Q2 2023 Otis Worldwide Corp Earnings Call
Okay.
Good morning, and welcome to Otis second quarter 2023 earnings Conference call. This call is being carried live on the Internet and recorded for replay.
Presentation materials are available for download from Otis website at Www Dot Otis dotcom.
I'll turn it over to Michael.
<unk> senior director of Investor Relations.
Thank you Liz welcome to Otis second quarter 2023 earnings conference call on the call with me today are Judy marks chair, CEO , and President and Iraq, Maheshwari Executive Vice President and CFO . Please 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 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 additional 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 everyone listening is safe and well starting with the second quarter highlights on slide three.
It has delivered a strong second quarter and a successful first half of the year in Q2, we grew organic sales high single digits in both segments.
Spanned at adjusted operating profit margin 20 basis points and achieved 7% adjusted EPS growth.
This performance again demonstrates the strength of our strategy and our ability to execute and deliver.
We have momentum going into the second half and beyond as new equipment share was up slightly in the quarter and up about 50 basis points in the first half we grew our maintenance portfolio of four 2% and continued to grow our new equipment and modernization backlogs.
We generated $409 million in free cash flow in the quarter and returned $175 million to shareholders through share repurchases, taking year to date repurchases to $350 million.
From an innovation standpoint, this quarter, we launched our latest elevator in North America. The Gen. Three core designed specifically to address the needs of customers in the large two to six story building segment.
Gen. Three core is built off the proven design and flat belt technology of Otis as Gen. Two family, while also being equipped with Otis one our Iot platform.
Gen. Three core will be manufactured in Florence, South Carolina and sales will begin this fall.
Here's some exciting customer highlights from the second quarter in.
In Montreal, Canada was selected to provide 28 units, including 11 Sky rise units to the <unk>.
<unk> require reliable transportation between floors at all times and we're excited to be a part of this important health care initiatives expected to open in 2026, it's our latest collaboration in Canada with general contractor Pomerleau.
In Egypt, Otis will provide a total of 57 units for the iconic tower in El Alamein, including Sky rise and Gen. Two elevators as well as our linked escalators at 267 meters. This will be the second tallest tower in Egypt and law for more than 200000 square meters of housing as well as services.
Leisure.
In China, another 280 elevators and escalators from Otis will keep people moving along Tianjin Metros new lines seven.
This project will bring the total number of <unk> units on the city's expanding subway network to more than 1800.
Since it opened Otis equipment has kept Tianjin metro passengers on the move and has been a critical part of the country's transportation network since 1984.
And as the Indian government continues to invest in transportation infrastructure.
We will install 255 units, including our heavy duty public escalators and Gen. Two elevators for the new Bhopal an indoor Metro. This is the first metro line in the state of modular Pradesh.
And is expected to serve 500000 passengers daily all.
All of the equipment will be manufactured at our factory in Bengaluru.
We made progress on our ESG priorities and in the second quarter receive zero waste to landfill certification for all three of our Spanish factories from ane or the Spanish Association for standardization certification.
This is important progress towards our goal of achieving 100% factory eligibility for zero waste to landfill certification by 2025.
In addition, our factory and San Sebastian, Spain received LEED Platinum certification the first factory in Spain to receive this designation the.
The facility opened last year and was designed to reduce environmental impact and the construction and operations through materials used in its waste control system.
San Sebastian's, our fifth factory to achieve LEED certification.
Continue pursuing ways, we can improve our environmental impact, which is an increasing focus of our colleagues customers and shareholders.
Moving to slide four Q2 results and 2023 outlook.
Overall organic sales increased nine 5% with all geographic regions exhibiting strong new equipment organic sales growth in the quarter.
And in service all lines of business contributed to our best service organic sales growth performance since spin.
We grew our adjusted new equipment backlog at constant currency by 5% compared to prior year and 3% to the prior quarter. Despite a tough compare on new equipment orders, which were down 12%.
We continued a strong trend in modernization with orders up 16% at constant currency and backlog up 14% in the second quarter. This is the fourth consecutive quarter of 10% or greater Mod orders growth.
We grew adjusted operating profit by $60 million and expanded margin by 20 basis points, we generated $409 million of free cash flow conversion rate of 109% of GAAP net income.
Before sharing our updated 2023 outlook, let me update you on our current geographic outlook for new equipment markets.
In Asia Pacific, There's no change to our previous outlook, we expect the new equipment market to grow mid single digits or better led by India.
In EMEA the market is now expected to be down high single digits in 2023 worse than our prior expectations of download and mid single digits.
This decline is driven by northern Europe as customer delays in buying decisions persist.
The Americas market has weakened over the past few months and we now expect it to be down high single digits in units.
I'm an end market perspective. This decline is driven by multifamily residential coming down from a high level over the past two years.
Slightly offset by a more resilient commercial market.
And finally in China, we now expect the market to be down 10% compared to our prior guide of down 5% to 10%.
This decline is primarily driven by a lack of momentum as we exited the second quarter at a weaker run rate than we had anticipated.
Despite the weakening of the new equipment markets globally, we've maintained a strong backlog, giving us good visibility to future sales growth.
On the service side, there is no change to our outlook for global install base growth of roughly 5% led by Asia.
Our strong performance in the second quarter and the progress we've made on our strategic imperatives gives us confidence to improve our 2023 outlook.
Organic sales are now expected to be in the range of 4.5% to 6% with net sales in a range of 14 to $14 $3 billion.
Adjusted operating profit is expected to be 2.25 to 2.28 billion up $155 million to $175 million at constant currency.
Adjusted operating profit at actual currency is expected to be up $125 million to $155 million, including a $20 million to $30 million headwind from foreign exchange translation.
We're raising our guidance for adjusted EPS and its now expected in a range of $3 45 to $3 50.
Up 9% to 10% versus the prior year.
Lastly, our expectation for free cash flow remains unchanged at about one $5 billion to $1.55 billion or approximately 105% to 115% conversion of GAAP net income.
We continue to prioritize returning cash to shareholders and I'm pleased to share we're increasing our share repurchases this year to $800 million.
Turning to slide five.
As announced earlier today, we're launching a program called uplift to transform our operating model to continue to drive sustainable profitable growth within our business.
After three plus years as a public company in which we have grown new equipment share expanded operating margins grown EPS built a formidable backlog and returned approximately $2 $7 billion in cash to shareholders. We're designing Otis for the next phase to ensure high performance and resiliency rigor.
Most of the economic environment, we may face in the future.
We're launching uplift to drive efficiency across the organization, while continuing to prioritize the customer experience.
Going forward, we expect our sales specialization to continue to accelerate our growth.
Our innovation cycles to continue at a rapid pace and our customer intimacy to continue unabated.
Our management team is laser focused on ensuring that our operating performance can achieve a new higher performance tier through the transformation of our financial processes, improving our supply chain procurement and right sizing our cost base where needed among other aspects of the program.
Throughout the next two years, we expect the program to generate approximately $150 million in savings as we drive efficiency across the organization.
Our plan is to adopt.
Date, our shareholders at regular intervals on the progress, we're making with this program and ultimately you'll see the results in better performance growth operating profit and returns for our shareholders with that I'll turn it over to anorak to walk through our Q2 results in more detail.
Thank you Judy starting with second quarter results on slide six.
Sales of $3 $7 billion were up six 7% and organic sales were up nine 5% driven by strong performance in all business lines.
Adjusted operating profit was up $49 million at actual FX and $60 million at constant currency.
Drop through on higher volume productivity and pricing in both segments and commodity tailwind were partially offset by inflationary pressures, including annual wage increases unfavorable new equipment mix and higher corporate cost.
Adjusted EPS increased 7% or six cents, reflecting 11 cents of benefit from operations.
This strong operational performance and accretion from a lower share count were partially offset by a <unk> <unk> headwind from foreign exchange translation and a <unk> <unk> tax headwind as a result of a tough compare.
Free cash flow was strong in the quarter at $409 million or 109% conversion up $83 million.
The increase versus prior year was driven by higher net income and improved changes in working capital.
Moving to slide seven.
In the second quarter as we noted previously new equipment orders faced a tough compare and were down 12% at constant currency.
New equipment backlog, however continues to trend higher and was up 5% at constant currency versus the prior year and up 3% sequentially with all regions being up providing visibility for sales in the second half and beyond.
Globally pricing of new equipment orders was up low single digits building on solid pricing improvements from the middle of 2022.
Pricing trends improved mid single digits or better year over year in all regions, excluding China.
While pricing was down low single digits in China due to deflationary pressure in the software market, we maintained price cost neutrality by focusing on material productivity.
New equipment organic sales were up nearly 10% in the quarter with all regions contributing.
APAC grew double digits, driven by strong performance in Korea and India.
EMEA grew high single digits, primarily from southern Europe .
The Americas grew high single digits as job site delays and few inefficiencies east.
And China delivered mid single digit growth by executing on the stable backlog.
Overall, we saw solid execution across all regions.
Adjusted operating profit was up $15 million at constant currency.
The benefits from higher volume price beginning to flow from the backlog strong productivity and better than anticipated commodity tailwind were partially offset by continued unfavorable regional and product mix transactional FX and higher SG&A expense.
Now turning to service segment results on slide eight.
Maintenance units were up four 2% with growth in all regions led by China, where we achieved another quarter of teens portfolio growth.
Modernization backlog expanded by 14% with growth across all regions driven by strong orders growth of 16% in the quarter.
Service organic sales grew nine 4% the highest rates in Spain with growth in all business lines.
Maintenance and repair grew nine 1% from better than expected repair volume.
Our portfolio continued to expand four 2% and we achieved strong pricing up four points on a like for like basis.
With strong backlog conversion in the quarter modernization sales were up 10, 9% with particularly strong performance in Asia, including China.
Service profit was up $52 million at constant currency as the benefit from higher volume favorable pricing and productivity were partially offset by annual wage increases and higher material costs.
Margins expanded 50 basis points in line with our full year guidance.
Overall, we are pleased with our first half results, where we gained approximately 50 basis points of new equipment share grew the portfolio again over 4% increase organic sales by six 6% and improved operating profit by $67 million at constant currency, while continuing to grow our backlog and.
Both new equipment and modernization.
This provides good growth visibility over the next several quarters.
So that moving to slide nine and the revised outlook.
Starting with sales with strong service momentum, we are raising outlook and now expect total orders organic sales to be up four 5% to 6% versus the prior guide of 4% to 6%.
Adjusted operating profit growth at constant currency is expected to be in the range of $155 million to $175 million and approximately $15 million increase at the midpoint versus the prior guide linked to the better than expected service volume.
Service margins are still expected to expand about 50 basis points to 24% and we anticipate new equipment margins to expand 20 basis points to six 8%.
Overall margins are expected to be up approximately 30 basis points to 16% the high end of the previous range.
Adjusted EPS is expected to be up 9% to 10% versus the prior year within the range of $3 45 to $3 50, and approximately <unk> <unk> increase at the midpoint versus the prior outlook largely the result of strong operational performance.
Due to our continued cash mobilization activities, we have increased our share repurchase target to $800 million.
And the outlook for free cash flow is one five to $1 55 billion.
Our roughly 110% conversion.
Now taking a further look at the organic sales outlook on slide 10, there is no change to the overall new equipment outlook.
By region, we still expect the Americas and EMEA to be up mid single digits consistent with our prior guide.
Within Asia Asia Pacific is performing better than anticipated led by India, which we expect to offset as offset a decline in China due to the continuing weak demand environment.
Turning to service organic sales are now expected to improve by 50 basis points versus the prior outlook to a range of 6% to 7% with improvement in all business lines.
We are increasing the outlook for maintenance and repair organic sales now expected to be up five 5% to six 5% and 23 driven by the strong first half repair volume.
Supported by our robust backlog, which was up mid teens.
Increasing our modernization organic sales outlook to be in the range of 7% to 9%.
Moving to slide 11, we expect adjusted EPS growth of 9% to 10% in the range of $3 45 to $3 50, a 31% increase for the full year with 29.
Coming from operations.
Overall with a strong first half behind us, we are well positioned to improve our outlook and deliver a solid second half financial performance on the strength of our service driven business model and focus on operational excellence.
With that Liz Please open the line for questions.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from Nigel Coe with Wolfe Research.
Nigel Your line is now open.
Thanks, Good morning.
And as well.
So.
First of all.
On the nuclear margin clip to the to the <unk>.
40 basis points high end down three basis points, Alright small news.
But you haven't changed your growth outlook doesn't feel like the mix Jeremy congrats against the changes I'm just wondering what's driving that.
More kind of moderate view, if you will on our margin.
We still on track for that price cost tailwind in the back half of the year.
Hey, thanks.
For the question.
I guess the first one is what we've done is we've just tightened the new equipment margin.
Our margin to 20 basis points. So as you noted right, we haven't changed our sales outlook for new equipment, but within that.
China, which we thought was going to be flattish for the year is going to be down low single digits and as you're aware, China is a higher new equipment profit margin.
Market, but we are able to offset that with definitely better commodity <unk>.
<unk> initially we were expecting about 25 $30 million now by $40 million pricing definitely in the second half is going to be better than the first half you put the two together.
I think we tied into two about which more than offset China, So which is why we tied into 20 basis points on the new equipment side.
Okay. That's very clear and then my follow up is on the Uprights program the $1 50 of cost.
Maybe just a bit more detail on where you see opportunities to further streamline our cost base.
How much of that $1 50, do you think will come to the bottom line versus being reinvested and then is this additive to your other programs and I'm thinking things like the.
Amortization margin initiatives.
Service productivity initiative is this additive to those programs.
Yes, Nigel let me take that and we're calling it uplift I think you called it a price.
[laughter], but let me take that first and foremost I think it's really important.
For people to understand why we're doing this now and then then I'll get to kind of where the where the cost take out is going to be.
Which is mainly mainly in G&A. So it will be additive to our other productivity initiatives as well as our modernization growth, but where it comes from as you know we spent a little over three three plus years ago and since that time, the team and our colleagues I mean tremendous thanks to them we.
Gained share new equipment, we've driven growth expanded operating profit margins, we've return billions in cash to our shareholders and quarter after quarter, we've executed our strategy and performed and I think it's important to know that we're approaching uplift from a position of strength.
I think it's incumbent on leaders to prepare the company to take us to the next level and that's what we're doing as an executive leadership team across the company. So we're going to focus really on three areas.
The operating model itself to give us more speed and agility.
Or a tremendously distributed organization with our 1400 branch offices, serving our customers globally, we want that speed and agility to be more customer centric, we're going to streamline processes, that's going to be extremely important I think it's something we've learned coming out of spin and now through performance that we can be more consistent.
Geographically and we can streamline our processes from from financial processes, all the way through to really how we how we sell to customers and we're looking forward to that and the third element is taking advantage of our scale and acting as an enterprise and implementing some pretty significant focus on supply.
Chain, and especially indirect so you add those three together it adds up to the $150 million, we're going to return which is predominantly through G&A again, it's additive to what we're doing.
Anything above that that we generate we are planning on reinvesting in our business to give us new capabilities, new competencies to continue to invest in innovation, we've brought more products to market since spend than we have for many years, we're going to continue to do that as we create the connected Otis is the future and take us to the next level.
Okay, Great uplift I've got it okay. Thanks, Thanks [laughter].
Our next question comes from the line of Julian Mitchell with Barclays.
Yeah.
Hi, yes, good morning.
Just maybe the first question.
Around the market outlook on the backlog.
Because you took down the market outlook in various regions.
The sales guide oversee intact.
The backlog is still growing even with the orders.
So just trying to understand sort of looking ahead.
Should we expect the backlog.
To start to shrink sequentially.
As that end market pressure starts to be.
Exerted.
And do you expect to sort of a lower backlog entering 2020 full because of the market pressure you called out yes.
Yeah, well I'll, let Andre answer the backlog, but let me just really straight on hit we do not expect it expect a lower backlog as we exit 'twenty three and enter 'twenty for.
Really pleased with the 5% backlog growth and if you go to our first Appendix chart, we have a record backlog, which gives us really good line of sight for our future and really helped US drive the sales growth that you saw the organic growth in both segments.
But let me let me talk to the market and then I'll turn backlog over two two entourage just so you get a little to give you a little more color. Let me let me start in Asia Pac we expect the market itself on new equipment to still grow mid single digits, we're seeing really strong markets, we're actually seeing double digit demand in India.
And I'm really pleased with how our teams responding there, but think of Asia Pac continuing at mid single.
The Americas, what we saw in the first half at the market level and units was the first half was down mid teens.
Our view is the second half is going to be flattish to slightly down so the full year will be down high single.
For the market itself.
The units are slowing but the Americas market itself was sequentially flat. So we're watching all the indicators, obviously talking to our customers you know looking at Dodge looking at Abi, but again watching the Americas carefully and happy to talk about the orders there as well as we go through these questions.
In EMEA.
We say that we're going to be down high single digit for the rest of 'twenty three we're watching the rate impact a little bit of a sluggish market, especially in northern and Northern Europe , Germany, France, and UK being weaker and it's it's delays in decision, making uncertainty the proposals are still going in.
Customers, it's a matter of when theyre going to make those decisions, Spain, and Italy are pretty resilient and for the segment itself. The middle East is up low single digits, we're going into Europe with a strong backlog for the second half and again when you look at our backlog. We're looking out 18 to 24 months with a backlog of this scale on China.
Market itself, we're calling down 10%.
We started April momentum was good may was weaker.
We really exited Q2 with with with the volumes being down and the market itself. So that lack of acceleration that we had been planning on for the book and ship business in the second half really has taken us to the lower end of the range. The only thing I'll remind everybody again that new.
Market outlook is very different from from the service outlook, which is still solid as growing mid single digit again led by Asia low single digit in developed markets I don't know you want to talk to backlog.
Absolutely. Thanks.
Thanks Judy.
Even if we assume there is no orders growth, we would expect our backlog to be up low single digit by the end of the year and the reason for that Julian is because we tend to book more orders in any given year than we ship and some of the orders on larger projects with multiyear in nature. So clearly.
So on the right analogy, but if you look at our book to Bill has definitely been far higher than one so we booked definitely more orders and reshape over here, but let's even if assume if conditions worsen from here and there is a new a new equipment orders, even slightly decline to even mid single digit I think we will end the year with backlog at least being higher more importantly, if you look at our <unk>.
Backlog mix today in Americas, it's still fairly high which is a multiyear backlog that we have Asia Pacific is fairly good and that should convert into revenues next year with China being the highest book to ship. So it gives us confidence as we go into next year to see our new equipment revenue growing in line of our medium term guidance and even any M.
Hey, Julien our backlog is up modestly both versus last year and versus last quarter. So we're really we're watching the backlog closely we've always shared with our shareholders.
That you should watch us at year end, it's the best indicator for our next year in terms of topline and bottom line.
And that's we expect this year to be no different.
Thanks, very much and then just a quick follow up is that was a very thorough answer just looking at seasonality within the second half normally your earnings are down slightly sequentially in Q4.
Thank you.
Consensus.
As you sort of up in Q4 sequentially. So maybe just is there anything different you are calling out on sort of Q3 versus Q4 earnings this year because of the price cost or something like that.
Yeah. So.
If you kind of look at the second half of the year for the first six months, we did about 172 of EPS, which means 176 in the back half and I think it's pretty equally split between Q3 and Q4 Julien.
Julien in terms of our EPS split if you look at new equipment and I'll, just start with equipment and go on to service.
We expect about three ish percent growth in the second half of the year I think it should be kind of equal between the two quarters around that we're going to see commodity to wind pricing the tune of about $30 million to $40 million, obviously, you're a little bit of that is more towards Q4 than Q3, but the margin rate, which should be above 7% should be between.
In Q3, Q4 should be no difference between that.
Now if you look at our service, we are doing $40 million to $50 million of operating profit increase every quarter, we expect that again in Q3 and Q4.
Maintaining its continues to do well with the pricing as well as the portfolio growth and converting demand backlog. So I think we're in a pretty good run rate over there and obviously, there's a little bit more of a corporate expense.
A headwind in Q3 versus Q4, so you put all the puts and takes over there I think the cadence between Q3 Q4 from an EPS perspective should be pretty similar.
Great. Thank you.
Okay.
Our next question comes from the line of Steve Tusa with Jpmorgan.
Yes.
Hello.
Dave.
Sorry, sorry, I got cut off there for a second.
<unk>.
Just a question on on China.
So this market is seemingly getting revised down.
This whatever recovery was going to come it seems to be deferred there is seems to be a mixed messaging on stimulus I mean, I guess first of all what's your view on how that market will evolve in 'twenty four.
And on the services side isn't there a bit of like a lag as to when you can go after converting those into service agreement. So like we should be thinking about those opportunities.
Two year lag to the market and at what stage if this market remains down.
Do you have to get a little more aggressive.
Tweak up that.
That.
Equation of units coming up for conversion versus conversion, because obviously, if the market downturn.
And a couple of years later, you're still growing your conversion that could still mean negative units under management. If this thing kind of continues to bleed lower just curious how you're evaluating that equation yes.
Yeah, Let me, let me try and address.
Kind of multiple items there first let me start with the service business.
This was the eighth straight quarter, we had mid to high teens portfolio growth in China, and Sally low now leads our China organization and she has really been driving that we are now at 350000 units on our portfolio in China, which is a pretty big step up from when we when we made this commitment to grow our served.
This business and it is it is driving returns and it's you know we're increasing the conversion rates as we go.
Our China, even though the segment was down 10 in the second quarter, Steve We were down five so yet another quarter of market share gain and new equipment, which bodes well for the two year warranty and then for the conversions for us as well because even though there may be less units you know our strategy to open service depot.
To have the ability to drive the service conversion shipping Gen threes with Otis one connected is at the same time, we are accelerating our conversion rates versus what we had traditionally had in the past so even if the volume goes down a little our rates will offset that so that that doesn't really get me.
Concerned in terms of what we really changed in the second half. It was we had expected things to tick up, especially on the book and Bill business, a book and ship business excuse me and you know as we as we exited the second half we just hadn't seen the momentum now like you. We've heard you know had a monday out of the <unk>.
<unk>.
A different tone, we have to see what that translates to I'm cautiously optimistic that once that tone is set from Beijing, there's positive potential that that especially in the larger tier cities really starts happening in sentiment changes, but our outlook did not assume that.
If and when that happens again being optimistic cautiously optimistic obviously, we're prepared for it we've got the capacity we've got the sales channel and we've got the product and innovation to be able to deliver as soon as that picks up the state owned enterprises are still doing well they are still growing there they are buying the land and that's why again, we think.
We've done really well with our strategy on key accounts and growing share.
Great. Thanks, and then just one last one.
For <unk>.
And with.
With orders down potentially here in the second half how should we think about.
The progress flow or the contract liability flow through the <unk>.
See the cash flow statement.
Oh, yes.
With orders being down obviously, the sum if orders were to be down for Steve you're not seeing orders are going to be down in the second half of the year, obviously will come in lower advanced payments for sure. However, as you can we built up a fair amount of receivables and.
In the first because of the higher revenue and that should kind of unwind into the second half of the year right. So from a cash perspective, I think we will be we will be fine over there Steve great. Thanks, a lot. Thanks.
Yes.
Our next question comes from the line of Jeffrey Sprague with vertical research partners. Thank you good morning, everyone.
Just coming back around to price.
Roger.
Thank you gave us some good color on price on orders on new equipment I'm. Just wondering if you could give us a little color on what's coming through and revenues at this point on new equipment side, and how that might build.
For the next two or three quarters.
Great.
Yes.
So if you look at let me start with the second quarter for US now on the new equipment side, we saw about $5 million of pricing coming through to the bottom line and which was encouraging we did expect more of it to come in the second half and in the second half, we expect about $20 million of that to come through so if you look back now it's been six consecutive quarters of price increases.
That we've done.
And our backlog margin is up by over 100 basis points today, and if we kind of go through the course by the end of the year, we should see that backlog margin tick up a little bit more as we flush out some of the older orders with the older prices in the new and this mid single digit price increase continues if that happens every 100 basis points of backlog in.
Price increase should go to about 50 basis points of about $30 million to $40 million for next year. So we should kind of see that come through more next year. So I think we're just beginning to see the price of new equipment coming into the revenue and that should tick up for the next few quarters.
Great and then maybe we could just get a little more color on mott's obviously, it's.
Very robust.
Create some margin headwind as you do that work you seem to be kind of managing that quite effectively but my question is really more around.
What's the backend is looking like on the Maus are you seeing.
Higher service retention on the back end higher revenue per unit on the backend.
Just how kind of the baas is really playing into your overall.
Service portfolio growth strategy.
Yeah, Jeff listen, we're really pleased with modern and how it's developing and I think it's something I know, it's something we're going to be talking about for many quarters to come as we've added it actually is our fifth strategic imperative at our company. Just last month are in May and are very much focused on making it more.
More like our new equipment business, which means youre going to see margins expand even though right now it's dilutive in the service segment. So pleased with the quarter again, our fourth consecutive quarter of orders up over 10% strong backlog I would call Asia is the standout in Mod we.
We had great volume and some major projects in Asia Pacific in the quarter, Japan, Korea, Hong Kong, India and China.
<unk> is an H a highly accelerating past due to their amex volume, our <unk> product, we have and youre going to continue to see that grow as units.
Continue to age in China. So we're optimistic about Mod as I said in the last call we're going to approach it.
By taking everything we've learned in new equipment and service and making it more more production ready versus custom and I think that's going to benefit us in terms of margin expansion as we as we drive more revenue through it once we do a mod our ability to retain that and put that key.
That on Otis service is in the high nineties, so much more significant than the than the conversion rates even in our industry, leading retention rate. So that's why margin important to us. It's it not only gives us additional customer intimacy both for the units that were on our portfolio. It let's.
Spring other units back to our portfolio drives great customer value energy efficiency gets them ready for another multiple years, especially as you think about all the buildings now that are being repurposed theres, a huge amount of opportunity for us as well with the with the office is changing to the multi use.
So mark is going to be something we talk about for a while going for almost consistently now every quarter and youre going to see us continue to deliver on that both in the orders the backlog and then most importantly, starting that service clock all over again.
Alright, Thanks, a lot.
Our next question comes from the line of Nick <unk> with RBC capital markets.
Yes, hi, everyone. Thanks for taking the questions.
So it's been another strong performance from repair I was wondering if you could just remind us how much is maintenance and repair is the repair piece, specifically and how sustainable the growth because I think it's been a couple of quarters now where the greatest surprise to the upside. So I'm wondering if maybe it's just a structurally stronger market.
Then you may be told previously that's the first one yes.
Yeah, Nick good to hear from you.
We don't disclose the difference between maintenance and repair.
Really strong repair this quarter and we keep waiting for the quarter, where it's going to slow down.
You go back probably six quarters, we saw a bounce back when when office you started picking up post COVID-19, because we had a little bit of a downturn in the early COVID-19 days. So it's been it's been a good strong six to eight quarters.
But again.
As people potentially put off some discretionary mod decisions.
Your units are still aging and need even more repair so really pleased with repair globally. It.
It was strong in every region and.
We're not sure how long this can keep up so we think we've got it tuned appropriately in the outlook, but I'll I'll, let Andre talked about from an outlook perspective.
Just a couple of points to add over there I think I think the team has really executed very well on the repair side I'm going after two years of double digit growth.
We entered this year, we thought that repair would be a low single digit growth. So if you look at the outperformance on the service business I think it's largely because of repair maintain its portfolio is growing at four 2%. We are price on a like to like basis of 4%.
Just from mix in June it's a 200 basis points, maybe maintain inches more than high single digit. So repair is definitely growing double digit in the first half of the year and it's not only because of coming back to work just executing on a very good strategy over there in the second half. The reason you see a step down in the service revenue is good.
<unk> continues to grow at the same clip modernization backlog in <unk> as we just assuming repair is going to be flattish now we may be a little bit cautious over there.
To execute well there could be a little bit more upside in the second half of the year.
That's great and then maybe just on Otis one can you just provide us with an update on your general assets on connectivity and how that's feeding into some of the metrics like retention and conversion.
Whether there's been any impact on pricing or profitability and kind of when we might see that.
If we haven't already because I know you've got a slightly different strategy to one of your peers, maybe pricing for it a bit more directly already so I was just curious to hear.
How the Iot operation as Kelly.
Yeah, we're really pleased the oldest one units are making a difference we are shipping all of our gen threes with Otis one and our new Gen. Three core will have that in North America, the new product we announced.
This quarter were.
We're driving a much larger volume of Otis one this year because of all the shipments that are happening and because of all the conversions in China that are happening so where in the past. We would tell you about 100000, a year that number is going to be up significantly more in 2023, which is what continuous us along that journey.
Many in our medium term guide right now we've got over 800000 of our units connected in general more than just Otis one, but now Otis one is picking up a bigger proportion of that.
You will see far more than 100000 units this year connecting it is making a difference.
If you look at China alone I would tell you. It's part of their significant service productivity. The majority of that is being driven by <unk>. One are running on arrivals are down across the globe and that that we are getting anytime we have a connected product our ability not just to convert but to retain that especially.
<unk> from the Isps, who really they don't want to come into a notice elevator, that's got any view screen and figure out how that how to maintain that and they can't offer that same connectivity. So we provide all of those numbers on an annual basis, we'll do that in fourth quarter, but it is an integral part of our strategy.
It is working it is helping us with service pricing.
And as <unk> said on service pricing like for like we're up four points. So were up from last year and honestly I've Gotta give EMEA incredible kudos there up mid single digits, this year and service pricing and Bernardo and the team there are doing a great job on that.
But a big part of that is being connected I was in a I was in Portugal, a few weeks ago with our team more than half of their portfolios connected and their their service margins are outstanding.
So it's Matt It makes a difference our strategy again to define that connection versus having people customers opt in from a subscription we're getting subscription services too, but again, we chose to invest the capex and we chose how we were going to deploy out of this one and I would tell you youre seeing it in our <unk>.
<unk> margins.
Great. Thank you very much.
Our next question comes from Josh Poker Winski with Morgan Stanley .
Hi, good morning, all.
Hey, Josh.
Judy I wanted to pick up on a couple of things you already touched on and I apologize I jumped on a little late so you might have covered this on the China question, but how are you seeing a divergence between national accounts and maybe more of the volume business in terms of where the weakness or.
The pricing pressure is coming.
It's kind of downstream implications for what that conversion will look like.
Yeah, No a fair question Josh.
We call them key accounts, which are the large developers are our team has continued to develop those key accounts and as a matter of fact, our R. R.
Our portion of National key accounts that are now state owned enterprises is significantly larger than the private developers. So that's really making a difference for us.
Tier one and tier two cities continue to outperform.
Not just the segment, but also outperformed for Otis versus the lower tier cities, but in the lower tier cities. It was volume for us and.
And our team our team performed pretty well as you look at the second quarter. The positive segments in China were the same as the first quarter infrastructure and industrial and the weakness was more in resi and commercial.
But I think I.
I like the strategy, we're on again, having those state owned enterprises, and then will you know, we're seeing what's going to happen again with with the government policy.
With the tone, that's being set and then how these policy he's eases, whether its mortgages lending rates or again, you know houses just the whole philosophy of you know of housing is for living.
Yeah versus investment that that phrase was no longer used on Monday. After many years. So we're watching it carefully we think we've got.
The right tuning for the second half if if there is an upturn with either stimulus or just sentiment, helping on volumes were ready and youll see it flow through.
Got it that's helpful. And then just shifting over to the mob business and Jeff's question.
I know you guys have aspirations to bring up those margins over time obviously.
The conversion rates or your attachment rates are good on the backend.
Is this a function of scale and sort of ramping up volume on this more standard work for business versus customization is it more price disciplined sort of what are the key.
Either milestones or initiatives that you need to do to bring the margins of that up or is it simply just a waiting game of getting us through the backlog.
A great question, Josh and I think I think you answered it in.
But if everything right. So if you kind of look at our Mod business that are just to level set everyone. Firstly. It is our lowest margin segment today, even relative to new equipment in.
Obviously, your repair and maintenance, but as we standardize the products as we build scale and as we kind of get a most of this and go to market strategy. We are already seeing this margins pick up because we're getting scale. So we are fairly confident that the trajectory that we're on right now that you should see margins pick up over the next six to nine months.
And who would take the new equipment margin as well so it's on a good track right now.
Great color, Thanks, guys best of luck.
Our next question comes from the line of Joe O'dea with Wells Fargo.
Hi, good morning, Thanks for taking my question.
Okay.
Yeah. Thanks, Joe.
I wanted to start just on the circling back on the orders backlog revenue dynamic and just to understand really what you think about in terms of the revenue implications with some of the changes in the end market.
<unk> for the year, obviously, not impacting how you're thinking about 2003, I'm not even really sure if its impacting how you're thinking about 'twenty four.
And so.
As you think through whats happening out there and I'm not sure how much of this is supply chain improving project execution, improving folks that donates maybe order as far in advance versus things like interest rates and credit and so as you just think about the past few months and then the revised views on some of the demand trends in the markets. If you can sort of translate that.
Any kind of revenue implications right now.
Yes, So let me let me just touch on a few at the top level.
Supply chain is improving and youre seeing that come through with the volumes were being able to ship.
And that's been helpful. As <unk> said in his opening remarks commodities are improving as well we had about a $15 million tailwind in the second quarter and we've upped our outlook for commodities as well so prices up commodities is up supply chain is improving that's all fairly positive.
Our backlog again as is at a record and we it really will see us through 2024 with with some certainty with probably the the question Mark being on China.
And when China bounces back.
Or <unk> what level, our China team has done a incredible job on material productivity.
And even though pricing is extremely competitive in China.
We have hit at least price cost neutral price cost slightly positive in China through the first half of the year.
So that's going to if the market doesn't change and there's no stimulus will it will adapt and continue to change our cost structure.
If it does come back we're ready.
No.
And then Oh go ahead.
Go ahead Joe.
I just wanted to touch on the pricing comment as well.
So just trajectory of pricing in China has there been any indication of stabilization recently and then also in developed markets.
Or are you seeing any.
Any pricing implications just from maybe a little bit lower demand patterns as well as cost starting to improve.
So China pricing is very competitive.
But no one has has yet taken it down to being unrealistic or undisciplined. So it is the most challenging place for us to get price.
And I think I think that's you see that market wide everywhere else in the matured and the emerging markets. We're seeing good price and we're seeing rational competitors doing the same things.
Yes.
Exactly I mean, we are still seeing mid single digit price increases in EMEA and Americas in low to mid single digit in Asia.
If commodity costs do come down and material productivity comes down you could see a little bit more pricing coming down but the key metric here is price cost and I think we are going to be neutral or positive.
Now we are and let's see how this trend continues but so far it seems quite rational.
Thank you.
Listen.
Our next question comes from the line of Gautam Khanna with TD Cowen.
Hey, good morning, guys.
Hey, good morning.
Just to follow up on.
Just the dynamics on 24 I was curious do you have an early read of where pricing might head portfolio wide and.
In 'twenty four.
Relative to 'twenty, three and then secondly.
Secondly have you seen any indications of backlog stretching.
Whether it's <unk> or just timelines.
Extending across any of these markets where orders have been a bit softer.
Yeah. So so D commits don't really happen.
Just on kind of non refundable deposits in our in our business. So people don't double order and Theres not a lot we do measure jobs that and we keep a careful eye on jobs that decommit. It's a very small low single digit at most percentage globally of the 10000 installations that are going.
On somewhere in the World every day.
Are there times and we experienced this in the past where there have been some labor challenges from other trades in the jobs have slowed down that seems to have gone away in the Americas. So we're not seeing that stretch out so.
So we either see you got them at the beginning when we've done our proposal we've been verbally awarded but it doesn't go to a booking when we get that deposit because of potentially rates and things like that and we're watching that carefully as well.
I think it's too early for us to talk about 'twenty four pricing, we're going to focus on the second half and keep building building our backlog is strong and executing on that backlog.
Thanks.
That concludes today's question and answer session I would like to turn the call back to Judy marks for closing remarks. Thanks, Liz our results in the first half reflect the continued execution of our strategy as we remain focused on ensuring we continue delivering value for our.
The balance of 2023 and beyond.
You all for joining the call today, and please stay safe and well.
This concludes today's conference call. Thank you for participating.
You may now disconnect.
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