Q3 2023 Otis Worldwide Corp Earnings Call
Yeah.
Good morning, and welcome to <unk> third 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.
Website at W. W. W Dot dot.
Dot com.
Now like to turn the conference over to Michael Radnor Senior Director of Investor Relations. Please go ahead.
Thank you Michelle welcome to Otis third quarter 2023 earnings conference call on the call with me today are Judy marks chair, CEO, and President and <unk> Executive Vice.
Rice, 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.
Two 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 now 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 Q3 higher.
Lights on slide three.
<unk> achieved strong results in the third quarter, marking nine months of solid execution. In 2023, we grew organic sales five 2% with growth in both segments expanded operating profit margins 60 basis points and achieved 19% adjusted EPS growth this year.
Marks the 11th consecutive quarter of service organic sales growth and the 15th quarter, where our service operating profit margin has expanded demonstrating the consistency in our execution and the strength of our strategy.
With our fourth consecutive quarter of maintenance portfolio growth about 4% and backlog growth in both new equipment and modernization, we have set ourselves up nicely for the future.
Last quarter, we announced the launch of our Gen. Three core elevator in North America and in the third quarter. We sold our first units this new product addresses the needs of our customers in the 2% to six story building segment the largest by volume in North America.
We also continued to drive progress toward our ESG commitments for the second year in a row, we achieved a gold rating from <unk> ranking us within the top 5% of all SaaS companies.
We're also proud to have been named by Newsweek as one of the world's most trustworthy companies and one of America's greatest companies.
Sure a few customer highlights from the third quarter.
In British Columbia, Otis is providing seven sky rise and eight gen three edge elevators for south yards, a mixed use development by anthem properties.
South yards will include more than 2500 residential units and over 60000 square feet of retail and office space surrounding a one acre community Park.
In Hong Kong as they are we're supplying 47 gen three units to enhance access to more than 30 elevated walkways.
These elevators will provide improved.
Excess ability for the aging population and people with disabilities.
Key part of Hong Kong's Universal accessibility initiatives construction.
Construction is expected to be complete in July of 2026.
In Saudi Arabia, we secured a contract to modernize 18 elevators at the Saudi National Bank headquarters in Riyadh as part of the modernization will upgrade the controllers and the high rise units, while adding our oldest one Iot solution. This new project builds on our existing relationship with the Saudi National Bank headquarters, which has four.
700 Otis units in total.
And in China, We received a contract to maintain 351 units at Shanghai's Pudong Airport with 271 of these returning to the <unk> portfolio as a recapture <unk>.
Unknown Executive: Good morning and welcome to Otis' third 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.otis.com.
<unk> Airport is a critical cargo access point in East Asia, While also serving roughly 80 million passengers. Each year. We're proud to say, we now maintain all Otis units the airport.
Michael Rednor: I would now like to turn the conference over to Michael Rednor, Senior Director of Investor Relations. Please go ahead. Thank you, Michelle.
We announced our uplift program last quarter and in Q3, we began executing initiatives focused on three essential areas.
<unk> scale across our global organization to unlock synergies.
Unknown Executive: Welcome to Otis' third quarter, 2023 earnings conference call.
Unknown Executive: On the call with me today are Judy Marks, Chair, CEO, and President, and Anurag Maheshwari, Executive Vice President, and CFL. Please note, except where otherwise noted, the company will speak the results from continuing operations, excluding restructuring and significant non-recurring 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.
Standardizing, our processes to generate efficiencies and driving supplier in indirect spend optimization.
We are on track to meet our stated expected run rate savings of $150 million by midyear 2025 taken together these initiatives to drive further value for our customers organizational effectiveness and sustainable profitable growth.
Moving to slide four Q3 results and 2023 outlook organic.
Unknown Executive: Otis' SEC filings, including our form 10K and quarterly reports on form 10Q, provide details on important factors that could cause actual results to differ materially.
Organic sales in the quarter grew five 2%.
Service was up eight 4% with all lines of business contributing and new equipment up 1% with growth in the Americas, EMEA and Asia Pacific.
Judy Marks: Now 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. Starting with Q3 highlights on slide three. Otis achieved strong results in the third quarter, marking nine months of solid execution in 2023. We grew organic sales 5.2% with growth in both segments, expanded operating profit margin 60 basis points, and achieved 19% adjusted EPS growth.
Although new equipment orders declined 10% versus the prior year backlog was up at 2% at constant currency.
Our share in the quarter remained relatively flat, leaving us at approximately 50 basis points of share gain year to date.
Order growth in EMEA, and Asia Pacific was more than offset by declines in the Americas and China.
In service modernization orders remained strong up 13% in Q3, the fifth consecutive quarter of Mod orders growth above 10% driven by strong performance in EMEA, China and Asia Pacific.
Judy Marks: This marks the 11th consecutive quarter of service organic sales growth and the 15th quarter where our service operating profit margin has expanded, demonstrating the consistency in our execution and the strength of our strategy. With our 4th consecutive quarter of maintenance portfolio growth above 4%, and backlog growth in both new equipment and modernization, we have set ourselves up nicely for the future. Last quarter, we announced the launch of our Gen3 core elevator in North America, and in the third quarter, we sold our first units.
<unk> backlog was up 15%, giving us line of sight to sales over the next several quarters.
With adjusted operating profit growth of $47 million in the quarter, we expanded margins by 60 basis points, driven by 90 basis points of service adjusted operating profit margin expansion.
We generated $272 million of free cash flow driven by higher net income.
To summarize we executed our strategy growing the portfolio of about 4%, increasing our new equipment and Mod backlogs, giving us a strong base to execute on for the next several quarters, while expanding operating profit margins as we drive a consistent operating cadence in the business ultimate.
Judy Marks: This new product addresses the needs of our customers in the two to six-story building segment, the largest by volume in North America. We also continued to drive progress toward our ESG commitments. For the second year in a row, we achieved a gold rating from Ecovatus, ranking us within the top 5% of all assessed companies. We're also proud to have been named by Newsweek as one of the world's most trustworthy companies and one of America's greenest companies.
Leading to just under 20% EPS growth.
Ultimately, we believe we're set up well despite the relatively weaker macro picture, we're facing which I will discuss next.
Judy Marks: Let me share a few customer highlights from the third quarter. In British Columbia, Otis is providing seven Skyrise and eight Gen3 Edge elevators for South yards, a mixed youth development by Anthem Properties. South yards will include more than 2,500 residential units and over 60,000 square feet of retail and office space surrounding a one-acre community park. In Hong Kong, SAR, we're supplying 47 Gen3 units to enhance access to more than 30 elevated walkways.
For global New equipment unit bookings Asia Pacific continues to grow although we now expect it to be up low to mid single digits, a step down from our prior expectations.
We anticipate that EMEA will declined high single digits in line with our expectations for last quarter, while Americas, we now expected to decline mid teens and China to decline north of 10% both worse than we were anticipating just a few months ago as the macro environment remains challenging.
Judy Marks: These elevators will provide improved accessibility for the aging population and people with disabilities, a key part of Hong Kong's Universal Accessibility Initiative. Construction is expected to be complete in July of 2026. This new project builds on our existing relationship with the Saudi National Bank headquarters, which has 47 Otis units in total. And in China, we receive the contract to maintain 351 units at Shanghai's Pudong Airport, with 271 of these returning to the Otis Port Folio as a recapture.
In total this would leave global new equipment bookings somewhere.
Around 850000 units.
Approximately 10% versus 2022.
In service, although global new equipment unit bookings are smaller than we anticipated we still expect the service installed base to grow nearly 5%. This year as units that were booked two to three years ago and installed one to two years ago roll off their warranty periods.
This will put the global service install base somewhere between 21 to 22 million units by year end of which we currently maintain approximately $2 2 million and expect to end the year around two 3 million units in our maintenance portfolio.
With that as the global backdrop, let me now update you on Otis was financial outlook.
We expect organic sales growth of approximately five 5% with net sales of about $14 $1 billion.
Judy Marks: Pudong Airport is a critical cargo access point in East Asia, while also serving roughly 80 million passengers each year. We're proud to say we now maintain all Otis units at the airport. We announced our uplift program last quarter, and in Q3 we began executing initiatives focused on three essential areas, gaining scale across our global organization to unlock synergies, standardizing our processes to generate efficiencies, and driving supplier and indirect spend optimization. We are on track to meet our stated expected run rate savings of $150 million by mid-year 2025. Taken together, these initiatives drive further value for our customers, organizational effectiveness, and sustainable profitable growth.
Adjusted operating profit is expected to be approximately $2 $2 65 billion.
Up $170 million at constant currency.
At actual currency adjusted operating profit is expected to be up $140 million, including a foreign exchange headwind of $30 million.
We're raising our outlook for adjusted EPS now expected to be $3 52.
Up 11% versus the prior year.
We now expect free cash flow of about $1 5 billion or approximately 105% conversion of GAAP net income.
We still expect share repurchases of $800 million.
With that I'll turn it over to <unk> to walk through our Q3 results in more detail.
Judy Marks: Moving to slide 4, Q3 results in 2023 outlook. Organic sales in the quarter grew 5.2%. Service was up 8.4% with all lines of business contributing, and new equipment up 1% with growth in the Americas, EMEA, and Asia Pacific. Although new equipment orders declined 10% versus the prior year, backlog was up at 2% at constant currency. Our share in the quarter remained relatively flat, leaving us at approximately 50 basis points of share gain year to date.
Thank you Judy and good morning, everyone, starting with third quarter results on slide five.
Net sales of $3 5 billion grew five 4% and organic sales were up five 2% with growth in both segments.
Adjusted operating profit was up $52 million at actual FX and $47 million at constant currency with margins expanding 60 basis points to 16, 9%.
Drop through on service volume productivity and pricing in both segments and commodity tailwind, while partially offset by inflationary pressures, including annual wage increases and higher corporate costs.
Judy Marks: Order growth in EMEA and Asia Pacific was more than offset by declines in the Americas and China. In service, modernization orders remained strong, up 13% in Q3. The fifth consecutive quarter of mod orders growth above 10%, driven by strong performance in EMEA, China, and Asia Pacific. Mod backlog was up 15%, giving us line of sight to sales over the next several quarters. With adjusted operating profit growth of $47 million in the quarter, we expanded margins by 60 basis points, driven by 90 basis points of service adjusted operating profit margin expansion.
Adjusted EPS increased 19% or <unk>.
With over half of this improvement coming from strong operational performance and the rest from a combination of our capital allocation initiatives and ongoing effort to reduce the tax rate, which came in at 25, 5% in the quarter.
Free cash flow came in at $272 million.
Up $57 million versus prior year, largely driven by higher net income.
Year to date, we generated $934 million of free cash flow $81 million lower versus the prior year, driven by lower down payments on fewer new equipment orders and the continued outperformance of our repair business as this work tends to be paid in areas.
Judy Marks: We generated $272 million of free cash flow, driven by higher net income. To summarize, we executed our strategy, growing the portfolio above 4%, increasing our new equipment and mod backlogs, giving us a strong base to execute on for the next several quarters, while expanding operating profit margins as we drive a consistent operating cadence in the business, ultimately leading to just under 20% EPS growth.
Moving to slide six.
Let me start by giving some color on Q3, new equipment orders and backlog.
In the third quarter at constant currency, new equipment orders declined 10% versus prior year.
Despite this our new equipment backlog increased 2% with mid teens growth in Asia Pacific mid single digit growth in the Americas and EMEA roughly flat.
Judy Marks: Ultimately, we believe we're set up well despite the relatively weaker macro picture we're facing, which I'll discuss next. For global new equipment unit bookings, Asia Pacific continues to grow, although we now expect it to be uploaded mid-single digits, a step down from our prior expectations. We anticipate that EMEA will decline high single digits in line with our expectations for last quarter. While America's we now expect to decline mid-teens and China to decline north of 10%, both worse than we were anticipating just a few months ago, as a macro environment remains challenging.
China backlog is down low single digits.
Sequentially outside of China, New equipment backlog was relatively stable in all the regions.
Globally pricing on new equipment orders was up low single digits building on a similar increase in the third quarter of the prior year.
Excluding China pricing improved by mid single digits or better in all regions.
Although pricing was down mid single digits in China due to macro challenges, we remain price cost neutral in the region from our continued focus on driving material productivity.
Judy Marks: In total, this would leave global new equipment bookings somewhere around 850,000 units, down approximately 10% versus 2022. In service, although global new equipment unit bookings are smaller than we anticipated, we still expect the service install base to grow nearly 5% this year, as units that were booked two to three years ago, and installed one to two years ago roll off their warranty periods. This will put the global service install base somewhere between 21 to 22 million units by year end, of which we currently maintain approximately 2.2 million, and expect to end the year around 2.3 million units in our maintenance portfolio.
New equipment organic sales were up 1% in the quarter with strong growth in all regions outside of China.
Asia Pacific grew low teens, driven by continued performance in India as well as traction with major projects.
In EMEA, new equipment sales grew high single digits underpinned by the significant orders over the past several quarters and southern Europe, and the middle East while in the Americas region grew high single digits for the second consecutive quarter executing on its multibillion dollar backlog.
We grew new equipment operating profit by $10 million at constant currency, despite China sales coming in weaker than expected.
Judy Marks: With that as the global backdrop, let me now update you on Otis's financial outlook. We expect organic sales growth of approximately 5.5%, with net sales of about 14.1 billion dollars. Adjusted operating profit is expected to be approximately 2.265 billion dollars, up 170 million dollars at constant currency. At actual currency, adjusted operating profit is expected to be up 140 million dollars, including a foreign exchange headwind of 30 million dollars. We're raising our outlook for adjusted EPS, now expected to be $3.52, up 11% versus the prior year. We now expect free cash flow of about $1.5 billion, or approximately 105% conversion of gap net income. We still expect cherry purchases of $800 million.
Driving productivity pricing flow through from the backlog and tailwind from commodities more than offset the project and reasonable mix headwinds leading to a seven 2% margin in the quarter.
Turning to service segment results on slide seven.
Maintain its units were up four 2% with growth in all regions led by high teens growth in China for the fourth quarter in a row.
We delivered another strong quarter of modernization orders up 13%, including China more orders growing double digits from continued success of new product offerings.
Asia Pacific also grew double digits due to a number of volume and major project wins, we had standout performance coming from North Asia.
Anurag Maheshwari: With that, I'll turn it over to Honourock to walk through our two to three results in more detail.
EMEA more orders grew 10% driven by major project wins.
Anurag Maheshwari: Thank you Judy, and good morning everyone, starting with third quarter results on slide five. Net sales of $3.5 billion grew 5.4%, and organic sales were up 5.2% with growth in both segments. Adjusted operating profit was up 52 million dollars at actual FX, and $47 million at constant currency, with margins expanding 60 basis points to 16.9%.
At quarter end backlog was up 15% with growth in all regions.
Service revenue came in better than expected with all lines of business contributing to organic sales growth of eight 4%.
Maintenance and repair was up eight 6% from higher than anticipated repair volumes and Mod was up seven 6% with growth across all regions highlighted by double digit increase in Asia.
Anurag Maheshwari: Drop through on service volume, productivity, and pricing in both segments, and commodity tailwinds were partially offset by inflationary pressures, including annual wage increases and higher corporate costs. Adjusted EPS increased 19% of 15 cents, with over half of this improvement coming from strong operational performance, and the rest from a combination of a capital allocation initiatives, and ongoing effort to reduce the tax rate, which came in at 25.5% in the quarter. Free cash flow came in at $272 million, up $57 million versus prior year, largely driven by higher net income.
Service pricing, excluding mix and churn came in around four point similar to last quarter's performance and adjusted for mix in June was a net two points.
Higher volume favorable pricing and productivity were partially offset by annual wage increases and higher material cost leading to $53 million or service profit growth at constant currency.
Service adjusted operating profit margin expanded 90 basis points in the quarter to 24, 8%.
Overall, we are pleased with our results in the quarter as well as year to date.
We have grown our new equipment and more backlogs expanded the portfolio at 4% and delivered over 10% EPS growth.
Anurag Maheshwari: Year to date, we generated $934 million of free cash flow, $81 million lower versus the prior year, driven by lower down payments on fewer new equipment orders and the continued outperformance of a repair business as this work tends to be paid in areas. Moving to slide six, let me start by giving some color on Q3 new equipment orders and backlog. In the third quarter, at constant currency, new equipment orders declined 10% versus prior year.
Moving to slide eight and the revised outlook.
Starting with sales total orders organic sales are expected to be up approximately five 5% consistent with the midpoint of our prior guide, including slight adjustments by segment.
Adjusted operating profit growth at constant currency is expected to be $170 million or $5 million increase versus the prior guidance midpoint and the result of strong performance in the service segment.
Anurag Maheshwari: Despite this, a new equipment backlog increased 2% with mid-teens growth in Asia Pacific, mid-single-digit growth in the Americas, and EMEA roughly flat. China backlog is down low single digits. Sequentially outside of China, a new equipment backlog was relatively stable in all regions. Globally, pricing on new equipment orders was up low single digits, building on a similar increase in the third quarter of the prior year. Excluding China, pricing improved by mid-single digits are better in all regions.
At actual currency, we expect adjusted operating profit of $2 265 billion as the better operating performance is offset by slightly higher foreign exchange headwind driven by a change in the euro and the weakening of various Asian currencies, such as the <unk>.
Our margin expectations remain unchanged with service margins expected to expand 50 basis points to 24% and new equipment margins expected to expand 20 basis points to just under 7%.
This puts overall operating margins at approximately 16% up 30 basis points.
Anurag Maheshwari: Although pricing was down, mid-single digits in China due to macro challenges, we remain price-cost neutral in the region from a continuous focus on driving material productivity. New equipment organic sales were up 1% in the quarter with strong growth in all regions outside of China. Asia Pacific grew low-teens driven by continued performance in India as well as traction with major projects. In EMEA, new equipment sales grew high single digits underpinned by the significant orders over the past several quarters in southern Europe and the Middle East, while in the Americas, the region grew high single digits for the second consecutive quarter executing on its multi-billion dollar backlog. We grew new equipment operating profit by 10 million dollars at constant currency, despite China sales coming in weaker than expected.
We have raised our guidance for adjusted EPS now expected to be up 11% versus the prior guidance to $3 52.
This represents a 4% increase versus the prior guidance midpoint, largely driven by strong operational performance and improvements in below the line items, including tax now expected to end the year at 26%.
We expect to generate approximately $1 5 billion and free cash flow of roughly 105% conversion rate and return substantially all of it to shareholders through $135 billion of dividends and share repurchases.
Taking a further look at the organic sales outlook on slide nine.
We now expect new equipment organic sales growth of approximately 3% at the low end of the prior range driven by larger than expected headwinds in China, which we expect to be down mid single digits.
Anurag Maheshwari: Driving productivity, pricing flowed through from the backlog and tailwinds from commodities more than offset the project in regional mixed headwinds leading to a 7.2% margin in the quarter. Turning to service segment results on slide 7, maintenance units were up 4.2% with growth in all regions led by high-teens growth in China for the fourth quarter in a row. We deliver another strong quarter of modernization orders up 13% including China more orders growing double digits from continued success of new product offerings.
The Americas and EMEA is still expected to grow mid single digits organically.
And service organic sales are expected to be up approximately seven 5%, a one point increase versus the midpoint of our prior guidance driven by maintaining and repair.
Consistent maintenance portfolio growth and pricing together with another quarter of strong repair volume enabled us to raise the outlook by 130 basis points to up seven 3% versus the prior guide.
Anurag Maheshwari: Asia Pacific also grew double digits due to a number of volume and major project winds with standout performance coming from North Asia. EMEA more orders grew 10% driven by major project winds. At quarter end our mod backlog was up 15% with growth in all regions. Service revenue came in better than expected with all lines of business Maintenance and repair was up 8.6% from higher than anticipated repair volumes, and more was up 7.6% with growth across all regions highlighted by a double digit increase in Asia.
Modernization organic sales expectations remain unchanged up 8% as we execute on our backlog, which was up 15% at quarter end.
Moving to slide 10, we have raised our expectations for adjusted EPS and now anticipate growth of approximately 11% or $3 52.
35% increase versus the prior year, driven by 30 <unk> of operational improvement.
In closing, we continue to execute well on the things, we can control and our resilient service business is driving profitable growth in an uncertain macro environment.
Anurag Maheshwari: Service pricing, excluding mixed insurance, came in around four points, similar to last quarter's performance, and adjusted for mixed insurance was in that two points. Higher volume, favorable pricing, and productivity were partially offset by annual wage increases and higher material costs leading to $53 million or service profit growth at constant currency. Service adjusted operating profit margin expanded 90 basis points in the quarter to 24.8%.
Our strong year to date performance gives us confidence to again raise our EPS outlook and deliver a solid fourth quarter, while positioning us well to perform in 'twenty four and beyond.
With that Michelle Please open the line for questions.
Thank you to ask a question. Please press star one one on your telephone.
For your name to be announced to withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.
Anurag Maheshwari: Overall, we are pleased with our results in quarter, as well as year to date. We've grown a new equipment and more backlogs, expanded the portfolio at 4% and delivered over 10% EPS growth.
The first question comes from Jeffrey Sprague with vertical research partners. Your line is open.
Thank you good morning, everyone.
Anurag Maheshwari: Moving to slide 8 and the revised outlook. Starting with sales, total Otis Organic sales are expected to be up approximately 5.5% consistent with the midpoint of a prior guide, including slight adjustments by segment. Adjusted operating profit growth at constant currencies expected to be $170 million, a $5 million increase versus the prior guide's midpoint, and the result of strong performance in the service segment. At actual currency, we expect adjusted operating profit of $2.265 billion, as the better operating performance is offset by slightly higher foreign exchange headwind, driven by a change in the euro and the weakening of various Asian currencies such as the CNY.
Judy are out or could you just elaborate a little bit more on your view on both the Americas and China, new equipment kind of the downward tick in the outlook.
Maybe just some thoughts on kind of even the trajectory as we exit two.
23 into 2024 in those particular regions.
Yes happy to Jeff, Let me start with the Americas. So we're now we now believe the new equipment market in the Americas is going to be down mid teens.
And we're really seeing that with the highest impact being the interest rates remaining high it really is impacting new project starts we've seen that in the most recent Abi and Dodge data. So we're watching that closely I would tell you the residential it performed the worst in the third quarter.
Anurag Maheshwari: Our margin expectations remain unchanged with service margins expected to expand 50 basis points to 24% and new equipment margins expected to expand 20 basis points to just under 7%. This puts overall operating margins at approximately 16% up 30 basis points. We have grazed our guidance for adjusted EPS, now expected to be up 11% versus the prior guide to $3.52. This represents a 4% increase versus the prior guide's midpoint, largely driven by strong operational performance and improvements in below the line items, including tax, now expected to end the year at 26%.
<unk>, followed by commercial not being great and then.
Infrastructure for the quarter being relatively flat, we expect infrastructure to pick up as we go into 'twenty four we tend to see that a little later in the cycle versus the early.
Construction companies with all the infrastructure activity that's starting.
What I do like about the America is beyond their performance and they really had a strong performance in terms of backlog conversion is we still have strong mid single digit mid single digit backlog on new equipment. It puts us in a really good position not just for the fourth quarter, but I would tell you with our cycle time in the Americas. It gives us really good line.
Anurag Maheshwari: We expect to generate approximately $1.5 billion in free cash flow, a roughly 105% conversion rate, and returns substantially all of it to shareholders, to $1.35 billion of dividends and share repurchases. Taking a further look at the organic sales outlook on slide 9, we now expect new equipment organic sales growth of approximately 3% at the low end of the prior range, driven by larger than expected headwinds in China, which we expect to be down mid-single digits.
A site for the next 12 months to 18 months in especially in North America, which is the majority of our Americas business.
So, we'll wait and see what happens with interest rates. If this does become the new normal we think people will adjust because housing demand is real it is still there. So we have to wait and see where this equilibrium is going to come out with with the developers and when they go ahead with projects.
We're not seeing a decline in terms of interest or proposals. So we really at this point, it's about people having conviction to start the projects from a development perspective in China, New equipment market does remain remained somewhat weak.
Anurag Maheshwari: The America's and EMEs are still expected to grow mid-single digits organically. In service, organic sales are expected to be up approximately 7.5%, a one point increase versus the midpoint of the prior guide driven by maintenance and repair. Consistent maintenance portfolio growth and pricing together with another quarter of strong repair volume enable us to raise the outlook by 130 basis points to up 7.3% versus the prior guide. Modernization organic sales expectations remain unchanged up 8% as we execute on our backlog which was up 15% at quarter end. Moving to slide 10, we have raised our expectations for adjusted EPS and now anticipate growth of approximately 11% or $3.52, a 35% increase versus the prior driven by 30 cents of operational improvement.
And it's worse than we saw it a quarter ago. When we told you we didn't see that inflection point for book and ship, we're now, saying it's really down.
The China market itself is really down north of 10%.
So we are continuing to focus on our pivot in China, and I couldnt be more proud of our team in China in terms of what we've done on the maintenance side to offset this as well is really how we've managed material productivity to be able to drive that cost price neutral scenario in China.
We have picked up share in China for the year.
And so we will continue even though the backlog is down our team is continuing to fight for all units and execute our strategy, which has been in play which is focusing on key accounts, mainly state owned enterprises, and continuing new product introduction and expansion on Otis one so our mod is up in <unk>.
Anurag Maheshwari: In closing, we continue to execute well on the business is driving profitable growth and an uncertain macroect environment. Our strong year-to-date performance gives us confidence to again raise our EPS outlook and deliver a solid fourth quarter while positioning us well to perform in 24 and beyond.
For the for the fifth straight quarter, sorry was it for this year, it's up double digits. So far all year, we've had the ninth straight quarter in China on the service side of.
Mid to high single a high teens.
Service growth. So we're finding a nice place there in terms of this pivot to more to becoming more of a service provider, but new equipment is our highest margin in China and I think what you see with the results as despite China being down our other three regions really picked it up nicely for us to be able to hold margins at 7% on new <unk>.
Unknown Executive: With that, Michelle, please open the line for questions. Thank you.
Unknown Executive: To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Equipment for the quarter and to grow organically, 1%, even with China down fairly significantly so we'll wait and see what happens in terms of of stimulus.
Unknown Executive: Please stand by while I'll compile the Q&A roster.
Jeff Breeze Sprig: The first question comes from Jeff Breeze Sprig with Vertical Research Partners. Your line is open. Thank you.
Obviously, we've seen we've seen certain actions already in China in terms of easing monetary support postponing property taxes loosening credit policy for mortgages, but we really do are watching sentiment in liquidity. There is in the two items that we're watching.
Judy Marks: Good morning, everyone. Judy, could you just elaborate a little bit more on your view on both America's and China and new equipment? Kind of the downward tick in the outlook and maybe just some thoughts on kind of even the trajectory as we exit 2023 into 2024 in those particular regions. Yeah, happy to Jeff. Let me start with the Americas. So we're now, we now believe the new equipment market in the Americas is going to be down mid-teens and we're really seeing that with the highest impact being the interest rates remaining high.
Great and just to shift.
Different direction, yet you started.
The conversation Judy with uplift kind of getting off the ground I guess, no pun intended but maybe.
Maybe just a little bit of color is that impacting results in Q3.
How do you see kind of the staging of that $150 million that youre talking about.
Yes, there is no impact in Q3, we just early days for US we have kicked off the key activities into including the operating model.
Judy Marks: It really is impacting new project starts. We've seen that in the most recent ABI and Dodge data. So we're watching that closely. I would tell you the residential, it performed the works in the third quarter followed by commercial not being great and infrastructure for the quarter being relatively flat. We expect infrastructure to pick up as we go into 24. We tend to see that a little later in the cycle versus the early construction companies with all the infrastructure activity that's starting.
A lot of education inside the company and a lot of focus now on process redesign and indirect spend youll see that start coming through slightly in Q4, but 2024 is when you'll really start seeing that impact and then we will achieve the run rate, we're very comfortable with all the analysis, we've done as well as some of the decisions.
We've taken already that the $150 million is absolutely achievable.
Great. Thank you.
Please standby for earn next question.
Judy Marks: What I do like about the Americas beyond their performance and they really had a strong performance in terms of backlog conversion is we still have strong mid single digit backlog a new equipment. That puts us in a really good position not just for the fourth quarter but I would tell you with our cycle time in the Americas it gives us really good line of sight for the next 12 to 18 months in especially in North America which is the majority of our Americas business.
Yeah.
The next question comes from Nigel Coe with Wolfe Research Your line is open.
Thanks, Good morning, everyone.
Yes.
So I understand.
Kind of like the weakness EBIT up eight.
Across the globe, we seen any project cancellations.
Judy Marks: So we'll wait and see what happens with interest rates. If this does become the new normal we think people will adjust because housing demand is real. It's still there so we have to wait and see where this equilibrium is going to come out with the developers and when they go ahead with projects. We're not seeing a decline in terms of interest or proposals. So we really at this point it's about people having conviction to start the projects from a development perspective.
With the rise in rates some projects milk Hudson that so just wondering on that and then but I did want to get a bit more into China with the pricing down.
Mid single digits.
I think that the view was that China would not.
Kind of be as bad as perhaps prior down cycles because margins there are much lower so just.
I'm just curious how you see the risk of further deterioration.
In China, you mentioned price cost remaining positive.
Judy Marks: In China the new equipment market does remain remain somewhat weak and it's worse than we saw it a quarter ago when we told you we didn't see that inflection point for book and ship. We're now saying it's really down. China market itself is really down north of 10%. So we are continuing to focus on our pivot in China and I couldn't be more proud of our team in China in terms of what we've done on the maintenance side to offset this as well as really how we've managed material productivity to be able to drive that cost price neutral scenario in China.
Overall neutral in China.
Our China margins holding in there.
We've seen some deterioration in margins.
Yeah, Let me, let me start and then I'll have Alan Rug, Nigel we're not seeing project cancellations at any.
And any level different than we have in the past.
And we can say that everywhere in the globe. There are always a small amount of project cancellations that occur in which we retain the deposits and the advance the advanced deposit, but nothing unusual there in terms of China. Let me just make sure everyone understands that China now represents about 17% of our global rare.
Judy Marks: We have picked up share in China for the year and so we will continue even though the backlog is down our team is continuing to fight for all units and and execute our strategy which has been in play which is focusing on key accounts mainly state owned enterprises and continuing new product introduction and expansion on oldest one. So our mod is up in China for the for the fifth straight quarter or sorry for this year it's up double digits so for all year we've had the ninth straight quarter in China on the service side of mid to high single high teams service growth.
Now there are several reasons for that one is a down China market, but second is with US now outlook Ing $14 1 billion in revenue and organic growth of five 5% you can see the impact and the pickup of the other three regions in terms of their growth So nice call.
<unk> Americas, EMEA Asia Pacific Rim.
Good revenue growth as you saw in <unk> presentation, but China is now about 17% of our total revenue down from 20% traditionally.
So that's that's just the reality of where the numbers are right now on.
On price cost.
Judy Marks: So we're finding a nice place there in terms of this pivot to more to becoming more of a service provider but new equipment is our highest margin in China and I think what you see with the results is despite China being down our other three regions really picked it up nicely for us to be able to hold margins at 7% on new equipment for the quarter and to grow organically 1% even with China down fairly significant. We'll wait and see what happens in terms of stimulus.
Hunter I wanted to comment on price cost as you mentioned either we are.
Either neutral or positive right in China definitely pricing the new equipment side is coming down, but we're driving hard on material productivity and it's a deflationary economy or were there as well so a combination of that and as pricing discipline in the market you put all of that together right now price cost is favorable and we are able to offset the China mix as you saw in third quarter with a nuc.
Shipment margin being at seven 2% and even if you look at the fourth quarter implied outlook.
Judy Marks: Obviously, we've seen certain actions already in China in terms of easing monetary support, postponing property taxes, loosening credit policy for mortgages. But we really do are watching sentiment and liquidity. Those are the two items that we're watching. Right.
Equipment margin is going to be about 7%, even though China is going to be down. So in a couple of reasons. One is obviously the price costs in China and pricing and all the other markets that it has gone up over the past 12, 15 months, which is in our backlog and sort of flushing through to the P&L. We again saw this quarter another $10 million pickup of pricing youre going to see that similar into next.
Judy Marks: And just to shift completely in a different direction, you started the conversation with uplift, kind of getting off the ground, I guess, no pun intended, but maybe just a little bit of color. Is it impacting results in Q3? How do you see kind of the staging at 150 million that you're talking about? Yeah, there is no impact in Q3. We just early days for us. We've kicked off the key activities including the operating model.
Quarter and commodities a tailwind so if I look at pricing in the backlog overall, which is probably up 50 to 70 basis points and if we snap the line on commodity today right, we should still see another $40 million or so tailwind next year you add these two things together I think.
More than kind of makes up for the China mix for us to believe that our new equipment is that a sustainable margin rate.
Okay, Great and I know, there's three questions if I can get one more.
Judy Marks: A lot of education inside the company and a lot of focus now on process redesign and indirect spend. You'll see that start coming through slightly in Q4, but 2024 is when you'll really start seeing that impact and then we'll achieve the run rate. We're very comfortable with all the analysis we've done as well as some of the decisions we've taken already that the 150 million is absolutely achievable.
As a follow on just to follow on Jeff's question on the the uplift program without a lifetime.
So obviously, the 150 run rate I'm assuming.
Unknown Executive: Great. Thank you. Please stand by for our next question.
25 run rate.
What would you feel comfortable enough down in for FY 'twenty four in terms of cost savings and what sort of restructuring would be associated with that savings.
Okay.
Well, we're not going to guide yet for 'twenty for uplift savings.
So we just need to be yet we're not prepared to do that yet we will get back to you. Obviously when we do our 24 guide to let you know what's going to be in that late January in terms of restructuring.
Nigel Coe: The next question comes from Nigel Coe with Wolf Research. Your line is open. Thanks.
Exactly so first this program is off to a great photos Judy mentioned, we'll give an update next year in terms of to achieve the $150 million of savings. The restructuring cost is about $150 million. It's a one on one right. It's going to start this quarter, but obviously, we're going to start seeing the savings coming in next year.
Judy Marks: Good morning, everyone. So, I understand the kind of like the weakness that you've got across the globe. I mean, are we seeing any, you know, product cancellation, you know, with the rising rates, you know, some projects not had been announced. So, just wondering on that and then but really, I just want to dig it a bit more into China with the pricing down mid-signal digits. I think that the view was that China would not, you know, kind of be as bad as perhaps prior down cycles because margins there are much lower.
That's great thanks very much.
Please standby for the next question.
The next question comes from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Judy Marks: So, just, you know, just curious, you know, how you see the risk of further deterioration in China. And you mentioned price cost remaining positive or rather neutral in China. You know, our China margins hold in there. You know, or we see some deterioration in margins.
Just wanted to start off with the global new equipment revenue outlook.
So <unk> bin.
Feeding off of a good backlog there.
The organic sales maybe.
That to up 1% year on year with new equipment in.
Judy Marks: Yeah, let me start then on a rug. Nigel, we're not seeing project cancellations at any, at any level different than we have in the past. And we can say that everywhere in the globe, there are always a small amount of project cancellations that occur in which we retain the deposit and the advance, the advance deposit, but nothing unusual there. In terms of China, let me just make sure everyone understands that China now represents about 17% of our global revenue.
In the back half of the current year I just wanted to know when you look at the sort of 12 months rolling on new equipment.
Or does down the full year to date down six.
Last quarter downturn.
And then when we think about sort of the nature of how quickly the backlog.
<unk> off very fast in China slower the rest of the world.
Is it sort of base assumption as we start out next year that new equipment sales are down then as those weaker orders.
Judy Marks: Now, there are several reasons for that. One is a down China market, but second is with us now outlooking, you know, 14.1 billion in revenue and organic growth of 5.5%. You can see that the impact and the pickup of the other three regions in terms of their growth. So, you know, nice call out, America's EMEA Asia Pacific, really good revenue growth, as you saw in honor of our presentation. But China is now about a 17% of our total revenue down from 20% traditionally. So, you know, that's just the reality of where the numbers are right now.
Through.
Yes.
Thanks for the question Julien so so firstly.
Backlog is up 2% right now on the new equipment side, we do think that even if orders are down low to mid single digit in the fourth quarter backlog is going to be flattish to slightly up and the reason is because we tend to book more orders than revenue over the past couple of years some of them major projects. So our assumption is that backlog should be flattish to up by end of the year.
Now within that Americas, Europe, and Asia Pacific If you put back together.
Anurag Maheshwari: On price cost, how do I want to come? So, on price cost, as you mentioned, Nigel, we are, you know, either neutral or positive, right? In China, definitely pricing the new equipment side is coming down, but we're driving hard on material productivity. And it's a deflationary economy over there as well. So, a combination of that and this pricing discipline in the market, you put all of that together, right now price cost is favorable.
Backlog is up low to mid single digit and that represents roughly about two thirds of our new equipment revenue. So that should be kind of up low to mid single digit next year, let's say low single digit the big variable of course is a one third of the revenue which is China.
Alright, and our China backlog is down low single digit it could be down mid single digit by end of the year and what happens to the market over there could be flattish it could be down 10% could be up right.
Anurag Maheshwari: And we are able to offset the China mix as you saw in third quarter with the new equipment margin being at 7.2%. And even if you look at the fourth quarter implied outlook, its new equipment margin is going to be about 7% even though China is going to be down. So, and the couple of reasons, one is obviously the price cost in China, second pricing in all the other markets that has gone up over the past 12, 15 months, which is in our backlog.
So that we do not know as to where thats going to happen, but let's assume that the market goes down next year and then chi.
Ana is probably down 5%, so that would mean that a new recruitment revenue could be flattish, so, but if I put things in perspective, it could be flattish it could be up 2% it could be down 2%, but two or 3% of new equipment revenue is about a couple of hundred million dollars of revenue.
Anurag Maheshwari: It started flushing through to the PNL. We again saw this quarter and another $10 million pick-up of pricing. We're going to see that in the next quarter and commodity is a tailwind. So, if I look at pricing in the backlog overall, which is probably up 50 to 70 basis points. And if we snap the line on commodity today, right, we should still see another $40 million. So, tailwind next year, you add these two things together. I think it more than kind of makes up for the China mix, for us to believe that a new equipment is at a sustainable market.
If we look at our margin. It's about 14 15 $18 million of profit, so which is two or three pennies of EPS. If you look at what we did this year, we more than overcame that through the service business, which is why we.
Went up every quarter because of tobacco Suez. So we think we should be able to make that up next year through our service business.
That's very helpful. Thanks.
Thanks, Ana Reagan and maybe just my follow up would be around.
Anurag Maheshwari: Roger, great. Okay, great. And I know there's three questions in there, but if I can get one more, as a follow on, just follow Jeff's question on the uplift program, that's right this time. So obviously the 150 run rate, I'm assuming that the exit 25 run rate, what would you feel comfortable in a down in FY 24 in terms of cost savings? And what sort of restructuring would be associated with that?
The service.
<unk>, perhaps so.
One element is.
Just.
Maybe it's some incorrect math, but it looks like the service margin in Q4 in the guide.
It's down sequentially or flat sales and sort of flattish.
Year on year, despite a big increase year to date. So just wanted to check if if thats right and if it's just conservatism or what have you and then secondly on the service margin how are we thinking about sort of price.
Anurag Maheshwari: Well, we're not going to guide yet for 24 uplift savings. So we just need to be, yeah, we're not prepared to do that yet. We'll get back to you. Obviously, when we do our 24 guide, to let you know what's going to be in that late January in terms of restructuring within exactly. So first, this, you know, programs off to great status duty mentioned, we'll give an update next year in terms of to achieve the $150 million of savings, the restructuring cost is about $150 million. It's a one-on-one, right? It's going to start this quarter, but obviously we're going to start seeing the savings coming in next year.
Unknown Executive: That's great. Thank you very much.
Unknown Executive: Please stand by for the next question.
Cost price net of material cost and service.
Pages playing out.
Is that sort of getting larger into next year or narrowing as a tailwind just any context around that please.
Absolutely so I'll break it up into two separate questions over here. So first is yes. The guide implies 24% margin for service in the fourth quarter, which is sequentially down 80 basis points, but were going to exit the year at what we guided for the full year versus 24%. It's a very healthy margin rates from last year, where we actually has a tough compare because last.
We grew margins by 60 70 basis points in the same quarter and the reason there is a difference between the $24 eight and 24% is largely two things it's the mix we.
Julian Mitchell: The next question comes from Julian Mitchell with Barclays. Your line is open.
Julian Mitchell: Hi, good morning. I just wanted to start off with a global new equipment revenue outlook. So you've been, you know, feeding off a good backlog there and the organic sales may be, you know, flat up 1% year on year in new equipment in the back half of the current year. I just wondered though, when you look at this sort of 12-month rolling on new equipment orders down for, you know, year-to-date down 6, last quarter down 10.
We are very encouraged I mean, the performance in third quarter margin was fantastic.
We look at the portfolio maintain insight portfolios growing pricing is sticking were flushing bank backlog into revenue and the repair business, which we got up to two years of very high growth was going to slow down it's not and it's because of the strategy of the team of penetrating more of the portfolio and that mixed with high end of the third quarter, and obviously productivity, which helped us get to the 24, 8%.
The big difference between Q3 and Q4.
Now we are assuming that repair to be flattish in the fourth quarter and more growing double digit. So that is a mix impact which is meeting for the margins to be lower but net net you're exiting the year at what we guided so feel pretty good about it.
Julian Mitchell: And then we think about sort of the nature of how quickly the backlog wears off. It's very fast in China, slower the rest of the world. Is it sort of base assumption as we start out next year that new equipment sales are down then as those weaker orders feed through?
On the service side, yes.
Yes, Julian on the second question, where youre talking about wages and inflation.
Inflation on the service side, while we have had wage inflation, we know we need to offset that with productivity and what we've been doing with price has been fairly significant we've had another quarter, where our service pricing like for like is up four points and with inflation staying pretty high especially in <unk>.
Anurag Maheshwari: Thanks for the question, Julian. So firstly, you know, our backlog is up 2% right now on the new equipment side. We do think that even if orders are down low to mid single digit in the fourth quarter, our backlog is going to be flatish to slightly up. And the reason is because we tend to book more orders than revenue over the past couple of years, some of them being major projects. So our assumption is that, you know, backlog should be flatish to up by end of the year.
And in the Americas, we should be able to as we negotiate the majority of our maintenance contracts first second quarter next year, which are mainly backward looking for this year's inflation, we expect to be able to get price again at levels comparable to that.
Anurag Maheshwari: Now within that America's Europe and Asia Pacific, if we put that together, that backlog is up low to mid single digit. And that represents roughly about two thirds of a new equipment revenue. So that should be kind of up low to mid single digit next year. Let's say low single digit. The big variable, of course, is the one third of the revenue which is China. Right now China backlog is down, you know, low single digit.
$4 24.
We have line of sight now the majority of our 23 maintenance contracts are in the books.
As our as our commodity prices and everything else as we go in with two five months left to go now so we're actually feeling pretty good about service pricing for next year in price cost and we negotiated with the majority of our collective bargaining across the globe. Most of our mechanics are represented and.
Anurag Maheshwari: It could be down mid single digit by end of the year. And what happens to the market over there could be flatish. It could be down 10% could be up, right? So so that we do not know as to where that's going to happen. But let's assume that the market goes down next year and then, you know, China is probably down 5%. So that would mean that a new equipment revenue could be flatish.
I know, we've treated them fairly and and we're able to recover that in both price and productivity.
Great. Thank you.
Anurag Maheshwari: So but but if I put things in all perspective, you know, it could be flatish, it could be up to a percent, it could be down to. 5%. But two or three percent of new equipment revenue is about a couple of hundred million dollars of revenue. And if we look at a margin, it's about 14, 15, 18 million dollars of profit. So, it's just two or three pennies of EPS. If you look at what we did this year, we more than overcame that through the service business, which is why we went up every quarter because of lack of service.
Please standby for the next question.
The next question comes from Joe O'dea with Wells Fargo. Your line is open.
Hi, good morning, Thanks for taking my questions.
I wanted to circle back to the backlog comments and could you just expand on how much of next 12 months revenue generally have visibility into based on backlog levels and talk about that in Americas, and Europe and then in China.
Anurag Maheshwari: So we think we should be able to make that up next year through our service business. That's very helpful. Thanks, Hannah.
And in particular in China than the mix that would be coming out of backlog and the mix would be book and ship and what youre seeing in some of those book and ship trends recently.
Anurag Maheshwari: And maybe just my follow up would be around the service margins perhaps. So, you know, one element is, you know, if I just maybe it's some incorrect maths, but it looks like the service margin in Q4 in the guide is down sequentially off flat sales and sort of flatish year on year despite a big increase year to date. So, just wanted to check if that's right and if it's just conservatism or what have you.
Yes, absolutely.
If you look at our backlog it is significantly more than a 12 month revenue because we have major projects in there we have other kind of long tailed projects as well we're very specifically the reason why I said earlier, we have confidence with America and Europe kind of growing low single digit next year is about <unk>.
Even if you snap the line today, we have very high visibility of that converting we enter any particular year with 80, 90% of Americas and EMEA revenue coming out of backlog followed by that is Asia Pacific ex China, which is probably a little bit lower depending upon the geography mix, but that backlog is up.
Anurag Maheshwari: And then secondly, on the service margin, how are we thinking about sort of price cost or, you know, price net of material cost and service wages playing out? Is that sort of getting larger into next year or narrowing as a tailwind?
Very healthy spot with double digit out right then China is the only one where we have higher book and ship. So when we entered the year I would say two thirds of that revenue probably comes from the backlog and a third comes from the book and ship, which is why for 304 regions.
Anurag Maheshwari: Just any context around that please. Absolutely. So I'll break it up into two separate questions over here. So first is if the guide implies 24% margin for service in the fourth quarter, which is a currently down 80 basis point. But we're going to exit the year at what we got it for the full year, which is 24%. It's a very healthy margin rate. It's from last year where we actually is a tough compare because last year we grew margins by 60 70 basis points in the same quarter.
Regions, we feel it's low single digit growth for next year and China is the only variable that we need to see how the next few months ago.
Got it that's helpful. And then just some perspective on where China volumes or can you talk about for the for the total market.
Anurag Maheshwari: And the reason there's a difference within the 24.8 and 24% is largely two things. It's the mix. We, I mean, where we are very encouraged. I mean, the performance in third quarter margin was fantastic. I mean, if you look at the portfolio maintenance side, portfolios growing pricing is taking. We are flushing more back, backlog into revenue and the repair business which we thought after two years of very high growth was going to slow down is not.
Volumes and over the last several years, where they're trending this year.
Do you think its setting up in terms of next year for some perspective on that.
Current softness relative to recent strength.
Yes, Joe we would tell you that if you go back to peak years in China, We probably peaked the segment peak new equipment at about 650000 units that's been coming down now for the past two years and we're at about 450000 currently for this year still 450000 of the 800.
Anurag Maheshwari: And it's because of the strategy of the team of penetrating more of the portfolio. And that mix was high in the third quarter and obviously productivity, which helps us get to the 24.8%. The big difference between three and Q4 is now we assuming that repair to be flatish in the fourth quarter and more growing double digit. So that is a mix impact, which is leading for the margins to be lower, but net net. We're exiting the year at what we guided. So feel pretty good about it on the service side.
<unk> thousand global units, so still a large healthy market.
And 450000, you'd probably have to go back to 2018 ish timeframe.
Where we had obviously pre COVID-19 to.
Having a market like this and so we still think it's a very attractive market. We've gained share there this year as we look in China.
Anurag Maheshwari: Yeah, Julie, on the second question, we're talking about wages and inflation, you know, inflation on the service side while we have had wage inflation. We know we need to offset that with productivity and what we've been doing with price has been fairly significant. We've have another quarter where our service pricing like for like is up four points and with inflation staying pretty high, especially in EMEA and in the Americas. Because we should be able to as we negotiate the majority of our maintenance contracts, you know, first, second quarter next year, which are mainly backward looking for this year's inflation.
And we will continue to execute our strategies of our agents and distributors.
Being our partners, which we now have about 2300, 50 agents and distributors more than twice since we since we spun we focus on our on our key accounts and we've also really focused on the tier cities that are having an impact. So if you look at the third quarter tier one cities Beijing Shanghai.
<unk> had the best market segments.
Anurag Maheshwari: We expect to be able to get price again at levels comparable to that for 24. You know, we have a line of sight now, the majority of our 23 maintenance contracts are in the books as our, you know, as our commodity prices and everything else as we go it, you know, with two and a half months left to go now. So we're actually feeling pretty good about service pricing for next year and price cost and we've negotiated with the majority of our collective bargaining across the globe. You know, most of our mechanics are represented and I think I know we've treated them fairly and we're able to recover that in both price and product, activity.
And then obviously it trailed off as you got to all the way to tier five so we've adjusted our strategy. That's why our agents and distributors are so helpful as well as our internal sales folks that support them. The key accounts again those relationships are strong and they are they are yielding for us.
Unknown Executive: Great. Thank you.
Unknown Executive: Please stand by for the next question.
Thank you I appreciate the detail.
Please standby for the next question.
The next question comes from Stephen Tusa with Jpmorgan. Your line is open.
Hey, good morning.
Hey, good morning.
You mentioned the trends of what's going on in China I think.
One of your competitors had some pretty big orders numbers there.
Joe O.D: The next question comes from Joe O.D, with Wells Fargo. Your line is open. Hi, good morning. Thanks for taking my questions. I wanted to circle back to the backlog comments and could you just expand on how much of next 12 months revenue you generally have visibility into based on backlog levels and talk about that in America, in Europe, and then in China and in particular in China, then the mix that would be coming out of backlog and the mix would be book and ship and what you're seeing in some of those book and ship trends recently.
Today.
Can you maybe help reconcile that because I don't I think you guys are obviously I think you were down but.
Maybe you could just maybe help reconcile what the difference might be obviously any quarter. There is some lumpiness, but.
Joe O.D: Yeah, absolutely. If you look at a backlog, it is significantly more than a 12 month revenue because we got major projects in there. We have other kind of long tail projects as well. We're very specifically. The reason why I said earlier, we have confidence of America and Europe kind of growing low single digit next year is that even if we snap the line today, be a very high visibility of that converting.
Just curious from a share perspective, there just trying to tie those two things together.
Yes, I think youre going to I mean orders are lumpy.
Across the board for both modernization and new equipment.
And I would argue share is also kind of hard to measure on a quarterly basis and something more you'd like to do on an annual level. When you really have some fidelity in the information I cant comment on what our competitors are doing but I can tell you that yes. We are again, our China team is executing.
Our strategy.
Down market.
Our China team has both driven cost out in terms of material productivity. So that again look if you look at any step back.
Joe O.D: We enter any politically year with 80, 90% of America's in year-to-year revenue coming out of backlog. Followed by that is Asia Pacific X China, which is probably a little bit lower depending upon the geography mix, but that backlog is very healthy. It's probably double digit up, right? Then China is the only one where we have higher book and ship. So when we enter the year, I would say two-thirds of that revenue probably comes from the backlog and a third comes from the book and ship, which is why for three out of the four regions, we feel it's low single digit growth for next year. China is the only variable that we need to share the next few months ago.
We're driving growth in all lines of business I notice, especially in service, we're seeing good growth in three regions outside of China.
But our China team has really in despite a tough macro environment on new equipment has really now added this service component, which now we're at 365000 units in our portfolio in China more than double from when we spun and our China modernization business has grown double digits. This year. So we're finding we're.
Moving model into the factories, so we're optimizing that cost basis, there and youre going to see that modernization business really in China as well as globally take off and for US we need to watch that mix. That's what anorak commented on for fourth quarter for service margins, but we think we know it's actually worth getting that modernization business because it will be.
Judy Marks: Got it. That's helpful. And then just some perspective on where China volumes are. Can you talk about for the total market where unit volumes have been over the last several years, where they're trending this year? How do you think it's setting up in terms of next year for some perspective on the current softness relative to recent strength? At Shell, we would tell you that if you go back to peak years in China, we probably peaked the segment peak new equipment at about 650,000 units.
Bring more units to our portfolio. So we're going to end this year at $2 3 million units in our portfolio.
When you think about 1% portfolio growth throughout the decade before before we spun and now us <unk> four straight quarters over 4%, we're going to end this year at $2 3 million units and that is the strongest but it's still at $2 3 million units of 'twenty, One 'twenty 2 million segment leaves us lots of room.
Judy Marks: That's been coming down now for the past two years, and we're at about 450,000 currently for this year. Still 450,000 of the 850,000 global units. So still a large, healthy market. And four in the 50,000, you'd probably have to go back to 2018-ish timeframe to where we had, obviously pre-COVID to having a market like this. And so we still think it's a very attractive market. We've gained share there this year as we look in China, and we will continue to execute our strategies of our agents and distributors being our partners, which we now have about 2,350 agents and distributors more than twice since we spun.
<unk> for growth and that's why we're that's why we're convinced the service driven growth strategy globally is the right answer for us and our shareholders.
Yes, quite clearly the services is very strong.
Just a question on castle I missed the first part of the call but.
Any reason for that that tweak on cash specifically.
Oh, yes.
Yes, absolutely.
Okay. So firstly on cash we are at about $934 million.
<unk> hundred 50, and I guess your question is tracking to the low end of our guidance is two reasons. One is clearly lower down payments because of new equipment orders, which have been a little bit lower with taken as also our repair business, which is growing we started this year would be low single digit repair it's growing at a very good rate great for sales grateful profit on the P&L side, but.
Judy Marks: We focus on our key accounts, and we've also really focused on the tier cities that are having an impact. So if you look at the third quarter, tier one cities, Beijing, Shanghai, had the best market segments, and then obviously it trailed off as you got all the way to tier five. So we've adjusted our strategy. That's why our agents and distributors are so helpful, as well as our internal sales folks that support them. The key accounts, again, those relationships are strong, and they are yielding, of course.
Unknown Executive: Thank you. Appreciate the details. Please stand by for the next question.
We do get paid after we complete our work so it's a little bit of a receivable drag I think it's a combination of these two reasons why you see a little bit of a tweak in the cash flow guide and for any of our customers listening Steve I think it's important they know that when they need to repair we do the repair and then we make sure we bill in follow up to collect and Thats really what happens in that repair world we know customers.
If they've got it to an elevator down we're going to get them back up.
Sorry, sorry, one last quick one a lot of volatility in multifamily.
In the U S kind of hard to tell where that.
That business is going any any impact on you guys from that and thanks, a lot for the answers to the questions.
Stephen to sub: The next question comes from Stephen to sub with JP Morgan. Your line is open. Hey, good morning. You mentioned the trends of what's going on in China. I think one of your competitors had some pretty big orders, numbers there today. Can you maybe help reconcile that because I don't, I think you guys are obviously, I think you were down, but maybe you just maybe help reconcile what the difference might be. Obviously, any quarter there's some lumpiness, but you know, just curious from your share perspective. They're just trying to tie those two things together.
Yes, so I mean that the multifamily was or from a market perspective, a segment perspective was the worst performing in the U S. This past quarter.
Now it's up it's down off record highs for multiple years.
And there is still demand for it but we're just seeing the developers slowdown on that.
On the start button, which is when we get those advances that <unk> was talking about in this cash answer so we'll wait and see.
If rates stay where they are in a developed we'll figure out the math for this because demand is still there for housing.
Judy Marks: I think you're going to, I mean, orders are lumpy kind of across the board for both modernization and new equipment, and I would argue share is also kind of hard to measure on a quarterly basis and something more you'd like to do on an annual level when you really have some fidelity and the information. I can't comment on what our competitors are doing, but I can tell you that, you know, we're, again, our China team is executing our strategy.
So we're in we're in a wait and see but our backlog in especially in North America is strong mid single digit including a lot of multifamily in the backlog. So we're going to keep performing and then our team will drive the orders as they come.
Thanks, a lot.
Please standby for the next question.
The next question comes from Nick <unk> with RBC. Your line is open.
Judy Marks: In a down market, you know, our China team has both driven cost out in terms of material productivity, so that, again, if you look at any step back, you know, we're driving growth in all lines of business and notice, especially in service. We're seeing good growth in three regions outside of China, but our China team has really, despite a tough macro environment on new equipment, has really now added this service component, which were 365,000 units in our portfolio in China more than double.
Yes, Hi, Judy interact Mike.
For the questions. So just.
Just on that free cash flow point, I mean, it looks like China is never going to go back to that 650000 unit Mark. So I'm just wondering if that means that.
Over the medium term that needs to be a permanent reset on the expectations the cash conversion from.
The current sort of 100% to 110% target that you've already got that's the first one.
Well I can take that one the answers now no reset.
Judy Marks: So from when we spun, and our China modernization business has grown double digits this year. So we're finding, we're moving mod into the factories, so we're optimizing the cost basis there, and you're going to see that modernization business really in China as well as globally take off. And for us, we need to watch that mix. That's what Honorog commented on for fourth quarter for service margins, but we think we know it's actually worth getting that modernization business because it will bring more units to our portfolio.
Okay.
Because I mean.
At the new lower definitely lower orders, but also executing on a high backlogs all these will normalize in the repair.
Revenue was also kind of we start converting more into cash. So I don't think there's any reason for us to reset the target.
Okay, great very clear.
And then just a second question on some of the competitive dynamics and modernization.
Sounds like when you guys or some of your European competitors modernize our unit, especially in China, It's almost always someone else's unit and very often it's one of the Asian competitors units that Youll modernizing and then moving into your own portfolio.
Judy Marks: So we're going to end this year at 2.3 million units in our portfolio, and, you know, when you think about 1% portfolio growth throughout the decade before, before we spun, and now us five four straight quarters over four percent, we're going to end this year at 2.3 million units, and that is the strongest, but it's still at 2.3 million units of a 21-22 million segment leaves us lots of room for growth, and that's why we're convinced the service-driven growth strategy globally is the right answer for us on our shareholders.
<unk> guys, just not focused on modernization or why does it seem to be the case that you all kind of eating that lunch that.
Well your hypothesis that most of our modernization is on non Otis equipment in China is accurate, but remember our China market share.
Anurag Maheshwari: Yeah, quickly the service is very strong. Just a question on cash light. I missed the first part of the call, but any reason for that tweak on cash specifically? Oh, yeah. Absolutely. It's two weeks. Okay. So firstly on cash, we are at about $900 and $34 million. We got $550. And I guess the question is, tweaking to the low end of the guidance is two reasons. One is clearly lower down payments because of new equipment orders, which have been a little bit lower.
Is <unk>.
Our share of segment in service is pretty low because 75% of the all the units in China are maintained by Isps.
So I wouldn't specifically say it's.
Some of the units we're getting back our oldest units that are not on portfolio many of our non Otis units.
But theyre not necessarily.
Japanese or European I can't comment on who they are what we've done is we've created very innovative packages to be able to put our hardware on non otis equipment to modernize it to add new technology, and then to convert it into our portfolio.
Anurag Maheshwari: But second is also a repair business, which has grown very, we started this year with below single digit repair. It's growing in a very good rate. Great for sales, grateful profit on the P&L side, but we do get paid off to we complete our work. So it's a little bit of a cerebral drag. I think it's a combination of these two reasons why you see a little bit of a tweak in the cash.
Okay, great. Thank you.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.
Anurag Maheshwari: And for any of our customers listening, Steve, I think it's important they know that when they need a repair, we do the repair. And then we make sure we build and follow up to collect. And that's really what happens in that repair world. We know customers if they've got an elevator down, we're going to get them back up.
Please Sam.
Our next question comes from Gautam Khanna with TV Cowen Your line is open.
Judy Marks: Sorry, sorry, one last quick one. A lot of volatility and multifamily in the US kind of hard to tell where that that business is going. Any impact on you guys from that? And thanks a lot for the answers to the questions. Yeah, so I mean that the multifamily was our from a market perspective, a segment perspective was the worst performing in the US this past quarter. Now it's up, it's down off record highs for multiple years.
Hey, good morning, guys.
Hey, good morning.
I had two questions first on a rug on your comment about escalators next year being comparable to that of this year I was wondering if you could elaborate maybe by region.
And why that's so given the level of inflation. This year seems below that of last year.
And then I have a follow up.
So.
You mean on the service business the price escalation.
Judy Marks: And they're still demand for it, but we're just seeing, you know, the developers slow down on the on the start button, which is when we get those advances that Anurag was talking about in this cash answer. So, you know, we'll wait and see, you know, if rates stay where they are, you know, develop will figure out the math for this because demand is still there for housing. So, you know, we're in a, we're in a wait and see, but our backlog in, especially in North America is strong mid single digit, including a lot of multifamily in the backlog. So we're going to keep performing. And then our team will drive the orders as they come.
Yes.
Yes, so yes.
Let's start with Europe, where we got about half of our portfolio over there.
Inflation is still pretty high in Europe.
Unknown Executive: Great. Thanks a lot. Please stand by for the next question.
As high as last year, but not too far off from there and most of our contracts are right now in negotiation and they obviously linked to an index. So we feel pretty good about.
The pricing increase in Europe next year could be around the mid single digit level again, so thats really encouraging inflation in America's results will not.
Coming down to a greater extent, so we should see that so these two definitely give us confidence on when pricing going up the rest of Asia has always been a low to mid single digit price increase that will continue and China I think as I mentioned earlier, there was more price discipline, but it's never been a price escalator market on the service side, So put all of that together.
Nick Howston: The next question comes from Nick Howston with RBC. Your line is open. Yeah. Hi, Judy, Anurag Mike. Thanks for the questions. So, yeah, just on that free cash low point. I mean, it looks like, you know, China's never going to go back to that 650,000 unit mark. So, I'm just wondering if that means that, you know, over the medium term, there needs to be a permanent reset on the expectations for cash conversion from the current sort of 100% to 110% target that you've already got. That's the first one. Thanks.
It gives us confidence as we are going to be another good price increase next year on top of our portfolio growth, which should mean that our maintenance business should grow mid single digit plus.
Okay.
Quick follow up could you talk a little bit about any any trends in churn coming down.
In the quarter and maybe year to date.
On service renewals.
So we will share our statistics at our fourth quarter earnings we do that on an annual basis, but there is no no significant changes that we've seen but we'll share that next quarter.
Anurag Maheshwari: Well, I can take that one. The answer is no. No reset. Yeah. Okay. No reset because, I mean, the truth with the new law, definitely lower orders, but also we executing on high backlogs. All these will normalize and the repair revenue will also kind of we start converting more into cash. So I don't think there's any reason for us to reset the target. Okay. Great. Very clear.
Thank you.
I show no further questions at this time I would now like to turn the call back to Judy marks for closing remark.
Yes. Thank you Michelle our service driven business model is working as we approach $2 3 million units in our portfolio by year end with the compounding lifetime value of each additional unit here.
Judy Marks: Then just a second question on some of the competitive dynamics in modernization. So it sounds like when you guys are some of your European competitors, modernize a unit, especially in China. It's almost always someone else's unit and very often it's one of the Asian competitors units that you're modernizing and then moving into your own portfolio. At the Asian guys, just not focused on modernization or why does it seem to be the case that you are kind of eating their lunch there?
Year to date results are indicative of the strength of our strategy as we continue to prioritize value creation for our shareholders for the remainder of 2023 and beyond Thank you for joining us today stay safe and well.
Thank you for participating this concludes today's conference call you may now disconnect.
Judy Marks: Well, your hypothesis that most of our modernization is on non-autistic equipment in China is accurate. But remember, our China market share, our share of segment in service is pretty low because 75% of all the units in China are maintained by ISPs. So I wouldn't specifically say it's, you know, some of the units we're getting back are Otis units that are not on portfolio, many are non- Otis units. But they're not necessarily, you know, Japanese or European.
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Okay.
Okay.
Okay.
Okay.
Judy Marks: I can't comment on who they are. That what we've done is we've created very innovative packages to be able to put our hardware on non-autistic equipment to modernize it, to add new technology and then convert it into our portfolio. Thank you.
Okay.
Yes.
Okay.
Okay.
Yes.
Unknown Executive: As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced.
Unknown Executive: Please stand. Our next question comes from Gautam Khanna with TV Cohen. Your line is open. Hey, good morning, guys. Good morning. I had two questions. First, Anurag, on your comment about escalators next year being comparable to that of this year. I was wondering if you could elaborate maybe by region and why that's so given the level of inflation this year seems below that of last year. Sorry, got an email in the service business, the price escalation.
Okay.
Yes.
Yes.
Hum.
[music].
<unk>.
Yes.
Okay.
Okay.
Unknown Executive: Yes, yes, so yeah, listen, let's stop at Europe where we got about half of a portfolio over there. Inflation is still pretty high in Europe, not as high as last year but not too far off from there. And most of our contracts are right now in negotiation and they obviously linked to an index. So we feel pretty good about the pricing increase in Europe next year could be around the mid-single digit level again.
Yeah.
Okay.
Unknown Executive: So that's really encouraging. Inflation in America is also not coming down to a great extent. So we should see that. So these two definitely give us confidence on pricing going up. The rest of Asia has always been a low to mid-single digit price increase. That will continue. And China, I think as I mentioned earlier, there is more price discipline, but it's never been a price escalated market on the service side. So put all of that together. It gives us confidence is going to be another good price increase next year on top of a portfolio growth, which should mean that a maintenance business should grow mid-single digit plus.
Okay.
Okay.
Gautam Khanna: Okay, just a quick follow up. Could you talk a little bit about any any trends and churn coming down in the quarter and maybe year to date on service renewals. So we will share our statistics at our fourth quarter earnings. We do that on a annual basis, but there's no no significant changes that we've seen, but we'll share that next quarter. Thank you.
Unknown Executive: I show no further questions.
Judy Marks: At this time, I would now like to turn the call back to Judy Marks for closing remarks. Thank you, Michelle. Our service driven business model is working as we approach 2.3 million units in our portfolio by year end with the compounding lifetime value of each additional unit. Here to date results are indicative of the strength of our strategy as we continue to prioritize value creation for our shareholders for the remainder of 2023 and beyond.
Unknown Executive: Thank you for joining us today. Stay safe and well. Thank you for participating.
Unknown Executive: This concludes today's conference call. You may now disconnect. Thank you. [inaudible] a lot of work to do, he's got a lot of work to do, he's got a lot of work[inaudible]
[music].