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Schindler Holding AG (SHLAF) CEO Thomas Oetterli on Q1 2020 Results – Earnings Call Transcript

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Schindler Holding AG (OTCPK:SHLAF) Q1 2020 Earnings Conference Call April 22, 2020 4:00 AM ET

Company Participants

Thomas Oetterli – CEO

Urs Scheidegger – CFO

Conference Call Participants

Lars Brorson – Barclays Bank

Andre Kukhnin – Crédit Suisse

James Moore – Redburn

Lucie Carrier – Morgan Stanley

Fabian Haecki – UBS Investment Bank

Martin Flueckiger – Kepler Cheuvreux

Daniela Costa – Goldman Sachs Group

Angelika Gruber – Tamedia

Operator

Ladies and gentlemen, welcome to the Schindler Conference Call on Q1 Results 2020. I am Myra, the Chorus Call operator. [Operator Instructions].

At this time, it’s my pleasure to hand over to Thomas Oetterli, Chief Executive Officer. Please go ahead, sir.

Thomas Oetterli

Thank you. Good morning, ladies and gentlemen, and welcome to our first quarter 2020 results conference call. My name is Thomas Oetterli. I’m the CEO of the Schindler Group, and I’m here together with Urs Scheidegger, our CFO, who will update you on the financials and provide an outlook for 2020.

I don’t need to tell you that we have experienced some extraordinary times over the last few weeks as a company, but also as individuals. Hence, I couldn’t be prouder of all the Schindler colleagues globally as they do the best they can on the given circumstances to serve our customers and continue to ensure the elevators and the escalators we install and service are kept in good working order. Our services are systemically important and it is vital that we can continue to deliver on our promise to customers and passengers. During these times, solidarity is imperative. We all must work together. First, to defeat and then to rebuild. Colleagues across the globe are fully engaged to do just that as they go above and beyond to help their communities fight back and stay resilient.

News reached me the other day of our colleagues in Indonesia. They have helped turn the athlete’s village of the 2018 Asian Games into an emergency hospital that will be able to treat as many as 22,000 COVID-19 patients. Meanwhile, our call center staff in Spain has opened its phone lines to anyone in need also for topics that go beyond elevator business. Additionally, there are initiatives throughout the world to collect cash donations and to donate personal protection equipment to the public. These are just a few examples of many more from across the Schindler family.

The world has changed dramatically in recent months, but high engagement and solidarity continue to make up the Schindler culture. This was also evidenced in the results of our recent employee engagement survey. We have launched a relief fund for employees to support individual hardship cases related to the COVID-19 pandemic. As an initial contribution, the executive committee and supervisory and strategy committee will waive 10% of their fixed salaries for 6 months starting in May 2020. Other senior leaders around the world can also participate. Each contribution will be matched by the company.

After this introductionary remarks, let me turn to Slide 2 now and focus on the first quarter results. Like many companies across the world, also Schindler has felt the impact of COVID-19 as this pandemic has become a truly global challenge. As countries implemented necessary quarantines and social distancing practices to contain the pandemic, the world has gone into a great lockdown. This has severely reduced overall economic and construction activities globally, significantly impacting the elevator and the escalator industry. Subsequently, we have seen delays and postponements, particularly in new installations and modernization as the absence of physical meetings has prevented the signing of contracts. Moreover, there has been a temporary shutdown of construction sites in many countries. Asia Pacific, particularly China, suffered first and the most. Since early March, other regions and countries have been following similar patterns.

That said, however, our service business has shown resilience, particularly since elevator and escalator service was declared as system critical service by most governments. This is a crisis like no other, and there is substantial uncertainty about its impact. What can we do? We will continue to focus on what we can influence.

Our key priorities are summarized on Slide 3. The safety and well-being of our employees, the family members of our customers and the passengers who use Schindler elevators and escalators throughout the world every day, continues to have our highest priority. And our crisis management efforts continue. We have established crisis management teams on corporate, regional and country level who are orchestrating actions to overcome the crisis with priorities set to our employees and customers, the supply chain and, of course, the liquidity. And I can say that these teams have done an impressive job. Meanwhile, the preparation of the company for the post COVID-19 pandemic era has started as some countries have planned to or have already started to loosen restrictions.

I would like to move to Slide 4, which provides an overview on the regional order intake development in the first quarter 2020. It reflects the situation I described at the beginning of my speech. Order intake in the new installations business and in modernizations declined in both Asia Pacific, particularly driven by China and the Americas. EMEA still showed positive development. While Asia Pacific was early in the cycle of the pandemic’s development and already started to show first signs of a recovery towards the end of the quarter, markets in the Americas and in EMEA only started to feel the impact from the COVID-19 pandemic from early mid-March. All countries followed similar patterns. Depending on severity and degrees of government measures to contain COVID-19 spread, resulting in complete lockdowns, closure of factories, delays in project awards or postponements and shutdown of construction sites.

Schindler production sites in China were temporarily closed in February. While factories in India have been closed since end of March and so far, have not been reopened. At the same time, the service business remained resilient and continued to grow across all the regions.

Let me pause here and hand over to Urs Scheidegger. He will talk to you how these developments have impacted our financial performance in the first quarter of 2020. Urs, over to you.

Urs Scheidegger

Thank you, Thomas. Good morning, ladies and gentlemen. I would like to draw your attention on Slide 6 with the key figures as of March 31, 2020. In the first quarter of 2020, the order intake decreased by 8.4% to CHF2.7 billion, corresponding to a decline of 3.2% in local currency. Order intake includes all product lines, new installation, modernization, service and repairs. The EMEA region reports pleasing growth, thanks to strong results in the new installation, the modernization and the service business, and this is partly compensating the COVID-19 impacted regions. Order intake in Asia Pacific, particularly in China and in the Americas region declined since service business growth could not compensate for slow performance in the new installation business.

Revenue amounted to CHF2.5 billion, which is equivalent to a decline of 5.2%. Negative foreign exchange translation effects amounted to CHF130 million, particularly due to the strong Swiss franc against the euro, the U.S. dollar, Brazilian reals, Chinese RMB and the Australian dollar. Supported by the resilient service business, revenue in local currency was stable. In the Asia Pacific region, revenue was below prior year levels but developed positively in the Americas and EMEA regions.

Operating profit was significantly impacted by special effects and decreased by 39.4% to CHF166 million. Previous year, CHF274 million. Restructuring cost of CHF51 million, previous year, CHF4 million were recognized for the closure of a production plant in Spain and efficiency initiatives in select countries. Foreign currency headwinds as well as additional cost for protective measures related to COVID-19 pandemic had further negative impact on EBIT. The decrease in local currency was 34.3%. The EBIT margin reached 6.8%; previous year, 10.6%. Before restructuring costs and expenses for BuildingMinds, operating profit reached CHF221 million versus CHF282 million, and EBIT margin was 9.0% versus 10.9% in previous year. The decline versus prior year is primarily due to less revenue and margins resulting from the temporary shutdown of production plants in several countries as well as the closure of new installation construction sites.

Results from financing and investing activities improved and losses on financial hedges in the first quarter of 2020 were much lower than in the previous year. Net profit totaled to CHF125 million, and cash flow from operating activities reached CHF323 million.

With this, I move to the outlook for the year 2020. COVID-19 pandemic has created a high level of uncertainty regarding economic development and their operational and financial consequences on the Schindler Group. Company has initiated measures to counterattack the negative impact as effectively as possible. Depending on the severity and duration of government measures worldwide to contain the COVID-19 pandemic spread, revenue growth is expected to be contained within 0% and minus 9 — 10% in local currency. Guidance for the 2020 net profit will be provided in the publication of half year results. Considering COVID-19 pandemic impact, foreign currency headwinds and higher restructuring cost, net profit for the year should be expected to come in below 2019 in the order of magnitude of 20%.

With this, I’m handing back to Thomas.

Thomas Oetterli

Thank you very much. So we could now start with the Q&A.

Question-and-Answer Session

Operator

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

Lars Brorson

Thomas and Urs, hope you’re both well and healthy. Thomas, I wanted to ask you, first off, on service pricing. You talk about service business facing increasing pricing pressures. Can you help me a little bit with where you see that geographically and by segment? In terms of segments, I think it would be helpful to understand a bit what you’re seeing between your sort of core maintenance contracts, your repairs business not covered by service contracts and your modernization business.

Thomas Oetterli

Lars, thank you for the question. Yes, we are all here in still healthy and good shape. So in the service business, we have mentioned that also in the — in our annual press conference. We have experienced in individual cases that certain customers were asking for rebates. And this usually is happening for those customers who are in the commercial sector. So hotels or retail business, these are, in fact, the two customer segments where the risk of such requests is the highest. It has been in the first quarter, only a couple of individual cases, starting in Asia.

And there were some individual cases already in the U.S. in March. This, of course, can further develop in the coming months, depending on the lengths of the lockdowns in the different countries. Key reason is, if you look on a hotel, occupancy rates in hotels are less than 10%. There is no income coming for the customers. So they are also trying to save costs on their side. And we have mentioned that we do have a very good experience from SARS, when we had the SARS pandemic in Southern China and Hong Kong. And there, we saw that if we support our customers in such a difficult time, we can create a lot of loyalty. But these are individual cases. We also have issued a policy internally how to deal with such requests. So we only have that in those customer segments, and we only consider that for large accounts where we have long-established very healthy relationships.

Lars Brorson

Can I ask a follow-up, Thomas, to that? How do you think about the duration of these rebates? Are we talking about a few weeks and then revert back to normal post lockdown or something longer than that? And maybe you can talk a little about — specifically about China as an example. Are you already seeing a reversion back to, should we say, a more normal pricing after the discounts you pushed through in February?

Thomas Oetterli

I think it depends really on the individual situation of the country, but also of the customers. I remember when we had SARS, in fact, it was very often coming slightly after the real lockdown because when you think about the hotel, it usually takes some time until travel, for example, is coming back, until people are traveling also for business reasons. So this can be a couple of months. But what we usually do, we do only a rebate for a certain period of time. And then we are reassessing the situation. If there is still severe impact on the customer side, we might be willing to provide support for another quarter. But you can expect that this can be 1 or 2 quarters depending on the country situation.

Lars Brorson

Secondly, can I ask to your 2020 revenue guidance within the context of that overall sales decline of 0% to 10%. As a follow-up to my earlier question, how do you think about services within that? Maybe you can give a little bit of color around both the maintenance part, but also the modernization part as you see it this year?

Thomas Oetterli

I think the main impact is coming from the project business. So the project business, where you have new installations or you have modernization projects, there are delays or postponements. In some countries, when you look in Europe, in some countries, construction sites are just shut down, depending on the restrictions of the government. We have seen that also in China, where for depending on the province, 1 to 2 months, there was a severe impact on the activities on construction sites. So the key impact on our top line is mainly coming from this project business, new installations and modernizations. There is also an impact in our service and repairs. Service, I think we have just discussed that there might be some temporary rebates being offered to customers. But also, if there is less activity in buildings and less usage in buildings, it could be that there are less repairs happening because customers maybe at the moment don’t want that you are entering a building and as the elevators are anyway not used so much, and you have maybe in a building 3 elevators or four elevators and you have the 1 elevator a breakdown. They say you don’t have to repair it now. Let’s do it maybe on a later stage when we have a higher occupancy again in an office building, for example.

Lars Brorson

I think your repairs business was flattish in 2008, 2009. Do you think it would track down sort of mid-single-digit this year in the base case?

Thomas Oetterli

I think it’s very early to make a forecast or a prognosis. Honestly, I do not dare really to say on — in detail what will happen all over the world. I think your assessment is quite right what happened due to the financial crisis. But I think this time, we have a little bit another type of a crisis where the magnitude is not yet fully predictable. But yes, of course, it also will have some impact on our repair business.

Lars Brorson

Can I ask a third and final question to Urs, please. I was quite impressed with the cash flow from operations, Urs, presumably despite a meaningful headwind from lower down payments in China in the new equipment business. Can you help us a little bit with the moving parts in Q1? And also your thoughts on 2020 as a whole?

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Urs Scheidegger

Thank you very much, Lars. So you have seen our cash flow was CHF323 million. Please be noted that like-for-like to 2019, you would have to add back the pension settlement, which we did in one of our European countries of CHF157 million. So like-for-like, we had a drop of about CHF100 million, mainly driven by the operational profit decline. We are, as you know, working on our net working capital initiative already since last year. This was timely to further optimize commercial terms and have restricted controls from quote to cash. And for the first quarter, I must say the situation is different country-by-country in terms of cash collections, but it was still doing quite well around the world. This may decline now a bit further, depending on the lockdowns in the countries.

Operator

The next question is from Andre Kukhnin from Crédit Suisse.

Andre Kukhnin

I also hope you’re very well. I wanted to come back to aftermarket. And if we take the rebates issue aside, and if we think about standard maintenance, do you expect to be able to continue kind of bill and recognize revenue there in situations where there are lockdowns and maybe where you can’t go out and visit maybe in that particular week? And kind of related to that, how has the experience been so far in countries like Europe and Spain on that regard?

Thomas Oetterli

Andre, very good question. At the end, in most of the countries, we were able, not only ourselves, but the industry was able to declare that maintaining elevators and escalators is a system-critical service. So it has been excluded in most of the countries from restrictions. There are some exceptions at the moment. We do have the exception in India. We also have exceptions in Peru. There also have been exceptions in New Zealand and temporarily also in some other countries. But most of the time, we have been able to perform service. I mean, those countries where you really have a lockdown, we could do in minimum entrustments. When we have entrusted people, we were able to go out and to quickly elevator back into operation.

And this is also our key strategic goal. We want to keep the elevators running because otherwise, also from a social point of view, cities are getting into real troubles. If you have buildings for typically people and you cannot anymore go for your grocery or pick up at the ground floor. It’s very important that those elevators are running. And then you have elevators which are really system critical, like in hospitals, for example. So we have tried to push as much as possible resources into our service business to maintain the elevators, also to do preventive repairs in order to keep the reliability of the elevators as high as possible. We are measuring our so-called fulfillment rate, which means planned service and actually performed service as high as possible, and we are measuring that every single day worldwide.

Andre Kukhnin

Very helpful. And just on that, and particularly on the U.S. side, has that been the case across the whole of U.S., all states that the elevator service has been classified as systems critical?

Thomas Oetterli

In the U.S., what we had established was we have like, globally, we have established a classification of severity of lockdown. So we started with white. You have no impact until where you have complete travel bans, no work is possible. And in the U.S., it is the case that it depends from state to state. So we do have a norm in some states where there is a complete lockdown. But in most of the cases, it impacts our new installation business, and not our service business. So for example, in New York, at the moment, you cannot work on the construction site or very, very limited, but we can still do basic service. And most — so most of the states in the U.S. this still works. But I have to admit also the new equipment business now is more and more impacted there. The good thing is that our factory, we do have a supply chain entity in the U.S., in Pennsylvania, and we were able to achieve an agreement with the government that this is also system critical. So we have full operation of our factory, which delivers new equipment but also modernization packages and also repair kits for our service business.

Andre Kukhnin

Got it. And just to close on that. So if I, again, take rebates aside and look at standard regular maintenance, it sounds like largely, it should be up with the number of units, even in 2020?

Thomas Oetterli

This is correct. This is correct. This should be possible because we still have conversions of new equipment into our service portfolio. And you might have, let’s say, a stop for 1 or 2 months, depending on your — whether you can close your jobs in the new installation business, but then you can hand it over to your service portfolio. However, what you have to consider is, and I have — I don’t know what will happen now in the next coming months. Of course, we have to observe very, very deeply how our customers are acting and behaving. And we probably can also expect that the one or the other customer might be in financial troubles and maybe has to shut down or to close the one or the other building. And this would have an impact on our service business in terms of feelings and value.

Andre Kukhnin

And I just also wanted to ask about China and Asia Pac performance versus your original or kind of early expectations of CHF200 million to CHF400 million top line impact. How has that developed?

Thomas Oetterli

Well, I mean, when you look on China, I mean, even if you look on the figures of the Bureau of Statistics, it’s quite clear that the Q1 has been tremendously impacted in terms of floor space started. Floor space sold, it went down more than 25% quarter 1, 2020 to quarter 1, 2019. Also, real estate investments went down not so much because interesting, enough prices went a little bit up. But what is good to see is that the biggest negative impact was in February. And in March, it already has started to soften a little bit. And in April, I think it’s already on a quite reasonable level. And so the key impact, of course, in terms of order intake, and in terms of operating revenue was mainly coming from China, but also some other countries in Asia Pacific has been impacted so far, like Indonesia, Malaysia, Vietnam, also partially Hong Kong. So — but I think we come closer to an end of the negative impact in these areas. And then it’s like traveling, the pandemic is traveling and have now traveled to Europe and is traveling to the U.S. and to Americas, and we will have some similar impact also now in the other areas.

Andre Kukhnin

And my last question is, the reason I ask this is that when I look at your EBIT development in Q1 compared to prior year and take FX out and some strategic investment that you guided to already, then I think we’re down about CHF40 million. And I think the initial kind of expectations for how much of the impact China will have in Q1 was kind of starting with CHF50 million. So apart from service kind of growing in the meanwhile globally, I just wondered if it’s kind of China had not as much as revenue impact as fierce at the time? Or did you handle it better with less operational gearing?

Thomas Oetterli

It’s probably both. I hope we have handled it very well. But we also have seen that the market was coming back. More or less according to our expectation, maybe even slightly better towards the end of March, I can say.

Operator

The next question is from James Moore from Redburn.

James Moore

I hope you can hear me. Thomas, Urs, perhaps you are healthy. It’s James from Redburn. Given the changing dynamics in all the different regions, could you help us, I’m going to ask this directly, with how you see organic sales growth and your adjusted EBIT margin developing in the second quarter compared with the flat demand in the minus 190 bps you saw in the first quarter?

Thomas Oetterli

Well, I can repeat, of course, the first quarter had the major impact in Asia Pacific and predominantly, it was happening in China, and we have just stated that somehow it is going back there. For now, I mean, everybody of us is experiencing that, that we do have now in April, May, we will have impacts here in Europe. I think in the U.S., it has not yet reached the peak. It’s still a little bit unpredictable how it will further develop. So we would expect that also our second quarter now maybe not so much by China, but by the western world, let’s call it, will be impacted. But at the end, to do a quarterly guidance is very difficult, I have to admit, at the moment. I mean, we — that was the reason why we did a yearly guidance which we keep. It is quite meaningful, but the impact is now shifting more in Q2 from Asia Pacific to Europe and North America, especially.

James Moore

I thought that might be the answer. Maybe I could just try a different way. Are you able to help us with the exit rate, maybe the last week or the last 2 weeks for organic sales growth in Europe and the U.S.? I was particularly surprised with Europe orders and sales developing positively. But I wondered within the quarter whether Europe changed a lot. And whether you could give us some color as to whether they’re down low single digits in the last couple of weeks of March or down 30%? Just trying to get a flavor for the exit rate.

Thomas Oetterli

Well, it depends extremely on the country, I have to say. And I fully understand that, of course, you have a high appetite to have all type of granularity. I fully understand this. Maybe to say that Central Europe still was quite strong. So in Germany, Switzerland, in that area, it was quite good, I have to say. You did not see so much of the impact, whereas other companies had a huge impact. So you can imagine that Italy was struggling a lot. We also have our marine business, for example, managed out of Italy, where you have all the cruise ships. And you can imagine how difficult it is now to get an order intake in cruise ships at the moment. Also in Spain and France, it was more difficult. But then in other countries, there was not so much of an impact in March because the real coronavirus impact in Europe came only in March, and so a lot of jobs are very close to finish or to sign, and we were able to do that. This will have some impact in quarter 2, yes. I think this might be possible. But what we also were focusing was a lot on big projects because big projects have a long-term horizon. And we have been quite successful in securing the one or the other large project all over the world, and this is one of our key focus areas also in the next quarters to come.

James Moore

Very helpful.

Thomas Oetterli

Maybe in the U.S., we still see there are some large projects in the market. There will be some impact on the volume business, yes, this we can expect. But as I said before, it’s very difficult to predict at the moment how the U.S. economy will really develop.

James Moore

Yes, Thomas, and just finally, if I could, your — if I strip out the currency impact, I think your organic adjusted EBIT fell CHF49 million, and your sales fell CHF29 million. So that’s a drop-through of 170%. And I understand that we’ve had supply chain issues, and I understand that variable costs in the very short-term are fixed. I’m just trying to think about how the relationship between demand and profit might behave in the coming quarter? And how quickly you think some of these supply chain and cost base issues can flex more in line with the demand picture?

Thomas Oetterli

So maybe on — it’s true, we had some supply changes in China because the new installation business and everything has been shut down for a couple of weeks. So there was a demand-side and supply side, which was being raised, you could almost say. And today, we have a similar picture in India, because also in India, everything has been shut down. So you have a similar pattern. The whole demand side is down, and also the supply chain — the supply side is down. In Europe and in the U.S., it’s a little bit different. It’s mainly driven by demand. It’s not driven by supply. We have achieved in Brazil, in the U.S. but also in Europe, we have achieved that we were able all the time to keep our factories in operation. But you do have a demand issue if construction sites are closed down. Then even if you can produce, you cannot deliver because also logistics was impacted. I think that the demand side within Q2 will come back. But it’s very difficult to say when exactly this will be the case. But we are hoping that if there is not a second wave coming up, yes, we are hoping that within the second half of Q2 demand will pick up again for deliveries in the second quarter — in the second half of the second quarter.

James Moore

And just to follow up on that. I mean if we look at the organic profit decline, CHF50 million, is the bigger impact supply chain? Or is the bigger impact demand?

Thomas Oetterli

It’s demand, it’s demand, it’s demand treatment.

James Moore

And given that maintenance is high margin and up, and equipment is lower margin and down, I’m just trying to understand — and the overall revenue is relatively flat on an organic basis. I’m just trying to understand that a bit better.

Thomas Oetterli

Well, in this — now I understand. You do have, of course, less. You have a more decrease of your new installation business operating revenue with the margin, but you are still also sitting on your fixed cost. So it’s not your EBIT margin. It’s, in fact, your gross margin. And the gross margin, we mentioned that on our annual press conference, the gross margin is something like maybe 20% to 25%. But on top of that, we also had onetime investments in the second quarter to buy all these personal protection equipment. This was also impacting our results. And of course, we have this less operating revenue with the respective margin. And so it was mainly driven by our project business with the respective margin plus onetime costs we had in the first quarter, and we also will have some of it in the second quarter.

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Urs Scheidegger

And maybe to add, it will not change the results since we are losing operating revenue and related contributions particularly in China and towards Asia in quarter 1. Those volume is coming with a good new installation margins. And therefore, you should not assume that we have a better profitability because we lose in high volume.

Operator

[Operator Instructions]. The next question is from Lucie Carrier from Morgan Stanley.

Lucie Carrier

I have actually a couple of follow-ups. The first one is on the maintenance business. We’ve spoken a lot between the contracted maintenance and the repairs call out. Can you maybe help us to understand how much was in your maintenance revenue? How much is actually really contracted? And how much is actually repairs and call out?

Thomas Oetterli

We usually do not make that, let’s say, deep-dive separation between normal contractual maintenance business and related repairs. We all consider everything together in one big pot.

Lucie Carrier

But considering you are saying you could see some disruption around the repair and call out, again, just to have a bit of a sense how much of the revenue base could be potentially under pressure.

Thomas Oetterli

Well, we believe still that our — we have said that before, we believe that our service business or service and repairs will also grow in 2020. In local currencies, of course, we do not see that we will have negative growth in that area.

Lucie Carrier

Okay. My second question maybe was just on extent some sort of pull off on what James was asking earlier on the profitability, which is, I guess, the biggest impact you had in the first quarter has been on APAC and China, specifically, where overall, the share of your maintenance business is lower than the average of the group business. And historically, and maybe this is incorrect, but historically, the way you view that maintenance and service margins were higher than OE. So can you maybe explain to us how we should think about the margin dynamic into the second and the third quarter, if we are seeing maybe a bit more pressure in EMEA and North America, where your share of service tends to be a bit higher than your OE business?

Thomas Oetterli

I think your assessment of China is spot on. It is clear that we had mainly the impact on our new installation business. This is correct. So there is a higher share of new installation business in Asia and, of course, especially in China, than in the other regions, if you look on the total operating revenue. And you have a higher share of service and repair in the western world, so in Europe and in the Americas. This is correct.

But what you should not forget is that there is a third element in our business mix, and this is modernization. So we do have a bigger share of modernization in Europe and in the Americas. And of course, this piece is a little bit more under pressure because it is more connected to, ah, shall I really do it now? Do I have to do it at the moment? Or maybe I can postpone it by a couple of weeks or a couple of months. So we don’t have a similar impact like in Asia on the new equipment business. We have a little bit more impact on the modernization business. But there is probably a little bit less impact — there is a little bit less impact in the new installation business because the share is less and maybe a little bit more impact on the modernization business. And that’s what we can expect in Q2. We believe still what we have said as our guidance, we stay to that. Overall for the total year, 0 to minus 10%. This is something we believe is the right guidance at the moment.

Lucie Carrier

And when we think about — just as a follow-up, when we think about the relative profitability by region, would you say that the service margin in China or the modernization margin in China are at the same level at EMEA or Americas? Or they are at lower profitability levels?

Thomas Oetterli

So the modernization business is still a small business in China, but it’s fast growing, and I think it has great opportunities for the future. But at the moment, this is not such — has not yet such a big impact on the overall EBIT in China. In terms of service, we do have a decent margin in service in China. Very good margins overall, I would say, in general, in Asia Pacific and not so much away from our average service margin behind.

Lucie Carrier

Just maybe my last question around trying to have maybe a bit more quantification around the numbers. You said APAC and China were down significantly in the first quarter, EMEA and Americas, were — are you able to provide at least some ranges around kind of this decline or this growth level, so we have a sense of what is kind of the comp effect sequentially, but also how much of a disruption can impact the top line? Because, I guess, probably if I look at consensus and based on the comments you had made beginning of March, there were maybe an expectation that the impact in China and Asia Pacific would be a bit bigger or would impact more your top line. So just to try to have a sense, when we think about 1 month loss in a quarter, how it impact you basically.

Thomas Oetterli

I’m not fully sure I have understood. But you can say in terms of top line, the major impact in Q1 is coming from Asia Pacific. And so we do not expect that this will continue over the next quarters. There will be still an impact in Q2, yes. But the major impact in Q1 was coming from Asia Pacific. So this, you can almost tick off and say okay, was the APAC impact. And now in Q2, we will have more an impact in Europe and in the Americas, and we have given a guidance up to how much this could be overall. So — and then I think in Q3, Q4, we believe that we have to come back to a more normal level again. So you can expect that in Q2, the gross impact in operating revenue will mainly be in Europe — the negative gross impact will mainly be in Europe and in the Americas. But there should not be so much anymore in Asia Pacific.

Lucie Carrier

So maybe to ask a slightly different way. Are you able to give us any range to quantify how much APAC and China were down in first quarter, numerically? And how much EMEA and America as well, as a range?

Thomas Oetterli

This detail we would not like to provide.

Lucie Carrier

Excuse me?

Thomas Oetterli

This detail we would not like to provide. Otherwise, maybe you also contact afterwards Marco Knuchel from Investors Relations.

Operator

The next question is from Fabian Haecki from UBS.

Fabian Haecki

First, on the Chinese market. Some local Chinese competitors reported sales decline of 30% in Q1. Do you see industry normal proportionally? And do you see the Chinese market now with the COVID crisis is further consolidated?

Thomas Oetterli

I think there was — there is a different — of course, there is — there are different impacts depending on the players in the market. We do have a very conservative business model actually in there. So we usually only record order intake when we have received the down payment. Maybe some other companies are behaving differently, especially Chinese local competitors. Sometimes already book when they have an award. And then if the award does not materialize, and they have to make a negative booking. Some others maybe do not always book immediately or retake. If the books are full for the last year, then they take something into the new year. So it’s difficult really to assess what was in the books of other companies.

For us, I can say we are focusing a lot on — in the past, historically, we are very, very strong in public transport. We have a very good reputation in large projects. And so I think we had — of course, we also had an impact because we think, okay, there is their signatures. It was very difficult to get signatures from government officials when you have a public transport job. It was just not possible to do, even if it has been awarded. I think overall, we were able to be — to grow faster than the market. I think this we can say. But I have to admit Q1 was probably — it’s very difficult to really assess. I think I’m not sure that a 3 months look really makes sense at the moment. Maybe with the half year results, we all will have, let’s say, a better assessment about the performance towards the market.

But could that be a consolidation, second part? Yes. If you think that a lot of the local companies anyway had already last year the decline of their share in the market and the overall profitability of the local competitors were plus/minus 0, I can imagine that there has been some financial pressure on them, I’m pretty sure, which then leads maybe to ourselves. Maybe that’s one of the questions nobody wants to ask this time. But we do have a very strong balance sheet. We do have a very strong liquidity. And what has been blamed in the past, probably now gives some claps on shoulder. We are very strong, and we are also able to fight in a more challenging market. And this could bring us some opportunities in our position for the future because we don’t have a liquidity issue as we always are very, very careful and very conservative in maintaining a certain liquidity level.

Fabian Haecki

Then my second question would also be in China. Some construction companies are reporting or seeing quite a swift recovery in China, pretty optimistic tone. You also said the worst is over. You see a recovery, but your tone is a bit more cautious. Can you share a bit with us, have you been positively surprised by its recovery? Or how do we describe this recovery?

Thomas Oetterli

Well, the question is, first of all, what is the recovery. And there is a lot of discussions. Are we coming back to the normal level where we have been before the COVID-19 crisis? That’s a big question. And we do have some confidence that we come back to a similar level where we have been before. We said that our assessment was that the overall market without COVID would not grow and would be more or less flattish. So — and we believe there is a good chance that the market will come back to the levels we have been before the corona crisis. Now the big question will be, do we recover what we have lost in 1 or 2 months, not only from ourselves, but also from a market perspective? And we do believe that there is like a shift of everything what was in the pipeline, everything is shifted by 1 or 2 months. So it will not gain back what we lost, but it will go back to a level we have been.

Fabian Haecki

What you say is this is just viable for China or also for Europe and Americas, going back to old level?

Thomas Oetterli

I have to admit, it’s too early to make such an assessment. It’s really a little bit into the crystal ball. I — a lot will depend how the overall economic situation will be. And if you look on all the economic experts, half of them say, we are in the deepest crisis ever. And the others say, we are in a new shape. So very terrible this year, but it all comes back next year. I think we have further to observe how these restrictions will be lifted in the next coming weeks in the different countries. And I hope that we can make a better forecast with our half year results.

Fabian Haecki

I fully understand. Just the last one on your financial results, which was better in Q1. For your 20% lower net profit guidance, what should we model as a financial result, kind of stable or better than last year? Can you give here maybe an indication?

Urs Scheidegger

Thank you for that question, Fabian. So I mean, you have seen Q1 was benefiting from the very strong Swiss franc and we were booking FX hedge gains. Looking forward, we had finance results and investing results of CHF57 million negative full year ’19. I expect it will be better now this year with the continued strong Swiss franc. But you should not expect that the very high FX gains will continue like this. So you would rather should take into account some quarterly negative results, maybe rather similar to last year going forward.

Operator

The next question is from Martin Flueckiger from Kepler Cheuvreux.

Martin Flueckiger

I’ve got three, and I’ll go one at a time. Just coming back to your explanations about the differences in development between services, installation and modernization, I was just wondering, particularly with the focus on new installation and modernization, what are the similarities and what are the differences in how the government measures impact the two businesses in the field? That would be my first question.

Thomas Oetterli

Okay. So new installation and modernization do have — let’s say, an impact from the government, if the government says lockdown of construction sites, this can be for both businesses. But it’s mainly in the new installation business, even more severe than in the modernization business. In the modernization, you are in a building. So sometimes, there are exceptions that within the building, you can still work, but you cannot work on the construction sites. But the modernization business is more driven by whether it grows or not, it’s more driven by demand, whereas new installation is more driven by the government restrictions. Because if our customers are in an uncertain time because they maybe have to lay off people, maybe they do not have people or no income, you can postpone a modernization. Once you have started really with the new installation construction site, usually, you want to finish it because you also want to sell or to rent out and you want to get income. The modernization usually does not generate additional income. It only generates on first side additional cost.

So the modernization business is more driven by customer sentiments, whereas the new installation business, the constructions are more driven by government restrictions. That’s a key difference. And in the service business, I think, as we mentioned before, we have performed service almost everywhere all the time because we also believe this is an essential contribution from us to the functioning of the cities. And only a few countries have really generated or implied a lockdown. However, if you are in the shopping mall at the moment or if you have a hotel, you do not have, at the moment, so much need of an elevator, I have to say. Does that answer your question?

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Martin Flueckiger

Yes. Perfect. My second question would be on national economic stimulus programs that may already starting to surface in a number of countries. I was just wondering what kind of new infrastructure projects are you seeing based on these new economic stimulus programs.

Thomas Oetterli

Well, I think there is not a change of what type of infrastructure projects you have. At the end, it’s all about public transport. And of course, public transport includes railway — new railway stations or expansion of railway stations, metro lines and also airports. At the moment, of course, you can ask yourself, well, do you really want to expand an airport, which all the airports we have at the moment are somehow not operational. But I think the government is — the different governments are thinking long term. It’s quick cash they can invest because they also have possibilities to speed up all the approvals. And there you have seen that we have been pretty successful also with one big job we were able to secure. The Melbourne metro, a very big job, the biggest, in fact, public transport job ever in Australia. And we believe this will continue, and we see that these pipelines of such governmental financed public transport jobs all over the world, by the way, in Europe, in Asia, but also in the U.S.

Martin Flueckiger

Okay. Great. But I was just wondering, do you see a step-up in programs as a result of the COVID-19 pandemic?

Thomas Oetterli

Not yet, not yet.

Martin Flueckiger

Okay. Great. And then my final question would be on the composition of your organic growth rate, which was pretty much flat here. So I was just wondering, for the group overall, without going into specific details by business, but for the group overall, was your pricing still positive, flat or negative in Q1? And what do you expect for the full year?

Thomas Oetterli

You mean in order intake or in operating revenue?

Martin Flueckiger

Sorry, in operating revenue, I’m sorry.

Thomas Oetterli

Okay. So in operating revenue, of course, we have a positive pricing impact in our service and repair business. We did pass that. We also had some organic growth. So in fact, our service and repair business was developing positive, clearly. And our new equipment business was developing negative so we had a negative growth in new equipment business, mainly. Now in terms of pricing of new equipment, if you talk about operating revenue, these are, of course, jobs which have been sold 1 or 2 or sometimes even 3 years ago. So actual pricing has not really an impact on our operating revenue. This is more an impact on order intake. And there we see some pricing pressure, especially in China, we have seen, after everybody came back to the market, somehow, everybody wants to catch up with the gap they have generated in 1 to 2 months. So at the moment, pricing pressure is quite high in the new equipment business in China.

Martin Flueckiger

Okay. That’s great. But just to follow up to clarify, I’m sorry, overall, as a ballpark number, then revenue — operating revenue growth, organic growth and new order intake growth across the group, is it positive or negative or flat?

Thomas Oetterli

You mean now towards Q2 and…

Martin Flueckiger

Just Q1, what you saw in terms of overall pricing? I’m trying to do an EBIT bridge here.

Thomas Oetterli

Pricing was slightly positive in — so impact was definitely positive in service and repair, and it was probably more flattish in the new equipment business.

Martin Flueckiger

Okay. That’s operating revenue, right?

Thomas Oetterli

Yes. And similar, when you look on order intake, I would say, it is a similar picture. Although in China, it was slightly negative, we can say that in some other areas, we were able to compensate.

Operator

The next question is from Daniela Costa from Goldman Sachs. Ms. Costa, we cannot hear you.

Daniela Costa

Can you hear me now?

Thomas Oetterli

Yes.

Daniela Costa

I have three questions as well. Sorry if I’m levering on some of the earlier points, but some points, the line was not very clear. But I just wanted to go back to your sales growth guidance of the 0 to minus 10. If I heard correctly, so you’re flat in 1Q. In 2Q, you see some impacts. But from the second half of 2Q, I think I’ve heard you saying that you would expect demand to start coming back and more normal levels in 3Q, 4Q. So is it fair to say that this 0 to minus 10 is just overly cautious and you’re more towards the lower parts of that? Or how shall we make — how shall we tie up all these comments with the 0 to minus 10? That’s question number one.

I will ask question two, which is somewhat related, but I think most of those comments were about deliveries. But what about tendering? I imagine tendering at least or sort of orders for OE modernization are coming down significantly. So can we still be back at more normal levels in 3Q, 4Q despite that? Or what shall we look into that for 2021?

And then the third one is then related to revenue. So I’ll pause here, and I’ll ask the third one after you comment on those.

Thomas Oetterli

Okay. So I think our guidance from 0 to minus 10 for the total year is based on different type of scenarios. So of course, everybody at the moment is working on different scenarios where we say, okay, what happens if government restrictions last for this time of period, for this type of business, country by country. So we have — and then we have applied certain probabilities, but this is our assessment. I mean you can expect that we also do our assessment, the best guess, I would say. And so we came to — looking on the different scenarios, this gives you quite a wide range. And I do not believe that at the moment, we don’t want to change this, I admit, a little bit wide range, but it’s also extremely unpredictable. We have to expect that also in Q2, as we have said, the pandemic has not traveled to Europe and to the Americas. We will now have an impact on our order retake and operating revenue in Europe and especially also North America and now also happening in Brazil. But then you have less in Asia Pacific. So this can have some substantial impact also in Q2 in our operating revenue. But the same, of course, as well in our order intake.

Now coming back to the second part, can we expect that in the second half, also a modernization business comes back to normal? This will depend a lot on the economical situation in the countries and the economical situation of our customers. If we come back quite quick, then I think we also can expect that modernization order intake comes back to normal levels. If this is not the case, then we would have to expect pressure on our modernization sales, and they would then probably not grow, but maybe even have a slight decline.

Daniela Costa

Okay. And my final question is regarding — I think when we met you in March when you were over at least in London, you’ve commented on obviously some of the margin headwinds we have in 1Q, 2Q, that drives margins down year-on-year, but towards the back end of the year, maybe getting back to some stabilization and getting closer to what the levels were last year where we were starting to see some stabilization on the drops year-on-year on the back end of last year. Has that — how your view changed versus then? Are we still sort of expecting that towards the end of Q4, we will have on the midpoint of your guidance, maybe to just use that as an anchor point, would we be back at sort of similar levels to what we — of margins to what we have last year? Or that is now out of the picture?

Thomas Oetterli

I think this is what we have said early this year that we have all the operational measures we have in place, and we are also executing them. So there is no reason why we should not be able to compensate some headwinds we have with wage inflation, with the material price developments, which anyway, we have to see how they develop and have unique times when you look on old processes. So it’s quite unpredictable at the moment. But there is nothing which speaks again that we will deliver according to our operational promise. This is correct.

There are two factors which are uncertain. One is the demand side, whether we come back to the levels we just have discussed now in the previous discussions, whether the demand side and operating revenue really is coming back to a reasonable level. And the second topic is FX. The FX, of course, has a huge impact on our Swiss franc figures and also had in Q1 an impact on margin. So we lost about 20 basis points due to the FX. But if you take that FX element out, and let’s assume we are somehow back to a normal revenue level, then you can expect that we are delivering an operational performance similar where we have been before the crisis. Correct.

Operator

The next question is from Angelika Gruber from Tamedia.

Angelika Gruber

I know Schindler is a global company, but in terms of sourcing of components on your supply chain, do you see a trend of de-globalization because of the corona crisis? I think if I’m correct, you mentioned at your annual press conference that the whole elevator industry was dependent on a special component coming from China, which you could not get for a while. So I was wondering whether you changed that and whether it’s even possible to do so.

Thomas Oetterli

Thank you for that question. Yes. Sourcing, of course, is a big, big topic. I have to admit, if I could have known what happened, then we probably would have managed even in a better way the sourcing. But it has, in fact, done a lot of topics in the supply chain. We already started before we had the crisis, but of course, we have to speed up some of those activities now also during the crisis.

Now if you look on sourcing, there are — or on the supply chain, there are two different elements. One is where are your supplies based and the suppliers of your subcomponents and where are your factories. Now we have the advantage that in all the big markets we have, our factories who are supplying dominantly the local markets. So we have a manufacturing or supply chain in China. We do have one in India. We have one in Europe, one in North America, one in Brazil. This gives us already a certain leverage. So if in a country like India, the demand is down, it is not such a big impact if also the supply chain is down. So that’s good news.

And then you have the supplier side, where we also work a lot on different optics. We have worked on dual sourcing. So we drive through all the components to have a second source. This is not everywhere exactly the case. We have a limited number of suppliers, which are single source. And there, of course, when you — if they fall out, then you really — you have an issue.

So what have we done? We have immediately, first of all, we have increased our own stock, but we also asked them to increase their stock. So they are producing in advance. And in Europe, we have the advantage from the learnings out of China, and we have acted very fast, so we were building up safety stock. And although one of your suppliers in Northern Italy or in France or in other areas have for a short period of time, maybe a couple of days or a week or even two weeks, could not supply, thanks to the safety stock, we always were able to operate. So this was really a big, big effort by the team, and I think they have done a fantastic job.

The third element is the subsuppliers. And there, of course, we were impacted by the effect that the subcomponent, 70%, is coming out of China and 100 kilometers around. And we had to feel if there would have been a longer lockdown in China, that is also would impact our supply chain in Europe or in America. This has not been the case. We were able to mitigate that, and at all times, we were able to supply.

Now looking forward, of course, we are rethinking our supplier structure. We don’t rethink our supply chain structure with the factories. But we are now working on plans where we do have single source to have now also a second source. And last but not least, the beauty of our ongoing modularity program is, of course, that we do have similar or the same component of use in different supply chain entities. This will help us in the future. If in one site, we would have a lockdown, we could produce on another job site. And on top of that, with our project of the digital twin, if we introduce a new component as we have digitally stored all this data, we could ramp up a new manufacturing of such a component somewhere else in the world very, very quickly in the future.

So these are all long-term initiatives. We have mentioned that many times. Also in difficult times, we don’t deviate from our strategic direction. We do those investments into strategic initiatives because we believe and now even more that it keeps us in front of industry standards, industry performance.

So thank you very much. I believe there are a lot of questions still to come. Ladies and gentlemen, I would like to close now, and thank you very much for following us today. I’m looking forward to our next event. I’m sure it will be a lot of interest also then, when we have a little bit more insight how the first half year was going on and maybe also a better outlook or a more precise outlook for the total year. So we do have our half year results conference call on July 24. I know there are still some follow-up questions. And please contact Marco Knuchel, our Head of Investor Relations. He is at your service any time.

Thank you very much, ladies and gentlemen. Goodbye, stay safe and keep distance. Thanks a lot, all the best.

Operator

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




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