Schindler Holding AG (SCHN) Q4 2021 Earnings Call Transcript

Schindler Holding AG (NASDAQ : SCHN) Q4 2021 earnings call dated Feb. 16, 2022

Corporate Participants:

Marco Knuchel — Head of Investor Relations

Silvio Napoli — Chairman and Chief Executive Officer

Urs Scheidegger — Chief Financial Officer

Analysts:

Daniela Costa — Goldman Sachs — Analyst

Lucie Carrier — Morgan Stanley — Analyst

James Moore — Redburn — Analyst

Andre Kukhnin — Credit Suisse — Analyst

Martin Flueckiger — Kepler Cheuvreux — Analyst

Andrew Wilson — J.P. Morgan — Analyst

Patrick Rafaisz — UBS — Analyst

Lars Brorson — Barclays — Analyst

Miguel Borrega — Exane BNP — Analyst

Presentation:

Operator

Ladies and gentlemen, welcome to the Full Year Results 2021 Conference Call and Live Webcast. I am Alice 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 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, Investor Relations, at Schindler. Please go ahead, sir.

Marco Knuchel — Head of Investor Relations

Good morning, ladies and gentlemen, and welcome to our full year 2021 results conference call. My name is Marco Knuchel, I’m heading Investor Relations at Schindler. It’s the second time that we do this in a virtual setup, and I think I can say, we miss you. We miss the face-to-face discussions with you, the face-to-face interactions. So eventually, we are quite a small group in here, I am here together with Silvio Napoli, our Chairman and CEO; and with Urs Scheidegger our CFO. Silvio will do the introduction at the beginning and Urs will then lead through the financials. After the presentation, we are happy to take your questions. I would like to ask you to limit yourself to two questions only. Thank you very much in advance.

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

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, Marco, and good morning everyone. Thank you for being with us today. Thank you for being with Schindler. Building on Marco’s comment, I, like him, I’d like to say that we miss you meeting in person, and since it is for me kind of a return to this opportunity, I’d like to see — I look forward to meeting again those of you, that I have had a pleasure to meet up until 2016, and I look forward to working together with those of you, who I haven’t had the pleasure to meet so far. So today the objective of course is to speak about our annual results ’21, and of course, this is also the time of the year, where traditionally companies also speak about the plans going forward. But this year, of course there is another question, and that is the question about a new structure. One that we announced last January 22nd, and one that understandably gave room to many questions. Some of these still unanswered, because in fact, we were during the blackout period.

So today’s agenda will be somehow different than usual annual presentations. Today, I’d like to really focus, at least from my section, on explaining the reasons that led us to the decision of bringing in the new structure. And so I’ll address that, and to do this, I’ll first talk about our challenges, the unprecedented macro challenges we are faced with, and then explain how that led to the new leadership structure decision that was communicated. Thereafter, Urs Scheidegger, our CFO, will take us through our financial results and then of course, we will provide you with an outlook and then move on to the Q&A session.

But, so let’s first start with the first question. The first question is, why? But before we do that, let’s just step back for a moment to last year in April, where we announced the launch of our Top Speed ’23 project. And to be very clear the objective that we announced then, are still very much valid, and you can see there were six modules, we can go through that afterwards, if you like, but they range from new installation growth, sustainability, digitalization, portfolio into the service management, product innovation, all things which remain absolutely vital to us, and these are the core initiatives. And then among the goals, you see there was the customer experience, there was sustainability and there was the competitive margin.

And now there is a famous quote attributed to Churchill, even though after checking, it’s actually not clear that he said that, but the quote goes, ‘Well, it’s nice to talk about strategy, provided one occasion looks at the result.’ And now if you look at the results this year, are circled around competitive EBIT margin. And there, we have to say, we have not yet been able to progress. As a matter of fact, you can see from the chart, but I am sure as keen followers of our industry, you observe yourself, that over the last three years, the competitive margin to our competitors has actually worsened. Now, I’m a big believer and some of you probably heard me saying that, that strong competitors make better companies. Absolutely! But to do that to become better, one has to first acknowledge the issue; and second, understand why are they stronger. And third, of course, take the measures necessary to close this gap.

Well, we’ve already taken one measure, that’s the structure, I’ll come to that in a second. But today’s focus will be on understanding exactly this, what are the issues that basically cause us to be unfortunately falling behind? So that is of course a state of mind, and this is something that together with the new team, we have already embarked upon over the last four weeks since the new structure has been put in place.

So what is really the situation? And to do that, I’d like to describe a very unique environment, where there are five key challenges that require an immediate, thorough, and impactful response, and the challenges are the following; number one, dealing with foreign exchange burden. Number two, regain competitive new installation margins. Number three, resolving the supply chain disruptions that have been affecting our industry and many others. Number four, streamlining our product portfolio complexity. And finally, this is something that occurred over the last few months, adjusting for China NI market contraction. So again, if you look at those, some of you may see, hang on a second, but this is well known, it’s not that special. Admittedly, yes. As a matter of fact, in my career, I’ve dealt with each one of these, in some cases even twice. But what makes it unique, is the mix of all five coming simultaneously. What makes it unique, is the speed of change, and in some cases, the magnitude, the impact that each one of these challenges carry by its own, so, not to mention the overall impact.

So let’s start with the first challenge foreign exchange burden; there again you can say, well, it’s a Swiss company, what’s the big deal? Well, there is one. Let me just first start on the left hand side of the chart, to highlight the magnitude. Since 2008, Schindler lost CHF3.8 billion topline and CHF507 million EBIT due to foreign exchange impact, probably some of you have it in your models. Now, that’s a staggering number. This is — size of a company. By the way, if you look at the topline and EBIT, quite a profitable one. And why did it happen? And you can see on the chart, we alighted [Phonetic] the progression or rather the degression of the exchange rate with the Swiss franc of some of the key currencies affecting our business, and of course the range from the minus 8% of the RMB to minus 74% for the Brazilian reais, a country, which is a key market for our industry.

Now, very good, but you can say, many Swiss companies are faced with that. But please bear with me for a second, look at the right hand side. The fact is, that less than 90% of our revenues — sorry, less than 10% of our revenues come from Switzerland, and of course we do have because of headquarters, an operating expenditure based in Swiss franc as well, and it is the gap we think within this to the crazy exposure. And then once more, our exposure is one of translation. Not transaction; transaction, we have been quite successful in mitigating that by systematic hedging of all transactions. But so this translation is there, and that’s one that we are not complaining about, we’re just saying it is a strategic issue to be tackled head on.

Moving on to the second challenge, and perhaps the most complex one of them all, and that is regaining competitive NI margins. I should [Indecipherable] the difference in margins between us and our competitors, and I said, in order to become stronger and come back, we need to understand, why? And one thing we believe is a key reason for our competitive gap, is NI margins. Now, NI margin itself is a complex aspect. As you know, we have a complex value chain, ranging from design factory, and then comes installation. So let me just break it into three fronts, to explain the challenge.

Front number one is, what we view on this slide, is the raw material and cost of component increase. In this case, we can speak about inflation. So on the left hand side, here you see what we call the raw material index. This is a blended index, taking into account the different impact of all the different raw materials in our value chain for new installation. And you can see here, this has gone up 47% since beginning of 2020. So that already gives an indication and look at the speed at which we went. And economy is predicted, this should have started to slow down in Q1. It’s not happening. So one better be humble, and take head on. And then just to give an example, because raw material index can be a bit abstract, so we have shown here the price of one little microchip, one that we use for our controllers, which within the year 2021 has gone up from CHF1.4 to CHF36, this is a 26 times increase. Again it’s an issue that we have to confront, others are confronted with that, and we have to find a way to bring into the solution for NI margins.

Second front of our NI margins is logistics. Now logistics, as you probably also know, has had an explosion of cost as well. As a matter of fact, here taking the example of ex Shanghai containerized index, you see they went — it increased five times since 2020. So major challenge, which happens at the same time as everything else. Now, we often say that, because of our regional manufacturing strategy, we are less exposed to these type of issues. Yes, we are, because indeed, we produce in China, in India, in North America, South America and of course, Europe, and India. But in fact, you can see that on the right hand side, our make-buy strategy, one that was developed, one could argue under the former paradigm of manufacturing and logistics, is based on an 80%-20% shift. In other words, 80% of our supplies are from external suppliers, and they don’t have all the same manufacturing footprint we have. That’s why this aspect of logistics cost, and by the way, we don’t speak about delays here, is a major issue, which affects our NI margins to be tackled with.

Front number three; pricing. Now here, this chart may surprise some of you that follow our industry. Often people talk about the global prices, let’s increase prices. But as I am sure you understand, we wanted to make sure it was visually explained here. There is no such thing as a global elevator and escalator price, it is very much a regional consideration. And of course, granularity makes all the difference, because at the end, the overall effect is the blended effect. And here we showed three strategic markets with their individual price level over the last 19 [Phonetic]. This is based on tenders on the way we observe the market.

And you can see that not all have the same development, in spite of our effort to increase prices. You can see that it goes from a country where you can have a 10% increase over two years, to one where in fact you ended up having a decrease, up to minus 6%. And then another one, which is just in the middle, about 2%. Now clearly we need and must do more, and yes, will increase prices a lot more and Urs Scheidegger will elaborate on that. But the fact is that so far, whatever we have done into the price increases, have been unable to offset the material and cost increases that you’ve seen in the previous pages. So this is something which we must act now, and something, which has impacted and will continue to impact our margins going forward. But we have to find a way, also with a different type of marketing, in order to address that.

We come now to the third challenge, supply chain issues. I mentioned that before, in terms of external challenges, in terms of how the external factors are affecting us. But we have to be absolutely open, and so we also are faced with some internal issues, internal challenges. And the biggest one of them all, is the issue of the manufacturing stretch between our new modular platform ramp up, and the delayed phasing out of legacy product lines. So yes, as you have heard, as we announced, our modular product line is selling very well. Customers love it and after the launch in 2020, today, you can see, it’s about a third of our new sales, are based on this new product line. But you can see, as you know, our business model, there is the issue of the order backlog, which then is the one that has to be produced by manufacturing. And then by simple time lag, you can see that today, while it starts to be very visible in 2021, we’re talking about a fifth thereabout of our order backlog.

What does that mean? This means that our production is very much stretched, between the old, the legacy product lines and the new ones. But it also means — I will come to the production in the second, it also means that, our complexity, which is managed as a portfolio, in terms of spare parts, in terms of sales, in terms of configurators, is a lot more complex. And why did it happen like this? Because of course with two years of pandemic, this order on hand, this backlog has been a lot slower to flow through our production. So that is, one key management issue that we need to deal with right away.

Now, speaking of complexity, there is here another element I’d like to stress. You probably heard that our — you remember, that we always said that the — so far the modularity was being ramped up segment by segment region by region. And here you can see that we still have some key segments, where still the modular platform is not yet fully introduced, and this has to be looked with the chart on the left hand side here, showing the split by regions and by segments of the industry. And you can see that while there are areas like EMEA, where the modular product line is very much on the way to become the full coverage of the market, with exception of high-rise, which is in fact as planned, not yet touched, there are others amongst other, Americas and to some extent, Asia Pacific, where we are not there yet, where the ramp-up is coming up now, and so that again creates complexity.

And let me give you a specific example now, since you speak so much about this complexity. This means that our factories, while having to deal with legacy and new product lines, have to deal with more components than we’re supposed to, and they have to have more production lines to accommodate for that. And so you can see on the right hand side, wanted to give a specific example, which is the number of cabin types produced by a factory. And you can see that up into 2017, we were producing four cabin types, covering all the segments. And now, while this transition takes longer, because there is still this tension between legacy and new product line, the same factory has to produce seven. For any of you who understands manufacturing, that is of course a big issue to be dealt with.

Coming to the fifth challenge; China. Now I lived 11 years in China, three years. In India, and I’ve been through some of those super cycles myself. So I’ve learned not to panic, and we have always managed to deal with them. Now this one that is now happening, is special, and different from the previous one. And why is that? First of all, if you look at the left-hand side, you can see that the speed at which it came after a very rapid growth in this in the second, in the first half of 2021, is incredible, unprecedented.

And the second is, if you look on the right hand side, you can see that this is not an issue or any bubble or whatsoever. You can see actually the inventories are actually still going down, which is very different from the ones I — they first had [Phonetic] in the past, where you can see the inventories growing across all tiers, all cities. But you can see here that, with the inventories are going down, [Indecipherable] and why is that? It is one, which is for one client driven. It is these large developers, of course, Evergrande being the most famous one, who basically now struggled with the financials and this creates uncertainty. Also on the buyer side, whom are we going to give deposit to, etc., etc. You know this, we can go through that more in detail.

But then, of course since key accounts, as we call them, large developers, account for more than 30% of the growth in China. This is very sensitive. Again, we remain convinced that the fundamentals in China remain very solid. China is still 70% of the world market, and you can see that these type of granularity among, tier-1, tier-2, tier-3 cities, shows there are many opportunities. But this of course demands, that one looks at a much sharpened focus go-to-market strategy, with different pricing, different products, in order to capture opportunities, where they are healthy, and there we are sustainable in the long term.

And of course China being China, all NI margin discussion has to start with China. Hence the importance, and frankly the unexpected addition of these extra challenge towards the end of last year.

So again these are our five big challenges. And again, once more, what makes them unique is that they come altogether, at a moment where we need to now step up our game and improve our margins. And so now comes again, the answer to the question, that was asked in January, why did we introduce the structure? We introduced the structure, because it’s totally consistent with our Top Speed ’23 objective, whereby we said, we need more speed, more agility, and more impact, in order to become more competitive. I know we’re not there yet.

And so today with this type of competitions, we need — I cannot find a better term, to speak about kind of war cabinet, a different approach to deal with the situation, whereby we compress the decision process at a much more agile level among less people, so that we can move and be more impactful. So that’s why, we had this combination of role between Chairman and CEO, and with the objective to have a clear focus on strategic decisions and fast decision making. And then to do that to support it, we introduced a new role of the Chief Operating Officer, which has been taken by Paolo Compagna, who has been the Head of our — one of our most successful regions in Europe, who will then have under him, all the value chain. So, and it’s important, we stress that. So the whole value chain is going to be coordinated, led by a single person. With the objective to break down silos, to be even faster in the execution.

And many [Phonetic] people speak about this often, but now more than ever, we came to conclude, this was absolutely essential, in order to give ourselves the means for our ambitions and to achieve our strategic targets. This structure of course is one that we will keep in place, as long as we have not achieved our objectives. We believe within two, three years, we should be there. And by that time, we will go back to the structure that we had, which we always say, we are very proud of, with the checks and balance of the Chairman and CEO. But in moments of special needs, we need to prepare, to adapt extraordinary measures, and that’s what we have done.

I look forward to answering — address any questions you might have. But for now, I’ll leave the word and the floor to Urs Scheidegger, who will take us through our closing results for the year and then our outlook. Thank you. Urs, please.

Urs Scheidegger — Chief Financial Officer

Thank you very much, Silvio, and good morning everyone. I would like to start my part by stating some qualitative statements, before I take you through the detailed financials of quarter four and the full-year 2021.

The order intake and revenue to pre-pandemic levels, 2019, since global markets have recovered at various speeds. Foreign currencies for once only had an insignificant impact on financials. Operating results affected by a number of adverse factors, including global supply chain issues, electronic component shortages, material and freight cost inflation, as well as delayed deliveries and construction sites. We reported solid cash flow from operating activities and the Top Speed ’23 program is now in execution phase.

Please turn to slide number 15, that provides an overview of the global market development in 2021. Global markets have continued to recover, but showing mixed patterns across geographies, product lines and segments. However, overall, the global market was up low to mid-single digit in unit and value terms, driven by China and Asia’s residential growth, particularly in the first half year of 2021.

I’m moving to slide 16, showing the order intake development. In the fourth quarter of 2021, order intake reached CHF3.1 billion, corresponding to an increase of 6.0% respectively, 5.9% in local currencies. With this, the fourth quarter order intake slightly exceeds 2019 by 0.4%, equivalent to a growth of 7% in local currencies. Order intake rose by 10.4% to CHF12.2 billion for the full year 2021, corresponding to an increase of 10.6% in local currencies, and also back to pre-pandemic levels. M&A activities contributed about 150 basis points to growth.

The following slide 17, provides an overview of order intake growth by region and product lines for the full year ’21 compared to 2020. And our order intake includes new installation, modernization, service and maintenance. All regions and product lines generated growth, as activity levels were maintained as well in the second half of the year. The Americas region generated the highest growth rate, up mid-teens, driven by strong growth across all product lines. Asia Pacific was also up double digit to mid-teens, recording growth just a touch below the Americas region. And the EMEA region generated a very solid mid-single digit growth. New installations remained robust, generating double-digit growth in value and unit terms.

After a slow start to the year, growth in modernization accelerated from the second quarter and exceeded the prior year by almost 20%. Repairs followed a similar pattern, resulting in double-digit growth while maintenance was steadily mid-single digit up, and hence our portfolio of maintained units increased by more than 5% year-on-year. Order backlog was 8.4% higher, but margins declined by about 50 basis points, due to very much accelerating material cost inflation, and price pressure, particularly in the second half of the year.

I continue with slide 18 on revenue development. In the fourth quarter of ’21, revenue increased by 0.9% to almost CHF3 billion, corresponding to an increase of 0.6% in local currencies. Third quarter slowdown continued into Q4. On one hand side, due to continued lower new installation and modernization growth, driven by disruptions in global supply chains, and delays in project execution. And secondly, due to a tougher prior year comparison.

For the full year, revenue amounted to CHF11.2 billion achieving pre-pandemic levels too. Growth reached 5.6% and 5.7% in local currencies. M&A contributed also here about 150 basis points to growth.

With that I go to slide 19, reporting the EBIT adjusted development. Margins are below pre-pandemic level. The drop in the fourth quarter was driven by substantially increased raw material component and freight cost inflation, combined with issues in supply chain, which hindered efficiency and delayed project execution. The EBIT adjusted in the fourth quarter reached CHF306 million, which is equivalent to a drop of 10.3%, respectively 10.6% in local currencies. With that the EBIT adjusted margin reached 10.4%. Full year EBIT adjusted increased by 5.7% to CHF1,252 million, corresponding to 5.4% in local currency growth. In the second half of 2021, we were facing challenges arising from the phasing of modular platforms, replacing legacy product lines, temporarily adding complexity to our supply chain, particularly in EMEA. Resulting bottlenecks, delays and inefficiency, had an adverse impact in 2021 of about CHF100 million of delayed revenues, respectively, about CHF35 million on EBIT adjusted. While the full year EBIT adjusted margin could be maintained and reached 11.1%.

I now combine slide 20 and 21, showing net profit and cash flow from operating activity. The ramp up cost for the Top Speed ’23 program in the fourth quarter of CHF42 million led to a drop in net profit for the fourth quarter of 15%. Net profit for the full year totaled CHF881 million, an increase of 13.8% compared to the prior year. Cash flow from operating activities remained solid, though declined 17% to CHF1.3 billion. The net working capital level has further improved and exceeded the first time, a negative CHF1 billion, though the improvement was much less pronounced than the previous year. An ordinary dividend payment of CHF4 per share and participation certificate is proposed to the General Meeting of shareholders scheduled on March 22, representing a payout ratio of 52%.

On slide 22, I would like to provide you a status update on the Top Speed ’23 program. Eight months after launch, we can report the following progress on the six core initiatives. We have achieved growth above market in all key markets, and increase the number of connected units by 30% in 2021, lifting the share of connected units in the maintain portfolio to more than 20%. New product innovations in modernization and new installation in selected markets are launched and under development. And the new procurement operating model is defined, and implementation underway. At the same time, we acknowledge that a lot more needs to be done, and there is further acceleration of our activities required, to bring the program to a successful completion in time.

Let’s now turn to the outlook for ’22, starting with the market, slide 24. Global market growth is burdened by a slowdown in new installations in China, which is expected to decline mid to high-single digit in 2022. All the regions are expected to grow. The EMEA and the Americas mid-single digit and Asia Pacific, other than China mid to high single-digit.

This is the starting point for the business outlook on slide 25. As mentioned, the China market is expected to contract, growth in the rest of the world will show mixed patterns. Construction site delays will continue to hinder project execution due to supply chain disruptions. Material cost inflation will continue to cause persisting margin pressure. We have implemented price increases across all product lines and regions. However, these are unlikely to offset cost near, term due to long lead times. We expect Top Speed ’23 expenses to reach up to CHF150 million in ’22, and revenue growth is expected between 1% to 6% in local currencies, barring unforeseeable events.

Margin pressure is expected to continue and quarter one and quarter two are expected with slow revenue growth, and a significant drop in profitability.

With that I hand back to Marco.

Marco Knuchel — Head of Investor Relations

Thank you. I would like — maybe I need to restart. Thank you, Urs. We are now happy to take your questions. And I would like to remind you to limit yourself to two questions only. Alice, please?

Questions and Answers:

Operator

Our first question comes from the line of Daniela Costa with Goldman Sachs. Please go ahead.

Daniela Costa — Goldman Sachs — Analyst

Hi, good morning everyone. Thanks very much for taking my questions. I’ll stick to two. First, I wanted to check, sort of comments [Phonetic] of this structure will remain for the next two to three, while you reach your objective? And I was wondering if you could give us a little bit more color, in what exactly those objectives will be in terms of, how you are going to drive shareholder value creation? So you talked about closing, for example, the margin gap with peers. Why are you not introducing a specific target, or will you in the future, what’s the — I guess the timeframe is two to three years, but what other metrics should we monitor, to see it, your moving towards those objectives. That’s my question number one.

My second question is regarding capital allocation, and given your solid balance sheet, but also the trajectory you’re going to go to in the next few years, I assume maybe inorganic activity, not a major focus going forward. Is that correct? And could we see a return to buyback remuneration like we had, over the past, I think maybe even over the period, where Silvio was around before? Thank you so much.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you. Daniela for the question. And let me take them both. Number one metrics. Yes, absolutely legitimate, at the same time, I — as explained at the beginning, we now have a new team that has been together for — it is the fourth week, and so we explained the challenges. What we’re doing now to just do justice to the importance, and the difficulty of the situation. We are reviewing the situation. Coming up and analyzing each one of our plan, and seeing which priorities we need to go, which is I think we’re already you quite advanced. And then transform these in a new strategic plan with new targets. And these are the targets that we’d be measured upon, and these are the targets which then will lead at the end of the, this what I call, transition phase, to then reestablish our structure that we have had, until last year.

Now, please bear with us, it wouldn’t just — I’m sure you would be skeptical if I told you, that in four weeks, we already have a new plan with new targets. We are working on that. And my commitment to you is that, as soon as going to — this would be ready, which would be, I would say summer by the latest, we’ll share them with you.

Second question on the capital allocation. Yes, you understood well. Connectivity — consistently with our Top Speed ’23, will continue to be a big part of our investment. Not only connectivity, but connectivity is step one. The question is, how do we then turn the connectivity into an overall data driven business model, which will then result in different way that the business hopefully, actually with the objective of delivering better quality for the customer, how do we measure that. And then of course, how do we then link and bring the customer, may be in a new — in a new business proposition. That is the biggest allocation. Now will the buyback will be part of this, at this stage, I cannot say.

Daniela Costa — Goldman Sachs — Analyst

Thank you very much.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you.

Operator

The next question comes from the line of Lucie Carrier with Morgan Stanley. Please go ahead.

Lucie Carrier — Morgan Stanley — Analyst

Hi, good morning gentlemen and thanks for taking my question. I will also stick to two questions, despite having a lot more. But just maybe a follow-up on Daniela’s question, trying to drill down a little bit on what you tend to be, want to be doing because it’s helpful that you gave us this clarity on the burdens you’re facing. But I guess, some of these are not necessarily dependent on your own execution, if I think about FX, for example, or the state of the construction market in China, they are more dependent on outside or external conditions. So how, what are you tangibly planning to do, to kind of offset some of those considering that the — as I said, they are not necessarily all down to your own execution. That’s my first question.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you. Again, I fully understand. Trust me, we have. We’re asking the same questions. And again, we don’t have the full plan. But let me give you an idea first, maybe a challenge but challenge to give you an indication, I think that’s legitimate. Into the foreign exchange, well, one thing for sure, we cannot sit idle. We probably will never be able to offset the full extent of the consolidation impact of the translation. However, if you look at the chart we presented before, you can see there is this gap between revenue and opex in Swiss francs into the percentage of total. This is the kind lever on which we can play. So we probably cannot hedge or cannot do much about the topline impact. But on the bottom line, yes. On the bottom line, I think it is, it’s not easy, I think you very well identified it. But to see how we can reduce our exposure to Swiss franc, in terms of operational measures, is a challenge that we owe to our shareholders to undertake.

Now China, you mentioned. Now China, there are ways to deal with this. By looking at the again granularity of the market, the chart referred to tier 1, tier 2, tier 3, and as you can go deeper, you can look within every city, what are the segments which have growth, which are the segments which have better margin, and most of all, which are the segments where our products have a bigger impact, a bigger differentiation. So by then sharpening our marketing and focusing on these products, all the way improving them through the value chain, and of course applying prices accordingly, is something we can and must do. So I — as much as you’re correct in saying, these are in such a magnitude, or an external force, I believe we can and must do something to offset that.

Lucie Carrier — Morgan Stanley — Analyst

Thank you very much. And just maybe looking a little bit more shorter term, if I understood well, Urs, I think you were indicating a margin in the backlog, which was down 60 basis points, and correct me if I’m wrong, I might have misunderstood, and you are obviously also indicating a difficult first half 2022, in terms of growth and profitability. I guess, it doesn’t really come as a big surprise, but can you maybe help us think about qualitatively, around the magnitude of that impact on profitability, in light of what you have delivered perhaps in the second half 2021, where obviously profitability was already under pressure?

Silvio Napoli — Chairman and Chief Executive Officer

Thank you. Yes Urs, would you like to take this question?

Urs Scheidegger — Chief Financial Officer

Yes, good morning Lucie. Thank you for the question. As you certainly have noted the challenges and headwinds have clearly increased in the second half of ’21, due to this very significant material cost inflation. Overall, we are talking about CHF150 million in ’21, and they’re off only CHF60 million, occurred just for Q4, and this will continue into ’22. We are expecting incremental additional up to CHF150 million material cost inflation, as commodity prices are still very close to peak levels, and a lot of that will occur in the first half year of ’22.

We also see increasing wage inflation into ’22 as an outlook. Last year it was a bit more than 2%, but now it will go up to about 3% of our total personnel cost line. But we also still will have to deal with some of these operational supply chain issues we have mentioned. One is in the market, we will see slow revenue generation, particularly in the first half-year, due to material shortages across construction sites. And I mentioned it, some operational issues to deal with the complexity right now, to ramp up the modularity systems and to ramp down the legacy systems.

So you see headwinds coming into the second half, particularly now in the first half year and we have also noted that in our media release, there is a significant drop of the profitability to be mentioned, that can be around 20% down on profit for the first half year. Then we will have to work on supporting measures, we will have to work on compensating measures certainly immediately, and then it should also recover a bit into second half year. The volume growth will certainly support us, to compensate the headwinds, that will enable scale in the factories, in the field. We will work on field efficiency. That’s clear. And also, to complete our cost optimization program, which we already launched in 2020, and that will also support us.

Having said that, I don’t expect that the headwinds, can be compensated by those supporting factors for the full year.

Lucie Carrier — Morgan Stanley — Analyst

Thank you, Urs. And just to make sure I perfectly understood your comment around the drop of profitability, of you talking about 20% adjusted EBIT, that’s for the first half 2022 and this is gross, i.e., not including some of the savings or measure that you’re putting in place? Even if these [Phonetic] measures won’t fully offset?

Urs Scheidegger — Chief Financial Officer

Yeah, I’m talking about the first half year of ’22. Yeah.

Lucie Carrier — Morgan Stanley — Analyst

Okay. Okay. And this is the gross impact from the headwind, pre some savings. I guess?

Urs Scheidegger — Chief Financial Officer

This is the net result. The net result headwinds, net of the [Phonetic] supporting factors.

Lucie Carrier — Morgan Stanley — Analyst

Yes. Okay, understood. Thank you very much for the precision. I go back in the queue.

Operator

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

James Moore — Redburn — Analyst

Oh, yeah. Hi, everybody. Silvio, lovely to have you back in the seat. Urs, hope, you are well. I have two questions. But, firstly, could I qualify the answer you gave to Lucie? I think you were saying that the 20% is a net income comment. If we were to turn that back into an adjusted EBIT margin in the first half, I think you did CHF638 million and an 11.6% margin in the first half of last year. Could you give us a flavor for what that might mean for the first half margin. And then my questions, the first one surrounds your ambition longer term. looking forward to hearing your targets in the summer, but as a starting point, can you give us a flavor for how you see medium to longer-term margin developing against your history? And my second question is on the China NI margin, if NI margin is one of the great challenges in the group at the moment, could you talk a little bit about the rough quantum of the China NI margin in 2021, and how that differs from the peak market back in 2014, and how much you think that might fall this year?

Silvio Napoli — Chairman and Chief Executive Officer

James. Thank you. Great to hear you again, and Urs, [Speech Overlap] questions here. The first one is about quantifying the margin for the first half. Then there is one about the long-term ambition, and then the third one is about the China margin 2021. Can I suggest I start with the second question, about the long-term ambition and you take the next two?

Urs Scheidegger — Chief Financial Officer

Yes.

Silvio Napoli — Chairman and Chief Executive Officer

James, long-term ambition. If you remember — if you see my chart number 4, long and short answer is that, I said we need to close this gap we need to be. And you can see, unfortunately, our margins have even dropped recently. We need to bring them back. So whether and how fast we’ll be able to reach the most profitable company in our industry, which I just announced very, I would say, clear improvement in terms of EBIT, is that’s an ambition. But let’s first start with the one that is in the middle, that we need to catch up with. And actually not so long ago, and you can see from the chart, we were there. So that has to be an ambition. And now how do we build on that? Just step by step like any other things, we need to get forward. I said, there is no reason why except, maybe the size of portfolio, which is something, which of course provides a leverage for margin. But for others, there should be no fundamental reason, not to give ourselves the ambition to be as profitable as our competitors. So that’s the short answer.

Of course we have to do that, or the same time achieving — the other ambition is to achieve healthy growth, which of course is a different consideration in view of the challenge that we just explained. Because when costs somehow predictable and flat, the model that consisted in selling, and then you know, planning on driving cost reductions, on things that you had sold at very competitive prices, that model, I am afraid, needs to be resolved.

So what are the outcome, the levers, and of course the targets coming out of that? That’s something I look forward to discussing together with you, and others — or your peers when we are ready for the discussion.

With that, I give the word to Urs for your other questions.

Urs Scheidegger — Chief Financial Officer

Thank you, Silvio. Yes James, last year, first half year was actually really a very solid result, because it was driven by higher revenue generation, growth of 10.4% and resulted in an EBIT margin at that time of 11.7%. But the world has changed. These macroeconomic factors have changed, material inflation is very significant and will now be significant, particularly in the first half year. You have seen 10.4% margin in Q4. So from that first half year ’21, I think it is well explained, a drop of 20% on EBIT adjusted margin. But of course, it depends as well, on our revenue generation capability, and how old construction sites can be managed, how the material shortages can be managed overall on construction sites. Thank you.

James Moore — Redburn — Analyst

Any comment on the China NI margin, and where that is versus the peak, and how much it might fall this year?

Urs Scheidegger — Chief Financial Officer

I don’t fully understand the question.

Silvio Napoli — Chairman and Chief Executive Officer

The China — I think I understood it. The question is, if you look at the profitability in China in 2021, how is this likely to evolve in 2022?

Urs Scheidegger — Chief Financial Officer

All right. Okay. So our China profitability in ’21 was and is at group average. Now we face this very high material cost inflation, and prices are very competitive in China. They were also very competitive in the second half year. You have also seen price development presented by Silvio. So if the overall profitability of the Group is dropping, now in the first half year, you can expect that this is also the case for our China profitability.

James Moore — Redburn — Analyst

Thank you very much.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, James.

Operator

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

Andre Kukhnin — Credit Suisse — Analyst

Good morning. Thank you very much for taking my questions. I wanted to just double check on the mid-term and the full margin potential, because in the past we discussed, kind of what would be fair for an elevated company, and there was always that qualification that you have got, additional hundred basis points of expenses related to kind of an internal audit system that you have implemented. So could you comment, or could you confirm to us, that the ambitions to close the gap to peers kind of full stop, with Schindler, as it is?

Silvio Napoli — Chairman and Chief Executive Officer

Andre, hello there. Thank you for the question. So now you’re going to specifically of course — we did discuss that. So yes, we do have processes that are, to some extent different — actually to a large extent, different from our competitors, which are probably more focused on safety and quality, which involve some costs. Now, I just don’t want to give any wrong sense here. We are not prepared to sacrifice quality and safety in order to grow the margins. That’s not the case. All right. So, our challenge is, how can we retain the quality and safety, and possibly achieving the same approach, differentiating ourselves from our competitors always. While may be doing it — maybe, definitely doing in a more cost competitive way. Yes, that’s our ambition.

But what you cannot say, is that we will now remove all the steps. This is an absolute in case. Does that address your question, Andre?

Andre Kukhnin — Credit Suisse — Analyst

Great. Yes, it does. Thank you, Silvio. And the second question I have is another broader one. On mass connectivity, I just wanted to get your fundamental view on how you view — how you see ultimate monetization of this effort and the investment, and how do you assess the risk of it becoming somewhat completed away for lower maintenance of prices because of just the magnitude of the operational efficiency benefit that it brings about?

Silvio Napoli — Chairman and Chief Executive Officer

I am afraid, if anything, just [Indecipherable] for our technical team, the sound is not really good. Can we do something may be increasing it, because I didn’t hear the second part of the question? If you get something like that please sorry. Andre. But I did hear the first part of it, if you don’t mind repeating the second part, but let me just first answer the first one.

Monetization of digital connectivity. See, now we are finally advancing and admittedly, we can — we want to grow even faster now, that will be part of our capital allocation, in terms of connecting more and more of our portfolio. So monetization comes in two part. One, it comes by a lower churn rate in our portfolio. We find and this is now validated over the years that the number of units that are connected, suffer from a much lower loss rate. That is in itself, monetization. So that in itself is very good. And then only because people feel hooked, is because they get, obviously, we believe our customers get a bit of service, understand better what we do, and ultimately we can address breakdowns timely, and also anticipate most of them. That is part one.

Then there is a second one, which is also internal, which is getting data in terms of product improvement. It’s amazing what kind of modeling we can build by gathering information from same, for example lift systems in different parts of the world to see, for example, how different type of climates, humidity affect performance. And so then we can go back to R&D and improve the design. Things that however long attest, you may want to do in test hours, which we did traditionally, we would never be able to capture. So this is another monetization, is our product design, quality and faster engineering innovation loops [Phonetic].

The third one is, I think you mentioned this is digital services. This is the beginning. You’ve seen that in some markets now, we are introducing them actually very successfully. Of course some markets are more open and prone to those. This is something that we are very keen to bring forward. You also see that we have the startup called BuildingMinds, that work on it from another point of view. So all of that is creating the knowhow knowledge and market intelligence, that will allow us to take this to the next step. This is part of the capital allocation work we will have over the next couple of years.

Now, there was the last part of your question which I’m not sure I captured please, Andre.

Andre Kukhnin — Credit Suisse — Analyst

Yes, thanks for that. The second part of it was, just on how you assess the risk of the investment in digital being computed away through lower — potential lower maintenance, ASPs, just because of the amount of operational efficiency benefits that it brings?

Silvio Napoli — Chairman and Chief Executive Officer

So far, I would say if anything, the investment realization has been additive, absolutely not deducting anything. So, so far is not the case. It is also strategic defense like you know, the strategic mode, that will also help us to fend off, which has been very much the case of our other industry disruptors, that based on digital, non-A&E any approach, and that is also another value. But so far we have not seen any evidence of that, or in terms of anyone of any destruction of investment being made. Thank you, Andre.

Andre Kukhnin — Credit Suisse — Analyst

Sorry. Thank you. I’ll stop here. But look forward to further conversations, of course. Thank you.

Silvio Napoli — Chairman and Chief Executive Officer

Pleasure.

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 and thanks for taking my question. Just would like to go back to the EBIT, adjusted EBIT discussion we have previously, because it was a little bit confusing, sometimes we heard net profit being down 20% than adjusted EBIT. I just wanted to clarify that, as we talking about, and then we were also talking about margins being down 20%, so I am a little bit confused now. So what’s really down 20%, according to your estimates in H1? And in that respect, I realized all the headwinds that you’ve been talking about, but we also have tailwinds according to my understanding, right. We have Top Speed ’23, which should start to bring some first fruit also in 2022, according to my understanding, and we also have the usual targeted cost savings, and efficiency gains. So I was just really wondering, how do you think Top Speed ’23 and these efficiency gains will help your cost base in 2022? That’s my first question.

And the second question is very, very simple on the acquisition impact that I’m — I would think was taking place also, on order intake and revenue growth in, in Q4, similar to Q3. I was just wondering whether you could confirm that, and whether you could provide some quantitative indication on the acquisition impact? Thank you very much.

Silvio Napoli — Chairman and Chief Executive Officer

Urs, I propose I take the first question, you take the second. All right. So headwinds and tailwinds. Very good question. Tailwinds, you mentioned are things that we already had in place and thank you for underlining it, such as Top Speed ’23 and efficiency gains. These were developed with known assumptions, with data on hand, that is today to be updated. This is one of the two questions. For example you talk about efficiency gains. Yes, and we are, as you can imagine going all in for it and definitely accelerating every part of [Indecipherable] anticipate. Part of our of our action plan that will be, we will be sharing with you. However, take another example, which I think I mentioned before, I didn’t want to bore you with too much. There is another element for example there, wage inflation, right. That’s a fact — that its true throughout the world now more than ever. U.S. being probably the most talked about case today. So all the plans we have, now needs to be recalibrated in order to take into account, this new reality, which I’m afraid adds a lot more headwinds and tailwinds.

Then you mentioned Top Speed ’23. Absolutely. Now based on all that, you can see so far, if you look at the results of ’21, we decided we need to accelerate. So clearly Top Speed ’23, we are definitely pushing. We are also assessing which of the Top Speed ’23 modules will give us the biggest boost in the shorter time, and then reprioritized accordingly, also reassessing capital location, among the different modules, to make sure that we get the boost that we are getting now, in order to face even stronger headwinds. So, yes, all is — that is part of the equation and dummy part of the plan that we present, and we’re working on together, together with the new team also.

Urs, would you like to take the second question, starting with the margin quantification, the 20%?

Urs Scheidegger — Chief Financial Officer

Okay. So let me — very clear, I am talking about EBIT adjusted line, when I state that this will be a drop of around 20%. On the M&A, as I said, we have 150 basis points contribution to growth, in order intake and operating revenue full year. In quarter four, its close, a little bit less than 100 basis points, as the contribution from the Volkslift joint venture acquisition are now fading out. Of course, we will continue running M&A, particularly on maintenance portfolios, and this will be also an activity we are running in ’22.

Andre Kukhnin — Credit Suisse — Analyst

Okay.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you.

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 everyone. Thanks for the time and taking my questions. If I can start with — question just on China and the outlook, and you’ve obviously been fairly clear in terms of the challenging market that you’re seeing there. I guess I’m interested if you have any view on when we may see that market start to improve? We’ve heard I guess from some of the industry commentator, talking about potential for the second half to look stronger than the first half, and interested if you have any view or I guess any stores, and when we might see those conditions start to ease?

Silvio Napoli — Chairman and Chief Executive Officer

Yes. Thank you, Andrew, let me see. We read the same sources and those predictions are very much, I would say the ones that we look at as well. At the same time I don’t think there is anyone that could tell you today, by when this will definitely improve. It all depends on how quickly those large players will be able to restructure and build up liquidity. and we don’t see an intervention from the government. Other than making sure that, investors or mortgage holders lose their deposit. That’s what the government wants to do, which is great. So I don’t see — we have no indication so far of a major breakdown.

However, you ask about recovery? Then at the moment, for the first half, we don’t see any indication. There is possible optimism in the second half. But I guess, in fact, as you go into — situations like, for example, [Indecipherable] which was actually within the three red lines compliant and yet now is facing issues, show that there is probably a lot more to understanding what the real issues are in terms of financing and liquidity, among those large developers. So it’s very difficult, you cannot really take a chart and saying, well, this is real assessment to-date. So I wish I had an answer, but I’m afraid I can only say yes, we hope it is going to get better in the second half, maybe in between the option would be public transportation. There’s lots of infrastructure projects coming on the market being tendered, which definitely will compensate some of the drop in terms of private, commercial and residential. However, to be very clear dose tenders are very long and complex and frankly, also has to be said, because it involves a lot of customization. They are not great for margins to put it bluntly.

So part of our marketing, which I discussed before, about how to make sure we improve our margins in China, will also include that consideration.

Andrew Wilson — J.P. Morgan — Analyst

That’s very helpful color. Don’t worry, I wasn’t anticipating you were going to give me a month, where you expect things to pick up in China. Second area, is just around the Top Speed, the cost guidance having increased for 2022. I guess I wanted to understand whether that was an increase in absolute cost in the total program, whether it was cost, which have been brought forward to accelerate the program? And then whether that the additional cost of it — is additional cost, was because you are going to expand the scope of the program or whether the program itself was going to cost more than you’d initially expected. So I guess, there’s a few aspects about it, just trying to understand, exactly where the CHF50 million extra has come from?

Silvio Napoli — Chairman and Chief Executive Officer

Thank you, indeed, observation absolutely correct. I’ll give the word to Urs, just one point. Going back to the topic of capital allocation, yes, we want to accelerate further accelerate our speed to generate the benefits that indeed are expected to give us some tailwinds finally. So, yes, there is an increase, Urs, please. If you’d like to elaborate?

Urs Scheidegger — Chief Financial Officer

Right. It’s a clear ambition to accelerate the program, particularly the work streams on product innovations in new installation and modernization in selected markets. We will also do an effort to further accelerate the connectivity, and our journey on Digital Twin, where we now just were able to launch the Digital Twin escalator for product planning, which is a first and early first milestone. So clear acceleration, up to CHF150 million for ’22. With that we would be in the range of CHF210 million after two years. We keep the overall program envelope of up to CHF270 million.

Andrew Wilson — J.P. Morgan — Analyst

That’s very helpful. Thanks for your time.

Urs Scheidegger — Chief Financial Officer

Thank you.

Operator

The next question comes from the line of Patrick Rafaisz with UBS. Please go ahead.

Patrick Rafaisz — UBS — Analyst

Yes, thank you and good morning everyone. I have two questions please. The first one is on the ramp-up and rollout of modular platforms, currently it looks to be about 30% of your intake and a bit behind plan, probably as you commented earlier, how should we think about the conversion of your order intake here? How much longer will it take for full conversion? And second question is actually related to this, you talked about CHF100 million impact of revenues, CHF45 million on EBIT from efficiency losses related to running increased number of platforms, in the facility. Is that a similar number we should anticipate in your bridge for 2022, and then will that be higher or significantly lower than that? Thank you.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you. I appreciate that, you know, you ask about this issue of complexity, which is really one that has to be dealt with, as an absolute priority. So the first question is, how long would it take for a legacy — for the legacy backlog to be produced and installed? To be clear, as I mentioned before, if you look at the slide I presented before, it was slide 10. In fact we definitely would have hoped by now, we would have been more advanced. Unfortunately, the situation with pandemic was what it was construction site delays. So normally, [Indecipherable] backlog on average was 18 months. Sometimes large projects are longer, but I think 18 months is a good term.

So if you look at what you see here, if you look at the mixture, if you can see that the third there is modularity, I would say probably two to three years. By then, we should be able to have a very marginal part of legacy, which would be the projects, which have been the most delayed, and then you would have probably some high-rise. So I would say, it is probably two to three years, three years is probably a safer assumption, also in view of the fact that in some countries, construction sites, and for example of Southeast Asia. Places like Malaysia, places like Indonesia, where we have been offered a large backlog, are still very much only now coming out of a serious lockdowns, in some cases, not even. So I think that’s a fair, that’s a fair assumption.

For the impact. EBIT, Urs please, would you like to take that?

Urs Scheidegger — Chief Financial Officer

So the CHF100 million revenue impact is something, which was delayed, due to the ramp up difficulties in the supply chain, we were a bit slower in delivering. So this will occur, which should be generated later in ’22. But of course, it will be combined, with these overall supply chain disruption, material shortages slowing down construction sites. But this is not lost. The CHF35 million EBIT impact is clear bottom line impact, due to operational ramp up topics and issues in the supply chain, including some corrective actions. We will also have such headwind me in the next quarter one, two, as soon — to finish and fix it. So I expect for the full year, that will also be a bit burden to the P&L, in the range of CHF30 million to fix it completely.

Patrick Rafaisz — UBS — Analyst

But is that incremental, or is it just a similar impact as in ’21?

Urs Scheidegger — Chief Financial Officer

This is the similar impact as in ’21.

Patrick Rafaisz — UBS — Analyst

Okay, thank you.

Operator

The next question comes from the line of Lars Brorson with Barclays. Please go ahead.

Lars Brorson — Barclays — Analyst

Oh, hi, good morning. Silvio, thanks for the presentation. I thought that was quite helpful. Can I have two questions, one on digital services and one on your pricing strategy. Maybe take them one by one. On digital services, you flagged the competitor that launched some ambitious margin targets this week, I think that’s right. I think that largely comes down to service growth and productivity in the service operations, which I guess in turn, partly comes down to the digital strategy. You talked a fair bit about what you’re looking to do on the NI side of your business, less so I think around your services business.

The bigger picture question for me is, do you think you’ve lost a bit of ground in digital? I think I hear similar penetration numbers from you and your competitors around penetration levels for digital, but I’m also mindful that again, historically you were built on Predix, and now of course, transitioned to Microsoft Azure? You rolled out initially with Huawei as your global connectivity partner. Can you give us some sense for what you see historically and whether you felt you have lost some ground perhaps, caught up with your key peers around digital in the last couple of years? Thank you.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you. I definitely — the fact that you mentioned that MS focusing [Phonetic] on our services, it goes straight to my heart, because the one thing I try to do, become best, to make sure that we don’t forget this is, not only 50% of our revenues, but a key part of our business. We are ultimately a service company. So thank you for helping me correcting that, and being understanding.

Let me just give you a straight answer. No, I don’t feel we’re losing ground and you can see from what I said before, I don’t think — one can see, we’re not humble. We don’t have a problem saying, when we have one. But in terms of digital and service, we don’t feel — even from a quantitative aspect, that we are actually staying behind. One thing for sure and this I just say this respectfully, we talk less about it, because we believe there is a lot of opportunity, a lot of competitiveness to be gained.

Now, perhaps to give some color on the service, we have been rolling out in a quite impactful way, what we call Technical Operations center, whereby now all our connected units are monitored at regional level, but also a group level; by data centers with elevator specialists and data scientist, that check the data, relate it, and then actually helps, not only as I mentioned before, the R&D, development, product management, to improve the products, but also in order to help understanding patterns for entrapments, for breakdowns. And therefore, that has given a tremendous improvement.

Now, when we speak next — today, I did not feel it was the place to be boastful, but when we present next in the summer, I will make sure we cover it. And I believe, we’re actually doing a lot more, even in terms of product design, you saw as part of our Top Speed ’23, we have a substantial part of our investment and capital allocation, which goes to what we call Digital Twin. That’s something, clearly, which doesn’t have a payback for the next few years. It’s very much a mid, long-term investment. But the idea is what is to link a digital avatar, from the moment a product is sold, designed, all the way from when it is installed, maintained, with all processes that go with it. Some of our competitors years ago announced Google Glass. I challenge anyone to find a technician that uses it anywhere in the world. So no, we don’t do this. We don’t announce it before. But because we believe if asked, let’s start first with the core, which has to have this Digital Twin concept and digital connectivity behind.

So there is a lot more, I’d like to say if you don’t mind, Lars, I’d like to raise it next time we speak, and we present our strategy, and then I think we have a lot more that we can show in this regard.

Lars Brorson — Barclays — Analyst

That’s clear Silvio. Thank you. And maybe just on disclosure in the summer time, should we expect to hear more on BuildingMinds. You’ve invested CHF60 million I think so far over last three years. I think we’ve got another CHF100 million to go. We haven’t seen a huge amount of disclosure. What might we expect around that, and particularly, what are the kind of key KPIs we might expect to see, for that business going forward?

Silvio Napoli — Chairman and Chief Executive Officer

Absolutely. We’ll keep it in mind. It will be my pleasure to do this. Of course, you have been following personally. Yes, absolutely. In the meantime, only would encourage you to look at the website. There is a lot of information of the partnership, the clients and the solution, which is now — not only about software-as-a-service for real estate, but a lot –always more the ESG aspects. So since most of our customers now are also confronted with the — how to comply with the Paris COP type commitments, how does the real estate industry confirm that? And BuildingMinds has become very much a key tool to support them. And so this is absolutely exciting. I look forward to discussing more about it next time.

Lars Brorson — Barclays — Analyst

Understood. Can I ask secondly, just to your pricing and pricing strategy. One of your competitors obviously gave some helpful disclosure around like-for-like pricing in China new installation. For them, that was flat last year, including late in the year. Can you help us with your own like for like price realization in China in the year and in Q4, and bigger picture, I didn’t hear a lot around sort of pricing strategy and changes there, should we think of you, particularly in Chinese market as being perhaps more selective? You talked about infrastructure not great for margins, have historically not been. How to think about sort of bigger picture, your pricing strategy going forward in the Chinese new equipment market please?

Silvio Napoli — Chairman and Chief Executive Officer

Good. Urs, I’ll let you take the one on the development of pricing last year. In terms of going forward, please allow me Lars, this will be part of — this is what we’re working on now. Again India is clustering, is understanding which segment is going where, which involves geography, which involves segments, going from residential, commercial. There is a topic of escalators, of course, which plays a big role, because that market is also changing rapidly. And so India is — in China, it was never going to be about a one size fits all. But then more and more, we need to look granularly in which area, which region to grow in. What investments are necessary? In our business, I’m going to say, selling is the easy part.

The questions are now, do you secure maintenance afterwards? How can you provide a service? How can you differentiate yourselves from the local competitors, with whom very candidly, you’re never going to be able to compete on price. And that in a market that is slowing down, will present different challenges. At the same time, going back to the question as before about opportunity, definitely in China, service and modernization are a huge opportunity. Now so far because of this crunch time, that is still not enough, neither in volume, nor in margins to offset the NI pressure. But it is all part of the overall consideration.

Urs, would you like to take the point of our price development in China?

Urs Scheidegger — Chief Financial Officer

Yeah. So the China pricing, you always have to differentiate a bit segment-by-segment. On the larger residential segment, pricing in second half-year or also in Q4, was flat, despite high material cost inflation yet and commercial public transport pricing was under pressure, competitive pressure for such larger projects. Thank you.

Lars Brorson — Barclays — Analyst

Thank you, both.

Silvio Napoli — Chairman and Chief Executive Officer

Thank you.

Operator

The next question comes from the line of Miguel Borrega, with Exane BNP Paribas. Please go ahead.

Miguel Borrega — Exane BNP — Analyst

Hi, good morning everyone. Two questions from me. On your top line guidance, I just want to understand your thought process for 1% to 6%, since your backlog is up 8%. So can you give us some flavor for how much you’d expect book to ship to be in 2022, and how much that typically represents, as a percentage of revenue?

Silvio Napoli — Chairman and Chief Executive Officer

Yes, thank you. Urs, would you like to take that?

Urs Scheidegger — Chief Financial Officer

Yes. Thank you. Well, you have seen how revenue generation has slowed down in the second half year, very remarkably. In quarter four, this is 0.6% growth in local currencies. Due to global supply chain disruptions, that’s not only affecting us, most construction sites are running much slower, due to material shortages and logistic bottlenecks. And this is hindering us to rollout the backlog more effectively, more positively for the next quarters. Our backlog is healthy, very active, but the turnover or the rotation is now much lower. This, you have to take into account. That’s why we indicate this wide revenue range. In the first half year, it will be clearly remaining slow, and then we will see in the second half year, whether these bottlenecks are releasing, and we can run much faster again.

Miguel Borrega — Exane BNP — Analyst

Thank you, that’s clear. And then you aim to achieve a competitive margin. You’re now doing 11%. It’s not yet clear to me, when you launched the Top Speed ’23 program. I suppose you also had a target in mind. So will that be raised or just brought forward? And are you thinking on an absolute level, because Urs, you just said earlier, that 11.7% in the first half of 2021 was solid. Your closest competitor guided for margins around 11% for 2022, your peak margins were 12%. So any flavor here for competitive margins, and what does that mean ahead of the summer, would be great?

Silvio Napoli — Chairman and Chief Executive Officer

Thank you. I truly understand your question. That’s obviously very important for your models. We are not in a position today, we all [Phonetic] described to give an exact target. One thing for sure we need to improve. So please bear with us until we can give you a specific answer. But clearly closing a gap, and you — but nonetheless, in the meantime, you see what our competition has guided to. That gives a sense of where we want to get. Of course, the other question you probably are going to ask me is by when, and the answer we will give you as soon as possible. A, we are at the same time applying the realism of the backlog you just saw, with the margins, we just discussed. But this will not be for any complacency whatsoever. Hope you — at least that was perceivable. We had extreme resolve, to do whatever it takes to get there. But please bear with us that we cannot give you a specific number now.

Miguel Borrega — Exane BNP — Analyst

Okay. I will. And just maybe if I can squeeze in one last question, apart from the margin impact, how does modularity impact your working capital? That’s my final question. Thank you.

Silvio Napoli — Chairman and Chief Executive Officer

Urs, would you like to take that?

Urs Scheidegger — Chief Financial Officer

Well mid-term is clear. Modularity will reduce valiant options for our platforms, as we roll it out component-for-component, and now as well, the full system. And you have seen the presentation, when we can roll it out completely across geographies and product lines. This will reduce inventories. On the other side, due to the material shortages we have now, we have to build up certain inventories, to be sure that we are ready to fulfill to our customers. And you also see that, that our inventory levels in ’21 versus 2020, have increased quite strongly to build up some strategic inventory buffers for deliveries. So it could be shorter term for the next one, two years or as Silvio says, until legacy products have been converted to modularity. Three years that our inventory levels will be now at a ’21 level or even a bit higher, until they will reduce. Mid-term, it will clearly help us to improve our net working capital.

Silvio Napoli — Chairman and Chief Executive Officer

If I may, just maybe build on Urs’ answer, because I think it’s really good question, a very important one. Thank you for that, Miguel. It really comes down to scale. I am at the risk of saying things that are evident. One of our challenge, if you look back to our results, has been, that we’ve been able to grow top line quite successfully, but not been able to turn that into improvements in margins. And this is a challenge with all scale theory. In theory when you grow size, you should be able to turn it into better margins, and that is something, which we believe has not been achieved also, and predominantly because of the complexity in our product portfolio. Because scale wasn’t generated. Now modularity, our objective is this, that we’re going to have less components, less suppliers, which therefore will give us more scale to negotiate with each of them, but also in a mutually successful way that we can then look forward, by setting margins with growing volume and negotiate and work together in a different way. That’s an example.

The other way, if you look now at the efficiency in our factory. You may — please allow me to recall the slide I showed about the number of cabins in a factory, right. So the goal is, now we are in this transition phase, where we have seven. But the goal is to go below to where we were in 2017, which was four, to go to three, to two, and then maybe with modularity weak, we will always element [Phonetic], and the element will be codes and standards that we cannot go below. But then, if you apply this to every single component, we’re going to have many less components to be delivered in a much more effective way.

So these are concrete examples. That’s why, what I wanted to put that chart with the cabins, that would explain where we want to get. And while unfortunately now we are a bit with our legs spread between two levers year, because at the moment, it’s unideal and is taking longer than expected because of the pandemic. But no excuse. We’ve got to fix it. I hope this helps to understand.

Miguel Borrega — Exane BNP — Analyst

That’s very clear. Thank you.

Operator

That was today’s last question.

Marco Knuchel — Head of Investor Relations

It was the last question for today. Thank you very much for your attending this webcast and this conference call. We’d like to close, please feel free to reach out to me if you have any further question. The next event is the Q1 results presentation on April 22nd. Thank you very much. Take care and bye-bye.