Q1 2021 Otis Worldwide Corp Earnings Call
Good morning, and welcome to Otis is the first quarter 2021 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 Dot Otis Dot com.
I'll now turn it over to Stacy with Jackie.
Vice President of F P and <unk> and Investor Relations. Please go ahead.
Thank you Stephanie and good morning, everyone welcome to Otis and first quarter 2021 earnings Conference call.
With me today are Judy marks the President and Chief Executive Officer, and a whole Guy 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. The company will also refer to adjusted results for adjustments for me is the oldest.
Standalone company and the current period and prior year. A reconciliation of these measures can be found in the appendix of the webcast and you also remind listeners of the presentation contains forward looking statements, which are subject to risks and uncertainties.
The SEC filings, including our form 10-K, 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.
Thank you Stacey and good morning, everyone. Thank you for joining us and we hope that everyone listening is safe and well I'm pleased to share. The Otis had an outstanding first quarter, demonstrating the power of our strategy the global execution strength of our company and the capability of all our colleagues.
And the business was robust and we gained close to two points of new equipment share with orders up high teens globally and a market that was up mid teens.
And Korea Otis was selected to provide approximately 170 elevators and escalators and moving walkways to support the fourth phase of the Incheon International Airport project.
This addition will expand the Otis his presence at the airport to over 615 units in.
In China, we continue to support key infrastructure projects throughout the country, including and Shanghai, New area, and new Metropolis being built near Beijing more than 1000, and Otis elevators and escalators have already been ordered supported projects and the area that would be of new home to the administrative services and residential.
Immunities being relocated from Beijing.
In Munich, we're continuing and over 35 year relationship with Scott Berg of motion, we've been selected to install and 92 escalators for the Munich Metros modernization project, bringing the total number of Otis escalators provided to the metro system to over 500 units using custom made controllers.
These escalators will seamlessly integrate with the Stan Berger of mobility to provide passengers and maintenance crews with real time data one of the escalator operational status and.
And finally in New York City, we received an order to modernize and three times square the Thomson Reuters building will provide new controls drives encompassed 360 destination dispatching on several units. This extends our long term relationship with the building.
The installed the original equipment, nearly 20 years ago, and it's been providing maintenance services ever since.
Our high margin recurring service business also grew in all lines of business, including modernization, while achieving the adjusted operating profit margins of 22, 6%.
Our strategy is based on our service model, which drives approximately 80% of our profit and.
This is the model the proves our resilience year after year, including during COVID-19 the.
The global service market grows faster than the global new equipment market and pricing tends to be more consistent and service.
Data and technology based innovation help us attract and retain customers and in Q1, we continued to deploy Otis one units and the field and are shipping Iot enabled units and go to China and North America.
We drove profit growth in both segments largely from the drop through benefit of higher volume with organic growth in both segments and continued benefits from our material and service productivity initiatives.
And our strong performance allows us to create more value for our shareholders. In January we completed the remaining $150 million of debt repayment, we had committed to the head of schedule and just last week, we announced a 20% increase and our quarterly dividend in.
In addition, we're now and are positioned to increase our planned share repurchases for the year to have $1 billion after completing $300 million and the first quarter.
And we're equally dedicated to delivering on our commitments as of global corporate citizen.
In March we share additional details with you on our important ESG initiatives, including becoming a signatory of the UN global compact and we continue to make progress towards our goals. Our ESG programs are integral to bringing our vision to life the.
This month, we completed the inaugural year of made the move communities, our signature of global corporate social responsibility initiatives.
And this pioneering program focuses on two principal goals.
Advancing stem education, and supporting young innovators and the development of inclusive of mobility solutions for under represented communities Stu.
Students from around the world put their knowledge and skills to work alongside Otis mentors to come up with many creative solutions. The winners were announced in April.
We look forward to extending the program geographically and to more students and mentors in the coming years.
Turning to slide for Q1 results and 2021 outlook.
First quarter, new equipment orders were up high teens of constant currency with mid teens growth and the Americas low single digit growth in EMEA and double digit growth and Asia, driven by China on a rolling 12 months total Otis orders were up one 4% the.
The strong order performance led to continued growth and new equipment backlog of 8% and 2% of constant currency versus the prior year.
Organic sales were up 10, 3% and the first quarter with 25, 1% organic growth and the new equipment segment, and one 3% organic growth and the service segment adjust.
Adjusted operating profit was up $83 million and margin expanded 40 basis points.
And for all margin expansion was impacted by segment mix as the new equipment business grew faster than the service business for.
Free cash flow was robust at $541 million with 176% conversion of GAAP net income.
I'm encouraged by the positive momentum and we're confident and our revised 2021 of the outlook improving across all key metrics. We now expect net sales to be in the range of $13 six to $13 $8 billion up six five to eight 5% versus prior year and up 4% to six.
Per cent organically. This is of two point improvement from the prior outlook at the midpoint driven by faster than expected recovery and the new equipment segment.
Adjusted operating profit is expected to be up $170 million to $210 million of actual currency and up $120 million to $160 million of constant currency with adjusted EPS in a range of $2.78 to.
To $2.84 of 10% to 13% increase versus the prior year and a 9% improvement from the prior outlook at the midpoint.
Lastly, we expect free cash flow to be robust and a range of 1.35 to one point for $5 billion with approximately 120% conversion of GAAP net income.
With that I'll turn it over the rule to walk through our Q1 results and 2021 outlook in more detail.
Thank you Judy and good morning, everyone, starting with the first quarter results on slide five.
Net sales grew 14, 9% to $3 $4 billion with organic sales up 10, 3%.
And as the growth momentum continued and new equipment and service returns to growth in the quarter.
Adjusted operating profit was up approximately 18% of $83 million and up $57 million at constant currency as the <unk>.
Drop through and higher volume strong material and service productivity and favorable service pricing more than offset the headwinds from new equipment mix and pricing as well as incremental public company expenses.
We maintained the focus on cost containment, while continuing to invest and the business as a percentage of sales and adjusted SG&A was down 20 basis points. Despite the step up and public company expenses and.
And R&D spend and other strategic investments were about flat versus prior year.
This strong focus on execution drove 40 basis points of margin expansion in the quarter.
First quarter, adjusted EPS was up 20% or 12 cents driven by 13th sense of operating profit growth and five cents from the lower adjusted tax rate.
This was partially offset by incremental interest cost from the full quarter impact from the external debt.
Moving to slide six.
New equipment orders were up 18, 4% at constant currency with growth and all regions.
Orders rebounded strongly and Americas up mid teens, and we're up for the fourth straight quarter in Asia, including strength in China, where the orders were up double digits.
Booked margin for the quarter was down 60 basis points year over year, but improved sequentially.
Organic sales were up 25, one person with the Americas, and Asia up about 22% and 46%, respectively, driven by strong backlog execution.
EMEA was up low single digits sustaining the turnaround and that started in Q4 of 2020.
Despite the strong sales there was broad based growth and backlog that was up 8% and up 2% at constant currency with backlog margin down slightly versus prior year and up 20 basis points sequentially from prior quarter.
New equipment adjusted operating profit was up $44 million and margin expanded 170 basis points and higher volume and strong material productivity that met our people and target more than offset the impact of unfavorable mix and pricing.
Service segment results on slide seven.
The number of units under maintenance contracts increased by 2% with growth and all regions and China up low teens after high single digit growth in 2020 from strong improvement and underlying operational metrics.
Modernization of orders were up slightly at constant currency as double digit growth and Asia driven by successful go to market strategy to leverage the mandated regulatory upgrades and certain markets and low single digit growth and the Americas was partially offset by lower order intake and EMEA.
Service organic sales were up one 3% and the first quarter with the continued resiliency of the contractual maintaining the business and discretionary and repair and modernization sales returning to growth and the corner.
Adjusted operating profit margin expanded 60 basis points and profit grew $35 million from the benefit of higher volume strong contribution from productivity initiatives and favorable pricing.
Translation FX benefit of $20 million was mostly offset by higher SG&A, including incremental public company expenses.
As we look forward to the remainder of 2021 on slide eight we feel confident about growth across all key metrics given the higher backlog.
Strength of the maintenance business and our focus on operational excellence.
So let's call backs and proxy for repair volume is also showing continued sequential improvement and contributed to the growth of the repair business and the first quarter.
After three quarters of year over year decline.
These encouraging trends combined with the strong Q1 results gives us confidence to raise the organic sales outlook to be up four to six per cent for the year.
Up two points versus prior outlook, driven by accelerated recovery and the new equipment business.
We now expect adjusted operating profit to grow $175 million to $215 million at actual currency up 45, moving dollars from prior outlook at the midpoint with sales growth operating profit growth and margin expansion and both segments.
Adjusted EPS is expected and a range of $2 78 to $2 and 84 nine.
Nine cents higher than prior outlook and up 12% versus prior year at the midpoint.
The year over year increase was driven by strong operating profit growth of 90 basis point reduction and the adjusted tax rate of 29, 5%.
And reduced the share count.
This EPS outlook is the head of the high single digit medium term growth target that we had provided at Investor day.
Following the strong cash generation and Q1 from higher net income and more than $300 million reduction and working capital. We now expect free cash flow for the year to be in a range of $1 35 to one for $5 billion.
$50 million higher than prior outlook at the midpoint.
Reflecting the improvement and net income and better working capital performance.
Given the strong Q1 free cash flow and success and repatriation of foreign cash.
We raised the dividend, 20% last week and are increasing the share buyback target for 'twenty, and 'twenty $1 million to $500 million.
Taking a further look at the organic sales outlook on slide nine.
The new equipment business is projected to be up between seven five to eight 5% driven by accelerated backlog conversion and continued recovery and the market.
This 4.5% improvement at the midpoint is driven by increased expectations and all regions and is supported by strong order intake in Q1 and demand signals from the market.
Americas is now expected to be up high single digits EMEA up low to mid single digits and Asia up approximately 10% from improved outlook and China and other markets and Asia Pacific returning to growth.
Consistent with our prior outlook, we expect service sales to be up 2% to 4% with maintenance and repair sales up 2% to 4% as well.
And modernization sales up low to mid single digits asthma and tenants remains resilient and we see continued recovery and the repair and modernization businesses.
In addition to our success and Asia Pacific modernization growth is also driven by market growth and China and conversion of backlog and the Americas and EMEA.
Overall, the organic sales growth outlook of five bus and at the midpoint represents a solid to unravel after the difficult 2020 with growth across all regions and all lines of business and puts us above for 2019 levels and both segments on a reported basis.
Switching to operating profit on slide 10.
We now expect operating profit to be up $175 million to $215 million and up Honda and 2200 $60 million at constant currency.
Reflecting the benefits of higher volume service and material productivity initiatives and favorable the service pricing environment.
Partially offset by unfavorable mix and pricing and the new equipment segment.
Headwinds from commodity and incremental Standalone expenses.
This the presence of $45 million increase versus prior expectations.
Driven by the improvement of outlook and both segments.
Corporate expenses and higher cross channel FX benefit.
New equipment margins at the midpoint and now expected to be up 80 basis points for the year versus prod expectations of 50 basis points.
And above 2019 levels.
Service margins and now expected to be up 40 basis points from 30 basis points previously building on the 110 basis point improvement in 2020.
We expect overall margin expansion of approximately 40 basis points for the year.
Overall, we believe that this strong outlook for the business on the sales growth margin expansion and cash flow generation reflects our focus on execution and the benefits for solid market recovery.
And with that I will request Stephanie Please open the line for questions.
Thank you at this time, if you would like to ask and audio question. Please press star followed by the number one on the telephone keypad.
Once again that is star one to ask the question.
And your first question is from the line of Nigel Coe of Wolfe Research.
Thanks, Good morning, everyone.
On the idle.
So the new equipment.
Growth in the quarter was sort of like took me by surprise, especially in the Americas. You know, we're not seeing too many signs of strength and and many of you and market. So I'm. Just wondering if you could maybe just focus perhaps a bit more of the Americas and you know what what's driving that strength by vertical.
And then on top of that.
And the same question really is and I'll be seeing a higher mix of Mega projects.
And the mix is driving that growth.
Yeah, and Nigel the great great to hear from you. This morning, we were very pleased with the Americas performance this quarter and I think it goes beyond just our performance I think we're seeing all the indicators now starting to turn whether that's the the Abi the architect billing index, which is in March was at a record since the 2007 timeframe the Dodge momentum.
Has turned positive as well.
Seeing that we're experiencing that in the Americas, our new equipment organic sales were up almost 22% and our orders were up over 14%, we're seeing that across the volume business as well as and some major projects. So there continues to be recovery, especially in North America and.
Brazil is still suffering some of the the COVID-19 impacts, but north America between the U S and Canada is back very strong again of volume type business.
As well as as major projects in terms of verticals of the commercial business the commercial non res and North America turned positive for us this quarter and.
And actually did a little better than residential for us and North America. So it was a little different and we saw in 2019, but again with the indicators and the indices heading and the right direction and this really strong performance by our Americas team, we had growth and new equipment orders significant but we also had growth in Ma.
<unk> and the Americas. So the team is executing well in local markets and then as well on national accounts, yes, the only other.
The other thing Nigel but all of that.
Is the extent of it accelerated backlog we've been talking about it you know that we had substantial disruption in 2020, both because of the COVID-19 relation and it shows in the factory and lack of access to job sites and with COVID-19 those things are not being as much of an issue in Q1.
And we saw really good field execution in the Americas, specifically, so that is where you saw the medical sales being up and the other point just to go back to your question on large orders you know if you look at the Mega orders, you know, which is like the defined all the 10 million of Bob that's less than 10% of our volume.
And any given quarter why is those are the up in the quarter, we saw really strong double digit plus increase.
And the ongoing volume business as well and so it was a good performance across both of the megawatt project and the volume of business.
That's great kind of thank you very much and leave it that thanks.
Your next question is from the line of Steve Tusa with J P. Morgan.
Hey, good morning wanting for Ya.
Steve.
Can you just talk about what youre seeing and in China.
You know tier one and two versus some of the other tier cities.
Yes, Steve So we had this quarter, our best progress and a long time in tier one and tier two cities.
Our strategy is working and we increased our agents and distributors significantly in 2020, we added another 200 and the first quarter, but the ones. We brought on in 2020 are really help yielding that access that we were looking for to grow and tier one and tier two cities. The other two places we saw.
The improvements were in our key accounts and and the infrastructure segment. They had the two largest areas of growth for us and the first two and China and that's important on the new equipment side, but for us it's even more important because of our conversion rates for key accounts and infrastructure allow us to grow our service port.
Folio, our service portfolio grew and the low teens and China in the quarter, which beat the high single digits from last year, So tier one and two positive.
More positive than we saw in 2020.
And then I guess, just thinking about the back half there and in the next year I mean, what what are some of the what are some of the signs you're seeing fundamentally and how do you think the trends play out.
You know and that time period.
For China, specifically, Steve Yep Yep, Yeah, so listen it's a competitive market in China, and we know that we're also watching really the credit and liquidity situation of the major developers, we're managing effectively through that Perry and the team are doing a really good job there and we are deploying Iot and hardest one they're.
Secondly, again to help us on conversions.
And half is going to be a little tougher compare for us in China, because China came back so quickly post COVID-19 and the second half of 'twenty. So we're going to watch all those factors, but the segment in China. The new equipment segment is going to grow mid single digits, it's the largest market and the world even despite some of the cooling measures that are still in play.
This we think the market's more balanced and and we're going to continue to perform it and correct.
Just a couple of one of the things to add.
The range related to China.
Really strong start to the ear and the market of Judy said, we expect kind of mid single digit revenue growing into the year and we think that market growth could be a little bit north of that so you know a little bit positive on China and the people at the beginning of the year and the other thing is that despite all of the conversations at all.
For the market pulling down the ADR under construction in China. The construction of you guys actually up 11%. So we've seen strong momentum and the market in China right. Okay. Thanks.
Your next question is from the line of Jeff Sprague of vertical research.
Okay.
Hey, two questions from me if I could.
First of the totally understand on kind of the accelerated execution out of the backlog.
Although the backlog managed to grow despite that.
And just wonder if you could speak a little bit since we don't have a ton of history. The go on.
And your backlog currently relative to your forward sales expectation is that on the.
Low medium or kind of the about right relative to what you'd expect as you.
Kind of project existing backlog and the future revenue conversion.
So good morning, Jeff So the question that.
And as our backlog is sufficient to drive growth sales and the back half is that for you.
We're trying to go well well, yeah, I mean, clearly and dollars. It is I'm just thinking about.
And the conversion of backlog to revenue is right, it's going to be all over the map I would say right depending on the type of the project and the like and we just when you think about you.
Your revenue guidance for the year would you say this backlog.
Gives you kind of above or below average comfort and net revenue forecast Yeah listen trust. This gives us I would say above the average confidence when we when we met you and everyone last February at our Investor Day rule and I and the team said our goal was to and 'twenty with the stronger backlog than we can.
Came in and we did that we've now obviously grown that backlog and 'twenty, one and the first quarter and we've got sufficient backlog now too to see us through.
And that's what gives us confidence and our outlook, what we need to do is keep growing that backlog as we and 'twenty one to position us for 'twenty, two and that's where we are already had the team focused and typically we expect our backlog to drive maybe two thirds of the revenue and the year Jeff.
Jeff that's kind of typical standard and this year, it's going to be north of that and that's part of the accelerated backlog conversion that we've been talking about as debt. This year, we expect the.
The revenue conversion to be higher so and that is weighted it's really positive to see backlog growing in the first quarter. Because we did have accelerated backlog conversion over Q1 of last year, driven by better execution of the field to <unk> question and higher shipments out of China. So despite that it was really good to see the backlog growing because of this.
Did have accelerated the conversion in Q1.
And and maybe just the follow on on that.
I know you probably don't want to get into the detailed quarterly guidance, but given all the kind of the crazy COVID-19 comps right.
It would seem that you would have very good new equipment growth again in the second quarter. Despite the fact that you pulled forward some stuff in Q1.
Can you, maybe just give us a little color on the kind of the magnitude of the revenue conversion you're thinking about for Q2 on the new equipment side.
Yes, so Chesapeake always expected of strong start till the year of new equipment, because as you pointed out easier compares in China, but even in the Americas because of Americas revenue was down in Q1 of 2020, and yet and relatively still start here, but as you look forward to Q2, you know China. The covered strongly and was up high single digits last year, but the rest of the world.
Still weak.
So we expect new equipment will still be strong and the second quarter, but maybe not as strong as Q1.
So that's where do we think of and then Q3 should be up as well and then compares get kicked off in Q4, because Americas and the EMEA market.
All of it very strongly last year, so on the southern side of the.
The flip side is true because we got out of the gate marginally stronger than we had expected with the recovery of the repair business, but the impact of that full year and is marginal.
And so we didn't change the guide there, but the fact is that we do expect service to be up really strongly in Q2, just given the year over year comparison.
Weak last year. So that's that's the reason we expect service to be really strong and Q2, and then Q3 as well.
Great. Thanks, I'll leave it there.
Your next question is from the line of John Walsh with Credit Suisse.
Yeah.
Hi, good morning, good morning.
Non.
Hey, two questions if I may as well one just curious.
You know when the some of these property developers are going in and looking at upgrading HVAC or indoor air quality. Just curious if that's an opportunity for you to have a modernization conversation with them or if they're also looking to maybe put some Iot and just curious if the.
Those are actually pulling in some conversations with your product portfolio.
Yeah, Theres, a areas of corollary and air correlation and it is helpful. But it's it's not something we depend on and we have of modernization sales force the specifically focused on modernization of those.
Equipment, and our portfolio, where we have existing customer relationships as well as modernizing.
Any equipment, but specifically Otis equipment, that's not on our portfolio.
And there is there is you know when someone is ready to make an investment one of these developers usually it's not the developer, though it's more of the building owner now where the building manager or the condominium Association that are looking for these upgrades than than the original developer and so our sales force is very focused.
And that we expect modernization to pick up I was pleased to see you know.
The modernization of in terms of of waters, we were up this quarter and we saw a nice turn there and we're going to see that pick up especially in EMEA.
Our Europe performance and and we don't talk a lot about this because the Americas and China was so strong but are you of our EMEA performance you know of new equipment sales were up over 3% orders were up over 3% and and they've had really good portfolio grows, but we see there's a pent up demand, especially in EMEA for modern is.
Nation, because these customers really couldn't get to us or couldnt meet to approve mod so whether it's health solutions, where we get integrated or standard modernization for technology for statics or for connections with Otis, One where I'll review product and we're expecting that to pick up especially in the <unk>.
Half of the year.
Great. Thank you and then you know maybe a question around the Gen. Two prime product offering any update there on kind of contributions to orders growth.
Or how the market is receiving that product.
Well, we launched and two prime and India out of our Bangalore and factory and as you can imagine there are some challenges in India are not so much with our supply chain, we've mitigated that and you can see based on the performance and Asia, we've mitigated supply chain challenges and had material productivity.
Throughout the of over 3%, but so we were surprised pleasantly surprised by the number of orders we have received in India, considering the current COVID-19 and economic challenges we have exported the southeast Asia. The Gen. Two prime already from our Bangalore factory and are getting ready to bring it to market.
In the middle East as well as Africa will be after that so very pleased with the product reception instead of great price point entry level point for us and I think we're going to see that continue to make a difference for us addressing what what wasn't an area we needed the product to bring the market and that's.
Where we are as an innovator.
Great. Thank you for the color.
Thanks, Sean.
Our next question from the line of Joel Spongin of Bear and Burke.
Good morning.
I was just wondering if I could pick up on your comments around the books margin being down and the course of 60 basis points and improving sequentially and your equipment.
And I was just wondering if could elaborate a little bit on that.
Do you sort of being driven by.
What was the was the fact that it was down year on year of being driven by quite some question per se and the market.
Or is it due to changes in the right mix.
Think about wipes and pretty quick.
Maybe you could just elaborate.
Because of that.
Easing and some of those questions Mike.
For all of that would be helpful. Thank you good afternoon, and so yes, there was a.
Pricing pressure and in in the first quarter and as we said in our prepared remarks. It was the headwinds from both mix and pricing for the pricing pressure was really no surprise I think we've been we've been talking about it given the macro environment, we did expect pricing environment to be challenges.
Said previously for.
And taking cost out of the business and even in the on the field site and focusing on reducing the number of installation of hours. So that's been our focus and that's where you saw a substantial improvement in the and the in the margins and the new equipment segment the.
And the positive, but we did see was that the both the backlog and the booked margins improved versus Q4, and that's a positive sign because if this improvement holds true the yard that should be positive for 2020 two and this is different and the trend seem especially on the backlog margin. This improvement in sequential improvement is different and the.
And if you were seeing last year. So that is a positive development and if it holds that should be of positive for 2020 two.
Okay, Great. That's very helpful. Maybe like the stuff and just take one more quickly which is and I'm sorry, if you have any observations around around raw material costs and logistics costs.
And which is something we discussed and the path, but you didn't really talk about too much today.
Is that something that you're able to pulse and without too many challenges for the moment.
And the expected to intensify.
Yeah.
While the because of kind of additional color.
Yeah, Thanks, Joel it's Judy and good afternoon.
Listen we are as you can see from our new equipment of 160 basis points of growth you're.
Youre seeing the drop through and you're seeing the margin expansion offsetting competitive pricing. We have always said, we will control what we can control we can't really predict.
The market driven pricing, but we will control of what we can and so when we started the year and and in our fourth quarter and then the first guide. We said we had accounted in our guide for about $20 million of commodity headwinds, we're seeing about 15 to 20 million.
Higher than that original thought and then what we originally built into the guide. So we're doing a few things about that we're driving material productivity, even more again, 3% and the FERC for little over 3% and the first quarter net of inflation.
Equipment margins of rising we're also targeting some pricing pricing is very competitive globally, but there are certain markets, where we believe we can have some targeted pricing increase to offset that additional $15 million to $20 million of headwinds and a few countries are not to be named but where we think that price will come through.
Through and we'll be able to offset that.
And that is very useful.
And if you look at our full year guide that as you know it and as Judy said, we've offset the incremental of commodity tool pricing and these countries. So the we've been able to address that and that is what you see for our if you look at our full year guide. We've now increased the margin expansion and the new equipment segment from 50 basis points and our previous guide ATB.
At this point so that's that's a good sign and also if you look at the remaining three quarters of the year of dropped tool on the higher volume and at constant FX is closer to 20 per cent. So clip, which is above our contribution margin of 18%. So clearly the fact that we're getting the benefit from volume and even a little bit from productivity that debt being able to see.
He and the 20% drop through for the remaining three quarters of the year.
Great many thanks.
Okay.
The next question. Your next question is from the line of Julian Mitchell with Barclays.
Okay.
Hi, good morning.
And maybe just wanted to circle back on the new equipment.
Profit guide, so I think you'll you'll new equipment profits are up.
Just on the 40 million.
And Q1 and my.
At constant currency and the year at the high and is guided up plus AC.
So I suppose if we assume the Q2 is up decently off the easy comp as you mentioned very little of no profit growth and new equipment and.
And the second half maybe just help me understand is it the weighting of the extra cost headwinds you just alluded to.
And the tougher comp pulse and on the top line and kind of what are those main moving pieces. The there's very little new equipment profit growth and the second half.
Well, let's just let's just kind of to take one of the pieces Julian so.
And the new equipment segment of the biggest driver for the earnings growth is going to be the 8% organic sales growth that we're talking about at the midpoint and the drop through from that along with material productivity that is offsetting the commodity headwinds and the savings that we're getting from restructuring actions that you've taken in 2020 that will help us offset the incremental standalone.
Boston all the headwinds from some of the actions of that.
Debt get we took last year, so and we raised the new coupon earnings.
Outlook, primarily from the high net revenue, but based on the drop through of the game just to repeat what he said earlier based on the drop through on incremental volume for the year is close to.
20%, So we are seeing and it's.
Don.
And just the fact that we are seeing the dropped when you'll see about the deep.
The $13 million improvement in earnings so it's early.
And in the year. So it's good to be prudent, but we are seeing good drop through and the good continued improvement in revenue and profit for us for the year.
And I see and is there any color on the weighting of that.
The cost headwinds you mentioned through the year or is it fairly even.
Well you know when you started the year, we expected the quantity of headwinds to be more skewed towards the first half given you know what you would expect and prices to come down but as we go and has been the prices of sitting right now I think that commodity headwind is probably evenly spread out throughout the year, just given the commodity prices of hanging.
And a little bit longer so we are expecting that to them.
And throughout the year. So you know that is weird, but it's good to see jewel and despite that I mean, if you look at our profit guidance even for the balance of the year, we'd expect and get up close to $40 million improvement and our new equipment.
So we and absorbing that you're seeing the benefit from volume. So we see continued improvement of the new cope and profitability of the margins are higher and the second half I mean based on the guidance you provided on margins for the remaining three quarters of the gear up 50 basis points year over year, So not only and you saw very strong margin expansion for the first quarter given the volume and.
The fees, but even as the gold for the rest of the year of second half compares do get tougher just given the strong growth and we had a new group and segment, especially in the fourth quarter, but despite that we're seeing of 50 basis point improvement and the margins and the remaining three quarters of the year.
The continued profit growth.
Thank you that's very helpful and maybe just the very quick one on the service.
You added and your profit bridge pricing is the tailwind for 2021, which wasn't there at the Q4 earnings but you left the revenue guide for service.
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So here's the one that does that mean that the pricing tailwind is very small or there's some slight reduction and the volume outlook offsets and yet just wanted to try and understand that service pricing and driver a little bit better.
Yes, I think it's it's still early in the year. We were you know we saw all of both repair and modernization turned positive in terms of of growth first quarter, which was better than we had seen the the former three quarters. The Chilean we use revenue per unit as our proxy for pricing and service and the revenue per unit was up.
About 50 basis points, so to us that was a very positive and that's a global number so even even in places that are we.
We can't even see.
Net to certain customers due to COVID-19.
Still and a few and a few markets.
We were really service pricing held very nicely.
And we're going to continue to monitor this and obviously, we'll be back to you next quarter with what we know we.
We do expect the second half service growth to be stronger and.
It's almost of the counter to the new equipment growth and as we continue to see that trend will continue to evaluate what our outlook should be and share that with us.
The other the good thing that happened and the service to them and the first quarter was our pricing concessions that we've been providing to our customers. They continue to come down.
Seeing that number continue to come down over the last four quarters and so that we can of Q2 last year was the week and they've been sequentially coming down and so that was another parts of the less than 5 million Bucks for the quarter. So it's insignificant to the apples another really positive development and the Judy said the pricing overall and so it was pricing was favorable and that is why you saw us increase the guide but that bad bought.
The concessions just given the overall COVID-19 environment that possibly of being very careful right. Now just because we are not true COVID-19 and especially if you see sudden and certain parts of the world. We've seen some resurgence. So you know that bought be baked in some improvement.
The improvement in service pricing, we reflected that in and out of guide, but we were careful not to bake in a debt.
The sequential reduction of service concessions and outlook, just given the uncertainty and the new items until you're being prudent on all of the absence of pricing concessions and archive.
That's good to hear thank you.
Your next question from line of Kayvon rumor of Cowen.
Thank you very much so.
Help me a little bit with the quarterly pattern, if I look back.
At 2018, 19, and the second quarter was on the average up 21, 22% from the first.
And then obviously normally the third and the fourth would be down sequentially, but you were so strong and this quarter is like if you're up close to 20 per cent and even last year you were up 15% sequentially you have almost a fall off the cliff. So I mean kind of just looking at this the other.
The constant currency or organic growth.
And new elevators.
Looks like it has opportunity and Mike.
Correct.
So, let's just talk for the quarterly trends for the Sky.
The difference between 2020, one and maybe some of the pride of yours is the COVID-19 impact. So this year is a little bit different and the priority of yours, just given the the.
Slowdown in China, and Q1 of last year, So we expected and China rebounded very strongly in Q2 of 2020 just because it was the snapback so and that is where you see the historical.
And that you mentioned, the primarily driven by the Chinese new year holiday. So Q1 is typically a lighter quarter in China.
And then you'll see and improvement in Q2, so that's what a difficult year for us, but last year of that trend magnified because of COVID-19. So therefore, we saw really snap strong snapback in Q1 of this year and I think the improvement in China, and while you're still going to see the sequential improvement in China like the old age do but it's not going to be the still the same extent.
I think that's what and response to Jeff's question I think that's what I was trying to say earlier. So that's what you'll see from this year. The trends are going to look a little bit different than the prior year trends just given that we expect Q2 to be strong. We expect you to new equipment sales and it'll be still be up strongly just given the Americas and EMEA.
Compares and again as we said earlier the service compares should be easy as well. So we expect the snapback and service compares are easy on a repair and modernization revenue is coming back and the the snapback of the repair revenue in Q1, and one of the positive that'd be have not seen that year over year of brought and the repair of revenue and since Q1 of 2020.
So that was the positive and we expect the trends to ex.
The accelerated in Q2 of 2020 Q2 of 'twenty 'twenty. One so that's that's the positive that the seats. So Q2 will be higher than Q1, but.
But.
Not to the same extent of its Friday goes just given the COVID-19 and back last year, Yeah and types of little more color I mean, we're seeing especially in the U S Nonresidential segment.
And Q1, we saw a really good snapback on the commercial side and saw a tougher residential compare so.
So it actually flipped what what a lot of other markets Youre seeing so we're seeing this turn in non res we experienced it both on the order side, but.
But the residential was a little tougher for us in the Americas.
Very helpful and then on.
The Otis won the Rollouts I think you did a 100000 I think that's the target for this year can you update us can you do a little better than that what are the main countries you expect to roll out.
We anticipate doing a lot better Otis one is a key element of our strategy for portfolio growth anytime we're connected them, whether it's the Otis one or our compass destination dispatch system E view anytime we're connected we get better conversions, where people come to us for service and then.
And we also get improved retention and our retention rate did maintain at 94%, which we believe is the best and the industry. We will at least deliver as many as in 2020, which was a 100000 in 'twenty. One we have started shipping all units out of our China factories and our north.
The factories already Otis one Iot enabled and we will beyond the six countries last year, which were China. The U S and for in Europe, we're going to be adding some and in Asia Pacific as well this year, there's great poll.
Just again this is this is about.
A focused strategy on density so we don't want to send Otis one to every country simultaneously, we want to have the ability to define where we're going to put it because it's all of our capital investment so that we can yield the productivity.
We expect from it and then obviously also give our customers. Some additional insight beyond you know the productivity and the information for our mechanics to to perform even better. So again, it's a logical strategic rollout and we will be adding some countries in Asia Pacific as well as potentially in other.
Another few and in EMEA.
Very helpful. Thanks, so much.
Thanks, Guy and you're you're.
Our next question from the line of Carter Copeland of Melius research.
Just a couple of points of a quick clarification first on the.
The revenue per unit are the 60 bps that you mentioned Judy any any color you can help us understand there on.
The regional differences and that number that you're seeing and then just on the service portfolio growth I know you highlighted the.
And the China number versus the other.
The 2% overall, but I wonder if you can tell us if theres any ISP share.
Here and there if you're having any success in that front, that's measurable that that's worth talking about thanks.
So great to hear from you Carter It was 50 basis points on revenue per unit. So let me make sure I said that correctly.
We saw that up everywhere, except one major country in Asia Pacific, where we had some very challenging service pricing, but not enough to obviously be material. So China was off the EMEA was off of Americas was up and the majority of the Asia Pacific was up with the exception of one you know kind of mature country. So.
Those results really stand tall, and it's important for us that that happens and first quarter because that's when so many of the maintenance contracts get resigned that's you know if we have a sense of seasonality that's where it happens. So that's why that was so important for us in terms of portfolio in China.
We are taking it away from the Isps Theres no doubt now with the pace and the the rate that we're securing debt portfolio growth in China, that's exactly who we're taking it away from and we've shared our strategy, where we've expanded service depots. We've added our reach in the you know the tier five and and on cities.
And it's paying off and so again double digit teens, and China and the first quarter and they just have sequentially now for the past three or four quarters continued to improve their portfolio attachment rate and.
Everywhere else.
In terms of portfolio are you know we had we had the EMEA had good growth we had growth in the Americas and again, the Asia growth was more driven by by China.
Great. Thank you for the color.
At this time, we have no further questions I'll turn the call back over to Judy marks for any closing remarks.
Thank you Stephanie.
On April <unk>, we celebrated our one year anniversary as a standalone public company I am proud of what our 69000 colleagues accomplished and every corner of the globe, serving our customers keeping passengers moving and building our company at a time of global crisis, We had a very strong start to 2021 and all.
Confident that our positive momentum and the continued recovery and our end markets positions us well to deliver our improved 2021 outlook will remain focused on driving value for our customers colleagues communities and shareholders, everyone stay safe and well take care.
Thank you. This does conclude today's conference call you may now disconnect.
Okay.