Otis Worldwide Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to Otis First Quarter 2023 Earnings Conference Call. This call is being carried live on the Internet and recorded for replay. Presentation materials are available for download from Otis' website at www. Otis.com. I'll now turn it over to Michael Redner, Senior Director of Investor Relations.

Speaker 1

Thank you, Didi. Welcome to Otis' Q1 2023 earnings conference call. On the call with me today are Judy Marks, Chair, CEO and President and Anurag Maheshwari, Executive Vice President and CFO. Please note, except where otherwise noted, The company will speak to results from continuing operations, excluding restructuring and significant non recurring items. A reconciliation of these measures can be found in the appendix of the webcast.

Speaker 1

We also remind listeners that the presentation contains forward looking statements, which are subject to risks and uncertainties. Otis' SEC filings, including our Form 10 ks and quarterly reports on Form 10 Q provide details on important factors that could cause actual results to differ materially. With that, I'd like to turn the call over to Judy.

Speaker 2

Thank you, Mike, and thank you, everyone, for joining us. We hope everyone listening is safe and well. Starting with Q1 highlights on Slide 3. Otis delivered a solid Q1 to start 2023, driving strong financial performance and executing on our capital allocation strategy despite continued market uncertainty. We achieved organic sales growth driven by our service business and expanded adjusted service operating profit margins by 40 basis points, leading to mid single digit adjusted EPS growth.

Speaker 2

Our Service segment performance, in addition to our maintenance portfolio growth of more than 4% reinforces the strength of our business model. We continue to execute our balanced capital allocation strategy with $175,000,000 of share repurchases in the Q1. Yesterday, we announced a 17.2% increase to our quarterly dividend. Since spin, we have increased our dividend 70%, emphasizing the importance we place on disciplined capital management and delivering value to our shareholders. In the Americas, building on our strong track record of major project execution and service across Canada, Otis was selected by the Montreal Metro System to replace escalators at 17 stations, while providing units for 5 new BlueLine stations.

Speaker 2

In total, 97 Otis escalators will keep Metro passengers on the move daily. In China, Hefe Metro placed a new order of 250 OtisOne Connected escalators and elevators across 3 new lines: Real time data insights, remote monitoring and predictive maintenance will all help bring the Hefe Metro into the future and add to our growing infrastructure installed base. In Germany, Otis has been selected by Signa Group to modernize the iconic Dusseldorf department store Karsh House as part of a larger renovation. Otis will provide 17 units, including our energy efficient link escalators and Gen 2 stream elevators with regen drives. The elevators will also feature eView and car displays.

Speaker 2

After the modernization is completed in 2024, Otis will service the units as part of our long standing framework contract with Katavi Group, which operates Karshaus and other leading department stores in Germany. In South Korea, we're providing 51 of our Signature Gen 2 Elevators for the Sunshine Chirumice Luxury Apartment Complex. The campus includes more than 2,000 units and buildings up to 29 stories. And we continue to drive progress toward our ESG goals as shared in our 2022 ESG report published earlier in April. Just this month, we announced the installation of solar panels at our Nippon Otis Logistics and Engineering Center in Japan.

Speaker 2

This upgrade is expected to reduce greenhouse gas emissions at the facility by 27% compared to 2022 and represents our 8th manufacturing site globally with solar panel arrays. Moving to slide 4, Q1 results and 2023 outlook. New equipment orders were up 7.4%, driven by strong growth in the Americas and Asia Pacific, and we ended the quarter with adjusted backlog of 10% at constant currency. We continue to drive share gains in new equipment with 70 basis points of improvement in the quarter, led by our outperformance in China, where our orders were down modestly in a market where we estimate was down approximately 10%. We continue to perform well across all other regions.

Speaker 2

We're especially encouraged by our modernization performance in the quarter with nearly 30% orders growth, driven by strong performance in the Americas and Asia. This growth is driven by our continued rollout of standardized packages for our mod offerings, coupled with improvements in our sales force coverage. Our mod backlog is up double digits in all regions as mod demand continues to remain robust. Organic sales were up 3.6% and adjusted operating profit was up $7,000,000 at constant currency, driven by performance in the Service segment. Before I discuss our 2023 financial outlook, let me briefly update you on our global market outlook, which largely remains unchanged.

Speaker 2

Entering the year, we expected global new equipment to be down mid single digits to approximately 900,000 units, largely due to China, which we expected to be down 5% to 10%, and our outlook in that key region remains the same. We also expected Asia Pac to be up mid single digits or better and both the Americas and EMEA to be flat. With the Q1 in the books, we now expect Asia Pac to come in closer to high single digits, offsetting a reduction in our EMEA outlook, which we now expect to be down low to mid single digits. Our outlook for global installed base growth remains unchanged at roughly 5%, which will add close to 1,000,000 maintenance units, bringing the installed base to roughly 21,000,000 units with high single digit growth in Asia and low single digit growth in the Americas and EMEA. Turning to Otis' 2023 financial outlook.

Speaker 2

We now expect net sales to be in the range of $13,900,000,000 to $14,200,000,000 up 2.5% to 4.5% versus the prior year, which is a 75 basis point improvement from the prior outlook at the midpoint, driven by FX. We still expect organic sales to be up 4% to 6%, with new equipment up 3% to 5% and service up 5% to 7%. Adjusted operating profit is expected to be up $90,000,000 to $150,000,000 at actual currency and up $130,000,000 to $175,000,000 constant currency with adjusted EPS in a range of $3.40 to $3.50 a 7% to 10% increase versus the prior year and an approximately $0.03 improvement from the prior outlook at the midpoint. We expect free cash flow to come in as we guided in February in a range of $1,500,000,000 to $1,550,000,000 with 105% to 115 percent conversion of GAAP net income. We remain disciplined in our capital allocation strategy and will continue to return the vast majority of our cash generation to shareholders through dividends and share repurchases.

Speaker 2

We will also continue advancing our bolt on M and A strategy to add density to our growing maintenance portfolio. With that, I'll turn it over to Anurag to walk through our Q1 results and full year outlook in more detail.

Speaker 3

Thank you, Judy. Starting with Q1 results on Slide 5. We delivered net sales of $3,300,000,000 with organic sales up 3.6%. This represents our 10th consecutive quarter of organic growth with better than expected performance in both segments. Adjusted operating profit was down $19,000,000 at actual FX and up $7,000,000 at constant currency.

Speaker 3

Drop through on higher service volume, favorable service pricing and traction with productivity in both segments were partially offset by inflationary pressures, including annual wage increases, new equipment mix and higher corporate costs. Adjusted EPS growth of $0.04 in the quarter was driven by stronger operational performance, continued tax rate improvement and a lower share count. Accretion from the Zadoya transaction Offset the $0.04 of foreign exchange headwind. Moving to Slide 6. Q1 new equipment orders were up 7.4% led by Asia Pacific and the Americas, up 27% 15%, respectively, with modest growth of a point in EMEA, more than offsetting a 3% decline in orders in China.

Speaker 3

Strong orders growth has contributed to our adjusted new equipment backlog increasing 10% at constant currency with growth in Americas, APAC and EMEA. China backlog was roughly flat. Our strong backlog provides new equipment sales visibility for the balance of the year as well as over the medium term. Globally pricing on new equipment orders was up mid single digits, leading to sequential backlog margin improvement in all regions. We benefited from pricing increases of approximately 10% in the Americas and mid single digit in both EMEA and APAC.

Speaker 3

While pricing in China remains competitive, down low single digits, we are driving material productivity to achieve slight price cost favorability in the region while continuing to increase our share. New equipment organic sales were roughly flat in the quarter with 22% growth in Asia Pacific, driven by strong performance in India and Korea and high single digit growth in EMEA, largely from Southern Europe. This growth was offset by a mid single digit decline in the Americas due to job site delays and supply chain impacts and a 10% decline in China as expected driven by the lower demand environment. Adjusted operating profit declined $24,000,000 at actual FX and $19,000,000 at constant currency as strong material productivity was more than offset by the impact of unfavorable regional and product mix. Turning to Service segment results on Slide 7.

Speaker 3

Maintenance portfolio units were up 4.2% with recaptured units more than offsetting cancellations. This was the 6th consecutive quarter of accelerating portfolio growth with China delivering another quarter of iTeams portfolio growth. Modernization orders grew nearly 30%, our 3rd consecutive quarter of more than 10% growth, driven by several major project wins, the continued success of our mod packages and good momentum in proposal activity from improved sales coverage. Our modernization business continues to Performed well across all regions with backlog up 13% at constant currency. Service organic sales of 6.3% was modestly ahead of expectations.

Speaker 3

Maintenance and repair grew 7%, driven by solid repair volume, strong portfolio growth and 3.5 points of maintenance pricing improvement on a like for like basis. Organic modernization sales were up 3.3% in the quarter, driven by EMEA in Asia, partially offset by the timing of major project execution in the Americas. Service operating profit at constant currency was up $40,000,000 and margins expanded 40 basis points. Drop through on higher volume, favorable pricing and productivity more than offset the headwinds from annual wage increases and higher material costs. Moving to Slide 8 and the revised outlook.

Speaker 3

Overall, we are off to a solid start in 2023, delivering strong orders, sales and portfolio growth, while expanding service margins to drive mid single digit EPS growth in the quarter despite continued macroeconomic uncertainty. This strong start gives us confidence to reiterate our February outlook for organic sales growth, Adjusted operating profit at constant currency and adjusted profit margins at both the Otis and the segment level. We are improving our adjusted operating profit outlook by $20,000,000 versus the prior guide, now expected to be up $90,000,000 to $150,000,000 from a smaller foreign exchange headwind. This FX change results in an approximately $0.03 increase in adjusted EPS at the midpoint. Our free cash flow outlook remains unchanged at $1,500,000,000 to $1,550,000,000 for the full year.

Speaker 3

In the Q1, free cash flow came in at $253,000,000 with working capital or use of cash of roughly $125,000,000 largely due to payables. We expect this to unwind as we execute on our new equipment backlog throughout the year. Taking a further look at the organic sales outlook on Slide 9. Our outlook remains consistent with the prior guide across all regions and segments with new equipment up 3% to 5% and service of 5% to 7%, driving total Otis organic sales growth of 4% to 6% for the year. New equipment organic sales growth will be driven by the Americas, APAC and EMEA as we execute on the strong backlog built over the past few years.

Speaker 3

We still expect to achieve roughly flat new equipment sales in China given the quarter ending backlog and favorable compares into year end. On the service side, we expect to build on our performance in the Q1 with growth in repair work moderating and modernization accelerating. Overall, we would expect to see consistent growth at around the midpoint of our guide each quarter. Moving to our adjusted EPS outlook on Slide 10, We now expect 7% to 10% growth, reflecting an approximately $0.03 increase from the prior guide at the midpoint. We anticipate 2nd quarter EPS to be flattish year over year as strong operational performance is offset by last year's lower tax rate.

Speaker 3

The continued strong growth in our service segment coupled with pricing and commodity tailwinds in new equipment will drive the acceleration in our second half EPS growth. For FX, we are now assuming full year rates of 1.06 and 6.93 for the euro and CNY respectively. Overall, we are encouraged by our Q1 results and well positioned to deliver solid financial performance for the balance of the year by executing on our new equipment backlog, accelerating our service portfolio growth and focusing on operational execution to offset macro headwinds. With that, Didi, please open the line for questions.

Operator

Thank you. Please standby while we compile the Q and A roster. And our first question comes from Jeffrey Sprague of Vertical Research Partners.

Speaker 1

Thank you. Good morning, everyone. Just a couple of quick ones here from me. First, just on mods. Interestingly, Schindler pointed the soft mods this last week and you and Kone are saying they're strong.

Speaker 1

Always thought of a little bit more of Discretionary aspect to kind of mod work. So maybe you could just give a little bit of color on what's Is there anything in particular driving the strength there, your visibility beyond kind of the current orders you've booked? And Is there sort of a kind of pent up demand to catch up on mods still from the delays we had back in COVID?

Speaker 2

Hey, Jeff. Good morning. It's Judy. Listen, the mod business itself, I think you're going to see sustained and accelerating opportunities. It comes from macro, 7,000,000 of the 20,000,000 units are 20 years or older in the world.

Speaker 2

It comes slightly from things that didn't happen during COVID, which you call pent up demand, but it's really now coming from a realization that elevators are aging, repairs as you've seen, we've had a really strong repair book. So people have been putting off modernization and now they are coming to those important decisions. So at the macro level, globally, we saw mod up in all four regions, strong order book this quarter 29%, backlog up 13%. I think you can you're going to continue to see that not just quarter over quarter, but year over year as the mod opportunity becomes larger. At a micro level, I'll just share a short story with you because part of mod is discretionary, but part of it is a rational decision our customers are making.

Speaker 2

I'll give you an example in North America where we have Almost 25 year old, 2 to 6 story hydraulic units installed throughout the country. We have a circuit board there where the parts had become and a life in obsolete. So we went out to all of our customers because so many of these customers, they only have one unit and they can't Forward for it to shut down and not have access to an obsolete part. So for our customers, we went out with digital marketing campaign and just said, listen, For a few hours, we'll pre plan, pre schedule this turnkey, one fixed price. Let us come and make sure you avoid Eddie shutdowns and extend the life of your elevator.

Speaker 2

Response has been fantastic. So part of mod is aging, part of it is opportunity creation, but but you're going to see it continue to pick up over time.

Speaker 1

Great. And just on the growth in service units, great to see and you're Kind of checking the box there on the strategic plan, it sounds like. I just missed, unless you didn't say it, The growth in service and maintenance units in China specifically and any other just kind of regional color that you might have on that?

Speaker 2

Yes, we had growth across the board, so all four regions grew. China had its 7th straight quarter. They grew high teens, but 7th straight quarter mid or high teens growth. So Asia Pac and China up more significantly than the mature markets, which we would say is probably low single.

Speaker 1

Great. Thank you. Appreciate it.

Operator

Thank you. One moment for our next question. And our next question comes from Steve Tusa of Morgan Stanley. Mr. Tusa, your line is open.

Speaker 4

Yes, sorry. Yes, wrong Morgan, but maybe someday, who knows. So can you guys maybe just talk about How you're looking at the China market now and maybe just the sequential trends On earnings, into the second half of the year and anything moving around at all on you guys?

Speaker 2

Yes. Thanks, Stephen. And we fully recognize JPMorgan. So let me be clear there. So Steve, I had the and I'm going to say honor of finally being on the ground again in China.

Speaker 2

So what I'm going to share is a little personal, having spent 10 days there earlier late last month, early this month and just really getting a sense of the economy. And I can tell you, you can feel it in the 4 cities I was in and with Our colleagues, it's in a state of recovery and my view is primed for economic development. No matter whether it was a government official, I met with our customers, We do believe this second half recovery will come and will come strongly. The government's being very supportive in their policies, whether it's mortgage rates So kind of where we started the year is what we're still seeing. We thought the market would be down 10%.

Speaker 2

We were down 3% in orders, so clear market share gain by Sally and the team in China. But the strengths in the market in the Q1, So you know the segments, Infrastructure and Industrials were up, Industrial Buildings. There was weakness in resi and the commercial market, But we are still expecting the market recovery, and I'm feeling good about the health of our business to be able to see The progress our team has made throughout the COVID years, whether it's in the automation in Industry 4.0 in our factories, The acceptance by our customers of our new product introductions, the relationships, I got to meet our agents and distributors. I'm very positive on a China recovery in the second half. Obviously, we want to see what the second quarter holds and when that inflection point is going to happen, but all signals look positive for China recovery second half and then obviously that continuing into the out years.

Speaker 4

And then just, does that change at all? I guess, I missed the first part of the call, but any of the market outlook, any of the market outlooks you gave On the Q4 call, any of those change?

Speaker 2

Yes. So as we shared last quarter, we said China would be down 10% to market, Americas would be flattish. We're seeing Asia Pac continuing to grow more to high single digit and we think that offsets maybe a little more negative now with EMEA download to mid single digit.

Speaker 4

Okay, great. Thanks a lot.

Speaker 2

And Anurag, I'll let you answer the second part.

Speaker 3

Yes. Hey, good morning, Steve. Just on the sequential earnings into the second half of the year. So second half we have to grow EPS after about 0 point 2 $0.05 of that will come from tax because we do face a headwind of $0.05 in quarter 2 because we had a big benefit in quarter 2 of last year. That unwinds in the second half of the year.

Speaker 3

So that will give us $0.05 So the $0.20 that we have to grow is about $120,000,000 operationally. We are growing service at about in the Q1 $40,000,000 so that run rate kind of continues into the second half of the year at the mid single digit growth. So that's about $80,000,000 The remaining $40,000,000 will come from new equipment. In the second half, I mean quarter 1 new equipment was kind of flattish, quarter 2 is returning back to growth. In In the second half, we expect mid single digit growth about 5%, 6% on the new equipment side with volume and some of the price Increases that we booked last year will flow through to the bottom line about $20 ish million from there, commodity tailwind of $20,000,000 in the second half.

Speaker 3

So you add that new equipment should be up about $40,000,000 So that's our sequential roadmap about $80,000,000 from service, dollars 40,000,000 from new equipment.

Speaker 4

Great, great details as always. Thanks guys.

Speaker 3

Thanks.

Operator

Thank you. One moment for our next question. And our next question comes from Nigel Coe of Wolfe Research.

Speaker 5

Correct. Good morning.

Speaker 2

Hi, Nigel.

Speaker 5

So obviously, nice job on orders. The Americas was surprisingly strong and the few some of your competitors have been highlighting weakness in the Americas. So maybe just talk about Kind of what drove the growth and what you're seeing right now in multifamily and maybe commercial?

Speaker 2

Yes. So kudos to Jim and the team. I mean, the Americas after a really strong 22% to come in, up 15% this quarter and rolling 12 month being strong as well over 18%. Just really highlights, We got a big backlog to work off in the Americas and our team knows it. Listen, we saw the Americas itself, The year is playing out as we thought it would.

Speaker 2

Non resi is actually better this Q1. Infrastructure and commercial were up and multifamily was down, coming off some really tough compares if you think about where multifamily has been the past few years. I will tell you, Nigel, that we got a real tough compare in the Americas coming up in the Q2 because last year's Q2, we were up 54% in the Americas. So we're going to do the best we can to try to match that, but it's going to be a tough compare. We still expect a flattish market Through year end, we think we're in a really good position.

Speaker 2

You saw the Montreal program we won, which was a major project in the Q1, and that will take us a few years to perform on, but both the volume business and the major projects did really well in the Americas, both Latin and North America for the Q1.

Speaker 5

Yes, great. That's great color. Thanks, Judy. And then in terms of China, Your comments on China sounded really constructive. Pricing down low single digits, I think it was trending pretty flat through 2022.

Speaker 5

So just What gives you confidence that we're not going to see the bottom pull out pricing in China? And then when you talk about the inflection in the second half of the year, are we talking about a break back into positive year over year growth In orders or are we talking about getting less bad in the second half?

Speaker 2

Let me take the pricing question. We are seeing rational pricing. I know we've shared that about 90% of the new equipment orders that happen in China now happen with the top 10 OEMs and they're all being rational, and we get to see that especially on public infrastructure bids. So Not to say there's not a bid or 2 someone really wants because of density and they'll do something, but we're seeing rational pricing in China. It's always the most competitive there in pricing of anywhere in the world and which means we've got to continue to drive our costs down And that's where so far we've seen the material productivity far better in China than we have everywhere else in the world.

Speaker 2

Part of that's commodities coming down, but part of that's through great supply chain management negotiation and our engineering team continuing to take cost out with our manufacturing team. So we're seeing rational. We don't anticipate that changing, but obviously we're keeping an eye on that.

Speaker 3

Yes. And I mean the 2 levers as Judy mentioned that we take a look at is definitely price cost and the share of segment. So far, we're balancing it quite well. The market is disciplined and we continue to look into that and make sure that that is the toggle that we are playing against. Now in terms of orders, if you look at the market, the market was down in the Q1.

Speaker 3

We are guiding it to be down 5% to 10% for the year. So clearly the market is going to pick up from in the second half of the year offer low compare as well from last year. And even if the market we don't assume no share growth in the second half of the year, you should see orders in China picking up in the second half of the year. But of course, we're going to continue Executive strategy that we are doing right now and feel pretty good about the China orders in the second half of the year.

Speaker 5

Okay. I'll leave it there. Thanks guys.

Speaker 2

Yes. Nigel, the only thing I'll add is our relationships and our length of those relationships with our 2,200 agents and distributors Continues to mature and we do expect those to yield as we continue to go on for both our brands. We're going to continue to ensure that we have the best products. We introduced a new product in China, a new rope connected product in the Q1 That's picking up nicely in the market. So our team, they've got sales coverage.

Speaker 2

We know where we need to be on price. We've got the right products and all that we really expect to happen in the second half to show those results.

Speaker 5

Great. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from Julian Mitchell of Barclays.

Speaker 6

Hi, good morning. Just wanted Let's start with the EMEA market outlook. So, yes, you and some of your peers sort of lowering The market outlook this year, just wondered any specific verticals or regions within Europe That's driving that on the new equipment side. How should we think about those EMEA orders playing out over the balance of this year? I suppose the last time we had a sort of a soft construction market there for any prolonged period, we saw The bleed through into service pricing at some point.

Speaker 6

Just maybe remind us kind of your confidence this time why even with Of the new equipment market there, the service price should hold up.

Speaker 2

Thanks, Julian. So yes, we're saying EMEA now is going to be down low to mid single digit. Obviously, we're watching rates and impact on building permits and starts. But in the Q1, our team in Southern Europe Performed incredibly well. Spain, Italy, extremely resilient, where we saw some of the weakness was really Germany and the U.

Speaker 2

Okay. And then the Middle East was up probably low single digits. So it's really a mix and we're going to continue to monitor and watch that. When we think back in time, I look at 2 key metrics. 1 is pricing and service pricing like for like.

Speaker 2

This last quarter, we were up 3.5 points and our Europe business was up mid single digits. So Bernardo and the team have been passing price through. We've had those inflationary clauses in and the team's been passing service price through, which is really good to see because the majority of our European contracts do come due service contracts come due in the first half of the year with most in the first quarter. The other part would be all the constructors from 15 years ago who moved into service and became independent service providers. We don't see that labor if you look at even unemployment is at fairly low levels in Spain and in other locations in Western Europe.

Speaker 2

So we don't see those that available workforce starting up as independent service providers. And the other difference now is what we call OtisOne. And the fact that when you have a connected elevator, it's not easy to start up as an independent right now or to grow your share. So I think all that combines to set us up to a very different Europe. But again, we think we're being responsible looking at the market at lowtomidsingle potentially down for the year.

Speaker 6

Thank you. And then, just my follow-up would be around The Slide 10, you've got that helpful EPS bridge. So just if I look at the operational portion within that, You highlight there kind of wage and material inflation and then mix and churn as headwinds that were not there on the bridge that you'd given back in January for the year ahead. So just wondered if that's just some extra detail. Did you see something Change in your outlook for those two items for 2023, and how we're thinking about those two items as to go through the year.

Speaker 3

Hey, Julian. Hey, thanks for the question. In February, when we gave guidance, we had Page on each of the segments, new equipment and service. And at that point in time, we had highlighted mix and churn as one of the headwinds and we just collapse it into this chart right now. There's been no change in our thinking since the beginning of the year.

Speaker 3

When we talk about mix and churn, we essentially In the new equipment side, the mix was coming from, as you know, China is our most profitable new equipment margin market. So there and the other markets are growing fastest on the equipment side that is the mix on from the regional perspective and obviously we built a very good backlog. We won a lot of share, but it's a combination of volume and major projects. And these major projects, though they come with a very good portfolio stickiness, They are low new equipment margin. So on the mix side, I would say on new equipment, it's more region and project similar to what we Called out in the last call, nothing has changed from there.

Speaker 3

In service, it's the same thing which you've seen in the past couple of years, China growing faster and obviously churn is more around the cancellation units which come with a little bit higher margin. So nothing really changed over there. Same thing for labor and wage inflation, right. It's so far our labor Negotiations are trending really, really well. We thought it will be low to mid single digit in most of the European markets.

Speaker 3

It's playing out that way and same on the material. So If I kind of take a step back, if you look at price over gross cost and mix and churn, we should be about $75,000,000 positive for the year. That is That would contribute to half of the operating profit that you see in the bar. So price minus gross cost of material labor inflation and adjusting for mix and churn.

Speaker 6

That's really helpful. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from Jack Aras of Cowen.

Speaker 7

Hi, guys. Good morning. This is Jack on for Gautam. I wanted to dig into service And apologies, I joined the call fairly late here. But if you could kind of just touch on the modernization orders up 29%, It seems extremely strong, which is encouraging.

Speaker 7

And then just piggybacking off that last Comment just sort of the maintenance units up 4.2%, obviously really strong again, kind of just what's happening there this quarter from like a retention conversion mix sort of churn perspective. Just any color there around service would be really helpful. Thanks.

Speaker 2

Hey, Jack. Yes, modernization, let me just reinforce what I said, which is, It's going to continue to be a contributor to our business and the market itself is going to continue to grow not just quarter over quarter, but the market itself will be growing year over year as more and more units age based on when they were put into We've got 7,000,000 of the 20,000,000 units are over 20 years old. So I think you can look for the modernization market to remain and actually become more attractive. And obviously, we're very focused on performing that in a more a way that allows us to approach customers with kits that gives us productivity and that gives them their modernization In a quicker time period. So, you're going to see modernization be talked about more, but also take the best of what we've learned since It's been in terms of our new equipment strategy and growing share there and being able to do things at scale, merging that with our service excellence and our productivity we And when we put those 2 together and attack the mod market with a growing market, we think that's going to be a positive contributor for much time to come.

Speaker 7

Thanks, Judy. I'll leave it there. Thanks, guys.

Operator

Thank you. And our next question comes from Nick Houston of RBC.

Speaker 8

Yes. Hi, everyone. Thanks for taking the questions. I think you mentioned maintenance pricing was at about 3.5% like for like. I'm just wondering if that rate should accelerate as we move through the year just on the basis that you've been implementing the service escalation clauses in Q1 and maybe that 3.5% is a reflection of the agreements that you had last year.

Speaker 8

So if you could provide some color on that, that would be helpful.

Speaker 2

Yes, Nick, go ahead.

Speaker 3

Yes. Thanks for the question, Nick. Yes, firstly, extremely encouraged by the way we started off in quarter 1 On the 3.5% like to like. As Judy mentioned, Europe is mid single digits. It's probably one of the higher price increases we've seen in Europe And it's sticking because everyone else is kind of driving the price over there.

Speaker 3

If you move into Q2, obviously more units get converted, Come up for renegotiation as well. So we should see that kind of stepping up a little bit as we go there on the 3.5%. So overall what we said in when we gave the full year guide was that we expect it to be up 3.5%, 4% mix and churn would take about 200 basis points to 2 50 basis points, so about 1.5% net. As of now where we stand, we feel Pretty good about 150 basis points of pricing adjusting for mix insuring for the rest of the year.

Speaker 2

And Nick, in China, the margin drivers are less about Price, they're really more about productivity, volume, density and OtisOne and all of those are good contributors for us.

Speaker 8

Right. That's very helpful. Then my second question sticking with service. Great to see that you're up to 4.2% Unit growth, so that's been accelerating pretty much for 3 years at this point. You mentioned that The market is growing at about 5%, about 1,000,000 units on a 20,000,000 installed base.

Speaker 8

So if I look at that 4.2%, you could Still argue that that's maybe slightly underperforming. Do you think that you can actually close that gap? Or is there maybe a mix effect that means that You as the largest OEM in terms of service units should maybe be underperforming a bit?

Speaker 2

I think we can and we should close that gap. That's the challenge we've given to our team and that's why you see the much higher growth rates in Asia, especially China for our service portfolio. Now it creates a mix, but we'll deal with that mix challenge as we get it. But Yes, we can and should be closing that gap.

Speaker 3

Yes. And just to add to that, right, I mean, not too long ago we were growing at 1%. The team is kind of there was call for action, teams focused on it, the wheels just started churning, where last year 4.1 up 4.2, we should close The gap and the gap is we won some good new equipment share that will get convert that will come into the conversion cycle. Our conversion rates are going up and we're going to keep looking at deploying IoT to ensure that our retention rates stay high. So it's using conversion as a lever, using retention as a lever to get us up to the mid single digit growth.

Speaker 3

And while doing that, we want to ensure that we also maintain the profitability for it, right. So at some point in time, this you will see from margins, it does come back to to profit growth, but that's where we want to take it to.

Speaker 8

That's great. Thanks very much.

Operator

Thank you. I would now like to turn the conference back to Judy Marks for closing remarks.

Speaker 2

Thank you, Didi, and thank Thank you all for joining us and let me also add a thanks to all of our colleagues for your continued excellent performance in quarter 1 and for serving our customers so well. Our solid first quarter results demonstrate the continued power of our business model and set us up well for the future. We will remain focused on executing throughout the remainder of the year in order to capitalize on our Q1 successes and continue to drive shareholder value. Thank you for joining us, everyone. Stay safe and well.

Operator

This concludes today's conference call. Thank you for participating and you may now disconnect.

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Earnings Conference Call
Otis Worldwide Q1 2023
00:00 / 00:00
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