Schindler Holding's (SHLAF) CEO Thomas Oetterli on Q1 2021 Results - Earnings Call Transcript

Schindler Holding AG Bearer Participation Certificates (OTCPK:SHLAF) Q1 2021 Earnings Conference Call April 30, 2021 4:00 AM ET

Company Participants

Marco Knuchel – Head of Investor Relations

Thomas Oetterli – Chief Executive Officer

Urs Scheidegger – Chief Financial Officer

Conference Call Participants

Andre Kukhnin – Credit Suisse

Martin Flueckiger – Kepler Cheuvreux

Andrew Wilson – JPMorgan

James Moore – Redburn

Daniela Costa – GS

Singh Madhvendra – Bank of America

Daniel Gleim – Stifel

Rizk Maidi – Jefferies

Patrick Rafaisz – UBS

Lars Brorson – Barclays

Operator

Ladies and gentlemen, welcome to the Schindler's Conference Call on Q1 Results 2021. I am Sandra, the Chorus Call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Marco Knuchel, Head of Investor Relations. Please go ahead, sir.

Marco Knuchel

Good morning, ladies and gentlemen, and welcome to our first call to 2021 results conference call. My name is Marco Knuchel; I'm heading the Investor Relations at Schindler. I'm here together with Thomas Oetterli, CEO of the Schindler Group; and Urs Scheidegger, our CFO. As usual, Thomas will set the theme and summarize the first quarter and also then lead us through the financials. After the presentation, we are happy to take your questions. I would like to ask you to limit your questions to two questions only. Thank you very much.

With that I would like to hand over to Thomas. Thomas, please go ahead.

Thomas Oetterli

Thank you, Marco. Good morning, ladies and gentlemen, and a warm welcome from me, too. Before we take a closer look at our quarter one 2021 results, I would like to highlight the factors that continue to impact our business. I think we are facing a unique environment at the moment. Geopolitical uncertainties, slowing global trade, a volatile economic recovery underpinned with historically low interest rates and increasing national debt will continue to affect markets. Equally, the continued Swiss franc appreciation continues to impact Schindler and our business negatively. Looking at the past ten years, we lost CHF2.7 billion in revenue and CHF400 million in EBIT due to the strong Swiss franc. This leads to longer-term circumstances and their effects on businesses drive our cautious market assessment.

With that, please turn to the Slide number 3. In the first quarter, we saw improved results in all line items supported by the gradually improving economic environment and especially a favorable prior year comparison, particularly related to the lockdown in China in Q1 last year. However, first quarter 2021 key figures are broadly only in line with Q1 2019 pre-pandemic performance. At the same time, we have a cautious assessment for the markets in the longer term, despite the fact that we currently see recovery signs in some geographies.

In the first quarter of 2021, increasing pricing pressure and cost inflation also continued to weight on the order backlog margin. Meanwhile, uncertainty remains, and we expect pricing pressure and commodity price inflation to accelerate. Hence, we continue to be cautious. Against this backdrop, we will launch our new program to accelerate digitalization, boost product innovation and address profitability gaps. I will elaborate on this later in the presentation. But for now, let me pause here and I would like to hand over to our CFO, Urs Scheidegger, for the financials in Q1. Over to you, Urs.

Urs Scheidegger

Thank you, Thomas. Good morning to all of you. Please move to Slide number 4, the order intake development. In the first quarter of 2021, order intake increased by 8% to CHF2.9 billion, equivalent to 10.6% in local currencies. Growth was supported by favorable prior year comparison, particularly related to the first quarter 2020 lockdown in China. In absolute terms, first quarter 2021 order intake was still slightly below 2019 level strongly impacted by unfavorable foreign currency impacts.

The following Slide 5 provides you an overview of order intake growth versus the first quarter of 2020. Order intake includes all product lines, new installation, modernization, repairs and maintenance. All regions and product lines, except for repairs, generated growth versus the first quarter of 2020. Overall, China was the driver for growth, strongly up high double-digit growth also supported by the first time consolidation of our joint venture with Volkslift in July 2020 and Asia Pacific, other than China, grew low single-digit. The EMEA region generated mid single-digit growth, mainly driven by Northern Europe and the solid performance in Southern Europe.

The Americas region recorded mid single-digit growth, both the North and the South contributing to the positive developments. New installations overall were up more than 20% in both units and value terms. Across all regions maintenance continued on its solid growth pattern. Our portfolio of maintained units increased mid single-digit. Modernization and repairs are showing an improving trend, particularly in North America.

I move on to Slide number 6, which shows the revenue development. In the first quarter of 2021, revenue increased by 6.3% to CHF2.6 billion corresponding to an increase of 8.9% in local currencies. With that, revenue reached about the level of Q1 2019. All regions generated growth driven by high double digit growth in China. The other regions were up low single digit. New installation revenue were up about 20%. Modernization and maintenance recorded mid single-digit growth. Repairs though, were still below previous years' level, M&A activities contributed 2.6 percentage points to growth. Foreign exchange translation effects due to the strong Swiss Franc, mainly against the U.S. dollar, the Brazilian real, the Indian rupee and the Turkish lira, have negative impact of CHF62 million.

The next slide shows you the order backlog development. Our order backlog includes new installation, modernization and repairs, but no maintenance contracts. As of March 31, order backlog increased despite strong revenue conversion during the quarter by 5.8% to CHF9.5 billion. This corresponds to an increase of 3.3% in local currencies. Total order backlog including maintenance margin remained about 50 basis points below previous year's level, but didn't get worse sequentially. However, it goes without saying that margin erosion will translate into operating margin headwinds in the coming quarters. In addition, we will have higher raw material and logistic costs in the rollout of backlog to revenues in the future.

I move on to Slide number 8. EBIT adjusted reached CHF301 million with a margin of 11.6% supported by operating leverage, effects of the cost optimization program and the modularity program and supported by lower operating expenses due to COVID-19 as well as operational measures. These factors were compensating pricing and backlog margin pressure as well as material and wage cost inflation and incremental expenses for strategic initiatives. Foreign currency exchange effects had a negative impact of CHF8 million. Restructuring costs were CHF8 million and the expenses for building lines amounted to CHF5 million, translating into an operating profit of CHF288 million with an EBIT margin of 11.1%. Please keep in mind that previous year quarter was also impacted by restructuring cost of CHF51 million for the factory closure in Spain and other efficiency initiatives.

Slide number 9 shows the development of net profit and cash flow from operating activities. Net profit totaled CHF213 million supported by higher operating profit and substantially reduced restructuring costs, while the financial result line was more negative than in the previous year due to comparatively less foreign currency gains. Cash flow from operating activities increased to CHF457 million as a result of rigid net working capital management and cash saving measures implemented across the group. Net working capital further improved strongly to more than negative 10% of revenue.

With that I hand over back to Thomas.

Thomas Oetterli

Thank you, Urs. Let's move to Slide number 10. Our quarter one results should be viewed in the context of the base effect created by the COVID-19 onset last year. We at Schindler remain cautious, particularly as the environment continues to be challenging due to the strong Swiss Franc, increasing commodity pricing and pricing pressure. We also face a changing competitive landscape, contracting segments in strategic markets and increased speed and scope of digitization. Schindler has a 147-year-old heritage of entrepreneurship, and it is key to stay on top of such changing conditions. So there is no better moment than the present to accelerate digital transformation, boost product innovation and address profitability gaps. Therefore Schindler launches the Top Speed 23 program.

Please move to Slide number 11. With Top Speed 23, we aim to strengthen our position in key markets, create an industry leading customer experience and further integrate sustainability into our business model. We will spend up to CHF270 million until 2023 to accelerate new installation and profitability growth – portfolio growth, especially in key markets and segments to drive mass connectivity and sustainable modernization solutions, to accelerate the Digital Twin for escalate this ad for our modular elevator product range, to boost product innovation for selected markets and to foster procurement excellence.

Now let me move on to Slide number 13 and the outlook for 2021. I just mentioned the challenges of a fast-changing environment we are facing in 2021 and also beyond that. For 2021 bearing unexpected events, Schindler updates the outlook for revenue growth to levels between 4% to 7% in local currencies. The guidance for the 2021 net profit will be provided with the publication of the half year results in July.

With this, I would like to hand over back to Marco.

Marco Knuchel

Thank you, Thomas. We are happy to take your questions now. I would like to remind you to limit yourself to two questions only. Thank you very much. Sandra, please.

Question-and-Answer Session

Operator

The first question comes from Andre Kukhnin from Credit Suisse. Please go ahead sir.

Andre Kukhnin

Good morning. Thank you very much for taking my questions. I'll start with the obvious one on the new program. Could you please help us in thinking about the savings from this program? Or should we think about it in terms of a certain margin level that you're looking to attain? And also how does that program relate to the existing programs that you're running? Is this kind of completely different? Or is this something that kind of overlaps and therefore should we adjust our savings expectations for any other programs? And just related to that in terms of costs and the adjustment for that, how do you view this as a – kind of maybe on a five, 10 year view, is this something that's kind of beginning of a series of programs for Schindler and therefore should we think about that kind of level of restructuring or a certain level of restructuring that reoccurs? Or is this one very dedicated clear program? And then after that, you expect a clear decline in costs?

Thomas Oetterli

Thank you very much, Andre. In fact, it has been many questions. So I'll try to answer them in the best way. Speed 23, so with Speed 23, we aim to create an industry-leading customer experience, and we try to strengthen our position in key markets and of course also sustainability plays a major role. So at the ASP 23 or VSP 23, we aim to become faster future-ready. And it's very important to say faster because some of the elements we already have discussed in the past when we talked about the Digital Twin, when we talked about connectivity, when we talked about certain product innovation, but what we have seen is that now it is the right moment to accelerate those programs. So it's not another program in the sense that all those elements are now brand new, but also we have seen that the world is changing faster than in the past.

There is more uncertainty around. So we decided together with the board of directors that we accelerate existing programs and that we also add the one or the other maybe on top of our existing programs. So Speed 23 or Top Speed 23 is an acceleration program. I do not expect that this is the next program and then there will be another program and another program. If you look at our actual situation, we are able to improve incrementally. So we have headwinds and we are fighting against that with our normal speed we had in the past. But if Top Speed 23, we want to be even more future-ready and bring our performance in the long-term to a new baseline. That's in fact what we are aiming for. And as you have seen strategic markets, investment in our portfolio connectivity, so we call it mass connectivity are major parts of that.

We also have seen that modernization will play an even stronger role in the future and we want to accelerate our solutions in the modernization business. I think the Digital Twin we have discussed for a couple of years already, and we saw that we would like to close this chapter until the end of 2023 beginning of 2024 in order to create this unique customer experience. And product innovation is an element where we have learned out of our modularity program, how strong we can act with new tailor-made future oriented solutions, but the modularity program did not cover all the markets and it did not cover all the market segments. So now we want to take our learnings and accelerate for the remaining parts in the market, our product innovations. And then last but not least procurement excellence becomes even more important, especially now in those challenging times. So we want to drive that initiative also faster than in the past.

Now the CHF270 million distributed over this year and the next two years and maybe Urs can say after that's how you should expect the distribution of those costs are one-time cost. These are costs on top of what we have done. So it does not include costs we already had. And I remember in some of the discussions in the last quarters that people said, well, you know, we always talk about strategic cost. In fact, these are almost running costs. So I think we have to change the way how we look at this. We have a onetime additional cost block of CHF270 million, and then we should not talk anymore about the strategic costs one we have finalized this acceleration program. Maybe Urs you can highlight a little bit what we expected in the sense of distribution of those costs.

Urs Scheidegger

Yes, Thomas. So this incremental expenses of up to CHF270 million, you can expect about 60 - CHF50 million to CHF70 million in 2021, expenses for accelerator programs and thereafter about CHF100 million for each of the following years. Now, maybe the last comment regarding profitability or expectation, yes, we have seen, of course, that there are certain elements or certain segments where we do have also – where we are not competitive enough. So we want to close in those segments, our competitiveness gap where we will end at the end in terms of overall EBIT margin, this I think is far too early to say, but as I have mentioned before, we want to come to a new baseline of performance from which we can then further develop incrementally in the years to come after the Top Speed 23 program.

Andre Kukhnin

Thank you very much. That's very exhaustive. May I just ask last question on this – that new baseline that you talked about? How would that compare to your historic performance? Is it right to think about that being above the historic 12% that you've printed?

Thomas Oetterli

I think it's too early to give now such an outlook. I think let's first manage now 2021. This year is challenging enough. We have mentioned that we are facing tremendous commodity price increases to come in the next couple of months and also freight costs are really challenging us. So it's difficult to say where you exactly land at the end of the year to make a good comparison where you would like to be at the end. But we always said that Schindler is aiming to be also in the overall margin on a competitive level. And we have to admit that in the last year, we had an increasing gap to some of our major competitors and this is definitely something we are not happy with.

Andre Kukhnin

Great. Thank you very much. I'll respect the number of questions. So I'll go back in the queue. Thank you.

Thomas Oetterli

Thank you.

Operator

The next question comes from Martin Flueckiger from Kepler Cheuvreux. Please go ahead.

Martin Flueckiger

Yes. Morning gentlemen. Thanks for taking my questions. Starting off with my first one. Now, I was just wondering, you've been talking about the higher raw material prices and your key European competitor has been talking about higher steel and copper prices, but we also know that logistics costs are higher. So I was just wondering if I remember correctly, I think, full year reporting stage, I think Urs mentioned an incremental total hit from those two items, raw materials and logistics of about CHF50 million. And I was wondering what your latest best estimate is for this year in terms of headwind from these two elements? And also with respect to this, are you trying to offset this with higher selling prices going forward?

And my second question is on last year's orders received prices in new installations, which I remember – and correct me if I'm wrong were down quite significantly as a result of the changed competitive landscape following the onset of the pandemic. I was just wondering, when do you expect these lower order received prices in new installations from last year to impact your profitability this year? I will go back into the queue after these two. Thanks.

Thomas Oetterli

Thank you, Martin. Maybe I start more a little bit with an explanation and then Urs can give some more details. So commodity prices, in fact, have sky rocked in the last quarters and probably overall increased if you take a basket between 30% to 40% within 12 months. Now, of course, we mentioned that in the past that we somehow fixed prices for a couple of months. So quarter one was not yet severely impacted by commodity price increases. The freight cost is a little bit different because usually in the freight cost, you do not make long lasting contracts. It's much more short-term. And there we saw already the first negative impact in quarter one, but maybe Urs can elaborate a little bit what is our new baseline that you see?

Urs Scheidegger

I can add some numbers. You are right Martin that we said we have an impact originally of about CHF40 million on material costs, so from the raw material inflation and about 10 million logistics. In the meantime indeed those prices have further increased and peaked, and we are now newly estimating P&L impact this year of CHF80 million to CHF90 million in total compared to the CHF50 million you mentioned.

Thomas Oetterli

So as a consequence additional headwind of roughly CHF30 million to CHF40 million compared to what we already announced with the full year results 2020. The second question, OIT prices. So it is true. We have seen last year definitely pricing pressure. And also with a certain boom we saw in some markets coming back in the second half, everybody tried somehow to catch-up compared to what they had as a personal target and so prices were under pressure. I can say that the pricing from quarter one to maybe the last quarter of last year has been rather stable. So it has not further deteriorated. But all those sales we have now will come to the backlog rollout in the next coming months. Now it depends a little bit on the countries, I would say in some countries it is between 9 to 12 months, especially the residential sector has a faster turn and more in the commercial sector, large projects, but also public transport, it's probably even beyond two years.

So it will start to hit us in the second half of this year and then it will even more impact us in 2022. So it will put pressure on our new installation margins. And then on top, of course, now you have to further increase in commodity prices, which then will even more put pressure on our margins. So for that, I think we have to prepare ourselves operationally and we are working very hard on that and we are benefiting, I have to say, from our modularity program, which really has compensated a lot of these additional costs, but it just demonstrates how fragile the future is at the moment, how uncertain. And I want to come back that's one good reason now out of a moment of strengths, seeing the clouds at the horizon to launch this Top Speed 23 program.

Martin Flueckiger

Okay, great thanks. And when you talk about pricing, were you talking about pricing across all three businesses or just new installations being stable in Q1?

Thomas Oetterli

No, it's mainly prices in the new installation partially also in the modernization business. Our service or maintenance business, we were able to further achieve price increases because most of the contracts are linked to inflation clauses. Now inflation is not that high as it was in the past, but we were able to increase our prices in the maintenance business. It is very, very, very resilient. And again customers are willing to accept such a price increase if you can create a special customer experience. And we also saw that – yes.

Martin Flueckiger

Sorry. So that price increase in maintenance is related to Schindler Ahead?

Thomas Oetterli

Not only, no. Also the basic maintenance price is increased.

Martin Flueckiger

Okay. Very good, thanks.

Operator

The next question comes from Andrew Wilson from JPMorgan. Please go ahead.

Andrew Wilson

Hi, good morning. Thanks for taking my questions. And I just wanted to start one on the Top Speed project. And I'm just interested in your thinking, how much of introducing this program is motivated by what you see as a change in the market? And obviously, you've talked to that a little bit. But how much of it is linked to a change in the market? And how much of it is sort of internally driven? Are you identifying areas that you feel that you've been underperforming and therefore can improve? I'm just trying to get a sense of the motivation for introducing that program today, and whether that's internally or externally driven?

Thomas Oetterli

Thank you, Andrew, for that question. I think it's both, right. Some elements are really – we see a change in the customer landscape or maybe in a wider sense and obviously that environment is changing. When you think about the Digital Twin as an example, this is not a weakness. We are, in fact, the pioneer in our industry to go for the Digital Twin because we see that our customers are changing also the way how they work. They want to have integrated suppliers into their building models. They want to have the possibility to digitally interact with us because they are also moving on the digitization path. So here we just want to be a pioneer on the frontline runner in terms of supporting our customers on their journey, others are very similar, mass connectivity, maybe to mention that.

We have elaborated on that also in the past that we saw that mass connectivity in fact we tried to generate with all our new installation equipment. So we equipped all our new sales with Schindler Ahead. Now we have seen that, in fact, the perception by the customers is very, very good. And we have seen that we can increase our retention rate for units, which are connected compared to units which are not connected. So we came to the decision that we have to adjust our plan, not only looking forward, but also looking backwards on our installed base. And of course we have to cluster our installed base in terms of age and technology, where does it really make sense to get information. A 50-year-old elevator you don't get information out of the control. But we now have decided to connect also our installed base, wherever it makes sense. And to accelerate that within the next two and a half years then we tick the box and then it's done.

So this is a one-time investment where we believe it's also driven by the environment. We have a very strong ahead solution. I would say it's really a top-notch and now we want to make this onetime sprint very, very fast to connect whatever we can connect and then we will go back to the normal, let's say connectivity around rate we have with our new installation equipment. Some others are maybe also based where we don't believe we are good enough at the moment where we see that maybe we have not done a good enough job in the past.

And instead of now investing the next five years in incremental improvements, we said, okay, let's squeeze all those efforts into two and a half years to be much faster in providing good solutions. And I would say probably in modernization, this is the case that we have good products, but we are not somehow competitive enough. And also in our procurement excellence, for example, I think we still have room to improve. So both sides covering and eliminating certain weak spots we have identified, but on the other side also very much future ready solutions, what we see is required by our markets and our customers.

Andrew Wilson

Thank you. That's very helpful. So my second question, I wanted to ask on the first of the two sides on Top Speed 23 and you've talked about a couple of times as well in the words, the changing competitor landscape. I'm interested as to specifically what you mean by that. I mean, I can think of sort of numerous things it could mean, but I'm interested as to if there's anything specific that you'd highlight there or if that's just a broader general comment.

Thomas Oetterli

Well, it's in fact a general comment, but of course we all are observing how our competitive landscape is changing. And we have seen that there have been among, let's say, the global OEMs, really substantial changes with the spinoff of Otis out of the UTC group and also PK Elevators becoming independent. And of course we are observing and we are also forecasting what could that means for us. I think it will increase competition. And so, we have to run faster and we have to run in a better way. That's one side, but on the other side we also have discussed in the past that there are maybe new entrants into our competitive landscape. And those new entrants are mainly driving technology, so they are not elevator companies. These are more technology companies. And we see and we take them very seriously.

We also see how they market themselves. We see if or if not they have at the moment success, but you should never underestimate if you have new entrants into a market. Now, the good thing is whatever they do, we also are able to do and we already do, but we might have to speed up the things we do. Coming back to this topic of connectivity and Digital Twin, which are really technology driven initiatives. We want to protect ourselves, we want to be a first mover. And with that, I think, we will be ahead of others in the competition race.

Andrew Wilson

Thank you. That's very helpful.

Operator

The next question comes from James Moore from Redburn. Please go ahead.

James Moore

Yes. Hello, everyone. Thomas, Urs, I trust you are all well. My first question is on the order backlog margin and the negative impacts for 2022, not this year. Can you help us think a little bit about, I guess, two aspects of that? What the raw material might be at current spots? I was wondering if it's another CHF50 million, CHF100 million once hedges roll off and we move forward. And what sorts of EBIT margin decline we might have seen without the Top 23? That's my first question. Maybe we get one at a time.

Thomas Oetterli

Okay. So good morning, James. Yes, we are all doing well. I hope you are doing well as well. By the way, I hope everybody is doing well in this very critical time. So yes, we elaborate that on the order backlog that we have seen, let's say, pricing pressure, especially also last year and we somehow stayed on that level. And maybe Urs we can elaborate a little bit what will be the impact also beyond 2021.

Urs Scheidegger

Yes. So if we assume we have now a burden of CHF80 million to CHF90 million in the P&L this year for raw material and logistics. This is mainly for the second half year this year as we have locked in our raw material prices last year, and we benefit still now in Q1 and Q2, but not anymore starting from second half year. So then we have a spill over into 2022. And if prices are remaining at these high levels of today, we need to assume we have a run rate cost impact next year of approximately CHK150 million. On the backlog margins, I said, right, we have a drop of about 50 basis points overall, including maintenance. Of course the margins, the prices are eroding mostly in the NI business where the margin drop is clearly higher than 50 basis points. And this mostly will hit us in 2022.

James Moore

Very helpful. Thank you. And my second question is really back on the Top 23, Top Speed 23 program, could you split the CHF270 million a little bit? Basically, I'm trying to understand how much is for connecting the installed base, which to me seems a very sensible and direct move to respond to some of the – how do we put it, new and nimbler digital service entrants? And how much is other buckets?

Thomas Oetterli

So at the moment we do not yet provide a detailed split, but you're absolutely right. The biggest impact will come from the installed base connectivity program. This is clearly the case. It is the biggest cost block we will have because you always have to remember these are one-time on top costs, what we usually have. So of course also in the past, we have developed products. So we now do not just say, well, if you had x million in the past, we now declared them as Top Speed and we somehow make a beauty case out of our P&L and balance sheet. That's not the case. It's really on top costs.

So acceleration of certain programs, which are on top of our normal run rate of costs we have. So the major share is in fact the connectivity piece, these I can confirm because this is a global program everywhere and it depends, of course, on the age and on the composition of our installed base in the different countries, how much you really can connect and how much you cannot connect. But it's the biggest cost block in those CHF270 million. And especially in 2022 and 2023, this acceleration will really be huge in terms of connectivity, but the detailed split we are not showing today.

James Moore

Thank you very much both of you.

Operator

The next question comes from Daniela Costa from GS. Please go ahead.

Daniela Costa

Hi, good morning. I have two questions. The first question I just wanted to clarify back tying to what you said before about the new program being – to establish a new baseline. And historically, you will always talk more about a focus on top-line and absolute earnings rather than on margin. You mentioned several headwinds now in the last few questions to margins. Is it – can you – what do you mean by new baseline? Is it new absolute baseline or a new margin baseline? And so these headwinds are more just temporary – but longer term, you wanted a higher margin?

Thomas Oetterli

Thank you, Daniela, for that question. Probably dispose. We are not changing our strategic targets. Our key target priority Number 1 is to grow faster than the market. And when you look on those elements of Top Speed 23, so pushing the growth of new installation and of our portfolio in strategic markets, it is a clear growth ambition. If you look into mass connectivity, it's probably both. And also in modernization, it's probably both. You try to push the top line because we have a higher portfolio retention and you have additional modernization business, but we also want to do it more profitable. Because profitable.

Because with connectivity, you can have so-called adaptive services where you can use singular Ahead to fulfill certain tasks where today, you need a service technician to do that. The Digital Twin, I think, is primary also something which will differentiate us from competition in the eyes of the customers. But in the long term, of course, it will also make our internal processes more efficient. So we will save costs. But it's mainly – but it's maybe the second ambition there. The first ambition is really to be much more customer-centric, to be now fast in product adoptions. So time-to-market is very important there.

Product innovation, again, is probably also both. It is more on one side, tapping into market segments or improving our position in certain market segments where we saw, we are not that good at the moment and maybe also historically. And of course, if you have a very good innovative and cost-competitive product when you enter into that market, you also will add something to your bottom line. But at the procurement excellence, I would say, it is more a cost-improvement program. So it's a little bit both.

Now I also say at the end, and I mentioned that many, many times, with the growth, you will have absolute profits, clearly, but we also want to improve our profitability, so our margin. Because I think we have to be honest to ourselves, 2020, I think the second half of the year; we have done an okay job. But when I look on the total year, there was an increase of the gap to some of our competitors in terms of margin. And I think it cannot be our ambition that we want to have an increase. We further would like to have a narrowing of this gap. Whether it is exactly on that level, I think it's far too early to say that. So yes, top line, absolute bottom line, but we also want to continue with our now already started margin improvement.

Daniela Costa

Thank you. And my second question relates to, how should we think about capital allocation during this period. Will you have to invest more organically? I know in last few quarters, you had actually talked about the inorganic a bit, but you didn't mention too much about that in this call. So can you talk about that cost on the organic versus inorganic investments? And I guess it’s – shareholders and you used to historically have a buyback for quite so many, many years, but you haven't had that for a while. Is that out of the question now, how – as you go through this transformation?

Thomas Oetterli

Well, you have seen in the quarter one. And yes, the group is doing smaller- and medium-sized M&A as in the past, and we actually see the effect this year what we have done last year. And we certainly will continue to grow; as well our service portfolio is smaller. M&A, this is an important element of our growth strategy. For anything else, I cannot comment.

Daniela Costa

Okay. Thank you.

Operator

The next question comes from Singh Madhvendra from Bank of America. Please go ahead.

Singh Madhvendra

Yes. Hi. Thanks for taking my questions. Couple of them. Firstly, on the EBIT Bridge, if you could give some breakdown of the CHF 88 million operational bucket you have there. If you could give the breakdown details around operating leverage, modularity. So basically, all the five items you have listed on the slide, if you could give some indications how much each of them actually contributed there?

And secondly, just clarifying on the raw material cost headwind you're expecting for next year and the backlog margin impact. I know you're talking about a 50 basis point headwind there. So is the 50 basis point headwind inclusive of the raw material price increases you are seeing? Or the raw material price increase can actually be on top of the 50 basis point lower margin you already have there? Thank you.

Thomas Oetterli

Thank you. Urs, I think this would be good for you to answer that.

Urs Scheidegger

Sure. So, we really have a strong operating leverage on quarter one versus quarter one 2020. Clearly, in the magnitude, this is strong with our volume growth; we see this about 200 basis points from operating leverage. We also have a good modularity and the COP cost of personnel savings. Both programs are as well doing – and materializing. Together, it's more than 100 basis points. And then we have a lower OpEx. We are really working with a very rigid cost-discipline and operational efficiency, which is also significant. But the negative two elements, pricing backlog, margin pricing pressure, that's more than 100 basis points. And the strategic costs in the Q1 are about 10 basis points. So that's overall the improvement of 260 basis points.

Thomas Oetterli

Now the second question was about the raw material cost increase impact in our orders on hand. I think we can say whatever we already had, as cost increase, we have in our order backlog. Now if the material cost should further increase, then of course, this would come on top on our deterioration we have on the orders-on-hand backlog. That's right, Urs?

Urs Scheidegger

Yes. Correct.

Singh Madhvendra

So it is fair to assume that you have around 50 basis point negative impact, which you had already flagged, let's say, at the Q4 earnings. But then since then, you have raised your raw material cost headwind estimated by about 30 million, 40 million. So the impact of backlog, would be around the same line because of that?

Yes. You are right. In the rollout for this year, this is correct. And as I said before, this will further spill over for another six months in 2022 of this 150 million and those headwinds, we will have to work to compensate those headwinds of backlog margin erosion, raw material costs, in particular, with the completion of the cost of personnel program, modularity program comes to an end, and we need to leverage it and of course, also field efficiency in new installation and in service. Those headwinds shall compensate these negative elements.

Singh Madhvendra

Okay. Thank you very much.

Operator

The next question comes from Daniel Gleim from Stifel. Please go ahead.

Daniel Gleim

Yes. Good morning, Thomas and Urs. Thank you very much for taking my questions. Thomas, maybe you can walk me a little bit through how you see the order intake momentum developing in the coming months. And specifically, I was wondering about APAC without China. You previously commented you expect the strongest end-market growth in that area and understand in the first quarter China was still growing stronger for Schindler. Is there something we should expect from the second quarter? That's my question number one.

And secondly, on the products. We think about modernization in EMEA. I read your slide; the order intake was still negative modernization in EMEA. And I was just wondering from the discussions with customers and what you witnessed in the market, when do you expect inflection point for EMEA modernization to take place this fiscal? Thank you.

Thomas Oetterli

Thank you. Thank you very much for those questions. So OIT momentum, I think it is true. When you look on the last year, we had the biggest drop in Asia Pacific, but also in North America as a market development. And the question was which market is coming back as the fastest. So I have to say that Asia Pacific, without China, yes, the market was coming back slightly by the low and mid-rise residential.

But there are – this is also a market where you have a lot of commercial programs and commercial projects, also quite a lot is entertainment and tourism, especially in Southeast Asia. And then last one not least, we should not underestimate India. So in fact, India, at the beginning of the year, was coming back very strong, I have to say, that the market was coming back very strong. But now in April, everything has been put upside down. So the whole country at the moment has come to a hold. And this is a little bit what I see overall in Asia, that some markets come back, then there is an increase in COVID and then there is an immediate drop down again. So it's quite volatile. But there are not many countries where I see consistently that the markets are coming back. It's more a roller coaster.

Now in Europe, we had surprisingly quite strong markets and resilience in 2020. And somehow, we saw that 2021, especially Northern Europe, was good. Markets are good. They are not exploding, but they are good. But also Europe South, the Southern European countries, some of them really came back. And so it's – Europe, I would call it stable. And then, of course, besides Asia Pacific, it's also North America. I think North America has come back, especially in the residential market. What I still see is that large project decisions like in Asia Pacific, the projects are there, but they are not yet decided.

So somehow, there is a postponement of decisions. And one element I see is that for those who plan and want to execute those large buildings, they're also impacted by commodity price increases, because they suddenly realize that the whole building becomes much more expensive than what they had maybe in their original business case. So they postpone at the moment certain decisions because of the uncertainty, what the total cost of construction will be. And so those large projects are still high activity but low decision criteria.

Now modernization in Europe, modernization in Europe is more a residential business. And I believe that in the second half of this year, modernization should start to come back and compensate the drop we had in 2020. I'm quite confident that the modernization will be coming back towards the end of this year.

Daniel Gleim

Very clear. Also if I may, could you give us a very rough indication what share EMEA modernization has in group total modernization? And what's your latest estimates in the lead period order intake to revenue conversion for that business is?

Thomas Oetterli

I take the second question, Daniel. In modernization, here in Europe, the cycle times are a bit shorter than normal and new installations of about six to nine months, in that range. To your first question, we are not providing those detailed geographical information.

Daniel Gleim

Very clear. Thank you very much to both of you.

Operator

The next question comes from Rizk Maidi from Jefferies. Please go ahead.

Rizk Maidi

Yes. Good morning, gentlemen. Thank you for taking the questions. So I'll stick to two again. So firstly, on the margin. Can you just perhaps help us with the phasing of the savings from Speed 23? You talked about the saving of the costs, maybe just on the savings. In last quarter, you mentioned that you're aiming to stay above 11% adjusted EBIT margin for this year, given the changes in raw material headwinds and logistics costs. Is that sort of sub guidance still – is still valid?

Thomas Oetterli

So maybe to the savings, we are not giving a detailed breakdown what exactly then the savings will be. First of all, the first saving is, at the end of 2023, we don't have the CHF 270 million anymore. That's the first saving we have because these are really one-time costs. Then, of course, we are working on the business cases. But you always have to see that as some of those initiatives are really future-oriented, they will have a long-term impact on what I also discussed with Daniela Costa, they are going to have a long-term impact on top line, on absolute profit and they will also long term, improve our margin. But the detailed, let's say, saving like we have, but in the modularity program, we are not communicating.

Urs Scheidegger

And on the second question. You have seen the group reported now the 11.6% EBIT adjusted for the first quarter. Obviously, we are having the benefit of not yet seeing this large material cost inflation. That will come in the second half year. Normally also wage inflation built and realized in the second half year loss. Also when the economies are recovering and our service portfolio has more drastic on it, we will see higher expenditures on the maintenance business going forward. And – but of course, we have saving measures. As I explained in the annual confidence, the cost of personnel program, the modularity saving program, also the field efficiency programs have to compensate those impacts for 2021, and we continue to aim for an EBIT-adjusted margin of 11% for this year.

Rizk Maidi

Okay. Thank you very much. And the second one is just on China. If you could just give us an update on the three red line policy. And how quickly the Chinese government wants real estate developers to comply with those regulations? Any early indications you're seeing there? And what's your outlook for China this year? Thank you.

Thomas Oetterli

Well, I think, overall, China has – is very strong as an economy. It is very strong. Also the construction market, the real estate market remains strong. We believe that for our industry, the market will be something between flattish to slightly up. Of course, quarter one somehow is a little bit misleading because we had a very weak quarter one last year. And last year then starting somewhere in May until December, it was not only going back to a normal level. It was also catching up some of the mixes we have for two or three months early in the year. So if I look on the total year, I believe it will be strong again in new installation. I think there are also increased modernization opportunities. And of course, as we always do, a key focus we have is also to focus on our portfolio or installed base growth.

Now the three lines policy that have been put in place, they also have been communicated. And it is valid now for certain large developers. And we see, of course, that this has created some disturbance, I would say, at the beginning because everybody has somehow to adapt and adjust and they have to manage now much stronger growth to the balance sheet with liability ratios, what kind of net debt do they have, what is the cash position. So we see, of course, that there was some turbulences.

But I still believe in the long term, we are happy if we are – if we have healthy customers. Because it's one thing to sell and then one thing to build. But at the end, cash is king. And we have to get the cash into our profit. And so I'm supporting that policy. We saw some hiccups. Honestly, yes, we saw that. And the more developers are getting into this three red line policy environment that will also be challenged at the beginning, but I'm sure mid- and long term, this is a good initiative for the whole industry.

Rizk Maidi

Thank you very much.

Operator

The next question comes from Patrick Rafaisz from UBS. Please go ahead.

Patrick Rafaisz

Thank you. And good morning everyone. And a couple of follow-ups for me please. The first one is on your new guidance for local currency growth. And obviously, with such a start to the year, it makes sense to adjust the guidance. I was just wondering if you can share some more insights into what developed differently than planned or budgeted maybe earlier in the year. If I recall correctly, at the full year 2020 conference call, you said modernization and repair. And the timing of the comeback here was sort of a key question mark you had?

And the second question, coming back to the EBIT Bridge. And you've already discussed, especially the costs, in quite detail. But now to the savings, can I assume that what you've communicated so far around the cost savings CHF 50 million and also incremental CHF 70 million from the modularity program, do these still hold? And the Top Speed program, I realize you're not quantifying, but will that already have an initial benefit this year already? Or is that too early? Thank you.

Thomas Oetterli

So maybe I start. Good morning. So local currency growth, maybe to start with that. Let's not be overenthusiastic about quarter one, to be very clear. Because when we compare ourselves with quarter one 2020, we were in the middle of disaster in China and other markets. So the baseline comparison is just – makes no sense at all. Now when you compare with 2019, the picture already looks a little bit more realistic. In fact, it is flattish. So we have worked two years to be at the same point where we have been two years ago.

And of course, it has a negative impact from currencies, but I just would like to say, hey, the baseline was really low. Now interesting enough, when you look ahead, then it might – the baseline might become very high because especially, in the Chinese market where they had a fast recovery, especially in the second half of the year, the baseline is very high. So because it was back to normal level, plus catching up some of the mixes we had in the first couple of months. So to top that bank line, this will be very challenging to achieve. Because when you look on our order intake we had last year, we had in fact a drop compared to 2019. So this makes us cautious looking ahead for the next three quarters to come in terms of top line.

Urs Scheidegger

Yes. Absolutely. You explained it. There is this low comp base line of last year. Don't forget, indeed, that we have this newly consolidated joint venture, Volkslift, since July. That gives us tailwind now still for the first half of the year, but then not anymore for the second half year. New installation revenue were a bit stronger now in the first quarter than we assumed, a bit faster activities on construction, particularly in China again, which certainly will calm down going forward with when this baseline effect is fading away.

On your questions on savings, yes, I do confirm that these two programs are on track. We will finish the modularity program by end of the year, and that incrementally will support the P&L, will be CHF 70 million. And also the cost of personnel program, we confirmed the CHF 50 million savings for 2021.

Thomas Oetterli

And maybe to add on top. I assume most of you are at home with a home office. So there is also, in those savings, we still have because of – there's no travel, there's no entertainment. There are much less costs, also operational costs. So we will continue with that. And of course, we also can compensate or we have a better impact from this compared to the first quarter last year, where, let's say, COVID was impacting mainly Asia in quarter one, but then quarter two, it was Europe and the Americas. But this year, we have the savings from lower operating expenses all over the globe. So this also has a positive impact that we did not have those operating expenses anymore.

Patrick Rafaiszc

Thank you for that. And on [Technical Difficulty] 2021 on savings as well or not, please.

Thomas Oetterli

No, you cannot expect savings for Top Speed 23 in 2021. In all fairness, we are – we have worked on all the initiatives. We have worked on all the modules you have seen on the Slide 11. But we are now more ramping up the teams. It's very; very important if you want to do in such a fast way such impactful programs, then you need very strong project leads with a very strong commitment from senior management. You need the right people on board to accelerate. But even if we accelerate as fast as we want, the impact will not come this year and also not early next year, maybe start then towards the end of 2022 slightly, but full impact should start in the year 2024, 2025. Because some of the programs will not have on day one already a positive momentum, but it will take us mid or long-term perspective to really see all the benefits from that, but not in 2021.

Patrick Rafaisz

Great. Thank you.

Operator

The next question will come from Lars Brorson from Barclays. Please go ahead.

Lars Brorson

Great. Thank you. I was a bit late Thomas on the call. I apologies, if this is a bit repetitive, but I have to come back to the 270 million investment plan. I mean, I saw the big investment phase for you and the industry was behind us, not ahead of us. So I wonder whether you can help us reflect a little bit on your digital strategy over the last three years. And I'm not really looking for a mea culpa here, but I'm just trying to understand why now. I mean, you talk about connectivity, you've been working with Huawei, I guess, since 2016. And I presume you've been adding some partners. That – what's going on as far as that partnership is concerned?

And on digital, you've been working with GE Predix. I guess, you're now moving over to Azure. Is this part of what's going on here? And what are the competitive implications here? I guess, is Choose Hope is built around Azure. So maybe you can help us understand that a little bit better. And I'll come back and maybe again around payback and communication around the program, but let me start there?

Thomas Oetterli

Yes. Lars, okay. So let's come back to the CHF 270 million and the remark, you thought it is behind and not ahead. There are two different type of investments when you look on digitization. One is you generate the product, the platform, the infrastructure. This, we have always shown as so-called part also of our strategic cost in the past. And then remember very well that I have been confronted with the question many times, "Why do you always have this increasing run rate of strategic costs?" And we said last year, now we have achieved the level with where we are. And we don't have special additional on-top investments for our remote monitoring platform, for our Ahead platform, for our digital services platform.

Yes, we have to maintain, and there is sometimes replacement cost, but this is not included in this CHF 270 million. Clearly not. The CHF 70 million and this is a change or maybe an adoption in our strategy. When we talk about Schindler Ahead, we always said we will connect all our units we sell to the market with new installations. Because we thought this is the easiest way. As we are fast growing, new installation over time, we will have higher and higher and higher share of connected units in our overall installed base. Now the results we have seen and the feedback from customers we have seen are just so convincing that we have to say, "Hey, it's now the time not only to look ahead, but also looking behind or back on our installed base.

"And you might remember the one or the other discussion where we have been asked, "Well, do you want to connect the overall portfolio?" We said, "Well, we are now focusing mainly on the new equipment." But the feedback is so good. We said, "Okay. We want to equip as much as we can of our installed base." Because we see that the retention rate from other customers is higher than if we do not have connected units. And we have seen that the perception of our customers is so good that they like also the digital services we can offer to them. So why should we only have those digital services we can offer to them. So why should we only have those digital services looking forward with new installation things?

Let's give them also backwards of that service in order to increase our retention rate. Now the topic is this is like a retrofit you do of an installed unit. You have to spend a little bit more time and spend a little bit more money because you go back to an installed installation. And we are convinced this onetime investment will pay off definitely because we have efficiency gains, we will be able to implement. But we also are able to have really future ready customer solutions, which they like. And this is really an investment where I'm totally convinced, this will definitely create a big differentiation to existing competitors, but also to new entrants into our market.

So sorry for that. We have this one-time investment that we are sure. First of all, end of 2023, it's over. And we don't have another one going in 2024. I mean, we cannot use that. And the last big, really big program we had was, in fact, the program LEAP 10 years ago and then another one we have was R03, 20 years ago. So don't expect that now, our frequency will increase to every three years we come with something new. That's it. And then you have achieved the new level.

Lars Brorson

Understood, Thomas. Sorry, I was also just trying to get a bit of clarity around your partnership program to the extent that you can talk about that. I mean we've heard your success rollout five years ago with – globally with Huawei. Is there a rethink there? Who are you working with now? And also as far as digital is concerned on Predix, am I right to assume you're now rebuilding around Azure? And can you help me understand what the competitive implications might be around that?

Thomas Oetterli

So it is correct. We have moved away from GE Predix. We have a very strong relationship with Microsoft, but also with other tech players in the market because we have learned that it is important to have a very broad base of partners because we are a lot co-creating with our technology partners. So whether this is Microsoft or other partners we have, we want to benefit also from their experience they have. So it's correct. We have moved away from Predix. We also have increased the number of suppliers for with cubes in the Schindler Ahead solution.

For quite obvious reasons, we were a little bit under pressure, having only a Huawei solution. I do not want to elaborate more on that. But we have to open up new suppliers, and we have done that. So we still are delivering, in certain markets, Huawei cubes, but we now have also two additional suppliers. And because we now go into mass connectivity, we might even have to increase the number of suppliers to be able to fulfill our ambition of mass connectivity.

Lars Brorson

Understood. If I can finally, just on communication around this. I'm sorry to twist the point a bit, but I find it quite rare for a company to come out and launch a multi-100 million, in this case, Swiss franc plan with the zero detail, frankly, on payback and expected returns. So wonder whether I can just clarify your EBIT margin ambition is to bring it to the high level of the industry's long-term margin level, which I understand you defined at 12% to 14%. So high end of that. Is that a correct understanding? And when should we expect to hear from you? And more generally, if I can, Thomas, have you learned much around how you launched your CHF 150 million, your investment plan, for building mines? And how to communicate around some of these big investment programs? Anything you learned from that in terms of how to communicate on this going forward, if you like?

Thomas Oetterli

Good point. So of course, it was the question whether when do you announce such a program? At which stage of maturity? So we have worked very hard in the last couple of months to fine tune what we exactly want to do, what are the necessary resources, what are our project plans, what are the different milestones. And of course, we will also, in the future, report more on that. This definitely, we will be able to do so whenever it does not jeopardize, let's say, our competitive situation. We can maybe not share everything in detail. And you are right; it's always easier to work on the cost. This is also internally exactly the same. People are much – it's much easier for them to calculate what it costs than calculate what it pays.

Of course, we have some high-level impact, our business case calculation. And you're probably not totally wrong with your assessment. But this is – it will depend a lot on how overall the market will develop. What I can say is we want to narrow the gap. This, I can say. Whenever, let's say, competition is, we will have to narrow the gap because we all face the same environment. We all face commodity. We all face freight. We all face the wages. We all face, let's say, the political turmoil. But what is definitely not acceptable for us is that the gap is widening. So we have to work on narrowing this gap. But we don't want to give a margin target in three years of it. This, we don't want to do, but let's say, to have a substantial step-up, this definitely you can assume.

Lars Brorson

Thank you.

Operator

The last question for today’s call is from Jorg Rune [ph] from AWP. Please go ahead, sir.

Unidentified Analyst

Yes. Good morning. This is Jorg Rune. Can you – my question is with the new program, what effect will it have on employment, especially in Switzerland, where you – where will you build up employment? And where will you make cuts?

Thomas Oetterli

Thank you for these question. Of course, this is – it is a program which is very much future-orient. So it talks about digitization. It talks about product innovation. It talks about sustainability. It talks about the customer experience. So it's more an investment into the future, and it's not a personal reduction program. This is not the aim of this program, definitely not. However, I have to say we have done the cost optimization program mid of last year, which is really focused on getting cost out of the organization. And this is an ongoing exercise. We are well on track, but we said this will be something which will accompany us in 2020, 2021 and 2022.

So we are continuing with that program. But here, Top Speed 23 is really more being industry-leading customer experience and not so much reducing jobs, honestly. I do not say that there is not a single case you know what can happen. But definitely, this is not at all our main purpose. Schindler is a company that really cares for the well-being of the current and also the future generations in our workforce. And we are thrilled by the long-term health of the company. When we have to take such decisions, we don't take them really lightly. For us, this is also difficult to do. But again, Top Speed is future-oriented, technology-based, new products and not cost cutting.

Unidentified Analyst

But the cost cutting program that is ongoing, that entails a reduction of the workforce in Switzerland and there's nothing changed there.

Thomas Oetterli

There's nothing changed. We said we talked about roughly 2,000 jobs, and we said up to 10% will be in Switzerland, so the 2,000 are worldwide. We are well on track with that. Always are, very, very, let say employee-centric…

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