Otis Worldwide Corporation — 2024 Q1

Sure. Thanks, Rob. Listen, Mod was up nicely in all regions. I think our strategy is on track. Our team is executing that strategy. And these are still early days in what will be probably more than a decade-long Mod growth market. So we're really encouraged by what we're seeing. Orders up almost 13% in the quarter, backlog up 15%. So now we're just building on quarter after quarter of double-digit growth.

Yes. Thanks. Just to add to that, so a few quarters ago, we said that we -- it should be higher than the New Equipment margin. We are here right now, modestly higher, as Judy said, 1 quarter does not make a trend, but we are very encouraged by what we are seeing in terms of Mod margins. And as the year goes by, we should see more of the expansion on Mod margin and more differential between that and New Equipment.

Yes. The last thing I'll add, Rob, is that Mod market has potential of several million units in every one of our regions. So this won't be lopsided growth. We anticipate significant growth by all regions.

Yes. Thanks, Julian, for the question. Listen, as we said, Mod was down about 10% in the first quarter, second quarter -- sorry, New Equipment was down 10% in the first quarter, expected to be down mid- to high single digit in the second quarter. So as the year kind of progresses, the compares do get better in the second half of the year because we started seeing the slowdown on the New Equipment side, especially in Americas and EMEA more towards starting from 2Q of last year. So let's see how that progresses. If we perform in line with what -- how the market does, the backlog of New Equipment could be down a couple of points. If we do better than the market, then it could be flattish. So there is a possibility that the New Equipment backlog as we end this year, could be flattish to down low single digits.

Yes. Let me unpack a few of those questions, Julian, and start with Service margins. It is early in the year, but what we're seeing, again, with the portfolio growth of 4 plus what we're getting in service pricing like-for-like over 3 points, we're feeling good there. We do have a mix coming into play a little bit as Mod revenue grows, and it grows a little faster than maintenance and repair. There's a little bit of a mix there that we've kind of factored in to that margin outlook. But we've done -- our team has done a fantastic job on the productivity side, especially in the field and on driving repairs and the repair backlog as well, especially in the Americas. So right now, we'll continue to watch it. We feel comfortable with at the 50 basis points. This is our 17th straight quarter of Service adjusted operating profit increasing, and it is the engine, as you know, to our model and our service-driven business model. Wage inflation, we're not seeing anything unusual. And obviously, we focus on productivity to offset that.

I know. I'm fun selecting them, Nigel.

Yes. Thanks for the question, Nigel. The reason we give a little bit -- we typically give quite good color on the New Equipment and Service outstanding for the quarter. You gave a little bit more color this time was exactly the question you asked was on the tax rate, which was much lower in the quarter coming in at 20% for the full year. The guide is roughly the same at 25.5%. But because of planning and discrete items, they shift quarter-to-quarter, so wanted to kind of highlight the fact that where tax was coming in for the quarter. And obviously, the team is doing a really good job in terms of managing it through the course and bringing it down in years to come.

It's essentially timing. I mean if you look back at the past few years, we have more than 100% conversion. We are confident that we will get to the 100% conversion this year. We built up a couple of hundred million dollars of working capital part, but a little bit of it was because of lower down payments due to lower New Equipment orders, but a larger part of it was just the timing of billings through the course of the quarter, where a lot happened in the month of March. We've already started unwinding that in the second quarter, we'll get to the $1.6 billion, and the confidence is reflected in the dividend and also increasing our share repurchase of $800 million to $1 billion. So no real structural change in terms of collection or in terms of cash flow generation.

Yes. Let me break it into New Equipment and Service pricing. China is by far the most competitive pricing market we are in anywhere in the globe, and it's the only region where we are not getting price for New Equipment. Now we've offset that with both productivity and a great job on commodities where we've seen -- we've locked in and we've seen steel prices, which are 80% of our commodity purchases come down. But it is extremely competitive. And we see that through the public bids, we see that through the volume bids, and we just see that through the segment. I mean the segment itself, the New Equipment market is weak. It's down 10% in the quarter, and we're calling it down high single digit to 10% for the year, and that's after really 2 years of it already being down.

No. I mean it's been challenging. This is year 3 of challenging pricing there. Again, Sally and the team were just focused on productivity, on commodities, on everything we can in terms of getting cost out of our products even from an engineering perspective and installation. So I think we've done a really good job there staying as neutral as we can in terms of price cost.

And Steve, just to add to that, right, so because it's a deflationary economy so input costs are coming down. But if you look at the overall New Equipment backlog for us, even after having about $20 million of pricing tailwind in the quarter, flushing through the P&L, our backlog margin for New Equipment is still higher relative to last year. I mean Americas, EMEA at mid-single-digit price increases, Asia Pacific low. So really, really good progress in terms of backlog margin, building it up and flushing it through the P&L as well.

Yes. So in North America, I would tell you that the New Equipment market segment that we saw in Q1, it remained weak but it was at a lesser pace than the weakness we saw in the second half of '23. And you saw we delivered -- we increased price and we delivered on the backlog significantly because our revenue was up 15%. Our orders challenge in the first quarter was a really tough compare. North America to us is Canada and the U.S. We had several major infrastructure orders in Canada first quarter last year. So I would tell you it's more of a compare. We are expecting more New Equipment stability in '24 than in '23. But the latest ABI data at 43.6%, I mean this is the lowest since December of 2020 and now another quarter of less than -- less below 50%, which means things are contracting similar Dodge is down.

Yes. Well, as Anurag shared on the cash repatriation, Kudos to our team, this is the first time I think we've made a significant decrease in our cash balance bringing it down from $1 billion to $900 million and continuing to focus on how we can do that since spin. So that's allowed us to repatriate $300 million and gave us the confidence between the cash and the repatriation to increase. This is the first time we're doing -- we've announced a share repurchase that starts with $1 billion since spin. So it's our fourth year repatriate of -- of cash buybacks -- of stock buybacks. But we're feeling confident there.

Yes, you got it. It's more around the conversion time, right? So if you look at our Modernization sales growth, it's actually been picking up every quarter. There's no reason why it should not be going up double-digit in the next 3 to 4 quarters. And as the sales conversion catches up with our backlog. And part of it is the same thing which is driving a margin increase. I think it's more around standardization of products, reducing the lead time from the factory, reducing the lead time to install it. I think those are drivers which will help us get there. So it's ticking up in the right direction, but where it should kind of mirror is where the backlog grows at, and we should be there in the next few quarters.

Yes. Nich, what we've done is we've taken everything we've learned in New Equipment service over 4 years, whether that's go-to-market strategy, whether that's sales specialization driving common installation beyond industrializing the packages, supply chain and everything else. So we're really encouraged by the continued Mod trajectory. And as we said, we're going to continue to expand margins there and focus on backlog conversion.

Just to clarify, the 300 basis points that we spoke excludes mix and churn. So it's a gross pricing. The net for the quarter was a little bit higher than being flattish over there, but it's consistent to what we are seeing in pricing in the Service business. So EMEA seeing mid-single-digit price increases. America is close to that. Asia Pacific has always been on the lower side. So from a pricing perspective, it's sticking well in the market, and we're seeing good traction over there.

Yes. Let me start, and Anurag will add on the margin side. But Miguel, we -- listen, I'm not here to declare a trough. As soon as we see that in terms of the competitive pricing and the segment, we will share that but we're not predicting it this year as you can tell with our outlook. Again though, I can say, having been in China in March and meeting with multiple government officials as part of the China Development Forum, there are efforts underway. The government is taking action. It has not changed sentiment or the liquidity easing yet. But as that happens, obviously, our team will respond. They'll respond quickly, and we have the ability to see price inflect. I believe you will see us do that as we have led in pricing in China many times. Margins?

Yes. Just exactly. It's a balance between the pricing and the share of segment, and I think we look at both. In terms of margins for us, if pricing is coming down in China, as we earlier mentioned, it's also commodity prices. We've seen tailwinds over there, and we're taking cost out and seeing more supply chain efficiencies. So we are maintaining our margin rates in China. And as we go forward, between price, between share, between margin, we're going to find a balance between all 3 of that so we can continue to grow our profitability as we move along.

Yes. And that's really what you're seeing, Miguel, with us [indiscernible] really now. Service now being 25% of our revenue in China and growing. The Mod element of that grew double digit last quarter. That's going to continue to grow and continue. So you'll see this trade we normally do between volume, price in every market, but in China, explicitly, we see it moving to becoming more of a mature market and reflecting that, especially in Service.

Well, our M&A approach for bolt-ons, no matter where it is, is a similar model. It's got to again be accretive to us. It's got to be in a place where we know how to integrate it, and it's got to happen in a location where it adds density to our routes. Now we're fortunate in most markets that, that works for people when they're ready to sell. But we're always interested in bolt-ons everywhere in the world. We ended up buying Schindler's portfolio in Japan in 2016, and that integration has gone extremely well. And our team has continued to grow our Service business in Japan, where conversion rates are highest in the world, call back rates are lowest in the world. So it's a high-quality, good margin business for us, and we thank our partners in Nippon Otis, but it was time we felt to -- like we've done with our disciplined capital everywhere else, for us to get our legal entities in order as well as get our balance sheet in order. So you'll see that in the NCI line in the future. And it just like we did Zardoya made sense to us.

Yes. I mean India -- yes, India -- Gautam, thanks. India is the highest growth market anywhere in the world. It's the #2 New Equipment globally after China, but it's got different attributes than China because the conversion rates look far more like mature markets like the Americas, like EMEA. We've been doing -- we installed our first unit in India in the 1890. So -- and we've had an operating company in India for a long time. We've got presence there. I really like our position there. We've got a factory there, so we have Made in India product across elevators and public and commercial escalators. The growth we're seeing is really in every area, but infrastructure is moving very rapidly. Obviously, large population that population, the rising middle class is driving not just urbanization, but demand for higher-end residential, especially multifamily, so -- and multi-use. So every vertical in India is growing, and we see that market growing double digit, and we are investing in it. We're investing in it in terms of adding colleagues and field colleagues. We've got them all over the country.

Yes. We -- the good news is we've worked through the majority of any of our supply chain issues. From a comfort perspective for you on commodities, we expect this year after last year, we drove about $44 million, $45 million of savings on commodities. This year, we're looking at $15 million to $20 million. We think we can get that on top of last year's. And the only reason I say $15 million to $20 million instead of $20 million as we've seen steel increase in certain parts of the world. But we are locked in terms of our commodities for the rest of this year from a productivity and a cost standpoint, fairly well, 60% locked, 80% on steel, our magnets are fully locked. So our supply chain team has done a great job through the challenges and now is optimizing.

Thank you, Sarah. We are quite pleased with our first quarter results as we make steady progress delivering value for our customers and shareholders throughout the remainder of the year and beyond. Everyone, thank you for joining us. Stay safe and well. Goodbye.