Otis Worldwide Corporation

Good morning and welcome to OTIS first 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. I'll now turn it over to Michael Redner, Senior Director of Investor Relations.

Thank you, Didi. Welcome to OTIS's first 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. We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties. OTC'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. With that, I'd like to turn the call over to Judy.

Thank you, Mike, and thank you, everyone, for joining us. We hope everyone listening is safe and well. Starting with first quarter highlights on slide three. Otis delivered a solid first quarter to start 2023, driving strong financial performance and executing on our capital allocation strategy despite continued market uncertainty. We achieved organic sales growth driven by our service business and expanded adjusted service operating profit margins by 40 basis points, leading to mid single digit adjusted EPS growth. Our service segment performance in addition to our maintenance portfolio growth of more than 4%, reinforces the strength of our business model. We continue to execute our balanced capital allocation strategy with $175 million of share repurchases in the first quarter. Yesterday, we announced a 17.2% increase to our quarterly dividend. Since SPIN, we have increased our dividend 70%, emphasizing the importance we place on disciplined capital management and delivering value to our shareholders. In the Americas, building on our strong track record of major project execution and service across Canada, Otis was selected by the Montreal Metro System to replace escalators at 17 stations while providing units for five new Blue Line stations. In total, 97 Otis escalators will keep Metro passengers on the move daily. In China, Hefe Metro placed a new order of 250 Otis One connected escalators and elevators across three new lines. Real-time data insights, remote monitoring, and predictive maintenance will all help bring the Hefe Metro into the future and add to our growing infrastructure installed base. In Germany, Otis has been selected by Cigna Group to modernize the iconic Dusseldorf Department Store Karch House as part of a larger renovation. Otis will provide 17 units, including our energy-efficient link escalators and Gen 2 stream elevators with regen drives. The elevators will also feature eView and car displays. After the modernization is completed in 2024, Otis will service the units as part of our long-standing framework contract with Katowice Group, which operates Karsh House and other leading department stores in Germany. In South Korea, we're providing 51 of our signature Gen 2 elevators for the Sunshine Churamache Luxury Apartment Complex. The campus includes more than 2,000 units and buildings up to 29 stories. And we continue to drive progress toward our ESG goals, as shared in our 2022 ESG report published earlier in April. Just this month, we announced the installation of solar panels at our Nippon Otis Logistics and Engineering Center in Japan. This upgrade is expected to reduce greenhouse gas emissions at the facility by 27% compared to 2022 and represents our eighth manufacturing site globally with solar panel arrays. Moving to slide four, Q1 results in 2023 outlook. New equipment orders were up 7.4%, driven by strong growth in the Americas and Asia Pacific, and we ended the quarter with adjusted backlog of 10% at constant currency. We continue to drive share gains in new equipment with 70 basis points of improvement in the quarter led by our outperformance in China where our orders were down modestly in a market where we estimate was down approximately 10%. We continue to perform well across all other regions. We're especially encouraged by our modernization performance in the quarter with nearly 30% orders growth driven by strong performance in the Americas and Asia. This growth is driven by our continued rollout of standardized packages for our mod offerings, coupled with improvements in our Salesforce coverage. Our mod backlog is up double digits in all regions, as mod demand continues to remain robust. Organic sales were up 3.6%, and adjusted operating profit was up $7 million at constant currency, driven by performance in the service segment. Before I discuss our 2023 financial outlook, let me briefly update you on our global market outlook, which largely remains unchanged. Entering the year, we expected global new equipment to be down mid-single digits to approximately 900,000 units, largely due to China, which we expected to be down 5% to 10%. and our outlook in that key region remains the same. We also expected Asia-PAC to be up mid-single digits or better, and both the Americas and EMEA to be flat. With the first quarter in the books, we now expect Asia-PAC to come in closer to high single digits, offsetting a reduction in our EMEA outlook, which we now expect to be down low to mid-single digits. Our outlook for global install-based growth remains unchanged at roughly 5%, which will add close to a million maintenance units, bringing the install base to roughly 21 million units with high single-digit growth in Asia and low single-digit growth in the Americas and EMEA. Turning to OTIS's 2023 financial outlook, we now expect net sales to be in the range of $13.9 billion to $14.2 billion, up 2.5% to 4.5% versus the prior year. which is a 75 basis point improvement from the prior outlook at the midpoint driven by FX. We still expect organic sales to be up 4% to 6% with new equipment up 3% to 5% and service up 5% to 7%. Adjusted operating profit is expected to be up $90 to $150 million at actual currency and up $130 to $175 million at constant currency with adjusted EPS in a range of $3.40 to $3.50, a 7% to 10% increase versus the prior year, and an approximately $0.03 improvement from the prior outlook at the midpoint. We expect free cash flow to come in as we guided in February, in a range of $1.5 billion to $1.55 billion, with 105% to 115% conversion of GAAP net income. We remain disciplined in our capital allocation strategy and will continue to return the vast majority of our cash generation to shareholders through dividends and share repurchases. We will also continue advancing our bolt-on M&A strategy to add density to our growing maintenance portfolio. With that, I'll turn it over to Anurag to walk through our Q1 results and full year outlook in more detail.

Thank you, Judy. Starting with first quarter results on slide five, we delivered net sales of $3.3 billion with organic sales up 3.6%. This represents our 10th consecutive quarter of organic growth with better than expected performance in both segments. Adjusted operating profit was down $19 million at actual FX and up $7 million at constant currency. Drop through on higher service volume, favorable service pricing, and traction with productivity in both segments were partially offset by inflationary pressures, including annual wage increases, new equipment mix, and higher corporate costs. Adjusted EPS growth of $0.04 in the quarter was driven by stronger operational performance, continued tax rate improvement, and a lower share count. Accretion from the Zedoya transaction offset the $0.04 of foreign exchange headwind. Moving to slide six. Q1 new equipment orders were up 7.4%, led by Asia Pacific and the Americas up 27% and 15% respectively, with modest growth of a point in EMEA, more than offsetting a 3% decline in orders in China. Strong orders growth has contributed to our adjusted new equipment backlog, increasing 10% at constant currency, with growth in Americas, APAC, and EMEA. China backlog was roughly flat. A strong backlog provides new equipment sales visibility for the balance of the year as well as over the medium term. Globally, pricing on new equipment orders was up mid-single digits, leading to sequential backlog margin improvement in all regions. We benefited from pricing increases of approximately 10% in the Americas and mid-single digits in both EMEA and APAC. While pricing in China remains competitive down low single digits, we are driving material productivity to achieve slight price-cost favorability in the region while continuing to increase our share. New equipment organic sales were roughly flat in the quarter, with 22% growth in Asia Pacific, driven by strong performance in India and Korea, and high single-digit growth in EMEA, largely from southern Europe. This growth was offset by a mid-single-digit decline in the Americas due to job site delays and supply chain impacts, and a 10% decline in China, as expected, driven by the lower demand environment. Adjusted operating profit declined $24 million at actual FX and $19 million at constant currency as strong material productivity was more than offset by the impact of unfavorable regional and product mix. Turning to service segment results on slide seven. Maintenance portfolio units were up 4.2% with recaptured units more than offsetting cancellations. This was the sixth consecutive quarter of accelerating portfolio growth with China delivering another quarter of ITIN's portfolio growth. Modernization orders grew nearly 30%, a third consecutive quarter of more than 10% growth, driven by several major project wins, the continued success of Amort packages, and good momentum in proposal activity from improved sales coverage. A modernization business continues to perform well across all regions, with backlog of 13% at constant currency. Service organic sales of 6.3% was modestly ahead of expectations. Maintenance and repair grew 7% driven by solid repair volume, strong portfolio growth, and 3.5 points of maintenance pricing improvement on a like-for-like basis. Organic modernization sales were up 3.3% in the quarter, driven by EMEA and Asia, partially offset by the timing of major project execution in the Americas. Service operating profit at constant currency was up $40 million, and margins expanded 40 basis points. Drop through on higher volume, favorable pricing, and productivity more than offset the headwinds from annual wage increases and higher material costs. Moving to slide eight and the revised outlook. Overall, we are off to a solid start in 2023, delivering strong orders, sales, and portfolio growth, while expanding service margins to drive mid-single-digit EPS growth in the quarter despite continued macroeconomic uncertainty. This strong start gives us confidence to reiterate our February outlook for organic sales growth, adjusted operating profit at constant currency, and adjusted profit margins at both the Otis and the segment level. We are improving our adjusted operating profit outlook by $20 million versus the prior guide, now expected to be up $90 million to $150 million from a smaller foreign exchange headwind. This FX change results in an approximately 3 cent increase in adjusted EPS at the midpoint. A free cash flow outlook remains unchanged at $1.5 billion to $1.55 billion for the full year. In the first quarter, free cash flow came in at $253 million, with working capital or use of cash of roughly $125 million, largely due to payables. We expect this to unwind as we execute on a new equipment backlog throughout the year. Taking a further look at the organic sales outlook on slide 9, our outlook remains consistent with the prior guide across all regions and segments, with new equipment up 3 to 5 percent and service up 5 to 7 percent, driving total Otis organic sales growth of 4 to 6 percent for the year. New equipment organic sales growth will be driven by the Americas, APAC, and EMEA as we execute on the strong backlog built over the past few years. We still expect to achieve roughly flat new equipment sales in China given the quarter ending backlog and favorable compares into year end. On the service side, we expect to build on a performance in the first quarter with growth and repair work moderating and modernization accelerating. Overall, we would expect to see consistent growth at around the midpoint of our guide each quarter. Moving to our adjusted EPS outlook on slide 10, We now expect 7% to 10% growth, reflecting an approximately $0.03 increase from the prior guide at the midpoint. We anticipate second quarter EPS to be flattish year over year, as strong operational performance is offset by last year's low tax rate. The continued strong growth in our service segment, coupled with pricing and commodity tailwinds in new equipment, will drive the acceleration in our second half EPS growth. For FX, We are now assuming full year rates of 1.06 and 6.93 for the Euro and CNY respectively. Overall, we are encouraged by our first quarter results and well positioned to deliver solid financial performance for the balance of the year by executing on a new equipment backlog, accelerating our service portfolio growth, and focusing on operational execution to offset macro headwinds. With that, Didi, please open the line for questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.

And our first question comes from Jeffrey Sprague of Vertical Research Partners.

Thank you. Good morning, everyone. And just a couple quick ones here from me. First, just on mods. You know, interestingly, Schindler pointed to soft mods this last week, and you and Kone are saying they're strong. I always thought of a little bit more of a discretionary aspect to kind of mod work. So maybe you could just give a little bit of color on, you know, what's, you know, is there anything in particular driving the strength there, your visibility beyond kind of the current orders you've booked? And, you know, is there sort of a, you know, kind of pent-up demand to catch up on mods still from the delays we had back in COVID?

Hey, Jeff. Good morning. It's Judy. Listen, the mod business itself, I think you're going to see sustained growth. and accelerating opportunities. It comes from macro, 7 million of the 20 million units are 20 years or older in the world. It comes slightly from things that didn't happen during COVID, which you called pent-up demand. But it's really now coming from a realization that elevators are aging. Repairs, as you've seen, we've had a really strong repair book. So people have been putting off modernization. And now they are coming to those important decisions. So at the macro level, globally, we saw a mod up in all four regions. Strong order book this quarter, 29%. Backlog up 13%. I think you're going to continue to see that, not just quarter over quarter, but year over year as the mod opportunity becomes larger. At a micro level, I'll just share a short story with you because part of mod is discretionary. Part of it is a rational decision our customers are making. I'll give you an example. In North America, where we have almost 25-year-old two- to six-story hydraulic units installed throughout the country, we have a circuit board there where the parts have become end-of-life and obsolete. So we went out to all of our customers, because so many of these customers, they only have one unit, and they can't afford for it to shut down and not have access to an obsolete part. So for our customers, we went out with digital marketing campaign and just said, listen, for a few hours, we'll pre-plan, pre-schedule this, turnkey, one fixed price. Let us come and make sure you avoid any shutdowns and extend the life of your elevator. Response has been fantastic. So part of mod is aging. Part of it is opportunity creation. But you're going to see it continue to pick up over time.

Great. Just on the growth in service units, great to see, and you're kind of checking the box there on the strategic plan, it sounds like. I just missed, unless you didn't say it, the growth in service and maintenance units in China specifically, and any other just kind of regional color that you might have on that?

Yeah, we had growth across the board, so all four regions grew. China had its seventh straight quarter. They grew high teens. but seventh straight quarter or mid or high teens growth. So Asia-Pac and China up more significantly than the mature markets, which we would say is probably low single.

Great. Thank you. Appreciate it.

Thank you.

One moment for our next question.

And our next question comes from Steve Tusa of Morgan Stanley. Mr. Tusa, your line is open.

Yeah, sorry. Yeah, wrong Morgan, but maybe someday. Who knows? So can you guys maybe just talk about how you're looking at the China market now and maybe just the sequential trends on on earnings into the second half of the year and anything moving around at all on you guys?

Yeah, thanks, Steve. And we fully recognize JP Morgan. So let me be clear there. So, you know, Steve, I had the, and I'm going to say honor of finally being on the ground again in China. So what I'm going to share is a little personal, having spent 10 days there earlier, late last month, early this month, and just really getting a sense of the economy. And I can tell you, you can feel it in the four cities I was in and with our colleagues. It's in a state of recovery, and my view is primed for economic development. No matter whether it was a government official I met with or customers, we do believe this second half recovery will come and will come strongly. The government's being very supportive in their policies, whether it's mortgage rates or other things. So kind of where we started the year is what we're still seeing. We thought the market would be down 10%. We were down 3% in orders, so clear market share gain by Sally and the team in China. But the strengths in the market in the first quarter, just so you know the segments, infrastructure and industrials were up, industrial buildings. There was weakness in resi and the commercial market. But we are still expecting the market recovery. And I'm feeling good about the health of our business. To be able to see the progress our team has made throughout the COVID years, whether it's in the automation and industry 4.0 in our factories, the acceptance by our customers of our new product introductions, the relationships. I got to meet our agents and distributors. I'm very positive on a China recovery in the second half. Obviously, we want to see what the second quarter holds and when that inflection point is going to happen. But all signals look positive for China recovery second half, and then obviously that continuing into the out years.

And then did that change at all? I guess I missed the first part of the call, but any of the market outlooks you gave on the fourth quarter call, any of those change?

Yeah, so, you know, as we shared last quarter, we said China would be down 10% the market. America's would be flattish. We're seeing Asia-Pac continuing to grow more to high single-digit, and we think that offsets maybe a little more negative now with EMEA down low to mid-single-digit.

Okay, great. Thanks a lot.

And Anurag, I'll let you answer the second part. Yes.

Good morning, Steve. Just on the sequential earnings into the second half of the year. So, you know, second half, we have to grow EPS after about 25 cents. Five cents of that will come from tax because we do face a headwind of five cents in quarter two because we had a big benefit in quarter two of last year. That unwinds in the second half of the year. So that will give us five cents. So the 20 cents that we have to grow. It's about $120 million operationally. We are growing service at about, in the first quarter, $40 million. So that runway kind of continues into the second half of the year at the mid-single-digit growth. So that's about $80 million. And the remaining $40 million will come from new equipment. In the second half, I mean, quarter one new equipment was kind of flattish. Quarter two is returning back to growth. In the second half, we expect mid-single-digit growth, about 5%, 6% on the new equipment side. With volume and some of the price increases that we booked last year will flow through to the bottom line, about $20-ish million from there. Commodity tailwind of $20 million in the second half. So you add that, new equipment should be up about $40 million. So that's our sequential roadmap, about 80 million from service, 40 million from new equipment.

Great. Great details as always. Thanks, guys.

Thanks.

Thank you. One moment for our next question. And our next question comes from Nigel Coe of Wolf Research.

Correct. Good morning.

Hi, Nigel.

So obviously, nice job on orders. The Americas were surprisingly strong, and some of your competitors have been highlighting weakness in the Americas. So maybe just talk about, you know, kind of what drove the growth and what you're seeing right now in multifamily and maybe commercial.

Yeah, so kudos to Jim and the team. I mean, the Americas, You know, after a really strong 22 to come in, you know, up 15% this quarter and, you know, rolling 12 months being strong as well, over 18%. Just really highlights we've got a big backlog to work off in the Americas, and our team knows it. Listen, we saw, you know, the Americas itself, the years playing out as we thought it would. Non-resi is actually better this first quarter. Infrastructure and commercial were up. And multifamily was down, coming off some really tough compares, if you think about where multifamily has been the past few years. I will tell you, Nigel, that we got a real tough compare in the Americas coming up in the second quarter, because last year's second quarter, we were up 54% in the Americas. So we're going to do the best we can to try to match that, but it's going to be a tough compare. We still expect a flattish market through year end. We think we're in a really good position. You saw the Montreal program we won, which was a major project in the first quarter, and that'll take us a few years to perform on. But both the volume business and the major projects did really well in the Americas, both Latin and North America for the first quarter.

Yeah, great. That's great, Kelly. Thanks, Judy. And in terms of China, your comments on China sounded really constructive. Pricing down low signal digits, I think it was trending pretty flat through 2022, so just What gives you confidence that we're not going to see the bottom of our pricing in China? And then when you talk about the inflection in the second half of the year, are we talking about a break back into positive year-to-year growth in orders, or are we talking about getting less bad in the second half?

Well, let me take the pricing question. We are seeing rational pricing. I know we've shared that about 90% of the new equipment orders that happen in China now happen with the top 10 OEMs. and they're all being rational. And we get to see that, especially on public infrastructure bids. So not to say there's not a bid or two someone really wants because of density and they'll do something, but we're seeing rational pricing in China. It's always the most competitive there in pricing of anywhere in the world, which means we've got to continue to drive our costs down. And that's where so far we've seen the material productivity far better in China than we have everywhere else in the world. Part of that's commodities coming down, but part of that's through great supply chain management, negotiation, and our engineering team continuing to take costs out with our manufacturing team. So we're seeing rational. We don't anticipate that changing, but obviously we're keeping an eye on that.

Yeah, and I mean, the two levers, as Judy mentioned, that we take a look at is definitely price, cost, and the share of segments. So far, we're balancing it quite well. The market is disciplined, and we continue to look into that and make sure that that is the toggle that we are playing against. Now, in terms of orders, if you look at the market, you know, the market was was down in the first quarter. We are guiding it to be down 5% or 10% for the year. So clearly the market is going to pick up in the second half of the year off a low compare as well from last year. And even if the market, as you know, share growth in the second half of the year, you should see orders in China picking up in the second half of the year. Of course, we're going to continue executing the strategy that we are doing right now and feel pretty good about the China orders in the second half of the year.

Okay, I'll leave it there. Thanks, guys.

Yeah, Nigel, the only thing I'll add is our relationships and our length of those relationships with our 2,200 agents and distributors, you know, continues to mature. And we do expect, you know, those to yield, you know, as we continue to go on for both our brands. We're going to continue to ensure that we have the best products. We introduced a new product in China, a new rope-connected product in the first quarter that's picking up nicely in the market. So our team, they've got sales coverage. We know where we need to be on price. We've got the right products and all that. We really expect to happen in the second half to show those results.

Great. Thank you.

Thank you. One moment for our next question.

And our next question comes from Julian Mitchell of Barclays.

Hi, good morning. Just wanted to start with the EMEA market outlook. So, yes, you and some of your peers sort of lowering the market outlook this year. Just wondered any specific verticals or regions within Europe that's driving that on the new equipment side? You know, how should we think about those EMEA orders playing out over the balance of this year? I suppose, you know, the last time we had a sort of a soft construction market there for any prolonged period, we saw the bleed through into service pricing at some point. Just maybe remind us kind of your confidence this time, why even with a softer new equipment market there, the service price should hold up.

Thanks, Julie. And so, yeah, we're saying EMEA now is going to be down low to mid-single digit. Obviously, we're watching rates and impact on building permits and starts. But in the first quarter, our team in Southern Europe performed incredibly well. Spain, Italy, extremely resilient. Where we saw some of the weakness was really Germany and the UK. And then, you know, the Middle East was up probably low single digits. So it's really a mix, and we're going to continue to monitor and watch that. When we think back in time, you know, I look at two key metrics. One is pricing and service pricing, like for like. This last quarter, we were up three and a half points, and our Europe business was up mid-single digits. So Bernardo and the team have been passing price through. We've had those inflationary clauses in, and the team's been passing service price through over which is really good to see because the majority of our European contracts do come due, service contracts come due in the first half of the year with most in the first quarter. The other part would be, you know, all the constructors from 15 years ago who moved into service and became independent service providers. We don't see that labor if you look at, you know, even unemployment is at fairly low levels in Spain and in other locations in Western Europe. So we don't see that available workforce starting up as independent service providers. And the other difference now is what we call Otis 1 and the fact that when you have a connected elevator, it's not easy to start up as an independent right now or to grow your share. So I think all that combines to set us up to a very different Europe. But again, we think we're being responsible looking at the market at low to mid-single, you know, potentially down for the year.

Thank you. And then just my follow-up would be around the slide 10. You've got that helpful EPS bridge. So just if I look at the operational portion within that, you highlight there kind of wage and material inflation and then mix and churn as headwinds that were not there on the bridge that you'd given back in January for the year ahead. Just wondered if that's just some extra detail. Did you see something change in your outlook for those two items for 2023 and how we're thinking about those two items as you go through the year?

Hey, Julian. Hey, thanks for the question. You know, in February when we gave guidance, we had a page on each of the segments, new equipment and service. And at that point in time, we had highlighted mix and churn as one of the headwinds. And we just collapsed it into this chart right now. There's been no change in our thinking since the beginning of the year. When we talk about mix and churn, we essentially, in the new equipment side, the mix was coming from, as you know, China is our most profitable new equipment margin market. And the other markets are going faster. So on the new equipment side, that is the mix from the regional perspective. And obviously, we built a very good backlog. We won a lot of share. But it's a combination of volume and major projects. And these major projects, though they come with a very good portfolio stickiness, they are low new equipment margin. So on the mix side, I would say on new equipment, it's more region and project, similar to what we had called out in the last call. Nothing has changed from there. In service, it's the same thing which you've seen in the past couple of years. China growing faster, and obviously churn is more around the cancellation units, which come with a little bit higher margin. So nothing really changed over there. Same thing for labor and wage inflation. So far, our labor negotiations are trending really, really well. We thought it would be low to mid single digit in most of the European markets. It's playing out that way, and same on the material. So if I kind of take a step back, if you look at price over gross cost and mix and churn, you know, we should be about $75 million positive for the year. That would contribute to half of the operating profit that you see in the bar. So price minus gross cost of material labor inflation and adjusting for mix and churn.

That's really helpful. Thank you.

Thank you. One moment for our next question.

And our next question comes from Jack Ayres of Callen.

Hi, guys. Good morning. This is Jack on for Gotham. I wanted to dig into service and apologies. I joined the call fairly late here. But if you could kind of just touch on the modernization orders up 29%. It seems extremely strong, which is encouraging. And then just piggybacking off that last comment, just sort of the maintenance units up 4.2%, obviously really strong again, kind of just what's happening there this quarter from like a retention, conversion, mixed sort of churn perspective, just any color there around service would be really helpful. Thanks.

Hey, Jack. Yeah, modernization, let me just reinforce what I said, which is It's going to continue to be a contributor to our business, and the market itself is going to continue to grow, not just quarter over quarter, but the market itself will be growing year over year as more and more units age based on when they were put into service. We've got 7 million of the 20 million units are over 20 years old. So I think you can look for the modernization market to remain and actually become more attractive. And obviously, we're very focused on performing that in a way that allows us to approach customers with kits that gives us productivity and that gives them their modernization in a quicker time period. So you're going to see modernization be talked about more. but also take the best of what we've learned since spin in terms of our new equipment strategy and growing share there and being able to do things at scale, merging that with our service excellence and our productivity we've gained there. And when we put those two together and attack the mod market with a growing market, we think that's going to be a positive contributor for much time to come.

Thanks, Judy. I'll leave it there. Thanks, guys.

Thank you. As a reminder, 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. One moment for our next question. And our next question comes from Nick Houston of RBC.

Yes. Hi, everyone. Thanks for taking the questions. I think you mentioned maintenance pricing was at about 3.5% like the like. I'm just wondering if that rate should accelerate as we move through the year just on the basis that you've been implementing the service escalation clauses in Q1 and maybe that 3.5% as a reflection of the agreements that you had last year. So if you could provide some color on that, that would be helpful.

Yeah, Nick, go ahead.

Thanks for the question, Nick. First, we're extremely encouraged by the way we started off in quarter one on the 3.5% like-to-like. As Judy mentioned, Europe is mid-single digits. It's probably one of the higher price increases we've seen in Europe for a while, and it's ticking because everyone else is kind of driving the price over there. If we move into Q2, obviously more units get converted, come up for renegotiation as well. So we should see that kind of stepping up a little bit as we go there on the 3.5%. So overall, what we said when we gave the full year guide was that we expect it to be up 3.5%, 4%. you know, mixed insurance would take about 200 to 250 basis points, so about 1.5% net. As of now, where we stand, we feel pretty good about, you know, 150 basis points of pricing adjusting for mixed insurance for the rest of the year.

And, Nick, in China, you know, the margin drivers are less about price. They're really more about productivity, volume, density, and Otis 1, and all of those are good contributors for us.

Right, that's very helpful, Ben. My second question, sticking with service, great to see that you're up to 4.2% unit growth. That's been accelerating pretty much for three years at this point. You mentioned that the market is growing at about 5%, about a million units on a 20 million installed base. If I look at that 4.2%, you could still argue that that's maybe slightly underperforming. Do you think that you can actually close that gap, or is there maybe a mix effect that means that you as the largest OEM in terms of service units should maybe be underperforming a bit?

I think we can and we should close that gap. That's the challenge we've given to our team, and that's why you see the much higher growth rates in Asia, especially China, for our service portfolio. Now, it creates a mix. But we will deal with that mixed challenge as we get it. But, yeah, we can and should be closing that gap.

And just to add to that, right, I mean, not too long ago we were growing at 1%. The team is kind of, you know, there was a call for action. Teams focused on it. The wheels just started churning. We're last year 4.1, now 4.2. We should close 4%. The gap, and the gap is we want some good new equipment shared. That will come into the conversion cycle. Our conversion rates are going up, and we're going to keep looking at deploying IoT to ensure that our retention rates stay high. So it's using conversion as a lever, using retention as a lever to get us up to the mid-single-digit growth. And while doing that, we want to ensure that we also maintain the profitability factor. So at some point in time, you will see from margins it does come back to absolute profit growth, but that's where we want to take it to.

That's great. Thanks very much.

Thank you. I would now like to turn the conference back to Judy Marks for closing remarks.

Thank you, Didi. And thank you all for joining us. And let me also add a thanks to all of our colleagues for your continued excellent performance in quarter one and for serving our customers so well. Our solid first quarter results demonstrate the continued power of our business model and set us up well for the future. We will remain focused on executing throughout the remainder of the year in order to capitalize on our first quarter successes and continue to drive shareholder value. Thank you for joining us, everyone. Stay safe and well.

This concludes today's conference call.

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Good morning and welcome to OTIS first 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. I'll now turn it over to Michael Redner, Senior Director of Investor Relations.

Thank you, Didi. Welcome to Otis's first 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. We also remind listeners that the presentation contains forward-looking statements, which 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. With that, I'd like to turn the call over to Judy.

Thank you, Mike, and thank you, everyone, for joining us. We hope everyone listening is safe and well. starting with first quarter highlights on slide three. Otis delivered a solid first quarter to start 2023, driving strong financial performance and executing on our capital allocation strategy despite continued market uncertainty. We achieved organic sales growth driven by our service business and expanded adjusted service operating profit margins by 40 basis points, leading to mid-single-digit adjusted EPS growth. Our service segment performance, in addition to our maintenance portfolio growth of more than 4%, reinforces the strength of our business model. We continue to execute our balanced capital allocation strategy with $175 million of share repurchases in the first quarter. Yesterday, we announced a 17.2% increase to our quarterly dividend. Since spin, we have increased our dividend 70%. emphasizing the importance we place on disciplined capital management and delivering value to our shareholders. In the Americas, building on our strong track record of major project execution and service across Canada, Otis was selected by the Montreal Metro System to replace escalators at 17 stations while providing units for five new Blue Line stations. In total, 97 Otis escalators will keep Metro passengers on the move daily, In China, Hefe Metro placed a new order of 250 OTIS 1 connected escalators and elevators across three new lines. Real-time data insights, remote monitoring, and predictive maintenance will all help bring the Hefe Metro into the future and add to our growing infrastructure installed base. In Germany, OTIS has been selected by Cigna Group to modernize the iconic Dusseldorf Department Store Karch House. as part of a larger renovation. Otis will provide 17 units, including our energy-efficient link escalators and Gen 2 stream elevators with regen drives. The elevators will also feature eView and car displays. After the modernization is completed in 2024, Otis will service the units as part of our long-standing framework contract with Katowice Group, which operates Karsh House and other leading department stores in Germany. In South Korea, we're providing 51 of our signature Gen 2 elevators for the Sunshine Churumache Luxury Apartment Complex. The campus includes more than 2,000 units and buildings up to 29 stories. And we continue to drive progress toward our ESG goals, as shared in our 2022 ESG report published earlier in April. Just this month, we announced the installation of solar panels at our Nippon Otis Logistics and Engineering Center in Japan. This upgrade is expected to reduce greenhouse gas emissions at the facility by 27% compared to 2022, and represents our eighth manufacturing site globally with solar panel arrays. Moving to slide four, Q1 results in 2023 outlook. New equipment orders were up 7.4%, driven by strong growth in the Americas and Asia Pacific, and we ended the quarter with adjusted backlog of 10% at constant currency. We continue to drive share gains in new equipment with 70 basis points of improvement in the quarter led by our outperformance in China where our orders were down modestly in a market where we estimate was down approximately 10%. We continue to perform well across all other regions. We're especially encouraged by our modernization performance in the quarter with nearly 30% orders growth driven by strong performance in the Americas and Asia. This growth is driven by our continued rollout of standardized packages for our mod offerings, coupled with improvements in our Salesforce coverage. Our mod backlog is up double digits in all regions, as mod demand continues to remain robust. Organic sales were up 3.6%, and adjusted operating profit was up $7 million at constant currency, driven by performance in the service segment. Before I discuss our 2023 financial outlook, let me briefly update you on our global market outlook, which largely remains unchanged. Entering the year, we expected global new equipment to be down mid-single digits to approximately 900,000 units, largely due to China, which we expected to be down 5% to 10%. and our outlook in that key region remains the same. We also expected Asia-PAC to be up mid-single digits or better, and both the Americas and EMEA to be flat. With the first quarter in the books, we now expect Asia-PAC to come in closer to high single digits, offsetting a reduction in our EMEA outlook, which we now expect to be down low to mid-single digits. Our outlook for global install-based growth remains unchanged at roughly 5%, which will add close to a million maintenance units, bringing the install base to roughly 21 million units with high single-digit growth in Asia and low single-digit growth in the Americas and EMEA. Turning to OTIS's 2023 financial outlook, we now expect net sales to be in the range of $13.9 billion to $14.2 billion, up 2.5% to 4.5% versus the prior year. which is a 75 basis point improvement from the prior outlook at the midpoint, driven by FX. We still expect organic sales to be up 4% to 6%, with new equipment up 3% to 5%, and service up 5% to 7%. Adjusted operating profit is expected to be up $90 to $150 million at actual currency, and up $130 to $175 million at constant currency, with adjusted EPS in a range of $3.40 to $3.50, a 7% to 10% increase versus the prior year, and an approximately $0.03 improvement from the prior outlook at the midpoint. We expect free cash flow to come in as we guided in February, in a range of $1.5 billion to $1.55 billion, with 105% to 115% conversion of GAAP net income. We remain disciplined in our capital allocation strategy and will continue to return the vast majority of our cash generation to shareholders through dividends and share repurchases. We will also continue advancing our bolt-on M&A strategy to add density to our growing maintenance portfolio. With that, I'll turn it over to Anurag to walk through our Q1 results and full year outlook in more detail.

Thank you, Judy. Starting with first quarter results on slide five, we delivered net sales of $3.3 billion with organic sales up 3.6%. This represents our 10th consecutive quarter of organic growth with better than expected performance in both segments. Adjusted operating profit was down $19 million at actual FX and up $7 million at constant currency. Drop through on higher service volume, favorable service pricing, and traction with productivity in both segments were partially offset by inflationary pressures, including annual wage increases, new equipment mix, and higher corporate costs. Adjusted EPS growth of $0.04 in the quarter was driven by stronger operational performance, continued tax rate improvement, and a lower share count. Accretion from the Zedoya transaction offset the $0.04 of foreign exchange headwind. Moving to slide six. Q1 new equipment orders were up 7.4%, led by Asia Pacific and the Americas up 27% and 15% respectively, with modest growth of a point in EMEA, more than offsetting a 3% decline in orders in China. Strong orders growth has contributed to our adjusted new equipment backlog, increasing 10% at constant currency, with growth in Americas, APAC, and EMEA. China backlog was roughly flat. A strong backlog provides new equipment sales visibility for the balance of the year as well as over the medium term. Globally, pricing on new equipment orders was up mid-single digits, leading to sequential backlog margin improvement in all regions. We benefited from pricing increases of approximately 10% in the Americas and mid-single digits in both EMEA and APAC. While pricing in China remains competitive down low single digits, we are driving material productivity to achieve slight price-cost favorability in the region while continuing to increase our share. New equipment organic sales were roughly flat in the quarter, with 22% growth in Asia Pacific, driven by strong performance in India and Korea, and high single-digit growth in EMEA, largely from southern Europe. This growth was offset by a mid-single-digit decline in the Americas due to job site delays and supply chain impacts, and a 10% decline in China, as expected, driven by the lower demand environment. Adjusted operating profit declined $24 million at actual FX and $19 million at constant currency as strong material productivity was more than offset by the impact of unfavorable regional and product mix. Turning to service segment results on slide seven. Maintenance portfolio units were up 4.2% with recaptured units more than offsetting cancellations. This was the sixth consecutive quarter of accelerating portfolio growth with China delivering another quarter of IT's portfolio growth. Modernization orders grew nearly 30%, a third consecutive quarter of more than 10% growth, driven by several major project wins, the continued success of Amort packages, and good momentum in proposal activity from improved sales coverage. A modernization business continues to perform well across all regions, with backlog of 13% at constant currency. Service organic sales of 6.3%, was modestly ahead of expectations. Maintenance and repair grew 7% driven by solid repair volume, strong portfolio growth, and 3.5 points of maintenance pricing improvement on a like-for-like basis. Organic modernization sales were up 3.3% in the quarter, driven by EMEA and Asia, partially offset by the timing of major project execution in the Americas. Service operating profit at constant currency was up $40 million, and margins expanded 40 basis points. Drop through on higher volume, favorable pricing, and productivity more than offset the headwinds from annual wage increases and higher material costs. Moving to slide eight and the revised outlook. Overall, we are off to a solid start in 2023, delivering strong orders, sales, and portfolio growth while expanding service margins to drive mid-single-digit EPS growth in the quarter despite continued macroeconomic uncertainty. This strong start gives us confidence to reiterate our February outlook for organic sales growth, adjusted operating profit at constant currency, and adjusted profit margins at both the Otis and the segment level. We are improving our adjusted operating profit outlook by $20 million versus the prior guide, now expected to be up $90 million to $150 million from a smaller foreign exchange headwind. This FX change results in an approximately 3 cent increase in adjusted EPS at the midpoint. A free cash flow outlook remains unchanged at $1.5 billion to $1.55 billion for the full year. In the first quarter, free cash flow came in at $253 million, with working capital a use of cash of roughly $125 million, largely due to payables. We expect this to unwind as we execute on a new equipment backlog throughout the year. Taking a further look at the organic sales outlook on slide 9, our outlook remains consistent with the prior guide across all regions and segments, with new equipment up 3 to 5 percent and service up 5 to 7 percent, driving total Otis organic sales growth of 4 to 6 percent for the year. New equipment organic sales growth will be driven by the Americas, APAC, and EMEA as we execute on the strong backlog built over the past few years. We still expect to achieve roughly flat new equipment sales in China given the quarter ending backlog and favorable compares into year end. On the service side, we expect to build on a performance in the first quarter with growth in repair work moderating and modernization accelerating. Overall, we would expect to see consistent growth at around the midpoint of our guide each quarter. Moving to our adjusted EPS outlook on slide 10, We now expect 7% to 10% growth, reflecting an approximately $0.03 increase from the prior guide at the midpoint. We anticipate second quarter EPS to be flattish year over year, as strong operational performance is offset by last year's low tax rate. The continued strong growth in our service segment, coupled with pricing and commodity tailwinds in new equipment, will drive the acceleration in our second half EPS growth. For FX, We are now assuming full year rates of 1.06 and 6.93 for the Euro and CNY respectively. Overall, we are encouraged by our first quarter results and well positioned to deliver solid financial performance for the balance of the year by executing on a new equipment backlog, accelerating our service portfolio growth, and focusing on operational execution to offset macro headwinds. With that, Didi, please open the line for questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.

And our first question comes from Jeffrey Sprague of Vertical Research Partners.

Thank you. Good morning, everyone. And just a couple quick ones here from me. First, just on mods. You know, interestingly, Schindler pointed to soft mods this last week, and you and Kone are saying they're strong. I always thought of a little bit more of a discretionary aspect to kind of mod work. So maybe you could just give a little bit of color on, you know, what's, you know, is there anything in particular driving the strength there, your visibility beyond kind of the current orders you've booked? And, you know, is there sort of a, you know, kind of pent-up demand to catch up on mods still from the delays we had back in COVID?

Hey, Jeff. Good morning. It's Judy. Listen, the mod business itself, I think you're going to see sustained growth. and accelerating opportunities. It comes from macro, 7 million of the 20 million units are 20 years or older in the world. It comes slightly from things that didn't happen during COVID, which you called pent-up demand. But it's really now coming from a realization that elevators are aging. Repairs, as you've seen, we've had a really strong repair book. So people have been putting off modernization. and now they are coming to those important decisions. So at the macro level, globally, we saw a mod up in all four regions, strong order book this quarter, 29%, backlog up 13%. I think you're going to continue to see that, not just quarter over quarter, but year over year as the mod opportunity becomes larger. At a micro level, I'll just share a short story with you, because part of mod is discretionary, Part of it is a rational decision our customers are making. I'll give you an example. In North America, where we have almost 25-year-old two- to six-story hydraulic units installed throughout the country, we have a circuit board there where the parts have become end-of-life and obsolete. So we went out to all of our customers, because so many of these customers, they only have one unit, and they can't afford for it to shut down and not have access to an obsolete part. So for our customers, we went out with digital marketing campaign and just said, listen, for a few hours, we'll pre-plan, pre-schedule this, turnkey, one fixed price. Let us come and make sure you avoid any shutdowns and extend the life of your elevator. Response has been fantastic. So part of mod is aging. Part of it is opportunity creation. But you're going to see it continue to pick up over time.

Great. And... Just on the growth in service units, great to see, and you're kind of checking the box there on the strategic plan, it sounds like. I just missed, unless you didn't say it, the growth in service and maintenance units in China specifically, and any other just kind of regional color that you might have on that?

Yeah, we had growth across the board, so all four regions grew. China had its seventh straight quarter. They grew high teens. but seventh straight quarter or mid or high teens growth. So Asia, PAC, and China up more significantly than the mature markets, which we would say is probably low single.

Great. Thank you. Appreciate it.

Thank you.

One moment for our next question.

And our next question comes from Steve Tusa of Morgan Stanley. Mr. Tusa, your line is open.

Yeah, sorry. Yeah, wrong Morgan, but maybe someday. Who knows? So can you guys maybe just talk about how you're looking at the China market now and maybe just the sequential trends on on earnings into the second half of the year and anything moving around at all on you guys?

Yeah, thanks, Steve. And we fully recognize JP Morgan. So let me be clear there. So, you know, Steve, I had the, and I'm going to say honor of finally being on the ground again in China. So what I'm going to share is a little personal, having spent 10 days there earlier, late last month, early this month, and just really getting a sense of the economy. And I can tell you, you can feel it in the four cities I was in and with our colleagues. It's in a state of recovery, and my view is primed for economic development. No matter whether it was a government official I met with or customers, we do believe this second half recovery will come and will come strongly. The government's being very supportive in their policies, whether it's mortgage rates or other things. So kind of where we started the year is what we're still seeing. We thought the market would be down 10%. We were down 3% in orders, so clear market share gain by Sally and the team in China. But the strengths in the market in the first quarter, just so you know the segments, infrastructure and industrials were up, industrial buildings. There was weakness in resi and the commercial market. But we are still expecting the market recovery. And I'm feeling good about the health of our business. To be able to see the progress our team has made throughout the COVID years, whether it's in the automation and industry 4.0 in our factories, the acceptance by our customers of our new product introductions, the relationships. I got to meet our agents and distributors. I'm very positive on a China recovery in the second half. Obviously, we want to see what the second quarter holds and when that inflection point is going to happen, but all signals look positive for China recovery second half, and then obviously that continuing into the out years.

And then just, did that change at all? I guess I missed the first part of the call, but any of the market outlooks you gave on the fourth quarter call, any of those change?

Yeah, so, you know, as we shared last quarter, we said China would be down 10% the market. America's would be flattish. We're seeing Asia-Pac continuing to grow more to high single-digit, and we think that offsets maybe a little more negative now with EMEA down low to mid-single-digit.

Okay, great. Thanks a lot.

And Anurag, I'll let you answer the second part. Yes.

Good morning, Steve. Just on the sequential earnings into the second half of the year. So, you know, second half, we have to grow EPS after about 25 cents. Five cents of that will come from tax because we do face a headwind of five cents in quarter two because we had a big benefit in quarter two of last year. That unwinds in the second half of the year. So that will give us five cents. So the 20 cents that we have to grow. It's about $120 million operationally. We are growing service at about, in the first quarter, $40 million. So that runway kind of continues into the second half of the year at the mid-single-digit growth. So that's about $80 million. And the remaining $40 million will come from new equipment. In the second half, I mean, quarter one new equipment was kind of flattish. Quarter two is returning back to growth. In the second half, we expect mid-single-digit growth, about 5%, 6% on the new equipment side. With volume and some of the price increases that we booked last year will flow through to the bottom line, about $20-ish million from there. Commodity tailwind of $20 million in the second half. So you add that, new equipment should be up about $40 million. So that's our sequential roadmap, about 80 million from service, 40 million from new equipment.

Great. Great details as always. Thanks, guys.

Thanks.

Thank you. One moment for our next question. And our next question comes from Nigel Coe of Wolf Research.

Correct. Good morning.

Hi, Nigel.

So obviously, nice job on orders. The Americas were surprisingly strong, and some of your competitors have been highlighting weakness in the Americas. So maybe just talk about, you know, kind of what drove the growth and what you're seeing right now in multifamily and maybe commercial.

Yeah, so kudos to Jim and the team. I mean, the Americas, You know, after a really strong 22 to come in, you know, up 15% this quarter and, you know, rolling 12 months being strong as well, over 18%. Just really highlights we've got a big backlog to work off in the Americas, and our team knows it. Listen, we saw, you know, the Americas itself, the years playing out as we thought it would. Non-resi is actually better this first quarter. Infrastructure and commercial were up. And multifamily was down, coming off some really tough compares, if you think about where multifamily has been the past few years. I will tell you, Nigel, that we got a real tough compare in the Americas coming up in the second quarter, because last year's second quarter, we were up 54% in the Americas. So we're going to do the best we can to try to match that, but it's going to be a tough compare. We still expect a flattish market through year end. We think we're in a really good position. You saw the Montreal program we won, which was a major project in the first quarter, and that'll take us a few years to perform on, but both the volume business and the major projects did really well in the Americas, both Latin and North America for the first quarter.

Yeah, great. That's great, Kelly. Thanks, Judy. And in terms of China, your comments on China sounded really constructive. Pricing down low signal digits, I think it was trending pretty flat through 2022, so just What gives you confidence that we're not going to see the bottom of our pricing in China? And then when you talk about the inflection in the second half of the year, are we talking about a break back into positive year-to-year growth in orders, or are we talking about getting less bad in the second half?

Well, let me take the pricing question. We are seeing rational pricing. I know we've shared that about 90% of the new equipment orders that happen in China now happen with the top 10 OEMs. and they're all being rational. And we get to see that, especially on public infrastructure bids. So not to say there's not a bid or two someone really wants because of density and they'll do something, but we're seeing rational pricing in China. It's always the most competitive there in pricing of anywhere in the world, which means we've got to continue to drive our costs down. And that's where so far we've seen the material productivity far better in China than we have everywhere else in the world. Part of that's commodities coming down, but part of that's through great supply chain management, negotiation, and our engineering team continuing to take costs out with our manufacturing team. So we're seeing rational. We don't anticipate that changing, but obviously we're keeping an eye on that.

Yeah, and I mean, the two levers, as Judy mentioned, that we take a look at is definitely price, cost, and the share of segments. So far, we're balancing it quite well. The market is disciplined, and we continue to look into that and make sure that that is the toggle that we are playing against. Now, in terms of orders, if you look at the market, you know, the market was was down in the first quarter. We are guiding it to be down 5% or 10% for the year. So clearly the market is going to pick up in the second half of the year off a low compare as well from last year. And even if the market, as you know, share growth in the second half of the year, you should see orders in China picking up in the second half of the year. Of course, we're going to continue the strategy that we are doing right now and feel pretty good about the China orders in the second half of the year.

Okay, I'll leave it there. Thanks, guys.

Yeah, Nigel, the only thing I'll add is our relationships and our length of those relationships with our 2,200 agents and distributors, you know, continues to mature. And we do expect, you know, those to yield, you know, as we continue to go on for both our brands. We're going to continue to ensure that we have the best products. We introduced a new product in China, a new rope-connected product in the first quarter that's picking up nicely in the market. So our team, they've got sales coverage. We know where we need to be on price. We've got the right products and all that. We really expect to happen in the second half to show those results.

Great. Thank you.

Thank you. One moment for our next question.

And our next question comes from Julian Mitchell of Barclays.

Hi, good morning. Just wanted to start with the EMEA market outlook. So, yes, you and some of your peers sort of lowering the market outlook this year. Just wondered any specific verticals or regions within Europe that's driving that on the new equipment side? You know, how should we think about those EMEA orders playing out over the balance of this year? I suppose, you know, the last time we had a sort of a soft construction market there for any prolonged period, we saw the bleed through into service pricing at some point. Just maybe remind us kind of your confidence this time, why even with a softer new equipment market there, the service price should hold up.

Thanks, Julie. And so, yeah, we're saying EMEA now is going to be down low to mid-single digit. Obviously, we're watching rates and impact on building permits and starts. But in the first quarter, our team in Southern Europe performed incredibly well. Spain, Italy, extremely resilient. Where we saw some of the weakness was really Germany and the UK. And then, you know, the Middle East was up probably low single digits. So it's really a mix, and we're going to continue to monitor and watch that. When we think back in time, you know, I look at two key metrics. One is pricing and service pricing, like for like. This last quarter, we were up three and a half points, and our Europe business was up mid-single digits. So Bernardo and the team have been passing price through. We've had those inflationary clauses in, and the team's been passing service price through which is really good to see because the majority of our European contracts do come due, service contracts come due in the first half of the year with most in the first quarter. The other part would be, you know, all the constructors from 15 years ago who moved into service and became independent service providers. We don't see that labor if you look at, you know, even unemployment is at fairly low levels in Spain and in other locations in Western Europe. So we don't see that available workforce starting up as independent service providers. And the other difference now is what we call Otis 1 and the fact that when you have a connected elevator, it's not easy to start up as an independent right now or to grow your share. So I think all that combines to set us up to a very different Europe. But again, we think we're being responsible looking at the market at low to mid-single, you know, potentially down for the year.

thank you and then just my follow-up would be around the slide 10 you've got that helpful EPS bridge so just if I look at the operational portion within that you highlight their kind of wage and material inflation and then mix and churn as headwinds that were not there on the bridge that you'd given back in January for the year ahead Just wondered if that's just some extra detail. Did you see something change in your outlook for those two items for 2023 and how we're thinking about those two items as you go through the year?

Hey, Julian. Hey, thanks for the question. You know, in February when we gave guidance, we had a page on each of the segments on new equipment and service. And at that point in time, we had highlighted mix and churn as one of the headwinds. And we just collapsed it into this chart right now. There's been no change in our thinking since the beginning of the year. When we talk about mix and churn, we essentially, in the new equipment side, the mix was coming from, as you know, China is our most profitable new equipment margin market. And the other markets are going faster. So on the new equipment side, that is the mix from the regional perspective. And obviously, we built a very good backlog. We won a lot of share. But it's a combination of volume and major projects. And these major projects, though they come with a very good portfolio stickiness, they are low new equipment margin. So on the mix side, I would say on new equipment, it's more region and project, similar to what we had called out in the last call. Nothing has changed from there. In service, it's the same thing which you've seen in the past couple of years. China going faster, and obviously churn is more around the cancellation units, which come with a little bit higher margin. So nothing really changed over there. Same thing for labor and wage inflation, right? It's, you know, so far our labor negotiations are trending really, really well. You know, we thought it would be low to mid single digit in most of the European markets. It's playing out that way, and same on the material. So if I kind of take a step back, if you look at price over gross cost and mix and churn, you know, we should be about $75 million positive for the year. That would contribute to half of the operating profit that you see in the bar. So price minus gross cost of material labor inflation and adjusting for mix and churn.

That's really helpful. Thank you.

Thank you. One moment for our next question.

And our next question comes from Jack Ayres of Callen.

Hi, guys. Good morning. This is Jack on for Gotham. I wanted to dig into service and apologies. I joined the call fairly late here. But if you could kind of just touch on the modernization orders up 29%. It seems extremely strong, which is encouraging. And then just piggybacking off that last comment, just the, you know, sort of the maintenance units up 4.2%, obviously really strong again, kind of just what's happening there this quarter from like a retention, conversion, mixed sort of churn perspective, just any color there around service would be really helpful. Thanks.

Hey, Jack. Yeah, modernization, let me just reinforce what I said, which is It's going to continue to be a contributor to our business, and the market itself is going to continue to grow, not just quarter over quarter, but the market itself will be growing year over year as more and more units age based on when they were put into service. We've got 7 million of the 20 million units are over 20 years old. So I think you can look for the modernization market to remain and actually become more attractive And obviously, we're very focused on performing that in a way that allows us to approach customers with kits that gives us productivity and that gives them their modernization in a quicker time period. So you're going to see modernization be talked about more, but also take the best of what we've learned since SPIN in terms of our new equipment strategy and growing share there and being able to do things at scale. merging that with our service excellence and our productivity we've gained there. And when we put those two together and attack the mod market with a growing market, we think that's going to be a positive contributor for much time to come.

Thanks, Judy. I'll leave it there. Thanks, guys.

Thank you. As a reminder, 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. One moment for our next question.

And our next question comes from Nick Halston of RBC.

Yes. Hi, everyone. Thanks for taking the questions. I think you mentioned maintenance pricing was at about 3.5% like the like. I'm just wondering if that rate should accelerate as we move through the year just on the basis that you've been implementing the service escalation clauses in Q1 and maybe that 3.5% as a reflection of the agreements that you had last year. So if you could provide some color on that, that would be helpful.

Yeah, Nick, go ahead.

Thanks for the question, Nick. First, we're extremely encouraged by the way we started off in quarter one on the 3.5% like-to-like. As Judy mentioned, Europe is mid-single digits. It's probably one of the higher price increases we've seen in Europe for a while, and it's ticking because everyone else is kind of driving the price over there. If we move into Q2, obviously more units get converted, come up for renegotiation as well. So we should see that kind of stepping up a little bit as we go there on the 3.5%. So overall, what we said when we gave the full year guide was that we expect, you know, it to be up 3.5%, 4%. You know, mixed insurance would take about 200 to 250 basis points, so about 1.5% net. As of now, where we stand, we feel pretty good about, you know, 150 basis points of pricing adjusting for mixed insurance for the rest of the year.

And, Nick, in China, you know, the margin drivers are less about price. They're really more about productivity, volume, density, and Otis 1, and all of those are good contributors for us.

That's very helpful. Then my second question, sticking with service, great to see that you're up to 4.2% unit growth. That's been accelerating pretty much for three years at this point. You mentioned that the market is growing at about 5%, about a million units on a 20 million installed base. If I look at that 4.2%, you could still argue that that's maybe slightly underperforming. Do you think that you can actually close that gap, or is there maybe a mix effect that means that you as the largest OEM in terms of service units should maybe be underperforming a bit?

I think we can and we should close that gap. That's the challenge we've given to our team, and that's why you see the much higher growth rates in Asia, especially China, for our service portfolio. Now, it creates a mix. But we will deal with that mixed challenge as we get it. But, yeah, we can and should be closing that gap.

And just to add to that, right, I mean, not too long ago, we were growing at 1%. The team is kind of, you know, there was a call for action. Teams focused on it. The wheels just started churning. Last year, 4.1, now 4.2. We should close 4%. The gap, and the gap is we want some good new equipment shared. That will come into the conversion cycle. Our conversion rates are going up. And we're going to keep looking at deploying IoT to ensure that our retention rates stay high. So it's using conversion as a lever, using retention as a lever to get us up to the mid-single-digit growth. And while doing that, we want to ensure that we also maintain the profitability factor. So at some point in time, you will see from margins it does come back to absolute profit growth, but that's where we want to take it to.

That's great. Thank you very much.

Thank you. I would now like to turn the conference back to Judy Marks for closing remarks.

Thank you, Didi. And thank you all for joining us. And let me also add a thanks to all of our colleagues for your continued excellent performance in quarter one and for serving our customers so well. Our solid first quarter results demonstrate the continued power of our business model and set us up well for the future. We will remain focused on executing throughout the remainder of the year in order to capitalize on our first quarter successes and continue to drive shareholder value. Thank you for joining us, everyone. Stay safe and well.

This concludes today's conference call. Thank you for participating and you may now disconnect.