Q3 2021 Otis Worldwide Corp Earnings Call
Good morning, and welcome to Otis third quarter 2021 earnings Conference call. This call is being carried live on the Internet and recorded for replay presentation materials are available for doing my own Oh, that's website at www Dot Dot Com I will now turn over to Michael Widner.
Senior director and Investor Relations.
Thank you Michelle welcome to Otis third 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 op.
<unk>, excluding restructuring and significant nonrecurring items. The company will also refer to adjusted results were adjustments were made as though 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 to risks and uncertainties Otis as 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 Mike and thank you everyone for joining us we hope that everyone listening is safe and well.
<unk> continued to make significant progress driving our long term strategic priorities as reflected in our strong financial performance year to date in the third quarter. We grew organic sales and expanded margins in both segments. We gained approximately one and a half points of new equipment share this quarter and year to date on top of.
60 basis points in the prior year.
On a year to date basis, new equipment orders were up mid teens with growth in all regions, reflecting our continued focus on providing value for our customers and the recovery in our end markets throughout the year.
In the quarter, new equipment orders were particularly strong in Asia mid teens, where we secured an order for the Hong Kong International Airport, extending an over 20 year relationship with this customer.
We will install over 100, escalators and moving walkways to keep passengers moving across the concourse. This is further progress of our sub strategy to win in infrastructure.
In China, we're seeing traction on our new Gen. Three connected elevators, reaffirming our investment and innovation, who just one provides to our customers and passengers just a few months after officially launching our gen. Three elevate here, we secured our first repeat customer in China for the new platform, Chile long Chang proper.
Develop a company ordered an additional 123 Gen three elevator systems for four more commercial and residential projects in northeast China.
We're also making progress on deploying our Gen 360 connected elevator platform in EMEA.
In the first few months after launch we received several 10 360 awards, adding more than 50% to the pilot phase volumes.
Moving to service in the quarter, we grew our industry, leading maintenance portfolio by 3%. Our goal we set for ourselves entering the year and grew organic service sales for the third consecutive quarter.
In the Americas Otis was selected to continue a 35 year partnership with one commerce square in downtown Philadelphia Otis.
Otis installed the building's original elevators in the 19 eighties and has been maintaining units since then.
Otis will now modernized buildings elevators, including the introduction of our accomplished $3 60 destination dispatching system.
One portfolio modernization awards are a testament to Otis service excellence and longstanding customer relationships.
This strong year to date company performance and robust cash flow generation in excess of 140% of net income enabled us to complete $725 million and share repurchases.
In September we announced a tender offer for the remaining interest in sorry, Joy at Otis a premier elevator business in Spain, Portugal, and Morocco with a strong service presence.
The transaction will simplify our corporate structure and operations, while optimizing alignment of assets and debt financing in Europe. We expect this transaction to be mid single digit percentage accretive in 2023.
In parallel with this strong financial performance, we made additional progress on our ESG initiatives.
Focusing on sustainability has always been an integral part of our operations culture and achieving ISO 14001 certification for all of our factories is an important part of our existing efforts. We're pleased that this quarter. We achieved this goal years ahead of schedule, adding our factories in Korea in Florence, South Carolina, we're proud.
To see several programs recognized that these two factories, including power consumption reduction programs robust package recycling processes and lubricant leakage prevention measures.
In addition in Florence, we launched a pilot for zero waste to landfill program that will scale to other manufacturing sites next year as we work towards our goal of having all factories eligible for zero waste to landfill certification by 2025.
We also made progress on our social initiatives launching the second year of our made to move community signature CSR program.
Participating colleagues will guide 200 student participants from 20 schools across 12 countries and territories to develop creative mobility solutions, while also helping to close the stem skills gap.
This year, we aim to make a difference by helping communities adapt and leverage better design and newer technologies to address the mobility health and safety concerns of older populations. We look forward to sharing these solutions and highlight to the program with you during our lift our communities month in April of next year.
Now turning to slide four Q3 results and 2021 outlook.
New equipment orders were up three 8% in Q3 and up 10, 3% on a rolling 12 month basis.
<unk> sales were up eight 1% in the third quarter with 14.1% organic growth in the new equipment segment, and three 6% organic growth in the service segment.
Adjusted operating profit was up $63 million and margin expanded 20 basis points. Despite a 50 basis point impact from segment mix as our new equipment business grew faster than the service business.
Year to date, we generated robust free cash flow of $1 $4 billion or 141% conversion of GAAP net income.
This positive momentum and our progress on our long term strategy gives us the confidence to improve our 2021 outlook and positions us well to build upon the strong performance in 2022.
We now expect sales for the year to be approximately $14 $3 billion up 11.8 to 12, 3% versus the prior year.
And up eight 5% to 9% organically adjust.
Adjusted operating profit is expected to be in the range of 2.18 billion to $2, one $9 billion up $260 million to $270 million at actual currency and up $195 million to $205 million at constant currency were.
We're improving adjusted EPS from the prior outlook by four cents at the midpoint and six cents from the low end and now expect it to be approximately $2 95, a 17% increase versus the prior year.
Lastly, we're improving our free cash flow outlook to approximately $1.5 billion to $1.55 billion with 125% conversion of GAAP net income.
With that I'll turn it over to rule to walk through our Q3 results in 2021 outlook in more detail.
Thank you Judy and good morning, everyone, starting with third quarter results on slide five.
Net sales grew 10, 8% to $3 $6 billion as the strong growth momentum continued in new equipment and service grew for the third consecutive quarter.
Adjusted operating profit was up 12, 5% or $63 million and up $52 million at constant currency.
<unk> from the benefit of higher volume in both segments.
Installation productivity initiatives, and new equipment, and favorable service pricing and productivity helped to offset the headwinds from commodity inflation and the absence of temporary cost actions taken last year to alleviate the impact from COVID-19.
We maintained the focus on cost containment, while continuing to invest in the business.
Adjusted SG&A was down 70 basis points as a percentage of sales despite the step up in public company expenses.
R&D and other strategic investments was up slightly versus prior year and were about flat as a percentage of sales.
This strong focus on execution resulted in 20 basis points of margin expansion in the quarter and 70 basis points of margin expansion at constant segment mix.
Third quarter, adjusted EPS was up 11, 6% or eight driven.
Driven by 11 cents of operating profit growth, partially offset by <unk> from a higher adjusted tax rate due.
Due to the absence of a cumulative year to date tax benefit in the third quarter of 2020.
On a year to date basis, the adjusted tax rate is down by 180 basis points.
Moving to slide six.
New equipment orders were up three 8% at constant currency.
Orders momentum remained strong in Asia up mid teens, including sixth consecutive quarter of growth in China.
As expected after a 47% growth in the second quarter orders declined year over year in the Americas, primarily due to timing as awards, which proceed order booking in North America were up approximately 24% versus the prior year.
EMEA was down one 8% from the timing of major project orders.
Proposal volumes in the quarter also continued to show signs of strong demand globally up double digits.
Total company backlog increased 4% and 1% at constant currency from strong growth in China.
Pricing on new orders declined by over one point and backlog margin was down about a point versus prior year.
Both pricing on new orders and backlog margin what about flat sequentially.
Year to date, new equipment orders were up 15%, including 13% growth in the Americas mid single digit growth in EMEA and approximately 20% growth in Asia.
Organic sales were up 14, 1% with growth in all regions.
Americas was up mid teens, driven by strong backlog execution as the business surpassed pre COVID-19 levels.
EMEA was up low single digits, and Asia grew high teens, driven by China, where organic sales were up double digits.
New equipment adjusted operating profit was up $33 million from higher volume.
Pricing was marginally unfavorable in the quarter and higher commodity prices were a headwind of $35 million, but we more than mitigated these impact through strong installation execution, including favorable project Closeouts, leading to 80 basis points of adjusted operating profit margin expansion.
<unk>.
Service segment results on slide seven.
Maintains portfolio units were up 3% versus the prior year with global improvements in retention recapture and conversion rates.
The number of units increased in all regions and China was up high teens accelerating from the mid teens growth in the second quarter.
There was pressure on modernization demand in the third quarter and modernization orders were down four 1% at constant currency as growth in EMEA and Asia was offset by decline in the Americas, primarily driven by timing of orders as the market is recovering strongly in 2021.
Overall modernization backlog was up 2% at constant currency.
Service organic sales were up three 6% with growth for the third consecutive quarter as the business continues to recover from the impact of Covid.
Maintenance and repair grew four 7% with strong recovery and repair and low single digit growth in contractual maintain sales.
Modernization sales were down one 2% as growth in Europe, and China was more than offset by declines in Asia Pacific from lingering Covid related lockdowns and in the Americas from supply chain shortages.
Adjusted operating profit grew $27 million as higher volume productivity initiatives and improved pricing and mix more than offset the absence of favorable D from COVID-19 related cost containment actions taken in the prior year.
Adjusted operating profit margin expanded for the seventh consecutive quarter and was up 30 basis points.
Overall year to date results reflect solid performance with approximately one five points of new equipment share gain our best portfolio growth in the last decade, 11% organic sales growth and $261 million of adjusted operating profit growth with March.
An expansion in both segments.
We also generated close to $1 4 billion in free cash flow, enabling us to complete $725 million in share repurchases.
Raised the dividend earlier this year.
Continue with bolt on acquisitions and announced a tender offer for the remaining stake in <unk> orders.
Looking forward the balance of the year on slide eight.
We feel confident about strong growth across all key metrics for the year.
We now expect organic sales to be up eight 5% to 9% up one point from the prior outlook with improvement in new equipment segment.
We now expect operating profit to grow between $260 million to $270 million up $15 million from prior outlook at the midpoint.
With sales growth operating profit growth and margin expansion in both segments.
Adjusted EPS is now expected to be approximately $2 95.
<unk> <unk> higher than prior outlook at the midpoint and up 17% versus the prior year.
The year over year EPS increase is driven by strong operating profit growth.
Reduction in the adjusted tax rate.
And a reduced share count.
The adjusted tax rate is now expected to be in a range of $28, 5% to 29% more than 150 basis point reduction versus the prior year and a 25 basis point improvement from the prior outlook at the midpoint.
Following strong year to date cash generation from net income growth and over $300 million reduction in working capital from the end of last year. We now expect free cash flow for the year to be between 151 $55 billion.
This is up $50 million from the prior outlook from improved net income and reduced working capital.
Taking a further look at the organic sales outlook on slide nine.
New equipment is now projected to be up 15% to 15, 5% driven.
Driven by accelerated backlog conversion and a 15% year to date orders growth.
This is an increase of more than 250 basis points from the prior outlook and over 11 point improvement from our expectations at the beginning of the year.
This broad based improvement in expectations is supported by robust market growth in all regions strong year to date performance and continued backlog growth.
Americas.
It's not up high teens, sorry up mid teens.
Up high single digits, and Asia up high teens, driven by China.
And so and so.
Service, we are adjusting our outlook to approximately 4% growth the lower end of the prior range, reflecting slower than expected recovery on modernization in the second half of the year.
Modernization is now expected to be up approximately 4% for the year from up mid single digits previously due.
Given by Covid related job site restrictions in Asia Pacific slower decision, making in EMEA and some parts shortages in the Americas.
Despite the resurgence of Covid in Asia Pacific that is no change to the maintenance and repair outlook that it's still expected to be up approximately 4% for the year.
Driven by continued maintained into portfolio growth and recovery in discretionary repair.
Overall, the organic sales growth outlook of eight 5% to 9% reflects our strong year to date performance and good momentum.
Turning us well to deliver growth across all regions and all lines of business, while building backlog to support continued growth in 2022.
Switching to operating profit on slide 10.
We now expect operating profit to be up between $260 million to $270 million versus the prior year with margin expansion of 30 basis points.
At constant currency operating profit is expected to be up between $195 million to $205 million.
This represents an improvement of $15 million versus the prior outlook from the impact of updated volume expectations in both segments and actions taken to reduce the corporate expenses.
FX tailwind is now expected to be approximately $65 million from $70 million that you were expecting previously.
Primarily due to the recent strengthening of the U S dollar against the euro impacting the profit growth in the service business.
The year over year growth in operating profit reflects the benefits of higher volume service productivity initiatives favorable service pricing and strong installation execution.
It is partially offset by unfavorable new equipment price mix headwinds from the absence of prior year cost containment actions related to COVID-19, and higher commodity prices.
The headwind from commodities is now expected to be between $80 million to $90 million for the year at the higher end of what we communicated in July driven partially by higher new equipment volume in the year.
The broader price increases announced last quarter have been rolled out and will help to alleviate the impact from higher commodity prices in 2022.
Overall this strong outlook puts us more than $1 billion ahead of our 2019 reported revenue with 100 basis points of margin expansion.
2021 sales earnings and margin in both segments are expected to be higher than 2019.
And adjusted EPS is expected to be up more than 30% versus 2019.
Reflecting broad based improvement in performance driven by our ability to execute implementation of our long term strategy and the benefits of a solid end market recovery.
And with that I'll request Michel to please open the line for questions.
Thank you if you have a question at this time. Please press Star then one if your.
Question has been answered or you wish to remove yourself from the queue. Please press the pound key and our first question comes from the line of Nigel Coe with.
Wolfe Research. Your line is open. Please go ahead.
Thanks, Good morning.
Hope everyone's well.
So I hate to start off with the obvious question, but maybe just talk about.
China, obviously, a lot of noise in that country.
I noticed in your <unk>.
<unk> is a useful chart around so risky developers, but just curious what you're seeing on the ground real time.
And then maybe just how sure.
Price and mix is evolving in China.
Sure. Good morning, Nigel good to hear from you. So let me let me try to put China into context, and we hope that chart was helpful as well.
We entered this year, we were expecting mid single digit growth in China, we have actually seen stronger growth year to date and the segment itself. We believe we'll end the year at high single digits through the first nine months all sectors in China have been strong residential commercial and infrastructure, we've seen increased <unk>.
Activity in tier one and two cities as well as in infrastructure and with our key accounts. The third quarter segment. We believe grew mid single digit and we anticipate and have planned for the fourth quarter to be down correspondingly mid single digit.
So if we go back to 20, we thought it was going to be mid single digit growth. We've seen that 'twenty. One we've seen high single digit growth. We're still seeing healthy demand. This is the sixth quarter in a row that we've had new equipment growth in China, but we're trying to be prudent for 2022, and we've actually planned for a flattish.
Market, there and we're going to control.
Control, what we can and what we know how to control theres clearly heightened possibilities there could be declines next year, given the macro environment in the property sector.
But we believe that the strategy, we've put in place and the initiatives. We've put for sales coverage for share gain and for price are really all paying off we've added agents and distributors. So now we're at 2300, we've added another 150 <unk> in the third quarter as Rahul shared in his opening comments.
Our portfolio growth is in the high teens. So our service strategy is paying off with more coverage and more service depots and our proposal volume was up significantly this quarter. So again, we're being prudent we're watching what's going on but we have we have put in place price increases those will yield in 'twenty two.
Yield quicker than that.
Cause of our long cycle business, but.
But we're managing that as well and I just will call your attention to that chart in the appendix.
And just put that as well into context, we did tens of millions of dollars of revenue across approximately 10 customers that a breach to either the two or three red lines with their liquidity issues and we share that that those 10 customers are less than 3% of our China sales through.
The third quarter and less than 1% of Otis sales through the third quarter and but we've been mitigating. This since the three redline policy has come into play and for any of these customers across these red lines, we've moved to a cash advance cash basis. So we're working this on an account by account basis, we do not believe in.
We've shared that the exposure is not large and we're going to continue to managing this effectively in executing our strategy.
Thanks, Judy that's that's very helpful.
And then.
Obviously supply chain is another key issue.
One of your competitors called out.
Some impacts from that but also called out some product delays, which are behind some of the new equipment weakness that they so I'm. Just curious are you seeing any it doesn't seem like it but are you seeing any weaknesses.
Weaknesses caused by delays on the construction projects and I'll be seen inflationary impact on steel, causing some delays to tendering activities out there.
Well, let me start with the steel and rural please add where we're not seeing delays due to steel obviously steel and again, it's in our new equipment business about $300 million a year of Rami of commodities that we purchase we have been able to purchase it but but obviously with the steel prices at fairly escalated price.
And the whole shared we've increased to 80 to 90 million or impact.
On commodities this year, primarily driven by our volumes being up.
First is what we shared with you in July so steel is not causing delays we are not seeing significant delays on job sites.
In terms of labor, we're all watching installation subcontract labor, especially in Europe, but in terms of Otis labor, we have not had any delays in any of our job sites and we've put plans in place our supply chain team has been dealing with this extremely effectively now for almost two years.
Whether its semiconductors ocean freight we have not had delays in delivering to job sites from our new equipment. Some of that's the benefit of our factories being local in our supply chain is being local with global agreements.
But we have done everything from spot buys and redesigning some of our chipsets from an engineering perspective to use more common chips to make sure. There was no impact to our customers. So we've not seen that but we will I'll, let you add no the only place and I'm sure. We will get there during the call Nigel is on modernization it does impact our revenue because it Judy.
Said on new equipment, we can manage the shortages wherever we see them because we can have multiple shipments to the job site elevator doesn't go in one box Oracle has completed unit, we actually assemble the elevator as you guys know on the job site. So it goes in.
Couple of dozen creates right. So whatever parts of short we can ship them later, but on modernization jobs, it's a little bit harder because they are shorter in duration. So on modernization, we've seen some impact.
From raw material shortages and Theres, a little bit of a construction delay it's not Judy said, we are not experiencing delays from our factories, we can manage that but there is a little bit of a construction slowdown or other shortages and that's impacting some revenue on the new equipment side, especially here in the U S, but other than that.
I think we're okay overall.
I'll leave it at that thank you very much thanks Nigel.
Thank you and our next question comes from the line of Jeff Sprague with vertical research. Your line is open. Please go ahead.
Yes, Thank you and good morning, everyone.
Good morning, Jeff.
Could we just.
Talk about price a little bit first I guess.
I think it's the price was down one.
But also flat sequentially.
Thats correct, but really the larger question is.
A little bit of color on kind of the competitive environment as you see it.
Your.
It does appear you're taking some share or is there a competitive price response that youre dealing with there.
And maybe a little bit of color on the price that you do have in the market. Currently when you do expect it to show up in the P&L.
Yes, let me start with the pricing and then I'll hand, it to Judy to add some color on the on the competitive dynamics there. So overall I think.
The numbers you quoted Jeffrey exactly right.
Overall pricing was down maybe slightly more than a point in Q3 here and was consistent with.
The booked margins in Q2.
And on a regional basis, EMEA was better year over year and pricing trends in both Asia Pacific and China were largely consistent with first half.
And medical pricing was slightly worse than first half and it's more the mix of customers is where we saw the pressure.
The distribution was a smaller share of orders and that comes.
It comes with a little bit better pricing, but pricing in Americas in the volume business was consistent with the first half. So you put all that in context the.
The fact is the pricing trends basically what we saw in first half is continuing into Q3, so no sequential change from the first half into Q3.
And the price increases that we put in place we've rolled them out.
Pretty much across the board at this point.
And where you will see that impact as those those courts have not yet converted to orders, which is fairly typical because that's the that's the cycle from quotation to two orders and they will probably start up maybe showing up in late Q4 early Q1, and the benefit of that as Judy said in response to <unk> question will.
Probably show up in 2022.
Let me pause there see.
And as Judy if you want to add something on competitive dynamics and listen Jeff. We're seeing strong competition I think across the board and we're seeing varying levels of price increase and we have rolled out we shared with you in our second quarter earnings that we had rolled out some limited price increases early in the year and then we went.
Right. After our second quarter earnings call ended global price increases at varying levels to understand and see what we could get in the market. Because we have obviously cost increases in terms of inflationary labor cost as well as input costs in and commodities.
Rural hit it right on and the only thing I would tell you is we are seeing some headwinds on pricing, but we're up our new equipment margins are up 150 basis points year to date. So we're able to as we've always said try to get at with price, but we understand the lag time increase our installation.
<unk>, which we did very well in the third quarter globally as well as.
Continue to control what we can in terms of productivity in our factories material productivity and every every lever we have so it's going to be competitive it's going to continue to be but the end markets are growing across the globe. So strong demand and we're going to we're going to continue to try and get price everywhere. We can.
Great and then just a follow up on China for me.
Maybe just a little bit more color on what youre seeing on kind of bid and proposal and forward pipeline and then really the nature of my question is it seems like there's some government pressure on these developers to complete projects right, which may give us some forward momentum but.
In terms of kind of the what you can see on the horizon the visibility that you have.
Just any other color there I think would be interesting, yes, so Jeff what else here. There is a I think I've said it in my prepared remarks, our proposal volume was up very strongly across the board and it was very very strong in China.
<unk> volume was up close to 40% in China, I think that goes back to what Judy said earlier is it's driven by all of the things that we have done increase and our channel partners increase in our sales force our sales forces up by more than 10%. In addition to the growth in the channel partners. So we have invested a ton to increase our reach in China, which is up close to 10 points.
As well so all of the things that we are doing is driving incremental activity on our site, but if you step back and even look at the market. Overall, if you look at the floor space under construction is up 8% year to date and 10 plus percent over 2019, the real estate investment is up 9% year over year. So historically.
It has been a very very strong correlation between these two metrics and the elevator growth, but the reality is the situation is fluid today and after a very strong start in the first half of the stops have slowed down in the last couple of months. So we are watching it very very carefully but again I think.
If you want to grow the overall economy next year, even if you say that the Chinese government doesn't set a target of six but had set a target of five <unk>.
30% off the GDP coming from the property market it'll be hard for them to achieve 5% to 6% growth next year the property market being down. So this is where I think going back to what Judy said earlier, we expect the market to be more stable for next year, but again, we will keep watching it and keep doing what we can control which is driving incremental.
Effort on our site and be healthy proposal activity is a good sign for us to come Yeah, Jeff Let me just add one or two other things.
As we said our share gain our new equipment share for the quarter and for the year. So far as it is 150 basis points.
It's at least that in China, so including in the third quarter. So we're our strategy really is working their second we've already been approached by people other than these developers and local governments to finish some job sites on our advanced cash basis.
So we believe the work in progress is going to continue even with the developers that are experiencing two or three red lines.
And so but again, we're being prudent we're planning for a flattish 'twenty two and we're going to continue to execute our strategies to gain share in that flattish 'twenty two.
Great. Thanks for the color.
Thank you and our next question comes from the line of Julian Mitchell with Barclays. Your line is open. Please go ahead.
Hi, good morning.
Just wanted to follow up on the backlog margin.
Because I thought that maybe pricing would be sort of filtering through.
More quickly, but I think the backlog margins down.
<unk> points and that was down I think 50 points in Q2.
So how should we think about the backlog margin sort of from here looking out over the next two or three quarters.
Yes, no I think.
Julian you're exactly right the back to the numbers you quoted exact trade backlog margin was down about a point and last quarter. We did see kind of half a point so you're exactly right. So it got slightly worse and the game I think going back to what we said earlier.
We'll see is that the pricing that we have put out in the market that should start showing up in late Q4 early Q Q1, and that is where youll see starts you can improvements in both our book margin and backlog margin. So that is when we expect the trends to ton, but in the Meanwhile, going back to earlier.
Bonds, we are just continuing to execute really really well on the installation side and that is what's driving our increase in <unk>.
Year to date margin. So that's that is offsetting both the pricing pressure and the commodity headwinds I mean, despite both those headwinds between incremental volumes that drives higher absorption and the installation execution, which we've said was always a priority between those two things thats whats, helping us continue to grow new equipment margin.
And then if you look at even the full year guide of quarter. We said, maybe it's 90 in this quarter, it's up 90 basis points for the year margin expansion and this is this guide we think we can get to between 90 to 100 basis points. Despite everything we are actually improving our margin.
On the new equipment segment for the year, Julian we've really pivoted to grow off our service productivity process changes technology changes to really we've always believed there was opportunity on installation and that's where we've been focused again, especially with trying to overcome but the backlog margin and commodity pressures.
Some new equipment and Thats, what you are seeing come through.
That's helpful and then maybe just on the.
New equipment orders by region. So clearly people are very focused on the China and Asia numbers, but in Q3 those were very good still.
What was more interesting for me was Americas and EMEA.
I realize it's lumpy, but you had the down orders there on new equipment I just wondered when you compare this up cycle in nonresidential with the 112 years ago. This up cycle has recovered far more quickly out of the recession and coming out of 2009.
So the slope of it from here you sort of thinking that we had an exceptionally strong V shape and now the growth from here is fairly muted.
Again, this is sort of ex Asia ex China.
Let me talk to the Americas first I mean, if you look at our guide first of all we've seen a faster sustained recovery in the Americas, whether you go back to the TFC or 12 years ago Julien.
At the end of the GSC, which is really when we felt it more on the Americas and our guide has us going up mid teens from the low teens, we've got a strong backlog execution and year to date in the Americas. If you take out the Lumpiness and just go year to date, we're at 13, 3% growth in the Americas and <unk> 12.
On the role of a healthy number as well so.
We see the Americas doing coming back strong the Dodge momentum index was up to $164 nine and the architect billing index was at 56 six so the indices are trending the right way and we're doing well.
Again, it's yes, and no one quarter makes an orders book.
We don't control all the timing on those orders, but year to date, the Americas has done tremendously.
Incredible second quarter and now again in the third quarter EMEA six 3% year to date down a little in the third quarter, but that's kind of timing.
We think we will see both of those are nicely accelerate in Q4, and that's important for US we want to end the year with higher than the 1% backlog, we're sitting at today and our entire team understands that.
We believe we can do that in the Americas because their awards are up as Rahul said in his opening remarks and that is a leading indicator where we've got the awards already and we've got the LOI and now we have to move it to a booking and get everything finished.
But we expect a strong fourth quarter and planned to.
To end the year with a backlog of two plus percent hopefully closer to three we'll have to see where that comes out so that we start 'twenty two strong.
That's great. Thank you.
Thank you and our next question.
Our next question comes from the line of Patrick Baumann with Jpmorgan. Your line is open. Please go ahead.
Alright, good morning, Judy good morning, Thanks for taking my questions.
First one just on the China exposure you detail in the appendix just wanted to test the sensitivity on that versus the macro stats. So I mean, you said planning for a flattish market.
Does does the assumption for a flattish market there embed any decline in floor starts.
Just trying to understand how much of your initiatives there and your exposures there could help mitigate declining for starts.
Yes.
It's an interesting question Patrick again, it's hard to draw a direct correlation between any of these metrics into.
Exactly the elevator markets because it depends on what's going on in the market how many buildings under construction, where obviously the declining in the floor starts have been down just the last couple of months. After a very very strong first half. So it's been you've seen in the last couple of months, but again. The first half was very strong so that is where if you come back in.
If you look at the other metrics.
Which I won't repeat because you've gone through those like the construction of a real estate investment I mean, historically, they've had a pretty high correlation with the elevated market. So that is where we sold leaves the market is going to be more flattish for next year.
And keep in mind that size level is at more than 600000 units and comes after two very strong years of growth high single digits. This year and mid single digits last year. So we think of the market stabilizes at this level Thats, a very healthy demand for the market and driven by all the self help initiatives that.
We're driving it gives us an opportunity to continue to drive gains in our China business.
Okay. So it's not as simple as taking 20% of sales and saying, okay floor start to a downturn, that's what we should attribute Otis it's.
It's more complex than that.
Yes for sure yes.
And then if you could just as a follow up can you help bridge that 20% of sales from China down to earnings how big <unk>.
Percentage of.
<unk> earnings is that when we take into account like the impacts from our joint ventures.
Et cetera, and then within that.
How much of that earnings.
<unk> <unk>.
Aftermarket or service versus kind of direct residential OE exposure.
Well, yes, we haven't we typically do not.
Reward that way, Patrick, but let me see what we can do here on the call. So if you take our China business on a year to date sales of about two.
$2 $1 billion.
So so that's our revenue for China year to date now, it's typically 80, 20, 80% new equipment and 20% service so and the service businesses is accelerating very very nicely as well driven by the portfolio growth that we've been talking about and what we've said historically is that.
<unk> is one of our more profitable.
New equipment businesses that affected most profitable of all the regions.
In terms of how we report.
And on the service side. It is the least profitable of our regions. So and then you put the mix on top of it so that the mix in the new equipment service mix also works against.
But overall Roth in China. So that's why it takes so the overall immuno put all that together.
The China profitability, maybe overall lower than where the oldest reports so that's kind of where we are and then obviously the JV share that you got through JV in China, and we have not disclosed our ownership, but obviously at some point between 50% to 100% so somewhere in there, but you're right I mean, obviously the profit that we own in China.
Shared with our with our JV partners.
So without giving a specific number on that obviously, it's less than 20% of earnings but is it less than 10% of earnings.
I want an exact number just kind of.
Curious as a follow up.
Patrick I, just want to stay away from that on the call I think Thats, We report segments I think.
We provided enough color here and I think you guys can more than.
All of you guys do the math, but we will leave it there. Thanks.
Thanks, Thanks, so much I appreciate the time.
Thanks, Patrick.
Thank you and our next question comes from the line of Cai von <unk> with Cowen. Your line is open. Please go ahead.
Yes, thanks, so much for taking yes, good morning.
So.
<unk>.
First Q4 cash flow it looks like you're guiding to 170 million maybe refresh my memory in terms of what do you have that kind of.
Depresses that number.
So first.
And a really great year.
On cash I mean, if you think about the working capital reduction that we've been able to drive <unk> had a third consecutive quarter of negative working capital it's down as I said in my prepared remarks more than $300 million from where we ended the year. So very very strong performance on cash now the two tanks that kind of I.
I would say three things that work as you go from sequentially from <unk> to <unk>. The first is that there is historically a buildup of working capital between third quarter and fourth quarter. So if you look at the last couple of years.
We had a cash flow is available you will see an increase in working capital from the third quarter for the fourth quarter. So that's one driver. The second is based on the guide that you provided there is lower net income in the fourth quarter than in the third quarter. So that's the second piece and we still have that tax payment in one of the European countries that we've built.
<unk> two before that's a long standing tax matter that predates spin that we still need to make in the fourth quarter here and that we see.
<unk> it previously between tens of millions of dollars. So those are the kind of the three big levers I would say as you go from third quarter fourth quarter cash flow. So that is why fourth quarter cash flow is less but still $50 million higher than where we were three months ago and it's driven by improvement in net income and better working capital performance and a very very healthy number.
Yes, I think it's close to $125 and yes, we're gonna be passed or mid <unk>.
Midterm guidance, we gave at Investor day in terms of cash flow for the second year.
Yes, so the big abnormal thing is the tax payment and then on the Saar Doi purchase I mean.
If you took that cash and bought back stock it looks like Zara toy is modestly maybe 1% accretive to full year basis.
And you already control it so maybe walk us through some of the potential opportunities. For example, I think we've discussed this offline but.
Spain is a tax rate of 25% I mean do you.
I assume youre going to issue Euro.
Euro bond debt and so are you able to two.
To expand at a higher tax rate. So what are some of the benefits from from the consolidation.
Well, let me talk about the financial and operational yet and then Judy I'll hand, it over to Judy you kind of talk about the operational opportunities that we have so from a from a financial standpoint, Cai, it's very very straightforward I mean, you look at it.
And I think we said that in our press release about $80 million of net cash outflow that we make to our JV partners there both minority and the family the small individual shareowner them institutional generalist and the family combined so that's about 80 million now if he can answer that.
Obviously, that's something that we don't have to make once we have full control of ownership of <unk> and then we will borrow as you said our intention is to bottle and in Europe. So we will do we'll do the borrowing in Europe, and so that is where if you net the two out we expect mid single digit percentage accretion in 2012.
Three now in 'twenty, two and <unk>, two it's going to be less than that because the fact is that it's going to take us a few months here. We just filed a prospectus is going to take three to four months for that filing to get approved then we launched the tender then theres a <unk> period and it may it may take us time to wrap up.
The full ownership, so theres going to be.
Staggered increase in our ownership and that is where I think we said in the press release, we expect maybe four to five of accretion in 2022, just given the timing of the close and the timing of acquisition of shares. So those two things that get us to 45, I think we said four to six.
In the press release, so somewhere in that range for 'twenty, two and then mid single digit percentage accretion in 2023, hopefully that answers the question Cai.
And then maybe Judy you want to talk I'll, just appreciate it simply because of the time I mean first Cai. This is going to simplify our corporate structure. It will allow us to eliminate the only remaining listed subsidiary we have and will save the public company costs that go with that as well, but it really will allow us to streamline our operations in Europe, which.
Gives us the launching point in the future for some strategic growth opportunities. It's a great service portfolio, we have three factories there.
We love this business and we think it just.
Yes, we control it which is why we're not worried about any implementation risks.
Because we have you know we have operational control right now, but as we think about some future strategic growth opportunities across the continent. This is going to give us just that full full capability to optimize everything from you know from our talent to our operations and our facilities.
Terrific. Thank you very much thanks Cai.
Thank you and our next question comes from the line of John Walsh with Credit Suisse. Your line is open. Please go ahead.
Hi, Good morning, everyone. Good morning, John.
Alright.
So a lot of ground covered around pricing and commodities, but I'm. Just curious if you can help us think about.
Maybe 2022, or maybe I'll, even broaden it and just say a deflationary.
Environment, if we start to get some relief around commodities, if we've kind of hit the.
Peak pain, so to say this year, how do we think about your ability to kind of capture positive price cost spread.
Are there certain things in your contracts or.
Just some of those escalators, maybe go away just trying to understand the price cost dynamics as we think into next year. If we are starting to see some relief in commodities.
So yeah, that's great question John.
We have <unk>.
Escalation capabilities and our service contracts in most of Europe, and the Americas that are primarily indexed to labor and most of those tend to renew the majority in the first quarter of the year. So we believe that will be to our benefit those clauses or a resident in those contracts and has been there.
For many many years, we just haven't been able to exercise them. So we will we will certainly try to flow through service price increases and we'll see what the market will bear there, but we have the ability to do that.
And the majority of them are indexed to labor, but theres. Some small portion that are indexed to material or commodities again, we haven't had that opportunity. It is a customer negotiation point, but we think that will at least start off 22 stronger in terms of service pricing.
Yes, and no new equipment again, I think we've said that before we expect some commodity headwinds next year John on the on the new equipment side, we do given where the commodity prices were in the first half of this year. We expect first half of next year to kind of be in the same range as where we were in the second half of this year so call.
30% to $35 million a quarter, so maybe 70 million for the first half and then beyond that.
If you look at the commodity forward today. They go start going the other way starting May June of 'twenty, two and we start right now the forwards that project, but there'll be tailwind in the second half of next year, but it's too early to call that but again go back to our pieces is going to be that for next year. We can continue driving.
Learning to expansion both in both segments, new equipment coming from higher volume, given where Judy said there'll be a plan to ending backlog it kind of in that low single digit growth range. So we'll continue to drive.
Revenue growth in the new equipment segment with incremental some help from pricing that we've already put in place.
Our continued execution on installation, we think we can use all of that to offset any commodity headwinds in the first half and drive earnings expansion and in service I think pricing should be a tailwind for next year, given where prices are and the volume should accelerate to kind of more mid single digit growth, which is what you would expect we've seen.
Really good year to date snapback on repair John and we expect that to continue fourth quarter and into next year globally and then if we can get some of these maintenance escalators.
But service pricing has been held up really strong.
Yes, no I appreciate the details there and then maybe just a follow up here on China.
A lot of ground covered already but.
As I think about Otis as opportunity within China. There is kind of the market piece, but also the share gains and was just curious as you look in a flat market.
If that if that does prove to be the case, how would should we think about <unk> ability to gain share in a flat market.
Is this one five points kind of.
The right bogey.
Could it be better should we temper ourselves a little bit just would love to get your thoughts on that.
We will share more obviously as we give guidance in 'twenty, two but our China team has taken on the challenge to grow share.
And grow portfolio and they've done dose robustly this year and we've lived through declining markets. You go back to 15 to 18.
We're the first to emerge really 18, 19 and to drive price increases there when others didn't want to follow.
And now we've really I think proven share gain for two straight years, and again six consecutive quarter of new equipment growth, while we're getting that share gain and driving profitability. So whether it's flat or up we intend to gain share.
Great. Thanks for taking the questions.
Thank you and our next question comes from the line of me Gilbert.
Exams being P. Perry boss. Your line is open. Please go ahead.
Hi, good morning, everyone.
Got a couple of questions. If I may the first one again coming back on China.
Can you comment on how are your clients reacting to these prepayments that you're asking for.
Sure.
Slide 16.
Is something you just started asking or are you know, while we go more towards reward those who set up a select few.
And so we have been.
Three red lines came into effect, if I get the month right August of 'twenty.
But some certainly sometime during the 23rd quarter.
And we've been we've been monitoring this closely and if we have clients who are not going to go to this cash payment then we've stopped taking orders from them to be to be candid, we're managing it effectively and what we think is prudently in a risk mitigation perspective, so that we don't get out ahead of their liquidity issues.
Or become.
The holder of their liquidity issues.
So they understand it we've been very upfront with them again, we go account by account. That's why you have these relationships and we have these open discussions.
Thank you and I would be interested in understanding the 10% increase that you mentioned on your sales sports in China can you can shed some color on when where are you investing.
Tier one cities or are you expanding more into tier three cities and can you remind us your exposure.
In terms of segments in China, whereas the commercial and infrastructure.
Yes, so our sales force I mean, obviously, it's pretty broad based Mcgill and its board in tier one and tier two cities are in and that is something we have done so that as we are adding more channel partners, we need our sales force to support the channel partners that we are hiring and gain our fair share of wallet from those agents and distributors. So.
That is where our incremental sales force is growing and it's split between both new equipment and service because thats the.
That's what we need to do to drive our service portfolio growth and in terms of our overall mix I think we are we do fairly well in every segment both residential commercial infrastructure. So we have a fairly strong presence across all verticals now obviously it depends on where the market is and we've been <unk>.
<unk> been focused a lot more on the infrastructure recently and that is we added if you look back at what we shared on our Investor day that is where we have gained a few points of share. So we continue to do well across all segments and I think our share base share gain is fairly broad based.
Thank you very much.
Thanks Neil.
Thank you and our next question comes from the line of Nick <unk> with RBC Capital. Your line is open. Please go ahead.
Yes, hi, everyone. Thank you for taking my questions just a couple of quick ones for me.
Mentioned productivity gain.
<unk> is a driver of pretty good margin result.
Just wondering if you can maybe quantify that a little bit more and also tell us to what extent that's still yes.
Yes potential.
Yes going forward in the next few quarters.
So our productivity gain is coming from both segments.
Nick it's coming from new equipment, we are.
We spoke about the material productivity.
Right.
Did our first Investor day, we've been talking about it that's a key driver for us as we continue to push really really hard on that in addition, we've been driving installation efficiency. So that means a better project closeouts and ending the project at a higher margin than what we booked at and that includes both using fewer hours to.
All of the product and taking cost out of the material because not not being dive, but tito cost comes from the fact that incremental material procurement that happens in the field. So we've been spending a lot of time and effort to understand where the supply base is and how we can take cost out of that so that has been the major push here and that is where you're seeing in the game to get an early.
Stages of that we just started we saw good results in Q2, we saw good results in Q3. So we're in early stages of that and we need that installation efficiency to continue to get better as we get into 'twenty. Two so that will be a push for us and on service productivity, which again has been a tailwind for us despite catchable maintain into ours and all the COVID-19 related.
The headwinds that we're absorbing our Q3 hours were still down year over year to maintain an elevator. So that comes from the push that we have on August one and some of the other productivity things that we're doing so that is what is driving our service productivity, which continues to be which continued to be strong in Q2.
That's obviously what drives profitability.
Okay.
That's correct and then just very quickly on the tax rate you mentioned, 28.5% to 29%. This year is that about the right number going forward or should we expect something a bit different.
No. So we guided at Investor day.
And after that actually that we expect that to continue to go down and to get to about 26, 5%.
And really that's what we're expecting over the mid term really two strong years in a row Nick.
We have brought it down to about 34 last year from over 34 in our first year and then another as we said 180 basis points this year to get us to the midpoint between 28 five in 2009.
So really good focus.
And it's now with what we have to do is to operationalize a lot of it but.
But we know we know the path, we know the trajectory and we're going to continue down that path to get us closer to that 26 and a half.
That's great. Thank you very much.
Thank you and our last question comes from the line of Joe Spak.
And then Jen with Dan Burke. Your line is open. Please go ahead.
Yeah.
Good morning.
So a couple of months.
Quickly.
Maybe we can just start with China.
Slide 16.
Just to help me understand when you talk about the 3% to China sales is that.
Both direct and indirect total exposure to those properties.
So between sales class third party distributors whenever that might be.
I guess the reason I'm asking just maybe take out some interesting.
Yes.
Yes.
The risk it might just be with potentially an epoch lab.
Going bust, but actually that it causes distress in the in.
In the distribution network in China.
Exposure to distributors, who might be put at risk. If some of these some of these guys go on that so I was just wondering if could talk a little bit more about that in terms of mix.
3% numbers.
To clarify that.
So the 3% presence our sales to these customers both direct and indirect yes. So thats a total exposure to these customers I think your question Joel is right and I think it goes to a broader contagion issue, which obviously is not represented on this chart in the game that goes back to all the discussions.
Joel that we've had on this call around.
Our expectations for the China market, so not to rehash all of that but we do expect that this is going to be we do expect the China, China elevator and escalator market to be more flattish next year. So that's our current expectation.
And but this 3% is our total exposure to these customers all of them.
Okay. Thank you and then maybe just one.
Final quickly.
Which was just on your comments around modernization, which I thought were interesting I mean, it sounds like youre slightly temper your expectations for me.
Fourth quarter in terms of modernization.
You think that there is there are some bottlenecks here like some of these issues unlikely.
Resulting some pent up demand being released in 2022 I'm just interested in your comments about being sort of delayed decision making.
That's likely to.
Thanks to the country Foster maybe next year.
In Mod Joel we think it really is demand delay versus disruption versus elimination actually or destruction.
The challenge on Mod as it is somewhat more bespoke and new equipment and custom.
That at least in the Americas has created a little bit of a supply chain challenge for us So we're dealing with it.
Think we've appropriately tempered the fourth quarter to the low end of the service guidance for that reason, but we don't see this or the EMEA demand or the Asia Pacific demand going away by any point modernization is going to continue to grow and we know we know what we need to do if you look on.
And year to date, our orders are up four 3% and our sales were up two 7%.
So we think the fourth quarter reflects that kind of knowledge as well as what we're experiencing and 'twenty two should be stronger.
Okay. Thank you very much.
Thank you and that concludes our question and answer session I would like to turn the conference back over to Judy marks for any further remarks.
Yes, Thanks, Michelle this solid year to date performance positive momentum and our ability to execute on our long term strategy gives us confidence, we'll deliver a strong close to 2021 with high single digit organic sales growth $260 to $270 million and operating profit growth and high teens EPS.
Growth.
While the external environment remains fluid I'm confident the investments we've made over the last few years and our progress is an independent company has set a new path and will position us well for 2022 as always we remain focused on driving value for our customers our colleagues our communities and our shareholders.
Thank you for joining us today and stay safe and well.
This concludes today's conference call you may now disconnect everyone have a great day.
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