Otis Worldwide Corp Q1 FY2024 Earnings Call

Good morning, and welcome to Otis' First Quarter 2024 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 Rednor, Vice President of Investor Relations. Please go ahead.

Thank you, Sarah. Welcome to Otis' First Quarter 2024 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 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. Otis' SEC filings, including our Form 10-K and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially. Now I'd like to turn the call over to Judy.

Thank you, Mike, and good morning, afternoon and evening, everyone. Thank you for joining us. Starting on Slide 3. Otis started the year off with a solid first quarter, again confirming and demonstrating the continued strength of our Service-driven business model, as we outlined during our Investor Day in February. Through the hard work and commitment of our colleagues across the globe, we achieved mid-single-digit organic sales growth driven by our Service business. We expanded adjusted operating margins by 80 basis points, with both Service and New Equipment operating profit margins expanding 70 and 20 basis points, respectively. With another quarter of maintenance portfolio growth above 4% and solid Modernization sales, we delivered 6.5% service organic sales growth. Mod orders increased 12.9% in the first quarter with growth across all regions while challenging market conditions in New Equipment continue. Delivering operational excellence across the organization drove 10% adjusted EPS growth. This quarter, we executed our capital strategy with excellence. We continue to work to repatriate cash from overseas and use it for the benefit of our shareholders. As such, we were able to repurchase $300 million of shares in the quarter. Additionally, yesterday, we announced a 14.7% increase to our quarterly dividend. We have nearly doubled our dividend since spin, emphasizing the importance we place on delivering shareholder value. We also made important progress towards our environmental goals. Earlier this month, the science-based targets initiative approved our near-term science-based greenhouse gas emissions reduction targets. This is a meaningful step on our sustainability journey, and our steady progress meeting our commitments will be shared in our next ESG report expected to be published later this year. Turning to our orders performance on Slide 4. New Equipment orders were down 10% in the first quarter as anticipated due to the tough compare versus the prior year. Double-digit growth in EMEA and mid-single-digit growth in Asia Pacific were more than offset by a double-digit decline in the Americas and high teens decline in China. Nevertheless, our New Equipment backlog at constant currency was roughly flat versus the prior year and up slightly versus the prior quarter. Service segment, we continue to deliver consistent solid performance with another quarter portfolio growth above 4%, demonstrating the value of Modernization as a new strategic imperative 13% orders growth and 15% backlog growth at constant currency, setting us up well for Modernization sales through the rest of the year and into 2025. Reflecting the hard work of our colleagues around the world, let me highlight a few orders we received during the quarter. In China, Otis Electric will provide 46 escalators and 9 elevators for an expansion of the Shenzhen Metro Line 5. The elevators and escalators will be installed at 3 new stations connecting to the city's grand theater, where passengers can transfer to 2 other metro lines. In Canada, Otis will provide 19 elevators at the South Niagara Hospital, a 12-story facility that will consolidate and expand acute care services in the region. It's designed to meet the Canada Green Building Council's lead silver standards and is an important step towards becoming the first well-certified hospital in Canada. These elevators will be equipped with Otis ONE, EMS Panorama and autonomous mobile robot system integration. In Japan, Otis is modernizing 6 elevators and 6 escalators at the Hamamatsu Act tower in Hamamatsu city. We look forward to continuing to service the 212-meter tall tower as we've done for nearly 3 decades. And in the United Kingdom, the National Health Service of Wales has been an Otis customer since 2018 and has recently renewed their service contract, covering 450 elevators across many health facilities in the country for an additional 5 years. Building upon our trusted relationship, we will now modernize 19 elevators at the University Hospital of Wales and Cardiff. Turning to Q1 results on Slide 5. We delivered net sales of $3.4 billion in the first quarter, with organic sales up 3.8%. Despite dynamic market conditions, we have delivered organic growth every quarter since the end of 2020. Adjusted operating profit, excluding a $7 million foreign exchange headwind, was up $50 million with both segments contributing. Adjusted EPS grew 10% or $0.08 in the quarter, driven by strong operational performance, improvement in the tax rate, early results from UpLift and the benefit of a lower share count offset headwinds from foreign exchange translation and increased interest expense.

Thank you, Judy. Starting with segment sales performance on Slide 6. Otis New Equipment organic sales were roughly flat in the first quarter when compared to the prior year. Americas grew mid-teens and solid backlog conversion, EMEA and Asia Pacific both grew low single digits, driven by growth in key markets, and China experienced a double-digit decline due to the lower backlog and weaker market conditions that Judy mentioned. New Equipment pricing was strong in the Americas, EMEA and Asia Pacific in the first quarter, up low to mid-single digits. In China, while the pricing environment remains challenging, we continue to drive productivity and capitalize on lower commodity prices. Service sales were $2.2 billion in the first quarter with organic sales growth of 6.5%, reflecting growth across all regions and in all lines of business and marking the 12th consecutive quarter of mid-single-digit or greater organic sales growth. Maintenance and repair continue to perform well, up 5.8% from portfolio growth, robust repair volumes and maintenance pricing, which was up more than 3 points excluding the impact of mix and churn. On Modernization, double-digit growth in China and Asia Pacific drove organic sales up approximately 10% in the quarter. Turning to segment operating performance on Slide 7. First quarter New Equipment operating profit of $71 million, was up $6 million at constant currency. Favorable pricing, productivity and commodity tailwinds more than offset mix headwinds and drove 20 basis points of margin expansion. Service operating profit of $523 million, was up $47 million at constant currency as drop-through on higher volume, favorable pricing and productivity more than offset annual wage inflation. This led to margin expansion of 70 basis points for the segment. Additionally, the ramp of UpLift initiatives alongside cost controls improved our SG&A as a percent of sales by 50 basis points year-over-year. All in all, we expanded overall adjusted margins by 80 basis points and grew EPS 10%. Shifting to cash. We generated $155 million of adjusted free cash flow in the first quarter, reflecting a build in working capital following a snapback from a strong Q4 and the timing of billings in the quarter. We are off to a good start. The strength of our Service business, including the execution of a Modernization strategy, combined with productivity efforts and the UpLift program more than offset the subdued New Equipment markets. As a result, and with good line of sight through the rest of the year, we are raising our profit guidance.

Now on Slide 8. Before I discuss our updated 2024 financial outlook, let me briefly update you on our global market outlook. For the New Equipment market, our expectations for the Americas and EMEA remain unchanged, down low-single-digit in units. We now expect Asia to be down mid-single digits in units versus the prior outlook of down low to mid-single digits due to weakness in China. There is no change to our outlook for Asia Pacific as India, Southeast Asia and the major infrastructure pipeline remained strong. We're revising China to be down high single digits to down 10% as activity remains sluggish. Although New Equipment markets remain challenging, Service market strength continues with low single-digit growth in the Americas and EMEA and mid-single-digit growth in Asia, driven by China. Installed base growth is driven by units that were booked roughly 2 years ago, installed over the past year or so and are now starting to roll off their warranty period. Therefore, we still anticipate the global installed base to add roughly 1 million units, a growth rate of mid-single digits. Turning to Otis' 2024 financial outlook. We expect net sales in the range of $14.5 billion to $14.8 billion, with organic sales growth of 3% to 5%, overall unchanged versus the prior outlook, although we made some modest changes within the segments, which Anurag will discuss in a moment. Adjusted operating profit is expected to be up $135 million to $175 million at actual currency and up $160 million to $190 million at constant currency, up $10 million from the low end of the prior outlook. Adjusted EPS is now expected in the range of $3.83 to $3.90, up 8% to 10% with $0.03 improvement versus the low end of the prior guide. We anticipate adjusted free cash flow to come in at approximately $1.6 billion. In addition to returning nearly all free cash flow generated to shareholders, we're also performing well on our cash repatriation programs, and we are raising our target share repurchases to approximately $1 billion for 2024. In addition, we are acquiring the remaining minority interest in Nippon Otis in Japan for approximately $70 million with cash. This will be about $0.01 accretive to EPS in 2024 and another $0.01 in 2025.

Taking a more detailed look at our outlook and starting with sales on Slide 9. We expect total organic sales to remain consistent with our prior outlook. For New Equipment organic sales, we still expect to be roughly flat, with no change to our outlook in EMEA, up low single digits. However, driven by a weaker market, we now expect China New Equipment sales to be down approximately 10%, offset by better-than-expected backlog conversion in the Americas and Asia Pacific. Our Service, in line with our prior guide, overall organic sales are anticipated to grow 6% to 7%, including maintenance and repair within a range of 5.5% to 6.5%. For Modernization, we anticipate organic sales growth of 8% to 9%, an increase versus the prior outlook of approximately 8% as we continue to execute on the expanding backlog. Turning to Slide 10. At constant currency, operating profit should grow $160 million to $190 million, an increase of $5 million at the midpoint versus prior expectations due to continued strong contributions from Service. On Service, we now expect operating profit margin at the high end of the prior guide, up approximately 50 basis points for the year due to solid first quarter performance. Our New Equipment net of the previously noted puts and takes, we still anticipate adjusted operating profit margin to be flat to up 10 basis points. Better flow-through of pricing from the backlog is offsetting the added mix impact from the weaker China outlook. We expect overall adjusted operating profit margin expansion of 50 basis points as a result of service volume, productivity and pricing tailwinds alongside ramping UpLift benefits. Turning to cash flow. There is no change to our outlook, and we expect to achieve adjusted free cash flow of $1.6 billion, largely driven by net income growth. In addition, our continued efforts on cash repatriation give us confidence to repurchase $1 billion in shares up from $800 million previously. This, combined with the recently announced increase in our dividend, allows us to return approximately $1.6 billion of cash to shareholders, up from $1.35 billion in our prior outlook. Moving to the 2024 EPS bridge on Slide 11. We have raised the low end of our guidance for adjusted EPS by $0.03 to a range of $3.83 to $3.90. That is over $0.30 of EPS growth at the midpoint, driven almost entirely by growth in operating profit. Before we turn to questions, let me provide some more color on the second quarter. Starting with Otis. We expect New Equipment to be down mid- to high single digits, reflecting the more challenged market conditions, though with backlog holding steady sequentially. Within Service, maintenance portfolio growth should remain above 4% and Modernization growth or orders growth should remain above 10%. For sales, we expect New Equipment to be down roughly mid-single digits organically due to China headwinds and a tough compare with approximately 10% growth in the prior year. Service should continue at roughly the same organic growth rate as Q1, netting to low single-digit overall organic growth for the quarter. Based on the recent deterioration in FX rates, we anticipate a headwind when compared to the prior quarter, netting to roughly flat sales versus the prior year. Turning to profit. New Equipment margins are anticipated to come in right around 7%, while Service margins are anticipated to be roughly the same as Q1 or slightly higher. Below the line due to the timing of certain tax benefits, the tax rate is expected to come in around 20%, and this benefit in combination with the lower share count will more than offset the headwind from higher interest costs. Absent further foreign exchange volatility, this should lead to approximately $0.10 of EPS growth on another quarter up 10% or greater. This implies first half EPS growth of roughly $0.20. And when adjusted for the tax rate impact, EPS growth should be fairly level loaded between the first and second halves of the year, largely driven by operating profit growth.

In closing, first quarter results further demonstrate our ability to execute our strategy to create momentum to perform for the remainder of the year. Growing our portfolio, leveraging our steady New Equipment and expanding more backlog and ramping on the UpLift program alongside continued operational performance, set us up well to achieve our financial outlook and returned $1.6 billion cash back to shareholders. With that, Sarah, please open the line for questions.

Your first question comes from Rob Wertheimer with Melius Research.

So my question is just around Mods, where sales and orders are showing obviously healthy double-digit-ish growth. Would you talk a little bit about margin in those orders in the backlogs and the drivers of it? I know you're working on standardizing production on the product and a bunch of stuff. I don't know if price is a positive driver there in the backlog as well as you kind of continue on that journey to bring margins up and above. And I wonder if you could just talk a little bit about what the environment is out there for that product? Is there a lot of customer pull on it? Do you have solid demand where you can kind of embrace pricing, maybe just the demand environment around that.

Sure. Thanks, Rob. Listen, Mod was up nicely in all regions. I think our strategy is on track. Our team is executing that strategy. And these are still early days in what will be probably more than a decade-long Mod growth market. So we're really encouraged by what we're seeing. Orders up almost 13% in the quarter, backlog up 15%. So now we're just building on quarter after quarter of double-digit growth. The standouts, we really saw in the quarter from the demand side, Asia Pacific and Americas were up really nicely, but Asia Pacific was a standout and China did well, too, double digit. So everyone, again, all regions are up. We're seeing a mix of major projects and just really good volume package demand by customers and we're performing well. In terms of the margin, I'll turn it over to Anurag for help with the backlog, but I want to highlight that we shared at Investor Day that we would soon be surpassing Mod margins over New Equipment margins. I'm pleased to report that in Q1, we reached that inflection point and Mod margins are now higher than New Equipment margins. Anurag, I'll let you provide additional insights.

Yes. Thanks. Just to add to that, so a few quarters ago, we said that it should be higher than the New Equipment margin. We are here right now, modestly higher, as Judy said, one quarter does not make a trend, but we are very encouraged by what we are seeing in terms of Mod margins. And as the year goes by, we should see more of the expansion on Mod margin and more differential between that and New Equipment. What's driving the Mod margin expansion is more of us becoming more productive on the cost side, right? The initiatives that we mentioned around standardization, be it across the supply chain, be it the factory, be it the product and doing field installation at a lower cost, all of this is helping out and it's really driving the margin expansion. So it's more on the product side that we control. But we've got to do a lot more than that and let's see how the year plays out, but very encouraged.

Yes. The last thing I'll add, Rob, is that Mod market has potential of several million units in every one of our regions. So this won't be lopsided growth. We anticipate significant growth by all regions.

Your next question comes from the line of Julian Mitchell with Barclays Capital.

Just wondered when you're looking the overall sort of global picture on New Equipment. The backlog was flat at constant currency year-on-year, with TTM orders down. It seems like TTM orders should be down again in the second quarter. Just wondered how you're thinking about the year as a whole, if you could frame up sort of any expectations in New Equipment around, say, book-to-bill and how we should think about the confidence in the New Equipment backlog not shrinking year-on-year over the balance of the year?

Yes. Thank you, Julian, for your question. As we mentioned, New Equipment was down about 10% in the first quarter and is expected to decline mid- to high single digits in the second quarter. As the year progresses, the comparisons will improve in the second half because we began to notice the slowdown in New Equipment, particularly in the Americas and EMEA, starting from the second quarter of last year. We will see how that develops. If our performance aligns with market trends, the New Equipment backlog may decrease by a few points. If we outperform the market, it could remain relatively stable. Therefore, there is a chance that the New Equipment backlog could be flat or down slightly as we reach the end of this year. And as we kind of mentioned at the Investor Day, if you look forward to the next few years, clearly, we're expecting New Equipment to be flattish. But where we see a lot of growth coming in is on the Mod side. And the Mod backlogs are up 15%. We continue to perform well in the Mod, New Equipment and Mod as we end the year, that backlog should be up low single digit as we enter into 2025.

That's helpful. And then just maybe, my second question on the Service margins, very good performance in the first quarter, up 70 bps year-on-year. Based on what you said about the second quarter could be up similarly year-on-year sort of 60, 70 bps in Q2 and the first half. So that guide of plus 50 bps of margin for the year, is that just reflecting sort of it's still only April a long way to go? Or is there anything specific happening with costs or technician wages or something in the back half? Maybe just any update around that wage inflation headwind.

Let me address a few of those questions, Julian, starting with service margins. Although it's early in the year, we're seeing a portfolio growth of over 4 percent and service pricing increasing by more than 3 points, which makes us optimistic. There is a mix effect as Mod revenue grows at a faster rate than maintenance and repair, which we've considered in our margin outlook. Our team has excelled in productivity, particularly in the field, and has been effective in managing repairs and the repair backlog, especially in the Americas. We will keep monitoring the situation and are comfortable with our 50 basis points outlook. This marks our 17th consecutive quarter of increased service-adjusted operating profit, which is crucial to our service-driven business model. Currently, we aren't experiencing anything out of the ordinary with wage inflation, and we are focusing on productivity to mitigate those costs.

Your next question comes from the line of Nigel Coe with Wolfe Research.

So as a proud watchman, I was very pleased to hear that mentioned a couple of times, so thanks for that, Judy. It doesn't happen very often in these calls.

I know. I'm fun selecting them, Nigel.

I appreciate that. It's quite unusual for you to provide such detailed information about the quarter. Is this a new approach where you'll offer more quarterly insights, or is there something unique occurring in the second quarter? Anurag, I believe you wanted to address this? Additionally, in an effort to help us refine our models, could you provide any details on corporate expenses we should consider, particularly since the tax rate appears to have decreased?

Thank you for the question, Nigel. We usually provide good detail on the New Equipment and Service outstanding for the quarter. This time, you requested additional information regarding the tax rate, which was significantly lower for the quarter at 20% for the full year. The guidance remains similar at 25.5%. However, due to planning and specific items, these can vary from quarter to quarter, so I wanted to emphasize how the tax rate was performing this quarter. The team is effectively managing it and is working to reduce it in the future. On the corporate expense, yes, it's going to be a few million dollars higher in the quarter, probably 0.9% to 1% of revenue. As we look at this year, nothing unusual there, except for foreign exchange, where we do have some foreign exchange headwinds and that does get reflected in our corporate expense, so that probably increases by 5 to 10 basis points.

Okay. That's really helpful. And then on the free cash flow, I understand it's mainly AR timing, but is there anything in the mix of business on Mod mix, so anything else that may be leading to a lengthening in the billing cycles, just curious seeing AR increasing from 4Q to 1Q. Anything to call out there? Or was it just timing?

It's essentially timing. I mean if you look back at the past few years, we have more than 100% conversion. We are confident that we will get to the 100% conversion this year. We built up a couple of hundred million dollars of working capital part, but a little bit of it was because of lower down payments due to lower New Equipment orders, but a larger part of it was just the timing of billings through the course of the quarter, where a lot happened in the month of March. We've already started unwinding that in the second quarter, we'll get to the $1.6 billion, and the confidence is reflected in the dividend and also increasing our share repurchase of $800 million to $1 billion. So no real structural change in terms of collection or in terms of cash flow generation.

Your next question comes from the line of Steve Tusa with JPMorgan.

I think that there has been, from your peers a little bit of chatter around China and pricing there. Can you maybe just clarify what you're seeing on the ground?

Yes. Let me explain the situation regarding New Equipment and Service pricing. China is the most competitive pricing market we face globally, and it's the only region where we aren't achieving prices for New Equipment. However, we've managed to offset this through improved productivity and effective management of commodities, as we've secured lower steel prices, which account for 80% of our commodity expenses. The competition is intense, evident in public bids, volume bids, and overall segment performance. The New Equipment market, in particular, is weak, down 10% this quarter, and we anticipate a decline in the high single digits to 10% for the year, following two consecutive years of downturn. If you ask us, Steve, we would say that the China segment for 2024 will be around 450,000 units, and we anticipate New Equipment pricing to stay competitive. We introduced some new product innovations this quarter and will continue to collaborate with our dealers, agents, and distributors to enhance our sales channels and increase our market share. Service pricing in China is relatively stable. However, the key factors influencing this are less about pricing and more focused on productivity, volume density, and Otis ONE, which has been a significant contributor for us. We have expanded our portfolio in China to 400,000 units, with over half integrated with Otis ONE, leading to notable productivity challenges. Nonetheless, pricing conditions in China remain difficult.

When you say challenging, I mean, can you give us a little bit of magnitude around that? I mean, is that down 5, down 10, like just any kind of magnitude on a year-over-year basis?

No. I mean it's been challenging. This is year 3 of challenging pricing there. Again, Sally and the team were just focused on productivity, on commodities, on everything we can in terms of getting cost out of our products even from an engineering perspective and installation. So I think we've done a really good job there staying as neutral as we can in terms of price cost.

And Steve, just to add to that, right, so because it's a deflationary economy, input costs are coming down. But if you look at the overall New Equipment backlog for us, even after having about $20 million of pricing tailwind in the quarter, flushing through the P&L, our backlog margin for New Equipment is still higher relative to last year. I mean Americas, EMEA at mid-single-digit price increases, Asia Pacific low. So really, really good progress in terms of backlog margin, building it up and flushing it through the P&L as well.

Your next question comes from the line of Joe O'Dea with Wells Fargo.

Wanted to just start on your observations of ABI and Dodge Momentum, most recent prints, how that aligns with what you're seeing in the market, clearly, some softening in those lead indexes. While at the same time, your Americas New Equipment outlook actually improving a little bit since prior. And so whether this is the result of just kind of long lead times on projects or if there's any kind of incremental softening that you're seeing on the ground out there in North America?

In North America, the New Equipment market in Q1 remained weak, although the decline was not as severe as the second half of 2023. We increased prices and significantly addressed the backlog, leading to a 15% revenue increase. The orders challenge in the first quarter was tough due to comparisons with major infrastructure orders in Canada from the previous year. We anticipate more stability in the New Equipment segment in 2024 compared to 2023. However, the latest ABI data at 43.6% is the lowest since December 2020, indicating continued contraction, similar to what we see with Dodge, which is also down. So we're watching it carefully, Joe. What I would tell you is all verticals this quarter in North America were down. Commercial was down more than residential. Residential is becoming more stable. And for the part of infrastructure where we compete and where we are successful, that has been more stable as well.

That's helpful. And then just on capital deployment and increasing the share repurchase for the year, it sounds like some opportunities there related to repatriation. My question is just related to the M&A side of things, what you're seeing on opportunities there, the pipeline just expectations for being able to execute on any bolt-on opportunities this year?

Yes. As Anurag mentioned regarding cash repatriation, our team deserves credit for making a significant decrease in our cash balance, reducing it from $1 billion to $900 million. We are focused on maintaining this momentum since the spin-off, which has allowed us to repatriate $300 million. This gives us the confidence to announce our first share repurchase of $1 billion since the spin-off. It marks our fourth year of cash buybacks, and we are feeling optimistic about it. Regarding M&A, our bolt-on business remains strong, and we have a solid pipeline. The timing of closures is what we are monitoring. Annually, we expect about $50 million to $100 million in bolt-on acquisitions, which need to be accretive, strategically located, and manageable for our team to integrate effectively. We have consistently demonstrated our capability in this area over the years. In terms of generational opportunities, we have a strong balance sheet. Opportunities in the elevator and escalator market are rare, and we will continue to assess anything that comes our way. Being the leading provider, our service strategy, capital strategy, and operational strategy are effective, so we don't feel the need to pursue significant mergers and acquisitions, but we will consider them if they arise.

Your next question comes from the line of Nick Housden with RBC Capital Markets.

Just on the outlook for Modernization. The sales growth guidance was tweaked up to 8% to 9% growth but that's against a backlog that's up 15%. So I mean I'm just trying to understand what the relationship is between backlog growth and maybe the next 12 months of sales growth that we can expect to see there? Is it just to do with conversion times, why it wouldn't be a little bit higher than that?

Yes, you got it. It's more around the conversion time, right? So if you look at our Modernization sales growth, it's actually been picking up every quarter. There's no reason why it should not be going up double-digit in the next 3 to 4 quarters. And as the sales conversion catches up with our backlog. And part of it is the same thing which is driving a margin increase. I think it's more around standardization of products, reducing the lead time from the factory, reducing the lead time to install it. I think those are drivers which will help us get there. So it's ticking up in the right direction, but where it should kind of mirror is where the backlog grows at, and we should be there in the next few quarters.

Yes. Nich, what we've done is we've taken everything we've learned in New Equipment service over 4 years, whether that's go-to-market strategy, whether that's sales specialization driving common installation beyond industrializing the packages, supply chain and everything else. So we're really encouraged by the continued Mod trajectory. And as we said, we're going to continue to expand margins there and focus on backlog conversion.

That's great. And then just on the Service pricing, I think a couple of times that it was 3 points in the quarter net, maybe I'm misremembering, but I think previously you commented saying that you were expecting 100 basis points of net pricing for 2024. So I'm just wondering where the extra 2 points has come from?

Just to clarify, the 300 basis points that we spoke excludes mix and churn. So it's a gross pricing. The net for the quarter was a little bit higher than being flattish over there, but it's consistent to what we are seeing in pricing in the Service business. So EMEA seeing mid-single-digit price increases. Americas is close to that. Asia Pacific has always been on the lower side. So from a pricing perspective, it's sticking well in the market, and we're seeing good traction over there. What's really helping our Service margins to grow besides that is clearly more on the productivity side. And with the productivity because of that, we kind of increase the profit on the Service business for the year.

Your next question comes from the line of Miguel Borrega with BNP Paribas.

I have two questions. First, regarding China. For several quarters, you have indicated that you've experienced price pressure for three consecutive years. While I know you're managing this with lower product costs, what do you believe is the lowest point for pricing? Considering the competition that is influencing pricing, how long do you expect this situation to last? Additionally, in the long run, where do you anticipate margins for New Equipment in China will ultimately settle compared to Western levels? That’s my first question.

Yes, let me begin, and Anurag will elaborate on the margin aspect. Miguel, I want to clarify that I’m not here to announce a bottom. As soon as we notice changes in competitive pricing and the segment, we will communicate that, but we’re not forecasting it for this year based on our outlook. However, I can mention that during my visit to China in March, I met with various government officials as part of the China Development Forum. There are ongoing efforts, and the government is taking steps, but it hasn’t altered the sentiment or liquidity easing just yet. Once that changes, our team will definitely respond swiftly, and we are prepared to see price increases. I believe you will see us take action on this, as we have set pricing trends in China multiple times before.

Yes. Just exactly. It's a balance between the pricing and the share of segment, and I think we look at both. In terms of margins for us, if pricing is coming down in China, as we earlier mentioned, it's also commodity prices. We've seen tailwinds over there, and we're taking cost out and seeing more supply chain efficiencies. So we are maintaining our margin rates in China. And as we go forward, between price, between share, between margin, we're going to find a balance between all 3 of that so we can continue to grow our profitability as we move along.

Yes. And that's really what you're seeing, Miguel, with us really now. Service now being 25% of our revenue in China and growing. The Mod element of that grew double digit last quarter. That's going to continue to grow and continue. So you'll see this trade we normally do between volume, price in every market, but in China, explicitly, we see it moving to becoming more of a mature market and reflecting that, especially in Service.

That's great. And then just a follow-up on capital allocation. So after you upped the dividend and buyback, I know you're buying the minorities in Japan. So does that mean there's not much out there? I know you talked about bolt-ons, but how would you think about potential targets in Southeast Asia, Japan also, what would be the rationale for buying more companies in Southeast Asia versus the rest of the world?

Well, our M&A approach for bolt-ons, no matter where it is, is a similar model. It's got to again be accretive to us. It's got to be in a place where we know how to integrate it, and it's got to happen in a location where it adds density to our routes. Now we're fortunate in most markets that, that works for people when they're ready to sell. But we're always interested in bolt-ons everywhere in the world. We ended up buying Schindler's portfolio in Japan in 2016, and that integration has gone extremely well. And our team has continued to grow our Service business in Japan, where conversion rates are highest in the world, call back rates are lowest in the world. It is a high-quality, good margin business for us, and we appreciate our partners at Nippon Otis. However, we felt it was time to align our legal entities and improve our balance sheet, which you will see reflected in the NCI line in the future. Similar to our approach with Zardoya, this made sense for us. We will consider other larger properties as well, but only if they align with Otis's goals and enhance our ability to serve customers and shareholders.

Your next question comes from the line of Gautam Khanna with Cowen.

I wanted to ask about India specifically and what seems to be a strong performance there. Could you discuss the key drivers in that market? Additionally, can you provide some perspective on how significant this is compared to the rest of Asia-Pacific?

Yes, India is the highest growth market globally and ranks as the second largest for new equipment after China. However, its characteristics differ from China, as the conversion rates resemble those of more mature markets like the Americas and EMEA. We installed our first unit in India in the 1890s, and we've maintained an operating company there for a long time, giving us a solid presence. I am pleased with our position in India, where we have a factory producing Made in India products, including elevators and both public and commercial escalators. The growth we are experiencing is widespread, particularly in infrastructure, which is advancing quickly. The large population and the emerging middle class are fueling not only urbanization but also the demand for upscale residential options, especially in multifamily and mixed-use developments. Every sector in India is expanding, and we anticipate that the market will grow at a double-digit rate, leading us to invest further. We are increasing our workforce, including field colleagues, and have a strong presence throughout the country. Our factory is significantly boosting production levels each quarter, while our supply chain is focusing on local sourcing and enhancing that local supply chain. It's a competitive environment, and we need to meet certain cost benchmarks, but our team has been exceptionally effective in navigating these challenges. Even though this is a high-growth market, it resembles a more established market since we do not have thousands of ISPs. We have the capacity to convert at a level exceeding 90%, similar to mature markets, which benefits our service portfolio as well. We have a very capable team in India under SEBI's guidance that knows how to conduct business successfully, consistently delivering substantial growth quarter after quarter. We are extremely optimistic about India and will keep investing there. Yes. And Gautam, I would add, the overall performance in India is really fantastic and we're excited about continuing to maximize opportunities there. The domestic market has embraced us, and we want to make sure that we keep following that growth trajectory with our resources, our investments, our engagement on the ground. We are working closely with local suppliers to ensure that we provide quality and value, capitalizing on the immense growth opportunities I see in that region which is different from any other market. We expect that as the country continues to develop infrastructure and improve urbanization, we will be well positioned to support and deliver solutions that will exceed market expectations. Overall, I'm optimistic about the future scope of our business operations in India and the long-term sustainability of our growth there. We are committed to investing in our India operations, enhancing our capabilities and ensuring we're grounded in the local context to maximize value for all stakeholders. Yes, India represents not only a key growth driver for us but also aligns with our long-term strategic vision. We're actively leveraging our proven business model within the Indian market, which has displayed a strong appetite for our services and products. In this context, the ongoing execution of our agenda to bolster our local partnership framework will play a crucial role in further solidifying our leadership position in India. And with that, I'll turn it back over to Sarah to summarize and wrap up the call.

This concludes the question-and-answer session. I will turn the call to Judy for closing remarks.

Thank you, Sarah. We are quite pleased with our first quarter results as we make steady progress delivering value for our customers and shareholders throughout the remainder of the year and beyond. Everyone, thank you for joining us. Stay safe and well. Goodbye.

This concludes today's conference call. Thank you for joining. You may now disconnect.