Q3 2020 Otis Worldwide Corp Earnings Call
Good morning, and welcome to <unk> third quarter 2020 earnings Conference call. This call is being carried live on the Internet and recorded for replay presentation materials are available for download from <unk> website at Www Dot notice dot com.
I'll now turn it over to Stacy Macheski, Vice President of S.P., M&A and Investor Relations.
Thank you Sonia.
And good morning, everyone. Welcome to Otis is third quarter 2020 earnings call on the call with me today are duty marks President and Chief Executive Officer, and Rahul Ghai Executive Vice President and Chief Financial Officer.
Please note, except where otherwise noted the company will speak to results from continuing operations, excluding restructuring and significant nonrecurring items.
He will also refer to adjusted results were adjustments for me.
This was a standalone company in the current period of the prior year reconciliation of these measures can be found in the appendix of the webcast. We also remind listeners that the presentation contains forward looking statements, which are subject to risks and uncertainties Otis its SEC filings, including our form 10-K quarterly reports on form 10-Q for my details on important factors that could cause actual results to differ.
Really with that I'd like to turn the call over to Judy.
Thank you Stacey and good morning, everyone. Thanks for joining us and we hope that everyone listening is safe and well to start I want to thank each of our colleagues around the world for their unwavering dedication as we continued to deliver on our commitments to passengers customers and shareholders overall as you'll see in our results or business.
It is trending back towards me, who bid levels improving sequentially across all metrics I'm pleased to share that we had a very strong quarter. We gained share in new equipment paid down debt and are raising our outlook. What are you providing additional details.
Our strategy is robust despite the unique environment Marine and as an example of our ability to continue to execute this quarter. We completed the acquisition of Baystate elevator, expanding our scale and density in the northeast United States. We're delighted to have the base day colleagues join you noticed team and we remain focused on it.
Celebrating growth to the service portfolio, both organically and Inorganically or bolt on M&A strategy is working and serves as an accretive source of growth.
Innovation is core to Energous Cove, it accelerates the need for new health and safety solutions, which we expect to continue post code.
Oh this is a leader in this space continuing to bring new products to market and during the quarter. We commissioned an elevator airflow study examining the risk of airborne transmission and elevators and how to best mitigate those risk through science based safety protocols. This study is being led by Purdue University expert in this.
Bread and prevention of infectious disease through indoor Air systems.
We look forward to sharing these findings in the coming.
Coming months.
Furthering our ability to provide innovative cutting edge products, we opened a new industry 4.0 escalator factory at East China that incorporates intelligent manufacturing advanced automation and digital technologies, such as Threed modeling custom engineering and real time quality management. This move continue.
Used to rationalize our footprint and build on our legacy of excellence, while upgrading our smart manufacturing capabilities for a new era.
We continue to deploy iPhone store field professionals, adding four more countries during this quarter and the adoption of our suite of apps continues to expand driving service productivity within the organization.
In addition, our I O T deployment continues to build momentum and we have plans in place to enhance the capability of Otis one solutions over the next several months to drive productivity in our organization.
Despite the challenges introduced by the pandemic, we continue to deploy these units in the U.S. Europe in China. During the first nine months and expect the pace of deployment to accelerate.
Oh. It is also received several key orders across each of the regions highlighted on slide three in Chicago, We received an order to outfit the new Salesforce Tower, Chicago Office building with over 30 Sky rise in Changshu elevators each of the passenger passenger elevators, we'll have our new innovative compass three so.
XT dispatching system, allowing for seamless travel in 60 story building.
In China Otis was selected to support tensions Metro expansion project will add approximately 120 elevators to line six bringing the total number of Otis elevators and escalators throughout the tenure in Metro to approximately 1400 units. This award extends oldest his involvement.
Infrastructure development in the region, a key strategy for us and in France, we're helping bring waterfalls the business area Paris to new Heights with in order to deliver 60 elevators and several escalators to the like the next tallest building in France. This project will include Compass plus equal.
And opto sensor technologies, creating a faster safer and more seamless trip for the passengers. These are just a handful of examples that led to the approximate 70 basis points of new equipment share gain during the first nine months into.
In terms of liquidity, we ended Q3 with $1.7 billion of cash and continue to maintain a revolving credit facility, which serves as a backstop for our commercial paper issuances and an additional source of liquidity if needed.
We also made progress on our debt repayment goal of $350 million and 2020 repaying $250 million in the quarter.
And as we remain dedicated to delivering results for our customers and shareholders our commitment to global corporate citizenship has not wavered.
Last quarter I shared with you the launch of our commitment to change in just three months, we've begun to make Otis a more diverse equitable and inclusive culture and identify and prioritize actions we need to take to get there for example in the quarter, we enlisted an outside diversity equity an inclusion expert.
To independently assess our practices and provide recommendations to guide future decisions and programs later during the quarter. We launched made to move communities a CSR programs focused on advancing you stem education, and providing inclusive mobility solutions for communities.
Neil this.
This is this extends Otis is ongoing commitment to the communities, where we live and work and we look forward to providing the avenue and resources to help young minds explore new ways to get people freedom to connect and thrive in a taller faster smarter world.
Turning to slide four Q3 results in 2020 outlook.
New equipment orders were up slightly in constant currency with low single digit growth in EM EMEA in Asia, partially offset by low single digit decline in the Americas, China orders were up high single digits as the business continued its rapid recovery from the impacts of Cove in 19.
On a rolling 12 months total Otis orders were down approximately 1%.
New equipment backlog continued to grow up 3% versus the prior year at constant currency.
In the third quarter organic sales were down 1.2% with the new equipment segment down, 1% and the service segment down 1.4%.
Adjusted operating profit was up $33 million and margin expanded 120 basis points driven by continued expansion in the service segment on strong contribution from productivity and the benefit from cost containment actions and favorable transactional foreign exchange.
Free cash flow was robust at $311 million with 117% conversion of GAAP net income.
While there remains uncertainty around the global recovery from the pandemic. We are encouraged by the strong year to date results and the trends, we are experiencing giving us confidence to revise our 2020 outlook.
We are improving the organic sales range now expected to be down 2% to 3%.
Adjusted operating profit is now expected to be in the range of up $30 million to $40 million 60 million dollar improvement versus the prior outlook at the midpoint.
We now expect adjusted earnings per share to be approximately $2.42 up 17 cents versus the prior midpoint. This.
This reflects our improved adjusted operating profit outlook lower adjusted tax rate and lower net interest costs. Lastly, we expect free cash flow to be robust at approximately $1.15 billion with full year free cash flow conversion at approximately 135% of GAAP net income.
With that I'll turn it over to Rahul to walk through our results and outlook in more detail.
Thank you Julie and good morning, everyone.
Starting with third quarter results on slide five.
Net sales were $3.3 billion down, 1.4% with a 1.2% decline in organic sales.
As anticipated boats, the new equipment and service segments declined organically.
Primarily from the impact of gold and 90.
Adjusted operating profit in the quarter was up approximately 7% or $23 million and up put $2 million at constant currency.
As the impact of lower volume temporary price concessions and field inefficiencies was more than offset by strong productivity cost containment unfavorable transactional FX.
Our focus on reducing material cost continues to yield results and maintaining obviously unit sustained a downward trajectory.
Cost containment efforts that we launched in Q1 up Twentytwenty also helped alleviate the pressure from lower volume and year to date as she may expense was down by more than $60 million year over year.
At the same time, we continue to invest in the business and R&D expense as a percentage of sales was about flat versus the prior year.
Our strong focus on operational execution drove 120 basis points of adjusted margin expansion with continued margin improvement in the service segment.
Current quarter, adjusted EPS was up 25% or 14 cents from six cents of operating profit growth and the balance from a lower adjusted tax rate and a drop in interest costs.
These results were better than we had expected in the previous outlook.
Driven by the stable appealed the maintenance business higher savings from service productivity and progress on reducing the adjusted tax rate.
Moving to slide six.
New equipment orders were up slightly at constant currency and were down approximately 1% on a rolling 12 month basis.
Order intake continues to outperform the market and regain approximately 40 basis points of share in the third quarter in a market that was down low single digits.
[noise] book margins were up slightly in the quarter and were flat year to date versus the prior year.
In the quarter booked margin improvement in China, and North America was partially offset that pressure and parts of Asia Pacific and EMEA.
New equipment backlog was up 3% at constant currency driven by growth in the Americas with overall backlog margin improving slightly from Q2 and remaining stable versus the prior year.
New equipment organic sales were down 1% as mid single digit growth in China was more than offset by declines in Asia Pacific and parts of EMEA.
As constant currency neutral adjusted operating profit was down $9 million and margin contracted 50 basis points, a strong material productivity and cost containment was more than offset by the impact of under absorption field inefficiencies and an unfavorable mix.
Service segment results on slide seven remained strong in the quarter number of units under maintenance contracts increased by over 1% with growth in all major regions and China up more than six Watson.
Modernization orders were down 7.3% at constant currency as double digit growth in Asia, driven by the mandated regulatory upgrades in certain markets was more than offset by lower order intake in the Americas and EMEA.
Service organic sales were down 1.4% as maintenance demand remains strong while discretionary repaired and modernization projects were pushed out.
At constant currency adjusted operating profit margin expanded 140 basis points and profit grew $19 million, a strong contribution from productivity and cost containment actions more than offset the impact from volume decline temporary price concessions and an increase in bad debt expense.
The service pricing environment, excluding the impact of these price concessions was about flat.
Overall year to date results are solid performance with $23 million of adjusted profit growth at constant currency and 90 basis points of margin expansion, despite organic sales being down 3.3% what's in the prior year.
The service business was particularly resilient with adjusted operating profit growth of $47 million at constant currency on a slight decline in organic sales.
In an extremely challenging market environment.
Total third quarter results reflect sequential improvement in both segments and steady progress towards returning to pre corporate levels.
Access to job sites and buildings has largely it returns to normal outside of India, and Southeast Asia and the service call volume is back to 2090 levels in China and Asia Pacific and.
And the trends are heading in the right direction and Europe and Americas.
We are improving our 2020 outlook to reflect strong progress during the year and these encouraging trends.
Turning to slide eight we now expect overall organic sales to be down to the creep up and for the year up from prior expectations of down to 4% with improvement in both new equipment and service segments.
We now expect new equipment sales to be down mid single digits and service sales to be flat to down slightly.
Adjusted operating profit is expected to be up $30 million to $40 million at constant currency for the year with 60 to 70 basis points of margin expansion.
This is an improvement of $60 million versus the prior outlook at the midpoint, reflecting the strong year to date performance benefit from an improved sales outlook and higher service productivity.
At actual currency adjusted operating profit is expected to be up $5 million to $15 million, reflecting favorable foreign exchange trends. In addition to the operational improvement.
Adjusted EPS is now expected to be up 8% versus the prior year to approximately $2.42.
And up 17 cents versus the prior midpoint.
Driven by an improved operating profit outlook lowered net interest cost and other deals stacks fleet.
We now expect to be adjusted tax rate for the year to be about 30.5% down one point, what's the profit outlook.
Taking a further look at the organic growth assumptions on slide nine.
In the new equipment segment Americas is now expected to be down mid single digits.
Reflecting strong recovery in the third quarter with sequential improvement and year over year growth in the fourth quarter.
EMEA is now expected to be down mid to high single digits, reflecting a strong recovery in northern and eastern Europe.
We are improving the Asia outlook, driven by better than expected third quarter performance in China. However, we expect Asia to be down in the fourth quarter due to continuing challenges in India and southeast Asia.
In the service segment, we expect the maintenance and repair business to be flat to down slightly with the maintaining sales remaining resilient and a slower recovery in discretionary repairs.
We are raising the modernization outlook to be about flat for the year driven by better than expected performance in Asia Pacific.
From an effective go to market strategy, but to tap into the demand created by regulatory requirements.
Overall, the outlook of two people, it's an organic sales decline reflects sequential improvement and for telco prequaled levels in the fourth quarter at the midpoint.
Switching to operating profit on slide 10.
At constant currency operating profit is now expected to be up $30 million to $40 million what's to the prior year.
Reflecting the benefit of solid contribution from material and so its productivity and cost containment actions that are more than offsetting the impact of reduced volume from the COVID-19 pandemic incremental under absorption of costs and temporary price concessions in the service business.
This represents a $60 million improvement what did the profit expectations with improvement in both new equipment and service segments.
The fourth quarter outlook includes incremental investments in the new equipment and service sales channel in China at.
Additional cost to complete the maintenance was it sequentially higher R&D expense and the expected step up in public company costs.
Foreign exchange is now expected to be a headwind of approximately $25 million and improvement from a headwind of $40 million to $50 million as we had expected in July.
Primarily due to the strengthening of the euro against the Us dollar.
An update on capital deployment on slide 11.
We started 2020 with about $1.4 billion of cash and now expect to generate approximately $1.15 billion of free cash flow in 2020.
An improvement of $100 million versus the prior to mid point.
From higher net income and improved working capital performance.
As Judy mentioned, we repaid $250 million of debt in the quarter with another $100 million of repayment plan for Q4.
We also refinanced $500 million of the U.S. dorm room for general commercial paper program.
First foreign currency denominated debt transaction as they continue to evaluate our capital structure.
We still expect to return $260 million to shareholders to dividends in Q2 to Q4 and spent approximately $200 million between non controlling interest and M&A.
These actions will allow us to maintain sufficient liquidity and position us to increase cash on the balance sheet by increased by the end of the year, giving us optionality, depending on the overall liquidity conditions, the stock share buyback and 21.
After we complete the previously disclosed $500 million of debt repayment with that I'll turn it over to Judy for closing remarks.
Thanks rule I'm pleased with our year to date performance navigating continued cobot challenges, while continuing to drive our long term strategy all in our first year as a Standalone company.
In early 21 will provide an update on our 2021 and medium term outlook, but we continue to expect sustainable growth in global share gains and are seeing traction with new equipment share approximately 70 basis points year to date.
This growth will continue to feed our leading service portfolio, where we remain focused on service transformation initiatives deploying aiotv and digital tools that drive value for our customers productivity and margin expansion.
We remain committed to driving value for our shareholders driving EPS growth and robust cash generation, although while investing at sustainable levels to position us to stay at the forefront of this industry.
With that I'd like Sonia to open up the line for questions.
Thank you as a reminder to ask the question do you need to press Star one on your telephone switch all your question press the pound key.
Our next question comes from Carter Copeland of Melius Research. Your line is now open.
Hey, good morning, everybody.
Good morning Carter.
Just a.
Quick ones one the Baystate acquisition did that add any meaningful amount to the service portfolio growth you talked about in the Americas and then just as a follow up on Otis, one and pricing and pricing differentials you've seen on those connected units or what your expectation is for those assets.
Sure just high level thoughts on that would be appreciated. Thanks.
You bet. So based state again pleased to have him join years family, but that is not material in terms of what contributed to the to the portfolio growth.
In the Americas, specifically in North America for the quarter into.
In terms of Otis one yeah. We are we are ramping up and accelerating our deployment, we've seen productivity gains, but in terms of additional subscriptions or revenue it's still early.
In terms of where we're able to gain traction on that it's certainly adding value in productivity, we've seen that China, we've seen it in Spain, and we're now seeing and hearing from our mechanics in North America in terms of how it's giving them the ability to show up.
Kicker to have less roughly in a less running on arrivals when they get there because they know it's already running on rival and they don't have to actually make that service call. So we're pleased with the early results, but it's not anything that's really added to the top line in terms of subscription revenue, yes, so just to add to that cotter.
In August one joins us.
The suit of although connected applications that we have like destination dispatch system as we've done our management system and those applications combined add about 30% to 40% of the subscription revenue. So Judy said, our first focus on August one is productivity and we do feel the benefit for the customer both in terms of visibility and better uptime that we can.
White rooftop, adding incremental and additional revenue over time, and we see that in Asia and other parts of Europe, where we do have a remote service capability that you provide through even the old lines, we are able to get incremental pricing. Both units. So it will help over time, but our first focus has been productivity on August one as the previously stated.
Great. Thank you for the color I'll I'll, let somebody else ask.
Thank you and our next question comes from Steve Tusa of Jpmorgan. Your line is now open.
Hey, guys good morning.
Hey, Steve.
So just first of all on the on the kind of new equipment guide for the year. It just looks like you kind of took up the high end of the range.
You know for some of those or at least you know moved those higher at the at the high end and.
You really only removing the low end of the range is that is that just kind of some rounding error around some of the regions. It just seems like maybe that that total number should have moved up a bit more.
We noticed that Steve you are right I mean, we did kind of look across the all the regions and we did have we have improved the bottom end of the range and down from mid to high single digits to down mid single digits and keep in mind was down 5% to 10% of the Q1 call. So continued movement in the right direction and the outlook has improved kind of across all that.
Agents and strong performance in Q3, and especially in China and the Americas.
And at the mid to high end, we have growth plan for Q4, so the if it will be some rounding because anything we don't give specific ranges. So I think we can you can take that offline if theres any questions, but overall we feel.
Really good about the weight of the businesses moving.
And we do expect growth in EMEA and Americas at the mid and the high end of the range. So that for US we feel good about our guidance.
And then just listening to some of these other guys I mean combination Larry you guys are all talking about.
Intense price pressure and I think Schindler mentioned pricing like 50 times and it's in it's in its presentation or something like that I'm using round numbers. Yet you guys are saying that you're booked margin was actually okay in the quarter.
Can you try and reconcile like what you are seeing financially in your orders in your business is that something in the pipeline that you guys. All see that you know is sneaking up on you from a price perspective, its just going be a matter of timing or or is that just hey. This is co that things are flying around where it's uncertain. So.
You know, we just don't want to make any price.
I promise is on price, but it just seems like there's a lot. There's a lot more high level caution around price, but I don't really see it in in orders or the numbers can you just kind of help reconcile that.
Yes, so Steven in the third quarter, we saw better volumes, our productivity remains strong and our pricing how are orders were up slightly and you said it was up 20 basis points in booked margin and really pleased with that improvement, especially coming after the second quarter, where we had seven basis points going the other way.
And we grew our backlog so every 3% when we're doing with 3% up in backlog. So while we're seeing markets competitive pricing was competitive in the third quarter. We would tell you the place it was most competitive.
Within North America, and but we are seeing we had low single digit gains.
In terms of.
EMEA and Asia high single digit gains in China, and a low single digit we were down in the Americas. So so far we are dealing with what we can control which is.
Winning the business growing the share we grew at about 40 basis points, and then executing on that backlog by driving as much productivity and cost control as we can and this backlog by growing is really going to feed our 21 and put us in a pretty good position. There. So we were pleased with what we saw.
Q3 versus Q2, and all the sequential improvements, but we would I would tell you it's getting more competitive certainly in North America on pricing and then to add Steve just does for not just.
Maybe a couple of points to add to what Judy said, our our year to date will margins are flat right. So that's kind of that's a good thing okay fourth quarter was up second quarter down third quarter is up so year to date. The book margins are flat for before for the nine months of the year and the other pointed our backlog is up and the backlog margins sequentially better than Q2 and flat.
Last year, so that goes back to the comment that you made on the pipeline right and so I bought backlog margin, which will drive revenue for next year. Those margins are flat and again, we do this is the stuff you've been saying since our kind of our investor day that we do expect tough pricing environment. We've expected. It obviously the macro economic conditions are not great but the.
Focus that we have on driving productivity and the fact that we've been hitting a 3% target now for nine months ended confident we're going to get for 12 months and that is that focuses on delivering so we will continue to improve our execution installation our maintenance productivity and if that is pricing pressure, we will find a way to offset that one last quick one for you guys.
We're all trying to kind of learn how to compare all these companies over time and I guess you guys define share gain differently. These companies your competitors say different things about the markets.
When you guys talk about your Mark you are kind of market share and how you're competing are you looking at like very high level numbers versus the schindler's economies of the world are you, saying within our specific verticals.
That's kind of how we analyze it because that obviously would explain.
You know why it's not directly necessarily like a one for one read from a cone era Schindler I'm or are you looking kind of high level globally, and you're not really paying attention to fighting with those guys and.
Across the different verticals like residential commercial infrastructure et cetera.
Yes, so when we talk about share Steve talk about how we have done what's that the market. So again I think one inch OLED reported in the other companies that don't so you don't know will be exactly be gaining share from but the fact is an easy compare orders, we know that we've outgrown the mark and Thats, how thats, how we compare it. So if you look at flat for the quarter down.
1% on a rolling 12 month basis, and obviously in this environment. The market. We know was down more than one person or willing 12 month basis, and we are down about two points year to date, so thats a fairly fairly strong performance given given the environment and so based on the analysis that we do we believe as Judy said in our prepared remarks, we think we've gained about 70 basis points of share.
And that has allowed us to grow our backlog grew about three points and brave. We task every every one of our countries to be chair it to grow share in their country and that's going to continue through 2021. So we do look at it and at a pretty finite level great. Thanks, a lot appreciate it.
Thanks, Steve.
Thank you and our next question comes from Julian Mitchell of Barclays. Your line is now open.
Hi, good morning.
Yes.
Hey, maybe just the first question around the the orders outlook in new equipment. So I guess sort of flattish in the third quarter globally down a touch on a trailing 12 month basis. When you look at the overall environment.
Do you think that this is kind of a status quo level that you're right now for the foreseeable few quarters.
Maybe there's some regional differences so Americans gets a bit better, but then you start to see China revenue.
Rolling over as comps get tougher maybe just help us understand.
How we should think about orders for the next couple of quarters, yes.
So Julien it's hard to concentrate inventories to comment on the order that boosted we are pleased with the performance we have year to date and then go back to what you said.
On the last call that for 21, our product is work that we wanted to end the year.
In a strong backlog position of being up 3% year to date, obviously gives us a lot of confidence and what do you want to take it up step further our next step obviously is the fact that we want to accelerate the backlog conversion for 21 and that would mean that gives us confidence to grow on new equipment business and not have the volume related headwinds.
You've had this year, so thats kind of our focus for driving new equipment revenue next year in terms of the market that can do to can comment as well, but the pictures pictures may extending the fact is we see a breach.
Seeing a sharp bounce back in China, the other markets a little bit softer as you as you would expect and the predictions I will get harder.
Based on the data we are seeing the little bit of a snap back in Asia and in China, and Europe looks okay. It's all North America is a little bit more mixed, but we'll see where that goes but what we are focused on is kind of driving what we can control and the other point I want to make up is up proposal activity. Our proposal activity year to date is up double digits.
And that goes to all the things that we've been we've been saying. These up you are going to do in terms of expanding our our sales coverage, adding more salespeople. We've added more than 100 salespeople year to date added 700 more channel partners in China. So the idea is that that allows us to even in a down market increased proposal activity and hopefully that means.
But our orders to come in Steve I'm, sorry, Julien, Let me just add one one item, we've really tried to take a hard look at the past few weeks or months or certainly engine starting into this quarter with the rebound of Kobe cases are we seeing any changes.
We're still continuing to see new starts in Europe.
We're cautious in North America, especially on on non res, but the Asian economies have turned the corner in China is accelerating and we expect growth next year in the Chinese segment.
Thank you very much and then maybe my second question around the.
The cost and profit outlook, so looking at slide 20.
Standalone costs guidance for this year has come down by about 20 million versus the prior guide.
The the run rate on Standalone cost is unchanged. So I was trying to understand does that mean that we get a step up in those costs just in the PNM as we see it.
40 million ish number into next year.
Or am I misreading it and then also the separation costs.
I think those will close to $30 million in Q3 did those separation costs.
Bait in fourth quarter or do we still get some into next year.
Yes, no. That's all good questions, we until on that so it will be like focused on producing that EPS unit right and you said that Reits into Q1, and obviously driving the $60 million reduction year over year is fantastic and you'll see some of that coming tool lower public company cost and that is that's a good sign we don't have a.
Anyone number yet we didnt want to update you guys on 1.1 number for 2021 works is providing the context and the framework for how everything else will be so again, our goal is to not get to 175, but we will provide more color and more guidance as we talk about the rest of 2021, so more to come on that but good news that we were able to in sort of being at 150.
Had won 30 for this just shows you the focus and the discipline that we have inside the company in terms of Standalone cost.
And separation costs I think I'd number is 141 70 thats. The number we had said and thats largely between this year and Q1 of next year I think might be tracking to that'd be the year to date numbers around $85 million. So thats been between 80 and 85, so far the rest between Q4 and Q1 and that will be the end of that separation costs.
Perfect. Thank you.
Thank you Julien.
Thank you and our next question comes from Jeff Sprague of vertical research. Your line is now open.
Thank you good morning, everyone.
Jeff I.
I Wonder if we could focus a little bit more picks up on a couple earlier threads, but kind of how and where you're competing and what I mean by that is.
No. In addition, decoding and Schindler, which we can all see right. There is probably another competitors that really matter, but interestingly in the quarter right. It does seem your orders did.
Did not grow nearly as much as they did but your total orders on a global basis actually matched.
You know obviously is going to be a lot of noise in a quarter, but are you purposely being more selective in China or are you.
Pursuing kind of opportunities that are maybe further below the radar screen that are inherently more profitable or.
Or maybe have maybe it's all just a coincidence in the quarter. That's that's the first question.
Yes, so in China, Jeff our orders are up high single digit are booked margin was up for the quarter in China. So we returned to really to getting price in China, or new equipment, which was important to us our sales were up mid single digit. We also got price on service and grow our service portfolio six per se.
In China and grew our share year to date in China. So we think we've got a solid performance.
We did well in the tier one and tier two cities and especially in some of our strategic verticals like infrastructure, where we've been spending a lot of time and investment or who will share that.
We've added over seven almost 750 agents and distributors in China. This year, which has been an intense focus on AOS to have greater reach.
Greater capability to provide tend to see the different opportunities and again, we returned to profitability.
Was that booked margin there and we're pleased with that week.
We continue to invest in China, with our new factory and we're going to continue to make investments in the sales channel in China in Q4, as Phil mentioned in his remarks.
To get us prepared for what we think is going to be a growth segment and growth for us significantly in 21.
Great and then maybe just back to the backlog commentary.
Certainly understand the relationship and what you're alluding to.
Is is an exit backlog growth rate.
Pretty good indicator of what we should expect for new equipment gross maybe you could give us just a little bit more color on kind of conversion cycles and Rahul you made the comment about trying to accelerate conversion of the backlog.
Just a little more color on how the whole algorithm works. If you could yeah. So just typically what we see is VC in any given year again. This is on going back to a little bit to pre folded because look we typically used to see is about two thirds of our revenue new equipment revenue in a given year coming from backlog. So thats. What we would have typically seen this year. It has been a little bit lower.
Just given all the disruption, but we've had both in the field and in the factories and our goal is I think we said previously our goal is not only to get back to 2019 levels would drive it a little bit higher than that and so we will continue to provide more color and more guidance as we talk about 2021, but typically what you see today.
Herds off the revenue for next year coming from backlog.
Hi, Bill.
Yes.
Thank you and our next question comes from John Walsh of Credit Suisse. Your line is now open.
Hi, good morning.
John.
I guess, maybe just the first one following on a couple of the pricing questions and sorry to keep bringing up pricing, but when I look at your bridge on slide 10.
And then I just go through each of the last quarters, the new equipment commentary that was called out.
We haven't seen pricing in bad debt.
So was just curious if that's some conservatism because we're still in coated or once again I think to an earlier question that you know something's actually going to hit in Q4. So it's just a timing related issue.
No no we have had the bad debt in is is higher a little bit year over year. It hasn't been material enough to call out, but you would expect that in an environment like this.
The credit environment, you would have incremental bad debt and being appropriately cautious I would say on how we are reserving for start. So if you are seeing no things go in the wrong direction, we are providing.
Adequate reserves for that so bad debt has been.
I mean without to the first nine months and again, it's not it hasnt been material enough to call on them I mean, each each line item, but cumulatively kind of adds up so it's OK pricing you're right.
It Hasnt BMD haven't pointed out as we said our book margins are flat kind of year to date, the flat backlog margins are flat, but again, we are expecting a little bit of Conservativeness forward for Q4, just in case.
Take things happen, so youre right on pricing for new equipment.
That is a common more for Q4 and that does affect a little bit of conservativeness on our part.
Great. That's helpful clarification, and then maybe just a question on on understanding the business a little bit better, but as we think about when service pricing takes effect.
There's some concern that depending on where.
Vacancy rates are we're building utilization rates that we could see some pressure next year on service, but I think the way as I understand it theres kind of like rolling waves and would only be a portion of that might even be impacted but can you help us understand how that re price.
Thing might work on parts of the service portfolio that on any given year, just as a kind of naturally rolling off contract.
Yes, so our service contracts.
Our contracts and our multi year in many parts of the world and annual in others. So each country is a little different we tend to renew our service contracts in Europe.
Early in the year and we do have we do have price escalators. There that are that are indexed to inflation and we'll be watching that as we enter next year as well.
In the North America, where a lot of our service contracts are as.
As well, we find that those are multi year.
The concessions we've given today.
Has been pretty limited to the hospitality and retail industry only and as we shared with our end market exposure, that's a little under 10% for us globally and those concessions to date have lasted typically for about 90 days and they all came in at staggered times, but as long as the building is open.
And it's important to note that we also match our our cost when those concessions go in terms of services, we deliver so we've been doing a good job in that and that's why we've been able to maintain our service margins and our margin expansion as.
As these come up for renewal every one of them, we discuss with the customers exactly what type services they need to receive and then we adjust our costs accordingly, but we have not seen any.
Any unusual cancellations on either the new equipment side every now and then a job does cancel but on the new equipment or even on the service side, we've not seen extreme cancellations happening right now everybody's kind of watching and as long as a building is open or and minimum use and all the resin and.
Actual buildings are at significant use we are out there providing maintenance our maintenance pricing has held up very resilient and our maintenance has held been very resilient.
And really its the discretionary repair and modernization, where we've had.
Any of the decline in sales as people are making discretionary choices I hope that was helpful.
No that was very helpful. Appreciate all that color. Thank you.
Thank you and our next question comes from Nigel Cole of Wolfe Research. Your line is now open.
Thanks, Good morning.
Yes, hi, so any.
I mean, that's that's in the China, probably sector and.
Some government concerns around that.
Seen any kind of cooling down measures that maybe might impinge on 21 are we seeing any.
RFP activity started to sell down little bit any concerns on China as it goes into 2021.
We have not seen these cooling measures have been in effect now for almost three years I would say.
And we have not seen any impact on.
Infrastructure segment, which is mainly public but even in the private with the property developers.
We have not seen any change in volumes or request for proposals in China and in China. We expected as we started the year. This segment to be flat the segments actually grown this year and we actually now will we believe that the segment will grow again next year, we're looking for very positive outcome in China.
And next year in 2021, and just nice to add a couple of just quick data points in that I mean, if you look at the domestic loan volume for the real estate developers, that's actually up year over year I think the estimates on that gets up 45% and the land value that abuse develop as his prepared is up 13%. So they continue to invest in the business.
That's great to hear and then on the discretionary pay you mentioned some.
Some some weakness.
What is the nature of this repair.
Okay. That's been that's been the food is it I don't know some some cracks in the.
And the thought or are we talking here about caps.
Secondly, the they're moving down.
From six to four.
Does this create a significant pent up demand as we go into next year.
We do believe this is a demand delay and it will create pent up demand on the repair side on the mob modernization side. We believe it will occur it's challenging to determine which quarter thats going to come back since so much of the modernization is discretionary but the repair we believe will happen some of it we need.
He'd access to those buildings some of it the buildings need more usage and the facility managers are just holding on some of those discretionary repairs. We expect it to bounce back and we think we'll see a little more of it in Q4 and as we go into 21, we expect that bounce back.
Thanks, Judy and then a quick one for Rahul.
A lot of cash on the balance sheet.
Once we get into a more sort of normal environment would have I mean, how much cash do you think otis needs.
To maintain going forward, yes.
Yes, it's a great question, Nigel and that's something again, we need to compete a few quarters under our belt to exactly figure that out I mean, a lot of cash is offshore so that flips that makes a little bit harder to figure out exactly what that right number is but safe to say, it's not 1.7 billion I mean that that's easy to say that it's not what I think we have more cash.
And what we need which is appropriate in an environment like this because if you go back to March April then you can borrow in the CP market.
So you want to be prepared because life is going to be uncertain at least for the next three to six months, but beyond that fuel be don't need 1.7, and I think thats, what promises to get that cash to shareholders.
As an add on when things settle down a little bit and we do feel that we should be in a position to accelerate our share buyback from 22 and 21. So that is a good thats a stated objective and we think we'll we'll we'll get there barring some really really unforeseen events. So we'll keep watching it but it's.
It is now 1.7 billion and it's lower than that what exactly that number did I think we need a few more quarters on for both move exactly what the right numbers.
Great. Thanks very much.
Thank you and our next.
Question comes from journeys Falani of Morningstar. Your line is now open.
Hi, Thanks, Pat Thanks for the question Denise Leena from Morningstar I'm, just trend route and to go back to the comment you made about 30% to 40%. That's on service revenue and the connected services and is that are those contacts that you think are adding.
Make a couple of hundred basis point to margin on top of what you would normally get under contract and then is that that level of revenue that expected to carry across to wide like customer base, because if you've got.
A budget for these kind.
Kind of yearly contract.
Just wondering if you're expecting that to be widely adopted are going to kind of have another 30% to 40% and their budget for these services or do you think that sort of going to be.
For certain high tier of your segment.
Maybe you know high population building.
Yeah, Jimmy So my comment on pets.
30% to 40% was more on the facts. So we have several connected solutions. In addition to just one so we have elevated management system be provide the destination dispatch we had he views systems that that's obviously one of our better connected so when you put all that together that can add about 30% to 40% off the revenue.
That we get on that unit.
And there's not a lot of incremental cost to support that so you would expect margins to be higher inhibition do almost.
Coastal add close to perfection retention rate as you can get so the invention rates are very very high. So there are lots of incremental benefit and that was that comment Im just wants to call. It a question on the oldest one do you expect of incremental revenue from that yes, we do it's not a big impact you cut to the 40% is cumulative so its not though doubled from what is one but.
We do expect incremental revenue because of the the customer gets complete visibility on how the portfolio is performing to get higher uptime because in that Judy responded earlier, we can dispatch a technician astronova unit breaks down so we know before the customer calls us we know the unit cost down. So we can dispatch technician on so the uptime to higher so we do.
We expect over time, we will get revenue from this but that has not been our primary focus we are investing this big installing these units at our own cost because we think the productivity benefit outweighs the costs. So that has been our primary focus but overtime. We do expect revenue in Tunis, our conversion rates and our retention rates on connected Ella.
Leaders.
Beats, our industry, leading retention rates across the globe. So we have the ability to actually routine in our service portfolio those connected units.
Several hundred basis points above what we do with our normal retention rate globally. So thats. Another added benefit for us It gives us more years on service and the ability to deal with that customer over time, especially when they want it.
Additional upgrades over time.
Can I ask one follow up on that because we've heard a lot from koning Tim there is on the connected services I think we're trying to figure out what the differences among the players, but it sounds like the <unk> piece of the ones that.
Or maybe not premium to compete as much because they don't have any meaning elevators kind of PD me me can you get to kind of uptime.
Do you think that's right do you think that the if you are going up again.
And typically pay that youre going up against another OEM that had the same number of elevators.
Reading that algorithm you think your your services be differentiate itself.
This is 55% as a service market right now is controlled by highest piece, that's who we're going to get share from to grow our service portfolio above our leading service portfolio with over 2 million units.
Already and we do believe that with scale and with differentiation comes incredible data and clarity in terms of being able to make decisions, having a data lake being able to do predictive and transparent maintenance and as far as will said to get they tend to roll the trucks and to get our field professionals out.
There as quick as possible to drive off time, it's the value of that data and the analytics thats going to make a difference and we are that's where we're going after share the highest piece has more than half of the share globally and that's what we intend, especially to get her this units back.
Very helpful. Thank you.
Thank you and our next question comes from kind of on rumor of Cowen. Your line is now open.
Yes. Thanks, so much so backlog margin you indicated that it's flat.
Schindler on their call talked of pricing getting worse in the third quarter and therefore looking for backlog margin to be down in the fourth quarter.
What what are you looking for can you hold that backlog margin in the fourth quarter.
The kind of thing it's high comment on future backlog margin. The good news is listen you look at the booked margin. That's up you look at the backlog margin Thats flat to last year, and it's in and out but generally 18, what what might equally from this is that the pricing environment in both new equipment and service is launched.
These stable there will be will they be precious as we've discussed previously yet, but I think the new equipment markets are are behaving right, China booking margins are up North America was up a little bit of pressure in Asia Pacific, especially in India, and Southeast Asia Asia. As you would expect a couple of markets in EMEA as well so all that we put all that.
And it's good to see the back the booking margin being up and the backlog margin being being stable letting Judy made the comment on service pricing is off limits and.
And that that's okay as well I mean, obviously it off these temporary price concessions and these are temporary because there for a limited time outside of these temporary price concessions. The overall service market is holding your puzzle that Europe was up North America was up over to pressure in Asia as you would expect but service pricing looks okay as well so we feel good about where the environment is.
Would they be pressured absolutely if that is the ready for it right I mean, the economy ready for the pressure that may come in but it has not manifested yet and be few okay, where we are and we have we have shown now for multiple straight quarters that we are yielding on the productivity both on the material productivity side for new equipment and the service productivity side.
Continuing yield and I I do pivot back to our service business, which is has remained resilient. Despite the discretionary challenges we've been facing and that 80% of our margins. We shared our medium term outlook and basically set our future is based on growing our service portfolio driving margins in both equip.
Service, but in service that plus other actions driving high single digit EPS. We're on track for our medium term outlook or strategy is on track and that's what we're executing.
Terrific and then your third quarter orders were bolstered by three very large wins you had are you looking for large wins in the fourth quarter or are we looking at a tougher orders compare.
They will probably wins last quarter as well Cai I think in short we had a few sizable wins in Q3 oclock tier side on a year over year. These large wins necessarily made a difference listen I think you've been talking about the pain tied that are driving our our.
Our sales performance I mean, if you look at our coverage in certain markets, whether it's China. It's the rest of Asia Pacific whether its markets in Europe, I mean, our sales coverage in the markets that we have targeted are up anywhere between seven to 10 points. So we are doing really well and just doing the basics like you've added and Judy and I, both said youve added more than 700 job.
Partners in China, we've added more than 100 salespeople. So we are putting more feet on the ground. We are tracking new segments. We didn't have a product in the entry to get market.
We do now we launched in India have expanding to southeast Asia.
Got it back into volume business in certain markets that we didn't play so it's a pretty all out of front on on making sure that we continue to gain share and these large wins are testaments to the technology and the customer relationships, but.
It's it's broader than that.
Terrific and then last one so listening to your competitors the three markets they've all been complaining about are the Americas Asia outside of China, and Southern Europe, All markets, where you have substantially greater percentage of revenues than they do.
Can you maybe comment.
Is that just share gains on your part and you mentioned you know 70 bips.
Of share gains, where do you think you're gaining share and where are you may be losing share.
So yes, we have if you take our Asia World outside of China. We are very pleased this year with our results out of Korea and Japan.
Where we are we are a major player.
And that has happened in both new equipment and service, especially in service in Japan, So our Asia Pacific, Although impacted by India and Southeast Asia like the rest of the World. We're really pleased with our share gain there and we have put some of those sales investments in place there to deal with both the new regulations incurred.
But also just to get get more share on the new equipment side as we pivot to the Americas I was really pleased with our performance in Latin America, we grew share in Brazil.
And we are continuing to perform well in Latin America.
North America remains a very competitive and we're going to continue to watch that closely and we've looked we gain the same access to the Dodge and the information.
Such as marginal improvement, but up for next year and we just have to watch the pace of that deal with what we can control workover backlog conversion quicker and then drive productivity throughout especially North America and align our cost with that.
In South Europe that is the heart of our maintenance portfolio and our teams have done a great job aligning cost with the service, we're providing and really having minimal concessions. So on the new equipment side. We think we're seeing new starts in Europe, including in South Europe and.
We're seeing really across the board new starts in the EMEA, a little slower in the middle East, but the Asian economies are are turning the corner led by China by far but the rest of the Asian economies are starting to turn the only place weve still have constraints in terms of job site access is really in.
India, which is less than 50% in parts of southeast Asia everywhere else has been restored to the high 90, percents and we haven't seen any retreat from that due to the second rebound with coated either in North America or in EMEA.
Terrific. Thank you very much.
Thank you and ladies and gentlemen, this does conclude our question and answer session I would now like to turn the call back over to Judy marks for any closing remarks.
Well, let me. Thank you all again for joining the call. This morning, I need and want so much to thank our colleagues for their dedication as well as all of those on the frontline fighting COVID-19, please stay safe and well. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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