Q4 2023 Otis Worldwide Corp Earnings Call
Good morning, and welcome to Otis says fourth 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 oldest as website at Ww W. Got older oldest dotcom I'll now turn it over to Michael Redner, Vice President of Investor Relations, Michael You may begin.
Michael Redner: Thank you Chris welcome to <unk> fourth quarter 2023 earnings conference call on the call with me today are Judy marks chair, CEO, and President and entourage Maheshwari Executive Vice President and CFO. Please note, except where otherwise noted the company will speak to results from continuing operations exclude.
Michael Redner: 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.
Michael Redner: <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.
Judy Marks: Thank you Mike and thank you everyone for joining us we hope everyone listening is safe and well we delivered a strong fourth quarter to cap off a strong full year performance, we enter 2024 with confidence in our service driven business model remaining focused on our strategic pillars, including deliver modernization valley.
Judy Marks: <unk>, which we add is our fifth strategic imperative last year, while driving operational excellence. We achieved these results with the hard work of our colleagues around the globe. So I want to thank each of you for your hard work commitment to our customers and demonstration of our Otis Absolutes Star.
Judy Marks: Starting on slide three we achieved full year organic sales growth in all regions with total Otis organic sales growth of five 6% driven by service, which grew seven 7%.
Judy Marks: Grew our industry, leading maintenance portfolio by a record high of four 2% for the year and it now stands at about $2 3 million units, a new milestone for our company.
Judy Marks: We delivered strong low teens adjusted EPS growth for the year, including mid teens growth in the fourth quarter.
Operator: Good morning, and welcome to Otis's fourth quarter 2023 earnings conference. This call is being carried live on the Internet and recorded for replay.
Judy Marks: Modernization orders were up 16, 8% for the year, including low teens growth in the fourth quarter.
Our modernization backlog is up 15%.
Operator: Presentation materials are available for download from OTIS's website at www.otis.gov. I'll now turn it over to Michael Rednor, Vice President of Investor Relations. Michael, you may begin.
Judy Marks: New equipment orders in Q4 increased two 9% and our new equipment backlog increased 2% for 2023.
Judy Marks: In 2023, we achieved approximately 50 basis points of new equipment share gain.
Michael S. Rednor: Thank you, Krista. Welcome to OTIS's fourth quarter 2023 earnings conference call. On the call with me today are Judy Marks, Chair, CEO, and President, and Anurag 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 non-recurring items. A reconciliation of these measures can be found in the appendix of the webcast.
Judy Marks: Heading into 2024 as our backlogs have continued to grow we have good visibility on our new equipment sales. Despite the uncertain macro environment and we expect strong sales growth in our modernization business.
Judy Marks: We generated approximately $1 5 billion and adjusted free cash flow, allowing us to return approximately $1.35 billion of cash to shareholders through dividends and share repurchases.
Michael S. Rednor: We also remind listeners that the presentation contains forward-looking statements that are subject to risks and uncertainties. Otis's 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.
Judy Marks: Additionally earlier in 2023, we began executing initiatives related to our customer centric uplift program.
Judy Marks: Just on gaining scale across our global organization to unlock synergies standardizing our processes to generate efficiencies and optimizing our supplier and indirect spend.
Judy Marks: Thank you, Mike, and thank you, everyone, for joining us. We hope everyone listening is safe and well. We delivered a strong fourth quarter to cap off a strong four-year performance. We enter 2024 with confidence in our service-driven business model, remaining focused on our strategic pillars, including delivering modernization value, which we added as our fifth strategic imperative last year, while driving operational excellence. We achieve these results with the hard work of our colleagues around the globe.
Judy Marks: Our streamline and transformation efforts are on track to achieve a $150 million of run rate savings in mid 2025, as we previously indicated.
Judy Marks: To summarize <unk>.
Judy Marks: 23 was characterized by solid organic sales growth adjusted operating profit margin expansion of nearly 12% EPS growth.
Judy Marks: Outperforming our medium term guidance we.
Judy Marks: We are well positioned as we enter 2024 as we focus on executing our growing new equipment and modernization backlogs with greater than 4% maintenance unit growth supporting sales growth in our maintenance and repair business.
Judy Marks: So I want to thank each of you for your hard work, commitment to our customers, and demonstration of our Otis Absolute. Starting on slide three, we achieved full-year organic sales growth in all regions, total Otis organic sales growth of 5.6%, driven by service, which grew 7.7%. We grew our industry-leading maintenance portfolio by a record high of 4.2% for the year, and it now stands at about 2.3 million units, a new milestone for our company. We delivered strong low-teams adjusted EPS growth for the year, including mid-teams growth in the fourth quarter. Modernization orders were up 16.8% for the year, including low team growth in the fourth quarter. Our modernization backlog is up 15 percent.
Judy Marks: We also made meaningful progress toward our 13 ESG goals in 2023, emphasizing the alignment of our absolutes of safety ethics and quality with our business strategy.
Importantly in early November we announced our commitment to setting near term science base greenhouse gas reduction targets, which have been formally submitted to the science based targets initiative for evaluation.
Judy Marks: Turning to our orders performance on slide four.
Judy Marks: New equipment orders returned to growth in the quarter up two 9% with quarter over quarter acceleration in all regions.
Judy Marks: Orders were down three 9% for the year as mid teens growth in Asia Pacific and low single digit growth in EMEA were offset by declines in China and the Americas.
Judy Marks: New equipment orders in Q4 increased 2.9%, and our new equipment backlog increased 2% for 2023. In 2023, we achieved approximately 50 basis points of new equipment share gain. Heading into 2024, as our backlogs have continued to grow, we have good visibility on our new equipment sales, despite the uncertain macro environment, and we expect strong sales growth in our modernization business. We generated approximately $1.5 billion in adjusted free cash flow, allowing us to return approximately $1.35 billion of cash to shareholders through dividends and share repurchases.
Overall globally, new equipment units were down approximately 8% to roughly 850000 units in 2023.
Judy Marks: Despite these macro challenges we were able to achieve about 50 basis points of new equipment share gain on top of the nearly three point increase between 2020 and 2022 and we were able to grow our new equipment backlog, which was up 2%.
Judy Marks: We continue to innovate to better serve our customers and drive growth across our business.
Judy Marks: For example, we continued to rollout our digitally connected elevator platforms launching the Gen. Three core North America and explained expanding the deployment of Gen 360 to China.
Judy Marks: Additionally, earlier in 2023, we began executing initiatives related to our customer-centric uplift program, focused on gaining scale across our global organization to unlock synergies, standardizing our processes to generate efficiencies, and optimizing our supplier and indirect spend. Our streamlining and transformation efforts are on track to achieve $150 million of run rate savings in mid-2025, as we previously indicated. To summarize, 2023 was characterized by solid organic sales growth, adjusted operating profit margin expansion, and nearly 12% EPS growth, outperforming our medium-term guidance. We are well positioned as we enter 2024, as we focus on executing our growing new equipment and modernization backlog, and greater than 4% maintenance unit growth supporting sales growth in our maintenance and repair business. We also made meaningful progress toward our 13 ESG goals in 2023, emphasizing the alignment of our absolutes of safety, ethics, and quality with our business strategy. Additionally, in early November, we announced our commitment to setting near-term science-based greenhouse gas reduction targets, which have been formally submitted to the Science-Based Targets Initiative for evaluation.
Judy Marks: In addition, we launched the Gen three mod plus a package of upgrades to support our modernization business in the Americas, which also includes connectivity to our oldest one Iot platform.
Judy Marks: R&D and strategic investments remained relatively stable at about one 4% as a percent of sales for the year, reflecting our ability to invest and innovate efficiently.
Judy Marks: We strengthened our number one position globally accelerating our portfolio growth to over 4% for a second year in a row.
Judy Marks: Demonstrated the power of geographic diversification within our business with double digit portfolio growth in China mid single digit growth in Asia Pacific.
Judy Marks: With single digit growth in the Americas and EMEA.
Judy Marks: Globally, our recaptures offset our cancellations for the second consecutive year, leading to conversions as the portfolio growth driver in line with our strategy.
Judy Marks: China conversion rate continues to improve currently standing at about 51% and approximately 4% improvement versus 2022.
Judy Marks: Additional details on our portfolio growth in 2023 can be found in the appendix is accelerating our portfolio growth isn't a central component of our long term strategy and top line growth algorithm.
Judy Marks: Turning to our orders performance on slide four, new equipment orders returned to growth in the quarter, up 2.9%, with quarter-over-quarter acceleration in all regions. However, orders were down 3.9% for the year as mid-teens growth in Asia-Pacific and low single-digit growth in EMEA were offset by declines in China and the Americas.
At year end 2023, we have 900000 connected units of which 500000 use our oldest one Iot solution.
Judy Marks: Our service sales force performed well throughout the year with like for like maintenance pricing of four points, helping to mitigate labor cost headwinds within the business.
Judy Marks: Our fifth strategic pillar of delivering modernization value is performing.
Judy Marks: Overall, globally, new equipment units were down approximately 8% to roughly 850,000 units in 2023. Despite these macro challenges, we were able to achieve about 50 basis points of new equipment share gain on top of the nearly three-point increase between 2020 and 2022, and we were able to grow our new equipment backlog, which was up 2%. We continue to innovate to better serve our customers and drive growth across our business. For example, we continue to roll out our digitally connected elevator platform, launching the Gen 3 core in North America and expanding the deployment of Gen 360 to China. In addition, we launched the Gen 3 Mod Plus, a package of upgrades to support our modernization business in the Americas, which also includes connectivity to our OTIS-1 IoT platform.
Judy Marks: Modernization orders were up 16, 8% driven by double digit growth in Asia, particularly in Korea is the strength of our in our Mod package offerings continues to drive results.
Judy Marks: Additionally, the Americas and EMEA drove strong fourth quarter modernization major project bookings.
Judy Marks: Our modernization backlog is up 15% versus the prior year, giving us good line of sight for strong growth in 2024.
Judy Marks: We continue to win many exciting projects based on our innovation ability to deliver and the trust our customers have in us as.
Judy Marks: As we build service and modernize our customers elevators, and escalators, we build loyalty and value with increasing recurring revenue streams.
Judy Marks: For new equipment in China Otis is building on decades of close cooperation with the nation's metro providers to help expand urban transport and city development.
Judy Marks: R&D and strategic investments remained relatively stable at about 1.4% as a percent of sales for the year, reflecting our ability to invest and innovate efficiently. We strengthened our number one position globally, accelerating our portfolio growth to over 4% for a second year in a row, and demonstrated the power of geographic diversification within our business with double-digit portfolio growth in China, mid-single-digit growth in Asia Pacific, and low-single-digit Globally, our recaptures offset our cancellations for the second consecutive year, leading to conversions as the portfolio growth driver, in line with our strategy.
We will provide 237 escalators and elevators for line 15 of the Chongqing Metro and West China, while incorporating or just one on these units.
Judy Marks: <unk> has a long history with Chongqing Metro, which carries more than 4 million passengers daily across rugged terrain on a network that is famous for its ingenious design and engineering.
Judy Marks: In San Francisco <unk> was awarded a comprehensive modernization of all 16 elevator units at $5 60 Mission Street the.
Judy Marks: The project includes the installation of custom cabin interiors, and our compass 360 destination dispatch system.
Judy Marks: The China conversion rate continues to improve, currently standing at about 51 percent and approximately 4 percent improvement versus 2022. Additional details on our portfolio growth in 2023 can be found in the appendix, as accelerating our portfolio growth is an essential component of our long-term strategy and top-line growth algorithm. By year-end 2023, we will have 900,000 connected units, of which 500,000 use our Otis ONE IoT solution.
In addition, <unk> has been awarded the maintenance contract for the 31 story commercial office building, extending our relationship with Commonwealth partners and contributing to our service recaptures in the quarter.
Judy Marks: In Hong Kong, we are honored to have been selected for a modernization project at Shinny Alex State.
This project for the Hong Kong housing authority, a longstanding customer includes the modernization of 18 elevators, which will all be maintained by Otis upon completion.
Judy Marks: The new units, we use gearless machines with energy efficient drives to meet the project's environmentally conscious requirements.
Judy Marks: Our service sales force performed well throughout the year, with like-for-like maintenance pricing of four points, helping to mitigate labor cost headwinds within the business. Our fifth strategic pillar of delivering modernization value is performance. Modernization orders were up 16.8 percent, driven by double-digit growth in Asia, particularly in Korea, as the strength in our MOD package offerings continues to drive results. Additionally, the Americas and EMEA drove strong fourth quarter modernization major projects. Our modernization backlog is up 15% versus the prior year, giving us a good line of sight for strong growth in 2020. We continue to win many exciting projects based on our innovation, ability to deliver, and the trust our customers have in us. As we build, service, and modernize our customers' elevators and escalators, we build loyalty and value with increasing recurring revenues.
Judy Marks: In Dubai, Otis will modernize 42 elevators and escalators at the Burgh <unk> Khalifa.
Judy Marks: We take pride in being the original equipment manufacturer and maintenance provider of the world's tallest building since its opening.
Judy Marks: Emaar properties has trusted us with the upgrade of their controllers and drives and providing the latest technology for this iconic building.
Judy Marks: In addition, the contract extends our service agreement for another 10 years.
Judy Marks: And last also in EMEA for nearly 130 years visitors have taken Otis elevators to the top of the Eiffel tower, where we're delivering a multiyear modernization of the psychotics towers to duo lifts.
Turning to the fourth quarter results on slide five.
Judy Marks: For the fourth quarter reported sales of $3 $6 billion were up five 3%.
Judy Marks: Organic sales grew for the 13th consecutive quarter and were up three 8% with high single digit growth in service, while new equipment was roughly flat in the face of the micro macro challenges, notably in China.
Judy Marks: For new equipment in China, Otis is building on decades of close cooperation with the nation's metro providers to help expand urban transport and city development. ODIS-1 will be integrated on these units. Otis has a long history with Chongqing Metro, which carries more than 4 million passengers daily across rugged terrain on a network that is famous for its ingenious design and engineering.
Judy Marks: Adjusted operating profit, excluding a 9 million dollar foreign exchange tailwind include increased $52 million with profit growth in both segments.
Judy Marks: Adjusted EPS grew 16% or 12 cents in the quarter.
Judy Marks: We ended the year with fourth quarter, adjusted free cash flow of $573 million, allowing us to finish the year strong at approximately $1 5 billion.
Judy Marks: In San Francisco, Otis was awarded a comprehensive modernization of all 16 elevator units at 560 Mission Street. The project includes the installation of custom cab interiors and our Compass 360 destination dispatch system. In addition, Otis has been awarded the maintenance contract for the 31-story commercial office building, extending our relationship with Commonwealth partners and contributing to our service recaptures in the quarter. In Hong Kong, we are honored to have been selected for a modernization project at Shinyao Estates. The project for the Hong Kong Housing Authority, a long-standing customer, includes the modernization of 18 elevators, which will all be maintained by Otis upon completion. The new units will use gearless machines with energy efficient drives to meet the project's environmentally conscious requirements.
Speaker Change: With that I'll turn it over to <unk> to walk through our 2023 results in more detail.
Speaker Change: Thank you Judy.
Speaker Change: Putting with segment sales performance on slide six.
Speaker Change: <unk> fourth quarter, new equipment sales were $1 $5 billion with organic sales roughly flat driven by high single digit growth in Asia Pacific offsetting mid single digit declines in China.
Speaker Change: Americas, and EMEA were up low single digits and roughly flat respectively.
Speaker Change: For service, we delivered another strong quarter of organic sales growth of six 8% with strong performance across all lines of business and regions.
Speaker Change: Maintenance and repair sales were up six 8% and March sales were up 7%, including the third consecutive quarter of double digit growth in Asia.
Speaker Change: For the full year, new equipment sales were $5 8 billion.
Speaker Change: And organic sales grew two 6% with solid growth in all regions outside of China.
Judy Marks: In Dubai, Otis will modernize 42 elevators and 8 escalators at the Burj Khalifa. We take pride in being the original equipment manufacturer and maintenance provider of the world's tallest building since its opening. MR Properties has trusted us with the upgrade of their controllers and drives and providing the latest technology for this iconic building. In addition, the contract extends our service agreement for another 10 years. And last, also in EMEA, for nearly 130 years, visitors have taken Otis elevators to the top of the Eiffel Tower, where we're delivering a multi-year modernization of the tower's two duoliths.
Speaker Change: New equipment pricing was up low single digits globally with Asia Pacific up low single digits, the Americas up mid single digits and EMEA up high single digits.
Speaker Change: Although the pricing environment in China remains challenging we remain price cost neutral in the region from our continued focus on price discipline and material productivity.
Speaker Change: Service sales were $8 $4 billion with seven 7% organic growth in all lines of business showing high single digit growth, including another year of outstanding performance and repair marking a three year CAGR in the low teens.
Anurag Maheshwari: Turning to the fourth quarter results on slide five, reported sales of $3.6 billion were up 5.3%. Organic sales grew for the 13th consecutive quarter and were up 3.8%, with high single-digit growth in service, while new equipment was roughly flat in the face of the macro challenges, notably in China. Adjusted operating profit, excluding a $9 million foreign exchange tailwind, increased $52 million. With profit growth in both segments, adjusted EPS grew 16% or $0.12 in the quarter. We ended the year with a fourth quarter adjusted free cash flow of $573 million, allowing us to finish the year strong at approximately $1.5 billion. With that, I'll turn it over to Anurag to walk through our 2023 results in more detail. Thank you, Judy.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Sales service sales were $8 $4 billion with seven 7% organic growth in all lines of business showing high single digit growth, including another year of outstanding performance and repair marketing a three year CAGR in the low teens.
Speaker Change: Maintained its pricing excluding the impact of mix since June came in about as expected up roughly four points for the year.
Speaker Change: Turning to segment operating profit performance on slide seven.
Speaker Change: Starting with new equipment, we delivered our best margin expansion for the year in the fourth quarter up 120 basis points.
Speaker Change: Adjusted operating profit, excluding $3 million of Forex headwind was up $20 million.
Anurag Maheshwari: Starting with segment sales performance on slide six, Otis' fourth quarter new equipment sales were $1.5 billion, with organic sales roughly flat, driven by high single-digit growth in Asia Pacific, offsetting mid-single-digit declines in China. Americas and EMEA were up low single digits and roughly flat, respectively.
Speaker Change: Our strong productivity pricing and commodity tailwind were partially offset by unfavorable regional and product mix alongside higher SG&A expense.
Speaker Change: Turning to service fourth quarter, adjusted operating profit, excluding $30 million of Forex tailwind was up $33 million as higher volumes favorable maintenance pricing and productivity were partially offset by annual wage increases and higher material costs.
Anurag Maheshwari: For service, we delivered another strong quarter of organic sales growth at 6.8 percent with strong performance across all lines of business and regions. Maintenance and repair sales were up 6.8%, and March sales were up 7%, including the third consecutive quarter of double-digit growth in Asia. For the full year, new equipment sales were $5.8 billion, and organic sales grew 2.6% with solid growth in all regions outside of China. New equipment pricing was up low single digits globally, with Asia-Pacific up low single digits, the Americas up mid-single digits, and EMEA up high single digits.
Speaker Change: For the past 16 consecutive quarters, we have delivered consistent service margin expansion and for the second consecutive year, we expanded margin by 50 basis points exiting the year at a 24% rate.
For the full year overall operating profit was up $166 million at constant currency and margin expanded 30 basis points.
Speaker Change: Despite the weakness in China, we were able to achieve $26 million of new equipment profit growth at constant currency as pricing productivity and growth in all other regions more than offset unfavorable mix.
Anurag Maheshwari: Although the pricing environment in China remains challenging, we remain price-cost neutral in the region from our continued focus on price discipline and material productivity. Service sales were $8.4 billion, with 7.7% organic growth, and all lines of business showing high single-digit growth, including another year of outstanding performance and repair, marking a three-year cagar in the lower teens. Sales, service sales were $8.4 billion, with 7.7% organic growth and all lines of business showing high single-digit growth, including another year of outstanding performance in repair, marking a three-year CAGR in the low teens. Maintenance pricing, excluding the impact of mixed insurance, came in about, as expected, up roughly four points for the year.
Speaker Change: This performance was better than anticipated and put us at the midpoint of our initial full year guidance for operating profit growth at constant currency as we overcame the weaker macro backdrop experienced during the year.
Speaker Change: Service operating profit increased $178 million at constant currency supported by strong volume pricing and productivity.
Speaker Change: Since spin we have increased service margins by 240 basis points.
Speaker Change: Slide eight lays out the full year 2000, <unk> adjusted EPS Bridge.
Speaker Change: Adjusted EPS in the year grew 37 cents.
Speaker Change: Driven by 29, a solid operational performance.
Accretion from the <unk> transaction share repurchases of $800 million in optimization of our tax rate by 40 basis points drove an additional 12.
Speaker Change: Which more than offset <unk> <unk> of foreign exchange headwinds.
Speaker Change: Additionally, we closed out 2023 with notable adjusted free cash flow of $573 million in the quarter up more than 30% versus the prior year driven by higher net income and favorable working capital.
Anurag Maheshwari: Turning to segment operating profit performance on slide 7, starting with new equipment, we delivered our best margin expansion for the year in the fourth quarter, up 120 basis points. Adjusted operating profit excluding $3 million of a forex headwind was up $20 million as strong productivity, pricing, and commodity tailwinds were partially offset by unfavorable regional and product mix alongside higher SG&A exports.
In addition to the growth in down payments from increased new equipment orders in the quarter. The team continued to manage working capital well.
Speaker Change: As a result, we achieved our annual guidance generating approximately $1 $5 billion of adjusted free cash flow.
Speaker Change: If you were to look back to the beginning of 'twenty. Three we initially guided that we would achieve low to mid single digit sales growth.
Anurag Maheshwari: Turning to service, fourth quarter adjusted operating profit, excluding $30 million of Forex tailwind, was up $33 million as higher volumes, favorable maintenance pricing, and productivity were partially offset by annual wage increases and higher material costs. For the past 16 consecutive quarters, we have delivered consistent service margin expansion, and for the second consecutive year, we expanded our service margin by 50 basis points, exiting the year at a 24% rate. For the full year, overall operating profit was up $166 million at constant currency, and the margin expanded 30 basis points.
Speaker Change: 30 basis points of operating profit margin expansion and approximately 8% EPS growth.
Speaker Change: Due to our operational performance continued penetration of repair sales on agreement payments base robust pricing and productivity we will.
Speaker Change: We're able to outperform all of these metrics despite an uncertain macro environment.
Adjusted EPS by approximately 12%.
Speaker Change: All while returning approximately 135 billion to the shareholders.
Speaker Change: With a strong end to the year on new equipment orders and solid modernization order activity throughout 'twenty three we further expanded both our new equipment and more backlog, which will support us in 'twenty four and beyond.
Anurag Maheshwari: Despite the weakness in China, we were able to achieve $26 million of new equipment profit growth at constant currency as pricing, productivity, and growth in all other regions more than offset the unfavorable mix. This performance was better than anticipated and put us at the midpoint of our initial four-year guidance for operating profit growth at constant currency as we overcame the weaker macro backdrop experienced during the year. Service operating profit increased $178 million at constant currency, supported by strong volume, pricing, and productivity. Since then, we have increased service margins by 240 basis points. Slide eight lays out the full year 23 adjusted EPS. Adjusted EPS for the year grew $0.37, driven by $0.29 of solid operational performance.
Speaker Change: I'll now turn it back to Judy to discuss our 2020 for outlook.
Judy Marks: Starting on slide nine with the market outlook.
Judy Marks: The Americas market in 2023, the market was down low teens as double digit decline in North America was partially offset by low single digit growth in Latin America.
Judy Marks: In EMEA Western and Central Europe were the primary drivers leading to a market that was down high single digits.
Judy Marks: In Asia, the market was down mid single digits with a solid year in Asia Pacific up low single digits, but the performance masked by the downturn in China, which we estimate was down just north of 10%.
Judy Marks: In 2020 for the global new equipment market is expected to be down low to mid single digits and units with markets in the Americas, and EMEA down low single digits and markets in Asia down low to mid single digits driven by China.
Anurag Maheshwari: Accretion from the Zeroya transaction, share repurchases of $800 million, and optimization of the tax rate by 40 basis points drove an additional $0.12, which more than offset $0.04 of foreign exchange headway. Additionally, we closed out 2023 with a notable adjusted free cash flow of $573 million in the quarter, up more than 30% versus the prior year, driven by higher net income and favorable working capital. In addition to the growth and down payments from increased new equipment orders in the quarter, the team continued to manage working capital well. As a result, we achieved the annual guidance, generating approximately 1.5 billion dollars of adjusted free cash.
Judy Marks: While new equipment market dynamics remain fluid the long term fundamentals of the industry are well supported by the service driven growth model.
Judy Marks: In 2020 for the global installed base is expected to grow at a similar rate to that of 2023 at around mid single digits and reach approximately $22 5 million units in.
Judy Marks: In the Americas, and EMEA, we expect low single digit growth and in Asia, We're expecting mid single digit growth driven by China.
Judy Marks: Overall, we expect service to be the growth driver for the industry and we expect the same for our business.
Judy Marks: With this as the industry backdrop for Otis we expect net sales of 14, five to $14 8 billion growing 3% to 5% organically or 2% to 4% at actual currency adjusted.
Judy Marks: If we were to look back to the beginning of 2023, we initially guided that we would achieve low to mid-single-digit sales growth, 20 to 30 basis points of operating profit margin expansion, and approximately 8% EPS growth. Due to our operational performance, continued penetration of repair sales on a growing maintenance base, robust pricing, and productivity, we were able to outperform all these metrics despite an uncertain macro environment and grow adjusted EPS by approximately 12%, all while returning approximately $1.35 billion to shareholders. With a strong end to the year on new equipment orders and solid modernization order activity throughout 2023, we further expanded both our new equipment and mod backlog, which will support us in 2024 and beyond. I'll now turn it back to Judy to discuss our 2024 outcome, starting on slide nine with the market out. In the Americas market, in 2023, the market was down in the low teens, as a double-digit decline in North America was partially offset by low single-digit growth in Latin America. In EMEA, Western and Central Europe were the primary drivers, leading to a market that was down high single digits.
Judy Marks: Operating profit is expected to be between two four and $2 $45 billion up $125 million to $175 million at actual currency or $150 million to $190 million, excluding foreign exchange headwinds.
Judy Marks: We expect adjusted EPS in the range of $3 80.
Judy Marks: To $3 90.
Judy Marks: Up 7% to 10% for nearly 25 cents at the midpoint versus the prior year.
Judy Marks: Finally, we expect adjusted free cash flow of approximately $1 6 billion.
Judy Marks: With our commitment to a disciplined capital allocation strategy, we expect to repurchase approximately $800 million in shares in 2024, as we look to grow our dividend payout and pursue our typical $50 million to $100 million of bolt on M&A.
Judy Marks: With that let me hand, it back to Iraq to outline the 2024 segment outlook in more detail.
Iraq: Starting on slide 10 for the new equipment outlook.
Iraq: We have good line of sight for new equipment sales due to a backlog coverage, which extends out to over a year of sales.
Judy Marks: In Asia, the market was down mid-single digits, with a solid year in Asia-Pacific up low-single digits. But the performance was masked by the downturn in China, which we estimate was down just north of 10%. In 2024, the global new equipment market is expected to be down low to mid-single digits in units, markets in the Americas and EMEA down low single digits, and markets in Asia down low to mid single digits, driven by China. While new equipment market dynamics remain fluid, the long-term fundamentals of the industry are well-supported by the service-driven growth model. In 2024, the global installed base is expected to grow at a similar rate to that of 2023, at around mid-single digits, and reach approximately 22.5 million units.
Iraq: This in combination with the share gain initiatives and incremental pricing actions, we have taken over the past few years.
<unk> is relatively well for 2024.
Iraq: As a result, we anticipate new equipment organic sales to be flattish with Americas, and EMEA up low single digits and Asia Pacific up mid single digits with mid single digit declines in China.
Iraq: We expect new equipment profit margin to be flat to up 10 basis points with roughly steady volume and tailwind from pricing productivity commodities and the benefits from uplift offset by unfavorable regional and project mix alongside higher SG&A expense.
Iraq: Driving strong material and installation productivity and faster backlog conversion will remain a priority with the goal to again outperform our targets.
Iraq: Turning to slide 11 for the service outlook.
Judy Marks: In the Americas, in EMEA, we expect low single-digit growth, and in Asia, we're expecting mid-single-digit growth driven by China. Overall, we expect service to be the growth driver for the industry, and we expect the same for our business. With this as the industry backdrop, for Otis, we expect net sales of $14.5 to $14.8 billion, growing 3-5% organically or 2-4% at actual currency. Adjusted operating profit is expected to be between $2.4 and $2.45 billion, up $125 to $175 million in actual currency or $150 to $190 million excluding foreign exchange headway.
Iraq: Starting with sales, we expect another solid year in service and anticipate organic sales growth of 6% to 7% maintaining.
Maintenance and repair organic sales are expected to be up five five to six 5% driven by the significant additions to our maintained its portfolio and approximately one point of net pricing after adjusting for mix in June.
Iraq: Mid single digit repair growth will also contribute through both our traditional and digital channels, although at a more moderate pace than what we saw in 'twenty three.
Iraq: For modernization, we anticipate organic sales growth of about 8% as we execute on our solid backlog, which similar to new equipment extends out over a year and ended the year up in the mid teens.
Iraq: Our strategy of standardizing products and driving more supply chain and factory optimization will enable us to accelerate sales growth above the 7% achieved in 'twenty three.
Judy Marks: We expect adjusted EPS in the range of $3.80 to $3.90, 7-10% or nearly 25 cents at the midpoint versus the prior year. Finally, we expect adjusted free cash flow of approximately $1.6 billion.
Iraq: This also as the added benefit of helping to drive modernization margin expansion.
Iraq: Turning to service profit, we expect roughly 50 basis points of margin expansion.
Anurag Maheshwari: With our commitment to a disciplined capital allocation strategy, we expect to repurchase approximately $800 million in shares in 2024 as we look to grow our dividend payout and pursue our typical $50 to $100 million of bolt-on M&A. With that, let me hand it back to Anurag to outline the 2024 Segment Outlook in more detail. Starting on slide 10 for the new equipment out... We have a good line of sight for new equipment sales due to our backlog coverage, which extends out to over a year of sales. This, in combination with the share gain initiatives and incremental pricing actions we have taken over the past few years, positions us relatively well for 2024. As a result, we anticipate new equipment organic sales to be flattish, with Americas and EMEA up low single digits, and Asia Pacific up mid single digits with mid single digit declines in China.
Iraq: Continued strong volume price productivity and uplift are expected to more than offset annual wage inflation and higher SG&A similar to 'twenty three.
Now turning to slide 12.
Iraq: We began executing project uplift initiatives in the second half of 'twenty three as we leverage enterprise scale optimize our indirect and supply chain spend and improvements standardize our processes.
Iraq: We are on track to achieve our targeted savings of $150 million with $80 million of run rate savings anticipated by year end 2024, and $150 million in run rate savings by mid 2005.
Iraq: But of the $150 million in total savings to be realized nearly half will come from leveraging enterprise scale rougher.
Iraq: Roughly 25% from indirect and supply chain optimization, and the rest from process improvements and standardization.
Anurag Maheshwari: We expect new equipment profit margin to be flat to up 10 basis points with roughly steady volume and tailwinds from pricing, productivity, commodities, and the benefits from uplift, offset by unfavorable regional and project mix alongside higher SG&A expenses. Driving strong material and installation productivity and faster backlog conversion will remain a priority with the goal to again outperform our target. Turning to slide 11 for the service out.
Iraq: We continue to analyze and execute on the opportunities and estimate 70% of the savings will be in the service segment with the remaining split between new equipment and corporate.
Iraq: Moving to the 24 EPS bridge on slide 13.
Iraq: Our guidance for adjusted EPS is $3 80 to $3 90, driven by approximately 30 of operating profit growth at the midpoint, reflecting organic sales growth of 3% to 5% with approximately 50 basis points of margin expansion.
Anurag Maheshwari: Starting with sales, we expect another solid year in service and anticipate organic sales growth of 6 to 7 percent. Maintenance and repair organic sales are expected to be up 5.5 to 6.5 percent, driven by the significant additions to our maintenance portfolio and approximately one point of net pricing after adjusting for mixed insurance. Mid-single-digit repair growth will also contribute through both our traditional and digital channels, although at a more moderate pace than what we saw in 2020. For modernization, we anticipate organic sales growth of about 8% as we execute on a solid backlog which, similar to new equipment, extends out over a year and ended the year up in the mid-teens. Our strategy of standardizing products and driving more supply chain and factory optimization will enable us to accelerate sales growth above the 7% achieved in 2020. This also has the added benefit of helping to drive modernization margin expansion. Turning to service profit, we expect roughly 50 basis points of margin expansion. Continued strong volume, price, productivity, and uplift are expected to more than offset annual wage inflation and higher SG&A, similar to 2020. Now turning to slide 12.
Iraq: Below the line, we expect to offset $3 to four so forex and increased interest expense headwinds with continued optimization of our tax rate and the benefit of approximately $800 million in share repurchases supported by $1 6 billion.
Iraq: And adjusted free cash flow.
Iraq: Looking at the EPS cadence for the year, we expect that 30 of EPS growth will be fairly level loaded between the first and the second half while in the first half we expect the first quarter EPS growth to be a couple of cents lighter than the second quarter.
Iraq: A little bit more color on the first quarter metrics starting with orders.
Iraq: We faced a difficult compare versus the first quarter of last year, where we grew more than 7%. So we expect new equipment orders to be down roughly 10%, while portfolio and modernization orders growth should remain strong.
Iraq: As for sales and profit sales growth will be roughly 3% and total company operating profit margins should expand over 50 basis points to 16% plus both led by service.
Iraq: Below the line headwinds from higher interest costs and a tax rate roughly in line with the prior year due to timing will be offset by lower share count.
Anurag Maheshwari: We began executing Project Uplift initiatives in the second half of 2023 as we leveraged enterprise scale, optimized our indirect and supply chain spend, and improved and standardized our processes. We are on track to achieve a targeted savings of $150 million, with $80 million of run rate savings anticipated by year-end 2024 and $150 million in run rate savings by mid-25. Out of the $150 million in total savings to be realized, nearly half will come from leveraging enterprise scale.
Iraq: All in this should lead to six to seven cents of EPS growth driven primarily by operational performance.
Iraq: Overall, our outlook reflects another year of performance led by consistent service business we remain.
Focus on continuing to mitigate macro challenges and further driving shareholder value.
Iraq: With that I will request Christa to please open the line for questions.
Yes.
Christa: As a reminder, if you would like to ask a question. Please press star followed by the number one on your telephone keypad. We also ask that you limit yourself to one question and one follow up. Your first question comes from the line of Nigel Coe from Wolfe Research. Please go ahead.
Anurag Maheshwari: Roughly 25% from indirect and supply chain optimization and the rest from process improvements and standardization. We continue to analyze and execute on the opportunities and estimate 70% of the savings will be in the service segment with the remaining split between new equipment and copper. Moving to the 24 EPS bridge on slide 13.
Nigel Coe: Thanks, Good morning, and thanks for the question.
Nigel Coe: So a solid outlook for 2024.
Nigel Coe: Thank you mentioned, Iraq, one firm price for new equipment.
I know we've had some weakness in China and I'm, just wondering if theres any sort of significant skus across the geographies that you called out the maybe again.
Anurag Maheshwari: Our guidance for adjusted EPS is $3.80 to $3.90, driven by approximately 30 cents of operating profit growth at the midpoint, reflecting organic sales growth of 3 to 5 percent, with approximately 50 basis points of margin expansion. Below the line, we expect to offset $0.03 to $0.04 of foreign exchange and increased interest expense headwinds with continued optimization of our tax rate and the benefit of approximately $800 million in share repurchases, supported by $1.6 billion in adjusted free cash. Looking at the EPS cadence for the year, we expect the 30 cents of EPS growth to be fairly level-loaded between the first and the second half, while in the first half, we expect the first quarter EPS growth to be a couple cents lighter than the second quarter.
Nigel Coe: Excuse me if I missed it but what would you expect the service pricing this year.
Speaker Change: Okay. Thanks for the question, let me clarify the one person that I spoke in my prepared comments was on maintenance.
Pricing so what you'll see is we'll see adjusted for mix in June. So we will see about 3% on a like to like basis and you adjust for that on the new equipment side.
Speaker Change: We've seen good price increases in 'twenty three in America, EMEA and APAC. Some of that will continue over into 'twenty for new equipment, but China does have price pressure as we saw in 'twenty three but its a deflationary economy. So we expect it to be price cost neutral.
Speaker Change: Okay, but no evidence of pricing deflation outside of China.
Speaker Change: No Nigel none at all.
Speaker Change: Okay, Great and then just on the uplift savings, obviously, you're starting to see those coming through in <unk>.
Speaker Change: And 'twenty for work.
Anurag Maheshwari: A little bit more color on the first quarter metrics, starting with Audit. We face a difficult compare versus the first quarter of last year, where we grew more than seven percent, so we expect new equipment orders to be down roughly ten percent while portfolio and modernization orders growth should remain strong. As for sales and profit, sales growth will be roughly 3%, and total company operating profit margins should expand over 50 basis points to 16% plus, both led by service. Below the line, headwinds from high interest costs and a tax rate roughly in line with the prior year due to timing will be offset by lower checks.
Speaker Change: These land mainly.
Speaker Change: This year I mean.
Speaker Change: What would you say more new equipment of services and I'm just curious if we're seeing any.
Speaker Change: Kind of upward trajectory on the amortization margins I know Thats an initiative.
Speaker Change: Focused on I'm, just wondering if we're going to see some of that coming through in 'twenty four.
Speaker Change: Yeah, Nigel let me talk to the uplift in 'twenty three we pretty much saw it across the board again early days, but pretty pleased with the the savings we've seen and more importantly, the trajectory of where we're going with the process work with the organizational model.
Rod: And really changing how we work to be more customer focused on rod I'll, let you touch on Mod margins.
Rod: Yes.
Rod: On the Mt margins as we said a few months ago that we expect it to be.
Rod: Our with new equipment in a few months and then start.
Anurag Maheshwari: All in, this should lead to six to seven cents of EPS growth driven primarily by operational performance. Overall, our outlook reflects another year of performance led by a consistent service business. We remain focused on continuing to mitigate macro challenges and further driving shareholder value. With that, I will request Krista to please open the line for questions. As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. We also ask that you limit yourself to one question and one follow-up. Your first question comes from the line of Nigel Coe from Wolf Research. Please go ahead.
Rod: Going up and we see that trajectory pretty good we'll give a little bit more color on the investor day in a couple of weeks, but but that is on the right trend and for the uplift on.
Rod: Savings I think the cadence what I outlined in the prepared comments, 70% in service and the rest between new equipment incorporate that should be for this year as well. So we're going to exit the year at $80 million in euro of $40 million with similar cadence across across that.
Speaker Change: Great great. Thanks for that.
Quantum Corner: Your next question comes from the line of quantum corner from TD Cowen. Please go ahead.
Quantum Corner: Yeah.
Quantum Corner: Hey, good morning, guys.
Quantum Corner: Good morning.
TD Cowen: I was wondering if you could quantify the net savings from uplift and how we should think about that.
TD Cowen: Got it.
TD Cowen: This year and next this year.
Anurag Maheshwari: Thanks, good morning, and thanks for the early question. So, a solid outlook for 2024. I think you mentioned, Anurag, the 1% price for new equipment. I know we've had some weakness in China, so just wondering if there's any sort of significant skews across the geographies that you called out there. Maybe, again, excuse me if I missed it, but what would you expect of service pricing this year? Okay, thanks for the question.
TD Cowen: Yes.
Speaker Change: Thanks for the question.
Speaker Change: $40 million is net savings, which is flowing through to the P&L or uplift right. So if you look at in 2024, we are going to grow our operating profit at constant currency by approximately $170 million about $140 million of that is price cost with price is what now.
Speaker Change: <unk> asked me earlier, a little bit from the service side from the new equipment side, we still see in commodity to wounds.
Speaker Change: I'll get a little bit lighter than 'twenty, three but thats, obviously positive.
Anurag Maheshwari: Let me clarify. The one person that I spoke to in their prepared comments was on maintenance pricing. So what we'll see is it will be adjusted for mixed insurance, so we'll see about 3% on a like-to-like basis, and you're just for that. On the new equipment side, clearly, we've seen good price increases in 23 in America, EMEA, and AP. Some of that will continue in 24 new equipment, but China does have price pressure, as we saw in 23, but it's a deflationary economy, so we expect it to be price cost neutral. Okay, but no evidence of pricing deflation outside of, No, Nigel, none at all. Okay, great. And then just on the uplift savings, obviously, we're starting to see those coming through in 2024. But where do these mainly land this year?
And the uplift is contributing $40 million to that right. So if you add all of that together, we're getting about price cost of about $140 million and the rest is coming from volume net of mix. So the $40 billion $40 million of uplift is 100% net flows through to the P&L.
Speaker Change: Got it and then to your earlier comment on China, and the new equipment market.
Speaker Change:
It doesn't sound like you are talking about price erosion due to competition per se, but rather.
Speaker Change: Is there some others reason for it was just lower costs across all of the competitors are.
If you could just expand on what's going on in China, new equipment pricing.
Speaker Change: Sure. So really it's a very competitive market, we'll start there and the market remains weak we've called it north of 10%.
Speaker Change: In terms of what we saw this year and we're going to we're going to be very focused on continued productivity savings.
Speaker Change: In a deflationary environment, we're seeing the costs come down too and that's really what's helping the commodity costs are coming down and it gives us this price cost neutral ability now listen every day in China, where that where a new equipment. We're balancing the quality of the orders the volume we're taking.
Anurag Maheshwari: I mean, would you say more new equipment or services? And I'm just curious if we're seeing any kind of upward trajectory on the modernization margins. I know that's an initiative that you're focused on. I'm just wondering if we're going to see some of that coming through in 2024. Yeah, Nigel, let me talk about the uplift in 23.
Speaker Change: In and what that's contributing to our backlog margin and we are.
In a market that's down 10% in this quarter Sally and the team did great job, we were down 5% in terms of orders and so we did gain share and we've gained share now consistently for several years. So we're managing that carefully.
Anurag Maheshwari: We pretty much saw it across the board. Again, early days, but pretty pleased with the savings we've seen. And more importantly, the trajectory of where we're going with the process work, with the organizational model, and really changing how we work to be more customer focused. Anurag, I'll let you touch on ModMart.
Speaker Change: But I will tell you our China business when you when you look at it as a whole our China business contributed significantly this year and their profit for the year was up year over year. When you look all in because what we've done is we've really executed our strategy well on new equipment with key accounts with our sale.
Speaker Change: Coverage, but just as importantly, gautam we've focused on.
Anurag Maheshwari: Yeah, on the margins, you know, as we said a few months ago that we expected to be at par with new equipment in a few months and then start going up, and we see that trajectory pretty good. We'll give a little bit more color on investor day in a couple of weeks, but that is on the right track. And for the uplift savings, I think the cadence, what I outlined in the prepared comments, 70% in service and the rest between new equipment and corporate, that should be for this year as well. We should exit the year with $80 million and within a year of $40 million, we trim the cadence across the board. Great, thanks. Your next question comes from the line of Gautam Khanna from TD Cowen. Please go ahead. Hey, good morning, guys. Good morning.
Speaker Change: Pivoting more and growing our service business our service sales have grown mid teen Cagr's and we service now accounts for 25% of our China sales, which is up from mid teens, a few years ago, and we had 20% growth in.
Speaker Change: In both units and add value in service and this last quarter and that's the that's the trend we've been on so it's about balance and new equipment.
Speaker Change: But it's it's a it's a survey of growth growing service in large story.
Speaker Change: I appreciate it.
Speaker Change: Yeah.
Speaker Change: If you would like to ask a question. Please press star one on your telephone Keypad. Your next question comes from the line of Julian Mitchell from Barclays. Please go ahead.
Hi.
Julian Mitchell: Good morning.
Anurag Maheshwari: I was wondering if you could quantify the net savings from Uplift and how we should think about that this year and next. Yeah, so the, thanks Gautam for the question. The $40 million is net savings, which is flowing through to the P&L or uplift, right? So if you look at 2024, we are going to grow our operating profit at constant currency by approximately $170 million. About $140 million of that is the price.
Julian Mitchell: Just wanted to.
Julian Mitchell: Clarify, perhaps on the new equipment outlook.
Julian Mitchell: Slide nine I think the market down in every region and globally for the year.
Speaker Change: How are you thinking about the backlog trending sort of as we move through the year.
Speaker Change: Because I guess last year, you had the backlog up in new equipment, even with the orders down. So you had a sort of a book to bill.
Speaker Change: Yes.
Over one times in 23 of the new equipment. So just trying to understand in 2024, how are we thinking about the sort of backlog progression there and the implied book to bill. Thank you.
Anurag Maheshwari: The price is what Nigel asked me earlier, a little bit from the service side, from the new equipment side, we're still seeing commodity tailwinds, a little bit lighter than 23, but that's obviously positive. And the uplift is contributing $40 million. So if you add all of that together, we're getting a price cost of about $140 million, and the rest is coming from volume net of mix. So the $40 million of uplift is 100% net flow through to the P&L. I got it.
Speaker Change: Yes, so the backlog itself Julien is obviously, we're going in with 2%, we really couldnt be more pleased with how especially the Americas and EMEA really drove strong new equipment orders in the fourth quarter.
Americas was up 6% EMEA was up 11, so everyone's going in with backlog strength with the exception of China backlog is down mid single digits as we go into <unk> to 'twenty four but it's that it's that strong backlog, that's giving us that line of sight in the majority of our regions that gives us the confidence.
Anurag Maheshwari: And then to your earlier comment on China and the new equipment market. It doesn't sound like you're talking about price erosion due to competition per se, but rather, is there some other reason for it, or is it just lower costs across all the competitors? You can just expand on what's going on in China, new equipment prices. So, really, it's a very competitive market. We'll start there, and you know, the market remains weak. We've called it north of 10% in terms of what we saw this year.
Anorak: That we can between that and new equipment share gain of 50 basis points that we're going to sustain that gives us the confidence anorak I'll, let you take him through kind of how the year transpires transpires, yes. Thanks Judy.
Anorak: As you said Julien our book to Bill was more than one in 'twenty three we expect that to be similar in 'twenty four because the orders are quite higher than our new equipment revenue. So as we go through the course of the year, we do expect to finish even if we perform in line with our market outlook and don't even increased share.
Judy Marks: And, you know, we're going to be very focused on continued productivity savings. But in a deflationary environment, we're seeing costs come down, too, and that's really what's helping.
Anorak: We should end the year at a backlog flattish to be slightly higher clearly the comps are tough for us in the first quarter in terms of new equipment orders, but then they get easier for us in the second and third quarter. So you will see a little bit of generation quarter by quarter, but we are confident that given this market outlook. If it stays the way we should we should end the year with a flattish.
Judy Marks: The commodity costs are coming down, and it gives us this price-cost neutral ability. Now, listen. Every day in China, we're on new equipment. We're balancing the quality of the orders, the volume we're taking in, and what that's contributing to our backlog margin. And we are, you know, in a market that's down 10% this quarter. Sally and the team did a great job. We were down 5% in terms of orders.
Anorak: Slightly higher backlog.
Speaker Change: That's helpful. Thank you and then maybe just one for Judy on particularly sort of North America, and EMEA, how youre seeing that market right now in terms of sort of verticals and how customers are behaving and new equipment.
Judy Marks: And so we did gain share, and we've gained share now consistently for several years. So we're managing that carefully. But I will tell you, our China business, when you look at it as a whole, our China business contributed significantly this year, and their profit for the year was up year over year when you look all in. Because what we've done is we've really executed our strategy well on new equipment with key accounts and our sales coverage. But just as importantly, we've focused on pivoting more and growing our service business. Our service sales have grown at mid-team CAGRs. And we service now accounts for 25% of our China sales, which is up from mid-teams a few years ago. And we had 20% growth in both units and value in service in this last quarter. And that's the trend we've been on. So it's about balance and new equipment. But it's a growing service and mod. I appreciate it.
Judy Marks: Are you seeing.
Judy Marks: Particular weakness in office versus multifamily.
Judy Marks: Seeing projects being delayed or it sort of existing projects going ahead on plan and it's the new projects that maybe it's just taking longer for customers to sign off any sort of color on that on North America and Europe. Please.
Speaker Change: Sure Julian let me start with North America, and as I said, our teams out there and it goes back to these long term customer relationships that really enable the orders book to be up in the backlog to be up but for context, the new equipment market segment in units in North America.
Finished last year the lowest since the GSA.
Speaker Change: And yet we still we gained share we delivered and we increased pricing.
Speaker Change: So our team is performing very well there when we look at the segments themselves.
Speaker Change: None of the segments are strong in North America.
Judy Marks: If you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from the line of Julian Mitchell from Barclays. Please go ahead.
Speaker Change: Multifamily is the weakest due to several years of outpace growth.
Speaker Change: If I had to rank order them infrastructure is the best and we've had really good success with major projects, we're going to continue to grow there, but all of the segments. None of them are strong in North America and so this is going to be a year, where the benefit to Otis and why we're going to be successful.
Judy Marks: Hi, good morning. I just wanted to clarify, perhaps, on the new equipment outlook. You've got slide nine. I think the market is down in every region and globally for the year. How do you think about the backlog trending as we move through the year? Because I guess last year you had a backlog of new equipment, even with the orders down. So you had a sort of a book to bill, I guess, you know, over one time in 23 and new equipment.
Speaker Change: <unk> is we invested in the low rise market, we introduced our gen three core product and 80% of the North American market is two to six stories and that market. We're still seeing active bids we have seen a great pipeline for gen. Three core and that gives us the encouragement between the backlog.
Judy Marks: So just trying to understand in 2024, how are we thinking about the sort of backlog progression there and the implied book to build. Yeah, so the backlog itself, Julian, is, you know, obviously we're going in with 2%. We really couldn't be more pleased with how, especially the Americas and EMEA, really drove strong new equipment orders in the fourth quarter. Americas was up 6%, and EMEA was up 11.
Speaker Change: And the orders, we're seeing to know that we can.
Speaker Change: Mid single digit backlog in North America, So and that gives us a good 12 to 18 plus months line of sight for next year's revenue.
Speaker Change: In Europe, South Europe remained strong.
Led by Spain.
Speaker Change: We're seeing we're seeing sustained activity.
Speaker Change: Central and northern Europe is weak and again their infrastructure tends to tends to lead.
Judy Marks: So everyone's going in with backlog strength, with the exception of China, backlog is down mid-single digits as we go into 24. But it's that strong backlog that's giving us that line of sight in the majority of our regions that gives us the confidence that we can, between that and the new equipment share gain of 50 basis points that we're going to sustain, that gives us the confidence. Anurag, I'll let you take them through kind of how the year transpired. Thanks, Judy.
Speaker Change: Residential a little better in Europe than it is in in North America by far.
Speaker Change: But again, we we.
Speaker Change: What we see on the ground, whether it's the German economy or any of the other locations is looks to us like 'twenty four it looks like 'twenty three in terms of the segments in Europe.
Speaker Change: That's very helpful. Thank you.
Anurag Maheshwari: So, as you said, Julian, our book to build was more than one in 23. We expect that to be similar in 24 because our orders are quite higher than our new equipment revenue. So as we go through the course of the year, we do expect to finish with a backlog flattish to slightly higher. Clearly, you know, communications are tough for us in the first quarter in terms of new equipment orders, but then they get easier for us in the second and third quarters. So you will see a little bit of gyration quarter by quarter, but we are confident that given this market outlook, if it stays the way, we should end the year with a flattish or slightly higher backlog. That's helpful; thank you. And then maybe just one for Judy on, you know, particularly sort of North America and EMEA, you know, how you're seeing that market right now in terms of sort of verticals and how customers are behaving with new equipment? Are you seeing, you know, this particular weakness in office versus multifamily?
Your next question comes from the line of Miguel Barriga from BNP Paribas Ex-army. Please go ahead.
Right.
Miguel Barriga: Hi, good morning, everyone and thanks for taking my questions. The first one.
Miguel Barriga: Just on China, the market the competitive environment in China.
Miguel Barriga: Clearly said the market remains weak, but the increased pricing pressure over the last quarter or so one of your peers reported strong market share gains in Q4. So just wanted to get your views on anything incremental to what we've seen so far.
Speaker Change: Sure well listen Miguel performance can vary in any given quarter based on compares but I like to take a step back.
And overall for 'twenty three we believe we gained share in China with the market down north of 10 and us coming in.
Speaker Change: Again, Dan.
Down about five.
Judy Marks: Are you seeing projects being delayed? Or are it sort of existing projects that are going ahead on plan, and it's the new projects that maybe it's just taking longer for customers to sign off on? Any sort of color on that in North America and Europe?
Speaker Change: And actually even low single digits. When you look for the year, but let me try and give you some additional color here.
Speaker Change: First we did perform better than the first half of the year versus the second half.
Speaker Change: But we always manage volume and share versus profitability and we manage those dials appropriately while maintaining momentum on our share growth.
Judy Marks: Sure, Julian, let me start with North America. And as I said, our team's out there, and it goes back to these long-term customer relationships that really enable the order book to be up and the backlog to be up. But for context, the new equipment market segment in units in North America finished last year at the lowest since the GFC. And yet we still gained share, we delivered, and we increased prices. So our team is performing very well there. When we look at the segments themselves, None of the segments is strong in North America.
Speaker Change: Our order value declined mid single digits, and we've spoken all year about the deflation that's impacted the market, but we've been able to offset the price decline with better productivity.
Speaker Change: And when you look at our strategy in China, we've added the agents and distributors, it's given us the geographic and vertical coverage and we've continued to innovate and invest in our product we brought multiple products to the market in China, we've upgraded our escalator offering R. O H R. O H 8000, and we brought gen $3 60 to them.
Judy Marks: You know, multifamily is the weakest due to several years of outpaced growth. If I had to rank order them, infrastructure is the best, and we've had really good success with major projects. We're going to continue to grow there. But all of the segments, none of them are strong in North America.
Speaker Change: But in China over the past year and that will yield for us and give us an advantage this year because of the technology because of our again our reach in terms of our sales channel overall, we've increased our bookings in China by nearly 20% since pre spin.
Judy Marks: And so, you know, this is going to be a year where the benefit to Otis and why we're going to be successful is that we invested in the low-rise market. We introduced our Gen III core product, and 80% of the North American market is two to six stories. And that market, we're still seeing active bids. We've seen a great pipeline for Gen III core, and that gives us the encouragement between the backlog and the orders we're seeing to know that we can, you know, it's a mid-single-digit backlog in North America. And that gives us a good 12, 18-plus-months line of sight for next year's revenue. In Europe, South Europe remains strong, led by Spain. We're seeing, you know, we're seeing sustained activity. However, central and northern Europe is weak.
All over the market over that same multi year period is down 10% to 15%. So our strategy is working our team is out there every day focused where our backlog, while it's down mid single digits.
Speaker Change: The quality of our backlog the profitability of our backlog, we're not sacrificing for volume.
Speaker Change: That's great. Thank you very much and then my second question. If you can talk a little bit about modernization you mentioned backlog is up 15%.
Speaker Change: Driving that growth exactly and how should we think about it from here 2024, and 2025 and then on the margin of modernization you mentioned at par with new equipment. I think one of your peers stated that margins are even higher than maintenance, where do you think the difference lies.
Judy Marks: And again, there, infrastructure tends to lead. Residential housing is a little better in Europe than it is in North America by far. But again, you know, what we see on the ground, whether it's the German economy or any of the other locations, looks to us like 24, looks like 23 in terms of the segments in Europe. That's very helpful. Thank you. Your next question comes from the line of Miguel Borrega from BNP Paribas XME. Please go ahead. Hi, good morning, everyone.
Speaker Change: Would you see those margins in modernization growing ahead of the other segments for you in the next few years. Thank you.
Speaker Change: Yeah. So so all I'll comment a little on let me talk about the market in a little bit on the margins because the margins vary by region.
Speaker Change: In terms of modernization margins, but the mod market is up nicely in all regions and the majority of that is just driven by the refurbishment required due to the aging equipment. That's out based on construction cycles from 20 plus years ago. We're just in a natural growth side.
Judy Marks: Thanks for taking my questions. The first one is just on China, the market, and the competitive environment in China. Obviously, as I said, the market remains weak, but do you sense increased pricing pressure over the last quarter or so? One of your peers reported strong market share gains in Q4, so just wanted to get your views on anything additional to what we've seen so far. Sure.
Speaker Change: <unk> now where.
Speaker Change: You're going to see year over year additional additional mod.
Speaker Change: Really pleased with the backlog up this was our sixth consecutive quarter of orders up over 10%.
Speaker Change: Asia Pacific really was the standout again with Korea, but yeah, we have a great mod product in China.
Judy Marks: Well, listen, Miguel, performance can vary in any given quarter based on comparisons, but I like to take a step back. And overall, for 23, we believe we gained share in China with the market down north of 10, and us coming in, again, you know, down about 5, and actually even low single digits when you look for the year. But let me try and give you some additional color here.
Speaker Change: And our China orders, albeit on a small base because it's a little bit of a younger install base.
Speaker Change: Is growing significantly double digit and Americas and EMEA as I said in my prepared comments.
Speaker Change: Really had a strong major project contribution and not orders in the fourth quarter and we expect that to continue again in terms of margins.
Judy Marks: First, we did perform better in the first half of the year versus the second half, but we always manage volume and share versus profitability, and we manage those dials appropriately while maintaining momentum on our share growth. Our order value declined by mid-single digits, and we've spoken all year about the deflation that's impacted the market, but we've been able to offset the price decline with better productivity. And when you look at our strategy in China, we've added agents and distributors, it's given us geographic and vertical coverage, and we've continued to innovate and invest in our product. We've brought multiple products to the market in China; we've upgraded our escalator offering, our OH8000, and we brought Gen360 to the market in China over the past year.
Speaker Change: As <unk> shared we will surpass new equipment margins shortly.
Speaker Change: But when you look in different geographies there are different different mod margins. The market is a combination again of aging and and safety regulations and demand creation and I'm really proud of our team because when when when a part goes obsolete our team is out there our sales teams out.
Speaker Change: There are mechanics are out there, they're ensuring our customers know what they need to keep their elevators, not just current but to prepare them for the future I'm really encouraged by modernization we've organized around it we've set up this is our fifth strategic imperative we have.
Speaker Change: <unk> kits, because we are going to industrialize, how we do mod. So it'll look more like new equipment coming out of a factory and that's what's going to drive drive the margin expansion.
Judy Marks: And that will give us an advantage this year because of the technology, because of our, again, our reach in terms of our sales channel. Overall, we've increased our bookings in China by nearly 20% since pre-spin, while the market over that same multi-year period is down 10% to 15%. So our strategy is working, our team is out there every day focused, our backlog, while it's down mid-single digits, the quality of our backlog, the profitability of our backlog, we're not sacrificing for volume. That's great. Thank you very much.
Speaker Change: Yes, just to add to that <unk> count.
Speaker Change: Speak about the others, but for US we are clearly seeing the trajectory on margins pickup and Theres No reason why it should be much higher than the new equipment and as we standardize our products optimize our supply chain.
Speaker Change: Debate on the go to market strategy, we see that inching up and as I said, we'll talk more about it in the next couple of weeks, but but clearly the margins should be outpaced new equipment margins.
Speaker Change: That's great color. Thank you very much.
Speaker Change: We have no further questions in our queue at this time I will now turn the call back over to Judy marks for closing remarks.
Judy Marks: And then my second question, if you can talk a little bit about modernization. You mentioned backlog is up 15%. What is driving that growth exactly? And how should we think about it from here in 2024 and 2025?
Judy Marks: Thank you Christa 2023 proved to be a another strong year for Otis as we focused on our strategic imperatives to drive value for all stakeholders.
Judy Marks: And then on the margin of modernization, you mentioned that power with new equipment. I think one of your peers stated that margins are even higher than maintenance. Where do you think the difference lies, and would you see those margins in modernization growing ahead of the other segments for you in the next few years? Thank you.
Judy Marks: We head into 2024 supported by the strength of our service driven customer centric business model and remain excited to share our 2024 successes with all of you.
Judy Marks: We look forward to you joining us at our Investor day at the New York Stock Exchange on February 15th please stay safe and well. Thank you.
Judy Marks: Yeah, so I'll comment a little on the market and a little bit on the margins because the margins vary by region in terms of modernization margins. But the mod market is up nicely in all regions, and the majority of that is just driven by the refurbishment required due to the aging equipment that's out based on construction cycles from 20 plus years ago.
Speaker Change: This concludes today's conference call. Thank you for your participation and you may now disconnect.
Speaker Change: Okay.
Speaker Change: Concludes today's conference call. Thank you for your participation and you may now.
Judy Marks: We're just in a natural growth cycle now where you're going to see year over year additional mod. Really pleased with the backlog. This was our sixth consecutive quarter of orders up over 10%. Asia Pacific really was the standout, again, with Korea.
Judy Marks: But we have a great mod product in China, and our Chinese orders, albeit on a small base because it's a little bit of a younger install base, are growing significantly double digits. And Americas and EMEA, as I said in my prepared comments, really had a strong major project contribution in mod orders in the fourth quarter, and we expect that to continue. Again, in terms of margins, as Anurag shared, we will surpass new equipment margins shortly. But when you look at different geographies, there are different mod margins.
Judy Marks: The market is a combination, again, of aging and safety regulations and demand creation. And I'm really proud of our team because when a part goes obsolete, our team is out there, our sales team is out there, our mechanics are out there. They're ensuring our customers know what they need to keep their elevators not just current, but to prepare them for the future. I'm really encouraged by modernization. We've organized around it. We have set this up as a fifth strategic imperative. We have mod kits because we are going to industrialize how we do mods so it'll look more like new equipment coming out of a factory.
Anurag Maheshwari: And that's what's going to drive the margin expansion. Just to add to that, Miguel. I mean, I can't speak about the others, but for us, you know, we're clearly seeing that trajectory on mod margins pick up, and there's no reason why it should be much higher than new equipment. And as we standardize our products, optimize the supply chain, you know, do better on the go-to-market strategy, we see that inching up. And as I said, we'll talk more about it in the next couple of weeks, but clearly, margins should outpace new equipment.
Anurag Maheshwari: That's a great caller. Thank you very much. We have no further questions in our queue at this time. I will now turn the call back over to Judy Marks for closing. Thank you, Krista. 2023 proved to be another strong year for Otis as we focused on our strategic imperatives to drive value for all states. We head into 2024 supported by the strength of our service-driven, customer-centric business model and remain excited to share our 2024 successes with all of you. We look forward to you joining us at our Investor Day at the New York Stock Exchange on February 15th. Please stay safe and well. Thank you. This concludes today's conference call. Thank you for your participation, and you may now disconnect. Thank you for your participation, and you may now go.