Q1 2022 Otis Worldwide Corp Earnings Call
Yeah.
Good morning, and welcome to the Otis first quarter 2022 earnings Conference call. This call being carried by them on the Internet and recorded for replay presentation materials are available for download from <unk> website at Www Dot Dot com.
Now I'll turn it over to Michael Redner Senior director of Investor Relations you may begin.
Thank you Latanya welcome to <unk> first quarter 2022 earnings conference call on the call with me today are Judy marks chair, CEO , and President and roll Guy Executive Vice President and CFO .
He's note, except where otherwise noted the company will speak to results from continuing operations, excluding restructuring and significant nonrecurring items. A reconciliation of these measures can be found in the appendix of the webcast. We would also remind listeners that the presentation contains forward looking statements, which are subject to risks and uncertainties.
<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.
Thank you Mike and thank you everyone for joining us we hope that everyone listening is safe and well we had a strong start to the year reflected in our financial results and in the progress made on our balanced capital allocation strategy. We grew organic sales expanded margins and achieved high single digit adjusted EPS.
Gross while driving growth in all regions and new equipment orders and our maintenance portfolio.
Our service business experienced favorable pricing and grew revenue margins and adjusted operating profit.
In addition, we generated nearly half a billion dollars in free cash flow, while continuing to return the majority of our cash generated to shareholders.
In Q1, we completed $200 million in share repurchases and received board approval of a $1 billion share repurchase authorization.
In April we announced a 28% increase to our quarterly dividend.
Acquiring the remaining interest in SAR doi at Otis.
After settlement of the tender offer in mid April we now have over 95% ownership of Sir Doi at Otis and expect to automatically delisted in early may.
Timing was better than our prior expectations and is expected to add another two cents of EPS accretion in 2022.
This progress sets us up well for the remainder of 2022 and beyond.
New equipment orders were up eight 8% in the quarter with growth in all regions, leading to approximately one point of new equipment share gain on top of close to two points of share gain since 2020.
In Korea <unk> was selected to provide more than 70, Chen two units to the young young Seacrest apartment complex in Incheon Korea, who.
Oh, just gen. Two elevators equipped with reach and drive technology that can deliver substantial energy savings will serve more than 2200 apartment units.
Our latest project in the region with G S engineering and construction and further strengthens our 20 year collaboration with them.
In China, we received in order to support the next phase of the Shenzhen Metro project extending more than two decades of collaboration with the installation of nearly 1000 units to date in this phase we will provide more than 350, Iot enabled elevators and escalators.
This award marks another milestone in our digitalization journey in China and allows us to continue delivering the benefits of Otis ones predictive maintenance to our customers.
In addition to executing on our financial priorities, we remain committed to advancing our ESG initiatives and published our inaugural ESG report in Q1 <unk>.
This report reflects the focus we have placed and progress we've made on reducing our carbon footprint, creating a safe equitable and inclusive work environment supporting the communities around us and maintaining best in class governance practices.
Moving to slide four Q1 results and 2022 outlook.
New equipment orders in the first quarter were up eight 8% at constant currency and up 10, 9% on a rolling 12 month basis contributing to backlog growth of 6% versus prior year.
Organic sales were up three 1% due to the strength in our service business, which was up five 8%.
Adjusted operating profit was up $29 million at constant currency and up $9 million at actual currency with margin expansion of 30 basis points driven by strong performance in the service business as well as some benefit from segment mix free.
Free cash flow was robust at $474 million at 152% conversion of GAAP net income.
A few additional updates before I begin our revised 2022 outlook in.
In April the agreement between the National Elevator Bargaining Association and the International Union of elevator constructors was ratified this.
This collective bargaining agreement covers the majority of Otis as U S field colleagues and will become effective this July with wage increases taking effect in January of 2023.
We believe this five year agreement is fair and equitable to both parties with the annual increases generally in line with historical trends.
And like in private years, we expect to fully offset this cost to increase productivity actually upskill and continue to develop this essential workforce.
In addition, we're just heartened to see the escalation of the crisis in Ukraine we.
We have growing concerns about the long term sustainability of Odysseus operations in Russia, especially with mounting regulations and supply chain disruptions.
As a result, we are motivated to find solutions and explore alternatives for our Russia business that are in the best interest of all of our stakeholders. We remain hopeful for return to peace and stability in the region and we will continue to contribute to the ongoing relief and humanitarian efforts necessary for those most impacted.
By this crisis.
Looking ahead to our 2022 outlook given the wide range of outcomes and the process that we're undergoing we have removed <unk> Russian operations from the current outlook as well as in the prior year compares.
This adjustment will largely impact the new equipment business rule will walk through this in more detail and a reconciliation of Odysseus result, excluding Russia for the last five quarters can be found in the appendix to this webcast.
For the year, excluding Russia, we expect organic sales growth of 3% to 4% with net sales in a range of $14 one to $14 $3 billion. Adjusted operating profit is expected to be in a range of $2.2 billion to $2.25 billion up 105 to 100 <unk>.
<unk> $5 million, excluding the impacts from foreign exchange.
At actual currency adjusted operating profit is expected to be in the $40 million to $90 million.
Adjusted EPS is expected in the range of $3 22 to.
To $3 27 up 9% to 11% versus the prior year.
Lastly, we still expect free cash flow to be robust at approximately $1 $6 billion or approximately a 120% conversion of GAAP net income.
We remain disciplined in our capital allocation strategy and in addition to increasing our ownership in SAR Doi at Otis, We will continue to return cash to shareholders through dividends and share repurchases and advance our bolt on M&A strategy, where it makes sense and adds to the density of our growing service portfolio.
With that I'll turn it over to rule to walk through our Q1 results in 2022 outlook in more detail.
Thank you Judy and good morning, everyone, starting with first quarter results on slide five.
Net sales were up 0.2% to $3 $4 billion.
Organic sales grew for the sixth consecutive quarter up three 1% driven by service sales, which increased nearly 6%.
Adjusted operating profit was up $9 million and up $29 million at constant currency as the drop through on higher service volume.
<unk> service pricing productivity in both segments and lower bad debt expense was partially offset by commodity headwinds and annual labor cost increases.
We also maintained our unrelenting focus on cost containment and adjusted SG&A expense was down $17 million versus the prior year and down 60 basis points as a percentage of sales despite the inflationary trends in the economy.
R&D trend and other strategic investments were flat versus the prior year.
Given the strong cash flow and progress on repatriation, we completed our deleveraging and repurchased $200 million of shares in the quarter.
Overall growth in operating profit reduction in share count and continued progress on reducing the tax rate resulted in first quarter adjusted EPS growth of six 9%.
Moving to slide six.
New equipment orders were up eight 8% at constant currency with growth in all regions.
Orders momentum remained strong in Asia up mid single digits with about 10% growth in Asia ex China.
China orders were up 3% the eighth consecutive quarter of orders growth in the country and outgrew the market that was down mid single digits.
Orders in America were up high single digit and awards, which proceed order booking were up nearly 25% in North America signaling continued strong demand.
You mean orders were up 17% with growth in both Europe and the middle East.
Strong orders growth contributed to total company backlog, increasing 4% and 6% at constant currency with growth in all regions, including approximately 6% growth in Asia.
In addition, global proposal volume was up low teens with more than 25% growth in China, demonstrating robust market activity and the benefits of increased sales coverage.
Globally pricing of new equipment orders was about flat in the quarter on a year over year basis.
New equipment organic sales were down 0.5% in the quarter EMEA was up mid single digits, but this was offset by a low single digit decline in both Americas and Asia.
Americas declined due to a tough compare from Covid recovery in the prior year and in Asia, China was impacted by job site closures towards the end of the quarter.
Adjusted operating profit was down $12 million, partially from the impact of lower volume.
Commodity inflation of $38 million that was in line with prior expectations was largely mitigated by installation and material productivity and lower bad debt expense.
Service segment results on slide seven.
Maintaining the portfolio units were up more than 3% from broad based improvements in retention recapture and conversion rates with recaptured units more than offsetting cancellations in the quarter.
And China conversion rates continued to improve and contributed to third consecutive quarter of high teens portfolio growth.
Modernization orders were down about 6% in the quarter, but are up close to 6% on a rolling 12 month basis.
Driving backlog growth of 3% versus the prior year.
Service organic sales grew for the fifth consecutive quarter up five 8% with growth in all lines of business.
Maintaining to repair grew five 6% with mid single digit growth in contractual maintain and sales.
Above our unit growth due to improved pricing that was up approximately two 5% adjusted for geographical mix and.
And the benefits of strong repair volumes.
Modernization sales were up six 9% with strong growth in Americas, EMEA and China.
Organization sales declined in Asia Pacific on a tough compare after strong demand in southeast Asia in the prior year.
Service adjusted operating profit was up $17 million with 30 basis points of margin expansion, the ninth consecutive quarter of margin improvement.
Profit at constant FX was up $14 million driven by benefit of higher volume favorable pricing and productivity and partially offset by annual labor cost increases.
As we look forward to the balance of the year on slide eight we had excluding Russia bolt and the current outlook for 'twenty, two and in prior year comparisons.
Overall organic growth expectations, 3% to 4% are unchanged at the midpoint.
With the improvement in service offset by lower new equipment growth expectations.
Total company margin expansion of approximately 30 basis points is also consistent with prior expectations.
We are raising our outlook for service margin improvement to 70 basis points from 50 basis points previously from better maintenance pricing and drop through from higher volume.
However, this is getting offset by reduced margin expectations in the new equipment segment from increased headwinds on commodities higher and higher freight costs.
And the impact from lower volume growth.
Overall, adjusted EPS is expected to be in a range of $3.22.
The $3 27.
Up 9% to 11% versus the prior year after adjusting for Russia.
This strong growth is driven by an increase in operating profit accretion from the <unk> transaction and progress on reducing our tax rate and share count.
Taking a further look at the organic sales outlook on slide nine.
The new equipment business is projected to be flat to up one 5%.
This is a one point decrease from the prior outlook at the midpoint driven by adjustment and sales growth expectations for EMEA and Asia.
While the backlog in EMEA is up more than 5% our customers are requesting postponement of deliveries due to a broader slowdown in building construction activity pushing.
Bush and shipments from 2022 through 2023.
As a result, we now expect EMEA sales to be up low to mid single digits for 2022.
In China, our backlog at the end of Q1 was up 4% from strong orders growth with the <unk>.
Current lockdowns are not only impacting shipments but are also disrupting the supply chain.
While we expect deliveries to pick up starting me given the supply chain challenges. We are adjusting our 2022, China outlook to be down low single digits from flat to down 3% previously.
Some sales moved to the right.
Given the lower volume expectations in China Asia is now expected to be down slightly for the year.
Outlook, our new equipment organic sales in Americas remains unchanged and is expected to be up low single digits in 2022.
Turning to services, we now expect organic sales to be up 5% to 6% an improvement from the prior outlook, 4% to 6%.
By better than expected maintenance pricing and repair orders in the first quarter.
And higher confidence to execute on modernization backlog from the steps we have taken to resolve the supply chain challenges.
Switching to adjusted EPS Bridge on Slide 10.
We now expect adjusted EPS growth of 9% to 11% with operating profit growth of $105 million to $155 million at constant currency.
This increase of 17 to 26 versus prior year is driven by strong operational execution.
Volume and favorable pricing.
This is partially offset commodity headwinds, which we now expect it to be $110 million for the year $20 million higher than in the prior outlook and incremental freight costs.
We are absorbing these higher commodity and freight costs through increases in productivity and better maintenance pricing.
And the midpoint of profit growth expectation at constant FX remains unchanged.
Foreign exchange translation is now expected to be 11% headwind versus the prior year and <unk> <unk> worse than the prior outlook.
Primarily from strengthening of the U S dollar against the Euro and the yen.
The Euro is now expected to be 110 for the year, implying a 109 for the balance of the year.
The 11% FX headwind is more than offset a 12 <unk> of any of the accretion expected from the <unk> transaction.
This estimate is <unk> <unk> better than the prior outlook from a faster pace of acquisition of shares.
The balance of the EPS growth is driven by progress on reducing the adjusted tax rate now expected to be approximately 27, 7% for the year and a lower share count.
We have completed $200 million in share repurchases for the year.
And plan on completing an additional $300 million and the balance of the year at the high end of the prior outlook.
This guidance really reflects the acceleration of both sales and profit trajectory of the service business from the benefits of investments and our sustained focus on driving productivity.
And while the new equipment business is challenged this year due to the current macroeconomic environment, our robust backlog pricing actions and over $100 million of India productivity will ensure that the business recovered sharply once the commodity and freight headwinds abate and with that I'll request Latanya to please open the lines.
Two questions.
Certainly as a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key one moment.
And our next question. Our first question comes from Nigel Coe of Wolfe Research. Your line is open.
Good morning, everyone. Thanks for the thanks for question.
So there's lots to go lots to talk about some maybe just to start off with China, what we've seen right now in China, obviously lots of headlines about central Beijing.
Locking down so curious what impact you're seeing and what we might expect it too cheap.
Yeah. Good morning, Nigel it's Judy so listen we had a really strong start to the year and I've got a just applaud our China team further tenacity and resilience really good start new equipment orders up low single digits backlog up mid single digits and their portfolio up high teens for the third straight quarter.
Our elevator factories are open in China, including our one in in Hangzhou, which is outside of Beijing.
Confirm that as well as recent as today.
But we do we've seen some challenges with shipments and obviously site a site access. So what we've done is we really expect the second quarter to be lighter due to the COVID-19 locked lockdowns and we've really adjusted the rest of the year to be down low single digits, mainly from our suppliers needing to re.
Start their operations as well. So this is all kind of full supply chain impact, where we manufacture in China, mainly for China. We think it's a reasonable approach we're going to continue to monitor how things come back in China, but again, our elevator our factories are open and the timing of the reopening could push some performance into.
2023, and that's why we think it's a prudent guide we revised China, new equipment to low single digits down and took our full guide down on new equipment, mainly because of this.
Thanks, Andy that's great.
On pricing, we're seeing strong obviously very strong pricing on.
Service.
Two 6% ethanol mistaken.
Equipment orders still spot on pricing so that the two questions. Here is any reason why we shouldnt expect that that kind of cadence on citizen pricing to continue.
And then all we electing to not get priced and equipment two to maybe gain share.
Or is there still a lag impact on the pricing recovery.
Yes, so pricing, let me start with service Nigel we're really pleased we're seeing good service pricing increased more than two points in Q1, and we expect that to continue very strong start on service pricing in the Americas, followed by EMEA. So we still have a mix as China's growing at the high teens and <unk>.
Arms of the portfolio, but really pleased that between the volume and the portfolio and the service pricing. That's why we're seeing such a nice guide and service and.
And we raised our outlook you know, 5% to 6% growth. There we expect that to continue as the year goes on we see no reason not to we're exercising our clauses that give us that ability to to up into up our service pricing because of inflation and our sales folks are being being able to realize that price. So very pleased with that.
In terms of new equipment overall were flat globally, a good performance in Asia, and Asia Pacific and EMEA Americas is flat, we expect America's new equipment pricing to improve throughout the year continuing the second half 'twenty one trend they had china's under pressure on pricing.
And and their pricing is down but overall, we expect to end the year with flat pricing on new equipment.
Great. Thanks, Judy So Nigel just maybe a point or two to Adam on China first thing. What's your what are you seeing in China is as Judy said the price pricing was a little bit under pressure, but what we are seeing is that the volume business is doing well that is where we've actually gained a little bit of pricing flattish to up on the volume side the larger projects.
<unk> is where we're seeing the pressure so that is where the pressure is coming through the flip side on China is that the commodity prices in China. Unlike the rest of the world are also coming down. So if you look at the rebar steel that was down close to 10% in Q1, and the hot rolled coil, which is another commodity that empower impacts of steel prices are down close to <unk>.
5% in the second quarter, so the China commodity market is behaving a little bit differently than the rest of the world. So that is why maybe the China pricing trends a little bit different so but overall the Judy said were kind of.
Flat for the quarter and for the year will be largely expecting that we will mitigate the the backlog pricing a headwind that we inherited from last year by India price increases largely will be kind of flattish on price for the year.
Great. Thank you.
And our next question comes from Steve Tusa of Jpmorgan, Steve Your line is open.
Hey, guys good morning good.
Good morning, Steve.
So on the services business some of the key stats that you talked about as being pretty positive you know the whole attrition recapture can you just give a little more detail on those just a little bit more like maybe.
Rolling averages on those on those metrics those kpis.
Two Oh, we typically don't provide those quarterly Steve as you know, but overall the trends were fairly robust across all pre got you know retention recapture and conversion I think we saw global improvements in all three metrics retention continues to be our as we've discussed previously continues to be our focus.
And that improved year over year in the in the quarter are kind of in line with the full year improvement that we saw for all of 'twenty. One so that trend is good recaptures are very strong, especially in China and as I said in my prepared remarks recaptured units exceeded the cancellations in the quarter. So that contributed to our portfolio growth and conversion trends look.
Really good I mean, again with China, where we see the maximal opportunity driving the way and that was a big contributor to the portfolio growth here. So overall listen we are we are we are very very pleased with the way things progressed, we have as we said previously a really really strong focus on that and there was a subtle change in what we said what that is.
Our portfolio grew more than 3%. So it tasted the continued traction that we said we grew 3% last year and in Q1, it's more than 3%. So that would be so we feel good about the full year growth on our service portfolio growth.
I think Schindler said something about a big difference in.
Order volume versus the order price and specifically in North America like a double digit difference.
Anything going on there with regards to timing of price increases.
Did you guys see that a pretty significant between orders volume and price in the developed markets North America. Yeah C. As he said you know our pricing in North medical was it was flattish right. So North America pricing was flattish I mean, the only part of new equipment, where you know group a sponsor Knighthoods question, Steve the only place where we saw a little bit of pressure on price was China.
So that's where the rest of the world kind of behaved and we expected North America to improve starting Q1, because the cycle time for from.
From proposals through actually booking the order is really long in North America. So we expected Q4, our pricing was down in the Americas and we always expected that Q1, we will see the sequential improvement and we did so that is good.
And hopefully it continues to gain traction as we as we go through the rest of the year, but in China. The pricing was under a little bit of pressure as previously discussed there was a difference between our our units booked and the overall revenue growth in China, Steve We're seeing a really strong market in North America.
Our orders were up 9.191% the awards as Earl said were up nearly 25%, which is our leading indicator radgie non RASM, but especially multifamily in in North America is just really coming in very strong 12 month roll in in the Americas is 13%.
So.
The market is strong we're seeing we're not you know obviously, we have a lag from the time, we book until the time, we recognize that revenue, but we think that bodes very well for the rest of 'twenty two and 'twenty three.
Okay, great. Thanks, a lot.
Thanks, Steve.
Our next question comes from Jeff Sprague of vertical research your line is open.
Thank you good morning, everyone.
First just kind of on housekeeping on Russia.
Would you have kind of been anticipating something similar to that six cents for 2022 and your original guide and maybe you could just elaborate on what the plan is there are you on winding the business youre trying to find somebody to acquire it and just a little unclear what the plan is there actually.
Yeah. So let me let me answer the first part of your question, Jeff and then I'll hand, it over to Judy for the second part. So we were expecting a little bit of growth in Russia and other markets were strong getting into the year. So we are expecting a little bit of growth in Russia, as we got into the year, but for the sake of ease we've kind of took six cents out because you.
We can size the number but in our original guide we had a little bit of growth coming from Russia, Judy maybe you want to take the second part. Thanks. Good morning, Jeff. So I think everyone's aware that we stopped taking new equipment orders and making new investments we have been very public about that.
In Russia, and really we're right now evaluating the best ownership structure for the business, whether that's with us or somewhere else and that's why we removed it from the outlook, we really wanted to be able to have a useful comparison.
Yeah, we're working through our backlog in Russia to try and meet existing customer commitments candidly. It is very challenging due to supply chain issues and sanctions and really it's against that backdrop that we're evaluating options to provide a more certain future for the business I can't comment on potential future transactions, but we will up.
Date, you in due course.
Great. Thanks, and then just coming back to to service its nice to see the uptick in the in the margin outlook and I'm sure. Some of it is explained by price I was just wondering if you could unpack a little bit more.
What youre seeing as it relates to mix and adoption of.
The Iot offerings across the geographies.
This outgrowth in China, which were technically be mix negative right and the margins are looking better in spite of that so I just wonder if you can unpack that a little bit more for us. Thank you.
Yes, so on Otis one we had a strong start to the year, especially versus last year first quarter, and probably 'twenty first quarter show, we're picking up nice momentum there.
And we are headed towards our mid term our medium term outlook of 60% of the portfolio covered we also had some really nice progress in EV bookings.
Which gave us another connected product.
We as we exited the quarter, we had significant EBIT bookings as well, but we're really starting to see both the volume pick up and.
<unk> said all three categories are doing better conversion.
Yeah.
The pension as well as <unk>.
Bringing portfolios for any items back to our portfolio.
Productivity is strong it is it is taken care of any labor increases, we're seeing and even our apps that we don't talk about as much anymore, Jeff have really seen sustained uptick we're still rolling them out in some of our southeast Asia countries as recent as last months and if you look at the apps.
We saw a 20% increase in repair sales booked through the upgrade up year over year, the tuna, App, which really gives our mechanics, just that ability to use use their iphones to do vibration checking is up more than more than double same period last year, and we had a <unk> 50.
<unk> parts ordered which is up mid single digit plus over the year before all using technology. So our mechanics are getting more productive or just one is adding that ability to be predictive they've got the ability to see what's happening with transparency with our customers and we're seeing actually I just want to make a difference in in our recapture.
<unk> when customers come to us put us back on on maintenance because of Otis one so all in all everything is trending and that's why we've got confidence in in the service not just in the in the revenue side, but it real well with volume it's going to fall through in the the incrementals are going to be strong.
Great. Thanks for the color.
And our next question comes from Nick Hilton of RBC capital market. Your line is open.
Yes, hi, everyone. Thank you for taking my questions. My first one is on China, and if I heard you correctly. You said that you grew orders, 3% against a market that was down mid single digits, which seems like a pretty significant outperformance. There. So I'm just wondering what exactly that.
Components or is it partly because when you talk about the market, you're including the lower tier cities, where it might be the declines have been sharp, whereas you'll focus is more on the higher tier cities, where my understanding as demand has been holding up a bit better or just any color you could give would be helpful to yeah.
Yeah, Let me, let me start rule and then and then I'll, let you add but we saw share gain of about a point globally, but we saw share gains clearly in China, we came into the year and we expect that our backlog to cover 60% ish or 60% or so of the revenue and the rest for the in year revenue and the rest would be.
Book to Bill, we thought that book to Bill NEC would be down 5% to 10%, but what we saw in the first quarter was it was only down 5%. So that was was fairly positive as you look at the first quarter, though we did well tier one through four cities. So it wasn't just the big tier ones, we really did well in tier one to four.
And we grew share there and we grew share in every vertical residential commercial high rise and infrastructure. So it was an across the board gain in terms of share from our China team and I think that's what really led to the to the up 3% in new equipment orders and the backlog up mid <unk>.
Single now.
And Nick monologue, rather than introduce kind of covered it I think we covered verticals we've had share gain in all verticals than what we saw in the market was the market was down about 5% in the quarter, where we saw the growth we saw growth on industrial and on the infrastructure side and residential as you would expect was down in the in the <unk>.
Or just given the policy that we had so the market and the minus 5% that we saw in the market was actually a little bit better than what we would have thought going into the year, we still expect the market to be down 5% to 10 for the year that that estimate has not changed even though some of the metrics have moved moved around.
The construction was up kind of 1% in the quarter investment was dominant couple of points that the new starts were down maybe 20 plus percent in the quarter, but that was a tough compare and then obviously you had the impact from Covid.
But the inventory is kind of holding in China.
So the inventories to let a three and a half months of inventory. So our estimates for the year on China market growth have not not changed so we still expect the minus five to minus 10, and with Q1 being down about minus five yeah. I think it's just execution of strategy neck. Our sales coverage is there are we kept a indeed that about our agents and distributors around 22.
<unk> hundred yeah, theres been some churn in them is the lower performers or exited and we bring on new for coverage.
But you know our sales coverage actually globally went up about 150 about 4% and.
Even though our SG&A went down significantly so we're driving everything in and it's all about executing our strategy.
That's great and then just one more on China and yeah looking at working capital so you're expecting the market to be down 5% to 10% this year.
And I'm, just wondering what the potential impact could be on working capital and specifically in terms of the prepayment position should we expect this to move downward a toll or will it just increase at a slower rate.
Yeah.
Our business in China did really well on cash last year, Nick I mean, we were up more than 20% over 2020 levels in 2020 , one and for the ear for 'twenty 'twenty. Two we kind of expect similar level of improvement in free cash flow in China. So last year. If you look at 2021, our receivables were up.
Slightly less than 10% on revenue that was up more than 25 person. So we did really well on cash management in China, but obviously the situation is volatile. We you know we are looking at up able situations we are extending our.
Some advances to our customers to ensure supply but at the same time. We're also looking at okay, where we can we are stretching the payable to them. So we kind of going both ways managing it on a supplier by supplier basis, but overall listen the situation gosh in China was good last year, and we expect similar level of performance in 'twenty two.
Okay.
That's great thanks very much.
And our next question comes from Julian Mitchell of Barclays. Your line is open.
Hi, good morning.
Hi, Julien, maybe hey morning, Judy maybe just switching away from China, perhaps to Europe .
I thought it was interesting you talked about the kind of push outs there.
Into 2023, so maybe just a little bit more color I suppose on you know was that a Europe wide comp.
Comment are there.
Nicola markets that are being affected and you know you had very very strong new equipment.
Orders growth in EMEA in Q1, just wondered how you're expecting those European orders to play out over the balance of the year and when you think about the broader Europe market you know that.
Last time, they had some kind of GDP.
Downturn, obviously service price and elevators was under pressure.
How you feel the market structure is different today if at all.
Yes, so as you said our.
Our orders were strong in Europe , and we are seeing the backlog was up as I said in my prepared remarks, it was up more than five and be nose up little more than that clearly, but what we are seeing julien.
Julien is we are seeing delays in construction activity and that's you know pretty much all the major European.
Mostly your major investment European markets. So we are seeing that slowdown, which is extending our delivery times from our from our factories. So that is what we are seeing and that is the reason we kind of looked at our revenue expectations for the year.
In EMEA and we took them down slightly we were up kind of mid single digit levels last time, when we took them to mid to high at this time of low to mid <unk>.
And part of that was obviously, Russia coming out because Russia was a faster growth markets with some of that impact will just Russia getting pulled out and some of that was construction. So now we think it's low to mid.
As you look at the overall construction activity in EMEA that is kind of holding so if you look at the building permit activity that was up 2% to 3%.
Over the last year, I think they're expecting that to continue until that is where we expect that our orders growth in Europe should be okay for the year, we're not expecting any big slowdown at this point so the business seems to be holding up and all we are seeing is this delay in.
And revenue recognition and the pricing was good as well. So we saw you don't really picked up.
Pricing up low single digits in EMEA. So overall the business is doing well except for the slowdown in construction that it's impacting yeah. It's not it's not a demand issue truly and it's just a delay in the delivery and the recognition of revenue.
Understood. Thank you and then just on the.
The operating profit line, so I think Youre just adult cross it.
Constant currency was up.
29 million in Q1 year on year.
And the year as a whole you're guiding up around 130.
So I guess sort of just taking it looks like the Q1 increase in sort of times. It by four you know across the quarters.
Wondering if there was any kind of cadence on that profit development to call out or it really is as simple as sort of 30 35 million increase every quarter.
And then specifically on that point, you mentioned the cost inflation headwind of $110 million for the year.
What was that in Q1, how do we think about that in the second half of the one time.
Yeah. So let me start with the second part of your question first Julian and then I'll get to the first part of the question to older commodity headwinds of about 110 for the year about $38 million in the first quarter similar levels expected in second quarter and what has shifted from the last estimate is clearly we are expecting a little bit of headwind in the second half of the year, which was not in our <unk>.
Good expectation that that's driven by the higher energy prices in Europe that are driving up aluminum costs and also some of the steel prices in Europe have gone up and same thing in North America, we've seen commodity.
Commodity pricing moving higher and in North America, as well offset to some extent by lower prices in China. So commodity headwinds 110 for the year about 76 million in the first half the balance in the second half of the year now in terms of all in terms of cadence you're right. I mean, what we saw you know you you can pink it's kind of a run rate with what you are seeing obviously the.
The earnings in new equipment were pressured in the first quarter because of the higher commodity headwinds and we are expecting kind of similar level of pressure on new equipment earnings in the second quarter. So the margins in new equipment it'll on in Italy year basis are going to look very similar in the second quarter as they did in the first quarter. So the <unk>.
Expectations of new equipment first quarter second quarter going to be similar and if you look at our full year margin guide that is more or less in line with the first quarter margin guide. So we're not expecting a huge acceleration in new equipment margins and maybe you know maybe that's a little bit conservative as we get into the second half, maybe there's a little bit of tailwind, but given all the uncertainty we felt.
That's okay, holding the margins kind of sequentially flat to Q1 levels was appropriate now as you move to service, though on the other side, we do expect acceleration of margins in the service segment and the biggest driver of that eight obviously sequential revenue growth in service that comes through at a high drop through but also if you go back to queue.
One of last year.
We still had they back from Covid. So in Q1 of this year, we had some of the costs coming back that would not there in Q1 of last year. So we absorb that incremental cost and yet grew margins. So as we get into the second to the fourth quarter that headwind is not there and that helps us drive higher service margins. So that's the that's the underlying color, but you know as you look.
Overall, obviously good start to the year and we expect Q2 and the.
Same you'd expect grew revenue in the second quarter, and then EPS on a year over year basis, and on a sequential basis should be up as well in the second quarter Julien the only other thing I would add is where what we saw in repair in the first quarter was very positive which shows even in the regions where people are concerned about.
Office.
Populations, we're seeing elevator usage pick up in the in the really in the commercial side of the business as well in our repair business certainly indicated that in Q1, that's going to help drive. This again this margin expansion in services as we go through Q2 through Q4.
That's very helpful. Thank you.
Thanks Julien.
And our next question comes from Joe O'dea of Wells Fargo.
Joe Your line is open.
Hi, Good morning, Thanks for taking my questions I wanted to go back to a comment I think last quarter, just talking about the cadence around the Americas and I think Judy you had mentioned that there were some larger projects in Americas that where you were kind of scheduled for back half of the year just wanted to kind of check in on that and see if those timelines are still kind of going according to plan.
Yeah, Joe Good morning, they are I mean, we had secured some large projects in 'twenty, one that will actually not just be second half of this year will be more.
Strong in early 'twenty, three and that's still consistent those projects are all on schedule. So what we said last quarter still holds.
Got it and then it looks like there was a $20 million cut to Capex guide how much of that is Russia related how much of that is other factors.
Yes, some back from Russia, but we are just looking at calibrating the full year. So that's what we did so just you know nothing major you know things move around all the time does not a big cut in in any one line, but there is some definitely some impact from lower investments in Russia, but overall, it just kind of minor tweaking in different different lines.
And then maybe just a clarification on service price the pricing got in the quarter how much of that was contractual just on kind of escalators you know how much of that was maybe a little bit more proactive on activity levels.
Well it all takes activity so even though we have those clauses in the contract they don't automatically.
Happened out of renewal unless we unless we can enforce it and sell the value of what we're doing so our sales force had to go out and basically make all that happen. So there was nothing that that would just happen automatically you know mechanically or commercially.
So it was all make happen and and the team did a great job explaining how we had additional costs and how its appropriate for those to flow through on price.
Got it thanks very much.
Thanks, Joe.
And our next question comes from K bonds, where Omar.
Cowen Your line is open.
Terrific. Thank you very much and nice results.
No.
To follow up on Jeff's question, I mean, you know.
We have terrible relations with Russia.
The numbers weren't bad, but presumably going forward. You know are you concerned that you know basically there will be any sort of penalties put on you or operating difficulties as a result of being a U S company and what should we think about the ultimate exit I mean are you going to be able to get your.
It back or are they basically going to squeeze you. So it ends up being a loss.
Well Cai I think it's important to reinforce that we are following all sanctions that have been imposed by the U S U K and EU.
So we are following all of those rules.
We provide an important life safety service everywhere in the world, especially in our service business. So we are obviously, we are evaluating you know who should be or could be a the rightful owner of this asset and that's the evaluation. We're under we will share more.
As we learn more but yeah, we'll have to see where that where that evolves.
Got it. Thank you and then and then turning to your you know your service population. So could you know you were up obviously.
You said high teens in China, which looks like it suggests the rest of the world was up a one and a half 1.8% could you give us some color on the service population growth in each of the other three areas as well as some comment in terms of the growth versus how.
Much from conversion what was the retention was and what was the recapture and M&A. Thanks.
No. It was either so as we said the overall guide.
Good growth globally, obviously strong growth in China, and the other emerging markets in Asia did well as well, but we did grow our portfolio in both Europe and the Americas as well, obviously, they are lower growth economies and so they contribute a lower amount because the growth is clearly happening in Asia, but it was global.
Improvement with improvement in all all four regions and then your second question on conversion I think the conversion rates, obviously moved up a lot overall 12, the world, but especially with the improvement in in China kind of driving that and that is where we expect most of the improvement to come.
And and the cancellation rate is good I mean, we keep making progress and the fact is that we meet you know and especially in the and where it is really important is in the more mature markets in the U S and in the Western European economies and that is where if you look at our improvement this year that as we solve that is where we saw the maximum improvement in our retention rates.
Both Europe and U S did really whether Europe , and the Americas did really well on improving retention rates and that is what you really need to see because that also drives price because that losing that portfolio hurts us the most and by improving our retention rate that drives incremental price and incremental margin, but overall really really.
And you know really pleased with the progress we're making globally tie you know we were 1% two years ago actually in 2020, we were 2% portfolio growth of eight 1% 19, 2% and 23% last year, we said we'd be three plus that's what's driving again everything we've said.
Ive that portfolio is the key to our service success and we just had our our fifth consecutive quarter of service organic sales growth and our ninth consecutive quarter of adjusted operating profit growth in our service segment. So this end and growth in every region. This quarter on our portfolio. So that's what we need to continue.
To see going forward, that's what our team is focused on.
Yeah, no I get that but.
You know you give projections for everything else, obviously, if China, you mentioned, how well China is doing if China continues.
Upper teens, even the mid teens as its getting bigger that has some leverage on the rest so.
What's the potential that you could be close to the 3.5% for the full year.
Definitely yeah, I mean, our our expectations I think we said it.
At Investor Day, Guy that we see portfolio growth edging continued.
Continuing to improve and there is a clear line of sight at some point to this portfolio growth starting with maybe a four and then you know maybe even going up from there, but you know we take this in small steps and every quarter is a data point on the board that in all these data points make up a trend. So I think that's what Judy kind of alluded to we just kind of the sequential improve.
And I think we're putting another data point on the board with this quarter and we are hoping that by the time, we end the year. This number starts with a four but we're not there yet so we'll keep we'll keep marching forward.
Terrific. Thank you.
And our next question comes from John Walsh of Credit Suisse. Your line is open.
Hi, good morning, and I appreciate you taking the questions.
Thanks, John .
Maybe just first on pricing.
Can you just remind us.
Kind of historical cycles, the ability to hold on to the pricing you've been pushing through and I guess the question really focuses around is this all still strategic or is some portion of this kind of a surcharge that you know.
As we get maybe some lack of inflation at some point gets given back to the customer.
To most of our price increases are structural are there our surcharges kind of built into that number because.
Because as we've discussed previously we have escalator clauses, which are tied to overall inflation in the economy.
So that gets captured on the maintenance side, so nothing unusual in the quarter, we should be keeping this entire.
Price increase obviously, it's all market dependent and.
A large portion of our portfolio comes up for renewal in the first quarter, but not all of it. So we will keep kind of guiding to you guys as the year goes on how this how this moves forward. So that's point number one.
And the second part is in and then obviously the new equipment side. It is once you sign the contract. It's there. So I think on both sides. There is no reason to give any of this price increase back on repair where it would be kind of do more break fix work. There are some surcharges that we add based on the travel that we need to do so.
It is where we do add a surcharge based on travel, but on maintenance and new equipment. There is nothing unusual about the price increases can you just kind of pushing to when we should we be gaining all of it.
Great and then maybe as a follow on to that just thinking about capital allocation every once in a while you get some noise around a larger asset either in Asia or Europe can you just remind us kind of where doing something larger kind of fits within your <unk>.
GAAP allocation strategy of share repurchase dividend smaller bolt ons.
Sure. So you know we talk about the smaller bolt ons at about the $50 million ish kind of level of year as you can see when something's attractive likes are doing at Otis, we didn't hesitate and kudos to our team for just executing that with excellence with the squeeze out occurring so we will be the full owner in Dallas in the next week or two.
So we're always looking for an opportunity we think we're at a really good leverage point right. Now are still investment grade, we were able to keep that as well as repaying and we repaid a half billion of debt in the first quarter after $350 million in 'twenty and $450 million in debt and 21, so we're keeping the debt.
Where we wanted our gross debts at about $6 75 billion right now and we think that's a good place and if if a large strategic opportunity comes up whether it's in Europe or Asia or the Americas, we're going to we're obviously interested in we're going to evaluate it because a large generation type opportunities don't happen that often.
This industry. So we're making sure we've got the flexibility on the balance sheet to do that in the interim the cash we generate in year. We plan on returning to our shareholders. We raised our dividend late last week, a little over 20% and now that's 45% over two years and already bought back.
$200 million shares in the first quarter as Earl said, we're going to do another $300 million. So it will be at 500 million for this year and our board off Reauthorized 1 billion dollar cap for us to do that so we're going to share with our shareholders until you know and and keep our ability to do strategic acquisitions when they arise.
Yeah.
Yes.
Great. Thank you very much thank you.
And our last question comes from Joe Spongin bearing Berg Your line is open.
Hi, there good.
Good morning.
Yeah.
Hi.
On Russia.
I can start that just I just wanted to see that number and in the presentation or the release, maybe I missed it but did you actually say what your operating assets in Russia is it at this level of any outstanding.
Sequels or working capital there.
So overall, we did not disclose that Joel so but the overall.
Our asset base in Russia is not huge we are you know, we typically do get advances from our customers in.
In everywhere in the world before we get a new equipment order and Russia is call it 80% new equipment. So our we are actually at a negative working capital position in Russia. So you know as and when something happens.
We will update the accounting, but we don't expect a big asset write off there could be some other charges that we'll have to evaluate as time goes on but we don't expect a big asset write off to come from from.
And even with Judy mentioned earlier.
Alright, Okay. Thank you for that and then can I just ask about I was just looking at the numbers on slide 28.
The adjusted operating profit margin in Russia on new equipment was 18% that seems incredibly high.
So just keep in mind, Joe Yes, it is high and the and the reason for that is twofold. One obviously the biggest reason for that is that we don't do a lot of installation in Russia, we sell the equipment through our factory to people, who actually install it. So therefore that just drives higher margins because what you do you know if you look.
Our industry, we make more money on selling the equipment and the installation part is lower profit. So that is what you see in Russia, because we don't do a lot of inflation that comes through and obviously, there's some other adjustments that go to as well anytime you try and pull a bullet business out so but the biggest driver of that is just the nature of our business in Russia.
Got it that's helpful. Thank you and then maybe just just just one quick question on China.
Thank you for that.
Detail on how you.
We're doing there.
The outlet.
I was just wondering to what extent I think it talks about the market being down mid single is now yours.
Your current thinking.
We're able to flex it implicitly within that what your assumptions are about normalization.
Some of the challenges you're seeing in Russia are you assuming that things get back together.
Approaching normality by the middle of the year or do you just assume that that stays roughly I'll say all.
Julia question as with China, where do we see you know the the market is getting back to normal in China.
Well actually it's more.
When you see supply chains, and some of the disruption that you've seen that normalizes.
Yes. So we are obviously Q2 is going to be tough right. I mean, we obviously, we are expecting the lockdowns to kind of end mid April but they have now extended.
So we will see how so Q2, we still expecting to resume deliveries starting me. So we that is still part of the expectation, but obviously, we'll keep monitoring that we think from our own delivery standpoint, we should be able to catch up as we get into Q2 and Q4, because we saw that just post COVID-19 .
After the Lockdowns, we had a really really strong Q2 in Russia in 2019, and finally in China.
China, we saw really strong.
<unk> in China in Q2 of 2019, and we expect that as soon as the Lockdowns lift we should be able to recover but the supply chain part is a little bit more uncertain for us because that we don't control directly and that was the reason for taking down our guide as Judy said earlier, so we've adjusted our guidance, reflecting more of the supply chain issues.
And potential some conversion challenges the job sites and other places, but from our own factory standpoint, we are pretty confident that as soon as the lockdown slips. We are we are ready to go.
Understood. Thank you very much for that.
Thank you.
I would now like to turn the conference back to Judy marks for closing remarks.
Thank you Latanya so to summarize we had a strong first quarter and continue to make progress on our strategic priorities, while weathering macroeconomic challenges. We recognize the work left to be done to continue building on our track record of resiliency and strong execution. We're confident we'll do just that and deliver.
Our 10% adjusted EPS growth in 2022 with continued momentum in 2023 and beyond Thank you for joining our call and please stay safe and well.
Thanks.
This concludes today's conference call. Thank you for participating you may now disconnect.
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