Schindler Holding AG (SCHN) Q1 2022 Earnings Call Transcript

Schindler Holding AG ( SWX : SCHN) Q1 2022 earnings call dated Apr. 22, 2022

Corporate Participants:

Marco Knuchel — Head of Investor Relations

Silvio Napoli — Chairman and Chief Executive Officer

Urs Scheidegger — Chief Financial Officer

Analysts:

Lars Brorson — Barclays — Analyst

Andre Kukhnin — Credit Suisse — Analyst

James Moore — Redburn — Analyst

Daniela Costa — Goldman Sachs — Analyst

Andrew Wilson — J.P. Morgan — Analyst

Martin Husler — ZKB — Analyst

Rizk Maidi — Jefferies — Analyst

Martin Flueckiger — Kepler Cheuvreux — Analyst

Patrick Rafaisz — UBS — Analyst

Presentation:

Operator

Ladies and gentlemen, welcome to the Schindler Conference Call on Q1 Results 2022 Conference Call. I am Alice, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it’s my pleasure to hand over to Marco Knuchel, Head, Investor Relations. Please go ahead, sir.

Marco Knuchel — Head of Investor Relations

Good morning, ladies and gentlemen, and welcome to the first quarter 2022 results conference call. My name is Marco Knuchel, I’m Head, Investor Relations at Schindler. I’m here together with Silvio Napoli, our Chairman and CEO; and Urs Scheidegger, our CFO. Silvio will, as usual, start with an introduction and Urs will then lead us through the financials. After the presentation, we are happy to take your questions. As in previous sessions. I would like to ask you to limit yourself to two questions only. Thank you, already in advance.

With that, I would like to hand over to Silvio, please.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, Marco, and good morning everyone. Thank you for joining us today. And it’s my pleasure to present our Q1 results together with our CFO, Urs Scheidegger.

Let me just start with a brief introduction. In fact, not so long ago, about two months ago that we met, as I’d just taken over the double role of Chairman and CEO, back then, I presented, what I called, our challenges in view of the macro/micro but also internal situation that we’re facing. We did it in total transparency, actually — one of you actually called it brutal honesty, which frankly I took as a compliment. And today, two months later, exactly in the same spirit, I would like to start this Q1 presentation with an update on each of the same challenges and provide you with a more specific update on the actions deployed so far to tackle them.

In February, actually when I presented, I spoke of — when I’m President, a mix of challenges. And frankly, little did I know that two months later, the situation would have gotten even more challenging. And on Page 2 of the handout you should have received, you see I listed exactly the same kind of challenges that we faced in, providing for each of them, a very short summary written in red about the latest situation. Later on in this presentation, you will see, I’ll provide more color on each one of them.

But perhaps starting with this overall summary and with the macro aspect, and of course the topic of the foreign exchange, which for us, as a company that consolidates results in Swiss francs remains very much a current and real headwind. The situation update is that the Swiss franc has further strengthened and in particular against the euro, a very important currency for our business, which has lost almost 5% today versus the Swiss franc.

Moving on to the next four challenges, which are more specific to the elevator and escalator industry. The first one I mentioned was this urgency to regain competitive new installation margins. And then, unfortunately, you see the situation has further worsened in particular because of the material cost inflation. Back then in February, we reported to you a forecast impact on our P&L, CHF150 million. Today based on latest estimates and the latest prices for commodities and other raw material, including components, the same estimate now has increased to CHF200 million for the year.

Moving on to the third challenge. I mentioned our supply chain disruption issues. Now there too, I don’t need to tell you how the Ukraine war and the China lockdowns have created additional challenges in this regard. Then moving on to the fourth, this time more internal, I did openly speak about the challenges in streamlining our product portfolio complexity. In particular, I mentioned then about the situation in our factories having to deal with the old products, the legacy ones, in combination with the ramping up of the new modularity platform ones, who are selling, still is, very successfully. Well, today, unfortunately, I have to report, and will provide more details in a second, that after an analysis of the backlog, we see that even the new platform in itself, does present some challenges in that unfortunately it offered too many optionality to the customers, who of course loved it, and because of these excess sales and choices of options, the whole portfolio complexity, in fact, has this additional front to be dealt with. More on that in a second.

Moving to the fifth and final challenge, at least the big picture one. The topic of the Chinese market was a addressed last time, where we explained, as the competitor is big as well, that the issue that the largest developers are facing, the most famous one of them all being ever granted, were leading to a contraction in the market, which at the time we estimated around minus 5%, max minus 10%. Well, today, we are talking about minus 15% latest forecast on China. And the main reason behind that is that the construction industry situation has further worsened, in particular, the consumption of the housing inventory, where last time figures show that it was still within healthy levels. And today, unfortunately latest figures released from China show that in Tier 2,3 and 4 cities, the housing inventory unfortunately is shifting to alert levels, while at the same time, housing starts continues to fall. So the China market, which of course, [Indecipherable] is providing itself some of the challenge. So this was the overall picture.

Now let’s move on specific updates for challenges two to five, since on the foreign exchange, I’m afraid, this is not really our business and you probably know much more than we do about that. But so let’s start with challenge number two, which is, we called it, regaining competitive NI margins. Now of course, there are many aspects. Last time, I actually had specific points on four aspects, but today I’d like to focus on two aspects of this NI margins recovery, which is inflation and of course, how we combat it and pricing.

Now the biggest evolution here as far as we’re concerned is the evolution of raw materials and in particular, I’d like to focus here, and you can see on Slide 3, on the most relevant metals for our business, which are steel and aluminum. Steel, of course, is the one we use in most elevators and escalators. Aluminum is particularly important because we produce escalator steps with a proprietary technology, which provides many advantages. Unfortunately, of course, when aluminum goes up, we have to accept that additional cost in our — in particular, in our escalator business. And you can see on the pie chart on the left, we show the relevance of these metals where, in between, you also put the electronic components, which of course, last time I mentioned the case of a semiconductor whose price had increased 40 times in the period over a year.

But now let’s focus on metals, and you can see in the middle chart how literally since our session last time, cost of both steel and aluminum has exploded literally, bringing it back to record levels. Clearly, here, one of the key contributors to the situation is the war in Ukraine and there is not a point but just having to fight it. And so what are we doing? You see here the key actions in the right hand side. We clearly have to look at it from a strategic procurement point of view, whereby we are increasing the outsourcing, whereby we’re renegotiating with all our key suppliers on how to find win-win solutions, whereby we navigate through this period, while retaining our relationships. But of course, there are transactional aspects, whereby we work with the same suppliers on locking in higher volumes. But also there are also new measures that frankly so far we’ve not been doing, which consists of, for example, of hedging bulk metals. In particular, you would imagine, [Indecipherable] aluminum, which is one of the rare metals actually you buy in bulk as opposed than separate components.

So of course, this is what we have to endure and manage. The question, of course, is how do you offset that situation. And then of course, the first thing that comes to mind is pricing.

So I’d like to move on to Slide 4 in your package. Last time I did mention that very openly we were behind in terms of pricing in some markets in particular and that’s why we presented the chart that you can see here on the left hand side below. Now the shaded part of the slide is the situation I presented last time. The other one, you can see from year-end and through March, is the evolution since last time. As you can see, yes, we’ve been able to increase prices. Unfortunately, the nature of our business is that you issue prices on new tenders and by the time those tenders are negotiated and awarded and, of course, by the time we get a down payment, which for us is the condition to recognize an order intake, this offer-to-bill takes time. So even the price increases we have enacted will take time to materialize.

Nonetheless, if you look now at the key actions that you can see on the right hand side of the slide, we have launched a very aggressive first series of price increases across all product lines and regions. I’d like to stress here ‘first’, meaning that more are likely to come as a result of, which as I said before, in terms of raw materials and inflation in general. But also we have looked at our contracts and realized that we have room to enforce inflation clauses, which are predominantly applied, except in some markets where they are in fact not possible. And so we have gone back to our operating units, and most importantly to our customers, both on open tenders or even on tenders that were awarded in the backlog to renegotiate based on the inflation clauses so that we can cover at least some part of this inflation pressure that we’re facing.

At the same time, we also spoke last time about the necessity to change mindset in terms of our sales force and then we’ve introduced a new incentive scheme for our sales force based on price and quality, i.e., not only on volume and market share. Pricing clearly is something on which we will continue moving as aggressively as one can in every market as part of dealing with this inflation.

Now let’s now move on to Page 5 on challenges three and four, which are rather updated together because, in fact, they are very closely tied to one another. In February, I openly shared the issue linked to our modularity platform ramp up and again the complexity of this lag in the supply chain in terms of managing both legacy and new platforms. And you can see, again, I present to the chart that you have on the bottom left part of this slide number 5, where you could see the status of sales in different regions of the modular platform versus the legacy product lines, because the product was not launched at the same time across the world. So there is a lag and difference also linked to those, some codes and standards that need to be built into the modularity platform.

And as we have been dealing with this very actively over the last two months, we also did the backlog analysis, not only on the legacy, but also the new modular platform. And there I have to say, in the spirit of openness displayed last time, we unfortunately found about [Phonetic] surprise, because this backlog analysis, which we do strictly, as we would do in Schindler, looking at every detail, and we discovered that there, there was an excessive number of options that were not only offered, but most importantly sold on a new modular platform, which of course creates a ripple-down effects across the whole value chain and adds complexity in preparing the delivery, in managing suppliers, which in turn creates delivery delays to site, which in turn creates revenue shortfalls or other revenue delays. Clearly, not a good finding, one that, of course, we have immediately acted upon.

And how did we do that? We immediately created a task force, which we called executive because we need decisions to be taken fast. This task force reports directly to the Chief Operating Officer. We have also given instructions to our field operation to reassess, in detail, the outstanding backlog and tenders to make sure that we would go back to customers to discuss with them whether we could optimize the design because sometimes these options could be dealt with a much tighter set of choices and so that they can also get a faster delivery time, which in turn, of course, allows a supply chain to work with the efficiency that we aim at.

We also, of course, had to look at our product management approach, whereby we immediately moved towards a drastic reduction of options offered. How do we do that? We looked at the market. We looked at what really — 80% of the market really needs, the famous cost [Phonetic] curve, and anything which is plus 10%, minus 10% of this 80% is excess, we just cut it out. And we did that not only by giving instructions to sales but actually as far as changing the sales configurator so that these options can no longer be ordered or if ordered, they will be then ordered as a customs requirement, of course, with all different pricing scheme.

Moving on to the next challenge, which refers to the market. So from internal, now, let’s go back to market topics from product to the markets. And we move to Slide 6 with China. China, as you all know, remains, by and large, still the biggest part of the market, more than 50%. Nonetheless, as I mentioned last time, as a result of the large developer liquidity crisis, Evergrande, first of all, the market was already subject to a slowdown, which we estimated at minus 5%, minus 10%. Again, the last time we did say — I did say, that based on figures we have, the housing inventory was still at healthy levels. Today, as you can see on the charts in the slide number 6, this is no longer the situation. In fact, larger developers still are in trouble. In fact, even more so are being challenged by liquidity crunch in the market. But in fact, the slowdown of the industry is remarkable by its speed and by its extent. On the one hand, view the left hand chart, floor space further declines across all city tiers, but then on the right hand side chart, you see that for Tier 2, 3 and 4 cities, the housing inventory is back to a alert levels.

Now how do we assess alert levels? There is an element of judgment, but based on our experience in previous crisis, and you can see here the history of the recent ones on the same chart, we estimate that our inventory level between nine and 12 months is really what we call the healthy level. So you can see that while Tier 1 cities, which is the red line, still are very much within the healthy levels, Tier 2 and 3 have now expanded into alert territory very clearly and very rapidly. So as a result, we have the 16% drop year-on-year that we estimate by year-end, but it is not all. This is clearly a concerning situation. There is, of course, another big unknown in the Chinese market today and these are lockdowns; lockdown due to COVID.

And so I’d like to move to the next slide on Page 7, where very openly, we present the situation of the lockdowns in our different units, namely: XJ Schindler in the Henan province, Schindler China in Shanghai, and Volkslift Schindler in the neighboring province of Zhejiang. Now in Henan, the lockdown was extremely severe in the beginning of the year, but by now, this is now reopened. There are still lockdown in cities, but at least in terms of production, we can produce and we can install in the province.

Where the situation is unfortunately very, very tense and I know that you’ll been following this in the news, and I’m sure all the companies suffer from the same situation, that is in Shanghai. In Shanghai, as you can see here, we started with the first lockdown mid-March, then we went into the short reopening, then it was followed unfortunately for — with the next even tighter lockdown which still goes on today. The situation is very frankly very difficult with employees that came to the office on a Friday and then were not allowed to leave and I understand the business situation there. So they had to stay on premises. We are actually just sharing a few things here. We had to buy sleeping bags, we had to buy camping beds. Some people had to sleep on pallets in the factory. And overall, I will say this here, I’m extremely impressed by the resilience and resolve of our employees who continue to work throughout the period and continues to do so. In the meantime, some of them have been released from our facilities. They’re going back into these quarantine centers. So the challenge continues. And again, I’m truly impressed how our management leadership manages business while at the same time dealing with the situation.

And in maybe in Zhejiang province, the lockdown started a bit later. It is, I understand, not as harsh as in Shanghai. But of course, this is also a major impediment and the situation with this up and, of course, across the country, which in turn creates a big unknown for the market and definitely has an impact on our business. So what are we doing to deal with this? Clearly, the first priority for us, I state it very openly, is supporting our staff during the lockdown. This includes amenities, but it also, by now, also include distributing food, not only for people who are in the factories, but actually take food to people in their homes because situation becomes difficult. But of course as this happens, we are also preparing for the reopening. We don’t know when it should be, and this of course is in the factory, but also in the field, where we have to make sure we have fulfillment capacity, sufficient to — for the ramp up. And based on the situation in 2020, I am — I know that our team and everyone in China will go out of their way to catch up and we have done it in 2020, and being in touch with them on a daily basis and all that. They are just preparing so that we can get off the starting blocks as soon as this would be over. And once more, I am extremely grateful to our staff.

Moving on to the maybe overall summary, that is Page 8. There is not a way to put it. The combination of order backlog, operational legacy and declining market creates a highly challenging situation. With the new leadership team, we are resolved to deal with this and this demands brutal focus on priorities. And the priorities here are listed here on this Chart 8, and it starts with the revised incentive scheme not only for the sales people, but for the whole group, which is the same for everyone based on these priorities. And the top on this priority is this NI/MOD profitability. The second, of course, I mentioned before, these price increases where we have to catch up in order to offset this inflation. At the same time, we need to accelerate all our measures to streamline our product offering.

This finding on the modular platform was extremely sobering and clearly, if anything, adds sort of urgency to further streamline for the move to modularity, real modularity, making sure that this is now implemented once and for all. We have to clean up our backlog. I mentioned before, that it’s actually — it’s a very, I’m going to say, tough task that demand extreme resilience and also proximity to our customers, but also a change in mindset within our team. We have to complete the supply chain turnaround. It’s absolutely essential. We’re moving on that one, we see some progress already, but it will take time. But of course, now, maybe coming to the last one there, efficiency drive. Efficiency drive is key because pricing alone will not be enough to offset inflation. So I would say this magic formula, pricing plus efficiency has to be even bigger than inflation. We are working on that. This means, of course, efficiency in terms of material, efficiency in terms of labor and structure and overhead.

Now talking structure and overhead, let me come to the first point on this slide, which I had not mentioned because there’s one more slide here, that’s Slide 9, which is the illustration of what we do of our resolve. Change starts at the top. When we speak about streamlining, about efficiency, we want to send — we sent a clear message to our team, back to everyone here that we are resolved to work in a different way. So that’s why, as of May 1st, as we announced today, we will have a leaner — even leaner Group Executive Committee. In February, we announced that we are combining the Chairman and CEO, that we had created a new COO role to help dealing with the situation and we have removed already one function from the Executive Committee. Today, we are announcing that actually we have two more positions removed from the Executive Committee, the one we called Operations and the one which covered the region, Americas. So all in all, this means that in less than three months, we have reduced our Executive Committee position from 14 to 11.

This is just one illustration of our resolve because, in conclusion now, we have a challenging situation. We will fix it. We have been here before. To resolve it at the core, to go to the root causes, they all will take time. We will keep you informed of our progress on a continuous basis.

And with that, I think we should start with information on providing more details on our Q1 with our CFO, Urs Scheidegger. Urs, please.

Urs Scheidegger — Chief Financial Officer

Thank you, Silvio, and good morning everyone. Let me start with a few qualitative statements to the results in the first three months of the year.

Page 10, it was a challenging start to the year. Nonetheless, Schindler generated growth in order intake and revenues. The operating results have been heavily affected by aggravated supply chain issues, cost inflation, lockdowns and the Chinese market in severe slowdown. The team is sharpening focus to offset the inflation by increasing prices, streamlining the product offering and driving efficiency.

Now on Slide 11, I am providing more details on the order intake. In the first quarter, order intake reached CHF3.2 billion, corresponding to an increase of percent equivalent to 8.9% in local currency. Organic growth was 8.5%. Acquisition impact contributed 0.4%, while FX had a negative impact of 1.2 percentage points to growth.

The following Slide 12 provides an overview of order intake growth by region and product line compared to the first quarter. Order intake includes all product lines, new installation, modernization, repair and maintenance. All regions and product lines generated growth as activity levels remained robust across almost the whole world, resulting in further sequential increase compared to the fourth quarter, 2021. The Americas region generated the highest growth rate, up double-digits, driven by strong new installation business. The EMEA region also generated double-digit growth, just a touch below the Americas region, supported by a very solid new installation business and a large volume of modernization projects. Asia Pacific was still slightly up despite the significant drop in the China new installation business, which should be more than compensated by strong performance in all product lines of other countries in the region.

New installations remained robust, generating mid-single-digit growth in value terms, growing in EMEA, in the Americas regions, while the Asia Pacific region dropped due to the issues in China. Modernization had a good start to the year, growing more than 20%, particularly in EMEA and Asia Pacific, admittedly, benefiting from relatively low comparables. Same for repairs, resulting in double-digit growth, while maintenance was steadily mid-single-digit up. Our portfolio of maintained units increased by more than 5% year-on-year. The order backlog was 7.2% higher. Margins, though, declined by 100 basis points year-on-year, reflecting price pressures and very significant cost inflation.

I move to Slide 13, showing the revenue developments. In the first quarter, the revenue was up by 1.2% to CHF2.6 billion, corresponding to an increase of 1.9% in local currencies. Organic growth reached 1.5%. Acquisitions contributed 0.4%, while FX had a negative impact of 0.7% to growth. Revenue rose in the EMEA and Americas region, while the Asia Pacific region declined as a consequence of the situation in China. New installation fell within all regions, driven by issues in supply chain and delays in project execution. Modernization, repair and maintenance remained solid, growing overall mid-to-high single-digits.

Moving to Slide 14, showing the EBIT adjusted development. EBIT adjusted in the first quarter reached CHF236 million, which is equivalent to a drop of 21.6%, respectively 20.6% in local currencies. Substantially higher raw material costs, disruptions in supply chains complemented with the additional internal challenges arising from the phasing of modular platform replacing legacy product lines and an excessive number of options, which have been offered on our new modular platform, resulted in bottlenecks, delays, and inefficiencies. As a consequence, the EBIT adjusted margin dropped to 9.0%.

Slide number 15 shows you the net profit and cash flow. As a result, net profit totaled CHF144 million, 32.4% less than in prior years. Cash flow from operating activities declined by 37.4% to CHF286 million since the change in net working capital, this missed [Phonetic] the extraordinary level of the previous year, the lower margins and onset of Top Speed 23 costs.

Let’s now turn to the outlook for ’22 on Slide 17. The order backlog product complexity and operational legacy continue to affect margins. Further price increases across all products and regions are still unlikely to offset the cost pressures. For the second quarter ’22, revenue growth and profitability are expected at similar levels as in Q1 ’22. For the full year revenue growth, we believe between 1% to 6% in local currencies.

With that, I hand back to Marco.

Marco Knuchel — Head of Investor Relations

Thank you. We are happy to take your questions now. I would like to remind you to limit yourselves to two questions only.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Lars Brorson with Barclays. Please go ahead.

Lars Brorson — Barclays — Analyst

Hi, good morning Silvio, Urs, Marco. I had three, if I can squeeze a third one in. First on China new equipment pricing, Silvio, I wonder whether you could give us a little more color. My understanding is price mix was down mid-single-digit in Q1, that will be consistent with your Slide 12 I guess. Just trying to understand like-for-like pricing and trying to understand whether country three on your Slide 4 is indeed China, and if it is, how that squares with the Slide 12. And just to your comment earlier around inflation clause enforcement, can you help us how much of the backlog that might cover and whether that also includes China and how much of an offset that might be coming through as far as those reengagement or reinforcements are concerned?

Silvio Napoli — Chairman and Chief Executive Officer

Lars, thank you for these two very specific questions on China. Urs, perhaps, has a best place to answer. Please go ahead, Urs.

Urs Scheidegger — Chief Financial Officer

Thank you. Hello, Lars. Indeed, it’s a tough first quarter for the China region and our order intake is down by about 15% overall, very much driven by the new installation business and of course, also driven by the overall very difficult market situation. We said it, market is down around 15% for the full year. Pricing remains very competitive in China also now for the first quarter, and you need to see that the time between offered into an order intake is long and therefore whatever the push for higher prices cannot yet seen very well, which means pricing overall was slightly down for the China regions.

Lars Brorson — Barclays — Analyst

Inflation clause?

Urs Scheidegger — Chief Financial Officer

And of course, we are working very, very strongly in enforcing price adjustment clauses to our backlog contracts around the world. Right? We talked about the commercial term, which allows us above a certain threshold to go back and adjust prices. And the teams around the world are working very hard on that to increase prices. But China, it is a bit more difficult, I must admit.

Lars Brorson — Barclays — Analyst

Thank you, Urs. Secondly, can I ask to the margin outlook for the second half? I appreciate you only give full year earnings guidance in July, but it looks to me like analysts are forecasting a very strong margin recovery to about 11% in the second half from around 9% in the first half, and I’m trying to understand why that would be. My understanding is backlog margins was down around 50 basis points sequentially, if I understood your Investor Relations earlier correctly. At raw math, you’re guiding for 200 [Phonetic], feels like that could be getting worse from here even from that level. And I appreciate you get some savings coming through but there are also additional “complexity costs” that are arising from these simplification measures. So just trying to get a sense for how to think about second half margin recovery versus that relatively steep expansion that seems to be embedded into expectations at this point.

Urs Scheidegger — Chief Financial Officer

Right. I want to thank you for this question, Lars. And it’s clear, right? We will only provide a net profit guidance in half year closing results. To give you a bit color, obviously, the team is intensively working on price increase, as I said before. Enforcing price adjustment clauses is one measure we take. We work on cost discipline measures. And for the second half year, I also expect higher revenue growth and that provides scale effects.

Silvio Napoli — Chairman and Chief Executive Officer

So Lars, to answer candidly, we’re not able to provide this as you appreciate things move very fast at the moment. There is not only pricing, there is efficiency. I would say this magic formula, pricing plus efficiencies has to beat inflation. Now at the same time, you see things keep moving. So honestly, we are not working here on [Technical Issues]. We’ll provide you all the color, including our action impact when we speak again in half year. I hope you can bear with us.

Lars Brorson — Barclays — Analyst

I can, thank you, Silvio. Can I squeeze a third quick one in? I have to ask around organizational changes. They’re coming much more sudden and much more rapid than what we’ve seen historically. We saw Thomas leaving relatively rapidly earlier this year or suddenly. Now, the COO, Head of Americas are leaving. I guess a couple of questions springs to mind. First of all, region Americas, is that permanently now removed from the Executive Committee? And if so, what’s the rationale for that? What’s the final organizational structure? It still is a fairly big Executive Committee. Should we expect further sort of simplification around that? And then finally, Silvio, forgive me, you say change starts at the top, some might say that’s rather incompatible with the decision to combine the Chairman and CEO roles under you. You’ve been with the company for 30 years. So can you give us some sense of how you think about your own time frame in the CEO role?

Silvio Napoli — Chairman and Chief Executive Officer

Thank you. So it’s a very specific and, I’m going to say, almost personal question. So even though it’s the fourth one, Lars, let me address it. So it’s like this. First of all, one by one. America, the reason for having it reporting to the CEO is because America is a very important market, one that we need to be able to act in an impactful and the right way. And that’s exactly what we’re doing. For those of you who’ve been around for some time may remember that when I became CEO the first time, we did exactly the same thing. And progressively, once we identified the — once the situation was “going” in the way we wanted and the trajectory had been corrected, then we introduced a new Head of Americas. So to your question, it is possible that in the near future or soon, that may change.

Second question, the organization where you say it’s quite large, well, one thing at a time. If you look now at the size of the industry structure of our competitors, I think with these changes, we are — I think, we are not only aligned but possibly a billionaire [Phonetic], but I’ll let you come with that about the judgment. Now change at the top versus somewhat that belong. I think this is a question of semantics. I don’t think changes certainly means bringing new people from outside. Change meaning working in a different way, meaning — means working with less silos, means working in a spirit of transparency that I hope you can see, it’s your judgment. We are also displaying in the way we present the results.

Change means taking decisions faster, change means having clarity about who is accountable for what. In that regard, for one, I believe the Board believes that having someone that knows the company, knows the market and has been there before, If anything, it’s an additional advantage. So this is our position on that. And now the question was asked [Indecipherable] how long the Chairman and CEO, we’ll see. I can only restate the position, you will see as long as it takes to navigate through the situation. Obviously, I said it last time, our desire is within the medium term, I mentioned last time 2024, but this will depend on many factors that definitely, handling two jobs is probably not something I would enjoy for too long. But I do this as a mission for the time it takes.

Lars Brorson — Barclays — Analyst

Understood, Silvio, thank you for your openness. Appreciate that, I’ll pass it on.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, Lars.

Operator

The next question comes from the line of Andre Kukhnin with Credit Suisse. Please go ahead.

Andre Kukhnin — Credit Suisse — Analyst

Yes, good morning. Thank you very much for taking my questions. I’ll stick to two. Can we start with the cost of complexity and the clash of modularity versus legacy products? I think you’ve been able to provide a bit more quantification of that. Could I just get an update on that? What is that cost together with the kind of newly discovered complexity in the backlog for modular products that you mentioned? And how do you expect that to phase through this year?

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, Andre. Urs, please.

Urs Scheidegger — Chief Financial Officer

Right. Hello, good morning, Andre. For the issues with our modularity platform, we estimated the cost impact of about CHF20 million through the quarter one EBIT results. As we guide into Q2 with similar profitability, you can assume similar amount for quarter two. And then I will provide you an update of the key actions for the second [Phonetic] quarter but of course, it’s clear, the team is working very hard to getting the results asap.

Andre Kukhnin — Credit Suisse — Analyst

Got it, if I may just follow-up, so if we annualize that CHF20 million, it’s obviously CHF80 million. So is that right, then if you were fully modularized as of now, than you will have roughly 80 basis points higher margin?

Urs Scheidegger — Chief Financial Officer

That’s okay. Yes, I mean these are incremental costs to our bottom line right now, yes.

Andre Kukhnin — Credit Suisse — Analyst

Thank you. And the second question is on Top Speed 23. You seem to not mention it much in the presentation. I appreciate you’ve got obviously substantial near-term priorities to fight through. But is there an update on the connectivity and digital adoption?

Silvio Napoli — Chairman and Chief Executive Officer

Andre, good point. We again, for the sake of time, we didn’t provide an update on everything. At half year, we definitely will. Connectivity continues. Let me just give you this approach. Where we are now unfortunately very much limited in execution is the biggest market is China. Where there is — this is the — not only the market for the connectivity, but of course, the biggest room to grow and now you cannot go to site, you cannot install. So — but besides China, we are proceeding all out according to plan. Now on the specific of Top Speed 23, this continues on all the modules that we establish as priority. In all openness, I think we’re also looking at — in the scope of streamlining and focusing on priorities. There are — we are actively considering making tough choices, which on the Top Speed 23 modules, maybe take a step aside and being given less speed and resources in the short term, while definitely continue to be down in the longer term. That’ll be part also of our NI/MOD profitability and also through making sure that we go back to profitability performance in the short term. So that’ll be part of our update when we meet next time.

Andre Kukhnin — Credit Suisse — Analyst

Great, thank you very much. [Indecipherable] I’ll do that. Thank you.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, Andre.

Operator

The next question comes from the line of James Moore with Redburn. Please go ahead.

James Moore — Redburn — Analyst

Good morning, everyone. Hope you’re well. I’ll do two questions as well. Could you help with these price adjustment clauses that you’re going to enforce? I wondered if you could say, of the China outstanding backlog for new equipment, what percentage you think you could do this for? You said that will be tougher. Are we talking, I don’t know, a third? And how much of the U.S. and European backlog do you think you can do this too? Is it the majority or half? Some form of scaling as to how much you think you can get this through will be helpful. That’s my first question.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, James. Good to hear you. Thank you for this question. Urs?

Urs Scheidegger — Chief Financial Officer

Good morning, James. So you need to see that the team is working on this particular topic, right, to go after the backlog now in Q1, and therefore, it’s still at bit too early to really give you specific indications on this. But I said it before, it’s easier to adjust here in the European and Americas markets and in Asia, it is much harder because all the commercial terms are different and more difficult to enforce.

Silvio Napoli — Chairman and Chief Executive Officer

[Technical Issues] I understand this is for the modeling, it’s very important, right? I wish I had this exact answer myself, to be clear, and hopefully when we meet next time, I’ll know more. But to be clear, the situation is like this. We know exactly which markets has the inflation clauses. At the same time, very transparently, with the low inflation we have had over the last 10 years, I mean, part of the curse of low inflation was that people lost habit of enforcing these clauses, not only from the — I mean elevator and escalator industry OEM, but also mostly putting on the customer side. So now, this is a new way, a new mindset change and therefore you have to go and in some places you can enforce commercial terms. In others, it is more difficult. The legal environment in different countries also plays a role. And hence the — very candidly, difficult for us to give an exact number because this is very much work in progress. It’s not a steady-state process yet, at least not for us. And I don’t believe anyone in the industry has been used to enforce these clauses over the last, I’m going to say, 10 years. So I hope that is clear. Thank you.

James Moore — Redburn — Analyst

Yeah. Thank you. And then my second question, if I can, is on input price inflation and thank you for the CHF200 million new raw material guidance up from CHF150 million. I wondered if you could quantify any logistics and energy inflation in this year. Is that included in the CHF200 million or could that be incremental? And more importantly to me, if we were to stay at current spot prices, which is a huge assumption, broadly what could FY ’23 raw materials headwind look like? I had originally thought, six months ago, it might be a tailwind but increasingly, I could see another headwind and I wanted to see if you could help us scale that.

Silvio Napoli — Chairman and Chief Executive Officer

James, thank you for the question. Urs, please?

Urs Scheidegger — Chief Financial Officer

Right. So these costs you are mentioning, logistics and energy is included in the new items of approximately CHF200 million cost inflation on material, logistics, energy. There also, about CHF10 million are related to logistics and CHF5 million to CHF10 million on energy. And for fuel, fuel would be on top of the CHF200 million. We have about CHF60 million fuel costs per annum. And then you can calculate yourself cost increase on this volume.

Silvio Napoli — Chairman and Chief Executive Officer

But, James, to be clear, and you know our financial model, fuel cost in our case are mainly recognized as part of service margins, to be very clear, because fuel is [Technical Issues] we have in many countries, service technicians driving cars. So that’s a direct cost for us.

James Moore — Redburn — Analyst

That’s helpful. Thank you. And I was just thinking about next year FY ’23. And if we were to stay at sort of current spot rates, would we — should we expect a further raw material headwind of, I don’t know, CHF50 million or CHF100 million, I was thinking, next year at current rates.

Silvio Napoli — Chairman and Chief Executive Officer

James, I don’t know if Urs has a better answer. I wish — we’re actually working and hopefully trying to scramble and getting ideas as we plan, indeed, for next year. So far, I’m not able to give an answer for this. Urs, would you be able to?

Urs Scheidegger — Chief Financial Officer

No, look, James, right, this is looking into a crystal ball. ’23, you’ve seen the curves, they went down when we met each other last time. In the mid of February, we were a bit on the decline on alloy steel costs, for example. But now we have increased again in the last three, four weeks. And so it’s really, really not possible to give you a guide, but it’s clear that the team is working on actions, right, to fine tune sources, multiple sources to hedge on bulk metals and to do negotiations with the suppliers.

Silvio Napoli — Chairman and Chief Executive Officer

But to be fair, maybe to your point, I concur with your view and this is whatever it takes, that it’s still likely much more to be a headwind than a tailwind today.

James Moore — Redburn — Analyst

That’s helpful. Thank you very much, gentlemen.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, James.

Operator

The next question comes from the line of Daniela Costa with Goldman Sachs. Please go ahead.

Daniela Costa — Goldman Sachs — Analyst

Hi, good morning. Thanks for taking my questions. Wanted to check on — first on free cash flow and obviously, it’s up to the lot of the headwinds on the P&L. Do you see sort of like the free cash flow situation sort of the drop year-on-year, just more has a temporary thing, given supply chains? And how should we think about cash conversion this year and going forward? That would be sort of my first question.

The second question is in terms of like have — if you could remind us, like, what we should be looking for in terms of like what you’re going to communicate about timeframes and objectives to close these gap with competitors? I think you’ve mentioned you would communicate something maybe around the summer, sort of. Is that still the idea? And can you give any more color regarding formats and what we should be looking for? And then just a quick final one on the price increases. It’s very clear, you said price is not enough to offset the inflation, but if we think about like the time lag between backlog and P&L, you’re doing this first price increases now, when should we — how long would it take for us to see at least this new price increases coming through on the P&L? Is that in 2022 still or that would only flow through later? Thank you.

Silvio Napoli — Chairman and Chief Executive Officer

Daniela, hello. Thank you. So you have now three questions. The one that you said on the free cash flow, whether it’s temporary or going to stay. Number two whether — about the goal setting and price increases, time offer-to-bill. So let me just maybe take one of the three and Urs can take you through the topic about by when will we have objectives, targets. I would say at this stage, I said around the summer, at the moment it’s what I can say, it probably is going to be late part of the summer. And that’s something which we’ll say, as you appreciate all this is new changes happening and have not re-facilitated our timeliness and the quality of our forecast hopefully will improve with, I believe, longer time. So that is the first answer. Urs, please, can you address the other two?

Urs Scheidegger — Chief Financial Officer

Yes, good morning, Daniela. Talking about cash flow for ’22, the cash flow obviously certainly will follow our lower EBIT developments versus last year that correlates. You also have seen changes in net working capital this year in quarter one, less improvements versus an extraordinary last year. But for full year, I would expect a flattish change of net working capital versus last year. So these are the two parameters influencing the cash flow for this year. As Silvio clearly presented measures to tackle and address the key issues in the company, but having said that, it takes time to getting results and it takes time to see then significant EBIT improvements going forward and then also cash flow generation.

Price increases, in the past, the price increase would have been seen in the P&L for new installation and modernization by 12 months. However, see, the current reality, this supply chain bottlenecks in material shortages, this is beyond the 12 months. It’s rather at about 18 months’ time that you really see a significant impact to the P&L of the price increase in the new installation business. Of course, it’s a bit shorter for smaller modernization shops and it’s clearly short — not short for our important repair business. This is — this will be seen earlier.

Daniela Costa — Goldman Sachs — Analyst

Got it. Thank you.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, Daniela.

Operator

The next question comes from the line of Andrew Wilson with J.P. Morgan. Please go ahead.

Andrew Wilson — J.P. Morgan — Analyst

Hi, good morning. Thanks for taking my questions. I think the first one, probably a clarification. But just couple of the comments on the margin backlog. Was I right in understanding that there has been a sequential deterioration in terms of the Q1 margins on the orders versus the existing backlog? Or when you comment about further pressure on the backlog, is that the deterioration of the existing backlog because costs increased? Hopefully that was clear enough to understand.

Silvio Napoli — Chairman and Chief Executive Officer

Thanks, Andrew, for the question. Urs?

Urs Scheidegger — Chief Financial Officer

Right. So as I said, the total backlog margins are now 100 basis points lower year-on-year. And sequentially, we have seen flattish development on backlog.

Andrew Wilson — J.P. Morgan — Analyst

That’s very helpful. Thank you. And then the second question, I just want to — it’s probably again a clarification, just on Slide 4, where you show the price increases, I just wanted to see — to understand, is that price increases or is it price realization, i.e., I guess there’s a difference between trying to put prices up and actually achieving prices going up. I just wanted to try and better understand whether that is actual price increases that customers and, I guess, the market as a whole, is taking, if that’s clear.

Urs Scheidegger — Chief Financial Officer

Yes. These are actual price increases to the order intake. So we see a slight uptick in most of the countries in quarter one.

Andrew Wilson — J.P. Morgan — Analyst

Perfect. And then just, I guess — sorry, a quick follow-up on that. My understanding was that you started to put prices up in the middle of 2021 in a kind of meaningful manner. Is that the right timeline or am I a little bit early on that?

Urs Scheidegger — Chief Financial Officer

Yeah, that’s correct. Your memory is that we started to increase prices last summer time. Having said that, Silvio presented in the annual result confidence exactly that chart, illustrating that we were actually not satisfied with these price decreases to the order intake. Somehow, it was not sticking, and therefore we have now renewed and strong plan — it’s not a plan, action to increase prices to our offers.

Silvio Napoli — Chairman and Chief Executive Officer

And this is now managed in a much tighter way, whereby this is reported to the Executive Committee on a monthly basis with, as I mentioned, new incentive plans. And I think I mentioned earlier, this is the — we’re in the first series now in February, and it is most likely that more will follow soon in the year because the — even though we drive efficiency like never before, the pressure from inflation continues. So more will come.

Andrew Wilson — J.P. Morgan — Analyst

That’s very helpful. Appreciate the very clear commentary. Thank you.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you. Thank you, Andrew.

Operator

The next question comes from the line of Martin Husler with ZKB. Please go ahead.

Martin Husler — ZKB — Analyst

Yes, good morning and thank you for taking my two questions. The first of all — the first one is a very general one. It’s my understanding that you’re still guiding actually kind of the same development for the first half year, namely minus 20% roughly on adjusted EBIT even though environment deteriorated further, as you explained, since April. I was just wondering whether there are also some positive factors actually compensating this further weakness in the environment. That’s the first question.

Urs Scheidegger — Chief Financial Officer

Your understanding is certainly correct and of course, we have taken many mitigation actions to compensate even more severe environment with efficiency, efficiency particularly in the field and also in our back office and personnel costs control and discipline, which can, a little bit, compensate here, these very strong headwinds and leading now to the guidance we have given for Q2.

Martin Husler — ZKB — Analyst

Okay. And then the second question is about your order intake in the first quarter, which is one of the highest I think we saw in the last quarters, if not at all. I was just wondering whether this might not maybe lead to a further kind of margin pressure in new installation when you’re kind of chasing volumes maybe, which I don’t hope. Or how should we read this high order intake in an environment that is more challenging and still I think you clearly outgrow the market with such a good increase in order intake?

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, Martin, for the question. Let me give a brief answer, then I’ll pass it over to Urs. Would we outgrow the market? I don’t know. I’ve not seen the results of our competitors. That’s in the — I cannot say. On the other hand, I must say, to your point, we are absolutely not chasing volumes. We are now directing towards quality sales as opposed to just sales per se. I’d just like to give the direction, which by the way, might already give some sense of the way we are looking at future strategy. At the same time, some of the orders that come now in Q1, as you appreciate, you know our business very well, the offer-to-bill and I mentioned it before, takes some time. So the order intake in Q1 is, to a large extent, the result of tenders that were made in Q3 or Q4 or possibly, in some cases, for large projects, typically even much longer. So this is just to explain that, no, it is not that people got off in January and went on to sell like crazy. This is, if anything, actually in the last few weeks or month, we actually even abandoned some tenders. Just — of course, we’ll not give details, but we did. And some of those quite large ones, some of those quite advanced, exactly, because we don’t want to fall into that trap. Urs, would you like to comment further?

Urs Scheidegger — Chief Financial Officer

Yeah. Well, you will see the granularity on Page 12 of our order intake growth, and the growth is mainly coming from our existing installation business and mainly really good growth in modernization and that’s coming from our European markets and selected Asian markets and then, of course, also repair and maintenance were growing very significantly. On the other hand, as Silvio clearly stated, China, we had a drop of order intake, because we are not going anymore after very low profitable jobs. So the growth there in new installations is clearly not coming from China. But from the rest of the world and also here particularly from Europe and the Americas, where we have positive markets and we work on our good position to grow our business.

Martin Husler — ZKB — Analyst

Thanks a lot. That’s very helpful. Just if we have this slide open, Page 12, maintenance growing 5% to 10% and globally. Is this — if you have to make an assumption, how much price, how much volume, what can you say there because you also face, obviously, salary inflation and that you were mentioning also fuel inflation?

Urs Scheidegger — Chief Financial Officer

Yes. So here clearly, we have a price effect to our P&L. I would say it’s about 2% price increases globally. Of course, then really different by regions and the rest is coming from the organic growth, growing number of units to our portfolio.

Martin Husler — ZKB — Analyst

Okay, thanks a lot.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, Martin.

Operator

The next question comes from the line of Maidi Rizk with Jefferies. Please go ahead.

Rizk Maidi — Jefferies — Analyst

Yes, good morning gentlemen. Thank you for taking the questions. First of all, thanks for helping us with assessing the headwinds this year, which clearly has gotten worse. I’m just wondering if you could spend some time on the potential efficiencies and savings. And I think, Urs, you talked about better efficiencies in the field than what you initially targeted earlier this year. So in my P&L, I have the cost optimization program savings of CHF40 million this year, efficiencies in the field of CHF50 million, CHF60 million. Am I missing anything or is there any update here on those two items that I mentioned?

Urs Scheidegger — Chief Financial Officer

Your understanding is pretty correct. Clearly, this cost optimization program and this is according to plan. So the CHF40 million full year or CHF10 million for the quarter is a good assumption. And then, as I said, your assumption is correct. The team is working to create efficiencies in the fields and it’s good. I agree with you.

Rizk Maidi — Jefferies — Analyst

Okay, thanks. The second one is on price increases. I might have missed your last comment, but I was just wondering if you could comment on the price increases in your backlog currently. How much of those you are expecting to achieve this year? You talked about the delayed conversion of new installations, which has gotten longer. Basically, what I’m interested in is, how much price increases do you think you can capture this year, excluding those escalation clauses?

Urs Scheidegger — Chief Financial Officer

Yeah, it is the same question as before, and I said before, it is too early to further specify it. It’s different by market to market and Silvio said it also clearly, customers are not yet so accustomed for this topic, but it’s clear that we’ll go after it. And this is one of our key action. We will give you an update in half year closing.

Silvio Napoli — Chairman and Chief Executive Officer

And perhaps just to give some alternative view on this, there are two elements on those outstanding tenders. One is the ones that we manage to renegotiate. But there is also the ones we step away from, which net also has an impact. And that’s why, it’s the complexity. Right? And so those, candidly, can be very big. So hence this compound calculation is something which evolves continuously and we just don’t want to give a figure that then we have to come and correct. So hence a difficultly. Again, thank you for your understanding. But the question is fully understood.

Rizk Maidi — Jefferies — Analyst

Okay, thank you. The last one is, Silvio, on your chart on inventory of unsold homes, which you’ve said have reached alert levels. Is this not just a function of less sales rather than overbuilt? I think there’s 400 million citizen in strict and severe lockdown, people are struggling to get food, let alone buying apartments. And if you go back in time in the period after the first COVID lockdown, we’ve seen in Tier 1 cities that reached above or alert levels without the market being in a significant decline afterwards.

Silvio Napoli — Chairman and Chief Executive Officer

I think you’re — obviously, your comment is correct. It’s a mixture of demand of, let’s say — I, for one, believe, I should say, that urbanization in China will continue. And as you can see from the same chart, they have been in ups and downs before. And the whole point is navigate those moments. So I am convinced that China will continue too, there is no question. But of course, this though temporary, those shocks can be extremely violent. And if — so there is less sales but the risk is that [Indecipherable] for example, having — you’re selling in a moment like that in something which is never completed, then you have those like skeleton left somewhere. We don’t want to be in that position. Hence the importance to monitor that very closely.

But long-term, that’s going to — I, for one, believe it’s going to come back because inherent organic demand in China is there. But that is also to be ascertained that the correction in the real estate and construction market in China today looks like it’s deeper than the one we had before.

Rizk Maidi — Jefferies — Analyst

Okay, thank you very much.

Silvio Napoli — Chairman and Chief Executive Officer

Because it involves those large developers that accounted for those [Indecipherable] industry for more than 30% of the growth. So this — as long as this is not taken care of, I think this might create an issue. But the question is very well understood.

Rizk Maidi — Jefferies — Analyst

Thank you very much.

Operator

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

Martin Flueckiger — Kepler Cheuvreux — Analyst

Yeah, morning gentlemen. Thanks for taking my questions. I’ve got two small ones left actually. Firstly on your Top Speed 23 expenses, I was under the impression that the guidance for the full year was around CHF150 million, so you used CHF16 [Phonetic] million if I remember correctly. It’s pretty significantly below the quarterly average. So I was just wondering what the — firstly, what the reasons are for that. And secondly, what kind of phasing over the next three quarters to expect.

And then my second question is really just a very tiny clarification question. I didn’t quite understand what Urs was saying about the targeted cost savings from efficiency improvements this year. if you could just very briefly repeat that. Thanks so much.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you for — Martin, for the question. On the Top Speed 23, I already gave some direction, but perhaps, Urs, can you take [Speech Overlap]

Urs Scheidegger — Chief Financial Officer

Yeah, thank you, Martin. So Top Speed 23, we — I expect clearly lower costs than originally announced [Indecipherable] million. One example was, Silvio was already explaining it that the cost for connectivity of our existing portfolio in China will slow down this year. And this is the current position of the lockdowns and that’s a difficult situation in the Chinese market. So of course, we are reviewing and re-prioritizing some of the initiatives of Top Speed 23 and leading to a lower amount, than CHF150 million. You still need to assume a little bit higher cost compared to our quarter one.

And then on the efficiency piece, clearly, this was a topic in quarter one, right? We were partially compensating the very strong headwinds, these efficiency and the operating leverage. And for the full year, this will be more than CHF100 million. And as we also usually have and now we are working on strong actions to achieve this.

Martin Flueckiger — Kepler Cheuvreux — Analyst

Great.

Urs Scheidegger — Chief Financial Officer

But again, only partially, right, compensating these very strong headwinds you have now seen as early in quarter one. Thank you.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you.

Operator

The last question for today comes from the line of Patrick Rafaisz with UBS. Please go ahead.

Patrick Rafaisz — UBS — Analyst

Thanks for taking my two last questions, and good morning everyone. The first one is a clarification and you’ve talked a lot about price and order backlog, but very specifically to dissect the Q1 order intake in local currencies, how much in that number was actually price contribution or price mix from the — those projects, both in new installations modernization and services?

And the second question is on the the actions you’re taking going forward with negotiating prices and forcing inflation clauses, etc. Is there a risk of cancellations in your backlog that you foresee as you’re doing this or as you’re renegotiating, so some of the designs for the modular products? Is that something we should take into consideration for the coming quarters? Thanks.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, Patrick, for your questions. Urs, would you…

Urs Scheidegger — Chief Financial Officer

Right. So the first question on the order intake, I would estimate that pricing has a slight uptick, positive impact to the growth of — slight, that’s a very low single-digit, 1% to 2% in that region, driven by service price increase, repair price increase and then much less on the new installation business. And…

Silvio Napoli — Chairman and Chief Executive Officer

The question was on backlog cancellations.

Urs Scheidegger — Chief Financial Officer

And on the backlog cancellations, I don’t see that yet that it has a significant impact. It’s marginal impact. That’s my assumption.

Patrick Rafaisz — UBS — Analyst

Okay, great. Thanks, thanks a lot.

Marco Knuchel — Head of Investor Relations

Thank you very much for attending this conference call today. We’d like to close now. Please feel free to reach out to me for any follow-ups you might have. The next event is the half year results 2022 presentation scheduled for July 22nd. Thank you, again, for attending. Take care, and goodbye.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, everyone, thank you for your questions and for your attention. Thank you.

Urs Scheidegger — Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]