Schindler Holding AG (SCHN) Q3 2022 Earnings Call Transcript

Schindler Holding AG (SWX: SCHN) Q3 2022 earnings call dated Oct. 20, 2022

Corporate Participants:

Marco Knuchel — Head of Investor Relations

Carla De Geyseleer — Chief Financial Officer

Silvio Napoli — Chairman and Chief Executive Officer

Analysts:

Lars Brorson — Barclays — Analyst

Andre Kukhnin — Credit Suisse — Analyst

Tong Efung — Goldman Sachs — Analyst

Rizk Maidi — Jefferies — Analyst

Martin Husler — ZKB — Analyst

Aurelio Calderon — Morgan Stanley — Analyst

Vladimir Sergievskii — Bank of America — Analyst

Martin Flueckiger — Kepler Cheuvreux — Analyst

Nick Housden — RBC — Analyst

Miguel Borrega — BNP Paribas Exane — Analyst

Daniel Gleim — Stifel — Analyst

Presentation:

Operator

Ladies and gentlemen, welcome to the Schindler Conference Call on the Q3 Results 2022 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it’s my pleasure to hand over to Marco Knuchel, Head of Investor Relations. Please go ahead, sir.

Marco Knuchel — Head of Investor Relations

Good morning, ladies and gentlemen, and welcome to the conference call for results as of September 30, 2022. 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 Carla De Geyseleer, our CFO. Silvio will provide an overview on recent developments and update on 2023 program as well as on our priorities, and Carla will then lead us through the financials. After the presentation, we are happy to take your questions. After the presentation, we are happy to take your questions. Marco Hoffler, the Head of Controlling actually will be present for this as well. We plan to close the call at around 11:30, at the latest. With that, I’d like to hand over to Silvio. Silvio, please. Thank you, Marco. Good morning, everyone. Welcome to this quarterly conference call. I’d like to thank all of you for your time. I understand it’s a busy period with many companies announcing the results including some today. I appreciate how difficult it must be for you to organize your time. So we’ll try to be as effective and clear as possible. So before we dive into the slides, let me just start with the key message. Since I took over this double role of Chairman and CEO, [Indecipherable] last February. I should say openly that, we are facing a difficult situation. I also said that we will fix it and also said that this will take time. Accordingly, we initiated process of change confronting reality and focusing on what we call the vital few priorities. I’ve shared these priorities with you and we will provide regular updates. Today, I must say that we have the first signs of improvement. At the same time. I would like to stress it and say again, we still have a long way to go. With that perhaps, let me start by addressing be it for a challenge, which was the market, and it is never easy to provide a market update or a market statements, but probably in my 20 years in industry, which is one of the most difficult periods, because things change so quickly. If we start with the new installation market and you have here a chart we try to summarize the situation, it is truly in continuous flux. The year started with a solid market development all around the world with the exception of China. In quarter three, somehow the same trend continued with some initial signs of slowdowns. Now if we look at quarter four, I must say the situation is that China would continue to contract as it has since the beginning of the year, unchanged. But then, the change here is that the rest of the world has also now started to slow down in a much more visible and I must also say quite rapid fashion. And this includes key markets such as North America, South America and also Europe. I’m going to end the existing solution market there. I’m pleased to say in the service, we continue to have stable growth, both in units and volume, thanks for the conversion. And then notably, the modernization pickup continues very strongly all over the world, including in China. We have a chance to discuss it later on in the presentation. We got [Indecipherable] going to come back to this also in relation to our order intake and address your questions. Let’s move on to our challenges. These are the same challenges again we presented to you since the beginning of the year. Today, I wanted to start maybe with the new format by first providing a general overview of all the challenges on the chart that you see here in front of you. Of course, region element here of qualitative assessment, but nonetheless I thought it was important for you to answer. I’ve been transparent due of the the overall progress. Before diving into the specific projects, let me perhaps add here the most important update, and that is that we stopped losing altitude. I say altitude in the sense of declining performance. We have started to stabilize the margins and we have initiated a new trajectory where we now plan to undertake profitable growth on a steady level. At the same time once more, we’re still a long way to go and that is visible on this chart. When I said it will take time, it was in February, beginning of the year. And now if you think of our book-to-bill cycle, as you all know following us and our industry sometime we talk about 12 months to 18 months to 20 months depending on the type of project, the types of the units we sell. If you lay this 12 month to 20 month proportion to the time that has incurred with nine months so you can see we’re about one-third of the way about that and you can see this reflected somehow in the chart that you see here in front of you. We go through each one of the challenges in a second. However, once more, while we progress on individual priorities, individual aspects, we have to continue digesting the bad food that we ingested in the last few years. So sometimes in our company we call this the constructor phenomenon when you just have to digest the backlogs, while the same which will effect in the P&L or the same time preparing the results of the future. Nonetheless, again. I’m pleased to say that, progress start to show. Let’s now have a look at each individual challenge. Starting with the first one, on the foreign exchange. That is another very volatile environment, where with the US dollar appreciating we were very much looking forward to having finally some tailwinds, unfortunately the improvement in US dollar and to some extent also in the Brazilian real, it’s been wiped out by the steep decline in euro and also in the RMB. This is the reality, we must deal with it. At the same time, once more, we reaffirm our pride to be a Swiss company and in our deep roots in Switzerland. So in getting with reality what do we do? Well we focus on the efficiency of the Swiss-based quarter cost, as you can see here on the chart on the right hand side, you see that this doubling down on efficiency as basically lead us not only to a reduction in absolute value of the Swiss-based quarter cost, but also and most importantly, on a reduction of the percentage of revenue reflected in this cost. In 2022 actually we were hoping to be even lower, unfortunately because of the initial slow pickup of the operating revenue, the percentage has not yet gone down as we plan but we are definitely struggling results to continue reducing that both in cost and in percentage of revenues. Moving on to the second challenge. Can you imagine this is one that is the source of much interest, not only among yourself, also for us within the company, because it is absolutely key. And you can what we’ve been driving from day one and we openly said that unfortunately we were a bit slow in the previous three years in reacting or even we should have anticipated inflation. We see that our effort are now being off around the world with the exception of Portugal, China where you will have heard from other industry players unfortunately the situation makes for a very difficult environment to increase prices. But so far I must say, you can see that we have high-single-digit price increases in APAC outside China. We have double-digit very strong price increases in the Americas, both North and South. This is, I think, something notable. We even delivered price increases in the EMEA region. That’s good news. On the other end, [Indecipherable] on a global level. Nonetheless, if you look at the right hand side, you see here the trajectory of the order intake margins. This has been going up. At the same time, when we speak about digesting the food, you see that the backlog margin has in fact not improved, in fact even went down because the more-and-more some of the orders that were sold, let’s say, overly optimistic, cost base in the last two years, now they flow through the P&L and so you can see that the backlog margin in fact is reducing. And the plan is, once this margins in the new orders will flow into the backlog, you will see that also increasing and then overall impacting finally on the P&L. Overall positive, but I like here to stress three words of caution. Number one, markets that we discussed a second ago are slowing down. So the ability to continue increasing prices going forward has to be question. We definitely continue unabated, but that has to be sent. The second, I’m sorry to be like a broken record on this but I think it’s important, is that sales margins do not equate build margins. This improvement will take time again 12 months to 18 months to flow through the P&L. Third words of caution and it is not something which is very clear is, wage inflation is now picking up very strongly. Unfortunately, as material inflation declines, wage inflation is picking up and it is true in unionized environment but also in non-unionized environment. Pricing alone, and we will come to that when we speak about our priority, will not be sufficient to reestablish better margins. We will have to work on efficiency and if you don’t mind staying with me for a few minutes to address that later when we speak about our priorities forward. Moving on to the next two challenges, three and four, which we call supply chain and product complexity, and then last combine them to get. On the left hand side, you see a positive development. When we spoke last time and half year, we clearly highlighted the difficulty in producing in our factory to a large extent due to the lockdowns in particularly in China but only with us also with some of our suppliers, but in fact struggle to deliver the components all around the world even in factories outside China and hence the difficulty in on-time delivery et cetera. The good news is that, this has now starting to change and you can see that — as we see the, July, August, September in Q3 production capacity has been ramping up very, very strongly, even well above the capacity production that was delivered in 2021. This is positive. On the right hand side, you see this digestion phenomena of the new orders versus old orders, but this time the perspective is between modular elevators and legacy credit lines. This is to do more about factory difficulty in managing multiple production lines in the lines. And the fact that for two years there was a slowdown, this created this traffic jam in the factory. You can see the progress in order intake, now the new lines are about half year-to-date. But then in the order backlog, the recent progress as the production capacity ramps, on the left hand side, but it has to be noted that legacy products so constitute two-thirds of the total order backlog. Going back on your question on margins here, but also a question of production efficiency in dealing with multiple product lines at the same time. Moving on to challenge number five and then this maybe one that we spend a bit more time which is China. And of course, China is so important that the effects of the world market as we saw before on the NII market and on the pricing level. Now you can see on the chart that we update you on the regular basis. First of all that the floor space will continue to decline across all CTT and we’ve now reached the levels of the latest crisis of 2017. What I find even more immediate relevance for our industry is the housing inventory on the right hand side chart. The crisis level is such that we now came back to the peak levels of the 2014 crisis in order to peers. Now what could be a positive thing is that you can see there is based on official data, assign of an inflection of the curve, and the key question is here, does that mean that we hit bottom or could it be that issued a temporary one and then we’ll continue increasing inventory going forward? These, of course, we all hope that would be the former — the peak of the crisis in terms of housing. I must say for the moment, the estimate for the Chinese — there is still a lot of traction between 15% and 20% which we’re not here to provide forecast, but based on latest indicators including the ones you see here, is likely to extend into 2023. Now what does that mean for China and of course there is a lot of [Indecipherable] many other aspects of China including geopolitics. But, we’re not going to go into. As far as our industry is concerned, it’s well known, but sometimes it doesn’t hurt to restate the reality. Is spite of this major construction, China still remains by far the largest installations market in the world. We’re seeing operator chart here on page 10. China still accounts for 63% of the world market, well of course this is in units. Last year was 66%, but most importantly you see that the second largest market India is depending on how you measure it, about a 10th of the size of China. We need to stay very close to China, and then you see that the other countries they’re on — even as more fraction of the world but also the China market in itself. Not only is China the biggest market in the world, but we believe, moving on to the next slide, that China still has major potential for growth, and why do we see that? You see on the chart, it’s sometimes good to see it on a chart, it is the highest concentration by far of mega and large cities of about 10 million — between 10 million and 3 million of anywhere else in the world. As you have seen in some studies by the EIUs and other independent organization, these cities are still growing due to the continued urbanization in China. Now if you look more granularly, other industry and you look now at the right hand side, you look here the density, measured by number of installed units per 1,000 people. Some of you may remember that when I was CEO in 2014, 2015, we use a chart on a regular basis to look at potential and you can see that China here is still way behind South Korea, Germany, Japan, much smaller markets then China. And China on the same chart, had a tremendous progress as expected over the last 11, years but still has wide range to grow before reaches the levels of South Korea. So, all-in-all, if you combine the two factual data points on this page, you see that China, medium-term, long-term still expect it to continue growing. And this is true for the new installation but it is also true for the existing installation markets. Moving on now to the next page on page 12, where you see that the figure on the left hand side for the China installed base or the overall number of units of maintenance of an escalator, is about to reach 50% of the world’s total. And incidentally there, you can see that if the market over the period 2017, 2021 grew by 12%, Schindler growth of portfolio in the same period was above market in the order of 15%. Much more to come, and this it only a unique opportunity, but storage in size, and one that must be sized. How do we go about this at Schindler? We clearly, as a first big block, we have to invest in technology and you may have some of the features and CPCC Congress happening at the moment, you see there is a lot of talk about technology, a lot of talk about how China continues to embrace technology and its true in dual economy, including in our business. The authorities are now promoting, this [Indecipherable] a new program to promote safety by our remote monitoring. We are supporting that, running pilots. And then of course this whole topic about connectivity and digital services will come to that in a second which shows that only drives the portfolio growth but also a differentiation versus local players. Then there is all aspects of the more classic approach which is regaining units that we have lost on the visual differentiation and better quality, but also doing that to some extent by acquiring independent service companies and there are several in China but again the focus there is to look at density, efficiency, quality to make sure that we overall gaining efficiency as a whole. That of course is a modernization in China because after all this growth over the last 20 years, there is now up to 1.5 million units, which are aged, which are especially in view the high usage in China, there are commoditization, which constitutes a huge opportunity. And for that, we are introducing a new modular platform. We will come to that, it was one of the programs that we will see in 2023. And then there is of course a big opportunity by combining this by sustainability solutions to reduce the footprint our buildings and our customer. This was an update on our challenges. China is a key one. But again, there are big opportunities. Over the last two quarters’ presentations, we stopped here and then we started speaking about financial results. Now, I also meeting you and also through exchanges we had over email, we understand it was a strong demand, which I understand is due to that to get a bit more color about how we operate, what are our priorities. We clearly know that we started stabilizing our performance [Indecipherable] our resources to provide you with this update. Here I would like first to provide an update on Top Speed 23 program. You remember we announced it and we explained that it was something to build the future Schindler with substantial investments. Today we’d like to provide you an update of where is this overall Top Speed 23 program, and then I’d like to move to page 14, and I’m pleased to say that overall, we have progress — we have a further focus on which module of the program address our immediate priorities and so most importantly that some of these modules already start paying dividends. So let’s look at the summary here. And again you see the sometimes speech about realigning with operational priorities because yes, when the year started and we to start with the situation, we said, yes, this is very important, but let me make sure and how we apply the same aspect of efficiency of focus also today’s program. The six modules here, some of them are either close to completed or close to closure. The first one is the one on new installation growth in selected strategic markets. And you can see part of the payoff is what you’ve seen an improvement in margins in a refocus in specific segments and markets where we can be the most successful. Another one that is very close to closure is the bottom one, which we call procurement excellence, which I’d say it was about time myth, but now of course in confronting the challenges of inflation or now the quick changes in raw material changes, we now have an organization that is set to address those and view the bottom line benefits but also quality and safety. Is it not yet completed, we have some staffing to be completed by year end. But clearly, by year end this will be completed and we already started seeing some of the benefits. Now maybe moving to the third one, sustainable modernization solutions. I spoke about China as a unique opportunity, and then you see we decided instead of looking at a modern solution worldwide, we saw we have this huge opportunity in China. So again, we refocused the project only on China. That in fact brought us back a bit in terms of progress because we had to relook about how we could really make sure that we have the right product for China using a modular platform. But we anticipate already EBIT impact as of next year. Then you have two that are more long-term, that were so planned, because even if there will be completed to some extent by end of 2023, the EBIT impact as well will take a bit longer and this digital and this new product for the market coverage in segments where we have been less present. Digital twin we see, we are much more advanced with escalators, this is the one we started with, where our factory and R&D modules are about to be launched beginning of next year. On the Elevators on the other hand, we started later as planned with a pilot phase, where then we will focus much more on the field operations to which would apply this digital technology seamlessly with our audit tools that we have for the year for installation and service as well. Finally, I mention the last, because I’d like to spend with you more time, you’ll see that the connectivity which is the second module here on this page has progressed very well. We have now 25% of our portfolio which is cloud connected. I’d like to stress the point, cloud connected. We do not include here the old tele alarm or these analog lines that we said before. These ones are there, [Indecipherable]. This is really with Schindler ahead call base with the whole software stack, edge computing, everything which we need to have in order to provide unique digital service to customers and so this has progressed well and is starting already to have an impact this year. Maybe to elaborate, I’d like to move to the next page on page 15, where you see some key numbers and see some of our auto industry presented in the case. This time, we spoke about hours. I’m pleased to see that topic about connectivity in delivery in a scheduled business is now a proven model. So again, you see here 25% of our portfolio cloud connected and one of the benefits immediately, when I spoke about EBIT impact already this year. First of all, look at the right hand side on the more classic aspect, our portfolio loss rate number of units in maintenance that you lose to competitors is dramatically reduced, something about one half. So this I would say is even beyond some optimistic scenario that what I was hoping for when we launched it back in 2016 and, I’m very pleased with the development, and that’s our fact. Now the other one on the right hand side is that you can see, thanks to the data connectivity, the type of early detection of the effects of cool batch. Remotely, thanks to our technical operating centers that are in all key markets which are on top of our normal call centers. We could reduce on these connected units callbacks by 30%. Now under 30% is compared to non-connected units. I know that some others have published higher numbers but if we now include all the improvement of callbacks for [Indecipherable] much higher percentage, this is simply the difference between connected and non-connected and this in itself is a tremendous, I’m talking about one-third efficiency gain. Now on the left hand side you see now the new areas of business that can be opened, thanks for this connectivity. I’m very pleased to say that 50% of the connected units now provide revenues. We call it the monetization rate which is an important number, especially because we are very clear from a marketing point-of-view, perhaps on it which you have some way to go this is a bit of our change of mindset but also competencies throughout organization but this of course shows for — substantial potential. And then you may remember I presented in Q2 the digital aspect of green maintenance module that now we actively sell in some strategic markets, and is now certified by — you may remember also presenting last time. In fact the overall footprint for our customers [Indecipherable] buildings due to a individual maintenance goes down as much as 99.5% if all the aspects are applied, including electric vehicles, et cetera. So that is I think a very important element and again showing I’ll start speaking about investments, was absolutely right. You can see on the next page we provide a more color on explaining how this sustainability aspect is been addressed and how you reach this 99.5% reduction potential if you apply the reward mentioned, less physical visits and thanks to the efficiency that your uptime but also of course then whenever we have to go because legally we selected for a number of times then which is done with electric vehicles. That was the 2023 update and we’ll continue providing you there and we can also [Indecipherable] in the financial aspects, but before passing the word to Carla De Geyseleer, our CFO, I also wanted to address on question that was asked you which is, how do you operate? What are your priorities? As you can imagine, we have been addressing that, and since the beginning of this transformation, this is something that we have beaten across the organization starting with the leadership on a regular basis. If you now move to page 18, you see our priorities that are maybe on regional manner for those also started marketing a miniscule. There was an expression call for [Indecipherable] and the priorities we’ve had for people, products, performance and planet. This is something that everyone reorganization now gets custom do, everything that we do, one of these four boxes. Otherwise we put it on hold or we just simply scrap it, perhaps giving some color with different boxes. You see on the people, the first point is frontline is the bottom line. Let’s not forget, two-thirds of our workforce are people, technicians, installers, project managers. The other one that carry the brand, other ones that are the most important people in company. The idea is that, all our resources must be driven in order to support the frontline, anything that doesn’t should be good as a secondary priority and therefore by definition we’re going to hold or scrap. We also have big element of culture, which addresses the change management. We call it back to basics, I think we learned the hard way that we must avoid by all close this gap between narrative and reality to make sure we confront the fact shed on and simply deliver by sticking to our original values. That is of course the topic of inclusion, diversity and the fact that we have to upgrade all our teams to make sure we are prepared to perform with the quality second to none in our industry. Products, we already discussed it to a large extent, the topic of profitability in new equipment business, the idea of modernization growth and profitability to profit from the unique opportunities today. Then of course we couldn’t speak about products without addressing service which is the essence of our value creation going forward, all we proceed on efficiency. And then of course the topic of supply chain where we addressed at the start of our priorities there is the need of — after we fixed the issues today, once you’ve done it, we need to look at the complete overall which we’re already starting to address. On the performance, I’d like perhaps to stress the first part, which is a formula that I think people in our organization are tired of hearing me repeating like a broken record, pricing plus efficiency has to be bigger than inflation. Pricing will not be enough to offset inflation, all more now with the education picking up. It’s about accept the inflation as a reality and driving the organization to stay above inflation with a combination of what can we do with pricing, but making sure we also drive efficiency to stay on top of it, to stay ahead of it. Then there is the aspect, of course, strategic markets. Of course, China is one of them. But it is that, one size does not fit all. We have market with dominant position where we are very profitable and there we have to continue growing, we have to make sure that we not only defend but built on dispositions then there is an a second group of markets where we are solid but we have profitability that is on par with the group minimum requirement and these markets can only grow if they improve the profitability the other key or improve the profitability. Then there’s a third category which our markets where we are way behind in profitability. And in those markets, the message is clear and it is will be clear now as we go forward with the objective in 2023, they can only grow if they prove the profitability. This is a third tier to apply worldwide and of course we shouldn’t forget that again the success is measured not by how we meet our targets but what our customer think of us, and so this is another message that is constantly driven across the organization. Finally and it could have be mentioned further adjustments of planet, we remember represented last financial at this time we have less of that that we’ve ESG roadmap the first one of which comes to fruition in 2022. We are working to make sure we can deliver. There are some challenges in particular in terms of electric vehicles, but nonetheless, we’re doing everything we can and more and we have a new net CO2 target confirmed by certified Bayside-based target organization on which now we are making plan, executing already driving and finally what we call industry-type of zero is the application of the new circular economy to the elevation and escalator model which we are certain will provide unique opportunities not only for our shareholders but also for our contribution to the planet. In conclusion, maybe takeaways before I pass, we have stopped losing by focusing on the priority established being reviewed. We have stabilized the business and started a new trajectory towards profitable growth. At the same time, it will take time before we close older gaps we’ve identified. We have a long way to go, but our result is absolutely unabated. Thank you and with that I’d like to pass the word to Carla De Geyseleer, our CFO.

Carla De Geyseleer — Chief Financial Officer

Thank you, Silvio. Good morning to everybody. You might know that I started here my role as CFO seven weeks ago, and without any doubt, I’m very much looking forward to engaging with you and to meeting you in person at a certain point in the future.

Before diving into the details, let me first make some high-level comments. Third quarter results show initial signs that the corrective measures that were implemented throughout the year are starting to pay off. Since the revenue recovered in the third quarter and the profitability clearly started to improve. Order intake remained under pressure due to globally slowing growth and our focus shift from volume to value and margin. We definitely see an encouraging trend in continued order intake margin development.

As pointed out already, the complex mix of challenges persisted in quarter three and eventually there was — still impacted our overall results. Nevertheless, we narrowed the bandwidth of the revenue guidance and confirmed our net profit guidance for the full year 2020.

The following two slides show the key figures for the third quarter and for the nine months year-to-date, respectively. And as I mentioned, with the exception of order intake and cash flow, the third quarter 2022 results show encouraging signs of recovery, particularly with respect to revenue and margin. Even more importantly, we recorded a progressive trend throughout quarter 3. Adversely, the year-to-date 2022 key figures reflect a very weak second quarter results, which were particularly impacted by lockdowns of our China operations during several weeks.

Moving on to the next slide, I’d like to present you the order intake development. As you can see here, in the third quarter of 2022, the order intake reached CHF2.7 billion corresponding to a decrease of 8.5% and to a decrease of 5.9% in local currency, and this as a result of our focus on sales margin and a slowing growth across the globe. In the first nine months of 2022, the order intake reached CHF9 billion, corresponding to a decrease of 0.8% but equivalent to a positive growth of 0.7% in local currencies. Organic growth amounting to 0.4%, acquisitions contributed 0.3 percentage points while the FX had a negative impact of 1.5 percentage points to growth.

The next slide provides you with an overview of order intake growth by region and product line compared to the first nine months of ’21. And order intake here represents all product lines, so the New Installations, the Modernizations, the Repair and the Maintenance.

The Americas and the EMEA regions grew while the significant contractions of the Chinese New Installation markets rated negatively on Asia Pacific. So overall, the New Installations declined, while Maintenance, Modernizations and Repair business continued to grow nicely, resulting in an overall positive growth. Since the beginning of the year, the order intake margin has been continuously increasing, and this is also reflected here in the value development which outgrew units development and is the result of successfully implemented price increases and our ongoing focus on higher margin projects.

Our portfolio of maintained units increased by more than 4% year-on-year, and the order backlog was 1.2 percentage points higher increasing to CHF9.9 billion. Backlog margins stabilized in the last quarter and declined by less than 100 basis points year-on-year reflecting cost inflation, product legacy and portfolio rotation.

I continue now with the revenue development on the next slide. And obviously, I’m happy to share here the positives first. The third quarter of 2022 showed an accelerated growth due to strong backlog execution throughout quarter 3. Revenue increased by 5.6% to CHF3 billion, corresponding to an increase of 7.9% in local currency. So encouragingly here, performance was almost evenly distributed across all regions but also across all the product lines.

In the first nine months of 2022, revenue reached CHF8.3 billion, equivalent to an increase of 0.3% and 1.7% in local currencies, respectively. Organic growth reached 1.1%, acquisitions added 0.6 percentage points, while FX had a negative impact of 1.4 percentage points to growth. The increase in the EMEA and the Americas regions was offset by a decline in the Asia Pacific region, clearly resulting from the situation in China during the second quarter of this year. Growth in new installations was negative, again, particularly due to the situation in China. Modernization was weak in Asia Pacific, while Repairs and Maintenance remained solid and is across all the regions.

Now the next slide shows you the development of the adjusted EBIT and the EBIT. And the inflationary pressure, product legacy, semiconductor shortage, supply chain issues and restructuring costs persisted in the third quarter. However, I would like to draw your attention to the positive trajectory of performance narrowing the year-on-year gaps.

EBIT adjusted in the third quarter of 2022 reached CHF272 million, which is equivalent to a decrease of 11.7% and a decrease of 8.8% in local currencies. In the first nine months of 2022, the EBIT adjusted reached CHF738 million, decreasing 22% and 20.2% in local currencies. And as a result of this decreasing profit, cash flow from operating activities significantly weakened. And in addition, the weakening was driven by substantially increased net working capital requirements, particularly reflecting challenges in our supply chain.

Cash flow from operating activities declined 67.5% to CHF77 million in the third quarter of 2022, and to CHF376 million in the first nine months of 2022, equivalent to a decline of 60.8%.

I’ve been now here with the company for a few exciting weeks, and obviously, I knew when I arrived that the team had been analyzing the situation and implemented a whole list of corrective actions. And based on what I’ve seen so far, I will continue building on this, and I will focus my attention on four areas, which are very much in line with the challenges and the priorities that were presented by Silvio.

Pricing and efficiency of top of mind, since these two at least need to exceed inflationary pressure to further improve our profitability going forward. And in view of slowing growth, efficiency across the organization will have again even more importance. And we will, therefore, further analyze all our processes to unlock additional potential that we might have. This also applies to our supply chain and the procurement challenges where performance needs to be further improved.

And at last but not least, I also strongly focused on the networking capital management in view of its most recent development and the economic environment.

With this, I would like to turn now to the outlook for 2022. Schindler expects the markets to further slow down globally. And assuming no further lockdowns or other unexpected events, Schindler foresees revenue growth between 0% and plus 2% in local currency. And we confirm the net profit guidance of between CHF620 million and CHF660 million for the full year 2022.

Let me now close with a bit of a personal note. First of all, I’m very happy I joined Schindler. And I’m very much looking forward to working with my colleagues on further growing the company profitably and sustainably. And I would also like to thank all Schindler employees around the globe for their hard work and their dedication to this encouraging performance in the last quarter.

And with this, I hand back to Marco.

Marco Knuchel — Head of Investor Relations

Thank you, Carla. We are now happy to take your questions. [Operator Instruction]. With that, I hand back to the operator to start the Q&A with the first question.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Lars Brorson from Barclays. Please go ahead.

Lars Brorson — Barclays — Analyst

Yes, hi, good morning. Silvio, Carla, Marco, thank you. I will restrict myself into two questions. Thank you for the [Indecipherable] Silvio and the additional detail you’re providing. My two questions would be, one, on your Slide 7, right-hand side, the chart there on OI margins. And secondly, Slide eight on the left-hand side, your region 2, which I assume is China. The first question on Slide 7. It’s obviously helpful to get your New Installation orders received margins ex China, guess it would have been even greater to get it including China. So maybe I can ask where China New Installation order margins are and whether this chart, had it included China, would also have shown an improvement sequentially on orders received margins? In other words, is rest of the world more than offsetting the weakness you’re seeing in China, New Installation orders received margins? That’s my first question.

Silvio Napoli — Chairman and Chief Executive Officer

Lars, thank you. So yes, we reflect on Slide 7. Very good question, I understand. So to be clear, the margins in China, in fact, stayed flat. So the trajectory you see, in fact, is we assume [Indecipherable] I think China and on China on this [Indecipherable] China stays flat. In fact, it doesn’t alter the change. So to your question, yes, the net effect is positive even offsetting China. China [Indecipherable] in the last two months, we have seen slightly big, but very, very limited, which doesn’t have, if you want an impact so far. And so it really consists of looking at the right project and finding them, but the situation is in China, as you also heard from other sources is [Indecipherable]. So I hope this answers your question.

Lars Brorson — Barclays — Analyst

It does. If I can sneak one related into that. I mean, if the industry doesn’t appear to be seeing better pricing now, I can only assume that pricing gets worse in 2023 in China as steel prices move lower and volumes continue to decline. At least that’s my assumption. A high-level question then is if you accept that assumption, why would China New Installation pricing for the industry not mirror that up, should we say, the last major downturn in 2015, ’16 when industry pricing was down, high single, low double? I’d be keen on your reflections on that.

Silvio Napoli — Chairman and Chief Executive Officer

Yes. Thank you, Lars. It is a question that you can imagine also interest us immensely. I must say having, as you — live six years in China, in Shanghai and having faced the situation exactly this kind of trends. I think something you see that in view of the reduction in raw materials, the price may go down in China. That is — I think it’s a rational observation. You may even add to that, and I don’t mean to be too gloomy that with the market shrinking, which I think for me is the key element here. Then, of course, the likelihood of pricing further declining in view of the excess capacity in the market is also very much refer assumption.

So the key there — and then on top of that is also wage inflation. Now in China, that is less of an issue. However, there are pockets, some of the cities we mentioned where this is one. But then I think that, if anything, is easing every day in China at the moment. But overall, I think any assumption of improving prices in China as much as we never stop trying is probably still unrealistic. So we probably — I think I would support your observation here, Lars.

Lars Brorson — Barclays — Analyst

A second quick one, if I can. Slide eight left-hand side, year-over-year deliveries. Again, region 2, which I assume is China, September is reversing that recovery you’ve seen since April. We heard Corona also a flag, of course, in their pre-release, the lack of site progression among developer customers in China, they’re effectively deferring deliveries. Should we continue to see that sort of sequential downtrend in Q4? Have you already seen that in October? And related to that, if I can, how do you assess the broader risk around order cancellations in China?

Silvio Napoli — Chairman and Chief Executive Officer

Order cancellation as such so far is not a big deal in China. No, order cancellation is not. The question though is site delays. That is one topic. So — but cancellation, we do have, as you saw before, you heard from Carla on the topic of bad debt, which is one that can affect depending on the stage the project itself in view of our paying schedules. But at the moment, we don’t see order cancellation, I must say. So the backlog being still solid, we do not see any immediate risk of sudden interruptions. The key, of course, is going forward, depending on the order intake, how can you keep the right backlog at the right level to then produce in order to generate the profit results. But this is — we’re talking about now further down the time and we’re working very hard to address that, too.

Lars Brorson — Barclays — Analyst

[Technical Issue]

Silvio Napoli — Chairman and Chief Executive Officer

Lars, we lost you. Could you repeat? Sorry, there was an interrupted communication. If you don’t mind, repeat your question, please, Lars.

Lars Brorson — Barclays — Analyst

Sorry. One last one and then I’ll go back in line. I was just curious on that Slide 8, where we see the region 2, again, assuming that’s China, that the September is reversing the recoveries since April. And I think it’s a key question because we see deliveries being deferred in China. So I’m just curious as to whether you’ve seen that sequential downtrend continues in October? And is that your expectation that, that will continue to slow down in the fourth quarter, meaning deliveries in China, please?

Silvio Napoli — Chairman and Chief Executive Officer

No, not at the moment. This is more of a big push in August. And you can see 100% is already a big, big delivery in a factory. So barring a — sorry I have to say that, barring another lockdown, and as you read, there is a few scares happening here and there, barring a lockdown, we don’t see the risk of a further lag in delivery. This is, if you want, a monthly trend, we don’t see this as being an ongoing trend going forward.

Lars Brorson — Barclays — Analyst

That’s clear. Thank you.

Operator

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

Andre Kukhnin — Credit Suisse — Analyst

Good morning. Thank you very much for taking my question. I’ll stick to two as well. First one, just on top line guidance for the year, given that we’ve got only one quarter to go, you seem to be implying quite a slowdown in the run rate in the fourth quarter with the midpoint or even at the top end. I just wanted to check if that’s kind of degree of conservatism built in because of what you mentioned, lockdown potentials, et cetera? Or is this what the order book is telling you?

Silvio Napoli — Chairman and Chief Executive Officer

Andre, I thought you and your colleagues will pick up the point. I do think you know us, I mean, this is — there is an element of conservative approach precisely in view of this frankly, incalculable risk of possible lockdowns.

Andre Kukhnin — Credit Suisse — Analyst

Thank you.

Operator

We take the next question from [Indecipherable] from Goldman Sachs. Please go ahead.

Tong Efung — Goldman Sachs — Analyst

Good morning. My question is actually also related to site delays. So you comment on China, but what about Europe and US because [Indecipherable] mentioned that they also see slow progress on site delivery for US and Europe? And that’s the first question. So I’ll ask also second after this one.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, [Indecipherable]. At the moment, we don’t see site delays. If you look at the immediate, I would say, next two quarters, no, we don’t see that. But there are indications, if one speak to some of our customers, of them — probably it’s more a question of them making less investments going forward. But the ongoing project backlogs is going as planned in Europe.

Tong Efung — Goldman Sachs — Analyst

That makes sense. And the second one is more on the margin target. I know you don’t probably give a specific one, but where do you see potentially medium term your margins going to be given the progress in your programs? Is that going back, we can think of a level like back in the last five years, about 11% to 12%. Is that a reasonable assumption there?

Silvio Napoli — Chairman and Chief Executive Officer

I think what I will say we don’t give a time by when this should be there. And I think in this uncertainty, we’re not compared to do that. However, I think the figure you mentioned since we said our goal is to close the gap with our competitors. This is the minimum target we could, as you can imagine, legitimately give ourselves.

Tong Efung — Goldman Sachs — Analyst

Thank you.

Operator

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

Rizk Maidi — Jefferies — Analyst

Hi, thanks for taking my question and the details provided today. I’ll start with the first one on China. So Silvio talks about a potential decline of 15% to 20% this year and potentially a decline into 2023 in light of the NPC announcements and perhaps a lack of stimulus, which has always been the case in previous downturns. Whenever we hit these levels, we’ve seen China coming in with big stimulus, which we’re not seeing now. Maybe if you use your sort of experience and your crystal ball, what would you think would be the sort of market performance next year [Indecipherable]?

Silvio Napoli — Chairman and Chief Executive Officer

Thank you Rizk for the question, gosh. I’m afraid of the crystal ball, I lost it some time ago. But to your question, I said before that at the moment, we are now triple checking, triangulating data even with external sources, but likelihood for next year in China is similar market contraction as this year. Now this is maybe the short and simple answer.

If you allow me one other question could be, how long will it take for the market to come back? If you look at the crisis that we suffered in ’14, and I was very much — very close to it by then. And the strategy took — it took two years to come back. So now China, of course, the economy is not growing at the pace it used to back then. So the pool they cannot apply this one to one. So top of my head, I would say maybe it will definitely take more than two years. Though in the meantime, you saw what the data we presented before, China will remain a huge market. So this is all I can say from our risk. I’m sorry, I cannot provide more color, but does that address your question?

Rizk Maidi — Jefferies — Analyst

Yes. That’s helpful. The second one is on wage inflation and how we should think about it for next year. So I think this year, you’re having something like CHF140 million, I guess that’s essentially coming from the US you could you just update us on how sort of negotiations are ongoing in Europe and other regions? And how should we think about that sort of wage inflation headwind next year?

Silvio Napoli — Chairman and Chief Executive Officer

Alright. Thank you for this question. Carla, would you like to address the question?

Carla De Geyseleer — Chief Financial Officer

Yes, with pleasure. Obviously, we take into consideration that the wage inflation will be picking up, Silvio pointed out already. And even I would say if we need to go a bit more specific for the full year, we are actually counting on more than CHF100 million for the wage inflation. And obviously, that will further also increase in 2023.

Rizk Maidi — Jefferies — Analyst

Okay. Thank you.

Operator

The next question comes from Martin Husler from ZKB. Please go ahead.

Martin Husler — ZKB — Analyst

Good morning, and thank you for taking my questions and thank you for the interesting slides deck. My first question is turning around the one-off costs that you usually deduct, and it looks like that after nine months, those were kind of pretty much lower than we were expecting. Can you give us some light why were TS and also restructuring costs below our expectations? And what is the full year outlook regarding those costs? That was my first question.

Silvio Napoli — Chairman and Chief Executive Officer

The first topic is definitely the Top Speed Program. As Silvio pointed out we have been really realigning the program there. So that resulted in the fact that we are actually foreseeing that we will spend less on the Top Speed program as a whole. And also, obviously, in the year 2022. That is one of the big elements there.

Martin Husler — ZKB — Analyst

Would you share a number with us maybe?

Carla De Geyseleer — Chief Financial Officer

Yes, definitely. I would say, on the full year, we foresee to spend approximately CHF65 million on Top Speed.

Martin Husler — ZKB — Analyst

Alright. And the restructuring costs will stay on the Q3 level also for the last quarter?

Carla De Geyseleer — Chief Financial Officer

Yes. No, for the full year, actually, for these costs, we foresee around CHF50 million.

Martin Husler — ZKB — Analyst

And then my second question, maybe a bit more strategic, but also turning to China and you were mentioning and showing the potential that you see for Service and Modernization, what margin at the moment, do you achieve in China, let’s say, for New Installation, but also Service and Modernization and probably you won’t give us a clear number. But if you compare it to the group average, can you give us there some more insights and what trends do you expect for the margins for, let’s say, Service and Modernization in China in the future?

Silvio Napoli — Chairman and Chief Executive Officer

Good. I understand your question. Again, you’re right to understand we’re not going to give exact numbers, but we definitely can give a relative answer, Marco, would you like to address this question?

Martin Husler — ZKB — Analyst

Yes. So EI margins are lower than group average because we have a very, let’s say, significant regulation in China of 25 visits a year, which is very, let’s say, limiting our ability to drive efficiency. However, there is also progress in terms of using connectivity to replace physical visits, et cetera. So we expect that we can drive this down the road, but it’s clearly below average of group margin in EI.

Silvio Napoli — Chairman and Chief Executive Officer

You also want to talk about Modernization?

Martin Husler — ZKB — Analyst

Modernization is aligned with group.

Silvio Napoli — Chairman and Chief Executive Officer

Does that address your question?

Martin Husler — ZKB — Analyst

Yes. And just to have to remind that in New Installation, it used to be always more profitable in China, but I think due to the pricing pressure we see and obviously the market downturn, is it now below average in China? That is correct. It’s below average in China for the Schindler brand. It’s different for dual brands.

Operator

The next question comes from Aurelio Calderon from Morgan Stanley. Please go ahead.

Aurelio Calderon — Morgan Stanley — Analyst

I’ll take them one at a time, if I may. So the first one is around one of your comments you were making on the order intake. I guess of the 6%, 5.9% decline that you’ve seen in the order intake, how much of that do you think is due to end market weakness itself? And how much do you think is you just staying away from projects which don’t meet the margin criteria?

Silvio Napoli — Chairman and Chief Executive Officer

Broadly — great question, Aurelio, thank you for that. I mean, broadly, it’s about 50-50. The — probably in China is mostly due to probably the market decline. And I think — but also other parts of the world but frankly, if one talks about large projects, there are some that we, I would say, very intentionally decided to step away from in view of the low profitability, not only in NI, but [Indecipherable] always, we call it well to all. So we go to the factory at the margin in the field, but also the future revenue. So it’s about 50/50.

Aurelio Calderon — Morgan Stanley — Analyst

Alright. That’s great. And my second question is, sorry to go back to China. You’ve mentioned overcapacity in the industry, and we can see the numbers. But I understand that you also have an export business from China. So the question would be, kind of two sides of this question. One, would you expect to see a restructuring in your China business, that absolutely is new normal? Or do you think that export market could still somewhat compensate for that weakness in the domestic market? And two, if you can remind us how much you export from China and how much is just local for local?

Silvio Napoli — Chairman and Chief Executive Officer

Alright. Good. So there are three elements to the question. Let me see — let me address it one by one. Let me start with the last one. It was about export, right? As you know, from our manufacturing setup, we have factories in India. We have factories in North America, South America; Europe, actually, we have several. So our approach was always to manufacture where the market is. Contrary to other players, we never used China as the global export hub.

Nevertheless, and I refer to that because, of course, the Asia Pacific proximity, China for us was mainly used as an export hub for Asia Pacific. Plus, there are some component suppliers that actually are present in China, but then we also often channel through our China supply chain. Overall, and if you don’t mind, allow me not to give an exact number, but I would say a fraction of our production capacity in China is dedicated to export. But the majority, the large majority is dedicated to production in China for the domestic market, which, as we saw by size, definitely justifies it.

Second question is how do we plan to adjust for the China market. There, I think we need to be realistic. A market declines 15%, 20%, two years in a row, if that is the way it’s going to be called for an element of restructuring. Now you use the word major. Now whether it’s going to be a major or a radical of a resizing of the China presence. For me, and we discussed over in the team, I think, is becoming more and more a very probable likelihood, if not an urgency. It doesn’t mean that we — this has to be exaggerated. No, as you saw the figure in China, still justified for a big presence, an important market, but it’s not the same size.

And so when you saw this chart we presented, it was, I believe, on Slide 11, on identifying cities with most growth potential, but also with portfolio density. This is the type of approach we’re having. And this note, of course, as you know, the China system also has agents. The idea is to focus our sales network and maintenance network in a more concentrated area where you have a more sustainable business in terms of margins, new installation, but also in terms of service conversion, service density, et cetera. This would be the essence and I’m sure we’ll talk more about it in February when we present the plan for the year.

Operator

The next question comes from Vladimir Sergievskii from Bank of America. Please go ahead.

Vladimir Sergievskii — Bank of America — Analyst

I have one left on the cash flow. So on my numbers to get those CHF77 million of operating cash flow in the quarter, you could have faced the working capital headwind not too far from potentially CHF200 million, which obviously is a big number for one quarter. So what was driving a sizable headwind? Is it unwinding prepayments or high inventories or unbilled receivables? And are those headwinds related to any particular region at all?

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, Vlad. Carl?

Carla De Geyseleer — Chief Financial Officer

Yes. Yes, definitely. It is mainly related to the inventory buildup. And obviously, that hangs together with the supply chain issues that we are working through. That is actually the main reason.

Vladimir Sergievskii — Bank of America — Analyst

And is it across the regions? Or again, any particular region is kind of a highlight there?

Carla De Geyseleer — Chief Financial Officer

It is actually spread over the whole portfolio, overall regions. Yes.

Vladimir Sergievskii — Bank of America — Analyst

And if I may follow up on that, would you expect those inventory builds to start [Indecipherable] perhaps in Q4 or in some point soon? Or that’s too early to call?

Carla De Geyseleer — Chief Financial Officer

Yes, we definitely expect an improvement in quarter four.

Silvio Napoli — Chairman and Chief Executive Officer

At the same time, I’d like to draw attention to the chart on Page 8, where you see that this, I call this traffic jam in the factories between legacy products and new products still not being resolved. So Carla is right, we definitely want to make sure that we continue producing at the rate we showed on the same chart on the left-hand side. However, I think we need to be realistic about the speed at which we can really go back to the — I won’t say how many days, but to a time that we can really run the factories with the level of efficiency that we love for.

And maybe a final point, one of the lessons from the last two years, is also out to our factories by combining efficiency with risk management. That means and I’m sure you pull from other companies. Now at the idea about just in time will definitely remain, but the level of just-in-time minimum inventory most likely will change. Now you rightly spoke about a trend. So the trend definitely should improve. That’s something keep in mind what is the ultimate point we could reach. Does that make sense?

Carla De Geyseleer — Chief Financial Officer

Yes. Thank you.

Operator

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

Martin Flueckiger — Kepler Cheuvreux — Analyst

Actually, I’ve got two as well. Firstly, on Modernization, seems to be quite a bit of volatility in your order intake in Modernization. Just looking at the last few numbers that I’ve estimated based on that slide, what is it, 24, I believe, yes, in your presentation. Just wondering what’s behind this huge volatility because it looks like Q3 Modernization was again down or am I missing something or misinterpreting something here? That would be my first question, and I’ll take one at a time.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, Martin. Good observation. And the answer is some projects in Modernization are large projects. In particular, there are large projects in relation to infrastructure projects that now governments or local authorities decide to modernize as opposed to replace the whole thing. And for example, in North America, part of this drive by the current government has had a number of those, which then qualify as modernization because it’s about replacing part of the escalator, replacing part of the lift, which, of course, to public traffic. And this is the answer. It’s like — and when you got these chunky things, there are so big compared to the base and then the result in this up-and-down peaks. Clearly [Indecipherable] managers, we want to grow the base of those standard products, you will see less of these peaks.

Martin Flueckiger — Kepler Cheuvreux — Analyst

Alright. Great. That makes a lot of sense. Then secondly, just wondering about the previous indication on wage inflation. I think if I remember correctly, the indication was more than CHF100 million. Now does that just pertain to personnel cost inflation? Or does that include subcontracting cost inflation too?

Carla De Geyseleer — Chief Financial Officer

No, I was talking about, yes, indeed, north of CHF100 million, we talk about CHF140 million. That’s actually what we foresee for the full year, and we are talking here about the wage inflation only.

Martin Flueckiger — Kepler Cheuvreux — Analyst

Sorry, I didn’t get that acoustically, which inflation only?

Carla De Geyseleer — Chief Financial Officer

Wage inflation only.

Martin Flueckiger — Kepler Cheuvreux — Analyst

Wage inflation only, okay. So we have to consider subcontracting cost inflation as well?

Carla De Geyseleer — Chief Financial Officer

That’s correct.

Silvio Napoli — Chairman and Chief Executive Officer

And this goes — Martin, this goes into margin. The subcontract thing goes into our NI margins as far as cost of goods sold.

Martin Flueckiger — Kepler Cheuvreux — Analyst

Right. That’s helpful. And sorry, just for clarification here. There was the statement about EI margins being below group average. I presume when you talk about group average, you mean the group average EI margin and not the overall consolidated group EBIT margin, is that right?

Carla De Geyseleer — Chief Financial Officer

Yes. And it was for China only, the statement.

Martin Flueckiger — Kepler Cheuvreux — Analyst

Right, right. I got that. But it’s for the business area average and not for the group overall average, right?

Carla De Geyseleer — Chief Financial Officer

Correct.

Operator

The next question comes from Nick Housden from RBC. Please go ahead.

Nick Housden — RBC — Analyst

First one, hopefully, just a quick one on China again. I was wondering if you could tell us what your — the respective exposures are to sort of Tier one and Tier two cities versus the lower-tier cities because just looking at the data, it seems like the property downturn is hitting the lower tier cities a lot harder than Tier one and Tier two ones?

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, Nick, for the question. Allow me to split in 2. We have three brands in China and the way we are organizing those and actually the way even they were originated. Schindler China is mainly Tier 1, Tier 2, very little presence in more and more parts, smaller cities. XJ-Schindler which is a large brand, they are mainly Tier two with some presence in Tier 3, but mainly Tier 2. [Indecipherable] that’s the newest of our dual brand, they are basically Tier three with some presence in Tier 2. So we try to — and this is a summit that works well into the coverage, but also in terms of product specs, and combination to market. So all in all, as you know, most of our revenues today are generated by Schindler China. So then without giving a specific percentage, I think that gives you some indication that our exposure to Tier 2 and Tier 3.

Nick Housden — RBC — Analyst

That’s very clear. And then just on the net cash position and the interest rate environment. So you’ve got CHF2 billion of cash on the balance sheet, I actually think a little bit more. And it seems like in the coming months, maybe for the first time in a while, you can actually start to earn some decent interest on that cash. I guess it kind of depends which countries the cash is parked in. But I mean how should we be thinking about the impact that rising interest rates could have on, say, net profit or the interest income? Will that be a clear net gain? Or will that be sort of correspondingly large increases in the interest expense?

Silvio Napoli — Chairman and Chief Executive Officer

So let me — very good question, we do have cash. Maybe Carla can add. So — but our approach, and I think this is public is that we repatriate system of dividend, I think, cash to Switzerland. So the discussion is how do we allocate and then, of course, leaving enough cash in the operations that they can run the business. This has always been our approach. So as you know, the interest rate in Switzerland now is slowly emerging from the negative interest rate area. But as some of your colleagues here work for Switzerland can confirm, we’re not yet into a very, I would say, high returns on interest on Swiss bank accounts. That is progressively shifting. So in other words, we definitely are looking at an improvement. But at the moment, there is nothing extraordinary coming.

Operator

The next question comes from Miguel Borrega from BNP Paribas Exane. Please go ahead.

Miguel Borrega — BNP Paribas Exane — Analyst

The first one, just going back to Slide seven on the high-margin intake. Is that already being influenced by what you think will be a higher margin from modular? In other words, are you estimating a higher margin because these will mostly come from modular? Or is it the point of the chart to show higher pricing? And following up on that, can you give us some sense of the gap between a normal order today versus modular? Is that 1, 2, 3, four percentage point difference? Some color there would be great.

Silvio Napoli — Chairman and Chief Executive Officer

Yes. Thank you, Miguel, for the question. Let me just say, let me answer this — put it in perspective. Modular today essentially applies to what we call our residential mass product. Traditionally, these products always had a higher margin than the mid-rise and the high-rise. And parallel issue is that because of the issue that we presented, this new generation of modular unfortunately didn’t had the impact we expected. So what is the deal that now gradually now as this issue are resolved, we’re going to — we want to reestablish the margins in residential that we always used to enjoy.

So I’m talking of margins that are superior by a certain dimension. I don’t think we ever revealed exactly what the different margin is per unit. But this is really key for us to reestablish profitability in New Installation and ultimately for our product. So this is the approach. So in this chart, it is basically the effect come from this modular product line and the improvement in the margin that get there, simply by sheer size. The other ones are usually more bulky products. And there, I would say the margins are — except for the issued supply chain somehow unchanged. But the biggest impact we had today was indeed in improving that. Does that answer your question?

Miguel Borrega — BNP Paribas Exane — Analyst

That’s very clear. And then can you just talk a little bit about wage inflation and help us understand what percentage of the business would be a pass-through? And what is today as far as visibility you have in the business, what would be the headwind for 2023? And how much would that need to be covered by the price cost spreads?

Silvio Napoli — Chairman and Chief Executive Officer

Alright. So for 2023, I’m afraid, Miguel, believe it or not, certainly, we’re working on that now. So just maybe, if you don’t mind, we park this question for February maybe in terms of which businesses are most affected. In Service, in fact, most of our contracts have an escalation clause. So you can — it’s not true in every country. For example, typically in the US, which is a very high-value country, it doesn’t have that escalation. So then there is many — there are pockets of Service where there is an exposure, though there you can actually increase prices in a more flexible way. But overall, by and large, I would say, in Service, the exposure is hedged.

Where you have an immediate risk for — I think, for the industry is on the new equipment. And that’s why I raised this word of caution when presenting the slide, specifically on wage inflation. Because there, as we discussed for raw material, the escalation is not always enforceable depending [Indecipherable] inflation clauses are often related to material rather than wage. And of course, there is a topic of the backlog, so a certain wage level and what the impact could be. So this is for us today, the biggest — one of the biggest concern we have. I must be very open, and I can see your question. I suggest you see it the same way.

Miguel Borrega — BNP Paribas Exane — Analyst

Thank you.

Silvio Napoli — Chairman and Chief Executive Officer

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

Daniel Gleim — Stifel — Analyst

You mentioned the 25 physical maintenance visits a year in China and your expectation to convert this to remote monitoring down the road. Could you elaborate on that expectation? I’m especially wondering about the potential time line and the extent of conversion. That’s my first question.

Silvio Napoli — Chairman and Chief Executive Officer

All right. Safe. Thank you, Daniel. The line wasn’t great. But let me see. So you refer to the China opportunity in terms of connectivity and conversion. So as you may know, the Chinese government is running pilots as we speak. I should have been doing that. They started doing it before the COVID started. And the deal was to have these pilot filers completed, we think a period of — I think it was 18 months to be. Now because of the COVID situation, there was uncertainty throwing in terms of timing. But the idea of this pilot is really to replace the physical visits that Marco referred to with remote visits. Now there is a specific request that then the connectivity will not only be between Schindler and the customer, but also the local government would also have a site access in view of what they say is a concern to monitor safety of these equipments. I must say we’ve been trying to get answers or — because we have been — is normally up. So I think most large players have been involved in these pilots. Based on latest information that we’ve been asking our Chinese colleagues to provide us with, no decision has been taken as to when they become completely effective and actually becoming full scale.

As you can imagine, we are very keen for this to happen. For all the reasons I mentioned, starting with safety, quality, but also efficiency and differentiation versus our customers. Now numerous pilots are done, not nationwide but by city. So ideally the conversion would then be that as soon as this is opened city by city [Indecipherable]. But I have to say, I love to figure on this. But at the moment, it is not in our hands.

So it’s really not for the lack of not wanting to give a number, but I don’t have this number. But what I can tell you is the day it starts because of portfolio connectivity, we are ready. We were the first ones to go in China. And I think in our portfolio, we are in China definitely already, but I cannot tell you how to grow. We need is the green light.

Daniel Gleim — Stifel — Analyst

Very clear. A very quick one, if I may. Do you plan to provide quantitative midterm targets at some point? What I’m referring to is above and beyond the narrowing of the gap on margins versus competitors? And if yes, at what point in time would that — could that happen?

Silvio Napoli — Chairman and Chief Executive Officer

I think we should take your — I understand your question. I think we will disclose — if you allow me, I’ll park this for when we speak in February. At the moment, there is so much uncertainty around that I think I’m not prepared — I’m not represented to give an answer to this. But let’s address this question again when we speak again in February.

Marco Knuchel — Head of Investor Relations

Thank you very much for attending this call today. We would like to close now. Please feel free to reach out to me in case you might have any questions. The next presentation will be on February 22 in the year 2023. Thanks again. Take care, and goodbye.

Operator

[Operator Closing Remarks]