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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome to the Schindler Conference Call on half year results 2023.I am Alice, the chorus call operator. I would like to remind you that all participants will be in listen-only mode when the conference is being recorded. The presentation will be followed by Q&A session. [Operator Instructions] At this time, it's my pleasure to hand over to Marco Knuchel, Head of Investor Relations. Please go ahead.
Good morning, ladies and gentlemen, and welcome to our half-year results 2023. My name is Marco Knuchel. I'm Head of Investor Relations at Schindler. I'm here together with Silvio Napoli, our Chairman and CEO, and with Carla De Geyseleer, our CFO. Silvio will start his presentation with the highlights of the first six months of the year, followed by the market update and performance update. Carla will then lead you through the financials. After the presentation, we are happy to take your questions. Today, we plan to close our session at around 11 o'clock.
With that, I would like to hand over to Silvio. Silvio, please go ahead.
Thank you, Marco. Good morning, everyone. Thank you for joining our Q2 half-year results conference. I'll start with the highlights, and that is slide 3 on your package. Before diving into the numbers, I thought it was helpful to take a moment to look back at where we are and how we got here. It's about eight months ago that we had the unpleasant yet beautiful task of confronting you with our situation, explaining how we were losing altitude, but also explaining how we identified the issues that led us to the situation we were in. And also we detailed the measures that we launched in order to fix the issues. We said it would take time, but we expressed a commitment to drive this improvement. Since then, we have indeed been working hard, making a few mistakes, but overall improving step by step, quarter after quarter. And now, with our half-year results, I'm pleased to say that these results show that we are gaining momentum, and that means that now we are ready for the next phase.
Interestingly enough, these improvements come as the market, in fact, has worsened dramatically in comparison to what it was 18 months ago. And this worsening environment can maybe be summarized in two main things. One is the market itself, what comes to that, and the foreign exchange. But starting with the market, in terms of highlights, the new installation market continues to be under pressure, mainly driven by China, but now, as we'll see in a second, also followed by Europe, as seen last time, but now lately also North America.
On the other hand, the service and modernization markets continue to be strong and growing. The other element of this worsening environment is the foreign exchange situation, where indeed we have those foreign exchange headwinds increasing. But notwithstanding that, I'm pleased to report that we have an order intake recovery with a strong uptake in Q2, which then leads, as we'll see later in more detail, to an increase in Q2 of 6.7% in terms of total order intake, for an overall stable half-year report.
Now, moving on to the next set of improvements, staying on the top line, we also had a pleasing revenue growth, which was underpinned by a strong backlog execution across all regions and product lines. Moving from top line to bottom line, which was really one of the key mandates we've given ourselves as a commitment towards our investors, we had in a half-year a strong profitability uptake with a need improvement year-on-year of CHF199 million and most importantly this is not just a blip, this is a continued sustained trend over the last four quarters. This was driven by our operational measures, first and foremost our supply chain stabilization combined with our pricing efforts which all together yielded these results.
Finally on cash flow, which of course are more important than ever nowadays we are also reassured to see an improvement of CHF227 million year-on-year driven by improving profits and networking capital reduced consumption. Let's maybe dive next into the market which is one of the key evolutions and I will now move to slide number 5.
Without going into all details maybe I would like to refer to our market assessment presented in Q1 and just focus on what changes there are versus then and the key difference here is the Americas which we highlighted in red here for your convenience on this slide where we can see we now downgraded our outlook for the market development driven by North America for now a latest assessment of minus 5% to minus 10% unfortunately still in declining phase. And I spoke on North America where we already observe a decline in commercial and multi-family construction.
It has to be said though clearly the declining trend is there that this decline also has to be seen against the base effect because first half 22 was definitely a record period of what one could call the post-COVID revenge building. So clearly the question is how will a second half look like indicators so far are not very positive but the question nonetheless is worthwhile to be asked.
But overall, the market displays a high overall uncertainty with perhaps two pockets of continued growth which are Asia and Middle East, North Africa. It has to be said though that neither of them are sufficiently growing to offset the decline in China, Americas but also Europe maybe last point on Europe here is that the underlying demand is still very much there. I was myself in Germany two weeks ago and you can see there the demand for new apartments, new dwellings is very strong unfortunately today because of set of circumstances developers are not prepared yet to put out the money because of what they see as uncertain returns.
So nonetheless for now that's where we are and that is the overall NI market. Once more we must stress that for modernization the market remains strong with robust demand has a service where fueled by previous conversions and also higher demand and I would say good pricing development, growth continues across all regions.
Moving on to the next slide and I think it is due and fair that we spend some time on China. As we all know China is the largest market for new installations and when we spoke last time we said that though there were signs of possible recovery the timing and magnitude were uncertain for the second half. Well today I must say we are still at the same place and arguably I would say I recognize that we might have been more cautious than some of our competitors in Q1 and I must say I am not at all pleased but to say that in fact our predictions are becoming more and more reality looking now from the situation already now that we are in the second half.
So what do we observe? We observe that the construction starts first of all continue to decline for the fourth consecutive year. For the first half of 2023 we talk about minus 24.3% which is you can argue less prominent than the full drop of the year of minus 39.4% in 2022 but nonetheless it is again negative. Equally now in terms of inventory, we see that inventory is finally decreasing a bit in all city tiers, but nonetheless we still stay at levels which are way above what I call the health line of one year. Tier 1 is barely around 12-13 months, but Tier 2 plus, we talk about 15 months and plus of housing inventory, which doesn't augur for a recovery any time soon. Perhaps a little more data that is not on this slide, real estate investment for the year is down 7.9%; floor space under construction is down 6.6%.
Now, one positive area is that the floor space completed, so completions, which by the way drove our revenue, we’ll come to that, they are up 19%. That is good. However, if one compares that with the May year-to-date, which was 19.6%, one observes that there is a decline even in that positive trend. So, what does that leave us? For D&I market in China, the 2023 outlook remains for us similar to last time when we said minus 10%, minus 15%, responding to one question from one of you. Last time I said it was probably closer to minus 10% than minus 15%. Today, I am afraid my answer will be different. I think we are now getting closer to minus 15% rather than 10%.
The next question of course would be what do we see for 2024? Considering the speed at which things change nowadays, it is probably difficult to say, but nonetheless I think it is fair and reasonable to say that we expect more decline in 2024 in view of today's situation. Now, staying on China, on slide 7, again N.I. first of all is declining, but it is once again the largest market in the world, accounting for 60-70% of worldwide volume. So, that's a fact. So, China cannot and will not be ignored and let's not forget even if you compare it to India, the second largest market is still 7-8 times bigger than India for about a similar population. And that’s the world population needs to be kept in mind and that's why I wanted to stress this idea about the potential of China going forward notwithstanding today's decline.
If you look on the left-hand side, we have this elevator intensity study that we used to present on a regular basis showing that China on the base of the immense historic growth of the last 20 years, now is barely, if one measures at installed base of elevator escalator per thousand inhabitants, at half the density level of let's say South Korea. So, if one imagines a type of social development or urban development similar, you could say there is still the opportunity to at least double up in the future and we know in China cities continue to grow and therefore this drives again more potential going forward both for new installation and existing installations.
And speaking of existing installations, that also leads to modernization and that's the chart on the right-hand side where you see that the forecast for the CAGR of the modernization market for China still is about in the order of 20%. To give you an idea, today we have a population of elevators of an age between 12 and 15 years, which is class typically the age of which a unit with a type of consumption of usage in China needs to be modernized. We talk about a full population of units of about 1.5 million. Now, of course, not all of them are modernized and then if you look at the chart here, you see an estimate for the modernization market in China of about 130,000 units for 2023. And if you take this 130,000 and you compare it to the new installation market for Europe and North America, it's about the same. So, only the modernization market in China by itself is as big as the new installation market in Europe and North America. I just wanted to give those data points because that puts the idea of the market in China, its importance in two perspectives while at the same time taking stock of the recent decline. I'm sure we're going to have more questions on the market, but for now, I'd like to move on to our performance just with some highlights before the CFO goes into more detail, which then takes us to slide number 9.
So, amidst those challenging markets, I'm pleased to say that we are indeed improving. And ironically, I'd like to say, perhaps the efforts that we had to undertake while the market was still coming up, maybe that gives a bit of an upper hand now as market declined because we started working on the hard measures already. We're definitely not where we want to be, but we are improving.
Now again, the CFO will give more details, but here the importance is that this improvement has been steady over the last 12 months, so we don't talk about a blip. We started first by delivering a trajectory correction, then we sustained it, and now we are into the accelerating phase on the back of the momentum we have created. If you look at the left-hand side, showing a revenue and EBITDA evolution, what I also wanted to stress here, besides the figures themselves, is that improvement in 2023 has been driven in spite of the increasing foreign exchange pressure.
In Q1, to give an idea, 2023, the top-line pressure, the top-line negative impact of foreign exchange, or the Swiss franc appreciation, was 100 million, chopped off about our top line, and now in the second quarter we talk about CHF200 million for an aggregate of about CHF300 million. So a doubling headwind between Q1 and Q2, which says something about the urgency to do what we are doing now in terms of improvements.
Moving on perhaps to the question, so the question can be saying, how did we get here, what is it that brought us here, and we will continue to create this momentum. I would like to move to slide number 10, and I would like to highlight two elements, the pricing and supply chain stabilisation. You will remember how much we were open about the fact that we had lost ground in terms of pricing, and how a series of issues in our supply chain were causing our difficulties in 2022.
So I am pleased to say that those two are inputs to the overall performance, and on both inputs we have been improving. You can see on the left-hand side here, how the pricing, your focus on the modular platform, on what we also call sometimes a commodity product, have started to yield results with positive improvements starting in Q2, but also getting into positive territory as of Q3 2022 and continuing into Q2 2023. Another input was the supply chain, and you can see there we were definitely embarrassed to display our on-time delivery performance due to our supply chain issues, and you can see that this KPI, which I consider a good proxy for the overall supply chain performance, is now back in check with on-time delivery as per our commitment, getting close to 100% across the world.
Now these were inputs, looking at outputs and moving on to page 11, if you do the things right in pricing, in supply chain, you then have a positive impact in terms of order intake margins, and you can see here on the left-hand side how our margins in terms of new installation order intake have been roughly doubling between half year 21 and half year 23 where we are today.
Now this order intake margin in turn drives backlog margins, which you see on the right-hand side of the chart, where you see the sequential improvement of our order backlog, and you can see that again, that took probably one quarter more than we saw there in the pricing, but now as of Q4 2022, our order backlog margin has been improving and overall driving our overall bottom line performance.
Now that by itself wouldn't be enough if we did not have, moving on to page 12, another key input, i.e. fixing our product, and in particular our modular elevator platform, for which I'm pleased to say the relaunch is on track, driving complexity reduction, cost competitiveness and higher margins. And you see here just a summary chart, we have seen it already, apologies for that but I thought it was important because it is really one of the key drivers here, how we now have three platforms that were previously independent, now combining to a single one, which in turns drives many benefits. And besides the ones that are on the chart, we talked about a seamless customer experience in terms of buying, in terms of designing other maybe data points, we used to have 25 different car modules. Now, consolidate into three car modules from 25 to three, which in turns, we do the same on other components, drives a radical reduction in variance, which in turn drives efficiency, cost reductions, and also quality and ultimately, better margins, better supply chain performance.
Now, moving on to Slide 13, I like to make one point clear, if there is any sense that we feel satisfied about where we are now. I like to dispel that sense, we are absolutely not in any position to feel satisfied, we there is no sense of accomplishment per say. To the results, if anything, are just a springboard for the continuous improvement that we are resolved to continue driving. And this improvement will be continued doing what you've been doing, but then doubling up on a number of things. And first and foremost, that is going to be efficiency, efficiency, which will be our biggest priority going forward. And why is that two elements?
First of all, because if you look at benchmarking with some of our competitors, very honestly, we see we got room to go and review this as an opportunity. But also because inflation even though now there are economies saying whether it's going to be reused or not, we believe is going to be here to stay. So it is key to stay focused on this mantra we have had since 18 month, which is that pricing plus efficiency has to be bigger than inflation.
And so now on the chart here, we just summarize maybe the main fronts where we believe efficiency needs to be driven faster than ever, starting, of course, with a new installation modernization business. And besides the product there, it's about process simplification, of course, service and repairs were with our portfolio growing, we need to continue driving density, scale effects, and digital services, which are now coming very strongly into the business, the number of your forces procurement, where we knew we were a bit behind some of our competitors, and there with this new platform, but also by streamlining supply matrix will continue driving improvements. And let's not forget back office processes. And they're really the benchmarking exercise made us realize that the potential once more is substantial. And so we're working now on redesigning some of our processes, which will yield improvement to the efficiency and quality and customer service and also bottom line.
So of course, I'm sure you see that to drive these efficiency, we require some investments. And these investments will come in the second half of the year, where the CFO we probably mentioned that we will need some structural rotation cost all over the world in order to make sure that we stay on track with the momentum we've generated so far.
So with that, I’ll give the word to our CFO, Carla please to take us into more detail into the details.
Thank you very much Silvio. Good morning to everybody. It's a real pleasure and a privilege to present you the strong healthier results. You have it already from Silvio we gained momentum and for me it is clear that the quarters two performance now to set the measures that we have put in place or really becoming effective.
Overall, we have been operating globally in a tough market environment. Maybe sorry, I'm on page 15. We have been operating in a tough market environment. Nevertheless, order in-take was up in local currencies sequentially recovering the second quarter from a muted order into development in the first quarter. New installation order in-take margin continues its upward trajectory and almost doubled since the second half of 2021 clearly reflecting our continued focus on margin accretive projects.
Now the good news is that all regions and product lines contributed to the solid three year or year top line growth, but also our service business continues to grow supported by an increase of units of 5% and also continued execution of the pricing measures. Number of connected units reached almost 30% now of the total maintained portfolio.
Moving now to the profitability, at the lower parts of the chart EBIT, adjusted and EBIT, both actually printed now significantly year-on-year improvement in absolute and in margin terms. And you heard it already the second quarter EBIT was supplemented by one of real estate gain of CHF6 million and which is now at a level or compatible which a level of course, the fourth 2019.
Last but not least, cash flow from operating activities improved by more than 70%. And this was particularly driven by the higher operating profit and the lower net working capital requirements. And finally, the Swiss franc strengthened against almost all of our currencies. And that significantly impacted our results. It has an impact of approximately CHF300 million on the top line, and it impacted our operating profits with CHF35 million.
So let's move now to the following slides slide 16, which shows the key figures for the second quarter. So second quarter of 2023 results, they really confirmed the positive trajectory. And you see here that we realize the 15.2% year-on-year improvement in revenue and the local currencies, and even higher growth in profits.
Order intake rebounded after a slow first quarter and increased by 6.7% in local currency, admittedly, of course supported by a favorable, low prior yield [Ph] comparison. Revenue and operating profits were negatively impacted by Forex, amounting to quite an impactful 7.3 percentage points, and then 11.4 percentage points respectively.
Moving to the next slide, slide 17. And then we see the first half key figures. And I can actually be very brief on that one, because the key figures for the first half, they show basically a similar picture, with substantial growth in all the line items. So this allow me then to move to the next slide, which gives you a bit of insight into our strong balance sheets, and particularly our strong cash position, despite a boom three payments of CHF400 million in June, just to be clear, so no renewal of the bonds.
And obviously, the improving interest rates lead to also a stronger financial income, financial income increased to approximately CHF30 million for the first half year. Now referring to our investments, I like to inform you that Schindler holding Aki [Ph] has been reducing its investment in Hyundai Elevator Limited Korea while it is the intention to remain a large shareholder with a significant stake there above 10% in the company.
Moving to slide 19, that gives you a bit more insight in the order intake. And we said it already you have been operating in a tough market environment that market environment that you see here the evolution of the order intake in the second quarter of 2023, which is shown on the left hand side of the slide. And the order intake for the second quarter reached CHF3 billion corresponding to a decrease of 0.5% however, in local currencies, order intake increased by 6.7%. That was supported by strong after sales business and obviously also favorable prior year comparison since the second quarter of 2022 was heavily impacted by the lockdowns in China. Organic growth reached CHF183 million in the second quarter acquisitions added CHF22 million and that more than compensated a CHF290 million negative foreign currency impact.
Moving to the right hand side of the slide, order intake for the first six months of 2023 reached CHF5.9 billion corresponding to a decrease of 4.6% and an increase of 0.8% in local currencies. Organic growth was 0.3% acquisitions contributed 0.5 percentage points, while the FX had a negative effect of 5.4 percentage points to the growth.
Moving to slide 20, and slide 20 provides you with an overview of the order intake by region and by product line comparing 23 with 22, again on the left hand side, the comparison for the second quarter. And on the right hand side, the comparison for the first half. Order in-take here represents all product lines so the new installation that you see, the modernization and the service. And I’ll comment now on the six month development indicated on the right hand side.
So new installation modernization, they had a slow start in the year but showed a significantly improving trend in the second quarter. New installations and modernization margins also continued to improve in all the regions. And the surface business remained very robust throughout the first half year and continued to grow, driven by the unit but also supported by pricing effects.
To be complete, the order backlog decreased by 7.5% to CHF9.5 billion. And in local currencies, the order backlog declined by 0.9%. And then if you consider that our lead times of 12 months combined with the improved new order in-take margins, I believe that the backlog is a robust base for continued solid improvements going forward.
Moving to slide 21, that gives you some insight into the revenue development. So the backlog execution remains very strong in the second quarter. And as a result, revenue shown, increased by 7.9% to CHF2.9 billion for the second quarter corresponding to an increase of 15.2% in local currencies. Obviously, we had also in our prior year comparison was supportive. Now all the regions continued on that growth path with Asia Pacific growing demand. And then new installations, modernization and service they were up all double-digit.
Moving to the right hand side of the slide, you see the revenue development for the first six months of 2023. Revenue reached CHF5.7 billion equivalent to an increase of 7.1% and 12.6% in local currency also year solid growth across all regions and product lines. Organic growth reached 12% acquisitions, contributed 0.6% and of course, you'll see the significant impact of the FX staggering negative impacts of 5.5% points to the growth.
Then moving to the next slide and taking a bit of a deep dive into the development of the profitability. Starting with slide 22 we mentioned it already a positive trajectory continued during the first half year, and you see here, the nice evolution at the left hand side of the slides and the effect it has on the EBIT adjusted and on the EBIT. So it's clear that our implemented measures yields results and they are more than offsetting the declining effects of inflationary pressures. And of course, that is supported by the improved supply chain.
Second quarter absolute EBIT was supplemented by a one-off real estate gain of 6 million, but it was the highest since the fourth quarter of 2019. So, moving to the following slides, where we have a comparison of the year-on-year EBIT, adjusted and EBIT and there you can see that actually the uptake of the profitability is really supported or driven by the operational measures, operational measures resulted year-on-year in CHF175 million improvement, foreign currency again had the negative effect CHF55 million on the EBIT.
EBIT adjusted reached CHF606 million which is a year-on-year increase of 30% and 37.8% in local currencies. Overall the margin increased by 190 basis points to 10.6%. EBIT, a similar uptake, it increased by 49.4% to CHF602 million which was supplemented by the land sale of our former factory in Shuzhou, China and which resulted in a one-off gain of CHF32 million in the first quarter.
But in addition to that we also incurred less expense for Top Speed ‘23 and less restructuring costs compared to last year. So the EBIT margin reached 10.5% and that represents an increase of 300 basis points. Maybe a short note on Top Speed program that has been aligned now and really included in our newly established operating model and we also plan and expect the initiatives launched under this program to be completed by year-end.
Just for completeness reason we achieved a net profit for the sixth month of the year of CHF463 million which is an equivalent of 56.4% and which is one of the highest operational net profits that were achieved in the history of the company.
Referring now to the operating cash flow, page 24 and you see here that the operating cash flow from operating activities increased to CHF240 million in the second quarter and to CHF521 million for the first six months of the year. So an equivalent of 74.2% and that is really driven by the solid increase of the operating profit and to a lower degree the lower networking capital requirements.
So that brings us now to the outlook of 2023. So considering the first year development of the top line and the profitability and Silvio also alluded to it or referred to it, it's clear that we will continue to focus strongly on the disciplined execution of our strategic priorities going forward and hence we expect a positive EBIT adjusted margin trajectory to continue. Based on that and taking into consideration the market developments we lift our revenue outlook for 2023 from low single-digit revenue growth in local currencies to a growth between 5% and 8% in local currencies.
Please keep in mind prior year comparison become much tougher in the second half and when we reflect on net profit, net profit we expect to reach between CHF860 million and CHF900 million, an increase between 31% and 37% compared to the 2022 results.
And before I finish and hand over to Silvio, I really would like to thank all colleagues around the world because it is clear that they made an outstanding contribution to the solid revenue growth and the progressive uptake of profit. So a big thank you to all our colleagues over the world and it has been really a pleasure I must say to join this organization almost a year ago. Silvio, Marco, I hand over to you.
Thank you Carla. We are happy to take your questions now. Well the queue is quite long therefore and given the limited time I ask you to limit yourself to two questions only.
Operator please, Alice.
[Operator Instructions] Our first question comes from the line of Klaas Bergelin [Ph] with Citi. Please go ahead.
Thank you. Hi Silvio and Carla, it’s Klaas at Citi. So the first one I had was the growth in orders. You're facing an easier comp than some of your peers in several regions, but orders are also improving quarter-on-quarter as well. And I'm curious to hear about the development, perhaps month-on-month, through the quarter, Silvio. You're doing better in China on orders versus the market year-over-year, but easy comp there as well as you were underperforming last year. Or are you also taking share quarter-on-quarter?
And then on modernization and in EMEA, there's a lot of repurposing of buildings, green efficiency upgrades, and you say that the market is strong. So I'm wondering why you're not growing faster there in EMEA tags.
Thank you, Klaas. Thank you for your questions. I think you show how well you know our industry. Clearly, it is true that as we also highlighted, our comp basis for last year is easier. But let me just turn it the other way. Last year was really tough. We had seven weeks lockdown in Shanghai with a factory. So, yes now, so coming back this year is not easy in any case, I like to stress. So it's not easy. But yes, if you look at numbers that is something we have to recognize. So Q1, as you saw, was for us very slow because also the organization needed to be realigned and also when the supply chain was still not aligned. So what we observe is a month-on-month improvement. This is important. And clearly, June, the last month, showed a continued improvement. And now we are resolved to continue moving in that regard in China and across the world. I must also say very transparently that one of the, let's say, leadership challenges we had here was to make the organization understand that, I would say, profits equal growth.
There was a moment when we refocused the organization on what mattered. That some people in sales in particular wondered, well, do you want profits or do you want sales? It may sound basic, but that's the reality. And so there has been a lot of change management in explaining to our sales force that getting products at the right margin, considering our premium provider position, was what they had to drive. And yes, we have to change a few people. We have to make sure targets are aligned. And that is coming through now. Are we there where we want to be? Not yet. And so I foresee this continuing to be one of our main challenges going forward.
The second question on modernization. Let me be very open. I'm not happy about what we are in modernization. You're right, we should grow faster. Not only in EMEA, but also I must say in China, where the opportunity is there. There are different situations there. In EMEA, it was in Europe or essentially it was more of a question of having the supply chain ready. Now that it is, I think we can definitely push more on modernization where we have seen that in some of the markets, we probably have not been as performing as we used to. China, it's a different discussion. There, we really need to do better on the product. That's today a handicap, but an opportunity going forward. And we are all driven to bring the product to the market. Part of our Top 23 investment, we're focused on that. And that's the direction we're taking. Hopefully, that answers your question, Klaas.
Thank you, Silvio.
The next question comes from the line of Andrew Wilson with JPMorgan. Please go ahead.
Hi, good morning. Thank you for taking my questions. Just firstly, I was hoping you'd help us a little bit with some of the drivers on obviously what's been very encouraging margin development. I think previously you sort of helped us around things like warm materials, the most priority program, wage inflation, a little bit on productivity. And also, I think you mentioned sort of additional investment for second half, so it'd be super helpful to some of those numbers more specifically.
And I guess secondly, and much broader question is, just around what you're seeing in China and the various policy measures you've seen so far, specifically on the property sector. It's the view now that you just need a stronger China macro and therefore bigger, broader sort of macro type stimulus that we've maybe seen historically, rather than just more measures specifically on the property sector specifically. So, I appreciate that's a broad one, but I'd be very interested in your view on that.
Thank you, Andrew. Maybe for the first question, if I understand, it's about profit drivers and headwinds and tailwinds going forward. Carla, would you like to address that?
Yes, absolutely, Andrew. And thank you for the question. Of course, there are a couple of drivers that lead to the uptake that I presented, and for sure the first one is the material cost. Material costs are coming down, so we take also there our fair share. But it's also fair to say that, of course, we have been disciplined in the past, and we remain disciplined when it comes to the pricing. So that is also having its positive effect.
And then Silvio referred already to it, we are strongly focusing on the efficiency, so this is also coming in different fronts through, and that is also really contributing to the uptake of the profitability.
Now, in terms of labour inflation, labour inflation is of course a headwind, and it is a headwind that mainly came through in quarter two, and there, of course, we will come to a full run rate in the second half of the year. So that but that has been, of course, that should not be a surprise. So that is one of the major, I would say, headwinds that will come our way. But we for sure will continue to work on the efficiencies to offset part of that effect.
Thank you, Carla. Coming to your second question, Andrew. I was in China twice already this year. I was there in April, and then I was there about a month ago, and in different parts of the country. Your question is really the one that everyone would like to have an answer for. A lot has been done on the micro. However, if one has to take stock of the fact it is not working. A lot of the private developers have not yet recovered, and the SOEs, or the state-owned or partially-owned developers, stepped in initially to take a lot of the on-going projects or taking on the new ones. However, what you observe, even the liquidity crunch, or even the over-indebtedness, is also touching them. So, if anything, that situation is not really improving. We don't see any improvement for a term. The good news is that the underlying demand is there. However, people are very cautious. And I remember, in a city like Shanghai, a family to invest in a flat may have to invest as much as 20 plus years of income. And that is a huge risk. So, the government also is careful to protect those, but in terms of creating new demand for new buildings, I was surprised, and frankly disappointed, that there is not much more happening.
Now, what should happen? I don't see, and again, I don't claim to be an expert here. There are much more much higher powers here at stake. I don't see, there is no signal at least, of any major intervention at government level to restart the construction industry. That, of course, would be very helpful even if it wasn't the bazooka type that we observe in 2015, 2016, or in 2008. However, at the moment the way I see this is that the digestion of the situation, that possibly, hopefully not too painful landing of all those companies that will have to fold, and then going forward where a micro-intervention would be helpful, would be at the service level, where, in fact, there have been those pilots on-going to allow for this data-driven service in China. These pilots have been going on for, I think, before COVID so it's now three years, but there is no result yet.
If that was to be released, then I think you would have a huge value-generating opportunity, efficiency, and quality, and safety happening in China. So that is two parts to answering. In an eye, I don't see anything coming short-term, but I see maybe some opportunities on the service side. Sorry, I cannot say more.
That's extremely helpful. Thank you very much.
Thank you, Andrew.
The next question comes from the line of Martin Flueckiger with Kepler Cheuvreux. Please go ahead.
Morning, Carla and morning, gentlemen. Thanks for taking my questions. I've got two, actually. Firstly, I guess they're more directed at Carla. Firstly, I was wondering whether you could quantify the kind of incremental cost savings you expect from restructuring the Top Speed 23 program this year. It's just something that we've got some input for our EBIT Bridge here and then along the same lines also I was wondering what the expected pricing impact as well as the raw material and components price impact on EBIT are likely to be according to your assessment in 2023. That's it for me. Thanks.
Thank You Martin, Carla.
Yes. Thank you Martin for the question. I’ll start with your second question on the material savings. So yes, we definitely will have substantial full year impact and let's say I mean it's yes, it's somewhere, between I would say between 50 and 70, million we could easily have when it comes to the net saving for the full year. Referring to the incremental cost saving coming from the restructuring you will appreciate that we are in the middle of the year and we are working on a number of initiatives so we're clearly not in a position, to give you some insight into that one.
Okay, got it. And anything on top speed 2023? Because my understanding is that you'll achieve further efficiencies there.
Yes, yes, can you repeat your question there please Martin?
Yes, it's basically about what kind of impact we should put into our EBIT bridges for Top Speeds 23 this year in terms of the positive cost savings the efficiency gains.
Maybe Marco because you are more in the from the past in the top feature.
Yes, Martin I mean the Top Speed ‘23 program as the program says, I mean, it's terminated by the end of this year and you might one of the slides he had earlier I don't remember when but there is it's a while ago but there you see that the impacts only start to flow through the P&L from the next year onwards and then gradually coming into the P&L. At the same time and Carla also mentioned that the Top Speed 23 program has been implemented now into our operating model. So it's within the whole framework. We apply now and now it's considered in the four elements that were shown by Silvio earlier during the presentation.
But I can't give you a clear number in that respect now, but the impact in 2023 anyhow, it would be very very slim.
Okay, thanks.
The next question comes from the line of Aurelio Calderon with Morgan Stanley. Please go ahead.
Hi, good morning. Silvio, Carla. Thanks for taking my questions. I have two if I may please. And the first one is kind of coming back to those investments in the second half because if we look at your sort of guidance for the full year. It implies that margins remain flat And even declining from the two key levels I wonder if that's just a reflection of those additional investments that you're putting in the business.
And the second question is more a bit broader question as well. And it's just trying to think about that growth that you've seen in services. How much you think I think you've mentioned 5% is coming from units if you can give us and also give us you gave us an update on the number of connected units. How do you see that digital or connected development going forward and also in terms of pricing if you're pricing above inflation there, please?
Very good. Thank you. So let me start maybe Carla. I'll take the second question. And you come back to the second part. Yes. Thank you for picking up this topic on connected units. This is really one of the few real novelties game changers in our industry coming forward. So by year end, we're going to be having about one third of our portfolio connected. Now as you may remember Aurelio today there is a unfortunately a portion of our portfolio which is a broad behalf of very old units analog type that are difficult to connect on today's technology. We're working on that too, but that has to be seen almost as asymptote [Ph] as a as a maximum now a target to be had which we are confident to reach within the next couple of years. We'll come with more detail when we present the plan for next year. This is the idea.
Now those I confirm that the connected units then drive digital services. These are services are one of our strategic targets we now -- we're not in a position to disclose figures, but what I can say that the growth is exponential. I confirm that those units are connected as a premium price and margin. But at the same time they also drive huge value for the customer in terms of reliability, in terms of less call backs, in terms of anticipating breakdowns and also in terms of CO2 footprint. So this is one area we are driving. It does, going back to the point I said before, involve also a big change management because the way you sell a traditional service contract is different from the way you sell a connected unit, a “Green Contract”.
So there too the speed is probably not as fast as we wish but the fact is that we need to drive that into the different operating units. So in some countries, typical Northern Europe, that's coming through a lot better also because the customer demand is more mature. In others we need to do a bit more groundwork but I'm confident there will be no return and I'm confident that is the model for the future. And that's where our investment in connected units will pay off and going back to the earlier question, let's not forget, Top Speed ‘23, the largest part of this cost was investing in connected units. So part of the answer to the previous one is that one of the paybacks will be being able to generate digital services. With that, hopefully I addressed your question Aurelio. Carla, will you take the second question?
Yes, absolutely. So yes, referring to your questions with respect to the margin, definitely this has to do with the additional investments that we will take but also I referred already to it, the effect of the labour cost inflation. Obviously to be offset at the other side by the increased efficiencies and of course partly also through pricing effects, yes.
That's very helpful, thank you.
Thank you.
Today's last question comes from the line of Andre Kukhnin with Credit Suisse. Please go ahead.
Hi, good morning, Silvio and Carla, thank you very much for squeezing me in. I'll be quick. My first question is on China modernisation, if we can just come back to that and I wonder if you could comment on the revenue opportunity there per unit, how that compares to new equipment. We think it's comparable but we've seen some contract awards that point to substantially high numbers so I just wanted to check with you on that. And secondary to that, how do you expect the profitability in China modernisation to pan out?
And the second question is more broadly on profitability. Thank you for the chart on slide 11. Just looking at the cadence of your backlog to sales, it looks like in Q2 you're still delivering some of that kind of heavily dropped margins. So I wondered if you could comment on where is the backlog profitability now versus what you're printing. Clearly it's above but we're talking about tens of basis points or in hundreds? Thank you.
Thank you, Andre. Can you if you don't mind, repeat your first question with modernisation China. I did get the topic on the profitability but the first part about the units, can you just, if you don't mind, repeat that part?
Sure. Of course, sorry. It was just to check how you expect the revenue per unit in modernisation to compare to, for example, revenue per unit in new equipment in China because we certainly agree on the growth in units but we just want to see how that translates into revenue growth opportunity.
Alright, so let me start with that one. The revenue per unit in mod is higher than NI if you take the commodity. The answer overall is, of course, as a total number it will be lower than new installation because new installation still has those large projects. But if you were to take a single unit, let's say residential, the mod per unit revenue is higher than new installation. The profitability in itself today in China is unfortunately lower than new installation. And why is that? It's a question of labour. There is, first of all, scarcity. Modernisation is a more sophisticated job than new installation. It happens in an occupied building so there are different processes, different safety measures and the skills or the competent labour to drive this type of jobs is scarcer and, by result, also more expensive. Not to mention that perhaps also the process maturity is not at the level of what it is in Europe.
So, in China, I like to stress, in China the profitability of modernisation is lower than new installation. I would say not majorly. We are talking about probably low single digit, but nonetheless it is lower. Carla, would you like to take the second question?
Yes, absolutely. So, referring to page 11, and the impact there of the new installation order intake margins it's clear that it has an effect on the orders on hand. And we talk about here now improvements sequentially, quarter-on-quarter, in tens, not in hundreds of basis points. But it's also the third quarter in a row. And it's also year-on-year that we are in the positive territory. And obviously we see that further increasing, not only because of the order intake margin, but because we are also working through the dilutive business, that has been taken in, in 21. And you remember there the chart that we showed last quarter, the so-called BOA chart. So we are really working through according to the chart that we actually presented to that. And if we continue to go at the speed that we are currently doing, we believe that approximately 70% of the dilutive backlog would have been worked through by the end of the year.
Thank you very much.
Thank you.
Thank you very much for attending this call today. Unfortunately, we have to close now. Please feel free to reach out to me for any follow-ups. The next event is the presentation of the first quarter results on October 19th, followed by our technology day on October 20th. If you would like to register, please contact me. With that, we wish you a nice summer break and hope to welcome you at the end of October. Thank you very much again. Take care and goodbye.
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