Schindler Holding AG Bearer Participation Certificates (OTCPK:SHLAF) Q3 2022 Earnings Conference Call October 20, 2022 4:00 AM ET
Company Participants
Marco Knuchel – Head of IR
Silvio Napoli – Chairman and CEO
Carla De Geyseleer – CFO
Marco Hasler – CFO, Schindler China
Conference Call Participants
Lars Brorson – Barclays
Andre Kukhnin – Credit Suisse
Rizk Maidi – Jefferies
Martin Huesler – ZKB
Aurelio Calderon – Morgan Stanley
Vladimir Sergievskii – Bank of America
Martin Flueckiger – Kepler Cheuvreux
Nicholas Housden – RBC
Miguel Borrega – BNP Paribas Exane
Joel Spungin – Berenberg
Daniel Gleim – Stifel
Operator
Ladies and gentlemen, welcome to the Schindler Conference Call on the Q3 Results 2022 Conference Call and Live Webcast. I’m 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
Good morning, ladies and gentlemen, and welcome to the conference call for results as of September 30, 2022. My name is Marco Knuchel, I Head 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 the Top Speed 23 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. Marco Hasler, 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 like to hand over to Silvio. Silvio, please.
Silvio Napoli
Thank you, Marco. Good morning, everyone. Welcome to this quarterly conference call. I’d like to thank all for your time. I understand it’s a busy period with many company announcing the results, including some today. So 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 slide, let me just start with a key message. Since I took over this double role of Chairman and CEO, and I had the pleasure of meeting you again last February, I said very openly that we were — we are facing a difficult situation. I also said that we will fix it and also said that this would take time. Accordingly, we initiated a process of change confronting reality and focusing on what we call the right of few priorities. I’ve shared these priorities with you and we provide the regular updates.
Today, I must say that we have the first signs of improvement. At the same time, I like to stress it and say it again. We still have a long way to go. With that, perhaps, let me start by addressing the first challenge, which was the market. And it is never easy to provide a market update or a market statement, but probably in my 20 years in the industry, I must say, it is one of the most difficult periods, because things change so quickly.
So if we start with the new installation market and you have here a chart where 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 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 been every 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.
On [indiscernible] the existing installation market, there, I’m pleased to say, in the service we continue to have stable growth, both in units and in volume, thanks to the conversion. And then notably, the modernization pick up continued very strongly all over the world, including in China. We have a chance to discuss it later on in the presentation. With that first market, I’m looking, I’m truly going to come back to this also in relation to our order intake and address your questions.
Let’s move on to our challenges. And these are the same challenges again we presented to you since the beginning of the year. And today, I wanted to start 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, there is an element here of qualitative assessment, but nonetheless, I thought it was important for you to have a very transparent view of the overall progress. So 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 stable level. At the same time, once more, we still have a long way to go. And that is visible on the chart.
Because when I said, it will take time, it was beginning — it was in February, beginning of the year. And now if you think of our book to bill cycle, as you all know, following [indiscernible] some time, we talk about 18 — 12, 18, 20 months depending on the type of project, the type of units we sell. And so now if you laid this 12, 20 month proportion to the time that has incurred, we have had nine months. So you could see we’re about one-third of the way about there. And you can see this is reflected somehow in the chart that you see here in front of you.
And we would see we go through each one of the challenges in a second. However, once more a point is what is that, 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 a company, we call this the [indiscernible] phenomenon, when you just have to digest the backlog while the sync, which then is affecting the P&A, or at the same time preparing the results of the future. Nonetheless, again, I’m pleased to say that progress start to show. So let’s now have a look at each individual challenge.
Starting with the first one, on the foreign exchange. Now that is another very volatile environment where — with the US dollar appreciating, we were very much looking forward to having finally some tailwinds, it’s a fair [indiscernible] unfortunately, the improvement in U.S. dollar and to some extent also in the Brazilian reals is been wiped out by the steep decline in euro and also in the RMB. So again, this is the reality. We must deal with it.
And at the same time, once more, we reaffirm our pride to be a Swiss company and in our deep roots in Switzerland. So in dealing with this 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 has basically led us not only to a reduction in absolute value of the Swiss based quarter cost, but also and most importantly here, on a reduction of the percentage of revenue reflected in this cost. I see 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 further resolved to continue reducing that growth in cost and percentage of revenues.
Moving on to the second challenge. And I 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 see 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. And this is, I think, something notable.
We even delivered price increases in the EMEA region now. That’s good news. On the other hand, the fact that China is so big, of course, somehow, dense digital effort 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 it even went down because the more-and-more some of the orders that were sold were, 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 our P&L.
Now, yes, 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 set. 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.
So 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, we 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 as the last time I have one, combine them together. On the left hand side, you see a positive development. When we spoke last time at 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 not 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 you 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. So this is positive.
On the right hand side, you see this, again, digestion phenomena of the new orders versus old orders, but this time the perspective is between modular elevators and legacy credit lines. And we sparely remember, this has 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. And you can see there is progress in that – first of all, in the order intake, now the new product lines are about half year-to-date. But then in the order backlog, the recent progress as the production capacity ramps up you saw on the left hand side, but it has to be noted that legacy products should constitute two-thirds of the total order backlog. So going back, not a question of 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 all over the world market as we saw before on the NI market and on the pricing level. Now you can see on the chart that we update for you on a regular basis. First of all, that the floor space sold continue to decline across all city tiers and we’ve now reached the levels of the latest crisis of 2017. What I find even more of immediate relevance for our industry is the housing inventory on the right hand side chart. And then see the crisis level is such that we now came back to the peak levels of the 2014 crisis in all three tiers peers. Now what could be a positive thing is that, you can see there is based on official data, a sign of an inflection of the curve, and the key question is here, does that mean that we hit bottom or could it be that this is a temporary one and then we’ll continue increasing inventory going forward? These, of course, we all hope that would be the former, i.e. [indiscernible] the peak of the crisis in terms of housing.
But I must say for the moment, the estimate for the Chinese NI marker is still of a contraction between 15% and 20% which we’re not here to provide forecast, but based on latest indicators including the one you see here, is likely to extend into 2023. Now what does that mean for China, and of course, there is a lot of [indiscernible] and of course, there are also many other aspects on China, including geopolitics. But we’re not going to go into that. As far as our industry is concerned, and I know it’s well known, but sometimes it doesn’t hurt to restate the reality. In 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 that 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. So 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 again, 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, and again, it’s sometimes good to see it on a chart. It is the highest concentration by far of mega and large cities [indiscernible] is about CHF10 million — between CHF10 million and CHF3 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 at a little bit of density measured by number of you sold units per 1,000 people. Some of you may remember that when I was CEO in 2014, 2015, we actually use the 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, you see had a tremendous progress as one expected over the last seven years, but still has wide range to grow before reaches the levels of, again, 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 is still expected to continue growing. And this is true for the new installation, but it’s also true for the existing installation market.
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, so the overall number of units of maintenance, elevators and escalator, is about to reach 50% of the world’s total. And incidentally there, you can see that if the market over the period ’17, ’21, grew by 12%. Schindler growth of portfolio in the same period was above market in the order of 15%. Now much more to come. And this is not only a unique opportunity, but one you could argue, it’s historic in size and one that must be seized.
So 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 heard some of the speeches at the 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 invest in technology, and it’s true in all economy, including in our business. And so the authorities are now promoting, this is I’m sure known to you, a new program to promote safety by remote monitoring. We are supporting them in that running pilots. And then, of course, there’s all topic about connectivity and digital services. We’ll come to that in a second, which also not only drives the portfolio growth, but also differentiation versus local players.
Then there is another aspect of the more classic approach, which is regaining units that we have lost on the basis of differentiation and better quality, but also doing that to some extent by acquiring independent service companies, and there are several of those 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.
Then, of course, with the 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, so which are especially due to high usage in China that are from modernization, which constitutes a huge opportunity. And for that, we are introducing a new modular platform. We’ll come to that. It was one of the programs that we have in Top Speed 23. And then there is, of course, a big opportunity by combining this by the sustainability solutions to reduce the carbon footprint of buildings and our customers.
So this was an update on all the challenges. China is a key one, but again, the big opportunity. Now over the last two calls, three presentations, we stopped here and then we started speaking about financial results. Now, I also meeting you and also through exchange we had or e-mail, we understand there was a strong demand, which I understand [indiscernible] to get a bit more color about how we operate, what are our priorities. And so, we clearly know that we start stabilizing our performance, I think this time that we also dedicate our resources to provide you with this update.
And so 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 of Schindler with substantial investments. So today, we’d like to provide you an update on 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, when one speaks about Top Speed 23, we have progress, we have a further focus on which module of the program address our immediate priorities. And third, most importantly, that some of these modules already start providing — paying dividends. So let’s look at the summary here. And again, you see that sometimes it speaks about realigning with operational priorities because, yes, when the year started and we took stock of the situation, we said, yes, this is very important, but let’s make sure we apply the same aspect of efficiency and focus also to this program.
And so the six modules you see here, some of them are either closed, completed or close to closure. The first one is the one on New Installations growth in selected strategic markets. And you can see part of the media payoff is what you’re seeing in improvement in margins in a refocus in specific segments and markets where we can be the more successful.
Another one that is very close to closure is the bottom one, which we call procurement excellence, which I would say it was about time, a myth. But now, of course, in confronting the challenges of inflation or now the quick changes in raw material changes, we have an organization that is set to address those and yield bottom line benefits, but also quality and safety is not yet completed. We do have some staffing to be completed by year-end. But clearly, by year-end, this will be completed, and we already start seeing some of the benefits.
Now maybe moving to the third one, the Sustainable Monetization solutions. I spoke about China as a unique opportunity. And there you see, we decided instead of looking at more 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 the 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. They were so planned because even if they will be completed to some extent by end of ’23, the EBIT impact, as planned, will take a bit longer, and this is a Digital Twin. And this new product for the market coverage in segments where we have been less present. Digital Twin, you 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 make sure how we can apply this digital technology seamlessly with our other tools that we have for the NI — for New Installation and Service as well.
Finally, and I mentioned it last because they would like to spend a bit more time, you 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 that point, it’s cloud-connected. So we do not include here the old tele-alarm or all these analog lines that we have said before. These ones are there. And if you have those, the percentage is much higher. This is really with Schindler card-based 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 EBIT impact this year.
And maybe to elaborate, I’d like to move to the next page on page 15, where you see some key numbers. And I see some of our [indiscernible] industry presented the case. And I think this is the time we spoke about ours. And I’m pleased to say that there’s all topic about connectivity in the elevator and the scheduled business is now a proven model. And so again, you see here, 25% of our portfolio cloud connected.
And what are 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, a number of units in maintenance that we lose to competitors, is dramatically reduced. I’m talking about one half. So this, I would say, is even beyond some optimistic scenario. That’s exactly what I was hoping for when we launched it back in ’16, 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 callbacks remotely, thanks to our technical operating centers that we have in all key markets, which are on top of our normal call centers, we could reduce on disconnected units callbacks by 30%. Now under 30% is compared to non-connected units. I now that some others have published higher numbers, but if we now include all the improvement of callbacks [indiscernible] talking about quality effort, I’m talking about a much [indiscernible] percentage. But this is simply the difference between connected and non-connected and this in itself is a tremendous result. So I’m thinking about one-third efficiency gain.
Now on the left-hand side, you see now the new areas of business that can be open, thanks to this connectivity. And I’m very pleased to say that 50% of the connected units now provide revenue. So we call it the monetization rate which is an important number, especially because to be very clear, from a marketing point of view, perhaps have to admit we still have some way to go. This is a bit of a changed mindset, but also competencies throughout the organization. But this, of course, shows for very substantial potential.
And then you may remember I presented it in Q2, this is all aspect of green maintenance model, that now we actively sell in some strategic markets, where — and this is now certified by TÜV. You may remember also we presented it last time. In fact, the overall footprint for our customers. So it is for us to complete for — for buildings due to elevator maintenance goes down for 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 how the Top Speed 23 investment was absolutely right. You can see on the next page, we provide a bit more color on explaining how this sustainability aspect has been addressed and how you reach this 99.5% reduction potential if you apply remote maintenance, less physical visits. And thanks to the efficiency in a year of time, but also, of course, that then the — whenever we have to go because legally, we still have to go a number of times, then it is done with electric vehicles.
That was the Top Speed 23 update, and we’ll continue providing you there and we can also address it if you like, in the financial aspects. But before passing the word to Carla De Geyseleer, our CFO, I also wanted to address another question that was asked by you, which is, “How do you operate? What are your priorities? And as you can imagine, we have been addressing that. And since the beginning of this transformation, this is something that we have drawn, beaten across the organization, starting with a leadership on a regular basis.
And if you now move to page 18, we see — our priority is that — and we’re seeing that seamlessly maybe under regional manner for those of us that started marketing a business role. There was an expression called 4P’s. Well, I think 4P’s applies very well to us, except these are different 4P’s. And the priorities we’ve had are 4P’s: people, products, performance and planet. And this is something that everyone in the organization now gets accustomed to, everything that we do has to fit in one of the four boxes. Otherwise, we put it on hold or we just simply scrap it, perhaps giving some color within 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 field people, technicians, installers, project managers. They are the ones that carry the Schindler brand, and the other ones that are the most important people in our company. So the idea is that all our resources must be driven in order to support the front line. Anything that doesn’t should be put as a second, third priority, and therefore, by definition, putting on hold or scrapped.
We also have a big element of caution, which can address by the change management. We call it back to basics, because I think we learned the hard way that we must avoid by all costs this gap between narrative and reality to make sure we confront the fact set on and simply deliver by sticking to our original values. There is, of course, a topic of inclusion, diversity and the fact that we have had to upgrade all our teams to make sure we are prepared to perform with a quality second to none in our industry.
The aspect of 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 with emphasis on efficiency. And then, of course, the topic of supply chain, where we addressed it as part of our priorities. There is the need of — after we fix the issues today, once we’ve done it, we need to look at a complete overall which we’re already starting to address.
On the performance, I’d like perhaps to stress the first part here, 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. Again, pricing will not been up to an inflation, all the more now with the wage inflation being up. So it’s about accept inflation as a reality and driving the organization to stay above inflation with a combination of what can do — what people can do on 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, of strategic markets. Of course, China is one of them. But it is what is that one size does not fit all.
With market with a 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 we build on this positions. Then there is a second group of markets where we are solid, but with a profitability that is on par with the group minimum requirement. And these markets can only grow if they improve the profitability — they either keep or improve the profitability.
Then there is a third category, which are markets where we are way behind in profitability. And in those markets, the message is clear and it’ll be — it is clear now — being clear now as we go forward with the objective in 2023, they can only grow if they grew the profitability. So this is the three-tier approach we apply worldwide. And of course, we shouldn’t forget that at the end, the success is measured not by how we meet our targets, but what our customers think of us. And so this is another message that is constantly driven across the organization.
Finally, and it could have been mentioned, the aspect planet. We remember I presented last time. So this time, we have less of that, that with ESG road map, the first one of which comes to fruition in ’22. We’re working incessantly to make sure we can deliver. There are some challenges, in particular, in terms of electric vehicles. But nonetheless, we are doing everything we can and more. And we have a new net zero CO2 target confirmed by — certified by a science-based target organization, on which now we are making plan, executing already driving. And finally, what we call Industry 5.0 is the application of the new circular economy to the elevator and escalator model, which we are certain will provide unique opportunities and — not only for our shareholders, but also for our contribution to planet.
In conclusion, maybe takeaways before I pass the word here. We have stopped losing altitude by focusing on the priorities we established in the beginning of the year. We have stabilized our business and started a new trajectory towards profitable growth. At the same time, it will take time before we close all the gaps identified. We have a long way to go, but our result is absolutely unabated.
Thank you. And with that, I’d like to pass over to Carla De Geyseleer, our CFO. Carla, please?
Carla De Geyseleer
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 see definitely 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 impact our overall results. Nonetheless, 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 ’22 results show encouraging signs of recovery, particularly with respect to revenue and margin. Even more importantly, we recorded a progressive trend throughout quarter three. Adversely, the year-to-date ’22 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 ’22, 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 ’22, 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 this 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 ’22 showed an accelerated growth due to strong backlog execution throughout quarter three. 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 ’22, 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 EBIT adjusted 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 gaps year-on-year.
EBIT adjusted in the third quarter of ’22 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 ’22, 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 ’22, and to CHF376 million in the first nine months of ’22, 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, efficiency 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 in importance. And we will, therefore, further analyze all our processes to unlock additional potential that we might have. This applies also 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 ’22. Schindler expects the markets to further slowdown 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 ’22.
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 like also 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
Thank you, Carla. We are now happy to take your questions. [Operator Instructions]. With that, I hand back to the operator to start the Q&A with the first question. Sandra, please.
Question-and-Answer Session
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
Yes. Hi, good morning, Silvio, Carla and Marco. Thanks you. I will restrict myself into two questions. Thank you for the [indiscernible] Silvio and the additional detail you’re providing. My two questions would be, one, on your slide seven, right-hand side, the chart there on OI margins. And secondly, slide 8 on the left-hand side, your region two, which I assume is China. The first question on slide seven. 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, please.
Silvio Napoli
Lars, thank you. So yes, we reflect on slide seven. 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 [indiscernible] I think China and on China on this [indiscernible] 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 [indiscernible] 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 heard also from other sources is [indiscernible]. So I hope this answers your question.
Lars Brorson
It does. If I can sneak 1 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
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
A second quick one, if I can. Slide 8 left-hand side, year-over-year deliveries. Again, region two, 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
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
[indiscernible]
Silvio Napoli
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
Sorry. One last one and then I’ll go back in line. I was just curious on that slide eight, where we see the region two, 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 continue 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
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
That’s clear. Thank you.
Operator
The next question comes from Andre Kukhnin from Credit Suisse. Please go ahead.
Andre Kukhnin
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, potential lockdowns, et cetera? Or is this what the order book is telling you?
Silvio Napoli
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
Thank you.
Operator
We take the next question from [indiscernible] from Goldman Sachs. Please go ahead.
Unidentified Participant
Good morning. So my question is actually also related to site delays. So you comment on China, but what about Europe and U.S. because [indiscernible] mentioned that they also see slow progress on site delivery for U.S. and Europe? And that’s the first question. So I’ll ask also second after this one.
Silvio Napoli
Thank you, [indiscernible]. 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.
Unidentified Participant
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 5 years, about 11% to 12%. Is that a reasonable assumption there?
Silvio Napoli
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.
Unidentified Participant
Thank you.
Operator
The next question comes from Rizk Maidi from Jefferies. Please go ahead.
Rizk Maidi
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 [indiscernible]?
Silvio Napoli
Thank you Rizk for the question, gosh. I’m afraid 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 take definitely 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
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 CHF 140 million, I guess that’s essentially coming from the U.S. 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
Okay. Thank you for this question. Carla, would you like to address the question?
Carla De Geyseleer
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 CHF 100 million for the wage inflation. And obviously, that will further also increase in ’23.
Rizk Maidi
Okay. Thank you.
Operator
The next question comes from Martin Huesler from ZKB. Please go ahead.
Martin Huesler
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.
Carla De Geyseleer
Yes. First — okay, I mean, yes, sorry, Silvio, I know you are — the first topic is definitely the Top Speed program. As Silvio pointed out, we have been realigning really 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 ’22. That is one of the big elements there.
Martin Huesler
Would you share a number with us maybe?
Carla De Geyseleer
Yes, definitely. I would say, on the full year, we foresee to spend approximately CHF65 million on Top Speed.
Martin Huesler
All right. And the restructuring costs will stay on the Q3 level also for the last quarter?
Carla De Geyseleer
Yes. No, for the full year, actually, for these costs, we foresee around CHF 50 million.
Martin Huesler
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
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?
Marco Hasler
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
You also want to talk about Modernization?
Marco Hasler
Modernization is aligned with group.
Silvio Napoli
Does that address your question?
Martin Huesler
Yes. And just to having 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?
Marco Hasler
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
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
Broadly — excellent 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 [indiscernible] always, we call it well to all. So we go at the factory at the margin in the field, but also the future revenue. So it’s about 50-50.
Aurelio Calderon
All right. 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
Okay. 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.
Nonetheless, 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 will 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
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
Thank you, Vlad. Carla?
Carla De Geyseleer
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
And is it across the regions? Or again, any particular region is kind of a highlight there?
Carla De Geyseleer
It is actually spread over the whole portfolio, overall regions. Yes.
Vladimir Sergievskii
And if I may follow up on that, would you expect those inventory builds to start [indiscernible] perhaps in Q4 or in some point soon? Or that’s too early to call?
Carla De Geyseleer
Yes, we definitely expect an improvement in quarter four.
Silvio Napoli
At the same time, I’d like to draw attention to the chart on page eight, 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 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 aim 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
Yes. Thank you.
Operator
The next question comes from Martin Flueckiger from Kepler Cheuvreux. Please go ahead.
Martin Flueckiger
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
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, [indiscernible] 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 [indiscernible] managers, we want to grow the base of those standard products, you will see less of these peaks, but at the moment, that’s the situation.
Martin Flueckiger
Okay. 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 CHF 100 million. Now does that just pertain to personnel cost inflation? Or does that include subcontracting cost inflation too?
Carla De Geyseleer
No, I was talking about, yes, indeed, north of CHF 100 million, we talk about CHF 140 million. That’s actually what we foresee for the full year, and we are talking here about the wage inflation only.
Martin Flueckiger
Sorry, I didn’t get that acoustically, which inflation only?
Carla De Geyseleer
Wage inflation only.
Martin Flueckiger
Wage inflation only, okay. So we have to consider subcontracting cost inflation as well?
Carla De Geyseleer
That’s correct.
Silvio Napoli
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
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
Yes. And it was for China only, the statement.
Martin Flueckiger
Right, right. I got that. But it’s for the business area average and not for the group overall average, right?
Carla De Geyseleer
Correct.
Operator
The next question comes from Nick Housden from RBC. Please go ahead.
Nicholas Housden
Hi. Thank for taking my questions. 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 1 and Tier 2 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 1 and Tier 2 ones?
Silvio Napoli
Thank you, Nick, for the question. Allow me to split in two. 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 2 with some presence in Tier 3, but mainly Tier 2. [indiscernible] that’s the newest of our dual brand, they are basically Tier 3 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, especially with Tier 3, is by far smaller than the rest of the urban environment.
Nicholas Housden
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 think actually 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
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 are 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
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, 4 percentage points difference? Some color there would be great.
Silvio Napoli
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 progressively 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
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
Okay. So for ’23, 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 U.S., 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 [indiscernible] 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
Thank you.
Operator
The next question comes from Joel Spungin from Berenberg. Please go ahead.
Joel Spungin
Hi. Good morning. Maybe I could just start with a relatively simple one, which is I was just wondering if you could tell us what the revenue growth rate for the third quarter, specifically by region, just to give a bit of color on that on slide 25? I think you give the nine months with the blobs there. But I was just wondering if you could just break that out specifically for the third quarter.
Silvio Napoli
Carla, would you like to give some indication?
Carla De Geyseleer
Yes, yes. If we just look what’s a breakdown from the region, then it is clear that the Americas and Asia Pacific, but obviously, excluding China. And well, I must say, EMEA, they are actually all three contributing at a similar level.
Joel Spungin
Okay. Can you say what that level is, roughly?
Carla De Geyseleer
Yes, that is like, yes, mid-single to high single-digit that contribute. And obviously, China is the exception with a lower single-digit growth there.
Joel Spungin
Understood. Okay. And then maybe just a second question, just coming back on the last question actually on wage inflation. Do you hear me?
Silvio Napoli
Joel, sorry, go ahead. Sorry to — the line is — are you still there, Joel?
Joel Spungin
I am.
Silvio Napoli
Go ahead, please. Can you repeat your second question? Apologies.
Joel Spungin
Sure. Yes, I just wanted to ask with regards to just adding to your previous comments around wage inflation of the CHF 140 million. Is it possible to say sort of broadly how much of that applies to the NI business as opposed to the Service business? Is that something you can give a bit more color on?
Silvio Napoli
Carla?
Marco Hasler
I would say it’s around one-third, two-third; one-third NI, two-third EI because EI is obviously the more heavy labor part of our business, right?
Joel Spungin
Great. And then maybe just very quickly, in terms of subcontractor costs, can you say roughly how much that is? And is that predominantly I assume going into new equipment installation?
Carla De Geyseleer
Yes, we estimate at around CHF30 million for the full year.
Marco Hasler
And this is predominantly NI and Modernization because in existing installation, we work with our own workforce in all markets.
Silvio Napoli
We have time for last question maybe.
Operator
The last question comes from Daniel Gleim from Stifel. Please go ahead.
Daniel Gleim
Yeah. Thank you. Good morning. 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
All right. Sure. 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 pilots 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 equipment’s. 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 [indiscernible]. But I have to say, I love to a 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
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
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
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
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
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