Q2 2021 Otis Worldwide Corp Earnings Call
Good morning, and welcome to Otis second quarter, 2021 earnings conference call.
This call is being carried live on the Internet.
And recorded for replay prison.
Presentation materials are available for download from Otis website at Www Dot Otis.
Com.
I'll now turn the call over to Michael Redner Senior director of Investor Relations.
Thank you Angie welcome.
<unk> second quarter 2021 earnings conference call on the call with me today are Judy marks President and Chief Executive Officer, and Rahul 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 non.
Comparing items. The company will also refer to adjusted results were adjustments were made as know Otis was a standalone company in the current period and prior year. A 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.
Non recurrence and uncertainties.
This is <unk> 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.
Mike and thank you everyone for joining us we hope that everyone.
To richness is safe and well before we get into the quarter I'd like to congratulate Mike on his new role, leading Investor relations and thanks, Stacy for all the great work getting us to this point, we look forward to seeing you both like selling your new positions.
Otis delivered an excellent second quarter closing out a.
Everyone long first half.
This included mid teens organic sales growth demonstrating the resiliency of our colleagues and business and our ability to execute on our long term strategy.
Overall demand in the new equipment segment was strong we gained about a point of new equipment share with orders up.
Approximately 24% in a market that was up low teens.
New equipment orders grew in all regions and were particularly strong in the Americas up nearly 50% with an over 4 times increase in major project bookings versus the prior year.
These orders will support customer projects.
Strauss North America for example, in Canada Otis secured in order to outfit a luxury high rise condominium building in the N City community with several elevators, including custom cabin interiors that fit the buildings upscale design.
Moving to service, we grew sales in all lines.
Extra readiness, including repair and modernization modernization demand was strong with orders up mid teens versus the prior year. This includes another Otis partnership with Silverstein properties in the Americas, where we will modernize more than 40 elevators in the U S Bank tower in Los Angeles and integrate.
Of this 360 and Otis is ecolab to allow for a more seamless customer and tenant access to the building services.
The demonstrated strength of the maintenance business continued and we achieved 3% growth year over year on our industry, leading service portfolio a key goal we set for ourselves.
Company entering this year.
We drove profit growth and margin expansion in both segments largely from the benefit of higher volume as.
This new equipment and service organic sales grew about 25 and 8% respectively.
Since spin our consistent performance reflects the power.
Shelves strategy and its implementation.
I hope many of you were able to join US for welcome to Tomorrow, where we shared our gen..3 and Gen 360, highly innovative platforms that meet the current and future needs of our customers in an increasingly connected world.
Gen 3 built upon the proven.
Flat belt technology of Otis as best selling Gen..2 platform, while adding built in Otis 1 Iot connectivity and a variety of options such as E call Ive, you Compass dispatching systems health solutions and updated the statics a.
P is allow us to access and leverage data with.
Sure of our semitics that drive value for our customers upon release Otis secured an order for more than 100 Gen..3 elevators for a new residential project in New Zealand Province Northeast China.
In EMEA after successful pilots in several countries Otis officially launched.
And reached 60, our next generation digitally native platform that includes all the features of the Gen..3 elevator built around an all new electronic architecture in a more compact design Gen.
Gen 360 is enabled with Iot capabilities and online tools are connected passenger.
Our experience and additional safety features to help limit and treatments and enable maintenance from inside the elevator cab.
In France, Otis was selected to outfit future aquatic centre in the Paris suburbs with the Gen $3.60 ecosystem.
In addition to its many digital safe.
Ft in passenger benefits. This platform has a decisive advantage for the first time, we can eliminate the need to accommodate hoist way projection onto the roof avoiding interfering with the building's architectural lines feature desirable to architects and building owners.
All of the strong first half performance, including robust free cash flow generation in excess of 150% of net income enables us to return additional cash to shareholders in the second quarter. We completed the previously planned half a billion dollars in share repurchases ahead of schedule and are now in a position.
<unk> to increase our 'twenty, 1.2021 target to $750 million.
In parallel with this strong financial performance, we continue to make progress on our ESG initiatives that are integral to bringing our vision to life in.
In May we released additional long term ESG goals aligning.
With our 4 ESG commitments health and safety people and communities environment and impact and governance and accountability.
During the quarter, we made progress on our goal to meet ISO 14001 certification standards in all of our factories.
This is manufacturing facility in Brazil.
<unk> became the latest to achieve this certification, meaning nearly 90% of our factories are now ISO 14001 certified.
This is part of our ongoing work to operate more sustainably initiatives in the factory include implementation of rainwater and water reuse systems led lighting to.
A reduced energy consumption by more than 2 thirds and.
And improvements to shipping and packaging materials to reduce waste by approximately 800 tonne.
Tons annually.
In Paris, we introduced electric vehicles into our fleet and we will be expanding this pilot over the coming months early feedback.
Back from our field professionals has been positive and the program will continue to contribute to our C. O 2 emission reduction targets.
Moving to social.
1 year ago in response to the urgent problems of social unrest and entrenched racism, we announced our commitment to change.
Our framework to ensure all colleagues feel safe welcome and heard.
While there's still work to be done I'm proud of the progress we've made on this initiative over the past year.
Actions taken include engaging all supervisors worldwide in a training program designed to help them mitigate unconscious bias.
Increasing access to employee assistance and wellness programs globally.
Launching our made to move communities signature stem education program.
And awarding not for profit grants to communities in each region that support diversity equity and inclusion programs.
And in June we began.
Our second annual season of safety reinforcing Otis is strong safety culture, Recommitting to our lifesaving Cardinal rules and prioritizing ongoing training on safety procedures and protocols, we remain committed to a zero harm workplace.
Now turning to slide.
For second quarter results in 'twenty 'twenty 1 outlook.
In addition to record new equipment bookings in the second quarter total Otis orders were up 9.4% on a rolling 12 month basis.
Organic sales were up 15, 4% in the second quarter with 25, 4% organic.
<unk> growth in the new equipment segment, and 7.8% organic growth in the service segment.
Adjusted operating profit was up $115 million and margin expanded 40 basis points. Despite a 60 basis point impact from segment mix as the new equipment business grew faster than the higher.
Your margin service business free.
Free cash flow was robust at $493 million with a 151% conversion of GAAP net income.
This positive momentum our continued progress on our long term strategy and the pace of recovery in our end markets gives us confidence to <unk>.
Prove our 2021 outlook across all key metrics.
We now expect sales to be in a range of 14.1 to $14.2 billion up 10.5% to 11% versus the prior year and up 7.5% to 8% organically.
Adjusted operating profit is expected.
Expected to be in a range of $2.16 billion to $2.18 billion up $240 million to $260 million at actual currency and up $170 million to $190 million at constant currency.
Our improving adjusted EPS by 10 cents at the midpoint versus the prior.
Your outlook and now expect it to be in a range of $2.89 to $2.93.
A 15% to 16% increase versus the prior year.
Lastly, we're improving our free cash flow outlook to a range of 1.45 to $1.5 billion with about 1 <unk>.
Hundred and 20% conversion of GAAP net income.
With that I'll turn it over to rule to walk through our Q2 results in 2020.1 outlook in more detail.
Thank you Judy and good morning, everyone, starting with second quarter results on slide 5.
Net sales grew 22.2 per cent to keep 1.7 billion.
<unk>.
As the strong growth momentum continued in new equipment and service grew for the second consecutive quarter.
Adjusted operating profit was up approximately 25% or $115 million and up $18 million at constant currency.
Primarily from the benefit.
Of higher volume in both segments.
Favorable service pricing and productivity initiatives in both new equipment and service helped to offset the headwinds from commodity inflation and the absence of temporary cost actions taken last year, who absorbed the impact from COVID-19.
We maintained the focus on cost containment, while continuing to invest in the business and adjusted SG&A was down 60 basis points as opposed from DHL sales. Despite the step up in public company expenses.
R&D spend and other strategic investments were up approximately $8 million versus prior year.
And were about flat as a percentage of sales.
This strong focus on execution resulted in 40 basis points of margin expansion in the quarter and a full point of margin expansion at constant segment mix.
Second quarter, adjusted EPS was up 41% or 23 cents.
Driven primarily from 18th sense of operating profit growth and 6 cents from a lower adjusted tax rate.
Moving to slide 6.
New equipment orders were up 23, 9% at constant currency with growth in all regions.
This momentum continued in the Americas and.
And EMEA up approximately 47 per cent and 19% respectively as the markets recovered and the investments made by orders continued to deliver.
Orders in Asia were up approximately 17% and we're up for the fifth consecutive quarter, including strength in China would.
The orders were up mid teens with record bookings during the quarter.
Pricing was down 60 basis points similar to the first quarter.
Organic sales were up 25, 4% with Americas, and EMEA up mid thirties, driven by strong backlog execution as the business continues to prove.
What's pre COVID-19 levels.
Asia was up mid teens, driven by China, where organic sales were up double digits.
Despite strong sales there was broad based growth in backlog that was up 10% and up 5% at constant currency with backlog margin down about.
Half a point versus prior year, including any adverse product mix impact.
New equipment adjusted operating profit was up $64 million, primarily driven by higher volume the strong year over year improvement and installation execution and continued focus on material productivity.
<unk> helped to offset the unfavorable impact from price mix and commodity inflation.
Adjusted operating profit margin expanded 2 percentage points.
Service segment results on slide 7.
Year over year growth in the number of units under maintenance contract accelerated to 3%.
Reflecting strong global improvement in retention recapture and recon and conversion rates versus prior year.
Number of units increased in all regions and China was up mid teens after the high single digit growth in 2020.
Modernization orders were strong in the quarter up.
10, 8% at constant currency as North America, and Europe grew double digits, a sharp rebound after a decline in 2020.
Modernization backlog was up 4% at constant currency, providing a foundation for sales growth in the subsequent quarters.
Service organic sales.
678% with growth in all lines of business.
Growth accelerated in maintenance and repair to 7.5% from a strong recovery and repair with the contractual maintenance remaining resilient.
Modernization sales were up 9.3% from continued momentum.
In Asia Pacific and China, and pick up of activity in EMEA.
Adjusted operating profit grew $55 million from higher volume and improved pricing.
Including favorable <unk> from the absence of price concessions made last year from.
Installation of FX benefit of $24 million.
<unk> was more than offset by incremental public company expenses and the snapback of Covid related cost containment actions taken in the prior year.
Adjusted operating profit margin expanded for the sixth consecutive quarter and was up 10 basis points.
Overall the first.
Half results reflect solid performance across all metrics with 1.5 percentage points of new equipment share gain 13% organic sales growth and close to $200 million of adjusted operating profit growth.
First half new equipment and service organic sales were up 25.
<unk>, 3 and 4.5%, respectively with margin expansion in both segments.
Free cash flow generation was robust at $1 billion.
Enabling us to raise the dividend and complete a debt repayment and previously announced $500 million of share buyback.
As we look forward to the second half of 2021 on slide 8 we feel confident about growth across all key metrics given higher backlog growth momentum in all lines of business and our focus on operational excellence.
This combined with strengthening demand in our end markets.
And strong first half results gives us confidence to raise organic sales outlook to be up 7.5% to 8% for the year up 275 basis points versus prior outlook.
We now expect adjusted operating profit to grow 240 to 260 moving.
Up from $55 million in the prior outlook at the midpoint with sales growth operating profit growth and margin expansion in both segments.
Adjusted EPS is expected in a range of $2.89.
$2.2.93 day.
Since higher than prior out.
Outlook and up 15% versus the prior year at the midpoint.
The year over year EPS increase is driven by strong operating profit growth of 140 basis point reduction in the adjusted tax rate that is now expected to be 29% for the year from 29, 5% in the prior outlook.
Outlook and a reduced share count.
Following the strong cash generation in the first half from net income growth and close to $300 million of reduction in working capital from the end of the year. We now expect free cash flow for the year to be in a range of $145.1 $5 billion.
This is $75 million higher than prior outlook at the midpoint from improved net income and better working capital performance.
Given the improved free cash flow outlook and the success in repatriation of foreign cash we are increasing the share buyback target for 2021 to 750.
<unk> million dollars.
In addition, we will continue our bolt on M&A activities and are always open to other opportunistic investments that can create value for our customers and shareholders.
Taking a further look at the organic sales outlook on slide 9.
The new equipment business is projected.
To be up 12% to 13% from 7.5 to 8.5% previously drilled.
Driven by accelerated backlog conversion and continued recovery in the construction activity in several countries.
This 450 basis point increase from prior outlook includes improved expectations.
In all regions.
EMEA is now expected to be up high single digits.
And we expect low teens growth in the Americas, and Asia driven by China.
We are also improving our service outlook by 125 basis points at the midpoint now expected to be up 4% to 4.5%.
This reflects improvement in maintenance and repair that is now expected to be up 3.5% to 4.5% from maintenance portfolio growth and stronger discretionary repair demand.
Modernization business is now expected to be up mid single digits, driven by higher Q2 ending backlog.
Overall, the organic sales outlook of 7.5% to 8% reflects growth across all regions and all lines of business.
Switching to operating profit on slide 10.
We now expect operating profit to be up to $140.260 million versus prior year, including FX.
Statement of approximately $70 million from strengthening of the renminbi and other currencies against the U S dollar.
At constant currency operating profit is expected to be up $170 million to $190 million.
Total company margin is projected to improve by 30 basis points.
This outlook reflects the benefits of higher volume service material and installation productivity initiatives and favorable service pricing.
It is partially offset by unfavorable new equipment price mix headwinds from incremental standalone expenses and higher commodity prices.
The commodity headwind for the year is now expected to be $70 million to $80 million for the year.
Approximately $35 million to $40 million higher than what we communicated in April.
As metal prices have stayed at an elevated level.
Despite this incremental headwind we are improving our earnings out.
Look for the business by approximately $55 million with improvement in both segments.
And to help alleviate the incremental commodity cost impact this year and in 2022, we are broadening the price increases announced last quarter to include additional markets.
This outlook.
<unk> is not only a sharp turnaround from 2020, but also puts us more than $1 billion ahead of 2019 reported revenue with 100 basis points of margin expansion 2.
<unk> 2021 revenue earnings and margins in both new equipment and service segments are expected.
To be higher than 2019.
This improvement reflects our confidence in long term strategy, our ability to execute and the benefits of a solid end market recovery and with that May I request <unk> to please open the line for questions.
And so can we take the first question.
Okay.
Jeff Your line is open please state your question.
Okay.
Hi, Jeff.
Sprague at vertical research.
Yeah, 2 questions good morning, everyone.
Just first on the revenue.
Look Judy Raul.
You'd mentioned.
And accelerated backlog conversion I'm, just wondering how that's playing into the top line and.
And so much as you know the guy who.
Suggests revenues in absolute term step down a bit in the back half relative to the Q2 level. So could you give us a little color on that just kind of what's going on with backlog and what are you thinking about conversion.
Yeah, Jeff Good morning, listen, we're really pleased with the backlog conversion we've seen through the first half of the year. It was obviously slower through 'twenty and the compares certainly for this quarter were favorable and our team performed very well. The compares do get a bit tougher, but you know we with.
With our orders up so significantly 23, 9% our backlog is up 5%. So we're not we're not burning we didn't pull ahead and not replenish we're actually delivering more for our customers and driving more more backlog there, but the compares do get tougher if you recall.
<unk> second half of last year, both Americas, and EMEA grew stronger, especially in the fourth quarter. So we think we're going to still see about the same momentum, but the compares do get tougher.
Sure.
As you noted in your picks up and down the line.
And things are kind of better than you were expecting and better than certainly the initial analyst day early last year.
Thank you from giving some thought to an updated outlook and longer range plans I Wonder if you could give us.
A sneak peek on what youre thinking about in terms of timing or magnitude.
On these particular metrics, particularly around <unk>.
Margins and growth.
Yeah, So Jeff we've been when we did Investor day in February of 'twenty are standing up as a new independent company and then faced we had already been experiencing the early days of Covid in China, We werent quite sure what.
What the midterm outlook that we shared where that would come out again strong performance through 2020, 1 and if you really look at EPS itself almost up 13% in 'twenty and our new guide at the midpoint really has it up 15%. This year, we had been talking about high single digits at the mid term.
Term outlook, so we're going to revisit that as we go into the second half of this year and we'll share more with you. We believe early in 'twenty, 2 with probably a revised mid term outlook on all the metrics.
Again, the end markets are far more positive and if you have a chance and look at slide 19 in the backup.
You'll see for adjusted operating profit for organic revenue, we did a compare that takes us to 19, 2020, 1 and 'twenty 1 outlook beats every metric.
Fairly significantly even from 19, so rule and I have some work to do there and we will get back to you in early 'twenty 2.
Great.
Great. Thanks, a lot appreciate it.
Your next question comes from the line of Nick <unk> with RBC capital markets.
Yes, hi, everyone. Thank you for taking my questions My first 1.
It's just looking at.
The guidance upgrades and my sense is that the underlying assumptions range to haven't really changed the race is more just a reflection of the strong Q2 results is that a fair assessment of the situation.
You know what I think that's fair Nick Good morning, first by the way.
No. That's a fair assessment I think as you look at from jewelry kind of alluded to that a little bit in her response to Jeff I mean, if you look at between first half and second half.
There's definitely.
It was.
More difficult compare bolt on new equipment and in service.
We were down about 10% in the first half of last year, new equipment up a couple of points.
Going to the second half of new equipment in 2020. So the compares get tougher service Q2 last year was a weaker guest quarter I would say and then Q3 and Q4 were down but not as down as Q2, so definitely tougher compares getting into the second half. So that you know as we look at first half and second half compare for 2021 new equipment.
And growth definitely slows down but services about flat in both you know up for 4 and a half for us in both first half and second half so that that growth looks consistent and then if you look at the on the earning side. Obviously second half reflects the change in volume growth assumptions, but also incremental commodity headwinds that we are that we are seeing in the business.
Which is going to be a little bit more back half loaded so you're seeing that and but you know I mean, our productivity initiatives continue to continue to deliver we've seen good improvement in our installation execution out in the field. So that is covering a lot of issues that we are that we're dealing with especially on the commodity side and if you look at first half and second.
Half of them in second half of the earnings continue to grow our margins continue to expand in both segments and there's a decent drop through coming on on the volume growth that we're seeing so we're seeing about a 10 basis points expansion in the new equipment.
Margin in the second half and 90 basis points overall for the year and on service, we're seeing about a 40.50 basis points expansion in the second.
Half in about 40 basis points for the full year. So we think it's a it's a solid second half recognizing a slightly different environment and a bit more difficult compare yeah. Nate it's Judy let me just add on to or who we also have some 1 off support that we're trying to offset including some government health.
That helped us in 2020, that's going to come through in the second half of the year, but we have seen again for the second quarter with repair and modernization revenue is up and orders up in dose that gives US you know.
Comfort on the on the service side and a 40 basis point margin expansion full year for service.
We will when you think when you look at the New guide.
Even with that second half as we've contacted it even with all of our abilities to offset that now $70 million to $80 million of raw material. The commodity headwinds I mean, there's really a good outcome here, our profit is going to be up $240 million or EPS.
So there's going to be up 15%, even accounting for all of that and the higher standalone costs and an extra quarter of interest expense and that's coming off a strong 'twenty, where we grew operating profit and grew EPS as well so for US it's growth on growth, which we believe you know.
All of our colleagues listening understand that is our mantra.
<unk> strategy.
Thanks.
I can just add onto that I mean listening to your results today and for your competitors last week I mean, it almost feels like.
Oh, sorry about it almost feels like you've been taken by surprise.
That is a strength that we've seen in Q2.
Wondering if when you look at the strength is there any areas, where you feel like it's unsustainable either in particular business lines on particular geographies or anything that should give us a reason to think that that's maybe a bit more risk in <unk> and into 'twenty.
By the day.
Not not really neat I mean, the Americas got off to a better start than we expected the markets up mid single digits. EMEA was you know was stable in 'twenty and we expect low to mid single digit growth in 'twenty, 1 and we're seeing that we still are watching Asia Pacific.
Ex China, because there are still obviously, India is coming back, but Singapore is in lockdown and several other southeast Asia countries are in locked down so we're watching that with caution and thinking about our colleagues and customers there, but really no no surprises are the second half on service EMEA and Americas are going.
And you kind of low single digit and you know the new equipment market is going to continue to feed our service market, having the portfolio, where we did for the first time at 3% and the backlog up 5% on new equipment is really what gives us the confidence to drive the sales and then the orders execution we.
<unk> seen real drastic changes in the end markets that would give us pause.
Okay, great. Thanks, very much guys.
Thank you.
Yes.
Your next question comes from the line of John Walsh with Credit Suisse.
We we hi, good morning.
Morning, John.
Maybe.
Question as it relates to price cost.
Appreciate all the color earlier around that equation wanted to dive a little bit into China.
You know 1 of the things that we had picked up is it seems like.
There are several Oems trying to go.
Net price in China, as we look forward in the back half of the year is that is that something youre seeing do you have any plans any any color you can kind of give there on the pricing dynamic on the ground in China.
Yeah sure John as Rahul mentioned 1 of the 3.
The strategies, we have to offset the commodity headwinds we're facing is a more broad based price increase we started this last quarter very focused in a few countries and now it'll be more broad based and go across all of our regions.
We are you know we always look at this in terms of you know.
<unk> can bear and how the competitors respond in China. The top 10 Oems have 90 per cent of the market segment. So we heard the same thing you did last week about people raising prices are we are we are doing similar but obviously, we'll tailor it to the segments in China, where we think we can get price and not.
What are you know give up share as well or you know what really pleased China results. So far as we came through the quarter record orders in the mid teens. So very pleased with that you know double digit sales and and the team grew our portfolio mid teens. So.
Give up share we think we grew faster than the market and even if you know even if China gets becomes more stable versus the high single digit growth. We saw in the segment in the first half it'll still be a growth segment not all the segment will be a growth for the year and it'll certainly be growth for Otis and just to add to that John I mean part of the reason why we feel.
We can hear about it.
Our situation in China is if you look at the floor space under construction, that's up more than 10% over last year and 13% over 2019, and the real estate investment in China is up 15%. So there's a lot of activity happening in China, we feel that the overall market growth in China has.
You look from kind of mid single digits would be when we started the year, maybe mid single digits plus and now we think it's high single digits. So the market is definitely growing and that gives us incremental ability to pass on a little bit of price in China.
Yes.
Thank you for that and then maybe just a question around digital.
Has gone up I think a lot of the well I'll just ask the question here, if you're seeing customers really increase their take up of kind of paid digital services.
Or if this is really still an opportunity more around you know kind of the the cost driven payback of.
Of upgrading to a digital service just curious what youre seeing there from kind of a customer's acceptance and willingness to actually.
Take these services yeah, so John our strategy was to control and drive productivity first with giving customers value whereby.
We control the deployment of the Otis 1 units so that we had and we're able to take advantage of route density as well as other other productivity measures for us obviously, our customers get visibility into this we've started seeing uptake on our Otis 1 subscription services, but it's early.
By ways, but we believe in it and that's why as we've rolled out our gen..3 and Gen 360. They are Otis 1 digitally enabled so the Iot is built in we're now shipping units with Otis 1 already built in so that we have the foundation, we have the ability to do over the air updates to add features.
Early day add value still early days, but we have seen the customer uptick not to where it's material yet in the revenue.
Great. Thank you.
Yeah.
Your next question comes from the line of Steve Tusa with J P. Morgan.
Okay.
Hey.
Good morning, Mike.
Steve.
Just kind of a question on the margins again.
The what was what do you expect kind of price to be for this year and kind of that lever to offset the day.
Commodity costs and then when you look out to the next couple of years is there any kind of bump in the road.
Hey, guys when it comes to margins and ultimately you guys are performing well here.
Is there a potential for kind of a higher entitlement back to where you were before.
Way back when and.
The good old days.
Steve Let me let me start.
Or who add to it but so with these price increases you know the order to revenue cycle is variable throughout the globe and some countries driving earlier benefit from the price increases than others. So the price increases that we started last quarter will start flowing through later.
And then all your the price increases we started in July we will see some of that at the end of this year, but the majority of that we put in place to again have protection through first half and more importantly, second half of 'twenty..2 so you know it's been targeted but the real actions to drive the offset you know beyond price.
She was gonna see quickly are the productivity, we've gotten an installation, which as any of you who follow US know we've had all these service productivity initiatives. We've invested in technology, there, there's ripe opportunity for us to continue to yield installation.
Productivity and then our material productivity has not stopped in.
The factories, and we were yielding 3% every quarter that weeks anticipate material productivity to continue to help us offset this and it's included in our outlook, but I'll I'll, let Rahul add there and see what he wants to say about returning to the days of old.
Listen it's early days, but you're right I mean, again, I think Judy alluded to it.
That was an earlier question clearly we are very very pleased with the progress we've made over the last couple of years.
Since Investor day between what we were able to do in 2020, and now 21, I mean, obviously between the 2 years, we have more than 100 basis points of margin expansion. So it is it is very very good progress.
Would return to growth.
1 on the numbers that are above 2019 level. Then if you look at the absolute profit dollars I feel that as you know the margins may not be but I think if you feel definitely.
Feel really good about delivering the absolute profit dollars and maybe at that point I don't know what the peak was.
But you know our revenue was probably $3 billion to $4 billion.
Low to where it was back in 2010.2011, and even if the margins are lower I think in absolute profit dollars. We may be kind of getting there I don't I don't know I havent gone back and checked that.
FX numbers for 2010, 2011, but it feels like and that's an important metric for us, but listen we'll continue to work at.
However, we are clearly doing everything that we should be doing in the business and we feel <unk> got good traction and as Judy said earlier will come back and kind of update our medium term guidance early next year.
Welcome.
It was 20 it was 20% I can I can send you. The number just in case you don't have it there.
And then just just 1 last.
I'm on the 3% maintenance.
Units under maintenance number.
What was the biggest lever on that.
You guys had some good obviously new unit deliveries.
Can you just give us a bit of an update on kind of attrition and recapture.
The numbers continue to improve.
Question, all metrics, Steve conversion rates or better including conversion rates in China I think they were.
It can't be marching towards a 60% target that we've set for ourselves and there'll be and again as we've said before we expect a meaningful improvement this year in.
In China on the converge on the conversion rates and we are we are getting.
The recapture rates are better as well in China, where we have the biggest opportunity and the retention rates continue to improve as well. So I think we're making good improvement across all key metrics and like we always do we'll update you guys annually on where we end for the year, but it was an improvement across all key metrics.
For orders overall.
They're obviously in China, you've seen some really good traction on the on the portfolio growth and the units were up in all regions, So where you're seeing some good traction overall in the service portfolio.
<unk> rate is still it's still at 94% at the round, we can't go up and we certainly with those actions Wouldnt go down and that 3%.
Net growth can translate into something a bit higher on the revenue side right. Now that's my last question, Yeah, absolutely and if you look at the service pricing overall service pricing is continuing to track well.
No.
And part.
Part of that be reflected that in our guide as well service pricing continues to track well the concessions have come down to day minerals.
Percentage.
Overall, so and does this high inflationary environment that we're seeing should help us from service price because most of our contracts in Europe, and Americas have price escalators built into largely tied to labor inflation and historically, we've always had that lever, but given low inflation.
Let me from the in the macro market.
The price is don't always stick and now with this inflationary environment, we should have a greater ability to stick those prices. So that that should help next year great.
Great. Thanks, a lot guys appreciate it.
Yeah.
Yeah.
Your next question comes from the line of Cal than Romer with.
Okay.
Yes.
Thanks, so much to follow up on kind of Steve's question, maybe give us a little bit more color on the 3% service growth. I mean, you mentioned, you know China mid teens, but where was it elsewhere and give us maybe a little more color also in terms.
However, the conversion and the recapture rate.
So it was a broad based growth Cai I mean Asia Pacific that start next biggest opportunity in terms of portfolio growth because that has some developing markets.
So that clearly continues to add to our portfolio count.
Also Asia Pacific I would say it would be number 2 and then Americas and Europe are obviously more mature markets. So the portfolio growth is.
Is lower compared to the other 2 regions, but again all regions grew the portfolio Guy. So that is obviously very very good and you'll see the overall growth accelerated and as I said in response.
There's about an earlier question I think that all 3 metrics improved so.
So we've seen good good improvement I mean, our recapture rates or better conversion rates.
To edge up.
And obviously, China is the biggest opportunity in there.
Made a meaningful step in the right direction and retention rates of again I'm repeating myself, but it just continues.
Response improve and every little bit helps.
Because you've got obviously on $2.1 million units of every 10 basis points helps in that it was up year over year, but retention was up year over year by the other element that most people, it's a little bit of a nuance, but I want to make sure everyone understands is.
We do Modernizations a lot of those are.
News stream portfolio that we then bring back to the modernization and it becomes part of our portfolio going forward. You know modernization orders were up double digit in the Americas, EMEA and China that led us to this kind of 17% across the board.
So the the Mod business is coming back nicely.
Awful, especially post pandemic some of it's pent up demand, but a lot of it is just elevators are now a year or year and a half older and so there's almost $6 million Ellen.
Elevators over out there that are over 20 years old they're not all in our service portfolio, but modernization gives us an opportunity not just to recapture them but to.
After them do a modernization and then start the service cycle and put them in our portfolio.
Great. Thanks, and then in terms of rollout of Iot and AR.
Connectivity I think your target was 100000 units can you maybe update us there.
Yeah, we're on track for the year will.
Recap another at least 100000 units. This year, we are shipping from the factories as well as we've now started shipping obviously, we have new orders on Gen..3 which is our Iot enabled platform everywhere, but EMEA, which has the gen 360, rolling out which is also Iot enabled so.
Finish all in all in we believe it makes sense for us as.
As we're going through the change management with our field professionals.
They have been embracing Otis 1 and I've heard some personal stories in Chicago, and the Chicago suburbs and other locations, where it's just it's amazing how this is driving them.
So lesson trapped minutes as well as customer satisfaction, because we are actually proactively.
Repairing parts of the elevator before the customer even has shut down so it's being it's being viewed well internally, which is important to get that ground swell our field professionals really are appreciating.
We've gotten the installation time down to very small minutes.
In terms of installing a unit and you know.
This is this is our future the connected elevator is here and Otis 1 helps us start that and becomes that foundational platform.
Terrific last 1 you added to.
Anything else force last year, and you added agents in China can you maybe update us in terms of what Youre doing there.
<unk> Corp, we added another 150.
Net so we're up to $21.50.
So that's we continue to tune it.
So you won't.
So the same acceleration, but we're also appropriately you know doing some assessments on who should be and who should be out so that we have the yield.
What we're seeing for the second quarter in a row is we gained share in the tier 1 and tier 2 cities, which is where we were not performing as well as we needed to and we're gaining share with.
See the accounts in China.
So the agent distributor network is working for us and I'll. Just you know Rahul spoke in his remarks about SG&A in Australia that down 60 basis points. This quarter, our SG&A in a dollar amount actually grew because we are investing in the S. Part of it we're continuing to add.
Sales resources in focused markets, where we where we're focusing on key segments in underserved markets in specific countries throughout the globe and our team's executing very well on that while we're trying to obviously drive the G&A piece down on increasing revenue. So we are committed to sales coverage.
Rich, whether that's through direct sales people in certain parts of the world or our agents and distributors.
We added about 100, just to add a little bit more color kind of you've added about 100 salespeople. This year. So between last year and through the first half our sales force was up about 6%. So that is that's a.
A step in the right direction and the digital marketing efforts are also.
And a lot of results I mean, our digital sales are bookings are up to X, where we were in the first half last year. So it's just not you know feet on the ground, but also the digital strategy.
Strategy, that's paying off.
Terrific. Thank you very much.
Your next question comes from the line of Julian Mitchell.
<unk> with Barclays.
Hi, good morning.
Morning, Julien Julien Good morning, maybe just wanted to clarify on the the pricing commentary because you talked about.
You know prices going up more recently prices going up into next year as well.
But there was a comment at the beginning of the prepared remarks.
It's about the pricing down 60 bps, so maybe I misheard that but just wanted to sort of trying to square.
It was the down $60 sort of lagging backlog number.
Net or something and then when we're looking forward to the gross and net price that starts to swing more.
Positively.
No Julien you heard that exactly right I think both of the statements are accurate I mean pricing was down in the quarter similar to the levels that we.
We saw in Q1, the price increases that we put in place in Q2 that we spoke about earlier they were in a day we're in targeted countries.
Very very carefully.
Careful because again it was early in the year, we would not sure how the markets are recovering. So we were very targeted in those price increase obviously that is still going through the courts to the order cycle. So hopefully you will see the benefit of that in the second half of this year, we do expect pricing headwinds in terms of absolute dollar terms to be lower in the second half.
Had in the first half so that should start to help and then we put in prices incremental price increases in additional markets across the world. This is a far more broader price increase and this is because the markets are recovering better than what we thought Americas I think Judy said it earlier Americas is now expected to be up maybe mid to high.
High single digits vs up slightly at the beginning of the year, China is going to be up more high versus mid so markets are trending in the right direction and that gives us confidence okay market has the ability to absorb these price increases so we are.
There's a much broader price increase and that should show up in into our numbers and more.
And 'twenty 2.
And maybe some in the first half, but maybe more in the second half in terms of absolute dollar benefit. So I think both of those statements are absolutely accurate because this the 60 basis points of price decline that we saw in the quarter was more in response to.
The growth that we showed last year.
<unk>.
Of our $17 billion of RPI O a 89% of that we recognized as sales in the following 24 months, which gives us time for productivity initiatives gives us time for learning curves on all of that backlog and as Rahul said that backlog margin and when you look at the performance this quarter.
<unk> be up 2 points in new equipment.
From that which we did within 6 months 20 months ago.
Think shows that we know how to drive those learning curves from the productivity.
Very helpful. Thank you and just my second question around.
Capital deployment is that anything that's come up.
Yet in the Q&A noticed the decent share buyback increase.
Clearly the very sort of high and stable cash flow levels mean, you'll have a lot of scope for capital deployment beyond this year.
Just wanted to how youre seeing the M&A environment right now.
There is an opportunity to go out there.
And buy up a lot of service providers locally in different regions for example.
Just wondered how appealing doing that systematically on a large scale would be.
Yeah, well, we ended the quarter with $1.9 billion of cash on the balance sheet and we clearly.
Don't require that much cash to operate this business share.
Quarter of negative net working capital. So everyone was very remains very focused on that we've continued our small.
Service company acquisitions, we've targeted and we share this in Investor Day 50.
$50 million to $70 million a year in doing that.
And the challenge is is their readiness, we've got a good book of potential targets that we continue to look at but the owners have to be willing to sell and then it has to it has to meet our model in terms of being accretive.
And as well as being in the right place for us.
Just to add to our to our routes into our locations from a density standpoint. So we do many of these most of those are private transactions.
Transactions with private companies. So you don't hear about all of them, but it's robust and it's continuing we remain open to all opportunities.
From an M&A perspective.
And you know, we don't know when generational opportunities will come come around but we remain open and evaluate all opportunities.
A year and a half ago, we needed to repay debt we needed to start our dividend we had no cash no stock buybacks, we've repaid the debt we thought was at the.
And level now so that our net debt to EBITDA is about a 1.7 kind of level, which we think is very healthy with the debt. We're holding we increased our dividend last quarter.
And we've increased share buybacks, we werent originally planning to do any of this year, we announced $300 million in the first quarter.
Or at the beginning of the year $500 million last quarter and now we're offering it to 750. So we will continue to drive shareholder value and remain open to M&A opportunities as they arise.
Fantastic Thanks very much.
Thanks Julie.
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Opiate phone keypad.
Your next question comes from the line of Nigel Coe with Wolfe Research.
Thanks, Good morning, Thanks for the question.
We've got low ground already but I wanted to go back to the 3% unit growth and maintenance units.
That's a pretty big number.
Do you think you can maintain that level of growth in units and what I'm trying to drive at here is if you do volume growth at that level with price, maybe an acquisition or 2.
And then maybe a digital sales hitting and getting traction then we could be looking at well north of 5% service growth I'm just.
If that is sort of how you view the world as well, but the main question is do you think 3% can be sustained.
And Nigel I think you've got a fairly accurate assessment.
As usual about our business.
We do think it is sustainable now that we've achieved it we said it is an internal target as we started the year.
Wondering we've never hit 3%.
In the last decade, and so to US this was important because as you know our service drives 80% of our profit and then this has that knock on effect, obviously of the 5% you were talking about.
So we set the target ourselves, we knew we needed to grow our portfolio in China, where the service market.
Growing faster than anywhere else as well as in the emerging markets, including India Southeast Asia and met and other emerging markets. Our team has taken that on board and this quarter was the first time, we hit 3% last year, we were at 2% I believe in 2019, we rounded to 1% so.
As Graham we have strategy in place to execute to do this in a lot of it is basic block and tackling perform drive the conversions drive the retention stopped it stopped the cancellations delight the customer and then add that digital layer that foundational layer of Iot that gives us.
Stickiness and it's not just Iot it's R. E view, it's any of our anytime we're connected to the customer all of our retention rate goes up our conversion rates go up and so you know whether it's E call. Our compass dispatch system everything we're doing now with our I'm just so excited about gen 3 and Gen 360.
And.
This morning, now that architecture out there that will give us that foundation to continue to grow and it's all about growing the service portfolio. So I think you've got it accurate and I think it's sustainable.
Thanks, Andy that's great.
Then on the on the buyback uplift.
I know that's a role that the cash flow around the organization.
And hadn't wasn't optimized flow from it at the time of spin. We now in addition, where we produce the wheels and we now have more fluid cash flow.
<unk>.
Just any kind of thoughts on textbook optimization strategies.
You know docs, Nigel we keep making progress I mean, we obviously lowered our tax rate to 29% from 2000.
It hasn't been 5 book and previously per click 1.4% last year was 140 basis point reduction in per year. So I think it's it's moving in the right direction.
Long term guide on medium term guidance still in the 25% to 28% range. So I think we are.
Continue to move towards that towards that number. So obviously there is.
Incremental improvements that you will see in 'twenty.
We do in 'twenty 3.
And then on repatriation listened.
The incremental 250 that we were able to do speaks well to the work that our teams are doing just to continue to look at different strategies to bring cash back from the U S, where we can put it to work so.
Not not to rehash the stuff that Judy just mentioned, but it is it's it's.
Clearly shows that we are doing a job, but you know.
And that is something that we'll need to continue working on I mean, it's not a 1 and done thing. This is something that we need to keep pushing because we keep building our cash offshore and you have to keep thinking of how do we bring it back to the U S. So that has to be an ongoing activity, but really good progress from the repatriations probably going.
B, maybe 1 and a half to 2 X. What we did last year. So clearly a lot better. This year and then we will need to think about what we can do next year.
That's an ongoing activity for us.
Thanks very much.
Thanks Nigel.
At this time there are no further questions I would like to turn the floor.
And this marks for any additional or closing remarks.
Thanks, Angie this solid first half of 2021 demonstrates the resiliency of our business the strength of our strategy and our ability to execute and innovate I'm confident that this positive momentum the dedication of our colleagues and.
And the pace of recovery in our end markets positions us well to deliver on the improved 'twenty 'twenty 1 outlook.
Looking forward to the second half of the year, we'll remain focused on driving value for our customers colleagues communities and shareholders. Thank you for joining us today and please stay safe and well.
This concludes.
Concludes today's conference call you May now disconnect your lines at this time.
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Okay.
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Mhm.
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