Schindler Holding AG (SCHN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Schindler Conference Call on Half Year Results 2023. I am Avi, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Marco Knuchel, Head of Investor Relations. Please go ahead.

Good morning, ladies and gentlemen, and welcome to our half year results 2023. My name is Marco Knuchel. I'm Head of Investor Relations at Schindler. I'm here together with Silvio Napoli, our Chairman and CEO; and Ms. Carla De Geyseleer, our CFO. Silvio will start his presentation with the highlights of the first 6 months of the year followed by the market update and performance update. Carla will then lead you through the financials. After the presentation, we are happy to take your questions. Today, we plan to close our session at around 11:00. With that, I would like to hand over to Silvio. Silvio, please go ahead.

Thank you, Marco. Good morning, everyone. Thank you for joining our Q2 half year results conference. I'll start with the highlights, and that is Slide 3 on your package. Before diving into numbers, I thought it was helpful to take a moment to look back at where we are and how we got here. It's about 8 months ago that we had the unpleasant yet beautiful task of confronting you with our situation, explaining how we were losing altitude, but also explaining how we have identified the issues that led us to the situation we were in. And also, we detailed the measures that we launched in order to fix the issues. We said it would take time, but we expressed a commitment to drive this improvement. Since then, we have indeed been working hard, making a few mistakes, but overall improving step by step, quarter after quarter. And now with our actual results, I'm pleased to say that these results show that we are gaining momentum. And that means that now we are ready for the next phase. Interesting enough, these improvements come as the market, in fact, has worsened dramatically in comparison to what it was 18 months ago. And this worsening environment can maybe somewhat be summarized in 2 main things. One is the market itself, we'll come to that, and the foreign exchange. But starting with the market in terms of highlights, the new installation market continues to be under pressure mainly driven by China. But now, as we'll see in a second, also followed by Europe as seen the last time, but now lately also North America. On the other hand, the service and modernization markets continue to be strong and growing. The other element of this worsening environment is the foreign exchange situation where, indeed, we have those foreign exchange headwinds increasing. But notwithstanding that, I'm pleased to report that we have an order intake recovery with a strong uptake in Q2, which then leads, as we'll see later in more detail, to an increase in Q2 of 6.7% in terms of total order intake for an overall stable half year report. Now moving on to the next set of improvements staying on the top line. And we also had a pleasing revenue growth, which was underpinned by a strong backlog execution across all regions and product lines. Moving from top line to bottom line, which was really one of the key mandates we've given ourselves as a commitment towards our investors. We had in half year a strong profitability uptake with an EBIT improvement year-on-year of CHF 199 million. And most importantly, this is not just a blip. This is a continued sustained trend over the last 4 quarters. This was driven by our operational measures. First and foremost, our supply chain stabilization combined with our pricing efforts, which altogether yielded these results. Finally, on cash flow, which, of course, are more important than ever nowadays. We are also reassured to see an improvement of CHF 227 million year-on-year driven by improving profits and net working capital reduced consumption. But let's maybe dive next into the market, which is one of the key evolutions. I will now move to Slide #5. Without going into all details, maybe I would like to refer to our market assessment presented in Q1 and just focus on what changes that are versus then. And the key difference here is the Americas, which are highlighted in red here for your convenience on this slide, where we can see, we now downgraded our outlook for the market development driven by North America for now our latest assessment of minus 5% to minus 10%. Unfortunately, still in declining phase. And I spoke on North America, where we already observed a decline in commercial and multifamily construction. It has to be said, though clearly, the declining trend is there, that this decline also has to be seen against the base effect because first half '22 was definitely a record period of what one could call the post-COVID revenge building. So clearly, the question is how will a second half look like? Indicators so far are not very positive, but the question nonetheless is worthwhile to be asked. But overall, the market displays a high overall uncertainty with perhaps 2 pockets of continued growth, which are Asia and Middle East, North Africa. It has to be said though that neither of them are sufficiently growing to offset the decline in China, Americas but also Europe. Maybe last point in Europe here is that the underlying demand is still very much there. I was myself in Germany 2 weeks ago, and you can see there the demand for new apartments, new dwellings is very strong. Unfortunately, today, because a set of circumstances, developers are not prepared yet to put up the money because of what they see as uncertain returns. So nonetheless, for now, that's where we are, and that is the overall NI market. Once more and what we must stress that for modernization, the market remains strong with robust demand -- service where we -- fueled by previous conversions and also higher demand and I would say, good pricing development. Growth continues across all regions. Moving on to the next slide, and I think it is due and fair that we spend some time on China. As we all know, China is the largest market for new installations. And when we spoke last time, we said that though there were signs of possible recovery, the timing and magnitude were uncertain for the second half. Well, today, I must say, we are still at the same place. And arguably, I would say, I recognize that we might have been more cautious than some of our competitors in Q1, I must say, not all pleased, but to say, but in fact, our predictions are becoming more and more reality looking now from the situation already now that we are in the second half. So what we observed? We observed that the construction starts, first of all, continue to decline for the fourth consecutive year. For the first half of '23, we talk about minus 24.3%, which is you can argue less prominent than the full drop of the year of minus 39.4% in '22, but nonetheless, it is again negative. Equally, now in terms of inventory, we see that inventory is finally decreasing a bit in all city tiers. But nonetheless, we're still staying at levels which are way above what I call the health line of 1 year. Tier 1 is barely around 12, 13 months. But Tier 2 plus, we're talking about 15 months and plus of housing inventory, which doesn't augur for a recovery anytime soon. Perhaps a little more data that is not on the slide, real estate investment for the year is down 7.9%. Floor space under construction is down 6.6%. Now one positive area is that the floor space completed, so completions, which, by the way, drove our revenue, we'll come to that. They are up 19%. That is good. However, if one compares that with the May year-to-date, which was 19.6%, one observes that there is a decline even in that positive trend. So where does that leave us? For the NI market in China, the 2023 outlook remains for us similar to last time where we said minus 10%, minus 15%. Responding to one question from one of you last time, I said it was probably closer to minus 10% than minus 15%. Today, I'm afraid my answer will be different. I think we're now getting closer to minus 15% rather than 10%. The next question, of course, would be what do we see for '24? Considering the speed at which things change nowadays, it's probably difficult to say. But nonetheless, I think it is fair and reasonable to say that we expect more decline in '24 in view of today's situation. Now staying on China on Slide 7. Again, NI, first of all, is declining. But it is once again the largest market in the world, accounting for 60% to 70% of worldwide volume. So that's a fact. So China cannot and will not be ignored. And let's not forget, even if you compare it to India, the second largest market is [indiscernible] bigger than India for about a similar population. And that's the world population needs to be kept in mind. And that's why I wanted to stress this idea about the potential of China going forward, notwithstanding today's decline. If you look on the left-hand side, we have this elevator intensity study that we used to present on a regular basis, showing that China on the base of the immense historic growth in the last 20 years. Now is barely if one measures at installed base of elevator, escalator per 1,000 inhabitants, at half the density level of, let's say, South Korea. So if one imagines a type of social development or urban development similar, you can say there's still the opportunity to at least double up in the future. And we know in China, cities continue to grow. And therefore, this drives again more potential going forward, both for new installations and existing installations. And speaking of existing installations, that also leads to modernization. And that's the chart on the right-hand side, where you see that the forecast for the CAGR of the modernization market for China still is about in the order of 20%. To give an idea, today, we have a population of elevators of an age between 12 and 15 years, which is typically the age of which a unit with the type of consumption of usage in China needs to be modernized. We talk about a full population of units of about 1.5 million. Now of course, not all of them are modernized. And then if you look at the chart here, you see an estimate for the modernization market in China of about 130,000 units for 2023. And if you take this 130,000 and you compare it to the new installation market for Europe and North America, it's about the same. So only the modernization market in China by itself is as big as a new installation market in Europe and North America. I just wanted to give those data points because that puts the idea of the market in China, its importance in 2 perspectives, while at the same time taking stock of the recent decline. I'm sure we're going to have more questions in the market. But for now, I'd like to move on to our performance because -- with some highlights before the CFO goes into more detail, which then takes us to Slide #9. So amidst those challenging markets, I'm pleased to say that we are indeed improving. And ironically, I'd like to say perhaps the efforts that we had to undertake where the market was still coming up, maybe that gives a bit of upper hand now as market decline because we started working on the hard measures already. We're definitely not where we want to be, but we are improving. Now again, the CFO will give more details. But here, the importance is that this improvement has been steady over the last 12 months. So we don't talk about a blip. We started first by delivering a trajectory correction then we sustained it. And now we are into the accelerating phase on the back of the momentum we have created. If you look at the left-hand side, showing our revenue and EBIT evolution, what I also wanted to stress here besides the figures themselves is that improvement in 2023 has been driven in spite of the increasing foreign exchange pressure. In Q1, to give an idea of '23, the top line pressure, top line negative impact of foreign exchange or the Swiss franc appreciation was CHF 100 million chopped up about our top line. And now in the second quarter, we talked about CHF 200 million for an aggregate of about CHF 300 million. So a doubling headwind between Q1 and Q2, which says something about the urgency to do what we are doing now in terms of improvements. Moving on perhaps to the question. So the question can be saying, how did we get here? What is it that brought us here and we'll continue to create this momentum? I'd like to move to Slide #10. And I'd like to highlight 2 elements: the pricing and supply chain stabilization. And you will remember how much we were open about the fact that we had lost ground in terms of pricing and how series of issues in our supply chain were causing our difficulties in 2022. So I'm pleased to say that those 2 are inputs to the overall performance, and both inputs have been improving. You can see on the left-hand side here how the pricing here focused on the modular platform on what we also call sometimes a commodity product have started to yield results with positive improvements started only in Q2, but also getting into positive territory as of Q3 '22 and continuing into Q2 '23. Another input was the supply chain. And you can see there, we were definitely embarrassed to display our on-time delivery performance due to our supply chain issues. And you can see that this KPI, which I consider a good proxy for the overall supply chain performance, is now back in check with on-time delivery as per our commitment getting close to 100% across the world. Now these were inputs. Looking at outputs and moving on to Page 11. If you do the things right in pricing, in supply chain, you then have a positive impact in terms of order intake margins. And you can see here on the left-hand side how our margins in terms of new order -- new installation order intake have been roughly doubling between half year last '21 and half year '23, where we are today. Now this order intake margin in turns drives backlog margin, which you see on the right-hand side of the chart, where you see the sequential improvement of our order backlog. And you can see that, again, that took probably 1 quarter more than we saw there in the pricing. But now as of quarter 4 '22, our order backlog margin has been improving and overall driving our overall bottom line performance. Now that by itself wouldn't be enough if we did not have, moving on to Page 12, another key input, i.e., fixing our product and in particular, our modular elevator platform, for which I'm pleased to say the relaunch is on track, driving complexity reduction, cost competitiveness and higher margins. And you see here just a summary chart. We have seen it already, apologies for that, but I thought it was important because it is really one of the key drivers here, how we now have 3 platforms that were previously independent now combining to a single one, which in turns drives many benefits. And besides the ones that are on the chart, we talked about a seamless customer experience in terms of buying, in terms of designing. Other maybe data point, we used to have 25 different car modules, now consolidated into 3 car modules, from 25 to 3, which in turn, we do the same on other components, drive a radical reduction in variants, which in turn drive efficiency, cost reductions and also quality and ultimately, better margins, better supply chain performance. Now moving on to Slide 13. I'd like to make one point clear. If there is any sense that we feel satisfied about where we are now, I'd like to dispel that sense. We are absolutely not in any position to feel satisfied. We -- there is no sense of accomplishment per se. Today's results, if anything, are just a springboard for the continued improvement that we are resolved to continue driving. And this improvement will be continue doing what you've been doing, but then doubling up on a number of things. And first and foremost, there's going to be efficiency. Efficiency which will be our biggest priority going forward. And why is that? Two elements. First of all, because if you look at benchmarking with some of our competitors, very honestly, we see we got room to go, and we view this as an opportunity. But also because inflation, even though now there are economists saying whether it's going to be reduced or not, but we believe it's going to be here to stay. So it is key to stay focused on this mantra we have had since 18 months, which is that pricing plus efficiency has to be bigger than inflation. And so now on this chart here, we just summarized maybe the main fronts where we believe efficiency needs to be driven faster than ever, starting, of course, with a new installation modernization business. And besides the product there, it's about process simplification. Of course, service and repairs were with a portfolio growth, and we need to continue driving density, scale effects and digital services, which are now coming very strongly into the business. The number three, of course, is procurement, where we knew we were a bit behind some of our competitors. And there with this new platform but also by streamlining supply metrics, we'll continue driving improvements. And let's not forget, back-office processes. And there really, the benchmarking exercise made us realize that the potential once more is substantial. And so we're working now on redesigning some of our processes, which will yield improvement in terms of efficiency and quality and customer service and also bottom line. So of course, I'm sure you see that, that to drive this efficiency will require some investments. And these investments will come in the second half of the year, where the CFO will probably mention that we will need some structure reduction cost all over the world in order to make sure that we stay on track with the momentum we've generated so far. So with that, I'll give the word to our CFO, Carla, please to take us into more detail -- into the details.

Thank you very much, Silvio. Good morning to everybody. It's a real pleasure and a privilege to present you the strong half year results. You heard it already from Silvio we gained momentum. And for me, it is clear that the quarter 2 performance now to set the measures that we have put in place are really becoming effective. Overall, we have been operating globally in a tough market environment. Maybe -- sorry, I'm on Page 15, yes. We have been operating in a tough market environment. Nevertheless, order intake was up in local currencies, sequentially recovering in the second quarter from a muted order intake development in the first quarter. New installation order intake margin continued its upward trajectory and almost doubled since the second half of '21, clearly reflecting our continued focus on margin-accretive projects. Now the good news is that all regions and product lines contributed to the solid year-on-year top line growth. So also, our service business continued to grow, supported by an increase of units of 5% and also continued execution of the pricing measures. Number of connected units reached almost 30% now of the total maintained portfolio. Moving now to the profitability. At the lower part of the chart, EBIT adjusted and EBIT both actually printed now significant year-on-year improvement in absolute and in margin terms. And you heard it already, the second quarter EBIT was supplemented by a one-off real estate gain of CHF 6 million and which is now at a level or comparable with a level of quarter 4 2019. Last but not least, cash flow from operating activities improved by more than 70%, and this was particularly driven by the higher operating profit and the lower net working capital requirements. And finally, the Swiss franc strengthened against almost all of our currencies, and that significantly impacted our results. It had an impact of approximately CHF 300 million on the top line, and it impacted our operating profit with CHF 35 million. So let's move now to the following slide, Slide 16, which shows the key figures for the second quarter. So second quarter '23 results, they really confirm the positive trajectory. And you see here that we realized the 15.2% year-on-year improvement in revenue and in local currencies and even higher growth in profits. Order intake rebounded after a slow first quarter and increased by 6.7% in local currency, admittedly, of course, supported by a favorable low prior year comparison. Revenue and operating profit were negatively impacted by ForEx, amounting to quite an impact for 7.3 percentage points and an 11.4 percentage points, respectively. Moving to the next slide, Slide 17. And then we see the first half key figures. And I can actually be very brief on that one because the key figures for the first half, they show basically a similar picture with substantial growth in all the line items. This allow me then to move to the next slide, which gives you a bit of insight into our strong balance sheet and particularly our strong cash position despite a bond repayment of CHF 400 million in June, just to be clear, so no renewal of the bond. Obviously, the improving interest rates led to also a stronger financial income. Financial income increased to approximately CHF 30 million for the first half year. Now referring to our investments. I'd like to inform you that Schindler Holding AG has been reducing its investment in Hyundai Elevator Limited Korea while it is the intention to remain a large shareholder with a significant stake there above 10% in the company, okay? Moving to Slide 19. That gives you a bit more insight in the order intake. And we said it already, we have been operating in a tough market environment that you see here the evolution of the order intake in the second quarter of '23, which is shown on the left-hand side of the slide. And the order intake for the second quarter reached CHF 3 billion, corresponding to a decrease of 0.5%. However, in local currencies, order intake increased by 6.7%. That was supported by a strong after-sales business and obviously also a favorable prior year comparison since the second quarter of '22 was heavily impacted by the lockdown in China. Organic growth reached CHF 183 million in the second quarter. Acquisitions added CHF 22 million, and that more than compensated the CHF 219 million negative foreign currency impact. Moving to the right-hand side of the slide, order intake for the first 6 months of '23 reached CHF 5.9 billion, corresponding to a decrease of 4.6% and an increase of 0.8% in local currencies. Organic growth was 0.3%. Acquisition contributed 0.5 percentage points while the FX had a negative effect of 5.4 percentage points to the growth. Moving to Slide 20, and Slide 20 provides you with an overview of the order intake by region and by product line comparing '23 with '22. Again, on the left-hand side, the comparison for the second quarter and on the right-hand side, the comparison for the first half. Order intake here represents all product lines for the new installation that you see, the modernization and the service. And I comment now on the 6-month development indicated on the right-hand side. So new installation, modernization, they had a slow start in the year but showed a significantly improving trend in the second quarter. New installations and modernization margins also continued to improve in all the regions. And the service business remained very robust throughout the first half year and continue to grow driven by the unit but also supported by pricing effects. To be complete, the order backlog decreased by 7.5% to CHF 9.5 billion. And in local currencies, the order backlog declined by 0.9%. And then if you consider then our lead times of 12 months combined with the improved new order intake margins, I believe that the backlog is a robust base for a continued solid improvement going forward. Moving to Slide 21 that gives you some insight into the revenue development. So the backlog execution remains very strong in the second quarter. And as a result, the revenue shown -- increased by 7.9% to CHF 2.9 billion for the second quarter, corresponding to an increase of 15.2% in local currencies. Obviously, here also our prior year comparison was supportive. Now all the regions continued on their growth path with Asia Pacific growing the most. And the new installation, modernization and service, they were up all double digits. Moving to the right-hand side of the slide, you see the revenue development for the first 6 months of '23. Revenue reached CHF 5.7 billion, equivalent to an increase of 7.1% and 12.6% in local currency. Also here, solid growth across all regions and product lines. Organic growth reached 12%. Acquisitions contributed 0.6%. And of course, you see the significant impact of the FX, a staggering negative impact of 5.5 percentage points to the growth. Then moving to the next slide and taking a bit of a deep dive into the development of the profitability. Starting with Slide 22. We mentioned it already, positive trajectory continued during the first half year. And you see here the nice evolution at the left-hand side of the slide and the effect it has on the EBIT adjusted and on the EBIT. So it's clear that our implemented measures yield results, and they are more than offsetting the declining effect of inflationary pressures. And of course, that is supported by the improved supply chain. Second quarter absolute EBIT was supplemented by a one-off real estate gain of CHF 6 million, but it was the highest since the fourth quarter of 2019. So moving to the following slide, where we have a comparison of the year-on-year EBIT adjusted and EBIT. And there you can see that actually, the uptake of the profitability is really supported or driven by the operational measures. Operational measures resulted year-on-year in CHF 175 million improvement. Foreign currency again had a negative effect of CHF 35 million on the EBIT. EBIT adjusted reached CHF 606 million, which is a year-on-year increase of 30% and 37.8% in local currencies. Overall, the margin increased by 190 basis points to 10.6%. EBIT, a similar uptake. It increased by 49.4% to CHF 602 million, which was supplemented by the land sale of our former factory in Suzhou, China and which resulted in a one-off gain of CHF 32 million in the first quarter. But in addition to that, we have -- we also incurred less expenses for Top Speed 23 and less restructuring costs compared to last year. So the EBIT margin reached 10.5%, and that represents an increase of 300 basis points. Maybe a short note on Top Speed program. That has been aligned now and really included in our newly established operating model. And we also plan and expect the initiatives launched under this program to be completed by year-end. Just for completeness reason, we achieved a net profit for the 6 months of the year of CHF 463 million, which is an equivalent of 56.4% and which is one of the highest operational net profit that were achieved in the history of the company. Referring now to the operating cash flow, Page 24. And you see here that the operating -- cash flow from operating activities increased to CHF 240 million in the second quarter and to CHF 521 million for the first 6 months of the year, so an equivalent of 74.2%. And that is really driven by the solid increase of the operating profit and to a lower degree, the lower net working capital requirements. So that brings us now to the outlook of '23, so considering the first year development of the top line and the profitability. And Silvio also alluded to it or referred to it. It's clear that we will continue to focus strongly on the disciplined execution of our strategic priorities going forward. And hence, we expect a positive EBIT-adjusted margin trajectory to continue. Based on that and taking into consideration the market developments, we lift our revenue outlook for '23 from low single-digit revenue growth in local currencies to a growth between 5% and 8% in local currencies. Please keep in mind, prior year comparison become much tougher in the second half. And when we reflect our net profit, net profit, we expect to reach between CHF 860 million and CHF 900 million, an increase between 31% and 37% compared to the '22 results. And before I finish and hand over to Silvio, I really would like to thank all colleagues around the world then because it is clear that they made an outstanding contribution to the solid revenue growth and the progressive uptake of profit. So a big thank you to all our colleagues over the world. And it has been really a pleasure, I must say, to join this organization almost a year ago. Silvio, Marco, I hand over to you.

Thank you, Carla. We are happy to take your questions now. [Operator Instructions] Operator, please, Avi.

[Operator Instructions] Our first question comes from the line of Klas Bergelind with Citi.

Klas at Citi. So the first one I had was the growth in orders. You're facing an easier comp than some of your peers in several regions. But orders are also improving quarter-on-quarter as well. And I'm curious to hear about the development perhaps month-on-month through the quarter, Silvio. You're doing better in China orders versus the market year-over-year, but easy comp there as well as you're underperforming last year? Or are you also taking share quarter-on-quarter? And then on modernization and in EMEA, there's a lot of repurposing of buildings, green efficiency upgrades, and you say that it is strong. So I'm wondering why you're not growing faster there in EMEA.

Thank you, Klas. Thank you for your questions. I think you show how well you know our industry. Clearly, it is true that as we also highlighted, our comp basis for last year is easier. But let me just turn it other way. Last year was really tough. We had 7 weeks lockdown in Shanghai with a factory. So yes, now -- so coming back this year is not easy in any case, I'd like to stress. So it's not easy. But yes, if you look at numbers, that is something we have to recognize. So Q1, as you saw was for us very slow because also those in the organization needed to be realigned and also when the supply chain was still on the line. So what we observed is a month-on-month improvement. This is important. And clearly June, the last month, showed a continued improvement, and now we are resolved to continue moving in that regard in China and across the world. I must also say very transparently that one of the, probably say, leadership challenges we had here was to make the organization understand that, I would say, profits equal growth. There was a moment when we refocused organization on what mattered that some people in sales, in particular, wondered, well, do you want profits or do you want sales? And that's -- it may sound basic, but that's the reality. And so there has been a lot of change management in explaining to our sales force that getting products at the right margin considering our premium provider position was what they had to drive. And yes, we have to change a few people. We have to make sure targets were aligned, and that is coming through now. Are we there where we want to be? Not yet. And so I foresee this continuing to be one of our main challenges going forward. The second question on modernization. Let me be very open. I'm not happy about we are in modernization. You're right, we should grow faster, not only in EMEA but also, I must say, in China where the opportunity is there. There are different situations there. In EMEA, it was in Europe or essentially, it was more of a question of having the supply chain ready. Now that it is, I think we can definitely push more on modernization. Where we have seen that in some of the markets, we probably not have been as performing as we used to. China, it's a different discussion. There, we really need to do better on the product. That's today a handicap but an opportunity going forward. And we are all driven to bring the product to the market. Part of our Top Speed 23 investment were focused on that, and that's the direction we're taking. Hopefully, that answers your question, Klas.

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

Just firstly, I was hoping you help us a little bit with some of the drivers on, obviously, what's been very encouraging margin development. And I think previously, you sort of helped us around things like raw materials and the modularity program, wage inflation, a little bit on productivity. And also, I think you mentioned sort of additional investments for the second half. So it'd be super helpful to -- some of those numbers more specifically. And I guess, secondly and much broader question is just around what you're seeing in China and the various policy measures you've seen so far, specifically on the property sector. Is the view now that you just need a stronger China macro and therefore, bigger, broader sort of macro-type stimulus that we've maybe seen historically rather than just more measures specifically on the property sector specifically? So I appreciate that's a broad one, but would be very interested in your view on that.

Thank you, Andrew. And maybe for the first question, if I understand it's about profit drivers and headwinds and tailwinds going forward. Carla, would you like to address that?

Yes, absolutely, Andrew, and thank you for the question. Of course, there are a couple of drivers that lead to the uptake that I presented. And for sure, the first one is the material cost. Material costs are coming down. So we take also there our fair share. But it's also fair to say that, of course, we have been disciplined in the past, and we remain disciplined when it comes to the pricing. So that is also having its positive effect. And then Silvio referred already to it, we are strongly focusing on the efficiency. So this is also coming in different fronts through, and that is also really contributing to the uptake of the profitability. Now in terms of labor inflation. Labor inflation is, of course, a headwind and it is a headwind that mainly came through in quarter 2. And there, of course, we will come to a full run rate in the second half of the year. So that -- but that has been, of course, that should not be a surprise. So that is one of the major, I would say, headwinds that will come our way, yes. But we, for sure, will continue to work on the efficiencies to offset part of that effect.

Thank you, Carla. Coming to your second question, Andrew, I was in China twice already this year. I was there in April, and then I was there about a month ago in different parts of the country. Your question is really the one that everyone would like to have an answer for. A lot has been done on the micro. However, one has to take stock of the fact it's not working. A lot of the private developers have not yet recovered. And the SOEs or the state-owned or only partially-owned developers stepped in initially to take a lot of the ongoing projects or taking on the new ones. However, what we observed even the liquidity crunch or even the overindebtedness is also touching them. So if anything, that situation is not really improving. We don't see any improvement further. The good news is that the underlying demand is there. However, people are very conscious. And I remember, in a city like Shanghai, a family to invest in a flat may have to invest as much as 20-plus years of income, and that is a huge risk. So the government also is careful to protect those. But in terms of creating new demand for new buildings, there is not -- I was surprised and frankly disappointed that there is not much more happening. Now what should happen? I don't see -- and again, I don't claim to be an expert here, there are much more -- much higher powers here, I don't see there is no signal at least of any major intervention at government level to restart the construction industry. That, of course, would be very helpful even if it wasn't the bazooka-type that we observed in '15, '16 or in 2008. However, at the moment, so the way I see this is that the digestion of the situation, possibly hopefully not too painful landing of all those companies that will have to fold and then going forward. Where a micro intervention would be helpful would be at the service level, where, in fact, there has been those pilots ongoing to allow for this data-driven service in China. These pilots have been going on for, I think, before COVID so it's now 3 years. But there is no result yet. If that was to be released, then I think you would have huge value-generating opportunity, efficiency and quality and safety happening in China. So that is 2 part to answering. In NI, I don't see anything coming short term, but I see maybe some opportunities on the service side. Sorry, I cannot say more.

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

I've got 2 actually. Firstly and then more, I guess, more directed at Carla. Firstly, I was wondering whether you could quantify the kind of incremental cost savings you expect from restructuring the Top Speed 23 program this year. It's just something that we've got some input for our EBIT bridge here. And then along the same lines also, I was wondering what the expected pricing impact as well as the raw material and components price impact on EBIT are likely to be according to your assessment in 2023. That's it for me.

Thank you, Martin. Carla?

Yes. Thank you, Martin, for the question. I'll start with your second question on the material savings. So yes, we definitely will have a substantial full year impact. And let's say, I mean, it's -- yes, it's somewhere between, I would say, between CHF 50 million and CHF 70 million we could easily have when it comes to the net savings for the full year. Referring to the incremental cost savings coming from the restructuring, you will appreciate that we are in the middle of the year, and we are working on a number of initiatives. So we're clearly not in a position to give you some insight into that one.

Okay. Got it. And anything on Top Speed 23 because my understanding is that you'll achieve further efficiencies there?

Yes. Yes, can you repeat your question there, please, Martin?