost inflation very significantly accelerated and was impacting the bottom line. EBIT-adjusted margin year-to-date reached 11.4%, 90 basis points up from previous year and almost on par with 2019 levels. Top Speed 23 program costs were CHF 16 million; restructuring cost, CHF 20 million; and expenses for building lines amounted to CHF 18 million. In the third quarter, real estate gains of CHF 20 million were realized, which also contributed in the EBIT adjusted. On Slide 8, you will see the first 9 months of 2021 EBIT adjusted reached CHF 946 million, supported by the top line growth, the operating leverage, efficiency and cost optimization, positive effects of the interruption of our modularity products and lower operating expenses due to COVID-19. These factors were compensating price and backlog margin pressure as well, and most importantly, the significant material and freight and cost inflation and supply chain disruptions. On Slide 9, you see the net profit. Net profit totaled to CHF 689 million in the first 9 months of '21, surpassing pre-pandemic levels and an increase of 26% compared to prior year. This result was supported by substantially lower restructuring costs, while the financial result line was more negative than in the previous year due to comparatively less foreign currency gains. On Slide 10, cash flow from operating activities was broadly unchanged and could be kept at CHF 958 million as a result of rigid net working capital management and cash-saving measures across the group. Net working capital and net liquidity remains at robust levels. I conclude with the outlook for '21 on Slide 12. Markets are recovering at varying speeds, while competition remains intense. At the same time, material costs will be an issue also in the fourth quarter. And we expect some additional CHF 40 million to CHF 50 million until the end of the year, which then would add up to some CHF 140 million to CHF 150 million for the full year '21. Shortage of electronics and other components are adding to the situation as it results in delays on construction sites across the globe. Lastly, the latest development in the China property market are a challenge we are closely monitoring. Nonetheless, barring unexpected events, Schindler confirms the full year '21 outlook of revenue growth between 4% to 7% in local currencies, with net profit reaching between CHF 840 million to CHF 900 million. With that, I hand back to Marco.

We are happy to take your questions now. [Operator Instructions] Thank you.

[Operator Instructions] The first question comes from Lucie Carrier from Morgan Stanley.

The first one is around the nature and, I guess, the duration you are seeing in terms of...

Ms. Lucie...

Can you hear me?

Yes. Now we can hear you.

Okay. Perfect. The first question I had was around the nature and potentially the duration of the headwind that you were mentioning around supply chain constraints and how this is affecting you. Are you able to give us an indication around how much longer it takes for projects to actually get executed in this context? And when you think about the situation now in 2021, how do you see this evolving into 2022? I guess my question is, do you think we are now at the worst possible kind of outcome in terms of headwind? Or do you think things staying at that level or would improve or would get worse?

Thank you very much for the question, Lucie. It is true at the moment, it is very challenging, I have to say and there are different type of challenges, I have to say. So one is the electronic shortage. I think I don't have to tell anybody what is at the moment happening, it is quite severe in -- it's very difficult to source microelectronics at the moment. I have to say that we have done really a very intensive work over the last couple of months. We were able to mostly mitigate this topic. It depends a little bit on the different chips we need. So what we have done, we have tried to build up alternative sources. We also have worked very hard with our suppliers to increase the engagement. We have bought a lot of chips also on the spot market. And of course, we are also working on design changes. So certain chips which are not really available at the moment, we try to redesign our boards and to switch to chips, which are more available. So far, in the worst case, we start with the mechanical parts. And then before we have to hand over to the customer, we are then installing the electronics. I think this topic of the electronic shortage will go into 2022. This is definitely not yet over. There are different, let's say, meanings and opinions. A lot of people say it goes until second quarter or maybe even until the mid of next year. And so this will be a challenge for us, definitely for more -- for a minimum in the next 6 months. Now there are also other shortages, shortages in steel, in copper, in aluminum. Here, I think we have seen in the quarter 3, certain really shortages. I think it has a little bit eased up, I have to say, the shortage itself, but the price levels have gone through the roof in all fairness. And we have seen that some of our suppliers were struggling to get material. And so they could not deliver on time material to our factories. So we were supporting them in their purchasing of raw material. There, I have the feeling, but it's very difficult to make a clear point to the future. I have the feeling that from a material supply, we are okay. But from a material cost, we are not okay. This is still on a very, very high level. And at the moment, looking forward, I have not yet find that this, let's say, a very high cost level will come down. And the third element is freight. So freight costs also went through the roof, and it's lacking containers. We have problems at the port. Here, I have to say, we do have the benefit that we are producing in all the major markets for ourselves. So we are a little bit less dependent on those shippings. But still, costs are high. But we are lucky that we produce in China, in India, in Europe, in North America and in Latin America, this helps us. So electronic shortage, in a nutshell, I don't see any slowdown of the problem until mid of next year. I think in other materials, it's a question of cost and freight. It's also mainly a question of cost, but not so much a question of supply.

I'd like to complement on the question of material cost inflation. We have now seen accelerated and significant material costs impact in quarter 3 of about CHF 50 million additional material inflation after a half year closing of CHF 40 million, so CHF 90 million versus last year. And I do expect this will be even higher in quarter 4, CHF 50 million to CHF 60 million additional. And with that, we reach a full year's material cost inflation of CHF 140 million to CHF 150 million compared to last year. If prices are at the level we see it now, obviously, this has an additional incremental impact also for '22 on material costs across the board, which can be in the range of CHF 70 million up to CHF 100 million. But of course, this is uncertain. It really depends how raw material prices are now developing into the first half year of '22.

And just maybe a quick follow-up on that. One thing you haven't mentioned is labor shortages. Is it an issue now in terms of your project execution? Or it is not yet an issue or not an issue at all?

Well, labor shortage is always an issue, but it's not only the absolute amount. It is also qualified labor. So we do a lot of efforts to train people. We are also very close to our subcontractors. At the moment, I can confirm that we have enough capacity to roll out that backlog. But what you have -- so we have enough capacity. What we see is that in many countries there is a pressure on wage inflation, especially for the next years. Usually, you have something like 2% of wage inflation, and it probably face up to 3% next year.

My second question was around China. Thanks for giving us some color around your exposure to Evergrande. But how do you -- aside the Evergrande situation, which I understand you're not materially exposed to, how do you think about the dynamic that we have observed on the starts -- on the property starts in China, which are down for the past 12 months and seemed to be even kind of worsening. How do you think about that dynamic as you go into 2022 and also some of the restriction on local government around the debt level? Because I know you're also quite exposed to infrastructure in China.

So this 3 red lines policy, of course, was to control the debt level and to have a healthy balance sheet for the real estate developers. And I think the Chinese government wants to minimize the risk to become a systematic risk. So this has been implemented, in fact, already more than 1 year ago for the top 12 developers, and then it has been expanded in 21 industry-wide. I think the authority's focus is really to stabilize also house prices. They don't want to have speculation. That's a key goal they have. And I think the government, according to my observation over many, many years, they are quite good in tightening or untighten certain measures. Now the top 50 developers, they have more than half of all the construction activities or measured in floor space sold, more than 50% are sold to the top 50 developers. The good thing is none of those top developers has a real substantial market share, so more than 3%, 4%, 5%. But still, we have seen that Evergrande, they're probably something like 4% of the total market. And we all know that there are some terrible [ instances ]. Now looking forward, we see, of course, that there are cash constraints with quite some developers. And I believe that the second half, and we see that there is, let's say, postponement of construction, there is a very cautious buying of new land. Also, when you look on floor space start, quarter 3 definitely went down substantially. You see those in one of our backup sites that in quarter 3, we were going down -- or China was going down by 17%. I would assume that also, the next 2 or 3 quarters are challenging. You should not look at the first half year, of course, was a little bit overstated because we had a very low baseline in 2020. So we had a baseline effect. And there was some catch-up for the -- from the second half of 2020 and the first half of 2021. So the market was, in fact, in the first half year, quite strong. But we have seen that there is a slowdown happening in quarter 3. I'm expecting the same in quarter 4. And I'm also expecting, but now we look really into the future. I believe that the first half year in 2022 will be challenging. But in the mid-term and in the long run, I have to say, China is such a big market with such a lot of people still moving into the cities. I'm sure that the markets will bounce back. But the next couple of months will be challenging, and we do expect that market '22 compared to '21 will slightly go down in new equipment, mainly driven by the first half of '22.

The next question comes from the line of Andre Kukhnin from Credit Suisse.

I'll focus on the kind of net price and the margin dynamics. So the questions I have are really versus that extra carryover raw material impact that you indicated for 2022. Do you think the pricing actions that you are taking or have taken already will be sufficient to offset that? And maybe if you could talk related to that on the pricing dynamics and the take-up of the price increases kind of globally and across the business lines, that would also be great. And maybe just to conclude that, taking the net price into account and the other factors on 2022, do you still feel confident that you'll be able to move margins higher in the year of 2022 versus 2021?

Thank you, Andre. Maybe I start with the question number two talking a little bit about the pricing, and then maybe the, let's say, the impact -- also timing impact, maybe I give to Urs. So the fact is that we have to distinguish between the different businesses. So we have the service business where we do service and repairs. There, we are continuously working also on the pricing, and it has a short-term impact. So in -- for example, in repairs, where you do also -- the spare parts, if you increase the prices, you can quite, short term, mitigate cost increases you are facing. And we have found that. In the service business, usually, we are increasing the prices once a year. It's normally based on an index. So it's -- and the index usually refers to certain inflation content. This can be labor inflation, but also partially material inflation. And we will continue to work on our pricing also in the service business. Much more challenging is, in fact, the new equipment and the modernization business or the project business. In the new installation business and in the modernization, we have started to work on pricing already in the middle of the year. So depending on the markets, I think we see now impact already coming up in Europe but also in the Americas. It is a little bit more challenging in Asia Pacific and in China. China as one of -- or maybe the most competitive market, we have not seen that market prices are going up. We always say, there is a slight negative market price impact, and we also saw that in quarter 3. Now important is that in this project business, when you start to increase the prices, you do not have an immediate impact on your P&L. It takes between 12 to 18 months until you really see it going through your P&L when you start to execute your orders. Now when you try to fast forward, that looks to 2022, I think 2022 will be challenging. But I can confirm that nothing has changed in our ambition that we would like to improve every year. I have to admit, '22 will be more challenging. So this might be -- maybe a slight improvement, but the overall strategic direction does not change. Maybe, Urs, you can highlight a little bit how we see the different timings and the impacts.

Certainly, and it's certainly more challenging now into '22 as the material cost inflation is higher than anticipated earlier. In half year closing, it was expected to have a material cost inflation of CHF 100 million to CHF 120 million upper range. But now we need to expect an inflation each year of CHF 140 million to CHF 150 million, which is an increase of CHF 20 million to CHF 30 million inflation this year, which has a spill over into next year. And as Thomas was indicating, there is a lag of the price increases in the project business, in new installation and modernization. From offer to orders, it certainly takes about 6 months on a global average. And from order intake to revenue generation, there is also a timing aspect of 12 to 18 months. So that means until we have the price increases in the P&L, it will go into the second half year of '22 for the project business. Of course, for the repair business and the smaller modernization activities, price increases have to be the fastest at shorter lead time and effects. Also wage inflation, as, indicated by Thomas, will be higher next year of about maybe 3% next year versus the 2% this year. That is clearly also a headwind. And this we have to compensate with the strong efficiency measures. We are intensively working in the field and also in our back office activities. We need to materialize the impact of the cost optimization program and the full benefit of the modularity program, which is finished by end of the year, and then we have the full impact next year. And with that, as Thomas said, we aim certainly to have a slight margin expansion next year. But there are a lot of uncertainties. There are really a lot of moving parts right now economically around the world.

Very helpful. May I just follow up on the service price increases? Could you give us some idea of the order of magnitude in that segment?

Well, this depends always on the country, I have to say. We do not disclose the overall price increases. But I can say, we do not expect any dilution of our margin in the service business. The only issue you have is usually those indexes are looking back to the last year. So as we expect some headwinds from increased wage inflation in 2022, this should impact our -- or this should be a tailwind for the price increases in 2023. So you sometimes struggle with the proper timing because usually, those indexes -- or the inflation forces are looking back for 12 months. And we have not so much inflation yet in 2021. So this challenges us a little bit, but we will compensate that with efficiency improvement. So in the service business, I clearly can say we will not see a dilution.

The next question comes from the line of Rizk Maidi from Jefferies.

So I have 2. And perhaps the first one is on the efficiency gains and the total savings that we should expect into 2022. So thanks for giving us all the clarity on the cost inflation, on wage inflation headwind. Can you just help us with the offsetting factors? And if you could just give us any numbers on the different program, whether that's cost optimization program, what would be the impact from modularity next year given the program is ending this year? And any other programs you're running? I'll stop there.

Yes. Urs?

Right. Let's start with the modularity program, which is now coming to an end, and we were successfully rolling it out. We have additional material savings this year of CHF 60 million, CHF 70 million. And so with that, we reached CHF 200 million, as we have expected. And that clearly will help us now going forward with a much more standardized product range with much less variances to work on our purchasing power. And this will clearly help us to mitigate a bit of the material cost inflation. Then we also have the cost optimization program, which we rolled out last year. And we have as well in that aspect about CHF 60 million now this year are savings. And we expect another CHF 40 million to CHF 50 million for next year, and then it will be close to [ 12 ]. And then in addition and most important, the group is working on operational efficiencies. And we get efficiency in the field with a much more dense and growing service portfolio and that delivers service efficiency. Also with the rollout of our new elevator product, modularity we will get new installation, installation efficiency in the field. And for sure, those measures at our aim shall compensate and slightly, slightly overcompensate the current headwinds. More, I cannot yet say for '22. It's too early. And there are too many moving parts. We will give an update in the next conference call.

And the second question is on your -- the China outlet, and then thanks for giving us an early look into 2022. But from where we stand, it looks like you've seen it as a year of 2 halves. So essentially having a sort of a negative impact in H1 and then perhaps less so in H2. I'm a bit surprised by this comment. And maybe the question here is how do you see the phasing of those bad construction statistics in the Chinese elevator markets? And more specifically, the floor space started or the reduction in land sales, that, to me, would essentially mean that it will have a much longer impact on the Chinese elevator market, not just in H1 2022. Just perhaps any color here would be helpful.

Well, Rizk, you are right. Usually, you can -- when you look on floor space, started -- or real estate investments, then you usually can add, it depends a little bit there on the segment, 12 to 18 months. And you see the impact on the markets now. It's already started. In fact, in quarter 2 '21, that floor space start went slightly down and a little bit accelerated in quarter 3. So this will somehow impact the market of our business, definitely in the first half of the year of '21. Maybe it goes a little bit longer, that could be. But I also have learned that whenever the real estate market is a little bit shaking, the government takes immediate actions. They, in fact, want that every citizen in China has an apartment. And this is very important also from a cultural aspect. So I believe that what I have seen over many, many years, the Chinese government is adjusting their measures quite rigid and fast. So if there is some slowdown in the market, they will open up the one or the other measure, more on the consumer side. And then you will have an increase of floors space sold, then the inventories will further go down. The cash is coming to the developers. The developers are starting to reinvest into new projects. Whether it is now exactly by the mid of the year or it is a little bit late, that's difficult to exactly assess. We believe that overall, the markets 2022, as I mentioned, will slightly go down. And let's also not forget that when you compare the first half of '22 with the first half of '21, you will have a baseline effect because the first half of '21 was super, super strong, catching up a little bit from the 2020 development. And if you take away that baseline, then you come maybe baseline effect and the catch-up and you come to a weaker second half. And then we see that maybe on this weak second half, it is some pressure in the first half. And we believe that towards the second half of '22, it might come up again.

The next question comes from the line of Martin Hüsler from Zürcher Kantonalbank.

I have 2 questions. First of all, coming back to China again. It might be helpful if you got an idea of you roughly have 16% of your overall sales in China. How does this look like if we look at separate segments, such as how much of the 16% is from developers? How much is from infrastructure and commercial construction activities? If you could maybe try to give us some more insight into that. And the second question would be if this change in market dynamics in China, if this does change at all or any of your strategy how to address the market, i.e., if you now find it more feasible maybe to push the channel of distributors or if you stick to your proven strategy that you would like to have a higher conversion rate, i.e., which means that you rather have your own distribution network.

Martin, thank you very much. Two very good questions. So in China, when you talk about the split maybe, yes, we have expanded our sales with larger developers over the last couple of years. I would say today, we are somewhere at roughly 1/3 of our sales, we do with large developers; and 2/3, we do with smaller ones or own sales activities for the public transport. So you can say it's 1/3 to 2/3. So we are a little bit underbalanced compared to the market. If you say that the top developers have more than 50% of the market, we can say we have less than this 50%. So in these turbulent times, where the one or the other large developer is now under pressure, it is not yet, I have to say, impacting us. I don't want to be too optimistic, but I think we are quite well balanced in our risk exposure. Nevertheless, going maybe forward, we do not really have planned a change in our strategy. We always say that we want to further increase our share of key accounts. This is something we do, and we are progressing well on that. A couple of years ago, when we go 10 years back, we had no exposure at all, these large developers. Now we are at 1/3, and we want to further increase that. But we are very selective. We are very selective. So cash control and risk control is absolutely a must for us. We rather prefer to skip 1 opportunity if we are not sure that all cash collection is possible. And then we step back and leave the field to someone else. The second topic you mentioned is distributed. Yes, we do have distributed business, and we always say, it should not be more than 25% to 30%. And we don't want to change that. There is not a change in strategy because, you mentioned it correctly, it's much more difficult to plan or to convert new orders into the maintained portfolio. And the portfolio in China is a key strategic target for us, and we want to keep our high conversion rate or even further improve our conversion rate. So we don't want to change our strategy because, long term, it will be important to have a solid portfolio in China.

The next question comes from the line of Flueckiger, Martin from Kepler Cheuvreux.

Two, if I may. Firstly, if you could elaborate a little bit on the operating cash flow development in Q3. If I remember correctly, it was down more than 20%. I realize that there's quite a bit of volatility from 1 quarter to the next, but close to 25% seems to be pretty harsh, at least at first glance. If you could just explain what's been happening there, that would be very helpful. And my second question would be on Schindler Ahead. And if you could give us an update on the -- on your penetration rate with paying customers for Schindler Ahead in the market and how that's developing with respect to your own expectations and what you're seeing on the pricing front there, whether you still command a nice price premium versus traditional service.

Thank you. I take first the operating cash flow question. Indeed, we need to be careful in comparing quarterly cash flows. They are volatile. And I do recommend that you observe and monitor this metric much more on a full year basis. However, quarter 3 versus quarter 3 '20, obviously, it was very much impacted as we had a very strong net working capital improvements last year. You have watched that, that the group has made substantial progress in the net working capital inflow over the last 2 years and, in particular, 2020. And now this is very much flattening downwards. There were also some noncash items last year. For example, we had a higher bad debt allowance provided last year due to COVID-19, which is not any more needed this year, and the collection was actually solid. As a third element that, in some locations, we are building a big stock and inventories as we have to purchase whatever is available in the markets, shortage of material. And in some occasions, we were able to get the material with the biggest amount, and this was also a little bit impacting the cash flow of quarter 3.

And maybe to the second question regarding Schindler Ahead, I can reconfirm that we have an attachment rate, as we call it, which is still above 50%. And we also still are generating this 10% to 15% premium, where we have an Ahead contract. And maybe just one additional information. Of course, due to the electronic shortage we had in quarter 3 and starting in quarter 2, we have not enough Ahead equipment to equip every single unit because we were having the shortage of microelectronics. But the team has done a very good job. They have found new sources. We also found, together with our new suppliers', way now that we can now deliver all the cubes. So we don't have any shortage there anymore. And our plan, we have internally, which I cannot share in detail, but we will come to our target level by the end of '21. So in this fourth quarter, there will be a huge effort by the team to do this mass connectivity, which we have also communicated on the Top Speed 23. So now we are somehow back on track in our installation of cubes. There will be a huge effort in October, November, December, yes, and then continuing next year. But I think I can say that we are happy with the -- with all our KPIs in the Ahead business.

The next question comes from the line of Andrew Wilson from JPMorgan.

I've only got 2 relatively quick ones left, so hopefully it'd be straightforward. Just on China again, just on the prepayment side, I just wanted to check if you've seen any sort of change in terms of contracting trends or contracting terms on the prepayment side or whether that was seemingly unchanged so far.

Right. First of all, in China, payment terms in the new installation business are more favorable than on a global average, meaning we have coverage with down payments to the work in progress, and projects are in execution, which is significantly higher than 100%. And those payment terms have not much changed or are relatively stable, particularly in the residential business. In the residential business, they are relatively stable. We are watching them very carefully, as Thomas also was indicating. Strong credit assessments are in place for customers, and the cash collection has always been and is very much in our focus. And you see the results of this strong focus in the net working capital improvement and also in our liquidity to the balance sheet. Of course, also in the segments of Chinese public transport particularly, payment terms are very demanding, very demanding. But that is not new. And it was ever very, very fiercely competed in the market. But as a result, we get the cash. It takes time, but we get the cash on public transport projects.

That's very helpful. And maybe just quick -- I think this is probably a clarification question just on the raw materials guide. And I think you've previously sort of wrapped up raw material and logistics sort of cost headwinds together. I'm assuming today's comments are on a similar basis. And I guess linked to that, I think you've previously guided to sort of the margin backlog being -- I think it was about a 50 basis points impact on the '21 and the '22 margin. I'm assuming there's no, I guess, update on those previous comments.

Yes. First of all, apple-to-apple, we are talking about material and freight cost inflation, which we have now to lift up, as I said before, from upper levels on CHF 20 million to the CHF 140 million to CHF 150 million this year. This includes both elements. Having said that, the freight is about 10% of this incremental inflation impact. So most of all, it's clearly on the material cost inflation. On the backlog margins and for our memories, we said the half is a 50% margin drop on the overall order intake in 2019 and 2020 which, of course, comes into execution in '21 and in '22. But we also said that since Q4 2020 that the margins have been relatively stable sequentially quarter-to-quarter. Now with the higher material inflation compared to earlier expectations, particularly in Q3 and now going forward, obviously, this backlog margins are a bit under pressure for the execution, short term, Q4, Q1, a little bit into Q2, until, again, new order intake is flowing into it with higher prices, which then helps compensate the material cost inflation.

The next question comes from the line of Rafaisz, Patrick from UBS.

Two questions, please. The first one would be a follow-up on China, and you drew a pretty complete picture here on what you're expecting on the installation side of things going into 2022. But if you throw in modernization and service into the mix on the revenue level, would you still say that China will likely be down slightly in 2022 versus 2021? Or was that just really purely a comment on the installation side?

So this was a pure comment on the new installation side. It's clear that all the units which are executed by us by the whole market, it's always flowing into the service business of the market. So -- and this is growing every year. When you think about an installed base, which is 7.5 million to 8 million, and you have 500,000, 600,000 new equipment coming in, this is always increasing your installed base. So the service market continues to grow. Now you mentioned correct, we also see that now you already see that the modernization business is starting to expand. And we also had a good growth from a lower level, of course, much lower level in China for the modernization business and these are double-digit growth and high double-digit growth we have. We talk about definitely more than 20% growth year-on-year in the modernization business. But it's still a much lower base than what we have in the new installation business. If you fast forward 5, 6, 7, 8 years, the picture will look different, and the modernization market will be much, much bigger than it is today and we'll get closer to the new equipment market, which probably, over many years then, will slightly come down. So our mentioning was really new equipment business.

Okay. So China could actually still be flattish, if not slightly up in 2022?

If you take everything together, yes, that's probably a right assumption.

Okay. Excellent. And the second question is on your order intake outside of China going into Q4. Now you talked a lot about the supply chain challenges and shortages at the -- some project delays. And is that something that you particularly see in your revenues on the execution side? Or is that also impacting the order intake?

Well, so far, it has not impacted our order intake because very often, due to the long lead time, people are maybe not so much scared about the -- what happens in 18 months. And you have seen that our quarter 3 results, in terms of order intake, were pretty solid, to use the expression of Urs. And I'm also expecting that we will have solid order intake in the next couple of quarters. Where you are right is I have seen the one or the other larger projects. There, there is some postponements, not governmental projects but privately financed projects where the developer says, "Wow, not only the cost for an elevator is -- the cost for [ poultry ], for steel, the cost for wood went through the roof." And they are, let's say, recalculating the business case of buildings and say, "Shall I start now at the peak of cost? Or maybe I postpone my construction a little bit?" That this might lead to the one or the other delay of decision also for the elevator and escalator business. But all in all, I have to say, I'm confident about our order intake also in the next couple of quarters.

The next question comes from the line of Nick Housden from RBC Capital Markets.

Just one quick clarification question from me regarding costs related to the Top Speed program. You previously guided for cost here of CHF 40 million to CHF 60 million. Can I just check that we're still on track to hit that range, given that we only had CHF 16 million of these costs in the first 9 months?

Yes, we are still on track on this so important the TS entity program. And we said CHF 40 million, CHF 60 million. I would assume we have CHF 50 million to CHF 60 million now for the full year, meaning I do expect a significant amount to be booked in Q4.

Next question comes from the line of Miguel Borrega from Exane BNP Paribas.

Just 2 questions from me. The first one is on your order intake in China. I see that in the first half of the year, in value, it was over 20%. Now over the last 9 months, it was between 10% and 20%. But in unit terms, it remains up by over 20% for the 9 months in the first half of the year. Is this a function of mix or perhaps some pricing pressure?

I think it's both. It is a function of mix. I just mentioned before that this topic of large projects is a little bit lagging. So then, of course, you have a mix change that you are more in the residential business, that the average amount per unit is lower. So you do have a mix impact and as Urs and myself said before, the reason pricing pressure, we saw that over in the first 2 quarters and definitely it also was there in the third quarter. And then there is a last topic you should also not forget. This is that we now consolidated in this year, since beginning of -- since the mid of last year, we consolidated Volkslift. And this was then accelerating the mix change because Volkslift mainly is in the residential area. So the mix was organic mix change, but it was also a mix change via M&A, where we have much more units due to the first consolidation and the units are more from the residential area, which have a lower average price.

Very clear. And then I would be interested in understanding the revenue slowdown in the quarter from project delays. Could you give us more color on that? Any particular region do you feel developers in China are slowing down construction on purpose or just generally construction works are seeing just some delays, and you can't effectively make the delivery?

Well, we saw that it was mainly a slowdown. When we look on the first 3 quarters, this was not China, I have to say. The China revenue still was very, very strong also in the third quarter. We were a little bit weaker in Europe because, in Europe, the topic of material shortage was stronger than maybe in the rest of the world. So the slowdown was especially driven by European delays. And one reason is, of course, that some of the material for our suppliers is coming from other continents. And with the freight, with the high cost, they were struggling to get enough material to supply to us and then us to supply to the customer. And on top of it, the customers also delayed some of the constructions. Almost in every country in Europe, you have a slowdown or a postponement of construction activities. So we just are a part of this process. We are not the root cause. We're just following also this slowdown in the European markets. And interesting enough, it was especially more in the northern part of Europe, Switzerland, Germany, the Nordics, the U.K., where we saw some more -- Eastern Europe, where we saw more slowdown than, for example, in the southern countries.

The next question comes from the line of Joel Spungin from Berenberg.

So just a couple of quick ones, just coming back on China again, I'm afraid. So just thinking with regards to your comments around the Chinese market being down from new installations in 2022, which seems pretty reasonable. What do you think the implication is for pricing as a result of that? Obviously, you've said that pricing is pretty fierce in China anyway, and that's been a year where growth has been good. Is it reasonable to expect an intensification of pricing pressure in 2022 in China if the market is going to shrink?

I think there is a risk for that. Clearly, there is a risk of intensified fierce price competition. If the cake becomes smaller and everybody has an internal budget to reach or to exceed what they have sold this year, then it just -- from a mathematics, it doesn't work. Everybody is struggling to reach their numbers. So there is a risk that some companies will try to get more share via price. On the other side, I have to say, everybody is facing this raw material cost increase. So the cost structure is unfavorable for everybody. And the price structure might be also a little bit unfavorable. In all fairness, we are discussing that, of course, as well in our teams. And we want to hold the line and to work on pricing also in China. This is clearly our ambition. But I cannot guarantee that everybody will follow, let's say, that clever approach.

Okay. Maybe just to follow on that. Do you have any observations around the market dynamics in China, just thinking about that? Is there any sign of stress amongst any of the local players? And maybe that some of them, this might actually force them out the market. And maybe to put that another way, is it your observation that the Western OEMs are taking share in China?

I cannot comment. I have to say, first of all, it's too early now with the latest development, but I can definitely say the market in China is very competitive for everybody, and the size matters. And yes, it's true that the large OEMs do have the advantage of economies of scale. And the smaller ones always are suffering more when prices are going down, and this was always the case. And I do not see a reason why that should be different. So usually, in difficult times, you have more power if you are, first of all, acting countrywide everywhere and also if you have a certain size.

The next question comes from the line of Bernd Pomrehn from Vontobel.

We all know that the supply chain of the industry is heavily depending on China, and it seems that current supply chain and logistics issues will be here for longer. Has this an impact on your view how the supply chain in your industry should be organized in general?

Thank you, Bernd, and this is, of course, a very strategic question. Usually strategy should not be driven by a very short-term environmental change. But I can say that overall, we do have quite a good setup of our supply chain. And we are, and we saw that also in the pandemic. Beginning of last year, we were able to supply to our customers all the time. And this was mainly due to the fact that we have, in our most relevant markets, own supply chain entities. Now you are right, not in every market, you have the same supplier base. And a lot of suppliers, even in Europe, they are sourcing their subcomponents out of China. And as we see at the moment a certain deep localization trends, this has put more pressure on the supply chain. So what we did, we were opening up new sources. So we have helped our suppliers also to develop new sourcing channels for themselves, to be a little bit more independent from the one or the other supplier or also on -- from the one or the other market. So I do not see that this can become now a bigger issue for us. This is not visible to us.

The next question comes from the line of Chand, Debashis from Societe General.

I have just 1 question that I wanted to confirm on your plans on mass connectivity, given the current scenario on component shortages. And if you see any shift in the time line related to the impact from mass connectivity, which I guess was, as you had mentioned, from 2023 onwards. So is it impacting the current -- component shortages impacting the timing?

Thank you for these questions, Chand. No, there is no change in our plan. We are fast-track working on the mass connectivity. I mentioned that in quarter 2 and 3, we had shortage but we were overcoming that situation, and we now have -- or I can confirm that we now can work according to our very aggressive plan until the end of 2023. So there is no change in that.

There are no more questions at this time.

Thank you very much for attending this conference call. It's Marco speaking again, by the way. We'd like to close now. Please feel free to reach out to me if there are any follow-ups. The next event is the full year results on February 16, 2022. Thank you very much again. Take care, and goodbye.

Thank you, and goodbye.

Thank you very much.

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