Schindler Holding AG (SCHN.SW) reported a strong third quarter for 2024, marking its seventh consecutive quarter of EBIT margin growth. The company achieved an 11.7% EBIT margin in Q3, alongside a 5.5% increase in order intake, despite challenges in the Chinese market.
Key Takeaways:
- EBIT margin reached 11.7% in Q3
- Order intake increased by 5.5%
- Modernization orders surged by 20% year-on-year
- Announced CHF100 million share buyback program over two years
- On track for low single-digit revenue growth for the full year
Company Outlook
- Confirmed 2024 guidance for low single-digit revenue growth
- Targeting 11% reported EBIT margin for the year
- Modernization segment expected to see further margin improvements
- Uncertainties remain in backlog conversion and Chinese market challenges
Bullish Highlights
- Seventh consecutive quarter of EBIT margin growth
- Strong service and modernization performance driving revenue growth
- Operating cash flow normalizing at EUR 257 million
- Increased dividend payout ratio to 50%-80%
- Signs of recovery in U.S. residential and commercial sectors
Bearish Highlights
- Continued challenges in the Chinese market
- Backlog decreased by approximately EUR 450 million, primarily due to foreign exchange effects
- Labor inflation remains a significant headwind
Q&A Highlights
- Modernization margins expected to improve outside of China
- Company not ready to disclose projections for 2025
- Ongoing efforts to close operational performance gaps, particularly in NI margins
- Cautious outlook on the impact of China's RMB 300 billion stimulus program
Schindler Holding AG reported a strong third quarter performance for 2024, with CEO Silvio Napoli highlighting the company's seventh consecutive quarter of EBIT margin growth. The company achieved an 11.7% EBIT margin in Q3, alongside a 5.5% increase in order intake, despite ongoing challenges in the Chinese market.
The modernization segment showed particularly strong growth, with order intake surging by 20% year-on-year. This growth was attributed to the introduction of enhanced offerings and standardized solutions, which have improved efficiency and quotation times.
Carla De Geyseleer, the company's financial executive, reported a 2.6% revenue growth in Q3, driven by strong service and modernization performance. The company remains on track for low single-digit revenue growth for the full year, confirming its 2024 guidance.
In a move to enhance shareholder value, Schindler announced a CHF100 million share buyback program over two years. This is part of a broader capital allocation strategy that includes an increase in the dividend payout ratio to 50%-80%.
Despite these positive developments, the company faces ongoing challenges, particularly in the Chinese market. Silvio Napoli expressed caution regarding the potential impact of a recently announced RMB 300 billion stimulus program in China, noting that it was too early to evaluate its effect on the market or new equipment projects.
Looking ahead, Schindler aims to further improve its modernization margins through stringent pricing discipline and operational improvements. The company is also focusing on closing operational performance gaps, particularly in new installation margins and efficiency across various markets.
While labor inflation remains a significant headwind, Schindler is committed to its self-help agenda to reach its mid-term margin target of 13%. The company's next earnings report is scheduled for February 12, 2025, where further updates on these initiatives and market conditions are expected to be provided.
Full transcript - None (SHLAF) Q3 2024:
Operator: Ladies and gentlemen, welcome to the Schindler Conference Call on the Q2 Results 2024 and Live Webcast. I am Sandra, the chorus call operator. I would like to remind you that all participants have been in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Lars Brorson, Head of Investor Relations. Please go ahead, sir.
Lars Brorson: Thank you, Sandra. Good morning, ladies and gentlemen, and welcome to our third quarter, 2024 results conference call. My name is Lars Brorson. I'm head of investor relations at Schindler. I'm here together with Silvio Napoli, our Chairman and CEO, Paolo Compagna, our COO, and Carla De Geyseleer, our CFO. Silvio will provide a brief overview of the key messages this quarter. Paolo will discuss our market outlook and order intake in the quarter, and Carla will take us through the financials, after the presentation we're happy to take your questions. We plan to close promptly at 11 O’clock and with that I hand over to Silvio. Silvio, please go ahead.
Silvio Napoli: Thank you, Lars. Good morning, ladies and gentlemen. Thank you for joining us today for our Q3 '24 results conference. Let me start looking back for a second here. Since 2022 when we started the journey we're on, investors and analysts, IU came out with the concept of self-help agenda. Well, today with our Q3 results, we are pleased to report that we are continuing to progress on this self-help agenda. First and foremost, on profitability, our primary objective. For the seventh consecutive quarter, we are improving our year-on-year EBIT margin. Now with Q3, 2024, we complement the continued bottom-line improvement with top line progress and this progress was achieved notwithstanding tough market conditions. On the one hand, the service and modernization markets continue to show robustness across the globe on the other NI markets present a mixed situation with China continue to decline, but with other large markets accelerating the growth. India, Brazil and the Middle East are the most prominent examples of this phenomenon. And I'm sure we're going to come back to this later on in the market section. Now looking at our performance, one of the highlights must be the takeoff of our modernization order intake with a plus 20% year-on-year increase in Q3, 2024 of course measured in local currency. The other, if not the highlight, has to be our plan to launch a share buyback program in the magnitude of CHF100 million over a period of up to two years. This plan adds another dimension to our self-help agenda, which was so far focused on operational improvements. Allow me to say this also shows how we continue listening to you, to your suggestions on how to enhance value creation for our investors. Very important we take this step while remaining faithful to our fundamental principle of preserving a strong balance sheet. And I'm convinced that this is all the more important today at a juncture where we have growing uncertainty across the board and also in terms of capital access and market fluctuations. Now, talking of principles, please allow me to step aside for a moment from financial results and express the fact that we were particularly pleased, and allow me to say, proud to realize that our progress was also recognized by external and non-financial institutions. And so, we were honored that Schindler was ranked by Newsweek Statista as one of the top ten world's most trustworthy companies in the machines and industrial equipment sector. For those of you who may not be familiar with the study, it is based on an independent survey of more than 70,000 participants and 230,000 evaluations from customers, investors and employees, and also including extensive social media analytics. Similarly, Schindler was ranked as one of Time Magazine's Worlds 1000 best companies in 2024, and this ranking is based on a formula including employee satisfaction, revenue growth, as well as ESG KPIs. Now, before moving on, please allow me to add this. And this is to prevent any possible question or doubt. Schindler neither applied to nor paid for any of the studies. Now, back to our Q3 results. Back to our progress. In Q3 2024, we recorded an order intake growth of plus 5.5% in local currency. This growth was consistent across all regions, with the exception of China. This progress in top line was also reflected in a revenue increase in Q3 2024, Schindler delivered a growth of plus 2.6% in local currency. It is important to stress how this performance was achieved in spite of a massive and in fact accelerating foreign exchange impact, accounting for more than CHF300 million for the first nine months of the year. Moving on to the other highlight, and as I said, improving our profitability is our primary objective. And I'm pleased to report that Schindler delivered an EBIT margin of 11.7% in Q3 '24. In terms adjusted margin, the Q3 performance reached 12.6%, corresponding to 12.1%, excluding sale of assets. Finally, because cash is important, one more highlight of our progress is the significant operating cash flow improvement of plus 27%, driven by both the operating profit improvement I mentioned before and improvement in networking capital management. In conclusion, Schindler continues to progress and to deliver on commitments. Now, to take a closer look at the markets and our performance, I give the floor to Paolo Compagna, our Chief Operating Officer. Paolo, please.
Paolo Compagna: Thank you, Silvio, and good morning, everyone. Allow me before we move on to discuss our market outlook and our order performance, I would like to emphasize once more the fact that we are a predominantly service company with well over 60% of our revenue generated in the growing maintenance, repair and modernization markets. While in terms of our exposure to the new installation business in China, this accounts for only 8% of our group revenue. With this introduction, I would like to move to our globally Outlook market outlook for 2024, which in our view remains unchanged by business and by region. The global installed base keeps growing at a healthy pace as the sizable NI volumes sold in previous years, in particular in Asia, are now being converted into service portfolio. In modernization, we have observed improved demand in the recent month in the US and have decided to upgrade our full year outlook for the Americas accordingly, while keeping it unchanged for the other regions. In China, an equipment renewal program worth RMB300 billion was introduced in July, which covers, among different building technologies, also elevators. This will help releasing some of the pent-up demand for elevated modernizations, but we have not yet observed any meaningful impact of this program as it is not yet fully effective in most of the major cities. In Spain, the new ITC regulation effective July 1 could affect up to 40% of the country's 1 million elevators, with a total program cost estimated by the authorities of more than €700 million over the next seven years, which will include substantial outlays for equipment upgrades. In contrast, the MOD market in Italy is coming off a peak, which was driven by various programs and incentives over the last years. In new installation there's no major change in our market outlook for this year across all regions, the emerging markets that we have indicated before as bright spots in new installation continue to shine. In India, housing sales and launches have increased high single digit so far this year, driven by premium residential, while in Brazil, apartment lounges increased this year up to close to 20% over the past twelve months. In the US, the rate cut by the Fed last month resulted in an improved sentiment among home buyers and a marked reduction in average mortgages. But it's yet to translate into increased housing supply and hence in high demand for elevators. In China in spite of the stimulus packages announced by the government, we keep the three minuses for the NI market and we currently expect a mid-teens contraction in the contraction in the E&E units sold this year. The measures introduced by the government are geared towards the absorption of the country's massive housing inventory, stabilizing home prices and improving customer sentiment, but have had no tangible impact on the construction of new housing so far. We continue to monitor very closely all announcements and developments on that front, but the stimulus does look vastly different from the one from 15 years ago in terms of impact to our markets. Turning to Slide six. Let's have a look on our order intake performance in the third quarter. Our service portfolio in units continue to expand at a healthy pace, driven by strong NI conversions, in particular in China and Asia Pacific, excluding China. I'm pleased to report that our modernization orders by value further accelerated globally in Q3 with double-digit growth across all regions. Elevating our year-to-date modernization growth to more than 10%. Particular strength was observed in the Northern Europe as well as in both North and South America. Our global new installation order volume decreased by slightly more than 5% overall due to the weak market conditions in China. Year-to-date, our orders were down just only slightly. Our performance in the Americas was the highlight of the quarter, with both North and South America growing double digit with solid growth recorded also in Asia Pacific, excluding China. In EMEA, our order intake declined low single digits in the quarter and stays flat year-to-date. With that, I'd like to hand over to Carla to lead us through the financials.
Carla De Geyseleer: Thank you very much, Paolo. Good morning, everybody. So let me start by saying that I'm pleased with our performance in the third quarter, and this for a couple of reasons. Firstly, our order intake returned to growth this quarter. In fact, Q3 saw the highest level of order growth in five quarters, and that's despite the headwinds that we continue to see in our new installation market. Secondly, I'm also pleased to see our continued margin improvement. Quarter three marked the seventh consecutive quarter of expanding margins on a year-on-year basis. And last but not least, today, we are announcing our intention to launch a share buyback program, which I will elaborate on later. So first, on the operating performance in the quarter, starting with Slide eight. Let me touch on three highlights before going into more details on the following slide. Firstly, we had a solid quarter with growth in order intake reaching 5.5% in local currency. And that's the highest level of growth since the second quarter '23. And I'm particularly pleased to see the development of our modernization business, which has seen growth now accelerate since the beginning of the year, and I will come back to that in more detail shortly. Secondly, our operating margins continue to expand, and we are firmly on track now to achieve our 11% reported EBIT margin for the year, as we have guided to. And despite higher restructuring charges this quarter and expect even higher again in quarter four. On an adjusted basis, operating margins are now above the 12% level. And thirdly, as we discussed after our H1 results, we are starting to see operating cash flow normalize after the volatility in net working capital during the prior quarters. Now moving on to the next slide, order intake and revenue and focusing on the left-hand side of the slide. Order intake grew organically by 5% and we saw a strong development in the modernization and the service orders with modernization growing 20%, as Silvio highlighted, and service growing high single digits this quarter. So let me spend a moment on the modernization business, because last year, we have been very clear with you that we were not growing in line with the overall modernization market. But it's fair to say that we have addressed the topic, and our efforts are starting to pay off. We have seen modernization orders growth accelerate this year from low single digits in the first quarter to high single digit in the second one and now 20% in quarter three. And importantly, the growth this quarter was broad-based. So all regions growing in the 10s or the 20s and without any outside boost from major project orders. Now as for the group backlog margin this quarter, it was sequentially stable and it continued to improve year-on-year. And I can also confirm that we continue to work down the legacy backlog, which is now less than 50% -- 15% of the total backlog. Now turning to the revenue growth on the right-hand side of the slide, Revenue growth came in at 2.6% in local currency in the quarter and 1.8% year-to-date, leaving us on track to deliver our full year guidance of low single-digit revenue growth. And it is a rather familiar picture with revenue in China declining due to the continued slowdown of the Chinese new installation market, which is impacting our top line, but that decline was more than offset by the good revenue development in service and modernization growing high single digits and low double digits, respectively, this quarter. Now moving on to Slide 10. The EBIT reported margin came in at 11.7% in quarter three, up 140 basis points versus quarter three last year, while the EBIT adjusted margin came in at 12.6% this quarter. It's important to note, however, that the operating profit this quarter was boosted by a EUR 40 million of gains from disposal of assets. So, without these gains, our EBIT margin adjusted would have been 12.1%, up 100 basis points year-on-year. As for the drivers of the higher margin price and mix continued to contribute positively, and so to, obviously, the procurement savings. But I'm also pleased to see that our initiative on SG&A efficiencies are starting to pay off, and I would expect this to provide further tailwind to margins in quarter four and more importantly, into of next year. However, our reported EBIT was also burdened by higher restructuring costs, which came in at EUR 18 million in quarter three, and I expect that to further increase in quarter four. Now moving to Slide 11. That gives you a bit of an insight into the net profit development. And you can see that net profit grew again with our net profit margin out staying above the 9% level, which we reported last quarter. Below the operating profit line, we have seen a very good development of our financial income this year. partly due to the cash management, and I will elaborate on shortly when I discuss the buyback program. Now moving to Slide 12, where you see the development of the operating cash flow. So operating cash flow came in at EUR 257 million in the quarter, which is a good development compared to the level that we saw in quarter three last year and also good development compared to Q2 this year. Overall, I would say that you are reaching a more normalized level for our quarterly operating cash flow in the EUR 250 million to EUR 300 million range, following the volatility in the prior quarters. I'm also pleased with the development in net working capital this year, including in quarter three, and that comes despite the headwinds that we are facing from lower down payments in our new installation business as we work actively on improving our net working capital position, particularly inventories. Now let's turn to Page 13, Schindler announced already our planned share buyback program. And let me first talk a little bit about our broader capital allocation strategy because earlier this year, at our full year '23 results call in February, you heard me talk about our active capital allocation strategy and how we aim to distribute capital to shareholders whilst at the same time, maintaining a strong balance sheet. At the time, we announced a change to our dividend policy, raising our payout ratio to a range of 50% to 80%, and now we are adding a next step of EUR 500 million share buyback program. So we believe that's the best next step in our capital allocation and one that really recognize that the dividend yield on our share is below the broader average on the Swiss market. So we believe that you, as shareholders, deserve a better yield. At the same time, it's also a decision which allows us to maintain an active M&A strategy and maintain our strong balance sheet with liquidity, let me remind you, excluding lease liabilities of EUR 3.8 billion, which represents approximately one third of our balance sheet. And in addition, we are also confident that we can continue to generate a healthy cash flow going forward. Now some brief details on the program. It's a EUR 500 million buyback that will run for up to two years and cover both our registered shares and our participation certificates. It's clear that the repurchased shares will be canceled. So moving to the next slide and also the last slide. So before we go to the Q&A. So we confirm our '24 guidance, expecting low single-digit revenue growth in local currencies and an EBIT reported margin of 11%. After the strong margin development so far, you may wonder why we are not raising our margin guidance. So let me give you some -- let me clarify our expectations to the next quarter. So firstly, as I mentioned earlier, we expect to see a further step-up in restructuring costs in quarter four as we have guided you to. Secondly, we also flagged with our H1 results that it's clear that the headwinds we have seen in our Chinese new installation business this year have not eased. Rather, they have accelerated, and that will add some uncertainty around our operating results over the coming quarters. And finally, there is always some uncertainty around the delivery of the backlog as we look into the final quarter of the year. But all in all, we are confident that we can deliver a reported EBIT margin this year of at least 11%. Now in conclusion, allow me to say that together with all the colleagues in the Executive Committee, we are very pleased with the progress on our self-help agenda. And this in what continues to be a very challenging and high market environment and in many of our key regions, and we remain very grateful for the persistent commitment of the thousands of colleagues that serve our customers on a daily basis. And with that, I hand over to Lars.
Lars Brorson: Thank you, Carla. We are now happy to take your questions. I'd kindly ask you to limit yourself to two questions only, given the limited time we have available. Thank you very much for that in advance. And with that, I hand back to the operator, Sandra, please.
Operator: [Operator Instructions] Our first question comes from Klas Bergelind from Citi. Please go ahead.
Klas Bergelind: Thank you. Hi, Silvio. Carla. Paolo Lars, Klas at Citi. First on the guidance for the year, I get what you said here, Carla, on the margin into the fourth quarter. But I just want to focus on revenues a bit. You have solid orders up over 5%, but you're not changing the revenue guide. The delta versus expectations is across modernization and mod orders to sales are typically shorter lead time than for NI, but you're not changing the sales guide. So the question really, are you baking in some cautiousness on the backlog conversion into the fourth quarter? Do you expect China NI sales sort of fall further sequentially? That's my first one.
Silvio Napoli: Carla, would you like to address this question?
Carla Geyseleer: Yes. Thank you, Klas. First of all, we have a lead time that is between 12 and 18 months before it translates into the revenue. That is number one. And secondly, of course, we have always a bit of impact of China and there, we remain cautious. And of course, it's also not a secret that we always take a conservative position.
Silvio Napoli: No, that's correct. Your analysis is 100% correct. The backlog conversion is the uncertainty, because I'd like to stress, let's not only pin it down to China. Take Europe, Germany, today's news, right? Construction sites are slow. Developers have less cash. The order book are being reduced. So, they put this way and uncertainty, as you say, our order book is strong. But so, we are not in control of the speed of construction sites, which is very much dictated by customer. So hence the uncertainty regarding revenue.
Klas Bergelind: Just to. Thank you, Silvio. Just on the lead time, I know it's 12 to 18 months, but I'm just sort of focusing on modernization, which I think is quicker, where you have a lot of growth at the moment. So the modernization orders or revenues is shorter than the 12 to 18 month NI, right?
Silvio Napoli: This is correct. This is correct. And this order had just come now. It is in Q3. So while it is less than 12 months -- three months or some of it will. That's to the point, Klas.
Klas Bergelind: All right. Very good. My second one is also on modernization. You upgraded the market outlook for Americas, but I want to assume a little bit on your own performance here as you're growing strongly across the board, not only in Americas. Obviously, some of your peers have been growing faster than you, and now you're catching up here in a big way, which is great to see. I'm trying to understand really what you've done in terms of the offering, more OEMs out there are introducing a modular concept modernization including partial modernization, which is improving both quotation and the time spent on the sites a lot. Are you introducing this offering now as well to the market. And is that driving the step up? I'm trying to understand the sort of sense effort within modernization for Schindler. Thank you.
Paolo Compagna: Thank you, Klas. A very good question. It's obvious that, yes, we have accelerated our mod business, and you are observing it right. We have also -- I don't say adjusted, but enhanced our offering, including what we call kits and it is very much in line with what you are assuming. So we are offering solutions for the installed base, which then can be offered, but as well installed in a much faster and more efficient time. So this offering is obviously supporting also our order intake together with many other actions. And I'd like to repeat what Carla was mentioning before, the nicely developing order intake in modernization in this quarter was not supported by larger projects, which once more underlines the importance of this many kits applied to many units.
Klas Bergelind: Thank you.
Operator: The next question comes from Andre Kukhnin from UBS. Please go ahead.
Andre Kukhnin: Good morning. Thank you very much for taking my questions I'll just start with one on modernization while we're on it. I wanted to ask about the margin potential of that business as the volumes are now ramping up clearly. And as you mentioned, offering more kind of productized offering there rather than dealing with this kind of on a project-by-project basis. Where do you think your modernization margins can go maybe on a more like a three-year view with this positive growth trajectory and your self-help measures.
Silvio Napoli: Thank you, Andre. Let me just first have, and then Paolo will build up on this. Modernization, a bit like in NI. There is a bit of a I want to create decoupling, but clearly, a differentiation to be made between China and the rest of the world. In China, let me start with the not so good news. We see mod pricing not developing well. In fact, we see mod pricing and margins with them declining parallel to NI, maybe not as fast, but following closely. Maybe let me elaborate for a second. Why is that? Well, in fact, and I was in China last week, so I can have some pressure formation there. In China, there is a model whereby agents are used a lot. And it is, in fact, the same agents that used to sell lots of new installation and now sell modernization. There is so far not really a critical mass of mod-only agents. And so, what do these people do? They cannot sell NI and as much as we work with them and to differentiate and we try also to sell direct to where we can with large customers, offered by simple market dynamic, then the mod follows the same element of NI because they're looking for more revenues to make up for NI. That's China. For the rest of the world, in fact, the modernization margins are higher all depending on the region, similar as NI. And our goal is clearly to make them higher than NI. So maybe Paolo would like to elaborate on where you're going to see an improvement there.
Paolo Compagna: Yes. So, the target is to work on the margins, as mentioned before, using more of these standard products, we call it kits and moving as much as possible away from this, as Silvio mentioned before, on case-by-case or project by project approach. So, this will also support margins. I'd like to add one component which for us is very important. That we apply modernization, what I would call the same pricing discipline we apply a new installation. Then it's obvious also here, very different, very different from region to region, from country to country one could follow the trap of following stepping away from price discipline. So, with the price discipline we apply, repeating Silvio, our aim is to further improve on the mod margins. And yes, with a bit of a caveat around China, as mentioned before.
Andre Kukhnin: Thank you. If I may just follow up on the China situation with agents competing for mod, I think historically, you were one of the kind of lesser users of those third-party agents or distributors. Does that mean that your installed base and maintenance base there is more protected from that phenomenon or not?
Silvio Napoli: So, Andre, thank you. Allow me here to build on this. Agents and distributors are not exactly the same model. Agents work on project by project, client by client, and so you sell projects specifically. Distributors, in fact, they buy both. And so you would have a contract whereby you agree upfront on large orders, usually a standard price, which then gets adjusted at a later stage depending on final specs. So, in both distributors who typically offer a lower conversion rate to maintenance than agents. Yes, it is true based on our market intelligence, you would see that we have traditionally used much less of distributors in the past than our competitors. Agents in the past, until not so long ago, were indeed offering higher conversion rate with distributors, however, I must say, this is part of the China model and issue at the moment that this is also becoming a challenge because some agents to make up for the drop in revenue and NI would also now enter the maintenance business. And clearly, digitization differentiation, all things that we try to deploy is to establish differentiation versus what they can offer, in fact, as an ISP versus what an OEM can face. So yes, we do have some protection working with agents. The best is just to sell direct. But that is the situation today, which also explains why service margins in China and conversion rates are lower than the rest of the world.
Andre Kukhnin: Thank you. If I may, just a second question. Lars, I promise I'll go back to queue and the next caller. I just wanted to really ask about at this stage of the year about any early indications it could give about their markets demand outlook for 2025. You talked about China clearly down in the past developments there. Does that change your view at all? And is there anything you can offer in terms of comments for the rest of the world, please, in terms of the installations?
Silvio Napoli: Andre, we're not prepared to give an indication of market '25. We'll do that in February. Perhaps since you mentioned China, it is fair to say this is a confirmation that we so far don't see any signs of the Chinese market having reached its bottom. I appreciate there was announcement by the government this week. We'll read them carefully. We still need to understand what the impact would be. I think it's probably too early now to provide an assessment. So, if you mind, by the way, when we speak in February, I'd love to hear your views on what this means on a macro level, but so far with this comment.
Andre Kukhnin: I understand. Thank you very much for your time.
Operator: The next question comes from Kim John from Deutsche Bank. Please go ahead.
John Kim: It's John from Deutsche. Good morning. Could we shift and talk a bit about your installed base? What sort of unit growth are you seeing in Q3? And how much of that is organic versus acquired. Also, previously when we spoke, we were talking about kind of price cost dynamics on the service element with inflation and price increases a bit mistimed. I'm wondering if you can comment on that.
Silvio Napoli: Thank you, John, Carla.
Carla Geyseleer: Thank you, John. Well, we can say that our portfolio develops healthy mid-single digit. And so it continues in line with what we have seen in the past. So very solid.
John Kim: Okay. And then on price cost?
Carla Geyseleer: And maybe, John, also important, it's organically because, yes, you see that the inorganic is also pretty low. Sorry, can you repeat your second question?
John Kim: Price increases versus underlying wage inflation and core maintenance.
Carla Geyseleer: Yes. I must say our price development is also positive and it's definitely offering when it comes to maintenance the major inflation is actually the labor so that we have seen. So yes, it's not only from portfolio unit perspective, but also I think from a value perspective that we keep on spending positively.
Silvio Napoli: John, let me build on Carla's answer to say this. I think you heard me say in the past, we really work by the mantra, pricing plus efficiency has to be higher than inflation. You correctly referred to labor inflation as being a major challenge and headwind in terms of we do by maintenance in particular. Overall, we are holding well. So, we're delivering on this price efficiency. It is fair to say that the pressure is increasing. And in most countries, we have this automatic clause for adjustment of pricing as a result of labor inflation. But clearly, this is one of our wash point on which we have been doing well so far. But you're right to point out this as one of the challenges to be looked at very carefully going forward.
John Kim: Thank you.
Operator: The next question comes from Vlad Sergievskiy from Barclays. Please go ahead.
Vladimir Sergievskiy: Yes, good morning. Thanks very much for the opportunity. First of all, I would like to ask about net income composition. There is rising noncontrolling interest in the P&L this quarter. On my calculation, it's about 8% to 9% of total net inflow. Could you possibly remind us is there any particular region this noncontraordinary interest is related to?
Carla Geyseleer: You refer to the noninterest financial income?
Vladimir Sergievskiy: Sorry, I'm referring to noncontrolling minority interest in the P&L.
Carla Geyseleer: I will have to come back to that question Yes. So, I will come back to that question. Yes.
Vladimir Sergievskiy: Understood. No problem, Carla. And maybe the second question would be the backlog trajectory. The backlog is down this quarter by about EUR 450 million. It's about 5% sequentially despite book-to-bill being actually very close to one healthy book-to-bill. Is there any reason for that outside of just currency headwinds or it's all currency?
Carla Geyseleer: Sorry, Vlad, I come back to your first question now because I know what you referred to. So sorry for that. This is actually dividends that we received on a financial asset actually. And to be honest with you, a stake that we hold in Korea. So sorry for that. I was a bit slow. I apologize.
Vladimir Sergievskiy: No worries, Carla. Thanks very much for this clarification and maybe on the backlog commentary, if you have any.
Silvio Napoli: So, Carlos, sorry, you were looking for the answer to this. The answer is the reason for the backlog reduction. Is it only foreign exchange driven, or are there other elements. I think Vlad this is question.
Carla Geyseleer: Well, it is actually, to be honest with you, it is flat in actual rates, we have a slight uptick in the on-field order balance, yes. So yes, 80 basis points is indeed currency effect. Yes.
Vladimir Sergievskiy: Okay. Thank you very much. That's very clear.
Carla Geyseleer: Pleasure. Thank you for the question Vlad.
Operator: The next question comes from Martin Huesler from ZKB. Please go ahead.
Martin Huesler: Yes, good morning and thank you for taking my question. I have a question maybe a ballpark. If we look at the improvement you did in the nine months and give or take, 100 bps improvement in adjusted EBIT margin. I wonder if you could break this down into the three factors that you were mentioning, pricing efficiency and mix. How is the contribution of those three factors. And added to that, if we go for the next step now from here to the 13%, maybe next or the year after the next year, which part will contribute most to that?
Silvio Napoli: Thank you, Martin. Carla?
Carla Geyseleer: Yes. Thank you, Martin, for the question. In fact, well, the expectations to go to the 13% midterm and the development there that we target is not that much different from what we've seen here now in the year because a big part of the contribution is coming in first instance from the supply chain recovery and the procurement savings. And that will also remain quite an important one going forward. And the second one of course, is the SG&A. The SG&A efficiency there, I mean, we see the first elements coming through now in the last quarter, and we expect obviously that to take up in the period to the midterm target. And thirdly, the NI and most efficiency that we are working on -- that was also rather, I would say, minimal in the last quarter, but we have very good signs that we are on the track to deliver more in the coming periods. And of course, mix, yes, it has an impact, but it is definitely not a major part of the improvement that we are targeting. We have also been very clear already in the past that we are not banking on the mix and that we rather go for what Silvio calls nicely our self-help agenda. What you definitely should take into consideration is, of course, labor inflation. That is one of the major headwinds, given, of course, our labor intense business. But obviously, that is also taken into consideration.
Silvio Napoli: Another way to look at it, Carla, I should say, is that so far, if I could say, probably the impact on our improvement was pricing efficiency and mix in order. Going forward, this order will change into efficiency, pricing and mix will remain third. Mix will also remain third why because we still hope going forward, the D&I business will come back. If not in China is in the rest of the world with a modular platform being completely rolled out across the world. So, this is -- we did definitely need to secure this transition. And that's why as I mentioned since the beginning of the year, efficiency has to be our key focus and will certainly be the measure of our success going forward.
Martin Huesler: Thank you. Very clear. And then a very short one on this divestment gain on this asset. I was just wondering, first of all, was this chart in Hong Kong or was these other assets? And do you have further divestments in mind for, let's say, the next quarter?
Carla Geyseleer: First of all, it's a bucket. It's a combination of different elements. So -- and of course, the divestments are part of it, but it's not the only part.
Silvio Napoli: So allow me to say, it's not Hong Kong, right? So of course, there is no question here to do Hong Kong.
Carla Geyseleer: Yes, since she was mentioned. Just that. Yes. It's a key component of our business in Hong Kong. And when it comes to other potential divestments, Look, we constantly look at the portfolio and it is clear, I mean, if there are markets where we believe that the future is not rosy, we will definitely not hesitate to divest these. Yes.
Silvio Napoli: Whenever we find that we have no, if you want, a right to win, that the local codes and correspond to our products or that we have some critical market share, then we rather divest. And we have been very methodical since the beginning of '22. And we'll continue to do. So clearly with time, I'd like to believe less and less candidates will be there, but also it's a clear message to our operating units that either they meet a certain standard in a relatively short time period or then divestment is actually a possibility. But clearly, our objective is to make sure that whenever there is a potential, whenever there is a market, we recover the situation. And actually, we've been doing so successfully in many markets over the last three years.
Martin Huesler: Okay, well understood. Thanks a lot.
Operator: The next question comes from Martin Flueckiger from Kepler Chevreux. Please go ahead.
Martin Flueckiger: Good morning, ladies and gentlemen. Thanks for taking my question, just a follow-up on the previous question, because can you just remind us about the timing of that divestment? And did I understand correctly that it was that it was taking place in China and that I heard correctly that Carla was talking about a positive onetime gain of EUR 14 million. That will be my first clarification question. And also building up on that. Did I understand correctly that it's part of adjusted EBIT? Why was it not reported as an exceptional item? Thanks so much.
Carla Geyseleer: First of all, just to be very clear, the EUR 14 million gain relates to disposal of different assets. That is number one. And yes, one of it is a divestment. It is not in China also to be very clear. Why did we not take this in adjustment that is because, first of all, these are operational assets. And secondly, I mean, the amount is also not that significant. But I just pointed out because we don't want to mislead you when it comes to the expectations for the following quarters. So that is the reason.
Martin Flueckiger: Okay. But sorry, just for the acoustics, we're talking about 1-4 or 4-0 in terms of the amount.
Carla Geyseleer: The total gain on disposal of assets is EUR 14 million, yes.
Martin Flueckiger: Okay. And it's included in adjusted EBIT?
Carla Geyseleer: Well, I mean, it is definitely included, yes, in the adjusted EBIT. It is not an adjustment, so it just flows through also to the...
Martin Flueckiger: Very helpful. Thank you so much.
Operator: The next question comes from Miguel Borrega from BNP Paribas (OTC:BNPQY). Please go ahead.
Miguel Borrega: Hi. Good morning, everyone. Thanks for taking my questions. I've got two. The first one I just wanted to confirm the guidance you gave last quarter was not factoring in this disposal. So when you guided for adjusted EBIT to be 70 basis points higher than reported EBIT and the second half adjusted EBIT 50 basis points higher half-on-half, we now need to add this EUR 14 million, correct?
Carla Geyseleer: Yes. But to be very clear, we guide on EBIT, and you also know that we are very active on reducing our SG&A and hence, our indirect headcount. So, we took already part of the restructuring cost in but you can expect higher restructuring costs in Q4. That is number one. Secondly, I also pointed out that we still have the backlog topic, what we called our cost dilutive backlog. We also try to work consistently through and as fast as we can. So that is a bit sometimes unknown. And then thirdly, China is not amazing one, but it's also very difficult to really predict precisely the impact of the volatility there in the Chinese market. And these elements together, by the way, also if you look at the FX, the FX impact also intensified in quarter three. So, let's see what that also will bring in quarter four. So that, of course, has also an impact on your absolute profit.
Miguel Borrega: Okay. I was just trying to understand what changed from last quarter to this quarter? Essentially, you mentioned FX. But in terms of the difference between adjusted EBIT and reported EBIT, now we've got a EUR 14 million gain in adjusted EBIT. So that should be added to the full year guidance, right?
Carla Geyseleer: Well, I mean, yes, but you have also the other elements that I say that will also play, I mean, a bit of volatility in China, a bit of volatility of working through your dilutive backlog. So yes.
Miguel Borrega: Okay. Thank you. And then my last question, maybe can you give us a sense of how much new equipment represent as a percentage of adjusted EBIT at the moment? Thank you very much.
Carla Geyseleer: No, we actually never go into the different segments. So yes, we don't give that kind of detail.
Operator: The next question comes from Nick Housden from RBC. Please go ahead.
Nicholas Housden: Hi, everyone. Thanks for taking my questions. The first one is on, I guess, the renewed capital allocation framework. And I guess I'm curious as to whether as you're having the internal discussions, you're expecting some kind of an acceleration in bolt-on M&A, I guess, just as the service market tilt towards connected units and away from the skills at where the ISPs can compete a lot. And if there is an acceleration in bolt-on M&A, would that mean that the buyback could potentially become a recurring thing? Thank you.
Silvio Napoli: Nick, thank you, at least one question on something that I thought was long in the making and high on the agenda of our investors. So, I'm pleased this one question comes up. I'll let Carla answer. This one element that we do have, just to get a sense, right? We do have every year between EUR 100 million and EUR 150 million of M&A. That continues. We only do it where it makes sense, where price makes sense, which is very much a question of market country and also for us, portfolio density accrual. That for us is absolutely key. That will never stop. Now for the possible next steps, please, Carla.
Carla Geyseleer: Nick, yes, so thank you for touching on those interesting step in terms of capital allocation. I think it's step by step. As I said, first of all, we take your feedback very serious. And of course, we reflect on it, and we made now the second step is to the capital allocation after the increase of the payout ratio. Now doing a buyback, I mean, we take it step by step. For us, it's always important to keep a balance between a good shareholder return, number one and keeping our strong balance sheet so that we remain in a good position when we see attractive acquisition targets.
Nicholas Housden: That's great. Thanks. And Silvio, maybe a more strategic question. So, as you referred to at the beginning of the call, it's been two years of very good operational improvement and there's been quite a bit of drastic action that's gone into that. And obviously, there's the EUR 80 million of restructuring plan for this year as well contributing. So as you see it now, taking a step back, what are the big areas that are left in terms of closing the gap in operational performance versus the peers where, I mean, obviously, the best-in-class operating margin is about 500 basis points above what you're targeting for the full year? Thanks.
Silvio Napoli: Thank you, Nick. Happy to address it, and I'm sure we have a chance to go deeper into that when we meet in February for our results '24 and plan '25. Today, the situation remains such that in spite of our progress, Clearly, the key difference is NI margins, and margins and to go with it is efficiency. We still have too much variability in terms of performance across different markets, different countries and even within countries across branches. So, what we're focusing on and Paolo in particular, with this team is process execution process discipline. And this is now a machine that is being deployed. And there is, in fact, agreement to the self-agenda, not much magic because we see within a company, we have champions that even with the old product platform we're doing very well. And now with the new one, we're going to make sure that we use it as no flow effect. But not only do we introduce a new product that will render supply chain and design much more effective. But then this also will have to be reflected also in the way we install and maintain these units across every country. That, of course, is for the main residential, but the same concept applies for everything we do. And building on to that, the same best-in-class player has also higher efficiency in terms of overhead. And so that's what Carla referred before, hence our substantial investment in restructuring, which are a step into this year, but depending how the market develops, but even continuing to the years forward.
Nicholas Housden: Thank you very much.
Operator: The next question comes from Ben Heelan from Bank of America. Please go ahead.
Benjamin Heelan: Yes, morning. Thanks for sitting me in. I wanted to ask a question on your comments in the presentation around green shoots in the Americas. And if you could isolate just what you've seen where there's been some inflections if that's what you've seen. That would be the first one. And the second one, obviously, you've given us the guidance for restructuring in 2024. Do you have any early views on how to think about restructuring costs in 2025? Thank you.
Silvio Napoli: Good. So maybe let's start with the second question on '25, Ben, if you don't mind, we're not in a position yet to give a figure for '25. But we look forward to discussing it and sharing our plan when we meet in February. Regarding the green shoots in America, Paolo, please?
Paolo Compagna: Yes. Our comments in the presentation then refers very much also to the U.S. market in which you remember the last -- because in previous periods, we were indicating and very much last year heavy decline as the new installation sector. So what we see now is -- and I think we were referring this in the half year closing. After the stabilization, we start to see really a bit more than adjusted positive sentiment also in residential, but also in commercial, very, very first projects coming back. And by the way, the latest decision by the fact, do support this trend. This is what invites us to look more positive into the future than we and also we personally would have done in Q1 of this year. So therefore, let's say, the future looks better than the past has been in the U.S., especially. And Brazil, it was strong all the time. And what we see in Brazil in the new installation is even an acceleration of the new installation with incredible demand on residential. By the way, all segments, you can say low end as up to premium. And if at all in Brazil at the moment, the limitation is more in installation capacity of our sale of the industry rather than the market. And this brought together led us to this comment.
Benjamin Heelan: Very clear. Thank you.
Operator: The last question for today's call comes from Maidi Rizk from Jefferies. Please go ahead.
Rizk Maidi: Yes, good morning. Thanks for letting me in. Just two quick ones really. Silvio, we've seen some other -- the first question is really on the maintenance pricing. And we've seen some other industries that are a bit sort of labor intensive, that their maintenance pricing contract is based on CPI rather than the normal sort of wage inflation, and we've seen them a little bit struggling because we've seen a bit of a mismatch between the CPI levels and the volume roughly at 2% and then mortgage inflation running at 4%. I'm just wondering whether you could just shed some light on how you think about your maintenance pricing? And what is it sort of based off.
Silvio Napoli: Thank you so much. Paolo, would you like to address that?
Paolo Compagna: Yes, a very good question. Allow me to give a bit of color. When we look at the maintenance business, we got the component of the wage and wage inflation and compensation by indexes, as Carla mentioned before, there's a second big component, which is the old part regarding efficiency methods and all that. And let me add a third one, which is the increasing digitalization of the maintenance coming with what we have also referred previously with all the connectivity and digital services. By the way, they also help and contribute efficiency. So now without going too much in comparison to other industries or to competitors, what we do, and I repeat, we don't aim to do, we do is to leverage and to combine the pricing you might get by indexes, wage inflation compensation and that with very clear efficiency measures, I repeat myself. one is method and the second one coming from digitalization with increased connected base.
Rizk Maidi: Understood. Thank you. And the second one is just maybe for you view since you just came back from China, just overall views on the recent stimulus announcement, the RMB 300 billion sort of program introduced? Do you think it's going to help new equipment in the midterm, are you getting those work-in-progress projects over the finish line? And what it also could mean to the modernization market there? Thank you.
Silvio Napoli: Thank you, Rizk. In fact, this announcement occurred after our return. So, I came back on Friday and this came today. And yesterday, there were some first signals last week. So, as I mentioned earlier, it's a bit early to assess. So far, I'd like to stress, there is no recovery visible nor inside. Those measures definitely would provide some type of wealth. The question that is still there. And I think we all need to study it a bit closer, is how this would be implemented. You saw that it is not the type of Bazooka intervention. It is one that is supposed to percolate through provincial governance through local banks and then go into specific projects with the main two somehow cleared inventory. Now that in itself comes across as intensive and complex. So, in terms of speed, there's a question open, but I've been in China long enough to know that sometimes you are surprised. But so far, there is no sufficient indication neither on the understanding of how this would work nor on any impact on the market so far.
Rizk Maidi: Thank you very much.
Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Lars Brorson for any closing remarks.
Lars Brorson: Very good. Thank you very much, everybody, for attending today's call. Please feel free to reach out to me and Investor Relations for any follow-ups you might have. Next scheduled event is the presentation of our full year results, as Silvio said, on February 12, 2025. With that, thank you very much, and goodbye.
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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